Apollo's Jim Zelter on the Future of Private Credit

Welcome to another episode of Goldman Sachs Exchanges: Great Investors. I'm Alison Mass, chairman of Investment Banking in Goldman Sachs's Global Banking & Markets business and your host for this episode. Today I have the pleasure of speaking with Jim Zelter, president of Apollo Global Management, one of the world's largest alternative asset

managers and provider of retirement solutions. We're talking with Jim at a truly dynamic time.

The global economy is experiencing an unprecedented surge in capital expenditures driven by the growth in AI, data centers, the energy transition, and infrastructure needs, while an aging population is facing new retirement challenges.

We'll talk to Jim about how he's strategically positioning Apollo to address the massive capital needs, his perspective on where risks are accumulating, and where he's seeing investment opportunities around the world. So, Jim, welcome to Great Investors.

It's a real pleasure to be here. So, I always like to start these sessions by asking what got people interested in business and finance in the first place.

You started your career on Wall Street as a trader in the public markets starting out as a fixed income trader and then working as a high yield trader here at Goldman Sachs.

I did not have a typical finance background out of college. I did various jobs. I worked

in the fishing industry in Alaska. And as I got out of Duke, I came to New York and interviewed for a few jobs. And when I walked on a trading floor I just felt for the first time, like, this is the energy that I was looking for. And so, it captivated me at a very early age. And

I played sports. I played sports in college. And I found the competition, the energy, the engagement, the intensity was something I just quickly cottoned to. And I feel like that's a real gift - to do it, to find it when that really clicks. The trading floor, I started really in fixed inc, corporate bonds. But quickly moved over to the high yield market in its nascent years,

corporate bonds. But quickly moved over to the high yield market in its nascent years, 1985, which you know so well. And when I was at Goldman, really very early in my career, it was a marketplace that was filled with news, corporate actions, corporate activity. And real creativity,

insight, knowledge of companies. It was being exploited because most of the fixed income markets before that were a little bit generic. But being on a trading floor environment, being in that environment, smart folks, but also the dynamics of competition, engagement,

client dialogue, I was very fortunate. It was that intellectual curiosity was something that I've always had. And it really was able to for me to really engage with that.

You were on the trading desk. But what did the trading desk teach you about risk that still influences you today at Apollo? Yeah. I think it's dealing with issues front and center. When you're on a trading desk, if there's a challenge or a problem coming to the surface,

center. When you're on a trading desk, if there's a challenge or a problem coming to the surface, you can't put it off till tomorrow. It's true engagement. It's confronting challenges quickly.

Making the decision with the information you have at that point in time.

We'd all like to get a lot more information to make the right decision. But you don't have the luxury of that. And a trading desk forces you to deal with marks, to deal with bad decisions, to deal with problems right away. And I think that's the reason why on Wall Street a lot of leadership

has come up from these environments. We work in a business. Some things are very slow moving. Some things are very fast moving. And you can't ignore situations on a trading floor. And

moving. Some things are very fast moving. And you can't ignore situations on a trading floor. And

so, when we think about Apollo today, we really have a disciplined and a fundamental focus on purchase price, creation value. And that permeates everything that we do.

Now, certainly, that started as a private equity mantra. Purchase price matters.

But the whole business of our credit business, our hybrid business, our insurance business Athene and Athora, that permeates literally everything we do.

Yeah, that mark to market mentality is valuable. And in fact, we talked earlier about you reading our former CEO's book, Lloyd's book, he talks about that a lot. That people on the trading floor would say that their marks were accurate. And you'd say, "Great, get me a bid."

Exactly. And that was everything.

And listen, there's a longer conversation which I'm sure we'll get into right now. But

this is my 20th year plus at Apollo. The firm was much smaller, but certainly we're in a fascinating time right now as the evolution of the markets, these massive capital needs. And the evolution of private markets and public markets. And the convergence of those two is playing a big role.

So, I do feel that the background that I've had being in the markets dealing on trading desk, dealing with illiquid assets for a long period of time, those are really important skills to understand. Capital formation and companies needs, along with those issues today.

to understand. Capital formation and companies needs, along with those issues today.

You said you were a college athlete. What teams?

Yeah, I played lacrosse. I grew up in upstate New York. And I played lacrosse down at Duke.

My freshman year I had a pretty bad knee injury. And I could have gone both ways. But I stuck with it. And I ended up playing for all four years. Fantastic.

it. And I ended up playing for all four years. Fantastic.

And I was not-- certainly, my knee injury had an impact on my skill. But the competition, the engagement was something that was pretty important to me. So, I really enjoyed those years.

