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This is Matt Russell, and today we are breaking down Apollo.
For this breakdown, I am joined by Hunter Hopcroft, financial analyst and writer based in New York.
And if you haven't read Hunter's work, please find links in the show notes.
You will enjoy his coverage of how the financial markets are evolving.
Now I reflected on my personal experiences with Apollo for this episode.
And there's a saying that hard work can be talent when talent doesn't beat hard work.
Well Apollo has talent and Apollo works really damn hard.
They will do everything they can to protect their capital, so if you're on the other side of the table from them, you never feel fully comfortable.
It's like having a 20 -point lead in the fourth quarter against a team that you know we'll find a way to come back and you can never take your foot off the gas.
So we get into what makes Apollo Apollo?
Hunter shares the backstory of how it was born out of Drexel Burnham and Michael Milkins DNA we get into some of the early deals.
We get into the theme of how they crave complexity and how they differ from some of the alt managers like KKR or Blackstone.
And while we could have spent the entire episode covering the history, you could argue that modern day leadership under Mark Rowan is even more interesting as Apollo evolves, they have the insurance army theme fully consolidated and a piece of the operating system today.
So we cover what that means for Apollo and the industry moving forward.
So please enjoy this breakdown.
All right, Hunter, I am pumped.
We are finally getting to break down Apollo.
It's one we have discussed behind the scenes here for a few months and exchanged a lot of work, a lot of interesting research, a lot of framing of what Apollo is and what it means to the financial markets.
And you sent me this great quote that I think is perfect for table setting this conversation.
So maybe we could just start there with that quote and how it frames the conversation and the breakdown of Apollo that we'll get into.
Sure. So this is a quote I believe from Mark Rowan, now CEO of Apollo.
And it says, our DNA going back 30 years and even in our Drexel beginnings and the Milken School of studying balance sheets is to find those areas where you're not compromising on credit risk, but you're willing to do something that may have a little more complexity in it, or that has a little less liquidity, but it still has the same investment -grade rating.
To me, this quote and really the story of Apollo and its various phases of growth, Apollo's a fascinating company.
It is ways, the growth and evolution of Apollo very much tracks the growth and evolution of financial markets generally.
And so, as we go through the history of the firm, I think you're going to see these themes about a focus on balance sheet, a focus on liquidity, and an attraction to complexity that really defines the culture of the firm.
And one of the things you mentioned, which is interesting, is not to overstate it, but But they have come full circle when you look at Drexel and where they came from in those days to where they are today.
So we'll jump forward to today, we'll give a sense of what Apollo looks like, and then we'll trace it back from the beginning.
But what is Apollo today?
How would you break it down just in the most simple understandable terms?
Well, I think on the highest level, Apollo is a global alternative asset manager.
It's up there with the echelons of KKR and Blackstone and others.
Today, Apollo has around $750 billion of total AUM, $570 billion of fee earning AUM.
That puts it second or third in terms of asset size compared to the others.
Most, if you go through the supplements when alternative managers release, they break down their performance and their fee -related earnings by strategy.
For most of the other alt managers, they do this in an intuitive way where you have private equity, real estate, credit.
Apollo breaks theirs down a little bit differently.
They break theirs down into yield, hybrid, and equity.
This is pretty differentiated from the other alt managers.
Yield is their largest bucket.
That's $480 billion of AUM.
That is a pretty standard credit operation covering corporate fixed income, credit, structured credit, like asset -backed securities and things, real estate debt, as well as direct lending or the invoke term, private credit.
There's hybrid that has $62 billion, which is the smallest bucket.
Honestly, it's probably more indicative of what Apollo is known for, which is basically this opportunistic investing through credit where there's some equity upside.
This segment also does some of the infrastructure and real estate equity investing, but again, opportunistic, more special situations.
And finally, there's the equity bucket which has 107 billion of assets.
And this is really your traditional private equity business, this houses their real estate strategies and things like that.
Apollo is very interesting to me because before we went into this recording, I just viewed Apollo more or less the same from a prestige factor as I did in the mid 2000s when I was graduating.
And they were this private equity powerhouse known for big deals that was a very particular era.
But if I actually look at some of these numbers, they had 8 billion of AUM in 2002.
70 billion when they IPO'd in 2010 2011.
So we're talking about something that is scaled 10x versus what it was at the IPO just a little more than 10 years ago, the prestige still feels as strong.
That's something that can go away, the more large and oversized that you become.
What are differentiating factors that led to that real scaling of the asset base?
Well, of course, over that time period, you cited private capital and alternative assets in general experience tremendous growth.
If you look at the closest competitors, a Blackstone or KKR, everyone found a niche that was their powerhouse of growth.
I think it's undeniable that for Blackstone, real estate was a powerhouse of growth.
For KKR, they stayed very focused on private equity and LBOs, and that's been their powerhouse of growth.
Apollo focused on credit, which I think if you go back to the 2000s, especially in that era where they're IPO'd rates were very low, it probably seemed like a less attractive bucket, but it looks a lot more fortuitous now.
As these alternative managers have gotten so big, there has been a focus that every alternative manager wants to get off the vintage fund treadmill where you have a closed end fund with a fixed life and so you're always in market fundraising.
And if you go to the filings of any pension fund that publicly discloses it and you look at their investments, they're basically in every vintage of every alternative asset manager's funds.
And so that means that that sponge had been adequately squeezed for all of these managers and they all started looking at ways to raise perpetual capital.
And they've all pursued this in various forms of open -ended vehicles, B -REIT famously.
Almost all of these managers have publicly -traded BDCs in market.
And they've also pushed into the private wealth channel with things like non -traded REITs and other products that don't have that fixed fund life.
Apollo has some of those as well, but it's really been their focus and doubling down on insurance, more specifically retirement solutions or what we might think of as annuities, that it was the strategic breakthrough for Apollo.
And today, that perpetual capital bucket is $450 billion of Apollo's total, $750 billion of AUM.
Apollo merged with Athene in 2022, which was an annuity provider.
And since then, the stock has basically doubled.
But if you go back to the IPO of Apollo, the stocks annualized at around 16 % since 2011.
But to get there, you really have to go back to the very beginning and understand where that strategic initiative came from and why it was such a cultural product of where Apollo started and the founders of the firm.
Yeah, let's get into that.
There's three founders here who each have their own legacies.
Can you just bring us back to that period of time and the environment and these three founders put some context around them and who they were when they came out and launched Apollo.
Okay, so Apollo was founded in 1990 and canonically, and the folks that came to be thought of as the founders of Apollo were Leon Black, Joshua Harrison, Mark Rohan.
But there's a lot of Drexel alum that were in this group that founded Apollo.
