Risk & Rebalance: Four Dynamics Reshaping Portfolios

Alex Wright · Apollo Global Management

85% of US companies with $100M+ revenue are private, so public markets cover about 15% of the universe.

Alex argues that public investments are concentrated narrowly. He cites that 85% of US companies with at least $100 million in revenue are private, so public markets cover only about 15% of the investable universe. Private markets therefore expand the opportunity set.

“85% of companies in The US with a 100,000,000 or more in revenue are actually private. So not only are the public investments concentrated narrowly, it's actually only about 15% of the entire [investable] universe.”at 6:14

Alex Wright · Apollo Global Management

Private manager outcomes diverge widely; how portfolios were positioned matters more than the label.

Alex argues that private markets are not uniform. Managers took contrarian positions, such as cutting software exposure about eighteen months earlier, so their results now differ widely. He says this economic dispersion depends on how portfolios were positioned going into the current environment.

“So you're seeing economic dispersion widening among private managers... You are seeing significant economic dispersion now based upon how portfolios were positioned coming into where we are today.”at 14:24

Alex Wright · Apollo Global Management

Growth PE's software bets relied on multiple expansion and cheap financing, both now gone.

Alex says growth private equity moved heavily into software over the last decade, and its returns came largely from multiple expansion and cheap financing. Both attributes are now gone, so funds show low DPI and return of capital. He therefore avoids software and tech under a valuation-discipline approach.

“growth private equity has moved materially into software... a lot of the attribution coming out of those funds really came from multiple expansion and cheap financing. Both of those attributes are kind of gone.”at 19:17

Alex Wright · Apollo Global Management

Buying at 6-6.5x rather than 11-12x EBITDA, and improving cash flow, should drive PE returns.

Alex says Apollo's deep-value approach is based on purchase price, paying about six to six and a half times for companies rather than eleven to twelve. Returns should come from free cash flow improvements, which the manager can control, while multiple expansion and cheap financing are upside. He says that skews away from software and tech.

“Purchase price matters, paying six six and a half times for companies not eleven twelve... the attribution of return comes from improvements to free cash flow. If you're good at it, it's controllable.”at 19:56

Alex Wright · Apollo Global Management

GP continuation secondaries speed up DPI because buyers enter mid-to-late fund life.

Alex calls secondaries very interesting, particularly GP continuation deals. Buyers come in mid-to-late in a holding's life rather than at the start, so cash flows turn over faster and DPI accelerates. The return depends on the discount paid and on the buyer's ability to improve the underlying investment.

“Secondary is very interesting, particularly GP continuation activities. You're getting an acceleration of DPI and cash flows because you're coming in not at the beginning hoping for an end.”at 20:35

Alex Wright · Apollo Global Management

Hybrid pref and convertible securities can match average PE returns with downside protection.

Alex says he likes the risk-adjusted return of hybrid securities, meaning preferred and convertible instruments. Their position above common equity gives downside insulation. Done well, he says, they can approach average private equity returns while sitting higher in the capital structure.

“We really like the risk adjusted return of hybrid securities, meaning pref and converts... you can actually get what I would view to be close to the equivalency of average private equity returns, but you're not private equity.”at 20:59

Chris Lvoff · Apollo Global Management

Hybrid structures with downside protection avoid variance drag and compound wealth more consistently.

Chris says downside matters more than upside. Avoiding variance drag, the loss in compounding caused by volatility, compounds returns more steadily. Hybrid structures keep some upside while using structure, covenants and protection to limit the downside, and that yields more consistent outcomes and higher wealth accumulation.

“To the extent that you can avoid that what we call variance drag or that downside risk so that you're compounding at a more consistent rate, over time, you yield much better, much more consistent portfolio outcomes.”at 21:35

Alex Wright · Apollo Global Management

Public investment-grade spreads are super tight to Treasuries, so public fixed income is less attractive now.

Alex says public fixed income is super tight in spread to Treasuries, so adding more of it may not be the right move. He suggests reducing public fixed income and moving some duration into floating rate, since rate-driven income is rising.

“public fixed as we've just discussed super tight by way of spread to treasury, that may not be the angle you wanna take.”at 2:48

Chris Lvoff · Apollo Global Management

Credit used for diversification is really just less risky equity risk, replicated with equity futures.

Chris describes a sell-side firm that writes total return swaps. It replicates credit spreads using equity futures rather than credit instruments. Factor analysis shows portfolio risk breaks into equity risk, interest rate risk, and a residual. The residual is the uncorrelated return investors want, but credit exposure largely reduces to equity risk.

