WEBVTT - Apollo Explains How Big Tech Is Disrupting Credit Markets 0:00:02.720 --> 0:00:16.759 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.960 --> 0:00:22.280 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:22.360 --> 0:00:23.840 I'm Tracy Alloway. 0:00:23.520 --> 0:00:24.720 And I'm Jill Wisenthal. 0:00:25.239 --> 0:00:27.840 Joe, do you remember those stories. I guess they were 0:00:27.880 --> 0:00:30.480 a bigger deal earlier this year, but they're still kind 0:00:30.480 --> 0:00:34.040 of out there, the stories about how the stock market 0:00:34.360 --> 0:00:36.080 is all about the big tech companies. 0:00:36.200 --> 0:00:39.760 Yeah, absolutely so, I mean, yeah, it still is. 0:00:39.840 --> 0:00:40.639 It still is. 0:00:40.800 --> 0:00:43.360 But I think like at one point earlier this year, 0:00:43.400 --> 0:00:44.959 there was a number that caught my eye. I think 0:00:44.960 --> 0:00:47.000 it was like thirty percent of the S and P 0:00:47.200 --> 0:00:49.879 five hundred came from the mag seven. So, you know, 0:00:50.040 --> 0:00:53.760 off of that, Microsoft, Nvidia and all of those. And 0:00:53.840 --> 0:00:57.680 I guess as all the hype and interest over AI 0:00:58.000 --> 0:01:02.000 has grown, the import of tech companies in the equity 0:01:02.040 --> 0:01:04.640 market has increased in size along. 0:01:04.360 --> 0:01:06.839 With it totally. You know, anything is an interesting stet. 0:01:06.880 --> 0:01:09.600 We're recording this on September twenty fifth. If I look 0:01:09.640 --> 0:01:12.319 at the major stock in the seas for the year, 0:01:12.880 --> 0:01:15.320 the NAS deck or as we used to write the 0:01:15.360 --> 0:01:18.360 tech having NAZ deck is up twenty eight point three. 0:01:18.800 --> 0:01:20.840 The S and P five hundred is up twenty point 0:01:20.840 --> 0:01:24.160 three five percent, virtually the same. So I think it's 0:01:24.200 --> 0:01:27.560 telling the degree to which the S and P is 0:01:27.920 --> 0:01:30.440 becoming the nas Deck in fact that we should that 0:01:30.480 --> 0:01:32.240 would be a good story or great headline. 0:01:32.319 --> 0:01:32.520 Yeah. 0:01:32.760 --> 0:01:35.559 Basically, the S and P, by virtue of the dominance 0:01:35.600 --> 0:01:39.520 of these handful of megacap tech companies that dominate both index, 0:01:39.760 --> 0:01:42.000 the S and P five hundred is morphing into the Nasdaq. 0:01:42.319 --> 0:01:46.040 Listeners, you get to witness how journalism happens in real time. 0:01:46.240 --> 0:01:47.680 You come up with Heplin, you. 0:01:47.640 --> 0:01:49.360 Notice some numbers, and you're like, oh, let's see if 0:01:49.400 --> 0:01:50.720 we could back a story into that. 0:01:50.920 --> 0:01:55.000 Okay, Well, speaking of everything becoming tech, I realized that, like, 0:01:55.200 --> 0:01:58.200 one thing we haven't really spoken that much about is 0:01:58.600 --> 0:02:02.120 what tech and all the recent enthusiasm for it actually 0:02:02.160 --> 0:02:04.960 means for the credit market, for the world of corporate bonds. 0:02:05.080 --> 0:02:08.120 Yeah, this is interesting, and there's probably a reason that 0:02:08.160 --> 0:02:10.720 we don't think about this very often, which is one 0:02:11.080 --> 0:02:13.079 is that if you look at like the really big 0:02:13.720 --> 0:02:17.040 tech companies and even like small companies, you know, a 0:02:17.040 --> 0:02:19.600 lot of it has not historically been credit funded. A 0:02:19.600 --> 0:02:22.639 lot of it has been equity funded, and VC is equity, 0:02:22.680 --> 0:02:25.959 and you know, these companies produce so much cash from 0:02:26.000 --> 0:02:28.440 their earnings, and they can fund themselves out of earnings. 0:02:28.480 --> 0:02:31.600 That credit to some extent hasn't been part of the story. 0:02:32.040 --> 0:02:34.120 But a few things a you know, some of these 0:02:34.120 --> 0:02:36.639 companies mature and they start to issue debt, and they 0:02:36.639 --> 0:02:38.840 do have debt, and some of it's to fund buybacks. 