Tony Ressler, who would go on to establish Aries, was in this initial group.
All of them were Drexel Burnham Lammert alums that came up under Michael Milken.
I really can't overstate how this background is foundational to the firm.
To do a quick history lesson, Milken established a junk bond market.
Prior to Milken, bonds were for bluechips, stayed safe companies.
Milken realized that there was a market for lower rated, higher yielding debt and it was this innovation that sparked the private equity LBO boom to begin with.
High yield bonds were such a boon for Drexel that Drexel is tied to the mast of just milken and high yield bonds in general.
When milken goes down, down goes Drexel, and down goes the high yield market.
If you think of some of the other foundings of alternative asset managers, Blackstone or KKR, it was very entrepreneurial.
They wanted to go out on their own.
Apollo obviously was entrepreneurial, but it's a little bit different.
Apollo was formed opportunistically.
There was this vacuum left by the collapse of Drexel after the high yield bond market collapse.
And Leon Black specifically saw an opportunity to step in to a lot of really interesting situations.
So Black was the most senior of the Apollo founders at Drexel.
He was head of M &A and worked really closely with Milken.
Mark Rowan who's now the CEO was actually just an associate at Drexel, but he was in the corporate finance department focusing on bankruptcies and restructuring.
Josh Harris is the youngest of the three, but he was also an MNA.
This has been described as a dysfunctional family for all that means.
Leon Black is known as a incredibly tough negotiator.
Mark Rowan, much more professorial, much more even -keeled.
And then Josh Harris is a dealmaker.
And so that is where Apollo comes from, and that's how they get their start is stepping into this opportunistic opportunity that's left after Drexel Burnham collapses.
Yeah. It's this really interesting contrast you have to something like Blackstone where they're going out on their own in the mid-'80s and you don't have this vacuum necessarily in the market.
You have Peterson and Steve Schwartzman going out and raising, I think it was $400 ,000 initially to get their fund off the ground.
And here, I think you had something like a $400 million initial fundraise for Apollo.
Is that the right number?
Right. Here's where we have to caveat this entire discussion with, again, Apollo is drawn to complexity, but Drexel Burnham's background obviously gives them a fantastic network.
What really gets Apollo off the ground is basically a mandate from the largest French bank at the time, Credit Léonais, to manage through some of the distress debt situations that arise after the collapse of Drexel.
And so, there's this Keystone deal that sets Apollo on its course to being one of the largest alternative asset managers.
ExecutiveLife is a California life insurance company that's faced with insolvency in 1991 due to their own junk bond portfolio.
CreditLienA wants to get their hands on some of the things in that portfolio, but there is a law prohibiting foreign banks from owning US insurers.
Basically, what CreateLienA does is they set up a shell insurance company called Aurora, and they set up a US subsidiary called Altus.
Altus provides the financing for Aurora to go and win the bid to buy executive life.
Then through a series of transactions, this distressed debt portfolio that was hiding in executive life slowly gets transferred to Apollo's management to fill the mandate from Credit Leona.
This again speaks to a recurring theme in Apollo's lifecycle, this deal is considered highly controversial.
In fact, there's decades long legal fallout when it becomes apparent that credit lien a was effectively secretly controlling Aurora.
Apollo is never found of any wrongdoing, ultimately credit lien a pleads guilty to fraud and pays over $771 million in settlements.
But the deal is a blockbuster for Apollo and really sets them on their Of course.
Just thinking about that, what it entailed, the distressed debt, again, you mentioned it's very credit driven in nature in terms of what was going on there.
Would you say that is the real DNA here, is the junk bond backstory and everything that was going on with Milken?
Where would you say the private equity piece comes into play with that credit background?
Was it always hybrid?
Just a little bit more about that evolution when that came into play.
Well, I think it goes back to that original quote is if you think about traditional private equity, it's very income statement driven.
Can you increase EBITDA and can you bootstraps on higher multiples somehow.
Apollo has always been balance sheet focused.
And so when they looked at these distressed situations, they saw a way to get at assets that had value.
And a good example of that is it's actually through the executive life deal that Apollo ultimately comes to control a brand like Samsonite.
So part of this giant executive life distress debt portfolio were EII bonds, which were Samsonite's parent company.
Samsonite itself actually was formerly a KKR portfolio company.
Anyway, EII falls into bankruptcy and Apollo's bond ownership gives them significant control over the restructuring.
EII ultimately emerges from bankruptcy as Astrom and refocuses on Samsonite, which spins out as an independent brand, And it's another huge win for Apollo, but again, it's getting at this ownership getting at these assets through the debt side of the balance sheet.
Yeah, owning through restructuring is an alternative private equity strategy.
But one that I think especially in this era, was ripe for opportunity and Apollo certainly played into that.
One of the things that's notable from their history and you tapped on it a little bit is what they've spawned in terms of talent that's gone elsewhere.
but also businesses that sat inside of Apollo, like Aries which is another private credit giant today.
Can you just get into that?
I was always curious about why that was spun out of Apollo, what the backstory is there, because it feels like it would have been a core piece of what they were doing to begin with.
Sure, it actually the founding of Aries speaks to this credit DNA portfolio.
Again, executive life was a California life, and sure.
Tony Wrestler sets up Aries, that that timeline advisors on the West Coast.
And it's closely affiliated, though not directly related to Apollo.
And it becomes this West Coast satellite for Apollo's credit operations.
And ultimately, again now, we're talking about 2002.
So this is almost 12 years after this initial executive life deal.
One of the things that leads to Aries officially separated from the relationship with Apollo is just the ongoing legal troubles with this executive life deal.
And we'll see echoes of that as we get into Caesar's palace, and even some of the more recent deals.
Yeah, it's very interesting and the legal complexity.
I can speak to it and having some dealings with Apollo at all different seats at the table alongside them on the other side of them.
They are not shy of complexity.
On the deal side would you point to anything else in the early days that stands out from deal perspective that maybe was defining, or a good microcosm of who Apollo is?
Yeah. I think the Vail Resorts deal is another one that certainly a lot of people will be familiar with.
Now, that was not part of the executive life portfolio, but it was another situation where Vail's owners, Gileigh Holdings, files for bankruptcy.
Apollo gets control of the company again through the debt.
Ultimately, brings Vail public in 1997.
Between executive of life, these first two fund vintages out of the gate absolutely crush it, they return 3 .6x on the invested capital, and it works out to an internal rate of return of 47 % before fees, 37 % after fees.
So again, in the vacuum left by Drexel Burnham, Apollo is just a wash and opportunities to pursue private equity through these distressed debt deals which they do to great success and sets them on the course to be one of these top three alt managers.
as private equity goes and gains adoption from institutional investors through the 90s up to the new millennium.
