Bloomberg Audio Studios, podcasts, radio news. Mark, thank you for doing this. Always a pleasure.
I'm just saying outside that when I just looked back in twenty ten, you had around seventy billion in assets. Now, as we said, closing in on a trillion. Just should we start with kind of current affairs. You've got the conflict in Iran. I suppose we talk about the geopolitics, but on the basic question about what it's doing to the markets and the economy, how do you look at that?
It's disruptive.
I mean we've had this, you know, our refrain on this has been if you look at the numbers, things are great. Everyone has a job. The capital spending is off the charts and very conducive to future employment. Government policy is very accommodati. If capital markets are wide open, that's normally ninety five percent of what you need to worry about. But now, as we've been saying, it's only seven twy percent of what you need to worry about.
The other thirty percent is geopolitics, it's government borrowing its excesses in capital markets, and it's technological change.
None of this is unexpected. It's just here.
How do you rate those I mean, do you worry about the Iraan things say more than that all the trade disruption.
Personally not really mean.
We always have an overreaction to the confrontation of problems. But this is a problem that needed to be dealt with, and if it were dealt with in other years, it would have been more difficult, and so the notion that it's being dealt with today in some ways is reassuring, notwithstanding the current instability.
Just getting to that list of things you had, you had government borrowing. Is that something that worries you particular at the moment.
It's not something to worry about, but it is something to watch. We have seen points in time when investors have called countries to account for their fiscal picture. We saw it most recently in the UK. It is trust, the departure of Liz Trust. And we have pretty much every government in the West spending more money than they are bringing in with no sign that they are letting up, and so there is nothing that says this will end soon. Japan did it for nearly three decades, and so it's
just something to watch. Normally, that kind of borrowing is inflationary. Normally, the restriction of the free flow of goods is inflationary. Normally the restriction of the free flow of labor is inflationary, but we just haven't seen it. Having said that, if you're a credit investor wearing your credit hat, you don't get paid other than your coupon and your principle, you look at the surrounding facts.
And you say, this has been a good time for risk off.
Yesterday Jamie Dimond talked about inflation being the skunk at the party.
Is that the way that you look at it, not so much as.
The skunk at the party.
But let's face it, we've had very accommodative capital markets, notwithstanding the backdrop that I've mentioned of things that can be inflationary. We've seen rates go down. We've actually seen curve steepening to the extent we saw a tick up in inflation that would probably handicap the fed'sibility to further push rates down.
We just go into credit.
You know, these big arguments, and it strikes me there's kind of two levels of it.
The first question is do we.
Think that there is more kind of laxness in the overall credit markets. That's what people Diamond talk about, Lloyd blank Mine talking and then there's a particular question of private credit. But just to look at those two, if I first look at credit as a whole, how worried you about that? I've seen you say that, actually the numbers aren't too bad, But how do you look at it?
So I don't spend a lot of time worrying about it. We are companies are in pretty good shape. Consumers are in pretty good shape. This is not just in US. This is pretty much around the world ironically right now, it's governments that are not in good shape.
Having said that.
We're at the end potentially of a very long accombinative cycleing credit. And in every cycle you have people who move out on the risk curve, who ignore things that are obvious, and it all feels good while it's happening, and then it doesn't feel so good once it arrives. Well, some of those changes have arrived, I mean low and behold, we think that AI might impact software?
Is that news?
Did we just discover that two weeks ago? But apparently two weeks ago we discovered that AI is going to impact software, And we've been in a massive risk off mode, and so software stocks are down almost seventy percent I remind people that software first lean is senior to HYO bonds and is senior to equity. So if you're going to have a problem in software lending, you're going to have a problem in equity, You're going to have a problem in high yield, you're going to have a problem
in bank lending and broadly syndicated and everywhere else. Because to your second point, credit is just credit. There are good underwriters of credit and there are bad underwriters of credit.
Just on that point about tech is, as I read it from what you've said, you are you You were nervous about software before two weeks ago, on hand on never hand in terms when it comes to kind of digital infrastructure there you're still fairly you're less cautious.
So I'd say I'm going to give you a more specific answer, because it doesn't it requires more specific answer. In our private equity portfolio, which is not the subject of this, we have zero software in our credit book across the totality of the firm.
It's a fraction of assets.
We run a broadly diversified credit book that is not concentrated in software. The problem with software is that it was thirty percent of the levered buyout market. Therefore it was thirty percent of the levered lending market, and therefore is just overrepresented and subject to attack. But we should not deny that change is coming, and change is not
coming just in data centers and AI. As a world, we are building infrastructure, we're building energy, we're doing energy transmission, we're building next gen manufacturing, we're ramping defense, and we're doing this thing called AI and data. We're essentially spending every dollar since the creation of fire.
