WEBVTT - Apollo Co-President John Zito Talks Private Credit Fears

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<v Speaker 1>Bloomberg Audio, Studios, Podcasts, Radio News.

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<v Speaker 2>FED Governor Michael Barr warning that stress in private credit

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<v Speaker 2>could spark quote psychological contagion. He told Bloomberg News, quite

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<v Speaker 2>people might look at private credit, they might say, wow,

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<v Speaker 2>there seemed to be cracks in our corporate sector. Maybe

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<v Speaker 2>over here in the corporate bond market there are also cracks.

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<v Speaker 2>Let's get reaction to that from Apollo co president John Zito.

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<v Speaker 2>He's sitting down with my co host Danny Berger at

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<v Speaker 2>the Milkin Institute Global Conference in Beverly Hills.

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<v Speaker 1>Danny, Matt, thank you so much, and I'm so pleased

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<v Speaker 1>to say I'm here with co president of Apollo John Zito. John,

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<v Speaker 1>thank you so much for joining, Thanks for having I

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<v Speaker 1>know we have a lot to talk about, but I

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<v Speaker 1>do want to just start on that note from Bar,

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<v Speaker 1>This idea that there are cracks, wider spread concerns.

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<v Speaker 3>Do you think there's any merit to that?

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<v Speaker 4>Look, lots of talk about private credit. We've talked about

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<v Speaker 4>it for a long time. For me, it's been and

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<v Speaker 4>for us at Apollo, it's really been what's the impact

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<v Speaker 4>on the overall economy. It's not is it private credit

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<v Speaker 4>or public credit? Is a private equity, public equity, there's

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<v Speaker 4>software equities, there's several that are down seventy percent this year.

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<v Speaker 4>Doesn't mean you don't invest in equities, and it doesn't

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<v Speaker 4>mean there's cracks in the entire equity system and you

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<v Speaker 4>should invest in any stocks. So we're in a completely

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<v Speaker 4>different regime for investing. We're in a completely different regime

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<v Speaker 4>for how things are going to be over the next three,

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<v Speaker 4>four or five years. If you believe in AI, if

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<v Speaker 4>you are in fact AGI pilled, then you know the

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<v Speaker 4>way that you're going to have to invest, the way

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<v Speaker 4>that you're going to have to underwrite, the way that

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<v Speaker 4>your entire business is going to have to function will

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<v Speaker 4>have to shift, and the valuation framework for both public

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<v Speaker 4>market investors and private market investors is going to have

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<v Speaker 4>to change. And that's I think very exciting. I think

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<v Speaker 4>it's very exciting for people in the industry who are

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<v Speaker 4>adaptive and love investing and love seeing around the corner.

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<v Speaker 1>It is such a big difference, though, because it used

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<v Speaker 1>to be an industry that loved asset light high margins.

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<v Speaker 1>This requires kind of the opposite of that. So much

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<v Speaker 1>investing needs to go into that. Is this an industry

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<v Speaker 1>prepared for it. Besides the giants, the Apollos, the blackstones.

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<v Speaker 3>Of the world.

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<v Speaker 4>I mean, look look at Intel for example. You know, Intel,

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<v Speaker 4>for like ten to fifteen years effectively was a drag

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<v Speaker 4>on the entire equity market and for a decade they

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<v Speaker 4>were viewed as the dumb money for actually investing in

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<v Speaker 4>their infrastructure. And we financed the deal. Where when we

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<v Speaker 4>financed the deal two years ago to finance their fab

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<v Speaker 4>and to build new chips in Ireland, everybody hated it.

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<v Speaker 4>Everyone called us and said what could you possibly do

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<v Speaker 4>to invest in Intel? And we got refinance this year.

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<v Speaker 4>And the story is not about us getting refinanced. It's

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<v Speaker 4>about the stock this year, which is up five hundred

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<v Speaker 4>percent because the entire world realizing that instead of wanting

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<v Speaker 4>to be asset light, maybe it's about being asset heavy.

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<v Speaker 4>Maybe what before was the rubric for success, it was

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<v Speaker 4>all about code was the scarce asset. Right now it's compute,

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<v Speaker 4>it's d to integrate data quality, it's your talents, what

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<v Speaker 4>kind of talent you have, it's all of these things.

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<v Speaker 4>The whole framework is shifting, I think, and from again.