That's great. And while you were at Goldman Sachs, it sounds like you forged lasting relationships with David Tepper, Jon Winkelried, Jonathan Kolatch, among others, all of whom have gone on to build their own businesses. So, how did those relationships help you in your career?

I came here with a lot of enthusiasm. I was the classic sort of PHD. I was poor, hungry, and very determined. And when I got to Goldman, these were some of the smartest people I'd ever met.

determined. And when I got to Goldman, these were some of the smartest people I'd ever met.

And they were really competitive. Really smart. Really determined. And I was an undergrad. I did

not have an MBA. That was the period of time when MBAs were starting to come to Wall Street. It was not a requirement by any means. But it was helpful to some degree.

Wall Street. It was not a requirement by any means. But it was helpful to some degree.

And I had the good fortune to sit literally next to Tepper and Kolatch for about five years.

And I remember early in my career I was about to apply to business school. I had

an application. I asked one of them to fill out a reference for me. And they looked at me and said, "If you really want me to fill that out, I'm going to fire you on the spot."

Wow. And it was a statement saying you're getting your MBA right here. And true to be told, those folks taught me how to tear apart a K, a Q, look at a company, really understand what drove the dynamics of the business.

And even today, I think that credit background, understanding of levered capital structure, understanding event-driven investing, understanding liquidity, I think those are amazing tools to learn. And my eyes really opened up to not only the markets, but Goldman was private back then. It was the partners' capital.

And so, that discipline of really knowing the numbers. That discipline of being-- they were actually an upstart compared to the incumbents. Drexel certainly.

But it was a fascinating time. And I think that they're both, and many of the folks you mentioned, just great investors. Really understanding how the markets worked. And I really got my MBA at Goldman Sachs during those years. What year that you leave Goldman Sachs?

I left, I believe, early '94. And I know you spent 12 years, right, at Citi.

Yeah. Ending as CIO of their alternative investment group before moving to Apollo to build out the private credit platform. So,

can you talk a little bit about how the transition from a large bank platform to an alternative asset manager shaped your perspective on the markets and capital formation?

When I was at Citi, which did all its mergers, it actually had a very large alts business in the early 2000s. It had about a $40 billion alts business from all the mergers.

But it was not well run at the top. And I'm being really polite. It was not a swiftly run, efficient organization. And so, I really wanted to go out and start my own hedge fund and credit fund. I knew it was the right time to be in these markets.

But I really wanted to be on a buy side investment fund. And I just felt at that point in time, and this was before the GFC, the global financial crisis, it wasn't the right entrepreneurial growth environment to grow an amazing buy side firm. You needed to break away from that institution.

It was much more institutionalized than the firm that I went to. The firm that I went to probably had less than 200 people. We had about $20 billion of capital, which was $19 billion of private equity and a billion of credit. I came from a trading floor environment where I worked for one person. And the idea of working for two or three was certainly a challenge.

But in retrospect, probably one of the best decisions I made away from the personal ones I've made in my life. And it's been an amazing ride. Been an amazing ride.

Clearly. How many people does Apollo have now? I'm just curious.

Apollo has around 3,500 plus or minus. Athene has another 1,500. So, Apollo

Global has about 5,000 in aggregate. So-- So, you've seen a lot of growth there.

Yes. It's a far cry. I mean, we're going to end this quarter, you know, $950 - $970 billion of assets. We've been in the right place at the right time. A lot of hard work, but a lot of good fortune. So, let's turn to the markets.

We're seeing fresh investor concerns now that the growth of private credit is adding leverage and risk to the financial system. And you at Apollo have been very vocal with your views that private credit is a $40 trillion largely investment grade market.

Is the market misunderstanding what private credit really is? And what is your view?

I think the market is missing what it really is. I think you need to be a little bit of a historian.

When you go back and look at the genesis of insurance companies in private placements to the high yield market to in the early '90s-- I was here at Goldman when in 1990 when they started to trade loans. Loans were not traded. Loans were on bank balance sheets. And I remember the partners introduced me to this candidate that was going to come and trade loans. Bob O'Shae

was the first gentleman to do that for us. So, I think you need to have, to answer this question, you need to have a little bit of a historical perspective. The global financial markets really changed after the GFC. The footprint of banks changed. We went to a zero rate environment. The regulatory backdrop changed. And in our collective career, the last 30 to

environment. The regulatory backdrop changed. And in our collective career, the last 30 to 40 years has been mostly non-investment grade companies, really upstarts in airlines, cable, casinos disrupting incumbents. Now, the last three or four years,

you've got these massive capital needs, as you mentioned at the intro: energy transition, data centers, and a variety of other things. These are all investment grade needs.

