All right. Good morning, everyone. Thanks for sticking with us here on day two of Morton C&L's financials conference. I'm Mike Cypress, equity analyst covering brokers, asset managers, and exchanges for Morton C&L research. And we're excited to have with us for our next session, John Zito, co-president of Apollo Asset Management. John, thanks so much for joining us here. Good morning. With nearly over a trillion in assets under management at Apollo, Apollo is one of the world's largest alternative asset managers. So, John, let's open with your thoughts on the macro, which feels increasingly bifurcated with higher for longer interest rates, inflation concerns, fiscal deficits, geopolitical fragmentation, yet we still have a robust corporate earnings environment, very strong economy, particularly here in the U.S. Spreads remain tight. So can you share with us some of your top of house perspectives?

I spend very little time thinking about most of the things you just brought up, I think. Um, I, I, I, I'm not joking. I think the only really thing that matters is, is, uh, whether or not, um, what's going on with anthropic in the labs is real or not, you know, like that it's so dwarfing to what, um, is going on in the world. Obviously I'm not trying to discount what's going on in both wars. Um, inflation, you know, if AI is real, it's so hyper deflationary to so many things over the long term that it's really hard to take risk and it's probably as hard I've been managing third party money for almost 25 years I think it's as hard of an environment to probability weight what the world looks like in 12 months to 24 months as it's been in a really long time and that's not like that's not for credit that's not for I mean it's just generally really just a really difficult environment because you know you go to the valley and even just just anthropic as a even if i was here in december i would have told you much much more sanguine about what's going on but anthropic doing 60 billion of arr and 80 billion and 200 billion in their latest filing for what they'll look like in a year it just dwarfs everything we're doing i mean palantir it took 17 years for palantir to get to a billion dollars of revenue. And so what that means for risk-taking, what that means for default rate, what that means for businesses, I think some businesses are going to massively thrive, just grow most of the enterprise, most of the efficiencies from what happens will be driven towards the big scale players. And you've seen what we've done kind of top down, obviously with our $36 billion announcement yesterday on Broadcom and 15 billion for SpaceX and, you know, close to, we'll do close to 10 billion in sports, tons of critical infrastructure, de-risking by going senior on, on kind of less exposed businesses, massively underweight software. Everything comes from the same place, which is trying to be super humbled about what's going on in the world and navigate the balance sheet to, to protect ourselves if you look at what we're doing on our own balance sheet really for the last 18 months de-risking in the context of much more treasuries much more hard assets a big push into asset back and things that are going to be much more inflation protected in whatever regime that looks like um look we're doing everything from from a lens i i grew up as a principal i grew up as a as a manager of vehicles and um really grew up at apollo that way and that's how we think about our own balance sheet too is principle first and you really have to have a view like the biggest thing in credit and the biggest thing in just risk markets generally is you can't you have to avoid the bad neighborhood at all costs you can't be in the center of the storm and there's a long history you've covered the you've covered financial institutions for a really long time it's like if you're in the bad neighborhood there's not much you can do. If you're not diversified, there's not much you can do. And so that's been my focus, I think, from a risk management standpoint. But the pace of change is as hard to accept and acknowledge as any time I've been investing. And I think probably as any, I mean, I struggle to find something that's moving this quickly and getting taken up as quickly as it is.

But at the same time, doesn't that create significant opportunities for dispersion I mean, active managers.

