Apollo: Connoisseurs of Complexity - [Business Breakdowns, EP.208]

All right, Hunter, I am pumped we are finally getting to break down Apollo. It is one we have discussed behind the scenes here for a few months, and we have exchanged a lot of work, interesting research, and framing around what Apollo is and what it means to the financial markets. You sent me this great quote that I think is perfect for setting the table for this conversation, so maybe we could just start there with that quote, how it frames the conversation, and the breakdown of Apollo that we will get into.

This is a quote, I believe, from Marc Rowan, now CEO of Apollo. It says, “Our DNA, going back 30 years and even in our Drexel beginnings in the Milken school of studying balance sheets, is to find those areas where you are not compromising on credit risk, but you are willing to do something that may have a little more complexity in it or that has a little less liquidity, but it still has the same investment-grade rating.”

To me, this quote, and really the story of Apollo and its various phases of growth, is fascinating. It is drawn to complexity, but in so many ways, the growth and evolution of Apollo very much tracks the growth and evolution of financial markets generally. As we go through the history of the firm, I think you are going to see these themes—a focus on the balance sheet, a focus on liquidity, and an attraction to complexity—that really define the culture of the firm.

One of the things you mentioned, which is interesting, is that they have come full circle when you look at Drexel and where they came from in those days to where they are today. We will jump forward to today, give a sense of what Apollo looks like, and then trace it back from the beginning. What is Apollo today? How would you break it down in the simplest, most understandable terms?

At the highest level, Apollo is a global alternative asset manager. It is up there with the echelons of KKR, Blackstone, and others today. Apollo has around $750 billion of total AUM and $570 billion of fee-earning AUM. That puts it second or third in terms of asset size compared with the others.

Most of the time, when alternative managers release their supplements, they break down performance and fee-related earnings by strategy. Most of the other alternative managers do this in an intuitive way, where you have private equity, real estate, and credit. Apollo breaks its business down a little bit differently. It breaks it down into yield, hybrid, and equity.

This is pretty differentiated from the other alternative managers. Yield is their largest bucket, at $480 billion of AUM. That is a pretty standard credit operation covering corporate fixed-income credit, structured credit such as asset-backed securities, real estate debt, direct lending, and what we might call private credit.

There is hybrid, which has $62 billion. That is the smallest bucket, but honestly, it is probably more indicative of what Apollo is known for: opportunistic investing through credit where there is some equity upside. This segment also does some infrastructure and real estate equity investing, but again, it is more opportunistic and focused on special situations.

Finally, there is the equity bucket, which has $107 billion of assets. This is really the traditional private equity business. It houses their real estate strategies and things like that.

Apollo is very interesting to me because before we went into this recording, I viewed Apollo more or less the same, from a prestige factor, as I did in the mid-2000s when I was graduating. They were this private equity powerhouse known for big deals, and that was a very particular era.

But if I look at some of these numbers, they had $8 billion of AUM in 2002 and $70 billion when they IPOed in 2010 or 2011. We are talking about something that has scaled more than 10 times versus what it was at the IPO just a little more than 10 years ago. The prestige still feels as strong, and that is something that can go away the larger and more oversized you become. What are the differentiating factors that led to that real scaling of the asset base?

Over that time period, private capital and alternative assets in general experienced tremendous growth. If you look at the closest competitors—Blackstone and KKR—everyone found an area that was their powerhouse of growth.

For Blackstone, it is undeniable that real estate was a powerhouse of growth. For KKR, they stayed very focused on private equity and leveraged buyouts, and that has been their powerhouse of growth. Apollo focused on credit, which, if you go back to the 2000s, especially in the era when they IPOed and rates were very low, probably seemed like a less attractive bucket. It looks a lot more fortuitous now.

As these alternative managers have gotten so big, there has been a focus on getting off the vintage-fund treadmill, where you have a closed-end fund with a fixed life and are always in the market fundraising. If you go to the filings of any pension fund that publicly discloses its investments and look at those investments, they are basically in every vintage of every alternative asset manager’s funds.

That means the sponge had been adequately squeezed for all of these managers, and they started looking at ways to raise perpetual capital. They have all pursued this in various forms of open-ended vehicles. Famously, almost all of these managers have publicly traded BDCs in the markets, and they have also pushed into the private-wealth channel with things like non-traded REITs and other products that do not have that fixed fund life. Apollo has some of those as well.

But it was really their focus on and doubling down on insurance, more specifically retirement solutions, or what we might think of as annuities, that was the strategic breakthrough for Apollo. Today, that perpetual-capital bucket is $450 billion of Apollo’s total $750 billion of AUM.

Apollo merged with Athene in 2022, which was an annuity provider, and since then the stock has basically doubled. If you go back to the IPO of Apollo, the stock has annualized at around 16% since 2011. But to get there, you really have to go back to the very beginning and understand where that strategic initiative came from and why it was such a cultural product of where Apollo started and who founded the firm.

Let’s get into that. There are 3 founders here who each have their own legacies. Can you bring us back to that period of time, the environment, and these 3 founders? Put some context around them and who they were when they came out and launched Apollo.

Apollo was founded in 1990, and canonically the people who came to be thought of as the founders of Apollo are Leon Black, Joshua Harris, and Marc Rowan. There were a lot of Drexel alumni within this group that founded Apollo. Tony Ressler, who would go on to establish Ares, was in this initial group as well. All of them were Drexel Burnham Lambert alumni who came up under Michael Milken.

I really cannot overstate how foundational this background is to the firm. To do a quick history lesson, Milken established the junk-bond market. Prior to Milken, bonds were for blue-chip, safe companies. Milken realized there was a market for lower-rated, higher-yielding debt, and it was this innovation that sparked the private equity and leveraged-buyout boom to begin with.

High-yield bonds were such a boon for Drexel that Drexel became tied to Milken and high-yield bonds in general. When Milken went down, Drexel went down, and the high-yield market went down with it.

If you think of some of the other founders of alternative asset managers, such as Blackstone or KKR, it was very entrepreneurial. They wanted to go out on their own. Apollo was obviously entrepreneurial, but it was a little different. Apollo was formed opportunistically. There was this vacuum left by the collapse of Drexel after the high-yield bond-market collapse, and Leon Black specifically saw an opportunity to step into a lot of really interesting situations.