And so, when people talk about private credit being the direct lending marketplace, that's very narrow. The reality is there's almost $40 trillion of private financing, commercial real estate,

narrow. The reality is there's almost $40 trillion of private financing, commercial real estate, resy real estate, asset-based finance. And that's the $40 trillion. The $2 trillion is really the private direct lending, which really came out as a result of how the high yield, public high yield,

and the leveraged loan market work. It really was a third product for financial sponsors.

So, I think the market is missing something when they focus on the trillion seven direct lending market and use that as the definition of private credit. I think private credit will provide a very important tool for companies going forward. In our last two or three years,

we've raised almost $150 billion from about 50 investment grade companies.

Sony. Intel. AB InBev. Air France and many others that it's part of their financing solutions. They

still use investment grade debt. They still will start to use more and more private credit.

But yes, I believe that private credit's a much, much broader asset class. It will be used by more and more companies. And we have a little bit of a dynamic going on right now in the narrow area of direct lending because of the nature of what it's financed. A lot of enterprise software. And the

growth of wealth products. There's a little bit of an intersection accident going on right now.

But I think we're missing the bigger tectonic plate, if you would, in the overall business.

So, with private credit now financing a meaningful share of corporate borrowers as you suggest, how confident are you that the private credit ecosystem could withstand a significant shock?

You know, you're asking a broader question here about we've really not had a broad dislocation in credit since the GFC. We've had little skirmishes, whether it's the euro crisis or the oil shock in '15/'16 or COVID. But there really has not been a credit cycle, a hard credit cycle in the last 16 - 18 years.

We haven't suspended economic cycles. They will come back. I think it's harder to have an economic cycle now because of the breadth of how the US finances lots of industries.

But I think there is going to be a time when credit undergoes a bit of a challenge.

And that won't just be the private credit market. It will be all credit. Credit's credit.

And whether it's public high yield or investment grade debt or leveraged loans or direct lending, I think there will be a credit cycle that has an impact on all of those asset classes. And in turn it'll have an impact on private equity. But today, I think that we're in the crosshairs

of a period of time, because of the emergence of AI, the disruptive nature of that technology, and the impact on a sector of direct lending, which is private credit software landing, it's sort of an intersection. But I would say that the headlines are a lot

louder than the spreads right now. And it's going to be a while for these companies that probably have a lower growth trajectory. I don't think you're going to see a massive distressed cycle like you had in '07/'09. In '07/'09, the banks were long $500 billion of first lien and high yield bonds. And that was a reset of the overall market.

So, it's going to be a challenging year or two. But I still think we are not on the precipice of a deep credit cycle. But it should come in due course.

So, I want to continue with something you mentioned on AI. We're also entering what appears to be this unprecedented secular capex cycle. AI infrastructure, the energy transition, reshoring, and the digital build out. So, how significant do you think the financing needs are ahead of us?

That's what I get excited about. And I think that if you look at the capital that's on paper required to fund just the data centers alone in the US, that's a $5 to $6 trillion capital need over the next five years. And that's arguably ex-some of the chips that are going to be needed. So, when you think about how to fund $5 to $6

trillion, which are phenomenal numbers, I see traditional sources of banks, of IG issuance a part of that. But that's not going to solve all the needs. So, the idea that insurance capital,

which is long dated and has an ability to match and partner with banks or the IG market to fulfill the breadth of the financing, I see that's what's going to have a larger role.

And I think when we turn around in 2035 and we look back at this last decade, we'll say that there were some skirmishes in private credit in a narrow definition.

We'll have dealt with the appropriate liquidity and structure of those vehicles. But those who got caught up in that and went to the sidelines will have missed a very large opportunity to be part of some of the greatest companies in the world in the future and how they fund these massive

capital needs. It's an exciting time. It is an exciting time. So, are you

capital needs. It's an exciting time. It is an exciting time. So, are you convinced that this capex cycle fundamentally is different from prior investment waves in terms of scale and duration? Very much so. And again, my career was really built on the non-investment grade universe. And the last 30 years you saw the emergence of cable.

You saw the emergence of airlines and gaming and healthcare technology in hospitals. A lot of disruptive enterprise and leadership in the non-investment grade world.

The capex of the next five to 10 years is really massive scaled investment grade counterparty risk.

