Marc Rowan Apollo Global Management's Surprising Strategy for Success

Sure. So Apollo is a publicly traded holding company. Down one side of that holding company is an entity called Athene. And Athene is the largest retirement services company in the world. So think of an insurance company that offers no life insurance, no health insurance, no property insurance, no real insurance of any kind, and only insures people's retirement. The business is actually an interesting business and I start here because it'll help explain the other side of the business. We make money by investing our portfolio at a higher rate of return than we pay out on our guarantees for retirement. But to be highly rated, which you need to be to guarantee people's retirement, you need safe yield. On the other side of the business is the business that people think we're in, which is Apollo Asset Management. And Apollo Asset Management, as you suggested, is an alternative asset manager, some 550 billion of assets under management approximately year end. The surprising part of it is 400 billion of that is credit. Most of that credit is investment grade alternative. Another 75 billion is hybrid. Think of that as lower risk, lower reward equity. And 75 billion approximately of that is traditional private equity and the like, which is the historic business of Apollo. And so of the 550 billion, Athene and its European counterpart Athora represent about 275 billion. So we are almost always the largest investor in everything we do.

It's really the mantra by which we run the business. So I ask our team all the time what is it we do? Why do we exist? Why does the firm exist? Why does the industry exist? Because investors if they have the opportunity to go into the public markets and have fully liquid access to their capital, they should. So if we are not offering them excess return per unit of risk, we don't exist. While that's very mechanical and technical, it actually speaks volumes to how we think. We don't talk about our business in we're going to grow this much. This is how much AUM we're going to have. This is what we're trying to build. We can only grow as fast as we can generate excess return per unit of risk. And if we ever forget that, remember we own half of everything. It's a very aligned, very interesting way to come to market and it forces you to be disciplined all the time and not chase growth.

No new toys. No new toys. And I say that jokingly, but if I think about our industry in Apollo at 2008, just prior to the global financial crisis, we were circa 40 billion of assets under management. We were 30 billion of private equity and 10 billion of everything else. And we're now 550 billion. And I'd like to say that's all management skill, but it's not. It's a lot of tailwinds, but it also speaks to what's been going on in our industry. We've been growing so fast that we've added lots of people. We've gone from some small number of hundreds to hiring 400 people a year to being roughly 2600 employees in our asset management business alone at year end. And if I look at the business, we have enough in-house today and the tailwinds of our business to accomplish our 5-year plan. And anything new, a new toy, the bar to doing anything new is just very high because it's keeping us from being efficient in how we run our business because we've been growing very fast and because our industry was never at scale before. We never thought about what the operating model of our business was. If we got busy, we added 100 new people and 100 new people and 100 new people. And while we could keep doing that, you realize that the addition of people actually is very taxing on culture. And so, we're in this constant balance of trying to be true to ourselves, trying to be big enough to do anything we can do, but small enough to really feel like a partnership. And it is probably the greatest balancing act we have.

So maybe I'll start in reverse. We had along with the management team at Athene built Athene from scratch. So we had in 2008 2009 invested $16 million into an entity and that entity has grown into 330 billion. So that's extraordinary. We had lived and they had lived with us. There were no surprises culturally. Anything that made sense to have put together we had put together over the prior 10 years. And so in some ways it was just a merger of capabilities and of alignment and not of any cutting or consolidation. And so from that point of view, there have literally been no surprises. And if there had been surprises after 13 years together, we would have had other issues. But if you think about where we're driving the business and I'll give you a little more detail. I look at the traditional business equity. I look at hybrid and I look at credit and I think about excess return per unit of risk. And in some ways, the market tells me where we're going. And the market is telling us in the equity business, we've been in it as an industry for 35 years. Every investment we make in equity is roughly $750 million on average. And let's face it, it's equity in a levered capital structure. So, it is risk. We may like what we do better than anyone else, but how many people do I want making $750 million risk decisions? Not too many. Not that many. And if I try and scale that business, I am likely not to be happy with the outcome. So, I think of that as a growing business, but not a growth business. I look on the other hand at the investment grade alternative business. Safe yield. We're 400 billionish today and we're not relevant. The markets are so big that even at twice our size, I'm not sure we're going to be relevant to that. So if you think about what the merger did, Athene needs safe yield. But Athene as a diversified buyer of credit wants 25% of everything and 100% of nothing. So the way we come to market, we find assets that make sense for Athene. Other clients look at us owning 25% of everything as principal and say, 'Boy, that's pretty good alignment.' Our largest group of third party clients are the direct competitors of Athene. They understand that we know how to put things on regulated balance sheets. And the rest of the world also needs safe yield. Banks need safe yield. Consumers need safe yield. Pension funds need safe yield. As a society, we're getting older and increasingly fixed income plays a role in how people finance their retirement. So this notion of alignment, I just can't say too much about. I mean, even though we own 35% of Athene for more than a decade, it's not the same as 100%.

