Apollo's Jim Zelter on the Future of Private Credit

[MUSIC] Welcome to another episode of Goldman Sachs Exchange's Great Investors. I'm Allison Mas, chairman of investment banking in Goldman Sachs' Global Banking and Markets Business, and your host for this episode. Today, I have the pleasure of speaking with Jim Zelter, president of Apollo Global Management, one of the world's largest alternative asset managers and provider of retirement solutions. We're talking with Jim at a truly dynamic time. The global economy is experiencing an unprecedented surge in capital expenditures driven by the growth in AI, data centers, the energy transition, and infrastructure needs. While an aging population is facing new retirement challenges, we'll talk to Jim about how he's strategically positioning Apollo to address the massive capital needs. His perspective on where risks are accumulating and where he's seeing investment opportunities around the world. [MUSIC] So Jim, welcome to Great Investors. It's a real pleasure to be here. So I always like to start these sessions by asking what got people interested in business and finance in the first place. You started your career on Wall Street as a trader in the public markets, starting out as a fixed income trader, and then working as a high-ealtrader here at Goldman Sachs. I did not have a typical finance background of college. I did various jobs. I worked in the fishing industry in Alaska. And as I got out of Duke, I came to New York and interviewed a few jobs. And when I walked on a trading floor, I just felt for the first time like this is the energy that I was looking for. And so it's captivated me at a very early age. And I loved I played sports. I played sports in college. And I found the competition, the energy, the engagement, the intensity was something that I just quickly caught into. And I feel like that's a real gift to do it to find it when that really clicks. The trading floor, I started really in fixing corporate bonds, but quickly moved over to the high-ealt market in its nascent years in 1985, which you know so well. And when I was at Goldman, really very early in my career, it was a marketplace that was filled with news, corporate actions, corporate activity, and real creativity insight. And the knowledge of companies was being exploited because most of the fixed income markets before that were a little bit generic. But being on a trading floor environment, being in that environment, smart folks, but also the dynamics of competition, engagement, client dialogue, it really, I was very fortunate. It was that intellectual curiosity was something that I've always had. And it really was able for me to really engage with that. You were on the trading desk, but what did the trading desk teach you about risk that still influences you today at a below? Yeah, I think it's dealing with issues front and center. When you're on a trading desk, if there's a challenge or a problem coming to the service, you can't put it off to tomorrow. It's true engagement, it's confronting challenges quickly, making the decision with the information you have at that point in time. We'd all like to get a lot more information to make the right decision. You don't have the luxury to that. And a trading desk forces you to deal with marks, to deal with bad decisions, to deal with problems right away. And I think that's the reason why on Wall Street, a lot of leadership has come up from these environments. We work in a business, some things are very slow moving, some things are very fast moving, and you can't ignore situations on a trading floor. And so when we think about a Powell today, we really have a discipline and a fundamental focus on purchase price, creation value, and that permeates everything that we do. Now certainly that started as a private equity mantra, purchase price matters, but the whole business of our credit business, our hybrid business, our insurance business, the theme and the thorough, that permeates literally everything we do. Yeah, that market market mentality is valuable. And in fact, we talked earlier about you reading our former CEO's book, Lloyd's book. He talks about that a lot. That people on the trading floor would say that their marks were accurate and you say great, get me a bid. Exactly. And that was everything. And this and there's a longer conversation which I'm sure we'll get into right now, but in the, this is my 20th year plus at Apollo. The firm was much smaller, but certainly we're in a fascinating time right now is the evolution of the markets, these massive capital needs and the evolution of private markets and public markets and the convergence of those two is playing a big role. So I do feel that the background that I've had being in the markets, dealing on trading desk, dealing with illiquid assets for a long period of time, those are really important skills to understand capital formation and companies needs along with those issues today. You said you were a college athlete. Yeah, I played the cross. I grew up in upstate New York and I played lacrosse down at Duke. My freshman year, I had a pretty bad knee injury and I could have gone both ways, but I stuck with it and I ended up playing for all four years. Fantastic. And I was not, certainly my knee injury had an impact on my skill, but the competition, the engagement with something was pretty important to me. So I really enjoyed those years. That's great. Yeah. Goldman Sachs, it sounds like you forged lasting relationships with David Tepper, John Winkery, Jonathan Colach, among others, all of whom have gone on to build their own businesses. So