The Exchanges

Q On the margin, what's an example of something you looked at differently because of that dynamic where so much of the capital was on your own balance sheet?

A Up until twenty-twenty-two, from 2010 to twenty-twenty-two, risk-free rate went to zero and basically stayed there. That led to a risking of investors. If you had a fixed return you had to achieve, you couldn't get there in the old way of investing. You had to keep creeping up The risk curve. We'd said that's not always right. One example was the high yield market. In December of 2021, the high yield index was four and a half percent. When I started doing buyouts 30 years ago, if I got my bond deal done inside of 12%, I considered that a good day. At four and a half percent for junior capital in a levered capital structure, that wasn't good risk return. If you looked at our entire footprint at the time, we had virtually no high yield on the Apollo platform. Now, could we have gone out and raised high yield funds? Yeah, absolutely. But it wasn't the right risk return. Similarly, the real estate market. Over the last 40 years, commercial real estate had basically gotten ground down to the point of being a proxy for IG bonds. In 2021, the cap rate on any commercial real estate asset It was probably three percent. Things were getting priced in the twos. So we're sitting here at Nine West. Right behind us is the Plaza Hotel. I remember when that was being sold, we could have bought that at a three and a half percent cap rate for the equity of a hotel that needed a turnaround, or I c…

AI assessment note: “One example was the high yield market. In December of 2021, the high yield index”

Q So after that period of time, the firm is effectively a boutique private equity firm, sounds like, series of funds. When did you start to evolve and say, we could do something more, something bigger?

A That was the GFC, the financial crisis. The financial crisis opened our eyes to a lot of opportunities. One, we had raised a fund right at the beginning of oh eight. So an unbelievable opportunity to deploy capital at Either good valuations or in distress situations where you could buy amazing companies, companies that Apollo never could have acquired at unbelievable valuations. That was a real game changer for our private equity business, but really the culmination of all the hard work over the prior 1520 years. It also opened up a couple of things. When I said how we think about investing in different parts of the capital structure, as the whole Financial systems started coming unglued. Banks wouldn't lend to other banks. The ability to obtain liquidity became problematic for companies, for banks, for other things. We were able to approach banks and buy tens of billions of bank debt at a time at deeply discounted prices. We started accumulating enormous amounts of corporate debt. Not all of it was distressed. It was just the seller was freaking out. The markets were freaking out. So we're buying good paper at discounted prices. It That moment, it became clear to us that the provision of capital to levered companies is the other side of the coin of providing equity in levered situations. Private credit and private equity were two sides of the same coin. We were the first folks…

AI assessment note: “That was the GFC, the financial crisis. The financial crisis opened our eyes”

Q So if we take a step back from the evolution of the products over time, I'd love to dive into your roles. Going from a dealmaker to a leader of the business. At what point in time did you leading the teams at Apollo and working on all these strategic initiatives compared to the day-to-day dealmaking?

A After the GFC, as Apollo and as me personally did some of the best deals that I think we've ever done as a firm, I guess it was about 2010 the founders asked me to become lead partner for private equity. The firm was starting to grow for the first time into these other areas. Founders were spending more time in other parts of the business. For the first time, the PE business needed a leader other than the founders. That was my reluctant first step into the land of management. I was able to be a player coach at the time, still one leg in the deal business, one leg in the leadership business. And I played that role until about 20 18. So from 20 11 to 20 18. At the end of 2018, the firm had continued to grow and scale in a way when myself and one of my colleagues, Jim Zelter, we were elevated to co-president across the whole firm, looking after all of our revenue generating businesses.

AI assessment note: “I guess it was about 2010 the founders asked me to become lead partner”

Q Was there a deal that you remember and hold out as notable in some way for both your career and what transpired at Apollo?

A In that early phase, I started out doing a lot of cyclical industrial deals, working on a lot of chemicals, metal and mining, forest products, energy, other industrial manufacturing businesses. One of my favorites at the time was a company called Compass Minerals. Compass Minerals was the carve out of a salt business from IMC Global, the agricultural company that got acquired many, many years ago. It was a salt business. It mined salt, but it was a sleepy business that people didn't really ascribe a lot of value to. We bought it at under six times enterprise value to EBITDA, but because of the nature of that business, much of its business went into highway salt. You were able to scale the business. It was a surprisingly more stable business than you would have thought, and Turned out being a phenomenal investment for us over a five X investment in what is just a sleepy little corner of one industry. That's the type of deals that we did. And we did really, really well, finding these underloved companies, running them better, eventually taking them public in that case, telling the story better, explaining to investors why it actually was an exciting business, bringing smart capital structure, smart financial engineering decisions to it as well. And creating a lot of value for our investors.

AI assessment note: “One of my favorites at the time was a company called Compass Minerals.”

Q The culture of the firm at the time, it sounds like there may have been a disconnect from your experience, and as you said, the brusque reputation on the outside. What's your sense of where that disconnect took place?

