John Zito - Inside Apollo - [Invest Like the Best, EP.426]

24:11And that's been a really fast growing segment for us at just over$80 billion. Do you talk about fees and the business model of asset management, which as you said in the beginning, historically, it's been, you give me some money, I charge you some fees, I charge you a percent of the profits, maybe above the hurdle or something Like very straightforward. These are so interesting because in some cases, these are extremely high margin businesses, especially like the two and 20 driven ones. What do you think about that model? It's persisted for a long time or do we need an innovation there? Where do you think it goes?

24:43Yeah, I think it depends on asset category. I think it's really specific on asset category and the ability for you to show outsized returns. If you show outsized returns, you can charge. Whatever you want. Yeah, and people will do it. You look at some of the multi-managers. I mean, they're charging pretty high fee. they can charge it because net returns. They've had great high net returns with low vault. And if you can do that over long periods of time with large swaths of capital, people will pay fee because they feel like it's differentiated. As you get into products or other things that get more commoditized, and you've seen that happen in parts of the really investment grade, take investment grade liquid credit, fees go down a lot.

25:18We're really around the more privately originated IG that you can't get elsewhere. And the reason that we've created this platform business is to control all that collateral where no one else can really get it other than unless you own those origination machines. So we feel like because we have those 4 ,000 people just originating assets that are completely diversifiers to the rest of anyone's credit portfolio, we should get compensated in some form. Where the fee settles out, it'll be somewhat dependent on overall rates and everything else. When rates were zero, it felt like fees were going to collapse.

25:51When rates go higher as a percentage of your aggregate return, if you're making 10%, you can charge fee. When credit was making 4%, fees collapsed because the net excess relative to the total return ended up being a lot. In alternative products, you've got to deliver the artistry. If the client doesn't feel like they're getting something opportunistic or special and they don't feel like they're getting either, There's been tremendous push on co-invest, which effectively has been a fee reducer, not from headline fee, but effectively a mechanism to fee reduce. You need to partner with clients now in a completely different way than 10, 15 years ago.

26:31They've fully built out their own. Many of them have built out their own fully capable, very productive, very smart teams that are willing and want to co-underwrite risk with you. And so it's much more of a partnership approach than it ever has been. I'd say I joke because there's always headline that the banks are getting upset with the alternative managers. They're stealing deals from each other. On one hand, we've built out our own origination, but we're still partners with them in so many ways that it's still working. The same thing's happening with the LPGP relationship. They've built out their investment capacity.

27:00And so we've had to pivot our business as well. So the whole chain is pivoting their business to be more partner-like and figure out the appropriate Venn diagram on how we work together. I don't know why this is happening, but I laugh that you go meet with venture guys and they all want to get into private equity. Talk to private equity guys. They all want to get in hybrid. Talk to the hybrid guys. They all want to get in credit. Talk to the credit guys. They all want to get an investment grade. And I'm like, wait, what's going on? I can't actually figure out. I don't know what's happening. I think because markets have been up for so long that these businesses who's very narrow in whatever they're doing, they're trying to go into bigger asset categories with less binary outcomes and just broader TAMs.

27:39And I'm like, but I didn't put it all together until I was like, I don't know what the theme is of that other than like everyone's trying to go bigger market and broader market. I'm really curious to understand how you think three different groups think about Apollo today and then how you would like them to think about Apollo, say, five years from now. So the groups are companies, issuers. I'll call them, I don't want to say retail, but people that might think about accessing equities through ETFs. It's not just retail institutions use it too, but people that want to put money in and earn a rate of return on the money, and then shareholders of Apollo, the business.

28:13So maybe starting with issuers. Issuers, we've made some progress. I think we did a deal for InBev in 2020, and I think I got 10 calls, people telling, John, great, it's COVID. You'll never do a deal for an S &P 500 company again. Set the stage for that. Why was that? Why does that represent such a change from what the history was prior? Investment-grade companies really never accessed private credit in that way. If you were an investment-grade company, you accessed capital through the bank channel. It was a very narrow view of the world. I got to build a - I need to build a plant or - I'm going to go to a bank.

28:46I'm going to raise bonds or I'm going to raise equity. Yeah. It was very simple. Like asset allocation was like, okay, I'm going to do 60, 40 bond and equity. No privates was involved. And still to this day, 401ks don't buy privates, which we can have a discussion about too. Yeah. But the idea that we would be able to do a multi-billion dollar deal for an S &P 500 company through private credit and through that was investment grade rated was something very foreign to the market, very new. And you look now, we've done deals for BP, Air France, Vinovia, Intel. The pipeline there is very large because people are realizing that they can get, first off, if you have$100 billion of debt, you're an investment grade company, doing a$5 billion deal with Apollo is just a diversifier.

29:30It doesn't mean it's not a negative of Conitone anymore. So that's gone away. And two, there's more flexibility we can do with our funding. We can get more flexibility. We can go much longer duration. We can do it attached to a certain asset or some sort of structured transaction. So it's just a little different. It does not by any means means that the traditional funding sources are going away or that it'll completely change and that it'll all go private, but it's another option. It's here to stay. If you take one of those examples, Intel or BP or whatever, they have options for how they're doing their financing.

29:59They chose you. These are big deals. What are the features of the financing from Apollo that are attractive to them relative to the traditional way of doing things? What are the variables that matter to them typically? Typically off balance sheet, it doesn't go against their existing debt quantum. So it's typically off balance sheet, typically longer duration, typically flexibility in some sort of coupon. And when it ramps, if it's a project that's ramping, we may give them a couple of years at the onset that you probably couldn't get through a traditional debt market. So really working with the issuer and saying, okay, what are we trying to solve for?