It's certainly interesting just in terms of the origins.
You can think of a KKR as having their large buyouts.
Some of those deals, I think particularly early on in the 70s, were much more friendly.
It was actually buying out the equity with Apollo.
It's owning something through restructuring, getting into the weeds of the debt.
And while they all have merged to look a little bit more similar or have strategies that all overlap.
It's always interesting to know the origins of these.
Let's get into the 2000s.
Again, this is when I came to know Apollo was a particular point early on in my career, where they are in the headlines, they have this prestige associated with them.
What went into that evolution for alt managers, for Apollo?
And talk about that environment and what it was like.
Yeah. So through the 2000s, and I think especially leading up to and right around the great financial crisis, institutional investors really embraced the asset class.
And so the numbers are getting really big in terms of what capital has to be deployed.
And so the deals are getting really big.
And I think obviously, one of these formative deals for Apollo is both in terms of their evolution, although the deal itself was not a success, but certainly in terms of their reputation, has to be Caesar's Palace, which obviously there's an entire book on.
And again, this is where we caveat that the complexity of these deals is almost endless.
So we're going to try to keep this high level for this.
But in any case, Apollo and TPG Capital try to do a $31 billion leveraged by out of Heras, which later becomes Caesars.
This starts in December 2006.
And it's one of the largest leveraged buyouts in gaming history.
Rowan has this grand strategy of reward points.
He's thinking of this like a traditional LBO.
They're going to come in, they're going to improve operations, and they're going to make a return by improving Caesar's operating.
But the deal closes in 2008 with $24 billion of debt and runs right into the jaws of the great financial crisis.
So by 2009, Caesar's has a debt to EBITDA ratio of like 14X.
Apollo immediately sees the writing on the wall and starts trying to protect its equity value by moving assets off Caesar's balance sheet, they're bullying junior creditors into swapping for equity and doing all sorts of aggressive esoteric strategies to try to preserve their investment.
And just like executive life, this leads to an incredibly long protracted legal battle.
And by 2019, Apollo is out of Caesar's.
But this, and this is to me what really makes Apollo Apollo.
2002, just four years after this Caesars fiasco finally winds down.
Apollo partner David Sambur, who was really central to the Caesars process is back in Las Vegas, speaking with the Nevada Gaming Control Board about Apollo's bid to acquire Las Vegas Sands, and a portfolio of casinos in Las Vegas Convention Center.
The best part about this is that a giant part of the financing for that deal is effectively a sale lease back with Vichy, which was a spin of Caesars real estate assets during that whole process.
Yes, Apollo's in the echelon with KKRs and Blackstone, but it's their appetite and willingness for this complexity.
That went poorly, but we learned and were going back in with those learnings that I think really sets them apart from somebody who would say, we got burned on that before.
It's too much reputational risk.
Apollo seems to have a really high appetite for taking on this reputational risk in the spirit of generating returns for their investors?
It's interesting here because oftentimes when you hear a scenario like that, it is someone who is a specialist in an industry, and it's something where they can move in and out of names along with how the market moves.
But let's just take a private equity fund that is purely focused on insurance.
And they can understand cycles, they can understand moving into different sub segments of the asset class.
With Apollo, it feels so much more tied to understanding the ways of derisking your financial investment and then therefore increasing return.
Is that selling them too short just in terms of their specialty and operations?
Do you think it's fair to say that is where they are experts or masters of the craft?
How would you split up the difference between their financial prowess and their operational execution?
Well, there's two things that stand out to me and one is, again, this focus on understanding that they can create a lot of value through the balance sheet, not necessarily just the income statement, how a company is capitalized, what the sources of the capital is, can really drive returns.
The second is Apollo sees a hairy or complex or dirty situation, and it doesn't go to their too hard pile, they want to dig in.
And I think Apollo is very open about they use a lot of consultants.
They parachute people in to understand what's going on.
And I think whereas other asset managers because they have a lot of capital to deploy and because there's pulled in a lot of directions that some of those more difficult situations ends up being a pass and it leaves this great white space for Apollo to come into these really complex situations that again, they're willing to do even sometimes if there's some reputational risk attached to it.
I think Apollo might actually operate with a too easy pile or whenever they get involved, they make sure that it is not simple.
We worked our way up towards the 2000s.
You talked about the financial crisis and some of the fallout, obviously, as it relates to the operations and some of the deals in the portfolio, but coming out of the financial crisis, you also had the big move to IPO the business.
So can you talk about what that means?
I think the idea of having an alternative manager with a publicly traded stock is just an interesting dynamic that we've all come to accept and appreciate.
But can you get into what that moment defined for Apollo and what it ultimately meant for them, and maybe the industry as well?
Sure. Well, in the spirit of these repeating cycles, 2008 -2009 is another one of those situations where the fallout creates a huge opportunity, not just for Apollo, but for all the alternative asset managers.
And again, there was already a strong tailwind behind alternatives.
And 2008 -2009 just adds fuel of the fire of people looking for what look like uncorrelated returns in private markets.
These firms at this point have gotten really large, both in terms of assets but in terms of people, and they have these founders that have a lot of their wealth tied up in these basically general partnerships.
The GP business at scale starts to become a bit of a liability and it's really talent -heavy.
It's driven by people, and you want to keep those people, and you need to find a way to compensate them and have them participate in the upside.
It's also really hard in general, at least it used to be, now things are changing a little bit, really hard to raise money just for platform expansion.
You're getting your fees in carry, but a lot of that's going out the door in compensation, and it's hard to reinvest in the business.
So they all go public in this 2010, 2011, they originally, most of them, including Apollo, come public as limited partnerships, but in 2019, they make C -Corp conversion.
This helps the founders monetize, and again, drawn to complexity.
The founders set up all sorts of elaborate tax structures to go public and protect their wealth in this windfall of monetization of taking the names public but I think it also shows that these are becoming, especially post -2008 -2009, post -odd -Frank, that these are really becoming full -fledged financial services companies in some ways.
They operate differently than banks, they make money differently than banks, but they are are a key part of the financial system we have today.
And when you think about the IPO, but then also strategically having a publicly traded equity.
I think you mentioned some of the different dynamics and reasons why you would take the business public.
But if we were to just isolate on an ongoing basis, you have equity, which could be used as a form of primary capital if you wanted to raise additional equity, use those proceeds within the business.
you could make it for secondary purposes, which I'm sure played a major role in the IPO.
And then you can use it as a currency for acquisitions or other things along those lines.
Would you say that there's one of those buckets that really stands out just in terms of what it allows these alternative asset managers to do, maybe focusing on post that initial monetization for some of the founders and partners within the business?
