This transcript captures a conversation between Nikla Tangin, CEO of Norges Bank Investment Management, and Mark Rowan, co-founder of Apollo Global Management. The discussion delves into Apollo's history, investment philosophy, the changing financial landscape, leadership insights, and Rowan's personal views on the market and the world.
Rowan begins by reflecting on his initial skepticism about entering the financial world, emphasizing the constant evolution of the industry. He credits fundamental change, rather than solely skill, as the driver of Apollo's growth from $40 billion in 2008 to over $700 billion today. He attributes Apollo’s founding to being unemployed after Drexel Burnham's collapse, underscoring that entrepreneurship often emerges from necessity, while acknowledging the significant role of luck alongside mastery of the craft. Rowan believes that starting a new financial services firm today is much more challenging, predicting a market dominated by small and very large firms.
Rowan clarifies that Apollo's operations encompass two primary businesses: asset management and retirement services (Athena). The retirement services side, initially capitalized with a mere $16 million, has exploded into a $400 billion enterprise. This success stems from the need for investment-grade fixed income with a spread, leading Apollo to develop its own credit origination capabilities. He emphasizes that origination is the lifeblood of the business. Apollo is also involved in credit origination, similar to the old GE Capital, using its expertise in various sectors to become a strong lender in areas like fleet, aircraft, and securitization finance.
The conversation transitions to the evolving role of non-bank lenders. Rowan dismisses the notion of a fierce battle between banks and investors for private credit market share. He argues that "private credit" should be defined more broadly to include almost every asset on a bank balance sheet, the vast majority of which is investment grade. While Apollo does engage in leveraged lending, it constitutes only a small portion of their overall business. Rowan highlights the trend of regulators worldwide encouraging investors to take on a larger role in credit provision, as opposed to banks. He points out that banks are ideal for operationally intensive, shorter-term lending, while institutions like Apollo, with long-term insurance liabilities, are better suited to providing capital for infrastructure and energy transition projects. He emphasizes the symbiotic relationship between banks and asset managers; banks want the client relationship and Apollo wants the asset, suggesting they don't compete directly.
Rowan contends that the claim that Apollo needs to be regulated like banks is unfounded, due to the lack of deposit-taking, maturity transformation, or access to treasury funds. He argues that increased investment participation in the credit market enhances the system's resilience and reduces leverage. He believes that private credit is ultimately headed towards integration with public investment-grade credit. Rowan notes the decline in publicly listed companies in the US and the increasing prevalence of private companies, suggesting the need for more private capital. He claims that public markets have become too indexed and correlated and is driven more by capital flows than genuine price discovery in the short term. He critiques that active fund managers consistently fail to outperform the index, indicating the structural shifts in the market.
Turning to private equity, Rowan anticipates lower returns on recent vintage funds due to high prices and low-cost leverage during periods of massive monetary stimulus. He predicts a shakeout, with firms providing "private markets beta" struggling, while those focusing on "private markets alpha" will thrive. Rowan expects stable fees but not necessarily industry growth. He anticipates increased demand for private assets from family offices and individuals and eventual convergence between public and private markets. He believes fixed income is leading the way, where allocations are splitting between beta and alpha.
Discussing liquidity, Rowan claims the shift of capital towards the private markets, paired with investment banks using less capital for market making, the liquidity in the public market will be strained. In turn, he suggests that the private market liquidity will increase for the investment grade market. He sees private markets eventually offering the same issuers, ratings, size, and liquidity as public markets. The discussion extends to equity markets and argues that investors will own private equities even if they're not a component in their private equity portfolio. He points to companies like Spotify and OpenAI, which have raised equities without going public.
When asked about asset growth vs return generation, Rowan stresses that pursuing asset growth at the expense of returns will destroy the business. He highlights three fundamental principles at Apollo: Purchase price matters, generating excess return per unit of risk (alpha), and ensuring alignment of interests. Rowan emphasizes value-based investing and generating alpha in both equity and fixed-income markets. He asserts that Apollo's investment philosophy has remained consistent since its inception, with a focus on value rather than chasing trends.
Rowan acknowledges geopolitical and political risks as key concerns, as well as the worrying implications of a large peacetime deficit. He also highlights indexation and correlation as systemic risks. He points out the lack of daily liquidity in public markets, especially in 401k accounts. Rowan advocates for top-of-the-capital-structure investments in credit markets and avoiding trends in equity markets as risk mitigation strategies.
Reflecting on leadership, Rowan describes himself as a servant leader who enables his team's success. He emphasizes managing the careers of his 200 partners and fostering a culture of judgment and partnership. Rowan underscores the importance of cultural communication. As for weaknesses, he stresses that the firm’s success comes from his position to position the company to benefit from tailwinds in the markets. Rowan is proud of his team and the overall work environment that he feels like they are privileged to work at every day. He is motivated every morning by learning what is happening around the world and figuring out how to take action.
In terms of decision making, Rowan says it is important to analyze, as well as trust your gut. He doesn’t see the job to be stressful and stresses that anyone who doesn’t want to be there should find a new job. When he interviews, the team is looking for a fit.
Finally, Rowan advocates for creating a safe environment for failing and moving on quickly. He stresses people and time frame mistakes that he has made and stresses the importance of a company to have the correct timing and position itself for success. And finally, when asked what advice he would give to young people, he highlights the importance of mastering one's craft and being honest with oneself, as well as loving the job.