| It was supposed to be a hard year for the giants of private equity. Luckily for Apollo Global Management, that's not their main business. The private credit behemoth's shares hit a record high this week after it pulled in more than $1 billion in profit, with record inflows, in the most recent quarter. It's pretty amazing to hit those numbers when it's been such a muted year in many corners of Wall Street, with investment banks still muddling through a downturn in fees and some of the most successful hedge fund strategies from last year now whipsawing. For Apollo, which has a larger private credit business than any of its biggest rivals, this is a coup for a strategy that was initially met with skepticism. After the 2008 financial crisis, Apollo doubled down on buying companies that focused on annuities. These so-called spread businesses look to make more money on the funds they loan out than they pay for the funds they take in. In 2021, Apollo agreed to merge with its insurance affiliate, called Athene, bringing an annuities provider in-house. In the early days of that decision, Apollo's shares lagged its rivals. Now it's catching up. This year, its stock price surge of more than 35% is pretty much keeping pace with Blackstone Inc. Both are surpassed by the more than 45% spike at Ares Management Corp., which also focuses more acutely on private credit. One Apollo investor told me it's the ultimate nonbank—and that, frankly, the "vampire squid" should move over. (That's a reference to a 2010 Rolling Stone article about Goldman Sachs that referred to the investment bank sprawling its tentacles across "anything that smells like money.")  Rowan. Photographer: Bess Adler/Bloomberg "Apollo has momentum," CEO Marc Rowan told analysts this week on a conference call. His soliloquy to private credit was both well rounded and contrary to how the rest of the industry sells the idea. I'll give it to you in full: Private credit: These are two words that actually mean nothing. Private credit can be investment-grade, private credit can be CCC. Barriers to entry in the private credit business are either quite low—anyone with a fund and a staff capable of evaluating investments can truly enter the private credit business—or barriers to entry can be extraordinarily high. And building a full ecosystem allows you to serve the needs of your clients in a very sophisticated way. Think of the difference between a hot dog stand and the Michelin-star restaurant: Both are in the food business, and both serve food. That is how we think about private credit and where people are positioned. Financial markets, financial literacy around private credit has actually gotten quite sloppy. What is private credit? Well, if we start in the abstract, everything that is on a bank balance sheet is private credit. But most of the time, markets—[when] market pundits talk about private credit, they are talking about a very small sliver of a private credit universe that's focused on levered lending. Don't get me wrong, we like the levered lending business. Levered lending is actually a terrific business right now. It will not always be a terrific business. It is a cyclical business with low barriers to entry, but one that at the right point in time can be very lucrative. What we have tried to build is not a single fund, is not a single opportunity—we've tried to build an ecosystem.
About three years ago I wrote a story about how Apollo was betting it could do GE Capital better than GE could. (GE was once one of the largest lending businesses in the world.) It's pretty safe to say Apollo is surpassing that benchmark—and then some. GE Capital at its peak had $500 billion in assets. Apollo's so-called yield and hybrid strategies, the latter often being a mix of credit and equity, have surpassed that sum. Although Apollo leaned into holes in credit markets that formed during the financial crisis, it's leaning in even harder now. It capitalized on the banking turmoil in recent months and bought assets from Credit Suisse that further helped it to originate loans at a greater pace. An entity linked to Apollo also picked up assets from an embattled PacWest Bancorp. While banks have stepped back in recent years, Apollo has made loans to giant corporations and lent toward giant buyouts. It's expanding Athene even more heavily across the world. Apollo has been remaking its culture as well. Bloomberg's Allison McNeely this week wrote a profile of how the firm—once known for its rough-and-tumble tactics is trying to be a friendlier version of itself. It's a natural evolution for an industry that started with scrappy startups and has become just as institutional and white shoe as any bank could be. Free Money Fallout There's a broad concern that even after a surge in short-term interest rates, financial conditions are set to get even tighter. Bankruptcies are coming at the fastest rate since the financial crisis, and there are bound to be more corporate turnarounds ahead. Companies that loaded up with cheap debt in the past several years will soon see it come due and have to refinance at higher rates, which could add tens, if not hundreds, of millions in fresh costs. But this leads to another corner of the market seeing huge gains. Although most investment banks are still flailing, PJT Partners Inc. hit record revenue in the first half, the best since it went public about eight years ago, partly because of its advice on corporate restructurings. "We're still feasting off the easy-money environment," PJT CEO Paul Taubman told me in a rare television interview, which you can find here. "But there's a day of reckoning, and we're going to see a meaningful uptick in restructuring activity. But again, to put it into perspective, that's relative to historic lows." Brendan Hayes, the co-head of capital structure advisory at Guggenheim Securities, told me he sees storm clouds. The loosening of credit standards over the past 5 to 10 years could create problems. He expects more defaults and credit rating downgrades ahead for more companies, given that there are hundreds with negative cash flow unable to cover their interest. He says "financing is meaningfully more difficult" today for companies with weaker balance sheets, and he expects to see more restructurings into 2024 and 2025. In a study by S&P Global Market Intelligence out today, bankruptcies that involve private-equity-backed companies have hit a 13-year high, given that these companies are so highly levered and haven't been able to maintain their profits. Yet there's a big camp on Wall Street that can't wait for sanity to come back. Its members often think the Federal Reserve went too far to prop up the markets through buying all sorts of bonds and that the unwind won't be easy. John Stoltzfus, the chief investment strategist of Oppenheimer, told Bloomberg Television this week, "It's an end to free money, and it's a good thing." "It's bad for memes, it's bad for cryptocurrencies we would think ultimately," he said. "We also think it's bad for highly leveraged players, and they will bemoan what's going on, and you'll hear from them all the time on how bad it is, but it's a good thing." It was a massive week for the safest bond markets in the world, with the US being downgraded from AAA to AA+ by Fitch Ratings this week, and the Treasury Department setting off a deluge of bond sales. The steepening of the yield curve given the sharp moves in long-dated Treasuries is a "2.5 standard deviation event," economist Jason Furman explained on X (the old Twitter), referring to a statistical condition that's extremely rare. From Monday to Thursday, the 30-year Treasury yield surged by about 30 basis points, a huge sell-off for a presumably safe bond. It recouped some of its losses by Friday but yields are still more than 20 basis points higher than the start of the week. Broadly speaking, these are levels not seen since 2011. There's debate about the continued ripple effects of the US downgrade. I spoke to Richard Francis, the analyst at Fitch who was responsible for the decision, for Bloomberg Television. He explained that he wanted to take his time to look at the trajectory of the US fiscal picture, having promised a resolution to the ratings watch in the third quarter. I also spoke to Citigroup's Richard Zogheb, who said the downgrade could be actually good for companies in the US that are AAA-rated but tough for riskier borrowers. I also spoke to Signum Global founder Charles Myers, who said the next big thing to watch is the October budget talks and the potential for a government shutdown that could burn into markets. Few noticed this week that Fannie Mae and Freddie Mac were also downgraded by Fitch. This is bound to create more constraints in the home loan market, especially as banks are likely to face more regulations tied to mortgages as well. This area has been a feasting ground for nonbanks, and I would expect that to continue. —Sonali Basak, Bloomberg Television's global finance correspondent | 
No comments:
Post a Comment