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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.

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Speaker 2: I'm Tracy Alloway.

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Speaker 3: And I'm Jill Wisenthal.

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Speaker 2: Joe, do you remember those stories. I guess they were

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Speaker 2: a bigger deal earlier this year, but they're still kind

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Speaker 2: of out there, the stories about how the stock market

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Speaker 2: is all about the big tech companies.

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Speaker 3: Yeah, absolutely so, I mean, yeah, it still is.

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Speaker 4: It still is.

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Speaker 2: But I think like at one point earlier this year,

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Speaker 2: there was a number that caught my eye. I think

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Speaker 2: it was like thirty percent of the S and P

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Speaker 2: five hundred came from the mag seven. So, you know,

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Speaker 2: off of that, Microsoft, Nvidia and all of those. And

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Speaker 2: I guess as all the hype and interest over AI

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Speaker 2: has grown, the import of tech companies in the equity

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Speaker 2: market has increased in size along.

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Speaker 3: With it totally. You know, anything is an interesting stet.

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Speaker 3: We're recording this on September twenty fifth. If I look

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Speaker 3: at the major stock in the seas for the year,

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Speaker 3: the NAS deck or as we used to write the

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Speaker 3: tech having NAZ deck is up twenty eight point three.

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Speaker 3: The S and P five hundred is up twenty point

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Speaker 3: three five percent, virtually the same. So I think it's

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Speaker 3: telling the degree to which the S and P is

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Speaker 3: becoming the nas Deck in fact that we should that

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Speaker 3: would be a good story or great headline.

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Speaker 1: Yeah.

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Speaker 3: Basically, the S and P, by virtue of the dominance

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Speaker 3: of these handful of megacap tech companies that dominate both index,

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Speaker 3: the S and P five hundred is morphing into the Nasdaq.

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Speaker 2: Listeners, you get to witness how journalism happens in real time.

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Speaker 2: You come up with Heplin, you.

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Speaker 3: Notice some numbers, and you're like, oh, let's see if

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Speaker 3: we could back a story into that.

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Speaker 2: Okay, Well, speaking of everything becoming tech, I realized that, like,

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Speaker 2: one thing we haven't really spoken that much about is

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Speaker 2: what tech and all the recent enthusiasm for it actually

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Speaker 2: means for the credit market, for the world of corporate bonds.

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Speaker 3: Yeah, this is interesting, and there's probably a reason that

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Speaker 3: we don't think about this very often, which is one

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Speaker 3: is that if you look at like the really big

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Speaker 3: tech companies and even like small companies, you know, a

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Speaker 3: lot of it has not historically been credit funded. A

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Speaker 3: lot of it has been equity funded, and VC is equity,

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Speaker 3: and you know, these companies produce so much cash from

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Speaker 3: their earnings, and they can fund themselves out of earnings.

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Speaker 3: That credit to some extent hasn't been part of the story.

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Speaker 3: But a few things a you know, some of these

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Speaker 3: companies mature and they start to issue debt, and they

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Speaker 3: do have debt, and some of it's to fund buybacks.

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Speaker 3: We're also in a period where a lot of tech

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Speaker 3: is more capital intensive than it had been in the past,

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Speaker 3: and sort of project based financing is more of an issue.

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Speaker 3: And maybe that's like it sort of you know, some

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Speaker 3: of the data center plays, et cetera. So I believe

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Speaker 3: there are interesting credit stories that, for reasons I can understand,

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Speaker 3: have not gotten much attention.

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Speaker 2: There definitely are interesting credit stories, and I am very

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Speaker 2: pleased to say we have the perfect guests today who

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Speaker 2: is going to tell them. We are speaking with Rob Bittencore.

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Speaker 2: He is a partner at Apollo. He is the co

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Speaker 2: head of Opportunistic Credit. He's also a member of a

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Speaker 2: bunch of different investment committees over there. Rob, thank you

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Speaker 2: so much for coming on all thoughts.

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Speaker 4: Tracy, Joe very excited to be here, longtime listener, and.

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Speaker 2: Fan ah right, thank you. So let me ask the

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Speaker 2: basic question, but what does the co head of Opportunistic

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Speaker 2: Credit at Apollo actually do? Opportunistic credit sounds like you know,

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Speaker 2: something you might get at college. What is it exactly?

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Speaker 4: So before I describe what I do within opportunistic credit,

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Speaker 4: I think it makes sense just a level set. Where

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Speaker 4: does that sit within the broader appall uplat platform. So

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Speaker 4: you know, Apaulo is an alternative asset manager and a

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Speaker 4: retirement services business. It manages about seven hundred billion dollars

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Speaker 4: of AUM, five hundred of which sits in our credit business.

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Speaker 4: And I focus on the opportunistic pool of capital, which

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Speaker 4: is about thirty billion dollars. So what is opportunistic It

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Speaker 4: is not as bad as you make it sound. It

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Speaker 4: is really credit investments on both public and private side,

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Speaker 4: targeting returns of eight to thirteen percent broadly speaking. So

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Speaker 4: in terms of what I do within that business, I

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Speaker 4: co lead a group of twenty analysts who are sector

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Speaker 4: focused and really are tasked with identifying, sourcing, and underwriting,

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Speaker 4: you know, the ultimate investments that go into a series

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Speaker 4: of funds that make that thirty billion dollar AUM pool

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Speaker 4: of capital that I mentioned.

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Speaker 3: So it seems like you know I mentioned that, you

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Speaker 3: know you do have debt issued by tech companies, and

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Speaker 3: sometimes they run across the headlines. Sometimes you read like, oh,

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Speaker 3: Apple is selling a bomb yourself to sure these do

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Speaker 3: not sound like exciting areas for opportunistic credit at that

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Speaker 3: level because they're pretty close to like triple a rate,

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Speaker 3: Like if I'm lending to Apple, it's like the next

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Speaker 3: closest thing to probably lending to the US government in

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Speaker 3: terms of the spreads and.

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Speaker 4: Stuff like that.

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Speaker 3: So when you talk about like opportunistic credit and the

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Speaker 3: opportunity to actually get those like substantial return as you said,

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Speaker 3: eight and thirteen percent, are where are we typically looking.

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Speaker 4: When I joined aupoll on two thousand and six, high

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Speaker 4: yield and the lever loan market were not synonymous with technology.

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Speaker 4: People thought of those as ways for slower growing companies

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Speaker 4: to finance themselves, companies that produce consistent, dependable cash flows.

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Speaker 4: Fast growing companies typically didn't look to the sub investment

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Speaker 4: grade market for financing. But that's steadily changed over time.

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Speaker 4: So if you look at a lot of the private

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Speaker 4: equity activity, which is a huge source of credit that

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Speaker 4: goes into the hy old market, about twenty five percent

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Speaker 4: of LBO activity today is in that technology space, and

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Speaker 4: that's steadily increased over the past ten or fifteen years.

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Speaker 4: It was about twenty percent before the pandemic. So that's

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Speaker 4: mostly been in software related names.

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Speaker 3: Yeah, right, So there are various p firms that are

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Speaker 3: buying these of middle markets type software company.

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Speaker 4: Or even larger multi billion dollar companies increasingly, so the

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Speaker 4: scale is certainly there. Today, about fifteen percent of the

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Speaker 4: levered loan market is software related. There's less of an

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Speaker 4: exposure in the higal bond market about five percent is

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Speaker 4: technology related. But I do think you have that critical

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Speaker 4: mass of technology names in both markets today. Obviously not

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Speaker 4: as intense as you see in the equity markets, but

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Speaker 4: it's definitely a market that's become more tech focused during

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Speaker 4: my career a topolla.

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Speaker 2: So what does that mean for the things that Apollo

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Speaker 2: specifically is buying. The growth of the private market, the

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Speaker 2: rush of private equity money as well, does that translate

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Speaker 2: into specific things that you're doing, such as direct lending?

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Speaker 4: Sure? So, a lot of what we've been talking about

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Speaker 4: right now is with respect to below investment grade, and

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Speaker 4: you talked about the fact that the larger hyperscalers have

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Speaker 4: largely self financed themselves or have gone to the public

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Speaker 4: ig bond markets. I think some of the more recent

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Speaker 4: technology themes that we've seen, namely AI, which I know

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Speaker 4: something you all have spoken extensively about. I think what's

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Speaker 4: interesting about this trend relative to maybe more recent technology

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Speaker 4: trends like smartphones and mobile computing, which was relatively asset light, right,

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Speaker 4: it was developing applications that sat on top of Android

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Speaker 4: and iOS, which didn't really require a lot of capital. AI,

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Speaker 4: which I think you referenced before, is very capital intensive.

