Scott Kleinman – Apollo’s Integrated Alternatives Platform (EP.481)

Summary

• Private Credit: Post-GFC, Apollo scaled private credit alongside private equity, emphasizing origination as the key growth bottleneck and underwriting across the capital structure.
• Insurance & Annuities: The firm built a large fixed annuities platform focused on spread lending in mostly investment-grade assets, avoiding duration mismatch and extracting excess return via complexity and illiquidity premia.
• Asset-Backed Lending: Apollo developed specialized origination, underwriting, and servicing across asset-backed verticals (e.g., fleet, rail, aircraft), earning higher spreads versus public IG through bespoke structures.
• Private IG Credit: It offers structured, large-scale private IG solutions to blue-chip corporates seeking flexibility beyond public bonds, leveraging size to deliver multi-billion financings.
• Commercial Real Estate: After avoiding low cap-rate CRE in 2021, Apollo is leaning in as pricing resets, including acquiring Bridge to expand capabilities and pursue more attractive opportunities.
• Market Outlook: The credit cycle is late but the U.S. economy remains resilient; Apollo runs defensively with higher-quality credit, lower leverage, and disciplined underwriting standards.
• Liquidity & Access: The firm cautions against semi-liquid private equity due to liquidity mismatches, favors semi-liquid credit, and sees growing public-private convergence via wealth, 401(k), and fund vehicles.
• AI Capex: AI-driven capex is boosting GDP and infrastructure demand, but ROI uncertainty at hyperscalers poses a meaningful market risk if returns underwhelm.

Transcript

As the whole financial system started coming unglued, banks wouldn't lend to other banks, the ability to obtain liquidity became problematic for companies, for banks, for other things. We were able to approach banks and buy tens of billions of bank debt at a time at deeply discounted prices. We started accumulating enormous amounts of corporate debt. Not all of it was distressed. It was just the seller was freaking out. The markets were freaking out. So, we're buying good paper at discounted prices. At that moment it became clear to us that the provision of capital to levered companies is the other side of the coin of providing equity in levered situations. Private credit and private equity were two sides of the same coin. We were the first folks to come out of the GFC saying well we should have private credit business and a private equity business under the same roof. [music] I'm Ted [music] Sides and this is Capital Allocators. My guest on today's show is Scott Kleinman, the co-president of Apollo Asset Management. Scott joined Apollo in 1996 as [music] its 13th employee and has spent nearly three decades helping build the firm into nearly a trillion dollar alternative asset manager and retirement powerhouse. Our conversation traces Apollo's evolution from a valueoriented private equity boutique to an integrated platform investing across the capital structure at scale. We discuss the firm's core philosophy of excess return per unit of risk, its postGFC expansion into private credit and retirement services, and why origination and not capital has become the key constraint on [music] its growth. We also explore Scott's transition from dealmaker to firmwide leader, touching on culture, [music] incentives, communication, and governance. We close with Scott's perspective on today's credit environment, the convergence of public and private markets, and the risks and opportunities shaping the next phase of alternative investing. Before we get going, have you noticed that airline travel takes a lot longer these days? >> [music] >> Security lines go on as far as the eye can see. And that's even with pre-check clear [music] or the pre-check clear combo, and flights seem to get delayed regularly for no apparent reason. Well, the next time you have even an inkling of a delay, and long before you have to board, deboard, board again, and sit on the tarmac for an hour before you leave, might I suggest you fill that idle time with successive episodes of capital allocators? By the time your plane leaves, you'll have gotten through at least [music] two or three amazing episodes, and probably made friends with your equally frustrated neighbor in the seat next to you, who may not have had the benefit of listening until you tell them to make a new friend, productively pass the time, and find your way around the world smarter than you started. [music] Thanks for spreading the word. Please enjoy my conversation with Scott Kleinman. [music] Scott, thanks so much for joining me. >> My pleasure. Great to see you. >> Why don't you take me back to your background and what led you to come to Apollo? >> Sure. So, graduated Penn Morton 94. Like most Wharton grads at the time, went to Wall Street, ended up at a place called Smith Barney back when there was a Smith Barney. What was interesting about Smith Barney is they were one of the few firms at the time that had a dedicated group to financial sponsors. I luckily joined this group and got to know a number of the players back then. This is 1994. Private equity was not the military-industrial complex that it is today. It was really a cottage industry. Private equity probably represented less than a half a% of GDP versus the 10 12 14% that it is today. I was in this group that got to work with a lot of different private equity firms. the Apollo, Tom Lee, KKR, Forceman, Little Blackstone, and I got to know the Apollo guys. They would request me and I would work on their transactions over and over again. Came to like them. One day, I just got a call out of the blue saying, "Hey, we haven't hired anyone in a bunch of years. Would you like to come here?" I said, "Well, I don't know. Let me go ask my boss." Well, I had two bosses at the time. One was Michael Klene and one was Ruth Pat. Both of whom have gone on to incredibly storied careers. They looked at me, they said, "Sure." There was no recruiting process the way there is today for the industry. Of all the shops I worked with at the time, I like the way Apollo approached investing. I like the people. I like the creativity of what was going on there. After this exchange, I joined. That was January of 96. I worked the whole year without really knowing what my compensation was going to be. I came and figured I'd get a bonus at the end of the year, and the rest was history. What was Apollo like when you joined? >> It was fascinating. Today we're here in 9 West. We're about 5,000 people globally. We've got 15 16 floors in this building and 18 offices around the globe. Back then we were half a floor on 6th Avenue. We shared the floor with a travel agency. That takes you back to what the mighty private equity industry and the mighty Apollo was. I was the 13th employee. We had a handful of folks in New York and a handful of folks in LA and that was the extent of Apollo. What we were doing was really interesting stuff. It was very creative structured investing. The reason we have the name Apollo relates among other things Apollo is the god of healing. We were formed five years earlier from when I joined out of the ashes of the SNL crisis to pick up the pieces of companies, bring capital to companies that needed restructuring, that needed healing. That's what Apollo did. We looked for off the run situations where we could bring our financial engineering and our knowledge of business to try and create value companies. There's a big journey from there 29 years ago to here today. I'd love to break down the most important milestones over that journey. You start with healing broken companies. What was the next iteration from that boutique strategy with 13 people to whatever the next important leg in the stool was for Apollo? >> I would say from 1990 when Apollo was founded or 96 when I joined, we had just raised our third fund. It was our first institutional fund. Our prior two funds were largely the capital of credit. It was a $ 1.3 billion fund which made us pretty big for the time. From there through 2007208 prior to the GFC this was about continuing to bring our brand of private equity to the market and find interesting deals that fit the mold of what's an Apollo deal. We had a core philosophy back then that still holds today, not just in our private equity business, but across the whole trillion dollars of Apollo platform, which is