Direct Lending: Strong Fundamentals, Shifting Dynamics

Jim Vanek · Apollo Global Management

Private credit grew strongly in benign markets; demand also rises during public-market stress.

The private credit market is measured at more than $2 trillion in AUM, and its fastest growth over the past four to five years has been in transactions for very large companies. Growth has continued over the past three years even though market conditions have been relatively benign. Demand has also risen during stress, as in April 2025 around new trade policy announcements. Vanek concludes that growth does not require volatility, though volatility does increase usage.

“I think the fact that the market's grown so much despite the fact that conditions have been benign and generally calm is an indication of the fact that you don't need that volatility to really see growth.”at 4:31

Jim Vanek · Apollo Global Management

European private credit demand is rising faster than in the US, given shallower public markets and bank and insurance constraints.

European public credit markets are smaller, shallower and less diverse than US markets, so they are less suitable for businesses. The European banking system faces constraints that the US system does not. Insurance investment regulation also limits insurers' role in Europe, whereas US insurers supply a large share of business capital. Because of these factors, Vanek sees a relatively faster uptick in private credit usage in Europe than in the US, and expects this to continue.

“And in Europe, the public credit markets are smaller, shallower, and less diverse than they are in The United States... we see an increase in demand for private credit solutions from companies across the spectrum in Europe relative to what we're seeing in The US, and we think that that's gonna continue.”at 22:36

Jim Vanek · Apollo Global Management

Leveraged credit fundamentals are very strong; sector return dispersion reflects investor expectations, not current credit performance.

Q2 revenue growth across the public loan market was about 11% and EBITDA growth about 7%, among the strongest readings in roughly three years. Default rates across public and private credit remain very low by almost any definition, and rating migration is as healthy as it has been in some time. Weak returns in technology credit are therefore not a fundamental underperformance story. Vanek argues the dispersion reflects how investors are pricing future AI-driven performance, with tech spreads widening even though those companies are not fundamentally underperforming.

“If you look at the second quarter, revenue growth across the public loan market, which is a rich data set to look at, was quite strong, up about 11%. EBITDA growth was up about 7%. These were some of the strongest numbers that we've seen in roughly three years.”at 6:54

Jim Vanek · Apollo Global Management

Widening spreads from post-GFC-tight levels are a time to add market exposure, especially in leveraged funds.

Spreads were close to or at post-global-financial-crisis tight levels for a very long time, driven by strong fundamentals and compelling yields. They are now widening alongside rising rates. Vanek says this is when investors should take up market exposure. Apollo is increasing exposure, particularly in funds that use leverage, as spreads widen, and it manages exposure on a continuous basis as spreads and yields move.

“I think what we layer on though is how we think about market exposure depending on where spreads are and increasing our exposure to the market, in particular, in funds that are using leverage as spreads are widening.”at 8:43

Jim Vanek · Apollo Global Management

Interest rates are not yet a standalone problem for borrowers; labor-market inflation is the bigger risk.

Three-month SOFR is a little above 4%, well below the more than 5% peak in 2023–24, and forwards suggest rates will average below that level for the foreseeable future. Vanek says the 2023–24 stress came mainly from inflation in other areas, especially expensive and hard-to-retain labor that compressed margins, not from debt costs alone. He says the bigger risk, even if the market expects three rate increases, is inflation spreading into the labor market rather than the rate level on its own.

“I think we have a ways to go before we're in a place where interest rates on their own are an issue, and we're well below where we were at the peak level of two thousand twenty three and four”at 11:44

Jim Vanek · Apollo Global Management

Higher-for-longer rates will hit consumers and rate-sensitive housing and building products, not yet visible in trailing data.

Trailing fundamentals are still strong across revenue growth, EBITDA, defaults and ratings. Spreads and equity multiples, however, imply the market expects higher rates to hurt consumers and subsectors that depend on cheap debt, with housing and building products cited as examples. Vanek says this will start to show up in fundamentals for certain business models. He adds that the high-rate period has lasted long enough to produce negative changes in consumer behavior, and that it is unclear when rates will come down.

“It's obvious that the market is suggesting in spreads and in equity multiples and in levels that higher rates are gonna negatively impact the consumer, that they're gonna negatively impact certain subsectors that depend on a lower cost of debt capital.”at 15:02

Jim Vanek · Apollo Global Management

AI could impair software borrowers, so some software credit must offer equity-like upside to be worth lending.

AI can disintermediate software business models, and credit investors have capped upside but substantial downside if a borrower is impaired or made obsolete. Vanek says that in some software areas lenders need a forward return profile with upside that looks like equity. This changes how Apollo prices those deals and where it allocates. Apollo has been underweight the sectors that have underperformed most and has been reducing exposure where it sees earnings harmed by AI and spreads at risk.

“And we do think in certain areas, and this is something that we have talked about related to software, that even if you are a credit investor, ...your upside has been capped, and your downside to a business that may see some sort of impairment or obsolescence can be substantial, that in some areas, need to be investing with a forward return profile that has upside that looks like equity only”at 20:36

Jim Vanek · Apollo Global Management

Financing AI digital and power infrastructure is a very compelling credit opportunity, especially in the US and Europe.

Capital raised to fund AI capex must generate revenue to be profitable. Demand for power generation is rising because of hyperscalers and data centers, and it is necessary globally, especially in the US and Europe. Vanek calls the resulting financing opportunities in digital infrastructure, real infrastructure such as power generation, and the companies that service and maintain them very attractive from a credit perspective.

“So much of the activity that we have the ability to finance is just very, very compelling. You're seeing investments not just in digital infrastructure, but in real infrastructure, particularly around power generation capacity”at 21:08

Jim Vanek · Apollo Global Management

The next five to ten years will bring major AI-driven creative destruction across investment strategies and sectors.

Vanek expects the coming five to ten years to be one of the greatest examples of creative destruction in the economy, given the expansion of new technology and the amount of investment in it. He says the outcomes will differ from historical expectations for certain investment strategies and sectors. The capital being raised for AI will disintermediate a very large number of businesses, products and functions beyond software, and every sector should expect ramifications, which is why Apollo has asked every analyst to assess AI exposure across its lending.

“When I think about the next five years, let alone ten years, we're heading into a period that should be one of the greatest examples of creative destruction that we experience in the economy, given the expansion of new technology and the amount of investment in it that's currently occurring”at 25:11