30:31Customization. It's all customization. And so we'll work with an issuer six months, nine months, 12 months to work through exactly the customization. And we have the teams that are capable of doing that, which is just very different than the traditional syndicated market. So the perspective from companies today, five years forward would be you evolved as this like personalized lender. Yeah. I hope that's the case. Look, it's gotten a lot better. The more big branded companies we do and the more they'll do it. And the more repeat issuers that we do, the more that it will happen. And we've made a ton of progress in the last five years, but I'll go to certain areas or certain parts of the globe and they're like, aren't you just a equity investor?

31:08Aren't you a distressed? That still happens every once in a while. So that's a brand problem. It's just by and large, listen, we have an incredible history of generating fantastic returns, sometimes in more difficult situations and sometimes stepping into situations that no one else would step into. And so people still have that perception of us, despite the business being in a completely different place to where it was 15 years ago. Can you comment on just the state of expected rates of return across asset classes today? You mentioned the zero rates for so long. The expected return was nothing.

31:37And so people weren't interested in it. Equities have come off a period of extremely strong returns since 2009. We now have this group of people that have had real long careers that didn't experience that drawdown and have seen nothing but like awesome returns to the S &P 500. What's your assessment of the landscape today? Just looking prospectively, there's all these people. I don't want to talk about like the innovation, 401k, annuities, retirement, et cetera, in a minute, but there's all these people, all these pools of capital that want a rate of return. They're interested in credit again, because there's a yield.

32:06What's your sort of like state of the union on what returns could or might be how you're thinking about it for the next 10 or 20 years? So we created a whole alternative universe based on zero rates. Most of the product design was based on zero rates. And it is still yet up for debate on how much of your return during that 15-year period was from just really low subsidized interest rates or actually from operational excellence. And we'll see that over the next couple of years as we start to try to monetize some of these assets. But buying an unlevered asset at 5 % or 6%, which is infra real estate related activity, and funding at zero, as I mentioned, makes a ton of sense.

32:43It works. Funding at six or seven and buying an asset at five, six or seven. That's good. That's good. So I think it's going to be harder. I think it's going to be harder. You're taking more risk. It's a different risk profile. I think those assets should be matched more with IG long duration product, not levered product because the leverage is too expensive. There'll be other times where the leverage is cheap, but right now it doesn't make all that much sense, but we've raised all these pools of capital under a construct that all of these alternative products should make 15 % plus rates of return in all different environments without the subsidy of effectively zero to negative rates.

33:15That seems hard. It seems really hard. Private assets generally, private equity generally has made net returns 13 plus across the board. You've seen packaging and secondaries grow. Access points are going to grow. I think that's a pretty good place to be in just generally private assets. I'd say broadly speaking, we have a high level view that all assets are going to get more liquid over time. And so the question is, what's that going to do to returns? And what's that going to do to volatility of those returns and the perceived riskiness of those assets? Can you say a lot more about that? I think that is such an interesting topic.

33:51It's also seems to be like the topic of the moment with some of the stuff going on with endowments. There's an incredible amount of money in private credit and private equity, and lots of it has been illiquid for a really long time. And off-ramp and liquidity are really interesting questions. What do you think is going to happen? This is back to the market structure conversation, which is you've historically had a market structure where institutions and actually probably 20 or 30 institutions controlled or dominated the private markets and define private markets as private equity in all asset categories, private equity and in for real estate and true corporate.

34:23And now you have the evolution of the wealth business and 91 % of private wealth clients don't have an alt. And that's growing at very fast rate where people are trying to get access to private assets because most companies have gone private and don't go public until they access to the whole economy. You probably need to own private assets. The structure of those vehicles in evergreen form versus the traditional drawdown form where you call capital, you're going to have lower headline returns, IRR versus actually evergreen returns. I think I told you about this, which is I did this comic where you have the two people at their 10-year reunion and one person says, I've saved a hundred grand.

35:02And the other girl, Susie says, I saved a hundred grand. Let's make sure we invest it well. And then they showed the 20 year reunion. You come back and he's got this nice suit on. And he says, I've absolutely killed it. I invested in all these private and I made 32%. Next frame. She has this like really sad face. And she's like, I invested in all these evergreen strategies and made 13. And she's like, just curious, like how much do you have? And he says, I have 180 grand. She goes, I have 330. I don't understand. I explain that story to my friends, my in-laws, people who aren't in the business.

35:33It's still not understandable. It's not understandable to them that somebody could say they made 32 % a year and someone made 12 % and somehow one of them has more money than the other because of the compounding elements of it. And I know that you get it, but as you go down distribution channel of more evergreen products, you're going to see a much more normal risk reward where equity is making somewhere between high single digits and low double digits and then credit depending on where we are in the rate cycle. We'll make high single digit, low double digit, whether it's levered or unlevered.

36:02But the compounding element and the income orientation in a more high rate regime is more valuable. International assets have traded historically at lower growth and lower multiple. And if some of this foreign direct investment changes, could you see with Germany really powering the printing press for the first time in a decade, could you see a normalization of multiple and a bit more higher growth regime in Europe? Everyone has a hard time betting on that, but it feels like the stars are aligned that potentially you see a higher growth regime in Europe for the first time in a decade. So how do you think we get pricing, liquidity, interesting new ways for people that have put all this money into these vehicles and want to get it out but can't contractually because the fund lives are whatever they are?

36:45You think that changes? I think that there's going to be secondaries marketplaces. I think the secondaries business is going to change dramatically. I think private asset exchanges will happen. And we've obviously started it. Who will build those? I think there's going to be, I think there's going to be new. First off, I think there's going to be a need to, I think that the more that wealth wants equity product and private equity type products, the more that they're going to need a liquidity lever and a need for this private marketplace. And so how that's designed is a question. You see us experimenting.

