Unveiling Marc Rowan’s Secrets to Thriving in Good Times! You Won’t Believe What He Shared in His Private Credit Speech!

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Apollo reported gains last week, and CEO Marc Rowan said he “the end of an erafor the private equity that naturally generates the most attention. But how Sonali Basak highlightedhe also made some interesting comments on private credit and its growing role in the financial system.

Some of it is just classic earnings boast – implicitly calling Apollo the Michelin-starred restaurant of private credit – but most of it is genuinely intriguing. Given Alphaville’s interest in the topic we decided to reproduce the comments in their entirety.

Here’s what Rowan told analysts on the call as part of his prepared remarks, courtesy of Sentieo/AlphaSense Transcription Services. With our highlights:

As I said earlier, private credit, those are 2 words that don’t really mean anything. Private credit can be investment grade, private credit can be CCC. Barriers to entry into the private credit sector are quite low. Anyone with a fund and a staff capable of evaluating investments can really enter the private credit business, or the barriers to entry can be extraordinarily high, and build a complete ecosystem that allows you to serve the needs of your customers in a very sophisticated.

Think about the difference between a hot dog stand and a Michelin star restaurant, both are in the food business and both serve food. That’s how we think about private credit and where people are positioned.

Financial markets, financial literacy on private credit has gotten pretty sloppy. What is private credit? Well, if we start from the abstract, all there is in a bank balance sheet is private credit. But most of the time, the markets – market experts talk about private credit. They are talking about a very small sliver of a private credit universe focused on leveraged lending. Don’t get me wrong, we like the leveraged lending business. Leveraged lending is actually a tremendous business right now. It won’t always be a great deal. It is a cyclical business with low barriers to entry, but which, when the time is right, can be very profitable.

What we have tried to build is not a single fund, it is not a single opportunity, we have tried to build an ecosystem. Looking back over the last decade, we’ve invested about $8 billion, building 16 original rigs. There are 4,000 people working at these platforms, not Apollo employees, who focus every single day solely on private credit creation. And as you know, a lot, if not most of what they do is investment grade. This is important because the investment grade market is at least 8 times the size of the high yield market and 8 times the size of the leveraged loan market.

This is a great time for private credit. This is not a quarter that is a big time for private credit, this is a secular change. Not only do we have higher base rates, regulatory changes and changes in market dynamics, but we are at the beginning of a secular shift in the way credit is provided to businesses and one that I believe will continue to gather speed. To be successful in this market, you need a single source recurring supply. This quarter, we originated approximately $23 billion, of which 50% from platforms.

[Apollo co-president] Jim Zelter will detail some of these transactions. But beyond the names you’d expect that are traditionally associated with private credit, AT&T, Air France and Vonovia, borrowers appreciate the certainty, scale and speed of execution. In addition to origin, an integrated business in the capital markets is required. Because, after all, we want 25% of everything and 100% of nothing. Our ACS business, led by Craig Farr, has done an amazing job extending the reach of private credit to customers and non-customers. And in fact, this is one of the best ways we introduce the company to people who aren’t yet Apollo customers and show them what we’re capable of.

This quarter, we raised approximately $7 billion of capital from third-party insurers and we expect that to accelerate as the market continues to improve. For private credit, especially investment grade, the way consumers and businesses borrow has traditionally been through the asset-backed market.

Asset-backed is, for the most part, private credit. This is a $20 trillion market, that we’ve been playing in for a long, long time, more than $220 billion in volume to date, better than 200 relationships. We currently have more than $100 billion of AUM associated with ABF, of which $55 billion is from third parties.

Most of what happens to us at ABF is investment grade, and is a key driver of our insurance business for Athene and our third-party insurance clients and, increasingly, fixed income replacement for our clients traditional institutions. One of the single most important factors in this market is that we are completely aligned with our customer base. We own what they own, at the same time, for the same price. There is nothing more confidence inspiring than alignment.

Rowan later spoke more about how “shadow banks” like Apollo interact with the traditional lending industry.

JPMorgan’s Jamie Dimon last month regretted how companies like Apollo were”dance in the streetsat the time, but Rowan insisted that both parties were dancing together.

I really want to talk about the market environment, especially the regulatory environment and the environment as it relates to our banking colleagues. In short, we have never had such a collaborative dialogue with the banking system. We have gone from being not just a major customer, a partner of the banking system, to a true collaborator.

The shape of our business, especially our willingness to do very large investment grade transactions, has made us an indispensable partner, and I mean partner with the banking system. While some are talking about the dance that this is a great moment for private lending, I have noticed that there has actually been a dance on both fronts, both on the banking side and on the private lending side, as most banks have had an outstandingly good quarter and are on the road to an outstandingly good year. We are also very symbiotic. We remember that we want the asset, but we don’t want what the bank typically wants, i.e. the customer. The bank wants the customer and typically doesn’t want most or any of the assets.

If I take a step back, the US financial system is the envy of the world. We have raised 50% of the world’s capital. And part of the reason we’re the envy of the world is the structure of our system. Banks have their role and the investment market has its role. Our system has all kinds of participants, but the vast majority of these participants borrow short and invest long or have short-term cash.

Think of an open-ended mutual fund, which has daily liquidity. Many hedge funds, quarterly liquidity. Banks, daily liquidity at least on deposits. The ability to bring institutional, pension and insurance investors who have long-term liabilities or long-term assets to this market makes them ideal short-term capital partners for the banking system and open-ended mutual funds.

In short, long-term frozen liabilities are a source of stability and somewhat anti-cyclical for our financial system. It doesn’t matter if they are in funds, which are themselves very stable, or if they are budgeted for pension services. The entirety of the market on the investor side doesn’t transform maturities, doesn’t have access to the Fed’s window, doesn’t benefit from the US government guarantee.

And in our case, if you look at the pension services balance sheet, we have more tier 1 capital and more tier 2 capital than the vast majority of the top 10 banks in the US. We conduct cash flow testing and scenario testing and deliver a granularity to our portfolio that very few, if any, institutions can match. Our balance sheet is much more investment grade than the typical depository institution.

In short, our model is highly complementary to the banking system. We have never been more collaborative and I expect this collaboration to increase as regulatory change takes hold, both in the US, in Europe and even at the onset of regulatory change in Asia.

Your thoughts on the private credit craze go below.