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FED Governor Michael Barr warning that stress in private credit could spark quote psychological contagion. He told Bloomberg News, quite people might look at private credit, they might say, wow, there seemed to be cracks in our corporate sector. Maybe over here in the corporate bond market there are also cracks. Let's get reaction to that from Apollo co president John Zito. He's sitting down with my co host Danny Berger at the Milkin Institute Global Conference in Beverly Hills.
Danny, Matt, thank you so much, and I'm so pleased to say I'm here with co president of Apollo John Zito. John, thank you so much for joining, Thanks for having I know we have a lot to talk about, but I do want to just start on that note from Bar, This idea that there are cracks, wider spread concerns.
Do you think there's any merit to that?
Look, lots of talk about private credit. We've talked about it for a long time. For me, it's been and for us at Apollo, it's really been what's the impact on the overall economy. It's not is it private credit or public credit? Is a private equity, public equity, there's software equities, there's several that are down seventy percent this year. Doesn't mean you don't invest in equities, and it doesn't mean there's cracks in the entire equity system and you
should invest in any stocks. So we're in a completely different regime for investing. We're in a completely different regime for how things are going to be over the next three,
four or five years. If you believe in AI, if you are in fact AGI pilled, then you know the way that you're going to have to invest, the way that you're going to have to underwrite, the way that your entire business is going to have to function will have to shift, and the valuation framework for both public market investors and private market investors is going to have
to change. And that's I think very exciting. I think it's very exciting for people in the industry who are adaptive and love investing and love seeing around the corner.
It is such a big difference, though, because it used to be an industry that loved asset light high margins. This requires kind of the opposite of that. So much investing needs to go into that. Is this an industry prepared for it. Besides the giants, the Apollos, the blackstones.
Of the world.
I mean, look look at Intel for example. You know, Intel, for like ten to fifteen years effectively was a drag on the entire equity market and for a decade they were viewed as the dumb money for actually investing in their infrastructure. And we financed the deal. Where when we financed the deal two years ago to finance their fab and to build new chips in Ireland, everybody hated it. Everyone called us and said what could you possibly do to invest in Intel? And we got refinance this year.
And the story is not about us getting refinanced. It's about the stock this year, which is up five hundred percent because the entire world realizing that instead of wanting to be asset light, maybe it's about being asset heavy. Maybe what before was the rubric for success, it was all about code was the scarce asset. Right now it's compute, it's d to integrate data quality, it's your talents, what kind of talent you have, it's all of these things.
The whole framework is shifting, I think, and from again. I think it's really exciting, but it's not about private or public. It's the whole valuation rubric and how you think about where you want to be in the strategic ecosystem of your business.
So the valuation rubric has changed. Does the industry as a whole realize that, John, Do you think everybody is going to start to have to change their mindset in this way or is it just a select few that can participate.
I look at what we've been doing. I mean asset we're going much closer to the asset we bought Atlantic Aviation.
This year.
We financed over ten billion dollars of chips for SpaceX, so GPU, financing's power, defense, all of the things that are going to require to grow all the CAPEX needs and to go asset heavy. Is actually the exciting part of private credit, not the old LBO loans that people made and everyone talks about. The actual excitment is investment grade lending for all this capex for a lot more
asset heaviness and all the sovereignty the whole. What you're seeing both with problems out in Europe and in the Middle East is a refocus on sovereignty and sovereignty meaning do you have your own power? Do you have your own AI sovereignty, Can you own your own compute, can you make your own chips? All of these things are really the future of how credit orients itself around that.
And as a business, it's nothing I thought we'd ever be in the middle of, but it is, I think, a really exciting thing.
But if you're not AGI pilled, is there this risk that maybe we go too far, that you build out too far. Some of the outcomes not exactly bimodal, but have that kind of flavor of it. But if things don't go right in the past to AI, perhaps we go too far.
Is that a real risk?
