Bloomberg: Apollo’s CEO on Real Estate, Banks, Markets

Apollo Global Management CEO & Co-Founder Marc Rowan says the recent US regional banking crisis will cause a “second wave” of losses in the commercial real estate market. He also discusses the banking sector and believes big banks are going to get bigger. Marc Rowan spoke with Sonali Basak on the sidelines of the Milken Institute Global Conference in Beverly Hills, California.
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Transcript

I WOULD LOVE TO BE A FLY ON YOUR WALL. IT IS NO SECRET PRIVATE EQUITY HAS BEEN IN AND AROUND REGIONAL BANKS. WERE YOU INTERESTED IN BUYING FIRST REPUBLIC ASSETS? >> WE ARE ALWAYS INTERESTED IN BUYING ASSETS BUT NOT IN THIS BUSINESS. WE DON’T BUY BANKS BUT IF WE

CAN BE SUPPORTIVE OF RESTRUCTURING OF THE BANKING SYSTEM THROUGH THE PURCHASE OF ASSETS, ABSOLUTELY. SONALI: LOOK BEYOND TODAY. WE HAVE THE FIRST REPUBLIC SALE TO JP MORGAN YOU HAVE JAMIE DIMON SAYING THE BANKING CRISIS IS ALMOST OVER. DO YOU SEE A SECOND WAVE OF THE

CRISIS COMING? MARC: I THINK PART ONE IS OVER. I WOULD NEVER DISAGREE WITH JAMIE BECAUSE THIS IS HIS JOB AND HE LOVES IT. BUT WHAT HAS HAPPENED SO FAR IS TOTALLY PROTECTABLE. MARK TO MARKET LOSSES IS WELL KNOWN. STRUCTURE OF DEPOSITS ABOVE MINIMUM GUARANTEES, WELL KNOWN. ARE WE SURPRISED? WE SHOULD BE.

EVERYONE KNEW WHAT WAS HAPPENING. RISING RATES CREATED STRESS. THE INTERESTING THING IS NOT WHETHER THESE RANKS FAIL, IT IS WHETHER — IT IS WHAT IS THE BUSINESS OF REGIONAL BANKING GOING FORWARD? 40 BILLION LEFT SVB WITHIN TWO HOURS WITHOUT A LINE.

SO YOU ARE A CEO OF A BIG BANK, YOUR COSTS ARE UP AND YOUR REGULATORY FUNDS ARE UP. CAN YOU EARN MONEY OR DOES THE BUSINESS MODEL NEED TO EVOLVE? THAT IS INTERESTING AND I THINK WE HAVE A SECOND WAVE IN COMMERCIAL REAL ESTATE. SONALI:

DO YOU THINK THAT WAVE PERTAINS TO THE BANKING SYSTEM AT LARGE OR A BROADER SET OF INVESTORS? MARC: THERE ARE LOTS OF PEOPLE IN REAL ESTATE ACROSS THE WORLD AND ECONOMY. INVESTORS WHO OWN REAL ESTATE SUFFER LOSSES. STOCKS GO DOWN, INVESTORS SUFFER LOSSES. THAT IS NOT SYSTEMIC.

A BANKING SYSTEM WHICH HAS GOVERNMENT GUARANTEES WHERE PEOPLE PUT THEIR MONEY IN A TRUST RELATIONSHIP, IF THEY SUFFER SIGNIFICANT LOSSES, THAT CAUSES CONCERN. THAT IS WHAT WE HAVE. IT WON’T BE SYSTEMIC IN MY VIEW BUT IT WILL BE CONCENTRATED. REGIONAL BANKS ARE THE PRIMARY

LENDERS TO MANY OF OUR REGIONAL REAL ESTATE ISSUES. SONALI: WE SOUGHT THIS MORNING THE BIG BIGGER. JP MORGAN BUYING A REGIONAL BANK. WHAT HAPPENS TO THE SYSTEM MOVING FORWARD? WHICH IS THE NEW BANKING SYSTEM LOOK LIKE COMING OUT OF THESE TROUBLES? MARC: IT HAS ALREADY CHANGED. WE HAVE YET TO ADJUST TO THE

