Rowan says the pool of assets yielding less than 5% is vastly larger than opportunistic credit.
“I like to say it's the pile of assets in the world that yields less than 5% is like this big.”
Rowan notes the 2008 crisis permanently shifted lending activities from banks to nonbank lenders like Apollo.
“You know, the financial crisis in two thousand and eight pushed a lot of activities out of the banking sector and into the nonbank lending sector.”
Rowan says Apollo's yield business will double from $330 billion today to twice that size in five years.
“We are in, as I sometimes say, the fixed income replacement business. We're $330,000,000,000 today. Five years from now, that'll be twice its size.”
Rowan says origination strategy earns 150 to 200 basis points premium at near investment-grade level.
“And if you could earn 150 to 200 basis points more in origination at a very safe near investment grade level, that's a business we want to build.”
Rowan forecasts Apollo's yield business will double from $330 billion to roughly $600-700 billion in five years.
“And the ability to get it to $607,100,000,000,000, it sounds massive, but in the context of the markets in which they participate, it's just not all that big.”
Rowan says Apollo focused on private investment grade markets and now competes for assets amid banking turbulence.
“We went for the private investment grade market. That is the dominant franchise we have built. What we're seeing right now, particularly the turbulence in banking, these are the kind of assets we compete for.”
Rowan says the private credit industry grew from $40 billion AUM in 2008 to $550 billion at Apollo.
“Our entire industry was 40,000,000,000 of AUM. Every one of the companies plus minus in 2008. We ended the year at 550,000,000,000.”
Rowan says Apollo's $400 billion in private credit is still irrelevant in a $40 trillion market.
“At 400,000,000,000 of private credit, mostly investment grade, unfortunately, we're not relevant. It sounds like a lot, 400,000,000,000, but we're talking about a $40,000,000,000,000 market.”
Rowan states Apollo ended the year with $550 billion AUM including $400 billion in mostly investment-grade private credit.
“Apollo Asset Management ended the year roughly $550,000,000,000 $400,000,000,000 of private credit, mostly investment grade, dollars 75,000,000,000 of hybrid equity, 75,000,000,000 of private equity.”
Rowan says investors can earn single A corporate rates plus 300 basis points for 90-180 days of illiquidity.
“If you can earn single A corporate bond rates plus 300 for being less liquid for ninety or one hundred and eighty days, it seems like a pretty good trade.”
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 regulators have only two choices for credit: banking system or investment marketplace.
“And regulators have only two choices as to where credit comes from. It can come from the banking system or it can come from the investment marketplace.”
Rowan argues that excess returns in private credit come from origination capacity, not from illiquidity premiums.
“I believe excess return comes from origination. The capacity of an investor, someone like us, and we're not the only ones who do this, who can go out and work with a company and solve their unique issues and make the commitment and structure and take the whole thing down and originate a credit.”
Rowan reveals Apollo has invested nearly $8 billion and employs 4,000 people dedicated solely to credit origination.
“And for us, we are very focused on scaling origination. We've spent nearly $8,000,000,000. We have 4,000 people who wake up every day, and all they do is origination.”
Rowan says Apollo has done $100 billion in investment grade private deals since AB InBev.
“A $100,000,000,000 later we're still doing investment grade private deals. And I I see nothing but a long line of interesting borrowers and interesting situations”
Rowan predicts investors won't distinguish between public and private investment grade credit within 18 months.
“Eighteen months from now, I do not believe investors will actually know the difference between investment grade public and investment grade private.”
Rowan argues European regulators told banks to do less lending but forgot to enable investor alternatives, unlike the US.
“Everywhere in the world as I suggested, regulators have two choices as to where debt capital comes from, the banking system or the investor marketplace. Everywhere they've told the banks to do less.”
Rowan says Apollo's $550 billion credit business needs to find $300-350 billion in assets over five years to double.
“There's mostly alpha, but there's a chunk of beta in there. For us to double that business, it's finding 300,000,000,000 of assets or 350,000,000,000 of assets over the next five years.”
Rowan explains all financing comes from only two sources: the banking system or the investment marketplace.