Yeah. So they all wanna grow.
And again, it's hard as private general partners to necessarily raise money for platform expansion.
To your point, access to equity and debt capital markets allow them to go out and spin up new platforms, spin up new strategies.
I think that's a big part of what you see as the growth following the GFC.
But I do also think that, as a currency for talent, this is a very key element of why it makes sense in some degree for these companies to be public.
I'll skip ahead a bit here.
Towards the end of the decade, the early 2020s, we have the transition of the business away from Leon Black.
And we can touch on those headlines, but really get into Mark Rowan being the chosen one, taking the reins of Apollo.
So, can you walk through that timeline in terms of how this all played out and that shift towards Rowan?
Sure. Well, Leon Black has certainly seen leading up to this as the key man at Apollo, this triumvirate of Black, Rowan and Harris are still very much visible characters in Apollo's life.
In 2021 news breaks of Leon Black's involvement with Epstein and right on the heels of that come additional sexual assault allegations and Black basically accelerates his departure.
Even before these stories started coming to the headlines, Josh Harris is presumed to be the heir apparent in the next CEO. But at this point, Harris has already pulled in a lot of distractions.
He's buying the 76ers.
He's buying the New Jersey Devils.
Eventually he comes to own the Washington commanders previously, the Redskins.
Josh Harris is very much involved, but also he's starting to do a lot of stuff on his own.
Basically based on the FT reporting, I don't know if we'll ever know what happened internally in these discussions, but after the allegations and headlines about Leon Black come to light, Harris becomes a very vocal critic of Black, and apparently that ices him out at the firm and leaves an opening for Rowan to ascend, which ultimately happens.
Josh Harris steps down, stays on the board, but Black is out and Rowan ascends to the CEO position.
One of the interesting things about Harris, you mentioned he's buying the 76ers and the Would you say that is just normal private equity, major wealth type behavior where, we certainly have seen it elsewhere, Milwaukee Bucks, Add A Few Backers.
So, it's not uncommon to see, I guess, but it felt way more operationally focused, platform focused in terms of what he was doing.
So, I'm just curious if that felt out of what you would traditionally see in someone who already has at least a portion of their foot out the door or if I'm looking into that too much.
Well, I would just be speculating as well, but I also think some of the reason Harris ultimately doesn't ascend is, if we go back to the personalities of these founders, Josh Harris's reputation was as a real deal guy and I think his attraction to these sports deals was that this is the type of deal he wanted to be doing and Apollo was increasingly moving in this credit direction that wasn't really what his background and what his appetite was for.
And so, as Rowan ascends, it becomes clear that the firm is going to continue to make this shift towards a credit focus.
And so, I think Josh Harris is just the deal guy he attracted to these big acquisitions which Apollo was doing less and less of.
Yeah, he remains deal guy that's been fun to watch him negotiate for the new stadium in Philadelphia and he's bringing some of the Apollo tactics with him.
I do think we need to again, to keep drawing the parallels to these top tier alt managers that were all founded basically in the 70s and 80s and have an original old guard that is starting to come to the end of the careers.
And again, this is a business that relies so much on reputation and talent, and how, respectively, they've handled succession planning.
I think Blackstone probably is the exemplar here of really elevating John Gray's profile ahead of that transition.
KKR goes with co -CEO's that has seemed to work okay, but again, they have a lot less volatility than Gray.
And then I think on the other side, you have Carlyle who did not and fumbled their succession planning.
Apollo was very close to falling into that bucket, but to me, if you go back to this era, 2122, you have this big headline risk of black, he leaves.
There's this brief spat of, is it going to be Harris or Rowan?
And then when Harris eventually steps away, then, like a lot of Apollo deals, you have this very derisk situation.
Okay. It's going to be Mark Rowan.
And that's where we get to the modern day and what I call Mark Rowan unleashed.
Yes, he is putting his stamp on the company in a way that feels different.
I think the comparisons that you made there are perfect.
You take someone like John Gray with Blackstone where he is keeping his stamp on the company.
But to me, it's mostly in the form of creative social media videos.
Or we're going to be more playful with the general public.
Mark Rowan seems to be taking this almost capital allocator type approach where it's very interesting when you have somebody who's running a business who is also a really thoughtful investor, because it turns your presentations and your remarks and the way that you think about the business into speaking the same language of some of the people on the other side of the table.
So I always find it's interesting when you get situations like this, bring us just into the early days of Rowan and some of the evolution that he's made for this business and what you think entails Rowan unleashed.
And you bring up a good point.
John Gray has become a personality that has softened and humanized Blackstone's image to a degree.
Especially recently, if you look at how Mark Rowan has taken on the role, he's almost become a preacher and evangelist for what they're doing in a way that I don't think John Gray has.
So Rowan ascends to CEO mid -21.
Apollo does investor day in December 2021 that to me, this investor day and the deck is still available online, really is redefining Apollo, but the industry around this idea of asset origination.
This is a five, six hour investor day.
It's got a 300 -page deck that accompanies it, and it so clearly reflects just decades of thought and visioning by Rowan about what he wanted to make Apollo.
It's around this time that Apollo is beginning to socialize the idea of merging with Athene.
And this is really where we get into Apollo today as an alternative asset manager with an insurance arm that is fully on the balance sheet.
What that immediately brings to mind with insurance and how valuable that business can be is Berkshire.
So with just the very cheap seats take of is Apollo taking the Berkshire approach to running a business and having this float, what does that mean?
And just a little bit more backstory, because it goes back well beyond the 2021 timeframe.
This is a long historic relationship that they've had.
So yeah, in fact, in 2022, Financial Times runs a headline Apollo with a theme, the new Berkshire Hathaway, the headline ends with a question mark.
I think we've seen many times where this type of headline can be a curse.
But, a theme is really a different animal.
This was another opportunistic trade for Apollo that turned into a full -fledged business.
In fact, we were speaking earlier, a lot of Apollo's success seems to come from them getting into a jam and then figuring out a very creative, financially engineered way to get out of it.
And I think Athene is really no different.
So Athene begins its life as an Iowa based insurer called American Equity Life.
And here I think we have to do a quick insurance industry primer, another very complex industry.
It has a historical recent historical role in the alternatives space.
And it helps illustrate why Apollo's approach was so bold.
So insurance, everyone's basically familiar with the business model.
People pay premiums, the insurer invests those premiums, and those investments help support liabilities that come from the insurance product being sold.
There is a spectrum of insurance liabilities from somewhat simple to complex. And complex would be things that are very actuarily difficult to underwrite.
