Odd Lots - Apollo Explains How Big Tech Is Disrupting Credit Markets

Episode Date: October 14, 2024

Big tech stocks have had an enormous impact on the stock market, with Magnificent 7 companies like Apple, Microsoft and Nvidia now dominating equity indices and basically dictating the path of benchmark returns. And of course, there's been loads of discussion about the real transformational value of AI and whether it's all going to end up being one big bubble. But tech investing and big disruptive trends like AI aren't just for equity investors. They're playing out in the credit market, too. And of course, building the data centers and producing the chips that power AI requires huge amounts of capital — much of which is sourced via bonds and loans. Increasingly, a lot of that capital is coming from private credit players, one of the biggest of which is Apollo Global Management. In this episode, we speak with Rob Bittencourt, a partner at Apollo and co-head of opportunistic credit, about how the tech story is playing out and what Apollo is doing in the space.Read More: Private Credit to Outperform in a Downturn, Apollo’s Zelter SaysOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast OddLots on Amazon Music. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the OddLots podcast. I'm Tracy Alloway. And I'm Joe Wisenthall. Joe, do you remember those stories? I guess they were a bigger deal earlier this year, but they're still kind of out there. The stories about how the stock market is all about the big tech companies. Yeah, absolutely. So, yeah, it still, I mean, it still is. It still is.

But I think, like, at one point earlier this year, there was a number that caught my eye. I think it was like 30% of the S&P 500 came from the Mag 7, so, you know, alphabet, Microsoft, Nvidia, and all of those. And I guess as all the hype and interest over AI has grown, the importance of tech companies, companies in the equity market has increased in size along with it. Totally. You know what I think is an interesting stat? We're recording this on September 25th. If I look at the major stock indices for the year, the NASDAQ, or as we used to write, the tech-heavy NASDAQ is up 28.3. The S&P 500 is up 20.35%, virtually the same.

So I think it's telling the degree to which the S&P is becoming the NASDAQ. In fact, that we should, That would be a good story or good headline. That basically the S&P, by virtue of the dominance of these handful of mega-cap tech companies that dominate both index, the S&P 500 is morphing into the NASDAQ. Listeners, you get to witness how journalism happens in real time. This is how we come up with headlines. You notice some numbers and you're like, oh, let's see if we can back a story into that. Okay. Well, speaking of everything becoming tech, I realize that, like, one thing we haven't really spoken that much about is what tech and all the real.

recent enthusiasm for it actually means for the credit market, for the world of corporate bonds. Yeah. This is interesting. And there's probably a reason that we don't think about this very often, which is one, is that if you look at the really big tech companies and even like small companies, you know, a lot of it has not historically been credit funded. A lot of it has been equity funded. And VC is equity. And, you know, these companies produce so much cash from their earnings and they can fund themselves out of earnings that credit to some extent has. hasn't been part of the story. But a few things. A, you know, some of these companies mature and they start to issue debt and they do have debt and some of it's to fund buybacks. We're also in a

period where a lot of tech is more capital intensive than it had been in the past and sort of project-based financing is more of an issue and maybe that's like a sort of, you know, some of the data center plays, et cetera. So I believe there are interesting credit stories that for reasons I can understand have not gotten much attention. There definitely are interesting credit stories. And I am very pleased to say we have the perfect guests today who is going to tell them. We are speaking with Rob Bittencourt. He is a partner at Apollo. He is the co-head of opportunistic credit. He's also a member of a bunch of different investment committees over there. Rob, thank you so much for coming on all thoughts. Tracy Joe, very excited to be here,

a long time, listener and fan. Oh, right. Thank you. So let me ask the basic question, but what does the co-head of opportunistic credit at a Apollo actually do. Opportunistic credit sounds like, you know, something you might get at college. What is it exactly? So before I describe what I do within opportunistic credit, I think it makes sense just a level set. Where does that sit within the broader Apollo platform? So Apollo is an alternative asset manager in a retirement services business. It manages about $700 billion of a UM, 500 of which sits in our credit business. And I focus on the opportunistic pool of capital. which is about $30 billion.

