Apollo's CEO has warned of inflated asset prices and escalating geopolitical risks. The company has significantly increased its cash reserves, reduced leverage, and divested high-risk assets such as AI loans and CLOs, with its insurance arm cutting CLO exposure to $200 billion. Apollo also cautioned that offshore regulatory arbitrage could trigger systemic risks in the insurance market, preparing for potential market volatility.
Global asset management giant $Apollo Global Management (APO.US)$ is implementing a series of aggressive defensive measures by stockpiling cash, reducing leverage, and selling off high-risk debt assets to prepare for potential market volatility.
On December 22, the Financial Times reported that Apollo Global Management CEO Marc Rowan explicitly stated in private meetings with investors this month that his top priority at present is to build “the best possible balance sheet,” establishing a defensive stance. This will ensure the company is in a favorable position to profit when credit and equity markets face greater challenges and “bad things happen.”
According to sources present at the meeting, Rowan warned that current asset prices are too high, long-term interest rates are unlikely to plummet significantly, and geopolitical risks are intensifying. He candidly noted, “As a company, not only are we in risk-reduction mode, but our balance sheet is also in risk-reduction mode.”
The report pointed out that Apollo Global Management has shifted from aggressive investments to conservative defense, focusing on cleaning up its balance sheet and maintaining a “cash-is-king” risk-averse model. It has cut AI-related loans and CLO exposure, reduced fund leverage, increased interest rate hedging, and warned that offshore regulatory arbitrage could trigger systemic risks in the insurance market.
Analysts have noted that Apollo’s strategic shift comes as cracks begin to show in the private credit market. As an industry bellwether, this trillion-dollar market is now facing dual shocks of deteriorating fundamentals and shaken confidence. According to a Wall Street News article, another major private credit institution $Blue Owl Capital (OWL.US)$ recently exited $Oracle (ORCL.US)$ a $10 billion financing project due to risk considerations. Coupled with plunging stock prices and surging bad debts from funds managed by firms such as KKR and Blackrock, this demonstrates that the credit market, once considered a safe haven, is now undergoing severe tests.
Cash is King and Risk-Averse Mode
While overall financial markets remain optimistic due to expectations of Federal Reserve rate cuts, Apollo’s management is sending highly cautionary signals internally.
According to media reports, a senior executive of Apollo Global Management who attended the company-wide internal meeting earlier this month revealed that there is an atmosphere within the company akin to 'waiting on the edge for the next market surge or some kind of upheaval.'
Marc Rowan reiterated his concerns about excessive market exuberance to investors at a conference held by Goldman Sachs. He believes that not only are asset prices currently at high levels, but the stickiness of long-term interest rates has also exceeded expectations.
Based on this assessment, Apollo Global Management has opted not to chase risks and instead focuses on cleaning up its balance sheet. This defensive posture is not a sudden decision; according to informed sources, this shift has been ongoing for more than a year.
Analysts point out that given Apollo’s significant presence in financial markets, its move from aggressive investment to conservative defense is considered a major change with signaling implications within the industry.
Selling High-Risk Assets: AI Loans and CLOs
Apollo’s specific actions in asset disposal vividly reflect its concerns about bubbles in certain sectors.
The first focus is a reassessment of the technology sector. Apollo is concentrating on reducing risks in areas particularly vulnerable to disruption by artificial intelligence technologies. Specifically, for loans to the software industry, Apollo believes that the development of AI may pose challenges to these companies’ business models, thereby affecting their debt repayment capacity.
This assessment is not an isolated case. According to a previous article by Wall Street News, private credit giant Blue Owl Capital recently decided not to support Oracle's $10 billion AI data center project, citing similar concerns regarding execution risks and the borrower’s debt level.
Analysts noted that Blue Owl’s “sudden halt” directly led to questions about the sustainability of the financing chain for AI infrastructure, corroborating Apollo’s foresight into the risks in this area.
Secondly, it involves retreating from the credit derivatives market. Rowan pointed out that returns in many debt markets have fallen to unattractive levels, especially for portfolios of low-rated loans used to finance private equity acquisitions – the spreads on CLOs have become 'completely and utterly compressed.'
To this end, Athene, an insurance company under Apollo Global Management, is building liquidity by purchasing tens of billions of dollars in government bonds and plans to cut its collateralized loan obligation (CLO) exposure by about half to USD 200 billion.
Deleveraging and Interest Rate Hedging
In addition to adjustments on the asset side, Apollo has adopted a more conservative approach on the liability side and in its hedging strategies.
According to sources familiar with the matter, Apollo Debt Solutions, Apollo’s flagship fund with a scale of USD 23 billion, has a leverage ratio lower than its competitors. Data shows that the fund’s net debt-to-equity ratio (a metric measuring the extent of borrowing for investment) was 0.58 in October.
Although this figure is slightly higher than a year ago, it is significantly lower than the nearly 1 level seen in October 2022 and also below 0.71 in October 2023. Apollo executives emphasized that such low leverage operations are indicative of their conservative stance.
Meanwhile, to address risks associated with interest rate volatility, Apollo increased its hedging positions against floating-rate debt this year. The company is betting that the Federal Reserve will continue to lower rates under pressure from Trump.
Given that Athene holds a portfolio of floating-rate debt totaling USD 50 billion, its earnings would shrink with declines in the Federal Reserve’s benchmark interest rate if no hedging measures were taken. These hedges are designed to protect the company's profitability during periods of declining interest rates.
Vigilance Against Offshore Regulatory Arbitrage Risks
Rowan’s concerns extend beyond market prices to systemic risks posed by regulatory arbitrage. He specifically warned about the 'contagion risk' in the insurance market, pointing out the rapid expansion of private capital groups amid insufficient regulation.
Rowan strongly criticized certain insurers’ practice of transferring assets to offshore jurisdictions like the Cayman Islands. According to reports, he publicly stated at a Goldman Sachs conference: 'What people are doing is shifting operations to the Cayman Islands, where there are fewer rules and lower capital requirements.'
He pointed out that there have already been three bankruptcy cases in the Cayman Islands, and more will likely follow. He even asserted that he does not believe the Cayman Islands will remain a viable jurisdiction within the next 24 months.
Apollo Global Management believes that since the assets transferred offshore are often ceded by U.S. insurance companies, which lack a federal government backstop mechanism, any offshore default will ultimately result in losses borne by U.S. insurers, triggering a chain reaction across the entire industry.
Chill in the Private Credit Market
Notably, Apollo's defensive measures are unfolding against the backdrop of a "reckoning moment" for the entire private credit industry. According to a Wall Street commentary, this market, which exceeds $2 trillion in size and was once touted as a safe haven for investors, is now experiencing a collapse in confidence.
JPMorgan CEO Jamie Dimon previously warned that seeing "one cockroach" in the private credit market might indicate many more, suggesting widespread systemic risks in the market.
Now, this warning seems to be materializing. As default rates rise, the Business Development Company (BDC) sector targeting individual investors is suffering significant blows.
According to the Wall Street Journal, despite the S&P 500's gains this year, shares of FS KKR Capital, BlackRock’s BDC, and others have plummeted, with bad debt rates surging. Notably, FS KKR Capital's non-performing loan ratio has risen from 3.5% at the beginning of the year to approximately 5%.
While some competitors like Blue Owl have attempted to address liquidity challenges through mergers and acquisitions, fears over valuation mismatches and redemption pressures are spreading. In contrast, Apollo’s strategy of preemptively cleaning house and hoarding cash appears to be a move to stockpile resources in preparation for an impending industry downturn.
Editor/KOKO