Black was the most senior of the Apollo founders at Drexel. He was head of M&A and worked really closely with Milken. Marc Rowan, who is now the CEO, was actually just an associate at Drexel, but he was in the corporate-finance department, focusing on bankruptcies and restructuring. Josh Harris was the youngest of the 3, but he was also in M&A.

This has been described as a dysfunctional family, for all that means. Leon Black is known as an incredibly tough negotiator. Marc Rowan is much more professorial and much more even-keeled. Josh Harris is a dealmaker. That is where Apollo comes from and how it gets its start: stepping into the opportunistic opportunity left after Drexel Burnham Lambert collapsed.

It is a really interesting contrast with something like Blackstone, where they were going out on their own in the mid-1980s. You do not have this vacuum necessarily in the market. You have Peter Peterson and Steve Schwarzman going out and raising, I think, $400,000 initially to get their fund off the ground. Here, I think you had something like a $400 million initial fundraise for Apollo. Is that the right number?

Here is where we have to caveat this entire discussion. Again, Apollo has drawn to complexity, but the Drexel Burnham background obviously gave them a fantastic network. What really got Apollo off the ground was essentially a mandate from the largest French bank at the time, Crédit Lyonnais, to manage through some of the distressed-debt situations that arose after the collapse of Drexel.

There is this keystone deal that set Apollo on its course to becoming one of the largest alternative asset managers. Executive Life was a California life-insurance company facing insolvency in 1991 due to its own junk-bond portfolio. Crédit Lyonnais wanted to get its hands on some of the things in that portfolio, but there was a law prohibiting foreign banks from owning U.S. insurers.

So, basically, what Crédit Lyonnais did was set up a shell insurance company called Aurora and a U.S. subsidiary called Altus. Altus provided the financing for Aurora to win the bid to buy Executive Life. Then, through a series of transactions, the distressed-debt portfolio hidden inside Executive Life was slowly transferred to Apollo’s management to fulfill the mandate from Crédit Lyonnais.

This again speaks to a recurring theme in Apollo’s life cycle. The deal is considered highly controversial. In fact, there were decades of legal fallout when it became apparent that Crédit Lyonnais was effectively secretly controlling Aurora. Apollo was never found to have committed wrongdoing. Ultimately, Crédit Lyonnais pleaded guilty to fraud and paid more than $771 million in settlements.

But the deal was a blockbuster for Apollo and really set it on its course.

Thinking about what it entailed, the distressed debt was very credit-driven in nature. Would you say that is the real DNA here? Is it the junk-bond backstory and everything that was going on with Milken? Where would you say the private-equity piece comes into play with that credit background? Was it always hybrid, just a little bit more? Tell us about that evolution and when it came into play.

I think it goes back to that original quote. Traditional private equity is very income-statement-driven. Can you increase EBITDA, and can you bootstrap some higher multiple somehow? Apollo has always been balance-sheet-focused.

When they looked at these distressed situations, they saw a way to get at assets that had value. A good example is that it was actually through the Executive Life deal that Apollo ultimately came to control a brand like Samsonite.

Part of this giant Executive Life distressed-debt portfolio was E-II bonds, which were Samsonite’s parent company. Samsonite itself had formerly been a KKR portfolio company. Anyway, E-II fell into bankruptcy, and Apollo’s bond ownership gave it significant control over the restructuring.

E-II ultimately emerged from bankruptcy as Astrum and refocused on Samsonite, which spun out as an independent brand. It was another huge win for Apollo. But again, it was getting ownership and getting at these assets through the debt side of the balance sheet.

Owning through restructuring is an alternative private-equity strategy, but one that, especially in that era, was ripe for opportunity. Apollo certainly played into it.

One of the things that is notable from its history, and you touched on it a little bit, is what it spawned in terms of talent that went elsewhere, but also businesses that sat inside Apollo, like Ares, which is another private-credit giant today. Can you get into that? I was always curious about why that was spun out of Apollo and what the backstory was there, because it feels like it would have been a core piece of what they were doing to begin with.

The founding of Ares actually speaks to this Crédit Lyonnais portfolio again. Executive Life was a California life insurer, and Tony Ressler set up Ares. At that time, Ares was an adviser on the West Coast and was closely affiliated, though not directly related, to Apollo. It became this West Coast satellite for Apollo’s credit operations.

Ultimately—now we are talking about 2002, almost 12 years after the initial Executive Life deal—one of the things that led to Ares officially separating from its relationship with Apollo was the ongoing legal trouble with the Executive Life deal. We will see echoes of that as we get into Caesars Palace and even some of the more recent deals.

Yes, it is very interesting, and the legal complexity is something I can speak to from having dealt with Apollo from all different seats at the table, both alongside them and on the other side of them. They are not shy of complexity on the deal side.

Would you point to anything else in the early days that stands out from a deal perspective, something that was defining or a good microcosm of who Apollo is?

The Vail Resorts deal is another one that a lot of people will be familiar with. That was not part of the Executive Life portfolio, but it was another situation where Vail’s owner, Gillett Holdings, filed for bankruptcy. Apollo got control of the company again through the debt and ultimately brought Vail public in 1997.

Between Executive Life and those first 2 fund vintages, Apollo absolutely crushed it out of the gate. They returned 3.6 times invested capital, which worked out to an internal rate of return of 47% before fees and 37% after fees.

Again, in the vacuum left by Drexel Burnham Lambert, Apollo was just awash in opportunities to pursue private equity through these distressed-debt deals. It did so with great success, setting itself on the course to become one of the top 3 alternative managers as private equity gained adoption from institutional investors through the 1990s and into the new millennium.

It is interesting just in terms of the origins. You can think of KKR as having its large buyouts. Some of those deals, particularly early on in the 1970s, were much more friendly. It was actually buying out the equity.

With Apollo, it was owning something through restructuring, getting into the weeds of the debt. While they have all merged to look a little more similar, or have strategies that all overlap, it is always interesting to know the origins.

Let’s get into the 2000s. This is when I came to know Apollo. It was a particular point early on in my career when it was in the headlines and had this prestige associated with it. What went into that evolution for alternative managers and for Apollo? Talk about that environment and what it was like.

