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U.S. banking system ‘is the envy of the world,’ Apollo Global Management CEO says

Apollo Global Management CEO Marc Rowan joins Yahoo Finance Live’s Brian Sozzi at the Milken Institute Global Conference 2023 in Beverly Hills, CA, to discuss global dealmaking in 2023, JPMorgan’s acquisition of First Republic Bank, and the outlook for regional banking. (Disclosure: Apollo Global Management is the parent company of Yahoo Finance.)

Video transcript

- Global deal making wasn't exactly on the up and up in the weeks before Silicon Valley Bank failed in March. Since then the landscape for both public and private markets has been uncertain, to say the least. It's been this way for a while now on both volume and value. 2022 was a muted year for PE activity on a relative basis. A recent report from S&P Global tells the story.

Market volatility has been the biggest challenge to closing deals in the last 12 months. It's been a slightly different story for take private deals, however. Last year tech was the focus with PE lured by significantly marked down prices. Private equity doesn't come much bigger than Apollo Global Management, the parent company of Yahoo Finance. And it's been making big moves in that space.

Just last month it struck a deal, huge deal to acquire and delist specialty chemicals distributor Univar Solutions for $8.1 billion. That company the latest in the string of deals for the PE giant. So are they bucking a wider trend or is this a sign of things to come for the industry? Let's get to Yahoo Finance's Brian Sozzi at the Milken Conference in Los Angeles. Brian.

BRIAN SOZZI: All right, thanks so much, Brad. Of course, joining us now is Apollo Global Management co-founder and CEO Marc Rowan. Marc, good to see you here.

MARC ROWAN: Good morning.

BRIAN SOZZI: Lots to talk about on the future of Apollo, but we have to start with what we saw this morning. JP Morgan scooping up a First Republic. Your thoughts on this deal.

MARC ROWAN: Strong get stronger. I mean, JPMorgan has run a conservative balance sheet. They run a fortress balance sheet. In times of stress they benefit. It's no more complicated than that. But I do think that this is not a huge story. I know it's this morning so we'll talk about it. But the three banks that have failed, totally predictable. Mark to market losses on treasuries, well known. Structure of the deposit base, well known. To me, the interesting question is, what is the future of regional banking going forward? When $42 billion of deposits can leave in four hours. Not did JPMorgan buy or not.

BRIAN SOZZI: What is that future?

MARC ROWAN: I think it's going to be interesting. I think we're not going to know for a while. But I look at the business model, they have always paid more for their deposits versus the money center banks. Now cost of deposits are up. They're going to have more regulatory costs, whether there's more regulation or not. Their cost of debt, their cost of equity is up. But most importantly, are deposits stable? Are they sticky funding? Can they run a loan book, a Nim or spread based business? I'm not so sure. So when the dust settles, I think there will be a real shakeout as to what the business is of regional banking going forward.

BRIAN SOZZI: Do you see more mergers in regional banking happening?

MARC ROWAN: I think that's a possibility, and there will be some. Certainly, we're watching the weak players get taken out now by the strong players. I think as Jamie said this morning, it's probably the end. But I would say the end of round one. I think we still have a lot of commercial real estate stress in the system, which probably will give rise to some round two.

BRIAN SOZZI: Is round two-- does the commercial real estate market get roiled? We had Charlie Munger over the weekend in an FT op-ed sounding alarm bells on the state of the commercial real estate market.

MARC ROWAN: It is roiled. I mean, if one looks at how the public measurement. Take three of the best operators out there. Take Vornado, take SL Green, take Paramount and look what's happened to their stocks. The market has already told you, it's roiled. And then you step back and you look at the diversity of asset class-- debt, equity, mezzanine. All the different markets, all there from product types. I don't know that it will be systemically threatening, but if you're a regional bank, you made real estate loans in your region. If your region turns out to be weak, you're going to have problems.

BRIAN SOZZI: A lot of the leaders we have talked to say the banking industry is stable. Some have said it's strong. Do you see it that way?