value orientation. This concept of excess return per unit of risk. Be prepared to be contrarian. If everybody's zigging, if you have a view, be comfortable zagging and be prepared to invest up and down the capital structure. Just because we're a private equity fund doesn't mean we only invest in equity. At the time it was a pretty novel concept that sometimes the best risk return in a company is not the equity, it could be the preferred, it could be the debt of a company. So be prepared to express that. That model worked. The value orientation which was what the whole industry was all about at the time. Industry's clearly changed since then. But that [clears throat] strategy allowed us to continue to be successful and raise successive funds delivering excess returns. Sitting here looking back our private equity business. So that strategy worked. That was the first phase of Apollo, which is master the art of private equity in the style of investing that I just described. Was there a deal that you remember and hold out as notable in some way for both your career and what transpired at Apollo? >> In that early phase, I started out doing a lot of cyclical industrial deals, working on a lot of chemicals, metal and mining, forest products, energy, other industrial manufacturing businesses. One of my favorites at the time was a company called Compass Minerals. Compass Minerals was the carve out of a salt business from IMC Global, the agricultural company that got acquired many, many years ago. It was a salt business. It mined salt, but it was a sleepy business that people didn't really ascribe a lot of value to. We bought it at under six times enterprise value to ibeta but because of the nature of that business much of its business went into highway salt. You were able to scale the business. It was a surprisingly more stable business than you would have thought and turned out being a phenomenal investment for us over a 5x investment in what is just a sleepy little corner of one industry. That's the type of deals that we did and we did really really well. Finding these underloved companies, running them better, eventually taking them public in that case, telling the story better, explaining to investors why it actually was an exciting business, bringing smart capital structure, smart financial engineering decisions to it as well and creating a lot of value for our investors. In your first decade at Apollo, what were the skill sets that allowed you to succeed? >> I came out of a bank, and this is probably true today in most banks. You look around, there's 10% of the folks you see, and you're like, "Wow, these are really, really smart people." There's 50% of the people there you say, "How are these people working at?" Then there's that other 40% that are smart people, but have more reps than you do, but quality people. Well, when I got to Apollo, Apollo was the top 1% of that top 10%. It was incredibly talented people. It's funny, for all of Apollo's historic reputation of brusk, sharp elbows, what have you, the most genuine group of people, really kind, totally family oriented, but quick studies. People are happy to explain something to you once, but you better get it after once. Being a quick study, being creative, being invented, it was not LBO, rinse, repeat, LBO, rinse, repeat. Every deal was a new adventure. It was structured differently. Where is that best risk return? What's the most creative way to structure it? What can we do to bring value to the table? That creativity was important. Not being a linear thinker, really being able to flex on the fly was valuable. The culture of the firm at the time, it sounds like there may have been a disconnect from your experience and as you said, the Rusk reputation on the outside. What's your sense of where that disconnect took place? >> Part of the early days of Apollo was when I talk about investing up and down the capital structure. Sometimes that brought you into distress situations where you were buying the debt of a company and then working with that company to restructure it either in court or out of court. That's a rough and tumble business. The folks who play in that space develop a reputation of boxing gloves and what have you. For a time, to be honest, that's not a bad reputation to have. When I would show up to a bank meeting and say, "Hi, I'm Scott Kleman and I own 30% of your bank debt. I'm from Apollo." That carried some weight. That actually helped. It was around that time frame where it started becoming clear if we wanted to keep growing and keep being a bigger part of the financial system, that wasn't going to work. You can only do that for so much. We started evolving inside the tent. It was an amazing place to work. It was an amazing group of people that cared about each other. I joke in those early days I went to more weddings, bar mitzvah, and brises than probably any other phase of my life because that's what we did with each other. It was a very collegial organization. >> So after that period of time, the firm is effectively a boutique private equity firm. Sounds like series of funds. When did you start to evolve and say we could do something more or something bigger? That was the GFC, the financial crisis. The financial crisis opened our eyes to a lot of opportunities. One, we had raised a fund right at the beginning of08. So, an unbelievable opportunity to deploy capital at either good valuations or in distress situations where you could buy amazing companies, companies that Apollo never could have acquired at unbelievable valuations. That was a real gamecher for our private equity business. really the culmination of all the hard work over the prior 15 20 years it also opened up a couple of things when I said how we think about investing in different parts of the capital structure as the whole financial system started coming unglued banks wouldn't lend to other banks the ability to obtain liquidity became problematic for companies for banks for other things we were able to approach banks and buy tens of billions of bank debt at a time at deeply discounted prices we started accumulating enormous amounts of corporate debt. Not all of it was distressed. It was just the seller was freaking out. The markets were freaking out. So, we're buying good paper at discounted prices. At that moment, it became clear to us that the provision of capital to levered companies is the other side of the coin of providing equity in lever situations. Private credit and private equity were two sides of the same coin. We were the first folks to come out of the GFC saying, "Well, we should have private credit business and a private equity business under the same roof." That was step one, saying, "Wait a minute, there's a huge market here that we can start playing a relevant role in." Regulation only helped things move in our favor as regulators were squeezing banks to get out of certain businesses, lower their leverage, raise their solveny, one of which was lending to small and midsize companies because it took a lot of people and a lot of labor and the ROE wasn't that great for them. But those companies still needed capital. Apollo was able to step in and we were one of the first to step in and be able to provide capital on that side. A correlary to that that we saw coming out of the financial crisis was in the insurance industry. Insurance is a big umbrella that covers a lot of different businesses under the term insurance. Your car insurance, your home insurance, your life insurance are very different things. We found one corner of the insurance business called guaranteed products. annuities where it's the business of you give me a dollar and I agree to give you a fixed return over a period of time to help you save for retirement typically but for lots of reasons and they give you your money back. There's typically some sort of life insurance component attached to that but that's very hedgeible. At the end of the day it's a spread lending business and Apollo happen to be really good spread lenders. When the GFC hit, you had a bunch of insurers who had been playing duration mismatch games. Rates had been stable for so long that these companies were making long-term promises to policy holders, but funding those with assets that were relatively short-term. When rates went from four or 5% to zero and then stayed there, it put a lot of pain in that guaranteed products business. But Apollo saw a couple of these and