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Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.
And I'm Jill Wisenthal.
Joe, do you remember those stories. I guess they were a bigger deal earlier this year, but they're still kind of out there, the stories about how the stock market is all about the big tech companies.
Yeah, absolutely so, I mean, yeah, it still is.
It still is.
But I think like at one point earlier this year, there was a number that caught my eye. I think it was like thirty percent of the S and P five hundred came from the mag seven. So, you know, off of that, Microsoft, Nvidia and all of those. And I guess as all the hype and interest over AI has grown, the import of tech companies in the equity market has increased in size along.
With it totally. You know, anything is an interesting stet. We're recording this on September twenty fifth. If I look at the major stock in the seas for the year, the NAS deck or as we used to write the tech having NAZ deck is up twenty eight point three. The S and P five hundred is up twenty point three five percent, virtually the same. So I think it's telling the degree to which the S and P is becoming the nas Deck in fact that we should that would be a good story or great headline.
Yeah.
Basically, the S and P, by virtue of the dominance of these handful of megacap tech companies that dominate both index, the S and P five hundred is morphing into the Nasdaq.
Listeners, you get to witness how journalism happens in real time. You come up with Heplin, you.
Notice some numbers, and you're like, oh, let's see if we could back a story into that.
Okay, Well, speaking of everything becoming tech, I realized that, like, one thing we haven't really spoken that much about is what tech and all the recent enthusiasm for it actually means for the credit market, for the world of corporate bonds.
Yeah, this is interesting, and there's probably a reason that we don't think about this very often, which is one is that if you look at like the really big tech companies and even like small companies, you know, a lot of it has not historically been credit funded. A lot of it has been equity funded, and VC is equity, and you know, these companies produce so much cash from their earnings, and they can fund themselves out of earnings. That credit to some extent hasn't been part of the story.
But a few things a you know, some of these companies mature and they start to issue debt, and they do have debt, and some of it's to fund buybacks. We're also in a period where a lot of tech is more capital intensive than it had been in the past, and sort of project based financing is more of an issue. And maybe that's like it sort of you know, some
of the data center plays, et cetera. So I believe there are interesting credit stories that, for reasons I can understand, have not gotten much attention.
There definitely are interesting credit stories, and I am very pleased to say we have the perfect guests today who is going to tell them. We are speaking with Rob Bittencore. He is a partner at Apollo. He is the co head of Opportunistic Credit. He's also a member of a bunch of different investment committees over there. Rob, thank you so much for coming on all thoughts.
Tracy, Joe very excited to be here, longtime listener, and.
Fan ah right, thank you. So let me ask the basic question, but what does the co head of Opportunistic Credit at Apollo actually do? Opportunistic credit sounds like you know, something you might get at college. What is it exactly?
So before I describe what I do within opportunistic credit, I think it makes sense just a level set. Where does that sit within the broader appall uplat platform. So you know, Apaulo is an alternative asset manager and a retirement services business. It manages about seven hundred billion dollars of AUM, five hundred of which sits in our credit business. And I focus on the opportunistic pool of capital, which is about thirty billion dollars. So what is opportunistic It
is not as bad as you make it sound. It is really credit investments on both public and private side, targeting returns of eight to thirteen percent broadly speaking. So in terms of what I do within that business, I co lead a group of twenty analysts who are sector focused and really are tasked with identifying, sourcing, and underwriting, you know, the ultimate investments that go into a series of funds that make that thirty billion dollar AUM pool of capital that I mentioned.
So it seems like you know I mentioned that, you know you do have debt issued by tech companies, and sometimes they run across the headlines. Sometimes you read like, oh, Apple is selling a bomb yourself to sure these do not sound like exciting areas for opportunistic credit at that level because they're pretty close to like triple a rate, Like if I'm lending to Apple, it's like the next closest thing to probably lending to the US government in terms of the spreads and.
Stuff like that.
So when you talk about like opportunistic credit and the opportunity to actually get those like substantial return as you said, eight and thirteen percent, are where are we typically looking.
