WHEN: Today, Thursday, September 19, 2024
WHERE: CNBC’s “Squawk on the Street”
Following are excerpts from the unofficial transcript of a CNBC interview with Apollo Global CEO Marc Rowan on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Thursday, September 19. Video will be available on CNBC.com.
More of the interview will air on “CNBC Leaders” tonight at 7pm ET.
All references must be sourced to CNBC.
ROWAN ON THE FED & RECESSION
MARC ROWAN: It does not feel to me like we are having a traditional recession, and yet we are using the tools of a traditional recession. We are — we’re going to run a $2 trillion deficit this year. So I think we’re in uncharted territory. And that’s why I say it’s an insurance policy.
DAVID FABER: Well, what’s it an insurance policy against? Because you seem to be indicating in some way, given your view, or the house view, that in fact there could be a lot of risk from lowering rates to this extent.
ROWAN: And I think there can, and that’s why I say it’s a risky insurance policy. The insurance policy is to get ahead of a potential slowdown based on incoming data. And the risk is that all of this fiscal stimulus, which is very long term, which has not yet come online, against the backdrop of noisy data and a noisy model, forces the government in — the Fed into a retreat.
ROWAN ON RATE CUTS & MORE ON THE FED
ROWAN: I don’t think we’re going to know for a long time. My view is what they did is they took out an insurance policy, insurance against things going poorly. But the insurance policy is not without risk. Certainly our house view is much more conservative than the market view, as to both the number of cuts and the final level of interest rates. But I come at this slightly differently. We’ve been through an extraordinary period of time. We’ve been through COVID, been through recovery. We’ve had unprecedented fiscal stimulus. How do we know that we’re calibrated correctly?
ROWAN ON CHANGING INDUSTRY & FINANCIAL SYSTEM
ROWAN: I look at a traditional investment portfolio. And this is, we can have some fun with this for individuals and also for institutions. They’ve mostly lived in a three-flavor ice cream world. We’ve had vanilla, chocolate and a little bit of strawberry, stocks and bonds and alternatives, so called privates. What we’re watching happen and what’s going to drive our business and I believe drive much of our industry over the next period of time is people are going to move out of this little bucket called alternatives, where our entire industry has been built for 40 years, and they are next going to go to their fixed-income bucket. And they’re going to go to their fixed-income bucket, which has become 100 percent beta, no excess return per unit of risk. And they are going to begin to ask questions like, how much liquidity do I actually have in my fixed-income portfolio? By recent measures, it would take you five days to sell an investment grade public corporate bond today because there is no liquidity. Once you accept that, why should I own public? Perhaps, I should own public and private. And the reason it’s going to happen in fixed-income first is because you have helpful signposts, rating agencies. A rating agency can tell a prospective portfolio manager, this is a single A, and this is a single A. They have the same measure of credit integrity. And, therefore, a buyer can make a choice as to whether to be in public or private or how much excess return they need for public and private. And, by the way, we take for some, we take for granted that there are actually differences between public and private. I will predict that, a year from now, you will not be able to tell the difference between public and private.
FABER: What does that mean?
ROWAN: That it won’t be different issuers. It won’t be different ratings. It won’t be different sizes, and it won’t even be different liquidity. Everything that exists in the public markets on the fixed-income side, repo, borrowing, easy leverage, ratings, daily pricing, is all coming to the private market, initially focused at investment grade, where most of the action is going to take place.
FABER: Right.
ROWAN: And that’s why I look and I step back and I think about the drivers of our business and come back to your question on interest rates. OK, interest rates are down. Therefore, the available yield on every fixed-income instrument is down.
FABER: It’s down.
ROWAN: That’s not really the question. The question is, how much more return can I get in the private market than in the public market?
FABER: I know you talk often about liquidity discount, so to speak, or the fact that you’re getting obviously a lower return as a result of taking liquidity on the other side, or having daily liquidity, even though, as you just indicated, in some fixed-income markets that doesn’t exist.
ROWAN: So I think we’re going to start again to change our nomenclature. The notion of a liquidity discount, I believe, is going to disappear, because there’s not going to be appreciable differences in liquidity. And so I asked myself and I really pushed the firm, where does excess return come from? I believe excess return comes from origination, the capacity of an investor, someone like us, and we’re not the only ones who do this, who can go out and work with a company and solve their unique issues and make the commitment and structure and take the whole thing down and originate a credit. Origination is where I believe excess return comes from. And for us, we are very focused on scaling origination. We’ve spent nearly $8 billion. We have 4,000 people who wake up every day and all they do is origination. Think of the number of firms in our industry who will actually make that kind of investment and who will master the ability, not just to have the people, because the people are hirable, but to organize them into platforms who specialize in originating aircraft loans, fleet finance loans, receivable loans, inventory loans, other forms of secured financing, loans to investment grade corporates. This is a process. Very few investors will actually do what I’ve just suggested. And we found ourselves here almost by accident. And I go back, and, sometimes, it’s the historical accidents that put you in the right place. When we started our retirement services company some 15 years ago, the secret to success in retirement service is the capacity to originate investment grade credit. You’re, after all, ensuring people’s retirement, right? That has excess return. But if you also believe, like I believe, that there’s no excess return in public fixed income, you better go originate it. And so we started originating for a theme. And we built and scaled and built and scaled. And then we did what prudent investors do. We diversified. A theme does not want a hundred percent of anything that we originate. They want to be a diversified investor. They want 25 percent of everything and 100 percent of nothing. We started building client businesses around that, other insurance companies, other funds. It will eventually end up, as you’ve now seen, in ETFs. And so the notion that private somehow means risky or private infers a size of company really, I think, is going to be relegated to a distant way that we used to think.
FABER: Right. And you indicate we’re still at the beginning of that process. And, obviously, you believe you positioned Apollo to benefit from it. I mean, where’s the harder conversation? Is it with the originator, in other words — excuse me — the issuer, or is it with the buyer?
ROWAN: It’s really with neither. It’s about change. We are, we are wedded to the ways we do certain things. We adjust very slowly. The products that exist today will not be the dominant products 10 or 15 years from now. And whether you are a regulator, whether you are an insurance company, whether you’re a portfolio manager or a consultant, you are just getting used to the notion of change. And so much in our financial system has changed, because we forget, in 2008, we came very close to destroying our financial system. And then we made a ton of changes to the financial system, Dodd-Frank, as well as numerous other pieces of legislation and practice. But none of us have ever experienced this, because right after we made these changes, we printed $8 trillion and everything went up into the right. We’re just experiencing it. We’re just finding out, for instance, that there’s no liquidity in fixed-income markets, that trading capital in the world is 10 percent today of what it was in 2008.
FABER: It’s taken us 15, 16 years to figure that out? ROWAN: We’ve had a very bullish, very positive liquidity situation in the US, but we have already seen instances of wholesale market failure. Thankfully, they have not been in the US.
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Jennifer Dauble
CNBC
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Stephanie Hirlemann
CNBC
m: 201.397.2838
