Key Takeaways

Apollo transformed from traditional asset management to a principal-focused model by merging with insurance company Athene, creating $300 billion of their own balance sheet capital that enables better alignment and duration-matched investments at attractive spreads.

Private credit is evolving beyond distressed situations as investment-grade companies like BP and Intel now access private markets for customized financing solutions, representing a fundamental shift in how large corporations view alternative capital sources.

The convergence of private and public markets is accelerating through technological innovations like tokenization and AI, with Apollo experimenting in 24/7 trading capabilities and expecting dramatic changes in secondary market liquidity and wealth management access.

U.S. capital markets maintain significant competitive advantages including scale ($15 trillion vs. Europe's $500 billion in securitized markets), faster deployment, lower cost of capital, and superior regulatory clarity, though maintaining this dominance requires continued innovation.

Organizational culture drives investment success through Apollo's flat structure, cross-team collaboration, and focus on total origination ($250 billion annually) rather than individual fund performance, enabling flexible capital deployment across opportunities.

Deep Dive

Podcast Introduction and Market Context

The episode opens with Patrick O'Shaughnessy introducing John Zito, Co-President of Apollo Global Management, setting the stage for an exploration of Apollo's role in financial markets and the convergence of private and public markets. The conversation begins with Zito reflecting on the dramatic transformation of capital markets over the past 20-25 years, highlighting how loans evolved from being solely on bank balance sheets to tradable assets, and how the scale of financial markets has expanded exponentially—with Apollo now managing nearly $800 billion.

Apollo's Innovative Business Model Evolution

Zito explains Apollo's strategic shift from a traditional asset management approach to a more aligned, principal-focused model. The key transformation came through their merger with Athene, an insurance and retirement services company, which brought approximately $300 billion of their own balance sheet into the equation. This allows Apollo to invest 95% in investment grade assets and 5% in alternatives, writing annuities at 4-5% while investing at 6.5%. The strategy represents a fundamental shift from bank-funded, shorter-duration financial products toward retirement and insurance-related, duration-matched capital investment, creating stronger alignment between asset managers and investors.

U.S. Capital Markets Dominance and Competitive Advantages

The conversation turns to the U.S.'s near-monopolistic position in global capital markets. Zito outlines key American advantages including the largest equity market, best venture capital ecosystem, faster investment responses, lower cost of capital, high talent density, and clear regulatory environment. He notes that U.S. markets are significantly larger than European counterparts (citing $15 trillion versus $500 billion in securitized markets), and historically every dollar leaving the U.S. has returned due to investment attractiveness. However, he acknowledges potential emerging opportunities for alternative capital markets and the risk of losing competitive advantages if the current system isn't maintained.

Organizational Structure and Investment Philosophy

Zito describes Apollo's unique approach of hiring highly competitive, knowledgeable professionals who understand entire capital structures, with no internal "walls" between different investment teams. The open architecture allows cross-team collaboration, with incentives aligned toward overall origination ($250 billion annually) rather than individual fund performance. This flexibility enables them to adapt solutions across different capital pools and focus on finding the best solution for each company, not just maximizing returns for a specific fund.

The Athene Innovation and Asset Origination

The development of Athene during and after the financial crisis capitalized on wide credit spreads and long-duration, cheaper liabilities. From 2014-2022, Apollo invested nearly $10 billion to build internal origination capabilities, hiring 4,000 employees and creating businesses like PK Air, NuFi (non-qualified mortgages), and Atlas. This massive investment in origination infrastructure allows them to generate differentiated assets for their balance sheet, setting them apart from competitors.

Current Portfolio Composition and Fee Strategy

Apollo's current $800 billion in assets breaks down to approximately 65% investment grade, with about $300 billion on their own balance sheet and the remainder from third-party investors. Their business segments include private equity, secondaries, climate business, and a fast-growing hybrid business (between performing credit and private equity) at over $80 billion. Their fee philosophy centers on demonstrating exceptional performance to justify higher fees, with fee levels influenced by overall market rates and return potential.