So what is opportunistic? It is not as bad as you make it sound. It is really credit investments on the both public and private side targeting returns of 8 to 13%, broadly speaking. So in terms of what I do within that business, I co-lead a group of 20 analysts who are sector-focused and really are tasked with identifying, sourcing, and underwriting, you know, the ultimate investments that go into a series of funds that make that $30 billion AUM pool of capital that I mentioned. So it seems like, you know, I mentioned that, you know, you do have debt issued by tech companies.

And sometimes they run across the headlines. Sometimes you read like, oh, Apple is selling a bomb. Sure. Sure. These do not sound like exciting areas for opportunistic credit at that level because they're pretty close to like AAA rate. Like if I'm lending to Apple, it's like the next closest thing to probably lending to the U.S. government in terms of the spreads.

and stuff like that. So when you talk about like opportunistic credit and the opportunity to actually get those like substantial returns, you said 8 and 13%. Where are we typically looking? When I joined Apollo in 2006, high yield and the levered loan market were not synonymous with technology.

People thought of those as ways for slower growing companies to finance themselves, companies that produce consistent, dependable cash flows. fast-growing companies typically didn't look to the sub-investment-grade market for financing. But that's steadily changed over time. So if you look at a lot of the private equity activity, which is a huge source of credit that goes into the high-yield market, about 25% of LBO activity today is in that technology space. And that's steadily increased over the past 10 or 15 years.

It was about 20% before the pandemic. So that's mostly been in software-related names. Yeah, right. So there are various P-E firms that are buying these, like sort of middle markets-type software companies. Or even larger multibillion-dollar companies increasingly. So the scale is certainly there. Today, about 15% of the levered loan market is software-related.

There's less of an exposure in the high-yield bond market. About 5% is technology-related. But I do think you have that critical mass of technology names in both markets today. obviously not as intense as you see in the equity markets, but it's definitely a market that's become more tech-focused during my career at Apollo. So what does that mean for the things that Apollo specifically is buying, the growth of the private market, the rush of private equity money as well? Does that translate into specific things that you're doing, such as direct lending?

Sure. So a lot of what we've been talking about right now is with respect to below investment grade. And you talked about the fact that, you know, the larger hyperscalers have largely self-financed themselves or have gone to the public IG bond markets. I think some of the more recent technology themes that we've seen, namely AI, which I know something you all have spoken extensively about, I think what's interesting about this trend relative to maybe more recent technology trends like smartphones and mobile computing, which was relatively asset light, right?

It was developing applications that sat on. top of, you know, Android and iOS, which didn't really require a lot of capital. AI, which I think you referenced before, is very capital intensive. You need to build the data centers. You need to build the power to support those data centers. You need to build the chipmaking facilities to build the GPUs, which are used in the data centers. And that's all going to require capital.

A lot of that capital is not going to be provided by the high-yield markets. Where it will be provided, in our view, is from the private investment grade market, which, you know, when people think of private credit, they don't necessarily equate it with investment grade. But as an institution, over half our credit AUM is associated with our retirement services business, Athene, which invest primarily in long duration, investment grade, credit. And so I think there's a huge opportunity for Apollo and others to invest those pools of capital that are looking for long-dated investments, high-quality behind some of these themes. And I can go into more detail around that if that's helpful in terms of some of the areas we've been focused. I have one question

just before you do that. But if I'm an investment-grade issuer, certainly if I'm an Apple or someone like that, why would I want to go into the private market to begin with? I'm IG. I can sort of, you know, dictate my own terms, presumably. Why would I even go down that route? Yeah, I mean, Apple's a tough one just because they're probably one of the highest rated companies in the world and one of the most profitable. Take an average IG rate of issue. I think there's a couple of reasons. One is, you know, some companies want a diversity of financial sources, right? They want to finance themselves both in the private markets and the public markets.

And so having access to multiple avenues of capital is just good risk management. I think specific to some of the themes we're talking about and some of this project-based financing, it's complicated, right? The underwrites, they take a long time. They take detailed diligence. Oftentimes when we're looking at these sorts of opportunities, we're bringing in third parties to help us analyze the situation, domain experts. So that's really hard to do on a syndicated basis. The investment-grade public bond market prices on a daily basis, right?

