Scott Kleinman – Apollo's Integrated Alternatives Platform

As the whole financial system started coming unglued banks wouldn't lend to other banks the ability to obtain liquidity became problematic for companies for banks for other things we were able to approach banks and by tens of billions of bank debt at a time at deeply discounted prices we started accumulating enormous amounts of corporate debt not all of it was distressed it was just the seller was freaking out the markets were freaking out so we're buying good paper at discounted prices at that moment it became clear to us that the provision of capital to levered companies is the other side of the coin of providing equity in leveraged situations private credit and private equity were two sides of the same coin we were the first folks to come out of the GFC saying well we should have private credit business and a private equity business under the same roof I'm Ted Cites and this is capital allocators my guest on today's show is Scott Kleinman co-president of Apollo asset management Scott joined Apollo in 1996 as its 13th employee and has spent nearly three decades helping build the firm into nearly a trillion dollar alternative asset manager and retirement powerhouse our conversation traces Apollo's evolution from a value-oriented private equity boutique to an integrated platform investing across the capital structure at scale we discussed the firm's core philosophy of excess return per unit of risk it's post GFC expansion into private credit and retirement services and why origination and not capital has become the key constraint on its growth we also explore Scott's transition from dealmaker to firmwide leader touching on culture, incentives, communication and governance we close with Scott's perspective on today's credit environment the convergence of public and private markets and the risks and opportunities shaping the next phase of alternative investing before we get going have you noticed that airline travel takes a lot longer these days security lines go on as far as the I can see and that's even with pre-check clear or the pre-check clear combo and flights seem to get delayed regularly for no apparent reason well the next time you have even an inkling of a delay and long before you have to board, de-board, board again and sit on the tarmac for an hour before you leave might I suggest you fill that idle time with successive episodes of capital allocators by the time your plane leaves you'll have gotten through at least two or three amazing episodes and probably made friends with your equally frustrated neighbor in the seat next view who may not have had the benefit of listening until you tell them to make a new friend productively pass the time and find your way around the world smarter than you started thanks for spreading the word capital allocators is brought to you by alpha sense alpha sense connects and accelerates every element of your research process and I'm excited they chose to be our lead sponsor this year one of the hardest 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with scott climate scott thanks for joining me my pleasure great to see you why don't you take me back to your background and what led you to come to appala sure so graduated pen morten ninety four like most warton grads at the time went to Wall Street ended up at a place called Smith Barney back when there was a Smith Barney what was interesting about Smith Barney is they were one of the few firms at the time that had a dedicated group to financial sponsors I luckily joined this group and got to know a number of the players back then this is nineteen ninety four private equity was not the military industrial complex that it is today it was really a cottage industry private equity probably represented less than a half a percent of gdp versus the ten twelve fourteen percent that it is today I was in this group that got to work with a lot of different private equity firms the appalo tom lee kk r forceman little blackstone and I got to know the appala guys they would request me and I would work on their transactions over and over again came to like them one day I just got a call out of the blue saying hey we haven't hired anyone in a bunch of years would you like to come here I said well I don't know let me go ask my boss well I had two bosses at the time one was Michael Klein and one was with parat both of whom have gone on to incredibly storied careers they looked at me they said sure there was no recruiting process the way there is today for the industry of all the shops I worked with at the time like the way appalo approach investing I like the people I like the creativity of what was going on there after this exchange I joined that was January of ninety six I worked the whole year without really knowing what my compensation was going to be I came and figured I'd get a bonus at the end of the year and the rest was history what was appalo like when you joined it was fascinating today we're here in nine west we're about five thousand people globally we've got 15 16 floors in this building and 18 offices around the globe back then we were half a floor on sixth avenue we shared the floor with the travel agency that takes you back to what the mighty private equity industry and the mighty appala was I was the 13th employee we had a handful of folks in New York and a handful of folks in LA and that was the extent of appalo what we were doing was really interesting stuff it was very creative structured investing the reason we have the name appalo relates among other things appalas to God of healing we were formed five years earlier from when I joined out of the ashes of the SNL crisis to pick up the pieces of companies bring capital to companies that needed restructuring that needed healing that's what appalo did we looked for off the run situations where we could bring our financial engineering and our knowledge of business to try and create value with companies there's a big journey from there 29 years ago to here today I'd love to break down the most important milestones over that journey you start with healing broken companies what was the next iteration from that boutique strategy with 13 people to whatever the next important leg in the stool was for appalo I would say from 1990 when appalo was founded or 96 when I joined we had just raised our third fund it was our first institutional fund our prior two funds were largely the capital of crediting a it was a $1.3 billion fund which made us pretty big for the time from there through 2007 2008 prior to the GFC this was about continuing to bring our brand of private equity to the market and find interesting deals that fit the mold of what's an appalo deal we had a core philosophy back then that still holds today not just in our private equity business but across the whole trillion dollars of appalo platform which is value orientation this concept of excess return per unit of risk be prepared to be contrarian of everybody's digging if you have a viewed be comfortable zagging and be prepared to invest up and down the capital structure just because we're a private equity fund doesn't mean we only invest in equity at the time it was a pretty novel concept that sometimes the best risk return in a company is not the equity it could be the preferred it could be the debt of a company so be prepared to express that that model worked the value orientation which was what the whole industry was all about at the time industries clearly changed since then but that strategy allowed us to continue to be successful and raise successive funds delivering excess returns sitting here looking back our private equity business so that strategy worked that was the first phase of appalo which is master the art of private equity in the style of investing that I just described was there a deal that you remember and hold out as notable in some way for both your career and what transpired of appalo in that early phase I started out doing a lot of cyclical industrial deals working on a lot of chemicals metal and mining forest products energy other industrial manufacturing businesses one of my favorites at the time was a company called