Yeah, for sure. I mean, that, that, that is going to be, I think you're going to have the haves and have nots in a big way. I think, um, you know, obviously for our business, there's huge tailwinds in that we've got a little bit lucky that we've kind of went all in on credit and what's needed more than anything else is credit. Right. And so you have super long door, the, the capital needs. I mean, I kind of feel like I'm in some fake reality movie or something when I go to the Valley now and everybody wants to be our friend and they didn't have the time of day for me a couple of years ago. So, you know, well, we love them. I don't mean it that way. But, you know, they're figuring out the future. We're just financial providers. But, like, just you take the two labs, they need a trillion dollars in chips. I mean, you see the OpenAI announcement last night with NVIDIA. NVIDIA is trying to, I mean, the scale of that Ohio project that got rumored last night is 500 billion dollars i mean it's very masa-esque announcement but the scale if you just look at the basic assumptions in the five-year plans of these businesses trillion dollars just for chips you know like that's you know for us when you look at that gets us excess spread that gets us additional fre that gets us on this on the mez and and whole business side we get potentially like infra like assets like it's and and only a handful of people can show up and with a be able to execute a 30 36 billion dollar deal i i think there's one or two but probably one and in this case it was in partnership with blackstone so i i don't think there's a lot of people that can do it with those dollars that you mentioned are just gargantuan do you worry that the token costs are going to be just as enormous folks are not going to want to spend and i think i think token maxing and token talk is is for it's a lot of bs honestly like if you look at um if you look at per unit of knowledge and cost per unit of knowledge prices are collapsing prices are collapsing per unit of iq if you did it that way and so you have to you have to bifurcate different types of compute into inference compute which is most of us like my iq is not high enough to be able to use what mythos 2 will be powerful enough i i we're not smart enough i mean there's only a handful of people that are smart enough to use these cutting edge frontier models that need 180 iq 24 7 like the the the problem to solve for that that's where you're seeing the prices go up. Our IQs are so low that we're actually using that IQ to do like, you know, check out the recipe for, you know, the French toast. and we're spending tons of money. And so like, you know, like, okay, so we have to figure that out clearly so that we can manage our, what, yeah, that's like, exactly. You know, like, it's okay. We can admit that what we use our things for like glorified, you know, be like a 120 IQ is good for me. Maybe 130 is good for my French toast. But so what you're going to see is like a whole new economy around how you direct the ask onto the right chip. Like the AMD chip, the Nvidia chip, all these different chips will be used and optimized for a certain use case to solve the spend problem. And then you're going to have the 180 plus Citadel, Jane Street, all the high octane quantum. That's going to be really expensive, but the ROI is going to be massive. Right now, everyone just views all of it in the same bucket. And so I worry more just how do we – there's only a handful of credit providers. Obviously, it's getting diversified. like what's the at what the problem is roi is so high and everybody assumes compute will be demand and that that so everybody's just building and buying and building and buying because if they say they don't need it they'll sell it to someone else it's very bull markety that part and so and and you know we're in the public markets where rate of change matters a lot and so if you have any slowdown once these companies are public if there's any slowdown it's growing at 100% a year and it grows at 80% a year. The market goes, the stock goes down 50%. So you'll have that moment. I don't know when that moment's going to happen. It's going to happen in the next two years at some point where people say, wait a second, the growth isn't as much or the ROI isn't as much, and maybe it just benefits the consumer. I don't know. I don't know where it lands. But everything is very, where it's bull market is where you say like there's 10 guys that are building data centers and that everybody can build a gigawatt data center. It's just not true. You're going to see guys, I think you'll have companies that don't deliver on their promise and they have leases canceled and people are like, oh wow, what happened here? And not each developer is good. Not each Neo cloud is great at providing efficiencies of clusters of chips. There's a lot of nuance that's going on. The bull market elements of it is that everybody thinks that everything's just commoditized and it's not. There's going to be a lot of dispersion amongst it.

Let's shift gears and talk about your role as co-president of the asset management and business at Apollo. Talk about some of your key priorities right now where you're spending most of your time and what are some of the key challenges that you're tackling?