Things like crop insurance or even some property and casualty.
normally. Simple liabilities are more actuarily certain, something like an annuity where you're promising a stream of payments in the future or even life insurance where they have a pretty good idea actuarily of what their life insurance liabilities are going to be.
Post GFC, this creates issues because especially in the annuity business, annuities were struck at higher rates.
So someone might be promised a payout of 4%, 5%, 6%.
Post GFC, yields come way down.
Insurers have this giant mismatch of they're no longer making spread because they owe people four, but they can only reinvest it two.
Additionally, their bond portfolios are way down and that new assets are not yielding enough to create that spread.
So, insurers start unloading insurance assets, which really are insurance liabilities, to alt managers.
Alt managers, again, in this desire to get off the vintage fund treadmill, are attracted to this long -duration capital that for them is at reasonably low cost.
So if you think about an insurance that is highly regulated, but basically what you can do with that insurance capital is 90 % to 95 % has to be invested in investment -grade fixed income.
AAA or cash. 5 % to 10 % of that becomes equity that you can take more risk with.
And so that's really what these alt managers are attracted to.
Yes, they can maybe earn a little bit of spread on that 90 -95 % portion, but this 5 -10 % that drops out is a great source of long -term, low -cost capital for them to grow their businesses, for them to seed other strategies or funds.
All alt managers post -GFC make varying degrees of investment into the insurance business.
Some are joint ventures, some are equity, some are just management agreement.
But they're all playing in this space a little bit.
So, Apollo buys American equity life in 2009.
And it's such a great opportunity because they load the balance sheet up with mortgage backed securities which the prices have collapsed but they're paying out nonetheless.
But by 2010, the fixed income markets normalized and now Apollo's biggest client is this insurance company that needs to make money from spread not risky LBOs and buyouts.
So the thing goes public in 2016 and Apollo owns 35 % of it.
And this is where I talk about Apollo, getting into a jam.
The stock is struggling because it's seen as just this fee pig for Apollo, it's paying out tons of fees to Apollo to manage its assets.
But at the same time, the feed is 30 % at this point of Apollo's asset base.
So they can't lose the account and Rowan realizes they have to merge.
And this is really risky.
And this is what this next Berkshire Hathaway question mark speaks to is, insurance is a highly regulated, capital -intensive business that typically trades at a much lower multiple than alternative managers do.
And there's actually a great quote from an unnamed Apollo executive.
He goes, I get why this is good for a theme, but I'm not totally clear on why this is good for Apollo.
As a private equity firm, Apollo ordered enormous fees by tying up little capital of its own.
Now, the firm will be in this capital -intensive insurance company overseen by regulators, watching for risk that it compares its hundreds of billions of dollars of assets.
So there's a lot of doubt about what this a theme merger means for Apollo at the time.
Yeah, it's interesting to hear that, that previous relationship we had to publicly traded companies with a lot of interaction.
It's like the real world version of a circular reference that you get in your model when you're trying to adjust for the different dynamics there.
One thing I just wanted to zero in on in terms of that initial move where insurance portfolios, you have these liabilities that you need to basically invest to offset and 90 % is going to be investment grade that other 10 % has a little bit more flexibility.
Would you say with the Alt -Managers that it's essentially that 10 % portion of the portfolio that really makes the difference in their ability to manage those assets liabilities?
They could be both.
But in terms of where the difference is made in terms of Apollo managing that versus it being on the insurance balance sheet, is there anything in that 90 % where they can make a difference?
This is really where Rowan has his big breakthrough in the genius of what he decides to do.
So, you're right. That 90, 95 % for most alt managers or insurance companies is basically a commodity.
Investment grade fixed income management is basically a commodity.
You can earn spread on that with a little bit of creativity.
And Rowan realizes that he needs to be in the spread generation business.
His big breakthrough is using the equity, that bottom 5 -10%, to acquire or otherwise seed asset origination platforms.
These are people that are going to be basically mini banks, not banks, but people that are originating de novo debt, what we might think of as private credit or asset backed debt.
And this is a big differentiator for Apollo because, for most of the other alt managers, they are in the flow -buying business.
They have to buy what comes out of investment banks or what comes out of the broadly syndicated loan market.
They are for other alt managers to realize spread on that 90%, 95 % all they can buy is what's for sale on the market.
Rowan realizes that he needs to be in the asset origination business.
He uses this 5, 10 % of equity that's at the bottom of the insurance capital stack.
He starts building, acquiring and seeding asset origination platforms.
There's lots of stuff in here.
There's a company MidCap which has a publicly traded BDC, which specializes in lending to midsize businesses and mostly healthcare companies.
There's Merck's Aviation in Ireland that provides financing for aircraft leases.
All of these are generating fixed income assets that can feasibly be fed back into the top of the balance sheet and drop new equity down.
But what's really genius is using this private equity structure.
So he's seeding these platforms, but he's raising outside capital for them as well.
And so all of these little origination platforms are getting basically private equity economics with fees and carry while they're feeding the insurance business on the other side.
Yeah, it's really interesting to think through.
It might just have to do with market dynamics, but is there any reason why they wouldn't just be in -house?
You might be able to explain where the fee structure and that type of relationship is more beneficial than just housing it on the balance sheet, but is there anything that immediately stands out as to why the relationship is better in that form than being in -house?
Right. So, let's say it was all in -house.
You would have your 90 % of investment grade and you'd have your 10 % that drop down, so basically for every $100 of insurance assets you bought, you would get $10 of equity to do your alternative manager strategies to do LBOs or private credit or whatever you were doing.
What Rowan's decided is he's going to take that $10 and he's going to see these platforms take that $10, he's going to use $5 to put into an origination platform and raise another $5 of outside capital.
And now that $5 is getting GP economics, or private equity structure, on the returns and carry from that originator.
Whereas something housed entirely on the balance sheet, you buy $100 of insurance asset, you get $10 of equity, Rowan has figured out a way to buy $100 of insurance assets and basically turn it into more like $30 of equity by running it through this private equity structure, they get fees and carry on the origination platforms that he's ceding.
Yes. I think we have arrived again at the theme of complexity and finding creative ways to generate returns.
That's really honestly the tip of the iceberg because there's a whole other level of financial engineering that's going into these balance sheets too.
If we think of the traditional private equity structure, LP capital is really a form of leverage in some sense, it's equity, but it's leverage for the GP in the sense that they're participating disproportionately in the upside over these certain hurdles.
And so through very complicated structures, Rowan is taking this $10 of equity that's dropping out of insurance assets he's buying and using it as their GP stake and all of these other origination platforms that can generate private equity life returns.
Yep, that makes sense.
And I guess just on that point, you mentioned it is essentially a form of leverage.
