WHEN: Today, Monday, September 13
WHERE: Delivering Alpha Livestream
In a CNBC interview, Apollo Global Management CEO and Co-Founder Marc Rowan speaks with CNBC’s Leslie Picker live during the Delivering Alpha Livestream today, Monday, September 13. Following is a link to the video on CNBC.com:
All references must be sourced to CNBC’s Delivering Alpha Livestream.
LESLIE PICKER: Hi everyone and welcome to our inaugural Delivering Alpha Livestream. I’m Leslie Picker. We’re entering a new era of opportunity and we’ve been bringing you some of the best and brightest investors in the world. Today, certainly no different. Today, I’m joined by Apollo Global Management Co-Founder and CEO Marc Rowan. Apollo is one of the world’s largest alternative investment managers with approximately $472 billion under management. Marc, welcome and thank you so much for being here. So it’s been about six months officially on the job perhaps unofficially a bit longer. You’ve done some blockbuster deals, you’ve made some high profile investments. The best quarter for distributable earnings going back, I think, eight years under your tenure and yet, Apollo’s share price continues to underperform its peers by a significant amount and what many analysts are attributing largely to what happened with Leon Black last year, and it’s kind of created this overhang on the stock. How do you move past that, as CEO?
MARC ROWAN: Well, first, good morning. Thank you for having me on on this incredible day outdoors in New York. Look, I wouldn’t be a CEO if I didn’t think my stock price was undervalued. For us, I think the noise is largely behind us. This has now been up to us to execute. While our stock has gone from the forties to the sixties, we have a long way to go. And we have a story that we are anxious to tell. We have scheduled an investor day for October 19 where we will really roll out the details of what we plan to do. But the reality is we are in an amazing business. We and our peers are an amazing business. Our business gets better every day. We’ve chosen a slightly different path. Our path includes way more credit. And to serve the market we’ve picked, you need different investors, you need a different capital source, and you need to have a slightly different business model. And I look forward to explaining all of that, but I would rather play our hand in this industry than anyone else’s hand.
PICKER: Just going back to kind of moving beyond, you know the overhang and some of the noise in recent years. You know, one of the big reasons why analysts and investors were concerned is because LP started pausing commitments. And, you know, waiting out to see if the noise and if the clouds go away. Have you seen that take shape? Are you back to say where you were in 2019 with LPs – back to 2018, where you were with LPs?
ROWAN: So we have raised approximately $20 billion a year for every year that we have not raised a flagship fund. This year will be no exception. We will raise $20 billion from institutional sources. But I think again it obscures a little bit of the picture. If you look at Apollo and Athene together, we will raise close to $55 billion of organic inflows this year in addition to what we do inorganically. Virtually no one has that kind of machine. And so yes, last year LPs had us on pause. This year the engine had to start up again, that engine is starting up again. Next year we will raise our 10th flagship fund, Apollo fund 10, and we look forward to it.
PICKER: So is the idea kind of maybe certain LPs who have sat out are being supplanted by other LPs who are more willing to put capital to work with you all?
ROWAN: Look I never say everyone, but the vast, vast majority – this is in the rearview mirror. This is now my 36th year in this business. Jim Zelter and Scott Kleinman not quite as long a tenure, but getting very close. The reality is that we have performed for investors in ways that few firms have performed. We have defined our business as one of excess return and we’ve delivered on that promise. The most recent fund, fund nine, roughly 25 billion was marked up about IRR-wise – 49% gross, high 20s net. Truly extraordinary performance. I think investors will be back.
PICKER: Can you explain how everything materialized so that you would be CEO? I ask because you were on sabbatical and then all of a sudden there were headlines, an independent investigation. And now your CEO. I think it was as a recent Business Insider profile described that you were tasked with lifting a firm out of a crisis. You know, did you want this job? What are you doing here?
