Video: Should You Have Private Assets in Your 401(k)?

Kunal Kapoor: We’ve got a lot to talk about, and we’re going to dive right in, and I think it’s really a special time to have you here because obviously Apollo has grown and changed over time, and I thought for all the advisors here in the audience, let’s maybe start with just setting the table with, What is Apollo today, and how do you think about your business?

Marc Rowan: Apollo Today is really two businesses. One business, in fact, the larger business, is retirement services. We are the largest provider of retirement income in the US through the brand Athene. It’s a roughly $350 billion retirement insurance company. All told, with its European partners, it’s about $400 billion. By far the largest in the world in doing it. On the other side of the business is the $800 billion private markets asset manager. We manage about 600 billion of private markets credit, 100 billion of private markets equity, and 100 billion of something that’s between debt and equity that we call “hybrid.” We essentially, half our money, half the money we manage is our own, and half the money we manage is client money, so we are always the largest investor in everything, which of course does not guarantee a good outcome, it just guarantees the same outcome.

Kapoor: When you think about how you’re allocating money and thinking about investing for the future, what are some of the areas that are most important to Apollo from that perspective?

Rowan: First, I look at our role in the world. What is it that a private markets firm does versus a public markets firm? If you start at the top, a public markets, traditional asset manager, they get to buy what exists. A lot of things exist because things have been created for hundreds of years, stocks and bonds. A private markets manager only gets to buy what they create. That’s where excess return comes from. If you look at the business, if you view your business as we do, which is we’re in the business of creating excess return per unit of risk, we focus on markets where we think we can do that at size.

So again, the mix of business, we’ve been in business for 35 years. The equity business, private equity, was the first business. It’s now a $100 billion business. Five years from now, it will be a $100 billion business. I don’t think the business will grow. Not because I don’t want it to grow, because it’s an amazing business, but because that’s the size of the market. On the other hand, in the credit business, we’re $600 billion today and we’ll be twice our size in five years. In the hybrid business, will be the fastest-growing business. It’ll be 3 times its size.

Kapoor: You started by comparing yourself a little bit to how public asset managers maybe thought of their business. One criticism Morningstar has leveled historically at some public asset managers is that they’ve grown too big and they lose their edge. How do you think about that as you serve more types of investors and take on more assets and the firm gets larger? We were talking about this backstage. How do you keep your edge?

Rowan: First, I’ll start again in the public markets because I think the contrast is there. It’s not clear to me that size has been the reason people have lost their edge. I actually think market structure has changed because if you look at the stats, some 90% of traditional asset managers, whether you’re debt or equity, active managers, have failed to beat the index for 20 years. That doesn’t sound like these people got stupider, because I don’t think they have. I think they’re plenty smart. It sounds like the structure of our market has changed. With everything now being indexed and correlated, it’s very hard over a short period of time for traditional asset managers to ply their craft. We think of public markets in their entirety as beta.

In the private markets, we used to have something which we call an “illiquidity premium.” You got paid for being illiquid. I’m not sure that really exists either. The way we see the market is you get paid to originate and diligence and structure something. That’s how you make money. If I go back again in history, the way you made money in private equity is you found the deal no one else was looking at, you originated it, and you made money. In the credit business, it’s kind of exactly the same thing. You work with the borrower. You provide a solution that they otherwise could not access in the public markets. You get paid for the work you’ve done.

I wish we could grow all the businesses we’re in and still get excess return, but the pursuit of excess return tells me credit can be grown a lot because at $600 billion we’re not relevant, whereas the 35-year-old private equity business tells me I should run that business for rate of return rather than for growth.

Kapoor: I’m going to come back to those points a little bit later on in the conversation. I’d like to maybe take a step out of Apollo now and just talk about the broader state of the economy and the world. If you’re an investor today, you’re an advisor, I think the primary thing folks are hearing from their clients is how do you think about uncertainty? Is the world really changing? We heard a lot of comments yesterday about whether people are overallocated to equity versus fixed income. What’s your view on the sort of state of potential investing returns from public and private markets going forward and how an advisor should be thinking about that?