A Part of the early days of Apollo was when I talk about investing up and down the capital structure, sometimes that brought you into distress situations where you were buying the debt of a company and then working with that company to restructure it either in court or out of court. That's a rough and tumble business. The folks who play in that space develop a reputation of boxing gloves and what have you. For a time, to be honest, that's not a bad reputation to have. When I would show up to a bank meeting and say, hi, I'm Scott Kleinman and I own 30% of your bank debt. I'm from Apollo. That carried some weight. That actually helped. It was around that timeframe where it started becoming clear if we wanted to keep growing and keep being a bigger part of the financial system, that wasn't going to work. You can only do that for so much. We started evolving inside the tent. It was an amazing place to work. It was an amazing group of people. That cared about each other. I joke in those early days, I went to more weddings, bar mitzvahs, and brisses than probably any other phase of my life, because that's what we did with each other. It was a very collegial organization.

AI assessment note: “distress situations... That's a rough and tumble business... inside the tent. It was an amazing place”

Q Love to double click on each of those, even though they tie together. On the credit side, when you first started hoovering up assets in early oh nine, where did you put them?

A At the time, we basically put it anywhere that we could find capital. We started with deeply distressed assets, which fit squarely into our private equity fund. We had a large private equity fund at the time. It had just been raised, so basically undrawn. That was right down the sweet spot, right down the fairway for Apollo. As the opportunity set continued to grow, we had lots of investors saying, I see this opportunity is not just a flash in the pan. This is huge. Who knows how to deploy capital in this environment? Apollo does. Folks were coming to us saying, can you manage this pool of capital for me? Lots of institutional investors started showing up saying, we don't know how to do this. Can we give you capital to go do this? We started raising SMAs, other pools of capital to be able to take advantage of that opportunity.

AI assessment note: “We started with deeply distressed assets, which fit squarely into our private equity fund.”

Q Why don't you take me back to your background and what led you to come to Apollo?

A Sure. So graduated Penn Wharton, 94. Like most Wharton grads at the time went to Wall Street. Ended up at a place called Smith Barney back when there was a Smith Barney. What was interesting about Smith Barney is they were one of the Few firms at the time that had a dedicated group to financial sponsors. I luckily joined this group and got to know a number of the players back then. This is 1994. Private equity was not the military industrial complex that it is today. It was really a cottage industry. Private equity probably represented less than a half a percent of GDP versus the 10, 12, 14% that it is today. I was in this group that got to work with a lot of different private equity firms, the Apollo, Tom Lee, KKR, Forceman Little, Blackstone, and I got to know the Apollo guys. They would request me, and I would work on their transactions over and over again. Came to like them. One day, I just got a call out of the blue saying, hey, we haven't hired anyone in a bunch of years. Would you like to come here? I said, well, I don't know. Let me go ask my boss. Well, I had two bosses at the time. One was Michael Klein, and one was Ruth Peratt. Both of whom have gone on to incredibly storied careers. They looked at me and they said, sure. There was no recruiting process the way there is today for the industry. Of all the shops I worked with at the time, I liked the way Apollo approac…

AI assessment note: “I worked on their transactions over and over again. Came to like them... After this exchange, I joined.”

Q What was your first paid job? What'd you learn from it?

A I'll bring us back to the early days of Edgemont, where we both grew up. My first real summer job was working at a toy store in Scarceville Village. You may remember it, it was called Child's Play. It's no longer there. It was a small single proprietorship owned by a fascinating and aggressive woman. There were two other older women who worked there and me, a fifteen-year-old boy who they shoved down in the stock room for nine hours a day and didn't really let out very often. What did I learn from that job? I would say physical labor is hard work. That there had to be a better way than the hours in the day that you can put in. I wasn't against hard work. My first job out of college working at Smith Barney, working a hundred hours a week, sleeping under my desk two or three nights a week. It wasn't the hard work, but it was the ability to see the old Andrew Carnegie. I can only do so much based on the labor of my muscles versus if I can get my capital to work for me. You can do lots of things, and that was the first eye-opening moment of that.

AI assessment note: “My first real summer job was working at a toy store in Scarceville Village.”

Q What'd you learn about leadership and your style of leadership in that journey?

A I knew I wanted to be in the deal business. I never thought about being in the management business. I learned on the fly. We didn't have a management structure. This wasn't GE where we had a management training program. We were growing so fast, and we were all figuring it out largely at the same time. I was always a lover of war movies and read a ton of history. The classic battlefield general who leads from the front was something that resonated with me. I believe never ask anyone to do anything you wouldn't do yourself. Demonstrate the The type of behavior that you want your teams to have and the beliefs and culture that you want your teams to have because organizations do reflect the cultural norms of their leadership. Normative behavior. If you're abusive and bad behavior, well, that trickles down. If you lead an organization with intellect and curiosity and lack of defensiveness and respect, then the organization will generally follow that. That's been the biggest learning along the way. The biggest change over the last five years, one of the things that was always ingrained in Apollo and quite frankly the industry, private equity is a secret of business. Information was power. Information was kept very close to the vest. The less the outside world knew about what we did, the better. We had grown up in a very non-communicative way, both externally and internally. When priv…

AI assessment note: “The classic battlefield general who leads from the front was something that resonated with me.”

