WEBVTT - Bloomberg Surveillance: Apollo's Jim Zelter

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<v Speaker 1>A publog Global Management posting a record in twenty twenty

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<v Speaker 1>three for private credit, the firm reporting more profit last

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<v Speaker 1>year than the previous decade. Jim's outser Apollo. John just

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<v Speaker 1>now for more. Jim, it's going to see you with

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<v Speaker 1>us of the Act. Good mornings you.

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<v Speaker 2>Good to see you too. Always welcome. I appreciate the invite.

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<v Speaker 1>Well, thanks for coming on. Let's talk about these ernigs

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<v Speaker 1>well received by this market. What's underpinning these trends for you?

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<v Speaker 2>Well, I think it's a repeat of the secular trends

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<v Speaker 2>we've been talking about over the last several years. You know, certainly,

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<v Speaker 2>we have a business and an industry that gets better

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<v Speaker 2>every day as there are more and more retirees and

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<v Speaker 2>savers looking to think about retirement retirement income on our

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<v Speaker 2>annuity business. At the same time, you've got an involving

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<v Speaker 2>banking system, which I'm taught. I'm sure we're talking about

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<v Speaker 2>where lots of companies are looking for a variety of

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<v Speaker 2>capital solutions. We have the broadest toolbox, but as an industry,

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<v Speaker 2>it's it's a secular change and where we've been fortunate

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<v Speaker 2>to be right in the middle of it. But you're right,

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<v Speaker 2>we had a business last year that hit on all cylinders.

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<v Speaker 2>All parts of our business were a to first and

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<v Speaker 2>foremost great investor performance. Assets and asset gathering follows performance,

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<v Speaker 2>and we did so on a very strong risk adjusted basis.

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<v Speaker 1>You went there early, so we'll go there early. Well,

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<v Speaker 1>this means for the banks there is a sentiment out there.

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<v Speaker 1>You know how this is portrayed in the media. She

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<v Speaker 1>goes something like this, Apollo's killing get the banks of struggling.

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<v Speaker 1>It's their loss? Is your wind your gain? Is that

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<v Speaker 1>how it works for you?

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<v Speaker 2>Well, the reality is this is a brutally competitive business

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<v Speaker 2>and it has been for the thirty nine years I've

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<v Speaker 2>been in a business, whether it's you, whether you're in

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<v Speaker 2>the banking side, the asset management side, or anywhere in between.

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<v Speaker 2>You know, the competition for market share for assets is

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<v Speaker 2>always brutally competitive. But certainly it's a great narrative right now.

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<v Speaker 2>The reality is there's much more of a symbiotic relationship

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<v Speaker 2>than exists. And we're a major counter party of all

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<v Speaker 2>the large US institutions and even globally in Japan and

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<v Speaker 2>Europe as well, So it's not certainly on any one

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<v Speaker 2>transaction a buyout financing, whether it's going to go to

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<v Speaker 2>the Broady syndicated market or it's going to go to

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<v Speaker 2>private credit. These are all they're competitive within our industry,

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<v Speaker 2>and they're competitive within the banks. That's never going to change.

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<v Speaker 2>But the reality is the financing that takes place at

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<v Speaker 2>the counterparty financing that we get from the large institutions

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<v Speaker 2>really critical to our business. We provide them a lot

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<v Speaker 2>of financing fees and opportunities across our equity and debt businesses.

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<v Speaker 2>So there's a narrative that sells papers, and then there's

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<v Speaker 2>the reality, and it's somewhere in between.

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<v Speaker 3>This is like in high school when they're two friends

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<v Speaker 3>and they're kind of always talking about each other behind

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<v Speaker 3>their backs, but they're really like to each other because

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<v Speaker 3>they kind of will operate in the same circles. I'm

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<v Speaker 3>just saying we're getting Stanley front of these a little bit.

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<v Speaker 3>I mean, the idea is Morgan Stanley bolstering it's private

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<v Speaker 3>credit portfolio to fifty billion dollars in the medium term.

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<v Speaker 3>Gold and Sachs reportedly aiming to double the size of

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<v Speaker 3>it's one hundred and ten billion dollar credit business. They

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<v Speaker 3>want to fight back, don't she kind of feel that yees.