ROWAN: So, let’s start with – I rarely get my news from Business Insider, so we’ll start there. This is an amazing job. Think about what’s going on in our industry. We have a unique macroeconomic backdrop. We have a business literally that gets better every day, whether it’s demographics, whether it’s low rates, whether it’s generational transfer of wealth. The momentum is there in this business. And then you have this interplay of technology coming into alternatives, and really reshaping the financial landscape. So anyone who’s not excited about what’s happening today is just missing the bigger picture. So now let me go back. So first I was on semi-sabbatical not on sabbatical. The reality is the first half of 2020 was unbelievable. In that period of time, we built our insurance franchise by $88 billion. And I worked around the clock, like an associate. And so at June 30 In the middle of the pandemic, decided to take a few months off and step back. When Leon stepped down, and when problems became clear in the Fall, we went through generational transition. And it’s something I’ve been very focused on as an industry. Our industry was all founded the same way as private equity partnerships. Most of the founders are in their mid-to-late 70s and believe it or not, everyone is going to go through a generational transition, we’ve just done it first. And it’s not just leadership, it’s governance, it’s an articulation of strategy, and it’s acceptance that this is a permanent business that is moving forward. We’ve just done it as I’ve jokingly said, more noisily than others probably will. But make no mistake this generational change, this generational shift is coming to every firm in our industry.
PICKER: Speaking of a generational shift, let’s pivot to strategy for a bit because you’re credited with kind of being the brainchild behind Athene. Recently Apollo, of course, announcing that merger giving the insurer an $11 billion valuation. The Wall Street Journal describes the shift as Apollo’s evolution from a leveraged buyout shop to a credit investing powerhouse catering primarily to insurance companies looking to park reems of cash. The firm is now 70% credit, Apollo is 70% credit only 19% private equity. What’s the key driver here? What’s the idea behind this clear pivot toward credit?
ROWAN: So this is the evolution that I spoke about. I mean, if you step back and look at our business, first we define it as excess return. And there are some of our businesses that benefit from more scale and there are some that just don’t benefit from more scale. In our opportunistic, our private equity business, we are $100 billion today. It is unclear to me that we derive strategic benefit or that our investors benefit from us being much larger. This will be an important part of our business going forward, it generates huge return, huge amount of profitability, intellectual capital. But it is not an AUM growth business. It is a business that we maximize returns in for the benefit of investors. And it’s a little bit like the farming business – we plant, we harvest, we plant, we harvest. It never really gets very far, nor should it. The hybrid business, which is very similar to our opportunistic business, is more nascent today, that’s about 30 billion. That exists because of inefficiencies in capital markets, it is, as I’ve said, the best risk reward in the market today. This in-between strategy. And this will be two, three times its size going forward. But now I come to credit. Credit today is circa 350 billion. 250 billion of that goes to Athene and Athora and 100 billion to our clients. And while 350 billion sounds large, in the scale of those markets it’s small. We have such a long way to go in credit.
PICKER: So how big do you think it will be?
ROWAN: I’ve said publicly, I think that business will be twice its size over the next five years. And it is the market that is telling us that excess return can be earned and scaled in this market, rather than us simply raising AUM. I think people have misunderstood how alternatives work. We exist to provide excess return. If we take in too much money and we just chase AUM, our ability to earn excess return will disappear. And thus, our business will become less unique. And therefore, what we’ve done is we have this amazing scalable business in credit. And that’s what we’re going to grow. That’s what deserves to be grown and we can earn returns, while scaling it, whereas in private equity and some of the other asset classes that opportunity does not exist.
PICKER: So, you say this market, and this market has certainly been a huge tailwind for just the alternatives industry as a whole. But, you know, if we think back to potential risks out there, you know, for example during the peak of the pandemic in March 2020 the credit markets froze. It provided at least it was reportedly, it provides some challenges for Apollo and, of course, the Fed’s intervention allowed that liquidity to flow once more. Are you worried about another challenge with regard to the credit markets freezing? Is that something that could be a big issue for the company as it moves to have so much more assets in that area?
