Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Jim's out to the president of a Pollo Global Management
Speaker 2: out with a new report asking the question, what if
Speaker 2: the world doesn't work the way you think it does?
Speaker 2: Zouch from the team, going on to write, the era
Speaker 2: of free money is over, ultra low interest rates our
Speaker 2: history inflation is structural, not transitory. It's redefining risk return
Speaker 2: and the cost of capital.
Speaker 1: Jim joins us. Now for more, Jim go Mornic.
Speaker 3: I got to hire you at Apollo as a marketing guy.
Speaker 3: You're doing a good job.
Speaker 1: I'm going to go one step further.
Speaker 4: Thank you.
Speaker 2: I woke up the other week, came into the office
Speaker 2: handwritten note from you, and it said, public markets power
Speaker 2: the narrative, Private markets power the economy.
Speaker 1: Just start there.
Speaker 2: What is the question you're posing for clients at the moment,
Speaker 2: what you want to get them to think about.
Speaker 3: Well, it's a bigger conversation about market structure and the
Speaker 3: changing backdrops, about how investors think about investing from a
Speaker 3: sixty to forty portfolio historically, and the tools they have
Speaker 3: to create better outcomes with less volatility. The reality is
Speaker 3: alternatives have worked for forty years for institutions, and if
Speaker 3: we think thoughtfully about the growing need for retirees around
Speaker 3: the globe, how do we augment which worked well in
Speaker 3: the past but may not be the compass for the future.
Speaker 3: On the other side of the coin, it's four companies
Speaker 3: eight thousand companies down to four thousand. The role of
Speaker 3: private capital is changing. Companies like SpaceX, Spie and Stripe
Speaker 3: can become to stay private for much longer. And so
Speaker 3: a little bit when I hear about your headlines this morning,
Speaker 3: I feel like many folks that come on talk a
Speaker 3: little bit about the world in the rear view mirror
Speaker 3: versus looking to the windshield. And the real aha moment
Speaker 3: for us came two three years ago when we heard
Speaker 3: when we saw what was going on with rates rising
Speaker 3: dramatically in this cycle, and universally we all thought that
Speaker 3: the economy would hit skids and they would be tightening
Speaker 3: financial conditions, and that really didn't happen. So that was
Speaker 3: a very practical situation where we really said, maybe our
Speaker 3: textbook that we've using all along is wrong. But changing
Speaker 3: market structure, how companies finance, how investors invest, it is
Speaker 3: a new playbook, a new.
Speaker 2: Paradigm, redefining public and private markets. Our good friend Mark
Speaker 2: around would often talk about this and say often the
Speaker 2: distinction was risk high risk in private markets. And now
Speaker 2: the distinction I think you and a team want to
Speaker 2: make is liquidity.
Speaker 3: Yeah, I mean the old idea when we grew up
Speaker 3: in a marketplace. This is my fortieth year in the
Speaker 3: business where private was was risky and volatile and public
Speaker 3: was safe and liquid. And there's many examples right now.
Speaker 3: I come from the world of credit and I started
Speaker 3: out as a high yeld slash junk bond trader back
Speaker 3: in the eighties, and there was it might have been
Speaker 3: it might have been a public security. But trust me,
Speaker 3: it was volatile and it was risky. And now over
Speaker 3: thirty years, is now bond to become high yield and
Speaker 3: asset class. There's still a lot of inherent volatility in that.
Speaker 3: And again we would say that across the whole risk
Speaker 3: reward spectrum. You know, I grew up in Rochester, New York,
Speaker 3: code Ax, Xerox, Boujalmaan, three great American icon companies. They
Speaker 3: didn't get the memo on disruption. They were safe in
Speaker 3: investment grade companies and Vohil they're not in existence anymore.
Speaker 2: Can we talk about how things have changed over the
Speaker 2: last forty years. So you and the tea would often
Speaker 2: talk about you are what you originate, you are what
Speaker 2: you create. The capex needs of companies now seem to
Speaker 2: have changed. I was reading the transcript from your address
Speaker 2: at a financial markets conference earlier this week, and you
Speaker 2: talked about the capex needs twenty to thirty forty years
Speaker 2: ago relative to now, and the change in quality, the
Speaker 2: changing character of things. How important is that even where
Speaker 2: we're at.