And so, done appropriately, done in scale with great companies, we would always prefer to lend as a senior investment grade lender to investment grade companies in scale. The Intel transaction we did a couple years ago was really a watershed. They'd built a $23 billion fab in Ireland. They

needed to take some money off the table. We became a 50/50 joint venture with them. There are two fabs in Europe. And we were a 50 percent partner with Intel on an $11 billion financing. Those were

transactions that have a lot of flexibility. They have real meaning. And you're providing a real need for the capex of investment grade companies. And those are the types of loans and assets that we want to put against our investment grade rated liabilities from the insurance side.

It's just very logical when you think about the need of retirees and the capex needs of companies.

And we feel like we're at the proverbial first and main intersection of those.

That's great. Last question on the markets. What do you think is the biggest risk that investors could the underestimating in this next phase of capital formation?

I think the return on invested capital of AI. When you talk to a lot of folks that are deep in the business and they're real believers in the utility of the product and the breadth and scale and impact that it s going to have. And we've seen this many times in our last 30 years, whether it's

cell phones or other technology uses. There's no doubt they're going to have a massive utility.

But is the economic owner going to harvest the right returns for that investment?

In these, the Mag 7 today are seven of the greatest companies ever created in terms of the amount of capital invested and the amount of cash flow sent out to shareholders. But there's

a massive capex cycle going on that's turning an asset light business into asset heavy.

And what are going to be the true economic returns to shareholders from these businesses? That's a

big question today. And I want to make sure just because companies need capital, doesn't mean they're all great investments. So, really understanding-- I learned this early on my trading desk, don't price equity risk with a fixed coupon.

You know? If you're equity risk, making sure you're getting paid for it. But if you're a creditor, make sure you have the right downside protections. So, this whole equity in debt and how you're getting paid for it and how it's getting structured, it's a really important lesson.

Okay, so I want to talk a little bit about you.

Sure. You're celebrating your 20th year at Apollo.

Congratulations. Thank you.

The Apollo that you joined in 2006 looks very different from the Apollo of today. So,

what were some of the key inflection points along the way in the markets that have shaped the way the firm has evolved? Yeah. I got to the firm in 2006, and it was an amazing organization of brilliant people and great investors. But we were, for the most part, a monoline investor in private equity. And the vision of the founders was

let's build a global credit business. And they had a great vision on doing so.

You have to say that the GFC was a critical point of our growth. We happened to have been building up the credit business. We were not involved in CLOs. We did not come into the crisis long credit. We had a pretty blank sheet of paper. And that really allowed us to take the

long credit. We had a pretty blank sheet of paper. And that really allowed us to take the investment acumen of the firm and the markets acumen that I had brought and that marriage was really perfectly well placed in '07/'09. We were one of the early movers on a lot of

the big portfolios that the banks sold. We wanted to buy it at 70. They wanted to sell them at par.

They ended up providing a lot of financing. And that financing, seven- to 10-year financing, basically a LIBOR plus 50, that was the real start of our credit business. And so, that dislocation, our ability to really bring institutional investors into that dislocation on the credit opportunity funds was critical.

From that period, it was the vision of creating Athene. Really, what Athene did for us as a firm, when you're in the private equity business, you're cost of capital is mid to high twenties.

And so, you're not relevant to lots of financing. So, you're relevant to a handful of companies out of 1,000. When you can bring the annuity capital to a solution toolbox, it puts you

of 1,000. When you can bring the annuity capital to a solution toolbox, it puts you in the middle of so many conversations. And so, the brilliance of the team and Mark to be able to really create Athene, that brought a capital base to us that was well ahead of its

time. And so, between the GFC and the structuring of Athene, those were really the first two.

time. And so, between the GFC and the structuring of Athene, those were really the first two.

And then once we actually created Athene, we decided not to follow the traditional playbook of just buying public investment grade. We really wanted to create our own opportunities. And so,

that led to the creation of the 16 origination platforms. Taking Athene public. So, between

the GFC, the creation of Athene, the creation of origination, those were the real times.

And then I would say certainly COVID. It let the marketplace see how we could execute in a crisis.

And in the credit business in particular, we probably put about $50 billion to work in about six - seven weeks in that period, in spring of 2020. Certainly, the PE team did a fabulous job investing in a handful of companies as well. But I think that was really a period of time that

the marketplace really took notice of the breadth of the portfolio that we had created and the ability to really partner with banks and other folks in an open architecture world.

Are there any particular regions of the world that you're now focused on?

So, certainly Europe and Japan are two that I talk about. Obviously,

we're US based. We think there's a tremendous amount of global industrial renaissance happening on the onshoring back in the US. But I've been to Germany five times in the last year.