And we're doing it all at once.
And whatever we're doing in the US, they want to do in Europe and they're not as well prepared to it, and they're doing in the Middle East, and they're doing it.
Elsewhere around the world.
We will see the largest need for capital ever and that's what we've seen so far this year. And so now to your specific question, it's about underwriting. There are a number of very strong US tech companies who run diversified businesses Amazon, Google, Microsoft, who are interested in seeing these centers built and are interested in not consolidating the debt on their balance sheet, and to the extent they are prepared to lend their credit. One can lend against
those types of things and make sensible underwriting decisions. There are those who are more equity story oriented, where it's maybe not as sensible or underwright, and good underwriters pick good credits and bad underwriters pick everyone.
You and Ido have lived between us through a lot.
I think we're almost identical ages Rob Stringtion, but we've lived through many iterations of credit coming and credit going. So when you talk about these individual decisions, like you know, is it good to be in digital infrastructure at the moment or not, that matters, But so does the overall picture and the one you just explained where you said there's all this money going into energy, going into AI,
getting into all these different bits. Does the bill for that either end up with taxpayers or does it end up with banks and credit institutions.
So, again, a longer answer than you probably want here, but the banking system is incredibly de levered and very diversified. I think it's in the best shape I've ever seen it in my forty two years of professional career. And then we get to the so called public and private markets. Private and public are just variations of the theme. The
vast majority of the private market is investment grade. There's a forty trillion dollar market, and ninety nine percent of the headlines are focused on a little slice of a trillion and a half called levered lending. Levered lending is a below investment grade activity. If you trace the history of this. In two thousand and eight, levered lending was on bank balance sheets post GFC. Banks distributed this credit.
On the one hand, you had the COLO market, which took credit off bank balance sheets, particularly less than investment grade credit, and distributed the risk to investment grade buyers on a senior basis and to below investment grade buyers how you'll buyers on a junior basis. Then it was also distributed to private market BDCs. Banks again supported them, but at a very safe tranch, and investors, private investors, retail investors, institutional investors came in to support private BDCs.
And now we look at it and we say, well, credit is going through a cycle. Is that good or bad? And the answer is relative to what. And this is the point that people often miss. Credit is the formation of credit, particularly in these private BDCs, is a de risking activity for the economy and for individuals. It's de risking because it moved it off bank balance sheets and
essentially democratized it throughout our economy. And it's de risking for individuals because people are not funding their investments in these BDCs with their treasury portfolio. They're selling their equities. Last I looked firstly in debt is senior to equity. They are making an intelligent decision that they can earn equity like returns without equity like risk and take money off the table.
That does not guarantee success.
You can have.
If you own software stocks, you're really unhappy. If you own mostly software first lean, you're really unhappy. You're just less unhappy than if you own the equity. We can't legislate out of existence stupidity.
But the underlying system you're arguing is safer because it's allocated in individual companies and it's not leaking back into the fully leveraged part of banks.
And that's what in some ways we can say the post regulatory reform of the GFC worked. It's doing exactly what it was supposed to have do. It has socialized this risk, It has given investors another thing to invest in, which is actually de risking for them, and it has moved it out of the levered government guaranteed portion of our economy because we made a choice, and we've made a choice going back to the formation of Drexel below, investment grade companies have been a massive source of growth.
Private companies have been a massive source of growth eighty percent of jobs. How are they financed? Well, they weren't really financed. They were cast out from the marketplace. If we want them to be financed, There's only two places they can get financed. One is the banking system, the second is the investment marketplace. If you're concerned about what's happening, you don't want it in your banking system. You prefer it in your investment marketplace where people can price the risk.
So it's an extent. There are problems in private credit.
You would argue it's a little bit more like that Dot Com problems of years ago, where it's really an equity play rather than a debt one. So there isn't that gelig nite of leverage going through things.
Almost every investor is not a levered investor in the private credit ecosystem. But we've also we have this habit of throwing the baby out with the bathwater. All the press is focused on this levered lending portion of the market. As I sometimes remind my partners, as a deal shop, we don't get to be that big because although we're doing something from an efficiency point of view, we use
up a lot of social capital. On the other hand, the vast majority of the market is private investment grade, which is also called private credit and has almost nothing to do with what we're talking about today.
So I think I try.
To be careful in using my language to make sure that we understand. Most of the capital going into private companies is actually going to finance this global industrial renaissance which is taking place around the world. A lesser amount of capital is going into the deal business, which is primarily being funded by investors or by institutions who are making a decision to sell their equity portfolio to invest in credit because they offer about the same rates of return.
