Apollo is ready to dance on banking’s grave

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Sometimes a new partnership might really be a passing of the torch. Last week, Apollo said it would work with Citigroup to originate $25bn of leveraged loans, most typically used in leveraged buyouts. More precisely, Apollo would bring the cash and Citi would find the deals among its vast Rolodex.

It was the boldest private credit/bank tie-up yet and also a portent. On Tuesday, Apollo held its investor day session which seemed to be both an exultation and a manifesto, where it declared it would become the “next generation financial services business”.

A generation ago that champion was Citi, the financial supermarket if not superpower. The edifice constructed by Sandy Weill by mid-2006 had an equity value of $270bn. Nearly 20 years later, Citi’s market cap is down to just $120bn. As for the ostensible next-gen Apollo, it has now soared to $70bn. If it hits the five-year targets it put out on Tuesday, it will not be long until it surpasses Citi. In one presentation slide, Apollo appeared to have already prepared a tombstone for the bulge bracket era, writing that the era of “banks/capital” lived only between 1990 and 2020.

The key year in that 30-year reign for banks is 2008. After the financial crisis, Citi and others simply would not be allowed by regulators to be assertive investors. That left the field open for asset managers, particularly those that wanted to not just manage money but take balance sheet risk like the banking sector of yesteryear.

Apollo says it should soon double assets managed, to $1.5tn, taking money from not just typical institutional capital but also retirement savers and wealthy individuals. That is supposed to generate by 2029 a healthy $9bn of net income split roughly evenly between asset management fees and net interest income.

At a 15 times multiple, that implies an Apollo market capitalisation of $135bn, roughly double Apollo’s current value. The firm pointed out that nearly all the value creation in public financial services stocks in the past decade had come from only the listed “alternative asset” managers.

The Citi of 18 years ago also seemed inexorable and unstoppable but ultimately was undone by a toxic balance sheet and an erratic funding model. The latter is less of an issue for Apollo. But private asset investing sometimes feels too good to be true, with companies and securities in complex forms seemingly just passed among friends at higher and higher values.

Eras in financial services always end or recede with the incumbents always the last to find out.

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