“the credit that you're relying on for diversification is really just less risky equity.”at 11:40

Alex Wright · Apollo Global Management

Core bond index is largely a Treasury rate bet plus tech issuers, duplicating equity exposure.

Alex says the core bond index skews toward Treasuries, making it more an interest-rate bet than a safe way to clip coupons. Hyperscalers and tech firms are becoming some of the largest bond issuers, so the index duplicates the tech exposure already held in equities. Combined, an investor could hold 50% or more of a portfolio in the same exposure.

“the skewing toward treasuries, you're really taking on an interest rate bet, if you will... you could actually wake up and find 50% or more of your portfolio with the same exposures.”at 24:01

Chris Lvoff · Apollo Global Management

Bloomberg Aggregate is now mostly Treasuries and concentrated issuers, with about six years of duration.

Chris says the Bloomberg Aggregate, the usual benchmark for the 40% bond sleeve, is predominantly Treasuries and carries interest-rate duration. It holds only investment-grade issuers and is concentrated in a smaller group of issuers. It sits about six years of duration in the belly of the curve, which may not suit every client. Treasuries are also tax-inefficient for taxable investors.

“And that index is now predominantly treasuries. It's that interest rate duration that's coming through. It's only investment grade, and you're capturing now a much more concentrated sleeve of issuers”at 25:15

Alex Wright · Apollo Global Management

After three years of gains most investors are overexposed; a 60/40 has drifted to about 72% equities.

Alex argues that three years of gains have left most investors overweight equities. A 60/40 left alone would drift to about 72% equities, which he calls rich for many. He says advisors are trying to pull clients back to target allocations despite capital-gains reluctance, and that a large wirehouse had already cut equities in October to rebalance.

“after three years of up to the right in the equity markets, most investors are somewhat overexposed from an allocation perspective. So like if you do a sixty forty, left it alone, for three years, you're now skewing up to like 72% equities, maybe a little higher.”at 2:58

Alex Wright · Apollo Global Management

S&P 500 mega-cap concentration is unprecedented and makes the index unusually volatile.

Alex calls the concentration in the largest stocks unlike anything seen before, though the companies are strong. The Magnificent Seven fell almost 15% in Q1 before rallying sharply and then swinging again. He says this makes the index a roller coaster, and that many of Apollo's strategies have outpaced the Magnificent Seven with muted volatility.

“This concentration is like nothing we've ever seen before and these are fabulous companies, don't get me wrong. But the volatility also is all kinds of whippy, right. If you isolate mag '7 first quarter down almost 15%”at 15:57

Chris Lvoff · Apollo Global Management

Expensive equity valuations imply low forward returns and lower equity allocations.

Chris says valuation is critical for forward-looking returns. When the earnings yield is low relative to price, it takes a long time to recoup the investment. Past cycles at similar levels produced weak forward returns. That lowers the equity risk premium and implies lower allocations, and it argues for rebalancing a sixty-forty that has drifted to seventy-thirty.

“When valuations are expensive, meaning your earnings yield for what you're paying into get that exposure is so low, it takes a long time to recoup that investment.”at 17:43

Chris Lvoff · Apollo Global Management

Equity concentration is so historic that a diversified hedge fund now just holds the index.

Chris says concentration is so extreme that the idea of a diversified hedge fund had to change so managers could simply hold the index. He calls that ludicrous and says the market has never been here before. This supports his call for private markets and hybrids that diversify the risk pool.

“this level of concentration is so historic that the idea of a diversified hedge fund had to change the rules so that you could just hold the index, which is ludicrous.”at 22:42

Chris Lvoff · Apollo Global Management

Bilateral origination and covenant protection in private credit generate excess yield, an origination premium.

Chris says private markets let investors earn an origination premium. Bilateral negotiation and covenants give lender protection, and that generates excess yield or excess spread over public credit. Active selection then becomes a key driver of private-market returns.

“being able to construct an investment through bilateral negotiation and the creation of covenants that can help protect you from a lender perspective, you generate excess yield or excess spread associated with that.”at 7:05

Chris Lvoff · Apollo Global Management

Asset-backed lending repays from collateral cash flows, giving a different default profile than corporate credit.

Chris argues that asset-backed lending depends on the cash flows collateralizing the loan, not on a company executing its business plan. Those cash flows can come from consumers, hard assets or risk transfers. This gives a different default and risk profile from corporate bonds or corporate lending, which adds diversification.

“you're premising off of the cash flows that are collateralizing that lending... Different default and risk profile than what you see in corporate bonds or corporate lending.”at 25:52

Alex Wright · Apollo Global Management

Floating-rate direct lending should earn more as the Fed hikes, versus earlier cut expectations.

