Interviewer (3:19)

Yeah.

Mark Rowan (3:20)

You, you look at the surrounding facts and you say this has been a good time for risk off. Do you?

Interviewer (3:27)

Yesterday, Jamie Dimon talked about inflation being the skunk at the party. Is that the way that you look at it?

Mark Rowan (3:33)

Not so much the skunk at the party, but let's face it, we've had very accommodative capital markets, notwithstanding the backdrop that I've mentioned of things that can be inflationary. We've seen rates go down. We've actually seen curve steepening to the extent we saw a tick up in inflation that would probably handicap the Fed's ability to further push rates down.

Interviewer (3:55)

We just go into credit. You know, these big arguments. And it strikes me there's kind of two levels of it. The first question is do we think that there is more kind of laxness in the overall credit markets than. That's what people diamond talk about. Lloyd Blankbank talking. Then there's a particular question of private credit. But just to look at those two, if I first look at credit as a whole, how worried are you about that? I've seen you say that actually the numbers aren't too bad, but how do you look at it?

Mark Rowan (4:24)

So I don't spend a lot of time worrying about it. We are. Companies are in pretty good shape. Consumers are in pretty good shape. This is not just in us, this is pretty much around the world. Ironically, right now it's governments that are not in good shape.

Interviewer (4:37)

Yes.

Mark Rowan (4:38)

Having said that, we're at the end potentially of a very long accommodative cycle in credit. And in every cycle you have people who move out on the risk curve, who ignore things that are obvious and it all feels good while it's happening and then it doesn't feel so good once it arrives. Well, some of those changes have arrived. I mean, lo and behold, we think that I might impact software. Is that news? Did we just discover that two weeks ago? But apparently two weeks ago we discovered that AI is going to impact software. And we've been in a massive risk off mode. And so software stocks are down almost 70%. I remind people that Software first lean is senior to high yield bonds and a senior to equity. So if you're going to have a problem in software lending, you're going to have a problem in equity, you're going to have a problem in high yield, you're going to have a problem in bank lending and broadly syndicated and everywhere else. Because to your second point, credit is just credit. There are good underwriters of credit and there are bad underwriters of credit.

Interviewer (5:43)

Just on that point about tech is as I read it, from what you've said, you are you, you were nervous about software before two weeks ago. But on the hand, on the other hand, in terms, when it comes to kind of digital infrastructure there, you're still fairly less cautious.

Mark Rowan (6:00)

So I'd say I'm going to give you a more specific answer because it does require a more specific answer. In our private equity portfolio, which is not the subject of this, we have 00 software in our credit book. Across the totality of the firm, it's a fraction of assets. We run a broader broadly diversified credit book that is not concentrated in software. The problem with software is that it was 30% of the levered buyout market, therefore it was 30% of the leverEd lending market. And therefore it is just overrepresented and subject to attack. But we should not deny that change is coming. And change is not coming just in data centers and AI as a world. We are building infrastructure, we're building energy, we're doing energy transmission, we're building next gen manufacturing, we're ramping defense and we're doing this thing called AI and data. We're essentially spending every dollar since the creation of FIRE and we're doing it all at once. And whatever we're doing in the US they want to do in Europe and they're not as well prepared to it. And they're doing it in the Middle east and they're doing it elsewhere around the world. We will see the largest need for capital ever. And that's what we've seen so far this year. And so now to your specific question. It's about underwriting. There are a number of very strong US tech companies who run diversified businesses, Amazon, Google, Microsoft, who are interested in seeing these centers built and are interested in not consolidating the debt on their balance sheet. And to the extent they are prepared to lend their credit, one can lend against those types of things and make sensible underwriting decisions. There are those who are more equity story oriented where it's maybe not as sensible and underwrite and good Underwriters pick good credits and bad underwriters pick everyone.

Interviewer (7:48)

You and I though have lived between us through a lot, I think almost identical ages, Rob, strangely. But we, we've lived through many iterations of kind of credit coming and credit going. So when you talk about these individual decisions like you know, is it good to be in so digital infrastructure at the moment or not that matters. But so does the overall picture and the one you just explained where you said there's all this money going into energy, going into AI, going into all these different bits. Does the bill for that either end up with taxpayers or does it end up with banks and credit institutions?