It's called a drive-by. A company will come in, hit the market, move on. For some of this project-based financing, that speed doesn't really translate. And it really requires bilateral negotiation and partnership to ultimately structure these deals, which have more complexity than your regular way publicly traded bond. Before we talk about some of these project-based deals or these KAPX heavy AI-related things, just going back to, you know, you mentioned in the mid-2000s, the sort of rise of PE back purchases, how much of that market emerged as a function of software as a service, specifically,

paying for software with subscription revenue. You have something, maybe like, you know, something that does dental billing. You get it in 80% of dentist office. And then it's like, okay, it would take a lot for this piece of software to ever get uprooted. And so let's just lever it up, put a lot of credit onto it. And then you have this fairly predictable revenue stream for years and years. 100%.

Okay. I think software as a service has, you know, smoothed out cash flow profiles. It's made those cash flow profiles. more predictable, which credit investors like. And it's a relatively capital white model. There's not a lot of CAPEX associated with these businesses. And as you mentioned, you know, many of these software applications are very much embedded in the workflows of enterprises and very hard to switch out, which is why you have very high retention in a lot of that market. So I think that's certainly one of the reasons why that sector has gained so much popularity amongst some private equity firms.

Okay, so we sort of outlined the growth of SaaS in credit markets, but talk to us about the growth of, I guess, AI-related tech in the current credit market. What impact is that actually having? Within below investment grade, few and far between. Recently, we've seen some excitement around increased bandwidth needs for data centers, so connecting the data centers that are being built. So there's a couple companies that operate enterprise fiber operations. networks that have benefited and that have announced some partnerships with some of the hyperscalers. So I think that's a tangible example of some of this infrastructure build out infiltrating the high-old markets. I think beyond that, it's really been more angst-inducing, honestly, with a lot of investors trying to figure out, you know, are there going to be losers, right? As this technology. Oh, the disruption story. Exactly. Right. And I still think we're in the first or second ending with respect to determining who the losers are going to be from this technology.

There were some announcements earlier this year around Clarnah, which was using AI chatbots for some of their customer service needs, which created some volatility in some of the call center operators. So I think that would be an example of a sector that has felt some impacts from AI, but for the most part, it's been somewhat limited. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all.

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I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading by Example, executives making an impact on the IHeart Radio, app, Apple Podcast, or wherever you get your podcasts. Joe, this reminds me of one of the fundamental realities of credit investing, which I think came up in a recent episode with Oak Tree's Danielle Polly. But really, a lot of it is about

trying to avoid the losers. Our brains went to the same place. Right. So when you're picking a tech stock, you want to pick the winners. And when you're lending to companies, you want to avoid the losers, which sort of brings me to exactly what I was going to ask you, which is like, all credit investing, but all investing is going to have some sort of like, you look at the balance sheet, you look at the cash flows, you look at the metrics, and then some subject matter domain expertise. And again, if you're picking stocks, you're like, no, this is the company whose chip is going to be the winner. This is the company whose liquid cooling system for data centers is going to be the

winner. Is the nature of sectoral analysis from a credit perspective a little different because it's about loser avoidance? So certainly there is less asymmetry just mathematically in bond investing or in credit investing, right? Your upside is capped. It's not necessarily capped at par, by the way, depending on the call schedule of a bond. Bonds can trade over par, but certainly you don't have the asymmetry that you have in the equity markets. So through that lens, I do think there's more of a downside protected mindset that credit investors bring to bear. I think you touched upon understanding the major trends and themes in a sector.

That's something we spend a lot of time thinking through because of that risk, that technology can potentially play from a disruption perspective, right? You know, what are the major themes around technology in the market today? And how is that going to influence individual sectors? And that gives you a little bit of a guidepost in terms of maybe not what sectors to entirely avoid, but where to be very careful as you're making, you know, analyzing the opportunities in a particular sector. You see that dispersion very much in the market today, right? If you look at the high-yield market, which is trading at about 300 basis points from a credit spread perspective,

and you look at the sectors that have the highest proportion with spreads above 1,000 basis points, it's cable satellite, it's telecom, and it's broadcasts. TV. And in some instances, you see those heightened credit spreads because there's too much leverage on individual companies. But I would suggest that there's clearly something sectorial going on in those sectors that's creating some headwinds, which is leading to those elevated spreads. So speaking of losers and disruption, could you maybe walk us through a specific example of like, suddenly there's this new thing and it impacts a different credit? Are there specific instances that you've observed? Sure. So a recent example would be the satellite industry. Yeah, say more about that.