When I joined aupoll on two thousand and six, high yield and the lever loan market were not synonymous with technology. People thought of those as ways for slower growing companies to finance themselves, companies that produce consistent, dependable cash flows. Fast growing companies typically didn't look to the sub investment grade market for financing. But that's steadily changed over time.
So if you look at a lot of the private equity activity, which is a huge source of credit that goes into the hy old market, about twenty five percent of LBO activity today is in that technology space, and that's steadily increased over the past ten or fifteen years. It was about twenty percent before the pandemic. So that's mostly been in software related names.
Yeah, right, So there are various p firms that are buying these of middle markets type software company.
Or even larger multi billion dollar companies increasingly, so the scale is certainly there. Today, about fifteen percent of the levered loan market is software related. There's less of an exposure in the higal bond market about five percent is technology related. But I do think you have that critical mass of technology names in both markets today. Obviously not as intense as you see in the equity markets, but it's definitely a market that's become more tech focused during my career a topolla.
So what does that mean for the things that Apollo specifically is buying. The growth of the private market, the rush of private equity money as well, does that translate into specific things that you're doing, such as direct lending?
Sure? So, a lot of what we've been talking about right now is with respect to below investment grade, and you talked about the fact that the larger hyperscalers have largely self financed themselves or have gone to the public ig bond markets. I think some of the more recent technology themes that we've seen, namely AI, which I know
something you all have spoken extensively about. I think what's interesting about this trend relative to maybe more recent technology trends like smartphones and mobile computing, which was relatively asset light, right, it was developing applications that sat on top of Android and iOS, which didn't really require a lot of capital. AI, which I think you referenced before, is very capital intensive.
You need to build the data centers, you need to build the power to support those data centers, you need to build the chip making facilities, to build the GPUs which are used in the data centers, and that is all going to require capital. A lot of that capital is not going to be provided by the high yield markets. Where it will be provided, in our view, is from the private investment grade market, which you know, when people think of private credit, they don't necessarily equate it with
investment grade. But as an institution, over half our credit AUM is associated with our retirement services business, a theme which invests primarily in long duration investment grade credit, and so I think there's a huge opportunity for Apollo and others to invest those pools of capital that are looking for long data investments, high quality behind some of these themes, and I can go into more detail around that if that's helpful in terms of some of the areas we've been focused.
I have one question just before you do that. But if I'm an investment grade issuer, certainly, if I'm an Apple or someone like that, why would I want to go into the private market to begin with? I'm IG, I can sort of, you know, dictate my own terms. Presumably, why would I even go down that route?
Yeah, I mean, Apple's a tough one, just because it's probably one of the highest rated companies in the world and one of the most problems take an average, average IG company. I think there's a couple of reasons. One is, some companies want a diversity of financial sources, right, They want toinance themselves both in the private markets and the public markets, and so having access to multiple avenues of
capital is just good risk management. I think specific to some of the themes we're talking about, and some of this project based financing, it's complicated, right. The underwrights they take a long time, they take detailed diligence. Oftentimes, when we're looking at these sorts of opportunities, we're bringing in third parties to help us analyze the situation domain experts. So that's really hard to do on a syndicated basis.
You know, the investment grade public bond market prices on a daily basis, right, it's called a drive by a company will come in, hit the market, move on. For some of this project based financing, that speed doesn't really translate, and it really requires bilateral negotiation and partnership to ultimately structure these deals which have more complexity than your regular way publicly traded bond.
Before we talk about some of these project based deals or these CAPEX heavy AI related things, just going back to you know, you mentioned in the mid two thousands the sort of rise of PEBAC purchases. How much of that market emerged as a function of software as a service, specifically paying for software with subscription revenue. You have something
maybe like you know, something that does dental billing. You get it an eighty percent of dentist office and then it's like, okay, it would take a lot for this piece of software to ever get uprooted, and so let's just lever it up, put a lot of credit onto it, and then you have this fairly predictable revenue stream for years and years.
Okay, I think software as a service has smoothed out cashflow profiles. It's made those cash flow profiles more predictable, which credit investors like. And it's a relatively capital hite model. There's not a lot of capex associated with these businesses. And as you mentioned, you know, many of these software applications are very much embedded in the workflows of enterprise. Isn't very hard to switch out, which is why you have very high retention in a lot of that market.
