Speaker 1: We begin this out with stocks inching lower. Jim Zelter
Speaker 1: and the team over at pollow Asset Management looking for
Speaker 1: opportunity outside of equities, saying, quote, if interest rates remain
Speaker 1: higher as we expect, and the terminal Fed funds rate
Speaker 1: stays higher than where it has been historically, we see
Speaker 1: private credit as an attractive alternative to over valued public equities.
Speaker 1: Jim joins us now for more. Jim, good morning, in
Speaker 1: a very happy new year to you.
Speaker 2: Good morning, Jonathan. I'm going to pick off.
Speaker 1: This conversation by stealing one of Lisa's questions to start
Speaker 1: twenty twenty five as stocks too rich or a bonds
Speaker 1: too cheap?
Speaker 3: Well, I think we have a backdrop. I think your
Speaker 3: point about the US and China and Europe and the
Speaker 3: three parties, you know, it's our view that there's intrtion
Speaker 3: has been very consistent. The US economy has been the
Speaker 3: beacon of opportunity in the last several years, strong economic growth,
Speaker 3: capital coming from around the globe, and so in terms
Speaker 3: of US talk, I don't want to talk about the
Speaker 3: stock market. I really talking with the underline economy. Underline
Speaker 3: economy looks like it's the place to invest. I don't
Speaker 3: think it's any surprise that when you peel the onion
Speaker 3: back private capital, which has really been embraced in the
Speaker 3: US and gives diversity of funding, lets companies grow, start, expand,
Speaker 3: and all the things we're talking about the global renaissance.
Speaker 3: It's been the place to invest and it's been attracting capital.
Speaker 3: Contrasts that to what's going on in the UK and
Speaker 3: continental Europe, where they are stuck in a financing system
Speaker 3: that's really fifteen twenty thirty years behind the rest of
Speaker 3: what's going on in North America. It tells us that
Speaker 3: the US is the place to invest.
Speaker 1: So you think some of these problems in Europe might
Speaker 1: be more structural in nature.
Speaker 3: I think structural is really the key to really analysis.
Speaker 3: It's very easy to focus on the last three to
Speaker 3: six months we talk about the Liz Trust moment in
Speaker 3: the UK. I think it is a great reminder for
Speaker 3: this current administration as they've got great ambitions in terms
Speaker 3: of US investment, capex, tariffs, immigration, a variety of other
Speaker 3: big initiatives. It's good for this reminder of the Liz
Speaker 3: Trust moment in the back of their minds. You know
Speaker 3: what can happen if you lose confidence, but there's no
Speaker 3: doubt I think if you look at what the Drogy
Speaker 3: document did later last fall, he pointed out in one
Speaker 3: hundred and fifty eight summary pages of all the challenges
Speaker 3: that they have not really embraced. And while the banks
Speaker 3: are in better shape than they've been in a couple
Speaker 3: of decades in Europe, the US is the standout. We
Speaker 3: have the greatest financial services sector in the world, we
Speaker 3: have the deepest, broadest capital markets. We've undergone a tremendous
Speaker 3: amount of regulations on our banks, and they've continued to.
Speaker 2: Thrive in a more narrow world.
Speaker 3: And that's the page that the Europeans should be looking at,
Speaker 3: Embracing securitization, embracing private capital. They've got a massive amount
Speaker 3: of infrastructure needs, and they should be embracing them for
Speaker 3: their long term economic success.
Speaker 4: In the meantime, people are saying that maybe the ghost
Speaker 4: of lis Trust is kind of hovering over this administration
Speaker 4: and hovering over the US treasure market right now, especially
Speaker 4: given the rise that we've seen in longer term yields.
Speaker 4: And I'm wondering how susceptible you are to changing your
Speaker 4: view on how constructive the US economy is if you
Speaker 4: get some more negative data prints. We had Greg Daeco
Speaker 4: yesterday talking about a frozen job market. We had Neila
Speaker 4: Richardson talking about how smaller companies really are feeling rates
Speaker 4: where they are.
Speaker 3: Rates have been higher for the last twelve to eighteen
Speaker 3: ONMS they been higher. Obviously, we're in a period right
Speaker 3: now where what the Fed did and its actions in
Speaker 3: the fall and what the market has responded to is
Speaker 3: a very unique period. So you're right, we are in
Speaker 3: a little bit of a unique zone here with regard
Speaker 3: to macro and rates in the US. I do think
Speaker 3: we are in a period where rates do look attractive
Speaker 3: versus where equities are, and we're in a period right
Speaker 3: now where we're still the place of economic growth. But
Speaker 3: is a sign for the administration about how much they
Speaker 3: can push now Clearly the other side of the trade,
Speaker 3: I would not probably be rete lowering rates right now.