I mean, look, we have two big things at the asset manager. Obviously, we have our own balance sheet is half the capital and half the capital is third party. You know, most of my time is, well, first off, risk management and making sure we don't do anything stupid in a time where I think uncertainty is higher than usual. So that's been going on for a while, you know, optimizing our own balance sheet and making sure we're in the right neighborhoods, much more infrastructure, much more around everything that's growing really quickly that clearly needs demand. building out Europe, building out ancillary-type businesses, building out our CLO replacement strategy, and I think creating new structures that are good for everybody that actually can earn the appropriate rate of return, and just trying to avoid making any big mistakes because I think there are elements of the balance sheet for that. I think on talent management, continuing to just get the best people in. But we've kind of set our plan with, our credit business obviously drives it, but between hybrid, our equity franchise, which we're in market this year, raising in a pretty difficult backdrop for PE, our team's done an amazing job there, just historically in terms of not getting in these bad neighborhoods and sticking to our knitting. But, you know, hybrid's a huge grower. I think Infra's a huge grower. How we handle sponsor solutions and secondaries, I think, could be a big grower. You know, people think we're really big and really penetrated. I think there's a lot of upside in certain markets that we have not penetrated. And some of our competitors have done a much better job. So I think there's upside in there. We just have to continue to just perform well, and I feel pretty good about that. But I spend most of my time worried as opposed to just making sure we don't – that's kind of been – that's how I grew up here. Which markets stand out, would you say, where competitors have done well and you see significant – I mean, look, you can see the numbers. I mean, we've dominated the credit ecosystem. In other parts of the ecosystem, we've been underweight. I view anything that we're under market on, I view as a huge opportunity because I feel like the investment regime is changing where having this open architecture that we have is going to be a huge competitive mode. And if you look at what's happening with the MAG-7 and to compare the MAG-7 to financial institutions, I know it's a hard one, but they're all going balance sheet heavy. And there was like a 20-year, 25-year environment where the public markets and everybody wanted everybody to be asset light. It was ARR, asset light, ROE, everything else. What if the regime is changing a bit to be more asset heavy and that the return is going to shift to capital? You're seeing it with the manufacturers. You're seeing it with the intels of the world that actually make their own stuff. you're seeing the large companies all go much more balance sheet heavy and capital intensive and maybe the the value framework for financial institutions you know something that public markets have not loved about us is our balance sheet heaviness maybe that's going to be our strength in this environment you know maybe that enables us to win deals and be more strategic partners? And should we be, you know, really leaning into that more? I think that's like, if I look at other industries, you're seeing value shift to capital. Still hasn't happened in asset managers yet, but I'm probably more excited about that than I've been since I've been in Nepal.

Let's talk about private credit, which continues to be a topic. I try to get through every 30 minutes without talking about private credit, but let's do it. all right oh because i get asked about it nine times a day so i have to like you know it's like i can't talk about a much such a boring safe asset class so much but it's so exciting for everyone well i think that's part of the debate people don't perceive it to be but that's what i want to get to is some of these misconceptions here right so i think there's you know been a lot of focus on the direct lending space which is a smaller part of the policy business but the emerging debates around the risk profile and private investment grade private ig which is a bigger part of your business compared to the sponsor. So I guess where do you see the most common misconceptions around private IG?

