Stimulus May Be Creating a False Sense of Security for Investors

Apollo Global Management remains wary of pandemic-related risks that could catch out credit investors, as excess liquidity threatens to obscure the extent of the harm done to the economy.

Monetary and fiscal stimulus for the Covid-19 pandemic may be creating a false sense of security, according to John Zito, senior partner, deputy chief investment officer and co-head of global corporate credit at the biggest player in private credit globally.

“There is real economic damage happening to several industries and the liquidity in the stock market and everything else is making it feel really safe,” Zito said in an interview.

The market for private debt is facing its first real test after more than doubling between 2012 and 2019 to reach $850 billion last year, according to data provider Preqin. Investors were drawn to its higher yields and relative safety, compared with public debt or private equity. The trade-off of no liquidity means that investors aren’t exposed to wild price swings, but can’t exit easily in a downturn.

He’s also concerned about long-term changes to aviation, hospitality and commercial real estate.

Stimulus May Be Creating a False Sense of Security for Investors

Apollo freed up as much as 35% of the capital from some of its liquid funds to buy assets during the credit market rout in March.

“You had a one-month opportunity to buy because central banks threw $21 trillion dollars at the problem,” Zito said. But he’s wary of “material structural change” in the longer term.

“What keeps me up at night is underwriting,” Zito said. “We don’t want to be in a situation where we’re on this call a year from now, and we’ve missed opportunities to de-risk -- situations where, with hindsight, it’s going to seem obvious that we should have been selling into the liquidity.”

©2020 Bloomberg L.P.

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