Through the 2000s, and especially leading up to the Great Financial Crisis, institutional investors really embraced the asset class. The numbers were getting very large in terms of the capital that had to be deployed, and the deals were getting very large.

One of the formative deals for Apollo, both in terms of its evolution and its reputation, has to be Caesars Palace. The deal itself was not a success, but it was certainly formative in terms of the firm’s reputation. There is an entire book on it, and again, we have to caveat that the complexity of these deals is almost endless. We are going to try to keep this high-level.

Apollo and TPG Capital tried to do a $31 billion leveraged buyout of Harrah’s, which later became Caesars. This started in December 2006 and was one of the largest leveraged buyouts in gaming history. Rowan had this grand strategy around reward points. He was thinking of it like a traditional LBO: they were going to come in, improve operations, and make a return by improving Caesars’ operating performance.

But the deal closed in 2008 with $24 billion of debt and ran directly into the jaws of the Great Financial Crisis. By 2009, Caesars had a debt-to-EBITDA ratio of around 14 times.

Apollo immediately saw the writing on the wall and started trying to protect its equity value by moving assets off Caesars’ balance sheet, bullying junior creditors into swapping for equity, and pursuing all sorts of aggressive, esoteric strategies to preserve its investment.

Just like Executive Life, this led to an incredibly long, protracted legal battle. By 2019, Apollo was out of Caesars. But this is what really makes Apollo Apollo.

In 2002, just 4 years after this Caesars fiasco finally wound down, Apollo partner David Sambur, who was central to the Caesars process, was back in Las Vegas speaking with the Nevada Gaming Control Board about Apollo’s bid to acquire Las Vegas Sands and a portfolio of casinos in the Las Vegas Convention Center.

The best part is that a giant part of the financing for that deal was effectively a sale-leaseback with VICI, which was spun out of Caesars’ real estate assets during that entire process.

Apollo is in the same echelon as KKR and Blackstone, but its appetite and willingness to pursue complexity—and its willingness to say, “That went poorly, but we learned, and we are going back in with those learnings”—really set it apart from somebody who would say, “We got burned on that before. It is too much reputational risk.”

Apollo seems to have a very high appetite for taking on reputational risk in the spirit of generating returns for its investors.

It is interesting here because often, when you hear a scenario like that, it is someone who is a specialist in an industry. They can move in and out of names along with how the market moves.

Take a private-equity fund purely focused on insurance. It can understand cycles and moving into different subsectors of the asset class. With Apollo, it feels much more tied to understanding the ways of derisking your financial investment and therefore increasing return.

Is that selling them too short in terms of their specialty in operations? Do you think it is fair to say that is where they are experts or masters of the craft? How would you split up the difference between their financial prowess and their operational execution?

There are 2 things that stand out to me. One is this focus on understanding that they can create a lot of value through the balance sheet, not necessarily just the income statement. How a company is capitalized and what the sources of capital are can really drive returns.

The second is that Apollo sees a hairy, complex, or dirty situation and does not put it in the “too hard” pile. They want to dig in. Apollo is very open about using a lot of consultants and parachuting people in to understand what is going on.

Whereas other asset managers, because they have a lot of capital to deploy and are being pulled in many directions, may decide that some of those more difficult situations are a pass, Apollo sees this great white space. It can come into these really complex situations because it is willing to do so, even when there is some reputational risk attached.

Apollo might actually operate with a “too easy” pile. Whenever they get involved, they make sure the situation is not simple.

We worked our way up toward the 2000s. You talked about the financial crisis and some of the fallout as it related to the operations and the deals in the portfolio. Coming out of the financial crisis, you also had the big move to IPO the business.

Can you talk about what that meant? The idea of having an alternative manager with a publicly traded stock is an interesting dynamic that we have all come to accept and appreciate. What did that moment define for Apollo, and what did it ultimately mean for them and perhaps for the industry as well?

In the spirit of these repeating cycles, 2008 and 2009 was another situation where the fallout created a huge opportunity, not just for Apollo but for all the alternative asset managers.

There was already a strong tailwind behind alternatives, and 2008 and 2009 added fuel to the fire as people looked for what appeared to be uncorrelated returns in private markets. These firms had become very large, both in terms of assets and people, and their founders had a lot of their wealth tied up in these general partnerships.

The GP business at scale starts to become a bit of a liability. It is talent-heavy, driven by people, and you want to keep those people. You need to find a way to compensate them and have them participate in the upside.

It is also hard, at least historically, to raise money just for platform expansion. You are getting your fees and carry, but a lot of that is going out the door in compensation, and it is hard to reinvest in the business.

They all went public in 2010 and 2011. Originally, most of them, including Apollo, came public as limited partnerships. In 2019, they made C-corporation conversions. This helped the founders monetize. Again, drawn to complexity, the founders set up all sorts of elaborate tax structures to go public and protect their wealth in this windfall of monetization.

But I think it also shows that, especially post-2008 and 2009 and post-Dodd-Frank, these were becoming full-fledged financial-services companies. In some ways they operate differently from banks and make money differently from banks, but they are a key part of the financial system we have today.

When you think about the IPO, but also strategically having publicly traded equity, you mentioned some of the different dynamics and reasons why you would take the business public.

If we isolate it on an ongoing basis, you have equity that could be used as a form of primary capital. If you wanted to raise additional equity, you could use those proceeds within the business. You could use it for secondary purposes, which I am sure played a major role in the IPO, and you can use it as a currency for acquisitions or other things along those lines.

Would you say one of those buckets really stands out in terms of what it allows these alternative asset managers to do, perhaps focusing on the period after the initial monetization for some of the founders and partners within the business?

They all want to grow, and again, it is hard for private general partnerships to necessarily raise money for platform expansions. To your point, access to the equity and debt capital markets allows them to spin up new platforms and new strategies. I think that is a big part of what you see as the growth following the Great Financial Crisis.

I also think that, as a currency for talent, this is a very key element of why it makes sense for these companies to be public.

I will skip ahead a bit, toward the end of the decade and the early 2020s. We have the transition of the business away from Leon Black. We can touch on those headlines, but the important point is Mark Rowan becoming the chosen one and taking the reins of Apollo.