Speaker 3: I think that you have full employment, economy is doing
Speaker 3: quite well. I'm not sure I see a need other
Speaker 3: than economic textbook to lower rates in terms of the target.
Speaker 3: But it does create a lot of room for the
Speaker 3: new administration if they have weakness in any kind of
Speaker 3: the economy, because of their initiatives, the FED put is back,
Speaker 3: they have a lot of room to.
Speaker 4: Move, your colleague, sort of edifying your points as you
Speaker 4: say them, towards and slock moments ago, inflation reaccelerating to
Speaker 4: your point about not necessarily needing to lower rates further.
Speaker 4: You talk about credit being the sweet spot in debt,
Speaker 4: maybe even over equities, and that has been the story
Speaker 4: over a long period of time, the past couple of years.
Speaker 4: If inflation could be reaccelerating, could you see that story
Speaker 4: changing at a certain point.
Speaker 2: Yeah, yeah, yes you could.
Speaker 3: And I guess this, and there's a lot of consensus
Speaker 3: out there about where the S and P is in
Speaker 3: a go where rates are going. But in our view,
Speaker 3: and the US economy is still the strength strength of
Speaker 3: the globe, it's the beacon of economic opportunity. We still
Speaker 3: have a lot of economic growth in terms of the
Speaker 3: industrial renaissance that we've been talking about. So in our view,
Speaker 3: the breadth of credit investment grade as well as non
Speaker 3: investment grade, we try to find areas of dislocation or
Speaker 3: areas of mismatch of capital and opportunity, and we're still
Speaker 3: seeing it in credit versus the equity markets.
Speaker 2: Now when you look at the S and P.
Speaker 3: Five hundred, I would say that it's interesting, you've got
Speaker 3: we all know what the magnificent seven are, but certainly
Speaker 3: the other four hundred and ninety three a lot of
Speaker 3: unloved opportunities in that in that basket. And there's probably
Speaker 3: an opportunity in a non consensus view in terms of
Speaker 3: those companies in terms of just pure economic growth.
Speaker 2: But we are still listen.
Speaker 3: Private credity has private credit and private capital has been
Speaker 3: the engine of economic growth in the US. And I
Speaker 3: will you know again I said earlier, it's not a
Speaker 3: great iron it's a great irony that the US has
Speaker 3: been the bastion of economic growth with the embracing of
Speaker 3: private capital. But you know, one of the greatest investors
Speaker 3: in US capital history, Warren Buffett in Berkshire. When you
Speaker 3: really pull the covers back on Berkshire Hathaway. Of the
Speaker 3: trillion dollars of assets at the end of twenty three,
Speaker 3: thirty percent are in the public equities that we know about, Apple,
Speaker 3: Coca Cola, American Express via A, but seventy percent are
Speaker 3: private companies. It's the growth engine. He's the greatest capitalist.
Speaker 3: He's been doing it for fifty years. That's where growth
Speaker 3: and opportunity is in America. Private capital in private companies,
Speaker 3: and they have access in the debt markets. They don't
Speaker 3: need to go public to raise capital anymore. Eight thousand
Speaker 3: public companies to four thousand. That's the trend in the future.
Speaker 3: And we're sitting really at an intersection trying to bring
Speaker 3: those opportunities to the broad group of investors, retirees, and
Speaker 3: savers around the globe.
Speaker 1: So you mentioned Europe and Europe centainly the bank channel
Speaker 1: is overburdened. We've been talking about this for years. The
Speaker 1: Europeans have talkt about trying to do something with public
Speaker 1: markets and the same way we have here in the
Speaker 1: United States, it's not happening. I want to understand from
Speaker 1: your perspective how you will work with the banks in
Speaker 1: America going forward from here, because this is kind of
Speaker 1: a new trend where the banks will originate the loans
Speaker 1: and then you'll provide the money. How's that going to
Speaker 1: work in years to come? How big can that opportunity be?
Speaker 2: Oh?
Speaker 3: I think we're I think twenty four was a pivot year,
Speaker 3: you know, for us as a leading firm in this
Speaker 3: industry and in this sector. You know, there was a
Speaker 3: great headline and you and I talked about the three
Speaker 3: of us have talked about in this show many times,
Speaker 3: where the great battle between private capital and banks. The
Speaker 3: reality is if you look at the commercial dialogue going
Speaker 3: on between the top five, top ten institutions and the
Speaker 3: handful of us to lead our industry, the amount of
Speaker 3: integration dialogue working together on big deals has never been deeper.
Speaker 2: Obviously, there was.