Alex notes base rates have moved down to above 4% and spreads have widened from a year ago. He argues the Fed is now supportive by hiking, which means floating-rate lending earns more in this environment. He contrasts this with the last two years, when markets expected many cuts. Investors cautious on risk should pivot to cash equivalents and floating rate, and most asset-backed lending is floating.

“Supportive Fed meaning they're hiking. And so generally speaking with floating rate, you're gonna make more money when you have that environment.”at 27:44

Chris Lvoff · Apollo Global Management

Higher rates and tight spreads have shifted bond risk-return; elevated uncertainty likely to persist.

Chris says higher rates bring more yield and income, but also more uncertainty and volatility. Investment-grade spreads are very tight, so moving further out the risk curve, into high yield, opportunistic credit or equities, builds on higher base rates. He concludes the risk-return profile has shifted and will stay elevated.

“So if interest rates are higher, there's more uncertainty... So the risk return profile has shifted and is anticipated to stay elevated from that uncertainty dynamic.”at 4:35

Chris Lvoff · Apollo Global Management

Treasuries can no longer be relied on to rally in risk-off periods, weakening their diversification role.

Chris says bonds were historically a great diversifier through flight to quality, with US government bonds rallying when uncertainty hit and offsetting losses elsewhere. That reliance is harder now, which weakens the traditional 60/40 hedge, so portfolios need other diversifiers.

“Historically, fixed income bonds have been such a great diversifier in that construct... you can rely on treasuries to rally and offset what may be happening elsewhere within your portfolio. That's harder to depend on now.”at 6:42

Alex Wright · Apollo Global Management

US nominal GDP is rising fast, but growth is narrowly driven by AI spending and high-end consumers.

Alex describes the macro backdrop as nominal GDP moving up swiftly and the economy as robust, but narrowly driven by AI spending and the high-end consumer. He links this strong economy to expensive liquid assets and to the bond-market moves that hurt longer-duration assets when rates rose.

“nominal GDP moving up to the right pretty swiftly, narrowly focused by way of what's driving that, the AI spend, the high end consumer.”at 1:36

Alex Wright · Apollo Global Management

Higher-for-longer rates are the reality needed to tame enhanced inflation, despite unemployment in check.

Alex notes unemployment is in check but inflation is high. He argues higher-for-longer rates are needed to address the elevated inflation, and says that is the reality being seen. He contrasts this with earlier expectations of several rate cuts.

“Unemployment seems to be in check. Inflation is high, but I think higher for longer to address this enhanced inflation is the reality that we're seeing.”at 2:11

Alex Wright · Apollo Global Management

Public equity valuations require faith that hyperscaler free cash flow assumptions will be met; time to rebalance.

Alex says public equity has become a matter of faith: investors must believe current valuation levels hold and that hyperscalers' free cash flow assumptions will be met, and there is some question about that. He concludes it may be a good time to trim equities and rebalance, given how tight public fixed income spreads are.

“You have to have some faith that these levels are going to hold from a valuation perspective, that the free cash flow assumptions for the hyperscalers will be met. There's some question around that.”at 2:27

Chris Lvoff · Apollo Global Management

Public companies have shrunk while private unicorns grew to nearly 1,000, pulling investors into private markets.

Chris says the number of public companies has fallen dramatically while the number of very large private companies has risen. Unicorns, private companies worth at least $1 billion, went from fewer than 10 in 2006 to almost 1,000 today. Companies now finance and grow differently, so investors must tap private markets for diversified return.

“the number of public companies has diminished dramatically. The number of incredibly large private companies has increased dramatically... Today, twenty years later, we have almost a thousand unicorn companies.”at 12:33

Chris Lvoff · Apollo Global Management

Evergreen funds and exchange-traded notes now give access to private markets beyond closed-end funds.

Chris says access to private markets has changed. Investors are no longer limited to committed drawdown closed-end funds. Open-end evergreen and perpetual funds, plus exchange-traded securities and notes, now offer exposures that were hard to reach before.

“the innovation of how you can access private markets has changed. It's not just your committed drawdown closed end fund anymore.”at 13:15

Alex Wright · Apollo Global Management

Buyout equity contribution rose from about 30% to 60%, slowing M&A and pushing secondaries as exits.

Alex says the equity share of buyout financing has roughly doubled from about 30% before 2022 to closer to 60%. That has put sand in the gears of M&A activity, which is why secondaries have taken off as an exit ramp for private equity firms.

“going back pre '22, 30% equity contribution more or less, now it's closer to 60. That sand in the gears of the m and a activity and why secondaries has kind of taken off as an exit ramp.”at 19:32