Yeah, for sure. I think. Look, inevitably, we're going to see a lot more efficiencies in most businesses because people are just using AI as a mechanism to actually tighten up their businesses, get their data cleaner, run their business more efficiently. And whether or not AI takes their business
to the next level will be a question. Lots of the capex I mean, we're talking about three four five trillion dollars of capex that's getting spent in the grand scheme of global economies, it's actually not that large a number. There will inevitably be the the not the not the core hyperscalers, but the second derivative and third derivative beneficiaries
of all this AI spend. If in fact doesn't work or does not provide the margin or the return on capital, there'll be lots of lots of lots of failures in that. And you know it's this is not about this is a much higher VALL regime because you're in the early days of a total technology platform. And I've mentioned it before that the technology platform can be a very violent platform in different in different paths, and so that's going
to create more uncertainty, more variety of outcomes. And usually it's a good place time to go into credit because you're going senior and you're getting closer to the asset. For whatever reason, everyone's acknowledging that we're going to be in a higher VALL regime, but they're not acknowledging that credit is actually typically been the safer place to be because it's senior in the capital structure.
So do you think that changes or have we just gotten stuck in this narrative that'll be hard to escape and potentially have ramifications for credit.
Yeah, it's going to have ramifications for the whole ecosystem of investing, what the enterprise value, what companies are worth, what the exit multiple is. If you're a services company, used to be able to transact that one multiple, you won't be able to do that anymore. So this is all about what sector are you in, how protected are you in the different regimes? Are you asset heavier, asset light?
Do you control your customer? Yes or no? Do you actually how close you to how much capital do you have? There's some probability that you shift that lots of the value shifts from labor to capital, and that's scary for people, scary for us. We think about the world in that way. It's a scary thing.
Are you one of these people that the labor market's going to have hue ramifications, that numbers have been thrown out there seventy percent of jobs to sappear.
I try to be much more of an optimist about it because it just I don't think anybody really knows. I think we're going to create some amazing new businesses that no one knows about. I think the venture community that what people can do. It took Palenteer seventeen years to get to a billion dollars in sales. Companies like you know my friends at Cognition, they get to a billion dollars in sales in less than three years with
less than three hundred employees. I mean, the ability for the most dangerous people is really smart group of folks that are actually sitting in a room with not that much they can actually design amazing companies. So I'm extremely bullish growth and venture and people who can transform things fully. Optimizing things is different than transforming things so and in that when you when you transform something, you're completely transitioning
that business. Optimizing things was a much more nuancing I'm going to cut costs by twenty percent, I'm going to raise sales by ten percent. I'm going to do this thing a little bit more efficiently. You can now transform things with much less capital than you did before, and that I think is pretty exciting. So for anyone out there who's more of an entrepreneur, I think it's an incredible environment. And so I get excited about that, and I try not to get into the doomer stuff too much.
I still go back to this idea though, that what happens if you're investing in the rest of the economy. What if you haven't changed your rubric to valuations that asset heavy is the place to go because there are plenty of firms out there and plenty of credit shops that don't want to venture into this AI data centers spend. Is there a place for them or is there sort of a crowding out where investment necessarily needs to go to this project.
It's not all going to be Every sector is not going to be all bad or.
All good, I think, but it sounds like the value proposition is just less. That they're more efficient, the returns aren't as high, you can't command the same margins.
I think things are going to get more competitive. I think if you're going to have to constantly if you're an asset like business or you're a services company, you're going to have to be constantly evolving, moving in front. And if you do that well, you'll be able to monetize as a cycle in a way that most people you know in other cycles have been able to do. There's lots of companies that in the late nineties said
the Internet would be amazing for their business. There was incredible companies that came out of that, and there inevitably will be great companies that come out of us. But through that cycle from mid to late nineties to early two thousand, mid two thousands, there was lots of companies that didn't struggle, didn't pivot or to bureaucratic, were too bloated, couldn't move quickly enough. And so again this is all about your talent, being adaptive, being willing to actually see
what's on the field. And if you can do that, I think it's it's an incredible environment. And again it's not private or public or.
I was going to say that the kind of freak out over private credit has been this idea that maybe the industry is too exposed to those bureaucratic software companies that aren't going to be able to adapt. I know you get asked about wealth a disproportionate amount to actually how much that is of a Paul business. But I do wonder for the funds, should there be a concern that some did over index to things like BDC's two wealth products. Is they're going to have to be a rethink of that going forward.
