Speaker 1: Bloomberg Audio, Studios, Podcasts, Radio News.
Speaker 2: FED Governor Michael Barr warning that stress in private credit
Speaker 2: could spark quote psychological contagion. He told Bloomberg News, quite
Speaker 2: people might look at private credit, they might say, wow,
Speaker 2: there seemed to be cracks in our corporate sector. Maybe
Speaker 2: over here in the corporate bond market there are also cracks.
Speaker 2: Let's get reaction to that from Apollo co president John Zito.
Speaker 2: He's sitting down with my co host Danny Berger at
Speaker 2: the Milkin Institute Global Conference in Beverly Hills.
Speaker 1: Danny, Matt, thank you so much, and I'm so pleased
Speaker 1: to say I'm here with co president of Apollo John Zito. John,
Speaker 1: thank you so much for joining, Thanks for having I
Speaker 1: know we have a lot to talk about, but I
Speaker 1: do want to just start on that note from Bar,
Speaker 1: This idea that there are cracks, wider spread concerns.
Speaker 3: Do you think there's any merit to that?
Speaker 4: Look, lots of talk about private credit. We've talked about
Speaker 4: it for a long time. For me, it's been and
Speaker 4: for us at Apollo, it's really been what's the impact
Speaker 4: on the overall economy. It's not is it private credit
Speaker 4: or public credit? Is a private equity, public equity, there's
Speaker 4: software equities, there's several that are down seventy percent this year.
Speaker 4: Doesn't mean you don't invest in equities, and it doesn't
Speaker 4: mean there's cracks in the entire equity system and you
Speaker 4: should invest in any stocks. So we're in a completely
Speaker 4: different regime for investing. We're in a completely different regime
Speaker 4: for how things are going to be over the next three,
Speaker 4: four or five years. If you believe in AI, if
Speaker 4: you are in fact AGI pilled, then you know the
Speaker 4: way that you're going to have to invest, the way
Speaker 4: that you're going to have to underwrite, the way that
Speaker 4: your entire business is going to have to function will
Speaker 4: have to shift, and the valuation framework for both public
Speaker 4: market investors and private market investors is going to have
Speaker 4: to change. And that's I think very exciting. I think
Speaker 4: it's very exciting for people in the industry who are
Speaker 4: adaptive and love investing and love seeing around the corner.
Speaker 1: It is such a big difference, though, because it used
Speaker 1: to be an industry that loved asset light high margins.
Speaker 1: This requires kind of the opposite of that. So much
Speaker 1: investing needs to go into that. Is this an industry
Speaker 1: prepared for it. Besides the giants, the Apollos, the blackstones.
Speaker 3: Of the world.
Speaker 4: I mean, look look at Intel for example. You know, Intel,
Speaker 4: for like ten to fifteen years effectively was a drag
Speaker 4: on the entire equity market and for a decade they
Speaker 4: were viewed as the dumb money for actually investing in
Speaker 4: their infrastructure. And we financed the deal. Where when we
Speaker 4: financed the deal two years ago to finance their fab
Speaker 4: and to build new chips in Ireland, everybody hated it.
Speaker 4: Everyone called us and said what could you possibly do
Speaker 4: to invest in Intel? And we got refinance this year.
Speaker 4: And the story is not about us getting refinanced. It's
Speaker 4: about the stock this year, which is up five hundred
Speaker 4: percent because the entire world realizing that instead of wanting
Speaker 4: to be asset light, maybe it's about being asset heavy.
Speaker 4: Maybe what before was the rubric for success, it was
Speaker 4: all about code was the scarce asset. Right now it's compute,
Speaker 4: it's d to integrate data quality, it's your talents, what
Speaker 4: kind of talent you have, it's all of these things.
Speaker 4: The whole framework is shifting, I think, and from again.
Speaker 4: I think it's really exciting, but it's not about private
Speaker 4: or public. It's the whole valuation rubric and how you
Speaker 4: think about where you want to be in the strategic
Speaker 4: ecosystem of your business.
Speaker 1: So the valuation rubric has changed. Does the industry as
Speaker 1: a whole realize that, John, Do you think everybody is
Speaker 1: going to start to have to change their mindset in
Speaker 1: this way or is it just a select few that
Speaker 1: can participate.
Speaker 4: I look at what we've been doing. I mean asset
Speaker 4: we're going much closer to the asset we bought Atlantic Aviation.
Speaker 1: This year.