compass minerals compass minerals was the carve out of a salt business from IMC global the agricultural company that got acquired many many years ago it was a salt business mind salt but it was a sleepy business that people didn't really ascribe a lot of value to we bought it at under six times enterprise value to EBITDA but because of the nature of that business much of its business went into highway salt you were able to scale the business it was a surprisingly more stable business than you would have thought and turned out being a phenomenal investment for us over a 5x investment in what is just a sleepy little corner of one industry that's the type of deals that we did and we did really really well finding these underloved companies running them better eventually taking them public in that case telling the story better explaining to investors why it actually wasn't exciting business bringing smart capital structure smart financial engineering decisions to it as well and creating a lot of value for our investors in your first decade in Apollo what were the skill sets that allowed you to succeed I came out of a bank and this is probably true today most banks you look around there's 10% of the folks you see and you're like wow these are really really smart people there's 50% of the people there you say how are these people working then there's that other 40% that are smart people but have more reps than you do but quality people well when I get to Apollo Apollo was the top 1% of that top 10% it was incredibly talented people it's funny for all of Apollo's historic reputation of brosk sharp elbows what have you the most genuine group of people really kind totally family oriented but quick studies people are happy to explain something to you once but you better get it after once being a quick study being creative being invented it was not LBO rinse repeat LBO rinse repeat every deal was a new adventure it was structured differently where is that best risk return what's the most creative way to structure it what can we do to bring value to the table that creativity was important not being a linear thinker really being able to flex on the fly was valuable the culture of the firm at the time it sounds like there may have been a disconnect from your experience and as you said the brosk reputation on the outside what's your sense of where that disconnect took place part of the early days of Apollo was when I talk about investing up and down the capital structure sometimes that brought you into distress situations where you were buying the debt of a company and then working with that company to restructure it either in quarter out of court that's a rough and tumble business the folks who play in that space develop a reputation of boxing gloves and what have you for a time to be honest that's not a bad reputation to have when I would show up to a bank meeting and say hi I'm Scott climate and I own 30% of your bank debt I'm from Apollo that carried some weight that actually helped it was around that time frame where it started becoming clear if we wanted to keep growing and keep being a bigger part of the financial system that wasn't going to work you can only do that for so much we started evolving inside the tent it was an amazing place to work it was an amazing group of people that cared about each other I joke in those early days I went to more weddings bar mitzvah's embraces than probably any other phase of my life because that's what we did with each other was a very collegial organization so after that period of time the firm is effectively a boutique private equity firms sounds like series of funds when did you start to evolve and say we could do something more or something bigger that was the gfc the financial crisis the financial crisis opened our eyes to a lot of opportunities one we had raised a fund right at the beginning of 08 so an unbelievable opportunity to deploy capital at either good valuations or in distress situations where you could buy amazing companies companies that Apollo never could have acquired at unbelievable valuations that was a real game changer for our private equity business really the culmination of all the hard work over the prior 15 20 years it also opened up a couple of things when I said how we think about investing in different parts of the capital structure as the whole financial system started coming unglued banks wouldn't lend to other banks the ability to obtain liquidity became problematic for companies for banks for other things we were able to approach banks and buy tens of billions of bank debt at a time at deeply discounted prices we started accumulating enormous amounts of corporate debt not all of it was distressed it was just the seller was freaking out the markets were freaking out so we're buying good paper at discounted prices and at that moment it became clear to us that the provision of capital to levered companies is the other side of the coin of providing equity in leveraged situations private credit and private equity were two sides of the same coin we were the first folks to come out of the gfc saying well we should have private credit business and a private equity business under the same roof that was step one saying wait a minute there's a huge market here that we can start playing a relevant role in regulation only help things move in our favor as regulators were squeezing banks to get out of certain businesses lower their leverage raise their solvency one of which was lending to small and mid-sized companies because it took a lot of people on a lot of labor in the ROE wasn't that great for them but those companies still needed capital Apollo was able to step in and we were one of the first to step in and be able to provide capital on that side a corollary to that that we saw coming out of the financial crisis was in the insurance industry insurance is a big umbrella that covers a lot of different businesses under the term insurance your car insurance your home insurance your life insurance are very different things we found one corner of the insurance business called guaranteed products annuities where it's the business of you give me a dollar and I agree to give you a fixed return over a period of time to help you save for retirement typically but for lots of reasons and they give you your money back there's typically some sort of life insurance component attached to that but that's very hedgeable with the end of the day it's a spread lending business and Apollo happened to be really good spread lenders when the gfc hit you had a bunch of insurers who had been playing duration mismatch games rates had been stable for so long that these companies were making long-term promises to policy holders but funding those with assets that were relatively short term when rates went from four or five percent to zero and then stayed there it put a lot of pain in that guaranteed products business but Apollo saw a couple these and said we can come in bail a couple of these out we started building this business we started figuring out wait a minute we're really good at this we're really good at spread lending we can run these businesses very efficiently that was the beginning of another aha moment I'd love to say we knew it was going to turn into the five hundred billion dollar business it is for us today but no it was an opportunistic trade at the time that little by little we started to figure out we were also really good at and it married well with the lending business because an insurer unlike a hedge fund is a regulated business I can't say great I'm gonna take your premium dollar and put it all in private equity and capture that delta for myself I need to put on a risk weighted regulated set of assets and that is mostly investment grade assets we had to figure out how do we earn excess return in double a and single a and triple b which no one in the alternatives industry was thinking about at the time that left the space wide open for us to be able to go do that left to double click on each of those even though they tie together on the credit side when you first started hoovering up assets in early oh nine where did you put them at the time we basically