Asset management giant Apollo has entered "risk-off mode": hoarding cash, deleveraging, waiting for "bad things to happen"?

Global asset management giant Apollo Global Management is taking a series of aggressive defensive measures to prepare for potential market turmoil by hoarding cash, reducing leverage, and selling off high-risk debt assets.

On December 22, the Financial Times reported that Apollo CEO Marc Rowan made it clear during a private meeting with investors this month that his current top priority is to build "the best possible balance sheet" to establish a defensive posture, ensuring the company is in a favorable profit position when credit and stock markets face greater challenges and "bad things happen."

According to attendees, Rowan warned that current asset prices are too high, long-term interest rates are unlikely to plummet significantly, and geopolitical risks are increasing. He bluntly stated, "As a company, not only are we in risk-reduction mode, but our balance sheet is also reducing risk."

The report noted that Apollo is shifting from aggressive investing to conservative defense, focusing on cleaning up its balance sheet and maintaining a "cash is king" risk-averse strategy, cutting AI-related loans and CLO risk exposure, reducing fund leverage, increasing interest rate hedges, and warning that offshore regulatory arbitrage could trigger systemic risks in the insurance market.

Analysts pointed out that Apollo's strategic shift comes at a time when cracks are appearing in the private credit market. As a bellwether for the industry, this trillion-dollar market is facing the dual impact of deteriorating fundamentals and shaken confidence. According to an article from Wall Street Journal, another major private credit institution, Blue Owl Capital, recently withdrew from a $10 billion financing project for Oracle due to risk considerations. Coupled with sharp declines in stock prices and a surge in bad debts from funds including KKR and BlackRock, it shows that the credit market, once seen as a safe haven, is facing severe tests.

Cash is King and "Risk-Averse Mode"

While the overall financial market remains optimistic due to expectations of interest rate cuts by the Federal Reserve, Apollo's management is conveying a highly vigilant signal internally.

According to media reports, an Apollo executive who attended an all-hands meeting earlier this month revealed that there is a pervasive atmosphere of "waiting on the edge for the next market explosion or some kind of change" within the company.

Marc Rowan reiterated his concerns about market over-exuberance to investors at a meeting held by Goldman Sachs. He believes that not only are asset prices currently high, but the stickiness of long-term interest rates exceeds expectations.

Based on this judgment, Apollo has refused to chase risk, instead focusing on cleaning up its balance sheet. This defensive posture is not a spur-of-the-moment decision; according to insiders, this transition process has been ongoing for more than a year.

Analysts pointed out that given Apollo's massive scale in the financial market, its shift from aggressive investing to conservative defense is seen as a significant change with signaling implications for the industry.

Selling High-Risk Assets: AI Loans and CLO

Apollo's specific actions in asset disposal reflect its concerns about bubbles in certain sectors.

First, a reassessment of the technology sector. Apollo is focusing on reducing risks in areas that are vulnerable to disruption from artificial intelligence technology. In particular, regarding loans to the software industry, Apollo believes that the development of AI may pose challenges to these companies' business models, thereby affecting their debt repayment capabilities.

This judgment is not an isolated case. According to a previous article from Wall Street Insight, the private credit giant Blue Owl Capital recently decided not to support Oracle's $10 billion AI data center project, also due to concerns about project execution risks and the borrower's debt levels.

Analysis indicates that Blue Owl's "emergency brake" has directly led to market doubts about the sustainability of the AI infrastructure financing chain, confirming Apollo's risk assessment in this area.

Second, a retreat from the credit derivatives market. Rowan pointed out that the returns in many debt markets have fallen to unattractive levels, particularly for low-rated loan portfolios used to finance private equity acquisitions—CLO spreads have been "completely and thoroughly compressed."

To this end, Apollo's insurance company Athene is building liquidity by purchasing hundreds of billions of dollars in government bonds and plans to reduce its risk exposure in collateralized loan obligations (CLOs) by about half to $20 billion.

De-leveraging and Interest Rate Hedging

In addition to adjustments on the asset side, Apollo has also adopted more conservative measures on the liability side and in its hedging strategies.

According to insiders, Apollo's flagship fund—Apollo Debt Solutions, which has a scale of $23 billion, has a leverage ratio lower than its competitors. Data shows that the fund's net debt-to-equity ratio (a measure of the fund's borrowing investment level) was 0.58 in October.

This figure, while slightly higher than a year ago, is far below the nearly 1 level in October 2022 and lower than the 0.71 in October 2023. Apollo executives emphasize that this low-leverage operation is a sign of their conservative tendencies.

At the same time, in response to interest rate volatility risks, Apollo has increased its hedging positions against floating-rate debt this year. The company bets that the Federal Reserve will continue to lower interest rates under Trump's pressure.

Since Athene holds a $50 billion floating-rate debt portfolio, without hedging, its returns would shrink as the Federal Reserve's benchmark interest rate declines. These hedging measures aim to protect the company's profitability during a declining interest rate cycle.

Beware of Offshore Regulatory Arbitrage Risks

Rowan's concerns extend beyond market prices to the systemic risks brought about by regulatory arbitrage. He specifically warned of the "contagion risk" present in the insurance market, pointing out the rapid expansion of private capital groups in the absence of regulation.

Rowan harshly criticized some insurance companies for transferring assets to offshore jurisdictions like the Cayman Islands. He reportedly stated at a Goldman Sachs conference: "What people are doing is moving business to the Cayman Islands, where there are fewer rules and lower capital requirements." He pointed out that there have already been three bankruptcy cases in the Cayman Islands, and more will be seen in the future. He even asserted that he does not believe the Cayman Islands will remain a viable jurisdiction in the next 24 months.

Apollo believes that since assets transferred offshore are often separated by U.S. insurance companies, which do not have a federal government backstop, any defaults offshore will ultimately result in losses borne by U.S. insurance companies, triggering a chain reaction across the entire industry.

The Chill in the Private Credit Market

It is noteworthy that Apollo's defensive measures are being taken against the backdrop of the entire private credit industry facing a "liquidation moment." According to an article from Wall Street Journal, this market, which exceeds $2 trillion in size and was once touted as a safe haven for investors, is now experiencing a collapse of confidence.

JP Morgan CEO Jamie Dimon previously warned that when you see one cockroach in the private credit market, there are likely many more, suggesting that there are widespread systemic risks in this market.

Now, this warning seems to be coming true. As default rates rise, the business development company (BDC) sector aimed at individual investors is suffering severe blows.

According to the Wall Street Journal, despite the S&P 500 index rising this year, stocks like FS KKR Capital and BlackRock's BDC have seen significant declines, with bad debt rates surging. Among them, FS KKR Capital's bad loan rate has risen from 3.5% at the beginning of the year to about 5%.

While some competitors like Blue Owl have previously attempted to address liquidity issues through mergers and acquisitions, panic over valuation inversion and redemption pressure is spreading. In contrast, Apollo's strategy of preemptively cleaning house and hoarding cash seems to be preparing for the impending industry winter