Apollo’s Michelini Sees Green Shoots in China

So I'm not sure if you heard one of thecomments coming through, but I'll just recap it.KKR. They're sticking.Speaking of private credit, they're sticking to the top high quality, thetop end of the capital structure still. I know you guys are big on that as well.High quality. Are you tempted now, given all theplayers coming in, given the yields and offer to start looking, but looking downto capital structure? Well, thanks for having us.Yeah, the. Sorry to go directly into it, but youknow, no problem for private credit by.

And large.We manage about $450 billion of credit. As it is, we're the largest alternativecredit provider. We chose to focus our platform on seniorcredit. The way that we've done that is we'veinvested about $8 billion of our own capital buying origination platforms.So these are the businesses that banks used to own.These are the business as regional banks used to be, and it's trade finance, it'saircraft leasing, it's lending to planes, trains, automobiles, consumers.And so we own now 16 of these that originate senior credit for us everysingle day.

And so for the last 15 years, we've beenbuilding this business and we're the largest.We also at Apollo provide senior capital to investment grade companies.So we did a multi-billion dollar deal for AT&T.We did a multibillion dollar deal for Adnoc, a multi-billion dollar deal forAB InBev. And that's because they were looking forcapital that the banks are no longer providing.And it's not plain vanilla where the markets easily digest it.That's right. And it is something tailored andbespoke.

And so we were able to step up with ourcapital and provide that. What are you seeing in terms of demandin the private credit space right now? I mean, it seems like institutionalfunding has as at least dried up a bit. Are wealthy investors or are they kindof stepping into that role in some way? Look, there's a significant demand bycompanies and consumers for private credit, again, because the banks havereally pulled back the specially in the U.S.and the regional bank business model is still in question of what it's going tobe over the course of the next several years.And so private capital is stepping into.

That from an investor perspective.Absolutely. I mean, there's a there's a once in ageneration shift from equity value to credit.And in private credit, when you can earn top of the capital structure at 12, 13%and then investment grade mid to high single digits, that's those look likepretty good deals when you compare that to what long term equity returns havebeen. And so that's why our investmentstrategy has been on senior credit and also on hybrid, which is senior equitygeographic focus this year for you would be which bit like what what are you guysbusy with right now?.

So our business has been very active inthe US and Europe. Deal activity for the whole sector hasbeen down in Asia. Given that the relative value of whatthe US has offered has been much better. The Fed raised rates 500 basis points.Yeah, Asia did indeed argue with that Asiathat it need to because you know, the Asian central banks didn't print as muchmoney, they didn't expand the balance sheet as much.So they didn't have to raise rates as much over the last two years to fightinflation in the US did. And so that dichotomy has created a bitof a challenge in relative value.

But you've seen deal activity pick upquite a bit across Asia. We've seen a lot of activity in India.We're seeing activity come back to life in Australia and we're seeing a lot ofactivity in Japan as well. In terms of deals, I mean, are the dealsizes in Asia a little bit smaller now as well?And are you looking? Are you able to look for thoseinvestment grade opportunities out there?Well, there are large deals to do in Asia.So we just recently announced a big carve out from Panasonic, one of theirbig businesses that make cockpit systems.

For for cars.A year and a half ago, we did a $750 million deal for the Mumbai airport.We do. But but by and large, you do need to bethey are going to be smaller deal sizes in Asia because you have to be local.I mean, the big change in the Asian markets over the last ten years is thelocal markets have gotten very sophisticated on the equity side and onthe private credit side, filling in the gaps where the banks are not.And so you have to be local to be able to source those deals.If the deal is large, it's going to typically come to the big deal centerslike Hong Kong or Singapore or maybe.

Even New York and London.But yes, the deal sizes will be will be smaller, but you'll also find some verylarge deals to do. How how small do you guys go?In other words, what would you leave to the others?It depends. It depends on the risk reward.So at Apollo, we tend to do 100 million and up, but we do a lot of smaller dealsthrough our platforms. So we own a stake in Max Cap, which is areal estate development lender down in Australia.Their average ticket size could be anywhere from 10 to 50 million we ownedwhen we bought Credit Suisse's.

Securitized Products business.That came along with a great Australian Australian business that Anthony Hermanis now leading and we'll do small deals out of that platform.And so to our platforms we'll do smaller deals.At Apollo we tend to stick to the large, slightly larger deals, 100 million andup here in Asia. Want to get your take on China becausethis is the China show, but are you looking at China as an attractiveinvestment venue or even just for capital raisingright now? Look, the headlines, if you look at theheadlines, we always start with where.