In many ways, it's a form of a liability in the sense that when a fund is retired, when it reaches the end, that capital, theoretically goes back to the investors and Apollo keeps some percentage based on the return profile and the fees that they earned.
Yeah, I've liked in this and people will certainly push back on this.
But private equity is a way of bootstrapping a call option.
Let's say that you're getting 20 % of the returns above of 8%, that is effectively a call option that's 8 % out of the money.
LP capital is a very special form of leverage where the GP benefits if it works out, but it has very little risk if it doesn't.
By Rowan layering on an insurance balance sheet on top of this, that has really long duration, low cost capital, you start to see the wisdom of what he's building here.
How much does the duration play into this?
I think it's something that is certainly a theme in the markets right now, whether it's in venture, whether it's in private equity, you have funds that reach 10 -year mark, 12 -year mark, you get all of your extensions in, and they have these prized assets that might be sitting there, but the market multiple at IPO is not that attractive.
They end up selling at some discount to some public peer that trades at a significantly higher multiple, and it feels like it's leaving crumbs on the table in terms of the return profile.
This is getting brought up a lot where you'll need to see things trade hands.
Do you think that plays much of a role just in terms of that theme today or is this a much bigger evolution for the business beyond that?
Well, I think as you see Mark Rowan's public profile increase, especially in his recent interviews and the way he speaks at conferences, he's really proselytizing this idea of private and public markets converging.
He really focuses on liquidity, and again, it goes back to that original quote about their early days at Drexel of understanding this trade -off between risk, liquidity, and credit.
Rowan's argument is basically if you're a retiree or a future retiree that is 20, 30 years from retiring, if you are a pension or endowment that doesn't need money till long in the future?
Why are you so concerned about having daily liquidity?
Rowan's vision is really to see these public and private assets converge and that wall between the two to come down and that's getting very literal here.
I think in the past two weeks or so, Apollo and State Street have launched a private credit ETF, which holds up some listed credit and then some private credit is.
Rowan is at least walking the walk in terms of trying to make a case for this private and public divide coming down to decondition investors from expecting daily liquidity, and the way he set up Apollo today really speaks to that.
Yeah, he's a great spokesperson for the private markets.
I heard him on an interview, mentioned that 80 % of companies generating over $100 million in revenue are private, and I don't know that you can really take that 80 % and apply it to the size of the market because there's a certain scale factor of the biggest companies of the world, but he brings up some strong points just in terms of the evolution of where these businesses can operate and be a hybrid of the two.
But you also see them making announcements like having private credit trading desk, which implies that liquidity is something on their mind I would imagine.
This brings up a really important point, especially about what we might consider the future of a Apollo and really the future of markets generally, is the problem of capacity.
Annuities specifically are on pace to have one of their best years ever in terms of sales.
2025 is expected to have around $400 billion of annuity sales.
All those annuity sales demand basically new credit creation.
And Rowan and Apollo realize that private credit can no longer be simply the purview of high yield junk bonds or highly lever companies.
In fact, I was at the grants private credit conference last year, and Apollo's CIO John Zito had a great opening monologue where he talks about French fries.
And he notes that, the Wikipedia page for French fries has a word count of nearly 4 ,000, and it's been edited over 1 ,400 times while the private credit, which is, as we've seen, undoubtedly more complex, has just 500 words.
And Zito's point is that they They want to make private credit more like French fries.
There's a million ways to prepare French fries, and they want people to stop thinking of private credit simply as this replacement to high yield or levered loans.
They want private credit to be able to do investment -grade origination.
They want private credit to be an option for the largest companies on the planet.
They want GE to consider a private credit versus an unsecured bond offering.
I also think they want to look at the asset -backed market.
In fact, they've been very explicit about that.
The reason they want to do this, especially with asset backed or these larger companies, is because they want an investment grade rating on this stuff.
They want to be able to originate investment grade credit that they can feed back into the top of that balance sheet.
They know that private credit needs to evolve beyond this private equity sponsored borrowing to level up small companies.
They need to move private credit out market.
Yeah, we're just proving out Moody's and S &P's Stronghold and mo when there is so much focus on the ratings of these credits and how much of a role that plays in mandates.
And just important to mention that, but on that point, in terms of this shift where the alternative managers can make a bigger push upmarket into investment grade.
I think what you mentioned there at the end, especially with the asset back securities, If you have a portfolio of aircraft leases, that is something that's very easy to see how that could fit into an investment grade portfolio.
But that feels very different than lending to Apple or to pick your A -rated credit that's out there in the market.
How is their effort to move into large corporate lending?
Is that something that is reasonable to think that they can bite into in terms of taking market share?
And what would be the drivers of that happening and banks losing that business if it were to happen?
Well, this really speaks to what private credits pitch and appeal is to borrowers, which is this one -to -one negotiation that allows for more creative structuring, which, as we've seen, is really Apollo's bread and butter.
So whereas a large company might want to go to a bank, and let's say they want to do a broadly syndicated loan offering, that's going to be somewhat of a rigid structure for that.
Certainly, if they want to do an unsecured bond offering on the public markets, that's going to be a rigid structure.
Apollo wants to be at the table and say, Hey, can we structure this?
Let's move these assets over here and lend against those, and then we'll take that and we'll tranche it out, and will have an investment grade sleeve that can be fed into the insurance market and will have a B piece that can maybe go to some of these evergreen vehicles or maybe even our ETF, their ability to originate in more creative ways and then to take that debt and structure it and basically feed the various tranches to the pools of capital that it meets their requirements is really what Rowan's vision is here.
In some ways, it makes a lot of sense just in terms of the bespoke nature.
In other ways, when I think of that rigid structure, I also think that's what allows for scale to understand when you're looking at a traditional IG unsecured issuance, you probably know the terms without even needing to look up the bond indenture and you have some sense of it.
So it's going to be interesting to see how that scaling goes, because the bespoke nature can sometimes slow things down.
Apollo is not involved in this deal, but you want to see, think about how creative things are getting is to look at the CoreWeave deal, which is basically a $12 billion private credit deal secured by Nvidia chips.
So things are getting very creative on the debt side.
And Rowan is very explicit about this demand for credit and their ability to scale up credit origination being the biggest constraint.
In fact, he said at a conference in September, quote, The biggest single constraint on growth is not capital formation.
It's not how many people you have, is really built.
Can you originate enough attractive assets to meet your need?
And that's why I've been so focused.
And in fact, some might say maniacally focused on making sure we are building the right type of origination in volumes, looking at the right places to be because that's our whole business is about quote delivering excess return per unit of risk, which is a phrase that Rowan evokes time and time again.
And just going back to the shift, the transition, to bring something like a theme in house, again, very high level view would be you took something that is in some ways very asset light with other people's money and you transition this into something that is way more asset heavy with an operating business, something that has to manage an insurance book.