put it anywhere that we could find capital we started with deeply distress assets would fit squarely into our private equipment we had a large private equity fund at the time they would just been raised so basically undrawn that was right down the sweet spot right down the fairway for Apollo as the opportunity set continued to grow we had lots of investors saying I see this opportunity is not just a flash in the pen this is huge who knows how to deploy capital in this environment Apollo does folks were coming to us saying can you manage this pool capital for me lots of institutional investors started showing up saying we don't know how to do this can we give you capital to go do this we started raising SMAs other pools of capital to be able to take advantage of that opportunity and then on the insurance side as this grew you mentioned you have a lot higher quality credit than the distress situation high yield situation how did you think about adding excess return in those different tranches of higher grade credit that's a great question and it's been a 15 year journey of us getting better and smarter at this to give you an example when you write an annuity at the end of the day the absolute rate environment is not that critical to us because we're in this spread lending business you're typically giving the whatever base rate is plus or minus to the policy holder you give me a million dollars I give you back a fixed return for 8 10 15 years I need to earn call it an extra 150 basis points for overhead and are we and I need to do it in a way that's 90% investment grade if I just went to Deutsche Banker Goldman Sachs to their trading desk and said give me IBM bought all the traded IG stuff all that excess return is going to be squeezed out of that by the time I'm showing up at a bank's desk to buy that we had to figure well where can you find excess return in the investment grade market we came up with three ways you could do that you could take more credit risk that's how you get more spread that may be good for a hedge fund but that's not good for an insurer to you can play duration arbitrage which is how these companies got into trouble in the first place we said no way we duration match our assets and liabilities extremely carefully because we do not want to be in that situation that when the liquidity dries up all of a sudden we're upside down we figured out there's a third way which has to do with duration we have this secret asset on our balance sheet called duration when we have a weighted average eight or nine year liability that gives us enormous flexibility unlike a bank that has mostly overnight deposits we have this super long liability that generally speaking can't be redeemed can't be called it's there so that allows us to take either more complexity less liquidity as long as we like the credit underwriting as long as we like the underlying risk we can do bespoke things and create excess spread that way that aha moment was huge and that's been the secret sauce that has allowed us to do what we do we develop two large lines of business that got us there one is on the asset backside when you make a asset back loan so fleet finance rail car finance aircraft finance trade finance warehouse finance it's not about two guys in a dog making a loan you need specialized origination where are you finding equipment finance customers specialized underwriting how do you underwrite a rail car and not just one rail car thousands of rail cars and then special servicing these things they're coming there going how do you process all that it's a different business and you're getting paid a premium for that type of specialization to the tune of a couple hundred basis points over the single a double a triple b corporate cost of capital that company is we set out to either buy or build these businesses across those different categories and that's built up to be a very large business for us it worked out well that at the time going back to the regulations I was talking about regulators were asking banks to trim down their balance sheets shrink their footprint a lot of these businesses used to live on bank balance sheets we were able to go lift out whole businesses from banks because they were getting out of these to a bank lower ROE business to us exactly what we needed type of business we have spent the better part of the last decade building our footprint in this category that's the asset back category today we are the undisputed leader in being able to provide that not just our own insurance balance sheet but to other insurance clients to other third party credit investors who now have seen this as a really attractive less correlated credit class the other place I mentioned we had two categories the second one was what I would call private IG private IG may sound like an oxymoron but private IG is going to big blue chip corporate issuers and saying we know you can access the public bond market and that's going to be your lowest cost capital to go raise money to do whatever it is you need to do but if you want any structure that market is very rigid it comes with a certain form of indenture issued out of a certain rated entity and if you want any flexibility you can't do it there so then your only other alternative is equity which is super flexible but expensive we showed up and so we can spoke structure some financing for you we can do it in a way that meets whatever your specific needs are we can do in a way that gives us the protections we need but we can also do things put other types of provisions maybe we can structure in a way to get you partial or full equity treatment maybe we can do it down at a subsidiary where you don't currently issue and so you're not able to issue IG debt into the public markets so do lots of creative things and to do it for a couple hundred basis points more that's a pretty flexible powerful tool for a big corporate we also had another fortuitous event which is the global industrial renaissance we're in a point in the CapEx cycle like we've never seen certainly in my career where companies have to spend so much money between the energy transition the digital transformation the re globalization of moving assets around given the new world order companies have so much CapEx to spend they can't just tap the public debt markets or the account they need in all of the above strategy this is very timely going to company saying issue what you want out of the public debt market but let us also give you things in scale and because of our scale we're not showing up at 200 and 500 million at a time we can show up at three five ten twenty billion dollars at a clip and speak for that level of capital to be able to do that with big IG counterparties that was the unlock for us these two categories that has given us a huge advantage and a huge leg up in building that business had you go from the idea for these two businesses as a great funnel for the asset side of the insurance balance sheet to building them some trial and error it starts with having a vision of what it is you need and then taking a long journey but starts with the first step I'd love to say it was more complicated than that but it was figuring out that we were going to have to build something completely new because there was no such thing as alternative IG there was no excess return in IG in any organized way so how are we going to go out and find that it was then seeking out these different platforms that would give us we call it all origination it's funny we started talking about the need for origination five or six years ago where we started talking to our public investors and our own employees the biggest constraint on our gross was origination the whole industry thinks in terms of capital formation I just got to raise more capital and I'll deploy it we flip that on its head and said no the limiter of our growth is not capital we've never had a situation where we've had good ideas and haven't been able to find the money for it the real limiter is the good ideas we have to keep expanding that footprint for the different categories of risk and return how do we find the best ideas how do we keep doing that and creating that