Private Credit Evolution and Market Expansion

Zito discusses how investment-grade companies are now accessing private credit—previously uncommon—with Apollo completing multi-billion dollar deals with major companies like BP, Air France, Vinovia, and Intel. Their private credit offerings feature off-balance sheet structures, longer duration, flexible coupon terms, customized repayment schedules, and potential for delayed payment ramps. This represents a shift where private credit is seen as a diversification option rather than a negative alternative.

Market Structure Transformation and Liquidity Trends

The conversation explores the changing investment landscape after a long period of zero/negative interest rates, with challenges in maintaining high returns (15%+) without low interest rate subsidies. Zito predicts significant changes in secondaries marketplaces and the development of private asset exchanges, particularly as the wealth management sector grows (noting 91% of private wealth clients currently lack alternative investments). He anticipates a transition from traditional drawdown capital models to evergreen investment structures.

Technological Innovation and Future Markets

Apollo is experimenting with market-making on private investments, tokenizing funds to enable 24/7 trading, and exploring blockchain protocols for fund listings. Zito sees potential for more liquid secondary markets for private equity interests, drawing parallels to fixed income markets where portfolio trading reduces transaction costs. He's particularly optimistic about AI's potential across three business segments: aggregating unstructured data, optimizing financial services operations, and enhancing investment decision-making through AI "co-pilots."

Complex Deal Case Studies

Atlas Structured Products Acquisition

Zito details the acquisition of a $45 billion balance sheet from Credit Suisse with diverse loan types, requiring significant operational expertise (300 people, complex margining). Successfully integrated and rebranded as Atlas, they now control 280 separate warehouses with goals to grow from 28 billion to 100 billion in warehouse business, having hired 180 new employees and established full corporate infrastructure.

Carvana Investment Experience

A significant investment that fluctuated from being down $500 million to up $1 billion in six months, demonstrating dramatic bond value fluctuations while remaining relatively stable in Apollo's overall portfolio context through proactive monitoring and stakeholder communication.

Complex Debt Negotiation Success

Zito describes a complex $5.5 billion debt negotiation involving creating a "co-op" where creditors agreed to a unified approach. Despite initial resistance and skepticism, persistent communication and relationship-building over an extended period resulted in a rare "win-win" scenario where stock price rose from $4 to $280 within 12 months and bonds traded up from 30 to 120.

Hertz Investment Journey

Beginning with a 2016 bankruptcy prediction that initially didn't materialize, COVID-19 dramatically changed the situation. Apollo became involved by buying term loans at 60 cents, becoming the largest secured lender, refinancing $4 billion in used car vehicle financing, buying Hertz's fleet finance platform, and providing $2.5 billion exit financing—demonstrating their ability to move "big and fast" across different parts of the capital structure.

Organizational Culture and Leadership Philosophy

Zito emphasizes Apollo's flat, non-hierarchical structure where employees at all levels can freely share ideas, with strong emphasis on personal accountability ("thumb guys, not finger guys"). The leadership encourages entrepreneurial spirit and innovation through a meritocratic approach where good ideas are welcomed regardless of source. He describes being highly comfortable with change and proactively seeking to "disrupt ourselves" before external disruption occurs.

Investment Strategy Evolution and Future Outlook

The conversation concludes with Zito suggesting a shift from viewing private assets as a small portfolio allocation (20%) to potentially considering private and public assets as a unified investment approach. He sees emerging opportunities in compute infrastructure investment for AI, sports financing, and specialty finance opportunities. His advice to young entrepreneurs centers on finding passion, creating unique products, focusing on risk management, and staying deeply engaged with specific investment niches.

Personal Philosophy and Meaning

Zito reflects on his journey from originally wanting to be a football coach to finding meaning beyond purely financial pursuits. He credits his supportive family, particularly his wife's insights and his stepdad's supportive role, while viewing the investment business as an "eternal learning center" spanning multiple industries where consistent performance builds client trust and authentic product creation generates long-term value.

John Zito - Inside Apollo - [Invest Like the Best, EP.426]