We've all been in the asset management industry for a long time, and MLPs were exposed to energy during twelve thirteen, fourteen, and lots of MLPs didn't do great because they're exposed to that. If you're an asset manager that runs sector focused funds, and there's very few of those, those will inevitably struggle if in fact, software companies go through some sort of cycle. But again, most of the large managers that are public managers have been through this. It happened
in the real estate business. You can see the ones that did it really well. I suspect that those firms will do an incredible job again, and you've already seen it earnings last couple of weeks. It's been pretty calming. It feels like it's been I think all most of these firms we know really well, they've done it a long time.
They're going to do just There have been so many calls in this industry though, for consolidation, and I wonder if we've seen the real pain for those that can't survive this, if that process is finally it has actually played out yet.
Yeah, I'm getting consolidation so hard. It's a people business. You know what I love about our business is that just culturally, we just foundationally have not done a ton of m and a Uh. And we organically build the business from from from from the ground up, and that in the investment business, particularly in times of heavy change, that cultural design is really one of your modes, in
one of your strengths. And so unless it's very transformational, I don't I don't see at least for us, tons of M and a. But in the industry, if it's transformational, it can give you actual a new a new resource, or a new asset class that you weren't in. Maybe you could see those firms merge. But the name of the game I think is, I'm obviously biased is in the credit business. Uh, and I'm pretty biased.
Uh.
Two things, One that that we've been doing it for a really long time and two that you know, we have walls across everything and so we're just one investment unit at the end of the day. And again in times of increasingly more and more change, where the pace of change is much faster on the outside than it is at the inside of any of these firms, it's it's to have one aligned firm is a pretty strategic mode for us.
Do you think though, that we get more firms that try to model themselves over diversification, that we get less sector specialists. I don't.
Again, I think this is about you know, fifteen years ago, everybody, if you had an alternative firm, you could go into any asset class. There's there's now been kind of more specialation by asset class, but diversification by industry, and so most firms invest in almost every industry. You know, for us, we've been leaning in into infrastructure and credit and hybrid and in equity. We've always been very value oriented and so we haven't been caught up in most of the stuff.
But again I don't I don't think there's going to be that big a pace of on I think financial service MNA is hard and so the bar is hard to get that done.
And then for these wealth products, again for those that are very exposed to it felt like a really big bullish thesis for this industry that there was this untapped resource of wealth of retail. Do we rethink that as well?
Look, again, this is not about again, I don't want to go down the rabbit hole on public versus private. But obviously you know the last thirty days public markets, seventy two percent of the return was ten stocks. Yeah, I mean, if you're talking about retirement and wealth products and what's the right product design. We can talk at length about what the appropriate product design and the pros and cons of all the products.
Iraning another hour for that.
Yeah, but the idea that you would not invest and lend money to the companies that we lend to on a diversified basis for the long term retirement is highly unlikely. It's very prudent to invest in income oriented, long duration products that generate yield over a decade in decades of history, it's highly likely that you're going to make a good return on that. And so I suspect we're still very underpenetrated relative to almost everyone's retirement in the world in
private assets. And that's the overwhelming theme. This is a moment in time around product design and some fears around over indexing of a cycle into industry that will work itself through and so not to say there won't be defaults, but again, when a stock goes down seventy percent, do you not invest in stock in the stock market? Again? No, if there's a default in a high yield company, do
you not lend money to a company? Again, Like, this is a little bit overblown with respect to the reactions of every single company when we lend a five thousand companies, and so when one situation goes wrong, it's hard to react too much to us.
So John, before I let you go, I just have to say, I know we're in LA, but I want to ask about your hometown of Miami.
Might we see an Apollo Miami headquarters.
I feel like you've got to be advocating for that as a Miami man yourself, right.
Family there, I grew up there. I love Miami me but you know, there's lots and lots of lots of good places. Both Texas and Florida have incredible options, and we're we're assessing.
That the decision has not been made yet.
I do. I do not think so. I do not think we've gone public with anything yet. So so we're but we're in the process.
And I also feel like behind the scenes you must be like win gwink, nudge nudge.
Mina is a great place, guys.
Yeah, I do. I do love Miami. It's a sweet sweet spot in my heart.
All right, John Oliver there, thank you so much for joining. I really appreciate your time. And Matt, that was of course Apollo's john Zo