Marc Rowan on Financial Market Evolution and University Governance

Conversations with Tyler is produced by the Mercatus Center at George Mason University, bridging the gap between academic ideas and real-world problems. Learn more at mercatus.org. For a full transcript of every conversation enhanced with helpful links, visit conversationswithtyler.com. Hello everyone, and welcome back to Conversations with Tyler. Today I'm talking with Mark Rowan, who is co-founder and now CEO of Apollo Global Management. Mark also has been leading a campaign to reform and improve American higher education. Mark, welcome.

Thank you so much. And while I do lots of interviews, this is actually my first podcast.

You said recently on Bloomberg that higher interest rates don't hurt the profitability of Apollo. How do you think about that in terms of your portfolio, what you do? How do you manage to be in that position?

So I just think globally about the shape of our business. So we are today a $650 billion asset manager, roughly $500 billion of that is credit and $150 billion of that are various forms of equity. Quite frankly, it's just math. We do better on the $500 billion when rates are higher up to the point that you have economic distress. Most of our equity, they are pretty savvy about how they borrow and how they lock in interest rates and using fixed rate and other hedging instruments. Generally, we have upside to the level of interest rates.

But how is it you manage to do maturity matching so much better than say alternative institutions?

I'm not sure it's better. I think you have to look at the structure of our business. I assume by other institutions you're really talking about the banking sector.

Sure, which was bigger before the rise of private asset management.

Well, yes and no. I mean, private asset management has not caused the decline of the banking system. The banking system has been shrinking in the US as a percentage of the total while it's been growing for a very long time. So just to set levels, the banking system today is roughly 20% of corporate and consumer credit in the US. The rest of it is not quote private credit. It's investors. If you think about it at a very macro level, regulators, governments, there are really only two choices for credit. You can have credit come from the banking system or you can have credit come from the investment marketplace. But now to your question, if you think about the banking system, the banking system borrows short and lends long. They are always mismatched. If you think about what we do, and different than many, half of our money comes from individuals and institutions who are seeking a rate of return. They have no maturity, they have no defined outcome that they want, therefore they are willing to commit their money for lengthy periods of time so long as they are obtaining the right risk and reward and they are not focused on day-to-day liquidity. They're focused on the ultimate return for this piece of their portfolio. The other half of our money comes from the insurance industry, including our own affiliated insurer Athene and money we manage for Athora, our European affiliate. As well as a number of third-party insurers. And insurers, unlike the banking system, they borrow long and lend long and everything therefore is asset matched. If you look at Apollo today, there is nothing that is daily redeemable.

But there's a traditional history of insurance companies suffering from some kind of duration risk, right? In the 1990s. How is it that Athene Apollo avoids that? What is it you do that's different?

Jumping around insurance, if you have to really look at it over a long period of time, Almost all of the problems that have come in the insurance industry of any scale for 100 years have come from traditional companies who have made poor choices as to their liabilities. We spent a lot of time today talking about assets, but most poor decisions have come from liabilities. Think about people who reinsured asbestos risk. Think about people who provided D&O insurance to the Enrons and others of the world. Think about people who insured Japanese earthquake and meltdown risk. Think about all of the mispricing in financial markets, whether it's what GE did on long-term healthcare, or it's what many companies did on variable annuity. These are liability problems. The asset problems in the insurance industry have actually been quite modest over a really long period of time. You have executive life, you have mutual benefit, and then you have a large number of small companies that add up to essentially nothing. Assets have not traditionally been a weak spot for the insurance industry. It's been liabilities.

But what's the source of your comparative advantage in making better liability choices than, say, older school insurance companies? Where does that come from?

Well, it comes from a very simple business model. We are at Athene in one business. We're in the business of retirement services. And therefore, we don't guarantee or don't insure your life. We don't insure your health. We don't insure your home. We don't insure your automobile or any other form of catastrophe. We simply ensure your retirement, and we do that through annuities, and we do that through pension. Those simple liabilities are locked in, and they are essentially a means for individuals to save. We have a retirement crisis in this country. People have not saved enough. Social Security is unlikely to provide a good standard of living for the vast majority of people. And so we also have a system that encourages retirement savings. Retirement savings in insurance products are tax free, they build up tax-free, and someone commits to these policies for 5, 10, 15, 20 years. And at the end of that, they have tax-free compounding at nice rates of return.

So given that so few other institutions seem interested in addressing this problem of retirement risk, what's the source of the comparative advantage that allows Apollo to do it, make money doing so, apparently be stable? How do the pieces fit together? Where's the— so-called free lunch coming from? Well, it's your talent. It's the building you bought, or what is it?