So I think that's certainly one of the reasons why that sector has gained so much popularity amongst some private equity firms.
Okay, so we sort of outlined the growth of SaaS in credit markets, but talk to us about the growth of I guess ai related tech in the current credit market. What impact is that actually having.
Within below investment grade few and far between. Recently, we've seen some excitement around increased bandwidth needs for data centers, so connecting the data centers that are being built. So there's a couple of companies that operate enterprise fiber optic networks that have benefited and that have announced some partnerships with some of the hyperscalers. So I think that's a tangible example of some of this infrastructure build out infiltrating
the high old markets. I think beyond that, it's really been more angst inducing, honestly, with a lot of investors trying to figure out, you know, are there going to be losers?
Right as this technology the disruption story exactly right, and I still think we're in the first or second ending with respect to determining who the losers are going to be from this technology.
There were some announcements earlier this year around Klarna, which was using AI chatbots for some of the customer service needs, which created some volatility and some of the call center operators. So I think that would be an example of a sector that has felt some impacts from AI, but for the most part it's been somewhat limited.
Joe, this reminds me of one of the fundamental realities of credit investing, which I think came up in a recent episode with Oak Tree's Danielle Paul. But really a lot of it is about trying to avoid the losers.
Our brains went to the same place, right, So when you're picking a tech stock, you want to pick the winners, and when you're lending their companies, you want to avoid the losers. Which sort of brings me to exactly what I was going to ask you, which is like all credit investing, but all investing is going to have some sort of like you look at the balance sheet, you look at the cash flows, you look at the metrics, and then some subject matter domain expertise.
And again, if.
You're picking stocks, you're like, no, this is the company whose chip is going to be the winner. This is the company whose liquid cooling system for data centers is going to be the winner. Is the nature of sectoral analysis from a credit perspective a little different because it's about loser avoidance.
So certainly there is less asymmetry just mathematically in bond investing or in credit investing, right, your upside is capped. It's not necessarily capped at par. By the way, depending on the call schedule of a bond, bonds can trade over par. You don't have the asymmetry that you have in the equity markets. So through that lens, I do think there's more of a downside protected mindset that credit investors bring to bear. I think you touched upon understanding
the major trends and themes in a sector. That's something we spend a lot of time thinking through because of that risk that technology can potentially play from a disruption perspective. Right, you know, what are the major themes around technology in the market today and how is that going to influence individual sectors? And that gives you a little bit of a guidepost in terms of maybe not what sectors to entirely avoid, but where to be very careful as you're making,
you know, analyzing the opportunities in a particular sector. You see that dispersion very much in the market today, right. If you look at the high market, which is trading about three hundred basis points from a credit spread perspective, and you look at the sectors that have the high proportion with spreads above a thousand basis points, it's cable satellite, it's telecom, and it's broadcast TV. And in some instances you see those heightened credit spreads because there's too much
leverage on individual companies. But I would suggest that there's clearly something sectorial going on in those sectors. That's creating some headwinds, which is leading to those elevated spreads.
So, speaking of losers and disruption, could you maybe walk us through a specific example of like, suddenly there's this new thing and it impacts a different credit. Are there specific instances that you've observed?
Sure? So a recent example would be the satellite industry. Yeah, say more about that, right switch company. Oh in starlink impact right elon musks. It's a subsidious SpaceX. Starlink operates the largest low Earth or a bit constellation of satellites, providing broadband at higher bandwidth than legacy technology with lower latency. Incredibly disruptive to some of the existing satellite communications providers.
Well, it's a name of one. I'm going to pull up a ticker.
On my terminal. SEES is one of the largest names in the space. They recently merged with Intelsat okay, thank you. And there's a group of about five or six of those players within that sector. And so that's a very tangible example of a new entrant with a new technology that has advantages relative to the existing technology, which has
created some headwinds in the broader space. Now, I do think the industry, and this is a trend that we tend to see oftentimes, when new technologies disrupt a sector, you actually do see more consolidation because it's a way for the industry to adapt effectively by getting larger cutting costs and then hopefully figuring out a way to better compete against the new entrant market.
