Credit: BrunoWeltmann/Adobe Stock
Private credit looks good, Apollo's assets look good and an economic downturn could soon cause problems for all assets.
Marc Rowan, co-founder and CEO of Apollo Global Management — one of the builders and shapers of the modern private credit sector — gave that assessment Tuesday, during a conference call held to go over company results for the third quarter with securities analysts.
"I don't think we're talking about systemic risk," Rowan said. "I think we're talking about late-cycle behavior, and bad actors, I believe, are going to get called out."
Apollo streamed the call live on the web and posted a recording on its website.
What it means: A big lender thinks that the economy could be about to face a hard frost.
Annuities: Apollo is the parent of Athene, one of the biggest writers of U.S. individual annuities.
About $10 billion flowed into retail products, and sales of fixed index annuities and multi-year guaranteed annuity contracts were especially strong, executives said.
Private credit: A private credit arrangement is a contract that provides financing to a borrower outside of the machinery of a traditional bank loan or a bond that's registered with secured regulators and suitable for sale directly to retail investors.
The recent failure of First Brands, an auto parts company, has led to intense scrutiny of all kinds of credit and securitization arrangements, including private credit arrangements.
Michael Arougheti, CEO of Ares Management, another private credit player, addressed the topic Monday during his firm's earnings call.
"Based upon the strength that we're seeing in our portfolios and what we're hearing from our peers and general credit trends, these events appear to be idiosyncratic and isolated and not the sign of a turn in the credit cycle," Arougheti said. "From our vantage point, our credit portfolios also remain healthy, and we've not seen any deterioration in credit fundamentals."
A downturn could help Ares by creating great new investment opportunities, Arougheti said.
Rowan's perspective: Rowan praised Arougheti's remarks and argued that private credit is not inherently different from other forms of credit.
"From my point of view, credit is credit, whether it's originated by a bank or an asset manager," Rowan said. "There are fundamentally good underwriters of credit, and there are less good underwriters of credit."
In the insurance industry, for example, the big source of risk is jurisdictions that attract U.S. insurers and reinsurers with relatively weak oversight, Rowan said.
But Rowan said that Apollo is asking clients three questions about the overall economic environment.
1. Are things cheap?
2. Do we think the rates that matter, long rates, are going to plummet?
3. Do we see enhanced sources of geopolitical risk?
Apollo's answers to all three questions suggest high levels of risk, and "the logical thing to do is to take risk down," Rowan said.
Private credit opportunities: Although all assets, including private credit, may go through turbulence, investing in private credit is less risky than investing in stocks, and companies like Apollo may have a big opportunity to expand private credit sales by selling them to the asset managers that serve ordinary savers and investors, Rowan said.
Sales to 401(k) plans are also likely to increase, but "everyone is in the information-gathering phase right now," Rowan said.
Private credit providers may need new guidance or regulations from the federal government before a groundswell can form, Rowan said.
Credit: BrunoWeltmann/Adobe Stock
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