Apollo Global Prepares for Market Turmoil with Defensive Strategy
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Apollo Global, one of the world’s largest alternative investment firms, is significantly bolstering its cash reserves, reducing its debt, and shedding riskier assets in anticipation of increased market volatility. The firm, managing $908 billion in assets, believes a conservative approach will position it to capitalize on opportunities during a potential downturn.
Rowan Prioritizes Balance Sheet Strength
According to sources, Apollo’s Chief Executive Officer, Marc Rowan, has made strengthening the company’s balance sheet his “number one job.” Rowan reportedly told investors earlier this month that a robust financial position is crucial for navigating challenging credit and equity markets and for maximizing investment gains “when something bad happens.” These comments, shared during private meetings at a Goldman Sachs conference, align with Rowan’s public warnings about current market conditions.
“We believe that prices are high, that rates — long rates — are not likely to plummet, and that we have enhanced geopolitical risk,” Rowan stated during the company’s earnings call in November. “As a firm, we are in risk reduction mode. We preach risk reduction. Our balance sheet is in risk reduction mode.”
An executive who attended an internal town hall meeting earlier this month echoed this sentiment, noting, “I get the feeling everyone here is on the edge for a next blow-up or something in markets.” Apollo declined to comment on these internal discussions.
Strategic Asset Adjustments
To fortify its position, Apollo is increasing liquidity at its insurer, Athene, through substantial purchases of U.S. Treasury bonds. Simultaneously, the firm is reducing its exposure to leveraged loans. Athene is actively working to halve its collateralized loan obligation (CLO) exposure to approximately $20 billion, a move Apollo has publicly acknowledged.
Beyond traditional debt markets, Apollo is also proactively addressing potential risks stemming from the rapid advancement of artificial intelligence. The Financial Times recently reported that Apollo is swiftly decreasing its investments in software loans that could be negatively impacted by AI-driven disruption. This strategic shift, underway for over a year, is being closely monitored throughout the financial industry, given Apollo’s significant influence in complex debt transactions, including financing for Intel and Elon Musk’s xAI.
Concerns Over Offshore Insurance and Contagion Risk
Rowan has also voiced concerns about potential “contagion risk” within the insurance sector, particularly regarding private capital groups operating with limited regulatory oversight. He specifically warned of potential bankruptcies among insurers that have relocated assets to the Cayman Islands, citing a lack of stringent rules and capital requirements.
“What people are doing is they’re taking business offshore to Cayman, where there are fewer rules and fewer capital requirements… We’ve now seen three bankruptcies in Cayman. We will see more. I do not believe that Cayman will be a viable US jurisdiction over 24 months,” Rowan stated at the Goldman Sachs conference.
Apollo believes that defaults in this offshore sector could spread to the broader insurance industry, as U.S. insurers that ceded assets to these Cayman-based entities would ultimately be responsible for covering any resulting losses, lacking a federal backstop.
Declining Returns and Interest Rate Bets
Rowan also expressed concern over diminishing returns in several debt markets, stating that “CLO spreads have completely and totally compressed.” This refers to the narrowing difference in yield between CLOs – bundles of low-rated loans used to finance private equity buyouts – and safer debt instruments.
In anticipation of potential Federal Reserve policy changes, Apollo has increased its hedging against floating interest rate debt. The firm is betting that the Fed will lower interest rates under pressure from President Donald Trump, a move that would protect the earnings of Athene, which holds a $50 billion portfolio of floating rate debt.
Conservative Fund Management
Apollo’s flagship $23 billion private credit fund, Apollo Debt Solutions, is being managed with lower leverage compared to its competitors. In October, the fund’s net debt-to-equity ratio stood at 0.58, down from 0.71 in October 2023 and below 1 in October 2022, indicating a more conservative investment approach.
Despite this overall defensive posture, some rivals note that Apollo remains active in the market, evidenced by its recent commitment to provide debt financing for Paramount’s $108 billion bid for Warner Bros Discovery.
[Additional reporting by Sujeet Indap in New York]
