A Conversation with Leon Black

Well, first of all, it's a pleasure to be up here with you. Great to be at Milken Global in LA, London, and Singapore, so I'm glad to complete the suite now being here at the Milken Global. My father was very involved in business; he was the head of a large conglomerate, so I had some exposure to business growing up. And clearly, my love of art was also there. My mother was an artist, a painter, and my aunt ran an art gallery in New York City, so I had no escape from the arts. When I was a student at Dartmouth, it was a liberal arts college—philosophy, history, not much in business or finance. My dad convinced me to go to business school, which I didn't really like very much. I loved doing business but studying it less. I thought maybe I would end up teaching history or even going into filmmaking, but then life happened. He died, I went to Wall Street, and that was the house that Mike Milken built at Drexel. I ended up spending 13 years there before starting Apollo. It was a great ride.

That's a good question. Drexel was an unusual place; it was extremely dynamic and kept changing. I started off financing telecom companies, and nobody on Wall Street wanted to do that because it lost so much money in its early years. But if you think about it, these were monopolies, and once they spent the money and put the wire in the ground to the home, they became cash cows. But nobody wanted to finance them; it was perfect for high-yield financing. So we ended up basically owning the cable industry, probably 90%. But then I moved into M&A, became the financier to most of the leveraged buyout and private equity establishments—KKR, Tomley, Odyssey. The most difficult part of the capital structure was that mezzanine piece, and then from there, I went into hostile deals. Not hostile, friendly, but profitable at the time in the mid and late '80s. So the dynamic kept changing. There were a lot of smart people there; we were dealing with a lot of smart people. So I don't know, I wasn't looking to leave, but again, life happened. The rocket ship that went straight up for 12 years came crashing down in the last year, and that's when I started Apollo.

It's certainly much bigger than I ever envisioned. I have to pinch myself when I look at how we have morphed and scaled. I knew that we wanted to be different from the get-go. The private equity industry as we saw it—we saw what worked on the way up, and we also saw what didn't work on the way down. So when Drexel collapsed at the beginning of '90, almost exactly 30 years ago—in fact, two days from now will be the 30th anniversary of Drexel's collapse—the country was in a recession, the world was in a recession, consumer sentiment was way down, there were oil shocks, the financing markets had shut down. That's really when I started Apollo. So from the get-go, we really wanted to create something very different. In fact, what we created was what I call a fund for all seasons, so that when capital was limited, when distressed debt was available, we could find ways to buy companies—good companies with bad balance sheets—by buying their debt at discounts and then restructuring those companies, delivering them with other creditors. Half of that capital we ended up owning the companies and backing into control, and the other half we made money on the debt when we didn't succeed in getting control. That has been a hallmark in the 30 years we've been around. We've gone through four cycles, and during down periods, it's a way where you're not dependent on capital markets and yet can deploy a lot of capital. We also, at that point, had come from the house that Milken had built of studying balance sheets, so I also wanted to make sure that instead of using just equity, we all came from understanding credit. Our whole approach was to find the best risk-reward in the capital structure. Sometimes it was owning the equity at the bottom, other times it was at other points in the capital structure. Finally, one of our real hallmarks, which I think has stayed a differentiator over the last 30 years, is that our whole approach was to be a value investor—buy good companies at low prices. Now, everybody says that, but we developed multiple pathways to do it. One was through the distressed route in downturns, and another was just dealing with a lot more complexity than others were dealing with. That included corporate carve-outs, buildups, idiosyncratic buyouts. The stools of value orientation, complexity, investing up and down the balance sheet, and being able to do distress in different cycles and all seasons were all very new. I'd say those were all differentiators that we started 30 years ago. We were very, very fortunate. Sometimes luck is more important than anything else. We had a big French bank approach me right after Drexel's collapse and ask if I would build up their M&A department. I said, 'There is no M&A in a global recession; capital markets are shot. There are a lot of undervalued situations out there. Why don't you be an anchor investor?' By May of that year, we had $800 million of capital from them. The team was alive; we worked with many of them. There was a lot of talent out there, so that was very fortunate. Then, a year later, what put us on the map to deploy all of these strategies was a very large transaction where we advised the French and then managed for them the purchase of a very large insurance company portfolio called Executive Life. That was a $6 billion face; we bought it for $3.4 billion. 400 positions—some of them were distressed positions, some of them were good junk. They loved the arbitrage, the yield difference of their low cost of borrowing and what you could get in the high-yield portfolio. And then some of it was just not very attractive things that we managed through.