A lot of time is being spent with Europe because all the challenges that we have with energy transition, transmission, infrastructure, highways, bridge, roads, etcetera, Europe because of the fiscal state of many of those economies-- so, a lot of time in Germany.

We, every year, take all of our partners to a three-day offsite in an interesting place around the globe. Where was it this year?

Three years ago, we went to Abu Dhabi. This past January we were in Tokyo. Japan is an amazing market for us. It's an amazing market for a number of reasons. One, in our original business, private equity, a lot of corporate carve outs and companies in transition in Japan.

The second is major retirement opportunity with the demographics and so much of their capital in zero yielding or low yielding assets. The diversification of how they invest from institutions to retail is a big opportunity for us. And finally, many companies trying to expand

beyond the shores of domestic activity. How do they finance and fund overseas? While the Japanese banks are well capitalized, that's not something that they're really prepared to do in size.

We're very focused on three or four locations in the Asia region. Japan, Hong Kong, Korea, and Australia are three areas in particular, in addition to Singapore, where that's how we invest.

We're not really an investor in China. It's not really our zip code because of credit and equity and our strategy. We're not really a tech growth investor. But between western Europe, Japan, and the four places I mentioned in Asia, those are where our target is today away from the US.

So, Apollo has lead out ambitious growth targets to grow the firm's assets to a trillion dollars by the end of this year. And $1.5 trillion by the end of 2029. So, what's been the most defining factor in reaching these goals? And what are your immediate goals for this year?

So, a lot is focused on the evolution of the fixed income market and how we bring those private solutions to insurance companies around the globe, to investors around the globe.

At the same time, there's concern about what's going on in the global wealth product. So,

we have a diversity to our business. Second big area is retirement solutions.

Certainly, the business of Athene today, we bring on liabilities in four different channels, retail being the largest. But pension risk transfer is a big growing area. So, feeding

the retirement channel with more solutions whether it's guaranteed lifetime income or a variety of those products, huge focus. And as well, we've always maintained that the big challenge is not the AUM growth but it's the origination sourcing the great products.

So, we're very focused right now on these periods of dislocation.

The headlines would tell you that it should be an amazing time to put money to work.

It's still a bit early. The dislocation has not really hit the marketplace yet.

So, I think if you say what's our goal for '26, fixed income replacement, focusing on retirement solutions, focus on the public/private convergence, and a variety of ways for us to partner with traditional managers. Those are the three or four big drivers for us.

As you grow and as you scale the business, how do you preserve the firm's investment culture while growing in complexity like you have? Yeah. I think it's-- we're a very flat organization. I've noticed here at Goldman that on the executive floor, a lot of the executives moved

organization. I've noticed here at Goldman that on the executive floor, a lot of the executives moved down into the trenches, if you will. We've done the same thing. At Apollo, I'm on nine. So, is

Scott and John Zito. Mark is up on 12. But we're right in the trenches with all the folks. So,

for us, a tremendous amount of time on the 200 partners and reinforcing culture and the One Apollo and the Clean Sheet Thinking and the ability to really have, get at the issues, this whole intellectual insubordination. But really it comes down to culture.

We carry a big stick, but we don't want to turn into too large of a company.

And so, maintaining a very flat, open organization. Having access to senior people.

That casual collision in the cafeteria. Those are all really important aspects of our business that we want to make sure that folks who come in, we spend a tremendous amount of time on onboarding.

And really not only meeting everybody, but really understanding the lore of the place. What got

us to this. Decisions we made. Proactive for the positive and proactive making sure we didn't make the bad decision. And you're never perfect. But really just culture eats strategy all day long.

We want to do both very well. But if it's one, we have to be really strong on culture.

Why people are there. What the objectives are. How they work as a team.

And we've had to really evolve this firm. And we want to maintain that great investment DNA.

But infuse it in this One Apollo mentality of the open toolbox and solution mentality.

Yeah. I'm smiling because Mark told me about a couple of years ago at the mandatory meeting he had at 4:30 am that he sent out to a lot of your senior leaders. And

the message said, "No, this is not a mistake." That's right.

And there was no Zoom. You couldn't, like, dial in. You either showed up or you didn't.

I thought that was fabulous. Yeah. I think, again, we're fortunate with the size of Apollo asset management right now, 3,500 of the 5,000, the partners are very visible. We still can know intimately all 200 partners. And it's how you communicate, engage.

visible. We still can know intimately all 200 partners. And it's how you communicate, engage.

And again, we're in an incredible time in the global markets. If you're not excited about the opportunities, but also aware of the challenges, you're in the wrong industry.