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Speaker 4: You need to build the data centers, you need to

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Speaker 4: build the power to support those data centers, you need

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Speaker 4: to build the chip making facilities, to build the GPUs

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Speaker 4: which are used in the data centers, and that is

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Speaker 4: all going to require capital. A lot of that capital

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Speaker 4: is not going to be provided by the high yield markets.

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Speaker 4: Where it will be provided, in our view, is from

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Speaker 4: the private investment grade market, which you know, when people

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Speaker 4: think of private credit, they don't necessarily equate it with

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Speaker 4: investment grade. But as an institution, over half our credit

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Speaker 4: AUM is associated with our retirement services business, a theme

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Speaker 4: which invests primarily in long duration investment grade credit, and

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Speaker 4: so I think there's a huge opportunity for Apollo and

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Speaker 4: others to invest those pools of capital that are looking

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Speaker 4: for long data investments, high quality behind some of these themes,

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Speaker 4: and I can go into more detail around that if

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Speaker 4: that's helpful in terms of some of the areas we've

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Speaker 4: been focused.

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Speaker 2: I have one question just before you do that. But

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Speaker 2: if I'm an investment grade issuer, certainly, if I'm an

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Speaker 2: Apple or someone like that, why would I want to

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Speaker 2: go into the private market to begin with? I'm IG,

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Speaker 2: I can sort of, you know, dictate my own terms. Presumably,

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Speaker 2: why would I even go down that route?

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Speaker 4: Yeah, I mean, Apple's a tough one, just because it's

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Speaker 4: probably one of the highest rated companies in the world

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Speaker 4: and one of the most problems take an average, average

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Speaker 4: IG company. I think there's a couple of reasons. One is,

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Speaker 4: some companies want a diversity of financial sources, right, They

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Speaker 4: want toinance themselves both in the private markets and the

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Speaker 4: public markets, and so having access to multiple avenues of

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Speaker 4: capital is just good risk management. I think specific to

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Speaker 4: some of the themes we're talking about, and some of

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Speaker 4: this project based financing, it's complicated, right. The underwrights they

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Speaker 4: take a long time, they take detailed diligence. Oftentimes, when

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Speaker 4: we're looking at these sorts of opportunities, we're bringing in

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Speaker 4: third parties to help us analyze the situation domain experts.

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Speaker 4: So that's really hard to do on a syndicated basis.

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Speaker 4: You know, the investment grade public bond market prices on

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Speaker 4: a daily basis, right, it's called a drive by a

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Speaker 4: company will come in, hit the market, move on. For

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Speaker 4: some of this project based financing, that speed doesn't really translate,

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Speaker 4: and it really requires bilateral negotiation and partnership to ultimately

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Speaker 4: structure these deals which have more complexity than your regular

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Speaker 4: way publicly traded bond.

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Speaker 3: Before we talk about some of these project based deals

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Speaker 3: or these CAPEX heavy AI related things, just going back

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Speaker 3: to you know, you mentioned in the mid two thousands

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Speaker 3: the sort of rise of PEBAC purchases. How much of

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Speaker 3: that market emerged as a function of software as a service,

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Speaker 3: specifically paying for software with subscription revenue. You have something

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Speaker 3: maybe like you know, something that does dental billing. You

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Speaker 3: get it an eighty percent of dentist office and then

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Speaker 3: it's like, okay, it would take a lot for this

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Speaker 3: piece of software to ever get uprooted, and so let's

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Speaker 3: just lever it up, put a lot of credit onto it,

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Speaker 3: and then you have this fairly predictable revenue stream for

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Speaker 3: years and years.

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Speaker 4: Okay, I think software as a service has smoothed out

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Speaker 4: cashflow profiles. It's made those cash flow profiles more predictable,

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Speaker 4: which credit investors like. And it's a relatively capital hite model.

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Speaker 4: There's not a lot of capex associated with these businesses.

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Speaker 4: And as you mentioned, you know, many of these software

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Speaker 4: applications are very much embedded in the workflows of enterprise.

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Speaker 4: Isn't very hard to switch out, which is why you

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Speaker 4: have very high retention in a lot of that market.

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Speaker 4: So I think that's certainly one of the reasons why

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Speaker 4: that sector has gained so much popularity amongst some private

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Speaker 4: equity firms.

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Speaker 2: Okay, so we sort of outlined the growth of SaaS

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Speaker 2: in credit markets, but talk to us about the growth

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Speaker 2: of I guess ai related tech in the current credit market.

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Speaker 2: What impact is that actually having.

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Speaker 4: Within below investment grade few and far between. Recently, we've

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Speaker 4: seen some excitement around increased bandwidth needs for data centers,

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Speaker 4: so connecting the data centers that are being built. So

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Speaker 4: there's a couple of companies that operate enterprise fiber optic

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Speaker 4: networks that have benefited and that have announced some partnerships

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Speaker 4: with some of the hyperscalers. So I think that's a

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Speaker 4: tangible example of some of this infrastructure build out infiltrating

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Speaker 4: the high old markets. I think beyond that, it's really

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Speaker 4: been more angst inducing, honestly, with a lot of investors

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Speaker 4: trying to figure out, you know, are there going to

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Speaker 4: be losers?

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Speaker 5: Right as this technology the disruption story exactly right, and

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Speaker 5: I still think we're in the first or second ending

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Speaker 5: with respect to determining who the losers are going to

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Speaker 5: be from this technology.

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Speaker 4: There were some announcements earlier this year around Klarna, which

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Speaker 4: was using AI chatbots for some of the customer service needs,

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Speaker 4: which created some volatility and some of the call center operators.

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Speaker 4: So I think that would be an example of a

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Speaker 4: sector that has felt some impacts from AI, but for

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Speaker 4: the most part it's been somewhat limited.

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Speaker 2: Joe, this reminds me of one of the fundamental realities

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Speaker 2: of credit investing, which I think came up in a

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Speaker 2: recent episode with Oak Tree's Danielle Paul. But really a

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Speaker 2: lot of it is about trying to avoid the losers.

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Speaker 3: Our brains went to the same place, right, So when

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Speaker 3: you're picking a tech stock, you want to pick the winners,

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Speaker 3: and when you're lending their companies, you want to avoid

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Speaker 3: the losers. Which sort of brings me to exactly what

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Speaker 3: I was going to ask you, which is like all

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Speaker 3: credit investing, but all investing is going to have some

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Speaker 3: sort of like you look at the balance sheet, you

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Speaker 3: look at the cash flows, you look at the metrics,

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Speaker 3: and then some subject matter domain expertise.

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Speaker 4: And again, if.

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Speaker 3: You're picking stocks, you're like, no, this is the company

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Speaker 3: whose chip is going to be the winner. This is

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Speaker 3: the company whose liquid cooling system for data centers is

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Speaker 3: going to be the winner. Is the nature of sectoral

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Speaker 3: analysis from a credit perspective a little different because it's

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Speaker 3: about loser avoidance.

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Speaker 4: So certainly there is less asymmetry just mathematically in bond

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Speaker 4: investing or in credit investing, right, your upside is capped.

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Speaker 4: It's not necessarily capped at par. By the way, depending

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Speaker 4: on the call schedule of a bond, bonds can trade

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Speaker 4: over par. You don't have the asymmetry that you have

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Speaker 4: in the equity markets. So through that lens, I do

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Speaker 4: think there's more of a downside protected mindset that credit

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Speaker 4: investors bring to bear. I think you touched upon understanding

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Speaker 4: the major trends and themes in a sector. That's something

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Speaker 4: we spend a lot of time thinking through because of

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Speaker 4: that risk that technology can potentially play from a disruption perspective. Right,

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Speaker 4: you know, what are the major themes around technology in

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Speaker 4: the market today and how is that going to influence

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Speaker 4: individual sectors? And that gives you a little bit of

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Speaker 4: a guidepost in terms of maybe not what sectors to

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Speaker 4: entirely avoid, but where to be very careful as you're making,

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Speaker 4: you know, analyzing the opportunities in a particular sector. You

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Speaker 4: see that dispersion very much in the market today, right.

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Speaker 4: If you look at the high market, which is trading

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Speaker 4: about three hundred basis points from a credit spread perspective,

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Speaker 4: and you look at the sectors that have the high

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Speaker 4: proportion with spreads above a thousand basis points, it's cable satellite,

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Speaker 4: it's telecom, and it's broadcast TV. And in some instances

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Speaker 4: you see those heightened credit spreads because there's too much

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Speaker 4: leverage on individual companies. But I would suggest that there's

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Speaker 4: clearly something sectorial going on in those sectors. That's creating

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Speaker 4: some headwinds, which is leading to those elevated spreads.

