The author is a former funding banker and creator of ‘Energy Failure: The Rise and Fall of an American Icon’
To listen to the chief govt of Apollo, Marc Rowan, inform it, there are nonetheless some misunderstandings concerning the rise and rise of personal credit score homes for the reason that finish of the worldwide monetary disaster.
Rowan got here to this realisation after a current abroad tour, the place he met the CEO of one of many largest European banks. “I had by no means met him earlier than,” Rowan informed the Financial Membership of New York on June 6. “It’s a blind date and typically blind dates may be enjoyable.”
However he may barely get a phrase in earlier than the financial institution CEO launched right into a 15-minute diatribe about how Apollo, with some $600bn of property below administration, is the “beneficiary” of unfair “regulatory largesse”. And the way, the CEO continued, Apollo and different calmly regulated asset-managers, reminiscent of Blackstone, KKR, Ares and others are a part of the so-called scary “shadow banking” market, the wild west of finance. “So, are you carried out?” Rowan requested ultimately when he may stand it no extra.
As soon as he obtained the ground again, Rowan launched right into a defence of Apollo and its enterprise. He defined that Apollo had a “a lot larger proportion” of investment-grade debt on its stability sheet than did the European financial institution.
He emphasised that Apollo seeks to match its property and liabilities from a length standpoint, not like most banks, which borrow quick and lend lengthy. “And at last,” Rowan continued, “I maintain extra fairness capital as a proportion of property than you do. I maintain extra Tier 2 [capital] as a proportion of property than you do, and if you wish to see my portfolio, [you can] click on on the web site and my portfolio is on-line. So, for those who’re carried out, now we will have our assembly.”
Rowan, one of many unique founders of Apollo some 33 years in the past, took over as CEO of Apollo in March 2021 within the wake of the continuing revelations about Leon Black’s longtime ties with Jeffrey Epstein. He’s a really younger wanting 60 years previous and one of many savviest minds on Wall Road.
Within the wake of the 2008 monetary disaster and the passage of what’s often called the Dodd-Frank legislation, personal credit score and fairness teams have assumed a a lot higher position. The massive banks — reminiscent of JPMorgan Chase, Morgan Stanley, Goldman Sachs, Financial institution of America, and Citigroup — are not Wall Road’s pre-eminent innovators and risk-takers. And that’s by design. The US Federal Reserve has made clear by way of its regulatory choices that it doesn’t need these banks to ever once more be on the centre of any future monetary disaster.
In consequence, the massive Wall Road banks are a lot much less leveraged than they had been 15 years in the past. They’re pressured to carry rather more capital than they as soon as did. They will nonetheless underwrite debt and fairness securities — because the markets allow — however should transfer the securities off their stability sheets as rapidly as attainable. The Fed has pressured the massive banks to be within the transferring enterprise, not the storage enterprise. The Fed has severely restricted the sorts of acquisitions or mergers that when had been so widespread amongst Wall Road companies, besides apparently throughout distinctive circumstances.
That has opened up territory for companies reminiscent of Apollo, Blackstone and KKR to broaden in. However, as Rowan found, when he met the European financial institution CEO, there’s nonetheless the notion on the market that much less regulated “various asset” managers are swimming in an enormous pool of danger, giving them an unfair benefit with regards to making a living.
Rowan mentioned Apollo is making a living the old school manner: taking prudent dangers the place others not are prepared to tread, reminiscent of within the senior secured financing of receivables, of plane, of actual property and of plant and tools. “That’s the personal investment-grade market,” he mentioned. About 75 per cent of Apollo’s property below administration are in personal credit score.
Briefly, Apollo does the sorts of issues that GE Capital did as soon as upon a time (earlier than its demise) however with out taking the existential danger of borrowing quick and lending lengthy. Over the previous decade, Apollo has spent billions constructing out “origination platforms,” permitting it to underwrite senior secured loans in quite a lot of industries. Apollo retains 25 per cent of the loans and shares the remaining. And in 2021, Apollo totally merged with Athene Holding, the annuity insurance coverage firm it created within the wake of the worldwide monetary disaster.
With Athene, Apollo can increase funds cheaply by promoting long-term annuities after which use that cash to make senior secured loans at a lot larger charges. Its all carried out utilizing little or no fairness, goosing the returns with out the agency having to fret a lot about deposits strolling out the door or huge strikes in rates of interest. No surprise these various asset managers have gotten the brand new powerhouses on Wall Road.