CHANGES OF 2008. WITH DODD-FRANK THE LEGISLATION WAS TO RESTRICT THE EXPOSURE OF THE U.S. ECONOMY TO LARGE, SYSTEMICALLY IMPORTANT BANKS. IT WORKED. BANKS ARE LESS THAN 20% OF ALL LENDING IN THE U.S.. NEW BANKS ARE INVESTORS. EVERYONE WHO IS AT THIS CONFERENCE TODAY IN SOME WAY OR ANOTHER PARTICIPATES IN THE

BANKING SYSTEM. IF YOU ASK ABOUT BANKING PROPER I THINK WE WILL SEE THE BIG GET BIGGER. PEOPLE WILL FLY TO SAFETY WHEN YOU HAVE A CRISIS. JP MORGAN IS POSITIONED TO STEP INTO FIXED AND SAVE FIRST REPUBLIC. WE SHOULD NOT BE SURPRISED. BUT REGIONAL BANKS ARE AN ATTRACTIVE POLITICAL ENTITY.

IT WILL BE INTERESTING TO SEE HOW THE SYSTEM DEALS WITH THE FUNDAMENTAL ISSUES FACING REGIONAL BANKING. SONALI: YOU MENTIONED OUR BANKING SYSTEM HAS ONLY BEEN 20% OF THE COUNTRIES LENDING. WHAT DOES THAT MEAN FOR WHO WILL AND WILL NOT BE ABLE TO HAVE ACCESS TO CREDIT IN THE FUTURE? MARC:

I WILL SING AT A COUNTRY LEVEL, WE ARE 50% OF THE WORLD’S CAPITAL. OUR BUSINESSES AND GOVERNMENT BENEFIT, OUR CONSUMERS BENEFIT. WE HAVE UNRESTRICTED ASSETS TO CREDIT. SOMETIMES MORE, SOMETIMES LESS EXPENSIVE. WE ARE THE ENVY OF THE WORLD AND NO ONE HAS WE HAVE. THE DEMOCRATIZATION OF CREDIT

THROUGH THE INVESTOR INVESTMENT MARKETPLACE HAS CREATED UNPARALLEL ACCESS. SONALI: IF YOU THINK ABOUT THE ISSUES WE TALKING ABOUT, AT APOLLO YOU LOOK AT THINGS SECURITY BY SECURITY, SOMETIMES BY BUILDING. WHAT OUR OFFICE VACANCIES TELLING YOU ABOUT THE COMMERCIAL REAL ESTATE MEANT — REAL ESTATE MARKET? MARC:

IT IS A BAD DAY TO HAVE REAL ESTATE IN SAN FRANCISCO OR CHICAGO. EVERYTHING IS NOW WORTH LESS. WE HAVE HAD A MOVE IN INTEREST RATES AND REAL ESTATE IS AN INTEREST RATE SENSITIVE ACTIVITY. EVERYTHING IS WORTH LESS. IT DOES NOT MEAN IT WILL NOT BE

A GOOD INVESTMENT. BUT IN THE SHORT TERM WE HAVE THIS AND THIS CHANGE OF HOW PEOPLE USE THIS. WE ARE GOING TO SEE LOSSES. SONALI: IN CONVERSATION WITH THE CEO OF APOLLO GLOBAL MANAGEMENT. MARC, YOU MENTIONED THE PAIN IN OFFICE SYSTEM AND COMMERCIAL

REAL ESTATE HAS YET TO SEE. OF WHAT’S THAT MEAN FOR INVESTORS IN COMMERCIAL REAL ESTATE AND IN REGIONAL BANKS AS A DERIVATIVE EFFECT? DO YOU THINK THE MARKET IS UNDERCOUNTING HOW BAD THINGS CAN GET? MARC: I THINK THE MARKET HAS YET TO ASK THE LONG-TERM QUESTION.

RIGHT NOW THEY ARE ASKING IS THE BANK SAFE, WILL IT SURVIVE? SAFETY HAS BEEN OUR PRIMARY FOCUS. BUT WE HAVE SEEN THE GOVERNMENT CAN MAKE THIS SAFE WITH THE STROKE OF A PEN. I BELIEVE THE BANKING SYSTEM TO BE SAFE. THAT IS DIFFERENT THAN WHAT IS

THE BUSINESS OF A REGIONAL BANKS GOING FORWARD? IF YOUR COST TO FUNDS — COST OF FUNDS IS HIGH, WHAT IS YOUR BUSINESS MODEL? LIKE EVERY INDUSTRY THAT HAS HAD TO ADJUST TO TECHNOLOGY, REGIONAL BANKING WILL. I WOULD BE SHOCKED IF IN FIVE YEARS AGO THE BUSINESS MODEL OF