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Speaker 2: So, speaking of losers and disruption, could you maybe walk

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Speaker 2: us through a specific example of like, suddenly there's this

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Speaker 2: new thing and it impacts a different credit. Are there

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Speaker 2: specific instances that you've observed?

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Speaker 4: Sure? So a recent example would be the satellite industry. Yeah,

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Speaker 4: say more about that, right switch company. Oh in starlink

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Speaker 4: impact right elon musks. It's a subsidious SpaceX. Starlink operates

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Speaker 4: the largest low Earth or a bit constellation of satellites,

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Speaker 4: providing broadband at higher bandwidth than legacy technology with lower latency.

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Speaker 4: Incredibly disruptive to some of the existing satellite communications providers.

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Speaker 3: Well, it's a name of one. I'm going to pull

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Speaker 3: up a ticker.

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Speaker 4: On my terminal. SEES is one of the largest names

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Speaker 4: in the space. They recently merged with Intelsat okay, thank you.

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Speaker 4: And there's a group of about five or six of

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Speaker 4: those players within that sector. And so that's a very

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Speaker 4: tangible example of a new entrant with a new technology

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Speaker 4: that has advantages relative to the existing technology, which has

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Speaker 4: created some headwinds in the broader space. Now, I do

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Speaker 4: think the industry, and this is a trend that we

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Speaker 4: tend to see oftentimes, when new technologies disrupt a sector,

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Speaker 4: you actually do see more consolidation because it's a way

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Speaker 4: for the industry to adapt effectively by getting larger cutting

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Speaker 4: costs and then hopefully figuring out a way to better

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Speaker 4: compete against the new entrant market.

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Speaker 2: You kind of anticipated my next question there, but what

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Speaker 2: happens to pricing in these scenarios and how quickly do

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Speaker 2: existential threats to a business model get priced into a

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Speaker 2: company's corporate bonds or loans or whatever they might have outstanding.

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Speaker 2: Because I feel like, on the one hand, if you're

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Speaker 2: getting a major competitor in the form of Elon, Musk

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Speaker 2: and Starlink, that's bad. But on the other hand, credit

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Speaker 2: markets are notoriously slow compared to stock markets, and on

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Speaker 2: the other side, it can spark defensive measures, consolidation or

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Speaker 2: cost saving, which would be very, very valuable if you're

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Speaker 2: a lender to this company.

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Speaker 4: I think the market reaction time has increased over the

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Speaker 4: last five years, and I think the reason is the

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Speaker 4: first widespread example of disruption in the credit markets was

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Speaker 4: retail and everybody knows it, Amazon e commerce its pretty

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Speaker 4: sure store all of that dead malls, and I think

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Speaker 4: that played out from sort of maybe twenty twelve to

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Speaker 4: twenty eighteen. You had a spate of bankruptcies and retail failures,

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Speaker 4: and I think the market realized that, you know, it's

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Speaker 4: hard to necessarily fight against a secular trend that powerful,

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Speaker 4: so we better start paying attention to it. Interestingly, I

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Speaker 4: would argue sometimes the market overreacts right and so counterintuitively

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Speaker 4: it could create interesting long opportunities. A great example, in

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Speaker 4: our opinion is the cable industry. So cable industry did

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Speaker 4: very well during the pandemic for obvious reasons. There's been

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Speaker 4: some normalization post pandemic that's impacted their business. But from

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Speaker 4: a secular perspective, the industry's face competition from a lot

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Speaker 4: of the old line telecom companies starting to build out fiber,

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Speaker 4: which has created more competition. You've also seen the likes

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Speaker 4: of Verizon and T Mobile offer home broadband over the airwaves. That,

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Speaker 4: on the margin, I think has created this narrative disruption

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Speaker 4: within the cable space, which has created quite a bit

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Speaker 4: of volatility within the capital structures. We still like the

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Speaker 4: cable space. We still think it has a lot of

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Speaker 4: really attractive attributes. It's typically duopoly market in each region

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Speaker 4: produces stable, consistent cash flow in the hierarchy of needs.

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Speaker 4: You know, it's sort of air, water, food, cable, cable, broadband,

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Speaker 4: and so we use that as an opportunity to lean

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Speaker 4: into the industry over the past you know, eighteen months.

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Speaker 4: So it's not all bad news, per se. I do

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Speaker 4: think sometimes the market tends to overreact or maybe act

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Speaker 4: too soon, right, Sometimes these trends do take quite a

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Speaker 4: bit of time to play out.

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Speaker 3: No, I mean this makes a lot of sense. Like

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Speaker 3: we can all look at say like, oh, you know

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Speaker 3: what Elon Musk is putting satellites into space. This is

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Speaker 3: going to allow me to cut the cord at home,

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Speaker 3: et cetera. Well, we're probably overestimating when I just tell

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Speaker 3: that story the speed at which I'm going to do that.

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Speaker 3: And I guess, like, just internally, maybe there's a better

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Speaker 3: solution for me, But it would take me a while

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Speaker 3: to get comfortable with the idea of just like cutting

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Speaker 3: off my broadband internet excess in their apartment.

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Speaker 4: Inertia is a very pet can be a very powerful force.

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Speaker 3: I pay for a lot of things. Tracy and I

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Speaker 3: just like, I don't know why, and then I get

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Speaker 3: a bill and it's like some app I downloaded three

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Speaker 3: years ago, And.

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Speaker 2: Yes, there is that annoyance.

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Speaker 4: Okay.

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Speaker 2: So, speaking of other things that have happened in recent years,

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Speaker 2: a big one has to be the influx of government

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Speaker 2: money into tech related areas, so data centers, also clean

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Speaker 2: energy technology, things like that. One thing we often hear

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Speaker 2: when it comes to fiscal spending is the idea of

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Speaker 2: crowding out the private market. And I'm curious, as someone

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Speaker 2: who sits at Apollo and is basically in charge of

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Speaker 2: directing a bunch of private capital, is that something you

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Speaker 2: notice or worry about at all.

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Speaker 4: We haven't seen any signs of that at this point,

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Speaker 4: but certainly the fiscal situation from a macroeconomic perspective is

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Speaker 4: something that at a high level we're constantly watching. Clearly,

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Speaker 4: I think the budget deficits at two trillion dollars, which

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Speaker 4: would seem to be unsustainable if it continues, you know,

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Speaker 4: in perpetuity. But haven't really seen a crowding out effect

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Speaker 4: per se, you know. If anything, I think, you know,

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Speaker 4: some of the more recent government programs that have targeted

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Speaker 4: investment in specific sectors that are deemed to be strategic

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Speaker 4: has been a positive development in terms of attracting crowding

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Speaker 4: in crowding in almost attracting private capital alongside you know,

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Speaker 4: the government investment. So you know, whether it's the Chip Act,

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Speaker 4: which allocated fifty billion dollars to construction of the domestic

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Speaker 4: semiconductor supply chain, I think that certainly had a positive impact.

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Speaker 4: You have the Bead Act, which is looking to extend

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Speaker 4: broadband in rural communities. I think you've seen a lot

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Speaker 4: of cable providers and other telecom providers talk about the

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Speaker 4: opportunity there to to potentially utilize that. And then obviously

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Speaker 4: the Inflation and Reduction Act has clearly focused resources on,

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Speaker 4: you know, the build out of the clean energy infrastructure,

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Speaker 4: and I think those aligned very much with some of

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Speaker 4: the major themes in the economy and the infrastructure needs

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Speaker 4: in the US, and so as a firm, you know,

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Speaker 4: we're very much focusing on those sectors. With respect to semiconductors,

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Speaker 4: we talked a little bit about it, but you know,

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Speaker 4: recently we announced eleven billion dollar joint venture with Intel

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Speaker 4: around one of their leading edge or their leading edge

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Speaker 4: facility and Ireland, which you know, I think is part

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Speaker 4: of that major trend of bringing back or making sure

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Speaker 4: that we have you know, stable, secure supply chains for

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Speaker 4: critical industries like semiconductors.

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Speaker 3: Going back to satellites for a second, if a legacy

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Speaker 3: satellite issue and we're not going to name any names,

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Speaker 3: go bankrupt or something like that. You know, obviously, as

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Speaker 3: credit investors, you think about collateral and there are obviously

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Speaker 3: assets that a satellite provider would have. However, if a

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Speaker 3: satellite provider were to go bankrupt, it might be because

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Speaker 3: those satellites just aren't competitive anymore or whatever. How do

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Speaker 3: you think about the value of assets that you could

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Speaker 3: seize in a bankruptcy when there is a question that

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Speaker 3: the reason that the company went down is because that

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Speaker 3: technology is no longer competitive.

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Speaker 4: So in a vacuum, it's it's hard to answer that question,

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Speaker 4: just you know, because it's so fact specific and situational.