Mark Rowan (8:25)

So again, a longer answer than you probably want here. But the banking system is incredibly delevered and very diversified. I think it's in the best shape I've ever seen it in my 42 years of professional career. And then we get to the so called public and private markets. Yeah, that's. Private and public are just variations of the theme. The vast majority of the private market is investment grade. There's a $40 trillion market and 99% of the headlines are focused on a little slightly slice of a trillion and a half called levered lending. Levered lending is a below investment grade activity. If you trace the history of this. In 2008 levered lending was on bank balance sheets. Post GFC banks distributed this credit. On the one hand you had the CLO market which took credit off bank balance sheets, particularly less than investment grade credit, and distributed the risk to investment grade buyers on a senior basis and to below investment grade buyers, high yield buyers on a junior basis. Then credit was also distributed to private market BDCs. Banks again supported them but at a very safe tranche. And investors, private investors, retail investors, institutional investors came in to support private bdc. And now we look at it and we say well, credit is going through a cycle, is that good or bad? And the answer is relative to what? And this is the point that people often miss. Credit is the formation of credit, particularly in these private bdcs is a de risking activity for the economy and for individuals. It's de risking because it moved it off bank balance sheets and essentially democratized it throughout our economy. And it's de risking for individuals. Individuals because people are not funding their investments in these BDCs with their treasury portfolio, they're selling their equities. Last I looked, first lien debt is senior to equity. They are making an intelligent decision that they can earn equity like returns without equity like risk and take money off the table. That does not guarantee success. You can have if you own software stocks, you're really unhappy. If you own mostly software, first lien you're really unhappy. You're just less unhappy than if you own the equity. We can't legislate out of existence stupidity.

Interviewer (10:47)

But the underlying system you're arguing is safer because it's allocated individual companies and it's not leaking back into the fully leveraged part of banks.

Mark Rowan (10:57)

And that's what in some ways we can say the post regulatory reform of the GFC worked. It's doing exactly what it was supposed to have do. It has socialized this risk. It, it has given investors another thing to invest in which is actually de risking for them and it has moved it out of the levered government guaranteed portion of our economy because we made a choice and we've made a choice going back to the formation of Drexel. Below investment grade companies have been a massive source of growth. Private companies have been a massive source of growth. 80% of jobs. How are they financed? Well they weren't really financed. They were cast out from the marketplace. If we want them to be financed, we there's only two places they can get financed. One is the banking system. The second is the investment marketplace. If you're concerned about what's happening, you don't want it in your banking system. You prefer it in your investment marketplace where people can price the risk.

Interviewer (11:52)

So to the extent there are problems in private credit, you would argue it's a little bit more like the dot com problems of years ago where it's really an equity play rather than debt one. So there isn't that that gel ignite of leverage going through things.

Mark Rowan (12:07)

Almost every investor is not a levered investor in the private credit ecosystem but we've also, we are, we have this habit of throwing the baby out with the bathwater. All the press is focused on this levered lending portion of the market. As I sometimes remind my partners as a deal shop we don't get to be that big because although we're doing something from an efficiency point of view, we use up a lot of social capital. On the other hand, the vast majority of the market is private investment grade which is also called private credit and has almost nothing to do with what we're talking about today. So I think I'm. I try to be careful in using my language to make sure that we understand most of the capital going into private companies is actually going to finance this global industrial renaissance which is taking place place around the world. A lesser amount of capital is going into the deal business which is primarily being funded by investors or by institutions who are making a decision to sell their equity portfolio to invest in credit because they offer about the same rates of return. And by the way, we have 10 companies that are 40% of the S and P. We're not even a quote qualified market at this point. We're too concentrated.

Interviewer (13:20)

There is, there is this issue there isn't that the private people, consumers are trying to get involved in this and you pushed into kind of retail for one case, things like that, which you know they are the investment grade. That's what they're looking at. Some people say that, you know, Apollo was a buccaneering shop. You know, it was all about taking, being at the forefront. The more you get pushed back into these investment grade debt and stuff like that or you might say expanding into it does that you worry that limits the kind of risk appetite of the kind of people you want to bring in?

Mark Rowan (13:52)

I don't think so. I think what happened in our market if you go back again to the history going the 80s and the formation of Drexel. Drexel created the high yield bond market. It basically provided capital to these companies. The banks responded with levered lending. All of the brain power in the financial marketplace left the investment grade market and everyone wanted to do levered lending and high yield bonds because that's where the money was, that's where the excitement was and it didn't come back into the market. The investment grade market is a drive by market with very low compensation, with very low creativity. What we've done starting 17 years ago with the need to create investment grade for our captive insurance carrier Athene and for others in the insurance market was to put creativity and intelligence back in the investment grade market. No one is bored. I can tell you that this is not now a question of they're not no longer buccaneering so they don't enjoy being there. The ability to be creative in the investment grade market is at a scale that's almost hard to imagine. So if you think last year we originated a little over $300 billion of new investments, mostly credit. 80% of that was investment grade. I assure you no one is complaining about the lack of buccaneering is.

