Private Credit's Next Trillion Will Arrive as Tradable Securities

What's New

Private credit will reach its largest new buyers only as rated securities that price daily and trade. Marc Rowan, Chairman and CEO at Apollo Global Management, argues this in a fireside chat at Bank of America's 31st Annual Financials CEO Conference. He names five new buyers: individuals, insurers, institutional debt and equity buckets, traditional asset managers, and retirement plans. He says none of them naturally invest through funds. Allocators should judge credit managers on daily pricing, security identifiers, and settlement alongside returns.

Why It Matters

The industry grew up selling drawdown funds to one client, the institutional alternatives bucket. Rowan sizes that bucket at about 10% of institutional portfolios. The debt and equity buckets dwarf it. Those buyers rarely hold funds. Most peers are pushing semi-liquid funds into wealth channels. Apollo is building products that plug into existing public market systems. That bet favors Apollo, which has already built much of the plumbing.

Zoom In

Apollo runs about $850 billion of credit. Clients have bought it through 16 separate strategies, from core investment grade to European levered lending. Each strategy has its own liquidity terms. Core investment grade returns capital monthly. Levered lending returns 5% a quarter.

Rowan's alternative pools the book and cuts it horizontally. One slice is investment grade. One is below investment grade. One is equity. Mixing the three approximates any of the 16 strategies. The resulting securities carry ratings, a daily price, and an identifier that trading systems recognize. Rowan says Apollo has issued $30 billion so far. He expects $40 billion by year end. He also expects Apollo to raise 3 times as much this way as through retail this year.

The plumbing is arriving in stages. Apollo's investment-grade products moved to daily NAV on June 30. The full credit business follows on September 30. Regular way settlement is targeted for next year.

Reality Check

• Slicing adds no liquidity to the loans. The underlying assets are still private loans, and a daily NAV on them is a model price. The depth behind a Tuesday sale is untested beyond Apollo's own market making.

• Trading volume is small against the base. Apollo expects about $50 billion of trading this year. That is roughly 6% of its credit book.

• A new wrapper creates no new loans. Rowan calls origination the bottleneck and says the industry will not grow to the sky. Better distribution cannot outrun the supply of assets to fill it.

• Replication is approximate. Rowan concedes the slices do not exactly match the 16 strategies. Buyers accept tracking error in exchange for liquidity.

Memorable Quotes

• "In our industry, 95% of the firms literally want the world to stop changing until they retire." Rowan casts most competitors as defenders of the fund model.

• "It turns out that none of the five new customers are natural investors in funds." The whole strategy rests on this premise.

• "It is not an exact replica of each of these 16 strategies, but they can get excess return per unit of risk." He concedes the product trades precision for access.

• "If they change their mind on Tuesday, they can sell it." This is the promise the next credit sell-off will test.

The Wrap

Rowan's case gains support if Apollo delivers regular way settlement next year. Competitors issuing similar securities would help more, since a market with one main issuer stays thin. The case weakens if the slices trade at wide discounts during stress. The first credit sell-off after settlement goes live will show whether the Tuesday exit holds.