New big tech concentration risk is in debt market, and here to stay
Alternative investment giant Apollo Global Management has seen its shares tumble this year as a result of fears in the private credit market. On Wednesday at CNBC’s Invest in America Forum in Washington, D.C., billionaire CEO Marc Rowan offered the latest defense of his book of business and his latest attempt to steer the firm away from the riskiest edge of the private credit market.
Apollo faced scrutiny over its decision to cap quarterly payments in a special loan fund at 5 percent; Although it is a generally accepted standard in the industry, other companies in the field have relaxed their refund limits. Apollo has also been vocal about many software valuations being “wrong”, the sector at the center of fears of private credit defaults as a result of the potential for rapid AI disruption.
At the CNBC event, Rowan had even harsher words for some of Apollo’s colleagues and investors in the private lending space amid escalating demands for repayment.
“We have a situation where investors don’t actually know what they own. Maybe they should have known,” he told CNBC’s Sara Eisen. “If you discovered eight weeks ago that enterprise software was vulnerable to AI, you were kind of not doing your job,” Rowan said. “This can be known.”
The private loan fund, which receives redemption requests representing 11 percent of assets, owns about 12 percent of software loans. one big industry Apollo Debt Solutions is at BDC.
The reimbursement claims met by Apollo equaled $750 million.
“We are a trillion-dollar manager,” Rowan said. With $750 billion in loan investments and $16 billion in retail investor assets, $750 million in three-month 5 percent redemptions were “rounded to zero,” Rowan added.
Black Rock drew a sand-like line at the specified location 5% limit“This is not on page 92 of a prospectus. It’s on Page 1,” chief executive Larry Fink told the BBC in March.
As for other lenders, Rowan added: “If you can’t afford 5% repayment per quarter as a first lien loan manager, I’ll say it plainly: You’re an idiot. It’s not that hard to do.”
Software stocks recover, tech’s role in debt market will increase
Beaten software stocks are starting to join the market recovery, and well-known investor and short-seller Michael Burry wrote in a new Substack post that he doesn’t believe “the technical pressures brought on by private credit/software debt issues are large enough to impact these stocks for much longer.”
But Rowan said the changes taking place in debt markets and the role of tech companies in those changes will continue to be important, even as he continues to say the market is overestimating fears about Apollo in particular.
“Private equity had a decade where 30% of its activity was enterprise software,” he said. “This is not a story about whether the private sector is good or bad. This is concentration in an industry impacted by technological change. … Enterprise software stocks are down 60-70%. This is all about business selection. This is over-concentration, too much growth, too much risk,” he added.
Last year, Apollo raised $310 billion in new investments, 80% of which was investment-grade financing, with top issuers including Intel, BP, Shell, Air France, AB InBev, AT&T and Meta.
“We’re talking about two different things,” he said.
Apollo Global Management shares last year.
According to Rowan, the private loan market overall is $40 trillion, and $2 trillion of that total consists of leveraged direct loans, which are at the heart of private loan market fears. Spreads have widened but in most sectors the widening will be seen as an opportunity for institutional investors and, with the exception of enterprise software, he said, interest rates will return spreads to the normal range, where default risk will remain as a result of technological change, valuation change and artificial intelligence.
In the subinvestment grade leveraged loan private lending space, “we’re rounding from 1 percent to closer to zero,” Rowan said. “That’s 0.4%.”
He added that this was true of most regulated balance sheets in the US, where “it is not a productive asset class.”
“For the top 15 insurers, this is nothing. This is not the asset class that private credit insurers have. Intel, BP, Shell, NFL and others,” Rowan said. he said. But he added: “I worry about what we don’t know in the Cayman Islands, Barbados and Anguilla.”
According to him, the presence of technology companies in the debt market is heading in a clear direction: larger. “The entire Silicon Valley ecosystem went the last 50 years without needing capital and suddenly became the most capital-intensive business on the planet,” he said. “The top 10 issuers of investment grade today are all banks. If all goes well, five years from now there will be five big tech companies and five big banks,” he said.
Rowan said investment-grade debt issued by tech companies had already risen from “nothing” to 11% of the index and had done so “out of the blue, and the scale of capital we need is unorthodox.”
“Right now, the big hyperscalers, Google, Meta, Amazon, Microsoft, they’re towards the bottom of the list… they have cash flows in other businesses and they provide their loans in the form of guarantees and leases, and so if we have problems with Microsoft and Amazon as a financial system, we have other problems,” he said. “There are companies that have that kind of credit rating and higher cost of capital, like Coreweaves and others, that are accessing another part of the market… but the risk is being segmented in a way that it’s hard to say it’s going to be all over the system. It’s going where it needs to go,” Rowan said.
