Private Markets, Software Repricing and Capital Allocation | Marc Rowan on a16z

10 stocks right now in the US are nearly 50% of the S&P and they're all levered to the same trend. The same thing is happening in the global fixed income market. And so if you're an investor and you're looking for diversification, there's no place to get it other than private markets. Great companies, Anthropic and every one of those companies is private, multiple trillion dollars, and yet most investors have zero exposure to them.

We operate under the assumption that every job is going to be replaced or enhanced. 2025 was just proof of concept that data centers and chips and energy were all needed. 2026 the market is starting to recognize that if this continues, everyone who is an investor is going to be concentrated in certain names.

Nothing better. My absolute pleasure.

You know, it was an interesting thing. Everyone who had come out of my program at Wharton had basically gone to Goldman Sachs. And what struck me about Drexel's business, which was financing entrepreneurs, financing new companies, is that you didn't really need to know all that much about finance. You needed to know a lot about business because these companies were not the Exxons of the day or the top-notch companies of the day. They were companies where legitimately there were questions on the business model. And I was always much more interested in business than I was in the nuances of finance and public offerings and things like that. And I was not disappointed. It was awesome.

Look, this business-first mentality and really understanding the business is ultimately about making credit decisions. These companies were not investment grade. They were below investment grade. It really forced you to understand the fundamentals of their business, not to rely on third parties, but also a whole market was being created. There were no high yield bonds. There were no levered loans. There were no ETFs. There was no real securitized product. All the products that we take for granted today that exist did not exist. This forced you into clean sheet thinking. The whole notion of PIK, I believe, was created in one afternoon solving a problem. The notion of silver-backed or silver index bonds solving another problem, and so on and so on. The notion of a highly confident letter, the notion of bridge financing. All of these things were basically problem solution, problem solution. And that mentality of understanding the business, understanding the credit, but also having clean sheet thinking is certainly what powers Apollo today.

They're just innumerable. But the story I tell about Mike is I was like a smart young guy. I had mastered my craft. I was well thought of. And so every time the market kind of went sideways, I would get a call from Mike and Mike would say, 'Could you come from New York to California?' I would of course ask when. This would be Monday. He'd be like, 'Tuesday.' So the immediacy of how you dealt with problems and the business-first mentality was definitely a Mike-ism. And I sat on the trading desk and at the end of every trading day, Mike would walk by my desk and I was supposed to have all the answers because Mike was doing a million things. I was just doing one thing. And every day he would ask me a question that I did not know the answer to. And he didn't do it to provoke me or to show me how smart he was. He was showing me to connect the dots. And I do think that that's a big part of what goes on in our world today. Can you take what's happening geopolitically? Can you take what's happening in technology? Can you take what's happening in financial markets? Can you take all the personalities and people and can you put it together in a coherent way that makes for good relationships, good deals, good partnerships, things that benefit the world. And I think that's the primary lesson I took out along with the pathiest thing is sometimes the most valuable. And the thing that he said is you either accept change or change is visited upon you. And we're certainly in that moment where you either accept change or change is going to be visited upon you.

Sure. Think Lehman Brothers 2008 because a lot of this audience will not know what was going on in 1990, but 1990 was a global recession, a banking crisis, a Texas real estate crisis, a New York real estate crisis, a savings and loan crisis. It was kind of a mess. And I went into my office or I left my office on Friday. I came back in on Sunday and I left with all my belongings in a cardboard box and Drexel was out of business. A great lesson. Financial services firms die from one of two causes. Heart attacks or cancer. Heart attack is funding risk. If you lend long and borrow short, you have funding risk. We saw this in Bear Stearns. We saw this in Lehman Brothers. We've seen this again and again. I will tell you that formative lesson. We will never see that at Apollo. It is ingrained in our culture to understand this funding issue, this heart attack risk. And then the cancer risk of course is the addition of bad assets over a long period of time which again we as a principal mentality firm do not allow to happen. We admit our mistakes. We move on. We take our losses. We don't double down and triple down and do these other things. But back to 1990, imagine being an unemployed investment banker in the midst of a global financial crisis. This is not a great situation for career employment. Fortunately, a group of us had been sharing office space. The demise of Drexel was so sudden that we were still working on transactions for clients without any hope of being paid or without a firm that was backing us. It was just what we did. And as happenstance would have it, we received a cold call from the government bank of France, the Credit Lyonnais bank, asking whether we would be interested in starting an M&A boutique under the mighty Credit Lyonnais banner. What a terrible idea in 1990. There is no M&A. There's total loss of confidence. And I think as a throwaway line, one of us said, 'But this would be an awesome time to deploy capital.' And the gentleman said, 'There's a guy in Paris. He thinks exactly the way you think. Why don't I set up a meeting?' A few months later, we left with $800 million of the government of France's money through the Credit Lyonnais bank with a group of people who had never invested money before from an institution that was not an investor. And by the end of the year, we had $6 billion of the bank's money. And in 1990, no one had $6 billion. And we went on to become the largest profit center of the Credit Lyonnais bank. For the next few years, we earned them regularly $3 billion plus a year. We were very, very popular in Paris despite speaking nothing other than restaurant French. The movie rights to this story of us talking past each other are just off the charts.