said, "We can come in, bail a couple of these out." We started building this business. We started figuring out, "Wait a minute, we're really good at this. We're really good at spread lending. We can run these businesses very efficiently." That was the beginning of another aha moment. I'd love to say we knew it was going to turn into the $500 billion business it is for us today. But no, it was an opportunistic trade at the time that little by little we started to figure out we were also really good at. And it married well with the lending business because an insurer unlike a hedge fund is a regulated business. I can't say great I'm going to take your premium dollar and put it all in private equity and capture that delta for myself. I need to put on a risk weighted regulated set of assets and that is mostly investment grade assets. We had to figure out how do we earn excess return in double A in single A and triple B which no one in the alternatives industry was thinking about at the time. That left the space wide open for us to be able to go do that. Have to double click on each of those even though they tie together. On the credit side when you first started hoovering up assets in early09 where did you put them >> at the time? We basically put it anywhere that we could find capital. [laughter] We started with deeply distressed assets which fit squarely into our private equity fund. We had a large private equity fund at the time that would just been raised so basically undrawn. That was right down the sweet spot, right down the fairway for Apollo. As the opportunity set continued to grow, we had lots of investors saying, "I see this opportunity is not just a flash in the pan. This is huge. Who knows how to deploy capital in this environment? Apollo does. Folks were coming to us saying, "Can you manage this pool of capital for me?" Lots of institutional investors started showing up saying, "We don't know how to do this. Can we give you capital to go do this?" We started raising SMAs, other pools of capital to be able to take advantage of that opportunity. And then on the insurance side, as this grew, you mentioned you have a lot higher quality credit than the distress situation, high yield situation. How did you think about adding excess return in those different tranches of higher grade credit? >> That's a great question and it's been a 15-year journey of us getting better and smarter at this. To give you an example, when you write an annuity, at the end of the day, the absolute rate environment is not that critical to us because we're in the spread lending business. You're typically giving the whatever base rate is plus or minus to the policy holder. You give me a million dollars, I give you back a fixed return for 8, 10, 15 years. I need to earn, call it an extra 150 basis points for overhead and ROE and I need to do it in a way that's 90% investment grade. If I just went to Deutsche Bank or Goldman Sachs to their trading desk and said, "Give me IBM B." all the traded IG stuff, all that excess return is going to be squeezed out of that by the time I'm showing up at a bank's desk to buy that. We had to figure out, well, where can you find excess return in the investment grade market? We came up with three ways you could do that. You could take more credit risk. That's how you get more spread. That may be good for a hedge fund, but that's not good for an insurer. Two, you can play duration arbitrage, which is how these companies got into trouble in the first place. We said, "No way. We duration match our assets and liabilities extremely carefully because we do not want to be in that situation that when the liquidity dries up, all of a sudden we're upside down." We figured out there's a third way which has to do with duration. We have this secret asset on our balance sheet called duration. When we have a weighted average 8 or nyear liability, that gives us enormous flexibility. Unlike a bank that has mostly overnight deposits, we have this super long liability that generally speaking can't be redeemed, can't be called, it's there. So that allows us to take either more complexity, less liquidity. As long as we like the credit underwriting, as long as we like the underlying risk, we can do bespoke things and create excess spread that way. That aha moment was huge and that's been the secret sauce that has allowed us to do what we do. We develop two large lines of business that got us there. One is on the asset back side. When you make a asset back loan, so fleet finance, rail car finance, aircraft finance, trade finance, warehouse finance, it's not about two guys and a dog making a loan. You need specialized origination. Where are you finding equipment finance customers? Specialized underwriting. How do you underwrite a rail car? And not just one rail car, thousands of rail cars. And then special servicing. These things, they're coming, they're going. How do you process all that? It's a different business. And you're getting paid a premium for that type of specialization to the tune of a couple hundred basis points over the single A, double A, triple A B corporate cost of capital that company is. We set out to either buy or build these businesses across those different categories and that's built up to be a very large business for us. It worked out well that at the time going back to the regulations I was talking about regulators were asking banks to trim down their balance sheets, shrink their footprint. A lot of these businesses used to live on bank balance sheets. We were able to go lift out whole businesses from banks because they were getting out of these to a bank lower ROE business to us. exactly what we needed type of business. We have spent the better part of the last decade building our footprint in this category. That's the asset back category. Today we are the undisputed leader in being able to provide that not just our own insurance balance sheet but to other insurance clients to other third party credit investors who now have seen this as a really attractive less correlated credit class. The other place I mentioned we had two categories. The second one was what I would call private IG. Private IG may sound like an oxymoron, but private IG is going to big blue chip corporate issuers and saying we know you can access the public bond market and that's going to be your lowest cost capital to go raise money to do whatever it is you need to do. But if you want any structure, that market is very rigid. It comes with a certain form of indenture issued out of a certain rated entity. And if you want any flexibility, you can't do it there. So then your only other alternative is equity, which is super flexible but expensive. We showed up and said, "Wait a minute. We can bespoke structure some financings for you. We can do it in a way that meets whatever your specific needs are. We can do it in a way that gives us the protections we need, but we can also do things put other types of provisions. Maybe we can structure it in a way to get you partial or full equity treatment. Maybe we can do it down at a subsidiary where you don't currently issue and so you're not able to issue IG debt into the public markets. So do lots of creative things and to do it for a couple hundred basis points more. That's a pretty flexible powerful tool for a big corporate. We also had another fortuitous event which is the global industrial renaissance. We're in a point in the capex cycle like we've never seen certainly in my career where companies have to spend so much money between the energy transition, the digital transformation, the reg globalization of moving assets around given the new world order. Companies have so much capex to spend. They can't just tap the public debt markets or the equin. They need an all of the above strategy. This is very timely. Going to companies saying issue what you want out of the public debt market, but let us also give you things in scale. And because of our scale, we're not showing up at 200 and 500 million at a time. We can show up at 3, 5, 10, 20 billion at a clip and speak for that level of capital to be able to do that with big IG counterparties. That was the unlock for us. These two categories that has given us a huge advantage and a huge leg up in building that business. How'd you go from the idea for these two businesses as a great funnel for the asset side of the insurance balance sheet to building them? Some trial and error. It