value that's really been the big differentiator for us versus what I would say the rest of the industry the other thing that has sharpened the senses is once we got into the insurance business that moved us from being a pure third party asset manager to managing our own money that changes the way you think about things will end the year performer for an acquisition right around a trillion dollars half of that 500 billion of that is our own captive insurance capital one out of every two dollars we invest is for our own balance your own company that thinking like an owner really does change things because now when I go to a third party investor a client it's not hey I have a new idea would you like to invest in it it's I have a new idea that I'm investing in would you like to invest alongside me that changes the whole dialogue with clients and it changes the way we think about risk and return we now are the largest investor in basically every product offering we offer out we've had lots of situations over the years where there's an interesting asset class that I can go raise money in but if we don't have a home on the apparel balance sheet that thinks that's an interesting risk return I'm not going to go out and raise that money because that may be right for the asset management business but that's not right for what we're trying to do in the big picture we are long term greedy not short term greedy I think too much of the asset management industry is short term greedy what can I sell tomorrow as opposed to what's the right thing to be doing over the long term where am I actually creating value on the margin what's an example of something you looked at differently because of that dynamic where so much of the capital is on your own balance sheet up until 2022 from 2010 to 2022 risk free rate went to zero and basically stayed there that led to a risking of investors if you had a fixed return you had to achieve you couldn't get there in the old way of investing you had to keep creeping up the risk curve we said that's not always right one example was the high yield market in December of 2021 the high yield index was four and a half percent when I started doing buyouts 30 years ago if I got my bond deal done inside of 12 percent I considered that a good day at four and a half percent for junior capital in a levered capital structure that wasn't good risk return if you looked at our entire footprint at the time we had virtually no high yield on the Apollo platform now could we have gone out and raised high yield funds yeah absolutely but it wasn't the right risk return similarly the real estate market over the last 40 years commercial real estate had basically gotten ground down to the point of being a proxy for IG bonds in 2021 that the cap rate on any commercial real estate asset was probably 3 percent things were getting priced in the twos so we're sitting here in nine west right behind us is the plaza hotel I remember when that was being sold we could have bought that like a three and a half percent cap rate for the equity of a hotel that needed to turn around or I could have gone out and bought PNG bonds for 3 percent it didn't make sense we had ground our real estate equity business to niche boutique things at the time because we didn't love the risk return profile now we had investors who would have given us money to grow a real estate business and some of our competitors grew massive real estate businesses in that time frame but it wasn't good risk return on our insurance balance sheet we had zero real estate equity at the time which is a typical for a big IG balance sheet like that we put our money where our mouth is from what we believe in obviously with rates moving and cap rates moving we this year went out and bought a 50 billion dollar real estate asset manager called bridge and that's now an area we're starting to redirect and lean into because the relative pricing has reprised there and it's certainly a lot more interesting and you look at that insurance business today so 500 billion dollars on the balance sheet 90 percent of it is some form of IG risk what do you do with the other 10 percent 50 billion still big number rough round numbers about 5 percent would be sub IG credit and about 5 percent would be traditional alternatives private equity infrastructure those sorts of equity of other vehicles in structured equity hybrid equity things like that so we take a step back from the evolution of the products over time I'd love to dive into your roles going from a deal maker to a leader of the business but what point in time did you leading the teams at Apollo and working on all these strategic initiatives compared to the day-to-day deal making after the GFC as Apollo and as me personally did some of the best deals that I think we've ever done as a firm I guess it was about 2010 the founders asked me to become lead partner for private equity the firm was starting to grow for the first time into these other areas founders were spending more time in other parts of the business for the first time the PE business needed a leader other than the founders that was my reluctant first step into the land of management I was able to be a player coach at the time still one leg in the deal business one leg in the leadership business and I played that role until about 2018 so from 2011 to 2018 at the end of 2018 the firm had continued to grow and scale in a way when myself and one of my colleagues Jim Zelter we were elevated to co-president across the whole firm looking after all of our revenue generating businesses would you learn about leadership and your style of leadership in that journey I knew I wanted to be in the deal business I never thought about being in the management business I learned on the fly we didn't have a management structure this wasn't GE where we had a management training program we were growing so fast and we were all figuring it out largely at the same time I was always a lover of war movies and read a ton of history the classic battlefield general who leads from the front was something that resonated with me I believe never ask anyone to do anything you wouldn't do yourself demonstrate the type of behavior that you want your teams to have and the beliefs and culture that you want your teams to have because organizations do reflect the cultural norms of their leadership normative behavior if you abuse of in bad behavior well that trickles down if you lead an organization with intellect and curiosity and lack of defensiveness and respect then the organization will generally follow that that's been the biggest learning along the way the biggest change over the last five years one of the things that was always ingrained in a following quite frankly the industry private equity is a secret of business information was power information was kept very close to the vest the less the outside world knew about what we did the better we had grown up in a very non communicative way both externally and internally when private equity was a cottage industry it didn't really matter but by 2020 private equity become a meaningful part of the financial ecosystem by the way businesses like Apollo were way more than private equity at the time we were in insurance we were in credit we were touching more of the broader economy we couldn't live in that gel anymore so communication which was new skill for all of Apollo we had to do a much better job there communicate our story externally and communicate our story internally we weren't thirteen folks sitting on half a floor on six they haven't anymore we were thousands of people spread around the globe having a articulated strategy that was clear for our employees to understand where were we marching where were we going why were we investing in this set of businesses and why were we cutting back on those why were we leaning in here employees needed to understand that that was the biggest revelation as someone who grew up keeping it close to the vest for many years that's been the biggest change it's been a game changer the other thing I'd add there is we had to figure this out I'd say more urgently than almost anyone because when we entered the insurance industry