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Jim's out to the president of a Pollo Global Management out with a new report asking the question, what if the world doesn't work the way you think it does? Zouch from the team, going on to write, the era of free money is over, ultra low interest rates our history inflation is structural, not transitory. It's redefining risk return and the cost of capital.
Jim joins us. Now for more, Jim go Mornic.
I got to hire you at Apollo as a marketing guy. You're doing a good job.
I'm going to go one step further.
Thank you.
I woke up the other week, came into the office handwritten note from you, and it said, public markets power the narrative, Private markets power the economy.
Just start there.
What is the question you're posing for clients at the moment, what you want to get them to think about.
Well, it's a bigger conversation about market structure and the changing backdrops, about how investors think about investing from a sixty to forty portfolio historically, and the tools they have to create better outcomes with less volatility. The reality is alternatives have worked for forty years for institutions, and if we think thoughtfully about the growing need for retirees around the globe, how do we augment which worked well in the past but may not be the compass for the future.
On the other side of the coin, it's four companies eight thousand companies down to four thousand. The role of private capital is changing. Companies like SpaceX, Spie and Stripe can become to stay private for much longer. And so a little bit when I hear about your headlines this morning, I feel like many folks that come on talk a little bit about the world in the rear view mirror
versus looking to the windshield. And the real aha moment for us came two three years ago when we heard when we saw what was going on with rates rising dramatically in this cycle, and universally we all thought that the economy would hit skids and they would be tightening financial conditions, and that really didn't happen. So that was a very practical situation where we really said, maybe our
textbook that we've using all along is wrong. But changing market structure, how companies finance, how investors invest, it is a new playbook, a new.
Paradigm, redefining public and private markets. Our good friend Mark around would often talk about this and say often the distinction was risk high risk in private markets. And now the distinction I think you and a team want to make is liquidity.
Yeah, I mean the old idea when we grew up in a marketplace. This is my fortieth year in the business where private was was risky and volatile and public was safe and liquid. And there's many examples right now. I come from the world of credit and I started out as a high yeld slash junk bond trader back in the eighties, and there was it might have been it might have been a public security. But trust me,
it was volatile and it was risky. And now over thirty years, is now bond to become high yield and asset class. There's still a lot of inherent volatility in that. And again we would say that across the whole risk reward spectrum. You know, I grew up in Rochester, New York, code Ax, Xerox, Boujalmaan, three great American icon companies. They didn't get the memo on disruption. They were safe in investment grade companies and Vohil they're not in existence anymore.
Can we talk about how things have changed over the last forty years. So you and the tea would often talk about you are what you originate, you are what you create. The capex needs of companies now seem to have changed. I was reading the transcript from your address at a financial markets conference earlier this week, and you talked about the capex needs twenty to thirty forty years ago relative to now, and the change in quality, the
changing character of things. How important is that even where we're at.
Well, just just to reset that question. You know, in the last thirty years, the high yield market globally has finance companies that are going through either a regulatory change or technology change. Think cable, think shale, think airlines, telecommunications, And for the most part that massive catbas was on non investment grade companies. As we sit here in twenty
twenty five. In the next ten years, massive cap backs boom between data, AI, sustainability, energy transition, transmission lines, the transaction we did for our we this year this week in Germany. And so I don't think people are still thinking that private credit and private capital is small, ill liquid, non investment grade companies, and the reality is eighty to ninety percent of the private credit market is really investment
grade counter parties investment grade debt. And again many, many companies now are afforded the opportunity to stay private much longer because of the breadth and the breadth of the financing markets.
To build on what John is talking about, does private debt have more of a role than private equity at this point?
Well, the debt markets and the capital markets and the credit markets are as we As the Congress learned in seven h nine, it's the lifeblood of the economy. When ge could not roll over their commercial paper, it was the aha moment for the Congress to say, wait a second,
we need to act here. And so when you think about the scope of private credit and scale, certainly the application with investment grade solutions, it's in the multi multi trillions tend to forty trillion, and the pe industry is a seven to ten trillion, depending on how you think
about the dry powder and the overhang. So I would argue over the next decade the impact of private credit, investment grade and non investment grade will probably have as large an impact, if not larger, than private equity has had in the last decade, so.
The peak of private equities over well, I.
Wouldn't say that.
I mean I think that the private equity industry is going to go through an evolution, and it's going to be a Darwinian evolution.
And I think that.
The challenges of monetization, the challenges of upfront capital commitments, there will be fewer and fewer firms that are able to go to investors and have that dialogue and have that relationship. We believe for one of them because of our investment track record, But the reality is, I think that many PE firms that business model is going to change, and how can they adapt.