starts with having a vision of what it is you need and then taking a long journey. It starts with the first step. I'd love to say it was more complicated than that, but it was figuring out that we were going to have to build something completely new because there was no such thing as alternative IG. There was no excess return in IG in any organized way. So how are we going to go out and find that? It was then seeking out these different platforms that would give us we call it all origination. It's funny we started talking about the need for origination five or 6 years ago where we started talking to our public investors and our own employees. The biggest constraint on our growth was origination. The whole industry thinks in terms of capital formation. I just got to raise more capital and I'll deploy it. We flipped that on its head and said, "No, the limiter of our growth is not capital." We've never had a situation where we've had good ideas and haven't been able to find the money for it. The real limiter is the good ideas. We have to keep expanding that footprint for the different categories of risk and return. How do we find the best ideas? How do we keep doing that and creating that value? That's really been the big differentiator for us versus what I would say the rest of the industry. The other thing that has sharpened the senses is once we got into the insurance business that moved us from being a pure third party asset manager to managing our own money. That changes the way you think about things. We'll end the year performer for an acquisition right around a trillion dollars. Half of that, 500 billion of that is our own captive insurance capital. One out of every $2 we invest is for our own balance sheet, our own company. That thinking like an owner really does change things because now when I go to a third party investor, a client, it's not, hey, I have a new idea. Would you like to invest in it? It's I have a new idea that I'm investing in. Would you like to invest alongside me? That changes the whole dialogue with clients and it changes the way we think about risk and return. We now are the largest investor in basically every product offering we offer out. We've had lots of situations over the years where there's an interesting asset class that I can go raise money in, but if we don't have a home on the Apollo balance sheet that thinks that's an interesting risk return, I'm not going to go out and raise that money because that may be right for the asset management business, but that's not right for what we're trying to do in the big picture. We are long-term greedy, not short-term greedy. I think too much of the asset management industry is short-term greedy. what can I sell tomorrow as opposed to what's the right thing to be doing over the long term? Where am I actually creating value >> on the margin? What's an example of something you looked at differently because of that dynamic where so much of the capital was on your own balance sheet? >> Up until 2022 from 2010 to 2022, risk-free rate went to zero and basically stayed there. That led to a risking of investors. If you had a fixed return you had to achieve, you couldn't get there in the old way of investing. You had to keep creeping up the risk curve. We said that's not always right. One example was the high yield market. In December of 2021, the high yield index was 4 and a half%. When I started doing buyouts 30 years ago, if I got my bond deal done inside of 12%, I considered that a good day. at four and a half percent for junior capital in a levered capital structure that wasn't good risk return. If you looked at our entire footprint at the time, we had virtually no high yield on the Apollo platform. Now, could we have gone out and raised high yield funds? Yeah, absolutely. But it wasn't the right risk return. Similarly, the real estate market over the last 40 years, commercial real estate had basically gotten ground down to the point of being a proxy for IG bonds. In 2021, the cap rate on any commercial real estate asset was probably 3%. Things were getting priced in the twos. So, we're sitting here in 9 West. Right behind us is the Plaza Hotel. I remember when that was being sold, we could have bought that at a 3.5% cap rate for the equity of a hotel that needed a turnaround or I could have gone out and bought PNG bonds for 3%. It didn't make sense. We had ground our real estate equity business to niche boutique things at the time because we didn't love the risk return profile. Now, we had investors who would have given us money to grow a real estate business. And some of our competitors grew massive real estate businesses in that time frame, but it wasn't good risk return on our insurance balance sheet. We had zero real estate equity at the time, which is atypical for a big IG balance sheet like that. We put our money where our mouth is from what we believe in. Obviously, with rates moving and cap rates moving, we this year went out and bought a $50 billion real estate asset manager called Bridge. And that's now an area we're starting to redirect and lean into because the relative pricing has repriced there and it's certainly a lot more interesting. And you look at that insurance business today $500 billion on the balance sheet 90% of it is some form of IG risk. What do you do with the other 10% 50 billion still a big number >> rough round numbers about 5% would be subig credit and about 5% would be traditional alternatives private equity infrastructure those sorts of equity of other vehicles and structured equity hybrid equity things like that so we take a step back from the evolution of the products over time I'd love to dive into your roles going from a dealmaker to a leader of the business. At what point in time did you leading the teams at Apollo and working on all these strategic initiatives compared to the day-to-day deal making >> after the GFC as Apollo and as me personally did some of the best deals that I think we've ever done as a firm. I guess it was about 2010 the founders asked me to become lead partner for private equity. The firm was starting to grow for the first time into these other areas. Founders were spending more time in other parts of the business. For the first time, the PE business needed a leader other than the founders. That was my reluctant first step into the land of management. I was able to be a player coach at the time. Still one leg in the deal business, one leg in the leadership business. And I played that role until about 2018. So from 2011 to 2018. At the end of 2018, the firm had continued to grow and scale in a way when myself and one of my colleagues, Jim Zelter, we were elevated to co-president across the whole firm, looking after all of our revenue generating businesses. >> What did you learn about leadership and your style of leadership in that journey? >> I knew I wanted to be in the deal business. I never thought about being in the management business. I learned on the fly. We didn't have a management structure. This wasn't GE where we had a management training program. We were growing so fast and we were all figuring it out largely at the same time. I was always a lover of war movies and read a ton of history. The classic battlefield general who leads from the front was something that resonated with me. I believe never ask anyone to do anything you wouldn't do yourself. demonstrate the type of behavior that you want your teams to have and the beliefs and culture that you want your teams to have because organizations do reflect the cultural norms of their leadership. Normative behavior. If you're abusive and bad behavior, well, that trickles down. If you lead an organization with intellect and curiosity and lack of defensiveness and respect, then the organization will generally follow that. That's been the biggest learning along the way. The biggest change over the last 5 years, one of the things that was always ingrained in Apollo and quite frankly the industry. Private equity is a secret of business. Information was power. Information was kept very close to the vest. The less the outside world knew about what we did, the better. We had grown up in a very non-communicative way, both externally and internally. When private equity was a cottage industry, it didn't really matter. But by 2020, private equity had become a meaningful part of the financial ecosystem. By the way, businesses like Apollo were way more than private equity