Rowan: So really complicated but also really simple. Three questions. Are things cheap? I don’t think by any measure public markets are cheap. We can debate whether they’re as expensive as they used to be, but by any historical standard, public markets are expensive, and that’s equity is easy to see, but credit spreads for public fixed income are at generational tights. OK, second, are interest rates likely to plummet? I don’t think so. Everything we’re doing is long-term inflationary, whether we’re tariff, at-home manufacturing, lack of immigration, government debt, all of it is potentially inflationary, even if in the short term, we get lower rates at the short end of the curve. The third, do we have lots of geopolitical uncertainty? Yes! Just wake up every day and something crazy is happening.

If that’s the backdrop, what do you do with your money? Our answer, and we have to make this answer every day with our own money, is we take risk off. In fixed income, that means moving from bottom of the capital structure credit selection to top of the capital structure and trying to get paid for structure and illiquidity or origination, and in equity, moving more toward contractual cash flows, less on growth. If things change, if the market’s wholly repriced, we would do something else. I don’t think we’re set up for the same series of strategies that have worked for 40 years working in the future because we’ve been the beneficiary of massive tailwinds. Rates have gone from high to low, we’ve printed a lot of money, we’ve pulled forward demand, and we haven’t paid the price for it because we’ve had globalization. It’s not clear to me any of those four things are true anymore, so why would the same investment style work for the next 40 years? I don’t think it’s going to.

Kapoor: What do you think the role here needs to be of the government? Obviously, you’ve been relatively close, I think, to folks in the administration, and one of, I think, the big debates that’s kind of blown up here in the last month is the level of debt that the US should be operating with. It’s clear that there’s no plan, seemingly, to bring it down. There’s lots of people who have an interest in it, but no one seems to want to act on it.

Rowan: Let’s be agreed. There is no plan.

Kapoor: OK, fine.

Rowan: So let’s start, again, my two cents. I think the administration is right in everything they’re doing. I think they’re right on having Europe pay more for defense. I think they’re right on setting U.S. trade policy. They’re right in what they’re doing vis-à-vis merit. The way they’re doing it? Eh, not so much. A lot of room for improvement. But the debt problem we’re facing is not a debt problem that this administration created. It’s not one that Biden created. This is administration on top of administration on top of administration. The good news, it’s a math problem, and the math problem has an answer. We can actually solve our own problems going forward. All it requires is change. The change is not that drastic. The change will actually be embraced by many, but it is change. If people are interested in that, they can look online at the Penn Wharton budget model. There are 16 suggestions which actually create the kind of dynamic that you would, I assume, support of getting toward a balanced budget over a reasonable period of time.

The problem we have is a political problem. Unless there is a crisis, the political class is not going to deviate from kicking the can down the road. So until we have a crisis, we’re going to do exactly what we’re doing. This budget is another deficit buster, just like the one from the Biden administration, just like the one from the Trump administration, just like, just like, just like. I don’t think this administration deserves unique criticism. They’re simply following a well-trodden path.

Kapoor: When you think about the fact that it may take a crisis, does that feed into how you think about where Apollo is investing to and how you put clients’ money to work?

Rowan: Look, as a good private markets investor, we’re a healthy skepticism, a down, a negative view of things. We’re very positive people and fun at a party, but we’re very negative investors. But I don’t think we’re going to, there’s nothing that says we’re going to have an imminent crisis because you look at the world, and the world has three big investment blocks in it. You can invest in China. You can invest in Europe. You can invest here. I would rather be here. We are just the cleanest dirty shirt. Every problem we have is worse in the other two regimes. What we’re watching take place for the last 15 years, our institutional clients have basically moved all of their excess capital out of Europe and out of Asia and to the US. We were, as I sometimes say, hyperexceptional. Ten stocks became 40% of the S&P. Those 10 stocks were at a 60 P/E at one point. One stock, Nvidia, was greater than the market cap of every stock exchange in the world other than Japan. That is hyperexceptional. We are now moving to merely exceptional. On the margin, money will now flow to Europe and to China because the US has made itself on the margin less attractive. That does not mean less attractive than Europe and China.

Kapoor: But potentially lower ongoing returns than maybe what we’ve experienced previously.

Rowan: I think we have to expect that.

Kapoor: Let’s shift gears a little bit. I think about the firm you run and who you serve. If we go back a decade ago, for example, financial advisors were maybe not core to how you thought about your future, but today you started by talking about the fact that you focus on retirement income, for example, and many here in the audience work with individuals who they primarily are trying to serve through that lens. How do you think about Apollo’s future, and why do financial advisors and what’s happening in the wealth/retail space become important to you relative to where you used to be?