A REGIONAL BANK LOOKS LIKE TODAY. SONALI: LET’S STEP BACK. THERE IS UNDERSTANDING THAT YOU CAN’T UNWIND 12 YEARS OF EASY MONEY SO EASILY. YOU SAW PICKUPS. THE PRICES IN THE U.K., THE REGIONAL BANKING CRISIS AND THE CRYPTO CRASH. WHAT ELSE IS YET TO BREAK? MARC: IT IS HARD TO BE A PREDICTOR OF

WHAT ELSE IS TO BREAK. BUT I LOOK AT PLACES WHERE WE HAVE MISMATCHES BETWEEN LIQUID LIABILITIES LIKE A BANK, BORROW SHORT AND LEND LONG. WE HAVE OTHER PLACES WHERE THE SAME BUILD HAS TAKEN PLACE. 12 YEARS OF EASY MONEY FORCED PEOPLE TO DO UNNATURAL THINGS TO LOOK FOR YIELD AND RATE OF

RETURN. IT WAS THE FIRST TIME THE QUESTION WAS CALLED. LDI WAS NOTHING MORE THAN AN — A MISPLACED — THAT PUBLIC SECURITIES WERE LIQUID. THEY ARE NOT LIQUID ON THE WAY DOWN. WE HAVE THE SAME IN CERTAIN OPEN-ENDED MUTUAL FUNDS. WE HAVE SEEN IT IN ETF’S AND

POINTS OF STRESS. EVEN IN SOME PRIVATE VEHICLES AND POINT OF STRESS. THIS IS NOT PUBLIC OR PRIVATE. THIS IS THE STRUCTURE OF LIABILITIES. SONALI: THERE IS QUESTION OF HOW WELL THE PUBLIC MARKETS HAVE HELD UP IN THE FACE OF SOME OF THIS.

HOW SAFE CAN YOU FEEL IN THE FACT THAT YOU HAVE LIQUIDITY? MARC: I THINK ABOUT WHAT HAS HAPPENED IN THE WORLD AND THE DIFFERENCE BETWEEN PUBLIC AND PRIVATE. WE USED TO THINK PUBLIC IS SAFE AND PRIVATE WAS RISKY. WE KNOW PUBLIC CAN BE RISKY AS WELL.

WE HAVE FOUND OUT PRIVATE CAN BE SAFE AND RISKY. WE ARE TALKING ABOUT DEGREES OF LIQUIDITY. WHAT WE HAVE ELECTED TO DO IN OUR INDUSTRY AND APOLLO IS FOCUS ON PRIVATE. WE DON’T BELIEVE THERE IS SUSTAINABLE OUTCOME. EXCESS RETURN IN PUBLIC TRAINING — PUBLICLY TRADING MARKET. IF INVESTORS COME TO US FOR

EXCESS RETURN, WE NEED TO STEP AWAY FROM DAILY LIQUID MARKETS. THERE IS PLENTY FOR US TO DO. SONALI: THIS MORNING, — REDEMPTION WHEN IT COMES TO THAT LIQUID VEHICLE AND THE REAL ESTATE MARKET. TRYING TO COURT RETAIL INVESTORS. WHEN YOU LOOK AT THE HICCUPS

SOME OF THE CURRENT FUNDS ARE FACING IN THE MARKET, SOME CHALLENGES WHEN IT COMES TO INVESTORS ASKING FOR THEIR MONEY BACK, FOR LONG DATE OF INVESTMENTS ON THE OTHERS, WHAT DOES THIS TELL YOU ABOUT THE DIRECTION OF TRAVEL? IS INVESTOR CONFIDENCE IN RETAIL SEMI LIQUID FUNDS BECOMING DENTED?

