Unlocking Private Market Opportunities: A Conversation with Alex Wright of Apollo

The Current State of Public Markets

Alex Wright, partner and global wealth strategist at Apollo, joined the podcast to discuss the current state of financial markets and the potential of private markets as an alternative to lofty public market valuations.

Wright began by highlighting the recent changes in the macroeconomic landscape, particularly the reduction of tariffs on China. This development has significantly lowered the probability of a recession, from as high as 90% to around 30%. However, Wright cautioned that we're not out of the woods yet, as inflation is expected to rise, potentially putting the Federal Reserve in a tricky position.

Public Equity Markets

Wright pointed out that over the past few years, there has been a crowding effect in U.S. equities, particularly in the "Mag 7" stocks. This concentration has led to a situation where a single company, Nvidia, has a market capitalization exceeding that of entire countries' stock markets.

Despite recent market volatility, the S&P 500 is trading at a price-to-earnings ratio of around 22, which is higher than historical norms. This valuation seems fragile, especially considering that many S&P 500 CEOs are pulling guidance due to uncertainty.

Public Fixed Income Markets

In the fixed income space, Wright noted that high-yield spreads have experienced significant movement, but even at their widest point, they were still inside historical norms. Investment-grade spreads have also tightened, raising questions about whether investors are receiving adequate risk premiums.

The Case for Private Markets

Given the challenges in public markets, Wright made a compelling case for private markets as an alternative:

Broader Universe of Opportunities

One of the most striking statistics Wright shared is that 87% of U.S. firms with $100 million or more in revenue are private, while only 13% are public. This vast universe of private companies offers significantly more investment choices compared to public markets.

Democratization of Access

Wright highlighted the recent trend of democratizing access to private markets. Historically, private market investments required high minimum investments and long lock-up periods. However, new structures like evergreen funds allow for lower minimums (as low as $2,500 in some cases) and more frequent liquidity options.

Private Equity Opportunities

In the private equity space, Wright distinguished between growth-oriented strategies and deep value approaches. He noted that growth strategies, which have relied heavily on multiple expansion and cheap financing, may face headwinds in the current environment. In contrast, deep value strategies focused on operational improvements and cash flow generation may be better positioned.

Private Credit Landscape

Wright identified two key areas of opportunity in private credit:

1. Large-cap direct lending: Focusing on companies with over $100 million in EBITDA, this strategy offers potentially lower default rates and higher recoveries compared to traditional bank lending.

2. Asset-backed finance: This diverse category includes financing for various assets such as aircraft, auto fleets, mortgages, and music royalties. Wright estimates this to be a $20 trillion opportunity set.

Infrastructure Investments

Wright highlighted the massive need for infrastructure investment globally, with an estimated $88 trillion funding gap by 2040. This opportunity extends beyond traditional infrastructure like roads and bridges to include data centers, energy transition projects, and other critical areas.

Key Takeaways for Investors

1. Diversification is crucial: Private markets offer a way to diversify away from concentrated public market exposures.

2. Manager selection matters: In private markets, the dispersion of returns between top and bottom performers can be significant, making manager selection critical.

3. Do your homework: Wright emphasized the importance of thorough due diligence, especially when evaluating private market opportunities.

4. Consider new vintage opportunities: In private credit, newer vintage loans may offer better downside protection due to lower loan-to-value ratios and better coverage ratios.

5. Look beyond traditional asset classes: Infrastructure investments can offer inflation protection and income potential.

Conclusion

As public markets face valuation challenges and increased volatility, private markets present a compelling alternative for investors seeking diversification and potentially attractive risk-adjusted returns. However, navigating these markets requires careful analysis, a long-term perspective, and partnering with experienced managers. By considering private equity, credit, and infrastructure opportunities, investors can potentially access a broader universe of investments and position their portfolios for long-term success.

Article created from: https://www.youtube.com/watch?v=D9WrMiWrK84