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Speaker 3: So talk to us about how you might Right.

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Speaker 4: So Intel sat did go backrupt.

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Speaker 3: Oh yeah, all right, Risco, let's talk about that.

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Speaker 4: But it was a little bit of a different situation

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Speaker 4: given they had quite a bit of wireless spectrum that

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Speaker 4: was in the process of being repurposed to support wireless Networks,

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Speaker 4: which was a huge asset for the estate that ultimately

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Speaker 4: you know, helped underpin the reorganization of that company, which

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Speaker 4: has been very successful by the way, as I mentioned before,

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Speaker 4: it's been acquired through a merger with SES. But we

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Speaker 4: generally try to avoid sort of secular loser, if you will,

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Speaker 4: because in my experience, predicting decline curves and businesses that

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Speaker 4: are facing significant headwinds and technological disruption can be really challenging.

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Speaker 4: If there is like true fundamental disruption versus angst inducing

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Speaker 4: headlines that might not answer your question directly. Generally we

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Speaker 4: want to avoid those sorts of situations if we are

437
00:24:22,640 --> 00:24:25,560
Speaker 4: in a position, you know, we are invested behind a

438
00:24:25,560 --> 00:24:30,240
Speaker 4: company that may face some of those challenges. Thinking more

439
00:24:30,280 --> 00:24:34,600
Speaker 4: broadly across the industry, as I mentioned before, disruption tends

440
00:24:34,600 --> 00:24:37,960
Speaker 4: to be a catalyst for consolidation. Thinking through the potential

441
00:24:38,000 --> 00:24:41,040
Speaker 4: value of those assets as part of another company can

442
00:24:41,080 --> 00:24:44,520
Speaker 4: be one way to frame, you know, downside valuation.

443
00:24:44,800 --> 00:25:02,760
Speaker 2: In our experience, I'm going to jump to the polar

444
00:25:02,840 --> 00:25:07,320
Speaker 2: opposite of downside valuation and talk about upside valuation because

445
00:25:07,560 --> 00:25:10,720
Speaker 2: certainly in the stock market there is this ongoing discussion

446
00:25:10,880 --> 00:25:14,400
Speaker 2: about all the hype around AI and tech and whether

447
00:25:14,520 --> 00:25:16,879
Speaker 2: or not at an extreme level it might be a

448
00:25:16,880 --> 00:25:21,639
Speaker 2: bubble or at a minimum it is potentially overvalued. Do

449
00:25:21,720 --> 00:25:25,880
Speaker 2: you see that kind of angst in the credit market?

450
00:25:25,960 --> 00:25:29,399
Speaker 2: And I'm thinking specifically if you're talking about new technology,

451
00:25:30,160 --> 00:25:34,200
Speaker 2: often there's a lot of uncertainty embedded in these business models,

452
00:25:34,400 --> 00:25:37,240
Speaker 2: and you see a lot of CEOs talk about like

453
00:25:37,680 --> 00:25:41,760
Speaker 2: total market size, and maybe they start acquiring other companies

454
00:25:41,760 --> 00:25:45,440
Speaker 2: and they start doing things like ad backs which affect

455
00:25:45,480 --> 00:25:47,800
Speaker 2: their credit profile and things like that. But how are

456
00:25:47,800 --> 00:25:53,399
Speaker 2: you sort of separating reality from future value specific AI

457
00:25:53,720 --> 00:25:56,920
Speaker 2: or specific to tech. But we could definitely talk AI

458
00:25:57,000 --> 00:25:59,200
Speaker 2: would seem to be a prime example there.

459
00:26:00,080 --> 00:26:04,600
Speaker 4: I think it's early. I think the quantum of investment

460
00:26:05,200 --> 00:26:11,160
Speaker 4: that is being allocated the associated infrastructure is unprecedented. There

461
00:26:11,200 --> 00:26:16,040
Speaker 4: are a lot of estimates, but broadly speaking, one gigawatt

462
00:26:16,119 --> 00:26:20,119
Speaker 4: of data center capacity costs about ten billion dollars to build.

463
00:26:20,440 --> 00:26:24,760
Speaker 4: I've seen estimates that AI is going to require over

464
00:26:24,800 --> 00:26:27,399
Speaker 4: one hundred gigawotts of capacity to be built.

465
00:26:27,680 --> 00:26:29,920
Speaker 3: So is that a trillion it's trillion dollars.

466
00:26:29,840 --> 00:26:31,720
Speaker 4: And that doesn't include the GPS that go into the

467
00:26:31,760 --> 00:26:34,880
Speaker 4: data center. Then you have to talk about the power

468
00:26:35,240 --> 00:26:38,520
Speaker 4: that's going to be needed to support these data centers.

469
00:26:39,040 --> 00:26:43,719
Speaker 4: A gigawot of natural gas power production cost a billion dollars,

470
00:26:44,240 --> 00:26:47,560
Speaker 4: a gigawot of solar production cost a billion dollars. The

471
00:26:47,640 --> 00:26:50,359
Speaker 4: last nuclear plant built in the United States was about

472
00:26:50,359 --> 00:26:53,440
Speaker 4: five gigawotts. It costs thirty five billion dollars. These are

473
00:26:54,160 --> 00:26:58,800
Speaker 4: huge numbers, and so that's real, right, Those dollars are

474
00:26:58,800 --> 00:27:04,200
Speaker 4: going to be spent. And I think the sponsors of

475
00:27:04,240 --> 00:27:08,440
Speaker 4: this technology, which are largely the hyperscalers, have very, very

476
00:27:08,520 --> 00:27:12,480
Speaker 4: very deep balance sheets, right, and so I think that

477
00:27:12,720 --> 00:27:15,320
Speaker 4: is going to give a durability to the trend and

478
00:27:15,840 --> 00:27:20,879
Speaker 4: instill a patience, if you will, versus other technology cycles

479
00:27:20,880 --> 00:27:24,240
Speaker 4: we've seen, which have been very dependent on the public markets,

480
00:27:24,240 --> 00:27:28,000
Speaker 4: the equity markets. You know, the Amazons and the Metas

481
00:27:28,080 --> 00:27:30,840
Speaker 4: and the Googles can afford to play, and the Microsofts

482
00:27:30,840 --> 00:27:33,680
Speaker 4: can afford to play the long game. So when will

483
00:27:33,680 --> 00:27:37,280
Speaker 4: this translate into tangible revenue? I don't have a strong

484
00:27:37,359 --> 00:27:39,920
Speaker 4: view on that, but I do think that the market

485
00:27:39,960 --> 00:27:42,720
Speaker 4: will be relatively patient. From that perspective.

486
00:27:43,080 --> 00:27:46,000
Speaker 3: Let's talk more about this build out of data centers

487
00:27:46,000 --> 00:27:48,720
Speaker 3: than specifically one of the things that I've seen some

488
00:27:49,240 --> 00:27:52,400
Speaker 3: headlines about and I'm not entirely sure whether they're real.

489
00:27:53,119 --> 00:27:56,280
Speaker 3: It kind of seems like maybe it's being overegged a

490
00:27:56,280 --> 00:27:59,960
Speaker 3: little bit. GPU backed loans and some of the day

491
00:28:00,160 --> 00:28:02,240
Speaker 3: centers like, hey, you know what, Michael bust but then

492
00:28:02,240 --> 00:28:05,560
Speaker 3: you can have our Nvidia Blackwell chips something you do.

493
00:28:05,600 --> 00:28:05,840
Speaker 4: Whatever?

494
00:28:06,000 --> 00:28:08,320
Speaker 3: Is that real? Is that a thing that's going on?

495
00:28:08,520 --> 00:28:11,200
Speaker 4: It absolutely is say more about that. I don't want

496
00:28:11,200 --> 00:28:13,399
Speaker 4: to name sort of company names because I don't know

497
00:28:13,440 --> 00:28:14,680
Speaker 4: it's been like publicly disclosed.

498
00:28:15,040 --> 00:28:17,680
Speaker 3: We talked to the core weave cso for example, they're

499
00:28:17,680 --> 00:28:18,560
Speaker 3: a big player.

500
00:28:18,280 --> 00:28:23,399
Speaker 4: In this, So we've looked at those opportunities before. I

501
00:28:23,480 --> 00:28:27,679
Speaker 4: understand the attractiveness of the opportunity. In many instances you

502
00:28:27,800 --> 00:28:31,280
Speaker 4: have high quality counterparties that are utilizing those GPUs. Yes,

503
00:28:31,359 --> 00:28:33,520
Speaker 4: I think is part of the credit support for those loans.

