I want to head over to an interview. We all are very much looking forward to Jonathan Farrow just high tail the ADDA here to head over to Apollo sitting down with Mark Rowan, who is the CEO.
John take it away, A Lisa, thank you.
This was the deal we agreed to it. If the stock closed, it an all time hard investigate. Mark Rowan would show up alongside me and it's a man of its word.
Market morning. It's good to see you.
Thank you, and technically you're here. You came to visit us, so thank you.
Thank you. You planned it this way.
I'm sure big target for twenty twenty nine ten billion dollars of annual learning. So I think we have to start with a pretty broad question. Race are coming down. Economy is pretty decent. Let's just call financial conditions easy. Why people coming to you instead of just issuing a bond in public markets?
I think if they come to us, when they can issue a bond in public markets and it's cant is not that it's not open, It's that they want to do something that the public markets will not allow. Public markets over the past two decades have become very vanilla, call it beta.
If you want to do something unique.
If you want to finance the next generation of infrastructure, you want to build a project, you want to build data centers, you want to build power, you want long data. Do you want special features that's just not available, you come to someone like us, and increasingly private markets are offering really compelling solutions to investment grade borrowers.
Let's talk about some of those days, IC and c IB and beth Intel recently. What's the common theme behind those three companies for you?
The common theme for US is excess return relative to the credit of the underlying borrower. The common theme for the issuer is they are achieving something they could not otherwise achieve. When we did ABMBV some six billion dollars years ago, everyone around us, our peer group, that was interesting. That was one off in COVID, You'll never do another one another investment grade private deal. One hundred billion dollars later,
we're still doing investment grade private deals. And I see nothing but a long line of of interesting borrowers and interesting situations.
Because think about what we're doing in the world today.
We are building infrastructure, we are building and changing energy transition. We're just at the beginning of this, and we are building the next generation of data and power. Every one of those things is long dated. Many of them are complex financings. Some will go to the banking system, some will go to public markets, But increasingly, for these more complicated financings and long dated financings, private market investment grade is where borrowers are coming.
There was a theme an invested Day, and you've talked about this with me yourself, privately global industrial renaissance.
What are you talking about?
We're talking about is this massive need for capital.
I mean, you can believe or not believe all the figures that are out there, but when you add up the amount of money that is needed for energy transition, the amount of money that is needed to fix our infrastructure, the amount of money that will be needed to build data centers and power to supply them, much less to connect and redo our power lines, you're talking about the amount of money that's been spent since the invention of five, all with the backdrop of the US government borrowing two
trillion dollars to finance itself. On a current basis, this is not a question of will private markets grow. The question will be how much, Yes, public markets will continue to play a really important role banking system, really important role. But this tool, this notion of private investment grade, has really not been available to CFOs or others arranging financing, and increasingly it will be.
How labor intensive is this for you?
And as you do more deals, do you get a benefit from that that you better able to replicate things and use less and less people.
This is scars of experience.
So these are all labor intensive, and that is actually what the competitive advantage is. The investment grade bond market became so efficient and so low cost that financial firms stopped allocating resources to it. There were just not any money in doing that, and so the market is very available, but it is very plain vanilla.
One has built what we've built.
When you look at employment at Apollo, the greatest group of employment four thousand people, some eight billion dollars that we've spent over the past fifteen years all goes to what we call origination. Now, not all of these originators are out calling on investment grade borrowers. Some are running other types of origination vehicles, aircraft finance, fleet finance, receivables finance, inventory finance, infrastructure finance.
Increasingly, this is how America.
Borrows introduced City and a twenty five billion a dollar partnership. What's behind that it's that acknowledgment from you that you've got more cash than you know what to do with.
