Joshua Easterly, Co-Chief Investment Officer and Co-president, Sixth Street Carey Lathrop, Partner, Chief Operating Officer, Credit, Apollo Moderator: Shawn Tully, Senior Editor-at-Large, FORTUNE
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00:00 We have a graphic we're going to put up briefly that should be helpful in understanding the
00:08 immense scope of private credit.
00:12 And you see all of these categories.
00:14 There are endless, practically rail car infrastructure, agricultural lending, movie lending, inventory
00:21 financing, it goes on and on.
00:23 We don't have to get into all the categories.
00:25 But just to give you an impression of how big this is.
00:28 So the question I have for you guys is, we'll start with Josh, how did this enormous, not
00:36 a pond, it's an ocean, be mistaken for a pond and fly below the radar for so long?
00:41 Well, first of all, thank you for having me here.
00:44 And I couldn't be more excited to share a stage with Apollo.
00:49 Look, this was the intended consequence, not the unintended consequence of the regulation
00:55 that came out of the global financial crisis, which was policymakers woke up one day and
01:01 there was a $700 billion put that they wrote for the global financial system or US banks.
01:08 And they wanted to figure out how to diffuse risk away from the taxpayer and away from
01:13 the FDIC.
01:14 And so you couldn't crush the economy by reducing credit.
01:19 And so the private credit industry grew.
01:23 The private credit industry actually has, I think, a better model, a more robust model,
01:28 holds more capital for the loans that they have on their balance sheet, has better funding,
01:34 matched funding.
01:35 So it's a more robust model with less risk without a taxpayer put.
01:41 So I think this was the intended consequence.
01:43 Yeah.
01:44 But it's been mistaken for the high yield market leveraged loans.
01:48 Could we go through that?
01:49 Sure.
01:50 And first, I want to thank you.
01:52 It's been a while since someone's referred to me as young, so thank you.
01:56 But I think what Josh said was correct.
01:58 I think there's a supply and a demand element, you know, and maybe we'll get into the demand
02:03 for some of the assets that you had up on the screen.
02:10 But as the screen showed, a number of people think about private credit as financing maybe
02:16 middle market loans.
02:18 And that is a portion of the market.
02:20 But as that slide showed, it's a very small portion of the market.
02:23 And at Apollo, a large portion of what we do, which I think surprised a lot of people,
02:29 is actually investment-grade risk.
02:31 So when you looked at a lot of those categories, those assets generate investment-grade funding
02:41 for us or that we provide to those originators and very attractive assets for our insurance
02:48 balance sheet as well as our funds.
02:50 So I think there's just a misnomer that private credit is a high-yield or leveraged finance
02:55 market, which a portion of it is.
02:58 But the large majority of what you had up on the screen actually is investment-grade
03:01 risk.
03:02 And a lot of that, as Josh was saying, drives economic growth and prosperity.
03:07 So we're lending to not just small companies but large companies as well.
03:12 Yeah.
03:13 And how did the problems with the regional banks and the smaller banks that we've seen
03:16 since the SVP collapse, how has that affected your growth or the migration of assets to
03:23 the alternative managers?
03:25 Which of course this trend started way before that in the great financial crisis.
03:29 Was it accelerated with these issues that the banks have had with capital essentially
03:33 fleeing?
03:36 My view of it is that it really showed the robustness of the business model, which was
03:42 banks' business models are the "Lin Long" and "Borrow Short."
03:47 And what kills financial institutions tend not to be an asset quality issue but tends
03:52 to be a liability quality issue.
03:55 And so banks have weak liabilities in the sense that you can go and take out your dollars
04:00 any time you want.
04:02 And so I think it showed the value of our business model both from what we do for the
04:11 economy but what we do for investors because we don't have that asset liability mismatch
04:17 and allows us to be a really good stable counterparty for the issuer on the other side, which is
04:25 we get to keep on supporting that company or supporting that asset class or supporting
04:29 that originator and our capital is more durable.
04:34 So I think that was a watershed moment for the value of the asset class both for the
04:42 investor and for the end user of capital.
04:46 And the one thing I would add, again, think about the assets that created some of the
04:50 problems last year.
04:51 They were HQLA.
04:53 They were treasuries and mortgages.
04:55 They just had long duration.
