Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Jill Wisenthal.
Speaker 2: Joe, do you remember those stories. I guess they were
Speaker 2: a bigger deal earlier this year, but they're still kind
Speaker 2: of out there, the stories about how the stock market
Speaker 2: is all about the big tech companies.
Speaker 3: Yeah, absolutely so, I mean, yeah, it still is.
Speaker 4: It still is.
Speaker 2: But I think like at one point earlier this year,
Speaker 2: there was a number that caught my eye. I think
Speaker 2: it was like thirty percent of the S and P
Speaker 2: five hundred came from the mag seven. So, you know,
Speaker 2: off of that, Microsoft, Nvidia and all of those. And
Speaker 2: I guess as all the hype and interest over AI
Speaker 2: has grown, the import of tech companies in the equity
Speaker 2: market has increased in size along.
Speaker 3: With it totally. You know, anything is an interesting stet.
Speaker 3: We're recording this on September twenty fifth. If I look
Speaker 3: at the major stock in the seas for the year,
Speaker 3: the NAS deck or as we used to write the
Speaker 3: tech having NAZ deck is up twenty eight point three.
Speaker 3: The S and P five hundred is up twenty point
Speaker 3: three five percent, virtually the same. So I think it's
Speaker 3: telling the degree to which the S and P is
Speaker 3: becoming the nas Deck in fact that we should that
Speaker 3: would be a good story or great headline.
Speaker 1: Yeah.
Speaker 3: Basically, the S and P, by virtue of the dominance
Speaker 3: of these handful of megacap tech companies that dominate both index,
Speaker 3: the S and P five hundred is morphing into the Nasdaq.
Speaker 2: Listeners, you get to witness how journalism happens in real time.
Speaker 2: You come up with Heplin, you.
Speaker 3: Notice some numbers, and you're like, oh, let's see if
Speaker 3: we could back a story into that.
Speaker 2: Okay, Well, speaking of everything becoming tech, I realized that, like,
Speaker 2: one thing we haven't really spoken that much about is
Speaker 2: what tech and all the recent enthusiasm for it actually
Speaker 2: means for the credit market, for the world of corporate bonds.
Speaker 3: Yeah, this is interesting, and there's probably a reason that
Speaker 3: we don't think about this very often, which is one
Speaker 3: is that if you look at like the really big
Speaker 3: tech companies and even like small companies, you know, a
Speaker 3: lot of it has not historically been credit funded. A
Speaker 3: lot of it has been equity funded, and VC is equity,
Speaker 3: and you know, these companies produce so much cash from
Speaker 3: their earnings, and they can fund themselves out of earnings.
Speaker 3: That credit to some extent hasn't been part of the story.
Speaker 3: But a few things a you know, some of these
Speaker 3: companies mature and they start to issue debt, and they
Speaker 3: do have debt, and some of it's to fund buybacks.
Speaker 3: We're also in a period where a lot of tech
Speaker 3: is more capital intensive than it had been in the past,
Speaker 3: and sort of project based financing is more of an issue.
Speaker 3: And maybe that's like it sort of you know, some
Speaker 3: of the data center plays, et cetera. So I believe
Speaker 3: there are interesting credit stories that, for reasons I can understand,
Speaker 3: have not gotten much attention.
Speaker 2: There definitely are interesting credit stories, and I am very
Speaker 2: pleased to say we have the perfect guests today who
Speaker 2: is going to tell them. We are speaking with Rob Bittencore.
Speaker 2: He is a partner at Apollo. He is the co
Speaker 2: head of Opportunistic Credit. He's also a member of a
Speaker 2: bunch of different investment committees over there. Rob, thank you
Speaker 2: so much for coming on all thoughts.
Speaker 4: Tracy, Joe very excited to be here, longtime listener, and.
Speaker 2: Fan ah right, thank you. So let me ask the
Speaker 2: basic question, but what does the co head of Opportunistic
Speaker 2: Credit at Apollo actually do? Opportunistic credit sounds like you know,
Speaker 2: something you might get at college. What is it exactly?
Speaker 4: So before I describe what I do within opportunistic credit,
Speaker 4: I think it makes sense just a level set. Where
Speaker 4: does that sit within the broader appall uplat platform. So
Speaker 4: you know, Apaulo is an alternative asset manager and a
Speaker 4: retirement services business. It manages about seven hundred billion dollars
Speaker 4: of AUM, five hundred of which sits in our credit business.
Speaker 4: And I focus on the opportunistic pool of capital, which
Speaker 4: is about thirty billion dollars. So what is opportunistic It
Speaker 4: is not as bad as you make it sound. It
Speaker 4: is really credit investments on both public and private side,
Speaker 4: targeting returns of eight to thirteen percent broadly speaking. So
Speaker 4: in terms of what I do within that business, I
Speaker 4: co lead a group of twenty analysts who are sector
Speaker 4: focused and really are tasked with identifying, sourcing, and underwriting,
Speaker 4: you know, the ultimate investments that go into a series
Speaker 4: of funds that make that thirty billion dollar AUM pool
Speaker 4: of capital that I mentioned.
Speaker 3: So it seems like you know I mentioned that, you
Speaker 3: know you do have debt issued by tech companies, and
Speaker 3: sometimes they run across the headlines. Sometimes you read like, oh,
Speaker 3: Apple is selling a bomb yourself to sure these do
Speaker 3: not sound like exciting areas for opportunistic credit at that
Speaker 3: level because they're pretty close to like triple a rate,
Speaker 3: Like if I'm lending to Apple, it's like the next
Speaker 3: closest thing to probably lending to the US government in
Speaker 3: terms of the spreads and.
Speaker 4: Stuff like that.
Speaker 3: So when you talk about like opportunistic credit and the
Speaker 3: opportunity to actually get those like substantial return as you said,
Speaker 3: eight and thirteen percent, are where are we typically looking.
Speaker 4: When I joined aupoll on two thousand and six, high
Speaker 4: yield and the lever loan market were not synonymous with technology.
