“The hottest PE” Apollo unleashed $75 billion in ‘private credit’ in the third quarter, a YoY surge of 21%! CEO: If you don’t want to invest in overvalued stocks, invest in PE.

Apollo Global Management, one of the world’s largest private credit institutions, is issuing loans aggressively to dispel market concerns about the profitability of private credit business. Although falling interest rates and narrowing credit spreads have pressured investment returns, record-breaking new loan issuance has generated enough income to offset this impact, causing the company’s third-quarter results to exceed expectations.

In the third quarter, Apollo issued $75 billion in new loans, up 21% year-on-year. Over the past 12 months, Apollo issued a total of $273 billion in loans to corporate borrowers around the world, a 40% surge compared to last year’s pace. The net interest margin profit of its insurance business, Athene, reached $871 million, marking the highest quarterly record in two years, with overall profits totaling $1.7 billion.

Apollo CEO Marc Rowan defended the private credit business on an analyst conference call. Responding to market concerns over declining returns, he said that even with lower yields, private credit remains attractive compared to other asset classes. He said that capital is rotating from the stock market to private credit, with high-net-worth individuals viewing it as an alternative to overvalued equities.

This performance has eased investors’ worries about the health of the private credit industry. Apollo’s stock price rose about 5% on the day, following a 4% jump for Ares Management after an earnings beat the day before, indicating a recovery of market confidence in this asset class.

“Record Loan Issuance” Hedges “Narrowing Spreads”

Apollo’s loan origination capacity stood out in its results. The $75 billion in new loans for the third quarter was second only to the previous quarter, setting a historic high. These loans are mainly funded by insurance premiums, with borrowers including large companies such as Intel and EDF taking out multi-billion-dollar loans.

Currently, Apollo’s annual lending volume is on track to surpass the five-year target set for October 2024, and is allowing the company to compete with investment banks like Citigroup in overall corporate loan volume. This highlights Apollo’s ambition to become a financial intermediation giant outside the heavily regulated banking system.

Although Athene’s portfolio’s net interest margin profit is below long-term expectations, the surging volume of new loans has compensated for the decline in profitability. Apollo partly attributed the lowered margin targets to higher-yielding loans issued during the pandemic being replaced by lower-yield debt now matured. However, the company has maintained its long-term margin return targets and initiated $9 billion of interest rate hedges in late summer to further protect its balance sheet from declining yields.

Infusion from Insurance Business Pushes Asset Size Above $900 Billion

Apollo secured $82 billion in new assets during the third quarter, with Athene absorbing $23 billion in net new funds, split equally between retail annuities sales and so-called funding agreement borrowings. These inflows led Apollo’s fee-based earnings to grow more than 22%, and its assets under management surpassed $900 billion, both exceeding analyst expectations.

The merger of Apollo and Athene once raised investors’ doubts, fearing that the deal would expose the investment group to the risk of declining returns from private lending. Rowan founded Athene in 2009 to match fixed annuities with higher-risk private credit. This strategy has transformed the investment group, known for bold corporate acquisitions and fierce creditor disputes, into one of Wall Street’s largest lending institutions.

However, it also means about half of Apollo’s earnings now come from the spread between Athene’s investment returns and what is paid out to policyholders, rather than simply charging fees for managing assets for pension and sovereign wealth funds.

This year, Apollo’s stock price is down a quarter, trailing competitors like Blackstone and Ares who have no insurance businesses and whose balance sheets are barely affected by interest rate fluctuations. Part of the share price decline stems from Apollo missing last year’s ambitious margin growth targets—projecting in October that net margin profits would typically grow by 10% annually, but this year it was only about 5%.

CEO Responds to Private Credit Health Concerns

Over the past month, debates about the health of the private credit market have hit the stock prices of some of the biggest players in the field. Concerns arose from multiple factors, including fraud at subprime lender Tricolor Holdings and auto parts supplier First Brands leading to credit losses, as well as interest rate cuts by the Federal Reserve and a revival of syndicated lending by bank brokers eating into private credit returns.

Rowan argued that the fraud at Tricolor and First Brands and the resulting credit losses were isolated incidents and do not reflect broader underwriting standards among lenders. He said that credit is credit, whether issued by banks or asset managers, and there is little difference; fundamentally, there are excellent credit underwriters and some that are less so.

Some companies argue that these cases should not be conflated with private credit, as they do not involve the most common form of direct lending and mainly affect hedge funds and banks.

In response to concerns that a surge in defaults might threaten the wider economy, Rowan was dismissive. He believes internal problems at banks are more likely to pose systemic risks to the financial system, and recent bankruptcies are not signs of a larger structural issue. He said, 'I do not think we’re talking about systemic risk, I think we’re talking about late-cycle behavior, and I believe bad actors will be weeded out.'

According to Moody’s ratings forecasts, the size of the private credit market will reach $3 trillion by 2028—approximately double its size in 2023. This asset class has yet to be tested by a wave of defaults since its explosive growth.

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