So, if I start in history a little bit and I think about the drivers of our business, what powered us from 40 billion to 550 billion and I really start at the global financial crisis. Global financial crisis we had a change in rules in the US Dodd-Frank and associated rules in Europe elsewhere but these fundamental changes to markets we didn't notice because almost immediately after the legislation was passed we printed $8 trillion and everything went up and to the right and everything went up everything was liquid interest rates went down and so it obscured fundamental changes to markets and the three that I talk to clients about: one is the inherent lack of liquidity in markets which sounds crazy given how much liquidity there's been but if you really think about what happened. Dodd-Frank, among other things, penalized market making capital. We have roughly the same amount of market making capital in the world today as we did in 2008. Markets are three times their size. Nothing is liquid on the way down. It's only liquid on the way up. So everything that was public got less liquid. Everything that was private actually got more liquid. I don't mean they're the same today, but the band of outcomes between public and private has narrowed. The second is to look at the role of banks. Dodd-Frank was specifically addressed to reduce the impact of global money center banks. US banks today are less than 20% of debt capital to US businesses and consumers. The new bank is the investment marketplace in many instances through firms like ours who package and underwrite and grade and securitize. But make no mistake, the investment marketplace is the role of the banking system today. Huge driver for our business, particularly for us, the investment grade portion of the market. And the third and I think the most powerful and the one that we're still grappling with is indexation and correlation. So if I think about how Apollo views the world, we no longer believe there's alpha left in publicly traded fixed income markets or broadly syndicated markets for that matter. The marginal buyer of everything is an open-ended mutual fund, an ETF or a derivative trader. They've never met the management team. They've never read the document. They have no idea what they're investing in for the most part. And they are buying when they get cash and they're selling when they lose cash. How do you as a fundamental investor compete with that? You're always in a whipsaw. And then I flip over to equity markets and I think about most of the money in the world is S&P 500. Huge percentage. A huge percentage of the market is ETFs or other forms of indexation. And five growth stocks are 25% of the S&P 500. So is there an equity market today that we grew up in in thinking of fundamentals or is everything indexed and correlated? I think the last 8 years would tell us everything is indexed and correlated. Last year in particular would tell us it's indexed and correlated that everyone has the same trade on which is leverage of the Fed. So if you're a fundamental investor and want alpha, I believe you need to step back from public markets. And that's our business. Stepping back from public markets, it doesn't mean you're illiquid. It doesn't mean private equity. It just means an alternative to publicly traded stocks and bonds. And then if I put my hat on and look forward, technology is revolutionizing our business. I mean, I could take any aspect of our business. I could take global wealth. It would not exist without technology. Securitization would not exist without technology. And the change is picking up rather than decreasing.

I have to say awesome. No better experience. I mean, even in its demise, the whole notion of borrowing short and lending long is just such a good cautionary tale. It is the classic way a financial services company goes out of business, which is a mismatch of liquidity transformation. But you know, more importantly, if I thought about the business and why I joined and what I experienced, we were working with businesses that in many instances were being built or didn't exist. Think cable television, think sell things that we take for granted today and financing them with products that didn't exist. And the whole notion of just working with a blank sheet of paper and thinking about what should be rather than what is, I think it's just the best training ever. To the extent possible have really tried to bring that same skepticism, that same creative thought, that same willingness to try new things to Apollo and also this notion of a healthy skepticism for the status quo. As I say it, we try to encourage intellectual insubordination which is very close to just outright insubordination which makes the place ungovernable but being able to question without regard to seniority without regard to anything I think is just one of the healthiest things we possibly can have and we're still of a size and scale where we can have that debate and it's really important that we never lose that.