John (3:12)

To extend the analogy though, to your point, the fairway is getting narrower, the rough is getting deeper. In the last few years it's not been that way. Allocate to risk and you'll perform, you'll do well, well, like a tougher environment.

Jim Souta (3:22)

The analogy for golf, for those who play a lot of golf, is worth the U.S. open. The U.S. open is known for tight fairways and really punitive rough. And if you keep in the fairway, you're going to be a great victor and you're going to have great success. I think there's going to be, as last year will remind us, you can have some bumps in the road during the course of the year that definitely change the trajectory on liquidity, on momentum, on risk appetite. So. But I think the long term trend is quite positive. But I do think you have to be very measured about how you execute your business model.

Host (3:56)

So if that's the US cup, do you go to the Ryder Cup? I'm sorry, No, I mean the idea. Do you stand here? I googled that. Evidently I bought it. I just am curious if you go overseas, you know, because to diversify away from the United States.

Jim Souta (4:11)

Well, we've been, we've been, I would say to accounts, we been very vocal and I've been vocal on this, on this program about Europe. You know, we, when you look at the, the needs of governments around the globe, especially in Europe, in Germany in particular, so more so in the uk, the government's demand for capital far outweighs their ability to participate. And so we want to be part of that renaissance in that part of the globe. In places like, like Japan and Australia, we want to be part of the retirement solutions and some of the global industrial renaissance with a banking system. You know, we're not a, broadly speaking a developing and emerging markets investor. So while we have a view on what's going on in In Latin America today, that's a negligible part of our capital. That's just not what we do. We're really a G7 and larger economy investor.

Host (5:07)

So you were talking about how you're getting more conservative yet corporations and governments are attacking the market at a record pace. So far this year, about $260 billion of bond issuance from governments and corporations around the world have been issued. The fastest pace ever.

Jim Souta (5:21)

Yeah.

Host (5:21)

Is this because there is a lot of optimism out there or is this because they see a small window that could close and they want to get in?

Jim Souta (5:29)

I don't think it's a small one. When you look at the numbers that have been put out by the large financial institutions, the big banks about net issuance in the AIG market, it's north of like it's anywhere from 800 billion to a trillion to net issuance. Issuance which is one of the largest numbers in the last 10 to 15 years. Same can be said in the high yield and the leveraged loan market. The net issuance is going to be quite high. So with, with real rates and real yields fairly high on a historic basis with a variety of pensioners and investors around the globe looking for long duration yield. It's a pretty powerful mix of supply and demand in terms of taking that, that, that, that overhang if you will. I think one of the big questions is does the equity new issue IPO calendar actually come to fruition? And the second thing people are talking about is where oil is right now. It's very deflationary. If it were to stay at these levels or even go lower again, we're talking about all the things that can go wrong. I'm a credit guy. You know, bonds don't go to 200, they go to zero. I'm, I'm cautious by definition. But you know, in oil at these levels, on WTI at 5,657, that's very deflationary and very positive for economic growth. So you know, again, I think that there's a variety of balancing acts here going on. But you know, to John's first question, I would say that we think that there's a variety of issues that one needs to deal with. But at the same time you want to be putting money to work in large scale. Now if you look at the traditional high yield market, the triple C LBO buyout, that activity is just not happening in scale anymore. It's being funded in private credit, which I'm sure we'll talk about because of our big white paper in December. But at the end of the day it's, it's really about credit and the ability for this IPO calendar to come.

John (7:23)

To fruition on some of this. Jim, because I can tell you sort of openly and honestly what I've struggled with. I don't know what to look at anymore. Payrolls has been a bit of a head fake in the last 12 months. We've seen a real deceleration in payrolls growth, but it's not been relevant to the performance of risk assets more broadly. Something you and the team have talked about for a number of years now. When we saw interest rates go to four, pushing 5%, Lisa and I were talking about this for the best part of 12 months. How on earth is this economy going to deal with 4 to 5% interest rates? And we dealt with that just about. Okay, what should we be focused?