504
00:28:34,160 --> 00:28:38,800
Speaker 4: If you do believe that there is this really unprecedented

505
00:28:39,480 --> 00:28:43,200
Speaker 4: secular push to build out associated capacity that should be

506
00:28:43,240 --> 00:28:46,680
Speaker 4: supportive for the underlying value of these chips. The counterpoint

507
00:28:46,720 --> 00:28:49,600
Speaker 4: would be these are new markets. You know, people I

508
00:28:49,640 --> 00:28:52,960
Speaker 4: think don't really have a lot of empirical history to

509
00:28:53,000 --> 00:28:56,360
Speaker 4: point to in terms of determining what they may be

510
00:28:56,680 --> 00:29:01,200
Speaker 4: worth under various scenarios. So, but clearly there's going to

511
00:29:01,320 --> 00:29:05,280
Speaker 4: need to be a financing solution if all that data

512
00:29:05,640 --> 00:29:08,760
Speaker 4: center capacity does get built out, because you know the

513
00:29:08,840 --> 00:29:11,760
Speaker 4: numbers I mentioned, you know, trillion dollars, you know, multiply

514
00:29:11,880 --> 00:29:16,320
Speaker 4: that by one plus to determine what the associated costs

515
00:29:16,280 --> 00:29:19,560
Speaker 4: of the GPUs required in those data centers. And that's

516
00:29:19,600 --> 00:29:22,000
Speaker 4: not all going to be equity financed. So it wouldn't

517
00:29:22,000 --> 00:29:23,640
Speaker 4: surprise me to see that market grow further.

518
00:29:24,400 --> 00:29:27,840
Speaker 2: So I'm old enough to remember when we have the

519
00:29:27,880 --> 00:29:32,040
Speaker 2: first securitization of solar panel leases. I think it was

520
00:29:32,080 --> 00:29:35,400
Speaker 2: by like Solar City or someone like that, and that

521
00:29:35,480 --> 00:29:37,880
Speaker 2: was that was such a novelty at the time, and

522
00:29:37,920 --> 00:29:39,800
Speaker 2: I'm pretty sure I wrote a story that was like

523
00:29:39,920 --> 00:29:44,840
Speaker 2: Sunshine backed bonds, hahaha. But in general, are you seeing

524
00:29:44,960 --> 00:29:51,240
Speaker 2: a resurgence in asset backed securities ABS for some of

525
00:29:51,280 --> 00:29:55,160
Speaker 2: these tech related investments just because of the scale of

526
00:29:55,200 --> 00:29:57,960
Speaker 2: the investment that's needed and maybe some of the interest

527
00:29:58,080 --> 00:29:59,600
Speaker 2: in collateralized lending.

528
00:30:00,320 --> 00:30:04,760
Speaker 4: So there's definitely a developed market for data center backed

529
00:30:04,800 --> 00:30:07,440
Speaker 4: ABS issuance. It's a relatively small market, so it's clearly

530
00:30:07,440 --> 00:30:10,080
Speaker 4: going to have to grow if all this capacity does

531
00:30:10,160 --> 00:30:13,160
Speaker 4: in fact get built out. We have continued to see

532
00:30:13,160 --> 00:30:16,880
Speaker 4: innovation in the ABS space. I talked about the build

533
00:30:16,880 --> 00:30:19,640
Speaker 4: out of fiber that's occurred and some of the challenges

534
00:30:19,680 --> 00:30:23,000
Speaker 4: that's created for the cable industry. That is a market

535
00:30:23,000 --> 00:30:26,000
Speaker 4: that now is accessing the ABS market, where companies that

536
00:30:26,040 --> 00:30:29,920
Speaker 4: have built out residential fiber are taking those assets and

537
00:30:29,960 --> 00:30:33,480
Speaker 4: effectively dropping them into securitization vehicles and then raising capital

538
00:30:33,480 --> 00:30:36,160
Speaker 4: at attractive rates relative to what they could raise in

539
00:30:36,160 --> 00:30:39,200
Speaker 4: the public high you bond market. So the market is

540
00:30:39,320 --> 00:30:42,920
Speaker 4: very creative at meeting needs, and so I would suspect

541
00:30:43,160 --> 00:30:46,760
Speaker 4: that you're going to see over time more ABS type

542
00:30:46,760 --> 00:30:49,200
Speaker 4: structures in addition to the role private credits going to

543
00:30:49,200 --> 00:30:53,160
Speaker 4: play in financing these projects is part of the funding solution.

544
00:30:54,160 --> 00:30:57,320
Speaker 3: By the time this episode comes out, we'll have recently

545
00:30:57,480 --> 00:31:00,160
Speaker 3: released an episode on Talk You a Lot about the

546
00:31:00,200 --> 00:31:03,280
Speaker 3: nuclear build out or this hope that many people have

547
00:31:03,360 --> 00:31:06,640
Speaker 3: for some sort of nuclear revival, and we recently had

548
00:31:06,680 --> 00:31:09,440
Speaker 3: the news of the Microsoft would committed to buy a

549
00:31:09,440 --> 00:31:13,680
Speaker 3: bunch of energy from Constellation to turn back on one of

550
00:31:13,720 --> 00:31:16,800
Speaker 3: the reactors at Three Mile Island and there is a

551
00:31:16,840 --> 00:31:19,440
Speaker 3: real like chicken and egg problem here because the nuclear

552
00:31:19,480 --> 00:31:22,840
Speaker 3: players need to have that guaranteed demand. And also it's

553
00:31:23,240 --> 00:31:26,120
Speaker 3: risky to build a new reactor because we've were out

554
00:31:26,160 --> 00:31:29,160
Speaker 3: of practice as you mentioned, and so forth. Is that

555
00:31:29,240 --> 00:31:33,120
Speaker 3: going to create any opportunities as you see it, like, okay,

556
00:31:33,160 --> 00:31:35,160
Speaker 3: if there is some momentum that gets going for some

557
00:31:35,240 --> 00:31:40,400
Speaker 3: of this like difficult construction projects, is that something that

558
00:31:40,480 --> 00:31:43,240
Speaker 3: you could see coming across your screen that space.

559
00:31:43,600 --> 00:31:46,520
Speaker 4: Absolutely. I mean so a little bit out of my element.

560
00:31:46,640 --> 00:31:49,720
Speaker 4: Not a nuclear power expert, so I don't want to misspeak,

561
00:31:49,840 --> 00:31:54,040
Speaker 4: but I think the consensus is it's unlikely that in

562
00:31:54,080 --> 00:31:56,239
Speaker 4: the near to medium term you're going to see the

563
00:31:56,280 --> 00:31:59,600
Speaker 4: construction of a large scale nuclear plant here in the

564
00:31:59,680 --> 00:32:04,280
Speaker 4: United States. I do believe that there's opportunities to increase

565
00:32:04,320 --> 00:32:09,640
Speaker 4: the capacity at existing facilities as well as restart brown

566
00:32:09,680 --> 00:32:14,080
Speaker 4: field facilities. So I think that's clearly going to be

567
00:32:14,480 --> 00:32:17,520
Speaker 4: part of the solution. But to the extent a market

568
00:32:17,600 --> 00:32:23,560
Speaker 4: does develop for green field nuclear projects in the US,

569
00:32:24,400 --> 00:32:28,480
Speaker 4: the cash flow profiles the long duration nature of these assets.

570
00:32:28,600 --> 00:32:32,280
Speaker 4: The size of the investment opportunity fits in very nicely

571
00:32:32,400 --> 00:32:36,360
Speaker 4: with the pools of capital that we manage primarily within

572
00:32:36,440 --> 00:32:38,320
Speaker 4: our retirement services business.

573
00:32:38,360 --> 00:32:40,680
Speaker 3: But one of the things they've in energy is that

574
00:32:40,720 --> 00:32:44,520
Speaker 3: in certain areas there is a need for project based finance,

575
00:32:44,560 --> 00:32:46,480
Speaker 3: but the market doesn't exist. So another thing we talked

576
00:32:46,520 --> 00:32:49,320
Speaker 3: about recently on a show is a geothermal for example

577
00:32:49,320 --> 00:32:52,520
Speaker 3: in these projects, which is sounds very good in theory,

578
00:32:52,640 --> 00:32:54,120
Speaker 3: but I don't know, there's a lot of money. What

579
00:32:54,160 --> 00:32:57,240
Speaker 3: does it take for a new market to build? Because

580
00:32:57,240 --> 00:32:59,600
Speaker 3: it seems like a chicken and an egg problem to

581
00:32:59,640 --> 00:33:02,200
Speaker 3: some extent, which is that, Okay, you don't you know,

582
00:33:02,280 --> 00:33:04,320
Speaker 3: here's a new idea. We're going to like put a

583
00:33:04,360 --> 00:33:06,160
Speaker 3: bunch of pipes in the ground and get heat out

584
00:33:06,200 --> 00:33:08,080
Speaker 3: of the earth and that's going to create all this power.