Speaker 3: Well, just just to reset that question. You know, in
Speaker 3: the last thirty years, the high yield market globally has
Speaker 3: finance companies that are going through either a regulatory change
Speaker 3: or technology change. Think cable, think shale, think airlines, telecommunications,
Speaker 3: And for the most part that massive catbas was on
Speaker 3: non investment grade companies. As we sit here in twenty
Speaker 3: twenty five. In the next ten years, massive cap backs
Speaker 3: boom between data, AI, sustainability, energy transition, transmission lines, the
Speaker 3: transaction we did for our we this year this week
Speaker 3: in Germany. And so I don't think people are still
Speaker 3: thinking that private credit and private capital is small, ill liquid,
Speaker 3: non investment grade companies, and the reality is eighty to
Speaker 3: ninety percent of the private credit market is really investment
Speaker 3: grade counter parties investment grade debt. And again many, many
Speaker 3: companies now are afforded the opportunity to stay private much
Speaker 3: longer because of the breadth and the breadth of the
Speaker 3: financing markets.
Speaker 5: To build on what John is talking about, does private
Speaker 5: debt have more of a role than private equity at
Speaker 5: this point?
Speaker 3: Well, the debt markets and the capital markets and the
Speaker 3: credit markets are as we As the Congress learned in
Speaker 3: seven h nine, it's the lifeblood of the economy. When
Speaker 3: ge could not roll over their commercial paper, it was
Speaker 3: the aha moment for the Congress to say, wait a second,
Speaker 3: we need to act here. And so when you think
Speaker 3: about the scope of private credit and scale, certainly the
Speaker 3: application with investment grade solutions, it's in the multi multi
Speaker 3: trillions tend to forty trillion, and the pe industry is
Speaker 3: a seven to ten trillion, depending on how you think
Speaker 3: about the dry powder and the overhang. So I would
Speaker 3: argue over the next decade the impact of private credit,
Speaker 3: investment grade and non investment grade will probably have as
Speaker 3: large an impact, if not larger, than private equity has
Speaker 3: had in the last decade, so.
Speaker 5: The peak of private equities over well, I.
Speaker 4: Wouldn't say that.
Speaker 3: I mean I think that the private equity industry is
Speaker 3: going to go through an evolution, and it's going to
Speaker 3: be a Darwinian evolution.
Speaker 4: And I think that.
Speaker 3: The challenges of monetization, the challenges of upfront capital commitments,
Speaker 3: there will be fewer and fewer firms that are able
Speaker 3: to go to investors and have that dialogue and have
Speaker 3: that relationship. We believe for one of them because of
Speaker 3: our investment track record, But the reality is, I think
Speaker 3: that many PE firms that business model is going to change,
Speaker 3: and how can they adapt.
Speaker 5: This is a really important conversation to be having, especially
Speaker 5: because on surveillance we keep talking about the divide between
Speaker 5: public markets and the underlying economy, and now it seems
Speaker 5: like it's growing an increasingly dramatic fashion, and we keep
Speaker 5: wondering whether the economy is really struggling right now, at
Speaker 5: least by virtue of some of these labor market pictures.
Speaker 5: The same time that you're seeing the oracles of the
Speaker 5: world do very well, are you seeing that? Are you
Speaker 5: seeing the need for money to be a little more
Speaker 5: free right now in order to rejucee some of that activity.
Speaker 4: You know, we're not seeing yet.
