Apollo’s private credit unit now manages more than $400 billion in AUM, four times the size of its buyout arm which historically was the lynchpin of its business. But this fastest growing piece of the alternatives market in India and world over is also attracting greater regulatory oversight.
In an exclusive interview during his first India trip James Zelter, Co-President of the firm, who co-leads day to day operations, shares his views on a wide ranging topic ranging from this new global shift in high finance to the transformation of his own firm and his first impression of our “vibrant, energetic and engaged economy.” Edited excerpts:
The era of cheap money seems to be over. So how does that impact the private equity business globally? And what does it mean for asset managers?
If you are a private equity firm and you’ve paid very high multiples for companies, and you did so with a lot of debt, that business model is probably challenged. We’ve always been known to be a disciplined buyer and pride ourselves on our ‘purchase price matters’ investment philosophy. Historically we have entered new investments at lower multiple than most firms in the industry, and therefore we’ve had to borrow less. So, while financing costs are certainly higher, from our perspective, this is a return to a more historical environment that favors disciplined investors. We feel we are one of the few firms that is well positioned to go on offense in this environment given our value orientation, structuring capabilities and ability to trade value for complexity. Historically, some of our most successful vintages have been deployed during periods of market disruption.
Globally, there seems to be a big shift towards private credit with many alternate asset managers jumping into the space and banks too tying up with fund managers to tap this opportunity. What’s driving this trend and how has Apollo positioned itself?
If you go around the globe today, banks in the US provide about 20% of the capital for corporations. In Europe, it’s around 75%. In Asia, it’s around 90%. Those numbers have evolved post 2008-09, depending on the regulatory backdrop and the role that the public and regulators want the banking system to play.
When I got to Apollo 18 years ago, institutional investors would typically buy credit that was either distressed or high yield. Now, with base rates going from near zero to 5%, institutional investors around the globe want credit as part of their portfolio given the potential to earn attractive returns at the senior parts of the capital structure. So you’re getting the growth from two areas, increasing investor demand for the product, as well a changing and evolving financial services system where banks are not able to fully solve all of companies’ needs.We are there to augment and partner with the banks. There’s a narrative out there that says that the banks and alternative firms are in a battle. The reality is we’re working more together than we ever have before. Companies increasingly need capital to grow and if the public markets are not open and the banks are not lending, we have been able to serve as that bridge between institutional investors who want to get exposure as well as companies that need capital.The good thing about the United States is that it has the deepest, broadest, most developed capital markets around the globe. So for a firm like ours with a lot of capabilities, we can be very active. But certainly when you go around the globe and look at parts of Asia, or Australia, or India, you will find well developed public sector banks, as well as a variety of non-bank financial corporations. We’ve been very thoughtful and measured over the last decade in our approach to investing and partnering with companies, and we’re going to continue to look at select equity opportunities. But when I look at the opportunity set, India is one where it appears to us that the breadth of our capital over a long cycle could play a burgeoning role here, as companies look at financing opportunities and seek differentiated access to capital where we can be a value-add partner to help them achieve their growth objectives.
In which pockets of the lending space do you think traditional banks are retrenching and giving players like Apollo the extra room?
In the current market, it’s clearly in the leveraged and sponsor finance space. In 2008-2009 at the peak of the cycle, there was $500 billion in LBO financings that Wall Street banks had extended to financial sponsors that proved to be a significant challenge. A lot of that paper ended up being sold at a discount because the banks didn’t want to own it. A year or so ago the market maxed out at about $100 billion and then the banks stopped. As financial institutions have been very disciplined, they’re limiting their risk exposure.
Another area is in private fixed income and investment grade credit that is less liquid or more bespoke than what’s offered by the public bond markets. This is where we focus at Apollo. Banks have highly liquid funding models that rely on deposits, whereas we fund ourselves primarily with permanent capital. So even in the investment grade space, a lot of this credit has moved to places like Apollo with clients that have long-dated capital and want to invest in IG assets.
The reality is we’re providing solutions for the needs of corporates and sponsors. Around the globe, the zero-rate environment was a real tax on savers and retirees. For the last 15 years with zero rates, it was punitive to be a credit or yield investor, as debt essentially subsidized the returns for equities. Now, that’s massively shifted with debt holders and lenders generating attractive returns for their capital, and we want to be part of that solution.
Apollo has transformed a lot in the past few years. Could you describe Apollo today and how it is different from what it was when you joined the firm?
