Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Apollo Global Management Co-Founder and Senior Managing Director Joshua Harris, and CNBC’s Leslie Picker, live from the CNBC Institutional Investor Delivering Alpha Conference in New York City on Thursday, September 19th.
TYLER MATHISEN: Thank you for coming. Thanks so much. Always fun. All right, folks. I think you deserve a round of applause. We’re coming to our last — you guys deserve a round of applause. We’re coming to our last speaker, and he is going to entertain you. He is an interesting fellow and he is one of the co-founders of Apollo Global Management.
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He will talk a little bit about what he’s seeing in the markets today, where he is finding alpha. He’ll tell us a little bit about the alternatives space that he is exploring, some of the business stories that he has lived, and I hope he’ll get into a little bit to two of his passions that happen to be mine, those are hockey and basketball.
He is one of the managing owners of the Philadelphia 76ers, who came within a couple of bounces of bouncing out the eventual NBA champions, the Toronto Raptors last year, and the New Jersey Devils, my hometown hockey team
. I live in the New Jersey suburbs. They have the top draft pick of all, a phenom named — I believe it’s Jack Hughes; and they have returning to their lineup — see, I’ve done my homework, folks — returning to their lineup this year, the year before last’s most valuable player. Please welcome to the stage, Joshua Harris of Apollo Global Management, and my friend Leslie Picker.
LESLIE PICKER: All right. We’ve got an MVP here to close out the day.
JOSHUA HARRIS: Am I talking sports or business? Because I thought I was talking business but…
LESLIE PICKER: The moderator is not so proficient in sports, so I think you’re going to be stuck talking finance with me. But maybe we’ll squeeze in a sports question. You guys stick around. So, big theme today has been this idea of public markets versus private markets. And in a recent Bain report, you were quoted as saying that if you, meaning a company, have a complicated story, you’re not really welcome so much in the public market that is creating either a fertile hunting ground for private equity.
A lot of people look at this and they say there’s actually been a disappearance of publicly traded companies on U.S. exchanges. It’s been halved in the last ten years or so. So, is it actually a bad thing to have fewer and fewer publicly traded companies?
JOSHUA HARRIS: Well, I think that there are a lot of — what’s happening in the public markets is that, you know, the companies are — the number of companies are declining. And the reason they are is that more and more, the public markets are suited for simple companies’ growth, things that are easy to understand.
So, if you go back, there was 7500 public companies; now, there’s 4400. In the case of — and many companies are suited for private equity. Private equity is 33,000 companies. So, you know, if it’s got cash flow but it’s not growing, if it’s diversified with many different segments.
And in the public markets, you don’t — the portfolio manager, you have about 20 to 30 minutes to explain your story. And quarterly earnings are really important; but in many cases if you want to invest, if you want to take a longer-term strategy, if you don’t want to worry about quarterly earnings, if you might be able to take on a little more leverage, which is tax efficient and deductible, public markets really don’t like that.
So there are many, many companies that make sense for private equity where private equity will afford them the opportunity to grow, versus the public markets. And what’s happening is a lot of these companies are now very large. We ourselves have 350,000 workers. But if you look at people employed by private equity, it’s about 6 million workers in the U.S., and it’s about 4 percent of the workforce now.
So more and more, there’s this bifurcation between the public markets, which is big, large-growth, high-value companies and private markets. And if you don’t fit the box in the public markets, you can’t raise money. And so what’s happening is that, you know, it’s also an opportunity for firms like Apollo that are buying a lot of public companies that might not fit.
LESLIE PICKER: WeWork is an example that a lot of people talk about in terms of the private markets being broken while the public markets are the ones that are smart in terms of valuation and so forth. Do you agree that the public markets are the smarter investors when it comes to these things? Or — I mean the private markets.
JOSHUA HARRIS: Well, I think it depends. I mean, obviously there can be arbitrages that exist both ways. But certainly — WeWork is a tech-oriented company with not a lot of cash, not a lot of growth. That traditionally has been — there’s been a lot of companies valuing themselves in some of the public markets that look like that. WeWork clearly is a unique situation.
