Why Apollo CEO Marc Rowan is Financing the AI and Energy Boom

0:00You run an increasingly large financial institution, retirement savings, private credit, private equity. This is an energy conference. Why are you here? I'm sorry, I'm in the wrong place. If you look at the scale of our business today, we are approximately a trillion one of assets of management. The business that most people associate with us, the private equity business, is about 8 % of that. This episode is brought to you by Hard Lessons, a podcast from Morgan Stanley. Some investing lessons only become clear after you see how a call plays out. On Hard Lessons, iconic investors sit down with Morgan Stanley leaders to go behind the scenes on the critical moments, both successes and setbacks, that shaped who they are today.

0:46Watch or listen to Hard Lessons wherever you get your podcasts.

0:548 % of that. And it doesn't mean it's not an important business, but it's not the driver of our business. If you look at the driver of our business today, it is what we sometimes call the global industrial renaissance. In the world, we are building everything everywhere all at once. Energy, energy pipelines, energy transmission, energy transition, next-gen manufacturing, defense, infrastructure, oh, and this AI and data thing too. And the scale of what's being invested is beyond anything we can imagine. And how much of everything, everywhere, all at once is energy? Energy is a big part of it because energy is the underpinning of AI and data.

1:39Energy is the underpinning of industrialization, re-industrialization. Energy is the underpinning of movement to EV. I mean, the charts that you and I have been discussing show numbers required for investments in energy that would be every dollar since the invention of fire. And we've got, by the way, we have those numbers. Can you put that chart up on the screen, please, so people can see it?

2:09It's a big gap. So this is a chart that Mayoshi-san likes to walk around with when he talks about what needs to be done. But it does show you the nature of the challenge. And this is being framed in an AI defense national competitiveness way of U.S. versus China. And what you see is that the U.S. has built virtually no energy in 20 years, whereas China has catapulted ahead. Why do you think that is, by the way? We went through a period where we were uber-focused on decarbonization and the source of energy, as opposed to the transition to lower-intensity forms of energy. And simply, we were exporting manufacturing jobs.

2:59We were exporting the industrial base. We were not making real progress on EVs. And what's really catapulted this is the whole AI and data center revolution. The numbers for the U.S. for AI and data, and one has to have a healthy skepticism of this, essentially encompass the totality of all of the energy that exists. You just start there. And if you think about what we're building as a world, it does not surprise me that we are watching inflation because every one of the projects I talked about uses concrete, uses steel, uses copper, uses glass, uses energy, and uses labor. And we're surprised we have inflation.

3:47But the other piece of this is a financing piece, and I think we have yet to focus on it in energy, but we're certainly seeing it come home to roost in chips and in AI and data. And it starts with kind of simple math. There's only two sources of debt capital everywhere in the world, banks and investors. There's no third choice. And banks are the most amazing source of financing for anything that is short-dated because the banking system funds itself with deposits. For anything that is long, you're basically talking to investors. And then you have a choice of talking to public investors if you want something simple or private investors if you want something complex.

4:29Most of what we're building as a world is long-dated and complex. And so what you see is businesses like ours, that if you go back to pre-2008, all of the firms that Sheikh Nwaf mentioned, our firm, we were sub$40 billion of assets under management. And now we're a trillion one. I'd like to attribute that to good management, but let's face it, a trend is dragging all of us in that direction. You're saying that we need, that the banks and public credit can't do the job. It is not possible because there's another reality that we often don't confront until we get to this moment, and that is the notion of concentration.

5:11So if you think about the equity market, 10 stocks are 50 % of the S &P, and yet we sleep at night. We have 100 % of the savings, retirement savings of the entire country levered to 10 stocks. And we're very blasé about that. But in equity, you are paid to be concentrated. You have unlimited upside. Failures in one place will be made up with success elsewhere. In the credit business, you are not paid to be concentrated because you only get your interest and your principal. So if someone wants you to be concentrated, they need to give you two things. They need to give you more return and more safety.