This is a really important conversation to be having, especially because on surveillance we keep talking about the divide between public markets and the underlying economy, and now it seems like it's growing an increasingly dramatic fashion, and we keep wondering whether the economy is really struggling right now, at least by virtue of some of these labor market pictures. The same time that you're seeing the oracles of the
world do very well, are you seeing that? Are you seeing the need for money to be a little more free right now in order to rejucee some of that activity.
You know, we're not seeing yet.
But I do think the question you're really asking is and it is the same question about you know, with the amount public markets used to be a great diversify fuire for portfolios, and it really was the bellweather how the US economy and the global economy was doing. But as more companies have stayed private and more companies are funding privately, you really are questioning that barometer on what
is telling you. Torson has a good piece out this morning talking about the concentration of the CAPEX cycle and how it's concentrated in a handful of companies in data, AI and technology. And while the capax is a massive number and it's driving a north start to growth, you're asking a provocative question, is it really hiding the underlying economy which is driven by private companies. Ninety percent of the hiring in America is by private companies, and is
at a different story today? It could be we're seeing if you look at the public numbers in terms of earnings over the second quarter, it be consensus by seven hundred basis points eleven versus four and for the most part, the credit portfolios that we oversee the multi thousands of counterparty basinusite to four thousand, it actually showed quality upgrades three to one versus downgrades in terms of performance. So in the breadth of our credit portfolio is we're not
seeing a weakness. I will tell you we definitely see more lingering inflation. And I do believe that the while this administration is dead set on getting rates lower, I believe that there is a legacy inflation issues in the economy. When's the last time any one of us bought something in the last year and he said, wow, that was cheaper than a year ago.
It has not happened.
And that's just in the and I do believe that's going to be the scourge of this rate cycle, because I do believe there's greater inflation and companies are having it a much more challenging time passing that along to consumers that we're seeing it across the board.
There's a lot to impact that.
One of the things I wanted to impact was the concentration risk and the AI financing that we've seen both in data centers and the energy transition. There's a quote in the last year that's just stuck with me for the last twelve months, and it came from the Alphabet CEO that the bigger risk is under investing and not
over investing, And that just sounded like a commitment to overinvesting. Now, I'd want to understand how your industry avoids a massive misallocation of resources at a time when everyone is chasing the same story.
Well, it feels like you have a bug in our investment committee rooms. I mean, I've been talking the last six months about the cycles of dark fiber in the late nineties, of shale on the early teens ten to twelve to sixteen, and certainly enterprise software the last five years. And you have to be concerned as an investor today, are you taking equity risk for a fixed rate of return? That's the ultimate sort of bubble if you would, And
I don't think that the true economics. Certainly consumers industry, the economy is going to benefit, but not all in industries as they evolved. Was it a great investor to be an investor? The cell phone is U is a great example. Only in the last decade is it become a good investment for companies to invest? So don't I don't have the answer though, once it's a question we're asking ourselves now. We find ourselves both on the debt and the equity side of funding a lot of the
data center activity. But there's a tremendous amount needed and there's a voracious appetite. But I certainly understand what the Alphabet executive was saying.
Just then there's a bit of a duration mismatch between how long it takes to build a data center and how long it takes to build the energy infrastructure to enable it.
And could that be problematic?
There certainly is we have spent more time. The energy supply issue could be a governor to growth and that's a challenge that we've not seen yet. But if you pencil out the numbers, that could be a concern. But I think the bigger questions back the first one we asked is these are ten twenty thirty year infrastructure builds.
Who really with our marketplace going towards indexes and ETFs and multipod shops that are all thinking about moment to moment liquidity, the era of the long investor is a question mark.
Who is that long investor?
And we would say it's the retirees of tomorrow. Every day twelve thousand folks in the US you hit sixty five, and the West, broadly speaking, in other countries around the world have not done a great job with retirees, and so the ability to thoughtfully introduce long duration infrastructure inflation hedge assets into these portfolios. In the UK they call
it matching adjustment for insurance assets. Those are really where the growth of our business is going to go, and that's going to benefit investors.
This makes a lot of sense, particularly if you're investing for retirement. You don't need daily liquidity. That's just launching. I think where the criticism is coming from for your industry at the moment is that family offices are already doing a lot of this. I think you had attain we talked about that a ton high net worth individuals are doing the same. You're now going go after retail, and then people start to feel a little bit uncomfortable
with that. Are you're looking for a new bank helder? Are we looking for someone else to pick up the pieces? What's the response from you and the team to address that head on.