But what we’re finding is certainly for older economy, cash-oriented companies, we’re finding our big arbitrage the other way. If you look at the S&P 500, it trades about 17 times. But if you just exclude five stocks, the FAANGs, it trades at 14 times. So what that means is that really, the vast unwatched public company stocks really trade below 14 times. They probably — so, they’re not as valued well. And what we’re finding is that if anything has a hint of internet disintermediation, if it’s complicated, we can buy it really well.
In our last fund, we acquired about 15 — we acquired about 15 — we spent about 15 billion in the last three years on public companies. And when you add leverage to that, that’s about $60 billion we spent on public companies, taking them private and then making private equity returns on that. So, in our case, like, we’ve been able to buy great companies really well, really cheaply because they’ve been misvalued by the public markets because they don’t fit a box.
LESLIE PICKER: So even though people look at the overall P ratio of the S&P 500, you actually say there’s opportunities and it’s not as overvalued as some might believe, just looking at the overall picture.
JOSHUA HARRIS: Exactly. Like our last fund, we averaged about six times EBITDA expressed in terms of evaluation of EBITDA. And the public markets trade double-digit multiples of EBITDA, and so it shows you there’s this disconnect where you’ve got this bifurcation, large-growth tech companies, small, more cash-oriented or more complicated stories.
And so private equity plays a role of, in essence, providing a cheaper source of capital even though we make great returns because we use a little bit of leverage. It can be a really cheap and really good source of alternative capital. Or if you have a long-run strategy, you need to invest, you need to build a plant, you need to grow, and you might have to — your earnings might have to go down first.
All those things really avail themselves in a nice way to private equity, where you can take a longer-term point of view. We own companies for five to seven years or even longer, typically and so you can take that longer-term point of view. And when you look at it, you know, the productivity figures in private equity, because of the ability to take a longer-term point of view are about double what they are in public companies right now if you look at over the last five years or so.
LESLIE PICKER: Now, speaking of that disconnect between public companies and private ones, you and many in the private equity industry have for years lamented the disconnect between what the industry believes their stock prices should be worth and what they’re actually trading at in the public markets.
That seems to have actually changed this year with a so-called C Corp. conversion, where a lot of these publicly traded private equity firms have converted to C Corp. Your stock prices went up more than 65 percent this year. Do you believe that the market finally understands what private equity does, or is there still learning to go?
JOSHUA HARRIS: Yeah, so I think it’s getting there. So I would say that the whole industry, when we first all went public, we went public as publicly traded partnerships. And we did that because there was a tax efficiency for us to do that. And what that did is it excluded half of the buyers.
Today, when you look at the long-only mutual funds, a lot of them don’t want to get K-1s, and certainly the index funds generally will exclude you. And so half of the stock market was literally excluded. So during the last decade or so, private equity grew into credit, into real estate, into fund to fund, into infrastructure.
And today, Apollo is not only a private equity company, that’s only about 70 billion of the 300 billion or so of assets. We are a big provider of credit. We’re a big buyer of real estate and infrastructure. And so we’ve diversified our revenue stream, and we have grown and so has the industry, about 14 percent, you know, a year top line and more like 20 percent in terms of cash flow and earnings.
But the public markets never really appreciated that. And so, when we converted and when the whole industry converted, you saw this rebirth of the industry in the public markets where all of a sudden all of these institutions that hadn’t been buying stock, you know, because of these technical factors have been flooding in. And we’re in sort of the beginning to middle of that. That’s going to go on for a while.
Even today, when you look at us or the industry, you see companies that grow double-digit top line, and then close to 20 bottom line, and then have big cash flow yield, dividend yields — in our case, it’s over 5 percent — and still are only valued on average at low to mid-teens. I mean, some of them are a little higher than that in terms of multiples of earnings. So, there’s still this big opportunity. And what’s happening is the old shareholders, which were primarily the hedge funds, are being replaced by the sort of more general marketplace.
