Apollo's Jim Zelter Says Not Seeing Credit Cycle Waning Anytime Soon

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00:00Do you find some of these arguments about cockroaches and growing weakness in the economy

00:04credible, or are you just not seeing it in what you're reviewing, even among the things

00:08that you're rejecting?

00:10You're 15, 16 years in a credit cycle right now in terms of the expansion since the GFC.

00:16You're going to find issues and challenges.

00:19In the last five to seven years, you've had companies like SVB and First Republic Bank.

00:24And so, yes, these are clearly idiosyncratic.

00:26We're seeing a much larger theme of a strong economy.

00:31Torsten talked about it yesterday in terms of a K-shaped economy.

00:34We're seeing an administration that's very pro-business, very regulatory-friendly, want

00:41to push rates lower.

00:42And so all of those things, you will see challenges in certain companies late in the cycle, but

00:50we are not seeing any kind of credit cycle on the horizon that's waning anytime soon.

00:56We are not seeing it.

00:57Are you seeing a scary allocation of resources?

01:00And I say this given the fact that it has been very top-heavy to AI-related endeavors.

01:04Deutsche Bank this morning, a story in the Financial Times, looking for ways to hedge against some

01:08of their data center loans because they are worried about the overall concentration, the

01:13risks that you're seeing overnight.

01:14Are you staying away from that?

01:15Well, I think what you're talking about is whenever you see a massive infusion of capital

01:20into a sector, dark fiber, E&P shale in the U.S., software enterprises, and now AI in the

01:28broad ecosystem, you have to think about debt and equity returns on invested capital.

01:34And there's been a tremendous rise in valuations on the equity side in the last 24 months.

01:39And certainly the assumptions that you're making on the debt side as an investor and a lender

01:45to those companies, you're taking more residual risks than you did 6, 12, 18 months ago.

01:50So valuations are high.

01:52You have to be a bit more cautious.

01:54You want to be a lot more senior.

01:55You want to be secured.

01:56And so I think there's going to be a dispersion between returns between the investment-grade

02:01and non-investment-grade market.

02:03But that's just late-cycle behavior.

02:05And when you look around the globe, as we talked about yesterday, their valuations are

02:09high.

02:10Geopolitical risks are a bit greater.

02:12And we don't see rates dramatically lower in the next 24 months.

02:16So that tells us take the risk down on subordinated credit.

02:21Lean into senior investment-grade opportunities.

02:23Jim, we've seen these capex cycles throughout economic history.

02:26You've lived a few of them over a long career as well.

02:29But there's something different about this one.

02:31And you're well-versed in this in a way that I'm not.

02:33Some of these assets depreciate rapidly.

02:36For you and the team, does that change how you put together some of these deals that you

02:40make?

02:40It does.

02:41I mean, I think you're raising a really interesting point.

02:44Are we thinking, is the right way to think about a data center, utility lines and electrical

02:49lines, 70, 80, 90 years ago, when day one, all you were doing is wiring the house for

02:55lights.

02:56And then you wired the house for a dishwasher, a TV, and everything else that goes with it.

03:01And how do you think about that technology?

03:04And what really is the advantage of that data center in 5, 10, 15 years with the power supply?

03:09I differentiate that with how you might finance a portfolio of chips, GPUs, that rapidly depreciate

03:16over three to five years.

03:18And they might both be in technology, but how you fund and structure both of those is

03:24very, very different.

03:25And I think that's the subtlety behind the headlines, which is going to differentiate the

03:30winners and losers.

03:30Because in every industry, even the last 20 years that I just mentioned, those are all

03:36sectors that drew in a tremendous amount of capital.

03:40And you really don't know who the winner is from the debt and equity side for a few years.

03:44And so certainly with valuations as high as they are in this cycle right now, you have

03:50to take a step back and pause and say, OK, do I want to be a lender?

03:54Do I want to be an equity owner?

03:55What's the residual value assumptions that I'm making?

03:58That's really what will differentiate the winners and losers.

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