Interesting. And in a desperate attempt to maintain its capital base, it sells its most profitable investment, Apollo, to its largest client, François Pinault.

And François Pinault does not understand that he is not buying an investment firm. He believes he is buying Samsonite and Culligan and Vail Resorts because after all he's an industrialist and so the movie rights to the first meeting with François Pinault are also amazing and hilarious. But as luck would have it we had a good enough track record that over time we not only made Pinault lots of money but began to diversify our business to US and European and international institutions and the rest as they say is history but it was a pretty contained history for about 18 years.

So if I start backwards a little bit, the firm today is a little bit over a trillion dollars in assets under management, which is just a measure. And it is in two businesses. It's in the retirement services business and it's in the asset management business. And if you look at the assets under management, 80% of the assets under management are credit and the vast majority of that is investment grade. And the other 200 billion or 20% of it, half of it is what we call hybrid equity, partner-like equity, and half of it is traditional private equity in a fund structure. It's a totally different makeup of a business than people expect when they say, well, Apollo is a private equity firm. Well, actually, Apollo is mostly an investment grade credit firm. And I think what we appreciate is when you are a small firm, you can be a good deal shop. But when you want to get large, you have to serve a fundamental good. Otherwise, the societal pressure, the government regulation, the forces around you constrain you. And so I always start with what is the fundamental good we're doing and then what are the drivers of the business. And so there they overlap. The fundamental good is we are the largest provider of retirement income anywhere in the world. The second is we are the largest source of financing for this global industrial renaissance that is taking place across the US primarily but across Europe and Asia and elsewhere. And finally we are diversification for public markets and this is the least understood portion of what we do. 10 stocks right now in the US are nearly 50% of the S&P and they're all levered to the same trend. So far that's been amazing. But we've levered most of the retirement system of the country to 10 stocks. We can question in hindsight the wisdom of that if things go poorly. And so the same thing, by the way, is happening in the global fixed income market. Dominated historically by 10 large banks, it's about to be dominated by five large banks and five large tech companies. As much concentration as exists in the equity market, that's how much concentration is going to exist in the fixed income market. And so if you're an investor and you're looking for diversification, there's no place to get it other than private markets. Private markets are 80% of the action going on in the world. And if you think about what's going on, great companies, Anthropic, OpenAI, SpaceX, Cognition, Cursor, and on and on and on. Every one of those companies is private, multiple trillion dollars of value and yet most investors have zero exposure to them. We're going to see the same thing happen with industrial companies. Lots of industrial companies are just going to decide to stay private longer for all the reasons we know. And so when I think about the business today, it is serving those fundamental goods. But it is also built on trends. The trends are the world is getting older. People have not adequately saved for retirement. There's this massive retirement income gap that's driving our business forward. They need income. Well, at the same time, corporations are borrowing money like every dollar since the invention of fire to build infrastructure, to build energy, to do energy transmission, to do next-gen manufacturing, to do AI, to do defense, to do data centers, and it's all happening at once. And so mostly investment grade borrowers, large companies against modern trends matching their needs for capital with the need for income of retirees with us in the middle. Sometimes I feel like we're at first in Maine and the traffic runs 24/7. You asked how I was. I said tired. Retired.

