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Eric Hanno, CFA: Unlocking Opportunities in a Volatile Market
00:25:38
Eric Hanno, CFA, is co-head of Apollo Global Management's Apollo Aligned Alternatives (AAA) strategy. He and host Mike Wallberg, CFA, discuss the current market dynamics for semi-liquid investments amid high levels of uncertainty and volatility in...
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- [00:00]
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- [01:01]
Mike Wahlberg
Hello and welcome to the Enterprising Investor, the flagship investment podcast for CFA Institute. I'm Mike Wahlberg and I'm joined today by Eric Hanno. Eric is a partner at Apollo Global Management where he is co head of the Apollo aligned alternatives or AAA strategy. As of year end, Apollo managed $750 billion globally and word on the street is that AAA may likely become Apollo's biggest fund this year. Before joining Apollo, Eric was a partner at Carlyle Group and he also spent time in private equity at Partners Group after starting his career at Goldman Sachs. We're going to focus today on the market for semi liquid investments. What they are, how investors are allocating them into portfolios, what to beware of and how to get the most out of them. So welcome to the show, Eric.
- [01:41]
Eric Hanno
Hey Mike, thanks for having me.
- [01:43]
Mike Wahlberg
Now Eric, I have to admit I feel lucky to be in this seat interviewing folks like yourself sometimes, especially when we're in the midst of periods like this spring with the high levels of uncertainty and volatility we've seen in the markets here. Now I know you focus on private assets so it doesn't affect you as much on a day to day basis, but I, I feel like I'd be remiss if I didn't check your pulse on the current state of the public markets. Like what are you seeing out there and what's the energy like in Apollo's offices these days?
- [02:09]
Eric Hanno
Yeah, no, great question. Look, I, I think we entered 2025 with a really strong economy and then, you know, Liberation day happened and we started to see both consumer and business confidence decline. We're now facing tariffs, we're facing the retaliation from Tariffs, we've got doge happening, laying people off. I think there's a number of negative impacts on the global economy right now. And so I do think with what we're seeing today, we think there's a higher probability of recession. And so we'll see as Trump starts to unwind things day to day how quickly that changes. But we're certainly much more cautious than we came into the year. And for us, really at Apollo, we believe it's our time to shine. We're a value investor. If you look back historically, we've deployed significant capital and in many cases made our best investments in periods of volatility. So the vibe at Apollo, you know, the day after everything happened, Mark Rowan, our CEO, and Jim Zelter, our president, came into our cafeteria at 6am, had big smiles on their faces and sort of told everyone stay calm. This historically, over our 35 year history has been a period where, you know, we've had great opportunities to deploy capital. We've got a lot of dry powder. We think we've been positioning our portfolio defensively. So less problems. Let's stay calm and play some offense. So you could almost literally feel the pulse of our offices in New York and around the world in the weeks since, you know, this volatility started, where everyone's just dialed in and focused and I'm not sure that that major opportunity to invest has quite hit. But generally in these periods of volatility, windows will present themselves. And so while we're not excited for a global recession, in some ways as value oriented investors, this is the most exciting time for us at Apollo.
- [04:04]
Mike Wahlberg
That's right, yeah. Because once you, especially once you start seeing signs of recession, that's when, you know, the valuations start to gap down a bit and that's when the opportun really present themselves. What do you feel like the in terms of demand? So you, you described what it's like from Apollo side and what the opportunity set looks like. But how do you feel? Like the uncertain macro outlook or the macro outlook that we're dealing with in general right now affects investors appetites for private assets relative to public ones.
- [04:32]
Eric Hanno
Great question. I do think that in general you see a bit of a pause from investors when they see a big event like this. Everyone's trying to reflect. I think there's a lot of smart financial advisors out there that are trying to advise their clients now this isn't the time to sell a lot of equities. It's actually the time where you should be leaning in and investing because We've been in this period of elevated valuations. It's the first time where we maybe are going to be able to find some opportunities for us. In its early days, I think people look at Apollo and our value oriented strategy in the defensive way that we position our portfolios and I think so far it's been a little more business as usual. But I do think that things could slow down with macro volatility. And I think in general the question everyone's trying to digest is is there sort of another leg down or is now the time to be leaning in? And I think it's a little too early to answer that question. And I think where we differentiate ourselves is that again, in private markets you can't just, you know, get in and out as easily as you can in public markets. You sort of need to take the long term course. And I think we've been thought of as a safe pair of hands that, that have been positioning things defensively that are probably one of the best investors in these volatile times. So hard to say investor by investor type, but we've certainly had some big institutional investors that we're expecting to be, you know, coming into some of our strategies over the course of the year. We consider, continue to see consistent flows in retail. But we're three weeks into this, so I think it's a little early to call any conclusions on how, how it will, will impact flows for, for us vis a vis some of the, the public opportunities out there.
