The Alts Report

[00:00:18] JED: Welcome to our inaugural episode of The Alts Report. It's a new series where we hear from visionaries and leaders and innovators in the alternative asset management space. And so it's fitting that for our very first episode, we have somebody who is all three of those things. Of course, I'm talking about Marc Rowan, the CEO of Apollo Global Management.

[00:00:39] Marc, thank you very much for being here.

MARC: So, so appreciated and so happy to do it.

JED: Theoretically, we're in your offices, so I should thank you for having me here.

MARC: You are more than welcome.

JED: So maybe the best place to start, maybe mirroring the growth of the firm, you can talk a little bit about what has driven the growth and the demand for Alts.

[00:00:55]  It's gone for something that was more niche, institutionally oriented to something now that ought to be part of everybody's portfolio, our own... Global Investment Committee recommends a 10 to 20% ish allocation depending on your time horizon and your risk tolerance, and obviously the correlations to the other parts of the portfolio.

[00:01:11] But what has been the biggest driver for someone who's been on the front seat of that evolution?

MARC: Number one, it's about fundamentals. These assets can offer excess return per unit of risk, and everyone wants better returns and more stability, particularly long-term investors. But the other thing that we have really seen take place is a total…

[00:01:27] …Change again in this framework of risk and reward. We used to, again, think private was risky and public was safe. And now we know both can be safe and risky. And so what's happened is also been a change in public markets. Public markets were 8,000 companies. We're down to fewer than 4,000 companies. We are gonna be 3,500 companies before we are 4,500 companies again.

[00:01:50] 80% of the economy is now private. 80% of employment is private. Companies are staying private longer. The ability of companies to source debt and equity and everything in between as a private company is increasing and public markets have become increasingly concentrated. 10 stocks are 40% of the S&P.

[00:02:10] Think of the mag seven as being an uber weight of public markets. And so we are now also a source of diversification for all of these groups, and so it does not surprise me to see initial forays into 10 and 20% portfolio allocation, but I do believe over time a private asset will be a competitor for every public asset.

[00:02:33] JED: So that's an interesting perspective. I mean, do you think that the dichotomy between public and privates as it exists today is going to persist? Because in some ways we've seen convergence in the sense of you've got, you know, private credit stepping into where banks were, and on the equity side you've got exchanges.

[00:02:49] Morgan Stanley just bought a private markets exchange particularly to address the growth of private markets. When you've got a lot of the appreciation happening with a very small number of investors, whether it's institutional or high net worth, it leaves a number of people out of that wealth growing pool.

[00:03:06] And whether it's democratization that we're seeing in fund structures on the private side, it feels like it's less, at least to me, binary, public, private, and more of a gradation over time where disclosure and investor access are the two vectors which you trade off, and maybe it's not one or the other, but you know, a set of of different buckets that you could fall in.

[00:03:25] MARC: It's, it's absolutely convergence and convergence in more ways than you've even suggested. So I'll start on the company side. The largest issuers of private investment grade are actually public companies. And so yes, I think you're gonna see increased convergence of public and private. On the product side, I actually think we're going to end up with a bit of a pyramid, and if I look at the top of that pyramid, the top of that pyramid is family office.

[00:03:55] Family offices have gotten so large and so sophisticated that they are just institutions. They will buy, they are capable of discerning public and private, and they will own private assets without regard to convergence. Uh, in fact, most of our family office clients today are already 50% private, which does not mean 50% alternative, it just means 50% private in in their portfolios.

[00:04:21] The next level is the, what I'll call the high net worth or fully advised clients. They will buy both fully private products as well as converged products because they have the sophistication and the advice necessary to be in private markets. I think this will become the norm. Rather than something that is unusual, maybe in fact, the new form of active management is not going to be the buying and selling of stocks and bonds to get excess return versus a market index.

[00:04:50] Maybe the new form of active management is going to be the blend of public and private portfolios to give investors access to the whole economy. And a hundred percent of the economy rather than a narrow slice of the economy in the public markets.