insurance is a different business than private equity insurance exists by the grace of your regulator today we touched probably twenty five for thirty regulators around the globe because insurance is a three four hundred year old industry we were doing things differently we said we have a better way to do this and we want to show you that we had the find a way to be able to communicate effectively to our regulators around the globe so that they initially be skeptical of what we're doing but take the time understand see that we're not financial guys coming into line around pockets but we are here on behalf of the policyholders but we're doing a better job than the way it was done in the past bringing those folks along as well all of this forced us to hone our communications skills and tell our story in a better smarter way we're going to take a quick break in the action to tell you about private equity investing at Brookfield with one hundred plus years its owner operators and a one trillion dollar ecosystem Brookfield focuses on essential industries and business services that help shape modern life yet are often overlooked it takes independent vision to see their potential perspective to acquire with precision and expertise to build lasting value it takes industry learn more at Brookfield dot com slash it takes industry and now back to the show once you realize that was going to be an important thing to do it sounds pretty straightforward we're just going to tell our story internally externally what did you learn along the way and what stumbles did you make in trying to make sure you're communicating in a way that everybody got what you were trying to say just because you believe you have the right answer doesn't mean that everybody's going to get it right away or even agree with you we're blessed that our CEO Mark Rowan is one of the greatest communicators certainly in the financial industry today sets a tone for the whole organization that has made it easier to drive in that direction you can look at a lot of our competitors who tell a fine story but it's not the same I really do believe we do a better job a more authentic job that is with thing that we've learned is anytime you're trying to tell your story with a spin or with a pitch or you're out there just hawking product it doesn't really work as well as you think we've learned along the way to be incredibly authentic why are we doing what we're doing tell it like we see it the good the bad and the ugly where we've made mistakes fast up to the mistakes and talk about how we're fixing it and that has worked really well other things with the growth we were a 13 person organization not that long ago in the grand scheme of things managing 5,000 people across almost two dozen offices sometimes you grow too fast you got to pull back you got to assess what's working what's not and then make adjustments one of the things Apollo has always done well and this goes back to the days when we were a small group sitting around an investment committee table we made a big deal about focusing on the deals that go wrong private equity guys only like talking about their winners when I was leading private equity we would have what I'd call near miss review not just the deals that went wrong but the deals that went well but but for the skin of our teeth could have gone the other way what did we miss and what can we do better but Apollo you historically didn't get in trouble for doing a bad deal you got in trouble for not talking about it 12 18 24 months before you hit the wall because we've all been there no one bats a thousand bringing your partners in talking about what can you do how can you restructure the dead what can you do operationally getting others and their experiences involved is absolutely critical we've always done a better job assessing how we can be better has always been a core part of the Apollo culture when you start with 13 people the top 1% of the top of what you saw at banks you'd like to think the 5,000 or still that top 1% but inevitably when you grow it's hard to have that same level of individual excellence how do you think about scaling the judgment and the experience that came from a smaller group of people to a much larger group of people that is the rub that is the whole shooting match we have two fundamental types of businesses we have businesses that make a small number of decisions each year that have very consequential outcomes and then we have other businesses that make thousands of decisions a week and any one of those decisions is not going to have the most consequential outcome the type of judgment and type of assessment you need sitting at top each are different you need that judgment and that assessment to go way down in the organization in the former the latter you need the right people with judgment sitting on top making sure the guard rails are right and the processes are right and those other businesses are much more about execution it's the sourcing the flow and finding the right types of situations for that small group of underwriters to make the assessment of what fits in the box and what doesn't fit in the box ultimately we want the top of the top all the time everywhere because it's not just about judgment it's about culture and fit and bringing the right ethos to what we do every day we're a business where your assets walk at the door every night I used to say in private equity those are the hardest types of businesses to go by I'd much rather by business where your physical plan your fixed assets are just there businesses where your people walk at every night and your assets are your people that's a lot trickier and you're much more reliant on the business model and the leadership to get it right in order to do that you have to get incentives right it's tricky enough when there's a small group of people in a pot of carry to go around how have you thought conceptually about how you incent your people so that they're aligned to the way you want and they're rowing in the direction you want you're absolutely right fortunately for us we went public a decade plus ago the Apollo stock is an amazing tool to do that we pride ourselves on running an integrated platform the financial industry is very asset class focused this is my asset class this is your asset class this is the next asset class the whole industry was built on living within those asset classes we've created enormous value by finding the spaces in between and connecting those dots bringing the right type of capital for the right type of risk return in order to do that you need the whole organization rowing together we call it our integrated platform that takes a lot of work and a lot of effort but when you go back to incentives to make that work how do you do that well for one goes back to everybody's bonus to some extent is based on a qualitative where they good Apollo citizen to every employee at Apollo gets a portion of their comp and Apollo stock and the stock only goes up if all the ships are rising not if some and not the others most importantly the reason this integrated platform works is because I spend 10% of my time helping you on your deal in some unaffiliated fund make your deal better and you spend 10% of your time helping some other and someone else helps me make my next deal better that fly wheel is what keeps this working if all the benefit went from this direction to that direction I don't care what the financial incentives are people with their other hands up and say I'm not doing that but because the system is a fly wheel and our people see the benefit flowing in all directions that's what keeps the system going the remuneration's immense at all together in the scheme of things in private equity all alternatives there aren't that many companies they're public you mentioned the value that brings in the line people and competition what do you see is those strengths and then some of the weaknesses of being public and why there aren't more companies who have done it it's different now than it was a 12 or 13 years ago when we went public it's tough to be a public company today we just got into the S&P last year to be a successful public company