>> I DON’T KNOW ABOUT THAT. I THINK BLACKSTONE IS DOING THE RIGHT THING. THE INDUSTRY OWES THEM A DEBT OF GRATITUDE BECAUSE THEY ARE TEACHING INVESTORS THAT ALTERNATIVES ARE NOT AN ATM. THEY ARE AN ASSET CLASS THAT IS UNDER STRESS BECAUSE PEOPLE ARE CONCERNED ABOUT REAL ESTATE VALUATIONS. THEY ARE REDEEMING BECAUSE THEY

THINK VALUATIONS ARE HEADED DOWN. THEY ARE DOING EXACTLY WHAT THEY ARE SUPPOSED TO DO AND WHAT THESE VEHICLES ARE DESIGNED TO DO. BUT I THINK ABOUT THE STRUCTURE OF OUR BUSINESS AND RETAIL INVESTORS ARE GOING TO BE 50% ALLOCATED. BUT NOT ALTERNATIVES, PRIVATE EQUITY AND HEDGE FUNDS.

JUST ALTERNATIVES TO PUBLICLY TRADED STOCKS AND BONDS. SONALI: WHAT DO YOU SAY TO PEOPLE WHO CRITICIZE THE PRIVATE MARKETS AND CREDIT MARKETS? >> THE EASIEST THING TO VALUE IS A BOND. CASH FLOWS, INTEREST RATE AND DURATION. BETTER RISK REWARD HAS BEEN AVAILABLE IN PRIVATE MARKETS

THAN IN PUBLIC MARKETS FOR MUCH OF THE LAST 10 TO 12 YEARS. EVERYONE IN OUR INDUSTRY HAS PICKED A DIFFERENT SEGMENT. PRIVATE INVESTMENT RATE IS SOMETHING PEOPLE HAVE NOT COMPTON PLATED — CONTEMPLATED. THINK WHAT GE CAPITAL USED TO DO. AT $400 BILLION OF PRIVATE CREDIT, MOSTLY INVESTMENT GRADE, UNFORTUNATELY WE ARE NOT RELEVANT.

IT SOUNDS LIKE 400 MILLION, BUT WE ARE TALKING ABOUT A $40 TRILLION MARKET. SONALI: GETTING BIGGER AS WELL. THERE IS DISCUSSION IN WASHINGTON ABOUT REGULATING NONBANKS. DO YOU THINK YOU FACE TIGHTER REGULATION? MARC: WE ALL DO. THAT IS THE DIRECTION OF TRAVEL. PEOPLE LOOK FOR, IF THE INFORMATION IS AVAILABLE.

IT IS ALREADY PUBLIC. ARE WE MISMATCHED IN TERMS OF BORROWING SHORT AND ENTERING — LENDING LONG? NO. ARE WE LEVERED OR CONCENTRATED, A DIVERSIFIER FOR THE ECONOMY? THE U.S. FINANCIAL SYSTEM IS THE ENVY OF THE WORLD. WE ARE 50% OF ALL THE ACTION IN THE WORLD. IT IS A RESULT OF DECISIONS

MADE ALONG THE WAY TO ALLOW INVESTORS TO BE SUPPLIERS OF CREDIT. SONALI: THAT IS THE ARGUMENT, IF NOT YOU, WHO? MARC: THE U.S. AND WORLD ECONOMY NEED A CERTAIN AMOUNT OF CREDIT. THE CHOICES ARE DO YOU ALLOW IT TO BE SUPPLIED EXCLUSIVELY BY THE BANKING SYSTEM BACKED BY

GOVERNMENT GUARANTEES AS IN MANY FOREIGN COUNTRIES, OR DO WE ALLOW RETAIL INVESTORS, HIGH NET WORTH INVESTORS, INSTITUTIONS TO PARTICIPATE IN GET DIVERSIFICATION AND SOCIALIZATION OF RISK? INVESTORS ARE PREPARED FOR THINGS THAT GO UP AND DOWN. SONALI: YOU MENTIONED THE BENEFITS OF THE PRIVATE MARKETS IN TERMS OF RETURN OPPORTUNITIES IN THE CREDIT MARKETS.