at the time. We were in insurance, we were in credit, we were touching more of the broader economy. We couldn't live in that shell anymore. So, communication, which was a new skill for all of Apollo, we had to do a much better job there. communicate our story externally and communicate our story internally. We weren't 13 folks sitting on half a floor on 6th Avenue anymore. We were thousands of people spread around the globe. Having a articulated strategy that was clear for our employees to understand where were we marching, where were we going, why were we investing in this set of businesses and why were we cutting back on those? Why were we leaning in here? Employees needed to understand that. That was the biggest revelation. As someone who grew up keeping it close to the vest for many years, that's been the biggest change. It's been a game changer. The other thing I'd add there is we had to figure this out, I'd say, more urgently than almost anyone because when we entered the insurance industry, insurance is a different business than private equity. Insurance exists by the grace of your regulator. Today we touch probably 25 or 30 regulators around the globe because insurance is a three 400 year old industry. We were doing things differently. We said we have a better way to do this and we want to show you that. We had to find a way to be able to communicate effectively to our regulators around the globe so that they initially be skeptical of what we're doing but take the time understand see that we're not financial guys coming in to line our own pockets but we are here on behalf of the policy holders but we're doing a better job than the way it was done in the past bringing those folks along as well. All of this forced us to hone our communication skills and tell our story in a better, smarter way. >> Once you realized that was going to be an important thing to do, it sounds pretty straightforward. We're just going to tell our story internally, externally. What did you learn along the way? And what stumbles did you make in trying to make sure you were communicating in a way that everybody got what you were trying to say? >> Just because you believe you have the right answer doesn't mean that everybody is going to get it right away or even agree with you. We're blessed that our CEO Mark Rowan is one of the greatest communicators certainly in the financial industry today. Sets a tone for the whole organization that has made it easier to drive in that direction. You can look at a lot of our competitors who tell a fine story, but it's not the same. I really do believe we do a better job, a more authentic job. That is the thing that we've learned is anytime you're trying to tell your story with a spin or with a pitch or you're out there just hawking product, it doesn't really work as well as you think. We've learned along the way to be incredibly authentic. Why are we doing what we're doing? Tell it like we see it. The good, the bad, and the ugly where we've made mistakes, fess up to the mistakes, and talk about how we're fixing it. And that has worked really well. Other things with the growth, we were a 13 person organization not that long ago. In the grand scheme of things, managing 5,000 people across almost two dozen offices. Sometimes you grow too fast. You got to pull back. You got to assess what's working, what's not, and then make adjustments. One of the things Apollo has always done well, and this goes back to the days when we were a small group sitting around an investment committee table. We made a big deal about focusing on the deals that go wrong. Private equity guys, they only like talking about their winners. When I was leading private equity, we would have what I'd call near miss review. Not just the deals that went wrong, but the deals that went well, but but for the skin of our teeth could have gone the other way. What did we miss? And what can we do better? At Apollo, you historically didn't get in trouble for doing a bad deal. You got in trouble for not talking about it 12, 18, 24 months before you hit the wall because we've all been there. No one bats a thousand. Bringing your partners in, talking about what can you do, how can you restructure the data, what can you do operationally, getting others and their experiences involved is absolutely critical. We've always done a better job. Assessing how we can be better has always been a core part of the Apollo culture. When you start with 13 people, the top 1% of the top of what you saw at banks, you'd like to think the 5,000 are still that top 1%, but inevitably when you grow, it's hard to have that same level of individual excellence. How do you think about scaling the judgment and the experience that came from a smaller group of people to a much larger group of people? >> That is the rub. That is the whole shoot and match. We have two fundamental types of businesses. We have businesses that make a small number of decisions each year that have very consequential outcomes. And then we have other businesses that make thousands of decisions a week. And any one of those decisions is not going to have the most consequential outcome. The type of judgment, the type of assessment you need sitting at top each are different. You need that judgment and that assessment to go way down in the organization in the former. The latter, you need the right people with judgment sitting on top, making sure the guard rails are right and the processes are right. Then those other businesses are much more about execution. It's the sourcing the flow and finding the right types of situations for that small group of underwriters to make the assessment of what fits in the box and what doesn't fit in the box. Ultimately, we want the top of the top all the time everywhere. Because it's not just about judgment, it's about culture and fit and bringing the right ethos to what we do every day. We're a business where your assets walk out the door every night. I used to say in private equity, those are the hardest types of businesses to go buy. I'd much rather buy a business where your physical plant, your fixed assets are just there. Businesses where your people walk out every night and your assets are your people. That's a lot trickier and you're much more reliant on the business model and the leadership to get it right. In order to do that, you have to get incentives right. It's tricky enough when there's a small group of people in a pot of carry to go around. How have you thought conceptually about how you incent your people so that they're aligned the way you want and they're rowing in the direction you want? >> You're absolutely right. Fortunately for us, we went public a decade plus ago. The Apollo stock is an amazing tool to do that. We pride ourselves on running an integrated platform. The financial industry is very asset class focused. This is my asset class. This is your asset class. This is the next asset class. The whole industry was built on living within those asset classes. We've created enormous value by finding the spaces in between and connecting those dots, bringing the right type of capital for the right type of risk return. In order to do that, you need the whole organization rowing together. We call it our integrated platform. That takes a lot of work and a lot of effort. But when you go back to incentives to make that work, how do you do that? Well, for one goes back to everybody's bonus to some extent is based on a qualitative were they good Apollo citizen. Two, every employee at Apollo gets a portion of their comp and Apollo stock and the stock only goes up if all the ships are rising, not if some and not the others. Most importantly, the reason this integrated platform works is because I spend 10% of my time helping you on your deal in some unaffiliated fund make your deal better and you spend 10% of your time helping some other and someone else helps me make my next deal better. That flywheel is what keeps this working. If all the benefit went from this direction to that direction, I don't care what the financial incentives are, people would throw their hands up and say, "I'm not doing that." But because the system is a flywheel and our people see the benefit flowing in all directions. That's what keeps the system going. The remuneration cements it all together. In the scheme of things in private equity and all alternatives, there aren't that many companies that are public. You mentioned the