Top Apollo Executive Sounds Off on ‘Arrogance’ in Private Markets - “Literally all the marks are wrong”
In the WSJ today. Pretty ominous stuff for a lot of JAMMBOs.
“Asked what kind of recovery rates he anticipates on a private-credit loan to a generic small or midsize “Joe Software Company,” Zito said:
“Joe Software Company, if he’s in the wrong place, I think is going to recover somewhere between 20 and 40 cents.”
He suggested investors’ voracious demand for buying stakes in existing private-equity investments but wariness of the private debt underpinning those deals doesn’t add up, since the equity would be junior to the debt if there were major problems with these assets.
“There’s . . . unlimited demand for secondary private equity but they are worried about private credit which finances 80% of those portfolios . . . I can’t compute, but I’m the dumb guy. I don’t understand. I start saying this and I get these blank stares back at me like OK, I don’t know.”
“I literally think all the marks are wrong. Is that what you’re asking me? I think private-equity marks are wrong.” https://www.wsj.com/finance/investing/top-apollo-executive-sounds-off-on-arrogance-in-private-markets-4f09b5cb?reflink=desktopwebshare_permalink
It seems like the Apollo executive is raising significant concerns about the valuation practices in private markets, particularly in private equity and private credit. Here's a breakdown of the key points:
Recovery Rates in Private Credit: The executive highlights that recovery rates for private-credit loans to smaller companies, like "Joe Software Company," could be as low as 20-40 cents on the dollar if these companies are in a tough spot. This suggests a grim outlook for certain segments of private credit, especially in a downturn.
Mismatch in Investor Sentiment: There's a noted contradiction in investor behavior. While there's "unlimited demand" for secondary private equity stakes, there's simultaneous wariness about the private credit that underpins 80% of those portfolios. This inconsistency is puzzling, as equity is junior to debt in the capital structure, meaning equity holders would take losses before debt holders in a distressed scenario.
Valuation Concerns: The executive bluntly states that he believes "all the marks are wrong," referring to the valuations of private equity and potentially private credit. This could imply that current valuations are overly optimistic and not reflective of the true risks or market conditions.
Market Arrogance: The tone suggests frustration with what he perceives as arrogance or complacency in private markets, where investors may be ignoring fundamental risks or inconsistencies in their strategies.
This commentary aligns with broader concerns in the private markets, especially as rising interest rates and economic uncertainty put pressure on leveraged companies and their creditors. It underscores the importance of rigorous due diligence and a cautious approach in both private equity and private credit investments.
Sources: Private Equity vs. Private Credit, Private Equity vs Megafund Credit, Are private debt funds getting fucked right now?, Private Credit Resources and Prep, https://www.wallstreetoasis.com/forum/credit/private-credit-will-it-hold-up?customgpt=1
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