We begin this out with stocks inching lower. Jim Zelter and the team over at pollow Asset Management looking for opportunity outside of equities, saying, quote, if interest rates remain higher as we expect, and the terminal Fed funds rate stays higher than where it has been historically, we see private credit as an attractive alternative to over valued public equities. Jim joins us now for more. Jim, good morning, in a very happy new year to you.
Good morning, Jonathan. I'm going to pick off.
This conversation by stealing one of Lisa's questions to start twenty twenty five as stocks too rich or a bonds too cheap?
Well, I think we have a backdrop. I think your point about the US and China and Europe and the three parties, you know, it's our view that there's intrtion has been very consistent. The US economy has been the beacon of opportunity in the last several years, strong economic growth, capital coming from around the globe, and so in terms of US talk, I don't want to talk about the stock market. I really talking with the underline economy. Underline
economy looks like it's the place to invest. I don't think it's any surprise that when you peel the onion back private capital, which has really been embraced in the US and gives diversity of funding, lets companies grow, start, expand, and all the things we're talking about the global renaissance. It's been the place to invest and it's been attracting capital.
Contrasts that to what's going on in the UK and continental Europe, where they are stuck in a financing system that's really fifteen twenty thirty years behind the rest of what's going on in North America. It tells us that the US is the place to invest.
So you think some of these problems in Europe might be more structural in nature.
I think structural is really the key to really analysis. It's very easy to focus on the last three to six months we talk about the Liz Trust moment in the UK. I think it is a great reminder for this current administration as they've got great ambitions in terms of US investment, capex, tariffs, immigration, a variety of other big initiatives. It's good for this reminder of the Liz
Trust moment in the back of their minds. You know what can happen if you lose confidence, but there's no doubt I think if you look at what the Drogy document did later last fall, he pointed out in one hundred and fifty eight summary pages of all the challenges that they have not really embraced. And while the banks are in better shape than they've been in a couple of decades in Europe, the US is the standout. We have the greatest financial services sector in the world, we
have the deepest, broadest capital markets. We've undergone a tremendous amount of regulations on our banks, and they've continued to.
Thrive in a more narrow world.
And that's the page that the Europeans should be looking at, Embracing securitization, embracing private capital. They've got a massive amount of infrastructure needs, and they should be embracing them for their long term economic success.
In the meantime, people are saying that maybe the ghost of lis Trust is kind of hovering over this administration and hovering over the US treasure market right now, especially given the rise that we've seen in longer term yields. And I'm wondering how susceptible you are to changing your view on how constructive the US economy is if you get some more negative data prints. We had Greg Daeco
yesterday talking about a frozen job market. We had Neila Richardson talking about how smaller companies really are feeling rates where they are.
Rates have been higher for the last twelve to eighteen ONMS they been higher. Obviously, we're in a period right now where what the Fed did and its actions in the fall and what the market has responded to is a very unique period. So you're right, we are in a little bit of a unique zone here with regard to macro and rates in the US. I do think we are in a period where rates do look attractive versus where equities are, and we're in a period right
now where we're still the place of economic growth. But is a sign for the administration about how much they can push now Clearly the other side of the trade, I would not probably be rete lowering rates right now. I think that you have full employment, economy is doing quite well. I'm not sure I see a need other than economic textbook to lower rates in terms of the target.
But it does create a lot of room for the new administration if they have weakness in any kind of the economy, because of their initiatives, the FED put is back, they have a lot of room to.
Move, your colleague, sort of edifying your points as you say them, towards and slock moments ago, inflation reaccelerating to your point about not necessarily needing to lower rates further. You talk about credit being the sweet spot in debt, maybe even over equities, and that has been the story over a long period of time, the past couple of years. If inflation could be reaccelerating, could you see that story changing at a certain point.
Yeah, yeah, yes you could.
And I guess this, and there's a lot of consensus out there about where the S and P is in a go where rates are going. But in our view, and the US economy is still the strength strength of the globe, it's the beacon of economic opportunity. We still have a lot of economic growth in terms of the
industrial renaissance that we've been talking about. So in our view, the breadth of credit investment grade as well as non investment grade, we try to find areas of dislocation or areas of mismatch of capital and opportunity, and we're still seeing it in credit versus the equity markets.
Now when you look at the S and P.
Five hundred, I would say that it's interesting, you've got we all know what the magnificent seven are, but certainly the other four hundred and ninety three a lot of unloved opportunities in that in that basket. And there's probably an opportunity in a non consensus view in terms of those companies in terms of just pure economic growth.
But we are still listen.