how did those relationships help you in your career? I came here with a lot of enthusiasm. I was the classic sort of PhD. I was poor, hungry and very determined. And when I got to Goldman, these were some of the smartest people I ever met and they were really competitive, really smart, really determined. And I was an undergrad. I did not have an MBA. That was the period of time when MBAs were starting to come to Wall Street. It was not a requirement by any means, but it was helpful to some degree. And I had the good fortune to sit literally next to Tepper and Colach for about five years. And I remember early in my career, I was about to apply to business school. I had an application, I asked one of them to fill out a reference for me. And they looked at me and said, "If you really want me to fill that out, I'm going to fire you on this spot." And it was a statement saying, "You're getting your MBA right here." And true to be told, those folks taught me how to tear apart a K, a Kew. Look at a company, really understand which drove the dynamics of the business. And even today, I think that credit background, understanding a levered capital structure, understanding you vent-driven investing, understanding liquidity. I think those are amazing tools to learn. And my eyes really opened up to not only the markets, but Goldman was private back then. It was the partner's capital. And so that discipline of really knowing the numbers, that discipline of being a, they were actually an upstart compared to the incumbents, Drexel certainly. But it was a fast-saying time. And I think that they're both, and many of the folks you mentioned, just great investors, really understanding how the markets worked. And I really got my MBA at Goldman Sachs during those years. What year did you leave Goldman Sachs? I left, I believe, early '94. Okay. I know you spent 12 years, right? In city. Yeah. Ending is CIO of their alternative investment group before moving to Apollo. To build out the private platform. So can you talk a little bit about how the transition from a large bank platform to an alternative asset manager shape your perspective on the markets and capital formation? When I was at the city, which did all its mergers, it actually had a very large alt business in the early 2000s. It had about a $40 billion alt business from all the mergers. But it was not well run at the top, and I'm being really polite. It was not a swiftly run efficient organization. So I really wanted to go out and start my own hedge fund, an credit fund. I knew it was the right time to be in these markets, but I really wanted to be on a buy-side investment fund. And I just felt at that point in time, and this was before the GFC, the global financial crisis. It wasn't the right entrepreneurial growth environment to grow an amazing buy-side firm. You needed to break away from that institution. It was much more institutionalized than the firm that I went to. The firm that I went to probably had less than 200 people. We had about 20 billion of capital, which was 19 billion of private equity and a billion of credit. I came from a trading floor environment where I worked for one person, and the idea of working for two or three was certainly a challenge. But in retrospect, probably one of the best decisions I made away from the personal ones I've made in my life. And it's been an amazing ride. It's an amazing ride. Clearly. How many people does Apollo have now? I'm just curious. Apollo has around 3,500 plus or minus. A theme has another 1,500. So Apollo Global has about 5,000 in aggregate. So you've seen a lot of growth there? Yes, it's a far cry. I mean, we're going to end this quarter, 950, 970 billion of assets. We've been at the right place at the right time. A lot of hard work, but a lot of good fortune. So let's turn to the markets. We're seeing fresh investor concerns now that the growth of private credit is adding leverage and risk to the financial system. you at Apollo have been very well. with your views that private credit is a $40 trillion largely investment grade market. Is the market misunderstanding what private credit really is and what is your view? - I think the market is missing what really is. I think you need to be a little bit of a historian. When you go back and look at the genesis of insurance companies and private placements to the high-yield market in the early '90s, I was here at Goldman in 1990 when they started to trade loans. Loans were not traded. Loans were on bank balance sheets. And I remember the partners introduced me to this candidate who was going to come and trade loans. Bob O'Shea was the first gentleman to do that for us. So I think you need to have a to answer this question. I think you need to have a little of a historical perspective. The global financial markets really change after the GFC. The footprint of banks changed. We went to a zero rate environment. The regulatory backdrop changed. And in our collective career, the last 30 to 40 years has been mostly non-investment grade companies really upstarts in airlines, cable, casinos, disrupting incumbents. Now the last three or four years, you've got these massive capital needs, as you mentioned in the intro, energy transition, data centers, and a variety of other things. These are all investment grade needs. And so when people talk about private credit being the direct lending marketplace, that's very narrow. The reality is there's almost 40 trillion of private financing, commercial real estate, resi real estate asset-based finance. And that's the 40 trillion. The two trillion is really that private direct