The banks trading and the banks aretrading at somewhere around .2.3 times book.That's a good reflection of investor sentiment whether.Reality. Whether that's reality or not, it's areflection of investor sentiment, right? What that tells us is that obviously theproperty sector was 20% plus of the economy.It won't be 20% plus of the economy going forward.It was a big driver of the economy. But we do see a lot of green shoots inChina. You know, if you look at all of ourprivate equity portfolio companies and.

Hybrid value portfolio companies, wewould be the size of Ford and globally. And all of those businesses are doingvery productive business in China today. We have about 10,000 employees andthrough our portfolio companies in China, over $5 billion of revenue.And they're seeing great growth. They're seeing growth in auto, out ofsupply, logistics, warehousing, so on and so forth.So there are really interesting things in China being excited about.But the point two times price to book and the property sector overhang is it'sgoing to take some time before sentiment turns around.And how are you probing that demand.

Right now as a through private wealthwealth managers here in Hong Kong? So we execute we will execute dealsthrough our hybrid strategy. So China obviously has a very robustbanking system and they have a very sophisticated equity system now, bothdomestic and foreign players. Our job is to provide the capital in themiddle that isn't easily provided. But go into your question about our ourwealth business. We've absolutely seen demand from Asianinvestors generally who have been heavily allocated to real estate anddomestic equities here in Asia, demanding credit,global credit.

So we have a semi liquid private creditvehicle that has done very well out here in Asia through our private bankchannels. And, you know, when you can get top ofthe capital structure, again, low, low double digit returns, that's a prettygood alternative when you're looking at equity.The equity outlook here in Asia or even where real estate prices are going.Yeah. And also given the state of the equitymarket, that as well, when you look at your portfolio companies, just to get asense of how the economy is doing, for example, in the greater economy, are youseeing any particular signs of repayment.

Stress or are things business as usual?For example? Things are by and large business asusual for us because in our private equity business, we always we've alwayshad a purchase price matters mentality. We always buy, think, buy good companiesat 6 to 7 times EBITDA. That means we need to roll up oursleeves quite a bit to find good companies at those prices.But that's what we've been able to do for 35 years.And so as a result, we also leverage these companies much less.Right. And so we don't we don't feel this, ofcourse, we feel the increase in cost of.

Capital, but we feel it less than ifyou'd bought something for 20 times, levered at ten times and you were reallyhoping on low rates to preserve your terminal value multiple, right?And you were hoping that the cost of capital didn't go up in terms of thecash flow coverage for your debt. So, yes, we certainly feel a little bitof the cost of capital increase, but our purchase price matters, discipline hasreally helped us. How much is your cost of capital goingup? The last, you know, since the Fedstarted raising interest rates. And I'm wondering, has that affectedreally just your universe of.

Possibilities at this point?Is it so on the on the equity side specifically?It actually hasn't. So a one of our biggest deployment yearswas in private equity was last year, mostly because the financing marketsweren't available for large deals. And so we were able to find creativeways to finance these buyouts and finance these transactions.And then you take advantage of market opportunities, like in January,February, where you had a record issuance of IG, record issuance ofcredit in the public markets and you refinance into a lower cost of capital.Can you talk a little more about other.

Geographies like India, Japan,obviously, I mean, there's there's so much hype about both these markets hereright now. What benchmark metrics are you are youusing to determine if these markets are going to deliver?Yeah. So, Mark, our CEO has said that Japan isone of our most important markets outside of the U.S.and for for really good reason. It's interesting, you look for the last20 years, it's obviously we've obviously been in deflation or at least norelation. And if you're a consumer, the rationalthing to do is to hold cash.

So they've held 50 to 55% cash for theaverage consumer, 25% in domestic equities and then 25% in other.But if you look at the last 20 years, that means that their portfolio has goneup on only 1.2 times versus the average saver in Europe or the average saver inthe US went up two and a half times. But now you have inflation coming in,both domestic as well as imported. You also have something else thathappened over the last 20 years. People got older and so in the timethey're in the period where savers could have been allocated to better allocatedto risk, that's when they should have done that.But now that they are ready to retire,.

Failure's not really an option on theinvestment side. And so what they're looking for isthey're looking for safe, guaranteed product that can generate alpha orgenerate excess return because they're now facing inflation for the first timein 20 years. And the government needs this becauseyou think about it, it's over 50% of Japan's GDP is consumer driven.But if you have a bunch of retirees who are worried about worried aboutinflation and invested in cash, you're not going to get people spending.And so you've seen the government really focus on asset management reform tobring good.

Good high quality investment products tothe average Japanese saver. And we've announced partnerships withNomura and Sumi Trust, and we have a very fast growing business for ourthrough our retirement services arm, Athene in Japan.

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