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Apollo Global Management President Jim Zelter Talks Role in Software Space, US Investment in Japan
00:15:16
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- [00:00]
Podcast Host/Announcer
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- [01:15]
Bloomberg Host
Bloomberg Audio Studios Podcasts Radio News Jim's out to the.
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John
Apollo Global Management president saying the firm maintains one of the leanest software positions in the sector. I'm pleased to say that Jim joins us now for more. Jim, good morning. Good to see you.
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Jim
Good morning John. Always good to see you. And Lisa, what do you think we're.
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John
Going to cover this morning? Probably software, right?
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Jim
I think you probably might ask that question, I suspect.
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John
Want to pick up on this quote from Mark Rowan, your colleague, good friend in our business. Our software exposure rounds to zero in our theme Balance Sheet a software exposure rounds close to the 0 them to 1. That was on the call in the last week. You frame for us your deployment into software versus maybe your competitors and why you weren't as big, as aggressive as others have been.
- [02:00]
Jim
Well, I think the answer is you need to take a step back in the whole evolution of the role of private credit. And as we've talked about on the show before, the non investment grade portion, which is really the, the area where PE sponsors look for financing, that's the area where software, software, tech, health care tech is around 40% of the marketplace. And we just used a, as a, as a principal investor in that area. We had a view that there was a greater degree of potential disruption over time in those business models. And a far greater focus for us is on the investment grade side portion of the, of the private credit world. So you know, I've been in the business for 41 years, the S&P 500. Since I got in the business in 1985, 373 companies have moved out of the S and P because of disruption in mergers and acquisitions. And I think every decade there's more evolution out of the s and P500. So I just think that we took, it wasn't that we were smarter, it's just that when you have a disciplined approach on value, when you have a disciplined approach on how you want to underwrite that, there's a tremendous amount of wonderful companies out there. But when we think about equity at the bottom of a levered balance sheet or a levered capital structure, there's just risks that we thought were not prudent for our style of investing.
- [03:28]
John
Management teams will often say they don't follow the stock that closely, but your stock has got caught up in the sell off. And I'm wondering what your interpretation of that actually is, why you think that's happening and what investors are telling you about how your name trades at the moment in public markets.
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Jim
You know, I think, I think is the evolution of the markets and the role of private credit has really continued to evolve and play a major role in the financing markets the last three to five years in particular, we've been a massive beneficiary of that. We've brought our retirement services, lower cost capital to be a solution provider. We've had tremendous growth in our company and every part of our company last four or five years. And I think that there's a, the great thing about capitalism is if there's concerns, the market reacts really, really quickly. Price activity, price action in the equity market is, is instantaneous as we've seen the last couple of months. And I think that there are some great companies in our sector that have been a, been, been victims of. Let's move on and let's, let's pare down positions in periods of uncertainty. So there's nothing fundamentally that investors have told us that there's concern about our company or sectors but there concerns about the growth of private credit in aggregate. And we've been pretty consistent for, for our stock long, long term to create the value that we believe it will, we're going to need to go through a credit cycle and at some point in time it's been, if you really go back, it's really been oh 7, oh 9 since there's been a deep credit cycle. We're supremely confident of our ability to navigate that credit cycle very, very well, especially with the predominance of our IG exposure. And when we do that, I think that the marketplace will see the great benefit of our franchise. But, but I'll also add, I'll just pivot for one second. You know, prior to earnings, we just got back from Japan. We took 200 partners over to Japan for better part of a week. We do it every two years. And when you think about the things that we're involved with, with retirement solutions, helping investment grade companies evolve, global growth of economies that are in transition periods, Japan was an amazing place for us to get that strategy. So a lot of answers there. But it's a very exciting time for our business.
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Bloomberg Host
I heard that there are certain actors who are bad actors in the space. They're dragging you down. That's kind of what I heard. I mean, is that correct? I mean, is that sort of how you see this scenario, given the fact that there will be a credit cycle and some of them are going to get washed out?