- [06:12]
Mike Wahlberg
Yeah, because you put, and you put like you say, three weeks of volatility against a backdrop of sort of 15 years of other macro trends that have been happening with the, you know, the low interest rates, the stretch free yield over that time, low cost of capital. So it's kind of a bonanza for private allocations over that time. Before coming into 25, did you, how did were where we were in that sort of life cycle of allocations among, specifically among institutions like were they, were they getting kind of full, were they getting to the level where they felt like they had enough?
- [06:45]
Eric Hanno
Yeah, you bring up a couple. So institutions in general, I think there's still some that are entering and ramping their private market portfolios. But for those that had mature private market portfolios, I think many were feeling the pain from not a lot of distributions as we've seen reduced exit activity and in typical private equity for the last few years. So I do think that, you know, the more mature private market investors were feeling a bit full, but there's still a lot of new entrants coming to the asset class. And I would say probably the more important trend for us and that we've been really highlighting at Apollo is that we think there's this convergence of public and private markets that is happening in front of our eyes. And you know, fixed income is, is a great place to kind of as a starting point, if you think about investment grade fixed income, we have these great signposts and rating agencies and you know, a lot of the, you know, public fixed income and both private fixed income are both rated. So it's very easy for an investor to sort of look at the two, assess, here's the return profile you get for this deemed level of risk. And we're seeing this convergence. And it's not just the higher risk direct lending that seems to get a lot of attention in the media, but it's this much bigger $40 trillion industry that includes investment grade fixed income. So we would sort of argue on that side of the house that there is this mega trend of convergence between public and private on the fixed income side. If you actually look at the equity side, and this is really fascinating, historically everyone has looked at public markets and they've said, you know, they're diversified, they're safe, you should put the bulk of your portfolio into public equity. And then as they looked at private markets for equity, they just really sought, you know, for a small percentage of their portfolio, let's take a bunch of risk, let's really seek the reward side of that. And you know, you highlighted this, that that's worked really well in an environment with very low interest rates or reducing interest rates and the environment where private asset prices have been slowly increasing. We've seen that trend for really an extended period of time until interest rates reset. Right. And now that interest rates have gone.
- [08:54]
Mike Wahlberg
Up a shock of 22.
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Eric Hanno
Exactly. Private asset value should come down. And what we're trying to highlight is that you just don't have to go to private markets for that reward. We think that you can go for safer segments of private markets and that today you got public equity where 10 stocks represent 35% of the index trading at, you know, 50 to 60 times price to earnings ratio. And they're great companies, but inherently there's just more concentration and more risks than we've seen. So we're trying to educate people that also on the equity side, there's components of public and private that are both risky and safe. And you shouldn't really think about it as this public private divide. But you should go out there and, and try and Build the optimal portfolio using both aspects of public and private, and particularly in the private markets. I think Apollo has been a leader in trying to deliver some solutions that are somewhere in between that really risky traditional private equity and private credit. And it's a segment we call hybrid, which we hope can have, you know, equity like return characteristics, but more fixed income like volatility and downside protection.
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Mike Wahlberg
Yeah, so that gets us to the point about, obviously the biggest difference between the two is liquidity there. And so I wonder if you can talk to us a little bit about semi liquid investments. As I, as I understand it, they straddle that divide between liquid public securities and traditional private assets. And you just describe how they work.
