The author, a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’, provides insights into the rise of private credit houses post-global financial crisis.
In a recent encounter with the CEO of a major European bank, Marc Rowan, the chief executive of Apollo, discovered some misconceptions surrounding the growth of private credit houses. The bank CEO expressed concerns about regulatory favoritism towards Apollo, Blackstone, KKR, and other lightly regulated asset managers, and labeled them as part of the risky “shadow banking” market.
Rowan took the opportunity to defend Apollo’s business, highlighting the higher percentage of investment-grade debt on their balance sheet compared to the European bank. He also stressed Apollo’s commitment to matching assets and liabilities from a duration standpoint, in contrast to banks that borrow short and lend long. Moreover, Rowan pointed out that Apollo holds more equity capital and Tier 2 capital as a percentage of assets. He invited the bank CEO to review the portfolio available on their website before continuing with their meeting.
Rowan, who assumed the role of Apollo CEO in March 2021, is recognized for his profound expertise gained during his 33 years with the company since its inception. His leadership comes amidst public scrutiny over Leon Black’s association with Jeffrey Epstein.
Following the 2008 financial crisis and the implementation of the Dodd-Frank law, private credit and equity groups have emerged as prominent players in the financial industry. The traditional Wall Street powerhouses, including JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of America, and Citigroup, have relinquished their leading roles as risk-takers and innovators. This shift aligns with the Federal Reserve’s regulatory decisions, aiming to prevent future financial crises by reducing the influence of these banks.
Consequently, the major Wall Street banks now operate with significantly lower leverage and increased capital requirements. They still engage in underwriting debt and equity securities but are obligated to quickly remove these securities from their balance sheets. This regulatory framework compels banks to prioritize liquidity management rather than long-term asset ownership. While mergers and acquisitions among Wall Street firms are restricted, exceptions exist for unique circumstances.
This regulatory landscape has created opportunities for firms like Apollo, Blackstone, and KKR to expand their presence. However, as Rowan experienced during his meeting with the European bank CEO, there remains a perception that underregulated alternative asset managers thrive on excessive risk, giving them unfair advantages in profit-making.
Rowan clarified that Apollo pursues profit through prudent risk-taking in areas overlooked by others, such as senior secured financing of receivables, aircraft, real estate, and plant and equipment. This constitutes the private investment-grade market, which accounts for about 75% of Apollo’s assets under management.
Apollo’s approach is reminiscent of GE Capital’s activities in the past, but with a focus on avoiding the existential risk associated with borrowing short and lending long. Over the past decade, Apollo has invested billions in developing origination platforms, enabling them to underwrite senior secured loans across various industries. Apollo retains 25% of these loans and shares the rest. In 2021, they completed a full merger with Athene Holding, the annuity insurance company they established after the global financial crisis.
With Athene, Apollo gains access to low-cost funds from the sale of long-term annuities, which they leverage to provide senior secured loans at higher rates. This strategy minimizes the need for substantial equity and mitigates concerns regarding deposit outflows or interest rate fluctuations. It is no surprise that these alternative asset managers have become powerful forces on Wall Street.
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