- [05:52]
Jim
I think, I think what a cycle does is a cycle always allows for dispersion of returns. And again, I think that there's a handful of us that are public. We all have very different strategies. We've all really leaned into either real estate, you've really, we've really leaned into credit. We've leaned into Asian equity, whatever it may be. Our business is a bit different because of the theme angle and the aspects of our retirement services platform and the fact that we act as a principal. So there's a variety of different strategies out there. We're convinced that ours over time, with the changing winds of finance, with the demands from technology, energy transition, that our, our model will be a wonderful model in that and others who have invested in areas what, which might have been interesting at a point in time with the information you had at that time, you know, we'll see how those do. But again, I'm not close enough to other software portfolios to see the robust nature, but certainly they're going, going to go through a period of economic disruption. And again, all the, all the, all the guests on your show talk about AI with regard to data and chips and energy. There's a second and third and fourth derivative. This will come out over the next three to five years about the real return on invested capital, what it does for employment, what it does for white collar jobs, what it does for a lot of areas. And I think it plays into Another big theme which we've talked about on the show is that the last 15, 18 years it's been monetary policy. Monetary monetary policy. It's all about monetary policy because a lot of government officials in the world have taken a step back and let the monetary authorities take the lead. The reality is this is a time for a lot of fiscal activity to be really dealt with. You talked about the UK with taxes and minimum wages. This is the time monetary policy can only do so much. You need to have good fiscal policy, really be thoughtful about long term retirement solutions, long term budget issues and that can't be led by the monetary authorities.
- [07:57]
Bloomberg Host
Jim, there's a lot to unpack there. I am curious, 2024 you were talking about the golden era for private credit and for credit in general. I wonder if there's been a shift given some of the difference in fiscal spending and the shift away from monetary policy, where that era is over and now it's shifting to things like insurance is shifting to infrastructure and frankly it's harder to raise money for private credit. There aren't as many opportunities right now because we might be heading into a credit cycle and it seems like the opportunities are elsewhere.
- [08:25]
Jim
Yeah, I'm not, I take a much longer view of the role of credit and I think, you know, if you take a step back as usual, look at bank earnings in the first quarter, they were, they were very, very strong. The evolution of finance in the U.S. it's no surprise that the economic engine of the U.S. has, has been leading the world. I think the evolution of the capital markets and the role of private credits had a big, a big impact on that. And again I sort of turn my, my lens to the broader investment grade portion which we've been as active on the issuance and the partner activities of our business and we've been in years, the non investment grade, the sponsor led business is going to go through some degree of turbulence. There's lots of questions about the private equity asset class in the monetization cycle and the IPO cycle. But don't be confused. The demands of capital by many of these companies, whether some of the Mag 7, not Apple but the other ones and many other companies, the demands on credit and the demands for capital to build out the vision of what they want to do is voracious. Look what's happened the last couple of weeks in the IG market with a couple of large issuers, whether it's, you know, Alphabet and others, you know, there's a voracious demand for capital and I think Many investors around the globe are saying I actually have allocated quite a bit to corporate credit. How do I allocate to asset based finance? How do I allocate to other IAG strategies when IG indexes are virtually at all time highs and I'm looking to make not 400 over, but I'm looking to make one 5200 over. With the treasury in the low fours, there's voracious demand for that around the globe.
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John
I've heard you use this phrase the pebbles versus the boulders.
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Jim
Yeah.
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John
Could you just communicate that to our audience what you mean by the pebbles versus the boulders and what we've been distracted by right now? What we should focus on?
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Jim
Well, I think, you know, in our case we are a company that when we announced our earnings last week, we were a 930 billion or plus minus in assets. We've grown tremendously over the 20 years that I've been there. And for us to really have an impact on our enterprise, we need to focus on large river opportunities. And when I think about the amount of software in the non investment grade world, it's a plus or minus 3, $400 billion opportunity set. There will be some winners and losers there. We're not spending a tremendous amount of time thinking about the winners or losers there. I'm thinking about how do I become a retirement solutions provider in Australia and Japan. Those are boulders, the software. It's a good conversation. Will we be talking about enterprise software and the impact on defaults in 12 to 18 months? I think there will be some conversations but I don't think it'll be the central conversation on this show.
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John
Jim, just back from Tokyo. Of course these numbers are big. Do you still think we sit here and we underestimate the amount of capital investment that will be deployed into this country over the next year?
