Apollo’s Rowan: With Lower Public Market Returns Ahead, Private Credit Allocations Will Rise

Key Takeaways

• Investment strategies that have worked for the past 40 years may not be effective in the future.
• Valuations on public stock and bond markets are currently not attractive.
• Private market credit may offer excess returns for investors who can tolerate liquidity restrictions.

At the Morningstar Investment Conference in Chicago on Thursday, Apollo Global Management chief executive Marc Rowan said that an evolving private credit market offers investors an opportunity to build a new layer of diversification into portfolios at a time when public market returns are likely to be muted for years to come.

Apollo manages some $785 billion, including more than $640 billion in private credit. It recently teamed up with State Street Global Advisors, which launched the SPDR SSGA IG Public & Private Credit ETF PRIV, which invests in a mix of investment-grade public and private debt, with the private debt sleeve holding debt originated by Apollo.

What Will Drive Private Market Allocations?

Amid the push by asset management companies to offer funds (especially exchange-traded funds) that make it easier for individual investors to access private markets, Rowan addressed the question of what allocations to private credit will look like going forward. He said the answer is “really complicated, but also really simple.” Rowan offered three questions for investors to ask.

First: “Are things cheap? I don’t think that by any measure, public markets are cheap. We can debate whether they’re as expensive as they used to be, but by any historic precedent, public markets are expensive. In equities, it is easy to see, but credit spreads for public fixed income are at generational tightness.”

Second: “Are interest rates likely to decline? I don’t think so. Everything we’re doing is inflationary in the long term, whether it’s tariffs at home, manufacturing, lack of immigration, government debt.

Third: “Do we have lots of political uncertainty? Yes. [You] wake up every day and something crazy is happening. And if that’s the background, what do you do with your money?”

Apollo’s answer is to reduce risk. “In fixed income, that means moving from the bottom of the capital structure credit selection to the top, and trying to get paid for structure, for origination and equity, moving more toward contractual cash flows and less toward growth. If things change, if the markets wholly reprice, we would do something else. And so I don’t think we’re set up for the same series of strategies that have worked for 40 years to work in the future,” Rowan said.

“We’ve been the beneficiary of massive tailwinds, rates have gone from high to low, we’ve printed a lot of money, we’ve pulled forward demand. We have to pay the price for it, because we have globalization. It’s not clear to me whether any of those things are true anymore. So why would the same investing style work for the next 40 years?”

Are Private Markets ‘Too Complex’?

Individual investors and advisors tend to view private markets as too complex. Rowan said that perception was due to a lack of understanding of these asset classes. “Private markets are primarily credit-oriented, primarily investment-grade in trade, and offer excess return for taking risk,” he explained.

“If I look at, for instance, what we’ve done over the past year—$4 billion to AT&T, $11 billion for Intel, and so on—private markets are now just another tool. A CFO at a large company thinks of bank debt, public debt, private [debt]. We get the call when something is long-dated and complex.”

‘No Free Lunch’ When it Comes to Risk

Rowan acknowledges that the private market is harder to access. “Currently you access in semiliquid format, which means every 30 days. So is it a hardship for an investor to go without daily liquidity, but every 30 days [instead]? If it is, they shouldn’t be in illiquid investments. If it’s not, they should get paid excess return risk for the same rate, same risk profile.”

Rowan continued: “There’s no free lunch in investing. The question I always come back to is what risk you want to take. You can take credit risk by going down the credit spectrum. You can take duration risk by going long. You can take equity risk, or you can take some liquidity risk. For someone who has a 30-day to 30-year horizon, liquidity risk is not hard to support. And if you can get paid for that, why not?”