"I look at the largest pool of investable capital anywhere in the world, some $12 trillion in 401(k), these are people in our country, who need returns the most, and we force them to be daily liquid," said Marc Rowan, a co-founder and CEO of Apollo Global Management, during the earnings call. "I don't think there's a good reason why, and we're beginning to see cracks, even in the 401(k) market of an allocation to privates, which is different than an allocation to risk."
There were $5.3 trillion in defined contribution assets among the 1,000 plans in the U.S. alone, as of Sept. 30, according to Pensions & Investments' annual top 1,000 U.S. retirement plans survey results.
Rowan explained that the 401(k) market is not limited by legal restriction but "by a risk mentality" that resulted from substantial litigation over a long period of time. He said that he sees a change, particularly as private market products are expanding beyond high fees and funds with more than 10-year lock ups.
The first baby steps are that fiduciary money managers are beginning to mix in private assets into their heretofore public market defined contribution investment options, "simply to get better outcomes and better diversification," Rowan said.
The largest 200 defined contribution plans had no private equity and $1.1 billion in real estate equity, P&I's annual survey shows.
In addition, there is a focus on guaranteed lifetime income or guaranteed income with annuities being added to target date funds for the same reasons, Rowan said.
"I believe we are going to see a continued migration," he said.
Rowan also said one of Apollo's goals over the next five years is to offer private credit strategies that serve as replacements for fixed income.
Apollo's yield unit, which mainly includes its private credit unit, is its largest business with $480 billion in AUM as of Dec. 31, increasing 4% from the quarter ended Sept. 30 and 22% from the year-earlier quarter.
"Institutions as they are evaluating how to improve their performance in their traditionally public only investment grade bond portfolios are willing to begin to move toward private so long as it is the same rating," Rowan said. "This is happening with extraordinary speed."
Rowan said that institutional and high net worth investors are also going to pivot out of active management of equities into a hybrid investments that are at the midpoint between debt and equity.
Apollo had $108 billion in its equity business at the end of the fourth quarter, down 1% from $109 billion as of Sept. 30, but up 9% from $99 billion as of Dec. 31, 2022. Apollo also reported $62 billion in AUM in its hybrid business, its smallest, up 2% from $61 billion at the end of the third quarter and up 11% from $56 billion year over year.
"The product set … is immature for the entire industry, and I think you will see this year introduction of new products with risk rewards and liquidity requirements and partnerships that our industry has not seen before," he said.
Institutional investors and high net worth individuals are going to move out of public equities, he said.
"I do not believe they are going to move into 10-year private partnerships," Rowan said. "I believe they're going to move into things that are more hybrid … at the midpoint between debt and equity."
Apollo reported generally accepted accounting principles net income of $2.9 billion for the quarter and $5.1 billion for the year ended Dec. 31, compared to GAAP net income of $660 million for the third quarter and $2.9 billion for the 12 months ended Sept. 30.