value that brings in aligning people and compensation. What do you see as those strengths and then some of the weaknesses of being public and why there aren't more companies who have done it? >> It's different now than it was say 12 or 13 years ago when we went public. It's tough to be a public company today. We just got into the S&P last year. To be a successful public company, you need a big diversified footprint. You need a scale that's relevant. You think about the concentration in the public equity markets today. Don't even get me started on the brokenness of the public markets. Need a big diversified business, single category asset managers. You're generally just not going to be of a scale that's going to be relevant to be a 5710 billion equity public company. It may not be worth it for a lot of folks at this point. You're never going to get the interest level from investors. You need the breath and scale to be able to do that. Now the benefits, it's been an amazing unifying currency for us. It's been an amazing disciplinary tool to make us run a more efficient, bettergoed company, but it comes with cost. Running a public company and the legal and compliance and all that good stuff that you need. That's not a small operation. The one thing that I would have thought we would have done more having a currency for acquisitions was one of the reasons we went public. It hasn't materialized in the way we would have thought at the time. We tend to do a better job building our own businesses than going out and buying huge asset managers. The asset management industry is fraught with bad M&A. It's hard to merge two completely disperate cultures. Tuckins are fine, but bringing in big stock mergers are tricky in the asset management industry where your people are your asset. That's the eb and flow. At this point in time, it's a scale question. There's only a handful of alternative asset managers that have the scale to go public and the vast majority of them are public already. >> Given that challenge in M&A, you mentioned earlier you recently did this bridge acquisition. What does it take knowing the challenges, knowing the hurdles for you to decide to go out and acquire another asset manager? >> For us, it is about a specific asset category, specific skill set that we need that is going to either take too long or we're too far behind to go build ourselves. but where it's narrow enough and focused enough where we're coming in and we have a high degree of likelihood this is going to be successful. The hardest type would be for one PE firm to go buy another PE firm. There is more disergies than there's actual synergies in something like that. If you look at the acquisitions we've done, we've picked up specific skill sets in origination or specific small technology tuckins where we either have to go spend a bunch of money to build some internal technology or we've been able to go pick up an interesting startup or things like that. That's been the type of acquisitions that we've done. >> You mentioned a couple times different aspects of something about your competition as you think strategically about the business about growth. How do you consider your competitors, even if you're just thinking the competitors as the other large alternative asset managers in where you take the direction of Apollo? >> We don't spend a lot of time thinking about that. We spend a lot of time thinking about where's the puck going and what skills do we need to get from here to there and how do we go build it? We've been clear over the last four or five years. Continuing to scale our origination, continuing to scale our delivery to the wealth management side of the industry has been an important piece. In the coming years, we've been vocal figuring out how we're going to be accessing the 401k market, the traditional asset manager, so the mutual fund market, the ETF market. Those are some of the places we're going now. Some of our competitors are starting to go there as well. I consider our competition to be some of the larger alternative asset managers, but also some of the traditional asset managers. This world of public and private that used to be so far apart where public was liquid and safe and private was illquid and risky. Well, post GFC that's been converging and the way you cut the asset management industry in five or 10 years, I'm not sure is going to be based on public and private. It'll be based on other risk categories, but that's not a good definition of what's risky and what's not risky anymore. I think you're already starting to see that change. By definition, you're going to see those worlds start to come together. >> I'd love to turn on your lens as an investor away from the business a little bit and walk through some of the important categories. I'm going to start with credit. A lot of change. You've talked about the supply and how you've thought about origination, but also in the demand of who is interested in credit and particularly private credit as an asset class. I'd love to get your sense of where we are in what historically has been a cyclical business. Moving away from public versus private credit because ultimately credit is credit. Public versus private really only speaks to who the holder is. Credit is simply the provision of debt capital to companies. The ultimate performance through the next cycle is going to be more determined based on the quality of the underwriting than was this a private credit fund or a public credit fund. I know that wasn't the crux of your question, but I couldn't miss the opportunity to hit on that. You were asking a more macro question. Where are we in the cycle? While I'd love to profess to have a crystal ball, we're clearly getting long in the tooth. We haven't had a real credit cycle since 2009. The post GFC rates went to zero, stayed there. The central banks used whatever tools necessary to keep the party rolling from an economy standpoint since then. We look like there might have been a credit cycle in CO, but guess what? Within three weeks, central banks poured another five, six trillion dollars into the capital markets and everything was good again. Nothing bad certainly from a credit standpoint really impacted things. Then of course all of the fiscal support that has gone on over the last decade as well has just kept the credit cycle going. There was a technical reset back in 22 when you pump that much money into a system. inevitably inflation was going to rear its head. It surprised us that it took so long. Shows you maybe the resiliency and stability of the US economy, but 2022 inflation rears up to 9 10%. The Fed had to then go raise rates from basically free to call it 5%. We've been drifting back down, but inflation isn't gone. That caused a reset in pricing, but it didn't really trigger an economic slowdown. It's pretty remarkable. The Fed jacked rates 500 basis points two and a half years ago and the US economy has kept powering on even now arguably some of the policies from the current year on paper should have or could have been slowing to the economy and that hasn't happened yet. And so US economy incredibly resilient which is allowing the credit cycle to keep going. Clearly you have to say we are late cycle now. There's been a reset because when the cost of capital was so low, when the high yield index was 4 and a.5%. You could put a lot of debt on companies and cover that cash flow. As those companies are having to refinance at a higher rate, that 4.5% bond is now 7 or 8 or 9%. That's going to put a little bit of pressure on things, but this is really a function of when the US economy cools off. I would have thought it would have happened by now. It hasn't. We'll keep cautiously watching. Certainly in our portfolios, we are more defensive. Our private equity portfolio is more defensive than most of our competitors. Our credit portfolio is for sure much higher rated, much less leverage, much less portfolio leverage. Our private lending portfolio has a fraction of the pick loans or other aggressive things that you see at late cycle than most of the market. We've tried to be defensive for when this does roll over, but we're not seeing it yet. >> What does it look like internally when you want to make sure in an environment like that that your underwriting standards are as disciplined or more disciplined because of that defensive posture. >> It's part of our ethos. When I talk about the Apollo culture, it