It was building on complexity and looking at a point in the market when things were low. The S&L crisis was going on in '91; that was the opportunity. The Executive Life wasn't so much that it was insurance; the theme was insurance again, but it was opportunistic. The macro environment, given where spreads were, was very attractive. So it was opportunistic, similar, but it wasn't the insurance parallel. One was really managing high-yield bonds. You're right, Athene is basically a spread business, so from that point of view, yes.

I think it has been critically important. It's been one of our big differentiators. A lot of people have always asked me what's more important: the operational skills or financial engineering when you look at private equity. My view has consistently been that they are equally important. Frankly, yes, you do have to have good management who can operate the company; you have to know what you're buying, barriers to entry, managing margins, strategic M&A, and so forth. But capital structure is so important. If you don't have the right capital structure in place on day one and you have hiccups, it's hard. So you have to have capitalized the company correctly, and then you have to have the right capital structure to take care of new opportunities and add-ons. You even have to know—and this is another differentiator with us—as much as we'd like to mostly do distressed approaches of third-party companies, sometimes in downturns, a few of our own companies in the portfolios experience hardships, and their debt may sell down. So I think you have to be able to have conviction on the companies you own. You know them better than anybody else, and if the debt is trading at 50 or 60, that is a great time to average down your price and basically buy the company at an even lower price than what you originally did. From a point of view, it's a way also to add value. If you don't have those credit skills or that conviction, you're really going to lose that opportunity.

Well, it requires a few things. It has always surprised me that more of our peers have not played that card. But most private equity firms are used to owning the whole company when they put the first dollar down. When you play on a distressed basis, you're buying secured debt where you're coming in at four times EBITDA in the capital structure, but you don't control the company on day one. And then it gets worse because ideally you want the debt to keep trading down, and if it does, you average down and just buy a larger and larger position. That's the good news. The bad news is that as it goes down and you double down on it, you have to mark it down. So not only do you have to have a commitment, but you have to have convinced your investors, your LPs, that you know what you're doing so that they don't get nervous as you're marking down the position. And then finally, once you have a large position, if you get to it, that's when the intramurals start among the different creditor levels in terms of delivering the company and who gets what and so forth. So it's a little different than one arrow in the quiver. I don't want to overstress distressed; it happens when we go through down cycles. There have been four of them in 30 years, but then there are a lot of years. If you look at the last 10-12 years, we haven't had down cycles, so you have to play to other strategies.

Well, we learned to our detriment, but it was a good education, that you shouldn't do a distressed operating turnaround. You never want to combine the two; it's just too overpowering. So I'd say most of it is what I'd call good companies that have very good cash flow, zero leverage. But you're right, it's combined with a whole value-oriented approach. Even if you look today at the whole terrain of private equity, the average deal today is being done at about 11.5 times EBITDA for deals over $500 million. This is an all-time high, certainly in my 40-year history in the business. Now, a lot of these are growth-oriented companies, and the sponsors feel that they can create value with good management and sell them at even higher multiples, and sometimes they've succeeded very well. There are many roads to Rome. Our value orientation has led us down a very different path. We have put our deals at about a six multiple of EBITDA, so not one or two multiples different, but almost half what our peers are doing. The corollary to that is that we also lever much less. If you buy a portfolio at six times, you're going to lever it maybe at four times. If you buy a portfolio at 11 or 12 times, our view is that we're not going to get the high multiples on the way out. Hopefully, if we buy at six, we add value, we have some growth, we maybe can get out at seven or eight times. We don't underwrite to that, but we're not getting out at 12 to 15 times. Having said that, we think there's more room for error, there's more of a cushion there if things go wrong, and there's more downside protection. That's kind of part of our little Apollo.