Interviewer (15:11)

But there is, but there is one. There's one good thing about what's happening out there is you could argue that finance has moved into private, private markets moved to non bank. What's happening is consumers are now getting a chance to participate. But there is a kind of trade off isn't there that the more this is, this is bringing them, this is giving them a chance to participate in these higher yielding areas which you've pioneered. But some people say there is a degree of risk in that and at some point that, that, that could cause problems.

Mark Rowan (15:40)

There's always a degree of risk. So I come back and no investment offers you a free lunch. There is no free lunch. You can take equity risk, you can take credit risk, you can take duration risk, you can take all sorts of risks. The question is what's appropriate. But if you look around the world, every place that private assets have been added to public portfolios, you've gotten better outcomes. And, and if you go to the extreme and you take retirees for instance in 401k an extra percent compounded over the duration of how long you're going to be in there is a 50 to 100% better outcome by having better investments. And what are they invested in today? Well, they're invested in daily liquid index funds for 50 years. Is that risk free? No. We have 10 companies that dominate the S and P. We've essentially, as I sometimes joke, we've levered the entirety of the retirement system of the US to Nvidia. So far that's been good. It's not always going to be good. Public is not safe or risky. Private is not safe or risky. They're both safe or risky. They're just differing degrees of liquidity.

Interviewer (16:46)

I suppose it's this, is that traditionally that, that this kind of slightly riskier on the face of it. Lending has been outsourced to provide professionals like you and to people who know what they're doing. The worry is that suddenly you're now getting in Britain we call on T Agatha coming into these markets where it's more worrying.

Mark Rowan (17:04)

Look, we're going to have a correction but it's no different than the correction that happening in banking. If you look in banking, the dominant banking institutions of today were not as dominant pre crisis. Those that sat out the subprime lending have arisen and become magnified in terms of their fortress balance sheet and market share because they were good managers of risk and good managers of underwriting dividend. I believe the same thing is going to happen in investment markets. Investment markets people made choices. If you wanted a higher dividend, you could take more risk. You could lend to smaller companies, you could do more pick. You can invest in equity and preferred, not just first lien and you could run with a lot of leverage. That felt really good on the way up, that's not going to feel so good on the way down. And there are companies of which we are one but not the only one, who went all first lien, who went almost all cash pay, who went large companies who work with low leverage. I like where we sit and we. Jamie Dimon said there's always going to be fraud, there's always going to be underwriting mistakes. But the question is who's a good risk manager and who's not a good risk manager. If 30% of your portfolio is in one industry and that one industry is being impacted by technology, you have not been a good risk manager.

Interviewer (18:16)

I think that I just looked at Blue Owl, I think was 70% in different versions of tech. There is a parallel though, isn't there? The way you describe the banking industry, it has consolidated, particularly at the top. That would imply the industry you're in is going to consolidate as well, that you will end up with fewer people because as you said, there is a reckoning coming. We, some of those people will have to.

Mark Rowan (18:38)

We have fewer people. I mean, you started. I mean we were the whole. The entirety of the companies that you see that are public Today, everyone was 40 billion in 2008.

Interviewer (18:47)

Yeah.

Mark Rowan (18:48)

We're now close to a trillion. Blackstone, more, KKR a little less. This is not good management or not solely good management. This is a, this is a function of structural change in our marketplace and that structural change is continuing and the reward for good work is actually more work. In our case, it's managing more money. And I think that is where we're heading. I think this will be a shakeout. I don't think it is going to be short term. I think the 30% overhang of geopolitics, inflation, technological change is now here. It was foreseeable, not maybe exactly how it occurred, but it was foreseeable. It was predictable and all you can do is have been a good underwriter, a good risk manager, have done a small number of stupid things and by the way, we've lived in an environment of tight spread. If you were a good risk manager, you are going to make more money this year and next year if it continues, than you ever have before because you've been risk off. And so that's the, that's always the bifurcation of minds. First you want to play defense and make sure in fact you've done what you think you have done, which is manage good risk and then you want to play offense.

Interviewer (20:00)

Do you think though you're going to end up with mega mergers in this bit, I mean that's what's, that's what happened in banks at some point.

