Apollo's Marc Rowan on the Fed, private credit markets, and the data center boom

Key Concepts

• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Yield Curve: A graphical representation of the yields on bonds of the same credit quality but different maturities. A steepening yield curve indicates that longer-term bonds have higher yields than shorter-term bonds.
• Private Credit: Debt financing provided by non-bank lenders, such as private equity firms, hedge funds, and specialized credit funds.
• Levered Lending: A type of private credit that involves lending to companies with high levels of debt, typically below investment grade.
• Investment Grade: A credit rating assigned to debt securities that indicates a low risk of default.
• Direct Lending: A form of private credit where asset managers directly originate and hold loans, rather than syndicating them through banks.
• Broadly Syndicated Loans (BSLs): Loans that are underwritten by banks and then sold to a large group of investors.
• Data Centers: Facilities that house computer systems and associated components, such as telecommunications and storage systems.
• Hyperscalers: Large cloud computing providers that operate massive data centers and offer a wide range of services.
• AI Ambitions: The development and deployment of artificial intelligence technologies, often requiring significant investment in computing power and data infrastructure.

Federal Reserve Decision and Economic Outlook

The discussion begins with the Federal Reserve's decision day in America. The speaker expresses the view that there is no definitive "right answer" to policy decisions. Internally at Apollo, there is no perceived need for an interest rate cut, as the data does not support it. However, the speaker acknowledges the rationale behind such decisions.

Longer-term perspective: The market is seen as the ultimate determinant of outcomes. Governments globally are borrowing record amounts of money. Fractionalization of the labor supply through immigration reform and the flow of goods through tariffs are identified as potentially inflationary factors. Borrowing large sums of money and currency depreciation are also noted as having inflationary potential. This is reflected in a steepening yield curve, where the 10-year Treasury yield remains higher even if short-term rates are lowered.

Impact of Rate Cuts: The speaker is not concerned about short-term fluctuations in monetary policy, considering them "not all that relevant." The primary focus is on maintaining the confidence of the financial system and the bond market, especially given the substantial borrowing needs of Western governments.

Economic Signals: While GDP and job growth have slowed, the speaker questions what constitutes "normal" after periods of COVID, massive stimulus, and tariff shocks. The current economic conditions, with growth around 2.5% and historically low unemployment, are described as "pretty good." However, mixed signals exist, including a potential shortage of workers, which could limit job creation. The speaker's observations within their companies suggest that "things are just fine."

Private Markets and Private Credit

A significant portion of the discussion focuses on private markets, particularly private credit.

Misconceptions about Private Credit:

• Definition: The financial press often equates private credit with levered lending (below investment grade). In reality, most private credit is investment grade.
• Investment Grade Private Credit: This segment competes with public investment grade and has generally outperformed it in both return and safety.
• Levered Lending: This activity, focused on below-investment-grade deals, comes in two forms:
  • Broadly Syndicated Loans (BSLs): Typically underwritten by banks and then distributed.
  • Direct Lending: Underwritten by asset managers and often held by them.

The "Myth" of Private Credit as a Simple Investment: The speaker criticizes the perception of private credit as just another investment like stocks or bonds. While market fluctuations in stocks (e.g., Nvidia or S&P 500) of 10-15% are accepted, a single default in private credit can cause significant alarm.

Rationale for Investing in Levered Lending: Investors are drawn to levered lending to reduce risk. They are often moving money from equities or high-yield bonds into levered lending, seeking similar returns with less volatility. The argument is made that if one dislikes levered lending, they would likely dislike high-yield bonds and equities even more. This is framed as a "de-risking activity" for investors seeking to reduce their overall risk profile.

Case Study: Color and First Brand Defaults: The speaker addresses why the defaults of companies like Color and First Brand did not spill over into the broader stock market. The argument is that companies default all the time. Well-underwritten credit, even if it defaults, typically has strong recovery rates. The key question is whether a default signals a broader economic problem. In these instances, the answer was no; it was attributed to "sloppy underwriting" and avoidable issues. Notably, both were underwritten within the banking system as BSLs, not direct lending by asset managers.

Data Centers and AI Ambitions

The conversation shifts to the financing of data centers and the debt taken on by tech companies for AI.

"Great Fortunes Will Be Made and Lost in Data Centers": This quote highlights the dual nature of investing in data centers.

• Credit Investor Perspective: For credit investors, the focus is on getting repaid before renewal. The current and near-term demand for data is exceptionally strong, suggesting predictable cash flows from existing contracts.
• Equity Investor Perspective: The ultimate return on equity is driven by renewal. The future demand for data and the underlying technologies (chipsets, energy usage, quantum computing) are highly uncertain, making it a speculative bet. Experts have no clear consensus on energy usage by 2030, illustrating this uncertainty. Therefore, while fortunes can be made, they can also be lost in data center equity. Apollo is an investor in data center equity under specific circumstances.

Debt for AI Ambitions:

• Hyperscalers: The speaker is not concerned about the debt taken on by hyperscalers (e.g., major cloud providers) for AI. These companies are the largest and most successful globally, with massive cash flows from diverse businesses. If their debt is a concern, the broader US economy has more significant issues.
• Intermediaries: The concern lies with intermediaries who are large owners of data capacity but lack the diversified businesses of hyperscalers. These companies, essentially the equity owners of data centers, are leveraging themselves. The speaker views this as a potentially risky strategy, especially given the uncertainties in long-term data center equity returns.

Industry Evolution

The final point touches upon the evolution of Apollo's business. The mantra of "no new toys" is dismissed as "old news." The industry has transformed from serving a single market (institutional clients in the "alts bucket") to six distinct markets. The requirements for serving these new markets differ significantly, leading to ongoing evolution and varied strategic approaches among industry peers.