37:17And one of the things I love about our place is we experiment with a lot of different things and we're experimenting with market making on private IG. We've experimented with doing partnership with State Street and Lord Abbott. We're experimenting with what we listed our first fund on blockchain with five different protocols. And we're tokenizing the fund where I think funds will actually trade. And even though they're quarterly liquid, they'll trade every day, 365, 24-7. Coinbase saying that they're going to list a token that's backed by their stock. You can see what's happening, which is this evolution to this 365 24-7.

37:55It's such a strange thing to imagine, I don't know, an LP interest in a normal private equity fund trading when the amount of information available on the fund, let alone the underlying companies and holdings and all that detail. It trades in secondary pretty liquidly. There's a pretty big bit. You look at the volumes going through the secondary business every year. It's extremely liquid. If you want to get out of it in most market conditions, you can get out of it at some price, not that far from 90, 92, 96, depending on the fund, depending on the design of the fund, the sector, the size of the manager and the brand of the manager.

38:30But by and large, you can transact on that. The more you pool assets, the more likely you'll get more liquidity, to your point. So the more that you can call it diversified beta, the more likely you'll be able to. More that it's deemed to be private markets beta as opposed to single name underwrite, the more likely you can actually move the risk. And that's happened in fixed income market where portfolio trading is happening. You can trade a pool of investment grade bonds at three basis points. But if you want to trade a single name bond, it's half a point to a point wide, which is just vastly different in terms of cost of execution.

39:03What do you think happens in the wealth market? That seems to have become a huge driver of new capital coming into industry. It's hard to say it doesn't grow. People are just under-indexed to private. It's not that dissimilar to the story I said about 2003. A billion dollars was a really big credit fund. And by the way, I was 24 years old going to Geneva. I'd go there. They'd send me. I'm like, they should not be marketing this product. I'm like, not prepared to do this. I'd go over there. I'd read off my list. I'd prep myself for what the marketing pitch was for a long-story credit fund. And we raised$50 to$75 million on one meeting.

39:35Now I'm at Apollo with close to 25 years of experience. It takes us two or three years to raise a dollar sometimes. People want to know I'm right on repeat the gestation period to raise money. It's completely gotten out. It's so much longer than it ever was in wealth. It's the early days where they need product. They need to get more indexed. They want to go with big, high quality managers. They want to go with someone they know they trust, et cetera. But there's only a handful of brands that can do that. and they're all short product. So the tailwinds there are going to be hard to see them not continue to grow.

40:12I want to ask about the third category, which is how shareholders of Apollo have historically thought about. You've talked about its legacy. For any shareholders listening, I hope they love us. We are extremely, generally at our core, we are pretty unsatisfied generally. We try lots of different things. We have probably one of the smartest, most strategic leaders in the marketplace. and that really powers the culture of the place. We have a set of people who are really, it's pretty flat still. You'll have principals and associates and analysts are not afraid to talk to me or anybody else and we like it that way.

40:46If you have a good idea, bring it up. We don't really have all the hierarchical stuff of a traditional, what you think of as an$800 billion manager. To me, it still feels pretty flat and we want to keep that feeling. There's the plate football at Amherst and there was this game that we lost my senior year against Wesleyan. We lost 24-17. We were definitely not supposed to lose. Anyone on Wesleyan, you weren't supposed to win. It was like Sunday, the day after the game, we were all sitting there and the coach came out. He was like, thumb guys, finger guys. Don't blame anyone else. Don't be a finger guy.

41:21We're all thumb guys. And the point was, take the accountability yourself. Stop trying to blame everything else. And when things go wrong or we're trying to create something, people take it on themselves. And we have that just embedded culture of just owning that ownership of both successes and mistakes. But really on the mistake side, people aren't always looking to blame other people. And we've surrounded ourselves with those people. We do that with our people, but that just emanates the whole place. Such a cool, amazing concept. If everyone did that, I think a lot of companies would be a lot better.

41:49I have sort of like a two-part question. In addition to the fingers versus thumbs thing, I'm curious how you think about the culture. first as a participant in it and now increasingly as a steward of it. And the second part of the question is how you navigated what has been. You're fairly young, like a fairly like meteoric rise inside of Apollo from managing 130 million to the position that you're in now. Thinking back on that, why do you think that happened? What did you do to do that? I think part of it, you always have to bifurcate seat versus person. Part of it, I was like, Mark drove a theme.

42:25Credit became powered by an internal pool of capital. Our team's an incredible job of navigating, creating new asset classes, being innovative. But listen, when you have tailwinds like that, and you're one of the leaders of those business and help architect that business, that obviously helps. But we have an incredible team, incredible people, but also the leadership across the board. They've always let, if we have an idea, they've let us run with it. In 2018, 19, we did a billionaire deal, direct lending deal when no one was doing multi-billion dollar deals. And we did it with not a very big direct business.

43:00When we wanted to go to the Middle East and partner with Mubatala to raise a$12 billion balance sheet, no one had raised a large cap direct lending. This is 2019. No one had thought of really raising a balance sheet to commit, to distribute and hold and have our own balance sheet that were effectively 50-50 with Mubadala. No one thought about those things, creating asset-backed businesses, our platform business, all of these things into products. If it was a good idea, pure meritocracy and pure just engagement with the entrepreneurial spirit, despite us getting bigger, we haven't lost that. And that starts with Mark and goes down to Zelter and Kleiman and just an acceptance across the board.

43:37And the team has just been amazing. And so that part has been fun. I'm definitely oddly over-indexed to change, so I like it a lot. So I have to work on that because even when things aren't supposed to change, I like the change. But the industry has changed a lot. I have tried to be really market-oriented around what is the appropriate equilibrium of where the market should sit, both in product design, fee, and asset category, and really question how to disrupt ourselves. I'm okay with that discussion. There's many people who are not okay with that discussion. I love that discussion because I'm like, okay, well, then let's do it.