5:49One of those things, more return is not enough because you can never make up for losses in credit because there's just not that convexity to use a bond market term. And what we're seeing is the scale of capital demand is starting to really put pressure on firms. It's first coming in the chip financing into the AI and data center, where companies on the one hand have$40 billion,$60 billion market caps and are paying 16 % to 18 % for their debt. one of those things is wrong. And you're starting to see even the largest companies, the investment grade companies start to crowd out other markets, start to crowd out even the government.

6:30We're going to see that in energy, maybe not as quickly, but we're going to see that as hell. So, but you talked about safety. I mean, there's a notion out there that private equity is not, excuse me, private credit is not as safe? Mostly that's a term of definition. When people mostly use the term private credit, they're referring to a tiny piece of the private market. And what they really mean is levered lending, lending associated with leverage buyout with deal activity. Which is, by the way, where you started. It's exactly where we started and it's exactly where my career started. But in the scheme of the financial markets, it's a relatively small market.

7:11And just for U.S. terms, that market's about$1.8 trillion against a$40 trillion private credit market that includes the investment-grade portions of private credit. So I go down in our energy book who we've been financing, and one oak I know is in the room, but it's Enbridge, it's BP, it's Shell, it's RWE, it's EDF, it's ADNOC. and Sheikh Nwof mentioned the other firms. This is a big company game in big size. The private credit market, the way most people use levered lending, is relatively small deals in the scheme of the world. We're talking about, in the chip financing market,$30 billion at a time.

7:53But just go a little deeper on, so why do big institutions, credit-safe institutions like that, go to you instead of using the public markets? Because the public markets are an amazing thing for entities that want to borrow in their own name very simply. If you want to do project finance, because at the end of the day, when we're talking about pipeline finance, when we're talking about field development, when we're talking about all of these refineries and other things, a lot of what we're talking about is project finance, where in turn the big public company is guaranteeing, is the offtake provider, has lent credit support, but it is not consolidating the debt on its balance sheet.

8:33It is no different than the Microsoft, Google, asset-like company that does not want to include the data center debt on its balance sheet. It is willing to lend its credit support to allow these things to get built. And from the standpoint of the safety of the financial system, does it matter if they're not willing to include the debt on their balance sheet? It doesn't really. This is a question of actual alignment amongst originators like ours, ourselves and investors, because they're like every market. There are safe things and there are risky things. Questions like who bears the offtake risk, who bears the force majeure risk, who bears the hurricane risk, and so on and so on and so on.

9:17Done well, this is in fact safer than most direct borrowing. And the reason being is almost all direct borrowing by investment-grade companies is unsecured. Almost all project finance is secured by the asset in which you're financing and the guarantee of the big company. So you're arguing you can be even safer? You are definitionally safer, and you need to be safer because what you are doing is providing concentrated amounts of capital, coming back to very safe rules. To get you to hold concentrated of positions of credit, you need to be offered both more compensation and more safety. For the company that's the borrower, the company is often using this form of credit in place of dilution to their shareholders, in place of other expensive forms of financing.

10:10In the world we live in, this is going to be in short supply. We're starting to see credit markets not behave the way we have seen them behave historically. We are watching various entities, various industries begin to max out their borrowing capacity. Yep. So give us one or two examples of energy projects that you were funding that couldn't have been funded by banks or in the public market. So I would say the biggest thing that we've been funding, and my colleague Dan Vogel is here, and if he hasn't met you, he's really not doing his job. His job is literally to meet everyone here. He's going to get up and wander through the audience.

10:53Exactly. Most of the things we've been doing are similar to the project that Sheikh Nwaf mentioned, which is very long-dated investments in infrastructure required to transport energy in various forms. But I'll just step back. Many of us in the room were in Canada a month or two ago where the prime minister launched Invest Canada. Canada had not added to its plant property and equipment since 2007. It was essentially stuck. Canada is going to spend a trillion dollars. The Gulf is going to rebuild. You heard the beginnings of what's being done in Kuwait, but this is happening in Qatar. It's happening in the UAE.