Speaker 3: But I do think the question you're really asking is
Speaker 3: and it is the same question about you know, with
Speaker 3: the amount public markets used to be a great diversify
Speaker 3: fuire for portfolios, and it really was the bellweather how
Speaker 3: the US economy and the global economy was doing. But
Speaker 3: as more companies have stayed private and more companies are
Speaker 3: funding privately, you really are questioning that barometer on what
Speaker 3: is telling you. Torson has a good piece out this
Speaker 3: morning talking about the concentration of the CAPEX cycle and
Speaker 3: how it's concentrated in a handful of companies in data,
Speaker 3: AI and technology. And while the capax is a massive
Speaker 3: number and it's driving a north start to growth, you're
Speaker 3: asking a provocative question, is it really hiding the underlying
Speaker 3: economy which is driven by private companies. Ninety percent of
Speaker 3: the hiring in America is by private companies, and is
Speaker 3: at a different story today? It could be we're seeing
Speaker 3: if you look at the public numbers in terms of
Speaker 3: earnings over the second quarter, it be consensus by seven
Speaker 3: hundred basis points eleven versus four and for the most part,
Speaker 3: the credit portfolios that we oversee the multi thousands of
Speaker 3: counterparty basinusite to four thousand, it actually showed quality upgrades
Speaker 3: three to one versus downgrades in terms of performance. So
Speaker 3: in the breadth of our credit portfolio is we're not
Speaker 3: seeing a weakness. I will tell you we definitely see
Speaker 3: more lingering inflation. And I do believe that the while
Speaker 3: this administration is dead set on getting rates lower, I
Speaker 3: believe that there is a legacy inflation issues in the economy.
Speaker 3: When's the last time any one of us bought something
Speaker 3: in the last year and he said, wow, that was
Speaker 3: cheaper than a year ago.
Speaker 4: It has not happened.
Speaker 3: And that's just in the and I do believe that's
Speaker 3: going to be the scourge of this rate cycle, because
Speaker 3: I do believe there's greater inflation and companies are having
Speaker 3: it a much more challenging time passing that along to
Speaker 3: consumers that we're seeing it across the board.
Speaker 1: There's a lot to impact that.
Speaker 2: One of the things I wanted to impact was the
Speaker 2: concentration risk and the AI financing that we've seen both
Speaker 2: in data centers and the energy transition. There's a quote
Speaker 2: in the last year that's just stuck with me for
Speaker 2: the last twelve months, and it came from the Alphabet
Speaker 2: CEO that the bigger risk is under investing and not
Speaker 2: over investing, And that just sounded like a commitment to overinvesting. Now,
Speaker 2: I'd want to understand how your industry avoids a massive
Speaker 2: misallocation of resources at a time when everyone is chasing
Speaker 2: the same story.
Speaker 3: Well, it feels like you have a bug in our
Speaker 3: investment committee rooms. I mean, I've been talking the last
Speaker 3: six months about the cycles of dark fiber in the
Speaker 3: late nineties, of shale on the early teens ten to
Speaker 3: twelve to sixteen, and certainly enterprise software the last five years.
Speaker 3: And you have to be concerned as an investor today,
Speaker 3: are you taking equity risk for a fixed rate of return?
Speaker 3: That's the ultimate sort of bubble if you would, And
Speaker 3: I don't think that the true economics. Certainly consumers industry,
Speaker 3: the economy is going to benefit, but not all in
Speaker 3: industries as they evolved. Was it a great investor to
Speaker 3: be an investor? The cell phone is U is a
Speaker 3: great example. Only in the last decade is it become
Speaker 3: a good investment for companies to invest? So don't I
Speaker 3: don't have the answer though, once it's a question we're
Speaker 3: asking ourselves now. We find ourselves both on the debt
Speaker 3: and the equity side of funding a lot of the
Speaker 3: data center activity. But there's a tremendous amount needed and
Speaker 3: there's a voracious appetite. But I certainly understand what the
Speaker 3: Alphabet executive was saying.
Speaker 2: Just then there's a bit of a duration mismatch between
Speaker 2: how long it takes to build a data center and
Speaker 2: how long it takes to build the energy infrastructure to
Speaker 2: enable it.
Speaker 1: And could that be problematic?
Speaker 3: There certainly is we have spent more time. The energy
Speaker 3: supply issue could be a governor to growth and that's
Speaker 3: a challenge that we've not seen yet. But if you
Speaker 3: pencil out the numbers, that could be a concern. But
Speaker 3: I think the bigger questions back the first one we
Speaker 3: asked is these are ten twenty thirty year infrastructure builds.