- [10:18]
Eric Hanno
Yeah, absolutely. And this is a big structural change. If you think about the allocation to private markets. With big institutions, you know, on average maybe 20 to 30% of their portfolio is in private markets. If you then go to, you know, the individual investor Marketplace, which is $150 trillion marketplace, you know, 1 to 2% allocations to private markets. One of the biggest challenges has been how do you access private markets? And traditionally you've done, you know, the closed end private equity fund where you commit amount of capital. They draw it down over typically a four to five year period. They go as they're doing deals and then they sell those companies and give it back to you. And for a big institution to ramp a portfolio using that type of instrument, they often take six to seven years to ramp that portfolio. They experience what's called a J curve.
- [11:10]
Mike Wahlberg
Right.
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Eric Hanno
Which is when you're paying fees on the entire amount you committed, but they haven't yet invested all that capital, so you actually have a negative return. That's just really hard for the traditional individual to digest that type of structure. So now we have evergreen or semi liquid funds. It allows you to buy in and get fully invested day one. It's almost like buying an index fund. You buy into a pool of assets. You know, you shouldn't get a J curve because you are fully invested. Typically those evergreen funds are available to investors on a monthly basis. So at the beginning or end of every month you can allocate so you can ramp up over time very easily. And they do. They're semi liquid. So we don't want to oversell the liquidity here. But they have liquidity features that allow you to often sell up to 5% per quarter is a pretty typical structure that's done at the fund level. So if more than 5% of investors want to redeem, they may not get fully out in that quarter. But it offers a lot more liquidity as an option versus the old way which essentially offered no liquidity until that business was sold. Unless you wanted to tap into the secondary markets, which are uncertain and actually quite difficult for individual investors to tap into a small investment. So, you know, fully invested day one, you know, no J curve aspects of liquidity. I think as individual investors start to understand these structures as they gain confidence, as these new structures build track records, I think it's going to be a big unlock to close the gap between the 1% that 1 to 2% high net worth individuals have versus the 20% plus that we're seeing with large institutions.
- [12:49]
Mike Wahlberg
So from the manager's perspective though, I mean I can imagine a scenario where you're fully invested, you've got all of your, it's an open ended fund, everyone's in and then you get massive flows. So how does that work? Because it's not like it's an instantaneous, you can't deploy as the J curve demonstrates. Right. So from the manager's perspective, how do you remain fully invested if you, if you're really successful in selling the fund?
- [13:15]
Eric Hanno
Yeah, I think that's one of the important aspects to getting it right. You know, you have to establish a fund and, and that that is able to match investor inflows with investment opportunities because you are taking all that cash day one. I think that that risk reduces as these funds scale. Right. So If I have $100 portfolio and I raise a hundred dollars, wow, I'm in trouble. I've got 50% cash by definition. I got to put it together quickly. But if you are thoughtful about scaling these structures and these products and I think you've got a lot of really smart, sophisticated institutions that are launching them that are being thoughtful about how they scale those. And if you think about Apollo, we've got 800 investment professionals, a lot of deployment. We're going to be thoughtful and we're going to scale it up so we make sure we hit the target returns. And once you do get to scale those inflows are much easier to manage given you got a big installed base of assets that are generating value.
- [14:17]
Mike Wahlberg
So you touched a little bit on it. The sort of 20% plus allocations that you've seen historically from institutions 1% ish among high net worth. So how are investors using semi liquids in their portfolios and in your mind what allocations make sense for institutions versus high net worth or ultra high net worth or even below that?
- [14:37]
Eric Hanno
Yeah, it's funny, you Mention it. So the leaders in private market assets are actually the ultra high net worth. So what we see in that family office segment is often, I think on average somewhere around 50% of their portfolio will be in private markets. Those are, you know, really wealthy individuals that are completely unconstrained that really are thinking about multigenerational wealth. They don't, they don't need the liquidity tomorrow.
- [15:02]
Mike Wahlberg
So yeah, they walk and talk more like institutions in that scenario.