04:56 And to Josh's point, you just have this mismatch where you're funding long dated assets or
05:01 illiquid assets with short term liabilities.
05:04 We don't run a business that way.
05:06 We're much more match funded.
05:08 But I think the other misnomer about, again, leveraged finance versus investment grade
05:13 assets is we're not looking to disintermediate the bank.
05:16 In fact, if anything, it's the opposite.
05:18 Like Mark Rowan will say, we don't want the bank's client.
05:22 We want the asset.
05:23 And I think the banks or the entities that are smart and forward thinking realize our
05:30 balance sheets are a virtual extension of their balance sheet.
05:33 They can use our balance sheet, which those assets have a more natural home, and still
05:38 kind of do all the other things of cross selling that they want to do and own the client, but
05:44 let us own the asset on our balance sheets.
05:46 Right.
05:47 So are the banks working more, as I think you guys would put it, in the moving business,
05:53 not the storage business.
05:54 They're getting fees.
05:55 They're doing originations.
05:56 But then you're parking the assets with you.
05:59 Is that pretty much what's happening?
06:02 I think that's part of it.
06:04 I think the banks, the regulatory regime of banks is the regulators want banks to not
06:11 have, the risk weighting asset system wants them to be wholesale financing sources for
06:18 the private credit industry.
06:19 That is actually what they want them to do.
06:23 And so they already have hundreds of billions of dollars out to the private credit industry
06:30 in wholesale financing.
06:32 And I think what they really want them to do is provide other services that are capital
06:38 light services to the client.
06:39 So if it's liquidity management, checking, 401(k), all those types of services that were
06:46 not in the business of servicing, but they really want the assets to be in a different
06:53 place.
06:54 Yeah.
06:55 I want to just go back also because you asked, I think this is still the early innings of
06:58 this game playing out.
07:00 Because again, if you think about it, if you're a bank and you're kind of looking at your
07:03 asset liability match, you probably, if you went back five or 10 years, you're like, okay,
07:07 I have this deposit and it's going to be here for a long time.
07:11 So I'm comfortable buying this long dated or illiquid asset.
07:14 I think what we've all realized with just the speed of what happened last year is all
07:19 of us can literally, before this panel's over, withdraw our money from the bank.
07:23 And it just forces the banks to kind of get out of the business of holding either very
07:29 long dated or illiquid assets because they don't have the liability structure that our
07:33 firms have.
07:35 Right.
07:36 It's always amazed me too that you're competing with the bond market too, the publicly traded
07:44 bonds, because the definition of private credit is it's not publicly traded, even though it's
07:48 a gigantic asset class.
07:51 But what I've always found amazing is you're able to get higher yields on the same duration,
07:58 in other words, the length of maturity and the same credit quality for the rating agencies,
08:05 the same ratings on these bonds as the public markets, but you get an extra 100 or 200 basis
08:12 points in yield.
08:13 Can you explain how you're able to derive those premiums?
08:18 I think it's value.
08:19 It's not only perceived value, but it's value to the issuer, which is banks are in the moving
08:25 business, which when they talk to an issuer, they say, "Hey, we don't know where your bonds
08:29 are going to price.
08:30 We'll underwrite them.
08:31 We'll either do it on a best efforts basis or we'll do it with caps."
08:34 And so your range of outcomes is X plus Y.
08:40 The private credit industry basically says, "We will own that risk at X."
08:46 That X is going to be wider than the tights, but probably inside the caps.
08:52 And so that extra economics plus the origination fee gets economically picked up to the investor
09:02 or the private credit provider, but there's real value of certainty being provided to
09:09 the issuer.
09:10 There's also less friction.
09:13 You know who is not going to be held in the markets.
09:15 You know who your lender is.
09:17 You are dealing with one counterparty.
09:20 You don't have to go through a ratings process.
09:22 And so it's all about value to the end user, and that value is just not captured in a single
09:29 number of spread number.
09:32 It's captured through the process.
09:33 It's captured through certainty.
09:35 It's captured through ease of use.
09:37 I think I would just echo the size, speed, and certainty.
09:42 Private credit is not going to eliminate public markets.
09:45 It's actually a complement to them.
09:48 And there are some assets, a triple B or a single A company needs to borrow money.
09:54 They're just going to go to the investment grade market and blow that issue through the
09:58 pipe.