ROWAN: So, as a CEO I’m a worrier about everything. That’s what we do. But I generally embrace change. Our industry has been very good at embracing change. Clearly in the equity markets, change has been good for our business. Uncertainty has been good for our business. And when the sun shines every day, it’s sometimes more difficult to put capital to work. Credit, I think, has to also be put in its proper context. Many in our industry have gone from private equity to real estate to infrastructure and then to so-called credit – so-called private credit, which I think is very much misunderstood. Private credit can be really opportunistic, or it can be really safe. We are in as I’ve said, the fixed income replacement business. We are in the safe end of the credit market. We’re there not just because we like that market, but because that’s the size. That is the massive market. Our competition there is everything that a bank once did, everything that a GE Capital once did. And so if you think about the seizing of the credit markets, I think you want to be senior secured, and you want to earn excess return through origination and taking on illiquidity, not through credit risk subordination or duration. So, I think for all those reasons, not that I welcome a setback in the credit markets because no one welcomes a setback, but we are set up for the long term as a senior secured top of the capital structure investor. And I think it’ll be just fine.
PICKER: Which is something that Apollo knows and has known just from its private equity beginnings is this idea of investing up and down the capital structure, known for more distressed buyouts. I want to get your thoughts on the markets because you have $50 billion worth of dry powder to deploy at least that was the case at the end of the second quarter. You also are looking to launch Fund 10 soon, potentially next year, early next year. The firm’s competitive advantage historically lies in areas of more distressed restructuring type situations, obviously you’ve move beyond that recently. How do you look at the markets right now? Does this feel like a time where it’s good to be a net seller because things are frothy out there or is it a time to be an net buyer because you’re seeing actual opportunity?
ROWAN: I think you have to take it business by business. So I’ll start with the largest business, which is credit. This is a business where we’re matching assets and liabilities. It is not a question of time. We don’t time the market. We wake up every day and we put spread on the books to offset liabilities for either our insurance company affiliates, or for our clients. So this is a manufacturing business. It exists whether markets go up or down, whether rates are high or low, it is about spread and capturing of spread, and not about market timing. The hybrid and opportunistic businesses necessarily are about market timing. And I would have to agree that on balance, things are priced for perfection. We have historically low rates, we have a flood of liquidity, we have unbelievable levels of correlation, whether it’s through open-ended mutual funds, ETFs or otherwise. All of that in some ways is a setup for a fall. But even in this market priced for perfection, there are whole sectors of the market that are just overlooked. Complexity, change, misunderstood situations, there’s always something to do. You know, for my 36 years, there’s always been too much money chasing too few deals. It’s never been any different. And somehow, the good firms have managed to dance between the raindrops and put money to work at very nice rates of return, independent of cycle.
PICKER: One of the most high-profile deals of course that Apollo has gotten into this year recently closed was that with Yahoo. What are your plans there? What are you thinking there is ? We kind of look into that realm of missed opportunities. This has been a company that’s seen its fair share of CEOs, its fair share of owners over the years. How is Apollo going to do things differently?
ROWAN: Look it’s early days. I think we’re a week past closing, so we’re not ready to you know do the victory lap just yet, but I come to this incredibly optimistic. And the reason I’m optimistic is the number of phone calls I’ve been getting with people who wants to do business with Yahoo. They want to do business with Yahoo Finance, they want to bring gaming, both for fun and for profit, to the Yahoo platform. There are people who want to do business with Yahoo Sports. And so anytime I see this swirl of activity, of growth players who want to access the 900 million customers that Yahoo has, I think that’s a pretty positive situation. And obviously we’ve been successful in attracting amazing leadership.
PICKER: And you announced that, just this past week, the new CEO.
ROWAN: Yes. It’s amazing how quickly this all gets done.
