Kleinman: PE Exit Window Narrowing on Valuation Gap

In Brief:

Private equity firms face years of sluggish exits as companies purchased during the decade-long low-rate era struggle to justify their acquisition prices in today's higher-for-longer interest rate environment, creating a bifurcated market where only disciplined buyers who avoided peak valuations can profitably sell assets. Scott Kleinman, Co-President of Apollo Asset Management, discusses this dynamic along with Apollo's structured financing approach to the Keurig Dr. Pepper transaction, growing concerns about excessive AI and tech valuations, and early evidence of AI-driven workforce changes across the firm's portfolio companies during an interview on Bloomberg Television. Speaking from Apollo's position as one of the world's largest alternative asset managers with over $700 billion in assets, Kleinman offers a sobering assessment of private equity's ongoing deleveraging challenge while defending his firm's contrarian value-investing strategy that positioned Apollo to execute multiple successful exits when competitors remain trapped by inflated purchase prices.

Big Picture Drivers:

• Rate Environment Reset: The fundamental shift from a decade of near-zero rates to sustained higher rates has created a structural valuation mismatch for companies acquired at peak multiples, requiring years for businesses to grow into their purchase prices

• Exit Market Bifurcation: Firms that maintained pricing discipline during the 2010s low-rate era can execute profitable exits at reasonable valuations, while those who overpaid during 2021-2022 remain stuck waiting for portfolio companies to justify their entry multiples

• AI Valuation Froth: Despite genuine belief in AI's transformative potential and volumetric expansion across the economy, mounting evidence of over-momentum in tech-related investments and unsustainable early-stage profit margins that will eventually normalize

• Workforce Transformation Acceleration: AI-driven productivity gains and labor reductions materializing across portfolio companies after two years of investment, with quarterly earnings calls increasingly featuring workforce displacement discussions alongside traditional financial metrics

Key Themes:

• Contrarian Value Discipline: Apollo's strategy of maintaining value-oriented investing principles throughout the low-rate decade—essentially "never getting the memo" about the extended cycle—positioned the firm to purchase quality companies at reasonable prices, enabling successful exits even at moderate valuations while competitors who paid peak multiples remain unable to sell profitably

• Structured Capital Solutions: Private equity's evolution toward creative financing structures using balance sheet and hybrid capital to help overleveraged portfolio companies reduce debt burdens, exemplified by Apollo's approach to Keurig Dr. Pepper where the firm provides downside-protected investments rather than traditional equity stakes

• Risk-Adjusted Tech Exposure: Strategic preference for providing financing and structured investments to high-valuation tech companies rather than taking direct equity positions, following the "selling pickaxes to gold miners" philosophy that seeks returns while avoiding exposure to valuation bubbles and eventual margin compression

• Volume-Value Disconnect Recognition: Clear-eyed understanding that AI's expanding presence across economic sectors doesn't automatically translate to sustained high profitability, as supply shortages and bottlenecks that drive current margins will inevitably correct themselves just as they did during PC and Internet revolutions

Key Insights:

• The Deleveraging Timeline: Using his now-famous "pig through the python" metaphor, Kleinman estimates the private equity exit challenge is roughly midway through resolution, with companies still needing several years to organically grow into valuations that made economic sense in low-rate environments but appear stretched under current conditions, creating a prolonged period of below-historical exit velocity across the industry

• Price Discipline Payoff: Apollo's ability to execute multiple high-profile exits including Aspen Insurance stems directly from purchasing companies at reasonable valuations rather than peak multiples during the acquisition frenzy, allowing profitable exits even at moderate valuations while competitors who paid top-of-market prices must wait for businesses to grow into those entry points or accept losses

• AI Investment Caution: Despite managing enormous pools of capital and expressing strong conviction about AI's volumetric growth trajectory, Apollo deliberately structures tech exposure through financing and downside-protected investments rather than direct equity stakes because current valuations in the AI space are "sometimes hard to wrap your head around" from an equity story perspective

• Labor Impact Reality: Portfolio companies show mixed AI implementation effects with some business areas still experiencing labor shortages while "lowest hanging fruit" productivity gains from AI are already materializing in more obvious use cases, though truly transformative workforce changes remain early days beyond these initial applications

• Circular Revenue Concerns: While diplomatically avoiding direct criticism of specific deals, Kleinman acknowledges significant "value on paper" being created through non-traditional tech deals with circular revenue structures where investments return as customer spending, a pattern that historically leads to one-sided outcomes where early participants profit but later investors "ride it back down"

• Market Timing Challenges: Despite the higher-for-longer rate environment theoretically limiting how far valuations can stretch in leveraged buyouts, visible over-momentum and excessive enthusiasm are building in tech-related investment spaces, suggesting some market participants are repeating the 2021-2022 overpaying mistake even as others remain stuck with legacy positions from that era

Memorable Quotes:

• "The pig is sort of somewhere like passing through the small intestine or something like that" - Kleinman, updating his widely-quoted Berlin conference metaphor about private equity's multi-year exit challenge to indicate the industry remains far from resolution

• "It's not that it's a tough exit environment, it's a tough exit environment at prices they would be happy with to justify their purchase prices. So if you've paid reasonable prices for assets, you absolutely can get out now" - Kleinman, explaining the bifurcated market where Apollo can exit successfully while competitors who overpaid remain trapped

• "We'd rather be selling pickaxes to the gold miners than doing the gold mining ourselves" - Kleinman, describing Apollo's strategic approach of providing financing to high-valuation tech companies rather than taking direct equity positions despite having enormous capital pools seeking deployment

• "People confuse the volume story and the value story. Just because volume is going up doesn't mean the profits that we're seeing today in the earliest days of AI, where there's supply shortages, bottlenecks, et cetera, for different components in the value chain that eventually will correct itself" - Kleinman, warning about the disconnect between AI adoption growth and profit sustainability

• "A lot of folks are creating a lot of value on paper right now and even more than on paper, at some point these type of things usually lead to one side outcomes. But for the time being there's a lot of money to be made along the way. But the problem is when it flips over, whoever's left sort of holding the bag rides it back down" - Kleinman, offering measured concern about circular revenue structures in tech deals without directly criticizing competitors

The Wrap:

Kleinman's assessment reveals a private equity industry still years away from normalizing exit activity, split between disciplined value investors like Apollo who can profitably sell assets and firms trapped by 2021-2022 vintage acquisitions at peak multiples. His warnings about AI and tech valuation froth carry particular weight given Apollo's scale and access to capital—the firm is choosing structured financing over direct equity stakes precisely because current valuations appear unsustainable despite genuine conviction about the technology's transformative potential. As AI-driven workforce reductions begin appearing in quarterly earnings discussions across portfolio companies, Kleinman's distinction between volume growth and value creation becomes increasingly relevant for investors navigating momentum-driven markets where early-stage supply constraints drive margins that will inevitably compress. The interview ultimately portrays an experienced investor acknowledging significant wealth creation happening in real-time while methodically positioning his firm to avoid becoming the eventual bag-holder when valuations correct.