Speaker 4: We financed over ten billion dollars of chips for SpaceX,
Speaker 4: so GPU, financing's power, defense, all of the things that
Speaker 4: are going to require to grow all the CAPEX needs
Speaker 4: and to go asset heavy. Is actually the exciting part
Speaker 4: of private credit, not the old LBO loans that people
Speaker 4: made and everyone talks about. The actual excitment is investment
Speaker 4: grade lending for all this capex for a lot more
Speaker 4: asset heaviness and all the sovereignty the whole. What you're
Speaker 4: seeing both with problems out in Europe and in the
Speaker 4: Middle East is a refocus on sovereignty and sovereignty meaning
Speaker 4: do you have your own power? Do you have your
Speaker 4: own AI sovereignty, Can you own your own compute, can
Speaker 4: you make your own chips? All of these things are
Speaker 4: really the future of how credit orients itself around that.
Speaker 4: And as a business, it's nothing I thought we'd ever
Speaker 4: be in the middle of, but it is, I think,
Speaker 4: a really exciting thing.
Speaker 1: But if you're not AGI pilled, is there this risk
Speaker 1: that maybe we go too far, that you build out
Speaker 1: too far. Some of the outcomes not exactly bimodal, but
Speaker 1: have that kind of flavor of it. But if things
Speaker 1: don't go right in the past to AI, perhaps we
Speaker 1: go too far.
Speaker 3: Is that a real risk?
Speaker 4: Yeah, for sure. I think. Look, inevitably, we're going to
Speaker 4: see a lot more efficiencies in most businesses because people
Speaker 4: are just using AI as a mechanism to actually tighten
Speaker 4: up their businesses, get their data cleaner, run their business
Speaker 4: more efficiently. And whether or not AI takes their business
Speaker 4: to the next level will be a question. Lots of
Speaker 4: the capex I mean, we're talking about three four five
Speaker 4: trillion dollars of capex that's getting spent in the grand
Speaker 4: scheme of global economies, it's actually not that large a number.
Speaker 4: There will inevitably be the the not the not the
Speaker 4: core hyperscalers, but the second derivative and third derivative beneficiaries
Speaker 4: of all this AI spend. If in fact doesn't work
Speaker 4: or does not provide the margin or the return on capital,
Speaker 4: there'll be lots of lots of lots of failures in that.
Speaker 4: And you know it's this is not about this is
Speaker 4: a much higher VALL regime because you're in the early
Speaker 4: days of a total technology platform. And I've mentioned it
Speaker 4: before that the technology platform can be a very violent
Speaker 4: platform in different in different paths, and so that's going
Speaker 4: to create more uncertainty, more variety of outcomes. And usually
Speaker 4: it's a good place time to go into credit because
Speaker 4: you're going senior and you're getting closer to the asset.
Speaker 4: For whatever reason, everyone's acknowledging that we're going to be
Speaker 4: in a higher VALL regime, but they're not acknowledging that
Speaker 4: credit is actually typically been the safer place to be
Speaker 4: because it's senior in the capital structure.
Speaker 1: So do you think that changes or have we just
Speaker 1: gotten stuck in this narrative that'll be hard to escape
Speaker 1: and potentially have ramifications for credit.
Speaker 4: Yeah, it's going to have ramifications for the whole ecosystem
Speaker 4: of investing, what the enterprise value, what companies are worth,
Speaker 4: what the exit multiple is. If you're a services company,
Speaker 4: used to be able to transact that one multiple, you
Speaker 4: won't be able to do that anymore. So this is
Speaker 4: all about what sector are you in, how protected are
Speaker 4: you in the different regimes? Are you asset heavier, asset light?
Speaker 4: Do you control your customer? Yes or no? Do you
Speaker 4: actually how close you to how much capital do you have?
Speaker 4: There's some probability that you shift that lots of the
Speaker 4: value shifts from labor to capital, and that's scary for people,
Speaker 4: scary for us. We think about the world in that way.
Speaker 4: It's a scary thing.
Speaker 1: Are you one of these people that the labor market's
Speaker 1: going to have hue ramifications, that numbers have been thrown
Speaker 1: out there seventy percent of jobs to sappear.
Speaker 4: I try to be much more of an optimist about
Speaker 4: it because it just I don't think anybody really knows.
Speaker 4: I think we're going to create some amazing new businesses
Speaker 4: that no one knows about. I think the venture community
Speaker 4: that what people can do. It took Palenteer seventeen years
Speaker 4: to get to a billion dollars in sales. Companies like
Speaker 4: you know my friends at Cognition, they get to a
Speaker 4: billion dollars in sales in less than three years with
Speaker 4: less than three hundred employees. I mean, the ability for
Speaker 4: the most dangerous people is really smart group of folks
Speaker 4: that are actually sitting in a room with not that
Speaker 4: much they can actually design amazing companies. So I'm extremely
Speaker 4: bullish growth and venture and people who can transform things fully.