You kind of anticipated my next question there, but what happens to pricing in these scenarios and how quickly do existential threats to a business model get priced into a company's corporate bonds or loans or whatever they might have outstanding. Because I feel like, on the one hand, if you're getting a major competitor in the form of Elon, Musk
and Starlink, that's bad. But on the other hand, credit markets are notoriously slow compared to stock markets, and on the other side, it can spark defensive measures, consolidation or cost saving, which would be very, very valuable if you're a lender to this company.
I think the market reaction time has increased over the last five years, and I think the reason is the first widespread example of disruption in the credit markets was retail and everybody knows it, Amazon e commerce its pretty sure store all of that dead malls, and I think that played out from sort of maybe twenty twelve to
twenty eighteen. You had a spate of bankruptcies and retail failures, and I think the market realized that, you know, it's hard to necessarily fight against a secular trend that powerful, so we better start paying attention to it. Interestingly, I would argue sometimes the market overreacts right and so counterintuitively it could create interesting long opportunities. A great example, in our opinion is the cable industry. So cable industry did
very well during the pandemic for obvious reasons. There's been some normalization post pandemic that's impacted their business. But from a secular perspective, the industry's face competition from a lot of the old line telecom companies starting to build out fiber, which has created more competition. You've also seen the likes
of Verizon and T Mobile offer home broadband over the airwaves. That, on the margin, I think has created this narrative disruption within the cable space, which has created quite a bit of volatility within the capital structures. We still like the cable space. We still think it has a lot of really attractive attributes. It's typically duopoly market in each region produces stable, consistent cash flow in the hierarchy of needs.
You know, it's sort of air, water, food, cable, cable, broadband, and so we use that as an opportunity to lean into the industry over the past you know, eighteen months. So it's not all bad news, per se. I do think sometimes the market tends to overreact or maybe act too soon, right, Sometimes these trends do take quite a bit of time to play out.
No, I mean this makes a lot of sense. Like we can all look at say like, oh, you know what Elon Musk is putting satellites into space. This is going to allow me to cut the cord at home, et cetera. Well, we're probably overestimating when I just tell that story the speed at which I'm going to do that.
And I guess, like, just internally, maybe there's a better solution for me, But it would take me a while to get comfortable with the idea of just like cutting off my broadband internet excess in their apartment.
Inertia is a very pet can be a very powerful force.
I pay for a lot of things. Tracy and I just like, I don't know why, and then I get a bill and it's like some app I downloaded three years ago, And.
Yes, there is that annoyance.
Okay.
So, speaking of other things that have happened in recent years, a big one has to be the influx of government money into tech related areas, so data centers, also clean energy technology, things like that. One thing we often hear when it comes to fiscal spending is the idea of crowding out the private market. And I'm curious, as someone who sits at Apollo and is basically in charge of directing a bunch of private capital, is that something you notice or worry about at all.
We haven't seen any signs of that at this point, but certainly the fiscal situation from a macroeconomic perspective is something that at a high level we're constantly watching. Clearly, I think the budget deficits at two trillion dollars, which would seem to be unsustainable if it continues, you know, in perpetuity. But haven't really seen a crowding out effect
per se, you know. If anything, I think, you know, some of the more recent government programs that have targeted investment in specific sectors that are deemed to be strategic has been a positive development in terms of attracting crowding in crowding in almost attracting private capital alongside you know,
the government investment. So you know, whether it's the Chip Act, which allocated fifty billion dollars to construction of the domestic semiconductor supply chain, I think that certainly had a positive impact. You have the Bead Act, which is looking to extend broadband in rural communities. I think you've seen a lot of cable providers and other telecom providers talk about the
opportunity there to to potentially utilize that. And then obviously the Inflation and Reduction Act has clearly focused resources on, you know, the build out of the clean energy infrastructure, and I think those aligned very much with some of the major themes in the economy and the infrastructure needs in the US, and so as a firm, you know,
we're very much focusing on those sectors. With respect to semiconductors, we talked a little bit about it, but you know, recently we announced eleven billion dollar joint venture with Intel around one of their leading edge or their leading edge facility and Ireland, which you know, I think is part of that major trend of bringing back or making sure that we have you know, stable, secure supply chains for critical industries like semiconductors.