Speaker 3: Who really with our marketplace going towards indexes and ETFs
Speaker 3: and multipod shops that are all thinking about moment to
Speaker 3: moment liquidity, the era of the long investor is a
Speaker 3: question mark.
Speaker 4: Who is that long investor?
Speaker 3: And we would say it's the retirees of tomorrow. Every
Speaker 3: day twelve thousand folks in the US you hit sixty five,
Speaker 3: and the West, broadly speaking, in other countries around the
Speaker 3: world have not done a great job with retirees, and
Speaker 3: so the ability to thoughtfully introduce long duration infrastructure inflation
Speaker 3: hedge assets into these portfolios. In the UK they call
Speaker 3: it matching adjustment for insurance assets. Those are really where
Speaker 3: the growth of our business is going to go, and
Speaker 3: that's going to benefit investors.
Speaker 2: This makes a lot of sense, particularly if you're investing
Speaker 2: for retirement. You don't need daily liquidity. That's just launching.
Speaker 2: I think where the criticism is coming from for your
Speaker 2: industry at the moment is that family offices are already
Speaker 2: doing a lot of this. I think you had attain
Speaker 2: we talked about that a ton high net worth individuals
Speaker 2: are doing the same. You're now going go after retail,
Speaker 2: and then people start to feel a little bit uncomfortable
Speaker 2: with that. Are you're looking for a new bank helder?
Speaker 2: Are we looking for someone else to pick up the pieces?
Speaker 2: What's the response from you and the team to address
Speaker 2: that head on.
Speaker 3: I think it's all about doing it in a methodical, logical,
Speaker 3: diverse way. You know, this is all about the you know,
Speaker 3: the proper amounts and the proper diversity. Certainly, we would
Speaker 3: never advocate for someone taking an outsized portfolio of their
Speaker 3: retirement and putting it all into alternatives. But clearly, over
Speaker 3: the last thirty to forty years, history has shown us
Speaker 3: that an allocation of alternatives ten to twenty percent of
Speaker 3: a portfolio increases returns and brings down volatility. And so
Speaker 3: from our perspective, there's a variety of areas in the
Speaker 3: world of credit, in particular the world of infrastructure, the
Speaker 3: world of secondaries that are more yield oriented, compounding type
Speaker 3: of vehicles.
Speaker 4: And certainly we.
Speaker 3: Have a view that private equity, while a very attractive
Speaker 3: asset class, even in returns to the next ten decade
Speaker 3: mid to high teens, that that should be done in
Speaker 3: appropriate doses. So it's all about diversity and proper portfolio allocation.
Speaker 2: Jim's down to the president of a public global management
Speaker 2: still with us, Jim, let's continue this conversation. At the
Speaker 2: stand of the year, you talked about macro paralysis. This
Speaker 2: story is continuing. It just feels like this market public
Speaker 2: markets have moved on. Have you and a team moved on?
Speaker 4: Yes?
Speaker 3: I think if you landed from Mars today and you
Speaker 3: had not had the benefit of the last six months,
Speaker 3: the idea of the death of US exceptionalism would not
Speaker 3: be on your radar screen, and you'd have four or
Speaker 3: five things. You'd say, massive capex cycle in front of us.
Speaker 3: You'd say administration, pro business and determined to cut rates.
Speaker 3: You'd say that the last quarters public numbers in terms
Speaker 3: of equities and credit have been strong. And you'd say
Speaker 3: there's a big M and a pipeline. We're on record
Speaker 3: to have the second biggest M and a light a
Speaker 3: year versus twenty one. So all those things would point
Speaker 3: to invest rates are going lower, spreads are going to
Speaker 3: stay tight, and I can give butts to all of those,
Speaker 3: but that is that's the trend going on right now,
Speaker 3: and the idea that investors were going to you know, boycott.