585
00:33:08,560 --> 00:33:10,880
Speaker 3: But it's novel, and it seems a little bit untested

586
00:33:10,960 --> 00:33:14,560
Speaker 3: and it's immature. But in theory it could produce stable

587
00:33:14,600 --> 00:33:17,160
Speaker 3: cash flows, and you know, there's some reason to think

588
00:33:17,560 --> 00:33:19,840
Speaker 3: just like maybe talk us through like if there's a

589
00:33:19,880 --> 00:33:22,520
Speaker 3: market that doesn't exist yet in real scale, but there's

590
00:33:22,600 --> 00:33:25,200
Speaker 3: reason to think it could. Like what is the process

591
00:33:25,240 --> 00:33:29,640
Speaker 3: by which the credit markets could agglomerate onto a new area?

592
00:33:30,160 --> 00:33:34,320
Speaker 4: So I'm speaking generically, yeah, Geneeric, Yeah, totally, Geothermal so

593
00:33:34,360 --> 00:33:37,920
Speaker 4: in some instances, the government is sort of the entity

594
00:33:38,040 --> 00:33:41,680
Speaker 4: that's priming the pump. Right, So you mentioned geothermo I

595
00:33:41,720 --> 00:33:44,280
Speaker 4: assume you're your referencing geothermal the utility.

596
00:33:43,920 --> 00:33:46,800
Speaker 3: Scales, Yeah, utility scale.

597
00:33:47,000 --> 00:33:48,800
Speaker 4: But if you look at the IRA, yeah, you know,

598
00:33:48,840 --> 00:33:51,440
Speaker 4: one of one of the provisions provides you know, tax

599
00:33:51,440 --> 00:33:53,800
Speaker 4: credits for you know, the build out of geothermo oh

600
00:33:53,920 --> 00:33:57,560
Speaker 4: kind the residential process. So and that's example of how

601
00:33:58,160 --> 00:34:00,920
Speaker 4: the government can play a role too. You sort of

602
00:34:00,920 --> 00:34:05,320
Speaker 4: fan the flames of a new technology. In terms of

603
00:34:05,720 --> 00:34:07,760
Speaker 4: the role the credit markets has to play, the reality

604
00:34:07,880 --> 00:34:11,120
Speaker 4: is if the technology isn't commercialized, it's you need to

605
00:34:11,160 --> 00:34:14,000
Speaker 4: go to the equity markets first, right, Like it doesn't

606
00:34:14,000 --> 00:34:16,800
Speaker 4: really necessarily fit the return profile or the downside protection.

607
00:34:16,920 --> 00:34:19,120
Speaker 4: I should say that that a credit investor is typically

608
00:34:19,120 --> 00:34:22,400
Speaker 4: looking for, so you know, typically the migration as you

609
00:34:22,440 --> 00:34:26,480
Speaker 4: start in the equity markets, you commercialize, generate free cash flow,

610
00:34:26,520 --> 00:34:29,640
Speaker 4: and then go from there and start accessing the credit markets.

611
00:34:30,480 --> 00:34:33,040
Speaker 2: Going back to nuclear for a second, One other thing

612
00:34:33,239 --> 00:34:36,919
Speaker 2: that happened recently in addition to the announcement about three

613
00:34:36,960 --> 00:34:40,160
Speaker 2: Mile Island is there was an announcement from a bunch

614
00:34:40,160 --> 00:34:44,640
Speaker 2: of pretty prominent banks saying that basically they were really

615
00:34:44,680 --> 00:34:47,640
Speaker 2: into nuclear power now and they would throw their weight

616
00:34:47,800 --> 00:34:53,000
Speaker 2: behind it. And setting that specific sector aside. I'm curious

617
00:34:53,200 --> 00:34:57,560
Speaker 2: how much competition you see from banks in the overall

618
00:34:57,920 --> 00:35:00,719
Speaker 2: credit market and how that might have changed changed in

619
00:35:00,800 --> 00:35:01,480
Speaker 2: recent years.

620
00:35:02,000 --> 00:35:07,640
Speaker 4: Absolutely so clearly the trend of you know, more lending

621
00:35:07,680 --> 00:35:11,120
Speaker 4: activity moving out of the banking system into other sources

622
00:35:11,120 --> 00:35:14,200
Speaker 4: of capital. We're talking about it now, but the reality

623
00:35:14,280 --> 00:35:16,359
Speaker 4: is in our our chief economist, Tourist and Slock had

624
00:35:16,440 --> 00:35:20,440
Speaker 4: a great graph which basically it showed the percentage of

625
00:35:20,480 --> 00:35:24,799
Speaker 4: non financial lending that resided in banks, and it hit

626
00:35:24,840 --> 00:35:27,480
Speaker 4: its peak in nineteen seventy five at fifty So fifty

627
00:35:27,520 --> 00:35:30,440
Speaker 4: percent of the non financial lending in the US economy

628
00:35:30,520 --> 00:35:33,120
Speaker 4: was done by banks. Two thousand and seven was thirty percent,

629
00:35:33,239 --> 00:35:35,560
Speaker 4: twenty percent today. The point is, this is a trend

630
00:35:35,560 --> 00:35:39,120
Speaker 4: that's been going on for fifty years, so long before

631
00:35:39,200 --> 00:35:43,320
Speaker 4: Dodd Frank, Long before Dodd Frank and all the financial

632
00:35:43,360 --> 00:35:47,719
Speaker 4: innovation you mentioned securitization. That's one technology or financial technology

633
00:35:47,800 --> 00:35:50,759
Speaker 4: that moved risk off bank balance sheets. The creation of

634
00:35:50,840 --> 00:35:53,120
Speaker 4: the leverage loan market in the early two thousands and

635
00:35:53,080 --> 00:35:56,520
Speaker 4: the late nineties. Another mechanism that moved risk off of

636
00:35:56,520 --> 00:36:01,720
Speaker 4: bank balance sheets into investors' hands. And I think private

637
00:36:01,760 --> 00:36:05,880
Speaker 4: credit is just another arrow in the quiver that is

638
00:36:05,920 --> 00:36:10,719
Speaker 4: supporting that trend. Now more recently recently defined as POSTGFC.

639
00:36:11,480 --> 00:36:14,719
Speaker 4: You've had changes in regulation which clearly have accelerated that

640
00:36:14,800 --> 00:36:19,440
Speaker 4: move and have forced banks to de emphasize certain behaviors.

641
00:36:20,280 --> 00:36:23,040
Speaker 4: So banks are still going to be an important part

642
00:36:23,280 --> 00:36:27,120
Speaker 4: of the extension of credit in the United States beyond

643
00:36:27,239 --> 00:36:29,719
Speaker 4: like the investment horizon and reasonable investment horizon that we

644
00:36:29,719 --> 00:36:33,120
Speaker 4: can talk about, and so I think private credit is

645
00:36:33,320 --> 00:36:37,160
Speaker 4: just one more tool or mechanism that allows for that

646
00:36:37,239 --> 00:36:42,480
Speaker 4: diversification of the provisioning of credit outside of the banking system. So,

647
00:36:42,680 --> 00:36:47,040
Speaker 4: you know, banks are oftentimes partners, not competitors in a

648
00:36:47,080 --> 00:36:51,560
Speaker 4: lot of situations because they have corporate relationship, but they

649
00:36:51,560 --> 00:36:54,239
Speaker 4: don't have the appropriate capital to meet the needs of

650
00:36:54,239 --> 00:36:57,080
Speaker 4: that corporation. So we can actually partner together and provide

651
00:36:57,080 --> 00:37:01,120
Speaker 4: the capital, they provide the relation, and you know, both

652
00:37:01,160 --> 00:37:02,880
Speaker 4: sides are benefiting as a result.

653
00:37:03,239 --> 00:37:05,920
Speaker 2: Speaking of relationships, so this was something else that I

654
00:37:05,960 --> 00:37:08,200
Speaker 2: really wanted to talk to you about. You're the head

655
00:37:08,239 --> 00:37:13,960
Speaker 2: of Opportunistic Credit. How do potential opportunities actually land on

656
00:37:14,000 --> 00:37:16,960
Speaker 2: your desk. Is it like a company or a bank

657
00:37:17,040 --> 00:37:19,960
Speaker 2: would come to you with a specific need or suggestion,

658
00:37:20,280 --> 00:37:22,759
Speaker 2: or is it your team of analysts who are you

659
00:37:22,960 --> 00:37:26,320
Speaker 2: looking at outstanding issuance at the moment and like finding

660
00:37:26,400 --> 00:37:28,879
Speaker 2: things they think are maybe mispriced or where there are

661
00:37:28,960 --> 00:37:31,040
Speaker 2: arbitrage opportunities or that sort of thing.