Apollo is an alternative asset manager and retirement services firm. We’re over $600 billion of AUM, about $100 billion in equity, about $100 billion in hybrid, the midpoint between credit and equity, and $400 billion plus billion in credit. Over the last 10 to 15 years, since 2008-09, there’s been a massive transition among alternative firms and our corporate strategies have meaningfully diverged. Our big bet was private investment grade credit.
Post 2008-09, we created a retirement services business called Athene, which we scaled, took public and eventually merged with Apollo in the beginning of 2022. Alongside that, we built the industry’s largest alternative credit business to invest this capital, primarily focused on private investment grade credit origination. Today, Athene is the number one provider of annuities in the United States, which are a retirement savings product that guarantee a certain rate of return for five or seven or 10 years.
What this means for companies is that we have a large pool of permanent capital and can lend to high quality companies at a very attractive cost of capital. This has allowed us to become a significant player in the arena of private credit, which is a broad, growing asset class with momentum in today’s environment. We’re most active in the US, have a significant presence in Europe where we have approximately one quarter of our AUM, and as you go around the globe, a place like India is very interesting to us.
I’m here in India for two reasons. One is engaging with our centre of commercial excellence in NESCO, where we recently unveiled an exciting new office space that continues to drive employee engagement. That business now has 500 people and continues to expand, and includes our enterprise solutions, finance, operations, risk, and a variety of activities that help us organise our business globally.
The second is to meet with a variety of corporates, financial firms, advisors and consultants, because as the economy continues to expand, and the need for new capital is constant in this growing economy, we are making sure to take a thoughtful approach to the role we want to play in helping great companies grow and become more successful.
So, the transformation that you see is really this pivot towards private credit and growing that pool of capital into a $400 billion platform that is active across many different parts of the economy. Is that the key differentiation for the firm?
We have one of the largest private equity businesses – our last fund, Fund IX, was $25 billion and latest flagship Fund X is ~$20 billion – so we’re one of the leading players globally and are at scale on that strategy.
But certainly, credit is the lifeblood of the global economy and presents a much larger addressable market. When you look at the scale and cost of our capital, and you combine that with our ability to originate high grade assets to match them, we see much more runway for growth and global expansion. This is especially true as investors around the world look for safe yield and companies continue to attractive forms of financing.
What has been your impression of India on this trip?
It’s a very vibrant, energetic and engaged economy. We have an amazing workforce at NESCO. We recently held a town hall, which was very enthusiastic and engaged, with lots of great questions and a lot of professional pride and focus on career development. We’ve been very pleased with the development of our workforce here as we’ve continued to invest to build out our presence and capabilities, and we’ve assembled an incredible team of local leaders to drive on-the-ground engagement and help build the Apollo brand in India.
Looking at the marketplace, we like to take a longer view and evaluate trends to see where the opportunity set may be going in the future. We’ve taken an extremely thoughtful approach to building out our business in Asia-Pacific and other parts of the world and will continue to analyze ways in which we can bring Apollo’s toolkit to bear in markets like India.
Does your visit point to a direction that you are looking to increase your focus on the Indian market? Many of your peers are running a much larger business here.
When you look at global growth over the next decade, India is going to be a key player and that will inevitably drive demand for investment and the types of financing solutions we can offer. Apollo has had a long and successful presence here in India, but historically that started out as private equity. Today, we are seeing increasing demand for hybrid and credit solutions, and I would expect those will be greater growth areas moving forward. I’m here spending a lot of time with the team to really understand and map out our future strategy and I see lots of opportunities for Apollo to be a more active player over the next several years.
There is a perception issue in the sense that Apollo was seen as a private equity fund when you first came to India. Then you were in a JV with one of the largest private lenders doing structured credit investments. Now you’re focusing more on private credit. So, what does Apollo in India stand for?
We want to be a leading non-bank provider of capital going forward. That’s going to be in credit, it’s going to be in hybrid, and it may also be in equity. You’re not coming here to build a business for 2023 or 2024. You’re here building a business for five to 10 years from now. And again, with the economic growth and the capital needs of this country, I still think it’s very early days in the evolution and maturity of the marketplace.
In the US residential mortgages, Solar finance, and aircraft leasing are some of the most active areas for private credit, but in India what are the opportunities?
It’s still very early and there are a variety of very clear regulatory limitations on players across the financial services ecosystem. And certainly, as an economy grows, there will be inevitable demand for alternative sources of capital, in addition to the traditional bank model.