“At the top of the house the fundamental trends are retirees, need for income and what we're building here because financing comes from only two sources.”
Rowan notes the levered loan market now has ETFs and mutual funds that are taken for granted.
“And lo and behold, we take for granted that the broadly syndicated market trades. We have ETFs. We have open end mutual funds.”
Rowan distinguishes between traditional private equity and a new model of private equity without leverage or fund structures.
“I think we're heading to a world where we not just have private credit, but we have equity that is private, not just private equity.”
Rowan recalls that 25 years ago, the idea of levered loans trading seemed impossible because every loan was different.
“Twenty five years ago, the notion that levered loans would trade was a fantasy. How could they trade? Every loan was different.”
Rowan recalls that twenty-five years ago the idea of tradable levered loans seemed impossible due to lack of standardization.
“Twenty five years ago, the notion that levered loans would trade was a fantasy. How could they trade? Every loan was different. Every company was private. There were no benchmarks.”
Rowan argues one bank's decision to make a market transformed levered loans into a tradable asset class over 25 years.
“Twenty five years later, levered loans trade because this one bank made a market in it, and then other banks came and made a market in it.”
“And lo and behold, we take for granted that the broadly syndicated market trades. We have ETFs. We have open end mutual funds. We have a series of products.”
Rowan argues the boundary between public and private markets is currently in transition.
“We don't think of them as private anymore. This notion of what's public and what's private, I think, is in transition.”
Rowan says most private credit is investment grade, contrary to financial press focus on levered lending.
“In much of the financial press, private credit means levered lending, a below investment grade deal related activity.”
Rowan says investors move from equity and high yield to levered lending for same returns with less volatility.
“Generally, what investors are doing is they're taking money out of equity or out of high yield bonds and moving into levered lending. It's roughly the same return, and it is less volatile.”
Rowan contrasts tolerance for equity volatility with outsized reaction to single private credit defaults.
“We don't think anything of Nvidia or the S and P going up or down 10 or 15%, and yet one private credit loan or one broadly syndicated loan defaults and people lose their mind.”
Rowan says recent private credit defaults reflected sloppy underwriting, not economic problems.
“The answer from my point of view is no. This was just sloppy underwriting. In both those instances, the warning signs were there. It was avoidable.”
Rowan corrects misconception that private credit means levered lending when most is actually investment grade.
“And the reality is most private credit is investment grade, And most of the credit in the financial system that is private, banks, insurers, pension funds, is investment grade.”
Rowan says investors use levered lending to reduce risk compared to equities and high yield bonds.
“We don't think anything of Nvidia or the S and P going up or down 10 or 15%, and yet one private credit loan or one broadly syndicated loan defaults and people lose their mind.”
Rowan argues private credit democratization has diversified risk and reduced system leverage versus bank concentration.
“We've diversified the risk. We've increased the resilience of the system. We've reduced the leverage of the system by doing it.”
Rowan contrasts tolerance for daily equity volatility with outsized reaction to small private credit moves.
“In fact, every day the market goes up or down, but we don't think of those as losses. And yet, the private credit market moves down two points and the world comes apart.”
Rowan argues private credit democratization has increased financial system resilience by diversifying credit away from banks.
“In fact, what's happened is the democratization of private credit has made our system more resilient. Rather than credit being concentrated in a handful of banks, it's now throughout the investment marketplace.”
“The vast majority of the private market is investment grade. There's a $40,000,000,000,000 market and 99% of the headlines are focused on a little slice of a trillion and 0.5 called levered lending.”
Rowan criticizes managers with 30% portfolio concentration in a single industry being disrupted by technology.
“If 30% of your portfolio is in one industry and that one industry is being impacted by technology, you have not been a good risk manager.”
“The vast majority of the private market is investment grade. There's a $40,000,000,000,000 market, and 99% of the headlines are focused on a little slice of a trillion and 0.5 called levered lending.”
Rowan says Apollo focused on first lien, cash pay loans to large companies with low leverage.
“And there are companies of which we are one, but not the only one who went all first lien, who went almost all cash pay, who went large companies, who work with low leverage.”