0:02:39.120 --> 0:02:41.360 We're also in a period where a lot of tech 0:02:41.440 --> 0:02:44.079 is more capital intensive than it had been in the past, 0:02:44.080 --> 0:02:47.280 and sort of project based financing is more of an issue. 0:02:47.320 --> 0:02:49.080 And maybe that's like it sort of you know, some 0:02:49.120 --> 0:02:51.280 of the data center plays, et cetera. So I believe 0:02:51.280 --> 0:02:56.280 there are interesting credit stories that, for reasons I can understand, 0:02:56.360 --> 0:02:57.560 have not gotten much attention. 0:02:57.760 --> 0:03:00.440 There definitely are interesting credit stories, and I am very 0:03:00.440 --> 0:03:03.040 pleased to say we have the perfect guests today who 0:03:03.160 --> 0:03:06.200 is going to tell them. We are speaking with Rob Bittencore. 0:03:06.440 --> 0:03:09.120 He is a partner at Apollo. He is the co 0:03:09.240 --> 0:03:12.440 head of Opportunistic Credit. He's also a member of a 0:03:12.440 --> 0:03:16.160 bunch of different investment committees over there. Rob, thank you 0:03:16.200 --> 0:03:17.600 so much for coming on all thoughts. 0:03:17.880 --> 0:03:20.919 Tracy, Joe very excited to be here, longtime listener, and. 0:03:20.880 --> 0:03:23.880 Fan ah right, thank you. So let me ask the 0:03:23.919 --> 0:03:28.160 basic question, but what does the co head of Opportunistic 0:03:28.200 --> 0:03:32.560 Credit at Apollo actually do? Opportunistic credit sounds like you know, 0:03:32.720 --> 0:03:35.760 something you might get at college. What is it exactly? 0:03:36.840 --> 0:03:40.040 So before I describe what I do within opportunistic credit, 0:03:40.120 --> 0:03:42.400 I think it makes sense just a level set. Where 0:03:42.440 --> 0:03:45.560 does that sit within the broader appall uplat platform. So 0:03:45.920 --> 0:03:48.440 you know, Apaulo is an alternative asset manager and a 0:03:48.480 --> 0:03:52.080 retirement services business. It manages about seven hundred billion dollars 0:03:52.120 --> 0:03:55.520 of AUM, five hundred of which sits in our credit business. 0:03:56.360 --> 0:03:59.600 And I focus on the opportunistic pool of capital, which 0:03:59.680 --> 0:04:02.240 is about thirty billion dollars. So what is opportunistic It 0:04:02.320 --> 0:04:05.720 is not as bad as you make it sound. It 0:04:05.800 --> 0:04:10.080 is really credit investments on both public and private side, 0:04:10.560 --> 0:04:15.360 targeting returns of eight to thirteen percent broadly speaking. So 0:04:15.600 --> 0:04:18.760 in terms of what I do within that business, I 0:04:19.000 --> 0:04:22.440 co lead a group of twenty analysts who are sector 0:04:22.480 --> 0:04:27.400 focused and really are tasked with identifying, sourcing, and underwriting, 0:04:27.480 --> 0:04:29.559 you know, the ultimate investments that go into a series 0:04:29.600 --> 0:04:32.680 of funds that make that thirty billion dollar AUM pool 0:04:32.680 --> 0:04:33.720 of capital that I mentioned. 0:04:34.320 --> 0:04:36.760 So it seems like you know I mentioned that, you 0:04:36.839 --> 0:04:39.560 know you do have debt issued by tech companies, and 0:04:39.680 --> 0:04:42.919 sometimes they run across the headlines. Sometimes you read like, oh, 0:04:43.000 --> 0:04:45.520 Apple is selling a bomb yourself to sure these do 0:04:45.640 --> 0:04:48.839 not sound like exciting areas for opportunistic credit at that 0:04:48.960 --> 0:04:52.080 level because they're pretty close to like triple a rate, 0:04:52.200 --> 0:04:55.000 Like if I'm lending to Apple, it's like the next 0:04:55.000 --> 0:04:57.320 closest thing to probably lending to the US government in 0:04:57.440 --> 0:04:59.560 terms of the spreads and. 0:04:59.360 --> 0:05:00.000 Stuff like that. 0:05:00.360 --> 0:05:02.640 So when you talk about like opportunistic credit and the 0:05:02.680 --> 0:05:07.000 opportunity to actually get those like substantial return as you said, 0:05:07.080 --> 0:05:10.760 eight and thirteen percent, are where are we typically looking. 0:05:11.080 --> 0:05:13.800 When I joined aupoll on two thousand and six, high 0:05:13.880 --> 0:05:17.560 yield and the lever loan market were not synonymous with technology. 