you need a big diversified footprint you need a scale that's relevant you think about the concentration in the public equity markets today don't even get me started on the brokenness of the public markets need a big diversified business single category asset managers you're generally just not going to be of a scale that's going to be relevant to be a five seven ten billion dollar equity public company it may not be worth it for a lot of folks at this point you're never going to get the interest level from investors you need the breath and scale to be able to do that now the benefits it's been an amazing unifying currency for us it's been an amazing disciplinary tool to make us run a more efficient better governed company but it comes with cost running a public company and the legal and compliance and all that good stuff that you need that's not a small operation the one thing that I would have thought we would have done more having a currency for acquisitions was one of the reasons we went public it hasn't materialized in the way we would have thought at the time we tend to do a better job building our own businesses then going out and buying huge asset managers the asset management industry is fraught with bad M&A what's hard to merge to completely disparate cultures tuck-ins are fine but bringing in big stock mergers are tricky in the asset management industry where your people are your asset that's the ebb and flow at this point in time it's a scale question there's only a handful of alternative asset managers that have the scale to go public and the vast majority of them are public already given that challenge in M&A you mentioned earlier you recently did this bridge acquisition what does it take knowing the challenges knowing the hurdles for you to decide to go out and acquire another sm manager for us it is about a specific asset category specific skill set that we need that is going to either take too long or we're too far behind to go build ourselves but where it's narrow enough and focused enough where we're coming in and we have a high degree likelihood this is going to be successful the hardest type would be for one p firm to go by another p firm there is more disenergies than there's actual synergies and something like that if you look at the acquisitions we've done we've picked up specific skill sets in origination or specific small technology tuck-ins where we either have to go spend it much money to build some internal technology or we've been able to go pick up an interesting startup or things like that that's been the type of acquisitions that we've done you mentioned a couple times different aspects of something about your competition as you think strategically about the business about growth how do you consider your competitors even if you're just thinking the competitors as the other large alternative asset managers in where you take the direction of Apollo we don't spend a lot of time thinking about that we spend a lot of time thinking about where's the puck going and what skills do we need to get from here to there and how do we go build it we've been clear over the last four or five years continuing to scale our origination continuing to scale our delivery to the wealth management side of the industry has been an important piece in the coming years we've been vocal figuring out how we're going to be accessing the 401k market the traditional asset manager so the mutual fund market the ETF market those are some of the places we're going now some of our competitors are starting to go there as well I consider our competition to be some of the larger alternative asset managers but also some of the traditional asset managers this world of public and private that used to be so far apart where public was liquid and safe and private was illiquid and risky well post GFC that's been converging and the way you cut the asset management industry in five or ten years I'm not sure is going to be based on public and private it'll be based on other risk categories but that's not a good definition of what's risky and what's not risky anymore I think you're already starting to see that change by definition you're going to see those worlds start to come together I'd love to turn on your lens as an investor away from the business a little bit and walk through some of the important categories and start with credit a lot of change you've talked about the supply and how you've thought about origination but also in the demand of who is interested in credit particularly private credit as an asset class I'd love to get your sense of where we are in what historically has been a cyclical business moving away from public versus private credit because ultimately credit is credit public versus private really only speaks to who the holder is credit is simply the provision of debt capital the companies the ultimate performance through the next cycle is going to be more determined based on the quality of the underwriting than was this a private credit fund or a public credit fund I know that wasn't the cruxier question but I couldn't miss the opportunity to hit on that you were asking a more macro question where are we in the cycle while I'd love to profess to have a crystal ball we're clearly getting long in the tooth we haven't had a real credit cycle since 2009 the post GFC rates went to zero stayed there the central banks used whatever tools necessary to keep the party rolling from an economy standpoint since then we look like there might have been a credit cycle in covid but guess what within three weeks central banks poured another five six trillion dollars into the capital markets and everything was good again nothing bad certainly from a credit standpoint really impacted things then of course all the fiscal support that has gone on over the last decade as well as just kept the credit cycle going there was a technical reset back in 22 when you pump that much money into a system inevitably inflation was going to rear its head it surprised us that it took so long to show you maybe the resiliency and stability of the US economy but 2022 inflation rears up to 9 10% the Fed had to then go raise rates from basically free to call it 5% we've been drifting back down but inflation isn't gone that caused a reset in pricing but it didn't really trigger an economic slowdown it's pretty remarkable the Fed Jack rates 500 basic points two and a half years ago and the US economy has kept powering on even now arguably some of the policies from the current year on paper should over could have been slowing to the economy that hasn't happened yet and so US economy incredibly resilient which is allowing the credit cycle to keep going clearly you have to say we are late cycle now there's been a reset because when the cost of capital was so low when the high yield index was 4.5% you can put a lot of debt on companies and cover that cash flow as those companies are having to refinance at a higher rate that 4.5% bond is now 7 or 8 or 9% that's going to put a little bit of pressure on things but this is really a function of when the US economy cools off I would have thought it would have happened by now but it hasn't we'll keep cautiously watching certainly in our portfolios we are more defensive our private equity portfolio is more defensive than most of our competitors our credit portfolio is for sure much higher rated much less leverage much less portfolio leverage our private lending portfolio has a fraction of the pick loans or other aggressive things that you see at late cycle than most of the market we've tried to be defensive for when this does roll over but we're not seeing it yet what does it look like internally when you want to make sure in an environment like that that you're underwriting standards are as disciplined or more disciplined because of that defensive posture it's part of our ethos when I talk about the Apollo culture it starts with we are an investors investor we look at investing not as in how do we grow the asset manager but how do we make good defensive investments we are constantly trading the last percent of upside for downside protection across every asset class that we invest in that starts from