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<v Speaker 4>I think it's really exciting, but it's not about private

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<v Speaker 4>or public. It's the whole valuation rubric and how you

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<v Speaker 4>think about where you want to be in the strategic

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<v Speaker 4>ecosystem of your business.

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<v Speaker 1>So the valuation rubric has changed. Does the industry as

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<v Speaker 1>a whole realize that, John, Do you think everybody is

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<v Speaker 1>going to start to have to change their mindset in

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<v Speaker 1>this way or is it just a select few that

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<v Speaker 1>can participate.

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<v Speaker 4>I look at what we've been doing. I mean asset

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<v Speaker 4>we're going much closer to the asset we bought Atlantic Aviation.

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<v Speaker 1>This year.

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<v Speaker 4>We financed over ten billion dollars of chips for SpaceX,

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<v Speaker 4>so GPU, financing's power, defense, all of the things that

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<v Speaker 4>are going to require to grow all the CAPEX needs

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<v Speaker 4>and to go asset heavy. Is actually the exciting part

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<v Speaker 4>of private credit, not the old LBO loans that people

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<v Speaker 4>made and everyone talks about. The actual excitment is investment

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<v Speaker 4>grade lending for all this capex for a lot more

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<v Speaker 4>asset heaviness and all the sovereignty the whole. What you're

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<v Speaker 4>seeing both with problems out in Europe and in the

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<v Speaker 4>Middle East is a refocus on sovereignty and sovereignty meaning

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<v Speaker 4>do you have your own power? Do you have your

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<v Speaker 4>own AI sovereignty, Can you own your own compute, can

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<v Speaker 4>you make your own chips? All of these things are

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<v Speaker 4>really the future of how credit orients itself around that.

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<v Speaker 4>And as a business, it's nothing I thought we'd ever

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<v Speaker 4>be in the middle of, but it is, I think,

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<v Speaker 4>a really exciting thing.

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<v Speaker 1>But if you're not AGI pilled, is there this risk

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<v Speaker 1>that maybe we go too far, that you build out

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<v Speaker 1>too far. Some of the outcomes not exactly bimodal, but

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<v Speaker 1>have that kind of flavor of it. But if things

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<v Speaker 1>don't go right in the past to AI, perhaps we

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<v Speaker 1>go too far.

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<v Speaker 3>Is that a real risk?

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<v Speaker 4>Yeah, for sure. I think. Look, inevitably, we're going to

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<v Speaker 4>see a lot more efficiencies in most businesses because people

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<v Speaker 4>are just using AI as a mechanism to actually tighten

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<v Speaker 4>up their businesses, get their data cleaner, run their business

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<v Speaker 4>more efficiently. And whether or not AI takes their business

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<v Speaker 4>to the next level will be a question. Lots of

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<v Speaker 4>the capex I mean, we're talking about three four five

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<v Speaker 4>trillion dollars of capex that's getting spent in the grand

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<v Speaker 4>scheme of global economies, it's actually not that large a number.

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<v Speaker 4>There will inevitably be the the not the not the

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<v Speaker 4>core hyperscalers, but the second derivative and third derivative beneficiaries

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<v Speaker 4>of all this AI spend. If in fact doesn't work

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<v Speaker 4>or does not provide the margin or the return on capital,

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<v Speaker 4>there'll be lots of lots of lots of failures in that.

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<v Speaker 4>And you know it's this is not about this is

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<v Speaker 4>a much higher VALL regime because you're in the early

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<v Speaker 4>days of a total technology platform. And I've mentioned it

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<v Speaker 4>before that the technology platform can be a very violent

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<v Speaker 4>platform in different in different paths, and so that's going

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<v Speaker 4>to create more uncertainty, more variety of outcomes. And usually

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<v Speaker 4>it's a good place time to go into credit because

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<v Speaker 4>you're going senior and you're getting closer to the asset.

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<v Speaker 4>For whatever reason, everyone's acknowledging that we're going to be

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<v Speaker 4>in a higher VALL regime, but they're not acknowledging that

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<v Speaker 4>credit is actually typically been the safer place to be

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<v Speaker 4>because it's senior in the capital structure.

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<v Speaker 1>So do you think that changes or have we just

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<v Speaker 1>gotten stuck in this narrative that'll be hard to escape

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<v Speaker 1>and potentially have ramifications for credit.