I mean, look, I think the biggest misconception is that we're misaligned in any way and that we're using structure to take a lot more risk. This idea that you could have made that argument maybe when we weren't merged with a theme and that most of our compensation wasn't in the equity of Apollo, which is subordinate to policyholders so when we merge those businesses we effectively said what we're doing in the credit business is good risk and we want to own all of it and so this idea that we use structure or private for opacity and lack of transparency is something we just just totally disagree with it is not how we behave or operate and no matter how much transparency we give to the market, they seemingly, I think private just feels risky to people. And so valuations is obviously a big part of that. And there's an intersection there that's gotten in the news, which we're trying to take a lead in terms of setting the market on that. But look, private credit is, private markets, not private credit. All of private markets are disproportionately exposed to services businesses, asset-light businesses, healthcare, and software. So private markets have some probability of not doing as well or having defaults that are high. Now, the LBO market and the BSL market has a big percentage of software and services and asset-light businesses because levered credit typically went there too. too. So lots of companies in the public markets are asset light, services companies. So I think we're going to go through a cycle potentially. It's not about private credit. Private credit's a de-risking trade. Private credit's going up in quality, up in seniority, closer to assets typically, and senior. Listen, some are more exposed than others. Some have more concentration some of the others, they're going to figure it out. But I think the much bigger conversation is around the subordinated parts of the capital structure. And so I think you're starting to see that with some of the other headlines going on. And I don't know, cross your fingers. It feels like people are getting bored about private credit, but maybe not. You know, most of us, private credit business is a pretty cottage industry. There's not a lot of, there's a handful of us that grew up in the business for over 20 years and all know each other. And it's different than the private equity business in that you're kind of either in a deal with someone else or you're going to be on the other side of someone else. But generally, it's not zero sum. And we're all definitely not used to being in the press as much as it's been. So you know, hopefully it calms down because the business is supposed to be a pretty boring business. It's supposed to lend money at par, get money back at par, make your coupon, and move on with your life and be pretty low vol in terms of what the asset vol, the asset is, and the underlying likelihood of default. So hopefully we'll get back there. Look, I think the night, as I say, nice thing, but redemptions are high right now. There's no way to hide from that. They're all, you can see them in the headlines. You can see what's going on with some of the interval funds. You've seen what's going on with all of our vehicles, generally speaking, and the structure. And the nice thing is, is no matter how much you've attacked the private debt business, there's been no run. There's been no SVB. There's been no financial institution failing. The structure is right. Like, could it improve? 100%. Can we talk about different ways? Sure. It's kind of nothing. We're giving back the, you know, We have 5% redemption, which is $750. We take in $750 that quarter. We have $5 billion of liquidity on a vehicle that needs to redeem $750 and a bunch of broadly syndicated loans. The assets pay income, and the income matches the distribution yield. The average life of the asset is 3 1⁄2 years. The average liability structure is 3 1⁄2 years. Fully matched.

For credit, it's a really actually appropriate structure. so i don't i don't fully get it but you know we'll keep talking about it i guess all right the other hot topic is software and apollo was um was early to identify potential ai disruption risks in software and you entered this period with amongst the lowest exposure to software relative to uh to peers in the space so maybe just share your latest views on software is it too early to step in here? Are you seeing some interesting opportunities emerge?

I've had every software sponsor come and pretty much send me hate mail at this point. So I've tried to go on my apology tour.

You can buy what's in the portfolio companies.

No, it's not soft. I think a lot of comments that we make sometimes get taken out of context. Software by all of us will be used, i don't know a thousand x in the next 10 years like it's not about whether or not software is going to be used or not it's the price we pay and if you're a new business are you going to build something from scratch are you going to go pay someone to do it if you feel like you could probably build it 90 95 close to what what an off-the-shelf solution does it 90% cheaper. What are you going to do? You know, and that's the debate. And, you know, we spent eight years, the average multiple software business went from 10 times to 31 times. The average ARR went from two to three times to 15 times. You're paying 15 times revenues for business. You guys are all in the markets, you know, you're assuming that like the assumption embedded in there was 100%, 99% retention rate, 90% plus margins, and significant gross until the end of time. That's how you grew into the valuation, because you viewed it as a utility. And now that paradigm has shifted. And so the question is price, earnings power, margin, all those things where you have a lot more competition in a much different framework. And so I think it's much more about what's the appropriate price for these businesses analytical software you're going to use an llm to do analytical software the llms are really good at analyzing big swaths of data critical infrastructure software where like the the state of record and very important data that you're going to use to build on other software probably goes up the, you know, the data bricks of the world. And there's some massive winners in the software space. I'm just not sure it's the, you know, vertical software company that does analytics or does surveys. It's just not, those companies are not going to do as well. I don't think what I'm saying is controversial, but apparently some people do. um i think it's kind of just what's happening and and it's just going to flow through the market over time the public markets moved first then they moved to the bdcs that have a lot of exposure the bdcs are are the least of anybody's concerns given you had 15 companies go from 500 billion to a trillion dollars in 60 days this year and the total size of the entirety of the BDC market is sub $500 billion. So in the context of an $80 trillion equity market and a $230 trillion net worth market for U.S. households, the $400 billion BDC market, which has 30% exposure to software, is really the least of anybody's concerns.