the investment committee on down no matter what asset class we operate in if we don't like the risk return in a certain area we would sooner not deploy the capital or even give capital back then just deploy in the next best available thing in that asset class that you gave me money for if we don't think it's a good investment because we're putting our own money in it in such a big scale on the equity side of the business and mark has said you don't necessarily see that the $25 billion fund becomes the 50 becomes the 75 becomes the hundred the way the private credit has scaled over time curious why you think that's the case there's only so much you can deploy in private equity when you are making six or eight consequential decisions a year there's only so much capital you can deploy on that basis in the credit business instead of buying a hundred million of this particular bond I can buy 200 million the scalability is always there were 750 billion of credit black rocks what 13 trillion there's just a much more scalable side of the credit business than there is of the private equity business I do think there are other categories of equity that isn't private equity that we're scratching the surface on over time you will see us be one of the leaders if not take the lead in the concept of active management for example when you talk about active managers in the public equity environment trying to beat the long term S&P by 200 300 basis points what used to be possible is no longer possible 95% of active ascent managers don't beat their index because the indexation has become so big a majority of the flows on public exchanges are passive at this point if you're not in 10 stocks if you're in nine of the 10 you can't beat the index it's become really hard but what if we could do that what if saying active isn't necessarily about picking stocks it's about bringing private equity type skills to a more diversified portfolio with less leverage than PEE does involve the risk of loss we think we do a really good job we don't have that often but when you put a decent amount of leverage on a company there's always risk that that equity value goes to zero but what if there was a way to do that in a way that was more diversified bringing the private equity skill set of oversight and management maybe that's what active management means my only point is there are lots of ways that over the next five years we will begin to bring other forms of equity to investors that isn't necessarily private equity i.e. levered equity buyout type capital that gives premium to the long term S&P with more stability more downside protection and equivalent diversification and even potentially a degree of liquidity that private equity doesn't necessarily bring these are the types of things that you're going to see us grow in our equity business over the next five years so help me peek behind the curtain what's an example of what some of those equity strategies might be i'm not really ready to roll out there's still on the lab here you'll have to wait and see one precursor to that we have been scaling over the last several years our hybrid business hybrid is forms of equity that are more downside protected so not swinging for the 20% rate of return per year but low to mid teens net rates of return that give you more downside protection things that look and smell like debt but have enough equity levers to give you higher returns we have built some fairly large pools of capital serving that structured equity market that's one category of that it'll be on the back of that that we grow into some of these other things that i've been alluding to would love to ask you about risks what do you think is underappreciated by the market we have an economy right now that is being extensively fueled by a iqx valuations in the public equity markets are increasingly tied to a handful of companies that have gone very long a i that have made multi trillion dollars worth a commitment to continuing to invest in that there's an expectation of ROI on that capital if those ROI don't come to pass i don't think the whole system is going back but that clearly will have a weighing effect on the markets certainly the biggest hyper scalers will be okay but that cascades down to many many players some of whom have gotten very levered to this there's big and better risk there six months ago no one was talking about this now i think there's a real dialogue it's shaved a little bit off the rose but still the rose is blooming i don't think it's flipped over because i don't think we know yet what the right answer is there's still enough potential optimism to keep the dream alive each quarter each six months we'll turn over another card and we'll see how that shaping up but that's representing at least a couple percent of gdp growth right now that's driving massive investment in infrastructure and chip manufacturing and energy and all of these things it's touching lots of different parts of the whole system on the convergence of private and public securities and particularly in the private equity world there's so much potential demand coming from the wealth channel we saw in the private credit side there's a certain structure general funds that allows some liquidity how do you think about the potential risk of liquidity mismatches working their way into the private equity part of the ecosystem this is something Apollo and i feel passionate about the semi-liquid products coming to market is for a lot of asset categories are really interesting and really good asset class in the credit market for example you could get to a point where investors want a redeem they want their money back they can't necessarily get it they get gated say in a semi-liquid product but credit is inherently self-liquidating weighted average life of about three years eventually if a fund stops taking a new money it'll allow those credit redemption so run off and investors will get their money back in a reasonable period of time you go to the other end of the spectrum and that's private equity we have seen a number of folks bring private equity semi-liquid products to market those things seem to be selling pretty well wealth investors would like access to private equity and that does increase the access and availability of private equity to the next tier of investors the problem is the liquidity mismatch there is even more profound because look at the current p-e environment right now we're going on to year four your five of meaningfully depressed realizations for the market in general put a side note in a poll has had some really nice monetizations but for the industry you ask anyone it's been way below where it's supposed to be and that could go on for a while had there been a huge pool of investors in private equity semi-liquid products and they wanted to start getting their money back or if we hit a downturn now and they want their money back they're going to be stuck for a while we don't think it's a great product so we have decided not to bring a semi-liquid private equity product we have a variety of semi-liquid other products but for private equity we've made the decision this isn't the right product it's not going to give the client i.e the wealth client a good experience in the long run it goes back to being long-term greedy versus short-term greedy i have peers who think will give you the exact opposite argument that i just gave you i guess time will tell perhaps we've missed out on a big business opportunity to pursue this but we're okay with that as a firm we have a lot of other things going on we do have a number of other equity products in the lab that soon enough we're going to be coming out that could be interesting for investors that solve some of these issues that i'm talking about what are you hearing from institutional LPs is you running around the world in general institutional LPs recognize the value of private assets across the board and institutional LPs have been ahead of the curve compared to traditional public investors or what have you on private assets in their portfolio and understanding what private assets can do to help the portfolio and so whether you're talking about private