44:15I want to go. Someone's going to disrupt them. I'd rather just do it ourselves before letting anything else happen. And I think you build trust by having that mentality. The other thing is I oversee a really big private credit business. That's how it's viewed from the outside. And really now I oversee a big private markets business. But I grew up in a public markets DNA in a job that was literally, here's a draw of very small nominal dollars. Eat what you kill. If you lose money, you won't have a job. And that's like a different thing. It's a different thing. You have to be all over all of the risk all of the time.

44:49That's hard to untrain. Part of that training, though, was create with very little capital. I worked at a$500 billion,$3 billion fund. And what you had to do in that is you had to design the skill of having the idea, going and creating the idea, getting other people to believe it's another good idea, having the banks in some cases finance that idea. And so I was constantly training ourselves and our team with small pools of capital with no brand. We were small brands, Brent Court, these places were small, not in the Apollo, where I learned how to do things without that business card, that seat.

45:21I learned to do it with very little resources. And so now when you have the resources, all of a sudden you're just like incredibly empowered to do things and you can do the whole deal yourself. Having that public spark of DNA in the context of a big privates manager, that really differentiates ourselves from a lot of different people out there. I also love this idea you've talked to me about before, that historically, Apollo and firms like it are attacking the alternatives sleeve of someone's portfolio, maybe the 20 % allocation they have to alternatives, and that the future might be much more about attacking all 100 % of a portfolio.

45:56How do you think about that shift, making that happen, making that possible? It's a very different approach. First, you have to agree that privates and publics become one. Overwhelming thesis that most assets get more liquid over time. So let's just assume that assets get more liquid over time. So what was seemingly perceived to be less liquid before will be more liquid and more accessible and more acceptable into those portfolios. There are certain states today which will take a rated private asset and a rated IG private asset, and it eats against their private equity bucket because it's deemed private.

46:30So by definition, we are all wired and we've talked about this a lot. We are wired to think that private is risky. But if it's an Intel bond with a 20-year guarantee from Intel, is it riskier or safer than the Intel QCIP bond? And you're attached to the asset. So you actually have a double claim in some ways. So that part we think will over time go away, particularly for start with private IG. Let's just start with credit to start, which is you have a third party saying that this is rated X. S &P is saying this is rated BBB. S &P is saying this other assets rated BBB. So you have guideposts. If you have the guideposts, when you look at your credit allocation in a 60-40, shouldn't you just be optimizing for return with your credit allocation?

47:12And will that then go into sub-investment grade? And that will go into equity. Will that go into equity pools, both private and public? Should there be diversifiers to the S &P 500? These are, I think, real questions. If you look at market structure, if you look at how capital pools are growing, They're telling you that's what's happening. When we talk to a client in the future, I don't think we're going to be talking about the 20. We're going to be talking about, okay, what's the best risk reward? And by the way, we're organizing our business with no walls. So the earlier comment on risk reward, it's the same thing when you talk to an issuer.

47:42What are you solving for? Here are all the things you can do in credit, public, private. We do all those things. By the way, we do them on our own balance sheet. Let's compare notes. Okay. Equity. What are you looking for? Public, private. Okay. We do all those things. We understand exactly that. Okay. here's the solutions we can provide you. And by the way, let's put it all together. There's a whole other ecosystem around private assets and data and exactly who owns what information you get from your data set versus public markets data sets. And which I think, again, early days, but I think the broader, bigger, scalable businesses that have more touch points across the economy, particularly when the economy is going more private than public, hopefully we can use that data to make better investment decisions.

48:23If I'm an equity investor, I'm a private equity investor or a longshore hedge fund investor or a pod investor or something. What is the value to me to understand what's the most important parts of your world to do my job better? for someone who grows up on the capital structure side, where you have to understand all parts of the capital structure, but as a credit investor, you need to understand the structural dynamics and flexibility of loans and converts and bonds and prefs. When you're purely equity investor, typically when you talk to them, they're focused predominantly on one thing, which is top line growth.

48:56And if you get the three-year top line growth number, right, you typically get the stock right. And when you go to California and you ask about debt, no one wants to talk about debt, But now you have venture companies actually building defense companies that are going to be super asset heavy. And now you have hyperscalers that have never had any debt that need a lot that are becoming now more capital intensive. So the powering of this stuff is more capital intensive, but investing in businesses and optimizing for ROE, you can, if you're running a business and you understand all the different flexibility points at different parts of the capital structure on balance sheet and off balance sheet, you're going to optimize and have better shareholder returns over time.

49:33because you're going to give yourself a lot more flexibility and in some cases have much cheaper growth capital than you think you probably do than just raising equity. If you understand credit and you're an equity investor, typically you understand all the option value you are long when you issue debt and you just create lots of optionality for yourself that maybe if you didn't understand that you wouldn't price it in to your stock. If you're teaching like a HBS class or something on, the class was called how to build a great origination platform. You work with a lot of origination platforms.

50:04You bought a lot of them historically. It's like a really key feature of everything that you do. You have to originate these things. What would be the curriculum or the syllabus of that class? Number one, have very clear credit box, very clear rules of the road on what you buy and what you don't buy. When you're not clear on that, it can create lots of issues. And so the more clear you can be upfront, if you're clear with someone about what you're willing to buy and what you're not willing to buy, what are the parameters and bookends of what you're willing to buy and not buy, that empowers your origination machine.

50:35If you're not clear, if you're not clear on your decision-making, if there's not a clear point of accountability, it creates way too much noise in the channel because you're not delivering to the clients because they think they can do X and that actually is brand degrading. So the number one rule is make sure you spend all the time in the world to define the credit box and be very quick. If you don't want to do stuff, be quick to redefine that credit box and be clear with your communication to anyone who's originating on your behalf. That's the rule number one. It sounds pretty simple, but you'd be surprised how hard it is to execute at scale.