Can you walk through that timeline in terms of how it all played out and that shift toward Rowan?

Leon Black was certainly seen as the key man at Apollo leading up to this. The triumvirate of Black, Rowan, and Harris was still very visible in Apollo’s life.

In 2021, news broke of Leon Black’s involvement with Jeffrey Epstein. Right on the heels of that came additional sexual-assault allegations, and Black basically accelerated his departure.

Even before those stories came to light, Josh Harris was presumed to be the heir apparent and the next CEO. But by that point, Harris had already been pulled in a lot of different directions. He was buying the 76ers, buying the New Jersey Devils, and eventually came to own the Washington Commanders, previously the Redskins.

Josh Harris was very much involved, but he was also starting to do a lot of things on his own. Based on the Financial Times reporting, I do not know if we will ever know what happened internally in those discussions, but after the allegations and headlines about Leon Black came to light, Harris became a very vocal critic of Black. Apparently, that iced him out at the firm and left an opening for Rowan to ascend.

That ultimately happened. Harris stepped down and stayed on the board, Black was out, and Rowan ascended to the CEO position.

One interesting thing about Harris is that you mentioned he was buying the 76ers and the Devils well before this all played out with Black. Would you say that is just normal private-equity, major-wealth behavior? We have seen it elsewhere. The Milwaukee Bucks had a few backers, so it is not uncommon to see.

But it felt much more operationally focused and platform-focused in terms of what he was doing. I am curious whether that felt outside what you would traditionally see in someone who already has at least a portion of their foot out the door, or whether I am looking into that too much.

I would just be speculating as well, but I also think some of the reason Harris ultimately did not ascend goes back to the personalities of these founders.

Josh Harris’s reputation was as a real deal guy. I think his attraction to these sports deals was that this was the type of deal he wanted to be doing. Apollo was increasingly moving in a credit direction, which was not really what his background or appetite was for.

As Rowan ascended, it became clear that the firm was going to continue shifting toward a credit focus. I think Josh Harris is simply a deal guy. He is attracted to these big acquisitions, which Apollo was doing less and less of.

He remains a deal guy. It has been fun to watch him negotiate for the new stadium in Philadelphia and bring some of the Apollo tactics with him.

I do think we need to keep drawing the parallels to these top-tier alternative managers, which were all founded basically in the 1970s and 1980s and have an original old guard that is starting to come to the end of its career. This is a business that relies so much on reputation and talent.

In terms of how they have handled succession planning, I think Blackstone is probably the exemplar in really elevating Jon Gray’s profile ahead of that transition. KKR went with co-CEOs, which seems to have worked okay, although they have a lot less visibility than Gray.

On the other side, you have Carlyle, which did not handle succession planning well and fumbled it. Apollo was very close to falling into that bucket. But if you go back to this era, 2021 and 2022, you had the major headline risk around Black. He left, there was this brief question of whether it would be Harris or Rowan, and then, when Harris eventually stepped away, like a lot of Apollo deals, you had this very complex situation: okay, it is going to be Mark Rowan.

That is where we get to the modern day and what I call “Mark Rowan unleashed.”

Yes, he is putting his stamp on the company in a way that feels different. The comparisons you made are perfect. You take someone like Jon Gray at Blackstone, who is leaving his stamp on the company, but to me it is mostly in the form of creative social-media videos or making the company more playful with the general public.

Mark Rowan seems to be taking an almost capital-allocation approach. It is interesting when you have somebody running a business who is also a really thoughtful investor, because it turns the presentations, remarks, and way of thinking about the business into the same language as some of the people on the other side of the table.

I always find it interesting when you get situations like this. Bring us into the early days of Rowan and some of the evolution he has made for the business. What do you think “Rowan unleashed” entails?

Jon Gray has become a personality who has softened and humanized Blackstone’s image to a degree, especially recently. If you look at how Mark Rowan has taken on the role, he has almost become a preacher and an evangelist for what they are doing in a way that I do not think Jon Gray has.

Rowan ascended to the CEO role in mid-2021. Apollo held an investor day in December 2021, and to me, that investor day and the deck—which is still available online—really redefined Apollo and the industry around this idea of asset origination.

It was a 5- or 6-hour investor day with a 300-page deck. It so clearly reflected decades of thought and envisioning by Rowan about what he wanted to make Apollo.

It was around this time that Apollo began socializing the idea of merging with Athene. This is really where we get into Apollo today as an alternative asset manager with an insurance arm fully on the balance sheet.

What immediately comes to mind with insurance and how valuable that business can be is Berkshire Hathaway. From the cheap seats, is Apollo taking the Berkshire approach to running a business and having this float? What does that mean? Give us a little more backstory, because this goes well beyond 2021. This is a long, historic relationship that they have had.

In fact, in 2022, the Financial Times ran a headline: “Apollo, Athene: The New Berkshire Hathaway?” The headline ended with a question mark, so I think we have seen many times where this type of headline can be a curse.

Athene is really a different animal. This was another opportunistic trade for Apollo that turned into a full-fledged business. A lot of Apollo’s success seems to come from getting into a jam and then figuring out a very creative, financially engineered way to get out of it. I think Athene is no different.

Athene began its life as an Iowa-based insurer called American Equity Life. Here, we have to do a quick insurance-industry primer. It has a historical and recent role in the alternative space, and it helps illustrate why Apollo’s approach was so bold.

Everyone is basically familiar with the business model. People pay premiums, the insurer invests those premiums, and those investments help support liabilities that come from the insurance product being sold.

There is a spectrum of insurance liabilities, from somewhat simple to complex. Complex liabilities would be things that are very actuarially difficult to underwrite, such as crop insurance or even some property-and-casualty insurance.

Simple liabilities are more actuarially certain—something like an annuity, where you are promising a stream of payments in the future, or even life insurance, where you have a pretty good actuarial idea of what the liabilities are going to be.

Post-Global Financial Crisis, this created issues because, especially in the annuity business, annuities had been struck at higher rates. Someone might have been promised a payout of 4%, 5%, or 6%. Post-GFC, yields came way down, and insurers had this giant mismatch: they were no longer making the spread because they owed people 4%, but they could only reinvest at lower rates.

