Jim Zelter 0.6 3 ideas

The speaker explicitly compares current concerns about private credit to early skepticism of the high-yield bond market in 1990, calling it "just growing pains" that will lead to a "legitimate asset class." He states investors have been making money over 15 years and sees a demographic need for "robust compounding yield." The high-yield market overcame its early crisis (Drexel) to become a mainstream asset class. The speaker draws a direct parallel, implying private credit is on a similar evolutionary path supported by structural demand for yield and a robust US financing ecosystem. LONG due to a positive, long-term structural view of the asset class's legitimacy and growth, defending it against current negative headlines. If investors stop making money in the asset class over the long term, or if a systemic crisis undermines the fundamental robustness of the private financing system.

Apollo (APO) has cut its exposure to software loans to zero, citing risk of business model disruption from AI. Conversely, Blue Owl (OWL) and Sixth Street have significant exposure (approx. 20% of portfolios) to software direct lending. Software stocks are down ~20% in a month. If SaaS cash flows degrade due to AI displacement (agents replacing seats), highly levered software companies will default. Apollo has immunized itself; Blue Owl is holding the risk. LONG APO (Risk management alpha) / AVOID OWL (Credit risk exposure). KKR's view (that software is oversold) proves correct and OWL collects high yields while defaults stay low.

Apollo's stock was hit by fears that private credit portfolios are exposed to "obsolete" software companies. Zelter clarifies their exposure to non-IG software debt is minimal. The market mispriced the risk. Apollo is pivoting to "boulders" (massive retirement service markets in Japan/Australia) and Investment Grade credit, which are less disruptable by AI than small-cap SaaS. LONG. The sell-off was based on a misunderstanding of their loan book composition. A broader credit cycle or recession would hurt their private credit book regardless of sector.