A version of this article was published in CNBC’s Inside Alts Newsletter. This is a guide to the fast-growing world of alternative investments, from private equity and private credit to hedge funds and venture capital. Sign up to receive future editions directly in your inbox.
The private market and private lending revolution sets the stage for a broad investor shift from publicly traded stocks to alternatives. Apollo Global CEO Mark Rowan.
As the stock market is increasingly driven by passive investments and indexing and dominated by a small number of megatech stocks, diversifying investors need to look to the rapidly expanding private market, Rowan told CNBC.
“I think (investment) is broken,” he said. “We had this notion of private life 40 years ago that private life is dangerous and that the public is safe. What if that was fundamentally wrong?”
Rowan and Apollo are at the forefront of structural changes in the investment environment, blurring the line between the public and private markets, and burgeoning businesses in private credit financing are increasing the growth of American companies.
Now, a handful of private equity giants are surrounding banks and stock markets to lend trillions of dollars, opening up new opportunities and risks for investors.
Apollo, Black Stone and KKR Currently, more than $2.6 trillion in assets are managed, with more than four times as much as 10 years ago. Apollo alone has $840 billion in assets, up from $40 billion in 2008, Rowan said.
“I want to attribute it to good management, but that’s not true,” Rowan said. “The answer is just the fundamental factors that are redesigning and growing the private market.”
These factors start with financial crisis regulations that curb bank lending and allow the private credit market to intervene and offer long-term (and often risky) loans to large corporate borrowers.
Marc Rowan, CEO of Apollo Global Management LLC, will speak in an interview with David Rubenstein of New York, USA on Tuesday, April 5, 2022 on an episode of Bloombergwells.
Gina Moon | Bloomberg | Getty Images
Private credit as an investment class expanded initially between donations, sovereign funds and pensions, and later among family offices and wealthy investors. Earnings of up to 15% or more have led to hundreds of billions of dollars flowing into private credit funds.
At the same time, the effectiveness of the 60-40 stock and bond portfolio has become outdated, Rowan said. An increase in funds and indexes traded on exchanges means that most investors have little research into the individual stocks they own. Even the index is driven by a handful of megatechnology stocks. And as stocks and bonds become more correlated, diversification needs to be redefine.
Rowan said the decline in the number of public companies, from 8,000 in the 1990s to around 4,000 today, means investors are not actually getting investment benefits for the US economy.
“When we own an S&P 500, do we actually own a 500?” he said. “Currently, 10 stocks are 40% of the index. We have lost the ability to really invest in ways that reflect the strength of the US market, or frankly, the strength of any market.”
Instead, investors will start allocating more bonds and equity portfolios in their private investments, he said.
According to Preqin, private credit companies have investments of around $450 billion.
And today’s private credit loans often involve large, publicly available companies. Meta Platformfor example, secured $29 billion in funding from the group led by The capital of the blue owl Pacific Investment Management Co., a data center in Louisiana.
Air France, ab inbev, Intel and AT&T Everything relies on Apollo for loans, not traditional banks. Investors and businesses are only waking up to the potential size of the market, Rowan said.
“If private credit is a direct loan, then if you take advantage of loans below the investment grade, it’s a market of around $1.5 trillion,” he said. “If private credit is an investment grade and a low investment grade, it’s the $40 trillion market today. A large part of what we’re doing today is an investment grade, and that always shocks people.”
The risks of investing in private credit are well known, but Rowan said it is often misunderstood. For example, investing in a loan in meta should not be considered more risky than buying stocks through an index.
“What if private life is safe and dangerous, the public is safe and dangerous, and the degree of liquidity is different?” he said. “That’s the world we think we are.”
As alternatives begin to move down the investment ladder and from institutions to family offices and eventually retail investors, concerns are growing that retail investors will place some of their retirement savings in less liquid assets. After all, Harvard, Yale and other donations struggle to sell some of their private equity and alternative investments at discounted prices to raise the cash they need.
Rowan said the rise of new funding, market makers and ETF products will increase the level of liquidity as private credit matures. However, he said that some degree of illiquidity is important for higher returns.
“If you’re working with Apollo today and want to get a 100% private investment grade every 30 days, you can take out 100% of your money,” he said. “As an investor, if you don’t have the ability to cover 30-day illiquidity, you should not be in the private market.”
Last month, the Trump administration issued an executive order with its 401(k) plan that began opening the door for more alternative investments and crypto. Rowan said the process takes time, but the experience of allowing more alternatives in national retirement plans, including Australia, Israel and Mexico, portends a good for US investors.
Additionally, increasing access will ultimately reduce fees, enhance performance and increase transparency in investment segments that are considered opaque.
“There is no market in the world that does not bring better access, lower prices and weeding from poor managers by opening up transparency and markets,” he said.