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<v Speaker 2>Again, we're in a really competitive industry with the smartest,

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<v Speaker 2>most determined mind in the globe in the US and Europe.

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<v Speaker 2>The reality is, and the end of the day, it

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<v Speaker 2>gets about your business model, how you fund your business,

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<v Speaker 2>and the client product that you're bringing to solutions. So

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<v Speaker 2>there's no doubt, I mean, there's no doubt that there's

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<v Speaker 2>going to be firms that are going to start private

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<v Speaker 2>credit businesses. But again let's take a step back. As

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<v Speaker 2>I've talked to you many times in New York and

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<v Speaker 2>in London, private credit is broader than just the sponsor

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<v Speaker 2>buyout business. It's a great headline product, it's a great

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<v Speaker 2>headline tool, but the reality is that's a trillion five market.

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<v Speaker 2>The reality is private capital, private credit is a forty

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<v Speaker 2>trillion dollar opportunity. And that's where when we see what

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<v Speaker 2>we're doing in terms of aircraft finance and solar finance

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<v Speaker 2>and a variety of trade and inventory finance, that's where

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<v Speaker 2>we have a really competitive toolbox. Because of the structure

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<v Speaker 2>of our liabilities, the duration of those liabilities, and the

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<v Speaker 2>cost of capital. What we've really done at a poll

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<v Speaker 2>the last ten twelve years has really brought our cost

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<v Speaker 2>of capital down drama. If you're just in the pe business,

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<v Speaker 2>your cost of capital is mid to high twenty percent.

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<v Speaker 2>If you're in the measure to stress businesses in the teens.

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<v Speaker 2>When you have an annuity business, and the reality is

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<v Speaker 2>in this higher rate environment, more people like to buy annuities.

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<v Speaker 2>Annuities had a record volume last year. That just brings

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<v Speaker 2>in a lot of long duration, lower cost capital. So

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<v Speaker 2>our ability to be very relevant to any client or

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<v Speaker 2>borrower is a It's really a defining characteristic.

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<v Speaker 3>How much has the money that you're talking about, which

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<v Speaker 3>is coming from different sources than traditionally, basically been the

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<v Speaker 3>reason why we haven't seen the credit cycle that so

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<v Speaker 3>many people were expecting.

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<v Speaker 2>Well, I think it's a very interesting question. I think

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<v Speaker 2>what's going on right now, and I know you had

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<v Speaker 2>tors in here yesterday, is you know last year you

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<v Speaker 2>had the equity markets of twenty something percent broadly speaking,

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<v Speaker 2>and at the end of the year you had defaults

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<v Speaker 2>going approaching almost five percent. That's a pretty unique characteristic.

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<v Speaker 2>Usually when you see defaults rising like that, you have

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<v Speaker 2>a decline economy. The strength of this economy has befuddled

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<v Speaker 2>economists and all your guests for the decade, and if

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<v Speaker 2>you look at where all the dot plots have been,

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<v Speaker 2>even with those folks who have all the information have

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<v Speaker 2>missed this. Now. I think once we all say that,

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<v Speaker 2>you know there's not going to be a cycle. I

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<v Speaker 2>do think you are seeing some signs of a hardening

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<v Speaker 2>of economic conditions that are fondly coming up. We'll see

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<v Speaker 2>it in the next few weeks. I think the Fed's

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<v Speaker 2>made the right choice. I think theyve I talked several

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<v Speaker 2>months ago here about the FED put us back. They

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<v Speaker 2>put themselves in a really interesting cosition right now where

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<v Speaker 2>they can mute volatility with having a lot of bullets

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<v Speaker 2>left in that gun. But I do think there's a

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<v Speaker 2>modern economy that's going on right now. The depth and

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<v Speaker 2>breadth has surprised economists and guests across the board, and

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<v Speaker 2>it's a much more resilient economy. The US economy is

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<v Speaker 2>the bulwarker the Western world right now. It really is.

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<v Speaker 1>Economy is strong, and I think you told us before Christmas.