I think you've put your finger on it. Your greatest assets are your people. Going back to your original question of did I ever dream that we'd be where we are today, the answer was no. Today, we manage about $350 billion of assets, we have about 1,400 employees, 600 of them are professional investors, in about 18 offices globally. Even though we're talking a lot about private equity today, we started out mostly private equity, but private equity today is probably 25% of the firm. By far, it's a very profitable area for us, but by far the largest and fastest-growing has been in credit, where we've gone in the last 12 years—just rates and the regulations that came in after the financial crisis—from $20 billion to $220 billion in terms of credit platform, which encompasses 30 different products now. On top of that, it's been augmented by Athene, which is our insurance relationship, a company that we helped build which is in the annuity business of reinsurance. It's a spread business, as I mentioned, credit related. We have in Europe, Athora, which is the European Athene. And then there's the real asset side, which is real estate and infrastructure. The good news is that we've been blessed. As we've grown, the profile has gotten to be pretty high, and that has helped be a magnet to attract good talent. Again, lucky that with the financial crisis, many of the traditional investment banks and banks were regulated out of many of the lending platforms where they were using depositors' capital, cross-collateralizing, leveraging at 32 to 1. That whole buildup of the shadow banking—we've been a beneficiary of that in terms of what we've been able to build, but especially of the good talent that existed that we've been able to attract. On the culture, I like to say it's an iterative Socratic dialogue that's encouraged. The best idea wins, but you better be able to back it up. Most of that has been grown, but a lot of the add-ons, especially with the new credit platforms and real assets, we've made lateral hires and then tried hard to integrate. One of the last differentiators I would mention about Apollo is that we run the firm as what we call a global integrated platform. All that means is that all these professionals in these different areas dialogue with each other on a regular basis. Other firms certainly want to maximize the trades; we're willing to say we'll be restricted in some of those. We think getting an informational library, the industry knowledge that's known, the markets—it's better to have everybody talking to each other on a regular basis. So that's also been part of the culture.

I think it's that institutional knowledge and having so many professionals able to talk to each other about their discipline. It's also an advantage to be able to play different size transactions. Going back to private equity, we have a $25 billion fund now. Not every deal that we do is 10% of it, but it's good to have the option. Normally, what we've had is deals where two or three of the transactions maybe as much as 10%—that would be our limit—but then sort of every day is probably three to five percent, so the portfolios end up being 30 or so companies. Likewise, in credit, what we've tried to do is, in this yield-thirsty world we're living in, from 5% senior secured up to high teens, 18% with some of what we're doing in European credit products related to real estate or other types of issues, and then be able to talk to all our best relationships and say, 'Where do you want to be on this spectrum of yield and maturity?' What we're not really willing to do is compromise that much on credit quality. But again, in this world where you just can't get there anymore, the whole pension industry can't cover their 7% or 8% bogey by investing in Treasuries or investment grade debt. It can be the difference of 200-300 basis points without giving up any type of credit quality. So you want to be able not to be just a one-trick pony, because the needs of pension funds, sovereigns, or our own insurance internal relationships—which by the way, a lot of it is investment grade, which a lot of people associate us with just high yield, but probably three-quarters of what we do is more on the high grade side, especially for our insurance relationships and the regulators. But you want to have that full spectrum, as I said, 30 different products. We recently bought an aviation finance business from General Electric; this is another type of product. You want to have that breadth and not be a one-trick pony.

Well, the answer is yes. There are a lot of investment committees. Some of them, as we grow, for instance, our insurance platforms, and as we try to meet the needs of a world today that has $15 trillion of negative rate debt, so if we're picking up more liabilities on the insurance side, we equally have to create more assets and more platforms. So we have groups that are just out there asking, 'Should we be in certain parts of consumer finance, trade finance, aviation finance, ship finance, healthcare finance?' Sounds a lot like GE Capital. Well, GE Capital may not have ended well, but not because of its original strategy. They were an incredible financing powerhouse, and there's certainly some things worthy of emulation. We do aspire to that. They just picked up some liabilities, especially related to healthcare, that was not known by the market and really hurt them. But I think there was a depth of industry expertise. You mentioned healthcare finance and aviation financing. At the end of the day, if you're going to play in those industries, you do need to know in depth what you're getting into.

