The Rise and Rise of Private Credit Houses: A Misunderstood Market

The writer is a former investment banker and author of “Power Failure: The Rise and Fall of an American Icon”

Apollo CEO’s Encounter with Misunderstandings

According to Apollo CEO Marc Rowan, there is still some misunderstanding about the rise and rise of private credit houses since the end of the global financial crisis. Rowan recently had an encounter with the CEO of one of Europe’s largest banks, where he realized the misconceptions surrounding private credit houses.

During their meeting, the bank’s CEO launched into a criticism of Apollo, labeling it and other asset managers as beneficiaries of unjust regulatory largesse and part of the so-called scary “shadow banking” market. Rowan had to interrupt him, questioning if he was done with his diatribe. Once the speech was recovered, Rowan defended Apollo and explained its investment-grade debt percentage, term perspective in matching assets and liabilities, and higher equity ownership compared to the European bank.

Apollo’s CEO Takes the Helm

Marc Rowan, one of the original founders of Apollo, took over as CEO of the company in March 2021. This leadership transition followed continued revelations about Leon Black’s longstanding ties to Jeffrey Epstein. Despite the challenges faced, Rowan brings extensive experience and wisdom to the helm.

The Role of Private Credit and Equity Groups After the 2008 Financial Crisis

After the 2008 financial crisis and the passing of the Dodd-Frank Act, private credit and equity groups gained prominence in the financial landscape. Traditional Wall Street banks like JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of America, and Citigroup no longer held their status as leading innovators and risk takers. This change was a result of regulatory decisions made by the US Federal Reserve to prevent future financial crises revolving around these banks.

These regulatory decisions have subsequently led to big Wall Street banks being less leveraged and holding more capital. They can still underwrite debt and equity securities but need to remove them from their balance sheets quickly. Mergers and acquisitions among Wall Street firms have also been restricted. These developments paved the way for the expansion of private credit and equity companies like Apollo, Blackstone, and KKR.

Perceptions and Realities of Alternative Asset Managers

Despite the growth and success of alternative asset managers, there is still a perception that they operate in a vast risk pool, giving them an unfair advantage in making money. Marc Rowan emphasized that Apollo makes money through prudent risk-taking in areas where others are hesitant, such as senior secured loans, aircraft, real estate, and plant and equipment financing. Approximately 75% of Apollo’s assets under management are in private credit.

Apollo’s approach to investment is reminiscent of what GE Capital once did but without the existential risk of borrowing short and lending long. Over the past decade, Apollo has built origin platforms, enabling the company to issue senior secured loans across various industries. This dynamic allows Apollo to keep 25% of the loans and share the rest. The company’s merge with Athene Holding, an annuity insurance company, further enhances its ability to raise capital and make senior secured loans.

The New Powers on Wall Street

With the ability to raise money through annuities and make lucrative senior secured loans, alternative asset managers like Apollo are becoming the new powers on Wall Street. By operating with lower capital requirements and mitigating risks associated with deposits and interest rate movements, these companies can generate attractive returns.

Additional Piece: Private Credit Houses and the Transformation of Wall Street

The Changing Landscape of Financial Institutions

The global financial crisis of 2008 and the subsequent regulatory actions transformed the financial industry. Traditional Wall Street banks faced tighter regulations and restrictions, resulting in a shift in power dynamics. Private credit houses, such as Apollo, emerged as prominent players, capitalizing on the changing landscape.

These alternative asset managers are reshaping Wall Street with their ability to take on riskier but often more profitable investments. By leveraging their expertise and market knowledge, these firms are able to identify hidden opportunities and act swiftly, without the burdensome regulatory constraints faced by big banks.

The Prudent Risk-Takers: Apollo’s Investment Strategy

Apollo distinguishes itself through its prudent risk-taking approach. While some may perceive alternative asset managers as operating in a vast risk pool, Apollo emphasizes that its investments are grounded in thorough analysis and a deep understanding of the industries it operates in. The company focuses on areas where others may be more risk-averse, allowing Apollo to capitalize on attractive opportunities.

For instance, Apollo’s focus on senior secured loans in sectors like aircraft and real estate enables the company to generate stable returns. These investments are supported by its expertise in assessing creditworthiness and its ability to structure deals that mitigate downside risks. By carefully managing its investments, Apollo is able to navigate the market successfully and deliver value to its investors.

Unlocking Value through Innovative Financing Models

One of the key advantages of private credit houses is their flexibility in financing models. Apollo’s approach involves building origin platforms that enable the issuance of senior secured loans across a diverse range of industries. By partnering with Athene Holding, Apollo harnesses the power of annuity sales to raise cheap capital, which is then deployed into senior secured loans at higher interest rates.

This innovative financing model allows Apollo to optimize its returns while minimizing the risks associated with traditional banking activities. Unlike banks that need to balance short-term borrowing with long-term lending, Apollo’s model reduces exposure to interest rate fluctuations and potential liquidity issues. As a result, the company can focus on generating attractive risk-adjusted returns for its investors without being burdened by the constraints faced by traditional banks.

Allaying Concerns: Regulatory Compliance and Transparency

Contrary to the perception that alternative asset managers benefit from lax regulations, Apollo emphasizes its commitment to regulatory compliance and transparency. The company’s higher percentage of investment-grade debt, prudent risk management practices, and transparency through online portfolio access demonstrate its dedication to maintaining a strong and responsible financial position.