PICKER: Exactly. I want to talk to you about fintech as well because this is not an area that I think most people associate with Apollo. But recently, you took a minority stake in a company called Motive, which is a PE firm with a fintech lens. And you’ve also partnered with a blockchain startup called Figure. What’s next? Is there an Apollo NFT? I mean, what are we doing here?
ROWAN: Look, I think that one has to look back and see what’s happening. So in the fintech landscape, you basically have challenger firms up and down the list of opportunities. There are challenger firms for MasterCard and Visa, there are challenger firms for brokerage, there are challenger firms for banks and all form of asset origination. One of the interesting things about those challenger firms is almost none of them have a balance sheet, nor do they want a balance sheet. And so, I started to look at this – and I think fintech is a multi-pronged opportunity for Apollo. We want the assets, provided these challenger firms originate quality assets. Therefore it’s our opportunity to partner with them, take an equity stake – help them be successful – and supply massive credit firepower as they take on the more traditional institutions. We also have a role as validator. You pointed out Figure. We are ourselves a large financial services enterprise. We have a massive position in the securitization market. The initial deal with Figure will be about bringing our securitization to Figure’s blockchain. We’re validating what Figure does. And by the way, Figure does an amazing job. Not only is it more secure, it’s 30% cost save, plus the information that we get in real time by using blockchain rather than paper really is a game changer for the business. And yes, for validating and for moving, we’re going to take a stake in Figure as well. And I would expect that we will continue to do this. We are at our core, a big financial services enterprise. We have always been a big financial services enterprise and if you look underneath at what Apollo’s done over its 31-year history, fig and fintech have been among the most dominant themes across our investor landscape and investment landscape.
PICKER: That’s certainly true. So you plan to use the blockchain then for the securitization products. Do you expect to expand that also maybe to the PE side of your business through portfolio companies, accounting, ledgers – that way?
ROWAN: That’s not the initial plan. Let’s start with securitization, which is where we see the most benefit. But technology is now – it’s not a sector. It’s inherent in every one of our businesses. We have built out an amazing technology platform within Apollo to serve the portfolio companies, They are first movers. They are very good at adapting to change. And if we as an industry can think that alternatives are protected from changes in technology, we’re not. But we should embrace this. We as an industry tend to move faster, we tend to be willing to try new things. Motive and Figure and the other partnerships we’re talking about are all about helping us move faster.
PICKER: What about crypto? When we hear the term blockchain some time people automatically look at crypto. I mean is that — it sounds wild even asking you about this, but is this something –
ROWAN: I’m not going to take a pass on many things today, I’ll take a pass on crypto.
PICKER: So you’re taking a pass on crypto as part of an Apollo –
ROWAN: Other than as a personal opinion, I really –
PICKER: Well, what is your personal opinion?
ROWAN: Look, I think the early days of crypto have been very, very difficult. Not in that it hasn’t been adopted, but it has been adopted in many ways because it is a way around a workaround of the financial system. Whether the U.S. government, the Chinese government, other governments allow that to continue, I think we’re already seeing the pushback. We’re seeing the investigations. We’re seeing the noise around stablecoin. We’re seeing the noise around bitcoin. But as I get out of my area of expertise, I’ll stop there.
PICKER: So you’re not too worried about this whole de-fi movement – decentralized finance, what it means for Fig and for your business.
ROWAN: I think you have, again, I come back to you. I think you have to separate the notion of decentralized finance does not automatically mean crypto. There are going to be many ways to construct payment rails and crypto is just one of them. Blockchain is another of them. I think we are in the early innings of this, but we can look around the world, and primarily to Asia, and see that this has been successful. This is not some great leap forward. This is a matter of time, and ultimately whether it is dominated by incumbent players or it is dominated by new entrants.
PICKER: So does that mean that Apollo is dipping its toes in in some form or?