But whether it’s commercial real estate, corporate credit, or other areas of lending, I suspect that over time, this type of alternative capital will play an increasingly important role. And we want to make sure that we are appropriately positioned to bring our capabilities to the marketplace to help solve companies’ needs.
In the more than decade-long period of low interest rates, the average buyout fund returned around 18 per cent, according to data from Adams Street Partners. By comparison, private credit funds are now expected to deliver returns in the low teens. How are your investors/LPs adjusting to that?
The shift you are describing is a major driver behind the robust demand in the product. If you’re a senior secured lender, top of the capital structure, and you’re making double digit returns on an unlevered basis, that’s a very attractive return proposition notwithstanding higher interest rates. So it’s not a surprise that institutional investors are looking at private credit as an attractive asset class. We’ve been very public at Apollo saying that the ability for us to provide solutions to companies amid expectations for a higher-for-longer rate environment positions us to capitalize on attractive opportunities in the market.
We have seen Apollo gradually become more active in the private credit space in India – you did the $750 million financing solution for Mumbai airport last year, a marquee transaction. Is your strategy going to focus on highly rated, large corporates or will you also look at smaller ticket sizes in mid-market corporates?
We don’t have any product or asset class envy. There’s long term growth ahead of us in India and we want to take our time to make sure we’re building strategies which will enable us to robust growth and that best serve India based clients.
Most foreign fund managers seem to play in the higher end of the risk-return spectrum in areas such as special situations or distressed debt – often yielding 18-20% and above. Given that you have access to low cost, perpetual pools of capital through retirement services provider Athene, post its merger with Apollo in 2022, will you look at the so-called performing credit space?
Over time, depending on yields and relative value, it is very possible that performing credit could be the largest opportunity we see in the market. We talk in the US about the opportunity to scale in private fixed income, where we go to highly rated investment grade companies and provide them with a financing solution where we’re not taking additional credit risk or duration risk. But what we’re taking really is structural and liquidity risk, because of the long-dated, perpetual nature of the capital that we have. These same capabilities can be applied here in India.
Does it make sense to partner with a bank when looking at private credit, considering how large the bank market is in India?
We’ll be having this conversation over the next several years, and I think it’d be premature for me to say that we have one gameplan and we’re going to stick to it. There’s a variety of players across the financial services ecosystem in India. We feel we bring a lot to the table, and depending on the right structure and right mandate, you may find us operating with different partners, including banks in certain instances.
Apollo has also been very active in the real estate lending business in India. Between residential and commercial, which space are you more bullish on in the near term?
The corporate lending market and the real estate lending market both provide opportunities. Capital has gotten harder to source by developers, and we have found that we can provide solutions-based capital, especially in real estate, through a number of highly successful transactions. We’ve done more on the commercial side than we have on the residential side, but we’ve been active in both. Depending on the pool of capital, we will augment some of the performing solutions, and there will be opportunities for more hybrid and bespoke solutions as well.
So far, sponsor financing has been the biggest bucket for private credit players globally. Will that trend continue even in India?
We don’t have a crystal ball, unfortunately. For Apollo, however, I can tell you that we see greater growth ahead in large corporate lending and asset-backed finance than we do in sponsor finance. This is partly a function of our capital base and need for high grade assets, as well as the origination capabilities we have built up over a decade-plus.
Tech companies have been struggling with the debt raised at the heights of the post pandemic tech boom. Are you keen on pursuing refinancing opportunities in the tech space or are you staying clear of the tech sector?
We have been active in partnering with tech companies on hybrid and structured solutions for the reasons you describe. Some of these companies have strong, long-term prospects but they simply can’t refinance their debt at the current levels, and so many are finding that private, bespoke solutions – convertibles, preferred equity, financings tied to new equity injections – are a better option in this market. I suspect this activity will be a growing business for us, depending on market conditions. Valuations remain fairly high right now and the cost of capital has gotten higher, so it’s a question of making the risk-adjusted value proposition work.
Many would argue that we are also becoming very protectionist. And we’ve seen an exodus of both global companies leaving India, we saw the Swiss building materials company Holcim, it was a very large exit from India. The worry also is that long term foreign capital – foreign direct investment, that’s gone off the cliff. So it’s only the quick money, the money that’s coming into the equity markets. That’s the flow that’s coming in, and that’s more temporary.
As rates have risen around the globe, there’s a lot more competition for capital. And that is going to impact the amount of FDI in the short run. But if the economy grows like people believe it will, I think that it’s still early in the evolution of the Indian economy.