The Broken Model of Traditional Investing: Insights from Apollo's CEO

According to Apollo's CEO, Marc Rowan, the rise of private markets and lending is ushering in a major shift in the investing world. We're seeing a notable transition from publicly traded stocks to alternative investments.

Rowan discussed with CNBC how passive investing and stock indexing are increasingly influencing stock markets, pointing to heavy reliance on several mega-tech stocks. To achieve true diversification, investors might need to explore the quickly growing realm of private markets.

"Our belief from 40 years ago that public investing was inherently safer than private might need reevaluation," Rowan remarked. He asserted that the conventional investing method is flawed.

Apollo, under Rowan's leadership, is at the forefront of redefining the investing landscape, where distinctions between public and private markets are becoming ambiguous. The expanding private credit sector is crucial to corporate America's growth.

Major private equity firms are now stepping in to replace banks and public stock markets in providing substantial loans. This shift opens both opportunities and potential risks for investors.

Apollo, along with its affiliates, manages more than $2.6 trillion in assets, showing significant growth from $40 billion in 2008 to $840 billion currently.

"While I'd like to claim credit, it really comes down to intrinsic changes boosting private markets," Rowan explained.

Factors Behind The Private Markets Surge

Post-financial crisis regulations have restricted traditional banks, allowing private credit markets to offer long-term, often riskier loans to large corporations.

Initially popular among entities like endowments and sovereign wealth funds, private credit has gained traction with family offices and affluent investors, thanks to attractive returns up to 15%.

Rowan observed that the 60-40 portfolio model of stocks and bonds is outdated. Exchange-traded funds and indices, driven by a few tech giants, don’t reflect the full market potential. With increasing correlation between stocks and bonds, rethinking diversification strategies is necessary.

Public companies have dwindled from 8,000 in the 1990s to approximately 4,000 today, limiting investors’ exposure to the broader scope of the American economy.

The Appeal of Private Investment

Shifting investments to private markets is a growing trend. Private credit firms have about $450 billion set aside for new investments, per Preqin research.

Larger public corporations are now substantial borrowers of private credit. For instance, a consortium, which included Pacific Investment Management Co., arranged $29 billion in financing for a significant data center development.

Private credit’s market size offers substantial opportunities. While commonly viewed as risky, it's often less risky or equivalent compared to public stocks in certain circumstances.

Rowan suggests that all investment types carry both safety and risk based on their liquidity, shifting the paradigm of how investments are perceived.

As more individual and family investors embrace private alternatives, there are concerns about investing in less liquid assets. Large endowments face challenges in liquidating private investments to raise capital.

Evolving Investment Practices

Emerging funds, market makers, and ETF products are striving to improve liquidity in private credit. Some level of illiquidity, according to Rowan, remains essential for superior returns.

"Someone rightly comfortable with a short-term illiquidity should consider involving themselves in private sectors," Rowan remarked.

Recent administrative actions may gradually increase alternative investment options for U.S. retirement savings, taking cues from countries like Australia and Mexico.

Wider access is poised to bring down costs, boost performance, and improve transparency for typically opaque private investments.

"Markets universally benefit from transparency, driving better access and efficiency," Rowan concluded.