Apollo exec: More investors get access to excess returns

In an era of high interest rates, Israeli banks are making incredible profits. Many investors want a piece of the credit saving pie, rather than buying stocks or bonds in the public market. To this end, large investment funds such as Apollo Global Management and others have built proprietary investment vehicles that compete with other alternatives.

Jonathan Orr, Managing Director responsible for managing client portfolios across international wealth at Apollo, one of the world’s largest leading investment companies, explained at the Globe Alternative Investments Conference, which was held in partnership with the Phoenix Group and Apollo, that the growth of this market is good for all markets, because Creates alternatives. He also stated that he is “unfazed” by the start of interest rate cuts by the US Federal Reserve, and believes that the provision of private debt through funds such as Apollo will remain attractive, compared to alternatives.

“The private equity market is currently valued at about $1.5 trillion,” Orr says, but adds: “It is difficult to know the exact number because there is no data available. In practice, this market includes infrastructure debt, entrepreneurship debt, and project finance debt.” Infrastructure. And a variety of other things when people talk about the private credit market, they’re talking about direct lending, which is estimated at $750 billion, and I think the right thing is to compare it to other types of credit markets, for example the public debt market (high public yield), At $1.5 trillion, syndicated loan allocations (by many lenders) of similar size have grown at a slower pace in recent years, and the private credit market has grown even larger.

“More investors are getting excess returns.”

“The private credit market has grown and, to some extent, taken a share of the leveraged (public) debt market. I don’t see this as a negative. In my opinion, this means that more investors can access the surplus,” Orr adds. “It is also a channel “An alternative for borrowers, which is good for broader markets.”

Orr explains that the approach offered by the private debt market, where investment funds such as Apollo and other entities provide credit to finance infrastructure projects and other types of projects, is important. He confirms that the reason for this is that “these options are starting to dry up.” He points to the situation in 2022, a year in which global inflation suddenly reared its head and the US central bank, and then central banks around the world, raised interest rates sharply. Orr points out that the private debt market creates more alternatives for companies and economic entities.

Why is the private debt market growing?

Orr: “One factor is the approach: education or awareness. For many years, the private credit market was only for institutions. It provided credit, locked up for periods of 6 to 7 years, to investment funds that had very high minimum thresholds (for investors). (Grants) Loan) This market has grown rapidly today we see a broader approach, as well as investors who are more aware of their ability to obtain a higher return, we also see new semi-liquid instruments relevant to a greater number of investors for example, family businesses and even smaller corporate entities. “

Orr describes a new picture, created in recent years, in which the credit granted is considered private, that is, not raised on the stock exchange or through banks, but through private investment entities, so that it is more accessible and liquid than before. . Orr says liquidity can also reach quarterly levels, meaning that when an order is issued, lenders can get their money back within a few months. These loans are still considered illiquid, but according to Orr, that is how investors in private entities are effectively protected. But he says: “Today, the minimum amounts (to extend a loan in the private credit market) are lower, and investors have more access to this market,” which explains the growth in the private debt market. He adds that “education” has also become an important factor. Investment managers today feel obligated to explain to investors the alternatives available in the private debt market. “Separate the myth from reality,” he says.

“We still have a very high interest rate in the debt market.”

US Federal Reserve Chairman Jerome Powell reduced the interest rate on the dollar by 0.5% in September to 5%. How does this measure affect the private debt market?

“We could talk about this topic all day long,” Orr points out with a smile, as an interest rate cut could have many consequences for a market that is ultimately in debt. “The simple answer to this question is that total returns, in an absolute sense, remain very attractive in the private debt market. If the Fed cuts interest rates another 0.5% by the end of the year, we will end 2024 with interest rates north of 4%, and that It has not happened, except for the last two years, since 2007. This means that after the interest rate cut, we are still at a very high interest rate in the private credit market, around 5%-6%, meaning that the private debt market provides a return of more than 10% to investors. .

According to Orr, even after a rate cut by the Fed, the private debt market remains more attractive compared to other alternatives investors face, such as providing credit as part of a pool (yielding 2% above the federal funds rate) or the market for marketable debt securities with higher interest rates. High yield (3% above the federal funds rate). “The returns on money market funds are falling rapidly. I think the prospects in the private market are still very attractive,” he adds. “Another way to think about interest rate cuts is on the risk side. Lower interest rates mean lower financing costs.” This is good for investments within the fund (reduces the risk of corporate bankruptcy). I believe this does not change the attractiveness of the private debt market in general.

Default rates are rising. How does this affect you?

Orr points out that since the end of last year, his industry has noticed an increase in secured debt, due to the increase in interest rates. The rate of loans that do not pay interest (non-accruing) has increased. “This is not surprising. We often talk about the importance of vintage. I divide the market into two parts, the part before 2022 and the market since then. What did the market look like before 2022? Zero interest rates and a rise in inflation that we thought would quickly disappear in 2022, Loans were given to companies that could justify themselves in an interest-free environment, but not when the interest rate was much higher.

Interest rates rose that year, leading to an increase in leverage and putting pressure on many companies that were already using leverage at the time. “Since 2022, the environment has changed a lot. Loans were given with a horizon in which the interest rate was going (upward). Loans were given in a much more conservative way.”

What is the best way for an investor to choose the right fund in your region?

Orr points out that supply in a number of funds has increased significantly, along with demand from investors. “You need to find investment managers who have been doing this for many years. We have half a trillion dollars. And when it comes to providing private credit, we are the largest private entity in the world in this area. I would check historical performance. In addition, I would check Default Rates (Insolvency) Our history goes back to 2008. You need to check what type of market you want to be in. We specialize in large capital loans, and most of the players are in the business of providing private credit loans to small and medium sized businesses. and companies with earnings before interest, taxes, depreciation, and amortization (EBITDA) between $30 million and $60 million annually.

Full disclosure: The conference was held in partnership with Phoenix and Apollo Global.

Published by Globes, Israel Business News – en.globes.co.il – on October 10, 2024.

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