00:00This is a story about henkaku. That's a Japanese term meaning fundamental reform.
00:05We've come to Japan to see how and why it is changing the way it does business,
00:09changing what it expects from its corporations and changing what it expects in its investments,
00:14not just for the sake of change, but in order to raise the capital needed to invest in productivity.
00:21Over the last three decades, Japan fell from second to fourth in the ranking of world economies.
00:26As it struggles to climb back up the leaderboard, it is focused on investment,
00:31in this case, trillions of dollars worth.
00:34Fifty-five percent of the assets sits in cash historically.
00:38And the corporate has been accumulating a lot of cash on balance sheet
00:42because they want to be safe and they want to be sustainable,
00:46and the cash is the safest assets for them to own.
00:51So even though the rate is the lowest in the world,
00:55the ratio of the cash on balance sheet among all the corporates was the highest in the world.
01:00That must be a lot of cash.
01:02It is.
01:03The retail asset is 2,000 trillion yen, so that's a lot of cash.
01:08While almost 55 percent of household financial assets in Japan sat in cash and deposits in 2022,
01:15a figure far higher than the U.S. or Europe,
01:17by 2024, that number had inched lower to around 50 percent,
01:22and the percentage of assets in equity markets had crept up to 14 percent.
01:26The head of the Tokyo and Osaka stock exchanges, Hiromi Yamaji,
01:31says that many Japanese companies are starting to use that cash to change the way they do business.
01:36Japanese companies are quite receptive for new development of technologies like AI.
01:44I think Japanese companies are early adopters of new technologies.
01:50But at the same time, how do we take advantage of those new technologies that, you know,
01:55you have to be quite serious how to utilize in what kind of areas.
02:01So now we are still in the very early stage.
02:04But I think Japanese companies are quite receptive to those new ideas.
02:10Japan is, I think, well positioned for the industrial renaissance.
02:15The energy shift, supply chain breakdown, and they need to rebuild it.
02:21AI changes.
02:22There are a lot of big themes going on where companies need a lot of capex.
02:28And the size of the new finance, finance needs is growing so, so fast.
02:36That big demand for the capex will create a lot of demand for new finances,
02:43which the lot of capital can shift to.
02:47Japan may have a big need for investment.
02:49It may have the capital that's needed.
02:51But are its financial institutions in a position to direct the capital to where it is needed and at scale?
02:57Japan is like, I would say, like many economies.
03:00If you think about the structure of the Japanese market, it is primarily two financial products.
03:06Bank debt and equity.
03:08Apollo CEO Mark Rowan sees his company as providing a much needed third way to finance the capital investment Japan
03:15needs.
03:16The equity market in the context of the world is actually quite small,
03:19although it is the second largest equity market in the world.
03:21But it is roughly the size of NVIDIA, just to put things in perspective.
03:25There's not the well-developed, you know, kind of corporate bond market that exists throughout the U.S.
03:31And so I think what we're watching, not just in Japan, but around the world,
03:35is corporate CFOs, corporate treasurers now understand that there are three types of finance.
03:41Things that are really highly rated and short, you want to be with your banks.
03:44There's no better provider.
03:46Equity, very, very expensive.
03:48Public markets for plain vanilla, very, very good execution.
03:53Everything else comes to the private market.
03:56The largest part of the private market today is investment grade.
03:58It is these large companies who have these transformational opportunities,
04:02who want to match long-dated investments, and most of what we're doing is long-dated, with long-dated capital.
04:10And that is not what the banking system does well.
04:12That is not what the public markets do well.
04:14And so you're seeing this extraordinary growth.
04:17In the U.S., we've seen it in lots of ways.
04:20Meta's financing last year at some $30 billion.
04:23In Europe, we've seen the Europeans, who also have structural issues vis-Ã -vis capital availability,
04:28really embrace private finance.
04:31In Japan, we're seeing the beginnings of that.
04:34The work we've done with Sony, the work we've done with SMBC,
04:37the work we've done in financing buy-now-pay-later Japanese companies
04:42is beginning to open up in the minds of CFOs and treasurers that there's just another alternative.
04:48It's not that private credit firms like Apollo seek to replace Japanese banks.
04:52Apollo's team says that it can supplement what the banks do.
04:55The public credit market is very, very small.
04:59I think there's only 60 trillion yen outstanding on the corporate bond market
05:04compared to the size of the finance.
05:08It's been quite small.
05:10So a lot of finance has been done by banks, who is basically private credit.