Speaker 4: People thought of those as ways for slower growing companies
Speaker 4: to finance themselves, companies that produce consistent, dependable cash flows.
Speaker 4: Fast growing companies typically didn't look to the sub investment
Speaker 4: grade market for financing. But that's steadily changed over time.
Speaker 4: So if you look at a lot of the private
Speaker 4: equity activity, which is a huge source of credit that
Speaker 4: goes into the hy old market, about twenty five percent
Speaker 4: of LBO activity today is in that technology space, and
Speaker 4: that's steadily increased over the past ten or fifteen years.
Speaker 4: It was about twenty percent before the pandemic. So that's
Speaker 4: mostly been in software related names.
Speaker 3: Yeah, right, So there are various p firms that are
Speaker 3: buying these of middle markets type software company.
Speaker 4: Or even larger multi billion dollar companies increasingly, so the
Speaker 4: scale is certainly there. Today, about fifteen percent of the
Speaker 4: levered loan market is software related. There's less of an
Speaker 4: exposure in the higal bond market about five percent is
Speaker 4: technology related. But I do think you have that critical
Speaker 4: mass of technology names in both markets today. Obviously not
Speaker 4: as intense as you see in the equity markets, but
Speaker 4: it's definitely a market that's become more tech focused during
Speaker 4: my career a topolla.
Speaker 2: So what does that mean for the things that Apollo
Speaker 2: specifically is buying. The growth of the private market, the
Speaker 2: rush of private equity money as well, does that translate
Speaker 2: into specific things that you're doing, such as direct lending?
Speaker 4: Sure? So, a lot of what we've been talking about
Speaker 4: right now is with respect to below investment grade, and
Speaker 4: you talked about the fact that the larger hyperscalers have
Speaker 4: largely self financed themselves or have gone to the public
Speaker 4: ig bond markets. I think some of the more recent
Speaker 4: technology themes that we've seen, namely AI, which I know
Speaker 4: something you all have spoken extensively about. I think what's
Speaker 4: interesting about this trend relative to maybe more recent technology
Speaker 4: trends like smartphones and mobile computing, which was relatively asset light, right,
Speaker 4: it was developing applications that sat on top of Android
Speaker 4: and iOS, which didn't really require a lot of capital. AI,
Speaker 4: which I think you referenced before, is very capital intensive.
Speaker 4: You need to build the data centers, you need to
Speaker 4: build the power to support those data centers, you need
Speaker 4: to build the chip making facilities, to build the GPUs
Speaker 4: which are used in the data centers, and that is
Speaker 4: all going to require capital. A lot of that capital
Speaker 4: is not going to be provided by the high yield markets.
Speaker 4: Where it will be provided, in our view, is from
Speaker 4: the private investment grade market, which you know, when people
Speaker 4: think of private credit, they don't necessarily equate it with
Speaker 4: investment grade. But as an institution, over half our credit
Speaker 4: AUM is associated with our retirement services business, a theme
Speaker 4: which invests primarily in long duration investment grade credit, and
Speaker 4: so I think there's a huge opportunity for Apollo and
Speaker 4: others to invest those pools of capital that are looking
Speaker 4: for long data investments, high quality behind some of these themes,
Speaker 4: and I can go into more detail around that if
Speaker 4: that's helpful in terms of some of the areas we've
Speaker 4: been focused.
Speaker 2: I have one question just before you do that. But
Speaker 2: if I'm an investment grade issuer, certainly, if I'm an
Speaker 2: Apple or someone like that, why would I want to
Speaker 2: go into the private market to begin with? I'm IG,
Speaker 2: I can sort of, you know, dictate my own terms. Presumably,
Speaker 2: why would I even go down that route?
Speaker 4: Yeah, I mean, Apple's a tough one, just because it's
Speaker 4: probably one of the highest rated companies in the world
Speaker 4: and one of the most problems take an average, average
Speaker 4: IG company. I think there's a couple of reasons. One is,
Speaker 4: some companies want a diversity of financial sources, right, They
Speaker 4: want toinance themselves both in the private markets and the
Speaker 4: public markets, and so having access to multiple avenues of
Speaker 4: capital is just good risk management. I think specific to
Speaker 4: some of the themes we're talking about, and some of
Speaker 4: this project based financing, it's complicated, right. The underwrights they
Speaker 4: take a long time, they take detailed diligence. Oftentimes, when
Speaker 4: we're looking at these sorts of opportunities, we're bringing in
Speaker 4: third parties to help us analyze the situation domain experts.
Speaker 4: So that's really hard to do on a syndicated basis.
Speaker 4: You know, the investment grade public bond market prices on
Speaker 4: a daily basis, right, it's called a drive by a
Speaker 4: company will come in, hit the market, move on. For
Speaker 4: some of this project based financing, that speed doesn't really translate,
Speaker 4: and it really requires bilateral negotiation and partnership to ultimately
Speaker 4: structure these deals which have more complexity than your regular
Speaker 4: way publicly traded bond.
Speaker 3: Before we talk about some of these project based deals
Speaker 3: or these CAPEX heavy AI related things, just going back
Speaker 3: to you know, you mentioned in the mid two thousands
Speaker 3: the sort of rise of PEBAC purchases. How much of
Speaker 3: that market emerged as a function of software as a service,
Speaker 3: specifically paying for software with subscription revenue. You have something
Speaker 3: maybe like you know, something that does dental billing. You
Speaker 3: get it an eighty percent of dentist office and then
Speaker 3: it's like, okay, it would take a lot for this
Speaker 3: piece of software to ever get uprooted, and so let's
Speaker 3: just lever it up, put a lot of credit onto it,
Speaker 3: and then you have this fairly predictable revenue stream for
Speaker 3: years and years.
Speaker 4: Okay, I think software as a service has smoothed out
Speaker 4: cashflow profiles. It's made those cash flow profiles more predictable,
Speaker 4: which credit investors like. And it's a relatively capital hite model.
Speaker 4: There's not a lot of capex associated with these businesses.