Speaker 3: The us FDI has been massively strong in the last
Speaker 3: four or five months, and you know, knock Wood, we've
Speaker 3: had We've had a very strong year across our public
Speaker 3: and our private businesses, a lot of origination. This week
Speaker 3: we led a very large transaction for RWE, which is
Speaker 3: exactly what we're talking about about big private solutions. Energy
Speaker 3: transmission a very exciting business. It's a blockbuster business, one
Speaker 3: we would never have talked about years ago. But they
Speaker 3: have billions upon billions of needs to restruct sure the
Speaker 3: transmission system in Germany. So the markets, markets are the
Speaker 3: animal spirits are fairly are back. There are lots of
Speaker 3: little hiccups out there, and whether it's instability or valuations
Speaker 3: or other headaches, but yes, active market. We've been active
Speaker 3: in the US and Europe dramatically this year, and the
Speaker 3: pipeline is quite strong.
Speaker 5: Have you found the need to hedge from the US
Speaker 5: a little bit more given the fact that there is
Speaker 5: this policy uncertainty, but more so this question around the
Speaker 5: FED cutting rates, allowing inflation to run hot and an
Speaker 5: appreciation of the dollar.
Speaker 3: You know, you know, certainly there's been a lot more
Speaker 3: hedging of investments from overseas investors, and certainly, you know,
Speaker 3: we typically because most of our liabilities are into dollars,
Speaker 3: we will hedge back to the dollar as well. But
Speaker 3: we certainly want to have exposure to other economies in
Speaker 3: the addition to the US because the concern about inflation.
Speaker 1: Gee, and this is a real daily in Europe. Get
Speaker 1: the thinning you.
Speaker 3: Do, well, you know, there was an interesting article I
Speaker 3: read this morning that a year after the Drag report,
Speaker 3: like eleven percent of the proposals and put in place.
Speaker 3: So I think companies are. I see corporate leadership in
Speaker 3: a variety of sectors, and I see a few government leaders,
Speaker 3: you know, passionately, passionately pursuing this. But I think the
Speaker 3: overall pace is not what it should be, and the
Speaker 3: paralysis of the broad government oversight in Europe is holding
Speaker 3: the progress back. So it's not it's not as fast
Speaker 3: as we would like it, but it's a training we
Speaker 3: want to be on.
Speaker 1: What would be an easy change to make that train
Speaker 1: and go fast?
Speaker 3: You know, they've pushed for a variety of relaxation of
Speaker 3: some of the securitization rules. You know, basically a solvency
Speaker 3: two balance sheet for an insurer in Europe you have
Speaker 3: to own almost sixty five seventy percent of your assets
Speaker 3: need to be sovereign bonds. That's just too large an
Speaker 3: amount and it's very, very challenging and difficult to purchase
Speaker 3: and to hold securitized product asset based securities, which have
Speaker 3: proven to be a very good tool for insurance companies
Speaker 3: and other financial services firms in the US. It's good
Speaker 3: for dispersing risk, and it's good for versus corporate purchases.
Speaker 3: So I think something like that securitized products would be
Speaker 3: a very easy and important move to make.
Speaker 2: I think ceratlely many of us just conditioned by experience,
Speaker 2: conditioned to be disappointed by Europe.
Speaker 5: Are we allowed to be disappointed? I keep thinking about
Speaker 5: what Howard Mark said after they announced the regime of tariffs,
Speaker 5: and he said the US is still the best place
Speaker 5: to invest, but it's less of the best place to invest.
Speaker 5: And so you start looking at other places and saying, yeah,
Speaker 5: there's hair on this and not going to get their
Speaker 5: act together, but at least there's some investment. We might
Speaker 5: as well diversify. And I wonder how much that's driving
Speaker 5: people to like with seeing even when there still is
Speaker 5: a lot of skepticism.
Speaker 3: Jim I would say, they've looked around. They still come
Speaker 3: back to the US, strongest, largest, deepest market in the world,
Speaker 3: greatest economy, rule of law, unbelievable banking system, creativity, intellectual capital.
Speaker 4: It's it's the place to invest.
Speaker 2: That found like he's running sounded like a politician space, didn't.
Speaker 1: They maybe for mayor Yeah, he's run Jim. Jim's out
Speaker 1: of apology Jim, thank you, sir. You don't want anything
Speaker 1: to do with that.