lending, which really came out as a result of how the high yield, the public high yield, and the leverage loan market work, it really was a third product for financial sponsors. So I think the market is missing something when they focus on the trillion seven direct lending market and use that as the definition of private credit. I think private credit will provide a very important tool for companies going forward. In our last two or three years, we've raised almost 150 billion from about 50 investment grade companies, Sony, Intel, ABN, Bev, Air France, and many others that it's part of their financing solutions. They still use investment grade debt. They still will start to use more private credit. But yes, I believe that private credit's a much, much broader asset class. It will be used by more and more companies. And we have a little bit of a dynamic going on right now in the narrow area of direct lending because of the nature of what it's financed, a lot of enterprise software, and the growth of wealth products. There's a little bit of an intersection accident going on right now. But I think we're missing the bigger tectonic plate if you would in the overall business. So with private credit now financing, a meaningful share of corporate borrowers, as you suggest. How confident are you that the private credit ecosystem could withstand a significant shock? You're asking a broader question here about-- we've really not had a broad dislocation of credit since the GFC. We've had little skirmishes, whether it's the Euro crisis or the oil shock in 1516 or COVID. But there really is not been a credit cycle, a hard credit cycle, in the last 16, 18 years. We haven't suspended economic cycles. They will come back. I think it's harder to have an economic cycle now because of the breadth of how the US finances lots of industries. But I think there is going to be a time when credit undergoes a bit of a challenge. And that won't just be the private credit market. It'll be all credit, credit's credit. And whether it's public high yield or investment grade debt or leverage loans or direct lending, I think there will be a credit cycle that has an impact on all of those asset classes. And in turn, it'll have an impact on private equity. But today, I think that we're in the crosshairs of a period of time because of the emergence of AI, the disruptive nature of that technology, and the impact on a sector of direct lending, which is private credit software lending. It's sort of an intersection. But I would say that the headlines are a lot louder than the spreads right now. And it's going to be a while for these companies that probably have a lower growth trajectory. I don't think you're going to see a massive distress cycle like you had in '07 '09. In '07 '09, the banks roll on 500 billion of first-lean and high-yield bonds. And that was a reset of the overall market. So it's going to be a challenging year or two. But I still think we are not on the precipice of a deep credit cycle, but it should come in due course. So I want to continue with something you mentioned on AI. We're also entering what appears to be this unprecedented secular capex cycle. Yeah. AI infrastructure, the energy transition, reassuring, and the digital build out. So how significant do you think the financing needs are ahead of us? That's what I get excited about. And I think that if you look at the capital that's on paper required to fund just the data centers alone in the US, that's a five to six trillion capital need over the next five years. And that's arguably X some of the chips that are going to be needed. So when you think about how to fund five to six trillion, which are phenomenal numbers, I see the traditional sources of banks of IG issuance, a part of that, but that's not going to solve all the needs. So the idea that insurance capital, which is long dated, and has an ability to match and partner with banks or the IG market to fulfill the breadth of the financing, I see that's what's going to have a larger role. And I think when we turn around in 2035, and we look back at this last decade, we'll say that there were some skirmishes in private credit in a narrow definition. We'll have dealt with the appropriate liquidity and structure of those vehicles. But those who got caught up in that and went to the sidelines will have missed a very large opportunity to be part of some of the greatest companies in the world in the future and how they fund these massive capital needs. But it's an exciting time. It is an exciting time. So are you convinced that this CAPEX cycle fundamentally is different from prior investment waves in terms of scale and duration? Very much so. And again, my career was really built on the non-investment grade universe. In the last 30 years, you saw the emergence of cable. You saw the emergence of airlines and gaming and health care technology in hospitals. A lot of disruptive enterprise and leadership in the non-investment grade world. The CAPEX at next five to 10 years is really massive scaled investment grade counterparty risk. And so done appropriately, done in scale with great companies, we would always prefer to lend as a senior investment grade lender to investment grade companies in scale. The Intel transaction we did a couple years ago was really a watershed. They'd built a $23 billion fab in Ireland. They needed to take some money off the table. We became a 50/50 joint venture with them. There's two fabs in Europe. And we were a 50% partner with Intel on 11 billion dollar financing. Those are transactions that have a lot of flexibility. They have real meaning. You're