Jim Souta (7:52)

I think, you know, I think to answer that question, it's really. We talk about the changing backdrop of market structure. The reality is in the US today, economy, it's been an extended credit cycle. It's harder to have a real economic recession because the diversity of funding across the board. We have the healthiest banks in the globe. We have a securitization market that's alive and well in record size of issuance, that disperses a lot of risk around the economy in terms of balance sheets. You know, you have a consumer in pretty good shape. You have a housing market where 40% of folks don't have a mortgage change. I'm not saying we're not going to have an economic cycle. We will have an economic cycle, we will have a credit cycle. But if the post SVP environment is any lesson to us all because of the advances and the evolution of the US economy since the gfc, it's a lot harder to push over this machine than it had been in the past. The transmission mechanism of the Fed that used to be instantaneous is not what it used to be. We saw it in the last two years with housing in the US because of the 30 year mortgage concept or the lack of a mortgage versus countries like the UK where most folks are on a five or seven year floating rate mortgage. That has an immediate impact on the brakes of the consumer and the economy. Not the case in the us. So the strength, the breadth of market structure, how companies finance, the role of banking, the ability for Fed, the Fed to actually have that transmission mechanism of raising rates and slowing the economy down, down. It's not what it used to be. It's not your father's economy.

John (9:33)

Jim, you're going to stick with us. So here's the latest this morning. President Trump taking a swipe at big business, announcing his plan to ban Wall street from buying single family homes. The White House looking to address housing affordability ahead of the midterms. Bloomberg's Jonathan tomorrow. He joins us now for more. Jonathan, the president's own words. I will announce some of the most aggressive housing reform plans in American history. What can we expect?

Jim Souta (9:58)

Well, we saw his announcement yesterday that he's looking to ban big institutional investors from buying new homes. The idea is to try to drive the price down there.

John (10:08)

The big challenge there is will that stand up legally?

Jim Souta (10:11)

Will he need approval from Congress?

John (10:13)

And how much housing do they really own?

Jim Souta (10:15)

If you look at the overall market, it's a relatively small amount that's owned by these big institutional investors.

John (10:21)

Jonathan with the latest down in Washington. Jonathan, thank you. With us around a table, Apollo's, Jim's Outer Apollo, not Blackstone. That's an important distinction. Jim, you're not big in this space.

Jim Souta (10:31)

No, as a matter of course, we are not.

John (10:33)

Why historically has that been the case?

Jim Souta (10:35)

You know, it's something that was not, it was not down the center of how we thought about investing our capital. As I remind you all, for many times, for, for us, most of our capital, half our capital is our own balance sheet. And we wanted to focus more of our activity on the big choke points of housing. Housing is a, is a massive issue we saw in New York City with our election affordability around the, there's a lot of demographic reasons why and we've just chosen to be much more on the choke points of the strategic growth. How do we, how do we actually help create more property for home builders and developers? How do we really create the choke points of building products and things like that? But we've just not pursued this for, for a variety of strategic activities. But I think what's going on right now is the president is saying a symbolic North Star laying out, but they're also going to work on a variety of massive strategic initiatives that will allow the social good to be dealing with this problem because it's not only in the US but it's in the UK it's in a variety of other countries. We don't have the zoning issues that the UK has, but certainly in terms of affordability and starter homes and whether it's initiatives to allow for subsidized mortgages or, or quicker building of standardization or a relaxation of the zoning rules, I mean these are all activities but we're not in the core franchise of this, so it has no impact on our franchise. You're not directly exposed. But do you think this idea of banning large institutional investors from buying up single family homes is the right policy approach? You know, we have an administration that's chosen to do a variety of things. Whether it's taking equity in large technological companies, companies. I think there's, there's better ways to actually solve these strategic issues. They have identified challenges that are affecting many, many Americans and many companies. But at the same time, I think there's broader policy strategies that can, that can help out to solve those problems. And I would say for us, you know, you don't get to the size that we've gotten without participating, whether it's retirement, the industrial renaissance or other big initiatives that help society out. So we want to be on the strategic helping side rather than the debate about, about policy.