662
00:37:31,440 --> 00:37:35,200
Speaker 4: All of the above. So, as I mentioned, I work

663
00:37:35,280 --> 00:37:39,120
Speaker 4: with a team of about twenty investment analysts. We've never

664
00:37:39,239 --> 00:37:42,840
Speaker 4: quantified exactly where the ideas come from, but I would

665
00:37:42,840 --> 00:37:46,680
Speaker 4: say fifty to sixty percent is being sourced by the analysts.

666
00:37:46,719 --> 00:37:49,640
Speaker 4: As I mentioned before, sector focused. So really what that

667
00:37:49,719 --> 00:37:53,160
Speaker 4: means is they're tasks with knowing everything about three or

668
00:37:53,160 --> 00:37:56,120
Speaker 4: four sectors, knowing the management teams and the companies in

669
00:37:56,120 --> 00:37:59,160
Speaker 4: those sectors, knowing the major trends in those sectors, and

670
00:37:59,200 --> 00:38:02,320
Speaker 4: through that process they're just naturally going to identify interesting

671
00:38:02,360 --> 00:38:05,680
Speaker 4: opportunities on both the private and the public side. In

672
00:38:05,719 --> 00:38:09,920
Speaker 4: addition to that, myself, some of the other credit partners,

673
00:38:10,560 --> 00:38:14,040
Speaker 4: our trading team, which is constantly interfacing with a seal side,

674
00:38:14,480 --> 00:38:18,400
Speaker 4: is serving the broader market to try to identify opportunities.

675
00:38:18,960 --> 00:38:21,960
Speaker 4: And then I think something that's somewhat unique to Apollo.

676
00:38:22,400 --> 00:38:25,520
Speaker 4: We have a very collaborative approach across our different businesses.

677
00:38:26,000 --> 00:38:27,799
Speaker 4: We have a large credit business, we have a large

678
00:38:27,800 --> 00:38:30,200
Speaker 4: equity business, we have a large hybrid business. So those

679
00:38:30,239 --> 00:38:35,160
Speaker 4: teams work very closely to share ideas because we've had

680
00:38:35,200 --> 00:38:39,640
Speaker 4: many situations where a company will come with an ask

681
00:38:39,880 --> 00:38:43,960
Speaker 4: from our a hybrid team about some sort of preferred

682
00:38:43,960 --> 00:38:46,960
Speaker 4: stock investment. You know, they want some sort of preferred investment.

683
00:38:47,640 --> 00:38:50,799
Speaker 4: The numbers don't quite work for either the company or

684
00:38:50,840 --> 00:38:55,959
Speaker 4: for us, but perhaps a secured credit and instrument does

685
00:38:56,040 --> 00:38:59,120
Speaker 4: work for both, at which point you know, the opportunity

686
00:38:59,120 --> 00:39:02,160
Speaker 4: will transition in into my team. So the goal is

687
00:39:02,200 --> 00:39:04,520
Speaker 4: to make the top of the funnel as wide as possible,

688
00:39:04,560 --> 00:39:07,920
Speaker 4: So we're looking as many opportunities as possible. You know.

689
00:39:08,280 --> 00:39:11,040
Speaker 4: I like to use the sort of metaphor that we're

690
00:39:11,040 --> 00:39:13,120
Speaker 4: panting for gold, right, so when you're painting for gold,

691
00:39:13,200 --> 00:39:15,160
Speaker 4: you want as much soil, if you will, in the

692
00:39:15,160 --> 00:39:17,279
Speaker 4: pan to find those top opportunities.

693
00:39:17,560 --> 00:39:19,880
Speaker 3: Very minor thing, but just an interesting you know. And

694
00:39:19,960 --> 00:39:22,839
Speaker 3: when I hear the word analyst in my head, I

695
00:39:22,880 --> 00:39:26,279
Speaker 3: just think of someone who's like looking at spreadsheets and

696
00:39:26,560 --> 00:39:30,319
Speaker 3: tweaking numbers. And seeing how different prices at the end

697
00:39:30,320 --> 00:39:33,120
Speaker 3: of the spreadsheet change with different assumptions. But part of

698
00:39:33,160 --> 00:39:37,120
Speaker 3: the job at an analyst at an established institution like

699
00:39:37,160 --> 00:39:40,239
Speaker 3: Apollo is also on the sourcing side and getting to

700
00:39:40,239 --> 00:39:42,680
Speaker 3: know these companies and that when one of these companies

701
00:39:42,760 --> 00:39:47,080
Speaker 3: needs financing for whatever reason, they have built that relationship.

702
00:39:46,760 --> 00:39:51,600
Speaker 4: Absolutely interesting, which is why regardless of where AI goes,

703
00:39:51,920 --> 00:39:56,480
Speaker 4: it will never fully disrupt, you know, the financial analyst

704
00:39:56,760 --> 00:40:01,319
Speaker 4: industry because it very much is a process an art,

705
00:40:01,600 --> 00:40:03,120
Speaker 4: it is art science. I think it's a little bit

706
00:40:03,160 --> 00:40:06,920
Speaker 4: of both. That involves just you know, building human relationships

707
00:40:07,400 --> 00:40:11,360
Speaker 4: with you know, with management teams, with experts in the industry,

708
00:40:12,000 --> 00:40:15,960
Speaker 4: with the cell side, with the banks, with our peers

709
00:40:16,000 --> 00:40:20,360
Speaker 4: on the buy side, so critical part and it's also

710
00:40:21,440 --> 00:40:23,520
Speaker 4: one of the interesting things that I've noticed. And I

711
00:40:23,560 --> 00:40:25,400
Speaker 4: started as an analyst, so I you know, that was

712
00:40:25,400 --> 00:40:27,680
Speaker 4: my first job from two thousand and six to like

713
00:40:27,719 --> 00:40:32,640
Speaker 4: twenty fourteen, and then I started doing other stuff. When

714
00:40:32,640 --> 00:40:35,600
Speaker 4: I started, it was very much you listen to the

715
00:40:35,719 --> 00:40:39,719
Speaker 4: conference call, download the ten K and ten Q and

716
00:40:39,880 --> 00:40:44,160
Speaker 4: it's amazing how much more information is available today and

717
00:40:44,200 --> 00:40:47,840
Speaker 4: it's not necessarily from the sources that you'd expect there. Obviously,

718
00:40:48,520 --> 00:40:51,480
Speaker 4: you know, there's there's industry research that you can access,

719
00:40:51,719 --> 00:40:54,760
Speaker 4: there's expert networks that allow you to talk to experts

720
00:40:54,800 --> 00:40:57,799
Speaker 4: in a specific industry. But it's even broader than that.

721
00:40:57,880 --> 00:41:01,160
Speaker 4: It's sometimes you get domain experts to write a really

722
00:41:01,160 --> 00:41:05,480
Speaker 4: interesting blog on a specific sector. Podcasts, you know, not.

723
00:41:05,520 --> 00:41:09,400
Speaker 2: To you know, go ahead, and that's fine.

724
00:41:09,640 --> 00:41:13,120
Speaker 4: Podcasts are actually an amazing way to learn about a sector.

725
00:41:13,200 --> 00:41:16,239
Speaker 4: Right just go to Spotify or whatever your platform is,

726
00:41:16,600 --> 00:41:19,600
Speaker 4: you know, search for a subject and you can hear

727
00:41:19,680 --> 00:41:23,080
Speaker 4: forty minutes from a domain expert YouTube. Even so, the

728
00:41:23,120 --> 00:41:27,120
Speaker 4: amount of information that's available has only expanded. It's sometimes overwhelming,

729
00:41:27,239 --> 00:41:29,279
Speaker 4: but I guess the point I'm trying to make is

730
00:41:29,360 --> 00:41:34,280
Speaker 4: beyond developing those personal relationships with key operators in a sector,

731
00:41:34,680 --> 00:41:38,360
Speaker 4: it's also just expanding, you know, the sorts of information

732
00:41:38,440 --> 00:41:42,120
Speaker 4: that you're intaking, because it's certainly it's amazing how much

733
00:41:42,120 --> 00:41:44,240
Speaker 4: more information is available than than when I started.

734
00:41:44,520 --> 00:41:48,560
Speaker 2: Well, on that note, subscribe to all thoughts everybody. No, Rob,

735
00:41:48,560 --> 00:41:51,000
Speaker 2: that was fantastic, Thank you so much for coming on

736
00:41:51,000 --> 00:41:53,040
Speaker 2: the show. Really appreciate it, my pleasure.