0:05:17.600 --> 0:05:21.960 People thought of those as ways for slower growing companies 0:05:21.960 --> 0:05:26.480 to finance themselves, companies that produce consistent, dependable cash flows. 0:05:26.880 --> 0:05:31.120 Fast growing companies typically didn't look to the sub investment 0:05:31.200 --> 0:05:34.720 grade market for financing. But that's steadily changed over time. 0:05:35.480 --> 0:05:38.600 So if you look at a lot of the private 0:05:38.680 --> 0:05:41.839 equity activity, which is a huge source of credit that 0:05:41.880 --> 0:05:44.599 goes into the hy old market, about twenty five percent 0:05:44.640 --> 0:05:47.920 of LBO activity today is in that technology space, and 0:05:47.960 --> 0:05:51.080 that's steadily increased over the past ten or fifteen years. 0:05:51.600 --> 0:05:55.000 It was about twenty percent before the pandemic. So that's 0:05:55.000 --> 0:05:56.800 mostly been in software related names. 0:05:56.880 --> 0:05:58.920 Yeah, right, So there are various p firms that are 0:05:58.920 --> 0:06:02.400 buying these of middle markets type software company. 0:06:02.279 --> 0:06:05.839 Or even larger multi billion dollar companies increasingly, so the 0:06:05.880 --> 0:06:09.680 scale is certainly there. Today, about fifteen percent of the 0:06:09.760 --> 0:06:13.960 levered loan market is software related. There's less of an 0:06:13.960 --> 0:06:16.880 exposure in the higal bond market about five percent is 0:06:16.920 --> 0:06:19.719 technology related. But I do think you have that critical 0:06:19.760 --> 0:06:23.720 mass of technology names in both markets today. Obviously not 0:06:23.760 --> 0:06:25.839 as intense as you see in the equity markets, but 0:06:26.360 --> 0:06:29.680 it's definitely a market that's become more tech focused during 0:06:29.680 --> 0:06:30.520 my career a topolla. 0:06:31.000 --> 0:06:34.360 So what does that mean for the things that Apollo 0:06:34.520 --> 0:06:37.960 specifically is buying. The growth of the private market, the 0:06:38.080 --> 0:06:42.520 rush of private equity money as well, does that translate 0:06:42.560 --> 0:06:45.839 into specific things that you're doing, such as direct lending? 0:06:46.600 --> 0:06:49.000 Sure? So, a lot of what we've been talking about 0:06:49.080 --> 0:06:53.040 right now is with respect to below investment grade, and 0:06:53.080 --> 0:06:57.640 you talked about the fact that the larger hyperscalers have 0:06:57.839 --> 0:07:01.080 largely self financed themselves or have gone to the public 0:07:01.160 --> 0:07:05.040 ig bond markets. I think some of the more recent 0:07:05.040 --> 0:07:07.560 technology themes that we've seen, namely AI, which I know 0:07:07.680 --> 0:07:11.160 something you all have spoken extensively about. I think what's 0:07:11.200 --> 0:07:15.360 interesting about this trend relative to maybe more recent technology 0:07:15.400 --> 0:07:20.480 trends like smartphones and mobile computing, which was relatively asset light, right, 0:07:20.520 --> 0:07:24.120 it was developing applications that sat on top of Android 0:07:24.200 --> 0:07:27.960 and iOS, which didn't really require a lot of capital. AI, 0:07:28.320 --> 0:07:31.240 which I think you referenced before, is very capital intensive. 0:07:31.280 --> 0:07:33.480 You need to build the data centers, you need to 0:07:33.480 --> 0:07:35.960 build the power to support those data centers, you need 0:07:36.000 --> 0:07:38.520 to build the chip making facilities, to build the GPUs 0:07:38.560 --> 0:07:40.880 which are used in the data centers, and that is 0:07:40.920 --> 0:07:43.840 all going to require capital. A lot of that capital 0:07:44.200 --> 0:07:46.160 is not going to be provided by the high yield markets. 