providing a real need for the CAPEX of investment grade companies. And those are the type of loans and assets that we want to put against our investment grade-rated liabilities from the insurance side. It's just very logical when you think about the need of retirees and the CAPEX needs of companies. And we feel like we're at the proverbial first and main intersection of those. That's great. Last question on the markets. What do you think is the biggest risk that investors could be underestimating in this next phase of capital formation? I think the return on invested capital of AI. When you talk to a lot of folks that are deep in the business, and they're real believers in the utility of the product, and the breadth and scale impact that's going to have. And we've seen this many times in our last 30 years, whether it's cell phones or other technology uses, there's no doubt they're going to have a massive utility. But is the economic owner going to harvest the right returns for that investment? And these, the Mag 7 today, our 7 of the greatest companies ever created in terms of the amount of capital invested and the amount of cash flow sent out to shareholders. But there's a massive CAPEX cycle going on that's turning an asset light business into asset heavy. And what are going to be the true economic returns to shareholders from these businesses? That's a big question today. And I want to make sure just because companies need capital doesn't mean they're all great investments. So really understanding, I learned this early on my trading desk, don't price equity risk with a fixed coupon. If your equity risk makes sure you're getting paid for it, But if you're a creditor, make sure you have the right downside protection. So this whole equity and debt and how you're getting paid for it and how it's getting structured, it's really important lesson. Okay, so I want to talk a little bit about you. You're celebrating your 20th year at Apollo. Congratulations. Thank you. The Apollo that you joined in 2006 looks very different from the Apollo of today. So what were some of the key inflection points along the way in the markets that have shaped the way the firm has evolved? Yeah. I got to the firm in 2006 and it was an amazing organization of brilliant people and great investors. And but we were for the most part a monoline investor and private equity and the vision of the founders was let's build a global credit business and they had great vision on doing so you have to say that the GFC was a critical point of our growth. We happened to have been building up the credit business, we were not involved in CLOs, we did not come into the crisis long credit. We had a pretty blank sheet of paper and that really allowed us to take the investment acumen of the firm and the markets acumen that I had brought and that marriage was really perfectly well placed in 0709. We were one of the early movers on a lot of the big portfolios at the banks sold. We wanted to buy that 70, they wanted to sell them at par, they ended up providing a lot of financing and that financing, 7 to 10 year financing, basically a live war plus 50, that was the real start of our credit business. And so that dislocation, our ability to really bring institutional investors into that dislocation on the credit opportunity funds was critical. In that period it was the vision of creating a theme. Really what a theme did for us as a firm, it took when you're in the private equity business your cost of capital is mid to high 20s and so you're not relevant to lots of financing. You're relevant to a handful of companies out of a thousand. When you can bring the annuity capital to a solution toolbox, it puts you in the middle of so many conversations. So the brilliance of the team and Mark to be able to really create a theme that brought a capital based to us that was well ahead of its time. And so between the GFC and the structuring of a theme, those were really the first two. And then once we actually created a theme, we decided not to follow the traditional playbook of just buying public investment grade. We really wanted to create our own opportunities. And so that led to the creation of the 16 origination platforms taking a theme public. So between the GFC, the creation of a theme, the creation of origination, those were the real times. And then I would say, certainly COVID, we let the marketplace see how we could execute in a crisis. And in the credit business in particular, we probably put about 50 billion to work in about six, seven weeks in that period in spring of 2020. Certainly the PE team did a fabulous job investing in a handful of companies as well. But I think that was really a period of time that the marketplace really took notice of the breadth of the portfolio that we had created and the ability to really partner with banks and other folks in an open architecture world. Are there any particular regions of the world that you're now focused on? So certainly Europe and Japan are two that I talk. Obviously, where US-based, we think there's a tremendous amount of global industrial Renaissance happening on the onshoreing back in the US. But I've been to Germany five times in the last year. A lot of time is being spent with Europe because all the challenges that we have with energy transition, transmission, infrastructure, highways, bridge roads, et cetera, Europe because of the fiscal state of many of those economies. So a lot of time in Germany, we every year take all of our partners to a three day off-site in an interesting place around the globe. Where was it this year? Three years ago we went