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Polo Global Management president Jim Zeltzer is highlighting a pressure point on the horizon. He writes the following, if Alphabet can't self fund AI Capex, think about the smaller players, June is shaping up to be a real stress test for the investment grade market. Jim joins us now from More Jim, good morning, can see you.
Good morning. Always fun to be here.
Think about the paper that we've been moving. We have priced almost a trillion dollars, a trillion dollars plus of investment grade credit in almost record time so far. The share we're talking about, mega IPOs on the horizon, Alphabet, Alphabet issuing numbers that are so difficult to internalize, an eighty five billion dollar capital race. Is the demand out there to meet the supply.
I think it just shows the breadth of these global markets. And I think if I've come here in the last couple of years and I've used a term, it's always and not or, it's the IG market and the private credit market and the equity market. I think that theme just really continues. I mean, certainly what Alphabet executed this year, this past week in the scale, the scope. I suspect it won't be the first big mandatory convert that gets done. I'm sure many other companies in that sector are now
looking at these securities. The ability for an investor to clip a nice coupon and have a debt exposure to these companies, I think that's a new market. But you know, I think also I would also ask you to take on our step back, so it's not only the scale of these I mean, last fifteen twenty years, the annual equity issues between IPOs and equity capital markets activity has been plus or minus two hundred billion a year. That's
the number last twenty years. You take the year of twenty one out of spas you know with open Ai, Anthropic and SpaceX, those three companies will eclipse that number. And I think there's commentary about out what it means to take a company public today. I mean, the scale that you need to achieve to be relevant is much much higher than it ever was before. That impacts a lot of smaller enterprises that are five to ten billion.
I also think as much as we're talking in the last four to six weeks about the AI cap ex boom, which is phenomenal and unprecedented. I think we're forgetting that there's a lot of other industries. There's a defense industry, there's the utility industry, There's going to be a number of other industries. So I think it's broader. But these numbers are unprecedented. But it just shows you the scale of the marketplace.
You'll get into the heart of a potential issue, though, is the space for everyone, how much crown and gap will they be well.
I do think we've been consistent. Torson has been consistent about the impact on longer tenor rates for governments around the globe. I think that is a very real issue. I've been consistent here coming here in January and February April, their rates were not going down in the short term. I do think, you know, we've always talked about fifteen
twenty years ago, the crowding out effective government debt. I think you're seeing a potentially long term crowding out of this massive long duration capex boom around the globe and the impact on government debt yields around the globe. So I think there is some dynamics that But as I said a few weeks ago this year, the IG market will have net issuance higher than the treasury market in the US. I mean, we got to put these numbers in perspective. The mag seven capex this year will be
larger than the Defense Department spending. I mean, these are phenomenal numbers. And again, I just think it's broader. I think there is no doubt that there is there is health and breadth in the market. But I think some pullbacks once in a while and some good questions that get answered. You know, these numbers are on precedent, and these companies will have to make the aren't on capital to justify the cabex.
How are you at Apollo trying to protect yourself against the increasing risk as these numbers get bigger and bigger and as expectations get higher.
Well, it all goes down to what your liability is. For us, because we have our third party business as well as our regulated balance sheet, We're trying to find yours where we can fund the picks and shovels the AI infrastructure, not just the AI capex to the equity.
There's a difference. You know. We've been rumored to be involved in a variety of chip financings and those financings allow you to get in the middle of a variety of investment grade companies that want to fund the purchase of the chips for a variety of these companies, and you can do it in a structure that basically lets you amortize that risk over three, five, seven years. So you either are taking if you take residual risk, you've taken your basis down to zero. So I think there's
ways to do that. I'm not suggesting there's investor who are really good at buying the equity of these businesses. That's not what we do. But I think the ability to fund the infrastructure and really structure at such you're not taking residual risk. I think there's an ability to do that. Now it comes at a lower rate a higher quality counter party. But that's all really structured.
Well, let's talk about the rumors, so I'll explore them in ways that maybe don't put you on the spot too much. Let's just say there is a firm that's getting together with another firm maybe talking about roughly thirty six billion dollars of debt financing to help maybe some company like Anthropic pay for some chips from say Google. That broad coom House develop Let's just throw that out there and just say maybe that's a story that might be on the rise and something that happens. Let's get
into how you structure that. So there's a senior part senior trunch, and then you've got a subordinated trunch as well. Can you just explain to us how you could use an ig balance sheet like broadcomp to support something like that, Just how people understand, how you get I.
Think that what I would want to highlight is in every financing there's folks who want to take shorter duration risk one two, three years, there's folks who want to take longer duration risk three five, seven years. There's either senior and then they're subordinated. So between maturity between where you fit in that stack, you appeal to different buyers in the fixed income universe. The fixed income universe is like the equity universe. There's value buyers, there's growth buyers.