Additionally, their bond portfolios were down, and the new assets were not yielding enough to create that spread. Insurers started unloading insurance assets—which really means insurance liabilities—to alternative managers.

Alternative managers, in their desire to get off the vintage-fund treadmill, were attracted to this long-duration capital, which for them was available at a reasonably low cost.

If you think about insurance, it is highly regulated, but basically 90% to 95% of the capital has to be invested in investment-grade fixed income, AAA-rated securities, or cash. The remaining 5% to 10% becomes equity that you can take more risk with. That is really what these alternative managers are attracted to.

They can perhaps earn a little bit of spread on that 90% to 95% portion, but the 5% to 10% that drops out is a great source of long-term, low-cost capital for them to grow their businesses and seed other strategies or funds.

All alternative managers made varying degrees of investment in the insurance business after the GFC. Some were joint ventures, some were equity investments, and some were management agreements. They were all playing in this space to some degree.

Apollo bought American Equity Life in 2009, and it was such a great opportunity because they loaded the balance sheet with mortgage-backed securities whose prices had collapsed but which were still paying out. By 2010, the fixed-income markets had normalized, and Apollo’s biggest client was now this insurance company that needed to make money from spread, not risky LBOs and buyouts.

Athene went public in 2016, and Apollo owned 35% of it. This is where I talk about Apollo getting into a jam. The stock was struggling because Athene was viewed as a fee pig for Apollo. It was paying out tons of fees to Apollo to manage its assets, but at the same time, Athene represented 30% of Apollo’s asset base.

Apollo could not lose the account, and Rowan realized they had to merge. This is what the “new Berkshire Hathaway?” question speaks to. Insurance is a highly regulated, capital-intensive business that typically trades at a much lower multiple than alternative managers.

There is a great quote from an unnamed Apollo executive: “I get why this is good for Athene, but I’m not totally clear on why this is good for Apollo as a private-equity firm. Apollo earns enormous fees by tying up little capital of its own. Now the firm will be in this capital-intensive insurance company, overseen by regulators watching for risk, to manage its hundreds of billions of dollars of assets.”

There was a lot of doubt at the time about what the Athene merger meant for Apollo.

It is interesting to hear about that previous relationship, where you had 2 publicly traded companies with a lot of interaction. It is like the real-world version of the circular reference you get in a model when you are trying to adjust for different dynamics.

I wanted to zero in on that initial move. With insurance portfolios, you have these liabilities that you need to invest to offset, and 90% is going to be investment grade. The other 10% has a little more flexibility.

Would you say, with the alternative managers, that it is essentially that 10% portion of the portfolio that makes the real difference in their ability to manage those assets and liabilities? In terms of where the difference is made between Apollo managing it and the assets remaining on the insurance balance sheet, is there anything in that 90% where they can make a difference?

This is really where Rowan has his big breakthrough and where the genius of what he decides to do comes through.

You are right that the 90% to 95% for most alternative managers or insurance companies is basically a commodity. Investment-grade fixed-income management is largely a commodity. You can earn spread on that with a little bit of creativity.

Rowan realizes that he needs to be in the spread-generation business. His big breakthrough is using the equity in that bottom 5% to 10% to acquire or otherwise seed asset-origination platforms.

These are people who are essentially mini-banks—not banks, but businesses that originate debt de novo. This is what we might think of as private credit or asset-backed debt.

This is a big differentiator for Apollo. Most of the other alternative managers are in the flow-buying business. They have to buy what comes out of investment banks or what comes out of the broadly syndicated-loan market.

For other alternative managers, to realize spread on that 90% to 95%, they can only buy what is for sale in the market. Rowan realizes that he needs to be in the asset-origination business.

He uses the 5% to 10% of equity at the bottom of the insurance capital stack and starts building, acquiring, and seeding asset-origination platforms. There is a lot of activity here.

There is MidCap, which has a publicly traded BDC that specializes in lending to midsize businesses, mostly healthcare companies. There is Merx Aviation in Ireland, which provides financing for aircraft leases. All of these businesses are generating fixed-income assets that can feasibly be fed back into the top of the balance sheet, dropping new equity down.

What is really genius is the use of the private-equity structure. He is seeding these platforms, but he is also raising outside capital for them. All of these little origination platforms are getting private-equity economics, with fees and carry, while feeding the insurance business on the other side.

It is really interesting to think through. It might just have to do with market dynamics, but is there any reason why they would not just keep it in-house? You might be able to explain where the fee structure and that type of relationship are more beneficial than simply housing it on the balance sheet.

Is there anything that immediately stands out as to why the relationship is better in that form than being in-house?

Let’s say it were all in-house. You would have your 90% of investment-grade assets, and then you would have the 10% that dropped down. Basically, for every $100 of insurance assets you bought, you would get $10 of equity to do your alternative-manager strategies, whether that was LBOs, private credit, or whatever else you were doing.

What Rowan has decided is that he is going to take that $10 and seed these platforms. He takes that $10, uses $5 to put into an origination platform, and raises another $5 of outside capital.

Now that $5 is getting GP economics, or a private-equity structure, on the returns and carry from that originator. Whereas, if something were housed entirely on the balance sheet, you would buy $100 of insurance assets and get $10 of equity. Rowan has figured out a way to buy $100 of insurance assets and essentially turn it into more like $30 of equity by running it through this private-equity structure.

They get fees and carry on the origination platforms he is seeding.

I think we have arrived again at the theme of complexity and finding creative ways to generate returns. That is really just the tip of the iceberg, because there is a whole other level of financial engineering going into these balance sheets.

If we think of the traditional private-equity structure, LP capital is really a form of leverage in some sense. It is equity, but it is leverage for the GP in that they are participating disproportionately in the upside over certain hurdles.

Through very complicated structures, Rowan is taking this $10 of equity that is dropping out of the insurance assets he is buying and using it as their GP stake in all of these other origination platforms that can generate private-equity-like returns.

That makes sense. On that point, you mentioned that it is essentially a form of leverage in many ways. It is a form of a liability in the sense that when a fund retires, when it reaches the end of its life, that capital theoretically goes back to the investors, and Apollo keeps some percentage based on the return profile and the fees it earned.

I have likened this—and people will certainly push back on it—but private equity is a way of bootstrapping a call option.