0:07:46.240 --> 0:07:49.520 Where it will be provided, in our view, is from 0:07:49.720 --> 0:07:52.760 the private investment grade market, which you know, when people 0:07:52.800 --> 0:07:55.480 think of private credit, they don't necessarily equate it with 0:07:55.640 --> 0:08:00.560 investment grade. But as an institution, over half our credit 0:08:00.600 --> 0:08:05.080 AUM is associated with our retirement services business, a theme 0:08:06.120 --> 0:08:11.760 which invests primarily in long duration investment grade credit, and 0:08:11.840 --> 0:08:14.920 so I think there's a huge opportunity for Apollo and 0:08:15.040 --> 0:08:18.040 others to invest those pools of capital that are looking 0:08:18.080 --> 0:08:22.160 for long data investments, high quality behind some of these themes, 0:08:22.480 --> 0:08:24.480 and I can go into more detail around that if 0:08:24.520 --> 0:08:26.440 that's helpful in terms of some of the areas we've 0:08:26.480 --> 0:08:27.080 been focused. 0:08:27.240 --> 0:08:29.360 I have one question just before you do that. But 0:08:29.520 --> 0:08:33.520 if I'm an investment grade issuer, certainly, if I'm an 0:08:33.520 --> 0:08:35.920 Apple or someone like that, why would I want to 0:08:35.960 --> 0:08:39.360 go into the private market to begin with? I'm IG, 0:08:39.880 --> 0:08:43.559 I can sort of, you know, dictate my own terms. Presumably, 0:08:43.679 --> 0:08:45.400 why would I even go down that route? 0:08:45.480 --> 0:08:47.160 Yeah, I mean, Apple's a tough one, just because it's 0:08:47.160 --> 0:08:49.079 probably one of the highest rated companies in the world 0:08:49.080 --> 0:08:53.120 and one of the most problems take an average, average 0:08:53.120 --> 0:08:56.199 IG company. I think there's a couple of reasons. One is, 0:08:56.880 --> 0:08:59.439 some companies want a diversity of financial sources, right, They 0:08:59.480 --> 0:09:02.000 want toinance themselves both in the private markets and the 0:09:02.000 --> 0:09:05.840 public markets, and so having access to multiple avenues of 0:09:05.840 --> 0:09:09.320 capital is just good risk management. I think specific to 0:09:09.360 --> 0:09:11.600 some of the themes we're talking about, and some of 0:09:11.600 --> 0:09:16.880 this project based financing, it's complicated, right. The underwrights they 0:09:16.920 --> 0:09:21.439 take a long time, they take detailed diligence. Oftentimes, when 0:09:21.520 --> 0:09:23.760 we're looking at these sorts of opportunities, we're bringing in 0:09:23.800 --> 0:09:27.360 third parties to help us analyze the situation domain experts. 0:09:28.000 --> 0:09:30.920 So that's really hard to do on a syndicated basis. 0:09:31.280 --> 0:09:35.079 You know, the investment grade public bond market prices on 0:09:35.120 --> 0:09:37.120 a daily basis, right, it's called a drive by a 0:09:37.160 --> 0:09:40.440 company will come in, hit the market, move on. For 0:09:40.520 --> 0:09:44.720 some of this project based financing, that speed doesn't really translate, 0:09:45.240 --> 0:09:48.880 and it really requires bilateral negotiation and partnership to ultimately 0:09:48.920 --> 0:09:52.520 structure these deals which have more complexity than your regular 0:09:52.559 --> 0:09:54.080 way publicly traded bond. 0:09:54.160 --> 0:09:56.640 Before we talk about some of these project based deals 0:09:56.760 --> 0:10:00.920 or these CAPEX heavy AI related things, just going back 0:10:00.960 --> 0:10:03.200 to you know, you mentioned in the mid two thousands 0:10:03.240 --> 0:10:07.199 the sort of rise of PEBAC purchases. How much of 0:10:07.320 --> 0:10:12.480 that market emerged as a function of software as a service, 0:10:12.520 --> 0:10:17.040 specifically paying for software with subscription revenue. You have something 0:10:17.120 --> 0:10:20.080 maybe like you know, something that does dental billing. You 0:10:20.120 --> 0:10:22.679 get it an eighty percent of dentist office and then 0:10:22.720 --> 0:10:25.280 it's like, okay, it would take a lot for this 0:10:25.440 --> 0:10:28.640 piece of software to ever get uprooted, and so let's 0:10:28.679 --> 0:10:30.880 just lever it up, put a lot of credit onto it, 0:10:30.960 --> 0:10:34.440 and then you have this fairly predictable revenue stream for 0:10:34.559 --> 0:10:35.160 years and years. 0:10:35.960 --> 0:10:40.000 Okay, I think software as a service has smoothed out 0:10:40.160 --> 0:10:43.920 cashflow profiles. It's made those cash flow profiles more predictable, 0:10:44.400 --> 0:10:49.640 which credit investors like. And it's a relatively capital hite model. 