That's going to transition this business model quite a bit.
What is the perspective?
from a business analyst perspective, but also from an investor perspective on how that changes the dynamics of Apollo.
If you go back to that 2021 Investor Day with that massive deck and those six hours of presentation, one of the last presentations is Apollo's CFO. And he basically says, here's how to think about the business now.
In Apollo's supplements, they break out their earnings now in fee -related earnings.
So, this is things like asset management fees.
This is your traditional alt -manager business.
Spread related earnings, this is that difference between their liabilities and what their assets are earning on this retirement services and insurance sleeve.
And then there's principal investing, which basically houses the carry that they're earning.
And despite that initial skepticism, spread -related earnings is now larger than fee -related earnings for Apollo.
Last year, Apollo originated something like $200 billion of credit, $222 billion of credit.
That's credit that they are originating, not going out and buying.
That's $220 billion of credit that Apollo is originating in -house to feed that spread -related earnings business.
To talk about where the firm is today in terms of this business plan, Apollo now either owns or has a role in 16 different origination platforms, and there's something like 4 ,000 employees spread across those various origination platforms, and they're all relatively niche with aircraft leasing.
It's music royalties.
It's these very niche sub -sectors that Apollo feels like they can stand up or acquire teams that have a real specialty in those areas to originate this credit.
Honestly, when I think about those categories, there are some obvious ones in private credit which have really transitioned away from the banks and they are high quality, they're asset backed, they have some type of cash -generating business underneath them all.
It'll be interesting to me to see that $220 billion, if that can continue to grow at the same pace, sticking to those traditional asset classes, or if they get continuously creative.
Would you say there's any bucket that makes up a significant percentage of that spread portfolio?
Is that something that they disclose?
The issue that Credit Origination has today, and it speaks to John Zito's comments, and it speaks to this desire to move up market, is that up until, let's say, 2022, the private credit market was supported by private equity sponsor -backed lending to pursue LBOs.
That market, for a variety of reasons, has been effectively closed or at least a lot less active.
A lot of the demand that was coming on the private credit side has tapered off.
They've had to get more creative, and they've had to go farther afield to look for basically lending opportunities.
I think a big open question for the industry is if private equity and sponsored backlending does not make a hard rebound, what fills that gap?
Because what Rowan's created here, and I do think it's unique to Apollo, is he's created a bit of a financial perpetual emotion machine where you sell an annuity, it creates equity, you use that equity to see an origination platform that originates debt that goes back on the top of the balance sheet and creates a new dollar of equity to do it again.
And so the more annuities you sell and the bigger your insurance balance sheet grows, it just creates more and more demand for credit.
That's why Rowan is so explicit about the single biggest constraint on their growth is now not the ability to form capital, which that was how most of these companies are judged.
That's where their multiple comes from is, at least in large part, based on, let's say, people's perception of Blackstone's ability to go out and raise another $30 billion fund, Rowan is saying, we're off that treadmill now, and our constraint is can we find and originate the credit we need to meet the demand that we're generating?
Yeah, I think you gave a very good distinction between the growth of private credit and I think there is so much focus on the sponsored -backed market, which in reality, was fairly straightforward.
I don't want to say easy, but that was something where you were part of a growing TAM.
It is more difficult to find the higher -quality deals that are not sponsor -backed that require a relationship with the businesses.
And when you describe that perpetual motion machine, I think listening to that, you hear about several forms of dollars creating leverage in the system.
And what that can often lead to, through financial complexity is inherent risk in the system, whether it's leverage or whether it's something one thing that once you have some break in the dam, it creates a ripple effect through the organization, that's not felt once, but it's felt multiple times and can bring things down.
I think that is probably not the right way to categorize this, but just thinking about risks with the leverage portfolio or what is inherent both from a standard company perspective in terms of how much traditional debt they have, but also just the liabilities that exist within the system, are there hidden things here that are worth paying attention to when you run something that has that complexity?
I'll perhaps editorialize a little bit here.
Please do. Which is basically what you're asking me to do is, I think there is, especially because of the muscle memory of 2008, to believe that there is this building systemic risk, that there's going to be this Minsky moment, as they say, where all of those credit dominoes start falling.
I actually disagree with that.
I think the regulatory response following the Great Financial Crisis has, in fairness, made risk far, far more diffuse than it was prior, where it was housed in a very somewhat concentrated banking system and now it's spread across these many, many asset managers in these many, many structures with many, many underlying investors in them.
I think the bigger risk here, Again, it's not fallout, it's that this really self -perpetuating demand for debt leads to basically a degradation of returns over time where there's a great definition of financialization where it's the demand for debt securities and the absence of productive uses for that debt.
And we have this structure here, and fairness annuities are still a very small slice of the global markets pie.
I do think they speak to something where we are heading for an era where fewer and fewer people want to take equity risk.
They want to feel higher up the capital stack.
They want to feel they're in some sort of secured position.
That creates a tremendous demand for assets that can check the credit box.
There are only so many lending opportunities out there that meet those requirements.
The bigger risk here is not some fallout, not some minsky moment, not some damn -breaking event.
It's just a slow degradation of returns as debt eats more and more of the benefits of asset ownership or the activities of these businesses.
It's a little bit of a ongoing dance in terms of what the cost of capital will look like, But a big piece of how I think about certain markets is you have banks who are getting deposits, their cost of capital is incredibly low, which allows them to make loans at fairly low interest rates, still collect an attractive spread.
Once you start bringing in players that don't have that same deposit base or have a very different profile in terms of their capital structure.
And their attempt to compete is going to be more challenged, just in the sense that if If they don't have that same cost of capital advantage or equivalent cost of capital, the spread calculations, the math is going to look different.
I imagine that number has come down significantly as you brought something like a theme onto the balance sheet.
That changes dynamics.
But where would you say that stands today in terms of Apollo's cost of capital and their ability to compete in that world of investment grade and still generate attractive returns?
Well, again, private credit is not now, nor has it ever made a cost of capital argument for itself.
It's made an argument for itself on the basis of a one -to -one lender -borrow relationship and an ability to be creative.
And I think that's continuing, especially as some of these companies need a creative solution.
Porweave, again, is a great example of this about lending against GPUs for a business that probably would not have checked many other credit boxes on its own.
It's worth noting this interaction with the banking system though because while banks have largely been forced out of a lot of these higher octane lending relationships, they're still very much providing back leverage to private credit funds and to the Apollo's of the world.
So, they found a way and I mean they've explicitly found a way through things like synthetic risk transfers, and things like that.