Rowan: I’d say it’s two-sided. I think we, private markets, not just Apollo, are important to them and vice versa. Our whole industry of private capital, we basically built the industry out of the smallest investment bucket called “alternatives” from our institutional clients. Now that business, the potential market opportunity has doubled because this thing called “individuals” has now come along. Oh, maybe it’s tripled because now we have retirement services insurance companies who are also focused on this. Maybe we yet have another market because institutions have figured out that private does not mean risky and public does not mean safe. Maybe private has a role in their fixed-income and their equity bucket, not just in their alternative bucket.

Now we have a fifth market where traditional asset managers led by BlackRock and others are looking at the failure of active management and are thinking that perhaps the new form of active management is the addition of private to public rather than the buying and selling of stocks and bonds. I think we’re going to get a sixth market, which is 401(k). I would expect at some point in this administration’s history or future to be able to sell private markets into the 401(k) system.

At the end of the day, all of these markets are looking for one thing, return. If we do not meet our promise of excess return per unit of risk, private markets will not prevail. If we do, private markets will prevail. The math is compelling, and this is the math when I go speak to regulators that I bring forward. A point and a half a year of excess return by allocating to private is 50% to 100% better outcome at retirement. It’s not 5% or 10%. Every place in the world this has been done. Australia, Mexico, Israel. In defined-benefit plans, this has been true. Why do we take the largest pool of savings in the world, individuals and 401(k), and consign them to what was 8,000 stocks, that is now 4,000 stocks and going down, and the same in the fixed-income market? It just doesn’t make any sense. We’re finding the balance in a world for what they know, listed stocks and bonds, to what’s available, the rest of the investment universe, that looks slightly different than stocks and bonds.

Our job is to come up, first, to build a firm not based on size, but to build a firm on originating good risk. Coming back to the first thing I said, we can only grow as fast as we can find good things to originate. Our firm is led by origination. The second is we want to diversify from just the institutional base, and there’s no better service than to serve the people who need retirement income the most, who are individuals.

Kapoor: Some of the skeptics who I’ve talked to would say, though, that this is happening largely because inflows have dried up in some quarters from traditional channels, and so that’s what’s driving a desire to get into this channel. How do you meet that skepticism and also just the reality that the product is not just quite yet easy to use, right? Advisors are worried about the complexity, for example.

Rowan: I’d say this, which is, I think it shows a lack of understanding of what the market is, and this goes back in history. Private, 35 years ago, 40 years ago, was three products. Private equity, venture capital, and hedge funds. All three of which are volatile, all three of which have a place in a portfolio, but they are complex. The last decade saw excesses in public markets and saw excesses in private markets. There are whole groups of firms in public and private markets who strayed from their discipline and suffered the consequences of doing that. Institutions in the private equity and the venture capital area have cut back on their allocations.

That is not where private markets are. Private markets are primarily credit-oriented, primarily investment-grade, and offer excess return per unit of risk. If I look at, for instance, what we’ve done over the past year, 4 billion to AT&T, 11 billion to Intel, 6 billion to AB InBev, 3 billion euros to Air France, 3 billion to Vonovia, and on and on and on, and private markets are now just another tool. A CFO at a large company thinks of bank debt, public debt, and private debt and we get the call when something is long-dated and complex.

As to the question of is it harder to access, it is harder to access. Currently, you access in semiliquid format. Semiliquid in the investment-grade area means every 30 days. Is it a hardship for investors to go not daily liquid but every 30 days? If it is, they shouldn’t be in illiquid investments. If it’s not, they should get paid excess return per unit of risk for the same rating and same risk profile.

There’s no free lunch in investing. The question I always come back to is, what risk do you want to take? You can take credit risk by going down the credit spectrum. You can take duration risk by going long. You can take equity risk. Or you can take some liquidity risk. For someone who has a 30-day to 30-year horizon, liquidity risk is not a hard risk for them to bear. And if you can get paid for that, why not?

Kapoor: You’re clearly among the group of individuals and leaders who feel the most bullish about the fact that, even getting out of the institutional space, the allocations to private credit, to private equity potentially, could rise much higher than what most people anticipate. And I was mentioning to you yesterday that when Salim was on stage, Salim Ramji from Vanguard, he said, yeah, it’s happening, but it’s going to take a really long time before it becomes material. How do you think about that?