Let’s say you are getting 20% of the returns above 8%. That is effectively a call option that is 8% out of the money. LP capital is a very special form of leverage where the GP benefits if it works out, but has very little risk if it does not.

By layering an insurance balance sheet on top of this, with really long-duration, low-cost capital, you start to see the wisdom of what Rowan is building.

How much does duration play into this? It is certainly a theme in the markets right now, whether in venture capital or private equity. You have funds that reach the 10-year mark or the 12-year mark, you use all of your extensions, and you have these prized assets sitting there. But if the market multiple for an IPO is not that attractive, you end up selling at a discount to a public peer that trades at a significantly higher multiple.

It feels like you are leaving crumbs on the table in terms of the return profile. This is being brought up a lot, where you need to see things trade hands. Do you think that plays much of a role in that theme today, or is this a much bigger evolution for the business beyond that?

As you see Mark Rowan’s public profile increase, especially in his recent interviews and the way he speaks at conferences, he is really emphasizing this idea of private and public markets converging.

He focuses on liquidity, and again, it goes back to that original quote about the early days at Drexel and understanding the trade-off between risk, liquidity, and credit.

Rowan’s argument is basically that if you are a retiree or future retiree who is 20 or 30 years from retiring, or if you are a pension or endowment that does not need money until far in the future, why are you so concerned about having daily liquidity?

Rowan’s vision is really to see these public and private assets converge and for the wall between the 2 to come down. That is becoming very literal. In the past few weeks, Apollo and State Street launched a private-credit ETF that holds some listed credit and some private credit.

Rowan is at least walking the walk in terms of trying to make the case for this private-public divide coming down and deconditioning investors from expecting daily liquidity. The way he has set up Apollo today really speaks to that.

He is a great spokesperson for the private markets. I heard him in an interview mention that 80% of companies generating over $100 million in revenue are private. I do not know that you can really take that 80% and apply it to the size of the market because there is a scale factor in the biggest companies in the world, but he brings up some strong points about the evolution of where these businesses can operate and how they can be a hybrid of the 2.

But you also see them making announcements like having a private-credit trading desk, which implies that liquidity is on their mind.

This brings up a really important point, especially about what we might consider the future of Apollo and the future of markets generally: the problem of capacity.

Annuities specifically are on pace to have one of their best years ever in terms of sales. 2025 is expected to have around $400 billion of annuity sales. All those annuity sales demand essentially new credit creation.

Rowan and Apollo realize that private credit can no longer be simply the purview of high-yield bonds or highly leveraged companies. In fact, I was at Grant’s private-credit conference last year, and Apollo’s CIO, John Zito, had a great opening monologue where he talked about French fries.

He noted that the Wikipedia page for French fries has a word count of nearly 4,000 and has been edited more than 1,400 times, while the Wikipedia page for private credit—which is, as we have seen, undoubtedly more complex—has just 500 words.

Zito’s point is that they want to make private credit more like French fries. There are a million ways to prepare French fries, and they want people to stop thinking of private credit simply as a replacement for high-yield bonds or leveraged loans.

They want private credit to be able to do investment-grade origination. They want private credit to be an option for the largest companies on the planet. They want GE to consider private credit versus an unsecured bond offering. They also want to look at the asset-backed market. They have been very explicit about that.

The reason they want to do this, especially with asset-backed credit or loans to larger companies, is because they want an investment-grade rating on this stuff. They want to be able to originate investment-grade credit that they can feed back into the top of that balance sheet.

They know that private credit needs to evolve beyond private-equity-sponsored borrowing to lever up small companies. They need to move private credit upmarket.

We are just proving out Moody’s and S&P’s stronghold and moat when there is so much focus on the ratings of these credits and how much of a role that plays in mandates. It is important to mention that.

On this shift, where alternative managers can make a bigger push upmarket into investment grade, what you mentioned at the end is especially interesting. If you have a portfolio of aircraft leases, it is very easy to see how that could fit into an investment-grade portfolio.

But that feels very different from lending to Apple, or to pick your A-rated credit in the market. How is their effort to move into large corporate lending? Is that reasonable to think they can bite into it and take market share? What would be the drivers of that happening and the banks losing that business, if it were to happen?

This really speaks to what private credit’s pitch and appeal are to borrowers: a one-to-one negotiation that allows for more creative structuring, which, as we have seen, is really Apollo’s bread and butter.

Whereas a large company might want to go to a bank and do a broadly syndicated loan offering, that is going to have a somewhat rigid structure. If it wants to do an unsecured bond offering in the public markets, that will also have a rigid structure.

Apollo wants to be at the table and say, “Can we structure this differently? Can we move these assets over here and lend against those? Then we will take that and tranche it out. We will have an investment-grade sleeve that can be fed into the insurance market, and we will have a B-piece that can go to some of these evergreen vehicles or maybe even our ETF.”

Their ability to originate in more creative ways, then take that debt and structure it, and essentially feed the various tranches to the pools of capital that meet their requirements is really what Rowan’s vision is.

In some ways, it makes a lot of sense in terms of the bespoke nature. In other ways, when I think of that rigid structure, I also think that is what allows for scale.

When you are looking at a traditional investment-grade unsecured issuance, you probably know the terms without even needing to look up the bond indenture. You have some sense of it.

It is going to be interesting to see how that scaling goes, because the bespoke nature can sometimes slow things down. Apollo is not involved in this deal, but to think about how creative things are getting, look at the CoreWeave deal, which was basically a $12 billion private-credit deal secured by NVIDIA chips.

Things are getting very creative on the debt side. Rowan is very explicit about the demand for credit and the ability to scale up credit origination being the biggest constraint.

In fact, he said at a conference in September: “The biggest single constraint on growth is not capital formation. It’s not how many people you have. It’s really: Can you originate enough attractive assets to meet your need? And that’s why I’ve been so focused—in fact, some might say maniacally focused—on making sure we are building the right type of origination, in volumes, looking right places to be, because that’s our whole business.”

“Delivering excess return per unit of risk” is a phrase Rowan evokes time and time again.

Going back to the shift and the transition, bringing Athene onto the balance sheet, the high-level view is that you took something that was, in some ways, very asset-light, with other people’s money, and transitioned it into something much more asset-heavy, with an operating business that has to manage an insurance book.