Private credity has private credit and private capital has been the engine of economic growth in the US. And I will you know again I said earlier, it's not a great iron it's a great irony that the US has been the bastion of economic growth with the embracing of private capital. But you know, one of the greatest investors in US capital history, Warren Buffett in Berkshire. When you
really pull the covers back on Berkshire Hathaway. Of the trillion dollars of assets at the end of twenty three, thirty percent are in the public equities that we know about, Apple, Coca Cola, American Express via A, but seventy percent are private companies. It's the growth engine. He's the greatest capitalist. He's been doing it for fifty years. That's where growth and opportunity is in America. Private capital in private companies, and they have access in the debt markets. They don't
need to go public to raise capital anymore. Eight thousand public companies to four thousand. That's the trend in the future. And we're sitting really at an intersection trying to bring those opportunities to the broad group of investors, retirees, and savers around the globe.
So you mentioned Europe and Europe centainly the bank channel is overburdened. We've been talking about this for years. The Europeans have talkt about trying to do something with public markets and the same way we have here in the United States, it's not happening. I want to understand from your perspective how you will work with the banks in America going forward from here, because this is kind of a new trend where the banks will originate the loans
and then you'll provide the money. How's that going to work in years to come? How big can that opportunity be?
Oh?
I think we're I think twenty four was a pivot year, you know, for us as a leading firm in this industry and in this sector. You know, there was a great headline and you and I talked about the three of us have talked about in this show many times,
where the great battle between private capital and banks. The reality is if you look at the commercial dialogue going on between the top five, top ten institutions and the handful of us to lead our industry, the amount of integration dialogue working together on big deals has never been deeper.
Obviously, there was.
Our City Bank transaction, our City Group transaction, there was a transaction we did with Standard Charter BNP, and so I think we're still at the early days. These partnerships need to have substance. They can't be excused the phrase shotgun marriages. They have to be ones that really have substance, dialogue, trust, and some history of doing a lot of transactions together. We've been fortunate and all the ones we've put together where there has been a lot of either history of
personnel or of activity. But I think it's I think still it's early days, early innings. Now there's a lot of headlines just to grab headlines, and there's not a lot of substance behind them. But I think that trend of private capital and bank partnerships is going to extend in twenty five and twenty six, and I do think if you think about the economic backdrop, I do sense that there is a great opportunity for strategic m and A that clearly feels like it's going to happen.
I'm a little bit more.
Skeptical about the massive IPO window. If you look at the last ten years equity issue, this has been about two hundred and fifty billion, fifty billion IPOs, two hundred billion secondaries. That's removing all the stack numbers. I think you still have a valuation issue with a lot of private equity companies that want to come out and do their IPO and so I think we have a consensus view or non consensus view would apollow that that number is going to be not as large as people think.
And so the big mismatch if.
You have a big credit market, a big equity market, this area of hybrid in between, which we've been talking a lot about applying capital to those over levered companies. That's the opportunity of twenty five and twenty.
Six just to build on the IPO issue just a little bit more. Is that just a valuation issue or do you think it's a role that you have to play here that these companies don't need to go public anymore.
It's a combination of both. It's a great question.
I think it is a valuation issue for probably fifty to sixty percent of them. I think it's very very clear now private companies have access to all sorts of capital, debt and equity, preferred, convertible, whatever it may be. And so the typical route where you needed to go to have your employees be able to monetize their investments broad based capital, equity revolvers. You saw what open Ai did
several months ago bringing in a bank facility. There's tremendous pools of capital, private capital to confund in finances companies. So going public is by no means the ticket to liquidity that you needed in the past.
A lot more.
Options in five to ten years. Will there be a difference between public and private markets?
We don't believe. So I think there will be some differentiations. And I think the question that gets raised right after that question that you ask, is, well, is there going to be a massive compression in yields and the advantage is going to go to those folks that have the bigger. You're going to make money on the origination, the ability to make the three, five, seven, ten billion dollar commitment to XYZ company, that's where you're going to garner the
extra spread. But all the things that we're doing in origination, in capital formation, in trying to bring some liquidity to these markets, in terms of secondary activity, with transparency and price discovery, I think the barriers and you know, what's private is risky and what's public is safe. I think those barriers will be coming down. And again I go
back to this Brookshare. It's no one really talks about it, but it's it is quite an irony that the greatest public investor of all time seventy percent of those companies when you look at the when you look at the web page, these are some great American companies and over fifty years he's assembled them and they're massive compounders. And that's seventy percent of the underlying value, Geico being at the top, Clayton Holmes, BNSF, many many other great companies.
And I think that's a lesson versu all's there's companies that are private and there's private equity. You should differentiate between the two. But we clearly want to be part of that big trend and offer those two investors in retirementes around the globe. It's a big change in market structure.
You're going to be sticking with us to talk about that change in market structure and the changes we could be seeing in Washington, d C. A little bit later this year. Jim's out to there for Apollo Asset Management,