Speaker 4: And as you mentioned, you know, many of these software
Speaker 4: applications are very much embedded in the workflows of enterprise.
Speaker 4: Isn't very hard to switch out, which is why you
Speaker 4: have very high retention in a lot of that market.
Speaker 4: So I think that's certainly one of the reasons why
Speaker 4: that sector has gained so much popularity amongst some private
Speaker 4: equity firms.
Speaker 2: Okay, so we sort of outlined the growth of SaaS
Speaker 2: in credit markets, but talk to us about the growth
Speaker 2: of I guess ai related tech in the current credit market.
Speaker 2: What impact is that actually having.
Speaker 4: Within below investment grade few and far between. Recently, we've
Speaker 4: seen some excitement around increased bandwidth needs for data centers,
Speaker 4: so connecting the data centers that are being built. So
Speaker 4: there's a couple of companies that operate enterprise fiber optic
Speaker 4: networks that have benefited and that have announced some partnerships
Speaker 4: with some of the hyperscalers. So I think that's a
Speaker 4: tangible example of some of this infrastructure build out infiltrating
Speaker 4: the high old markets. I think beyond that, it's really
Speaker 4: been more angst inducing, honestly, with a lot of investors
Speaker 4: trying to figure out, you know, are there going to
Speaker 4: be losers?
Speaker 5: Right as this technology the disruption story exactly right, and
Speaker 5: I still think we're in the first or second ending
Speaker 5: with respect to determining who the losers are going to
Speaker 5: be from this technology.
Speaker 4: There were some announcements earlier this year around Klarna, which
Speaker 4: was using AI chatbots for some of the customer service needs,
Speaker 4: which created some volatility and some of the call center operators.
Speaker 4: So I think that would be an example of a
Speaker 4: sector that has felt some impacts from AI, but for
Speaker 4: the most part it's been somewhat limited.
Speaker 2: Joe, this reminds me of one of the fundamental realities
Speaker 2: of credit investing, which I think came up in a
Speaker 2: recent episode with Oak Tree's Danielle Paul. But really a
Speaker 2: lot of it is about trying to avoid the losers.
Speaker 3: Our brains went to the same place, right, So when
Speaker 3: you're picking a tech stock, you want to pick the winners,
Speaker 3: and when you're lending their companies, you want to avoid
Speaker 3: the losers. Which sort of brings me to exactly what
Speaker 3: I was going to ask you, which is like all
Speaker 3: credit investing, but all investing is going to have some
Speaker 3: sort of like you look at the balance sheet, you
Speaker 3: look at the cash flows, you look at the metrics,
Speaker 3: and then some subject matter domain expertise.
Speaker 4: And again, if.
Speaker 3: You're picking stocks, you're like, no, this is the company
Speaker 3: whose chip is going to be the winner. This is
Speaker 3: the company whose liquid cooling system for data centers is
Speaker 3: going to be the winner. Is the nature of sectoral
Speaker 3: analysis from a credit perspective a little different because it's
Speaker 3: about loser avoidance.
Speaker 4: So certainly there is less asymmetry just mathematically in bond
Speaker 4: investing or in credit investing, right, your upside is capped.
Speaker 4: It's not necessarily capped at par. By the way, depending
Speaker 4: on the call schedule of a bond, bonds can trade
Speaker 4: over par. You don't have the asymmetry that you have
Speaker 4: in the equity markets. So through that lens, I do
Speaker 4: think there's more of a downside protected mindset that credit
Speaker 4: investors bring to bear. I think you touched upon understanding
Speaker 4: the major trends and themes in a sector. That's something
Speaker 4: we spend a lot of time thinking through because of
Speaker 4: that risk that technology can potentially play from a disruption perspective. Right,
Speaker 4: you know, what are the major themes around technology in
Speaker 4: the market today and how is that going to influence
Speaker 4: individual sectors? And that gives you a little bit of
Speaker 4: a guidepost in terms of maybe not what sectors to
Speaker 4: entirely avoid, but where to be very careful as you're making,
Speaker 4: you know, analyzing the opportunities in a particular sector. You
Speaker 4: see that dispersion very much in the market today, right.
Speaker 4: If you look at the high market, which is trading
Speaker 4: about three hundred basis points from a credit spread perspective,
Speaker 4: and you look at the sectors that have the high
Speaker 4: proportion with spreads above a thousand basis points, it's cable satellite,
Speaker 4: it's telecom, and it's broadcast TV. And in some instances
Speaker 4: you see those heightened credit spreads because there's too much
Speaker 4: leverage on individual companies. But I would suggest that there's
Speaker 4: clearly something sectorial going on in those sectors. That's creating
Speaker 4: some headwinds, which is leading to those elevated spreads.
Speaker 2: So, speaking of losers and disruption, could you maybe walk
Speaker 2: us through a specific example of like, suddenly there's this
Speaker 2: new thing and it impacts a different credit. Are there
Speaker 2: specific instances that you've observed?
Speaker 4: Sure? So a recent example would be the satellite industry. Yeah,
Speaker 4: say more about that, right switch company. Oh in starlink
Speaker 4: impact right elon musks. It's a subsidious SpaceX. Starlink operates
Speaker 4: the largest low Earth or a bit constellation of satellites,
Speaker 4: providing broadband at higher bandwidth than legacy technology with lower latency.
Speaker 4: Incredibly disruptive to some of the existing satellite communications providers.
Speaker 3: Well, it's a name of one. I'm going to pull
Speaker 3: up a ticker.
Speaker 4: On my terminal. SEES is one of the largest names
Speaker 4: in the space. They recently merged with Intelsat okay, thank you.
Speaker 4: And there's a group of about five or six of
Speaker 4: those players within that sector. And so that's a very
Speaker 4: tangible example of a new entrant with a new technology
Speaker 4: that has advantages relative to the existing technology, which has
Speaker 4: created some headwinds in the broader space. Now, I do
Speaker 4: think the industry, and this is a trend that we
Speaker 4: tend to see oftentimes, when new technologies disrupt a sector,
Speaker 4: you actually do see more consolidation because it's a way
Speaker 4: for the industry to adapt effectively by getting larger cutting
Speaker 4: costs and then hopefully figuring out a way to better
Speaker 4: compete against the new entrant market.