Going back to satellites for a second, if a legacy satellite issue and we're not going to name any names, go bankrupt or something like that. You know, obviously, as credit investors, you think about collateral and there are obviously assets that a satellite provider would have. However, if a satellite provider were to go bankrupt, it might be because
those satellites just aren't competitive anymore or whatever. How do you think about the value of assets that you could seize in a bankruptcy when there is a question that the reason that the company went down is because that technology is no longer competitive.
So in a vacuum, it's it's hard to answer that question, just you know, because it's so fact specific and situational.
So talk to us about how you might Right.
So Intel sat did go backrupt.
Oh yeah, all right, Risco, let's talk about that.
But it was a little bit of a different situation given they had quite a bit of wireless spectrum that was in the process of being repurposed to support wireless Networks, which was a huge asset for the estate that ultimately you know, helped underpin the reorganization of that company, which has been very successful by the way, as I mentioned before,
it's been acquired through a merger with SES. But we generally try to avoid sort of secular loser, if you will, because in my experience, predicting decline curves and businesses that are facing significant headwinds and technological disruption can be really challenging. If there is like true fundamental disruption versus angst inducing
headlines that might not answer your question directly. Generally we want to avoid those sorts of situations if we are in a position, you know, we are invested behind a company that may face some of those challenges. Thinking more broadly across the industry, as I mentioned before, disruption tends to be a catalyst for consolidation. Thinking through the potential value of those assets as part of another company can be one way to frame, you know, downside valuation.
In our experience, I'm going to jump to the polar opposite of downside valuation and talk about upside valuation because certainly in the stock market there is this ongoing discussion about all the hype around AI and tech and whether or not at an extreme level it might be a bubble or at a minimum it is potentially overvalued. Do you see that kind of angst in the credit market?
And I'm thinking specifically if you're talking about new technology, often there's a lot of uncertainty embedded in these business models, and you see a lot of CEOs talk about like total market size, and maybe they start acquiring other companies and they start doing things like ad backs which affect their credit profile and things like that. But how are you sort of separating reality from future value specific AI
or specific to tech. But we could definitely talk AI would seem to be a prime example there.
I think it's early. I think the quantum of investment that is being allocated the associated infrastructure is unprecedented. There are a lot of estimates, but broadly speaking, one gigawatt of data center capacity costs about ten billion dollars to build. I've seen estimates that AI is going to require over one hundred gigawotts of capacity to be built.
So is that a trillion it's trillion dollars.
And that doesn't include the GPS that go into the data center. Then you have to talk about the power that's going to be needed to support these data centers. A gigawot of natural gas power production cost a billion dollars, a gigawot of solar production cost a billion dollars. The last nuclear plant built in the United States was about five gigawotts. It costs thirty five billion dollars. These are huge numbers, and so that's real, right, Those dollars are
going to be spent. And I think the sponsors of this technology, which are largely the hyperscalers, have very, very very deep balance sheets, right, and so I think that is going to give a durability to the trend and instill a patience, if you will, versus other technology cycles we've seen, which have been very dependent on the public markets, the equity markets. You know, the Amazons and the Metas and the Googles can afford to play, and the Microsofts
can afford to play the long game. So when will this translate into tangible revenue? I don't have a strong view on that, but I do think that the market will be relatively patient. From that perspective.
Let's talk more about this build out of data centers than specifically one of the things that I've seen some headlines about and I'm not entirely sure whether they're real. It kind of seems like maybe it's being overegged a little bit. GPU backed loans and some of the day centers like, hey, you know what, Michael bust but then you can have our Nvidia Blackwell chips something you do.
Whatever?
Is that real? Is that a thing that's going on?
It absolutely is say more about that. I don't want to name sort of company names because I don't know it's been like publicly disclosed.
We talked to the core weave cso for example, they're a big player.