09:59 There are times that markets start to seize up a little bit, as we saw in '22 and '23,
10:04 and you may see some activity that maybe in a more benign environment would end up in
10:09 public markets, end up in private markets.
10:12 But I view it as a complement to public markets.
10:16 And again, even if you went back in time, like you think about the evolution of the
10:21 investment grade market, high yield market, the tradable loan market, I think the private
10:25 credit market is just that next evolution of assets and activity migrating out of the
10:32 banking system into the public, if you will, hands.
10:36 Yeah.
10:37 Also, I know that both of you have specialized teams, many of which came out of the banks
10:42 that specialize in rail car financing, airplane financing, leveraged loans, numerous categories.
10:49 And you've got these teams on the ground finding the best deals, and the banks have lost those
10:55 teams, GE Credit, many other organizations.
10:59 Can you go through, Josh, the advantage that you have or the edge that you have with these
11:04 specialized teams that you have in-house?
11:07 Well, I think the bigger...
11:10 Look, for us, our competitive advantage is our people and culture.
11:16 And hopefully, we've tried to build a culture, and we've had the opportunity to build a firm,
11:21 our firm's only 15 years old, to kind of build it in a new world where collaboration really
11:27 matters.
11:28 And so we have that 3.0 version of the alternative asset management firm.
11:32 But the real issue is not only is capital changing in the regulatory framework for banks,
11:40 but that's led to, I think, a little bit of a brain drain from DNA from banks.
11:44 I started my career, or middle part of my career, was at Goldman Sachs.
11:49 Before that, I was at Wells Fargo.
11:51 Kerry was at Citi for a long time.
11:53 And there's this flow of talent, not only senior talent, but junior talent, away from
11:59 banks and into our system.
12:01 And that's ultimately what makes a difference, that and culture.
12:05 And I would add, in addition to people and culture, we think one or two of the things
12:09 that differentiate us is, one, the Athene Insurance Balance Sheet, which has structural
12:14 liquidity.
12:15 It's raising seven and 10-year liabilities, which allows us to take illiquidity or structure
12:22 risk because we don't need daily liquidity, maybe like a mutual fund does.
12:26 And we capture that incremental 100 or 200 basis points.
12:30 The other would be our origination platforms that we're actually -- we can create the alpha
12:35 ourselves.
12:37 And whether it's then -- those assets end up on the insurance balance sheet, in the
12:42 funds.
12:43 Some of those assets end up in the market.
12:45 But being able to leverage off of the 16 origination platforms, we think, is differentiating alongside
12:51 having Athene's balance sheet and the structural liquidity that comes with it.
12:56 Yeah, and it's fascinating to me that you guys both left major jobs at major banks.
13:00 How did you see this thing coming so early?
13:04 Because you immediately went into this business with -- you're coming -- going to Apollo,
13:09 Josh.
13:10 Yeah.
13:11 I saw it as a necessity, to be honest.
13:12 I mean, like, I was sitting inside a business that ultimately survived in Goldman Sachs,
13:18 but there was a vocal role.
13:20 And I remember I was sitting with my boss, there's a guy named Harvey Schwartz, who now
13:23 runs Carlyle.
13:24 And he says to me, "Hey, Josh, do you think the Fed's going to want Goldman in your business?"
13:30 And this was in 2009.
13:31 And I'm like, "Huh.
13:32 I think I need to go find another job."
13:35 So mine was out of -- you know, a little bit of a necessity.
13:40 And I kind of joke around.
13:41 I said, "Sixth Street wouldn't have been born if it wasn't for I was 32 years old and too
13:45 dumb to think it was going to be hard."
13:48 And the global financial crisis --
13:49 Look, I like to -- we were joking before this, like, Josh was a founder.
13:56 Like, I jumped on the bandwagon.
13:57 I'm a slow learner.
13:59 But I obviously knew Apollo and similar firms because they were great partners and clients
14:05 of the firm.
14:06 But it was clear how hard it was to get things done that made economic sense in the bank
14:12 environment versus -- you know, I think both of our firms are probably more commercial
14:17 in how we make decisions and how we price risk.
14:19 Okay, guys.
14:20 Thank you so much.
14:21 Thank you.
14:22 Great job.
14:22 Thank you.
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