Right. Wait, which company? Oh, and Starlink. Right. Elon Musk's, it's a subsidiary of SpaceX. Starlink operates the largest low-Earth orbit. Constellation of satellites, providing broadband at, you know, higher bandwidth than legacy technology with lower latency. Incredibly disruptive to some of the existing satellite communications providers. What's a name of one? I'm going to pull up a ticker on my terminal. SES is one of the largest names in the space. They recently merged with IntelSat.

Okay, thank you. And there's a group of about five or six of those players within that sector. And so that's a very tangible example of a new entrant with a new technology that has advantages relative to the existing technology, which has created some headwinds in the broader space. Now, I do think the industry, and this is a trend that we tend to see, oftentimes when new technologies disrupt a sector, you actually do see more consolidation because it's a way for the industry to adapt effectively by getting larger, cutting costs, and then hopefully figuring out a way to better compete against the new entry into the market. You kind of anticipated my next question there. But what happens to pricing in these scenarios and how quickly do existential threats to a business model get priced into a company's corporate bonds or loans or whatever they might have outstanding?

Because I feel like on the one hand, if you're getting a major competitor in the form of Elon Musk and Starlink, that's bad. But on the other hand, credit markets are notoriously slow compared to stock markets. And on the other side, it can spark defensive measures like consolidation or cost saving, which would be very, very valuable if you're a lender to this company. I think the market reaction time has increased over the last five years. And I think the reason is the first widespread example of disruption in the credit markets was retail. And everybody knows it. Amazon, e-commerce. It's pretty straightforward. All of that. Dead malls. And I think that played out from sort of maybe 2012 to 2018. You had a spade of bankruptcies and retail failures. And I think the market realized that, you know, it's hard to necessarily fight against a secular trend that powerful. So we better start paying

attention to it. Interestingly, I would argue sometimes the market overreacts, right? And so counterintuitively, it could create interesting long opportunities. A great example, in our opinion, is the cable industry. So cable industry did very well during the pandemic for obvious reasons. There's been some normalization post-pandemic that's impacted their business. But from a secular perspective, the industries face competition from a lot of the old-line telecom companies starting to build out fiber, which has created more competition. You've also seen the likes of Verizon and T-Mobile offer home broadband over the airwaves.

So that on the margin, I think, has created this narrative of disruption within the cable space, which has created quite a bit of volatility within the capital structures. We still like the cable space. We still think it has a lot of really attractive attributes. It's typically a duopoly market in each region, produces stable, consistent cash flow. In the hierarchy of needs, you know, it's sort of air, water, food. Cable. Cable, broadband.

And so we use that as an opportunity to lean into the industry over the past, you know, 18 months. So it's not all bad news per se. I do think sometimes the market, you know, tends to overreact or maybe act too soon, right? Sometimes these trends do take quite a bit of time to play out. No, I mean, this makes a lot of sense. Like we can all look at say like, oh, you know what, Elon Musk is putting satellites into space. This is going to allow me to cut the cord at home, etc. But we're probably overestimating when I just tell that story, the speed at which I'm going to do that. And I guess like just internally. maybe there's a better solution for me, but it would take me a while to get comfortable with the idea of just like cutting off my broadband internet access of their apartment.

Inertia can be a very powerful force. I pay for a lot of things, Tracy. And I just like, I don't know why. And then I get a bill. And it's like some app I downloaded three years ago. Yes, there is that annoyance. Okay. So speaking of other things that have happened in recent years, a big one has to be the influx of government money into.

tech-related areas. So data centers, also clean energy, technology, things like that. One thing we often hear when it comes to fiscal spending is the idea of crowding out the private market. And I'm curious, as someone who sits at Apollo and is basically in charge of directing a bunch of private capital, is that something you notice or worry about at all? We haven't seen any signs of that at this point, but certainly the fiscal situation from a macroeconomic perspective, is something that at a high level we're constantly watching. Clearly, I think the budget deficits at $2 trillion, which would seem to be unsustainable if it continues in perpetuity, but haven't really seen a crowding out effect per se. If anything, I think, you know, some of the more recent