In this, So we've looked at those opportunities before. I understand the attractiveness of the opportunity. In many instances you have high quality counterparties that are utilizing those GPUs. Yes, I think is part of the credit support for those loans. If you do believe that there is this really unprecedented secular push to build out associated capacity that should be supportive for the underlying value of these chips. The counterpoint
would be these are new markets. You know, people I think don't really have a lot of empirical history to point to in terms of determining what they may be worth under various scenarios. So, but clearly there's going to need to be a financing solution if all that data center capacity does get built out, because you know the numbers I mentioned, you know, trillion dollars, you know, multiply that by one plus to determine what the associated costs
of the GPUs required in those data centers. And that's not all going to be equity financed. So it wouldn't surprise me to see that market grow further.
So I'm old enough to remember when we have the first securitization of solar panel leases. I think it was by like Solar City or someone like that, and that was that was such a novelty at the time, and I'm pretty sure I wrote a story that was like
Sunshine backed bonds, hahaha. But in general, are you seeing a resurgence in asset backed securities ABS for some of these tech related investments just because of the scale of the investment that's needed and maybe some of the interest in collateralized lending.
So there's definitely a developed market for data center backed ABS issuance. It's a relatively small market, so it's clearly going to have to grow if all this capacity does in fact get built out. We have continued to see innovation in the ABS space. I talked about the build out of fiber that's occurred and some of the challenges
that's created for the cable industry. That is a market that now is accessing the ABS market, where companies that have built out residential fiber are taking those assets and effectively dropping them into securitization vehicles and then raising capital at attractive rates relative to what they could raise in
the public high you bond market. So the market is very creative at meeting needs, and so I would suspect that you're going to see over time more ABS type structures in addition to the role private credits going to play in financing these projects is part of the funding solution.
By the time this episode comes out, we'll have recently released an episode on Talk You a Lot about the nuclear build out or this hope that many people have for some sort of nuclear revival, and we recently had the news of the Microsoft would committed to buy a bunch of energy from Constellation to turn back on one of the reactors at Three Mile Island and there is a real like chicken and egg problem here because the nuclear
players need to have that guaranteed demand. And also it's risky to build a new reactor because we've were out of practice as you mentioned, and so forth. Is that going to create any opportunities as you see it, like, okay, if there is some momentum that gets going for some of this like difficult construction projects, is that something that you could see coming across your screen that space.
Absolutely. I mean so a little bit out of my element. Not a nuclear power expert, so I don't want to misspeak, but I think the consensus is it's unlikely that in the near to medium term you're going to see the construction of a large scale nuclear plant here in the United States. I do believe that there's opportunities to increase the capacity at existing facilities as well as restart brown field facilities. So I think that's clearly going to be
part of the solution. But to the extent a market does develop for green field nuclear projects in the US, the cash flow profiles the long duration nature of these assets. The size of the investment opportunity fits in very nicely with the pools of capital that we manage primarily within our retirement services business.
But one of the things they've in energy is that in certain areas there is a need for project based finance, but the market doesn't exist. So another thing we talked about recently on a show is a geothermal for example in these projects, which is sounds very good in theory, but I don't know, there's a lot of money. What does it take for a new market to build? Because it seems like a chicken and an egg problem to some extent, which is that, Okay, you don't you know,
here's a new idea. We're going to like put a bunch of pipes in the ground and get heat out of the earth and that's going to create all this power. But it's novel, and it seems a little bit untested and it's immature. But in theory it could produce stable cash flows, and you know, there's some reason to think just like maybe talk us through like if there's a market that doesn't exist yet in real scale, but there's
reason to think it could. Like what is the process by which the credit markets could agglomerate onto a new area?
So I'm speaking generically, yeah, Geneeric, Yeah, totally, Geothermal so in some instances, the government is sort of the entity that's priming the pump. Right, So you mentioned geothermo I assume you're your referencing geothermal the utility.
Scales, Yeah, utility scale.
But if you look at the IRA, yeah, you know, one of one of the provisions provides you know, tax credits for you know, the build out of geothermo oh kind the residential process. So and that's example of how the government can play a role too. You sort of
fan the flames of a new technology. In terms of the role the credit markets has to play, the reality is if the technology isn't commercialized, it's you need to go to the equity markets first, right, Like it doesn't really necessarily fit the return profile or the downside protection.