51:06Do you have a favorite example of a great, will you view to be a great origination platform? Just like tell a little story about what one of these things might look like. So CS was going through some changes and then ultimately bought by UBS. Atlas was the structured products business at Credit Suisse. It was the number one profit center for a decade, generating a big percentage of CS's earnings for a long time with effectively no losses. They had a$45 billion balance sheet. And what they do is they provide warehouses to originators all over the world. And they would let those originators write a bunch of small loans.

51:44And when they get to a certain quantum, they would securitize those loans and distribute those loans via through a distribution mechanism. Because CS stock was trading at such a discount to book, they needed to, if they could sell it at book value, it was actually a creative. But what was this had every, this was the classic Apollo deal. It had mortgages. It had solar. It had commercial real estate. It had consumer to underwrite. All of those things was almost impossible for anyone in the market other than us, because you had to have the full suite of the team and you had to bring on the full op X of the business.

52:20So you're talking about 300 people in 22 when rates moved they spent they sent 2 million wires for margining okay so you have to have the scale to actually do it you have to know all these asset classes and you have to have the experience of being able to take on a team culturally integrate the team all those things and then execute on a plan so it got down to the wire i was i remember sitting here we was we were sitting here it was like midnight or 1 a.m and i was eating chinese food with one of the analysts than the deal partner. I was like, this is fun. Like I love this is, we're back. Let's do this again.

52:53And that's what it's like. We were all on the floor having fun and we ended up winning that deal. We ended up taking on 28 billion of assets. We brought in three partners, including MassMutual to partner with us on the equity, two sovereigns as well. And now we're on pace to grow that to, I think 50 billion. And our long-term goal is to grow that to a hundred billion dollar warehouse business. We've hired 180 people into that business completely. we'd have to restaff it with its own CFO, CRO, entire operations as a real company. We rebranded it Atlas. And now we control 280 separate warehouses.

53:29We're one of the go-to places to provide across all these different asset categories and we control the front end. That's just right down the middle of the fairway, everything about Apollo, where it's working. What deal that you have been an intimate part of has been the most fun for you at Apollo? I'd say the most time and attention the last five years I had to deal with was probably Carvana. And I know you know, Ernie, that situation went from us being down half a billion dollars to up a billion dollars, probably in a matter of six months. It went from us being a lead order in a JP Morgan syndicated deal in 22 to all of the bonds a year later trading at 30, having bought another 750 to a billion of bonds on the way down and being questioned about the whole investment.

54:19And I think every single investor, every meeting I went into, I was like, I will never do this again. Every single meeting I went into, I was getting questions like, what's going on? And it sounds like it was a big position for us, but in the context of all of our funds, even with it at 30, we had, we were up 8 % or 9%. So we took a hundred or 150 basis point loss by vehicle, but just because it was in the news, it was so much headline for meme, the whole thing. And, you know, I kind of sensed that there was going to be an issue. I think probably in November of 22, about six months after we did the original deal, every time I started going out to California to go to the Athena offices, I would email Ernie and say, Hey, I'm going to be in Phoenix.

54:58we need to catch out he'd be like okay i'm sure you could tell he was like who's this guy first off who's this guy from apollo yeah and what does he want there's not a problem yet and then bonds keep going down i'm texting i was looking at my text last night and i was like wait how am i going to tell this story and you look at the text from the beginning and he like wouldn't respond he wouldn't engage he just wouldn't and it was like sure and you could tell he's like who is this person yeah i think in november we caught wind that they were going to try to do and by the way I probably did 20 calls and two or three dinners with him.

55:30He heard what I was saying, but he didn't. He was just worried that I was trying to do something that was not in his best interest, which I understood. You can get that. They hire Mollis and I catch wind of it prior to it, that they're going to launch a super coercive exchange. And this is before the idea of co-ops. Co-ops are where you actually partner with other creditors and agree that no matter what, we're going to take the same deal so that they can't take other lenders and give them a better deal versus us. So we said, listen, guys, we're, it's us for it's, we're the lenders. There's a company.

56:00We're going to figure out a good deal together, but it's not going to be because they'd pin us against each other. So it was a five and a half billion of outstanding debt coalescing five and a half billion of debt requires you to have known these people for a long period of time. And the credit markets, whether or not you accept it or not, it's a cottage industry. Handful of people. I'm friends with most people in the market. I'd like to say I've not done anything wrong to anyone in the market and generally have real personal relationships that have gone for a long period of time. They're deep, real relationships that, because in credit, it's not zero sum.

56:32The equity markets are more zero sum. You win the deal, I lose the deal. You typically are in the same bond with them or same loan, or maybe we'll be on the other side, but I know I'll be in the same side again. And so it's a very different dynamic. So we were able to get 90 % of the bonds on board. They launch this exchange. The exchange gets blocked. What is the exchange that's described? The exchange is effectively, hey, if you roll into this bond at a steep discount, we'll give you security, but you have to take a big haircut to par. All of a sudden, no. They launched it. They extended it.

57:02And no deal. And people don't know this part of the story, but I'm sitting in vacation, like my first vacation probably a year in the south of France. And I'm sitting there with my wife. And guess who's sitting next to me? Ken Mollison, his wife. Okay. And I'm like, Ken, I'm on vacation. and it's one of these places where you got to stay like a minimum couple nights or whatever and so ken's there sitting at every meal he's there and i'm like ken can we somehow get to an agreement on this other thing and he's his famous quote of the whole thing is co-ops are made to say no meaning that once you guys all get together you're never going to get to a deal i'm like we can get to a deal reasonable deal just get everyone together send us over something i'm just encouraging them to do it and eventually we end up flying out to phoenix as a group and we back and forth.