I think it's an acknowledgment that origination, the control of the product is actually what has value. And some of that origination we're going to build ourselves, and we've built more of it than any But let's face it, we a whole industry is short origination. To the extent we can find a meeting of the minds with City, that's fabulous. And I think the bigger theme here is the banking system, particularly one of the big four banks, is actually figuring
out what we believe all along. We don't want what the bank wants. We don't want the bank's customer. We want the asset the bank. We can't offer advice, m and A, derivatives hedging, foreign exchange payments, credit cards, or any other service the bank wants to offer those things. The bank sometimes wants the loan, but more often than not does not want the loan.
Who do you think field it?
The most calls that day when that was announced that partnership, was it Jane Fraser an annoyed asset managers or was it you an annoyed bankers.
From the comparing of notes last night? It was Jane.
It was Jane. Did you get the calls you saw from LOX.
We definitely got a few calls.
Do you get the sense that this is the beginning of something bigger? Twenty five billions the number with citsy just give me an idea of what this looks like further down the line.
Does it include other banks too?
I think it does, and now I think it is difficult to serve lots of people in the same way with the same terms. But the City partnership is focused on a certain type of borrower. I think you'll see international partnerships. I think you'll see investment grade partnerships. I think you'll see infrastructure related partnerships. I do think that we are becoming a partner in some ways to the banking system, rather than how it is portrayed in the press, which is a fierce competition over everything.
This conversation so far has really been about how the financing of companies, particularly in this country, is changing, how the company's doing the financing is shifting. The emphasis being on private markets. Part of your vision is how investing is going to change as well, So let's spend some time on that. How is investing going to change? How do we think about public versus private now? And how do you hope we're going to think about it in years to come.
Look for me, this is year forty.
It's sometimes hard to believe I've been doing it this long, but we grew up thinking private was risky and public was safe, and probably forty years ago that was true. Private was three products, equity, venture capital, and hedge funds, all three of which can be risky, but done the right way are excellent investments. And public was eight thousand public companies, diversified portfolios of stocks and bonds.
Let's just say that's not how the world is today.
The world that we see private is safe and risky and public is safe and risky.
And if that's.
True, everything we know about portfolio management, the way we construct portfolios today is going to change. Think of the typical investor a very bland I say, a three flavor ice cream portfolio, stocks, bonds, and a little bit of alternatives. Why well, because when something is risky, you put it in a small bucket called alternatives. You watch it carefully
and you demand high returns out of it. But if private is just another form, I think what you're going to see is the whole business of what I call replacement fixed income, which today means investment grade public credit. I think is going to be investment grade public and investment grade private teen months from now. I do not believe investors will actually know the difference between investment grade
public and investment grade private. It will not be the issuers, it will not be the size, it will not be the ratings, it will not even be the liquidity. Everything that exists in the public markets, repo borrowing, market making, daily pricing, is coming to the private markets.
What is the total addressable market? What kind of numbers are we thinking about?
We're talking about massive marketplace when we look at the entirety of our industry.
The entirety of our.
Industry has been built out of the alternative bucket of institutional investors. The fixed income bucket, which is the one I'm talking about now, is fifty percent larger than the alternative bucket and is mostly one hundred percent private.
Work to me public.
Investment grade iquitcy different to debt.
Can you tell me how that's going to be transformed, and whether some of the companies that typically would becoming public are going to state private. Whether we've got to see a big shift in capital markets over the next five years or so on that front.
Well, we're seeing it already.
So this is this This is a two pronged to answer, which is eight thousand public companies? Is now four thousand public companies. Fewer than one hundred companies go public every year and more than one hundred companies go private. There do not seem to be compelling reasons for companies to be public, particularly with what's happened on the investing side. So much of our market today is indexed and correlated. Think of passive now sixty seventy percent of the overall marketplace.
Active management, which historically has been the buying and selling of stocks, has really been a very, very difficult place to be, has failed to be at the index ninety plus percent of the time for twenty years. I think we're going to see an evolution also take place in equity. It's going to happen more slowly. In fixed income. We are going to see fixed income replacement public and private essentially come together. And the reason I know that is
we're seeing it every single day. And in fixed income we have arbiters of credit quality rating agencies who tell investors that something public and something private is of the same quality.