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Eric Hanno
Exactly. So if you put that bogey at the far end of the spectrum as you come down that wealth spectrum, there is a component that you need to fund your lifestyle and your day to day where it may not make sense to have as high a proportion in private markets. And if you really look so, so, so depending on where you are in that spectrum, I guess you could say you could be somewhere between 1 to 2% and 50% in general. I would expect that individual investors that have significant wealth will look at the excess return and risk parameters in private markets, recognize the benefit of having access to this, this asset class from a portfolio construction standpoint. And over time, to the extent they don't need the liquidity in the near term, I think that high net worth universe will come to the 10, 20% as they gain comfort with these structures. You know, there are some other market opportunities I should mention like defined contribution or 401k plans. Everyone is investing for their retirement so way out in the future. And they're doing that in a structure that requires daily liquidity. That makes no sense. If you can get excess returns and build a better portfolio by tap, trading off a little liquidity. And by the way, this is a pool of assets you're not expecting to need until retirement. I think we are going to break down some barriers. I think we're in the early stages of starting to get private markets in to define contribution. I think a lot of people see the merit. So yeah, I think there is just this enormous opportunity. When you think about that one, 2% versus this $150 trillion market, I don't know how fast the adoption will be. I think that will be driven by how good we are as managers at delivering alpha or excess return per the universe that we do. And that's sort of what you pay us for day in and day out. And that's what we're super focused on at Apollo.
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Mike Wahlberg
It's. Yeah, it's strange. I had a PR rep for a fun company call me the other day. He was asking about having their CEO on, on this show to talk about a product innovation that they developed, which is that they'd essentially figured out a loophole that allowed them to sell units of funds that were entirely invested in private assets and carried all the same liquidity risk, but they offered it on a DIY basis. So it's directly to investor with no asset minimums. And it's, it's. You can see where my questions come from. It's no secret I'm, I'm skeptical of these assets being sold at scale to unsophisticated investors. So down wa. Down the asset level. So when you talk about the ultra high net worth, it's, it's a different model. Right. And so in this model it, this model didn't even have an advisor sitting between them and the potential lockup of all their capital. So I should back up and say I know this is not Apollo's model and I know you, you can't talk about your funds itself, but what do you think is necessary to ensure that this general like industry wide sort of move down market doesn't leave some investors out in the cold?
- [17:57]
Eric Hanno
Yeah, so you bring up a really important point predominantly when, when Apollo is interfacing directly with clients, we are interfacing with the, the family office or really that ultra high net worth, very sophisticated act and talk like institutions as you just said, or, or really that high net worth community where we're accessing that via, you know, a financial advisor, an RIA or someone that is sophisticated in understanding this. And when we are actually talking to those financial advisors are selling to their end clients, those have been very well vetted by home offices that are actually quite sophisticated and act like institutions themselves. So I do think for that high net worth community there's a very, you know, there is a good layer of people coming in and really understanding the structure, understanding the manager and the strategy and being thoughtful about ramping these up over time. When it comes to the mass affluent, those that are not using an advisor, you know, we really don't or have not planned to access them directly. We plan to be a parts provider to them. So those investors may be in a State street or a Fidelity or you name the traditional asset manager, maybe we provide some parts in the private markets to one of those big, well established traditional managers that are going to be the path. So in that situation again you have sort of a professional asset allocator in between us and that end investor helping to make sure that they're thinking about it. Right. Because you're right, this is new. People need to make sure that they understand it. And we fundamentally believe the education piece is one of the most important things for these individual investors as they start to access private markets. We've actually put a public education site out there is Apollo, where we allow individuals to access information that tells them about private markets because we want people to understand what we're doing, what we're designing things for. We want them to have a good experience and a good outcome. And I think that's something that the whole industry understands and is really taking serious as we start to roll out into the individual marketplace more broadly.
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Mike Wahlberg
That's, that's great. Thanks for that. I wanted to circle back on one, one thing you mentioned, you touched a little bit on, on private credit there. And we had Danielle DiMartino Booth, who was on the show in the last couple of months, and one of the things she was worried about was the state of private credit. And as I understand it, Apollo, I think, is the largest originator of private credit in the world, if I got that right. So what are you seeing and, and what's the opportunity here?