0:10:50.120 --> 0:10:52.599 There's not a lot of capex associated with these businesses. 0:10:52.640 --> 0:10:55.760 And as you mentioned, you know, many of these software 0:10:55.800 --> 0:10:59.920 applications are very much embedded in the workflows of enterprise. 0:11:00.120 --> 0:11:02.440 Isn't very hard to switch out, which is why you 0:11:02.440 --> 0:11:04.600 have very high retention in a lot of that market. 0:11:04.679 --> 0:11:06.800 So I think that's certainly one of the reasons why 0:11:06.840 --> 0:11:09.360 that sector has gained so much popularity amongst some private 0:11:09.400 --> 0:11:10.200 equity firms. 0:11:10.520 --> 0:11:14.360 Okay, so we sort of outlined the growth of SaaS 0:11:14.400 --> 0:11:16.920 in credit markets, but talk to us about the growth 0:11:16.960 --> 0:11:21.880 of I guess ai related tech in the current credit market. 0:11:21.920 --> 0:11:23.839 What impact is that actually having. 0:11:24.440 --> 0:11:28.760 Within below investment grade few and far between. Recently, we've 0:11:28.840 --> 0:11:33.160 seen some excitement around increased bandwidth needs for data centers, 0:11:33.160 --> 0:11:35.280 so connecting the data centers that are being built. So 0:11:35.960 --> 0:11:40.079 there's a couple of companies that operate enterprise fiber optic 0:11:40.120 --> 0:11:44.280 networks that have benefited and that have announced some partnerships 0:11:44.280 --> 0:11:46.160 with some of the hyperscalers. So I think that's a 0:11:46.160 --> 0:11:50.679 tangible example of some of this infrastructure build out infiltrating 0:11:50.679 --> 0:11:54.880 the high old markets. I think beyond that, it's really 0:11:54.960 --> 0:11:58.440 been more angst inducing, honestly, with a lot of investors 0:11:58.480 --> 0:11:59.920 trying to figure out, you know, are there going to 0:11:59.960 --> 0:12:00.520 be losers? 0:12:00.600 --> 0:12:04.839 Right as this technology the disruption story exactly right, and 0:12:05.320 --> 0:12:09.280 I still think we're in the first or second ending 0:12:09.880 --> 0:12:12.680 with respect to determining who the losers are going to 0:12:12.720 --> 0:12:14.640 be from this technology. 0:12:15.040 --> 0:12:19.160 There were some announcements earlier this year around Klarna, which 0:12:19.720 --> 0:12:24.680 was using AI chatbots for some of the customer service needs, 0:12:24.720 --> 0:12:28.080 which created some volatility and some of the call center operators. 0:12:28.120 --> 0:12:30.440 So I think that would be an example of a 0:12:30.520 --> 0:12:35.080 sector that has felt some impacts from AI, but for 0:12:35.120 --> 0:12:36.920 the most part it's been somewhat limited. 0:12:52.400 --> 0:12:55.520 Joe, this reminds me of one of the fundamental realities 0:12:55.559 --> 0:12:57.760 of credit investing, which I think came up in a 0:12:57.760 --> 0:13:01.360 recent episode with Oak Tree's Danielle Paul. But really a 0:13:01.400 --> 0:13:03.960 lot of it is about trying to avoid the losers. 0:13:04.400 --> 0:13:06.360 Our brains went to the same place, right, So when 0:13:06.360 --> 0:13:08.600 you're picking a tech stock, you want to pick the winners, 0:13:08.880 --> 0:13:11.360 and when you're lending their companies, you want to avoid 0:13:11.440 --> 0:13:13.680 the losers. Which sort of brings me to exactly what 0:13:13.720 --> 0:13:15.120 I was going to ask you, which is like all 0:13:15.160 --> 0:13:17.319 credit investing, but all investing is going to have some 0:13:17.400 --> 0:13:19.680 sort of like you look at the balance sheet, you 0:13:19.679 --> 0:13:21.880 look at the cash flows, you look at the metrics, 0:13:22.200 --> 0:13:25.560 and then some subject matter domain expertise. 0:13:26.240 --> 0:13:27.120 And again, if. 0:13:26.960 --> 0:13:29.360 You're picking stocks, you're like, no, this is the company 0:13:29.360 --> 0:13:31.080 whose chip is going to be the winner. This is 0:13:31.120 --> 0:13:34.080 the company whose liquid cooling system for data centers is 0:13:34.120 --> 0:13:37.480 going to be the winner. Is the nature of sectoral 0:13:37.600 --> 0:13:41.600 analysis from a credit perspective a little different because it's 0:13:41.600 --> 0:13:43.600 about loser avoidance. 