It's exactly. I mean, there are a couple of different ways of coming at this and it starts with a misconception of what success looks like in our industry. For a traditional asset manager, assets under management is a really good measure of success because if you give a traditional asset manager any amount of money, they will invest it because they have the ability to simply go to the public markets and buy what exists. If you give us any amount of money, we will not invest it. We can only invest as fast as we originate, as fast as we create. And therefore, I believe that we should be judged by our capacity to create interesting investments. And I believe our capacity to create interesting investments is limited. We are not limited ultimately by capital. We are limited by our capacity to create. And so a couple of things come out of that. If every asset we create is what's in short supply. As a business owner, as a business builder, as a strategist, I want to make more money from each asset. So yes, I like running assets for a fee, but I also want to be a principal. I want to own the upside for as much of the asset as the market will allow me to do. And the more interesting thing is clients who are dabbling in private markets who don't always have the same information that you have, who have on a fiduciary basis or a non-fiduciary basis asked you to manage their money. They like the alignment. There is nothing like being a partner with your clients, eating your own cooking, whatever the expression is. And so for valid strategy reasons if assets are in short supply I want to earn more money, for external reasons I want to be aligned with my clients, having a big capital base I believe to be important. And I've started saying this, there's been this debate in our marketplace between capital light and capital heavy. I think we should be unapologetic because I look at the world that we're about to enter and change is a constant but this pace of change is even faster than we've ever had it. In the world we're entering, what has value? On the one hand I think brand and reputation have value. The second thing is I believe the ability to guarantee outcomes has value. Capital is key to being able to guarantee outcomes both for issuers as well as for people on the insurance side or the retirement income side where you're guaranteeing their insurance. So we've amassed a massive capital base and it's going to get bigger. It allows us to partner with our clients. I think that is the sweet spot of where we are in a changing world.

So what's happened so far is if you think about our industry which has only existed for about 40 years in a real industrial form, the entire industry was built out of one capital source. This was the alternative bucket of institutions and essentially it was all in funds. It was all relatively slow-moving and yes there were private equity funds but then there were real estate private equity funds and infrastructure private equity funds and credit kind of private equity funds. It was all one business and it was a pretty simple business and you did not need a lot of infrastructure because same institutions, quarterly, fine. Well there are five new markets. We serve individuals. We serve insurance companies. We serve the debt and equity bucket of institutions. We serve traditional asset managers. And we serve 401k. All of these other five markets want nothing to do with a drawdown fund. They live in a public world. And so the notion that they are going to somehow conform to us is just hubris. We are going to have to conform to them if we want to serve them, if we want to exist in their world. But we have to also do it in a way that does not bastardize our products, that does not create unacceptable mismatches between risk and reward. And so we're starting with our investment grade private suite of products and we will be daily estimated value by June 30. Value alone is not enough. We are standardized information, standardized CUSIPs or ICE IDs, standardized data warehouses, market-making, regular disclosure of prices, other dealers. This is about creating an ecosystem. And by the end of September, this will be across the entirety of our credit business. And I believe this is the direction of travel. I've never seen a market in the world where you have transparency and price discovery that is not 10 times its size. And change like everything else, it may be uncomfortable for people, but it's coming. And five other markets want it. And will it be perfect the first day? It will not. Will it get better every day? It will get better every day. And one day soon, maybe it'll even come for equity. But that's not this year's business.

So I do think it starts with a skill set of managing a credit book because at the end of the day managing credit is different than managing equity. In credit you only get your principal and interest. You should not be around risk-taking as a rule. You should be fully diversified. In the equity business you actually get paid for risk-taking. And so that mindset difference perhaps is obvious but it has not been obvious in people's actual performance and how they've constructed portfolios. The second is you need a low cost of capital or you need a variety of costs of capital. And so one of the reasons I think we've been so successful at this is we are willing to match low-cost retirement liabilities with safe long-term yield assets. Not risky long-term yield assets, that does not belong in a regulated balance sheet. But if you think of the largest issuers of private investment grade, it's Intel, it's Air France, it's EDF, it's AT&T, it's Meta, it's BP Energy, and so on and so on and so on. And you're hearing lots of public companies. And so public companies and public company CFOs and CEOs now understand that there are three markets for financing. One is the bank market. The bank market is the best source of financing on a short-term basis anywhere in the world. A bank borrows short, deposits, and lends short. A bank is the best short-term lender. It is not a good long-term lender. The public market and private capital are both good long-term lenders. The public market does something very standard. If you want anything other than plain vanilla, you need to come to the private market. And if you think again about the world we're in today, when we're building a data center that is marrying energy and chips and offtake, it is anything but simple. It can be creditworthy, but it is not simple. It is not a 10-year bond underwritten by a single issuer. And so the ability and willingness to take brain power and apply it to investment grade, which itself is not a great asset management business, but we need the asset in addition to once we originate an asset it feeds our third party credit business because if we as a large retirement services insurance company need the asset other insurance companies need the asset. Pension funds need the asset. Endowments need the asset and individuals likely will want this asset as well. And that's what we've seen. Our underwriting risk as principal shows people the alignment that they need to get comfortable with these investment grade underwriting.