Rowan says investors fund BDC investments by selling equities, making safer first-lien choice.
“people are not funding their investments in these BDCs with their treasury portfolio. They're selling their equities. Last I looked, first lien debt is senior to equity.”
Rowan predicts good risk managers will make record profits this year and next from defensive positioning.
“If you were a good risk manager, you are going to make more money this year and next year if it continues than you ever have before because you've been risk off.”
“That felt really good on the way up. That's not going to feel so good on the way down.”
Rowan argues private credit formation derisk economy by moving credit off bank balance sheets and democratizing it.
“It's derisking because it moved it off bank balance sheets and essentially democratized it throughout our economy.”
Rowan says investors de-risked by selling equities for private credit, not by selling safe bonds.
“no one sold their treasuries or their investment grade bonds to buy private credit. Investors sold their equities. Investors made a logical decision to get equity like returns by owning first lien debt,”
Rowan says the private credit market is $40 trillion, but press coverage focuses on only $2 trillion of levered lending.
“Loans to customers, loans to companies, they're all private. What we spend all our time talking about on the press is $2,000,000,000,000 of $40,000,000,000,000 which should properly be called levered lending.”
Rowan says media focuses on $2 trillion of levered lending, ignoring the broader $40 trillion private credit market.
“What we spend all our time talking about on the press is $2,000,000,000,000 of $40,000,000,000,000 which should properly be called levered lending.”
Rowan says investors sold equities, not bonds, to buy private credit, thereby de-risking their portfolios.
“no one sold their treasuries or their investment grade bonds to buy private credit. Investors sold their equities.”
Rowan argues private credit has de-risked the United States by moving risky lending out of the government-backed banking system.
“I would say that private credit levered lending, direct lending, has actually been a de risking for the entire United States and for investors.”
Rowan explains banks excel at short-term lending while Apollo excels at long-term lending backed by retirement liabilities.
“And if you think about people like us, we borrow really long because we back retirement liabilities. And institutions, pension funds, endowments, sovereign wealth funds, they borrow really long.”
Rowan says Apollo's insurance company holds only 0.4% in levered lending due to regulatory inefficiency.
“to give you a sense for our insurance company, we round closer to zero than to 1%. It's like point 4%.”
Rowan says credit managers unable to meet 5% quarterly redemptions are idiots.
“For us, if you can't, as a first lien credit manager, meet 5% redemptions per quarter, I'll say it frankly, you're an idiot.”
Rowan calls the industry's focus on the $2 trillion levered lending market a failure of imagination.
“The obsession with this very narrow corner of the market, this $2,000,000,000,000 slice levered lending is frankly a failure of imagination.”
Rowan says the investment grade private credit market is $38 trillion, making the total private credit opportunity $40 trillion.
“The investment grade private credit market, which is being driven by the global industrial renaissance, is a $38,000,000,000,000 market. Therefore, the total opportunity in private credit is some $40,000,000,000,000”
Rowan says Athene's exposure to levered lending is 0.4% and software exposure is 0.1%.
“Our exposure to levered lending, which people sometimes call private credit is de minimis. Rounds closer zero than to 1% came in at 0.4%. Our exposure to software, 0.1%.”
Rowan says Apollo will provide daily pricing for all corporate investment grade assets by June 30.
“For our platform, which is the largest private credit platform in the world, by sixthirty, our investors will have daily pricing for all corporate investment grade fixed income assets.”
Rowan predicts Europe will become the strongest investment grade private market on a percentage basis.
“Europe is going to be on a percentage basis, in our opinion, the strongest investment grade private market in the world.”
Rowan reports consistent spreads of 340 basis points over treasuries at BBB average rating on originations.
“But most importantly, it's coming at consistent spread, three forty basis points over treasuries off an average rating of BBB.”
Rowan reports Q2 originations of $74 billion, excluding Broadcom which was the sector's largest ever origination.
“Origination here was a very strong quarter, 74,000,000,000. Just to give you some perspective, that does not include Broadcom, the largest origination in our sector ever, or a number of others.”