starts with we are an investor's investor. We look at investing not as in how do we grow the asset manager but how do we make good defensive investments. We are constantly trading the last percent of upside for downside protection across every asset class that we invest in. That starts from the investment committee on down. No matter what asset class we operate in, if we don't like the risk return in a certain area, we would sooner not deploy the capital or even give capital back than just deploy in the next best available thing in that asset class that you gave me money for if we don't think it's a good investment because we're putting our own money in it in such a big scale. On the equity side of the business, you know, Mark has said you don't necessarily see that the $25 billion fund becomes the 50, becomes the 75, becomes the 100 the way that private credit has scaled over time. I'm curious why you think that's the case. There's only so much you can deploy in private equity. When you are making six or eight consequential decisions a year, there's only so much capital you can deploy on that basis. In the credit business, instead of buying a h 100red million of this particular bond, I can buy 200 million. The scalability is always there. We're 750 billion of credit. Black Rockck's what 13 trillion. There's just a much more scalable side of the credit business than there is of the private equity business. I do think there are other categories of equity that isn't private equity that we're scratching the surface on. over time you will see us be one of the leaders if not take the lead in the concept of active management for example when you talk about active managers in the public equity environment trying to beat the long-term S&P by two or 30 hund basis points what used to be possible is no longer possible 95% of active asset managers don't beat their index because the indexation has become so big a majority of the flows on public exchanges are passive at this If you're not in 10 stocks, if you're in nine of the 10, you can't beat the index. It's become really hard. But what if we could do that? What if saying active isn't necessarily about picking stocks? It's about bringing private equity type skills to a more diversified portfolio with less leverage than PE. PE does involve the risk of loss. We think we do a really good job. We don't have that often, but when you put a decent amount of leverage on a company, there's always risk that that equity value goes to zero. But what if there was a way to do that in a way that was more diversified? Bringing the private equity skill set of oversight and management. Maybe that's what active management means. My only point is there are lots of ways that over the next five years we will begin to bring other forms of equity to investors that isn't necessarily private equity i.e. levered equity buyout type capital that gives premium to the long-term S&P with more stability, more downside protection, and equivalent diversification and even potentially a degree of liquidity that private equity doesn't necessarily bring. These are the types of things that you're going to see us grow in our equity business over the next 5 years. >> So, help me peek behind the curtain. What's an example of what some of those equity strategies might be? I'm not really ready to roll out and it's still in the lab here. You'll have to wait and see. One precursor to that. We have been scaling over the last several years are hybrid business. Hybrid is forms of equity that are more downside protected. So, not swinging for the 20% rate of return per year, but low to mid- teens net rates of return that give you more downside protection. things that look and smell like debt but have enough equity levers to give you higher returns. We have built some fairly large pools of capital serving that structured equity market. That's one category of that. It'll be on the back of that that we grow into some of these other things that I've been alluding to. >> Would love to ask you about risks. What do you think is underappreciated by the market? We have an economy right now that is being extensively fueled by AI capex. Valuations in the public equity markets are increasingly tied to a handful of companies that have gone very long AI that have made multi- trillion dollars worth of commitments to continuing to invest in that. There's an expectation of ROI on that capital. If those ROIs don't come to pass, I don't think the whole system is going bankrupt. that clearly will have a weighing effect on the markets. Certainly the biggest hyperscalers will be okay but that cascades down to many many players some of whom have gotten very levered to this. There's big embedded risk there. 6 months ago no one was talking about this. Now I think there's a real dialogue. It's shaved a little bit off the rose but still the rose is blooming. I don't think it's flipped over because I don't think we know yet what the right answer is. There's still enough potential optimism to keep the dream alive. Each quarter, each six months, we'll turn over another card and we'll see how that's shaping up. But that's representing at least a couple percent of GDP growth right now. That's driving massive investment in infrastructure and chip manufacturing and energy and all of these things. It's touching lots of different parts of the whole system. on the convergence of private and public securities and particularly in the private equity world. There's so much potential demand coming from the wealth channel. We saw on the private credit side there's a certain structure these interval funds that allows some liquidity. How do you think about the potential risk of liquidity mismatches working their way into the private equity part of the ecosystem? This is something Apollo and I feel passionate about. The semi-liquid products coming to market is for a lot of asset categories a really interesting and really good asset class. In the credit market, for example, you could get to a point where investors want to redeem. They want their money back. They can't necessarily get it. They get gated say in a semi-liquid product. But credit is inherently selfquidating. Weighted average life of about 3 years. Eventually, if a fund stops taking in new money, it'll allow those credit redemptions to run off and investors will get their money back in a reasonable period of time. You go to the other end of the spectrum and that's private equity. We have seen a number of folks bring private equity semi-liquid products to market. Those things seem to be selling pretty well. wealth investors would like access to private equity and that does increase the access and availability of private equity to the next tier of investors. The problem is the liquidity mismatch there is even more profound because look at the current PE environment right now we're going on to year four year five of meaningfully depressed realizations for the market in general I'll put a side note in Apollo's had some really nice monetizations but for the industry you ask anyone it's been way below where it's supposed to be and that could go on for a while had there been a huge pool of investors in private equity semi-liquid products and they wanted to start getting their money back or if we hit a downturn now and they want their money back, they're going to be stuck for a while. We don't think it's a great product. So, we have decided not to bring a semi-liquid private equity product. We have a variety of semi-liquid other products, but for private equity, we've made the decision this isn't the right product. It's not going to give the client, i.e. the wealth client, a good experience in the long run. It's goes back to being long-term greedy versus short-term greedy. I have peers who think we'll give you the exact opposite argument that I just gave you. I guess time will tell. Perhaps we've missed out on a big business opportunity to pursue this, but we're okay with that as a firm. We have a lot of other things going on. We do have a number of other equity products in the lab that soon enough are going to be coming out that could be interesting for investors that solve some of these issues that I'm talking about. What are you hearing from institutional LPs as you running around the world? >> In general, institutional LPs recognize the value of private assets across the board and institutional LPs have been ahead of the curve compared to traditional