And by the way, we have ten companies that are forty percent of the SMP. We're not even a quote qualified market at this point. We're too concentrated.
There is this issue. There isn't other private people.
Consumers are trying to get involved in this, and you've pushed into kind of retail four oh one KSE things like that which you know they aren't investment grade, that's what they're looking at. Some people say that, you know, Apollo was a buccaneering shop. You know, it was all about taking being at the forefront. The more you get pushed back into these investment grade debts and stuff like that, or you might say, expanding into it, do you worry that limits the kind of risk appetite of the kind.
Of people you want to bring in. I don't think so.
I think what happened in our market if you go back again to the history, going to the eighties and the formation of Drexel. Drexel created the high yo bond market. It basically provided capital to these companies. So the banks responded with levered lending. All of the brain power in the financial marketplace left the investment grade market, and everyone wanted to do levered lending and high yo bonds because that's where the money was, that's where the excitement was,
and it didn't come back into the market. The investment grade market is a drive by market with very low compensation, with very low creativity. What we've done, starting seventeen years ago, with the need to create investment grade for our captive insurance Carrier Athene and for others in the insurance market, was to put creativity and intelligence back in the investment grade market.
No one is bored.
I can tell you that this is not now a question of they're not no longer buccaneering, so they don't enjoy being there. The ability to be creative in the investment grade market is at a scale that's almost hard to imagine.
So if you think.
Last year we originated a little over three hundred billion dollars of new investments, mostly credit, eighty percent of that was investment grade, I assure you no one is complaining about the lack of buccaneering.
But there is there is one.
There's one good thing about what's happening out there is you could argue that finance has moved into private private markets.
We have just a non bank.
What's happening is consumers are now getting a chance to participate. But there is a kind of trade off, isn't there that there is? This is bringing them, this is giving them a ans to participate in these higher yielding areas which you've pioneered. But some people will say there is a degree of risk in that, and at some point that could cause problems.
There's always a degree of risk. So I come back and no investment offers you a free lunch.
There is no free launch.
You can take equity risk, you can take credit risk, you can take duration risk, you can.
Take all sorts of risks. The question is what's appropriate.
But if you look around the world, every place that private assets have been added to public portfolios, you've gotten better outcomes. And if you go to the extreme and you take retirees, for instance, in four oh one k an extra percent compounded over the duration of how long you're going to be in there is a fifty to one hundred percent better outcome by having better investments. And what are they invested in today, Well, they're invested in daily liquid index funds for fifty years.
Is that risk free?
No?
We have ten companies that dominate the SMP. We've essentially, as I sometimes show, we've levered the entirety of the retirement system of.
The US to navidia. So far, that's been good.
It's not always going to be good. Public is not safe or risky. Private is not safe or risky. They're both safe for risky, they're just different degrees of liquidity.
I suppose It's this is that traditionally, this kind of slightly riskier on the face of it, lending has been outsourced to professionals like you and too, people who know what they're doing. The worry is that suddenly you're now getting in Bush and weekle On Tagata coming into these markets.
We're more worrying.
Look, we're going to have a correction, but it's no different than the correction that happening in banking. If you look in banking, the dominant banking institutions of today were not as dominant pre crisis. Those that sat out the subprime lending have arisen and become magnified in terms of their fortress, balance sheeted market share because they were good managers of risk, and good managers is of underriding. I believe the same thing is going to happen in investment markets.
Investment markets made choices. If you wanted a higher dividend, you could take more risk, you could lend to smaller companies, you could do more pick, you can invest in equity and preferred not just first lean, and you could run with a lot of leverage. That felt really good on the way up. That's not going to feel so good on the way down. And there are companies of which we are one, but not the only one, who went all first lean, who went almost all cash pay, who
went large companies, who worked with low leverage. I like where we sit, and Jamie Diamond said it. There's always going to be fraud, There's always going to be underwriting mistakes. But the question is who's a good risk manager and who's not a good risk manager. If thirty percent of your portfolio is in one industry and that one industry is being impacted by technology, you have not been a good risk manager.
I think that I just looked at Blue Oul I think was seventy percent in different versions of tech. There is a parallel, though, isn't it. The way you described the banking industry, it has consolidated, particularly at the top. That would imply the industry you're in is going to consolidate as well, that you will end up with fewer people, because as you said, there is a reckoning coming. Some of those people will have to We have fewer people.
I mean you started, I mean we were the whole, the entirety of the companies that you see that are public today. Everyone was forty billion in two thousand eight. We're now close to a trillion Blackstone more KKR.
A little less.
This is not good management, or not solely good management. This is a function of structural change in our marketplace, and that structural change is continuing, and the reward for good work is actually more work. In our case, it's managing more money. And I think that is where we're heading. I think this will be a shakeout. I don't think it is going to be short term. I think the thirty percent overhang of geopolitics, inflation, technological change is now here.