MARC ROWAN: This is a complex dynamic. So is the banking system stable from a capital point of view? Absolutely. Is it stable from a business model point of view? If you're a large bank, pretty much. If you're a regional bank, as I've already suggested, I'm not so sure the business model is stable going forward. But I look at what's happened over a long period of time.

2008 Dodd-Frank, country made a decision to reduce their dependence on the banking system, government guaranteed deposits for funding. Today, banks are less than 20% of all debt finance in the US. Investors, people at this conference, pension funds, endowments, insurance companies, so on, they are the new banks. And so we are, if you step back, our system is the envy of the world. We're 50% of the world's capital. Our government benefits. Our business benefits. Our consumers benefit. I think it's likely to stay that way.

BRIAN SOZZI: Are there opportunities for Apollo in an environment like this where we might see commercial real estate market uprooted, we might see more banking and regional banking consolidation.

MARC ROWAN: Look, we are in the alternatives business. And alternatives to us are alternatives to publicly traded stocks and bonds, not narrow hedge funds or private equity or anything else. So I think about the last decade, while we printed $8 trillion, the irony is I'm not sure if people needed alternatives or active management of any sort. The single best thing to have done was to bought the index, bought the 30 year and worked on your golf game or whatever else your hobby is.

BRIAN SOZZI: Like all things, pretty bad right now Marc, it's bad.

MARC ROWAN: And now if you look going forward, we're just unlikely to have that kind of tailwind. Now is, ironically, when you need alternatives. Public markets, particularly public markets for fixed income, are all beta. They are liquidity driven markets driven by open-ended mutual funds, ETFs, derivatives, traders, and the like. If one wants alpha today, you need to step away from publicly traded markets, and you're seeing that. You're seeing the growth in private credit.

For us, the bet we've made is investment grade private credit. Very much akin to what a bank used to do, to what a GE Capital used to do. We are top of the capital structure senior secured. And we've built a really large business. We are $400 billion of private credit today. Which sounds large, but I assure you, Jamie Dimon, Jane Fraser, Brian Moynihan, and Charlie Scharf, they don't wake up every day wondering what the mighty Apollo is doing. And I like that. Being large, but not relevant in the scheme of this marketplace, just affords me room to run.

BRIAN SOZZI: At the core of a lot of the things we're seeing in markets right now, First Republic, JPMorgan, you name it, is what the Federal Reserve has done. Your take on what the Federal Reserve has done, in terms of raising interest rates this aggressively, and we might see another rate hike this week.

MARC ROWAN: Look, go back to 2008 again. We printed $8 trillion. That's a lot of money. Exactly what we thought would happen when we printed $8 trillion happened. Everything went up and to the right-- stocks, bonds, real estate, cars, wine, you name it. We withdrew a little bit of stimulus in '22 and everything corrected. Lo and behold. But if you again step back, of the $8 trillion, $3 to $4 trillion ended up in the banking system.

The banks had relatively low loan demand. Banks, therefore, put that money into treasuries. Interest rates go up, the value of treasuries go down. Now consumers act. Consumers who have lived with a decade of low rates all of a sudden can go to money market funds and get 4% or 5%. It turns out consumers prefer 4% or 5% to a half a percent. $800 billion left the banking system. First Republic, SVB, Signature we're just the most exposed in plain sight. Everyone knew.

BRIAN SOZZI: The Federal Reserve, what have they done in terms of the private equity industry? Raising the rates where they have been, what have you seen in that particular area of the markets?

MARC ROWAN: Look, I'm not sure the Federal Reserve has intended to do anything in the private equity industry, but let's talk about equity. When rates are down and credit is free and liquidity is plentiful, everything moves up and to the right. And the more risk you took, the more long dated your business plan, the further up and to the right you were. And so public equity markets, technology growth clearly succumb to the sirens' song of liquidity.

People now have to figure out, were they good investors or was this all market data. Private equity was not immune to that. 60% of the money that was invested in private equity over the last 10 years was not traditional private equity it was growth. And while it was happening, it felt really good. And now that it's not happening anymore, it doesn't feel so good.