ROWAN: You know, more than dipping its toes. I mean if you look at we are nearly half a trillion dollar asset manager. And underneath that, we have a large retirement services business. In our retirement services business we are larger than either Munich Re or Swiss Re. We have a role to play. And so I would say beyond dipping our toes, we are a validator, a la Figure. We are a source of financing, the way I have described us backing up many of these front ends. And we are an investor, through Motive and others. I think fintech is going to be one of the more interesting areas and where we can play a strategic role, in addition to an investment role.
PICKER: Fascinating.
ROWAN: It is fascinating. By the way, one of the most interesting parts of the job is to watch technology come at the same time we’re watching really unique situations in market history.
PICKER: Yeah, I agree. So, you mentioned regulation as a concept. Just overnight – yesterday and this morning – the big chatter has been around a new tax plan being proposed in the House that would raise the corporate tax rate. Of course, you and a lot of your peers, converted to a C-corp with this idea of kind of changing corporate governance, being more included in the indexes, but the idea and the math really worked for a lot of firms, because of the lower corporate tax rate. Does that move the needle for you or would that change the game in terms of converting back into partnership?
ROWAN: The answer is no, not really, because the talk is not just about corporate tax rate but it’s also about raising tax rates on individuals generally. The general feeling in the business community is that taxes will go up however you are structured. For us and for most in the industry, the C-corp is to make us more ownable, more investable by the public. And it is the logical sequence from private partnerships to publicly traded partnerships to controlled companies, and now for us, to a fully normalized C-Company. Normal governance.
PICKER: So, C-corp will stay?
ROWAN: C-corp will stay.
PICKER: Carried interest did seem to kind of escape this latest House plan. Is that something that you think will also continue to be treated as capital gains as opposed to ordinary income?
ROWAN: I think it’s just too hard to say. Carried interest has certainly been a topic of discussion now for almost 20 years, we’ll have to see.
PICKER: It’s certainly been a sticking point where people like to bring it up, but nothing really seems to change. I want to get your take on the credit markets in particular because we talked earlier about the spread and the fact that, you know, markets go up, markets go down. It doesn’t really impact the spread. Does a change in monetary policy regime impact that business at all? In other words, you know, as we see the recent inflation numbers, as we see the recent print, does that translate into anything with regard to your spread business if interest rates were to go up, say in the next year or two?
ROWAN: I don’t think directly, but we have to be mindful that government intervention QE around the world in all its various forms, is a huge part of the credit markets. But I think there’s something that’s even bigger. What’s happened over the last 20 years is like the equity markets ,credit markets have commoditized. There is a wall of money that wants return. And spread return in credit markets is the lifeblood of banks, of insurance companies, of finance companies, of retirees, of pension plans – every investor wants spread. And what’s happened is the advent of open- ended mutual funds, ETFs and derivatives have really driven spread out of the public credit markets. So, yes rates may be higher if we end up with less QE. It is unclear to me that spread will return at all, other than in times of crisis to the credit markets. And so our bet is not that spread is coming back, our bet is that the way to achieve the kind of spread that we want – safe spread – is through origination. When you originate an asset, you control its diligence, you control its documentation, you control its structure, its underwriting and ultimately the economics. I mean think of all the businesses that a GE Capital was once in. Those are the businesses that we have built. We lend against planes, we lend against trains, we lend against franchise. We want to be in the senior secured origination business, because that we think is what is enduring, whether we have QE, whether we don’t have QE, but I do believe as a firm that spread has pretty much disappeared from public credit markets.
PICKER: Are you seeing inflation popping up in your portfolio companies?
ROWAN: Everywhere.
PICKER: Everywhere. Tell me how.
ROWAN: There’s not a place. Everything we once did now costs more. Lead times, pressure on inventory, pressure on supplies, pressure on employment. I mean, our experience in our portfolio is really no different than the broader economy. We have a portfolio that in many ways is representative of the broader economy. And we’re seeing it everywhere.
PICKER: Is that something that you as portfolio managers are you able to get that under control? Do you believe it will be under control? Do you believe that this is given what you’re seeing on the ground that it is transitory as some Fed officials believe? Or do you think it is more permanent?