I, I assure you it's not my talent. I'm fortunate that nearly 10,000 people make me look good most days. Not every day, but most days. So if you think about our industry, in our industry, you need 4 things to be successful. Easiest of those things is capital. If you are a responsible investor and you sell investors on a long-term business plan, you should be able to raise capital. But if you look at our industry, The public companies in the retirement services business over the last decade have raised virtually no capital. Fundamentally, investors have decided they do not trust the public companies as good stewards of capital. And in fact, the vast majority of these companies have paid out their current book value as dividends over the last decade. So I start with, while capital should be easy, capital for this industry is actually quite hard. And so we showed up in 2008 with capital. That doesn't guarantee you'll be successful. The next piece is you need long-term, low-cost liabilities. Initially, as a startup company in 2008, we had no right to participate in this market, but 2008 was a very tumultuous period of time. Lots of companies were looking to get back to their, quote, home market, and people were selling off old blocks of business. We bought old blocks of business. And we did it successfully and got to scale, and we acquired a large amount of low-cost business. Today, that same opportunity, by the way, is no longer available because there are not big blocks for sale. The interest rate environment is different. There's not the same tumultuous need to sell. And so we are now the largest originator, organic originator, the sale of new products through traditional channels in the retirement business. Last year we did some $60+ billion. This year we're projected to do $70+ $1.2 trillion just in the US. This is a big market if you get it right. So long-term, low-cost liabilities that are predictable that you can invest against. Third, you need a scaled, low-cost operating infrastructure. Even though we are not the largest insurer, we are the largest retirement services company. We focus on one product segment. You look at other big insurers, they have diverse operations. In some cases, they don't have scale in any of their businesses, even though they are quite large. We are, as one product, based in Iowa, really efficient, very low cost, and that allows us to make money. But the other thing that you need to be successful, an insurance company, a retirement services company, needs to both be and appear to be and project solvency. Regulatorily, you need solvency. Rating agencies, you need solvency. And if you're backing 20-year promises, you need solvency. So you need lots of lower risk, higher yielding assets. And we have become at Apollo experts in originating higher quality, higher yielding assets, so-called private credit, and have been successful in originating them to the benefit of Athene and others in the insurance industry.

So how do the macroeconomics of this new world work if you don't have much maturity matching risk. You're relatively insensitive to where interest rates are moving. So if the Fed is controlling interest rates, say to disinflate or for any other reason, it seems that matters much less than it used to. Do you agree?

To us, yes, it matters much less than it used to. We run in our retirement services business, a spread business. And in that spread business, the absolute level of rates is not all that important. What matters is that we are able to earn a spread on our assets versus our liabilities versus our cost of operations such that we are profitable and therefore can both attract new capital, retain the capital we have, and provide investors with a reason to invest with us for the long term.

But say more and more of the economy goes into relatively successful private credit. Doesn't the Fed have to raise interest rates all the more because there's no impact or no major impact on your lending and the lending of your peers, but there's still some banks out there, 20%? So to get those banks to respond, Does monetary policy become tougher and tougher to pull off? How do you think about this?

I think it has become tougher and tougher to pull off. I think that to the extent we lived in a world where banks were 100% of the credit market, there was a very direct relationship between Fed action and what happened in the economy. To the extent 80% of credit is now provided by investors, forget about private credit for the moment, but by investors, there is a— less direct, but still incredibly important because the alternatives, you know, as rates go up, credit becomes more attractive to investors versus equities. As rates go down, the reverse happens. So there are a lot of ability still of the Fed to influence outcomes, but it is not the direct correlation that you once had. But I also don't think of it in just a monolithic way about, well, the Fed has less control. I think about resilient and necessary. Those are the words that always come back to me. I look at the US and relative to almost every other big capital market, the US is in an extraordinary position. And that is, in my opinion, reflective of the diversity of capital sources that we have. No other place in the world really has what we have. If you look at almost every Asian economy, 2 products, equity and bank debt. Look at Europe, equity and bank debt. Yeah, there's the beginnings of a fixed income market, there's a high grade, but there is not the diversity of capital sources that you have here. And so I come back to resilient and necessary. If the banking system, while really important and not going away and still vital for the country, is borrowed short and lent long, Every dollar that moves out of the banking system and into the investment marketplace actually deleverages the entire system. Think about that. A bank is levered 10 to 12 times. When you move credit out of the banking system into a mutual fund, it's zero levered.

But there's less liquidity in that world, right?

Well, let's talk about liquidity anyway. So this is one of those things. Yes, it, it is less liquid, but we're going through a whole rethink of what liquidity means. So 2008, we had just an unbelievable series of changes that took place in our economy in response to the financial crisis. We essentially redid all of our financial markets, financial regulation. The problem is none of us have experienced that yet for any length of time, because right after we changed all the rules, we printed $8 trillion and everything went up into the right. Beginning in '22, we started to experience the new world and in '23 we experienced it more. But we all, myself included, we have a lot to learn about what this new world is. But if you just look at the numbers, trading capital, the capital used for market making is 1/10 today of what it was in 2008.

And why has that gone down so much? Is that Dodd-Frank partly or what is it?

That is Dodd-Frank more than partly.

A 10X effect from Dodd-Frank.