There's growth in the reasonable praise buyers in the equity market. In the In the fixed income market, there's folks who like short duration risk one year, two year risk i e. Sometimes banks. There's longer duration investors who will take more of a residual risk, and so you're just appealing to different risk tolerance all in the investment grade community. But
you're doing it just like in the equity market. When when Alphabet goes out and raises an equity deal and a mandatory convert, you get what they're really doing is they're appealing to an income buyer in the equity market that might not necessarily be able to buy that equity
because of the low dividend yield. So again you're just really appealing to the beauty of the US is we have the most robust, deepest, broadest markets in the world, and so you know, a company can do a mandatory convert five, ten, fifteen, twenty billion in size, and there's plenty of equity income accounts that want to buy that, and you can also do a large equity offering and then they follow on at the money offering over the next several months, and
there's breadth and depth very really. Nowhere else in the globe has that breadth and depth of the marketplace.
Breath and depth is certainly here, which is the reason why you're seeing these incredible IPOs and debt issuance. The scale of money being raised though around the world really is mind boggling. It's not just the US, it's Germany, it's also over in Asia in a number of places, whether it's IPOs, whether it's a corporate debt. Where is the money coming from?
Right?
I mean, how do you compete for this money? And how much higher do you yields have to go? Not just in the treasury world, but also on your end when you see coupons, don't they have to climb considerably just to compete for your capital?
Well, you know, you know, relatively. Even though rates have risen to where they were three to four years ago in the US, rates in the US are approximately where they've been over the last thirty to forty years. Like we're in a more normal rate environment right now. And a theme that I've been talking about I've been here over the last couple of years is we have an
amazing broad retirement challenge around the globe. There are many investors in the UK and Canada and Australia in the West that do not have the right retirement saving structure. At the same time, you've got this major global industrial cap BAX today it's an AI, It'll be in other industries and appropriately matching that duration of demand for assets with the duration of the companies needing to borrow money. It Actually you'd be surprised that depth and breadth of
these markets. And so you know, we're active now in the UK. In the UK there's a concept called matching adjustment, whereas a regulated balance sheet you need to actually have long duration and so they funded student housing and a lot of other activities. So you know, I do think there is a natural point in time right now where we do have these retirement pools around the globe that
are looking to invest long term. And actually, if you look at what the treasury market has done, the Treasury has really been funding a lot of their financing in the short end the last three to five years, really one to five year financing. There's a shortage of long duration paper out in the globe right now. You've had other guests on this show talk about the lack of long duration assets against the breadth of long duration liability. So I do think that's a broader theme that we
should talk about. The other thing I would talk about is, you know this came up last year. We were talking about a lot of the teriff activity, the benefit of the breath of this of these capital markets is US companies are the beneficiary of lower cost capital and access to capital. That's a that's a that's a flywheel of economic growth. And again going back, what Alphabet was able to do their IPO was you know, one point seven billion twenty six years ago or twenty five years ago.
And it is phenomenal, but it is a it's a hidden gem of the US economy. And so when we talk about taxing foreign investors, we have to be very very careful because this cost of capital, this breadth of capital. I think it's no surprise that we've been leading the globe in this, in this cappec cycle, because these companies do have access.
It's the sacred source, without a date, no doubt, without a doubt. We at the creative stage of financing from the outside looking at and people might hear some of these stories the conversation we just had in I think circle of financing off balance cheet debt. At the creative stage, the more dangerous stage, I would suggest.
You know, I think that you always have to be a where of who's taking equity risk at a fixed rate of return. I think my forty one years tell me, I want to be investing with the leading companies. When you think about the world today in terms of winner take most concentration in the top three or four companies, I think it would lead you to be wanting to invest alongside these companies and to do so in a
manner where you are well structured with downside protection. But I think that there will, let me be me very clearly, there will be companies that enter this CAPEC cycle, some on the investment grade side, some on the non investment grade side, that their business models will prove not to be as resilient over five ten years. That's the destructive aspect of capitalism. And I think you're getting paid for
it still with a lot of structure. But I do think the overall trend is in the right direction.
So we're not at the prospect the very precipice of hitting capital constraints right now.
I don't think so. I think. I do think it's interesting when you think about, you know, why Alphabet did this. I mean there is a depth and breadth in the IG market. We talked about it earlier, how much they've done. What's interesting, though, is I talked about a lot is in the equity market. If you're an investor, you don't mind or you can absorb the idea of getting very concentrated in a name because you can move in and out of it very quickly and you're getting paid because
of the convexity of that equity. In the fixed income market, as a IG buyer, bonds don't go to two hundred, they can go down dramatically. And being a little facetious there, but my point is you need to have breadth of distribution and diversification in the fixed income markets. And so it's not as if Alphabet or Microsoft or Broadcom doesn't have exposure. They're just trying to find a broader universe of other buyers that will be able to access and provide funding.