57:48And finally, you realize that first off to get these deals done incredibly hard, very rare to get done to it's probably the only cop where everything worked. We cut a deal, the stock and we had bought stock at four. The stock went from four to over to 280 in the next 12 months. The bonds went from 30. You exchanged at 90. Those bonds were trading at 120 a year later. Everybody won in this. There's very rarely do you have in that time short of time period, Do you have a deal that's effectively a fair deal, not where we're taking the equity or anything? And a year later, everybody's won. Now we sold the stock at like 15 and it went to 290.

58:24So we're the idiots. Here, I'll pull it up now because I was laughing. Ernie and I are both into where he wouldn't reply to anything before. Now we're like personal friends and I'm like reading through the text and I sent him this song. I sent him Evening Gown by Mick Jagger. I don't know why. I sent him this song like a year ago. We're both into music. And he goes, if the FBI had to profile you based on your music, they would say you were a 60 year old from West Texas with an optimistic form of depression. So you go through the channel and you're like, okay, how did this deal get done? It got done because I was just kept going back.

59:00I kept being super brutally honest. And despite his lack of, he didn't want to trust. I think part of it was like institutionally or what we were doing in the car. He just didn't want to. Smart people just see through it. smart people just see through and they actually were, he heard me for the content. And once he got there, if you talk to him now, he'll tell you there was no deal without us having spent all that time before. And the whole process of me going to Phoenix, all those times and actually engaging with him and just keep giving him just feedback. That's what ultimately got our deal done.

59:29And in most cases, that situation would have ended up in some sort of bankruptcy or some sort of aggressive thing where no one probably would have won. Honestly, That one was fun because I feel like Ernie and I are great friends now. And I think we both learned a lot. And you realize that you have to have flexible capital. You have to be willing to actually commit to having a personal trusting relationship with whoever the decision maker is. And if you don't have that trusting personal relationship with the decision maker, not only the decision maker, but also your peers. Because in credit, you have to be able to agree that sometimes one plus one is three.

1:00:02It's not zero sum. And that amazing story. And I love having heard it. It's obviously one of the most fascinating capital market stories of the last 20 years. Another story that I've loved to hear you talk about is Hertz, mostly just because it seems to tell the story of what Apollo does and why it's interesting and differentiated. Can you tell that story as well? Yeah, so that story was like 2016 annual meeting I said that Hertz would file for bankruptcy. I was dead wrong for three, four years. Because I was of the view that Uber, people would rent fewer cars, pricing would collapse, used car prices would go down.

1:00:34own. That was kind of thesis in 2016. COVID hits. I talked to the management team a month later. They're like, we don't have any plans for anything. EBITDA's fine. And I'm like, okay, so this is like locked up in my house in Bedford. I'm like, what are you guys talking about? And we bought several hundred million of June insurance and company filed in May, literally a month later after they told me everything was fine. So that was like the start of the Hertz journey. From there, we bought the term loan at 60. We thought that we'd probably own the company at a sub billion dollars. It was very different than whether company, when we hated it, it was a$10 billion company.

1:01:11We were buying the company effectively at a billion. And you go over the life of the journey from mid-20 to when we were buying the term loan at 60 as a distress for control, which is, again, not really what we do historically, but it was COVID times. And we're like, if we own it here, we don't think it's going to be distress for control, but if we own it at this valuation, it's worth this. We refinanced to think about the story of Apollo and how it can actually provide solutions, right? From that point forward, we became the largest secured lender. We provided the dip. We refinanced$4 billion in that summer,$4 billion of their entire used car vehicle financing because they had to, because the used cars were collapsed, they needed a refi.

1:01:50We refied$4 billion. The terminal went up. Then when the company ultimately ended up exiting bankruptcy. They took out the term loan. In November of that year, they had a lease business, a platform business that actually did fleet finance inside of Hertz that they wanted to sell before they exited. We bought it in our platform business and they've merged it with wheels, which is a specialty lending fleet finance platform business. Then when they actually, it ended up being a solvent company where there was value to the equity, Nighthead ends up winning the bid. We provide the two and a half billion dollar exit financing, which six months later we get taken out at a one 30.

1:02:27We put in$10 billion into the ecosystem across dip secured, securitized product, pref, buying a business out of the platform. Nobody could have navigated that whole over a 12 or 18 month period. You have to have tons of flexibility, creativity, and agility. You can't, you have to think up and down the capital structure. That was the first time I saw the whole platform at work, working together from our platform team to our senior team, to our hybrid team, all working in the whole ecosystem. That was a pretty special thing. And hope to do a lot more like that. You need a combination of market ball and single name ball for that to happen.

1:03:07But when it happens and you can execute on it and showcase everything again, being close to the decision maker, the more we did, the more we were getting the first call, right. By providing the 4 billion of securitized, probably not, it's not that that's a plus 300 business, meaning it's not high returning, But because we did that, guess what? We got the first call on the platform. Then we did that. We were the call. We got a call last minute on that pref from Nighthead. And in 30 minutes, because we knew the company so well, I said, okay, we'll do two and a half billion of pref. Because we could react that quickly at scale, big and fast, very few firms can move big and fast like that.

1:03:42And when we move big and fast like that, because we know the business is so well, we follow them well, we have a big balance sheet to be able to commit fast. and we do it in a way that it's because we have, we've invested in five, that we're invested in all these companies for so long. I-O companies don't, they never go away. They either get acquired, they either refinance their debt. So they're back in market every two or three years or they file. It's never like you do the loan and hope you're gonna get paid enough in cash. So these are companies that you follow for a long period of time. I love to talk about some of the future categories that you think you'll be most focused on.

1:04:14The obvious one is like US infrastructure build out around AI. AI is, of course, like you have to ask about it. It's the thing everyone's talking about. I know you've spent some time meeting with some of the young companies, which is so cool. We've met with some of the same companies. It's pretty wild to imagine like where the world's going. But when you think about Apollo's role in all of that, one of the things happening is just a massive outlay of capital to update in compute infrastructure. How do you think about something like that? How do you approach it? What do you know like the right time is?

