Jim Zelter Talks AI Capex, ‘Higher for a While’ Rates

SPEAKER_1 (0:02)

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Jonathan Ferro (0:07)

Investment firms increasingly backing the technology, including the infrastructure needed to fuel the boom. Apollo Global Management President Jim Zelter saying in the company's most recent earnings call, quote, the sheer size of the AI infrastructure buildout is unprecedented. We see an enormous opportunity for private capital to finance a portion of this along with public capital. Jim joins us now for more. Jim, welcome.

Jim Zelter (0:28)

Good to see you. Good to see you.

Jonathan Ferro (0:29)

No days off for Apollo. What an August you just had.

Jim Zelter (0:32)

It was, we didn't have an August break.

It was pretty much pedal to the metal. A bunch of announcements, a bunch of travel and a bunch of financing. So the firm did an amazing job.

Jonathan Ferro (0:43)

Walked in with the Yankees cap as well. Distributed some merch. Brammo, how do you feel about that? Are you going to put that on?

Brammo (0:48)

Well, I'm going to just amend and embroider a couple of lines around the Y, and I think it'll be fine.

Jonathan Ferro (0:53)

Can we pair the two stories, the boom in Apollo sports capital with what's happening in AI? Is that one of the reasons why sport is becoming such a big focus for investment firms?

Jim Zelter (1:03)

Well, I do think, you know, there's been a few themes as I've been on this show for the last couple of years, and there's no doubt there's a broader theme with society as you, as the AI technology plays a larger and larger role. You know, what are industries, what are activities, what are businesses that will have a very low chance of obsolescence? And I think it's as simple as that. I mean, the last, you know, 50, 100 years, there's been more and more leisure time, leisure time activities, whether it's the whole travel, entertainment business and other activities like that. And I think people see the purview of sports, especially mainstream sports and the aggregate followership. If you look at the top 100 shows in a year, 95, 97 are sporting events, and that's probably unlikely to get disrupted. So I think this is a thematic view that we had over the last three or four years about putting our firm in the limelight of those activities.

The other thing I would say is we've been much more of a, within the arena of sports and entertainment, we've been much more of a debt financing partner. Certainly there's transactions where there's equity along as well. I think a lot of folks have put their stake in just the equity side of the business, but we've done the equity as well as the debt financing and the capex expansion.

Jonathan Ferro (2:27)

Why is the debt slightly more interesting to you?

Jim Zelter (2:29)

Well, when you think about a franchise like the Yankees, there has not been historically a variety of financing alternatives of companies of that, of teams. And the loan to value is exceptionally low that you can make a loan at versus other comparative industries. You're owning 10, 15, 20 cents on the dollar of value versus other industries, 50, 60, 70 So you have a great margin of safety of protection on what we would say is world class unique assets that we want to be associated with for decades.

Brammo (3:07)

How much is that applicable to the broader investment universe? This has been a debate on Wall Street for the better part of 18 months now. Would you rather be on the debt side of the industrial build out or the equity side to participate in the upside of what could potentially come?

Jim Zelter (3:22)

Well, it depends on the capital you have. I mean, as I spoke on the show many times, half of our capital comes from regulated balance sheets. On those regulated balance sheets, our objective is to make plus or minus 7 percent depending on the rate environment. So when you see the short end right now in three and five years where they are in their yields right now, I'm focused in, we are focused on high quality spread in that short duration. So you don't have to take that equity risk.

There's no doubt that what we bring in, you had the quote up on as the show started, the message that we've been saying is the scale of this capex cycle is unprecedented. It's gonna take any and all precincts, equity, public equity, private equity, private capital, investment grade debt, and everything else in between. And so for us, for our regulated balance sheets, we're really a debt financing provider. And hence, the Intel financing, the Broadcom financing, the Nvidia financing. On the other side of our business, transactions like what we announced for the Yankees, we announced a very interesting transaction for Atlantic Aviation, which is arguably another business that I don't think is going to get disrupted. This is an airport fixed based operator of private aviation. Those are businesses that we think have amazing resilience. And so that's how we're trying to make sure that we are thoughtful on the debt side, and on the equity side being very, very thoughtful about disruption. I'm often fond of saying, we don't want to take equity risk for a fixed coupon. And I think when you think about what's going on right now in a lot of the build out, across the whole spectrum, from the large language models, to the racks and the chips, it's interesting to see today, the gross margin is highest away from the models.