Rowan: Well, material is different when you’re $14 trillion than when you’re $800 billion. I think we can both be right, starting there. But I think that people don’t understand the current dynamic. I believe we are not short capital in the private asset industry. We are short origination and very quickly the dynamic is going to change. If I’m right, we went from serving one market to now six markets. We have not grown our capacity to create 6 times. We’re growing quickly, but we’re not growing at 6 times. Right now if we originate a good risk in the private markets, we’re on allocation. This is a question of who we serve, not do we have capital to do it. Now that is not necessarily true in private equity and other things, but for the vast, vast majority of private markets, people are short product rather than the other way around.

I look at the big firms, the traditional asset managers, and Salim, I think, is doing really interesting things. But you look at what BlackRock’s done, they bought three companies last year for $35 billion, and they didn’t buy them to hold them separate. They bought them because they believe what we believe, which is convergence is going to happen. We, for instance, are not going to serve the vast, vast majority of investors in the world. The vast majority of investors in the world have a relationship with a traditional asset manager, and that traditional asset manager will create products or augment existing products that have private assets in them. You’re seeing this happen in ETFs. You’re seeing this happen in open-ended mutual funds. You look at some of the open-ended mutual funds. Why can they hold SpaceX and Spotify and Stripe and OpenAI? Why only tech companies? Why won’t there be 30 or 40 industrial companies that are in the private bucket of mutual funds? I think that’s where we’re going, and the traditional asset management industry is so big that for them to have small allocations will double and triple the size of our industry, whereas from Salim’s point of view, it’s not going to be half his business, because I don’t think it’s going to be half his business.

Kapoor: Let’s take a financial advisor here who’s working with a client, let’s say, in their 40s, and today is 100% allocated to public markets. How do you think that allocation might change, and what’s the path to that allocation changing?

Rowan: See, I think we’re in the early stages of really thinking about this. At a point in time in history, people bought stocks and bonds. I don’t think they buy stocks and bonds anymore. I think they buy exposures. I think that’s where we’re heading as an industry. If they have, for instance, a 60/40 portfolio, they will still have a 60/40 portfolio. Maybe that 60 is comprised of two-thirds public markets and one-third private markets, and the 40 is comprised of same two-thirds, one-third. That is what we’re seeing. It is already happening in managed accounts. It is already happening in retirement. It’s happening in insurance and it’s starting to happen more broadly in asset management. The vast majority of investors, the vast majority of financial advisors may not go to private markets directly. They will buy products that give them access to public and private markets.

When I meet with a traditional asset manager, a trust company, and they’re talking about how they distinguish their product from everyone else’s product in the market, because if public markets are beta, how do you distinguish yourself? Well, maybe such and such trust company takes their secret blend of public market ETF and marries it with private markets and offers their clients all access. I think that’s where the world is going. I think that’s how convergence is going to happen. I don’t think advisors are necessarily going to make conscious decisions initially.

When you get up into the high net worth, advisors are making conscious decisions because let’s look at the future. If I look at how we deal with individual investors, it’s a pyramid. At the top of that pyramid are family offices. They are 50% private. At the bottom of that pyramid, the vast majority of investors, zero private. We’re watching this migration happening. The top of the pyramid is showing the bottom of the pyramid where it is. Not everyone is going to buy the same product in the same way at the same time.

Kapoor: But when you think about the bottom of the pyramid, let’s say getting to even 20%, it sounds like you think that could happen relatively quickly through different means.

Rowan: I think we’re going to be imbalanced on the demand side, not on the supply side, so long as we meet our promise. Something being private does not make it better. It makes it less liquid. For it to be less liquid, investors should want some sort of premium. Our job is to deliver excess return per unit of risk. Investors need to be able to bear some amount of less liquidity risk. We can debate how much less liquidity.

Kapoor: One of Dana Emery’s points yesterday, and you’ve kind of already answered this, though, was that she felt like there was no excess return to be earned anymore from that illiquidity, given that it had sort of been whittled away. It sounds like you two agree with that, but more so because you feel like it’s an origination where you earn your keep.

Rowan: I think that’s it at the end of the day, our belief is the ability to go in and structure something for the market that you want to serve is how you get paid, and not because it’s private. In fact, because it’s private, you should demand more rather than less. I do think this notion of an illiquidity premium is changing. I also think the notion of illiquidity is changing and this is the piece that people, I don’t think, understand.