11:33It's happening everywhere else. They're going to spend a trillion dollars. The U.S. is already on its way to north of$4 trillion for just of this. And Europe is thinking about what it might do should it decide to spend money. But it's very clear that the driver of this is demand for energy, demand for electricity. You cannot be AI sovereign without models, chips, and energy. And that's where we are. And almost everyone is short energy. How much of your investment these days is your investment, your financing is going to energy? A very large percentage. I would say, I don't know exactly, but of the$400 billion or$500 billion we will originate this year, it'll be$50 to$75 billion.

12:24Wow. Big numbers. So look, normally, I mean, you're a student of history. You've lived a good part of this. You've watched all of this. Normally, when you see an investment boom like this, it's followed by a bust. Almost always. Yeah. So when are we going to have the bust? Exact date, please. Exactly. And so I think what you're really talking about is AI in some way, because that's where we've really seen the boom. But I come back to AI and the data center build out is not one financing, it's four financings. One financing is energy, because almost every project needs energy. The days of tapping into the grid are over.

13:07Public polling, which is not my specialty, but the one that caught my eye is most of the country would prefer to live next to a nuclear power plant than a data center. Of course, it makes no sense, but that is what the polling says. And so what you will see is either on a state-by-state basis or on a more prescriptive basis, people having to bring their own energy to the party. Energy is going to be built. That's a big driver of this boom. So can you finance energy safely? Energy at the end of the day is a commodity. It's going to be used as long as it's produced at the right cost. I think you can finance it safely.

13:45I go to the second piece of risk. The second piece of risk is chips. Can you finance chips safely? I believe you can finance chips safely because chips are in short supply. We're going to use more computers a world. five years from now, this may not be the case, but today you could look out and say for the next five years, just like we're short energy, we're short chips. What I don't know is what the price of compute will be. If it's low, something tells me that's good for energy because we're going to use a lot more of it. It's probably good for chips because we're going to use a lot more of it.

14:20But if it's low, there will not be adequate return on data centers and data center investments. So when will this boom happen? Right now we're short compute, we're short chips, we're short energy. If you have those things today, you are in a really good position. As these first wave of contracts roll in the next five years, you will see the price of compute determine whether these data centers are good or bad investments for the most part. So it sounds like you're assuming the high probability at some point along the way, we will have a bust and you are calculating your financings to be sure you're on the right end of the curve.

14:56Look, the things you do as an investment grade lender, you expect to get paid back. Almost all of what we're doing is financing energy and chips. The things you do wearing your equity hat where you're buying your lottery tickets are in very, very small size, are appropriately scaled and are treated as what they are, which is riskier investments. And anyone who thinks they can predict the outcome of compute pricing. I have a chart on my wall of the 10 leading consulting firms predicting both energy use and compute price in 2032. You would think this was a child-scattered document. And so the experts are divided as to where we are.

15:40The fact that there are unknowns does not mean you have to stand still. It means you can finance the knowns and understand that there are a bunch of unknowns. This episode is brought to you by Hard Lessons, a podcast from Morgan Stanley. Some investing lessons only become clear after you see how a call plays out. On Hard Lessons, iconic investors sit down with Morgan Stanley leaders to go behind the scenes on the critical moments, both successes and setbacks, that shaped who they are today. Watch or listen to Hard Lessons wherever you get your podcasts.

16:17Let's back up a little bit, because you have built, you've been talking about it for the last 15 minutes, this really interesting financial institution that is unlike anything that has come before. And by the way, you personally, I think, get most of the credit for building it. Blame, credit, whatever. However it works out in the end, point to you. Describe it. What is it? What is this thing you have created? So in the most abstract way, what I would say is on the one hand, we have companies around the world engaged in this global industrial renaissance who have an insatiable demand for capital.