0:13:44.000 --> 0:13:50.040 So certainly there is less asymmetry just mathematically in bond 0:13:50.080 --> 0:13:53.559 investing or in credit investing, right, your upside is capped. 0:13:53.600 --> 0:13:55.959 It's not necessarily capped at par. By the way, depending 0:13:56.000 --> 0:13:58.560 on the call schedule of a bond, bonds can trade 0:13:58.600 --> 0:14:02.160 over par. You don't have the asymmetry that you have 0:14:02.240 --> 0:14:05.839 in the equity markets. So through that lens, I do 0:14:05.960 --> 0:14:09.520 think there's more of a downside protected mindset that credit 0:14:09.559 --> 0:14:15.920 investors bring to bear. I think you touched upon understanding 0:14:16.080 --> 0:14:19.160 the major trends and themes in a sector. That's something 0:14:19.200 --> 0:14:21.360 we spend a lot of time thinking through because of 0:14:21.360 --> 0:14:25.640 that risk that technology can potentially play from a disruption perspective. Right, 0:14:26.080 --> 0:14:30.000 you know, what are the major themes around technology in 0:14:30.040 --> 0:14:33.760 the market today and how is that going to influence 0:14:33.840 --> 0:14:36.280 individual sectors? And that gives you a little bit of 0:14:36.400 --> 0:14:39.400 a guidepost in terms of maybe not what sectors to 0:14:39.600 --> 0:14:42.800 entirely avoid, but where to be very careful as you're making, 0:14:43.000 --> 0:14:46.840 you know, analyzing the opportunities in a particular sector. You 0:14:46.880 --> 0:14:49.520 see that dispersion very much in the market today, right. 0:14:50.000 --> 0:14:53.320 If you look at the high market, which is trading 0:14:53.320 --> 0:14:56.840 about three hundred basis points from a credit spread perspective, 0:14:57.400 --> 0:14:59.960 and you look at the sectors that have the high 0:15:00.200 --> 0:15:06.400 proportion with spreads above a thousand basis points, it's cable satellite, 0:15:06.960 --> 0:15:12.680 it's telecom, and it's broadcast TV. And in some instances 0:15:13.440 --> 0:15:15.440 you see those heightened credit spreads because there's too much 0:15:15.480 --> 0:15:18.640 leverage on individual companies. But I would suggest that there's 0:15:18.680 --> 0:15:22.920 clearly something sectorial going on in those sectors. That's creating 0:15:22.960 --> 0:15:25.600 some headwinds, which is leading to those elevated spreads. 0:15:26.000 --> 0:15:29.320 So, speaking of losers and disruption, could you maybe walk 0:15:29.400 --> 0:15:33.600 us through a specific example of like, suddenly there's this 0:15:33.640 --> 0:15:37.400 new thing and it impacts a different credit. Are there 0:15:37.440 --> 0:15:39.360 specific instances that you've observed? 0:15:39.920 --> 0:15:45.400 Sure? So a recent example would be the satellite industry. Yeah, 0:15:45.400 --> 0:15:49.080 say more about that, right switch company. Oh in starlink 0:15:49.280 --> 0:15:54.440 impact right elon musks. It's a subsidious SpaceX. Starlink operates 0:15:54.480 --> 0:15:58.240 the largest low Earth or a bit constellation of satellites, 0:15:58.320 --> 0:16:03.080 providing broadband at higher bandwidth than legacy technology with lower latency. 0:16:03.600 --> 0:16:08.000 Incredibly disruptive to some of the existing satellite communications providers. 0:16:08.000 --> 0:16:09.320 Well, it's a name of one. I'm going to pull 0:16:09.360 --> 0:16:10.080 up a ticker. 0:16:09.840 --> 0:16:13.000 On my terminal. SEES is one of the largest names 0:16:13.040 --> 0:16:16.600 in the space. They recently merged with Intelsat okay, thank you. 0:16:17.360 --> 0:16:20.120 And there's a group of about five or six of 0:16:20.160 --> 0:16:24.240 those players within that sector. And so that's a very 0:16:24.280 --> 0:16:28.080 tangible example of a new entrant with a new technology 0:16:28.360 --> 0:16:31.920 that has advantages relative to the existing technology, which has 0:16:32.000 --> 0:16:36.600 created some headwinds in the broader space. Now, I do 0:16:36.640 --> 0:16:39.080 think the industry, and this is a trend that we 0:16:39.160 --> 0:16:45.040 tend to see oftentimes, when new technologies disrupt a sector, 0:16:45.200 --> 0:16:50.360 you actually do see more consolidation because it's a way 0:16:50.360 --> 0:16:55.240 for the industry to adapt effectively by getting larger cutting 0:16:55.280 --> 0:16:58.160 costs and then hopefully figuring out a way to better 0:16:58.160 --> 0:17:00.640 compete against the new entrant market. 