Q start with 13 people, the top one percent of the top of what you saw at banks, you'd like to think the 5000 are still that top one percent, but inevitably when you grow, it's hard to Have that same level of individual excellence. How do you think about scaling the judgment and the experience that came from a smaller group of people to a much larger group of people?

A That is the rub. That is the whole shoot and match. We have two fundamental types of businesses. We have businesses that make a small number of decisions each year that have very consequential outcomes. And then we have other businesses that make thousands of decisions a week, and any one of those decisions is not going to have the most consequential outcome. The type of judgment and type of assessment you need sitting atop each are different. You need that judgment and that assessment to go way down in the organization in the former. The latter, you need the right people to With judgment sitting on top, making sure the guardrails are right and the processes are right, then those other businesses are much more about execution. It's the sourcing the flow and finding the right types of situations for that small group of underwriters to make the assessment of what fits in the box and what doesn't fit in the box. Ultimately, we want the top of the top all the time, everywhere, because it's not just about judgment. It's about culture and fit and bringing the right ethos to what we do every day. We're a business where your assets walk out the door every night. I used to say in private equity, those are the hardest types of businesses to go buy. I'd much rather buy business where your physical plan, your fixed assets are just there. Businesses where your people walk out every night, a…

AI assessment note: “You need that judgment and that assessment to go way down in the organization”

Q What are you hearing from institutional LPs as you're running around the world?

A In general, institutional LPs recognize the value of private assets across the board, and institutional LPs have been ahead of the curve compared to traditional public investors or what have you on Private assets in their portfolio and understanding what private assets can do to help the portfolio. And so whether you're talking about private equity or private credit, infrastructure, other asset categories, there's still a healthy demand. We mentioned a few minutes ago, the private equity cycle being a little bit lower on the monetization side, which has put some pressure on certain institutional investors to be able to Deploy private equity capital at the same pace because they've gotten a little bit less back. That's starting to right itself as portfolios in general continue to grow. Otherwise, across the board, the allocations continue to go up in private assets.

AI assessment note: “institutional LPs recognize the value of private assets across the board”

Q In the scheme of things in private equity, all alternatives, there aren't that many companies that are public. You mentioned the value that brings in aligning people in competition. What do you see as those strengths and then some of the weaknesses of being public and why there aren't more companies who have done it?

A It's different now than it was, say, 12 or 13 years ago when we went public. It's tough to be a public company today. We just got into the S&P last year. To be a successful public company, you need a big diversified footprint. You need a scale that's relevant. You think about the concentration in the public equity markets today. Don't even get me started on the brokenness of the public markets. You need a big diversified business, single category asset managers. You're generally just not going to be of a scale that's going to be relevant to be a five, seven, ten billion dollar equity public company. It may not be worth it for a lot of folks at this point. You're never going to get the interest level from investors. You need the breadth and scale to be able to do that. Now, the benefits, it's been an amazing unifying currency for us. It's been an amazing disciplinary tool to make us run a more efficient, better governed company, but it comes with cost. Running a public company and the legal and compliance and all that good stuff that you need, that's not a small operation. The one thing that I would have thought we would have done more, having a currency for acquisitions, was one of the reasons we went public. It hasn't materialized in the way we would have thought at the time. We tend to do a better job building our own businesses than going out and buying huge asset managers. …

AI assessment note: “Now, the benefits, it's been an amazing unifying currency for us.”

Q Would love to ask you about risks. What do you think is underappreciated by the market?

A We have an economy right now that is being extensively fueled by AI CapEx. Valuations in the public equity markets are increasingly tied to a handful of companies that have gone very long. AI that have made multi-trillion dollars worth of commitments to continuing to invest in that. There's an expectation of ROI on that capital. If those ROIs don't come to pass, I don't think the whole system is going bankrupt, but that clearly will have a weighing effect on the markets. Certainly the biggest hyperscalers will be okay, but that cascades down to many, many players, some of whom have gotten very levered to this. There's big embedded risk there. Six months ago, no one was talking about this. Now I think there's a real dialogue. It's shaved a little bit off the rose, but still the rose is blooming. I don't think it's flipped over because I don't think we know yet what the right answer is. There's still enough potential optimism to keep the dream alive. Each quarter, each six months, we'll turn over another card, and we'll see how that's shaping up, but that's representing at least a couple percent of GDP growth right now. That's driving massive investment in infrastructure and chip manufacturing and energy and all of these things. It's touching lots of different parts of the whole system.

AI assessment note: “There's an expectation of ROI on that capital. If those ROIs don't come”

Q What does it look like internally when you want to make sure in an environment like that, that your underwriting standards are as disciplined or more disciplined because of that defensive posture?

A It's part of our ethos. When I talk about the Apollo culture, it starts with, we are an investor's investor. We look at investing not as in how do we grow the asset manager, but how do we make good defensive investments? We are constantly trading the last percent of upside for downside protection across every asset class that we invest in. That starts from the investment committee on down, no matter what asset class we operate in. If we don't like the risk return in a certain area, we would sooner not deploy the capital or even give capital back than just deploy in the next best available thing in that asset class that you gave me money for. If we don't I think it's a good investment because we're putting our own money in it in such a big scale.

AI assessment note: “starts from the investment committee on down... we would sooner not deploy the capital”