But banks have found a way to coexist with private credit and with this private capital lending market in a way that probably raises some additional regulatory questions, but they've fallen into symbiosis, not necessarily into competition.
Just bringing this all together with an investor hat on, with all of these changes with the business, I think we have certain rules of thumb or frameworks, in terms of banks.
You look at an ROE and use that to instruct what the multiple on book value should be, that's just again, loose framing.
But is there an approach today in terms of how the market goes about evaluating and valuing these businesses, whether it's separating fee based earnings and putting a multiple on that versus everything else?
Do you think there's a general framework that's being used by the market today?
Well, there's certainly a framework that was established up to today.
And these have typically traded on a multiple of fee -related earnings.
For these companies, earnings for shares are pretty noisy.
And fee -related earnings, a multiple market cap, a multiple on how much they were earning from fees was the way the market was pricing their growth in assets.
And the biggest driver of their growth in assets was their perceived ability to fundraise new and larger funds.
There was some degree to which it was the carry that was accruing from performance, but for most part, those multiples were a projection of future fundraising ability.
Apollo has really broken the mold here by basically saying that fundraising is no longer an issue, and so I think the way that they are going to be valued is closer to a bank albeit an unregulated related one in terms of the spread related earnings and how much spread the market is offering them for Apollo specifically, how much spread they're able to originate.
Then I think in the fullness of time to known unknown is where credit losses settle out for this type of activity.
And so Apollo has really changed the mold in terms of how at least they are being valued as they've successfully found the exit ramp from perpetual capital raising?
I think those are two simple valuation frameworks for a business that is born on being complex. If you're an analyst that covers the name, you just have to come up with a complex valuation to give them their proper do.
It's certainly interesting to see evolution of industries and now these things shake out.
Everything you mentioned is based on this foundation of logic, which makes a lot of sense in terms of what you have visibility on versus what you don't and the potential for upside, but I always enjoy monitoring these things as they're evolving.
I think the biggest theme here, and Rowan is finding his way to speak to this, is we have been referring to this entire episode as alternative asset managers, but increasingly they're not so alternative.
I think that these businesses that started out that we're going to occupy a niche part of the market have come to dominate a growing and growing perhaps even plurality of the market.
And their business models are in the period of evolving from being something that was an alternative to something that is the financial market.
One thing that we've touched upon, but I would love to get your view of, is the reputation of And I can speak firsthand to talking to investors where Apollo was a part of the transaction, and when they realized that, they basically just screamed profanity and said, I need to spend a lot more time on this.
And there was this inherent belief that you might want to build in some additional risk factor, and you might need to check the docs extra strong, and your lawyers weren't going to be able to go up to bat against their lawyers.
So, there was in the credit world a lot that came along with the reputation of Apollo.
Where do you think that stands more broadly?
And do you think it has any impact on their business?
And it's so interesting to contrast relative to Blackstone and what's happening over there.
So, I have that in mind as I ask this question.
Sure. Yes, I think for most people that were participants in financial markets for this area, you're right.
Apollo has this reputation of they're going to roll up their sleeves and fight.
I think that's something else that the Rowan era is trying to determine and trying to work through how much of that to work on sloughing off and how much of that to retain because Apollo still very much has this reputation of being very smart, again drawn to complexity, willing to take on a difficult situation which makes them very competitive in this current lending environment, at the same time, they need to be seen as a partner now to a lot of these businesses, not as an adversary, especially if they want to go up market and start accessing investment grade.
I think you're seeing an evolution of that image, a softening of that image.
I can't imagine 10 years ago, maybe even 5 years ago, of seeing an Apollo Christmas video.
I think you're beginning to see that or at least attempted transformation of public image.
but I do think they want to retain this reputation for being able to take on difficult situations.
Yeah, sometimes the PR and the outward communications can have a material impact and you still retain the ability to roll up your sleeves, get a little litigious, get some extra juice from the banks when you need it.
So it's an interesting one, and we're seeing PR evolution around the marketplace in all different segments and sectors.
So no surprise to see it there.
Just quickly on that point, to draw the comparison with Blackstone is I've noticed how proud Blackstone is of their Jersey Mikes acquisition.
They keep finding ways to bring up the fact they brought Jersey Mikes and that's to me, really, they're trying to speak to the everyday American that private equity owned is familiar and normal and you love Jersey Mikes and that's owned by Blackstone.
It's a risky endeavor in my opinion because what do I think of private equity?
We're going to be paying some type of subscription service just to buy Jersey Mike Subs and they're going to dangle some rate of getting $4 sandwiches if you sign up for the monthly rate.
But yes, I have noticed it too.
It's interesting to witness and they are trying to get the message out there.
So to bring it all together, we like to wrap up these conversations with the lessons that can take away from this business.
I really liked how we got into the history and the evolution.
What would you point to as lessons from Apollo?
I don't mean this pejoratively, but I think in a lot of ways, especially as they pursued Rowan's vision for the business, they've effectively remade a lot of what made Drexel successful in terms of innovating around these capital structures, innovating around sources of capital and innovating around how the market functions.
And so, just like how Caesar's Palace didn't work and they went right back and did Las Vegas Sands, I think they have internalized these lessons all the way back from the beginning of their career.
And they saw what worked and they saw what didn't.
And they have really come full circle into being this huge player in debt markets that is really reshaping how financial markets operate.
I think the other thing that is becoming more and more important, especially in this environment, is an understanding that the balance sheet is a huge value driver for businesses and for Apollo, how that balance sheet can be self -perpetuating.
There is a focus in markets on the income statement.
How much earnings are you driving?
What multiple can you get on those earnings?
And for Apollo and for the market at large.
I think there's a lot more realization that a lot of value gets created in asset conversions and refinances and M &As and changing the capital structure and allocating through the balance sheet, not necessarily just having really rapidly growing top line that gets a multiple applied to it.
And then finally, I think APO's own history charts the evolutions of markets at large, probably better than a lot of the other alt managers do.
They started in this debt collapse in the late 80s.
They were opportunistic then.
They were set on the course that they're on today following the collapse of the great financial crisis and what that did to insurers.
Now, they have moved into the debt -centric market we have today a leader.
So Apollo's rise and fall and becoming who they are today really charts how markets themselves have evolved in terms of the growth of private capital and the focus on credit and yield as being growth areas relative to certainly public equity but maybe even now private equity.
You summed it up nicely there.
It's interesting to think about that original quote in the DNA that's still in the business, and it's fun, because there's a great history, but it's also going to be a lot of fun to watch how this evolution goes and plays out over time.
Thank you for sharing the knowledge that's lived up to my high expectations for an episode, I appreciate it, Arthur.
A lot of fun. Thank you, Matt.
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