So, it’s one of those areas in the public markets that is now being more appreciated. The other thing I’d say is that we’re a 16 to $17 billion market cap company now. Blackstone, that’s the biggest, they’re 60. So, we’re getting to be pretty large as an industry. And the growth characteristics of private equity being alternatives are still pretty favorable because of the returns that private equity can offer and alternatives can offer relative to the public markets.
LESLIE PICKER: As you mentioned, the diversification into credit, insurance. Apollo is known for that, and I want to talk about that in a minute. But first, you mentioned that private capital, the conditions are favorable for fundraising, private capital has actually grown at more than double the rate of public capital in the last few years and there’s no end in sight. With so much capital chasing the same or similar strategies, is there a risk of a reckoning if certain factors in the economy turn and if people are washed out in the process?
JOSHUA HARRIS: Sure. So, what’s going on everywhere, right, is the monetary authorities are quantitatively using rates are near zero. So, there’s this push out of fixed income into equities into risk assets. And what’s happened in the market is that it’s bifurcated. The public markets and the fixed income and equities, but particularly equities have gone passive, you know, the Vanguards, and then alternatives.
And so, you’re seeing both in fixed income, in credit, in private equity, risk equity, you’re seeing this bifurcation. If people want public markets, they’re generally moving towards lower fee solutions; and then for the return, they’re going private. And so what private equity offers is a very high-return alternative.
But sure, like every other asset class, there’s money floating into it. And the average TEV to EBITDA paid by a private equity buyer for a large transaction is about 11 times EBITDA now, and so that’s probably as high as it’s ever been and so, returns have come down a bit, but the median and the top quartile private equity players are still able to generate just over 20.
And that’s still — and the median private equity players in the low to mid-teens. So that’s still way better than the alternatives in the public market, even though returns have come down. And so, because of that, you’re still seeing money come in. But certainly, you have to be differentiated, you have to be unique, you have to go off the run and have a distinctive strategy.
LESLIE PICKER: You guys raised the largest buyout fund at the time two years ago, upwards of $20 billion.
JOSHUA HARRIS: Yeah.
LESLIE PICKER: How hard is it to devoid that capital right now, especially since Apollo is known for traversing in downturns, as Leon Black once said?
JOSHUA HARRIS: Yeah, we’re value-oriented. We’re agile. And, certainly, this is not a value-oriented environment. But we’ve been able to employ about just under 20 percent of that fund in a year and a half. A little behind. But we’re able to find really interesting diamonds in the rough.
LESLIE PICKER: Like what?
JOSHUA HARRIS: Yeah, so most of what we’re doing now, three of the first four transactions have been in public to private. So we acquired Smart & Final, which is part of a grocery retailer, and obviously that sector is under attack, but part — a warehouse concept for small businesses, which is growing a lot. And again, because the market was — it was a little complicated.
The market didn’t understand it. Amazon — we were able to buy it at six times cash flow. And now we’re going to, you know, probably end up dividing it up and growing both those sectors separately. But we think that’s a good bet. We acquired an insurance company called Aspen Insurance, which is a Lloyd’s reinsure. We bought it at book value. It was sort of an under-managed situation where maybe they were in some businesses they shouldn’t have been in.
And we had had a very successful insurance transaction with a company called Brit Insurance, which was an insurance company; and so we brought in that management team, and we’re now managing better. But, like, what — so a lot — about two-thirds of what we’ve done right now is this public to private stuff and if you go back, you know, we bought Rackspace that way, we bought ADT that way, we bought Outerwall that way.
And in each of these, you know — West, you know, the big communications company and so, in many cases, you’re taking businesses that might not necessarily belong together, and you’re separating them and managing them better. In many cases, you’re making investments in higher growth sectors of different businesses and devaluing — and de-emphasizing others. In many cases, you’re bringing more efficiency to these businesses.