That changes the business model quite a bit. What is the perspective, from a business-analyst perspective but also from an investor perspective, on how that changes the dynamics of Apollo?

If you go back to that 2021 investor day, with the massive deck and 6 hours of presentations, one of the last presentations was from Apollo’s CFO. He basically said, “Here’s how to think about the business now.”

In Apollo’s supplements, they now break out earnings into fee-related earnings, spread-related earnings, and principal investing. Fee-related earnings include asset-management fees and the traditional manager business.

Spread-related earnings are the difference between their liabilities and what their assets are earning in the retirement-services and insurance sleeve. Principal investing basically houses the carry they are earning.

Despite the initial skepticism, spread-related earnings are now larger than fee-related earnings for Apollo. Last year, Apollo originated something like $222 billion of credit. That is credit they are originating, not going out and buying. It is $222 billion of credit that Apollo is originating in-house to feed the spread-related-earnings business.

To talk about where the firm is today in terms of this business plan, Apollo now either owns or has a role in 16 different origination platforms. There are something like 4,000 employees spread across those various origination platforms.

They are all relatively niche. There is aircraft leasing, music royalties, and other niche subsectors that Apollo feels it can stand up or acquire teams in that have a real specialty in those areas to originate this credit.

When I think about those categories, there are some obvious ones in private credit that have really transitioned away from the banks. They are high quality, asset backed, and have some type of cash-generating business underneath them.

It will be interesting to me to see whether that $222 billion can continue to grow at the same pace by sticking to those traditional asset classes, or whether they continue to get more creative.

Would you say there is any bucket that makes up a significant percentage of that spread portfolio? Is that something they disclose?

The issue that credit origination has today speaks to John Zito’s comments and this desire to move upmarket. Up until, say, 2022, the private-credit market was supported by private-equity-sponsored lending to pursue LBOs.

That market, for a variety of reasons, has effectively closed, or at least become much less active. A lot of the demand that was coming from the private-credit side has tapered off, so they have had to get more creative and go farther afield to look for lending opportunities.

A big open question for the industry is: if private equity and sponsor-backed lending do not make a hard rebound, what fills that gap?

What Rowan has created here—and I do think it is unique to Apollo—is a bit of a financial perpetual-motion machine. You sell an annuity, which creates equity. You use that equity to seed an origination platform, which originates debt that goes back into the top of the balance sheet and creates a new dollar of equity to do it again.

The more annuities you sell and the bigger your insurance balance sheet grows, the more demand it creates for credit. That is why Rowan is so explicit that the single biggest constraint on their growth is no longer the ability to form capital.

That was how most of these companies were judged, and that is where their multiple came from, at least in large part: people’s perception of Blackstone’s ability to go out and raise another $30 billion fund.

Rowan is saying they are off that treadmill now. Their constraint is whether they can find and originate the credit they need to meet the demand they are generating.

You gave a very good distinction between the growth of private credit and the sponsor-backed market, which in reality was fairly straightforward. I do not want to say easy, but it was something where you were part of a growing TAM.

It is more difficult to find higher-quality deals that are not sponsor-backed and require a relationship with the businesses. When you describe that perpetual-motion machine, you hear about several forms of dollars creating leverage in the system.

What that can often lead to through financial complexity is inherent risk in the system, whether it is leverage or whether there is something where, once you have a break in the dam, it creates a ripple effect through the organization that is not felt once but multiple times and can bring things down.

That is probably not the right way to categorize this, but just thinking about risks with the leveraged portfolio, or what is inherent both from a standard-company perspective in terms of how much traditional debt they have and also the liabilities that exist within the system, are there things here that are worth paying attention to when you run something with that complexity?

I will perhaps editorialize a little bit here.

Because of the muscle memory of 2008, there is a tendency to believe that there is some building systemic risk and that there is going to be a Minsky moment, as they say, where all of those credit dominoes start falling. I actually disagree with that.

The regulatory response following the Great Financial Crisis has, in fairness, made risk far more diffuse than it was before, when it was housed in a relatively concentrated banking system. Now it is spread across many asset managers, many structures, and many underlying investors.

I think the bigger risk here is not fallout. It is that this self-perpetuating demand for debt leads to a degradation of returns over time.

There is a great definition of financialization: the demand for debt securities in the absence of productive uses for that debt. We have this structure here. In fairness, annuities are still a very small slice of global markets, but I do think they speak to something we are heading toward.

Fewer and fewer people want to take equity risk. They want to feel higher up the capital stack and feel that they are in some sort of secured position. That creates tremendous demand for assets that can check the credit box.

There are only so many lending opportunities that meet those requirements. The bigger risk here is not fallout, a Minsky moment, or some dam-breaking event. It is simply a slow degradation of returns as debt eats more and more of the benefits of asset ownership or the activities of these businesses.

It is an ongoing dance in terms of what the cost of capital will look like. A big piece of how I think about certain markets is that banks get deposits, and their cost of capital is incredibly low. That allows them to make loans at fairly low interest rates and still collect an attractive spread.

Once you start bringing in players that do not have that same deposit base or have a very different profile in terms of their capital structure, their attempt to compete is going to be more challenged. If they do not have that same cost-of-capital advantage, or an equivalent cost of capital, the spread calculations and the math are going to look different.

I imagine that number has come down significantly as you brought Athene onto the balance sheet. That changes the dynamics. Where would you say that stands today in terms of Apollo’s cost of capital and its ability to compete in that world of investment grade while still generating attractive returns?

Private credit is not, nor has it ever been, making a cost-of-capital argument for itself. It has made an argument based on a one-to-one lender-borrower relationship and an ability to be creative.

I think that is continuing, especially as some of these companies need a creative solution. CoreWeave is a great example of lending against GPUs for a business that probably would not have checked many other credit boxes on its own.

It is worth noting the interaction with the banking system. While banks have largely been forced out of a lot of these higher-octane lending relationships, they are still very much providing back leverage to private-credit funds and to the Apollos of the world.

They have found a way—explicitly through things like synthetic risk transfers and similar structures—to coexist with private credit and this private-capital lending market. That probably raises additional regulatory questions, but they have fallen into a symbiosis, not necessarily into competition.