equity a private credit infrastructure other asset categories they're solely healthy demand we mentioned a few minutes ago the private equity cycle being a little bit lower on the monetization side which is put some pressure on certain institutional investors to be able to deploy private equity capital at the same pace because they've gotten a little bit less back that's starting to write itself as portfolios in general continue to grow otherwise across the board the allocations continue to go up in private assets as you look out over the next five in your case maybe 30 years in this business what do you think it looks like it's fascinating the constraint on our business is clearly going to be the provision of good assets good investments if i'm right and that institutional investors are going to continue growing their allocations to private assets and wealth investors are going to continue growing their allocations to private assets and 401k is going to open up to private assets that's a 13 trillion dollar market that has essentially zero private assets in it traditional asset managers i.e. mutual funds ETFs they're going to start injecting some amount of private assets blended into their products the demand for private assets is only going in one direction and that direction may be pretty vertical pretty fast so those operators who can find and get ahead of and continue to generate interesting bespoke investments are going to separate from those who are just buying what's available and that's going to be the difference between who succeeds and can continue to have a premium product versus who is just providing a commoditized product and economics will follow accordingly all right it's got a couple closing questions are closing questions are brought to you by themea for all the private equity managers out there themea is an amazing tool that uses AI to help map the landscape and source private businesses there's nothing i've seen like it it's the third of our strategic investments and i'm sure you'll quickly see why there's a link in the show notes so you can learn more here are those closing questions what is your favorite hobby or activity outside of work and family a couple years ago i started getting into hunting of all things it's something that for the last 30 years i would have loved to have done it's always been an interest of mine for better for worse i married a woman who is virulently anti-gone and anti-killing things for the last 28 years i've suppressed that interest but a couple years ago i turned 50 and i said i'm going to figure this out i'm only in the first or second inning of this journey but i've done it a bunch of times in it is a lot more fun than you would think certainly coming from a small suburban east coast town but it's also given me a real appreciation for the two sides of the gun argument coming from a household that was very rapidly anti-gun now two years into this journey i can totally see responsible gun ownership and responsible gun usage as part of sporting activity is part and parcel of a lot of people's lives so it's a trickier issue than i think folks sitting here in New York think and has your wife responded to that acceptance what was your first paid job that would you learned from it i'll bring us back to the early days of edgemont where we both grew up my first real summer job was working at a toy store in scarzo village you may remember it was called child's play it's no longer there it was a small single proprietorship owned by a fascinating and aggressive woman there were two other older women who worked there and me a 15 year old boy who they shoved out in the stock room for nine hours a day and didn't really let out very often what did i learn from that job i would say physical labor is hard work that there had to be a better way than the hours in the day that you can put in i wasn't against hard work my first job out of college working at smith barney working a hundred hours a week sleeping under my desk two or three nights a week it wasn't the hard work but it was the ability to see the old andru Carnegie i can only do so much based on the labor of my muscles versus if i can get my capital to work for me you can do lots of things and that was the first eye opening moment of that what's the best advice you ever received i'll give you two because they're great and they were life changing one i had just gotten engaged folks around the office were giving me congratulations and a former partner here i'll give them a shout out and the afric said to me i'm gonna give you a piece of advice never tell your wife which china pattern you like until you know which one she likes when i was like okay great thanks very specific but this is one that actually has a lot of personal application a lot of work application we are all type a personality if you ask me the opinion which china pattern to like of course i have an opinion but do i really care at the end of the day if i pick the one that she likes great if i pick the one that she doesn't then that's a half an hour conversation over the same is true and work there's a handful of things that i really care about but if you're going to be an effective manager not micromanage focus on the things you care about let people make the last 20 percent decisions let them make their way on the things that aren't the most consequential that's been a great piece of advice that is shaped not only my personal life but my managerial style the other one which is truly a personal one i was married probably for a couple years it was a Saturday morning i was in the office as i normally was on a Saturday morning we were working on a deal and i was on the phone with my financing attorney we were talking for about 10 minutes and then he said it's got i hate to do this to you but can i call you back either later or tomorrow and i said well sure but what's up it's like well i'm about to go to my son's bar mitzvah i'm like you're about to go to your son's bar mitzvah this is a lawyer who only seemed a couple years older than i was at the time first off why you talking to me go secondly how is it that you have a bar mitzvah age son i don't even have kids and he said he got married young and they'd always talked about kids but they finally just said screw it we're having kids and he said to me you're never going to feel like you're ready to have a kid but just do it because once you have it you're going to wish you did it five years earlier i now repeat that advice to every newlywed couple that i come across because it is so true you just want all the time in the world with your children now is the parent of adult children i wish i had more time with them i just got one more house your life turned out differently from how you expected it to this is gonna sound funny but for the most part it's turned out the way i expected it to i always believed that my hard work and the head of my shoulders would get me to success i never really envisioned how much success or what success means monetarily or otherwise and i don't spend a lot of time dwelling on that went to warden i knew i wanted to be in the financial industry got out of school started down the path and had a vision i was drawn immediately to private equity an alternative asset management was continued to evolve i'm one of these folks that you put one foot in front of the other and you don't think about it too much and you don't really spend a lot of time smelling the roses you just think about what you can be doing next i had a sense i'd be successful and never really put a specific quantification around it just got thanks so much for sharing this incredible success story both your journey and apologize my pleasure was great catching up thanks for listening to the show if you like what you heard hop on our website at capitaliselcators.com where you can access past shows join our mailing list and sign up for premium content have a good one and see you next time all opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms this podcast is for informational purposes only and should not be relied upon as a basis for investment decisions clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast