Top Apollo Executive Sounds Off on ‘Arrogance’ in Private Markets
‘I literally think all the marks are wrong,’ Apollo’s John Zito said of private equity in previously unreported comments; Apollo says comment was about software companies.
Executives at the biggest private-credit lenders have sought to play down an exodus of investor money from their funds, making carefully worded television appearances to calm jitters about the sector. Apollo Global Management’s APO 4.13%increase; green up pointing triangle John Zito, co-president of the firm’s asset-management arm that is one of private-credit’s largest players, spoke more bluntly in a previously unreported discussion UBS UBS -1.52%decrease; red down pointing triangle arranged for some of its clients late last month.
Zito called out “arrogance” in private markets, predicted a private-credit loan made to a generic small or midsize “Joe Software Company” might recover 20 to 40 cents on the dollar and said Federal Reserve Chairman Jerome Powell is needling President Trump with his inflation commentary, according to audio recordings of the comments reviewed by The Wall Street Journal.
Zito also detailed why he believes his own firm’s private-credit business is on solid footing, joining a chorus of similar comments from his peers. UBS declined to comment.
On private credit’s recent stumbles
He blamed the media for creating a frenzy around private credit:
“Obviously we’re in the middle of a private credit party, apparently . . . if you do credit well, it’s supposed to be pretty boring . . . If you do stupid things and you do concentrated things, and you do things that you’re not supposed to do in your vehicle, you probably will have a bad ending.”
Zito talked about the selloff in shares of large software companies, which was largely sparked by fears about artificial intelligence. He cautioned that smaller software companies bought by private equity, many with private-credit loans, could face even more challenging conditions. Those dismissing concerns by pointing to strong results from public companies are missing the point, he said.
“I’m not as rosy and I’m not as confident in what will happen with the technology. Anyone who tells you that . . . the earnings last quarter were really good so all is good, anyone who says that clearly doesn’t understand . . . Most of the businesses that were bought from 2018 to 2022 are lower quality than those companies, smaller than those companies and were trading at a much higher valuation than those companies and so I am concerned about many of [those] take-privates.”
He pointed to Thoma Bravo’s 2021 $6.4 billion take-private of the software firm Medallia in particular. Several lenders to Medallia including Apollo have already written down its debt.
“There will be an issue . . . with respect to that credit, which I think will be worse than people expect.”
Thoma Bravo declined to comment.
Zito noted that he expects private-credit loans originated in the next 12-18 months to be “much better vintage” as it relates to “quality of company, amount of leverage, documentation, spread.”
He also weighed in on redemptions and whether private-credit managers should enforce limits, typically 5% of funds’ shares each quarter, or allow more investors to cash out when they are flooded with requests. It is a topic he and others on Wall Street have recently been asked about as funds take different approaches.
“You’re going to see elevated redemptions for a handful of quarters. I don’t know how long it lasts.”
“Making a decision in one quarter may be the right, like, decision for fundraising in the near-term and then a quarter later, you’ll realize it was a really bad decision. So my overall bias is to stick to the 5% to protect all my existing investors.”
On vulnerabilities in private equity
Zito sought to shift the focus to private equity, where Apollo has less exposure than most of its peers. He suggested investors’ voracious demand for buying stakes in existing private-equity investments but wariness of the private debt underpinning those deals doesn’t add up, since the equity would be junior to the debt if there were major problems with these assets.
“There’s . . . unlimited demand for secondary private equity but they are worried about private credit which finances 80% of those portfolios . . . I can’t compute, but I’m the dumb guy. I don’t understand. I start saying this and I get these blank stares back at me like OK, I don’t know.”
(Some might say private-equity funds are built assuming some bad deals and some home runs, while credit funds tend to be designed to deliver predictable returns.) Asked where he sees the pain in Apollo’s private-equity portfolio or those of other firms, Zito said:
“I literally think all the marks are wrong. Is that what you’re asking me? I think private-equity marks are wrong.”
An Apollo spokeswoman said Zito was referring to software companies and added, “We believe software valuations do not yet reflect first-quarter market conditions.” Zito pointed out in the appearance that Apollo has very low exposure to software companies. Asked when the market will see private-equity markdowns, he said:
“This next cycle is going to be a big moment in time for the private markets because people are way smarter than I think private-market participants, particularly people in the wealth channel. Like, I kind of sense an arrogance of the people who grew up in the private-markets business . . . If you don’t mark your book, I think you actually lose trust with the clients . . . We are going to be a market leader in actually marking our book.”
On the economy and markets
“I think it’s more likely than not that we go into a recession . . . [a] consumer confidence-led recession. Most of [the companies we lend to] are getting a lot of pressure to show clear AI execution . . . It’s forcing people to do stuff before the actual technology works . . . that’s going to be the first step of just a slowdown in the broader economy.”
He paused to verify that the event was off-the-record before commenting on Powell, who has had a public battle with Trump and is set to be succeeded by Kevin Warsh atop the Federal Reserve:
“I literally think Powell, he’s so upset at how it’s ending that he’s just saying there’s inflation everyday to piss off the president, like I literally think that’s what’s going on, and so it’s hard for me to see inflation. I don’t see it anywhere. I see it much more deflationary. I think that technology is attacking every profit pool.”Zito on the economy and Powell
A Federal Reserve spokesman declined to comment and a White House spokeswoman didn’t respond to a request for comment.
Asked why a popular high-yield corporate bond ETF seen as a benchmark for such debt that is typically under pressure in an economic crunch was relatively flat for the year despite all the noise, Zito responded:
“I don’t have any idea . . . The amount of dispersion going on beneath the surface is kinda crazy. I literally, at home, I told my wife last night . . . I feel like the market should be down at least 10 [%], and it’s flat or up.”
On Apollo’s credit business
Zito made a plug for Apollo, which has transformed itself and now generates most of its profits from originating and investing in debt. The firm has done so using complex financial maneuvers, like creating investment-grade debt backed by shares in hard assets such as microchip factories.
“On our balance sheet, we are 95% [investment-grade], private and public [investment-grade] . . . I have a view that bigger companies are going to do better than smaller companies and so I’ve tried to position ourselves in the most thoughtful way. But inevitably, if we’re in a really bad recession . . . I’m certain we’ll have nicks as well as other people, but I think we’re going to come out of it much, much better and I think we are going to be able to have the flexibility to buy stuff over that time period that makes us significant amounts of capital.”