737
00:41:53,120 --> 00:42:07,920
Speaker 4: Really enjoyed the conversation. Joe.

738
00:42:08,000 --> 00:42:11,160
Speaker 2: I'm really glad we did that episode because again, so

739
00:42:11,280 --> 00:42:13,960
Speaker 2: much of the focus is on what tech means for

740
00:42:14,080 --> 00:42:16,680
Speaker 2: the equity market. It was really good to get a

741
00:42:16,680 --> 00:42:20,480
Speaker 2: different perspective. And as you said, like instead of identifying

742
00:42:20,480 --> 00:42:23,520
Speaker 2: the winners, the focus is very much on identifying the losers.

743
00:42:23,719 --> 00:42:26,640
Speaker 2: So that was interesting. One thing that also struck me

744
00:42:27,000 --> 00:42:29,960
Speaker 2: when Rob was talking about the scale of the capital

745
00:42:30,200 --> 00:42:34,800
Speaker 2: investment needed and how that fit into the discussion over

746
00:42:35,080 --> 00:42:40,080
Speaker 2: hype and future revenue street, it does sound like, dare

747
00:42:40,120 --> 00:42:42,440
Speaker 2: I say it, maybe things are a little bit different

748
00:42:42,760 --> 00:42:46,520
Speaker 2: this time, just because, as he was pointing out, the

749
00:42:46,719 --> 00:42:51,000
Speaker 2: size of the dollar amount that's needed is so huge

750
00:42:51,360 --> 00:42:55,200
Speaker 2: that you might not get this massive influx of players

751
00:42:55,320 --> 00:42:59,399
Speaker 2: into the market because like the starting point for all

752
00:42:59,480 --> 00:43:02,399
Speaker 2: of this is so high. So I wonder if there's

753
00:43:02,480 --> 00:43:05,600
Speaker 2: like maybe more of a moat around the business than

754
00:43:06,200 --> 00:43:08,680
Speaker 2: there was when it comes to for instance, software.

755
00:43:09,120 --> 00:43:12,040
Speaker 3: Well, I mean the analogy where you'd reach back to,

756
00:43:12,280 --> 00:43:15,320
Speaker 3: I think is the telecom build out in nineteen ninety

757
00:43:15,360 --> 00:43:18,040
Speaker 3: eight to two thousand and two, and there you had

758
00:43:18,040 --> 00:43:22,040
Speaker 3: this huge over investment in cable or various versions of

759
00:43:22,040 --> 00:43:25,440
Speaker 3: cable copper specifically as they called it back then, and

760
00:43:25,520 --> 00:43:27,920
Speaker 3: there was a massive over investment and a bunch of

761
00:43:27,920 --> 00:43:29,600
Speaker 3: stuff in bankrupt and then we all sort of know.

762
00:43:29,880 --> 00:43:32,719
Speaker 3: I forgot about several years. But it's interesting that you

763
00:43:32,760 --> 00:43:37,719
Speaker 3: bring up the scale requirement because the entities that really

764
00:43:37,760 --> 00:43:40,000
Speaker 3: got hit hard in like two thousand and two thousand

765
00:43:40,000 --> 00:43:43,320
Speaker 3: and one were called the selex, the competitive local exchange carriers.

766
00:43:43,719 --> 00:43:45,520
Speaker 3: So you did have a lot of these sort of

767
00:43:45,680 --> 00:43:51,120
Speaker 3: local players building, laying down their own copper wires, and

768
00:43:51,440 --> 00:43:53,520
Speaker 3: they all sort of got washed out when the Internet

769
00:43:53,560 --> 00:43:56,160
Speaker 3: bubble burst and the revenues didn't materialize.

770
00:43:56,320 --> 00:43:56,520
Speaker 4: You know.

771
00:43:56,560 --> 00:43:59,719
Speaker 3: I think another thing is like there's just objectively going

772
00:43:59,760 --> 00:44:03,200
Speaker 3: to be a lot of demand for data. Clearly there's

773
00:44:03,280 --> 00:44:07,880
Speaker 3: nothing on the horizon, even setting aside AI specifically, And

774
00:44:07,920 --> 00:44:10,200
Speaker 3: in our recent episode, the Jigger made this point like,

775
00:44:10,280 --> 00:44:13,960
Speaker 3: even sitting aside the ambiguity about AI revenue, like data

776
00:44:14,000 --> 00:44:18,080
Speaker 3: center demand only seems to be going up. So there's

777
00:44:18,080 --> 00:44:21,880
Speaker 3: probably two Rob's point, A lot of investment that you

778
00:44:21,880 --> 00:44:25,719
Speaker 3: could feel reasonably secure is not just going to be

779
00:44:26,120 --> 00:44:29,840
Speaker 3: empty shelves or semiconductors that sit idle.

780
00:44:30,320 --> 00:44:32,319
Speaker 2: Joe, we should do an episode where you just talk

781
00:44:32,400 --> 00:44:35,120
Speaker 2: about the early two thousand yeah, telecitation.

782
00:44:35,239 --> 00:44:37,759
Speaker 3: Actually we should do a c lex episode. I do

783
00:44:37,800 --> 00:44:39,960
Speaker 3: think that would be useful. Let's find that's a great idea.

784
00:44:39,960 --> 00:44:41,560
Speaker 3: I think we should find someone because I do think

785
00:44:41,600 --> 00:44:45,000
Speaker 3: that's the most analogous story that everyone is a little

786
00:44:45,040 --> 00:44:48,719
Speaker 3: anxious about, which is and Ron got into broadband and

787
00:44:48,840 --> 00:44:52,120
Speaker 3: Tycho gotten was really big into broadband and all these

788
00:44:52,120 --> 00:44:55,560
Speaker 3: big players. Then it busted. So why did it bust

789
00:44:55,680 --> 00:44:59,560
Speaker 3: even though internet demand never really stopped slowing down? Is

790
00:44:59,640 --> 00:45:00,759
Speaker 3: kind of an interesting question.

791
00:45:00,920 --> 00:45:03,120
Speaker 2: Yeah, and you're absolutely right that was a big story

792
00:45:03,120 --> 00:45:05,520
Speaker 2: in the credit market too. Yeah, that was one of

793
00:45:05,560 --> 00:45:08,200
Speaker 2: the last big pullbacks in the credit market, was like

794
00:45:08,239 --> 00:45:09,040
Speaker 2: two thousand and one.

795
00:45:09,239 --> 00:45:10,919
Speaker 3: Eric, Okay, we got to get on this. Yeh would

796
00:45:10,960 --> 00:45:13,160
Speaker 3: be a really good telecom analyst from two thousand and one.

797
00:45:13,160 --> 00:45:13,960
Speaker 3: I'll try to think of.

798
00:45:13,920 --> 00:45:17,120
Speaker 2: Some All right, we're back to journalism in real time

799
00:45:17,400 --> 00:45:20,080
Speaker 2: and generating new podcast ideas. All right, shall we leave

800
00:45:20,080 --> 00:45:20,640
Speaker 2: it there for now?

801
00:45:20,760 --> 00:45:21,480
Speaker 3: Let's leave it there.

802
00:45:21,600 --> 00:45:24,440
Speaker 2: This has been another episode of the aud Loots podcast.

803
00:45:24,520 --> 00:45:27,359
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy.

804
00:45:27,080 --> 00:45:29,680
Speaker 3: Alloway and I'm Jill Wisenthal. You can follow me at

805
00:45:29,719 --> 00:45:33,439
Speaker 3: the Stalwart. Follow our producers Carmen Rodriguez at Carmen Erman,

806
00:45:33,560 --> 00:45:37,040
Speaker 3: Dashel Bennett at dashbot and Keil Brooks at Kelbrooks. Thank

807
00:45:37,080 --> 00:45:39,480
Speaker 3: you to our producer Moses on Them. For our odd

808
00:45:39,520 --> 00:45:42,160
Speaker 3: Lots content, go to Bloomberg dot com slash odd Lots.

809
00:45:42,239 --> 00:45:44,799
Speaker 3: We have transcripts of blog and a newsletter. You can

810
00:45:44,880 --> 00:45:47,520
Speaker 3: chat about all of these topics twenty four to seven

811
00:45:47,680 --> 00:45:51,799
Speaker 3: with fellow listeners in our discord Discord dot gg slash.

812
00:45:51,440 --> 00:45:54,680
Speaker 2: Od lots And if you enjoy add Lots, if you

813
00:45:54,800 --> 00:45:57,959
Speaker 2: want us to do that episode on the early two

814
00:45:57,960 --> 00:46:01,560
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815
00:46:01,640 --> 00:46:04,799
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816
00:46:04,840 --> 00:46:08,480
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817
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819
00:46:15,640 --> 00:46:16,480
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