to Abu Dhabi. This past January, we were in Tokyo. Japan is an amazing market for us. It's an amazing market for a number of reasons. One, in our original business, private equity, a lot of corporate carve-outs and companies in transition in Japan. The second is major retirement opportunity with the demographics and so much of their capital in zero yielding or low yielding assets, the diversification of how they invest from institutions to retail is a big opportunity for us. And finally, many companies trying to expand beyond the shores of domestic activity. How do they finance and fund overseas? All the Japanese banks are well capitalized. That's not something that they're really prepared to do in size. We're very focused on three or four locations in the Asia region. Japan, Hong Kong, Korea, and Australia are three areas in particular in addition to Singapore where that's how we invest. We're not really an investor in China. It's not really our zip code because of credit and equity in our strategy. We're not really a tech growth investor. But between Western Europe, Japan, and the fourth place I mentioned in Asia, those are where our target is today, away from the US. So Apollo is laid out ambitious growth targets to grow the firm's assets to a trillion dollars by the end of this year and one and a half trillion dollars by the end of 2029. So what's been the most defining factor in reaching these goals and what are your immediate goals for this year? So a lot is focused on the evolution of the fixed income market and how we bring those private solutions to insurance companies around the globe, to investors around the globe. At the same time, there's concern about what's going on in the global wealth products. So we have a diversity to our business. Second big area is retirement solutions. Certainly, the business of a theme today, we bring on liabilities in four different channels, retail being the largest, but pensionless transport is a big growing area. So feeding the retirement channel with more solutions, whether it's guaranteed lifetime income or a variety of those products, huge focus. And as well, we've always maintained that the big challenge is not the AUM growth, but it's the origination sourcing the great products. So we're very focused right now on these periods of dislocation. The headlines would tell you that it should be amazing time to put money to work. It's still a bit early. The dislocation has not really hit the marketplace yet. So I think if you say what's our goal for 26 fixed income replacement, focusing on retirement solutions, focusing on the public private convergence, and a variety of ways for us to partner with traditional managers. Those are the four big drivers for us. As you grow and as you scale the business, how do you preserve the firm's investment culture while growing in complexity like you have? I think we're a very flat organization. I noticed here a Goldman that on the executive floor, a lot of the executives moved down to the trenches, if you will. We've done the same thing at Apollo. I'm on nine. So with Scott and John Zito, Mark is up on 12, but we're in the trenches with all the folks. So for us, a tremendous amount of time on the 200 partners and reinforcing culture and the one Apollo and the clean sheet thinking. And the ability to really have, get at the issues, this whole intellectual and subordination. But really comes down to culture. We carry a big stick, but we don't want to turn into a too large of a company. And so maintaining a very flat open organization, having access to senior people, that casual collision in the cafeteria. Those are all really important aspects of our business that we want to make sure that folks who come in, we spend a tremendous amount of time on onboarding. And really not only meaning everybody, but really understanding the lore of the place, what got us to this. Decisions we made, proactive for the positive and proactive, making sure we didn't make the bad decision. And you're never perfect. But really just culture, eat strategy all day long. We want to do both very well. But if it's one, we have to be really strong on culture. Try people are there, what the objectives are, how they work as a team. And we've had to really evolve this firm. And we want to maintain that great investment DNA, but infuse it in this one apolamentality of the open toolbox and solution mentality. Yeah, I'm smiling because Mark told me about a couple years ago about the mandatory meeting. He had a 4.30 AM. That's right. That he sent out to a lot of your senior leaders. And the message said, no, this is not a mistake. That's right. And there was no Zoom. You couldn't like dial in. You either showed up or you didn't. I thought that was fabulous. Yeah, I think again, we're fortunate with the size of the Apollo asset management right now, 3500 to the 5,000. The partners are very visible. We still can know, intimately, all 200 partners. And it's how you communicate and gauge. And again, we're in an incredible time in the global markets. If you're not excited about the opportunities, but also aware of the challenges, you're in the wrong industry, we feel we are unbelievably well positioned right now. But it's a constant job to make sure that we stay in our lane and focus down what we do and what we do best. So outside of the office, you sit on the board of trustees. of your Amamada Duke University and are also involved in several non-profits like the partnership for New York City and Bridge Golf Foundation. So how do these commitments shape the way you think about leadership and responsibility? I didn't