Immense. There's it's only about time in the day right now but I'm going to first delve into this notion of intersections because this intersection notion is actually what creates value in our business. So if you think about how institutions allocate capital they allocate it into buckets. Some of those buckets they advise themselves if they have good investment teams. Some of those buckets they outsource to consultants or advisers, but they're still in buckets. And so the traditional buckets are equity. What's in the equity bucket? Public equities. Fixed income. What's there? Public fixed income. Then there's sometimes a liquidity bucket, a real assets bucket, and then there's this thing called alternatives. That's been most of the world for 40 years. What do you do with the equity that is private, safe, but doesn't have a high enough return for alternatives? It doesn't have a home. It's neither. It's not public. It doesn't go into the public bucket. It's not an alternative. It's not high enough rate of return, but its risk-reward is the best risk-reward. We call that hybrid for us. That's our fastest growing business. Again, this notion of private investment grade, most things that are in institutions' fixed income bucket are public. Therefore, they're not a source of capital. We have been able to originate and earn excess return because private but investment grade is not a bucket. Now, as we get bigger and bigger, we are changing the world and we've seen institutions adopt this notion of total portfolio approach. We've seen family offices and we see a general migration. So in between is almost always the best asset class because there is poor capital formation. And there's no one who is assigned every day as their day job for the risk. This is exactly what's happening between our two firms. Because you have an entire ecosystem of which your firm is a major player that has never been capital intensive. And for the first time, not only is it capital intensive, but it is going to be capital intensive on a scale that is unimaginable because the amount of money that's going to be put into data centers, into chips, into robotics, into manufacturing, into defense is, as I suggested, every dollar since the invention of fire, that is not going to be financed with equity. Entirely because that is not efficient and the scale of it is not achievable. It is going to have to be parceled out into various risks and that's what we're seeing happen right now. So if I look at the drivers of our business for this year it is data centers. It is massive amounts of chip financing and what we're doing is we're parceling out the risks on the venture side. On the equity side, there is the fundamental business underwrite of this company or that company. And then on the infrastructure side, things that are reusable, things that have hard asset value are being offloaded into the credit markets at the appropriate rate of return and at the appropriate risk rating. But I believe we're approaching a really interesting time. We've never really talked about the quantum of money. I think that's where we are right now. 2025 was just proof of concept that data centers and chips and energy were all needed. 2026, the market is starting to recognize that if this continues, 800 billion of capex from just four public companies this year, not to mention the private, that everyone who is an investor is going to be concentrated in certain names and we're actually going to hit concentration limits. We're starting to see this across the board. I think spreads are going to widen. I think really good entrepreneurs are going to end up in partnership with entrepreneurs of another type. Those who are financial entrepreneurs who help to democratize credit assets and hybrid equity and other types of things. And I don't think the imagination is going to stop at chips and data and energy. The visits I've had out to the Bay Area and to Seattle and to elsewhere, robotics is a whole another thing. The notion that once the world was able to solve the Waymo problem, which was a real problem, how do you solve a situation for self-driving in a constantly changing environment where safety is paramount and where you can't stop? Well, therefore, the equation of doing this for construction equipment should not be as difficult as doing Waymo. The equation for doing this for other types of robotics should not be as difficult.

Totally. That is a much lower cost of capital than venture capital and a much greater scale of capital gives us and people like us diversification gives you the appropriate amount of leverage and the understanding of how to parcel out those risks. The trust of how to partner on these risks I think is going to make sure that we spend a lot more time in your hometown.

And vice versa. And it's part of our physical strategy. I mean, yes, we love being in New York. New York has certain constraints. This is not the podcast for that. We could go off in the political direction. But we are committed to a second headquarters. We want access to a second talent pool.

And something tells me that second talent pool is going to be much more focused on change.

On challenger business models and on making sure we partner with the growth ecosystem.

Totally. It's nice to hear you say that. I mean, again, people ask, are you Silicon Valley or are you Wall Street? Are you an entrepreneur, investor, and operator? I think the answer should just be yes. If it's too easily bucketed, it's too legible. And again, the opportunity is to live at this intersection. Look, for our industry from 1990, our founding, until 2008, the firm was slightly larger, but it kind of did the same thing.