I'm not sure it really will on a practical basis. We've probably been a little minute, mostly from our insurance relationships. Those companies, Athene and Athora, today have assets of almost $200 billion. So we've been again fortunate to have a lot of permanent capital. The reason I say fortunate is that I view there are three models out there; they all begin with B. One, call it the Blackstone model, which we have been most closely associated with, which is the one that everybody knows. You could say the KKR model, but say Blackstone to make it three B's. Two has been Brookfield, and three has been Berkshire Hathaway. I think they're all very good models, but in many ways, permanent capital is key. As fortunate as we are in the Blackstone, KKR, Apollo one, one can aspire to Brookfield because it has a lot of merits, but Warren got it right. The more permanent capital you have, the longer you can hold your assets. There's no pressure to sell them; you don't have to give back every 5, 7, 10 years, whatever the contract is with your partners. You don't need to fundraise. Having said that, we like coming to Abu Dhabi, we loved having ADIA as our partner, and being in general. So I wouldn't give up one for the other. I think it's great to have a bit of both, and especially during downturns, you're not quite as much on your back foot the more permanent capital you have. So that has been a conscious aspiration on our part. I think something like 80% of our capital now today is either permanent or over seven years in duration, so it's quite opposite than most of the hedge fund mentality where you often find yourself in a mismatch of timing, which can be a problem.

I think you can be right, but you can make the opposite argument. If you have a very good company, why have to sell it? We're seeing that argument can be made. That's why I think it's great to have some capital in both pools. I think we're seeing a number of private equity firms now deal with that by selling from one fund to another effectively.

Our view is, look, we have sold a number of our companies to other funds, and we've bought some. It really depends on what price you pay and what you think you can do with it. But I think the willingness of the LPs to see fund resell to fund in select circumstances is much greater than it was say 10 years ago. That seems to have been a development in the industry. We've done too much of that; we have sold to other sponsors and likewise have bought from them. Those transactions tend to have to be approved by the LPAC, and obviously as we sit on LPACs, we see them month to month in that context.

I think there are a number of themes here. When I started Apollo 30 years ago, there might have been 300 private equity companies. Today, there are 4,500. Back then, the industry was maybe $250 billion; today it's $5 trillion. So clearly, there's been huge growth in companies going private. I think during that same period, public companies have decreased. There are a number of reasons for this. One reason is that it's a very compelling asset class. Private equity has returned its investors the highest returns, whether it be three years, five years, ten years—better than real estate, even better than venture. So that is why investors have poured a lot of money into the industry. I also think there's real alignment of interest. Some of it is because the LPs, over periods of time, have said we want better governance, we want better transparency, which I think are very healthy things. But if you look at today, you have a situation, as opposed to the hedge fund industry, where we make roughly a point in the quarter of management fee, and then we get 20% of profits above 8% back to the LPs, and if we get our 20%, we return the cumulative management fees. So there's a real feeling that it's a pretty fair deal, and it has performed well. On a more macro basis, you also have the public markets that have become incredibly punitive on a quarter-to-quarter basis. You miss your quarter by a few pennies, and you get slaughtered. It's tough for managements to do any type of long-term planning. Long-term planning and strategic planning ought to be pretty intense, frankly. The public markets have been awfully punitive. Having said that, there's also been a real bifurcation in the public markets between the high-growth companies that have been very rewarded—look at the FANGs in the last 5-10 years—and the companies on the other hand that are lower growth, although they may be very solid cash flow generating companies. That's the pool, the sandbox if you will, we play in. If you look at the last three years, 80% of our private equity capital, $18 billion that we put to work, was put into 14 companies that were public-to-privates, mostly companies that we felt the market either misunderstood or just didn't care about, even though they were generating reasonable cash flows. They weren't exciting, they didn't have high growth, and that is very interesting in terms of being able to generate good returns.

