Rowan argues institutions should get paid for liquidity risk rather than equity or credit risk.
“I often say you can take equity risk. You can take credit risk. The risk these institutions should always get paid for is liquidity risk.”
Rowan says LDI crisis revealed public securities are only liquid in rising markets, not falling ones.
“LDI was nothing more than a misplaced expectation on the part of UK institutions that public securities were liquid. They found out they're only liquid on the way up.”
Rowan reframes public versus private markets as fundamentally about liquidity rather than risk.
“We now know public can be risky as well. We now have found out that private can be both safe and risky. What we're talking about is differing degrees of liquidity.”
Rowan says $8 trillion in equity printed since 2008 created a fabulous credit entry point as it's withdrawn.
“Equity we printed $8,000,000,000,000 from 2008 until 2022. Exactly what was supposed to happen happened. Now that we've started withdrawing it, entry point for credit is fabulous, has adjusted very quickly.”
Rowan says Apollo has no daily or quarterly liquid money, structured to exploit illiquid assets.
“There is no daily liquid, quarterly liquid money at Apollo. We are ideally situated to take advantage of less liquid assets. We've structured ourselves that way.”
Rowan argues retirement systems know their liquidity needs for ten years and should get paid for illiquidity.
“Liquidity liquidity is a risk to everyone but in differing degrees. So if you are a retirement plan or a retirement system, you know your liquidity requirements for the next ten years.”
Rowan questions why $12-13 trillion in 401k plans are daily liquid for fifty-year investments.
“What are these people invested in? They don't know. Well, I'll tell you, on the whole, they're invested in daily liquid mutual funds and ETFs for fifty years.”
Rowan says public and private markets will converge across issuers, ratings, sizes, and liquidity.
“That it won't be different issuers. It won't be different ratings. It won't be different sizes, and it won't even be different liquidity.”
Rowan states that selling an investment grade public corporate bond now takes five days due to liquidity issues.
“By recent measures, it would take you five days to sell an investment grade public corporate bond today because there is no liquidity.”
Rowan states that global trading capital is now only 10% of 2008 levels.
“That trading capital in the world is 10% today of what it was in 2008.”
Rowan states that trading capital in fixed income markets has declined to just 10% of 2008 levels.
“We're just finding out, for instance, that there's no liquidity in fixed income markets. That trading capital in the world is 10% today of what it was in 2008.”
Rowan states it takes five days to sell an investment grade corporate bond, contradicting assumptions about public market liquidity.
“One of the most interesting things that changed there is no liquidity in public fixed income. The stats I've seen it takes five days to sell an investment grade corporate bond.”
Rowan challenges the perception that public markets are safe and private markets risky.
“We have a perception that what's public is safe and what's private is risky. But what if we're wrong?”
Rowan notes investment grade bonds take five days to sell, predicting poor trading in risk-off moments.
“Takes five days today to sell an investment grade corporate bond. We should expect in every risk off moment public credit to trade poorly.”
Rowan identifies the expectation of daily liquidity in everything as the biggest risk buildup in the world.
“What I worry about and the biggest buildup of risk I see in the world is we are brought up with an expectation of being able to trade everything every day. Everything is daily liquid.”
Rowan argues public and private markets both contain risk; the key difference is liquidity, not safety.
“What if private is safe and risky, and public is safe and risky, and we're talking about differing degrees of liquidity in different markets? I think that's what we're seeing.”
Rowan bluntly states any first lien credit manager unable to handle 5% quarterly redemptions is incompetent.
“if you can't as a first lien credit manager meet 5% redemptions per quarter, I'll say it frankly, you're an idiot. This is not that hard to do.”
Rowan dismisses redemption concerns, saying Apollo handled $750 million in first quarter outflows easily.
“And so for us, $750,000,000 in the first quarter, dollars $750,000,000 out in the first quarter, this is not of any moment.”
Rowan references recent gating of direct lending funds as negative liquidity discussion in the industry.
“The most recent discussion that's had across our industry on liquidity has been in the negative context of the gating of direct lending funds over the past few months.”