Speaker 3: Our City Bank transaction, our City Group transaction, there was
Speaker 3: a transaction we did with Standard Charter BNP, and so
Speaker 3: I think we're still at the early days. These partnerships
Speaker 3: need to have substance. They can't be excused the phrase
Speaker 3: shotgun marriages. They have to be ones that really have substance, dialogue, trust,
Speaker 3: and some history of doing a lot of transactions together.
Speaker 3: We've been fortunate and all the ones we've put together
Speaker 3: where there has been a lot of either history of
Speaker 3: personnel or of activity. But I think it's I think
Speaker 3: still it's early days, early innings. Now there's a lot
Speaker 3: of headlines just to grab headlines, and there's not a
Speaker 3: lot of substance behind them. But I think that trend
Speaker 3: of private capital and bank partnerships is going to extend
Speaker 3: in twenty five and twenty six, and I do think
Speaker 3: if you think about the economic backdrop, I do sense
Speaker 3: that there is a great opportunity for strategic m and
Speaker 3: A that clearly feels like it's going to happen.
Speaker 2: I'm a little bit more.
Speaker 3: Skeptical about the massive IPO window. If you look at
Speaker 3: the last ten years equity issue, this has been about
Speaker 3: two hundred and fifty billion, fifty billion IPOs, two hundred
Speaker 3: billion secondaries. That's removing all the stack numbers. I think
Speaker 3: you still have a valuation issue with a lot of
Speaker 3: private equity companies that want to come out and do
Speaker 3: their IPO and so I think we have a consensus
Speaker 3: view or non consensus view would apollow that that number
Speaker 3: is going to be not as large as people think.
Speaker 2: And so the big mismatch if.
Speaker 3: You have a big credit market, a big equity market,
Speaker 3: this area of hybrid in between, which we've been talking
Speaker 3: a lot about applying capital to those over levered companies.
Speaker 3: That's the opportunity of twenty five and twenty.
Speaker 1: Six just to build on the IPO issue just a
Speaker 1: little bit more. Is that just a valuation issue or
Speaker 1: do you think it's a role that you have to
Speaker 1: play here that these companies don't need to go public anymore.
Speaker 2: It's a combination of both. It's a great question.
Speaker 3: I think it is a valuation issue for probably fifty
Speaker 3: to sixty percent of them. I think it's very very
Speaker 3: clear now private companies have access to all sorts of capital,
Speaker 3: debt and equity, preferred, convertible, whatever it may be. And
Speaker 3: so the typical route where you needed to go to
Speaker 3: have your employees be able to monetize their investments broad
Speaker 3: based capital, equity revolvers. You saw what open Ai did
Speaker 3: several months ago bringing in a bank facility. There's tremendous
Speaker 3: pools of capital, private capital to confund in finances companies.
Speaker 3: So going public is by no means the ticket to
Speaker 3: liquidity that you needed in the past.
Speaker 2: A lot more.
Speaker 4: Options in five to ten years. Will there be a
Speaker 4: difference between public and private markets?
Speaker 3: We don't believe. So I think there will be some differentiations.
Speaker 3: And I think the question that gets raised right after
Speaker 3: that question that you ask, is, well, is there going
Speaker 3: to be a massive compression in yields and the advantage
Speaker 3: is going to go to those folks that have the bigger.
Speaker 3: You're going to make money on the origination, the ability
Speaker 3: to make the three, five, seven, ten billion dollar commitment
Speaker 3: to XYZ company, that's where you're going to garner the
Speaker 3: extra spread. But all the things that we're doing in origination,
Speaker 3: in capital formation, in trying to bring some liquidity to
Speaker 3: these markets, in terms of secondary activity, with transparency and
Speaker 3: price discovery, I think the barriers and you know, what's
Speaker 3: private is risky and what's public is safe. I think
Speaker 3: those barriers will be coming down. And again I go
Speaker 3: back to this Brookshare. It's no one really talks about it,
Speaker 3: but it's it is quite an irony that the greatest
Speaker 3: public investor of all time seventy percent of those companies
Speaker 3: when you look at the when you look at the
Speaker 3: web page, these are some great American companies and over
Speaker 3: fifty years he's assembled them and they're massive compounders. And
Speaker 3: that's seventy percent of the underlying value, Geico being at
Speaker 3: the top, Clayton Holmes, BNSF, many many other great companies.
Speaker 3: And I think that's a lesson versu all's there's companies
Speaker 3: that are private and there's private equity. You should differentiate
Speaker 3: between the two. But we clearly want to be part
Speaker 3: of that big trend and offer those two investors in
Speaker 3: retirementes around the globe. It's a big change in market structure.
Speaker 1: You're going to be sticking with us to talk about
Speaker 1: that change in market structure and the changes we could
Speaker 1: be seeing in Washington, d C. A little bit later
Speaker 1: this year. Jim's out to there for Apollo Asset Management,