Scott Kleinman Talks Intel, Apollo Joint Venture

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I mean, we have nothing to talk about.

What a shame.

So look, this is a big deal, eleven billion dollars. It does feel a very Apollo appropriate deal, but it is something a little bit different than what you usually do, perhaps in size and the type and industry it's in. So how hard was this deal to do? What did it take to get it over the line?

Sure?

Well, look, I think you're seeing if you take a step back, companies all over the world are facing unprecedented levels of cap x right, digitization, deglobalization, energy transition, and they're starting to think more creatively about how are they going to fund this? How are they going to fund this capital and private capital is going to play an

And the ability to scale it.

You know, these type of blue chip large cap companies, they're not talking about one hundred million or five hundred million, They're talking two billion, five billion, ten billion plus, and so the ability to really come up with those creative solutions in scale is really really critical. But I think you're going to see more and more of this coming because absolutely more from apollow but in general, just the need for this type of capital is insatiable, is really.

I mean, we saw in the earnings report right all these tech giants having an insane amount of copecks to try to get their AI capacity up. Intel obviously is one of them. They did those say that they're manufacturing won't be profitable about twenty until twenty twenty seven, So how much of this also is not just Apollo backing AI, but Apollo backing Intel for the long term.

Absolutely, this is all about partner selections, structuring. Every situation is going to be different. That's the beauty of private capital. It doesn't have to fit one single box. You can really be creative to meet the needs of the project, the needs of the counterparty. And this is just a great example of how you're going to see more and more of this.

Yeah, if you're going to see more of it, I mean, does Intel need more? They're trying to take a cracketed video that is no easy.

Feed, right, Well, I think Intel's announced over one hundred and fifty billion dollars a project, So that's just one of I think many companies across lots of different industries that really need this type of capity.

We're talking to other companies do besides Intel for this type of thing.

Well, no comment, but you can probably assume.

Which is the last thing on this, Scott because I mean, we are here in Europe, this is a europe deal. It's a plant in Ireland, and Europe has been behind on manufacturing. Is there some way that this is almost a test tube, that's a test trial, and if this works, maybe you do more in Europe like this?

Well, I think just zooming out a little bit.

I do think you touch on an important point, which is if you compare the growth rates in Europe versus the growth rates in the US.

Obviously it's undeniable. What's happening.

A big part of that is companies access to capital. Right in the US, in addition to the banking system, you have a very robust capital markets, a securitization market, a very deep private capital market. Europe, all of those things either don't exist or are very very small, very fragmented, very nascent, And I think you need to see more and more of this and you will start to see private capital play a bigger role here in Europe.

Yeah, it's a tougher environment though, because there does feel to be more regulation here. So how does that impact your global allocation That there's opportunities here, but they're a little bit harder to execute.

Well, it just makes it more complicated. But you're seeing it.

I think European leaders are starting to recognize that Europe is choked for capital, that that is limiting the amount of growth that Europe is falling behind, and it needs this type of capital. It needs to encourage private capital, it needs to encourage securitization in order to make that happen. And you know, I know Europe's been talking about it for a while, but you know, hopefully this is a bit of the wake up call it needs to get going.

There's also a rate divergent story happening in about twenty four hours, about three hundred miles from here, in Frankfurt, we'll get what presumably will be the first cut of this cycle from the ECB. Does that make a difference to it all that maybe there's easier policy here.

No, I think that's more indicative of the need of the economy needs to get boosted by I'd say artificial lowering of rates as opposed to the US, where we've been saying for some time the economy is so strong, rate cuts probably don't make sense yet.

Right, Do you think that there's some people in the US then that just have been doing the extend and pretend that they bought deals at high valuations and have just been hoping for rate cut. So what happens if we don't get one this year and maybe only a few next year?

Oh? I think that's absolutely right.

I think the reality of this, and I think what you know, it's the morning of the conference here, but I think you're going to see a lot of gps and LPs coming to the recognition that it's going to be a pretty dry spell for the next few years. Vis a vis the old portfolio of private equity companies,

What does that actually look like or what causes that dam to break, and then what does it look like when it does.

Yeah, I don't know that it's so much a dam.

I think the reality is private equity loaded up at the top of the market using very inexpensive debt. Valuation environment has fundamentally changed, and as a result, private equity sponsors are just going to have to hold companies longer, have to grow into those capital structures, are going to need to take on equity to get some refinancings done, and all that means it's just math that returns are going to be lower over the next few years.

Well, I'm sure LP's investors who hear the idea that they need to hold on for companies longer are not going to be happy with that. They've been clamoring to get their cash back. So how do they do both at the same time?

They generally don't. They generally don't.

I think you're going to see sponsors looking for creative ways to return capital, whether that's through structured equity investments or other things into these portfolio companies. But eventually sponsors are just going to have to accept the valuation environment is lower and start selling companies.

So you're getting ready to buy some deals you're getting ready to absolutely, are you hiring to match that?

No, we have a pretty robust we have you know, several hundred people already here in Europe and feel like we have a good footprint.

He okay, so you're ready, You're ready for the deals of what they come. Absolutely, Look what kind of valuation discounts do you think we're talking? How have doy could they get?

Well?

I don't think it's so much discounts as it is. The current environment is just you know, repriced. Uh you know, folks, you know that that that you know when when deals are purchased at a zero percent rate, that implied a valuation environment of X at a five percent rate, you know, risk free rate, you know that valuation environment is lower. And whether marks reflect that or not tbd. But the reality is it's coming.

And you know, one of the venues for exiting historically is pretty much closed. It's been iced over. That is I p O s. Unless you have maybe a really robust company that you can ipo. It's a really hard environment. But it's kind of counterintuitive because stocks at an all time high, you think that the IPO market would be back. So if it's not back now. Has something fundamentally changed absolute, Danny.

I think you're really onto something here.

The equity markets have fundamentally changed, right because of the massive increase in indexation in passive market participants. The market doesn't care about a three billion dollar IPO a five billion dollar IPO, and that's forcing sponsors to also think about, well, how do you exit? Right, because unless you're prepared to just exit at a mediocre valuation in the equity markets, you're going to need a different path, a different path to exit. And I think that trend is only continuing.

And that's tough. That's tough for small companies.

You sound a little bit like David Einhorn. He's also said that fundamental companies can't get a break because of just the price and sensitive buyers. So what is the good option? You say, Other ways to exist, other ways for liquidity. Take me out. You know, five ten years from now, where the IPO market. We've decided that this is no longer an option except for a few slim companies. What are people doing instead?

Sure, but by the way, I'll answer that in a second.

But it's that very disconnect that actually makes public deprivate. It's very interesting right now, Yes, the S and P looks like it's hitting all time highs, but you have a third of the companies in the SMP whose stock is down here to date. Right, that's just not reported on. That's not what people fundamentally know. But there's a lot of interesting companies a reasonable valuations out there. To answer your question, though, where do you go with this? You know,