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The revolution in private markets and private lending is setting the stage for a sweeping investor shift out of publicly traded stocks and into alternatives, according to Apollo Global CEO Marc Rowan.
With the stock market increasingly driven by passive investing and indexing, and dominated by a handful of mega-tech stocks, investors seeking diversification will need to start turning to the rapidly expanding private markets, Rowan told CNBC.
“I do think [investing] is broken,” he said. “We had this notion 40 years ago that private was risky and public was safe. What if that’s just fundamentally wrong?”
Rowan and Apollo are at the forefront of a tectonic shift in the investing landscape, with the lines between public and private markets blurring and the burgeoning business of private credit funding a growing share of corporate America’s growth.
A handful of private equity giants are now muscling out the banks and stock markets to make trillions of dollars of loans and open up new opportunities – and risks – for investors.
Apollo, Blackstone and KKR together now have more than $2.6 trillion of assets under management, more than quadruple what they held a decade ago. Apollo alone has $840 billion in assets, up from $40 billion in 2008, Rowan said.
“I’d like to attribute that to good management, but that wouldn’t be true,” Rowan said. “The answer is, there are just fundamental factors that are reshaping and growing private markets.”
Those factors start with the post-financial crisis regulations that curbed bank lending and allowed the private credit market to step in and provide long-term (and in many cases riskier) loans to large corporate borrowers.
Marc Rowan, chief executive officer of Apollo Global Management LLC, speaks during an interview on an episode of Bloomberg Wealth with David Rubenstein in New York, U.S., on Tuesday, April 5, 2022. Jeenah Moon/Bloomberg via Getty Images
Jeenah Moon | Bloomberg | Getty Images
Private credit as an investment class expanded, first among endowments, sovereign wealth funds and pensions and later among family offices and high-net-worth investors. With returns of up to 15% or more, hundreds of billions of dollars flowed into private credit funds.
At the same time, the effectiveness of the 60-40 portfolio of stocks and bonds has become outdated, Rowan said. The rise of exchange-traded funds and indexing means most investors do little research about the individual stocks they own. Even the indexes are now driven by a handful of mega-tech stocks. And as stocks and bonds have become more correlated, diversification needs to be redefined.
Rowan said the decline in the number of publicly traded companies – from 8,000 in the 1990s to about 4,000 today – means investors aren’t actually getting the investment benefits of the American economy.
“When we own the S&P 500, do we actually own the 500?” he said. “Ten stocks are now 40% of the index. We have lost the ability to really invest in a way that reflects the strength of the U.S. market, or, quite frankly, the strength of any market.”
Instead, he said, investors will start allocating more of their fixed income and their equities portfolios in private investments.
Private credit firms have about $450 billion available to invest, according to Preqin.
And today’s private credit loans often involve big, publicly traded companies. Meta Platforms, for instance, just secured $29 billion in financing from a group led by Blue Owl Capital and Pacific Investment Management Co. for a data center in Louisiana.
Air France, AB InBev, Intel and AT&T have all turned to Apollo for loans rather than traditional banks. Investors and companies are just waking up to the potential size of the market, Rowan said.
“If private credit is direct lending, leverage lending, below investment grade, it’s roughly a $1.5 trillion market,” he said. “If private credit is investment grade and the low investment grade, it’s a $40 trillion market today. Today, the vast majority of what we do is investment grade, and that always shocks people.”
While the risks of investing in private credit are well known, Rowan said they’re often misunderstood. Investing in a loan to Meta, for instance, shouldn’t be considered more risky than buying its stock through an index.
“What if private is both safe and risky, and public is both safe and risky, and they are just differing degrees of liquidity?” he said. “That’s the world I think we’re in.”
As alternatives start to move down the investing ladder, from institutions to family offices and eventually to retail investors, concerns are growing that retail investors would be putting a portion of their retirement savings into less liquid assets. After all, Harvard, Yale and other endowments are now struggling to sell a portion of their private equity and alternatives investments at discounts to raise needed cash.
Rowan said the rise of new funds, market makers and ETF products will provide increasing levels of liquidity as the private credit world matures. Yet, he said some level of illiquidity is important for higher returns.
“If you work with Apollo today and you want to be 100% private investment grade, every 30 days, you can take 100% of your money out,” he said. “As an investor, if you don’t have the capacity to bear 30 days of illiquidity, you should not be in private markets.”
Last month, the Trump administration issued an executive order that will start opening the door for more alternative investments and crypto in 401(k) plans. Rowan said the process will take time but that the experience of countries that allow more alternatives in national retirement plans – including Australia, Israel and Mexico – bodes well for U.S. investors.
Expanding access will also eventually lead to lower fees, stronger performance and more transparency in an investment segment that’s still widely seen as opaque.
“There’s no market in the world where transparency and opening up the market has not brought better access, lower prices and a weeding out of the poor managers,” he said.