ROWAN: It is very hard to know and I’m not sure it’s our job to get it under control. Our job is to prosper in the environment that is in front of us and we prosper in the environment that is in front of us. Whether it’s transitory or not remains to be seen. As a personal belief I do believe it’s transitory. If you step back, we in the U.S. are just a slower growth economy, slower population growth, slower productivity growth, and it will not surprise me to see some of these pressures ease off as the pent up spending retreats, subject to what the government does.
PICKER: I want to ask you about corporate culture and diversity, because this has been a really hot button issue in financial services overall over the last year, the broader economy as well of course. You partnered with some of your peers to create a pipeline and invest dollars to historically black colleges and universities in order to recruit more talent and diversify the – I’m assuming your firm as well as the industry as a whole. What’s the thinking behind that? And why do you think that there has been such a hurdle to make the private equity industry so diverse in the past? Is this a solution or should there be more?
ROWAN: There is no solution. This is a piece of a broader agenda. For us, the culture of the firm is one of authenticity. And so, if you look at how diversity or opportunities typically run, it’s run out of HR, it’s run out of a special TD&I department. And if you look at what we’re doing, yes, we have all the programs that one would want. We’re tracking what we do. We have an amazing team in DE&I, and I think we’re in the top third of what we do in the industry. But if you really step back and you want to affect fundamental change, that’s not going to do it. The way we get anything done in the firm is we set the guardrails or we set the goals, and we let the firm loose. And so for us, we have to find our Northstar as opportunity. All of us. You scratched the surface at Apollo, everyone is there as a beneficiary of some opportunity. Maybe not the way you ask the question, but whether it was a loan program, government support, a mentor or some other lucky break, we are all the beneficiaries of opportunity. And so my message is, If you’re in our legal department go do opportunity. Think about who you give cases to, think about who you give work to. If you’re in our portfolio operations team, do the same thing. Yes, if you’re in HR, and so when you ask about all finance. This is a little bit of the seeding of the pipeline to make sure we get good candidates. We as an industry hire typically out of investment banks and commercial banks, and if those candidates themselves are not diverse, it is unlikely that we will end up with a diverse population at Apollo, or throughout the industry. So this is one piece of a much broader puzzle. And it is not just opportunity or all finance built around race. It’s around geography. It’s around gender. It’s veterans. It’s opportunity in every way you can define it. We exist as a majority millennial workforce. This is the right thing for us to do. This is what our teams want us to do. And for us, it’s the best way to get talent.
PICKER: Beyond what your employees want to do and you want to do and I’m assuming your LPs have also been discussing this with you, what does it mean from the standpoint of return? what have you noticed with regard to how a more diverse workforce has translated into performance specifically?
ROWAN: Look, it’s very hard to pin down the specific benefits of diversity. Obviously there are all forms of academic studies that tell us a more diverse workforce leads to better outcomes. I would be hard pressed to tell you that we have documentable proof that that is the case. It certainly feels better, and it feels different. And we are an evolving industry. We confront as you’ve already suggested and through your questions really interesting problems along the way. And having diverse points of view around how to confront those problems will no doubt benefit us.
PICKER: Yes, I would definitely second that that you are certainly someone who is confronting a variety of interesting challenges on so many fronts. We appreciate you joining us today to share them with us and explain how you’re thinking about things with the economy, with your company. Marc Rowan, we really appreciate you being here for this livestream today.
ROWAN: Thank you. It’s amazing. Thank you so much.
PICKER: And thank you, all of you for watching this Delivering Alpha livestream today. Don’t forget Delivering Alpha is September 29. We have an amazing lineup of speakers including Jim Coulter, Mary Erdoes of J.P. Morgan, and Chamath Palihapitiya, just to name a few. For more details and to register for this year’s event, go to cnbcevents.com/deliveringalpha. See you there.