16:55Most of it is debt capital, but some of it is hybrid equity capital and some of it is true equity capital. On the other hand, you have an older population in most Western countries that has not adequately saved for retirement who are in need of retirement income directly through insurance or indirectly through pension funds, endowments, and the like. We find ourselves in the middle. When we guarantee the outcome, we call that insurance. We put our capital behind it. We guarantee behind the promise we've made. When we pass that same opportunity through to investors, we call that asset management.

17:29we charge a fee. What people like about it is of the trillion one that we manage, half of it is our own money and half of it is client money. And in a world that is changing fast, where things are uncertain, there is nothing like being a principal to ensure sober decision making. But no one had ever made that connection before between retirement and your kind of active investing. Why had no one done it before and what made it possible for you to do it? A longer conversation about the structure of change in markets, but what's happened to public fixed income markets is the same thing that's happened to public equity markets.

18:11They've become indexed and correlated. So I start with equity, 10 companies, 50 % of the S &P, 80 % of trading S &P 500. The stat that I really find mind boggling, 90 % of active managers of equity have failed to beat the index for 20 years. Did they get stupider or did the structure of the market change? The structure of the market change, because these are really smart people, it is just very hard to fight a structured market like that. The same thing has happened in fixed income. And sometimes I say there is no alpha in public markets, but really what I mean, it's very hard to find alpha in public markets.

18:45So if you were an insurer who is making really long-term promises to retirees and you were primarily a fixed income investor and you could not earn excess return versus any other insurer, you had no source of differentiation. In 2008, we seized on that simple premise and we said, if we can find a way to differentiate and originate investment grade, we will have a differential on the asset management side. And the industry fought us for a while because it was change. And now the industry is us. We are not just an originator of credit for our own balance sheet, but for the whole industry. And just one thing on that, there are people who say the alpha that you're finding isn't going to the retirees, it's going to you.

19:31It actually is getting split. So it's very true. I fully admit to being a capitalist and some of that alpha is coming to us. And if you're a shareholder, you should be very happy We do that, but a lot of an alpha is going to the retiree, and the easy way to see that is in the marketplace. We started as a buyer of existing books of business originating no new business. We have, over the past period of time, become the largest originator of new business by a scale of four or five ahead of any company you recognize. and it is not our advertising because there is none. It is not our sports stadium naming or our blimp or our cute mascot because there aren't any.

20:15It's simply the notion that consumers prefer more to less. If you give them a little bit more and you have safety, you give them a good rating, you run a responsible, sober business, you will get more. And that is where we are. We've become the largest retirement insurance company in the world of a scale that we never could have imagined. And as you have suggested in this conversation, part of that is because of how you're playing in the market. But part of it, you believe, is because of the unique culture of Apollo. And I know you've been very intentional in building that culture. Tell us a little bit about what it is.

20:54So what it is, it's hard to encapsulate, but we've had a negotiation amongst our partners because as we've gotten to our size and scale, what makes Apollo Apollo? When we bring in a young person, it's very easy for them to understand both our culture and to do business. When we bring you in after 15 or 20 years in another institution, we can train you to do business. But how do we teach you the softer side of our culture? So after a pretty healthy discussion, we've put on our website, What Makes Apollo Apollo? And it boils down in my mind to six things. To start with the one you were on, principle mentality.

21:30We do not sell anything to a client that we do not own. That is an amazing filter for risk-taking. We're not about telling a client a story. If we don't think it makes sense, it doesn't make sense. That starts there. Clean sheet thinking. making sure we're giving the answer that we think is the right answer, not the answer that's been done before. Ignored the legacy? Ignore the legacy. Right over easy. Lots of people, if you go back in history, we had this trend where people were carbon zero, completely abandoning hydrocarbons. Some very big asset management companies with prominent names that begin with letters at the beginning of the alphabet were a big part of that.

22:15We had a simple rule. You can do anything you want, but you have to make it better, not worse. That is the only rule that we've existed by, right over easy. We took a lot of heat for that, but we were right. And then you get down to some - I just want to make sure we understand that. So you're not saying you're against moving towards energy transition. You want every investment to move in the right direction, but it doesn't have to be absolute. Sheikh Noath, I think, said it best. When you add up every source of energy that anyone is planning from technologies that exist today, it is inadequate to meet our needs.

