Chapter 1: What is the main topic discussed in this episode?
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Apollo Global Management just posted third quarter earnings that surpassed Wall Street estimates as the firm edges closer to reaching $1 trillion of assets. The Apollo president, Jim Zelta, joins us now for more. Jim, good morning. Good morning. Always good to be here. Congratulations. We joked when you walked in, what happens when you hit a trillion? Does Mark run around popping champagne?
How does this work?
Well, listen, as we've said yesterday and we've said before, assets under management are just a great vote of confidence for great performance. And if you deliver for investors over time, we find ourselves that the flywheel of our business is really in place, whether it was capital formation, whether it was origination.
We just find that our business model is really hitting the mark right now and accelerating. And we're very happy with the quarter, but feel very good about the trajectory of the business in front of us.
There's a phrase that you and the team use, we are what we originate. Can we talk about that a little bit more? Sure. Your capacity to scale, can you just flesh that out, how things are tracking at the moment?
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Chapter 2: What insights does Jim Zelter provide on the current state of the credit market?
It allows you to see a broad swath of the economy to understand exactly where the pitfalls may be. Do you find some of these arguments about cockroaches and growing weakness in the economy credible? Or are you just not seeing it in what you're reviewing, even among the things that you're rejecting? You're 15, 16 years in a credit cycle right now in terms of the expansion since the GFC.
You're going to find issues and challenges. In the last five to seven years, you've had companies like SVB and First Republic Bank. And so, yes, these are clearly idiosyncratic. We're seeing a much larger theme of a strong economy. Torsten talked about it yesterday in terms of a K-shaped economy.
We're seeing an administration that's very pro-business, very regulatory-friendly, want to push rates lower. And so all of those things, you will see... challenges in certain companies late in a cycle, but we are not seeing any kind of credit cycle on the horizon that's waning anytime soon. We are not seeing it. Are you seeing a scary allocation of resources?
And I say this given the fact that it has been very top-heavy to AI-related endeavors. Deutsche Bank this morning, a story in the Financial Times, looking for ways to hedge against some of their data center loans because they are worried about the overall concentration, the risks that you're seeing overnight.
Chapter 3: How is Apollo Global Management performing in the credit market?
Are you staying away from that? Well, I think what you're talking about is whenever you see a massive infusion of capital into a sector, dark fiber, E&P shale in the US, software enterprises, and now AI in the broad ecosystem, you have to think about debt and equity returns on invested capital. And there's been a tremendous rise in valuations on the equity side in the last 24 months.
And certainly the assumptions that you're making on the debt side as an investor and a lender to those companies, you're taking more residual risks than you did six, 12, 18 months ago. So valuations are high. You have to be a bit more cautious. You want to be a lot more senior. You want to be secured.
And so I think there's going to be a dispersion between returns between the investment grade and non-investment grade market. But that's just late cycle behavior. And when you look around the globe, as we talked about yesterday, their valuations are high. Geopolitical risks are a bit greater, and we don't see rates dramatically lower in the next 24 months.
So that tells us take the risk down on subordinated credit, lean into senior investment-grade opportunities.
Jim, we've seen these capex cycles throughout economic history. You've lived a few of them over a long career as well. But there's something different about this one, and you're well-versed in this in a way that I'm not. Some of these assets depreciate rapidly. For you and the team, does that change how you put together some of these deals that you make? It does.
I think you're raising a really interesting point. Is the right way to think about a data center, utility lines and electrical lines 70, 80, 90 years ago, when day one, all you were doing is wiring the house for lights, and then you wired the house for a dishwasher, a TV, and everything else that goes with it.
And how do you think about that technology, and what really is the advantage of that data center in five, 10, 15 years with the power supply? I differentiate that with how you might finance a portfolio of chips, GPUs, that rapidly depreciate over three to five years. And they might both be in technology, but how you fund and structure both of those is very, very different.
And I think that's the subtlety behind the headlines, which is going to differentiate the winners and losers. Because in every industry, even the last 20 years that I just mentioned, those were all sectors that drew in a tremendous amount of capital. And you really don't know who the winner is from the debt and equity side for a few years.
And so certainly with valuations as high as they are in this cycle right now, you have to take a step back and pause and say, okay, do I want to be a lender? Do I want to be an equity owner? What's the residual value assumptions that I'm making?
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Chapter 4: What does Jim Zelter mean by 'we are what we originate'?
That's really what will differentiate the winners and losers.
I'm not sure how many people are taking a step back, Lisa, at the moment.
Right now, it seems like absolutely nobody. Those debt offerings are absolutely flooding. And frankly, there is a real question about whether there's behavior that potentially isn't as prudent as what you're doing that could potentially pose some sort of risk to the rest of the market.
Well, if you think about the MAG-7, in the last five to seven years, they have been a very, very small participant of the IG new issue market. In the last two months, there's been a handful of these companies that have been issued very, very large benchmark transactions. And again, that's not a zip code we play in day in and day out.
But you have to wonder, as a CFO, are they being very strategic about accessing that financing? And what's the long-term return of those opportunities? Jim, you're going to stick with us.
I'm happy to say we've got a lot to talk about. Jim's out of there of Apollo.
Hello, I'm Joel Weber. And I'm Eric Balchunas. We're the hosts of the Trillions podcast from Bloomberg, a deep dive into all things ETFs and investing. Eric, what's so amazing about ETFs?
It's never a dull moment. They track everything under the sun, four new ETFs launch a day, and they take in $4 billion every day. So it's where all the money's flowing to and a lot of the innovation is happening. I call it the Silicon Valley of the investing world.
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Chapter 5: How has the evolution of financing markets affected investment strategies?
As you can hear, Eric's passionate about them. My role is to try and keep him in check and make all of this a little bit more understandable for the rest of us. Not always easy, but always worth a listen. So listen to Trillions on Apple, Spotify, or wherever else you get your podcasts.
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