Speaker 4: Optimizing things is different than transforming things so and in
Speaker 4: that when you when you transform something, you're completely transitioning
Speaker 4: that business. Optimizing things was a much more nuancing I'm
Speaker 4: going to cut costs by twenty percent, I'm going to
Speaker 4: raise sales by ten percent. I'm going to do this
Speaker 4: thing a little bit more efficiently. You can now transform
Speaker 4: things with much less capital than you did before, and
Speaker 4: that I think is pretty exciting. So for anyone out
Speaker 4: there who's more of an entrepreneur, I think it's an
Speaker 4: incredible environment. And so I get excited about that, and
Speaker 4: I try not to get into the doomer stuff too much.
Speaker 1: I still go back to this idea though, that what
Speaker 1: happens if you're investing in the rest of the economy.
Speaker 1: What if you haven't changed your rubric to valuations that
Speaker 1: asset heavy is the place to go because there are
Speaker 1: plenty of firms out there and plenty of credit shops
Speaker 1: that don't want to venture into this AI data centers spend.
Speaker 1: Is there a place for them or is there sort
Speaker 1: of a crowding out where investment necessarily needs to go
Speaker 1: to this project.
Speaker 4: It's not all going to be Every sector is not
Speaker 4: going to be all bad or.
Speaker 1: All good, I think, but it sounds like the value
Speaker 1: proposition is just less. That they're more efficient, the returns
Speaker 1: aren't as high, you can't command the same margins.
Speaker 4: I think things are going to get more competitive. I
Speaker 4: think if you're going to have to constantly if you're
Speaker 4: an asset like business or you're a services company, you're
Speaker 4: going to have to be constantly evolving, moving in front.
Speaker 4: And if you do that well, you'll be able to
Speaker 4: monetize as a cycle in a way that most people
Speaker 4: you know in other cycles have been able to do.
Speaker 4: There's lots of companies that in the late nineties said
Speaker 4: the Internet would be amazing for their business. There was
Speaker 4: incredible companies that came out of that, and there inevitably
Speaker 4: will be great companies that come out of us. But
Speaker 4: through that cycle from mid to late nineties to early
Speaker 4: two thousand, mid two thousands, there was lots of companies
Speaker 4: that didn't struggle, didn't pivot or to bureaucratic, were too bloated,
Speaker 4: couldn't move quickly enough. And so again this is all
Speaker 4: about your talent, being adaptive, being willing to actually see
Speaker 4: what's on the field. And if you can do that,
Speaker 4: I think it's it's an incredible environment. And again it's
Speaker 4: not private or public or.
Speaker 1: I was going to say that the kind of freak
Speaker 1: out over private credit has been this idea that maybe
Speaker 1: the industry is too exposed to those bureaucratic software companies
Speaker 1: that aren't going to be able to adapt. I know
Speaker 1: you get asked about wealth a disproportionate amount to actually
Speaker 1: how much that is of a Paul business. But I
Speaker 1: do wonder for the funds, should there be a concern
Speaker 1: that some did over index to things like BDC's two
Speaker 1: wealth products. Is they're going to have to be a
Speaker 1: rethink of that going forward.
Speaker 4: We've all been in the asset management industry for a
Speaker 4: long time, and MLPs were exposed to energy during twelve thirteen, fourteen,
Speaker 4: and lots of MLPs didn't do great because they're exposed
Speaker 4: to that. If you're an asset manager that runs sector
Speaker 4: focused funds, and there's very few of those, those will
Speaker 4: inevitably struggle if in fact, software companies go through some
Speaker 4: sort of cycle. But again, most of the large managers
Speaker 4: that are public managers have been through this. It happened
Speaker 4: in the real estate business. You can see the ones
Speaker 4: that did it really well. I suspect that those firms
Speaker 4: will do an incredible job again, and you've already seen
Speaker 4: it earnings last couple of weeks. It's been pretty calming.
Speaker 4: It feels like it's been I think all most of
Speaker 4: these firms we know really well, they've done it a
Speaker 4: long time.
Speaker 1: They're going to do just There have been so many
Speaker 1: calls in this industry though, for consolidation, and I wonder
Speaker 1: if we've seen the real pain for those that can't
Speaker 1: survive this, if that process is finally it has actually
Speaker 1: played out yet.
Speaker 4: Yeah, I'm getting consolidation so hard. It's a people business.
Speaker 4: You know what I love about our business is that
Speaker 4: just culturally, we just foundationally have not done a ton
Speaker 4: of m and a Uh. And we organically build the
Speaker 4: business from from from from the ground up, and that
Speaker 4: in the investment business, particularly in times of heavy change,
Speaker 4: that cultural design is really one of your modes, in
Speaker 4: one of your strengths. And so unless it's very transformational,
Speaker 4: I don't I don't see at least for us, tons
Speaker 4: of M and a. But in the industry, if it's transformational,
Speaker 4: it can give you actual a new a new resource,
Speaker 4: or a new asset class that you weren't in. Maybe
Speaker 4: you could see those firms merge. But the name of
Speaker 4: the game I think is, I'm obviously biased is in
Speaker 4: the credit business. Uh, and I'm pretty biased.
