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At times, a new collaboration can signify a transition of influence. Last week, Apollo announced its partnership with Citigroup to initiate $25bn in leveraged loans, commonly employed in leveraged buyouts. Specifically, Apollo would provide the capital while Citi would leverage its extensive network to source deals.
This marked the most significant collaboration between private credit and banks thus far and foreshadowed future trends. On Tuesday, Apollo conducted its investor day event—a combination of celebration and declaration—stating its ambition to evolve into a “next generation financial services firm.”
Two decades ago, Citi was seen as this champion, a colossal financial entity crafted by Sandy Weill, which by mid-2007 boasted an equity valuation of $270bn. However, its return on equity in 2023 stands at just 4.5%, about 25% of the profitability observed in 2006.
Fast forward nearly 20 years, Citi’s market capitalization has dwindled to around $120bn. In contrast, the purported next-generation leader, Apollo, has surged to $70bn. If they meet the five-year objectives presented on Tuesday, it won’t be long before Apollo eclipses Citi in value. One notable slide from their presentation hinted at the end of the bulge bracket era, stating that the phase of “banks/capital markets” extended only from 1990 to 2020.
A pivotal moment in the banking landscape during this 30-year period was 2008. Post-financial crisis, regulators restricted Citi and others from acting as proactive investors. This created opportunities for asset managers who were willing to not only manage funds but also take on balance sheet risks reminiscent of banking practices from the past.
Apollo anticipates that it will soon double its managed assets to $1.5tn, drawing from both traditional institutional investors and affluent individual savers. This growth is projected to yield around $9bn in net income by 2029, with earnings expected to be roughly evenly distributed between asset management fees and net interest income.
Using a 15 times earnings multiple, this could result in an Apollo market capitalization of $135bn, nearly double its current worth. The firm emphasized that most of the value creation in public financial services stocks in the last decade has been generated by the publicly listed “alternative asset” managers.
Citi, 18 years ago, appeared invincible but ultimately faced challenges due to a problematic balance sheet and an unpredictable funding structure. Fortunately, Apollo faces fewer issues on that front.
Thus far, there have been no significant failures, with no credit downturns in sight and central banks continuing their support for asset valuations. However, the private asset investment landscape can sometimes feel overly favorable, with businesses and securities trading hands among acquaintances at increasingly inflated prices.
Financial service eras tend to conclude or diminish, often with existing incumbents being the last to realize the shift.