This opaque, lightly regulated corner of Wall -2-

In one high-profile development on this front, Apollo and Citigroup Inc. C on Sept. 26 said they'd team up for a private-credit program to make up to $25 billion in loans to businesses over the next several years. Apollo's Athene insurance annuities unit and the Mubadala Investment Authority, owned by the Abu Dhabi government, will provide capital for the loans.

John Zito, partner and deputy chief investment officer of credit at Apollo, said that when the private-equity firm announced a $3 billion investment-grade financing package for Anheuser-Busch InBev (BUD) in late 2020, many on Wall Street scratched their heads.

Apollo was known as a specialist in riskier forms of debt. Loans like the one to Anheuser-Busch would normally be made by a regulated bank, not a private-equity firm, Zito observed.

'Everyone told me they thought it was a one-off - there's no way S&P 500 companies with investment-grade balance sheets are going to access Apollo's balance sheet.'John Zito, Apollo Global Management

"Everyone told me they thought it was a one-off - there's no way S&P 500 companies with investment-grade balance sheets are going to access Apollo's balance sheet," Zito said.

Fast-forward to 2024, and Apollo has handled more of these corporate investment-grade debt deals, including the financing of an $11 billion investment by Intel Corp. (INTC) in a new chip-making plant and two separate deals, valued at about $2.7 billion each, for Air France (AFLYY) and Germany-based real-estate company Vonovia (VONOY).

The interest-rate environment has fostered this new class of senior debt from private-credit lenders. Up until interest rates started climbing two years ago, investors had to use "complex strategies" to generate returns over 5%, Zito said.

"Now you can do it with a pretty simple loan," with 8% to 10% returns possible, he said.

Generating, say, a 7% return for a retiree through private credit, compared with a more typical 5% return, could help solve the crisis of unfunded pensions, he said.

Zito sees a huge opportunity for more private-credit deals with about 1,200 companies now considering refinancing as they face higher-for-longer interest rates.

Other potential growth drivers include providing capital for infrastructure, logistics, artificial intelligence and energy. Such improvements collectively require trillions of dollars, he said, adding: "We're in the early innings."

There are certainly plenty of deals and tie-ups being announced.

Earlier this month, State Street Corp. (STT) said it would team up with Apollo to offer access to private credit for individual investors. Plans are under way to set up an exchange-traded fund with exposure to private credit and other products, the firms said.

New alliances among banks, insurance companies and private-credit managers are also taking aim at the opportunity.

The list of players reads like a roll call of the largest and most powerful names in finance, including publicly traded firms such as BlackRock, Partners Group Private Equity Ltd. UK:PEYS and Wells Fargo & Co. (WFC), as well as big private-equity firms such as Centerbridge Partners and Warburg Pincus.

'The largest private-equity firms have realized they need to be a supermarket, so to speak, for their limited partners who invest in their funds.' Gil Mermelstein, West Monroe

Gil Mermelstein, president of West Monroe, a Chicago-based technology and business consultant that works on private-credit deals, said private-equity firms have been ramping up their presence in the lending space for more than 10 years because it offers good returns and a different risk profile than buyouts or other investments more typical of the private-equity business.

"The largest private-equity firms have realized they need to be a supermarket, so to speak, for their limited partners who invest in their funds," Mermelstein said. "The overall trend is that LPs would rather invest with a private-equity firm and get exposure to different asset classes, whether it's private equity, credit, real estate, infrastructure. Private-equity firms are adding asset classes."

-Steve Gelsi

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10-03-24 1217ET

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