Speaker 2: You kind of anticipated my next question there, but what
Speaker 2: happens to pricing in these scenarios and how quickly do
Speaker 2: existential threats to a business model get priced into a
Speaker 2: company's corporate bonds or loans or whatever they might have outstanding.
Speaker 2: Because I feel like, on the one hand, if you're
Speaker 2: getting a major competitor in the form of Elon, Musk
Speaker 2: and Starlink, that's bad. But on the other hand, credit
Speaker 2: markets are notoriously slow compared to stock markets, and on
Speaker 2: the other side, it can spark defensive measures, consolidation or
Speaker 2: cost saving, which would be very, very valuable if you're
Speaker 2: a lender to this company.
Speaker 4: I think the market reaction time has increased over the
Speaker 4: last five years, and I think the reason is the
Speaker 4: first widespread example of disruption in the credit markets was
Speaker 4: retail and everybody knows it, Amazon e commerce its pretty
Speaker 4: sure store all of that dead malls, and I think
Speaker 4: that played out from sort of maybe twenty twelve to
Speaker 4: twenty eighteen. You had a spate of bankruptcies and retail failures,
Speaker 4: and I think the market realized that, you know, it's
Speaker 4: hard to necessarily fight against a secular trend that powerful,
Speaker 4: so we better start paying attention to it. Interestingly, I
Speaker 4: would argue sometimes the market overreacts right and so counterintuitively
Speaker 4: it could create interesting long opportunities. A great example, in
Speaker 4: our opinion is the cable industry. So cable industry did
Speaker 4: very well during the pandemic for obvious reasons. There's been
Speaker 4: some normalization post pandemic that's impacted their business. But from
Speaker 4: a secular perspective, the industry's face competition from a lot
Speaker 4: of the old line telecom companies starting to build out fiber,
Speaker 4: which has created more competition. You've also seen the likes
Speaker 4: of Verizon and T Mobile offer home broadband over the airwaves. That,
Speaker 4: on the margin, I think has created this narrative disruption
Speaker 4: within the cable space, which has created quite a bit
Speaker 4: of volatility within the capital structures. We still like the
Speaker 4: cable space. We still think it has a lot of
Speaker 4: really attractive attributes. It's typically duopoly market in each region
Speaker 4: produces stable, consistent cash flow in the hierarchy of needs.
Speaker 4: You know, it's sort of air, water, food, cable, cable, broadband,
Speaker 4: and so we use that as an opportunity to lean
Speaker 4: into the industry over the past you know, eighteen months.
Speaker 4: So it's not all bad news, per se. I do
Speaker 4: think sometimes the market tends to overreact or maybe act
Speaker 4: too soon, right, Sometimes these trends do take quite a
Speaker 4: bit of time to play out.
Speaker 3: No, I mean this makes a lot of sense. Like
Speaker 3: we can all look at say like, oh, you know
Speaker 3: what Elon Musk is putting satellites into space. This is
Speaker 3: going to allow me to cut the cord at home,
Speaker 3: et cetera. Well, we're probably overestimating when I just tell
Speaker 3: that story the speed at which I'm going to do that.
Speaker 3: And I guess, like, just internally, maybe there's a better
Speaker 3: solution for me, But it would take me a while
Speaker 3: to get comfortable with the idea of just like cutting
Speaker 3: off my broadband internet excess in their apartment.
Speaker 4: Inertia is a very pet can be a very powerful force.
Speaker 3: I pay for a lot of things. Tracy and I
Speaker 3: just like, I don't know why, and then I get
Speaker 3: a bill and it's like some app I downloaded three
Speaker 3: years ago, And.
Speaker 2: Yes, there is that annoyance.
Speaker 4: Okay.
Speaker 2: So, speaking of other things that have happened in recent years,
Speaker 2: a big one has to be the influx of government
Speaker 2: money into tech related areas, so data centers, also clean
Speaker 2: energy technology, things like that. One thing we often hear
Speaker 2: when it comes to fiscal spending is the idea of
Speaker 2: crowding out the private market. And I'm curious, as someone
Speaker 2: who sits at Apollo and is basically in charge of
Speaker 2: directing a bunch of private capital, is that something you
Speaker 2: notice or worry about at all.
Speaker 4: We haven't seen any signs of that at this point,
Speaker 4: but certainly the fiscal situation from a macroeconomic perspective is
Speaker 4: something that at a high level we're constantly watching. Clearly,
Speaker 4: I think the budget deficits at two trillion dollars, which
Speaker 4: would seem to be unsustainable if it continues, you know,
Speaker 4: in perpetuity. But haven't really seen a crowding out effect
Speaker 4: per se, you know. If anything, I think, you know,
Speaker 4: some of the more recent government programs that have targeted
Speaker 4: investment in specific sectors that are deemed to be strategic
Speaker 4: has been a positive development in terms of attracting crowding
Speaker 4: in crowding in almost attracting private capital alongside you know,
Speaker 4: the government investment. So you know, whether it's the Chip Act,
Speaker 4: which allocated fifty billion dollars to construction of the domestic
Speaker 4: semiconductor supply chain, I think that certainly had a positive impact.
Speaker 4: You have the Bead Act, which is looking to extend
Speaker 4: broadband in rural communities. I think you've seen a lot
Speaker 4: of cable providers and other telecom providers talk about the
Speaker 4: opportunity there to to potentially utilize that. And then obviously
Speaker 4: the Inflation and Reduction Act has clearly focused resources on,
Speaker 4: you know, the build out of the clean energy infrastructure,
Speaker 4: and I think those aligned very much with some of
Speaker 4: the major themes in the economy and the infrastructure needs
Speaker 4: in the US, and so as a firm, you know,
Speaker 4: we're very much focusing on those sectors. With respect to semiconductors,
Speaker 4: we talked a little bit about it, but you know,
Speaker 4: recently we announced eleven billion dollar joint venture with Intel
Speaker 4: around one of their leading edge or their leading edge
Speaker 4: facility and Ireland, which you know, I think is part
Speaker 4: of that major trend of bringing back or making sure
Speaker 4: that we have you know, stable, secure supply chains for
Speaker 4: critical industries like semiconductors.
