Receive free Marc Rowan updates
We’ll send you a myFT Daily Digest email every morning with the latest Marc Rowan news.
Apollo reported earnings last week, and CEO Marc Rowan’s statement that “it’s the end of an era” for private equity naturally drew the most attention. But as Sonali Basak pointed out, he also made some interesting comments on personal credit and its increasing role in the financial system.
Some of it is just classic boasting — Apollo is implied to be the Michelin-starred restaurant for personal loans — but most of it is genuinely intriguing. Given Alphaville’s interest in the topic, we thought we’d reproduce the comments in full.
Here’s what Rowan told analysts during the call as part of his prepared remarks, courtesy of Sentieo/AlphaSense transcription services. With our focus:
As I said before, personal loan, those are two words that don’t really mean anything. Personal loans can be investment grade, personal loans can be CCC. The barriers to entry in the personal loan business are either quite low. Anyone with a fund and staff capable of valuing investments can actually get into the personal lending business, as the barriers to entry can be extraordinarily high and a full ecosystem needs to be built to allow you to meet the needs of your Serving customers in a very sophisticated way.
Think about the difference between a hot dog stand and a Michelin star restaurant: both are in the food business and serve food. This is how we think about personal loans and about positioning people.
The financial markets and the financial literacy surrounding personal loans have actually gotten pretty sloppy. What is a personal loan? Well, if we start in the abstract, all that’s on a bank’s balance sheet is personal loans. But mostly markets – market experts talk about private credit. You’re talking about a very small part of a private lending universe that focuses on leveraged lending. Don’t get me wrong, we like the leveraged lending business. Leveraged lending is actually a great business right now. It won’t always be a great deal. It’s a cyclical business with low barriers to entry, but one that can be very lucrative when the time is right.
What we were trying to build is not a single fund, not a single opportunity, we were trying to build an ecosystem. When I think back to the last decade, we’ve invested around $8 billion building 16 platforms. 4,000 people work on these platforms, not Apollo employees, who focus solely on private lending every day. And as you know, much if not most of what they do is investment grade. That’s important because the investment-grade market is at least eight times larger than the high-yield market and eight times larger than the leveraged lending market.
This is a great time for personal loans. This is not a particularly good quarter for personal credit, but a long-term change. Not only have we seen interest rate hikes and regulatory changes and changes in market dynamics, we are also at the beginning of a long-term shift in the way companies obtain credit, and a shift that I believe will continue to gain momentum. To be successful in this market, you need a recurring supply with a unique provenance. In the quarter, we made about $23 billion, 50% of which came from platforms.
[Apollo co-president] Jim Zelter will detail some of these transactions. But alongside the names one typically associates with personal loans, like AT&T, Air France, and Vonovia, borrowers also value security, scope, and speed of execution. In addition to lending, you need an integrated capital markets business. After all, we want 25% of everything and 100% of nothing. Our ACS business, led by Craig Farr, has done an exceptional job expanding the reach of our personal loans to clients and non-clients alike. In fact, this is one of the greatest ways to introduce the firm to people who aren’t yet Apollo clients and show them what we’re capable of.
During the quarter we raised approximately $7 billion of capital from third party insurers and expect this to pick up momentum as the market continues to improve. Traditionally, consumer and corporate borrowing for personal loans, particularly investment grade loans, has taken place through the asset-backed market.
Asset security is mostly private loans. This is a $20 trillion market that we’ve been in for a very, very long time, with over $220 billion worth to date, 200+ relationships. We currently have over $100 billion in assets under management associated with ABF, including $55 billion from third parties.
Most of what happens for us at ABF is investment grade and it is a key driver of our insurance business for Athena and for our third party insurance clients and increasingly also for fixed income replacement for our traditional institutional clients. One of the most important factors in this market is that we are fully aligned with our customer base. We own what they own, at the same time and at the same price. There is nothing that inspires more trust than alignment.
Rowan later spoke more about how “shadow banks” like Apollo interact with the traditional lending industry.
JPMorgan’s Jamie Dimon last month regretted that companies like Apollo were “dancing in the streets” at the moment, but Rowan insisted both parties were dancing together.
I really want to talk about the market environment, specifically the regulatory environment and the environment of our banking peers. In short, we have never had such a cooperative dialogue with the banking system. We have not only developed from a great customer, a partner of the banking system, to a real cooperation partner.
The nature of our business, particularly our willingness to undertake very large, investment grade transactions, has made us an indispensable partner, and indeed a partner of the banking system. While some are talking about this being a great time for personal lending, what has struck me is that there are actually dance moves on both sides, both on the bank and personal lending side, as most banks had an exceptionally good quarter and this also do on the way to an exceptionally good year. We are also very symbiotic. Remember, we want the asset, but not what the bank usually wants, which is the customer. The bank wants the customer and usually not much or any part of the assets.
If I take a step back, the US financial system is the envy of the world. We have raised 50% of world capital. And one reason the world envies us is the structure of our system. Banks have their role and the investment market has its role. There are all types of participants in our system, but the vast majority of these participants borrow short-term and invest or have short-term money for the long-term.
Imagine an open-end mutual fund that has daily liquidity. Lots of hedge funds, quarterly liquidity. Banks, daily liquidity at least on deposits. The ability to bring institutional investors, pension schemes and insurance companies with long-term liabilities or long-term assets into this market makes them ideal partners for the short-term capital of the banking system and mutual funds.
In short, long-term debt is a source of stability and somewhat anti-cyclical to our financial system. It doesn’t matter whether they are in funds that are themselves very stable or on the balance sheet of the pension insurance company. The entire market does not perform maturity transformation on the investor side, does not have access to the Fed window and does not benefit from the US government guarantee.
And in our case, if you look at the retirement services balance sheet, we have more Tier 1 capital and more Tier 2 capital than the vast majority of the top 10 banks in the US. We perform cash flow testing and scenario testing, delivering a granularity to our portfolio that very few, if any, institutions can match. Our balance sheet is significantly better than investment grade than that of a typical custodian.
In short, our model is highly complementary to the banking system. We have never been more collaborative and I expect that collaboration will only increase as regulatory changes gain momentum in the US, Europe and even Asia as the regulatory changes begin.
Below are your thoughts on the private credit craze.
Comments are closed.