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<v Speaker 4>Yeah, it's going to have ramifications for the whole ecosystem

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<v Speaker 4>of investing, what the enterprise value, what companies are worth,

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<v Speaker 4>what the exit multiple is. If you're a services company,

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<v Speaker 4>used to be able to transact that one multiple, you

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<v Speaker 4>won't be able to do that anymore. So this is

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<v Speaker 4>all about what sector are you in, how protected are

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<v Speaker 4>you in the different regimes? Are you asset heavier, asset light?

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<v Speaker 4>Do you control your customer? Yes or no? Do you

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<v Speaker 4>actually how close you to how much capital do you have?

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<v Speaker 4>There's some probability that you shift that lots of the

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<v Speaker 4>value shifts from labor to capital, and that's scary for people,

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<v Speaker 4>scary for us. We think about the world in that way.

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<v Speaker 4>It's a scary thing.

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<v Speaker 1>Are you one of these people that the labor market's

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<v Speaker 1>going to have hue ramifications, that numbers have been thrown

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<v Speaker 1>out there seventy percent of jobs to sappear.

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<v Speaker 4>I try to be much more of an optimist about

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<v Speaker 4>it because it just I don't think anybody really knows.

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<v Speaker 4>I think we're going to create some amazing new businesses

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<v Speaker 4>that no one knows about. I think the venture community

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<v Speaker 4>that what people can do. It took Palenteer seventeen years

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<v Speaker 4>to get to a billion dollars in sales. Companies like

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<v Speaker 4>you know my friends at Cognition, they get to a

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<v Speaker 4>billion dollars in sales in less than three years with

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<v Speaker 4>less than three hundred employees. I mean, the ability for

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<v Speaker 4>the most dangerous people is really smart group of folks

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<v Speaker 4>that are actually sitting in a room with not that

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<v Speaker 4>much they can actually design amazing companies. So I'm extremely

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<v Speaker 4>bullish growth and venture and people who can transform things fully.

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<v Speaker 4>Optimizing things is different than transforming things so and in

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<v Speaker 4>that when you when you transform something, you're completely transitioning

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<v Speaker 4>that business. Optimizing things was a much more nuancing I'm

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<v Speaker 4>going to cut costs by twenty percent, I'm going to

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<v Speaker 4>raise sales by ten percent. I'm going to do this

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<v Speaker 4>thing a little bit more efficiently. You can now transform

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<v Speaker 4>things with much less capital than you did before, and

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<v Speaker 4>that I think is pretty exciting. So for anyone out

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<v Speaker 4>there who's more of an entrepreneur, I think it's an

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<v Speaker 4>incredible environment. And so I get excited about that, and

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<v Speaker 4>I try not to get into the doomer stuff too much.

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<v Speaker 1>I still go back to this idea though, that what

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<v Speaker 1>happens if you're investing in the rest of the economy.

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<v Speaker 1>What if you haven't changed your rubric to valuations that

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<v Speaker 1>asset heavy is the place to go because there are

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<v Speaker 1>plenty of firms out there and plenty of credit shops

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<v Speaker 1>that don't want to venture into this AI data centers spend.

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<v Speaker 1>Is there a place for them or is there sort

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<v Speaker 1>of a crowding out where investment necessarily needs to go

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<v Speaker 1>to this project.

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<v Speaker 4>It's not all going to be Every sector is not

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<v Speaker 4>going to be all bad or.

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<v Speaker 1>All good, I think, but it sounds like the value

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<v Speaker 1>proposition is just less. That they're more efficient, the returns

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<v Speaker 1>aren't as high, you can't command the same margins.

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<v Speaker 4>I think things are going to get more competitive. I

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<v Speaker 4>think if you're going to have to constantly if you're

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<v Speaker 4>an asset like business or you're a services company, you're

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<v Speaker 4>going to have to be constantly evolving, moving in front.

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<v Speaker 4>And if you do that well, you'll be able to

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<v Speaker 4>monetize as a cycle in a way that most people

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<v Speaker 4>you know in other cycles have been able to do.

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<v Speaker 4>There's lots of companies that in the late nineties said

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<v Speaker 4>the Internet would be amazing for their business. There was

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<v Speaker 4>incredible companies that came out of that, and there inevitably

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<v Speaker 4>will be great companies that come out of us. But

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<v Speaker 4>through that cycle from mid to late nineties to early

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<v Speaker 4>two thousand, mid two thousands, there was lots of companies

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<v Speaker 4>that didn't struggle, didn't pivot or to bureaucratic, were too bloated,

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<v Speaker 4>couldn't move quickly enough. And so again this is all

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<v Speaker 4>about your talent, being adaptive, being willing to actually see

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<v Speaker 4>what's on the field. And if you can do that,

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<v Speaker 4>I think it's it's an incredible environment. And again it's

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<v Speaker 4>not private or public or.

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<v Speaker 1>I was going to say that the kind of freak

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<v Speaker 1>out over private credit has been this idea that maybe

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<v Speaker 1>the industry is too exposed to those bureaucratic software companies

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<v Speaker 1>that aren't going to be able to adapt. I know

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<v Speaker 1>you get asked about wealth a disproportionate amount to actually

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<v Speaker 1>how much that is of a Paul business. But I

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<v Speaker 1>do wonder for the funds, should there be a concern

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<v Speaker 1>that some did over index to things like BDC's two

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<v Speaker 1>wealth products. Is they're going to have to be a

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<v Speaker 1>rethink of that going forward.

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<v Speaker 4>We've all been in the asset management industry for a

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<v Speaker 4>long time, and MLPs were exposed to energy during twelve thirteen, fourteen,

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<v Speaker 4>and lots of MLPs didn't do great because they're exposed

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<v Speaker 4>to that. If you're an asset manager that runs sector

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<v Speaker 4>focused funds, and there's very few of those, those will

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<v Speaker 4>inevitably struggle if in fact, software companies go through some

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<v Speaker 4>sort of cycle. But again, most of the large managers

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<v Speaker 4>that are public managers have been through this. It happened

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<v Speaker 4>in the real estate business. You can see the ones

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<v Speaker 4>that did it really well. I suspect that those firms

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<v Speaker 4>will do an incredible job again, and you've already seen

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<v Speaker 4>it earnings last couple of weeks. It's been pretty calming.

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<v Speaker 4>It feels like it's been I think all most of

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<v Speaker 4>these firms we know really well, they've done it a

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<v Speaker 4>long time.

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<v Speaker 1>They're going to do just There have been so many

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<v Speaker 1>calls in this industry though, for consolidation, and I wonder

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<v Speaker 1>if we've seen the real pain for those that can't

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<v Speaker 1>survive this, if that process is finally it has actually

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<v Speaker 1>played out yet.

0:11:04.880 --> 0:11:08.480
<v Speaker 4>Yeah, I'm getting consolidation so hard. It's a people business.

0:11:09.040 --> 0:11:10.680
<v Speaker 4>You know what I love about our business is that

0:11:10.920 --> 0:11:13.400
<v Speaker 4>just culturally, we just foundationally have not done a ton

0:11:13.440 --> 0:11:16.160
<v Speaker 4>of m and a Uh. And we organically build the

0:11:16.200 --> 0:11:19.840
<v Speaker 4>business from from from from the ground up, and that

0:11:20.400 --> 0:11:22.959
<v Speaker 4>in the investment business, particularly in times of heavy change,

0:11:23.520 --> 0:11:25.800
<v Speaker 4>that cultural design is really one of your modes, in

0:11:25.840 --> 0:11:30.560
<v Speaker 4>one of your strengths. And so unless it's very transformational,

0:11:30.960 --> 0:11:34.240
<v Speaker 4>I don't I don't see at least for us, tons

0:11:34.280 --> 0:11:38.520
<v Speaker 4>of M and a. But in the industry, if it's transformational,

0:11:38.520 --> 0:11:41.880
<v Speaker 4>it can give you actual a new a new resource,

0:11:41.960 --> 0:11:44.080
<v Speaker 4>or a new asset class that you weren't in. Maybe

0:11:44.120 --> 0:11:47.640
<v Speaker 4>you could see those firms merge. But the name of

0:11:47.640 --> 0:11:51.040
<v Speaker 4>the game I think is, I'm obviously biased is in

0:11:51.080 --> 0:11:54.440
<v Speaker 4>the credit business. Uh, and I'm pretty biased.

0:11:54.600 --> 0:11:54.840
<v Speaker 3>Uh.