government programs that have targeted investment in specific sectors that are deemed to be strategic has been a positive development in terms of attracting. Crowding in, almost, attracting private capital alongside the government investment. So whether it's the CHIP Act, which allocated $50 billion to construction of the domestic semiconductor supply chain, I think that certainly had a positive impact. You have the BED Act, which is looking to extend broadband in rural communities. I think you've seen a lot of cable providers and other telegraphies. telecom providers talk about the opportunity there to potentially utilize that. And then obviously the Inflation Reduction Act has clearly focused resources on, you know,

the build out of the clean energy infrastructure. And I think those aligned very much with some of the major themes in the economy and the infrastructure needs in the U.S. And so as a firm, you know, we're very much focusing on those sectors. With respect to semiconductors, we talked a little bit about it, but, you know, recently we announced $11 billion joint venture with Intel around one of their leading edge or their leading edge facility in Ireland, which, you know, I think is part of that major trend of bringing back or making sure that we have, you know, stable, secure supply chains for critical industries like semiconductors.

Going back to satellites for a second. If a legacy satellite issue, and we're not going to name any names, we'll go bankrupt or something like that. You know, obviously as credit investors, you think about collateral. And there are obviously assets that a satellite provider would have. However, if a satellite provider were to go bankrupt, it might be because those satellites just aren't competitive anymore or whatever. How do you think about the value of assets that you could seize in a bankruptcy when there is a question that the reason that the company went down

is because that technology is no longer competitive? So in a vacuum, it's hard to answer that question just, you know, because it's so fact-specific and so situational-specific. So talk to us about how you might. Right. So IntelSat did go back. Oh, yeah, all right. Let's go.

Let's talk about them. But it was a little bit of a different situation given they had quite a bit of wireless spectrum that was in the process of being repurposed to support wireless networks, which was a huge asset for the estate that ultimately, you know, helped underpin the reorganization of that company, which has been very successful, by the way. As I mentioned before, it's been acquired through a merger with S. but we generally try to avoid sort of secular losers, if you will. I would hope so.

Because in my experience, predicting decline curves in businesses that are facing significant headwinds and technological disruption can be really challenging. If there is like true fundamental disruption versus angst inducing headlines, that might not answer your question directly. Generally, we want to avoid those sorts of situations. If we are in a position, you know, where we are invested behind a company that may face some of those challenges. Thinking more broadly across the industry, as I mentioned before, disruption tends to be a

catalyst for consolidation. Thinking through the potential value of those assets as part of another company can be one way to frame, you know, downside valuation in our experience. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report. delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed.

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or wherever you get your podcasts. I'm going to jump to the polar opposite of downside valuation and talk about upside valuation, because certainly in the stock market, there is this ongoing discussion about all the hype around AI and tech and whether or not at an extreme level it might be a bubble or at a minimum it is potentially overvalued. Do you see that kind of angst in the credit market? And I'm thinking specifically if you're talking about new technology, often there's a lot of uncertainty embedded in these business models. And you see a lot of CEOs talk about like total market size. And maybe they start acquiring other companies and they start doing things like ad backs, which affect their credit profile and things like that. But how are you sort of separating reality from future value?

Specific to AI or? Specific to tech. But we could definitely talk. AI would seem to be a prime example there. I think it's early. I think the quantum of nests. investment that is being allocated to the associated infrastructure is unprecedented. There are a lot of estimates, but broadly speaking, one gigawatt of data center capacity

costs about $10 billion to build. I've seen estimates that AI is going to require over 100 gigawatts of capacity to be built. So is that a trillion? It's a trillion dollars. And that doesn't include the GPUs that go into the data center. Wow. Then you have to talk about the power that's going to be needed to support these data centers. A gigawatt of natural gas power production cost a billion dollars. A gigawatt of solar production costs a billion dollars. The last nuclear plant built in the United States was about five gigawatts.

It costs $35 billion. These are huge numbers. And so that's real, right? Those dollars are going to be spent. And I think the sponsors of this technology, which are largely the hyperscalers, have very, very, very deep balance sheets, right? And so I think that is going to give a durability to the trend and instill a patience, if you will, versus other technology cycles we've seen, which have been very dependent on the public markets, the equity markets. you know, the Amazon's and the metas and the Googles can afford to play, and the Microsofts can afford to play the long game.

So when will this translate into tangible revenue? I don't have a strong view on that, but I do think that the market will be relatively patient from that perspective. Let's talk more about this buildout of data centers than specifically. One of the things that I've seen some headlines about, and I'm not entirely sure whether they're real, it kind of seems like maybe it's being over-egged a little bit. GPU-backed loans.