22:51We've seen this play out in Europe. We've seen this play out in other places around the world. The reality is we are in a transition, and that transition will take a very long period of time. And firms, not just ours, but lots of firms around the world are now making 15, 20, and 30-year investments that envision - Sorry to divert you. Keep going on your culture. Oh, I'm sure I will hit a few. One that I like is life's work. What is it we offer clients at the end of the day? We offer judgment. And to me, that means you only get judgment when you have been there for a long time, seeing what we do and don't do.

23:27Therefore, we want you to spend your entire career with us. That means you're going to go through any number of life cycles, some good and some bad. How we deal with you in these moments that matter is going to almost matter more than anything else we do. We want to be the best place to be a partner in financial services. And we are re-imagining this business. The business that we run today looks nothing like the business that existed in 2008. The business in five years will be very different than the business that people are looking at today. So as you pointed out, the culture statement is available on your website.

24:03I'd urge people to go look at it. It's a fascinating look into what you're trying to do. It's a reflection of the firm, but it's really a reflection of you. Where did you learn leadership? Who were your mentors? Did you get it from a book? How did you develop your sense of how to run a firm? I think everywhere along the way. I go back and I think about the things that have made impressions on me. I've only had two jobs. I worked at Drexel briefly from 1984 to 1990, And then from 1990 to today, I've been with Apollo, including a co-founder of Creating Apollo. So the thing I saw at Drexel, as Drexel was financing many of these new industries, they were not a financial firm that focused on the execution in the market because it was not about execution.

24:52They were asking fundamental questions like, will these businesses exist? Will mobile telephony exist? Will cable television exist? Will satellite exist? And so on and so on. And so it taught you that this is not about finance. It's actually about fundamentally understanding the need of the business. That allows you to come up with solutions that essentially place you there. The other thing I learned there is something we've done, I think, really well at Apollo, informal. But I'll say it the way it really works at Apollo. We are intellectually insubordinate, which I distinguish from actual insubordination.

25:27best idea wins often the best idea is coming from someone who is not the most senior if you don't create space in your organization for people to tell you you're wrong or to share their thoughts you're not going to get the benefit of new thinking for people like me if i speak first in a meeting i've failed if i don't allow people to have their point of view now i'm not going to speak last because i just don't have much patience yeah and anyone who leads a business This knows exactly what I mean, but there are all these tidbits along the way, contrarian thinking. Some of the people I've met along the way really influenced me.

26:02The pithy statement, don't be defensive, be curious. So it's not a single person. There's not. You pick up bits and pieces from. What are we all trying to do? If you look at, if you step back and you just say, it's not about Apollo, almost every great company has this peak of growth and they get to a point. and almost all of the companies decline into slow mediocrity. Age. The process becomes what people think. How do you keep companies playing to win? Very few companies get to successful and play to win. You think you have the formula. I won't say I have the formula, but when I wake up every day, my job is to get the company to play to win.

26:45Mark, thank you so much. One last question, because I know you're a famous foodie. You look for great restaurants. Why don't you make a... What's your favorite New York restaurant to tell this crowd to? Oh, my God. I can't do that. I can't do that. Come on, give one. Oresh. There you go. Give me one. Thank you. All right. Thanks so much for being here. Today's episode was produced by Kevin Burke, Michael Claudio, and Lulu Chang. It was edited by Nicole Zarrilla, and my executive producer is Lulu Chang.

27:23This episode is brought to you by Hard Lessons, a podcast from Morgan Stanley. Some investing lessons only become clear after you see how a call plays out. On Hard Lessons, iconic investors sit down with Morgan Stanley leaders to go behind the scenes on the critical moments, both successes and setbacks, that shaped who they are today. Watch or listen to Hard Lessons wherever you get your podcasts.