public investors or what have you on private assets in their portfolio and understanding what private assets can do to help the portfolio. So whether you're talking about private equity or private credit, infrastructure, other asset categories, there's still a healthy demand. We mentioned a few minutes ago the private equity cycle being a little bit lower on the monetization side, which has put some pressure on certain institutional investors to be able to deploy private equity capital at the same pace because they've gotten a little bit less back. That's starting to write itself as portfolios in general continue to grow. Otherwise, across the board, allocations continue to go up in private assets. >> As you look out over the next five, in your case, maybe 30 years in this business, what do you think it looks like? >> It's fascinating. The constraint on our business is clearly going to be the provision of good assets, good investments. If I'm right and that institutional investors are going to continue growing their allocations to private assets and wealth investors are going to continue growing their allocations to private assets and 401k is going to open up to private assets. That's a $13 trillion market that has essentially zero private assets in it. Traditional asset managers, i.e. mutual funds, ETFs, they're going to start injecting some amount of private assets blended into their products. The demand for private assets is only going in one direction and that direction may be pretty vertical pretty fast. So those operators who can find and get ahead of and continue to generate interesting bespoke investments are going to separate from those who are just buying what's available. That's going to be the difference between who succeeds and can continue to have a premium product versus who is just providing a commoditized product and economics will follow accordingly. >> All right, got a couple closing questions. Our closing questions are brought to you by FEMA. For all the private equity managers out there, FEMA is an amazing tool that uses AI to help map the landscape and source private businesses. There's nothing I've seen like it. It's the third of our strategic investments, and I'm sure you'll quickly see why. There's a link in the show notes so you can learn more. Here are those closing questions. What is your favorite hobby or activity outside of work and family? A couple years ago, I started getting into hunting of all things. It's something that for the last 30 years, I would have loved to have done. It's always been an interest of mine. For better, for worse, I married a woman who is virilently anti-gun and anti-killing things. For [laughter] the last 28 years, I've suppressed that interest. But a couple years ago, I turned 50 and I said, I'm going to figure this out. I'm only in the first or second inning of this journey, but I've done it a bunch of times and it is a lot more fun than you would think. Certainly coming from a small suburban east coast town, but it's also given me a real appreciation for the two sides of the gun argument. Coming from a household that was very rapidly anti-gun. Now, two years into this journey, I can totally see responsible gun ownership and responsible gun usage as part of sporting activity is part and parcel of a lot of people's lives. So, it's a trickier issue than I think folks sitting here in New York think. >> And how's your wife responded to that? >> Acceptance. Acceptance. [laughter] >> What was your first paid job? What did you learn from it? >> I'll bring us back to the early days of Edgemont where we both grew up. My first real summer job was working at a toy store in Scarzo Village. You may remember it. It was called Child's Play. It's no longer there. It was a small single proprietorship owned by a fascinating and aggressive woman. There were two other older women who worked there and me, a 15-year-old boy who they shoved out in the stock room for 9 hours a day and didn't really let out very often. [snorts] What did I learn from that job? I would say physical labor is hard work. that there had to be a better way than the hours in the day that you can put in. I wasn't against hard work. My first job out of college working at Smith Barney, working 100 hours a week, sleeping under my desk two or three nights a week. It wasn't the hard work, but it was the ability to see the old Andrew Carnegie, I can only do so much based on the labor of my muscles versus if I can get my capital to work for me, you can do lots of things. And that was the first eye opening moment of that. What's the best advice you ever received? >> I'll give you two because they're great and they were life-changing. One, I had just gotten engaged. Folks around the office were giving me congratulations. And a former partner here, I'll give him a shout out, Andy Afric said to me, I'm going to give you a piece of advice. Never tell your wife which China pattern you like until you know which one she likes. [laughter] And I was like, okay, great. Thanks. Very specific. But this is one that actually has a lot of personal application and a lot of work application. We are all type A personality. If you ask me the opinion, which China pattern do I like? Of course, I have an opinion, but do I really care? At the end of the day, if I pick the one that she likes, great. If I pick the one that she doesn't, then that's a half an hour conversation over. The same is true in work. There's a handful of things that I really care about. But if you're going to be an effective manager, not micromanage. Focus on the things you care about. Let people make the last 20% decisions. let them make their way on the things that aren't the most consequential. That's been a great piece of advice that has shaped not only my personal life but my managerial style. The other one which is truly a personal one, I was married probably for a couple years. It was a Saturday morning. I was in the office as I normally was on a Saturday morning. We were working on a deal and I was on the phone with my financing attorney. We were talking for about 10 minutes and then he said, "Scott, I hate to do this to you, but can I call you back either later or tomorrow?" And I said, "Well, sure, but what's up?" He's like, "Well, I'm about to go to my son's bar mitzvah." I'm like, [laughter] "You're about to go to your son's bar mitzvah. This is a lawyer who only seemed a couple years older than I was at the time. First off, why are you talking to me? Go." Secondly, how is it that you have a bar mitzvah age son? I don't even have kids. And he said he got married young and they had always talked about kids, but they finally just said, "Screw it. We're having kids." And he said to me, "You're never going to feel like you're ready to have a kid, but just do it because once you have it, you're going to wish you did it 5 years earlier." I now repeat that advice to every newlywed couple that I come across because it is so true. You just want all the time in the world with your children. Now, as the parent of adult children, I wish I had more time with them. All right, Scott, one more. How's your life turned out differently from how you expected it to? >> This is going to sound funny, but for the most part, it's turned out the way I expected it to. I always believed that my hard work and the head of my shoulders would get me to success. I never really envisioned how much success or what success means, monetarily or otherwise. And I don't spend a lot of time dwelling on that. Went to Wharton, I knew I wanted to be in the financial industry. got out of school, started down the path and had a vision. I was drawn immediately to private equity and alternative asset management has continued to evolve. I'm one of these folks that you put one foot in front of the other and you don't think about it too much and you don't really spend a lot of time smelling the roses. You just think about what you can be doing next. I had a sense I'd be successful and never really put a specific quantification around it. >> Scott, thanks so much for sharing this incredible success story, both your journey and Apollos. >> My pleasure. It was great catching up. Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list, and sign up for premium [music] content. Have a good one and see you next time. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is forformational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this