But for us now and for the industry, it’s more than just buying right. And we buy very right. It’s now about operating these companies more effectively because you’re out of the glare of the public markets. But I’d say it’s the public to private. And there are sectors that are still under significant issues, even though you’ve got this economy that’s booming.
So, you know, when people lower rates to zero, that puts a lot of pressure on banks and insurance companies. And we’ve been doing a lot. We have an asset management capability so we can, you know, buy, invest in a bank or an insurance company and then get returns up just by being a little smarter about how we invest. And then energy, obviously. You’ve got to be very, very careful.
But, you know, there’s very little capital flowing in energy at this point and so there’s the ability to buy, you know, very, very top-shelf reserves that are economic at very, very low prices. And so low that, you know, it’s hard to envision, you know, even the volatility in the energy markets hurting those companies.
And so more and more it’s about, you know, taking complexity and aggravation and trading it for rate of return, rolling up our sleeves and being able to take on those situations that maybe the public markets don’t want to deal with or don’t have the time to deal with.
LESLIE PICKER: You know, your industry doesn’t have — it has friends in Washington, but increasingly more enemies, at least vocal enemies. Senator Elizabeth Warren, she unveiled new rules in July which she called the Stop Wall Street Booting Act, which would, among many things, make PE firms responsible for the debt and pension obligations of the companies that they buy.
She said PE firms often act like vampires bleeding a company dry and walking away enriched, even as the company succumbs. We’re hearing the “vampire” word again when it comes to Wall Street. So how concerned are you that these rules will actually come into effect, and what would it mean for the industry?
JOSHUA HARRIS: You know, so what I focus on is telling the story about why alternatives, why private equity is good. And, obviously, I watched the developments in Washington with great interest. But right now I think we just haven’t done a good job of telling our story. You know, the truth of the matter is over the last five years, if you look at the investments over a life cycle in private equity, it’s roughly double the amount of employment growth in the public markets.
We’re adding more than double what the public markets do, and the productivity figures are also better. And so — and, you know, we, ourselves, have 350,000 employees that we take care of and also, the industry is very important to deal with, the $1.3 trillion underfunded pension system we have here in the United States.
And so for all those reasons, I think it’s a positive thing for America. I think private equity, alternatives is a good thing for America. I think, you know, we need to do a better job of telling the story of what we’re doing and not getting painted in a negative way.
And I appreciate that, you know, it’s easy to — there’s a populous climate right now. And it’s easy to paint the industry in a certain way. But we’re not getting to tell our story in a positive way. Obviously, those types of rules will put the industry out of business, which wouldn’t be good for America.
LESLIE PICKER: The politicians look at situations like Toys “R” Us and Sears, and they say, Oh, here are all these retail workers are out of work. Private equity gets blamed for that. Do you think that’s fair?
JOSHUA HARRIS: There’s always going to be examples of things that don’t work out. And certainly, you know, there are going to be examples where people can point to things. I think the reality is that in those sectors — you know, Amazon and Walmart have changed their sectors dramatically. And whether it’s private equity or public companies, whether it’s — you know, those companies or Sears or J.C. Penney, there’s plenty of carcasses that have been run over by the changing retail climate, climate in eCommerce and what Amazon is doing. And so certainly, you know, there are going to be examples. But I think by and large, when you look at the overall facts and figures, the industry itself is very positive.
LESLIE PICKER: Interestingly, you mentioned and you alluded to this earlier, two-thirds of Apollo’s assets under management are now private credit. It’s funny because we also call you a private equity firm but, really, you’ve got a bunch of other things going on, too. A big part of the growth story in private credit has been to fill this void left behind by the banks after the financial crisis. But now people are looking at this and saying private credit is in a bubble.
JOSHUA HARRIS: Yeah.
LESLIE PICKER: Do you think it is?
JOSHUA HARRIS: You know, I think there’s some elements of late cycle but by and large, when I look at the public markets, everything goes back to the fact that interest rates are at zero. And so, when you look at these stabs on private credit, there’s less leverage, more interest coverage, higher returns. And when you look at the stats of private credit versus public credit, private credit is generally a better, both investment and a better risk/return from a risk standpoint.