05:16So I think there's a demand for longer-dated capital and also complex capital
05:24because the bank can provide cheaper and short-term finance.
05:29And with the huge CapEx needs, they need longer-term, more complex finance structure
05:36where the private capital markets can solve the problem for it.
05:40We will start to establish private as just another alternative for every CFO and every treasurer.
05:47And by the way, in partnership with the Japanese banking system,
05:50because at the end of the day, we don't do what the banks do.
05:54We don't provide advice.
05:55We don't provide hedging, derivatives, M&A, any other service.
05:59That's the purview of the banking system.
06:01We provide a piece of capital that is in very short supply in Japan,
06:06investment-grade, long-dated, to finance what they need.
06:10It's growing gradually.
06:12And I think it's a good alternative investment vehicle,
06:16I mean, alternative funding vehicle from the viewpoint of the companies.
06:19As you said, it used to be banks were the main creditors.
06:23But in these days, because the banking industry has so many restrictions,
06:29capital restrictions kind of things,
06:31so their capability to provide lending to a private sector is getting to a limited amount.
06:39So I think private credit can play a bigger role in Japan as well.
06:44Firms like Apollo Global Advisors may see an important opportunity in the newly evolving Japanese markets.
06:50But are Japanese investors and companies receptive to adding private market alternatives to their means of financing?
06:56As you go out into the Japanese market, what resistance do you get to these new forms of investment vehicles?
07:05I don't think it's resistance.
07:07I think, again, just like in the wealth market, this is about education.
07:10In many instances, we are not going to Japanese corporates directly.
07:14We're going with their longtime banker.
07:16In some instances, particularly when Japanese companies are financing overseas, we'll deal with them directly.
07:22Our team here is unbelievable.
07:25From our chairman, Tanaka-san, to the head of our Asian business, Oeda-san,
07:31these are very well-known, very substantive individuals who have been at the cutting edge of finance for a very
07:37long time.
07:38The weight we have put here, the intellectual capital we've put here, is second to none.
07:43I think we're at the beginning of a trend, but I think this is going to be just a fascinating
07:48market for any number of reasons.
07:49I have never seen a business strategy or an investment that doesn't have some downside risk.
07:54So what are the possible downside risks to this bright new future that you see?
07:58Well, look, the downside risks are the same risks that exist around the world.
08:02So for me, the way I describe it is in my business career, most of the time, or I'd say
08:0895% of the outcomes are between two sidelines.
08:12And sometimes we like what's on the playing field, and sometimes we don't.
08:15Sometimes the economy is better or worse.
08:17Sometimes the capital markets are better or worse.
08:19Valuation is better or worse.
08:20But we know how to navigate those things.
08:22And the chance of an outside-the-sidelines outcome was small and unpredictable.
08:29That's my normal setup.
08:30Today, I only think 70%, 75% of the outcomes are between the two sidelines.
08:36And what's between the two sidelines is amazing.
08:40Capital cycle, growth, employment, inflation coming down on a worldwide basis, lots of opportunity.
08:48But we can ignore that there is an increased risk of an out-of-the-box, out-of-expected outcome.
08:56And it's of a magnitude that investors, people like us, need to pay attention to that.
09:02And yes, there's always the credit cycle.
09:04I don't think that's what we're talking about.
09:06I think we're talking about geopolitics.
09:07I think we're talking about government deficits.
09:09I think we're talking about rates up and rates down.
09:13And so for the first time in a very long time, we are trying to address outcomes that perhaps could
09:19occur outside of what we normally see in front of us.
09:22But absent one of those outside-the-sidelines events, Rowan sees his firm as well-positioned for a bright future
09:29in Japan.
09:30When I look at our toolkit, our toolkit starts with retirement services.
09:35We have been here any number of years.
09:37We are a very large reinsurance player to the Japanese market.
09:41And we are creating products for Japanese retirees.
09:45Second, we're a provider of capital to industry, whether it's Sony or SMBC or others.
09:52Third, we are in the buyout business here.
09:54This is one of the best buyout businesses here.
09:56You've met with some of our portfolio companies or companies we've had an investment in here.
10:00It is a very robust market and a very interesting market.
10:04The capital coming off the sidelines from households is looking for better rates of return now that they are facing
10:103% inflation.
10:11And I expect this to be a very promising wealth market where people want safe yield.
10:17They want defensive equity.
10:19They want the kinds of things that have been available institutionally around the world for a long time that are
10:25now available as wealth products.
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