Apollo’s Jim Zelter on PE Evolution, ‘Lingering’ US Inflation

Market Structure & Investment Strategies - Public markets power the narrative, while private markets power the economy, prompting a re-evaluation of traditional 60/40 portfolios and the tools needed for better outcomes with less volatility [1] - Alternatives have historically benefited institutions, and there's a growing need to augment past strategies to cater to retirees globally [2] - The role of private capital is evolving as companies like Space X and Stripe stay private longer [2] - The distinction between public and private markets is shifting from risk to liquidity [5] - The traditional view of private markets as risky and volatile, and public markets as safe and liquid, is no longer accurate [6] Capital Expenditure (CapEx) & Financing - The high yield market has financed companies undergoing regulatory or technological changes over the past 30 years [9] - A massive CapEx boom is expected in the next ten years (by 2035), driven by data centers, sustainability, energy transition, and transmission lines [10] - 80-90% of the private credit market involves investment-grade counterparties and debt [11] - Private credit, particularly investment grade, is poised to have a significant impact, potentially larger than private equity in the last decade [14] - The CapEx cycle is concentrated in a few data and technology companies, raising questions about whether it masks the underlying economy driven by private companies [19] Economic Outlook & Inflation - Public market numbers beat consensus by 700 basis points (7%) in the second quarter, showing 11% versus 4% [20] - Credit portfolios show quality upgrades at a 3 to 1 ratio versus downgrades, indicating no widespread weakness [21] - Lingering inflation is evident, with companies finding it challenging to pass costs on to consumers [21][22][23] Investment Risks & Opportunities - There's a risk of over-investing in certain sectors, potentially leading to a misallocation of resources [24][25] - Investors should be wary of taking equity risk for a fixed rate of return, which could indicate a bubble [26] - The energy supply issue could limit growth, posing a challenge [29] - The lack of long-term investors is a concern for 10, 20, and 30-year infrastructure builds [30] Portfolio Allocation & Global Investment - Allocating 10-20% of a portfolio to alternatives has historically increased returns and reduced volatility [34] - The US remains the strongest, largest, and deepest market globally, with a robust economy, rule of law, banking system, creativity, and intellectual capital [47][48] - There's increased hedging of investments from overseas investors due to policy uncertainty and concerns about the Fed allowing inflation to run hot [41] - Europe's progress in energy transition and infrastructure development is slower than desired due to government oversight [42][43]