In equity, we lack those.
Our But nonetheless, I think investors are beginning to understand when ten stocks are thirty five to forty percent of your portfolio and four stocks have determined all your returns for the past four years, and one stock has basically been one hundred percent of your quarter. I mean, think of what we've done as a country. We've taken the largest pool of savings in the world, four oh one k twelve to thirteen trillion dollars from a group of people who need retirement savings more than ever.
What are they own?
They own daily liquid stock index funds generally S and P for fifty years. Why well, we have a mistaken belief that public is safe and private is risky. You look at the best retirement system anywhere in the Western world in Australia, where they've introduced superannuation forty years ago. Just a fancy way of saying is they gave the equivalent of four oh one k investors access to private markets.
The returns have been nothing short of spectacular. Outcomes for investors can be not a little bit better, fifty and sixty percent better.
You know the view here public is transparent and privates a payek.
How do you change that view?
Well, I think it's going to happen in fixed income. I think when you get to daily pricing, when you get to daily liquidity, when you can see a market. But let's not fool ourselves. Markets are different than we think they are. Everything changed in two thousand and eight, as it should as a response to the financial crisis, but we just did not experience as investors those changes because right after we change the rules, we printed eight
trillion dollars and everything went up into the right. One of the most interesting things that changed there is no liquidity in public fixed income the SATs I've seen it takes five days to sell an investment grade corporate bond. So when you see a quote, is that liquid, Well, we feel good because it's public, it's there, we can see it. I do think we're going to end up not caring in fixed income in the next eighteen months
as to whether something is public or private. The comfort that people are developing in private markets on the fixed income side, I believe will eventually extend to equity, and we will see equity also adopt private side by side with public. As I sometimes joke, investors will own equity that is private rather than private equity, the difference being the leverage.
You say, wait, you mean investors to regulate to say it the same way.
I think they do.
I mean, the conversation with regulators is actually a fascinating one because clearly.
Change is scary.
But the typical conversation is every dollar of borrowing that moves outside of the banking system to the investment marketplace. And let's face it, there are only two choices for regulators. Money in an economy can come from investors or from banks.
There's no third choice.
So every dollar that moves actually delevers the banking system and makes it safer, and people recoil and shock. And this is just math. A bank is levered twelve to fourteen times. The typical institutional investor is levered zero, the typical mutual fund levered zero, typical bde levered one point five times, typical retirement services company levered eight times. It is deleveraging. The second is disclosure. We think it's not transparent.
The typical bank disclosure says loans to customers and loans to companies. You click on our website you can see every security we own every quarter. Then you talk about maturity transformation. Maturity transformation is really where the economy has suffered and financial markets have suffered. Banks are in business to do maturity transformation. They borrow shortened form of deposits and lend long in form of loans. That's not a
bad thing, that's just how they're set up. In the investment marketplace, generally, you're talking about investors who are matched from a maturity point of view. And the final thing that I always sit with regulators, what percentage of assets in the US banking system are investment grade?
They don't know.
We have a perception that they're all investment grade, but the reality is about sixty percent of bank.
Assets are investment grade.
You look at a balance sheet like ours and just as an example, we're ninety plus percent investment grade. And so it's change, but it is actually changed. That is making the system more robust and more diversified. And we let's make no mistake we are the envy of the world. We the US are the envy of the world. In Europe, they are squeezing the banking system through Vaslin game, but they haven't yet decided to allow investors to fill that gap.
And there are questions, why are we struggling with financial markets? Well, you're squeezing the banking system and you're not allowing investors to fill the gap.
Have you had this conversation with a senator from Massachusetts As that conversation ever happened.
It hasn't, but I welcome it.