0:11:54.920 --> 0:11:56.679
<v Speaker 4>Two things, One that that we've been doing it for

0:11:56.720 --> 0:11:59.760
<v Speaker 4>a really long time and two that you know, we

0:11:59.800 --> 0:12:02.800
<v Speaker 4>have walls across everything and so we're just one investment

0:12:02.880 --> 0:12:05.720
<v Speaker 4>unit at the end of the day. And again in

0:12:05.760 --> 0:12:08.880
<v Speaker 4>times of increasingly more and more change, where the pace

0:12:08.880 --> 0:12:11.240
<v Speaker 4>of change is much faster on the outside than it

0:12:11.280 --> 0:12:13.880
<v Speaker 4>is at the inside of any of these firms, it's

0:12:14.160 --> 0:12:17.960
<v Speaker 4>it's to have one aligned firm is a pretty strategic

0:12:18.040 --> 0:12:18.600
<v Speaker 4>mode for us.

0:12:18.920 --> 0:12:20.760
<v Speaker 1>Do you think though, that we get more firms that

0:12:20.800 --> 0:12:23.800
<v Speaker 1>try to model themselves over diversification, that we get less

0:12:23.840 --> 0:12:27.280
<v Speaker 1>sector specialists. I don't.

0:12:28.160 --> 0:12:31.680
<v Speaker 4>Again, I think this is about you know, fifteen years ago, everybody,

0:12:31.679 --> 0:12:34.080
<v Speaker 4>if you had an alternative firm, you could go into

0:12:34.120 --> 0:12:37.360
<v Speaker 4>any asset class. There's there's now been kind of more

0:12:37.400 --> 0:12:41.200
<v Speaker 4>specialation by asset class, but diversification by industry, and so

0:12:42.000 --> 0:12:45.360
<v Speaker 4>most firms invest in almost every industry. You know, for us,

0:12:45.400 --> 0:12:49.000
<v Speaker 4>we've been leaning in into infrastructure and credit and hybrid

0:12:50.080 --> 0:12:52.920
<v Speaker 4>and in equity. We've always been very value oriented and

0:12:53.000 --> 0:12:55.319
<v Speaker 4>so we haven't been caught up in most of the stuff.

0:12:57.440 --> 0:13:00.040
<v Speaker 4>But again I don't I don't think there's going to

0:12:59.960 --> 0:13:03.280
<v Speaker 4>be that big a pace of on I think financial

0:13:03.280 --> 0:13:05.679
<v Speaker 4>service MNA is hard and so the bar is hard

0:13:05.679 --> 0:13:06.520
<v Speaker 4>to get that done.

0:13:06.960 --> 0:13:10.880
<v Speaker 1>And then for these wealth products, again for those that

0:13:10.920 --> 0:13:12.480
<v Speaker 1>are very exposed to it felt like a really big

0:13:12.520 --> 0:13:15.760
<v Speaker 1>bullish thesis for this industry that there was this untapped

0:13:15.800 --> 0:13:19.920
<v Speaker 1>resource of wealth of retail. Do we rethink that as well?

0:13:21.480 --> 0:13:23.640
<v Speaker 4>Look, again, this is not about again, I don't want

0:13:23.640 --> 0:13:25.520
<v Speaker 4>to go down the rabbit hole on public versus private.

0:13:25.559 --> 0:13:28.880
<v Speaker 4>But obviously you know the last thirty days public markets,

0:13:28.920 --> 0:13:31.200
<v Speaker 4>seventy two percent of the return was ten stocks. Yeah,

0:13:31.280 --> 0:13:35.160
<v Speaker 4>I mean, if you're talking about retirement and wealth products

0:13:35.520 --> 0:13:37.600
<v Speaker 4>and what's the right product design. We can talk at

0:13:37.679 --> 0:13:39.880
<v Speaker 4>length about what the appropriate product design and the pros

0:13:39.920 --> 0:13:40.920
<v Speaker 4>and cons of all the products.

0:13:40.880 --> 0:13:41.880
<v Speaker 3>Iraning another hour for that.

0:13:42.080 --> 0:13:46.560
<v Speaker 4>Yeah, but the idea that you would not invest and

0:13:46.679 --> 0:13:48.640
<v Speaker 4>lend money to the companies that we lend to on

0:13:48.679 --> 0:13:52.960
<v Speaker 4>a diversified basis for the long term retirement is highly unlikely.