Pretty easily. Here you have a parent company that's known for certain products and certain core businesses, and oftentimes they also happen to own some subsidiaries or divisions that are no longer core to them. They're spending most of their time and attention on their core businesses, and here you have divisions that are undermanaged, undercapitalized. They finally wake up and say, 'You know what, these are more complex transactions because oftentimes there are supply contracts that may want to be continued.' A lot of these parent companies don't want to be negotiating with multiple parties. So if you can be the chosen one, usually it's a longer, more complex dialogue; it could take up to a year. But the advantage to it is you usually end up with a better price if you're the buyer. Again, our view is we're willing to deal with complexity if it gets us a lower price. So we actually do a lot of corporate carve-outs.

Sure. Look, when Drexel went under, call it about '89, the high-yield market then was about $200-250 billion. Drexel had 50% or so market share. There wasn't much of a leveraged loan market back then. Today, when you fast-forward 30 years, if you combine the high-yield market and the leveraged loan market, it's probably $2.5 to $3 trillion. And in terms of how many traders and inventory, maybe that's $50-60 billion. So there's volatility, there's some illiquidity in it, and a lot of it today is mid-market. It's all parts of the capital structure. The banks are still players, but they don't want to take on that much syndication risk anymore. So part of the reason why it's grown is that less of the large institutions are players, and yet the world's need for capital has continued to grow. So just from a pure supply-demand, there's been a vacuum that was created that a lot of these players who were in private credit have gone into. Some of it, I think, has become a little sloppy. Our own view, again because we can, we think it's better to be playing mostly first lien, mostly where we can write the documentation and covenants, and mostly for larger plays where we can give a pretty quick answer. We're willing to hold paper; we have partners we can syndicate to. We think there are a lot of opportunities there, and I think that will continue. There's been such low interest rates now for so long.

I think we're opportunistic, but we're not first movers, especially when it comes to foreign markets. If you looked at Apollo today, you'd see that the preponderance of our business, probably 75%, is in the US, and that's both private equity and credit. Probably another 20% would be Europe, mostly Western Europe. The other 5% includes some transactions in Australia, a few in India. Yes, we think there could be an opportunity in Japan now that the government is talking to the conglomerates about shedding some of their non-core divisions, so there could be more M&A activity that we'd at least like to see. Having said that, credit markets need a few things in place, and probably the most important is rule of law applied consistently, especially bankruptcy laws and who you have recourse to and what courts exist. I think the world will get there, but it's still in the early stage. There are some credit opportunities, but one has to be very, very careful.

We've been thinking and have thought for 10 years pretty seriously about it. I think anybody who ignores it—and I applaud the fact that it is becoming more critically important to companies but also to investors. We've just put out our 10-year report. We have 100% of our hundreds of portfolio companies involved in terms of reducing greenhouse gas emissions, waste management. We also now have almost a billion dollars that various employees from our different companies are going towards ESG projects, over a million hours by portfolio company employees. This is something that's very important to us. Frankly, it's the right thing to do, but it's also going to become more and more obligatory. We're hearing now of some institutions basically saying they won't invest unless certain rules are followed in terms of how portfolios are set up.

I think that value is in the eyes of the beholder. In a nutshell, the things we are most focused on as general topics—obviously when you drill down, it's company by company, situation by situation—but as a general topic, we still see an area where a lot of value can be created. When you look at the insurance platforms we've built, especially in the low interest rate environment, a lot of the big companies are just having trouble managing their portfolios because they can't create spread. So we think there's going to be probably a trillion and a half of buying opportunities over the next five years. We don't need to—we won't get all of that, nor do we need to—but we will get our share that makes the most sense for us. So that's one area. The corollary to that is what I talked about before: continuing to build credit platforms in this yield-thirsty, starved world. As long as interest rates stay low and growth is muted, there's going to be areas where you can generate a very safe 8% to 10% type of return in many of these credit platforms. So that's also an area that we are very, very focused on. And finally, I'd say into the whole area of infrastructure, given how much is needed all over the world, certainly in the United States. If you look at so much in terms of roads and bridges, but more than that, you have to pick your spots. Some of it's pretty congested already; some of it may not meet return criteria. But for us, areas of transportation, communications, and power are areas where we think there's a lot of opportunity to build value.

Thank you.