So, I think that that’s what I would say. Now, in all cases, right, you have an interest rate environment that is very low. And so, in many cases you have leverage levels that might be a little bit above median but interest coverage that’s quite good. And so private credit would be no exception to that. You know, if you look at the stats, the low interest rates are helpful. But right now default rates are less than 2 percent.
And the private credit markets have been quite disciplined about how much leverage they’re prepared to put on a company. And so I think what you’re finding is that, you know, players like Apollo, where we have our own money up and our investors’ money, private capital, are better assessors of risk, maybe, than the banks where they’re taxpayer guaranteed, cross-collateralized systematically, and also specifically on each investment. I think you’re seeing more discipline around how private credit players play.
And, you know, what we’re finding more and more is the ability to step in, you know, in the void, that the banks just say we’ve announced two or three transactions; one with, you know, YRC, Yellow Freight, you know, one with the acquisition of Gannett. And we’re literally putting up, you know, somewhere between $1 billion and $2 billion in capital, and we’re taking it down for our investors.
The banks more and more are in the distribution business, not in the whole business. And when we have to underwrite that kind of loan, we’re very disciplined. And then we own it. We do our own cooking. So, I think that we’re not syndicating a lot of that. So, I think it helps when that’s where you are and you’re going to own it, you’re much more disciplined about, you know, how much debt you’re going to put on a company.
LESLIE PICKER: How does your business respond to the current interest rate environment? Do you believe — obviously we saw yesterday the Fed cut by a quarter of a percentage point. Are you of the belief that the interest rate environment will continue to be hawkish, doveish?
JOSHUA HARRIS: I think —
LESLIE PICKER: Stay the same?
JOSHUA HARRIS: We think about this stuff a lot. I’d say for Apollo, it would be positive if things got volatile and we had, you know, more of an economic or distress cycle. Obviously, that wouldn’t be good for the economy or the world. But I think what the Fed today has — and the other monetary authorities have a pretty — but particularly the Fed has a pretty easy hand right now, in terms of, you know, low — it’s got low unemployment, but it also has very little hint of inflation and it’s also got the rest of the world at much lower rates.
And so I think, you know, what Chairman Powell said yesterday is what they’re going to do — and I think they try to tend to be pretty transparent — which is they’re going to lean into sustaining job growth and investment and economic growth here in the U.S. And so between that, which is a big push — you know, when they print money, they lower rates, they expand their balance sheet, which they’ve signaled they would be willing to do.
It’s a major thing for the stock market. And the reason the stock market is so important is that 70 percent of the U.S. economy is the U.S. consumer. And so the U.S. consumer, while business confidence has been a bit shaken by the China trade dispute, the U.S. consumer is cranking along pretty well. They feel pretty wealthy. And so the Fed is going to watch all that.
Between the U.S. consumer and the Fed, you know, pushing the economy, I think you’ll see rates remain lower. I think the rest of the world is very doveish.
LESLIE PICKER: Can the Fed, though, prevent some of the slow-down as it relates to the trade war? We saw the OECD today come out, you know, with their lowest projection of global growth since the financial crisis. I mean, is this —
JOSHUA HARRIS: So, the trade war has taken 25 to 50 basis points off the global economy. And the most important thing — if you look at it, China and the U.S. are 40 percent of the global economy, 55 percent of the stock market, 75 percent of the growth of the global economy, and 55 percent of the fixed income market. So, I’m not in any way denigrating Europe or the rest of the world, but these are the two things that matter.
I think that certainly if the China/U.S. trade got really bad, it could really hurt the global economy, but right now you see it kind of taking the growth down a bit. So, you’re going from 4 to 3. In the U.S., you’re going from high 2s to low 2s. Europe is teetering on a recession.