grow up in New York and I've been in New York now for 40 plus years. I certainly went to Duke and I love to play golf. So I want to have, it's an obligation of all the Apollo partners that to be involved in some type of philanthropic or community activity. For me, I feel very fortunate. When I started here, I would never have expected to be the subject of a podcast on great investors. So thank you, but I think it's just a responsibility. I love New York City. I love golf. I know the opportunities that it's open for me and it's just an embedded obligation that I think it's from one where I really, it's a great appreciation. There's obviously the financial contribution, but also a little bit of time and I think it makes you better at your job. I really do. I think if you have that kind of balance, whether it's kids, athletics, family and these type of activities, these are incredibly demanding, but there's got to be a reason why you're doing it. And there's got to be a little bit of a North Star and I get a kick out of being involved in those three particular activities. I think it's very important for New York right now. Partnership of New York is really important. It's a great city. We got to keep a golf for the next 40 years. If not longer. I agree. It's not longer. So one fun fact, I hear you keep bees. I do. How did that start? I played a lot of golf and I was playing golf at a golf course several years ago and I noticed I'm one of the fairways on the side was a bunch of bee hives. And it just so happened that the fella who was cutting for me, his father was a beekeeper and he had become a beekeeper. And I asked a bunch of questions and then the next year we installed two bee hives at our home out in Southampton. So we produce about 50 pounds a honey a year, Z's bees. And if I wasn't Z's bees and my daughter is an artist so she did the label. But if I wasn't doing this, I'd probably I've always wanted to have a farm and to grow things. I'm not a ton of time in nature, but I like to spend a little time in nature. So yeah, that's Z's bees. I noticed you asked for some honey this morning. I did actually. I think it's good for you. I'm trying to be healthy. Okay. But I thought if you weren't doing this, that you wanted to be on a fishing boat. Well, I do. I always tell all the kids who were starting in Apollo. I did not go through a training program. I call myself not a rose scholar, but a scholar of the road. I learned a lot on a fishing boat. It was a bit of a brutal job. It was really long hours. I learned how to work. I learned to be self-reliant and it really was for a lot of personal development at that point in time. I did not break the academic records. It undergrad. But for me, that was an incredible time. But I do love to fish and I like to be outside when I'm not in the office. I like to be outside doing something. So I have a lot of energy. I'm fortunate. That's great. So I have a lightning round at the end with. Run through some questions. Just get a quick answer. That's okay. So what do you think is your greatest dream as an investor? I think it's to maintain a very calm approach in heated moments. I try to avoid all the emotional baggage and just try to decipher things that are really complex. I don't need all the information and I'm able to really process things pretty quickly in moments of stress and anxiety. Keep calm. Keep calm. Equanimity. Exactly. All right. So what's the best piece of advice you've ever received? The best advice I ever received was from my father who had an expression two ears and one mouth. Use them in that proportion. And I've always used that. I've always been a good listener. I think listening is an underutilized skill. Whether it's with clients or with partners or with tough conversations. Try to listen more. I think that's a great skill that I always take on my father and I bring to the business every day. I like that. Which investor do you admire most? Well, I'm at Goldman Sachs. I've got to say David Tepper. I look at investors as great analysts or great market understanding of trading and market dynamics. And I probably put David at the top of both of those. His analytical mind and his ability to break down really complex situations into the most basic simple elements. He and I still stay in touch. We talk about markets and opportunities. But I've probably put him at the top of the heap. Okay. I want to hand on a high note. Yeah. So what are you most excited about in the world right now? Yeah. I'm excited about the growth opportunity and the environment that AI is going to create. I think that we've heard all the doomsday stories about employment and others. But I think it could be a great equalizer in terms of talent in terms of education in terms of insight in terms of science. So I think the fact that I'm on the outside of that helping fund and finance and roll that out. I'm 63 when I think about the last 40 years and all the technological advancements, globalization. I think well by no means is the world a perfect place. We've made a lot of progress. And I'm excited by the future. I feel as I said earlier, excited about the firm and my role. But being able to come in here and navigate the growth of the future I think is an amazing opportunity. Keys we still work in every day. It's great. So thank you, Jim. Fascinating discussion and appreciate you being part of our show. Big fan of Goldman Sachs. And I always enjoy spending time with you. So thank you for inviting me to this great podcast. It's great. And thank you all for listening to this episode. 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