BREAKINGVIEWS-Apollo tempts fate with credit-god complex

By Jonathan Guilford

NEW YORK, Nov 25 (Reuters Breakingviews) - Apollo Global Management’s APO.N quest for supremacy is reaching mythic proportions. The buyout and lending shop managing more than $900 billion increasingly embodies its namesake’s penchant for prophecy, with an insurance-fueled model widely imitated. Boss Marc Rowan tried to quiet a chorus of Cassandra-like warnings this week, but there are growing concerns of a credit-god complex.

Athene, Apollo’s captive life insurer, is the pillar of Rowan’s business model. It issues annuities that require high-yielding assets to fund. A Byzantine system flows from there. One unit helps companies turn music royalties or boats into securitized loans. Anotherissues IOUs against airplanes and their engines. All this competes with traditional financing sources.

Although the approach suits Athene's balance sheet, fears of missteps are rising. The interconnectedness of often-opaque offshore insurers and New York-based financiers has raised alarms at the Bank for International Settlements, the International Monetary Fund and beyond. Apollo’s shares are now the most-shorted among its major private equity peers, according to LSEG data.

Rowan took to the mountaintop on Tuesday to push back. One slide listing recent headlines asked: “Does anyone know what they’re talking about?” An appendix to the presentationargues that Athene is a safety standout as others gorge on risk.

One Rowan target is overly generous safety labels. None of Athene’s balance sheet has credit ratings from smaller outfit Egan Jones, and fewer than 8% is reviewed solely by KBRA or DBRS. It also clocks the lowest relative exposure to troubled commercial real estate equity among a host of insurers, the lowest share of sub-investment-grade bonds and only tiny exposure to junk-rated loans.

As it deflected concerns, Apollo also emphasized its ever-growing ambitions. Rowan vowed to seek a “replacement” product for collateralized loan obligations, securitized loan bundles that keep credit markets churning. They account for $1 trillion in the United States alone, according to CLO Research. It similarly peddles “replacements” for equity- or fixed-income exposure. An exchange-traded fund including harder-to-trade loans is a quiet side project that tests the big idea of market-making in private credit.

Even at $3 trillion of assets, however, non-bank lenders account for a mere sliver of the worldwide pool. U.S. banks alone count some $19 trillion in credit outstanding, per the Federal Reserve. Apollo is unlikely to ever be as deep in the market plumbing as JPMorgan JPM.N.

With growth in private markets so rapid, however, the firm stands to grow in significance. Inevitably, that will attract more scrutiny. When the Apollo of Greek lore tried to usurp Olympus, he was cast out and rendered mortal. It's an ancient tale all too familiar on modern Wall Street.

Follow Jonathan Guilford on X and LinkedIn.

CONTEXT NEWS

Apollo Global Management, the private equity and credit firm, hosted an investor update for its Athene insurance arm on November 24.