Speaker 3: Going back to satellites for a second, if a legacy
Speaker 3: satellite issue and we're not going to name any names,
Speaker 3: go bankrupt or something like that. You know, obviously, as
Speaker 3: credit investors, you think about collateral and there are obviously
Speaker 3: assets that a satellite provider would have. However, if a
Speaker 3: satellite provider were to go bankrupt, it might be because
Speaker 3: those satellites just aren't competitive anymore or whatever. How do
Speaker 3: you think about the value of assets that you could
Speaker 3: seize in a bankruptcy when there is a question that
Speaker 3: the reason that the company went down is because that
Speaker 3: technology is no longer competitive.
Speaker 4: So in a vacuum, it's it's hard to answer that question,
Speaker 4: just you know, because it's so fact specific and situational.
Speaker 3: So talk to us about how you might Right.
Speaker 4: So Intel sat did go backrupt.
Speaker 3: Oh yeah, all right, Risco, let's talk about that.
Speaker 4: But it was a little bit of a different situation
Speaker 4: given they had quite a bit of wireless spectrum that
Speaker 4: was in the process of being repurposed to support wireless Networks,
Speaker 4: which was a huge asset for the estate that ultimately
Speaker 4: you know, helped underpin the reorganization of that company, which
Speaker 4: has been very successful by the way, as I mentioned before,
Speaker 4: it's been acquired through a merger with SES. But we
Speaker 4: generally try to avoid sort of secular loser, if you will,
Speaker 4: because in my experience, predicting decline curves and businesses that
Speaker 4: are facing significant headwinds and technological disruption can be really challenging.
Speaker 4: If there is like true fundamental disruption versus angst inducing
Speaker 4: headlines that might not answer your question directly. Generally we
Speaker 4: want to avoid those sorts of situations if we are
Speaker 4: in a position, you know, we are invested behind a
Speaker 4: company that may face some of those challenges. Thinking more
Speaker 4: broadly across the industry, as I mentioned before, disruption tends
Speaker 4: to be a catalyst for consolidation. Thinking through the potential
Speaker 4: value of those assets as part of another company can
Speaker 4: be one way to frame, you know, downside valuation.
Speaker 2: In our experience, I'm going to jump to the polar
Speaker 2: opposite of downside valuation and talk about upside valuation because
Speaker 2: certainly in the stock market there is this ongoing discussion
Speaker 2: about all the hype around AI and tech and whether
Speaker 2: or not at an extreme level it might be a
Speaker 2: bubble or at a minimum it is potentially overvalued. Do
Speaker 2: you see that kind of angst in the credit market?
Speaker 2: And I'm thinking specifically if you're talking about new technology,
Speaker 2: often there's a lot of uncertainty embedded in these business models,
Speaker 2: and you see a lot of CEOs talk about like
Speaker 2: total market size, and maybe they start acquiring other companies
Speaker 2: and they start doing things like ad backs which affect
Speaker 2: their credit profile and things like that. But how are
Speaker 2: you sort of separating reality from future value specific AI
Speaker 2: or specific to tech. But we could definitely talk AI
Speaker 2: would seem to be a prime example there.
Speaker 4: I think it's early. I think the quantum of investment
Speaker 4: that is being allocated the associated infrastructure is unprecedented. There
Speaker 4: are a lot of estimates, but broadly speaking, one gigawatt
Speaker 4: of data center capacity costs about ten billion dollars to build.
Speaker 4: I've seen estimates that AI is going to require over
Speaker 4: one hundred gigawotts of capacity to be built.
Speaker 3: So is that a trillion it's trillion dollars.
Speaker 4: And that doesn't include the GPS that go into the
Speaker 4: data center. Then you have to talk about the power
Speaker 4: that's going to be needed to support these data centers.
Speaker 4: A gigawot of natural gas power production cost a billion dollars,
Speaker 4: a gigawot of solar production cost a billion dollars. The
Speaker 4: last nuclear plant built in the United States was about
Speaker 4: five gigawotts. It costs thirty five billion dollars. These are
Speaker 4: huge numbers, and so that's real, right, Those dollars are
Speaker 4: going to be spent. And I think the sponsors of
Speaker 4: this technology, which are largely the hyperscalers, have very, very
Speaker 4: very deep balance sheets, right, and so I think that
Speaker 4: is going to give a durability to the trend and
Speaker 4: instill a patience, if you will, versus other technology cycles
Speaker 4: we've seen, which have been very dependent on the public markets,
Speaker 4: the equity markets. You know, the Amazons and the Metas
Speaker 4: and the Googles can afford to play, and the Microsofts
Speaker 4: can afford to play the long game. So when will
Speaker 4: this translate into tangible revenue? I don't have a strong
Speaker 4: view on that, but I do think that the market
Speaker 4: will be relatively patient. From that perspective.
Speaker 3: Let's talk more about this build out of data centers
Speaker 3: than specifically one of the things that I've seen some
Speaker 3: headlines about and I'm not entirely sure whether they're real.
Speaker 3: It kind of seems like maybe it's being overegged a
Speaker 3: little bit. GPU backed loans and some of the day
Speaker 3: centers like, hey, you know what, Michael bust but then
Speaker 3: you can have our Nvidia Blackwell chips something you do.
Speaker 4: Whatever?
Speaker 3: Is that real? Is that a thing that's going on?
Speaker 4: It absolutely is say more about that. I don't want
Speaker 4: to name sort of company names because I don't know
Speaker 4: it's been like publicly disclosed.
Speaker 3: We talked to the core weave cso for example, they're
Speaker 3: a big player.