And some of the data centers are like, hey, you know what, we might go bust, but then you can have our Nvidia Blackwell chips and then you do whatever. Is that real? Is that a thing that's going on? It absolutely is. Say more about that.

I don't want to name sort of company names because I don't know what's been publicly disclosed or not. We talked to the CoreWeave CSO, for example. They're a big player in this. That's clearly. So we've looked at those opportunities before. I understand the attractiveness of the opportunity. In many instances, you have high-quality counterparties that are utilizing those GPUs,

which I think is part of the credit support for those loans. If you do believe that there is this really unprecedented secular push to build out associated capacity, that should be supportive for the underlying value of these chips. The counterpoint would be these are new markets. You know, people, I think, don't really have a lot of empirical, history to point to in terms of determining what they may be worth under various scenarios. But clearly there's going to need to be a financing solution if all that data center capacity does get built out because the numbers I mentioned, a trillion dollars, you know, multiply that

by one plus to determine what the associated cost of the GPUs required in those data centers. And that's not all going to be equity finance. So it wouldn't surprise me to see that market grow further. So I'm old enough to remember when we had the first securitization of solar panel leases. I think it was by like Solar City or someone like that. And that was such a novelty at the time. And I'm pretty sure I wrote a story that was like Sunshine-backed bonds. Ha, ha, ha.

But in general, are you seeing a resurgence in asset-backed securities ABS for, some of these tech-related investments just because of the scale of the investment that's needed and maybe some of the interest in collateralized lending. So there's definitely a developed market for data center backed ABS issuance. It's a relatively small market, so it's clearly going to have to grow if all this capacity does, in fact, get built out. We have continued to see innovation in the ABS space. You know, I talked about the build out of fiber that's occurred and some of the challenges

that's created for the cable industry, that is a market that now is accessing the ABS market where companies that have built out residential fiber are taking those assets and effectively dropping them into securitization vehicles and then raising capital at, you know, attractive rates relative to what they could raise in the public high-yield bond market. So the market is very creative at meeting needs. And so I would suspect that you're going to see over time more ABS-type structures in addition to the role private credit is going to play in the in financing these projects is part of the funding solution. By the time this episode comes out, we'll have recently released an episode on,

talking a lot about the nuclear buildout or this hope that many people have for some sort of nuclear revival. And we recently had the news that Microsoft would commit to buy a bunch of energy from Constellation to turn back on one of the reactors at Three Mile Island. And there is a real like chicken and egg problem here because the nuclear place. players need to have that guaranteed demand, and also it's risky to build a new reactor because we're out of practice, as you mentioned, and so forth. Is that going to create any opportunities as you see it, like, okay, if there's some momentum that gets going for some of this, like,

difficult construction projects? Is that something that you could see coming across your screen, that space? Absolutely. So a little bit out of my element, not a nuclear power expert, so I don't want mispeak, but I think the consensus is it's unlikely that in the near to medium term, you're going to see the construction of a large-scale nuclear plant here in the United States. I do believe that there's opportunities to increase the capacity at existing facilities, as well as restart brownfield facilities. So I think that's clearly going to be part of the solution, but to the extent a market does develop for greenfield nuclear projects in the U.S. The cash flow profiles, the long duration nature of these assets, the size of the investment opportunity fits in very

nicely with the pools of capital that we manage, you know, primarily within our retirement services business. But one of the things within energy is that in certain areas, there is a need for project-based finance, but the market doesn't exist. So another thing we talked about, recently on a show is a geothermal, for example, in these projects, which is, sounds very good in theory, but I don't know if there's a lot of money. What does it take for a new market to build? Because it seems like a chicken and an egg problem to some extent, which is that, okay, you don't, you know, here's a new idea. We're going to, like, put a bunch of pipes in the ground and get heat out of the earth, and that's going to create all this power. But it's novel, and it seems a little bit untested

and it's immature. But in theory, it could produce stable cash flows. And, you know, there's some reason to think, just like maybe talk us through, like, if there's a market that doesn't exist yet in real scale, but there's reason to think it could. Like, what is the process by which the credit markets could agglomerate onto a new area? So I'm speaking generically. Yeah, yeah, yeah, totally. Geothermal. So in some instances, the government is sort of the entity that's priming the pump, right? So you mentioned geothermal. I assume you're referencing geothermal, the utility scale as opposed to residential geothermal. Yeah, that's right. That's right. Yeah, utility scale.

