Apollo’s Rowan Warns of Shakeout Coming for Private Markets

Apollo Global Management Inc. Chief Executive Officer Marc Rowan warned that a shakeout is coming for private credit firms as the industry faces a wave of concerns about rising defaults on loans to software companies.

For weeks, private credit executives have faced questions from investors over whether the $1.8 trillion industry can withstand sustained pressure if the software sector is upended by artificial intelligence in the coming years. Rowan’s comments came as business development companies have been hit by redemptions in recent weeks amid those broader investor concerns.

“This will be a shakeout — I don’t think it is going to be short term,” Rowan said in an interview with Bloomberg News Editor-in-Chief John Micklethwait at Bloomberg Invest in New York on Tuesday. “It was foreseeable. It was predictable. And all you can do is have been a good underwriter, a good risk manager, have done a small number of stupid things.”

As investors’ fears have mounted, Apollo’s shares have come under pressure, slumping 30% so far this year. That outpaced the 2% decline of the broader S&P 500 Index. Rowan also pointed to a string of blow ups in bank loans as an example of broader issues facing credit markets.

Just last week, the collapse of Market Financial Solutions Ltd. left banks including Barclays Plc, Jefferies Financial Group Inc., Banco Santander SA and Wells Fargo & Co. nursing potential losses amid allegations of financial irregularities.

Atlas, the structured-credit arm of Apollo, had about £400 million of exposure to MFS, or about 1% of its balance sheet, and a spokesperson for the firm has said its “pursuing all legal avenues to maximize recoveries.”

“We’re going to have a correction, but it’s no different than the correction that’s happening in banking,” Rowan said. “There’s always going to be fraud. There’s always going to be underwriting mistakes. But the question is who’s a good risk manager and who’s not a good risk manager? If 30% of your portfolio is in one industry and that one industry is being impacted by technology, you have not been a good risk manager.”

Rowan said Apollo doesn’t have a high concentration of software bets, though the fact that the industry accounted for nearly a third of the entire levered lending market meant it was “over-represented and subject to attack.”

The MFS saga followed the blowups of US auto parts supplier First Brands Group and subprime lender Tricolor Holdings, adding to mounting questions about underwriting standards and risk controls in credit markets.

Rowan argued investors should prefer to have those types of risks living in private markets firms rather than on the balance sheets of banks, which can use government-insured deposits to extend such loans.

“If you’re concerned about what’s happening, you don’t want it in your banking system,” Rowan said. “You prefer it in your investment marketplace, where people can price the risk.”

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