Speaker 4: In this, So we've looked at those opportunities before. I
Speaker 4: understand the attractiveness of the opportunity. In many instances you
Speaker 4: have high quality counterparties that are utilizing those GPUs. Yes,
Speaker 4: I think is part of the credit support for those loans.
Speaker 4: If you do believe that there is this really unprecedented
Speaker 4: secular push to build out associated capacity that should be
Speaker 4: supportive for the underlying value of these chips. The counterpoint
Speaker 4: would be these are new markets. You know, people I
Speaker 4: think don't really have a lot of empirical history to
Speaker 4: point to in terms of determining what they may be
Speaker 4: worth under various scenarios. So, but clearly there's going to
Speaker 4: need to be a financing solution if all that data
Speaker 4: center capacity does get built out, because you know the
Speaker 4: numbers I mentioned, you know, trillion dollars, you know, multiply
Speaker 4: that by one plus to determine what the associated costs
Speaker 4: of the GPUs required in those data centers. And that's
Speaker 4: not all going to be equity financed. So it wouldn't
Speaker 4: surprise me to see that market grow further.
Speaker 2: So I'm old enough to remember when we have the
Speaker 2: first securitization of solar panel leases. I think it was
Speaker 2: by like Solar City or someone like that, and that
Speaker 2: was that was such a novelty at the time, and
Speaker 2: I'm pretty sure I wrote a story that was like
Speaker 2: Sunshine backed bonds, hahaha. But in general, are you seeing
Speaker 2: a resurgence in asset backed securities ABS for some of
Speaker 2: these tech related investments just because of the scale of
Speaker 2: the investment that's needed and maybe some of the interest
Speaker 2: in collateralized lending.
Speaker 4: So there's definitely a developed market for data center backed
Speaker 4: ABS issuance. It's a relatively small market, so it's clearly
Speaker 4: going to have to grow if all this capacity does
Speaker 4: in fact get built out. We have continued to see
Speaker 4: innovation in the ABS space. I talked about the build
Speaker 4: out of fiber that's occurred and some of the challenges
Speaker 4: that's created for the cable industry. That is a market
Speaker 4: that now is accessing the ABS market, where companies that
Speaker 4: have built out residential fiber are taking those assets and
Speaker 4: effectively dropping them into securitization vehicles and then raising capital
Speaker 4: at attractive rates relative to what they could raise in
Speaker 4: the public high you bond market. So the market is
Speaker 4: very creative at meeting needs, and so I would suspect
Speaker 4: that you're going to see over time more ABS type
Speaker 4: structures in addition to the role private credits going to
Speaker 4: play in financing these projects is part of the funding solution.
Speaker 3: By the time this episode comes out, we'll have recently
Speaker 3: released an episode on Talk You a Lot about the
Speaker 3: nuclear build out or this hope that many people have
Speaker 3: for some sort of nuclear revival, and we recently had
Speaker 3: the news of the Microsoft would committed to buy a
Speaker 3: bunch of energy from Constellation to turn back on one of
Speaker 3: the reactors at Three Mile Island and there is a
Speaker 3: real like chicken and egg problem here because the nuclear
Speaker 3: players need to have that guaranteed demand. And also it's
Speaker 3: risky to build a new reactor because we've were out
Speaker 3: of practice as you mentioned, and so forth. Is that
Speaker 3: going to create any opportunities as you see it, like, okay,
Speaker 3: if there is some momentum that gets going for some
Speaker 3: of this like difficult construction projects, is that something that
Speaker 3: you could see coming across your screen that space.
Speaker 4: Absolutely. I mean so a little bit out of my element.
Speaker 4: Not a nuclear power expert, so I don't want to misspeak,
Speaker 4: but I think the consensus is it's unlikely that in
Speaker 4: the near to medium term you're going to see the
Speaker 4: construction of a large scale nuclear plant here in the
Speaker 4: United States. I do believe that there's opportunities to increase
Speaker 4: the capacity at existing facilities as well as restart brown
Speaker 4: field facilities. So I think that's clearly going to be
Speaker 4: part of the solution. But to the extent a market
Speaker 4: does develop for green field nuclear projects in the US,
Speaker 4: the cash flow profiles the long duration nature of these assets.
Speaker 4: The size of the investment opportunity fits in very nicely
Speaker 4: with the pools of capital that we manage primarily within
Speaker 4: our retirement services business.
Speaker 3: But one of the things they've in energy is that
Speaker 3: in certain areas there is a need for project based finance,
Speaker 3: but the market doesn't exist. So another thing we talked
Speaker 3: about recently on a show is a geothermal for example
Speaker 3: in these projects, which is sounds very good in theory,
Speaker 3: but I don't know, there's a lot of money. What
Speaker 3: does it take for a new market to build? Because
Speaker 3: it seems like a chicken and an egg problem to
Speaker 3: some extent, which is that, Okay, you don't you know,
Speaker 3: here's a new idea. We're going to like put a
Speaker 3: bunch of pipes in the ground and get heat out
Speaker 3: of the earth and that's going to create all this power.
Speaker 3: But it's novel, and it seems a little bit untested
Speaker 3: and it's immature. But in theory it could produce stable
Speaker 3: cash flows, and you know, there's some reason to think
Speaker 3: just like maybe talk us through like if there's a
Speaker 3: market that doesn't exist yet in real scale, but there's
Speaker 3: reason to think it could. Like what is the process
Speaker 3: by which the credit markets could agglomerate onto a new area?
Speaker 4: So I'm speaking generically, yeah, Geneeric, Yeah, totally, Geothermal so
Speaker 4: in some instances, the government is sort of the entity
Speaker 4: that's priming the pump. Right, So you mentioned geothermo I
Speaker 4: assume you're your referencing geothermal the utility.
Speaker 3: Scales, Yeah, utility scale.