It was foreseeable, not maybe exactly how it occurred, but it was foreseeable, it was predictable. And all you can do is have been a good run underwriter. Risk manager have done a small number of stupid things, and by the way, we've lived an environment of tight spread. If you were a good risk manager, you were going to make more money this year and next year if it continues, than you ever have before because you've been risk off.
And so that's always the bifurcation of minds. First, you want to play defense and make sure in fact you've done what you think you have done, which has managed good risk.
And then you want to play offense.
Do you think, though you're going to end up with mega mergers in the bit, I mean that that's what happened in banks at some point.
I don't think so, because I think that we are limited by two other factors. I think our business is not at the will not in the long term be limited by capital raising. It will be limited by our capacity to find good investments and by culture. So unlike a public asset manager who can buy anything any day, we can only grow as fast as we can originate good risk we actually create.
And therefore, if we grow too fast, we.
Start commoditizing our business because we're forced to take things we don't want. And so judging our industry should be judged by our capacity to originate good investments, not by our capacity to raise money. But the second piece of this, and they're directly related, is culture. We are, at the end of the day, an origination driven organization. Whether our peers say this or not, they are origination driven organizations.
Often we're doing the first of everything. It's very hard to feed the first of everything into a model and get the right answer.
We will be more efficient because it will not.
We will not ignore us technology technological change, but the ability to attract the best people, have them want to come to work, have them spend their whole careers at Apollo is the primary job that I have.
It strikes me if you look at all the things we've talked about. You're lending money, you're trading private credit assets.
We just saw the headlight up there.
You're building a kind of retail business. At some point you begin to look very like a bank, with the one exception that you're not taking deposits. Is is not really what it's coming down to in the end.
Not really.
I mean what you look at as a bank works with a government guarantee, they take deposits, they do maturity transformation, and they primarily make money from the capacity of their own balance sheet. We do two or three different things. One is we don't take deposits. We don't have a government guarantee, but we originated investments and we distribute them.
And for a small portion of the investments generally, as I say, sometimes twenty five percent of everything, at one hundred percent of nothing, we keep on our balance sheet to match with our retirement obligations.
Thanks to a lot of those sort of things, they will originate loans, and then distribute them. It's not that different. Take the comparison slightly differently for you. If you're a public asset manager, you come in every day and you make a decision to buy something, and then you distribute it amongst the accounts that you manage, and then you go home. We kind of do the same thing, except we don't get to buy something in the public market. We have to go find it in the private market.
We structure it, we originate it, we distribute it amongst the accounts that we manage, and then we go home.
And so.
Everyone in the financial market, if you're not solely a trader, you're an investor.
That's what we are at the end of the day.
And in the broadest sense, if you think about the drivers of our business today, there are two drivers of our business. One global retirement crisis. Everywhere in the world we are short retirement income guaranteed lifetime income. Retirement income is a fixed income obligation. On the one hand, we need to produce retirement income. On the other hand, we have this global industrial renaissance primarily taking place investment grade companies, and we find ourselves in the middle.
We originate risk.
We put some of it on our insurance company balance sheet, and we distribute the rest to investors and source it for them without maturity, transformation, without government guarantees. And I believe we are playing a more important and a different role than most people perceive. And it's not just Apollo. This is the private market firms who have gotten to be sized. You don't get to be sizable in the deal business. The deal business can only get so big.
You have to serve some fundamental public good otherwise you don't get.
To be big.
You talked about culture, and as you know, Apollo is being drawn into the Epstein thing because your fellow founder, Leon Black, who left in twenty twenty one.
As part of it.
Polo's done an investigation, said everything was to do with him, And I'm sure this eats up and lots of your time. Just as a general question for you, well, a strange one if we look back at that whole period because of individual meetings and things. When you look back now looking to what would you have done differently other than perhaps not having had Leon as a partner.
Look, Leon made his own decisions and will I will not do that. But the answer is nothing. This is whether through good, good judgment, or good fortune. This is not someone I built a personal or business relationship with.
It's not someone that Apollo did business with.
If a relationship is, you know, one meeting over twenty years and a couple of unreturned emails, then that's a relationship. But other than he was Leon's tax advisor. We ran a tax We ran a partnership, not a company. Back then, Leon's tax position was relevant to my tax position. Other than that, I'm very sorry and didn't see what Jeff was doing me. I didn't like him for my own reasons. He wasted my time and.
Now but now it does occupy time and questions as well.
Even from the grave, he's wasting my time.
Maroon, thank you very very much for talking to us.
Thank you, thank you for having me.
Thank you