Jim, You're going to stick with U. Jim's out to that of Apollo Global Management. So here's the lass this morning, the President maintaining a deal could be there, as Tyran says, there has been no tangible progress, and Haspala and Israel continue to exchange strikes.
They continue to exchange strikes.
And a question we have been asking on this program is at what point would this administration say, actually drones coming at our allies. Ballistic missiles coming at our allies and our air bases means that the ceasefire is over. I think the most important story is the Wall Street Journal overnight saying Trump has told aids privately that when he would consider ending the ceasefire is if Iran targets
American troops directly. So if American troops lives are injured in a way or that they're killed, that is when maybe he would decide to end the ceasefire. So basically, I think this tells Iran they can continue with some of these clashes and skirmishes until now until they get a deal. The President says, we're going to get a deal soon. But the point you've been making continuously is how many times still wait in here Since the end of February.
For markets, it hasn't really mattered who remembers this conversation from a few months back. Take a listen to this.
Sometimes there's days we should just go out and take a walk around for thirty minutes. You just had a quarter with record M and A, literally record M and A in the United States and globally we've really lost a plot on credit. We're talking about a little bit of skirmish on the sidelines here. I suspect if I'm sitting here, in three to six months, we'll be talking about a much much different backdrop. Here we are.
A few months later, Jim's out to bank with his Jim, congratulations because you were dead on, absolutely right. A few months later the markets stopped having this conversation about this issue.
Well, it was interesting to see with a strong earnings season in the last six weeks, you know, and they were strong across the board. The big focus was Capex. You know who has the bigger Capex budget? Almost it's in essent. That's a marketplace where there's more greed driving the market than fear, is David Solomon quoted yesterday. So
that's certainly the backdrop. I mean, certainly, I've been consistent having a view that for the next year to two years, we think that inflation is a bit more of a concern. I don't think it's going to affect the fundamentals of the market. I am candidly surprised, and I've been consistent that if we were still talking about Iran at this point, with the straits being closed and the impact on oil prices, that we would see some second and third derivative volatility.
That so I'm a bit surprised, but you know, momentum and emotions can work both ways, and they can change pretty quickly. But I do believe this bigger trend is upon us, and I think this will be the conversation we have for the next couple of years.
Take a walk. That was the advice at a time, and it was good advice too, based on how things have turned out. The one thing that really surprised us is how much earnings expectations have climbed through this war. That was the surprise and clintingly to the market as well, Bromo, given the price sanction we've seen.
Yeah, and when they don't out surprise perform in a significant way than they're penalized at will cost. And ultimately, this is one thing I'm wondering whether this is keeping either Jim Upper or others the labor market. And at what point do we start to see the ramifications of all of these cuts potentially to pay for AI. And we're seeing that some of the Challenger Christmas Challenger reports earlier this morning.
Jim will steight chown we are the return on investment stage. Is that still further down the line, and we at this point where you have to cut operational expenses to support a lot of this funding at a lot of this money, I think.
There's some marginal optimization around hiring right now. I think the secular trends that are the big question mark in front of a lot of folks. If we're sitting here in June of twenty eight, we will have a much better insight in terms of really what's the secular impact of these this CAPPEC cycle and AI on broad broad employment numbers. I think any changes you see over the next year or two were you know a percent, you know, a quarter of a percent up or down. I don't
think there are long term secular trends. And I think we'll be talking about how does the extent of this CAPPEC cycle, the extent of the AI boom, the extent of the return of investing capital. That's the conversation I think we'll be having. And I think that then at that point in time, once you have a sense of the employment numbers, are the employment impact, Once you have a sense of the returns, then that's going to feed into is the inflation going to be curtailed? And turning
into a deflationary environment. But I think that's eighteen to twenty four months out. I think anybody that tells you they really have it nailed right now, I would suspect that they really have not been doing this for a long time. So I think there's a healthy degree of humility you have to have by making those huge macro views.
Does the labor market keep you up at night this transformation?
I think it does. I think any leader of a business today is thinking about how they want to evolve their business. Last week, I was at a leadership meeting of a bunch of CEOs done in Texas. They were, you know, these were not all tech companies, and the big questions were, how do I fund my aspirations in my industry? That was an industry. That was a conversation that they would not have invited the head of Apollo to be there twenty four months ago. Okay, we were
front and center in that conversation. And they're also thinking about how they deploy their resources, of which human capital is the biggest element, and they want to execute their plan today, but they also want to make sure they're investing in the future. And I don't think anybody is having a massive Yeah, you're seeing sub highlines of companies that will make ten or twenty percent, you know, hiring cuts across the board. Yeah, I don't think that's that's the mainstream.
Jim So always got to see you, buddy. I thank you. Jim's own to there of a public global management A good lesson for a soul.
I took a walk yesterday, good beautiful day in New York. Ronal