0:17:00.880 --> 0:17:03.560 You kind of anticipated my next question there, but what 0:17:03.640 --> 0:17:07.959 happens to pricing in these scenarios and how quickly do 0:17:08.280 --> 0:17:12.760 existential threats to a business model get priced into a 0:17:12.880 --> 0:17:17.199 company's corporate bonds or loans or whatever they might have outstanding. 0:17:17.240 --> 0:17:19.760 Because I feel like, on the one hand, if you're 0:17:19.760 --> 0:17:22.520 getting a major competitor in the form of Elon, Musk 0:17:22.560 --> 0:17:26.560 and Starlink, that's bad. But on the other hand, credit 0:17:26.600 --> 0:17:31.560 markets are notoriously slow compared to stock markets, and on 0:17:31.640 --> 0:17:37.320 the other side, it can spark defensive measures, consolidation or 0:17:37.400 --> 0:17:41.200 cost saving, which would be very, very valuable if you're 0:17:41.320 --> 0:17:42.680 a lender to this company. 0:17:43.000 --> 0:17:47.040 I think the market reaction time has increased over the 0:17:47.119 --> 0:17:51.640 last five years, and I think the reason is the 0:17:51.680 --> 0:17:54.960 first widespread example of disruption in the credit markets was 0:17:55.040 --> 0:18:00.240 retail and everybody knows it, Amazon e commerce its pretty 0:18:00.240 --> 0:18:04.800 sure store all of that dead malls, and I think 0:18:05.160 --> 0:18:07.919 that played out from sort of maybe twenty twelve to 0:18:07.960 --> 0:18:12.560 twenty eighteen. You had a spate of bankruptcies and retail failures, 0:18:13.119 --> 0:18:16.560 and I think the market realized that, you know, it's 0:18:16.640 --> 0:18:21.520 hard to necessarily fight against a secular trend that powerful, 0:18:21.600 --> 0:18:25.600 so we better start paying attention to it. Interestingly, I 0:18:25.600 --> 0:18:29.040 would argue sometimes the market overreacts right and so counterintuitively 0:18:29.440 --> 0:18:33.280 it could create interesting long opportunities. A great example, in 0:18:33.320 --> 0:18:37.119 our opinion is the cable industry. So cable industry did 0:18:37.240 --> 0:18:40.200 very well during the pandemic for obvious reasons. There's been 0:18:40.200 --> 0:18:45.000 some normalization post pandemic that's impacted their business. But from 0:18:45.040 --> 0:18:48.880 a secular perspective, the industry's face competition from a lot 0:18:48.880 --> 0:18:51.320 of the old line telecom companies starting to build out fiber, 0:18:51.359 --> 0:18:54.880 which has created more competition. You've also seen the likes 0:18:54.920 --> 0:19:00.199 of Verizon and T Mobile offer home broadband over the airwaves. That, 0:19:00.240 --> 0:19:02.560 on the margin, I think has created this narrative disruption 0:19:02.680 --> 0:19:05.040 within the cable space, which has created quite a bit 0:19:05.080 --> 0:19:08.560 of volatility within the capital structures. We still like the 0:19:08.600 --> 0:19:10.679 cable space. We still think it has a lot of 0:19:10.840 --> 0:19:14.959 really attractive attributes. It's typically duopoly market in each region 0:19:15.680 --> 0:19:19.320 produces stable, consistent cash flow in the hierarchy of needs. 0:19:19.440 --> 0:19:23.520 You know, it's sort of air, water, food, cable, cable, broadband, 0:19:24.760 --> 0:19:27.280 and so we use that as an opportunity to lean 0:19:27.320 --> 0:19:29.680 into the industry over the past you know, eighteen months. 