I should say that that a credit investor is typically looking for, so you know, typically the migration as you start in the equity markets, you commercialize, generate free cash flow, and then go from there and start accessing the credit markets.
Going back to nuclear for a second, One other thing that happened recently in addition to the announcement about three Mile Island is there was an announcement from a bunch of pretty prominent banks saying that basically they were really into nuclear power now and they would throw their weight behind it. And setting that specific sector aside. I'm curious how much competition you see from banks in the overall credit market and how that might have changed changed in recent years.
Absolutely so clearly the trend of you know, more lending activity moving out of the banking system into other sources of capital. We're talking about it now, but the reality is in our our chief economist, Tourist and Slock had a great graph which basically it showed the percentage of non financial lending that resided in banks, and it hit its peak in nineteen seventy five at fifty So fifty percent of the non financial lending in the US economy
was done by banks. Two thousand and seven was thirty percent, twenty percent today. The point is, this is a trend that's been going on for fifty years, so long before Dodd Frank, Long before Dodd Frank and all the financial innovation you mentioned securitization. That's one technology or financial technology that moved risk off bank balance sheets. The creation of the leverage loan market in the early two thousands and the late nineties. Another mechanism that moved risk off of
bank balance sheets into investors' hands. And I think private credit is just another arrow in the quiver that is supporting that trend. Now more recently recently defined as POSTGFC. You've had changes in regulation which clearly have accelerated that move and have forced banks to de emphasize certain behaviors.
So banks are still going to be an important part of the extension of credit in the United States beyond like the investment horizon and reasonable investment horizon that we can talk about, and so I think private credit is just one more tool or mechanism that allows for that
diversification of the provisioning of credit outside of the banking system. So, you know, banks are oftentimes partners, not competitors in a lot of situations because they have corporate relationship, but they don't have the appropriate capital to meet the needs of that corporation. So we can actually partner together and provide the capital, they provide the relation, and you know, both sides are benefiting as a result.
Speaking of relationships, so this was something else that I really wanted to talk to you about. You're the head of Opportunistic Credit. How do potential opportunities actually land on your desk. Is it like a company or a bank would come to you with a specific need or suggestion, or is it your team of analysts who are you looking at outstanding issuance at the moment and like finding things they think are maybe mispriced or where there are arbitrage opportunities or that sort of thing.
All of the above. So, as I mentioned, I work with a team of about twenty investment analysts. We've never quantified exactly where the ideas come from, but I would say fifty to sixty percent is being sourced by the analysts.
As I mentioned before, sector focused. So really what that means is they're tasks with knowing everything about three or four sectors, knowing the management teams and the companies in those sectors, knowing the major trends in those sectors, and through that process they're just naturally going to identify interesting
opportunities on both the private and the public side. In addition to that, myself, some of the other credit partners, our trading team, which is constantly interfacing with a seal side, is serving the broader market to try to identify opportunities. And then I think something that's somewhat unique to Apollo. We have a very collaborative approach across our different businesses. We have a large credit business, we have a large
equity business, we have a large hybrid business. So those teams work very closely to share ideas because we've had many situations where a company will come with an ask from our a hybrid team about some sort of preferred stock investment. You know, they want some sort of preferred investment. The numbers don't quite work for either the company or for us, but perhaps a secured credit and instrument does work for both, at which point you know, the opportunity
will transition in into my team. So the goal is to make the top of the funnel as wide as possible, So we're looking as many opportunities as possible. You know. I like to use the sort of metaphor that we're panting for gold, right, so when you're painting for gold, you want as much soil, if you will, in the pan to find those top opportunities.
Very minor thing, but just an interesting you know. And when I hear the word analyst in my head, I just think of someone who's like looking at spreadsheets and tweaking numbers. And seeing how different prices at the end
of the spreadsheet change with different assumptions. But part of the job at an analyst at an established institution like Apollo is also on the sourcing side and getting to know these companies and that when one of these companies needs financing for whatever reason, they have built that relationship.