Bringing this all together with an investor hat on, with all of these changes to the business, I think we have certain rules of thumb or frameworks. With banks, you look at return on equity and use that to help determine what the multiple on book value should be.

That is loose framing, but is there an approach today to evaluating and valuing these businesses? Is it separating fee-based earnings and putting a multiple on that versus everything else? Do you think there is a general framework being used by the market today?

There is certainly a framework that was established up to today. These companies have typically traded on a multiple of fee-related earnings. Earnings per share can be pretty noisy, and a market-cap multiple on how much they were earning from fees was the way the market priced their growth in assets.

The biggest driver of their growth in assets was their perceived ability to fundraise new and larger funds. There was some degree to which it was the carry accrued from performance, but for the most part, those multiples were a projection of future fundraising ability.

Apollo has really broken the mold by saying that fundraising is no longer an issue. I think the way Apollo is going to be valued is closer to a bank, albeit an unregulated one, in terms of spread-related earnings and how much spread the market is willing to offer them.

For Apollo specifically, the question is how much spread they are able to originate. Then, in the fullness of time, the known unknown is where credit losses settle out for this type of activity.

Apollo has really changed the mold in terms of how at least it is being valued, now that it has successfully found an exit ramp from perpetual capital raising.

Those are 2 simple valuation frameworks for a business that is built on complexity. If you are an analyst who covers the name, you just have to come up with a complex valuation methodology to give it its proper due.

It is interesting to see the evolution of industries and how these things shake out. Everything you mentioned is based in a foundation of logic that makes a lot of sense in terms of what you have visibility on versus what you do not and the potential for upside.

I always enjoy monitoring these things as they evolve. I think the biggest theme here—and Rowan is finding his way to speak to this—is that we have been referring to this entire episode as alternative asset managers, but increasingly they are not so alternative.

These businesses started out occupying a niche part of the market, but they have come to dominate a growing, perhaps even pluralistic, share of the market. Their business models are evolving from something that was alternative into something that is the financial market.

One thing that we have touched on, but I would love to get your view of, is the reputation of Apollo. I can speak firsthand to talking to investors when Apollo was part of a transaction. When they realized that, they basically screamed profanity and said, “I need to spend a lot more time on this.”

There was an inherent belief that you might want to build in some additional risk factors, that you might need to check the documents extra carefully, and that your lawyers were not going to be able to go up against their lawyers.

In the credit world, there was a lot that came along with Apollo’s reputation. Where do you think that stands more broadly, and do you think it has any impact on their business? It is interesting to contrast it with what is happening at Blackstone.

For most people who participated in financial markets during this era, you are right: Apollo has this reputation that it is going to roll up its sleeves and fight.

I think something else that the Rowan era is trying to determine and work through is how much of that reputation to slough off and how much to retain. Apollo still very much has the reputation of being very smart, drawn to complexity, and willing to take on a difficult situation. That makes it very competitive in the current lending environment.

At the same time, it needs to be seen as a partner to a lot of these businesses, not as an adversary, especially if it wants to go upmarket and start accessing investment-grade credit.

I think you are seeing an evolution and softening of that image. I cannot imagine seeing an Apollo Christmas video 10 years ago, or maybe even 5 years ago. You are beginning to see at least an attempted transformation of its public image.

But I do think Apollo wants to retain its reputation for being able to take on difficult situations.

Sometimes the PR and outward communications can have a material impact. You still retain the ability to roll up your sleeves, get a little litigious, and get some extra juice from the banks when you need it.

It is an interesting evolution, and we are seeing PR evolution around the marketplace in all different segments and sectors. It is no surprise to see it at Apollo.

To draw the comparison with Blackstone, I have noticed how proud Blackstone is of its Jersey Mike’s acquisition. It keeps finding ways to bring up the fact that it bought Jersey Mike’s.

To me, that is a clear attempt to speak to the everyday American: private-equity ownership is familiar and normal, and you love Jersey Mike’s, which is owned by Blackstone.

It is a risky endeavor, in my opinion, because when I think about private equity, I imagine that we are going to pay some type of subscription fee just to buy Jersey Mike’s subs, and they are going to dangle the opportunity to get a $4 sandwich if you sign up for a monthly plan.

But yes, I have noticed it too. It is interesting to witness, and they are trying to get the message out there.

To bring it all together, we like to wrap up these conversations with the lessons you can take away from the business. I really liked how we got into the history and evolution, but what would you point to as the lessons from Apollo?

I do not mean this pejoratively, but in a lot of ways, especially as it has pursued Rowan’s vision for the business, Apollo has effectively remade a lot of what made Drexel successful in terms of innovating around capital structures, sources of capital, and how the market functions.

Just as Caesars Palace did not work and they went right back and did Las Vegas Sands, I think they have internalized these lessons all the way back from the beginning of their careers. They saw what worked and what did not, and they have come full circle into being a huge player in debt markets that is reshaping how financial markets operate.

The other thing becoming more important, especially in this environment, is an understanding that the balance sheet is a huge value driver for businesses. For Apollo, that balance sheet can be self-perpetuating.

There is a focus in markets on the income statement: how much earnings are you driving, and what multiple can you get on those earnings? For Apollo and for the market at large, there is a growing realization that a lot of value gets created in asset conversions, refinancings, M&A, changing the capital structure, and allocating through the balance sheet—not necessarily just by having a rapidly growing top line that gets a multiple applied to it.

Finally, I think Apollo’s own history charts the evolution of markets at large better than a lot of the other alternative managers. It started in the debt collapse of the late 1980s, was opportunistic, was set on the course it is on today following the collapse of the Great Financial Crisis, and has now moved into the debt-centric market we have today as a leader.

Apollo’s rise and evolution into what it is today really charts how markets themselves have evolved in terms of the growth of private capital and the focus on credit and yield as growth areas relative to public equity, and perhaps even now relative to private equity.

You summed it up nicely. It is interesting to think about that original quote and the DNA that is still in the business.

It is fun because Apollo has a great history, but it is also going to be a lot of fun to watch how this evolution goes and plays out over time. Thank you for sharing the knowledge. This lived up to my high expectations for the episode.

A lot of fun. Thank you, Matt.