Host (12:50)

What is strategic helping? I mean, we saw this with JP Morgan's recent find, their one and a half trillion dollar fine. Where are you expanding?

Jim Souta (12:56)

You know, kudos to JP Morgan and Jamie for doing that. It's really consistent with, you know, pro U.S. policy. We're doing, we're in dialogues with them and many, many others on a variety of funding, the choke points in the, the defense initiatives. We're doing a variety of things in the housing, in terms of land banking for builders and otherwise. All the things we've been doing in technology, getting chip building back in the U.S. those are all the things that we think are good for us long term. Whether you're on either side of the political party agenda, can you frame capital.

John (13:29)

Needs for us in the private space? At a moment I'm going to reduce it down to one company.

Jim Souta (13:32)

Yeah.

John (13:33)

Feels like a lot of this year is centered around OpenAI. Yeah. Capital needs of whether it'll be met or not. And that's going to set the tone for risk appetite for the year ahead.

Jim Souta (13:39)

Yeah.

John (13:40)

How small is that compared to the bigger pool?

Jim Souta (13:43)

You know, when you look at the, the number I used earlier was over the next five to six years, it's been bantered around that the, the hyperscalers in aggregate are going to need 5 to 7 trillion. You know, when you think about how that's going to be filled, about a third of it will be filled from their free cash flow. Not open air, but the other six, the high yield market, the investment grade market, the structured finance and ABS market, they will all fill that. When you identify the gaps, it's another trillion of the 5 to 7 trillion, about a trillion trillion. Five has not been identified. You know that seems like it's a huge number. As I was mentioning to you earlier, U.S. economy, 30, 30 trillion plus economy, global economy, almost 125 trillion. So, so it's a big number. It's definitely going to strain and have an impact on the AIG issuance markets where these companies were negligible participants. Now they're going to be 10 to 15% participants. But I think, I think that's a. When you say to me what are the questions that I would love to know for year end, 26 or 27. I'd love to know where oil is, I love to know where 10 year bonds are and I'd love to know what the return on this capex of broad, broad AI data centers is. And if you knew those, those would be great demarcations of success. But I do think there's a big question about the return on invested capital on some of these companies.

Host (15:10)

There's a bigger question about return on invested capital for the biggest in the private debt and private equity space because some of these deals are really large and increasingly they are the market. And there have been questions about how do you outperform when you are the market, how much are you seeing actual performance, actual returns inherently go lower as you try to be safer and as you do invest in such big size.

Jim Souta (15:33)

You know the transaction we did for, for Baylor and X, a double digit amortizing transaction with the value of the chips being zero in five years, that's, that's good risk return for us. You know again I think that OpenAI is a unique company vis a vis some of the others because of the, the strong cash flow and balance sheet those companies have inherently versus the growth initiatives of Open Air. But you know, certainly it's going to be a very large question. And I think that around the globe more and more investors because of the pension challenges, they're looking for a long duration yield that's a bit different than we've had historically in the last 10 or 15 years. So I think there is plenty of demand to be a scale solution provider. I think the big, the other big question will be how many of these companies actually are able to hit the equity market and what will the equity calendar really absorb over the course of the next year?

John (16:30)

Do you think that's the private story is coming to a close? These companies have got to go public?

Jim Souta (16:35)

You know I do think that with the VC and private equity overhang there is a greater demand for liquidity from a variety of investors, whether it's endowments or foundations that are knocking at that door. So I think there's no doubt there's an ability to stay private a lot longer. But depending on your constituents, employees and others who might need liquidity, that's a challenge you're going to have to confront.

John (17:02)

Jim, good to see you.

Jim Souta (17:03)

Always good to be here.