Absolutely interesting, which is why regardless of where AI goes, it will never fully disrupt, you know, the financial analyst industry because it very much is a process an art, it is art science. I think it's a little bit of both. That involves just you know, building human relationships with you know, with management teams, with experts in the industry, with the cell side, with the banks, with our peers on the buy side, so critical part and it's also
one of the interesting things that I've noticed. And I started as an analyst, so I you know, that was my first job from two thousand and six to like twenty fourteen, and then I started doing other stuff. When I started, it was very much you listen to the conference call, download the ten K and ten Q and it's amazing how much more information is available today and
it's not necessarily from the sources that you'd expect there. Obviously, you know, there's there's industry research that you can access, there's expert networks that allow you to talk to experts in a specific industry. But it's even broader than that. It's sometimes you get domain experts to write a really interesting blog on a specific sector. Podcasts, you know, not.
To you know, go ahead, and that's fine.
Podcasts are actually an amazing way to learn about a sector. Right just go to Spotify or whatever your platform is, you know, search for a subject and you can hear forty minutes from a domain expert YouTube. Even so, the
amount of information that's available has only expanded. It's sometimes overwhelming, but I guess the point I'm trying to make is beyond developing those personal relationships with key operators in a sector, it's also just expanding, you know, the sorts of information that you're intaking, because it's certainly it's amazing how much more information is available than than when I started.
Well, on that note, subscribe to all thoughts everybody. No, Rob, that was fantastic, Thank you so much for coming on the show. Really appreciate it, my pleasure.
Really enjoyed the conversation. Joe.
I'm really glad we did that episode because again, so much of the focus is on what tech means for the equity market. It was really good to get a different perspective. And as you said, like instead of identifying the winners, the focus is very much on identifying the losers.
So that was interesting. One thing that also struck me when Rob was talking about the scale of the capital investment needed and how that fit into the discussion over hype and future revenue street, it does sound like, dare I say it, maybe things are a little bit different this time, just because, as he was pointing out, the size of the dollar amount that's needed is so huge that you might not get this massive influx of players into the market because like the starting point for all
of this is so high. So I wonder if there's like maybe more of a moat around the business than there was when it comes to for instance, software.
Well, I mean the analogy where you'd reach back to, I think is the telecom build out in nineteen ninety eight to two thousand and two, and there you had this huge over investment in cable or various versions of cable copper specifically as they called it back then, and there was a massive over investment and a bunch of stuff in bankrupt and then we all sort of know.
I forgot about several years. But it's interesting that you bring up the scale requirement because the entities that really got hit hard in like two thousand and two thousand and one were called the selex, the competitive local exchange carriers. So you did have a lot of these sort of local players building, laying down their own copper wires, and they all sort of got washed out when the Internet bubble burst and the revenues didn't materialize.
You know.
I think another thing is like there's just objectively going to be a lot of demand for data. Clearly there's nothing on the horizon, even setting aside AI specifically, And in our recent episode, the Jigger made this point like, even sitting aside the ambiguity about AI revenue, like data center demand only seems to be going up. So there's probably two Rob's point, A lot of investment that you could feel reasonably secure is not just going to be empty shelves or semiconductors that sit idle.
Joe, we should do an episode where you just talk about the early two thousand yeah, telecitation.
Actually we should do a c lex episode. I do think that would be useful. Let's find that's a great idea. I think we should find someone because I do think that's the most analogous story that everyone is a little anxious about, which is and Ron got into broadband and Tycho gotten was really big into broadband and all these big players. Then it busted. So why did it bust even though internet demand never really stopped slowing down? Is kind of an interesting question.
Yeah, and you're absolutely right that was a big story in the credit market too. Yeah, that was one of the last big pullbacks in the credit market, was like two thousand and one.
Eric, Okay, we got to get on this. Yeh would be a really good telecom analyst from two thousand and one. I'll try to think of.
Some All right, we're back to journalism in real time and generating new podcast ideas. All right, shall we leave it there for now?
Let's leave it there.
This has been another episode of the aud Loots podcast. I'm Tracy Alloway. You can follow me at Tracy.
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