I think it's all about doing it in a methodical, logical, diverse way. You know, this is all about the you know, the proper amounts and the proper diversity. Certainly, we would never advocate for someone taking an outsized portfolio of their retirement and putting it all into alternatives. But clearly, over the last thirty to forty years, history has shown us that an allocation of alternatives ten to twenty percent of
a portfolio increases returns and brings down volatility. And so from our perspective, there's a variety of areas in the world of credit, in particular the world of infrastructure, the world of secondaries that are more yield oriented, compounding type of vehicles.
And certainly we.
Have a view that private equity, while a very attractive asset class, even in returns to the next ten decade mid to high teens, that that should be done in appropriate doses. So it's all about diversity and proper portfolio allocation.
Jim's down to the president of a public global management still with us, Jim, let's continue this conversation. At the stand of the year, you talked about macro paralysis. This story is continuing. It just feels like this market public markets have moved on. Have you and a team moved on?
Yes?
I think if you landed from Mars today and you had not had the benefit of the last six months, the idea of the death of US exceptionalism would not be on your radar screen, and you'd have four or five things. You'd say, massive capex cycle in front of us. You'd say administration, pro business and determined to cut rates. You'd say that the last quarters public numbers in terms of equities and credit have been strong. And you'd say
there's a big M and a pipeline. We're on record to have the second biggest M and a light a year versus twenty one. So all those things would point to invest rates are going lower, spreads are going to stay tight, and I can give butts to all of those, but that is that's the trend going on right now, and the idea that investors were going to you know, boycott.
The us FDI has been massively strong in the last four or five months, and you know, knock Wood, we've had We've had a very strong year across our public and our private businesses, a lot of origination. This week we led a very large transaction for RWE, which is exactly what we're talking about about big private solutions. Energy transmission a very exciting business. It's a blockbuster business, one
we would never have talked about years ago. But they have billions upon billions of needs to restruct sure the transmission system in Germany. So the markets, markets are the animal spirits are fairly are back. There are lots of little hiccups out there, and whether it's instability or valuations or other headaches, but yes, active market. We've been active in the US and Europe dramatically this year, and the pipeline is quite strong.
Have you found the need to hedge from the US a little bit more given the fact that there is this policy uncertainty, but more so this question around the FED cutting rates, allowing inflation to run hot and an appreciation of the dollar.
You know, you know, certainly there's been a lot more hedging of investments from overseas investors, and certainly, you know, we typically because most of our liabilities are into dollars, we will hedge back to the dollar as well. But we certainly want to have exposure to other economies in the addition to the US because the concern about inflation.
Gee, and this is a real daily in Europe. Get the thinning you.
Do, well, you know, there was an interesting article I read this morning that a year after the Drag report, like eleven percent of the proposals and put in place. So I think companies are. I see corporate leadership in a variety of sectors, and I see a few government leaders, you know, passionately, passionately pursuing this. But I think the overall pace is not what it should be, and the paralysis of the broad government oversight in Europe is holding
the progress back. So it's not it's not as fast as we would like it, but it's a training we want to be on.
What would be an easy change to make that train and go fast?
You know, they've pushed for a variety of relaxation of some of the securitization rules. You know, basically a solvency two balance sheet for an insurer in Europe you have to own almost sixty five seventy percent of your assets need to be sovereign bonds. That's just too large an amount and it's very, very challenging and difficult to purchase and to hold securitized product asset based securities, which have proven to be a very good tool for insurance companies
and other financial services firms in the US. It's good for dispersing risk, and it's good for versus corporate purchases. So I think something like that securitized products would be a very easy and important move to make.
I think ceratlely many of us just conditioned by experience, conditioned to be disappointed by Europe.
Are we allowed to be disappointed? I keep thinking about what Howard Mark said after they announced the regime of tariffs, and he said the US is still the best place to invest, but it's less of the best place to invest. And so you start looking at other places and saying, yeah, there's hair on this and not going to get their act together, but at least there's some investment. We might
as well diversify. And I wonder how much that's driving people to like with seeing even when there still is a lot of skepticism.
Jim I would say, they've looked around. They still come back to the US, strongest, largest, deepest market in the world, greatest economy, rule of law, unbelievable banking system, creativity, intellectual capital.
It's it's the place to invest.
That found like he's running sounded like a politician space, didn't.
They maybe for mayor Yeah, he's run Jim. Jim's out of apology Jim, thank you, sir. You don't want anything to do with that.