"The Hottest PE" Apollo aggressively issued $75 billion in "private loans" in the third quarter, a year-on-year increase of 21%! CEO: If you don't want to invest in overvalued stocks, just invest in PE

One of the world's largest private lending institutions, Apollo Global Management, is reversing market concerns about the profitability of private credit businesses by aggressively issuing loans. Despite the pressure on investment returns from declining interest rates and narrowing credit spreads, the revenue generated from record new loan volumes is sufficient to offset this impact, leading the company to exceed expectations in its third-quarter performance.

Apollo issued $75 billion in new loans in the third quarter, a year-on-year increase of 21%. Over the past 12 months, Apollo has lent a total of $273 billion to global corporate borrowers, a staggering 40% increase compared to last year's annual lending pace. Its insurance business, Athene, reported net interest income of $871 million, the highest quarterly record in two years, with overall profits reaching $1.7 billion.

Apollo CEO Marc Rowan defended the private credit business during an analyst conference call. In response to market concerns about declining returns, he stated that even with lower yields, private credit remains attractive compared to other asset classes. He said that capital is rotating from the stock market to private credit, with high-net-worth individuals viewing it as an alternative to overvalued stocks.

This performance has alleviated investor concerns about the health of the private credit industry. Apollo's stock rose about 5% on the day, following a 4% increase for Ares Management the previous day due to better-than-expected earnings, indicating that market confidence in this asset class is recovering.

"Record Loan Issuance" Offsets "Narrowing Spreads"

Apollo's loan issuance capacity has become a highlight of its performance. The $75 billion in new loans in the third quarter is second only to the previous quarter, marking the second-highest in history. These loans are primarily funded by insurance premiums, with borrowers including large corporations like Intel and Electricité de France receiving loans in the billion-dollar range.

Currently, Apollo's annual lending volume is on track to exceed its five-year target set for October 2024, competing with investment banks like Citigroup in overall corporate loan volume. This underscores the company's ambition to become a major financial intermediary outside of the highly regulated banking system.

Although the net interest income from Athene's portfolio is below long-term expectations, the surge in new loan volume compensates for the decline in profitability. Apollo attributes part of its reduced spread targets to high-yield loans issued during the pandemic maturing and being replaced by lower-yield debt. However, the company maintains its long-term spread income targets and hedged $9 billion in interest rate exposure at the end of summer to further protect its balance sheet from the impact of declining yields.

Insurance Business Injection Drives Assets Over $900 Billion

In the third quarter, Apollo gained $82 billion in new assets, with Athene attracting $23 billion in net new funds, split evenly between retail annuity sales and so-called financing agreement borrowings. These inflows resulted in Apollo's fee-based revenue growth exceeding 22%, with assets under management surpassing $900 billion, all exceeding analyst expectations.

The merger between Apollo and Athene had raised concerns among investors, who worried that the deal would make the investment group vulnerable to declines in private credit returns. Rowan founded Athene in 2009 to match fixed annuity policies with higher-risk private loans This strategy has transformed the investment group, known for its bold corporate acquisitions and fierce creditor disputes, into one of Wall Street's largest lending institutions.

However, this also means that about half of Apollo's earnings come from the spread between Athene's asset returns and policyholder contract payments, rather than simply charging fees for managing assets for pension funds and sovereign wealth funds.

Apollo's stock has fallen by a quarter this year, lagging behind competitors like Blackstone and Ares, which do not hold insurance companies and whose balance sheets are not significantly affected by interest rate fluctuations. Part of the stock price decline is due to Apollo's failure to meet the ambitious spread profit targets set a year ago—last October, it predicted a typical annual increase of 10% in spread profits, but this year it has only grown by about 5%.

CEO Responds to Concerns About Private Credit Health

In the past month, debates surrounding the health of the private credit market have impacted the stock prices of some of the largest participants in the field. Concerns stem from multiple factors, including credit losses caused by fraud at subprime lenders Tricolor Holdings and auto parts supplier First Brands, the Federal Reserve's interest rate cuts, and the recovery of the bank-brokered syndicate loan market, which is eroding private credit returns.

Rowan attempted to clarify that the fraud and related credit losses at Tricolor and First Brands are isolated incidents and do not represent the underwriting standards of broader lending institutions. He stated that credit is credit, whether issued by banks or asset management companies, with little difference; fundamentally, there are excellent credit underwriters and less competent underwriters.

Some companies argue that these situations should not be conflated with private credit, as they do not involve the most common forms of direct lending and primarily affect hedge funds and banks.

In response to concerns about whether the surge in defaults could threaten the broader economy, Rowan dismissed them. He believes that internal issues within banks are more likely to pose a threat to the financial system, and recent bankruptcies are not indicative of some larger structural problem. He said, "I don't think we're talking about systemic risk; I think we're talking about late-cycle behavior, and I believe that bad actors will be weeded out."

According to Moody's rating predictions, the private credit market is expected to reach $3 trillion by 2028, roughly double its size in 2023. This asset class has yet to experience a wave of defaults following its rapid growth