- [20:30]
Eric Hanno
Correct. So that's correct. Apollo is the largest private credit manager in the world. And I think, you know, there's been a lot of headlines around private credit that are focused on this narrow direct lending component of private credit, which is where there's been a lot of growth and product proliferation. We actually view the private credit landscape to be more the $40 trillion market, which also includes the investment grade private credit segment. So the majority of what we do at Apollo is actually investment grade private credit. And so, you know, that's one of the reasons that we are one of the largest private credit managers is because we are also a very large insurance company, a retirement services company. And in the insurance business, you are a large consumer, you're a long term holder of assets, and a large portion of that is investment grade. And one of the reasons behind the success is we've been able to find excess return per unit of risk in private investment grade. So, yeah, I do think that the more direct lending segment has become very popular. We as Apollo play there as well. I think we have been very defensively positioned. We've got over 350 investment professionals. We're a top relationship for all the banks for all the different origination areas. We've also built out our own origination, so we own 16 origination platforms. We think the key to being successful as a private market investor and in private credit is to have differentiated ability to originate and see everything and then select into what you find to be an attractive risk reward. So if you are new to private credit and you've got 15 people and you're out there and you raised a fund and you're trying to do deals, your ability to see the market, to have a large opportunity set to choose from, I think it's much harder. And there's a lot of new entrants that, that fit those profiles. But we've been large, we've been steady. As I said, we're doing a lot in the investment grade space and we are really thinking about, we, particularly in the last year or two, have been really positioning ourselves defensively should we see any sort of credit cycle. So we feel well positioned, we see the headlines, but we think this is a megatrend that's here to stay. Private credit is growing, it's taking share from public credit. And as I mentioned earlier, there's just this mixing of what really is the difference between public and private credit when they're both rated and as they become more and more liquid over time on the private side.
- [22:54]
Mike Wahlberg
So, so what are you seeing in just in terms of that credit cycle? I mean, I know spreads, spreads were pretty tight coming into this year. There's been a lot going on since Liberation Day. Is this, or is it starting to get a little bit more interesting in credit?
- [23:05]
Eric Hanno
Yeah, I mean, look, it's, it's still early days. Look, one of the, one of the, the biggest opportunities when you see a market sell off, one of the initial things you can do is you can go out there and you can potentially buy, you know, first lien debt at huge discounts where you can get equity like returns and you're at the most senior position in the capital structure. So, you know, when the equity market sold off in a meaningful way, we did not see the credit market sell off to the same level. So I would say the opportunities to date have been a little bit more limited. But we do think that increased volatility, significant increase in the risk of recession should create opportunities in the future. But, you know, we're three weeks in deliberation day. We just saw consumer and business confidence sort of come down. So I'd say, you know, we're defensively positioned with our existing holdings and we're sort of getting ready to, you know, play offense should the opportunity present itself.
- [24:01]
Mike Wahlberg
So time flies when you're having fun on here, Eric. Unfortunately, we're down to our final 2.2 part question for you. So I wonder if you could tell me. I know you were at Goldman. I don't know if you were anywhere before that. But the question is, what is your first job in the industry? And if you could go back and take yourself for coffee on your first day, what key piece of advice would you offer yourself?
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Eric Hanno
Yeah, Goldman Sachs was my first job. I started in Chicago. We were actually, Goldman was actually in the Sears Tower back then. And I came from maybe a less traditional school. I went to Colorado State University, which is a great university, but not a big recruiting university for Goldman Sachs. And so I felt very lucky to have that opportunity. And I came in, you know, really big eyed and excited to be at what was one of the top financial institutions. And you know, I think my one, one big piece of advice to anyone that's starting is to, number one, you gotta put your time in. So put your head down, work hard. But number two, pay attention to the trends, pay attention to the way things are shifting. Find something that you enjoy that's well positioned in a growth area. And I think I was very lucky in my career because I started at Goldman Sachs on the public side, really enjoyed it, learned a ton, but very quickly realized that public markets were incredibly efficient. It was incredibly difficult to drive alpha and with the technology that was gaining speed, it felt like it was going to be tough to have the type of career that people prior to me had. And so, you know, I was lucky to have moved to New York, have a lot of good influence where I, I was able to see maybe early on this, this private market trend taking off, had an opportunity to sort of make the jump over to that side. So that's my advice to everyone. Work hard, but keep an eye out for the big megatrends in the industry and try to position yourself in a way that you can take advantage of it.
- [25:55]
Mike Wahlberg
I've been speaking today with Eric Hanno, partner at Apollo Global Management and co head of the Apollo Aligned Alternative Strategy. Thanks for coming on the show today, Eric. This has been great.
- [26:04]
Eric Hanno
Thanks Mike. Appreciate the time. Take care.
- [26:07]
Mike Wahlberg
I'm Mike Wahlberg and this is me, the enterprising investor.