But, like I said, it’s not as important now. It doesn’t not matter, but it’s really not as important. So, I would watch the U.S. and China. China has a lot of policy tools to sustain its growth rate. It has — it still has 3 trillion of foreign currency reserves. It’s still got a lot of flexibility, even though it’s getting a little bit leveraged to lower rates. It can move its exchange rate down to offset the trade dispute.
So, I think today you’ve got China moving forward, you’ve got the U.S. consumer moving forward and that’s sort of offsetting what you see, which is weakness in Europe and some other places. So, you’ll see a little bit of the growth rate falling, but I don’t think you’ll see a recession. And I think relative to rates, you know, the Europe and Japan and China and U.S. are all lowering rates to sustain the — you know, the bull market and the economies and I don’t really see that changing until you see inflation. And there’s no real hint of inflation.
LESLIE PICKER: You don’t see a recession in the next few years for — longer than that?
JOSHUA HARRIS: Well, I think certainly through the election. I mean, I’d say the election — you know, the Trump administration has a lot of policy tools that it can use to sustain the economy. I mean, the Fed has basically said it’s in to sustain the recovery. And then I think China will — has a lot of political and economic reasons to sustain the growth of its middle class. So, I think between all of those things, I think that you’ll see the economy keep growing. I mean, recession indicators are up, right? People are worried about it. You see very high — 30 to 35 percent probability.
But I think if I were to bet, I’d say that that’s not going to happen because of all these tailwinds, even though you might see growth fall. Now, you know, obviously were there to be a big geopolitical event or a massive oil shock, were there to be a massive trade battle that’s worse than what we see now, all those things could happen. But I just think there’s a lot of logical reasons why they won’t. At the end of the day, there are people making these decisions, and so it’ll come down to the decisions they’re making.
LESLIE PICKER: Rational actors. I just wanted to open it up real quick before we conclude to the audience and see if anyone has any questions for Josh?
JOSHUA HARRIS: I know I’m standing between you and —
LESLIE PICKER: Drinks.
JOSHUA HARRIS: — dinner or drinks.
LESLIE PICKER: We could turn to sports if you want. Why don’t we do that? Why don’t we turn to sports?
JOSHUA HARRIS: Great.
LESLIE PICKER: Okay. So got a hockey team?
JOSHUA HARRIS: Got a hockey team.
LESLIE PICKER: Basketball team?
JOSHUA HARRIS: Got a basketball team. Yeah.
LESLIE PICKER: Football team?
JOSHUA HARRIS: A Premier League team, football.
LESLIE PICKER: American football?
JOSHUA HARRIS: No, I don’t have a football team.
LESLIE PICKER: Is that part of your wish list or —
JOSHUA HARRIS: No, we’re — right now we’re — I mean, American football is an amazing industry and an amazing sport and a really interesting economic model, but right now I’m focused on basketball and hockey. And, you know, we’re looking at the Sixers being positioned to win the East. I mean, it’s a long season, but we are right there. And the Devils having massively improved their team with, you know, the acquisition, the pick of Jack Hughes, and bringing on P.K. Subban and Gusev from Russia and a whole lot of other moves. So really excited on the eve of the sports seasons.
LESLIE PICKER: Have you learned anything from managing a sports portfolio that you apply to your private equity portfolio?
JOSHUA HARRIS: I’d say that the fundamentals of running — it’s all about great — you know, getting great people, either on the ice or on the court or in the front office, and motivating them to — and having a strategy that allows you to win and compete, and so those fundamentals are very similar. The difference is I’d say the media scrutiny of sports, even though I’m sitting up here at the CNBC Alpha conference is very, very high.
So, you know, we owned — we always tell the story of we owned Lyondell Chemical and we had thousands of workers, $50 billion company, but no one really cared about the price of polypropylene, but everyone cares about the Sixers’ starting lineup or the Devils’ starting lineup. You’ve got a lot of people that care and have a view. So, just there’s a lot of media attention and that takes a little bit of getting used to.
LESLIE PICKER: All right. Joshua Harris, co-founder of Apollo, thanks so much for joining us.
JOSHUA HARRIS: Thank you.