Speaker 4: But if you look at the IRA, yeah, you know,
Speaker 4: one of one of the provisions provides you know, tax
Speaker 4: credits for you know, the build out of geothermo oh
Speaker 4: kind the residential process. So and that's example of how
Speaker 4: the government can play a role too. You sort of
Speaker 4: fan the flames of a new technology. In terms of
Speaker 4: the role the credit markets has to play, the reality
Speaker 4: is if the technology isn't commercialized, it's you need to
Speaker 4: go to the equity markets first, right, Like it doesn't
Speaker 4: really necessarily fit the return profile or the downside protection.
Speaker 4: I should say that that a credit investor is typically
Speaker 4: looking for, so you know, typically the migration as you
Speaker 4: start in the equity markets, you commercialize, generate free cash flow,
Speaker 4: and then go from there and start accessing the credit markets.
Speaker 2: Going back to nuclear for a second, One other thing
Speaker 2: that happened recently in addition to the announcement about three
Speaker 2: Mile Island is there was an announcement from a bunch
Speaker 2: of pretty prominent banks saying that basically they were really
Speaker 2: into nuclear power now and they would throw their weight
Speaker 2: behind it. And setting that specific sector aside. I'm curious
Speaker 2: how much competition you see from banks in the overall
Speaker 2: credit market and how that might have changed changed in
Speaker 2: recent years.
Speaker 4: Absolutely so clearly the trend of you know, more lending
Speaker 4: activity moving out of the banking system into other sources
Speaker 4: of capital. We're talking about it now, but the reality
Speaker 4: is in our our chief economist, Tourist and Slock had
Speaker 4: a great graph which basically it showed the percentage of
Speaker 4: non financial lending that resided in banks, and it hit
Speaker 4: its peak in nineteen seventy five at fifty So fifty
Speaker 4: percent of the non financial lending in the US economy
Speaker 4: was done by banks. Two thousand and seven was thirty percent,
Speaker 4: twenty percent today. The point is, this is a trend
Speaker 4: that's been going on for fifty years, so long before
Speaker 4: Dodd Frank, Long before Dodd Frank and all the financial
Speaker 4: innovation you mentioned securitization. That's one technology or financial technology
Speaker 4: that moved risk off bank balance sheets. The creation of
Speaker 4: the leverage loan market in the early two thousands and
Speaker 4: the late nineties. Another mechanism that moved risk off of
Speaker 4: bank balance sheets into investors' hands. And I think private
Speaker 4: credit is just another arrow in the quiver that is
Speaker 4: supporting that trend. Now more recently recently defined as POSTGFC.
Speaker 4: You've had changes in regulation which clearly have accelerated that
Speaker 4: move and have forced banks to de emphasize certain behaviors.
Speaker 4: So banks are still going to be an important part
Speaker 4: of the extension of credit in the United States beyond
Speaker 4: like the investment horizon and reasonable investment horizon that we
Speaker 4: can talk about, and so I think private credit is
Speaker 4: just one more tool or mechanism that allows for that
Speaker 4: diversification of the provisioning of credit outside of the banking system. So,
Speaker 4: you know, banks are oftentimes partners, not competitors in a
Speaker 4: lot of situations because they have corporate relationship, but they
Speaker 4: don't have the appropriate capital to meet the needs of
Speaker 4: that corporation. So we can actually partner together and provide
Speaker 4: the capital, they provide the relation, and you know, both
Speaker 4: sides are benefiting as a result.
Speaker 2: Speaking of relationships, so this was something else that I
Speaker 2: really wanted to talk to you about. You're the head
Speaker 2: of Opportunistic Credit. How do potential opportunities actually land on
Speaker 2: your desk. Is it like a company or a bank
Speaker 2: would come to you with a specific need or suggestion,
Speaker 2: or is it your team of analysts who are you
Speaker 2: looking at outstanding issuance at the moment and like finding
Speaker 2: things they think are maybe mispriced or where there are
Speaker 2: arbitrage opportunities or that sort of thing.
Speaker 4: All of the above. So, as I mentioned, I work
Speaker 4: with a team of about twenty investment analysts. We've never
Speaker 4: quantified exactly where the ideas come from, but I would
Speaker 4: say fifty to sixty percent is being sourced by the analysts.
Speaker 4: As I mentioned before, sector focused. So really what that
Speaker 4: means is they're tasks with knowing everything about three or
Speaker 4: four sectors, knowing the management teams and the companies in
Speaker 4: those sectors, knowing the major trends in those sectors, and
Speaker 4: through that process they're just naturally going to identify interesting
Speaker 4: opportunities on both the private and the public side. In
Speaker 4: addition to that, myself, some of the other credit partners,
Speaker 4: our trading team, which is constantly interfacing with a seal side,
Speaker 4: is serving the broader market to try to identify opportunities.
Speaker 4: And then I think something that's somewhat unique to Apollo.
Speaker 4: We have a very collaborative approach across our different businesses.
Speaker 4: We have a large credit business, we have a large
Speaker 4: equity business, we have a large hybrid business. So those
Speaker 4: teams work very closely to share ideas because we've had
Speaker 4: many situations where a company will come with an ask
Speaker 4: from our a hybrid team about some sort of preferred
Speaker 4: stock investment. You know, they want some sort of preferred investment.
Speaker 4: The numbers don't quite work for either the company or
Speaker 4: for us, but perhaps a secured credit and instrument does
Speaker 4: work for both, at which point you know, the opportunity
Speaker 4: will transition in into my team. So the goal is
Speaker 4: to make the top of the funnel as wide as possible,
Speaker 4: So we're looking as many opportunities as possible. You know.
Speaker 4: I like to use the sort of metaphor that we're
Speaker 4: panting for gold, right, so when you're painting for gold,
Speaker 4: you want as much soil, if you will, in the
Speaker 4: pan to find those top opportunities.
Speaker 3: Very minor thing, but just an interesting you know. And
Speaker 3: when I hear the word analyst in my head, I
Speaker 3: just think of someone who's like looking at spreadsheets and
Speaker 3: tweaking numbers. And seeing how different prices at the end
Speaker 3: of the spreadsheet change with different assumptions. But part of
Speaker 3: the job at an analyst at an established institution like
Speaker 3: Apollo is also on the sourcing side and getting to
Speaker 3: know these companies and that when one of these companies
Speaker 3: needs financing for whatever reason, they have built that relationship.