Shifting gears to origination. been a core differentiator for Apollo. Can you talk about how your approach to origination is evolving in the current environment and where you find some of the most interesting opportunities?

Yeah. I mean, listen, we, we've never been in the origination business as a calling effort business. We've been in the ideas business where we cover sectors. We have no walls between our equity and debt business. We assess what we think the appropriate solution is for the company and we go in with product agnostic. So we'll have 20 products off the shelf, whether it's an investment-grade revolver, investment-grade term loan, high yield, pref, take private, hybrid, you name it, infrastructure, off-balance sheet, lease. We probably have the most broad creative front end that actually is proprietary and can commit to risk where we actually have a view. We've gone from originating $50 to $75 billion of what we call excess spread assets. We'll originate somewhere between $300 and $400 billion this year. We've grown from $50 to $100 to $200 to $300 to $400 without losing spread despite spreads going tighter, which if you asked me five years ago, would we be able to do that? I would have said no. And we just keep going after new asset classes and creating new asset classes out of really consistent cash flows. I'd say the benefit of the AI boom is all of this. You can create lots of investment grade collateral at excess spread because of the supply demand dynamic going on. There's a lot of demand for capital. And we're going to raise more investment grade debt in the syndicated market than the actual government market, which has never happened. So there's just so much new supply, which is keeping spreads wide, which is great for our spread business at a theme.

And high-grade capital solutions appears to be the fastest growing?

Yeah, that's in there. There's been 125 high-grade deals. We've done over 100 of them. We've been a disproportionate market share there. It's getting a little bit more competitive, but still need to be really big size, really creative, permanent. Our funding structure and our front end are competitive moats on that business a lot of people want to get in that business it's a really hard business we have you know hundreds of people that are dedicated to that um because you know if we if we had just a third-party business we would have never gotten in that business we would have just kind of been a traditional credit manager but because we get hundred cent dollars on excess spread we really invested in that business over the last 10 years to build it out and have a really commercial and creative front end that's totally tied to our total asset manager. And that's created products on the back of that, not the other way around. A lot of people go into businesses and say, we're going to create a product because a client wants it. We're usually the first client. So it's a very different mindset. And when people, you know, we, when we bring people, we've hired a lot of people over the last couple of years, when we hire people, they're, they're shocked as to how that mindset is totally different from how we, we think about product and risk-taking. It's much more principle-heavy all the time, not the other way around.

How big could that business get? And what do you see as any sort of key getting factors?

I mean, you're seeing a lot of new sectors. Healthcare is getting into it. Europe is a huge opportunity. Asia has not yet done that market because of the banking system. I think over time, a huge market. We'll spend a trillion one this year in In the U.S., Asia and Europe combined are $300. They need to do trillions of spend that they're backlogged on in terms of infraspend. So I don't know. I think if we keep that share, it's super accretive to all parts of our business, both third party and the balance sheet.

You mentioned innovation. Another area where we're seeing some innovation is daily pricing for you guys are pushing ahead. And trailblazers here across the industry and privates pushing for that greater liquidity, greater transparency and private credit. So what are you ultimately trying to accomplish with your efforts there?

No, this is just acknowledgement that many, some of us decided to go from drawdown funds into evergreen funds where money could come in and out. And listen, if money comes into a product and is in and locked up with all the investors and then comes out at the end of life, you know the marking methodology is not impacting is not unfair to any one client once we decided to allow money to come in and out you have to make sure that everything is transparent and has some level of that there's some element that we're acknowledging that some of the assets have some level of volatility and so this is just about expanding the marketplace You know, Mark talks a lot about all of our new clients in the form of individuals and 401k. Those clients are used to much more of public markets dynamic in terms of nav and require more daily pricing. And the product design that is required to service those clients is much more of a daily pricing construct. And so this is, you know, at the end of the day is about trust and transparency. and we've tried to lead with that out of the theme with our multiple 200-page decks that we put out, which I make you read. My favorite weekend read. There you go. There you go. But we're trying to just from a very good place be as transparent as possible. I know that sometimes for whatever reason people find that hard to believe, but we're just trying to be a market leader in terms of transparency, and we ultimately think that will lead to much more trust over time, and it enables us to actually build our business at the scale that we want it to be. Look, it's a lot easier to just be super narrow and service a much smaller corner office and alternatives. We have obviously more ambition for that.