Mark Rowan (20:07)

I don't think so, because I think that we are limited by two other factors. I think our business is not at will, not in the long term be limited by capital raising. It will be limited by our capacity to find good investments and by culture. So unlike a public asset manager who can buy anything any day, we can only grow as fast as we can originate. Good risk we actually create. And therefore if we grow too fast, we start commoditizing our business because we're forced to take things we don't want. And so growing. Judging our industry should be judged by our capacity to originate good investments in, not by our capacity to raise money. But the second piece of this, and they're directly related, is culture. We are at the end of the day an origination driven organization. Whether our peers say this or not, they are origination driven organizations. Often we're doing the first of everything. It's very hard to feed the first of everything into a model and get the right answer. We will be more efficient because it will not, we will not ignore us Technology. Technology will change. But the ability to attract the best people, have them want to come to work, have them spend their whole careers at Apollo is the primary job that I have on.

Interviewer (21:30)

That strikes me if you look at all the things we've talked about, you're lending money, you're trading private credit assets. We just saw the headline up there. You're building a kind of retail business. At some point you, you begin to come look very like a bank. With the one exception that you're not taking deposits is really what it's coming down to in the end.

Mark Rowan (21:50)

Not, not really. I mean, what you, what you look at is as a bank works with a government guarantee, they take deposits, they do maturity transformation, and they primarily make money from the capacity of their own balance sheet. We do two or three different things. One is we don't take deposits, we don't have a government guarantee. But we originated investments and we distribute them. And for a small portion of the investments generally, as I say, sometimes 25% of everything and 100% of nothing, we keep on our balance sheet to match with our retirement obligations.

Interviewer (22:24)

Banks do a lot of those sort of things. They will originate loans and then distribute them. It's not, it's not that different.

Mark Rowan (22:29)

I'll make the comparison slightly differently for you. If you're a public asset manager, you come in every day and you make a decision to buy something and then you distribute it amongst the accounts that you manage and then you go home. We kind of do the same thing, except we don't get to buy something in the public market, we have to go find it in the private market. We structure it, we originate it, we distribute it amongst the accounts that we manage and then we go home. And so the everything, everyone in the financial market, if you're not solely a trader, you're an investor. That's what we are at the end of the day. And in the broadest sense, if you think about the drivers of our business today, there are two drivers of our business. One, global retirement crisis. Everywhere in the world, we are short retirement income, guaranteed lifetime income. Retirement income is a fixed income obligation. On the one hand, we need to produce retirement income. On the other hand, we have this global economy industrial renaissance primarily taking place amongst investment grade companies and we find ourselves in the middle. We originate risk, we put some of it on our insurance company balance sheet and we distribute the rest to investors and source it for them without maturity, transformation, without government guarantees. And I believe we are playing a more important and a different role than most people perceive. And it's not just Apollo, this is the private market. Firms who have gotten to be size, you don't get to be sizable in the deal business. The deal business can only get so big. You have to serve some fundamental public good, otherwise you don't get to be big.

Interviewer (24:08)

You talked about culture and as you know, Apollo's been drawn into the Epstein thing because your, your fellow founder, Leon Black, who left in 2021, was part of it, polished on an investigation, said everything was to do with him. And I'm sure this eats up a lot of your time, but just as a general question for you, a strange one, if you look back at that whole period, regardless of individual meetings and things, when you look back, you know, now looking at it, what would you have done differently other than perhaps not having had Leon as a partner?

Mark Rowan (24:43)

Look, Leon made his own decisions and I will not do that. But the answer is nothing. This is whether through good, good judgment or good fortune, this is not someone I built a personal or business relationship with. It's not someone that Apollo did business with. If a relationship is, you know, one meeting over 20 years and a couple of unreturned emails, then that's a relationship. But other than he was Leon's tax advisor. Mike, we ran a tax, we ran a partnership, not a company. Back then, Leon's tax position was relevant to my tax position. Other than that, I'm very sorry. And I didn't, didn't see what Jeff was doing. Me, I didn't like him for my own reasons. He wasted my time.

Interviewer (25:30)

And now, but now it does occupy time and questions as well.

Mark Rowan (25:34)

Even from the grave, he's wasting my time.

Interviewer (25:38)

Mark Rowan, thank you very, very much for talking to us.

Mark Rowan (25:42)

Thank you. Thank you for having me.

Interviewer (25:43)

Thank you.

IBM Representative (25:44)

The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across hr, IT and procurement processes, we've reduced cost by millions, slash repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business IBM if you

Podcast Announcer (26:14)

follow markets, you know the value of long term thinking. You plan, you diversify, you prepare for volatility. But even the best strategies can't prevent every bad day. For more than 75 years, Cincinnati Insurance has helped individuals and businesses navigate tough moments with expertise, personal attention and independent agents who focus on relationships, not transactions. The Cincinnati Insurance companies let them make your bad day better. Find an agent@cinfin.com.