In 2008, we made a fundamental change in the way our markets are structured. In the equity markets, we had four firms step forward to provide liquidity. I always ask regulators, where does liquidity come from in the equity market? Well, they think it comes from the stock exchange. It doesn’t. It comes from Citadel, Jane Street, Susquehanna, and Bluecrest. Four firms make equity markets.

Then I challenge them and say, Who makes a market in fixed income? I have yet to get an answer, because no one stepped forward to make a market in fixed income. Publicly traded fixed income is not liquid. Publicly traded fixed income is not liquid. It has a quote, it has a price, but that is not accessible for any real amount of volume. Things that are private already trade. Loans. Loans trade. They’re not even securities, but they trade because JP Morgan and Goldman Sachs and Deutsche Bank and others make a market.

We’re watching the same thing happen in private investment-grade. Private investment-grade trades. You can get a price every day. You can sell your position every day. I think where the world is going, more of the market will trade through market makers. That does not mean private equity and venture capital will trade. That’s not what I’m saying, but in the credit markets, I believe we are going to see things trade and price.

Kapoor: We’ve got just a few minutes left, and I want to shift gears and focus on your relationship with State Street and the launch of a State Street ETF where you’re kind of behind it. Maybe you want to just talk a little bit about what the idea there is and what you’re hoping to achieve, and then I want to get into how you think about the trading aspect of it because obviously there have been a lot of questions about how you’re going to ensure that people get the liquidity that they’re seeking.

Rowan: So the State Street relationship is really twofold at this point. First, public and private firms are now experimenting. No one has the answer. We have a relationship with State Street, one with Lord Abbett, Blackstone has one with Wellington, KKR with Capital Group, and on and on and on. No one has the secret sauce yet. Our relationship with State Street at the moment is two different ideas. One is in retirement, basically to offer the 60-40 solution with access to private markets and public markets bundled into one solution.

Kapoor: Like a target-date fund.

Rowan: It’s already happening. That’s being sold. It’s moving along. It’s a perfect market. On the ETF, we’re taking an ETF that is all investment-grade, and we are mixing public and private in the same ETF. Same ratings, in some cases, same companies. We compare it to the ETF universe that is out there. So if everything in the public markets is beta, how does an investment-grade ETF outperform? Well, it outperforms because they’re not 100% investment-grade. They are allowed to have emerging markets, high yield, loans, or something else in there which gives them their outperformance.

Our ETF is 100% investment-grade. And the difference is it has access to public and private and it relies on private market premium for its outperformance. How does it trade? Because it does daily create and redeem. It trades because there’s market making. We make a market in the product, and we started making a market. We’re now $4 billion of trading. Guess what? Goldman Sachs didn’t like that we were earning wide spreads. They come in and make a market. JP Morgan doesn’t like that Goldman Sachs is earning wide spreads. They come in and make a market. This is how the market develops. This is how the fixed-income market develops. Every day there’s a price. Every day there’s liquidity.

Having said that, we should expect in public and private fixed income more volatility than we have historically because of the structure of market making in the entirety of the fixed-income business. There is no difference in my mind between public and private. Both should be semi-illiquid when things get really bad, and we’ve seen that.

Kapoor: You’re pretty confident that, in a crisis, if it were to come, that you have the mechanisms to ensure that investors would get a fair price if they want to trade that ETF? You’d provide the liquidity?

Rowan: I’d say it this way. The market has a mechanism. I’ll come back to the analogy that people need to onboard. Why do loans trade? Loans aren’t even securities. Every loan is to mostly private companies. They don’t have information. Every loan is different. They trade because 25 years ago, a banker at JP Morgan said loans are going to trade. JP Morgan started making a market. Goldman didn’t like that JP Morgan was earning wide spread, so they made a market, and Deutsche Bank, and so and so. Now we have loan ETFs, loan mutual funds, loan CDS, and we don’t ever think that loans won’t trade. The same thing is happening. We just have to imagine things that are going to be different than they are today. I look at my career, no securitized product, no levered loans, no high-yield bonds, no ETFs. Why are we so pigheaded that we think the products of today are going to exist in their current form for the next 20 years? I don’t think they are.

Kapoor: I think that’s a really good thought to end the conversation on. You said to me in the back, 30 minutes is going to fly by and I’m looking at the clock and it says zero. Thank you, Marc, for being here. Thanks, everybody. Round of applause for Marc. Thank you all.