Speaker 4: Absolutely interesting, which is why regardless of where AI goes,
Speaker 4: it will never fully disrupt, you know, the financial analyst
Speaker 4: industry because it very much is a process an art,
Speaker 4: it is art science. I think it's a little bit
Speaker 4: of both. That involves just you know, building human relationships
Speaker 4: with you know, with management teams, with experts in the industry,
Speaker 4: with the cell side, with the banks, with our peers
Speaker 4: on the buy side, so critical part and it's also
Speaker 4: one of the interesting things that I've noticed. And I
Speaker 4: started as an analyst, so I you know, that was
Speaker 4: my first job from two thousand and six to like
Speaker 4: twenty fourteen, and then I started doing other stuff. When
Speaker 4: I started, it was very much you listen to the
Speaker 4: conference call, download the ten K and ten Q and
Speaker 4: it's amazing how much more information is available today and
Speaker 4: it's not necessarily from the sources that you'd expect there. Obviously,
Speaker 4: you know, there's there's industry research that you can access,
Speaker 4: there's expert networks that allow you to talk to experts
Speaker 4: in a specific industry. But it's even broader than that.
Speaker 4: It's sometimes you get domain experts to write a really
Speaker 4: interesting blog on a specific sector. Podcasts, you know, not.
Speaker 2: To you know, go ahead, and that's fine.
Speaker 4: Podcasts are actually an amazing way to learn about a sector.
Speaker 4: Right just go to Spotify or whatever your platform is,
Speaker 4: you know, search for a subject and you can hear
Speaker 4: forty minutes from a domain expert YouTube. Even so, the
Speaker 4: amount of information that's available has only expanded. It's sometimes overwhelming,
Speaker 4: but I guess the point I'm trying to make is
Speaker 4: beyond developing those personal relationships with key operators in a sector,
Speaker 4: it's also just expanding, you know, the sorts of information
Speaker 4: that you're intaking, because it's certainly it's amazing how much
Speaker 4: more information is available than than when I started.
Speaker 2: Well, on that note, subscribe to all thoughts everybody. No, Rob,
Speaker 2: that was fantastic, Thank you so much for coming on
Speaker 2: the show. Really appreciate it, my pleasure.
Speaker 4: Really enjoyed the conversation. Joe.
Speaker 2: I'm really glad we did that episode because again, so
Speaker 2: much of the focus is on what tech means for
Speaker 2: the equity market. It was really good to get a
Speaker 2: different perspective. And as you said, like instead of identifying
Speaker 2: the winners, the focus is very much on identifying the losers.
Speaker 2: So that was interesting. One thing that also struck me
Speaker 2: when Rob was talking about the scale of the capital
Speaker 2: investment needed and how that fit into the discussion over
Speaker 2: hype and future revenue street, it does sound like, dare
Speaker 2: I say it, maybe things are a little bit different
Speaker 2: this time, just because, as he was pointing out, the
Speaker 2: size of the dollar amount that's needed is so huge
Speaker 2: that you might not get this massive influx of players
Speaker 2: into the market because like the starting point for all
Speaker 2: of this is so high. So I wonder if there's
Speaker 2: like maybe more of a moat around the business than
Speaker 2: there was when it comes to for instance, software.
Speaker 3: Well, I mean the analogy where you'd reach back to,
Speaker 3: I think is the telecom build out in nineteen ninety
Speaker 3: eight to two thousand and two, and there you had
Speaker 3: this huge over investment in cable or various versions of
Speaker 3: cable copper specifically as they called it back then, and
Speaker 3: there was a massive over investment and a bunch of
Speaker 3: stuff in bankrupt and then we all sort of know.
Speaker 3: I forgot about several years. But it's interesting that you
Speaker 3: bring up the scale requirement because the entities that really
Speaker 3: got hit hard in like two thousand and two thousand
Speaker 3: and one were called the selex, the competitive local exchange carriers.
Speaker 3: So you did have a lot of these sort of
Speaker 3: local players building, laying down their own copper wires, and
Speaker 3: they all sort of got washed out when the Internet
Speaker 3: bubble burst and the revenues didn't materialize.
Speaker 4: You know.
Speaker 3: I think another thing is like there's just objectively going
Speaker 3: to be a lot of demand for data. Clearly there's
Speaker 3: nothing on the horizon, even setting aside AI specifically, And
Speaker 3: in our recent episode, the Jigger made this point like,
Speaker 3: even sitting aside the ambiguity about AI revenue, like data
Speaker 3: center demand only seems to be going up. So there's
Speaker 3: probably two Rob's point, A lot of investment that you
Speaker 3: could feel reasonably secure is not just going to be
Speaker 3: empty shelves or semiconductors that sit idle.
Speaker 2: Joe, we should do an episode where you just talk
Speaker 2: about the early two thousand yeah, telecitation.
Speaker 3: Actually we should do a c lex episode. I do
Speaker 3: think that would be useful. Let's find that's a great idea.
Speaker 3: I think we should find someone because I do think
Speaker 3: that's the most analogous story that everyone is a little
Speaker 3: anxious about, which is and Ron got into broadband and
Speaker 3: Tycho gotten was really big into broadband and all these
Speaker 3: big players. Then it busted. So why did it bust
Speaker 3: even though internet demand never really stopped slowing down? Is
Speaker 3: kind of an interesting question.
Speaker 2: Yeah, and you're absolutely right that was a big story
Speaker 2: in the credit market too. Yeah, that was one of
Speaker 2: the last big pullbacks in the credit market, was like
Speaker 2: two thousand and one.
Speaker 3: Eric, Okay, we got to get on this. Yeh would
Speaker 3: be a really good telecom analyst from two thousand and one.
Speaker 3: I'll try to think of.
Speaker 2: Some All right, we're back to journalism in real time
Speaker 2: and generating new podcast ideas. All right, shall we leave
Speaker 2: it there for now?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the aud Loots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy.
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