And this is not good management. I'd like to think there was some of that, but that is not the primary driver. The answer is we're shaped by outside forces and those outside forces coming out of the great financial crisis to moving into COVID, moving into the change in rates, moving into the product proliferation. Okay, what are the outside forces now shaping our industry?

We operate under the assumption that every job is going to be replaced or enhanced. Every single job. And I think that's what is going to happen. I mean, a world where GDP grows, where profit margins grow, where wages grow, but where employment does not, maybe is okay.

How we balance this as a country, how we balance this as a world, how we balance this as a city, I think is going to be the interesting challenge.

I mean, this is who we are. The ability and willingness to focus on any one transaction for an entrepreneur is just about the two resources we have, time and money. And of those two, time is the one that is in shortest supply right now. And so the ability to engage us and to paint a picture of not just where you are, but where you're going and how we can win together, I think is where the world is going. And this is happening in places that require specified knowledge. Defense, where we're spending an awful lot of time.

You do not get to come out and just show up in defense. You have to know a lot about the ecosystem and the environment and everything else. But it's also showing up in the whole notion of capital being limited. Great entrepreneurs who have created things of value have had a choice historically which is wait to the public markets as their exit. Now the world is changing so fast. Maybe what they want to do is to have an interim private liquidity event where they then get to recycle their capital back into the much higher rate of return and participate with the private capital event going forward and eventually getting to a public exit or getting to a full monetization.

Awesome. I'm curious to dig into maybe the value or kind of residual value that you see kind of in this world of AI. You know, there's been kind of the SaaS apocalypse. You've been saying for months that a lot of the real problem in direct lending has been overexposure in enterprise software and that ultimately, AI is going to keep hurting that kind of book of business. I guess where are we now and where do you think we go from here?

Right.

Totally. And 30% of the private equity industry over the past decade has been devoted to enterprise software. I personally expect the returns from private equity in the ground to be disastrous because so much of exposure is to enterprise software. And this does not mean that enterprise software companies are going out of business, far from it. It means that the prospects of onselling it either to the public markets or to someone else are now simply reduced just because the prices that they paid were too high and the price they paid reflected a future that did not have AI in it and now there's AI in it.

But the scale of change is just off the charts and if people who are not as tech-focused are seeing this in their business day-to-day, you know, I think about how we run the business here, everyone at Apollo can envision how the job they do currently can change with the benefit of AI.

A handful of people can actually envision when data and software become free, how the business should exist versus how it does exist. Well, there's still yet another part of this which is how do you envision how you start new businesses, the cost of starting a new business, the velocity of starting a new business. We've seen more business startups than ever.

Because challengers now can start from a much different place. This is why we're tired as well. It's why we're tired, which is we have to be, established companies, including companies that are successful like ours, we have to be really paranoid about replacement risk. But change is taking place faster in places there are a right answer. So why do we see coding in software? Because at the end of the day, the AI can check whether the AI is right. So the rate of change is a vertical line.

And that's where we're seeing. On the other hand, if you want an answer to what is the best Shakespeare essay, we're seeing improvement, but someone has to inform. There's no right answer. What is the best Shakespeare essay? And so, we're going to see change, but not that same rate of change. This describes our business world perfectly. In some things that have a right answer, accounting, trade ops, a number of other applications, we are going to see replacement.

On the other hand, in things that require judgment and know-how, we're going to see augmentation or enhancement. Is this a permanent state of events? No. Because none of us know how this ends or how good the judgment will eventually be. So, we need to continue to be paranoid to continue to be change focused. But for the near term, I'm very bullish on businesses that adopt change and have a change mentality. I'm actually very bullish on wages. And I think we will see a cycling in employment. What I've said previously is I think we're going to see a little bit of blue-collar ascendancy and white-collar decline. And I think that's going to be a difficult spot for politics which has not operated with that notion historically. It's going to be a difficult thing for blue cities where much of this white-collar employment is focused. But the faster we get on with this and create the new businesses, the new industries, which historically has always been the case, the better off everyone is going to be.

So a lender with a lender's hat on, we've always had that mentality which is change is a constant. If I go back and I think about the year 2000 as a dividing line, people were worried as to whether the entire digital infrastructure of the US would fall down on Y2K. All right, we survived.

But you go from there. In 2000, the market was still lending against something called yellow pages. How could a yellow pages be replaced? After all, it was free. It was granular. It was ingrained in culture. In this year's associate class, I use the term yellow pages and people raise their hand. They want to know what it was.