I've spent I spend lots of time in DC and elsewhere speaking to regulators because we are in a really dynamic phase. Everything that we think works the way it works has changed, and we're about to experience and are experiencing the changes that were made in two thousand and eight in response to the financial crisis.
Speaking of change, which is Washington, DC is becoming increasingly interventionist. You compared some of the benefits of doing business in America and doing business in Europe. Doing business in America is aren'turally not as easy as it used to be, and it may well get harder.
What's your view on where we're heading.
You may be right, but it's all relative.
This is the single best market to be in at this point in time, Barnutt.
When we spoke before Christmas and we talked about the choices on the menu, then for the upcoming election, you went too impressed.
The menu's changed a little bit. What's your view?
Well, since i'll be under banishment here if I give you a direct view, let me to say. The way I frame this is you are either more scared of four years of the status quo or more scared of four years of change. You just have to decide what you're more scared of. Me personally, I'm more scared of four years of the status quo.
What's wrong with the status quo?
I see a direction where the trend is not our friend. Right now, we are, as you suggest, we are the single best place to do business in the world. We are the luckiest people in the world. Can we screw it up?
Yeah? We can.
The notion that we are spending two trillion and excess of what we take in in peacetime with full employment does not bode well for the availability of capital to do what we need to do for the next generation. We're spending the next generation's money currently.
Do you see anyone in the campaign trail that's waiting to do And I think.
About that on the campaign trail, not in reality. Let's hope. All we can hope for is better governance.
I've said repeatedly on Bloomberg Surveymance, on Bloomberg TV, on Bloomback Radio for years that America has the privilege, the unique privilege of acting recklessly.
Are we losing that?
Not yet? We have a long way to go.
We have lots of examples around the globe of people who have acted recklessly for a much longer period of time than we have been acting recklessly. But we also have obligations that others do not. Right now, we are the beneficiary of being the strongest economy, the strongest capital market, the strongest.
Military, and the best place to do business.
I mean, if you tick off what's happened over the past years here, we may not like how we got here and how we financed it. Three years ago we decided to build infrastructure. We allocated two trillion dollars. None of that's built yet, it's all being built. Two years ago we spent fifty two billion dollars of semiconductor subsidies to build semiconductors here. Not a single plant is open.
It's all being built a year ago. Inflation Reduction Act to encourage the manufacturer renewables one point three to two point three trillion.
No one really knows. Not a single plant is opened.
We are the beneficiary and the largest recipient of foreign direct investment three years in a row. So people around the globe are actually figuring out we're better off here.
And something tells me we're ramping defense production.
All of those things are fiscally stimultive and positive fore employment. Oh, by the way, we have no legal immigration. This sets us up very well fiscally. A strong economy, which I think we're seeing.
Federal Reserve is kind of interest rates by fifty basis points. Are you in Toulston slot camp? And you can agree with, agree or disagree with. Tulson of course works here. He believes this economy doesn't need rate cuts. We're in a great place. Do you share that view?
I said it.
I was, I guess unfortunate to be on TV an hour after the raid cut, and I said, this was a very very expensive insurance policy.
What's expensive about it?
The notion that we would cut rates.
Financial markets are wide open, equities are at all time high, financing is available, real estate prices are going up in every market, and yet we're stimulating, and we're stimulating fiscally. It is not clear that we need more rate cuts at this point in time. And to the extent we encourage growth, and growth was very strong, as you saw from GDP for the quarter. To the extent we accelerate the economy and have to go in the other direction, that would not be a good deck.
Just pause. You think the Fed might have to start hiking interest rates again.
I'm not saying that yet. I'm just saying I see no reason for the cutting of rates right now. So am I in the Torston camp? I'm absolutely in the Torston camp and it's my privilege to have him down the hall.
I make sure to check in with him every morning.
I do as well, Mark, Ryan, this was a privilege, a pleasure. Good luck for the next five years. And I hope it's told you every year.
Every year you get to do it.
Thank Mark, Thank you, sir, appreciate it.