0:13:53.000 --> 0:13:56.600
<v Speaker 4>It's very prudent to invest in income oriented, long duration

0:13:56.960 --> 0:14:01.240
<v Speaker 4>products that generate yield over a decade in decades of history,

0:14:01.600 --> 0:14:03.280
<v Speaker 4>it's highly likely that you're going to make a good

0:14:03.280 --> 0:14:06.600
<v Speaker 4>return on that. And so I suspect we're still very

0:14:06.679 --> 0:14:09.920
<v Speaker 4>underpenetrated relative to almost everyone's retirement in the world in

0:14:09.960 --> 0:14:13.160
<v Speaker 4>private assets. And that's the overwhelming theme. This is a

0:14:13.160 --> 0:14:16.640
<v Speaker 4>moment in time around product design and some fears around

0:14:17.000 --> 0:14:20.080
<v Speaker 4>over indexing of a cycle into industry that will work

0:14:20.080 --> 0:14:24.200
<v Speaker 4>itself through and so not to say there won't be defaults,

0:14:24.240 --> 0:14:26.560
<v Speaker 4>but again, when a stock goes down seventy percent, do

0:14:26.560 --> 0:14:28.600
<v Speaker 4>you not invest in stock in the stock market? Again? No,

0:14:28.800 --> 0:14:31.400
<v Speaker 4>if there's a default in a high yield company, do

0:14:31.440 --> 0:14:33.160
<v Speaker 4>you not lend money to a company? Again, Like, this

0:14:33.400 --> 0:14:37.119
<v Speaker 4>is a little bit overblown with respect to the reactions

0:14:37.120 --> 0:14:40.120
<v Speaker 4>of every single company when we lend a five thousand companies,

0:14:40.160 --> 0:14:44.240
<v Speaker 4>and so when one situation goes wrong, it's hard to

0:14:45.000 --> 0:14:45.840
<v Speaker 4>react too much to us.

0:14:45.880 --> 0:14:47.160
<v Speaker 1>So John, before I let you go, I just have

0:14:47.200 --> 0:14:48.840
<v Speaker 1>to say, I know we're in LA, but I want

0:14:48.840 --> 0:14:51.280
<v Speaker 1>to ask about your hometown of Miami.

0:14:51.360 --> 0:14:53.640
<v Speaker 3>Might we see an Apollo Miami headquarters.

0:14:53.640 --> 0:14:55.760
<v Speaker 1>I feel like you've got to be advocating for that

0:14:55.800 --> 0:14:57.280
<v Speaker 1>as a Miami man yourself, right.

0:14:57.160 --> 0:15:00.160
<v Speaker 4>Family there, I grew up there. I love Miami me

0:15:00.720 --> 0:15:02.640
<v Speaker 4>but you know, there's lots and lots of lots of

0:15:02.680 --> 0:15:06.560
<v Speaker 4>good places. Both Texas and Florida have incredible options, and

0:15:06.640 --> 0:15:08.000
<v Speaker 4>we're we're assessing.

0:15:07.560 --> 0:15:09.200
<v Speaker 3>That the decision has not been made yet.

0:15:09.360 --> 0:15:11.480
<v Speaker 4>I do. I do not think so. I do not

0:15:11.560 --> 0:15:14.760
<v Speaker 4>think we've gone public with anything yet. So so we're

0:15:14.800 --> 0:15:15.560
<v Speaker 4>but we're in the process.

0:15:15.560 --> 0:15:17.040
<v Speaker 1>And I also feel like behind the scenes you must

0:15:17.080 --> 0:15:18.240
<v Speaker 1>be like win gwink, nudge nudge.

0:15:18.240 --> 0:15:19.440
<v Speaker 3>Mina is a great place, guys.

0:15:19.520 --> 0:15:21.600
<v Speaker 4>Yeah, I do. I do love Miami. It's a sweet

0:15:21.680 --> 0:15:22.640
<v Speaker 4>sweet spot in my heart.

0:15:22.800 --> 0:15:24.600
<v Speaker 1>All right, John Oliver there, thank you so much for joining.

0:15:24.640 --> 0:15:26.960
<v Speaker 1>I really appreciate your time. And Matt, that was of

0:15:27.000 --> 0:15:28.360
<v Speaker 1>course Apollo's john Zo