I’M CURIOUS WHAT YOU THINK ABOUT THE CURRENT STATE OF INVESTMENT-GRADE WHEN YOU LOOK AT THE PUBLIC MARKETS. THERE HAS BEEN DISCUSSION ABOUT HOW CALM SPREADS HAVE BEEN BEHAVING IN THE FACE OF WHAT MANY FEEL IS A PENDING RECESSION. DO YOU FEEL THERE ARE MORE

RISKS UNDER THE SURFACE WHEN YOU LOOK AT PUBLIC CREDIT? MARC: I THINK YOU HAVE A COMMUTE FUSED — CONFUSED MARKET. THE CURVE IS UP AND DOWN. IT DOES NOT SURPRISE ME INVESTORS BEING OFFERED YIELDS TODAY OF A CERTAIN MAGNITUDE ARE ACTIVE AND LOCKING THE MEN. ESPECIALLY AFTER A DECADE OF

LOW RATES. SONALI: I HAVE HEARD YOU SAY THE ERA OF EQUITY IS ERODING. DOES THAT MAKE A BIGGER SECULAR PUSH TO CREDIT? MARC: I THINK IT DOES. THIS IS AN AMAZING ENTRY POINT FOR CREDIT BECAUSE OF WHAT HAS TRANSPIRED. WE PAINTED–PRINTED — NOW THAT WE HAVE STARTED WITHDRAWING,

ENTRY POINT FOR CREDIT IS FABULOUS. IT IS ADJUSTED QUICKLY. LIQUIDITY HAS ERODED. BANKING CRISES HAVE ERODED. IT WILL NOT ALWAYS BE THIS GOOD, EQUITY HAS ADJUSTED BUT NOT AS MUCH AS CREDIT. SONALI: WE’VE SEEN FROM THE BANKING SYSTEM THAT WHAT WAS SAFE

YESTERDAY CAN BE JUNK TOMORROW. DO YOU NOT BELIEVE WE WOULD BE FACING A WAVE OF DOWNGRADES? MARC: THERE IS NO DOUBT. BUT IF YOU ARE CONCERNED ABOUT THE DIRECTION OF TRAVEL, I WOULD ALMOST RATHER BE TOP — YOU TEND TO GET PAID BACK. BEST HAS BEEN ON PRIVATE INVESTMENT GRADE.

I WOULD RATHER PLAY OUR HAND THAN ANYONE ELSE’S. SONALI: I AM CURIOUS ABOUT APOLLO’S PLAN FOR THE REST OF THE YEAR. YOU ARE SEEING PEOPLE SLIM BACK ON HIRING OR FLAT OUT LETTING GO OF THOUSANDS OF STAFF. WHAT OPPORTUNITY DO YOU SEE GIVEN APOLLO HAS DONE THIS? MARC: WE WILL CONTINUE TO GROW.

BETTER THAN 25% THIS YEAR ON THE RETIREMENT SERVICES SIDE. THAT IS WITH AN OVERLAY OF OUR STRATEGY CALLED NO NEW TOYS. THE UPSIDE FROM EXECUTING THE BUSINESS PLAN IN FRONT OF US IS SO HIGH THAT THE PRICE A DISTRACTION IS HARD TO CONTEMPLATE.

I THINK 23 FOR US, WE WILL GROW, AND WE WILL DO IT IN THE CONTEXT OF THE ENVELOPE OF OUR BUSINESS THAT EXISTS. NO NEW TOYS. SONALI: ARE YOU FINDING IT EASY TO HIRE FROM BANKS OR TECHNOLOGY COMPANIES? MARC: IT IS NEVER EASY TO HIRE. THIS IS ABOUT CULTURE.

WE HAVE GROWN THE TEAM AND IT IS THE LIMITER OF OUR GROWTH. AT THE END OF THE DAY WE PROVIDE CLIENTS JUDGMENT. IT COMES FROM PEOPLE BEING AT APOLLO FOR A LONG TIME AND INTEGRATING INTO OUR CULTURE. WE CAN ONLY GROW AS FAST AS WE

CAN CULTURALLY ABSORB IT. THERE IS A NATURAL HEDGE OR LIMITER TO OUR GROWTH. WE WATCH THE BALANCE CAREFULLY. SONALI: WEDNESDAY IS BIG FED DAY. WHAT YOU EXPECT WHEN YOU LOOK AT THE INTEREST RATE PER–TRAJECTORY? MARC: THERE IS A POST-POLL. THE DIRECTION OF TRAVEL WEDNESDAY IS GOING TO BE OUT.

IT WILL DEPEND ON THE LANGUAGE THAT SURROUNDS IT AND THE ACTIVITIES THAT TAKE PLACE FOLLOWING IT. IF WE HAVE A SECOND LEG OF THIS BANKING CRISIS, IT WILL BE SLOWER. IF WE SEE THE WAGE PRESSURES WE JUST SAW, IT WILL BE TOUGHER.

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