Speaker 3: Uh.
Speaker 4: Two things, One that that we've been doing it for
Speaker 4: a really long time and two that you know, we
Speaker 4: have walls across everything and so we're just one investment
Speaker 4: unit at the end of the day. And again in
Speaker 4: times of increasingly more and more change, where the pace
Speaker 4: of change is much faster on the outside than it
Speaker 4: is at the inside of any of these firms, it's
Speaker 4: it's to have one aligned firm is a pretty strategic
Speaker 4: mode for us.
Speaker 1: Do you think though, that we get more firms that
Speaker 1: try to model themselves over diversification, that we get less
Speaker 1: sector specialists. I don't.
Speaker 4: Again, I think this is about you know, fifteen years ago, everybody,
Speaker 4: if you had an alternative firm, you could go into
Speaker 4: any asset class. There's there's now been kind of more
Speaker 4: specialation by asset class, but diversification by industry, and so
Speaker 4: most firms invest in almost every industry. You know, for us,
Speaker 4: we've been leaning in into infrastructure and credit and hybrid
Speaker 4: and in equity. We've always been very value oriented and
Speaker 4: so we haven't been caught up in most of the stuff.
Speaker 4: But again I don't I don't think there's going to
Speaker 4: be that big a pace of on I think financial
Speaker 4: service MNA is hard and so the bar is hard
Speaker 4: to get that done.
Speaker 1: And then for these wealth products, again for those that
Speaker 1: are very exposed to it felt like a really big
Speaker 1: bullish thesis for this industry that there was this untapped
Speaker 1: resource of wealth of retail. Do we rethink that as well?
Speaker 4: Look, again, this is not about again, I don't want
Speaker 4: to go down the rabbit hole on public versus private.
Speaker 4: But obviously you know the last thirty days public markets,
Speaker 4: seventy two percent of the return was ten stocks. Yeah,
Speaker 4: I mean, if you're talking about retirement and wealth products
Speaker 4: and what's the right product design. We can talk at
Speaker 4: length about what the appropriate product design and the pros
Speaker 4: and cons of all the products.
Speaker 3: Iraning another hour for that.
Speaker 4: Yeah, but the idea that you would not invest and
Speaker 4: lend money to the companies that we lend to on
Speaker 4: a diversified basis for the long term retirement is highly unlikely.
Speaker 4: It's very prudent to invest in income oriented, long duration
Speaker 4: products that generate yield over a decade in decades of history,
Speaker 4: it's highly likely that you're going to make a good
Speaker 4: return on that. And so I suspect we're still very
Speaker 4: underpenetrated relative to almost everyone's retirement in the world in
Speaker 4: private assets. And that's the overwhelming theme. This is a
Speaker 4: moment in time around product design and some fears around
Speaker 4: over indexing of a cycle into industry that will work
Speaker 4: itself through and so not to say there won't be defaults,
Speaker 4: but again, when a stock goes down seventy percent, do
Speaker 4: you not invest in stock in the stock market? Again? No,
Speaker 4: if there's a default in a high yield company, do
Speaker 4: you not lend money to a company? Again, Like, this
Speaker 4: is a little bit overblown with respect to the reactions
Speaker 4: of every single company when we lend a five thousand companies,
Speaker 4: and so when one situation goes wrong, it's hard to
Speaker 4: react too much to us.
Speaker 1: So John, before I let you go, I just have
Speaker 1: to say, I know we're in LA, but I want
Speaker 1: to ask about your hometown of Miami.
Speaker 3: Might we see an Apollo Miami headquarters.
Speaker 1: I feel like you've got to be advocating for that
Speaker 1: as a Miami man yourself, right.
Speaker 4: Family there, I grew up there. I love Miami me
Speaker 4: but you know, there's lots and lots of lots of
Speaker 4: good places. Both Texas and Florida have incredible options, and
Speaker 4: we're we're assessing.
Speaker 3: That the decision has not been made yet.
Speaker 4: I do. I do not think so. I do not
Speaker 4: think we've gone public with anything yet. So so we're
Speaker 4: but we're in the process.
Speaker 1: And I also feel like behind the scenes you must
Speaker 1: be like win gwink, nudge nudge.
Speaker 3: Mina is a great place, guys.
Speaker 4: Yeah, I do. I do love Miami. It's a sweet
Speaker 4: sweet spot in my heart.
Speaker 1: All right, John Oliver there, thank you so much for joining.
Speaker 1: I really appreciate your time. And Matt, that was of
Speaker 1: course Apollo's john Zo