1:04:45Do you wait and let it settle out a little bit. We approach something like that. My wife's banned me from talking about AI at dinner because I think it ruins a dinner party. So we don't talk about it. Why is your a boomer about it? I'm less nihilist. I'm more excited about it, but I want to talk about it a lot. I think there's three segments of our business that we have to think about. One is the aggregate data, taking tons of unstructured data and structuring it. How do we use that in a way that's attractive? How do we use that in a way that potentially is predictive? Two is all the operations of a financial services company, which I think will just get better, right?

1:05:15The way that just everything from custody to cash transfer, trade settlement, whenever you do a transaction, there's a whole host of workflow that I think will get more optimized and more efficient. And three is the investment process. And really for us, it's how do you co-pilot? How do you create co-pilots to make our risk decision makers better? I think that's going to happen. You have to have people who are very proficient at that to actually train the computer and the system and create the system the way you want. You can create a system that gives you bad advice too. So you want to make sure that it's creating it under the framework that you acknowledge to be the framework that will suit the product's needs or the fund's needs or the investment process needs.

1:05:54That stuff's pretty exciting for us because we're very large, which means we have lots of information and lots of optimized stuff that we can do that we haven't done yet. So I'm pretty excited about our future. In that regard, I'm really excited about doing it. it's obviously you talk to people in the ecosystem, they get a little nervous about what that means for everybody. I think that we're just going to be doing our jobs better and more proficient and be able to do more, which is, I think, exciting. Do you think it affects where you put your dollars, meaning like so much money is being spent on all this stuff and making it possible, like everything you just described, you're going to spend money on that's flowing through a whole new set of infrastructure.

1:06:35Do you think you'll be involved in that part of the equation? Yeah. So compute is the center of all of this and the demands for compute will go up. The sizing of these mega data centers is astronomical. There's not, frankly, there's only a few investors that can finance them with matched liabilities at the scale. And we're fortunate to be one of them. I think we'll be a leader in that. Intel was just the start of that. There'll be a handful of us, which will lead that charge, which again, the most important thing for that is that we work. First off, the counterparty risk typically is high quality because the hyperscalers and others that want that compute are typically very well capitalized and growing their earnings really quickly.

1:07:13So the more that we can partner with them to create the most flexible type of capital structure duration-wise that matches with exactly what they need, I think the more likely we're going to be the service provider of that. And I think we are positioned, given just the org design of the liability structure of our business, we're designed to be the provider, one of the largest providers of all that capital. It feels like that and probably defense are probably our largest sectors that are growing really quickly. If you think about young entrepreneurs interested in capital markets amidst this entire shifting, changing landscape that we spent a lot of time describing, Where do you think are the most interesting opportunities to start new finance firms, new capital markets firms, new asset managers?

1:07:56Look, I always think there's going to be some level of the core, let's say core credit, core equity businesses are going to get consolidated. So if you're big, you're going to become mega and you're going to distribute and produce products. And I think there'll be consolidation there. And you're seeing that. But there'll always be the family office, the endowment that wants the small artist. I started here with$130 million fund. Like no one paid attention to me for at least five years. What the hell is this guy doing over there with this long, short credit fund? And I did that for 10 years before coming here.

1:08:27So those businesses are wake up every day, super risk managed, or in the liquid business, super risk managed, and every line item, every risk, every night, and you're living and breathing the artistry of that business, whether it's buying small businesses, investing in small businesses, venture. These are just artists' businesses. And I think there's always room for the artist in the aggregate asset allocation. So my thing is find something that you love doing, find something you're super interested in, create a product around that, and get yourself excited about what you're doing every day. Because if you do that, you're going to probably design a pretty good product and a pretty good investment process.

1:09:07And the clients, again, the clients see through this stuff. They either feel the authenticity of whether or not you care or not, or whether or not you're interested in that or not. in the product that you designed, they know. And whether or not they know day one, they'll know. Do you think there's a future for Apollo in sports, financing teams, doing anything like that? In a world where let's go AI abundance and let's go seven night a week, the Ari, we just backed Ari and his, the Miami Open and Madrid Open and hopefully some other events. Their thesis is the events business went from two nights a week to work from home, turned it into three or four nights a week.

1:09:44Then you go AI abundance, It's a seven night a week business. People will be enjoying a GDP that's five to 10 X and we're all just getting serviced by robots. Let's go there. AI abundance. And if we do that, the events business is pretty cool. What happens in asset categories that go up in value really quickly, take sports teams, for example, when they go up so fast, but it's not so much cashflow, it's more enterprise. There's not a ton of lending. So there's this huge gap in specialty finance. And so I think you could see us lending against teams more actively, not so much buying teams, but I could see us doing more things like we did with Ari, where we provide financing and own a little bit of, and we back them through some sort of hybrid instrument.

1:10:27Yeah. It'd be really cool to imagine you applying this to literally every single sector as it matures over time. Yeah. As you do that, what are the things in the Apollo culture that you hope either stay the same or grow or become more true? Just a willingness to try new things. I think everyone realizes the world's changing pretty quick. And if not, the thing they're going to realize, it's just changing fast. It feels like it's changing faster than any of us can even accept. And the people who are closer to it even say, we can't even predict this stuff. So just a willingness to try new things and openness, a flexibility around that.

1:11:00I prefer Gumby. We want people who are willing to test some of those norms and just be outside the box thinkers. And not just because something worked in the past necessarily is going to work in the future. and just have fun doing it. We have our Olympics. I try to keep things pretty fun. We do like an Olympics. We had last year at the end of the Olympics, we had this like kind of standard corporate Olympics. It was going to be fine. It was fun. We go out to Randall's Island, but to mix it up, I always do something a little different. I had the team meet us at the fish market at 5 a.m. We got three 50-pound grease cods because when I was growing up in Maine, we'd have this annual grease cod race where you had to get in a fireman's outfit and a 50-pound grease cod back and forth.