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Jim
I do. I think the administration went out and they structured from our understanding six of these agreements. Three in Asia, pac three in the Middle East. This is the first to actually get announced. And when I've been here before and we've talked, you know, the center of the fairway in the US economy and the global economy is quite strong right now. You have an administration that is very pro business and very much into trade agreements and bringing FDI into the US you got a major M and A boom, you got a major cap ex boom. You know, certainly the center of the fairway is pretty strong. So I do think you're going to see more of these. I do think the worry is on the in the rough. If you would. So as I've spoken about, in terms of not only the concerns, inflation feels like it's a bit matted down. Geopolitics is a bit matted down right now. I think the worry that we see is a bit of consumer sentiment. Some of the consumer sentiment numbers are very, very challenging. They're not in the data yet. We'll keep an eye on how those progress. But certainly this administration is doing a strong job by this agreement. Plus the four or five that are behind it.
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John
The investments helping gdp, is it helping jobs growth?
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Jim
I think that's a big open question right now. And I think that when we have these conversations about the impact of AI in terms of, of chips and CapEx and energy and power, I think we're talking, you know, we've talked to, talked a lot about this concept of a K economy and I think you're going to have more and more companies fit into that. The top of the K is companies that are winners, that are, that are having access to capital, that are getting data, that are getting energy and power to be able to really benefit. And the bottom of the K is companies that are really under a tremendous amount of margin pressure. And I don't think, if you ask me, well, what's not in the marketplace long term, I don't think the second and third derivative of the long term impact of productivity and actual employment and then consumer spending, I don't think that's really in the marketplace. And I suspect if I was to get invited back later this year to have that conversation about the emergence of the K economy, K companies and what's the second and third derivative to consumer confidence, consumer spending and the overall economic growth?
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Bloomberg Host
Jim, you know, you have an open invitation. Anytime you want to come, you can be here and you will be here. I just want to build on that, this idea because there's a fierce debate right now about whether I really will disrupt corporate America, whether it really will eradicate the need for a lot of white collar workers. What are you seeing in portfolio companies? What are you hearing from some of your colleagues in the industry about how much people are restraining from hiring people or potentially ratcheting back their hiring plans going forward as a result of, of some of these technological shifts?
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Jim
I think there's the immediate euphoria when one goes home and tries out these applications and figures out what it can do. They come in and say, you know, why are we doing X, why are we doing Y? But I don't think you've seen broad red, broad based evolutionary strategy in hiring across our portfolio companies there's certainly a degree of discipline that's being, that's being brought to the forefront. But I don't think there is a massive strategic change at this point that I've seen. I still think it's quite a bit early. I think people are trying to anticipate productivity gains and what makes sense in terms of their business model. But I've not seen wholesale approach changes of hiring in the companies that we've overseen today. Now there's, there's obviously exceptions to that. There's some on the, on areas that are much more impacted that will take a greater degree of change. But I think that's a story that will continue to evolve.
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John
The hiring issue is a massive problem potentially for the politicians. How they respond to that I think is really difficult to price. It's so far out there, it's just not on the market's radar. Right now we're asking the question but I don't know if the president can get through the idea of saying capping interest rates on credit cards is a risk. Can they get it through Congress? Got no idea who's going to be in the White House two years from now. What kind of policies are they being elected on, I don't know. But that's a risk and it's something we're going to have to confront in the years to come.
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Bloomberg Host
And right now it seems like there's a constraint where Washington doesn't want to fall behind China so they don't want to regulate a lot of the technology. And when you get a response, it's going to be when there are people angry, not necessarily trying to be proactive and try to do trading programs and incentivize companies to hire people to potentially train in positions that will be relevant.
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John
Jim, 30 seconds. Got enough time for a final word?
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Jim
You know, listen, I think, I think this last conversation is one we're going to be continuing, continuing to have I think, I think this big the market the last 10, 15 years, monetary liquidity driven and this is a much broader evolution of a capital allocation, long term retirement and fiscal challenges. And I think that's the conversation that I suspect it may not be day to day what's driving individual stock performance but I think it will drive economic performance over a cycle. And I know that's where we have positioned there's. I talk about the both the boulders are still big retirement problems around the globe.
- [16:33]
Podcast Host/Announcer
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