JED: Well, I think that makes a lot of sense, particularly because the top of the pyramid is such a small fraction of the growth of private markets.

[00:05:10] There's $6 trillion in family office assets, and private markets are gonna be $30 trillion over the next several years, and so where's the rest of it going to come from?

MARC: We are in the early innings of investor exposure to private assets, and investors still approach the private markets the way maybe they approached the public markets 20 years ago.

[00:05:30] 20 years ago, people bought individual stocks and bonds in the public markets. Now they buy exposures, they buy indices, they buy other forms of investment. In the private markets, they're still buying stocks and bonds. This Apollo fund, that Apollo fund, and that's fine and that may continue for a number of clients for a long period of time, I do believe they will eventually buy exposures and that…

[00:05:54] You… will form the packages that you need to meet your clients needs.

JED: And we're, and we're already starting to do it, as you know, we have some solutions, particularly for clients who want access, but don't wanna necessarily select all of the individual ways to fill out that sleeve where it's a single ticket, single portfolio, single 1099, for diversified access to a bunch of the asset classes within the private markets space, private credits, private equity, private infrastructure, et cetera.

[00:06:20] MARC: In fact, I view our whole industry as being the beneficiary of technology and packaging. I mean, think back to how long you're doing this or how long I'm doing this. The first iteration of wealth product, we were faxing signature pages back and forth, or FedExing them. The notion that this can now be integrated into your statement that this is electronic, online, everything we need to is in one place in one integrated package...

[00:06:48] …is really partly responsible for the growth of private markets. It's brought down distribution costs, it's simplified structures, it's made your life easier. Portfolio construction also cannot happen without technology. How do you mix and match building blocks without a piece of technology? So the world I envision is one that is more democratized.

[00:07:08] More investors will have access to private markets. The value of advice is going way up. In a world that we live in, which I sometimes joke is a three flavor ice cream world, vanilla, chocolate, and a little strawberry – stocks, bonds and a little bit of private markets… The world we're going to is more like Baskin Robbins.

[00:07:25] There are so many more choices when we democratize that without good advice, without good models, without good portfolios, clients are gonna be lost on the journey. Yes, some family offices will make this transition on their own, but the vast majority of clients are gonna spend way more time with their financial advisor than they ever have…

[00:07:42] …to make sure these choices are the right choices.

JED: So you've been very gracious with your time. I wanna, uh, finish with one last question because it is of the moment right now. Should we be scared right now about the credit dynamics going on and what's your view given how intimately you see what's happening on a day-to-day basis?

[00:08:00] MARC: So I start by saying, no, I, I don't think that's what we're seeing. Um, I think there's good credit and bad credit and there's good bank credit and there's good private markets credit. Uh, this is not a wholesale change, but I think we have to appreciate private credit levered lending for what it is. This is a decision by investors to take less risk and that always, you know, kind of, people look for me to explain that. Investors have a choice.

[00:08:29] They've been in the equity markets and the equity markets over a long period of time have offered high single digit to low double digit rate of return. Equity Markets are incredibly volatile. PEs are very high. That does not mean they won't stay high, but history has not been kind to starting at a high PE.

[00:08:45] They then look at the high yield market. The high yield market is trading at very, very thin spreads. The decision to move out of equity and out of high yield and into levered lending is a risk reduction decision, and investors are making really logical choices. They're basically saying, I can get the equivalent of long-term equity returns side by side with a professional manager.

[00:09:07] And take less risk than being in high yield and being in equity. I think investors should continue to think about levered lending private credit as an alternative to equity and high yield. And I continue to believe in this environment. It is a good alternative to levered. Let that. That's great.

[00:09:23] JED: Yeah, that's great to hear. Marc Rowan, very much appreciate it. For our clients who are listening, if you want to know more about Apollo, about the partnership, about private credit, about Alts, please reach out to your advisor. We are investing incredibly heavily in making sure that we are bringing to bear the most sophisticated solutions that can help you achieve your financial goals as the markets evolved.

[00:09:45] So thank you very much and Marc, thanks for being here.

MARC: Thanks for the time today.

JED: Appreciate it.

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