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<v Speaker 1>Basically the Federal Reserve has the space now because of

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<v Speaker 1>lower inflation, to respond to negative shock. What I'm trying

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<v Speaker 1>to work out though, of the issuance that we've seen

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<v Speaker 1>so far, and this is more in public markets where

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<v Speaker 1>Lisa and I've been talking about this boom and supply

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<v Speaker 1>to start this year and this flood of demand. Is

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<v Speaker 1>that because the economy is strong or we're just anticipating

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<v Speaker 1>lower rates this year? Which one is it?

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<v Speaker 2>I think it's a combination of. You know, the US

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<v Speaker 2>consumer has prepared themselves very well for a higher rate environment,

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<v Speaker 2>corporate balance sheets have prepared themselves very well for a

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<v Speaker 2>balance sheet, and when people see financing opportunities, they know

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<v Speaker 2>now that like, don't wait a round for perfection. And

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<v Speaker 2>I think that's been a good lesson, you know, don't

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<v Speaker 2>let don't let perfect get in the enemy of progress.

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<v Speaker 2>And I think there's been a very very thoughtful There's

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<v Speaker 2>no doubt there is when people see what's going on

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<v Speaker 2>where rates we're supposed to be going, there has been

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<v Speaker 2>a rush and there's a there is a risk on

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<v Speaker 2>trade right now and virtually every asset class the market

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<v Speaker 2>has priced to perfection in virtually every asset class, and

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<v Speaker 2>that means it's a good time to issue. I'll tell

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<v Speaker 2>you For us, we typically underperforming periods like this. We

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<v Speaker 2>have a lot of cash on the balance sheet, of

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<v Speaker 2>the then right now we're very low levered. We put

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<v Speaker 2>ourselves in the position if there are pockets of volatility,

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<v Speaker 2>we're going to be well positioned. But that's how we prudently,

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<v Speaker 2>that's when we have a macro view, that's how we

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<v Speaker 2>express it.

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<v Speaker 1>It's a classic approach. You want to be the courdancy

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<v Speaker 1>provider in sound to stress. It makes sense.

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<v Speaker 2>Yeah, And I think the story that really has not

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<v Speaker 2>been spent a lot more time on this issue of

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<v Speaker 2>market structure, the rise of passive, the lack of company's

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<v Speaker 2>ability to really do the equity market is and the

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<v Speaker 2>equity IPO market is fundamentally challenged. And I know spacks

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<v Speaker 2>were not the answer, but the real in our view

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<v Speaker 2>that this market structure issue has been going on for

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<v Speaker 2>several years, it's going on for a decade, and the

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<v Speaker 2>advent of passive and scale now more than fifty percent.

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<v Speaker 2>I think that's going to have profound implications on how

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<v Speaker 2>companies raise capital going forward.

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<v Speaker 1>We've got time to work through that through the act

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<v Speaker 1>is luckily going to stay with us. You mentioned credit stress. Fact,

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<v Speaker 1>that's my word. I can't remember the word you use precisely.

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<v Speaker 1>By want to ask you about that are you seeing

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<v Speaker 1>pockets of stress right now? Nyc B Commercial raal Est State.

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<v Speaker 1>We talked about it for the best part of five minutes.

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<v Speaker 1>Market moves on. What are you seeing?

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<v Speaker 2>I think you are seeing in a very broad, growing

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<v Speaker 2>economy with massive fundamental strength, you're seeing some situations where

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<v Speaker 2>companies either poor business plan or way too much debt

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<v Speaker 2>and have not maybe recovered from the COVID crisis. You're

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<v Speaker 2>seeing that a little bit more in the corporate world.

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<v Speaker 2>In the US. The US consumer we are the average

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<v Speaker 2>mortgage is three point eight percent. We've not seen the

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<v Speaker 2>pain that's been seen in the UK and Germany. That's

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<v Speaker 2>really protective. So you're seeing some signs of challenge and weakness.

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<v Speaker 2>But there's been a tremendous amount of private equity activity

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<v Speaker 2>and financing activity the last five to seven years. So

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<v Speaker 2>the fact that you're going to have some stray challenges

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<v Speaker 2>around the edges interesting. I don't think it's a macro

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<v Speaker 2>telltale sign of things changing, but there are challenges out there,

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<v Speaker 2>no doubt.

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<v Speaker 1>It's great to have you with us. Jim's out of

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<v Speaker 1>Apollowest Management