But if you look at the IRA, you know, one of the provisions provides, you know, tax credits for, you know, the build out of geothermal on the residential basis. So I think that's an example of how the government can play a role to sort of fan the flames of a new technology. In terms of the role the credit markets has to play, the reality is if the technology isn't commercialized, it's you need to go to the equity markets first, right? Like it doesn't really necessarily fit the return profile or the downside protection, I should say, that a credit investor is typically looking for. So, you know, typically the migration is you start in the equity markets, you commercialize, generate free cash flow, and then go from there and start accessing the credit markets. Going back to nuclear for a second, one other thing that happened recently in addition to the announcement about Three Mile Island is there was an announcement from a bunch of pretty prominent banks saying, that basically they were really into nuclear power now and they would throw their weight behind it. And setting that specific sector aside, I'm curious how much competition you see from banks in the

overall credit market and how that might have changed in recent years. Absolutely. So clearly the trend of, you know, more lending activity moving out of the banking system into other sources of capital. We're talking about it now, but the reality is, and our chief economist, Torson, Sloc, had a great graph, which basically, it showed the percentage of non-financial lending that resided in banks. And it hit its peak in 1975 at 50%. So 50% of the non-financial lending in the U.S. economy was done by banks. 2007 was 30% is 20% today. The point is, this is a trend that's been going on for 50 years.

So long before Dodd-Frank. Long before Dodd-Frank. And all the financial innovation, you mentioned securitization. That's one technology or financial technology that moved risk off bank balance sheets. The creation of the leverage loan market in the early 2000s and late 90s, another mechanism that moved risk off of bank balance sheets into investors' hands. And I think private credit is just another arrow in the quiver that is supporting that trend. Now more recently, recently defined as post-GFC, you've had changes in regulation,

which clearly have accelerated that move and have forced banks to de-emphasize certain behaviors. So banks are still going to be an important part of the extension of credit in the United States beyond like the investment horizon, reasonable investment horizon that we can talk about. And so I think private credit is just one more tool or mechanism that allows, for that diversification of the provisioning of credit outside of the banking system. So, you know, banks are oftentimes partners, not competitors, in a lot of situations, because they have a corporate relationship, but they don't have the appropriate capital to meet the needs of that corporation. So we can actually partner together and provide the capital.

They provide the relationship and, you know, both sides are benefiting as a result. Speaking of relationships, so this was something else that I really wanted to. to talk to you about, the head of opportunistic credit. How do potential opportunities actually land on your desk? Is it like a company or a bank would come to you with a specific need or suggestion? Or is it your team of analysts who are looking at outstanding issuance at the moment and finding things they think

are maybe mispriced or where there are arbitrage opportunities or that sort of thing? All of the above. So as I mentioned, I work with a team of about 20. investment analysts. We've never quantified exactly where the ideas come from, but I would say 50 to 60 percent is being sourced by the analysts who are, as I mentioned before, are sector-focused. So really what that means is they're tasked with knowing everything about three or four sectors, knowing the management teams and the companies in those sectors, knowing the major trends in those

sectors, and through that process, they're just naturally going to identify interesting opportunities on both the private and the public side. In addition to that, myself, some of the other credit partners, our trading team, which is constantly interfacing with the sell side, is surveying the broader market to try to identify opportunities. And then I think something that's somewhat unique to Apollo, we have a very collaborative approach across our different businesses. We have a large credit business.

We have a large equity business. We have a large hybrid business. So those teams work very closely to share. share ideas because we've had many situations where a company will come with an ask from our hybrid team about some sort of preferred stock invest. They want some sort of preferred investment. The numbers don't quite work for either the company or for us, but perhaps a secured credit and instrument does work for both, at which point, you know, the opportunity will transition into my team. So the goal is to make the top.

of the funnel as wide as possible. So we're looking as many opportunities as possible. You know, I like to use the sort of metaphor that we're painting for gold, right? So when you're painting for gold, you want as much soil, if you will, in the pan, to find those top opportunities. Very minor thing, but just an interesting,

you know, when I hear the word analyst in my head, I just think of someone who's like looking at spreadsheets and tweaking numbers and seeing how different prices at the end of the spreadsheet change with different assumptions. But part of the job at an analyst at an established institution like Apollo is also on the sourcing side and getting to know these companies and that when one of these companies needs financing for whatever reason, they have built that relationship. Absolutely. Interesting.