And so you have firms like ours who are purchase price matters, excess return per unit of risk. We did just fine over 10 years. But this is the period of time when liquidity has been withdrawn, when we're playing offense, and lots of playing defense that I'm excited about. This is what we're made for.

BRIAN SOZZI: Is it a recessionary backdrop?

MARC ROWAN: It is a recessionary backdrop. But as I have sometimes said, I think we're going to have a non-recession recession. And what that means to me is those of us in the asset world, you who live in the reporting on an asset world, we're going to feel like we've had a real recession. Because everything that went up is coming down.

But if you look at the numbers, 3.5% unemployment, strong wage gains, continued job growth, the infrastructure money that was passed by Congress, we have yet to feel the stimulus of the Inflation Reduction Act money. It's very hard for me to see where we will have a classic demand destruction pattern of the kind of magnitude that we historically have associated with recessions or deep retrenchments from the kinds of excesses we've seen.

BRIAN SOZZI: Do the portfolio companies that Apollo owns, are they telling you they have started to see their business slow down.

MARC ROWAN: No. You're seeing perfectly fine business trends. If we actually shut off all the news sources--

BRIAN SOZZI: Can't shut off the Yahoo Finance.

MARC ROWAN: Everything except for Yahoo Finance.

BRIAN SOZZI: OK, thank you. Just want to put that out there.

MARC ROWAN: It would actually feel pretty good.

BRIAN SOZZI: Talk to us about your overall market outlook. As you look towards the back half of the year, maybe a couple more rate hikes, what does that suggest to investors that are actively involved in this market?

MARC ROWAN: Look, I step back and I'm going to, again, try to put it in a macro sense. I think we live in a bifurcated market. And I think we've been lulled into some passivity over the last 10 years. And what I mean by that is when everything is going up and to the right, not a lot of questions are asked. People puff their chests and they say, well, that's because of great management. I don't think that's the market we're in. I think we're unlikely to have any tailwinds.

People are actually going to need to figure out how to be good investors going forward. And we have not yet mentally adjusted. What happened over the last 10 years is abnormal. I come to where we are today, are valuations low? No. Are rates high? No. Is liquidity low? No. Spreads wide? No. What we're living in is actually normal. What we've been through is the abnormal period of time. We have so many people who have just not mentally adjusted to that, but that's the business we're in. We're in the business purchase price matters, excess return per unit of risk, and in a market that has adjustments, corrections, deviations, stresses that's an Apollo market.

BRIAN SOZZI: Marc, you have touched every part of the Apollo organization. As you sit atop your perch now as the CEO of the company, does PE still get a bad rap? That PE comes in, ravages companies, lays people off. How do you see it?

MARC ROWAN: I think the market, first of all, was never like that. And it's certainly not like that today. This is a 35-year-old business where there are not a lot of obvious things one can do by simply buying the company and breaking it up or laying people off. This is now all about building. And what's interesting, you think about the structure of the market today, 60% plus ETFs, everyone is daily liquid, who are the long term investors in equities? I just haven't met any of them recently.

We buy something, we operate the business as if we're going to own it forever, and if we make decisions as if we're going to own it forever, we usually will make the right decision. Whether we own it forever or is not the point. We make decisions that are long-term, that will pay off, and were not measured in quarters. It is one of the real luxuries of our business to be able to think long-term and not care what happens on a quarterly basis.

You don't make long term investments if you're measured quarterly. You don't make the kinds of bets to fundamentally change business models if you're measuring quarterly. And when you own the equity, particularly in a concentrated way, it has a way of focusing the mind on getting good outcomes. The whole notion or soundbite of private equity as ravaging businesses was always that, just a soundbite.

BRIAN SOZZI: All right, we'll leave it there. Apollo Global Management co-founder and CEO Marc Rowan. Good to see you. Thanks for spending some time for Yahoo Finance. We appreciate it.

MARC ROWAN: What's better than this?

BRIAN SOZZI: Not much. Brad, back to you.

- Great stuff there. Our own Brian Sozzi at the Milken Institute Conference alongside Apollo Global Management CEO Marc Rowan.