1:11:41Didn't tell anyone what the finale was for the finalists, the winners, the finalists, you guys get to race for the winning thing. And then I pulled out the two 350 pound grease cods and it was the relay race for who would win. But we still are trying to have fun here. I'd like to think that most of us, you got to have fun coming to work and enjoy doing it. Where do you find the meaning in all this stuff? And the reason I ask this question is my wife and I are watching this new Jon Hamm show on Apple TV. A couple episodes. And I find it to be both really fun to watch and also maximally depressing.

1:12:14Makes me like hurt. And it's all these guys who are incredibly rich whose lives could not seem like emptier or worse. Yeah. And I think this is a true thing that happens in finance where like the product literary is money and therefore like the world is money. The incentives are money and the market system is incredibly powerful. And this is capital markets are the centerpiece of it. We talked about that at the beginning, how powerful an asset this is for the U.S. But it seems like there's a chance that you get really distorted by the incentives and the structure of the system as a human. And so I'm curious where you find meaning in it and why you've chosen to do it.

1:12:52I wanted to be a football coach and I was screaming to not come down to New York. It all hit the peak when I was coming in through the, I drove down from Amherst down to New York to move into my one bedroom with three guys on 38th and first. And I'm coming in the midtown tunnel and my tire pops going into the midtown tunnel, moving all my stuff because I had so much shit in my, so much stuff in my bag and in the back of the car. And I was like, I cannot believe I'm doing this. And then getting on four 35 AM trains up every morning to beat my boss to work because my stepdad would say, you got to be first in work actually got me a job.

1:13:30But funny story on that is like when I'd get up there, I try to get there first every morning. And my first boss, Jim Casberg, he'd get there super early and I couldn't beat him there. And he had just had a fourth kid. He was going to have his fourth kid. The fourth kid was ended up being triplets. So they had six kids. And now that I have three kids, I realized, okay, he wanted to get there first before anyone woke up. So he, so I was competing with the six kid household. Yeah. So that was like too hard, but I went up there and my step does like, just try it. And I met with the founder of the firm.

1:14:01And he's like, look, are you competitive? Yes. Are you good at math? Yes. Do you like new things? Yes. He's like, your blood's going to turn green. Just come up here and do it. For me, it was always about having a really good product, making good returns versus other people. I wasn't so outcome focused. I've always been about trying to make sure like authentically feeling like I have an idea or a product or something that's just very original and very what we believe in. You can use a fund as effectively a mechanism to actually take that view. And the thing I loved about it too is that if you have good, I've always had the view that if you have good performance over time for long periods of time, that just you will have clients forever.

1:14:41They trust you and you do what you say you're going to do. It's like a pretty good framework for how to operate. And if you can do that consistently for long periods of time, you'll always have it. I didn't realize how much I was going to love the business from the beginning, which is like, where else can we be in the middle of compute, oil and gas, software, healthcare, being in the middle of all these conversations globally. It is the eternal learning center. And I don't think I could do anything else. And then people ask me, you know, are you ever going to, I don't think I'm going to stop. I don't know how I stop.

1:15:14I love some blueberries. All right. So my, my, my wife, she's incredibly healthy. She also has a great way of finding very special things and as like anything that is special i love to be a part of the building of something special something unique and i like sharing things that are unique first is the every time you order an avocado in new york from instacart or order in like half of them are not or bad there's this guy called da avocado guy and he like yeah yeah and he's like da avocado guy you guys can go get it right now it's like probably i don't know what it's probably it's 50 or 100 percent higher than a regular avocado, but every avocado is perfect.

1:15:54So no matter what, back to your idea on young ideas, anything that is unique, special, solves a problem. You can have a business, the avocado guy. Blueberries, my wife found this farm down in Florida that makes blueberries once a year. Harvests, you can order five pounds once a year. You got to order it the day of, you just missed it, everybody. I actually don't know the name of the farm, but it harvests it one once he yeah blueberry guys duh blueberry guys we get them and i had them the first year and literally you can't eat other blueberries because they're so good for the and i'm like okay you can't and then now i started sending them to people on the floor so i sent them this out there they're the people on the floor are all getting five oh then they're like why are you sending me blueberries just a message around just it's really unique really special that's how you build relationships anything good anything good is around that and i give all the credit to my wife, obviously, on anything health related, but also just these jobs are impossible.

1:16:53If you don't have someone at home that's supportive and just full trust all the time and just always making the right decision for you and always looking out for you, I'm pretty lucky to have that. It's been so cool learning from you over many conversations because Apollo is this sort of monolith that you might think was a private equity firm. Maybe you thought it was in credit. It was doing just mid-market sponsor-back deals. And it's obviously turned into something much different. And so it's been cool for me to learn about it. I'm glad that everyone else listening gets to learn about it as well.

1:17:24When I do these, I ask everyone the same traditional closing question. What's the kindest thing that anyone's ever done for you? My stepdad who went to Westbrook, we were talking about him earlier. I was with my mom and stepdad for most of my life, but he set a ton of structure and really always treated me like his own. Now that I have three kids, it's hard to thank someone enough for that. Amazing. Great place to close. Thanks for your time, John. Thank you. If you enjoyed this episode, visit joincolossus.com where you'll find every episode of this podcast complete with hand edited transcripts.

1:17:55You can also subscribe to Colossus Review, our quarterly print, digital, and private audio publication featuring in-depth profiles of the founders, investors, and companies that we admire most. Learn more at joincolossus.com slash subscribe.

1:18:12Thank you.