Which is why regardless of where AI goes, it will never fully disrupt, you know, the financial analyst industry because it very much is a process, an art. It is art science. I think it's a little bit of both. That involves just, you know, building human relationships with, you know, with management teams, with experts in the industry, with the sell side, with the banks, with our peers on the buy side. So critical part. And it's also one of the interesting things that I've noticed. And I started as an analyst. So I, you know, that was my first job from 2006 to like 2014. And then I started doing other stuff. When I started, it was very much, you listen to the conference call, download the 10K and 10Q, and it's amazing how much more information is available today.

And it's not necessarily from the sources that you'd expect. Obviously, there's industry research that you can access. There's expert networks that allow you to talk to experts in a specific industry. But it's even broader than that. It's sometimes you get domain experts who write a really interesting. blog on a specific sector. Yeah. Podcasts, you know, not to, you know. No, go ahead and podcast, that's fine.

Podcasts are actually an amazing way to learn about a sector, right? Just go to Spotify or whatever your platform is, you know, search for a subject, and you can hear 40 minutes from a domain expert, YouTube even. So the amount of information that's available has only expanded. It's sometimes overwhelming, but I guess the point I'm trying to make is beyond developing those personal relationships with key operators in a sector. It's also just expanding, you know, the sorts of information that you're intaking because it's certainly it's amazing how much more information is available than when I started. Well, on that note, subscribe to all thoughts,

everybody. No, Rob, that was fantastic. Thank you so much for coming on the show. Really appreciate it. My pleasure. Really enjoyed the conversation. Joe, I'm really glad we did that episode because, again, so much of the focus is on what tech means for the equity market. It was really good to get a different perspective. And as you said, like instead of identifying the winners, the focus is very much on identifying the losers. So that was interesting. One thing that also struck me when Rob was talking about the scale of the capital investment needed and how that fit into the discussion over hype and future revenue streams, And it does sound like, dare I say it, maybe things are a little bit different this time.

Just because, as he was pointing out, the size of the dollar amount that's needed is so huge that you might not get this massive influx of players into the market because like the starting point for all of this is so high. So I wonder if there's like maybe more of a moat around the business than there was when it comes. to, for instance, software. Well, I mean, the analogy where you'd reach back to, I think, is the telecom buildout in 1998 to 2002. And there you had this huge overinvestment in cable or various versions of cable, copper specifically, as they called it back then. And there was a massive overinvestment and a bunch of stuff went bankrupt.

And then we all sort of know that several years. But it's interesting that you bring up the scale requirement because the entities that really got hit hard in like 2000, 2001 were called the CLEX, the competitive local exchange carriers. So you did have a lot of these sort of local players laying down their own copper wires and they all sort of got washed out when the internet bubble burst and the revenue didn't materialize. You know, I think another thing is like, there's just objectively going to be a lot of demand for data clearly.

There's nothing on the horizon, even setting aside AI. specifically, and in our recent episode with Jigger, he made this point, like even sitting aside the ambiguity about AI revenue, like data-centered demand only seems to be going up. So there's probably, to Rob's point, a lot of investment that you could feel reasonably secure is not just going to be empty shelves or semiconductors that sit idle. Joe, we should do an episode where you just talk about the early 2000s telecom situation. Actually, we should do a C-Lex episode. I do think that would be useful.

Let's find, that's a great idea. I think we should find someone because I do think that's the most analogous story that everyone is a little anxious about, which is Enron got into broadband and Tyco got and was really big into broadband and all these big players. Then it busted. And so why did it bust even though internet demand never really stopped slowing down is kind of an interesting question. Yeah, and you're absolutely right. That was a big story in the credit market too. That was one of the last big pullbacks in the credit market was like 2001 era. Okay, we got to get on this.

Who would be a really good telecom analyst from 2001? I'll try to think of some. All right, we're back to journalism in real time and generating new podcast ideas. All right, shall we leave it there for now? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Allaway.

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