Apollo’s ability to navigate the intricacies of regulation while maximizing opportunities highlights its expertise and commitment to ethical practices. By instilling trust and confidence in its investors, Apollo sets the stage for continued growth and success in the private credit market.

The Future of Wall Street: Private Credit Houses at the Forefront

As the financial industry continues to evolve, private credit houses like Apollo are poised to play a leading role in shaping the future of Wall Street. Their ability to adapt to changing market dynamics, leverage innovative financing models, and deliver attractive risk-adjusted returns positions them as key players in the financial landscape.

With their prudent risk-taking strategies, commitment to regulatory compliance, and focus on value creation, alternative asset managers are redefining the concept of Wall Street success. As more investors recognize the unique advantages and opportunities offered by these firms, the influence and prominence of private credit houses are only expected to grow.

Summary:

Marc Rowan, CEO of Apollo, highlighted the persistent misunderstandings surrounding private credit houses since the global financial crisis. Apollo differentiates itself through its investment-grade debt percentage, matching of assets and liabilities from a term perspective, and higher equity ownership. Alternative asset managers like Apollo are reshaping Wall Street by taking on prudent risks and leveraging innovative financing approaches. The company’s focus on senior secured loans and partnerships, such as the one with Athene Holding, enables it to generate attractive returns while mitigating risks associated with traditional banking. Apollo prioritizes regulatory compliance and transparency, setting the stage for continued growth and success in the private credit market. These alternative asset managers are expected to play a leading role in shaping the future of Wall Street.

The writer is a former investment banker and author of “Power Failure: The Rise and Fall of an American Icon”

According to Apollo CEO Marc Rowan, there is still some misunderstanding about the rise and rise of private credit houses since the end of the global financial crisis.

Rowan came to this realization after a recent tour abroad, where he met the CEO of one of Europe’s largest banks. “I’ve never met him before,” Rowan told the Economic Club of New York on June 6. “It’s a blind date, and sometimes blind dates can be fun.”

But he barely managed a word before the bank’s CEO launched into a 15-minute diatribe about how Apollo, with some $600 billion in assets under management, is the “beneficiary” of the unjust “regulatory largesse” . And how, continued the CEO, Apollo and other poorly regulated asset managers, such as Blackstone, KKR, Ares and others are part of the so-called scary “shadow banking” market, the wild west of finance. “So, are you done?” The Rowan finally asked when he could hold on no longer.

Once speech was recovered, the Rowan launched into a defense of Apollo and his business. He explained that Apollo had a “much higher percentage” of investment-grade debt on its balance sheet than the European bank.

He pointed out that Apollo seeks to match its assets and liabilities from a term perspective, unlike most banks, which borrow short and lend long. ‘And finally,’ the Rowan continued, ‘I hold more equity as a percentage of assets than you do. I own multiple Tier 2s [capital] as a percentage of assets relative to you, and if you want to see my portfolio, [you can] click on the site and my portfolio is online. So if you’re done, we can now have our meeting.

Rowan, one of the original founders of Apollo some 33 years ago, took over as CEO of Apollo in March 2021 in the wake of continued revelations about Leon Black’s longstanding ties to Jeffrey Epstein. He is a very young-looking 60-year-old and one of the wisest minds on Wall Street.

In the wake of the 2008 financial crisis and the passage of the so-called Dodd-Frank Act, private credit and equity groups took on a much more prominent role. Big banks – like JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of America and Citigroup – are no longer Wall Street’s leading innovators and risk takers. And this is by design. The US Federal Reserve has made clear through its regulatory decisions that it does not want these banks ever to be at the center of a future financial crisis again.

As a result, the big Wall Street banks are far less leveraged than they were 15 years ago. They are forced to hold much more capital than they once did. They can still underwrite debt and equity securities, if markets allow, but they must remove the securities from their balance sheets as quickly as possible. The Fed forced the big banks to deal with moving, not storage. The Fed has severely restricted the types of acquisitions or mergers that were once so common among Wall Street firms, except seemingly in exceptional circumstances.

This paved the way for the expansion of companies such as Apollo, Blackstone and KKR. But, as Rowan discovered when he met with the European bank’s chief executive, there is still a perception out there that less regulated “alternative asset” managers are swimming in a vast risk pool, giving them an unfair advantage when it comes to to make money.

Rowan said Apollo is making money the old-fashioned way: by taking prudent risks where others are no longer willing to tread, such as in senior secured loans, aircraft, real estate and plant and equipment financing. “This is the investment grade private market,” she said. About 75 percent of Apollo’s assets under management are in private credit.

In short, Apollo does the sort of thing GE Capital once did (before its demise) but without taking the existential risk of borrowing short and lending long. Over the past decade, Apollo has spent billions building “origin platforms,” ​​enabling it to take out senior secured loans across a variety of industries. Apollo keeps 25% of the loans and shares the rest. And in 2021, Apollo merged completely with Athene Holding, the annuity insurance company it created in the wake of the global financial crisis.

With Athene, Apollo can raise money cheaply by selling long-term annuities and then use that money to make senior secured loans at much higher rates. It’s all done using very little capital, boosting returns without the business having to worry so much about deposits going out the door or big interest rate movements. No wonder these alternative asset managers are becoming the new powers on Wall Street.