And if you're ultimately successful in bringing more liquidity transparency here to private credit markets with daily pricing, I guess, what are the implications for excess spread? Does that ultimately compress? And how do you think about the implications for the value proposition and private credit and the premium there?

Listen, again, I grew up in the public markets and then I've been here 15 years. So I view the value prop of a credit manager has always been to be the credit underwrite and the credit picking and avoiding defaults. That's kind of like step one. Step two is the relationship with the issuer. And if you're actually originating your own product, a lot of the excess spread is from that origination spread, not from illiquidity spread. People can call it illiquidity spread if they want, but there's different components of excess spread. There's illiquidity spread and then there's origination spread. If you have your own origination, our view has been always that your excess return will over time as assets get more liquid. And again, every asset has gotten more liquid over time. And this is just part of the evolution of markets, that the originator will retain most of the excess spread, which means our client and our balance sheet will retain most of that excess spread, and it won't be about liquidity or illiquidity excess premium.

And how much should that excess spread be over time? Like, what do you think is ultimately sustainable?

I don't know if, like, historically it was 150 to 200. It'll go down, but I don't know by how much. maybe it goes to 100 to 150. But again, if people trust us more, does our funding spread go down? So it's not as easy as, it's not as simple as saying, okay, if spreads go down, that disproportionately will happen. I think if we're a market leader in transparency and we're a market leader in trust, that our overall cost of capital should go down over time too. And then how do you think about the components of that excess spread over time today versus like five, 10 years from now?

Does that mix change?

It sounds like it does because you're thinking I think it's going disproportionately from historically what people deem to be, I think it's a little bit of a fallacy to say that it was all in illiquidity spread, but let's just say it was, it will go to predominantly origination spread. So you're going to have to control origination to actually maintain any sort of excess spread.

We're almost up on time, but I wanted to talk about the institutional part of the business. Institutional fundraising has remained resilient, perhaps more resilient than people had feared just a couple of months ago. So talk about what you're seeing that's driving the strength today. How durable is that? And were you seeing some of the strongest demand across client-type geography?

Yeah, look, our shareholders had loved what's happening in the wealth channel up until, let's say, the last six months. the um and and that by the way i think is proven is going to prove to be more resilient than people think over time the overwhelming macro on that business is people are still massively under invested in alternatives and over time it's hard to debate that that more people won't be in privates but we're going through our our little test here in private credit um institutions thought they were getting crowded out right by well so they didn't like that they kind of are secretly rooting for more dispersion in wealth channel, because I think it makes them the star of the show again. But they want to take risk, right? So like, you know, the amount of conversations I'm having on the institutional channel on direct lending, they're just waiting for spreads to go wider. They want more of it. They're still underweight. And many of the large institutions are still not at their target to bogey for anything in private debt or credit or hybrid. They're just not there. So I think when they see the headlines, they're like, great, this is going to create a bunch of excess spread for us to put some money to And they actually want to get out and they're more underweight, the equity side of their business. And they're been low on DPI and everything else. So they've been every money, every distribution they get from their equity business, they're plowing back into either infra hybrid or credit. So I, I think, we'll launch our third direct lending fund soon. I'm more excited about that part of the business, just because I feel like the headlines actually inspire the institutions to go in. They tend to be more counter-cyclical. So you're seeing more of a... More demand, which is not consistent with the headlines, you would think, but the institutions will take the other side of that. Right. I'm afraid we'll have to leave it there. John, thank you so much. It's been great. Appreciate it. Thank you.