0:19:29.760 --> 0:19:32.280 So it's not all bad news, per se. I do 0:19:32.400 --> 0:19:37.440 think sometimes the market tends to overreact or maybe act 0:19:37.440 --> 0:19:39.639 too soon, right, Sometimes these trends do take quite a 0:19:39.680 --> 0:19:40.800 bit of time to play out. 0:19:41.000 --> 0:19:42.639 No, I mean this makes a lot of sense. Like 0:19:42.640 --> 0:19:44.680 we can all look at say like, oh, you know 0:19:44.720 --> 0:19:48.199 what Elon Musk is putting satellites into space. This is 0:19:48.240 --> 0:19:50.360 going to allow me to cut the cord at home, 0:19:50.400 --> 0:19:54.680 et cetera. Well, we're probably overestimating when I just tell 0:19:54.680 --> 0:19:56.439 that story the speed at which I'm going to do that. 0:19:56.840 --> 0:19:59.960 And I guess, like, just internally, maybe there's a better 0:20:00.080 --> 0:20:02.040 solution for me, But it would take me a while 0:20:02.119 --> 0:20:04.520 to get comfortable with the idea of just like cutting 0:20:04.560 --> 0:20:07.400 off my broadband internet excess in their apartment. 0:20:07.600 --> 0:20:09.879 Inertia is a very pet can be a very powerful force. 0:20:10.000 --> 0:20:12.040 I pay for a lot of things. Tracy and I 0:20:12.119 --> 0:20:13.920 just like, I don't know why, and then I get 0:20:13.920 --> 0:20:16.680 a bill and it's like some app I downloaded three 0:20:16.720 --> 0:20:17.199 years ago, And. 0:20:17.600 --> 0:20:18.800 Yes, there is that annoyance. 0:20:19.359 --> 0:20:19.719 Okay. 0:20:19.800 --> 0:20:23.760 So, speaking of other things that have happened in recent years, 0:20:24.040 --> 0:20:27.360 a big one has to be the influx of government 0:20:27.440 --> 0:20:32.320 money into tech related areas, so data centers, also clean 0:20:32.400 --> 0:20:35.600 energy technology, things like that. One thing we often hear 0:20:35.840 --> 0:20:38.879 when it comes to fiscal spending is the idea of 0:20:38.920 --> 0:20:42.200 crowding out the private market. And I'm curious, as someone 0:20:42.280 --> 0:20:46.080 who sits at Apollo and is basically in charge of 0:20:46.160 --> 0:20:49.480 directing a bunch of private capital, is that something you 0:20:49.640 --> 0:20:51.520 notice or worry about at all. 0:20:52.840 --> 0:20:55.159 We haven't seen any signs of that at this point, 0:20:55.240 --> 0:20:59.199 but certainly the fiscal situation from a macroeconomic perspective is 0:20:59.240 --> 0:21:03.560 something that at a high level we're constantly watching. Clearly, 0:21:04.119 --> 0:21:07.320 I think the budget deficits at two trillion dollars, which 0:21:07.960 --> 0:21:10.480 would seem to be unsustainable if it continues, you know, 0:21:10.520 --> 0:21:14.560 in perpetuity. But haven't really seen a crowding out effect 0:21:14.640 --> 0:21:18.600 per se, you know. If anything, I think, you know, 0:21:18.680 --> 0:21:22.760 some of the more recent government programs that have targeted 0:21:23.320 --> 0:21:27.440 investment in specific sectors that are deemed to be strategic 0:21:28.000 --> 0:21:32.200 has been a positive development in terms of attracting crowding 0:21:32.280 --> 0:21:36.840 in crowding in almost attracting private capital alongside you know, 0:21:36.880 --> 0:21:40.200 the government investment. So you know, whether it's the Chip Act, 0:21:40.200 --> 0:21:43.880 which allocated fifty billion dollars to construction of the domestic 0:21:43.920 --> 0:21:47.200 semiconductor supply chain, I think that certainly had a positive impact. 0:21:47.920 --> 0:21:51.959 You have the Bead Act, which is looking to extend 0:21:52.000 --> 0:21:55.520 broadband in rural communities. I think you've seen a lot 0:21:55.560 --> 0:21:59.040 of cable providers and other telecom providers talk about the 0:21:59.080 --> 0:22:03.640 opportunity there to to potentially utilize that. And then obviously 0:22:03.760 --> 0:22:07.720 the Inflation and Reduction Act has clearly focused resources on, 0:22:07.760 --> 0:22:10.240 you know, the build out of the clean energy infrastructure, 0:22:10.800 --> 0:22:13.240 and I think those aligned very much with some of 0:22:13.240 --> 0:22:16.920 the major themes in the economy and the infrastructure needs 0:22:17.040 --> 0:22:19.919 in the US, and so as a firm, you know, 0:22:19.960 --> 0:22:23.920 we're very much focusing on those sectors. With respect to semiconductors, 0:22:23.920 --> 0:22:25.960