Trading capital is 10% of what it once was. We had an incredibly liquid market and now we have a less liquid public market. By the way, we now have public markets that are 3 times their size. Doesn't take a genius to say that's 1/30th of the liquidity, but we haven't experienced it because everything is liquid on the way up. When we're printing $8 trillion, it all is good. But now when things go the other way, we're finding out that what we thought was liquid is not as liquid as it once was. And I'm not talking about the top 500 stocks, I'm talking specifically about the credit market. I saw an article the other day, it was saying that the average length of time to sell an investment-grade public corporate bond is now 5 days. We have had the first wholesale failure in a market of liquidity. Think about what happened in the UK in their pension meltdown. Institutions in the UK thought they had market liquidity at or near the market price. They tried to sell AAA and AA obligations. The market gapped down. They tried to sell more, the market gapped down again. Bank of England had to step in and stabilize the market before major damage happened.

But why is there so much adjustment in the quantity of liquidity and not more in the price? So a 30x decrease is a massive adjustment in the Q or the quantity.

We have, so—

Why don't you just pay people to get more liquidity? That might be inefficient, a higher price.

But isn't that what's happening? I mean, isn't that what LDI in the UK showed us? Is that there is liquidity, it's just not at or near the market price. And I do expect that in risk-off environments, we will actually see much greater price adjustment. And so this comes back, I don't want to go down the rabbit hole of liquidity, but I want to contrast this to what I see taking place in the world. We have this impression, this is my 40th year doing this, and we have an impression in the investment marketplace that Private is risky and public is safe. Well, was that the case? Yeah, that probably was. When I started in, in business, that probably was true. Most things that were private were private equity, venture capital, and hedge funds, and things that were public were generally public for the right reasons. Well, is it true today? Right now I look at the S&P 500, I look at 10 stocks that are nearly 35% of the S&P. I look at those 10 stocks that trade north of a 50 PE. And I say to myself, is that actually safe or is that just a reflection of a liquidity bubble and everyone piling into passive management and everything else? I don't have to conclude that, but my belief of where the world is today is public is safe and risky. And we've seen that. Look at all the tech correction that took place in 2020.

It's very correlated, right?

Everything is correlated. But I'll make the point on safe and risky in public. And safe on risky in private. Because something is private no longer means it's risky. Private goes from AA to levered equity, public AA to levered equity. We're just talking about degrees of liquidity and whether liquidity or illiquidity is a risk or not. So to a wealthy individual, how many wealthy individuals, high net worth investors, need 100% of their money on Tuesday? Probably none. Therefore, they should be looking at using liquidity as a choice. Are they getting paid for giving up that option to be more liquid? Same for institutions. If you're a pension fund, if you're an endowment, if you're a sovereign wealth fund, sure, you want a portion of your portfolio that's liquid, but how much of it actually needs to be liquid? And so I find myself asking and talking to CIOs today and CEOs today, not so much about public or private or liquid or illiquid, but are you being adequately compensated for having less liquidity? And are you structurally able to be less liquid prudently?

So if we're thinking about pre-Apollo, pre-Athene traditional insurance companies, you're saying they were investing too much in too many liquid assets. And what's the reason for that market failure? Why did they make that mistake?

It's not a question of market failure. This is when you grow up in a world and private is perceived as risky, Insurance companies have always been investors in private placements. It's just the size of the traditional private market has been very, very small, and so a small portion of their asset. So they found themselves invested primarily in public assets because 20 years ago public was safe and private was risky. Well, the world we're in today does not look like that. Even the term private credit, they're just two English language words that sound like they mean something, But for the most part, they mean nothing. In the popular press, people use private credit to refer to a very small sliver of a market. They refer to private credit as direct lending or so-called lending to buyouts. This is a below-investment-grade activity. Sometimes it's really attractive, sometimes it's not so attractive, but it is a $1.5 trillion market, a large market. But the market that I'm talking about for private credit is $40 trillion. Everything that's on a bank balance sheet is actually private credit. Think about that. Loans to companies, private credit. Loans to consumers, private credit. We haven't yet gotten to a more sophisticated view of the market where private can be AA, just less liquid. Public can be CCC, just more liquid. There is nothing inherently credit sensitive about being public or private. It's just differing degrees of liquidity.

So in the old banking model, say I get a checking account, my local Chinese restaurant gets a small-sized loan. In relative terms, is there now less of that? I mean, what's the opportunity cost of moving to more maturity-matched, higher-yielding assets? What is the economy giving up, even if it's a good trade-off?

I think it's clear that the largest companies in the world have access to both the banking system and to the investment-grade bond market every day. Medium-sized and smaller companies, no matter how creditworthy, have less access to the banking system and have virtually no access directly to the bond market. And so they increasingly will come through intermediaries. Some of that activity is below investment grade and speculative. That's a perfectly fine business. It's not primarily the business we're in. Some of that business is investment grade and secured, and that is primarily the business that we are in. And so I don't think it's better or worse. I think that we are just looking at evolution. I'm constantly reminded that financial services is not a status quo business. I go back to when I started, beginning of high yield bond market, not a lot of high yield bonds, no leveraged loans, no ETFs, not a lot of securitized product. Those 4 products today we take as mainstream products. Why do we expect that 15 years from now or 20 years from now, the same 4 products will be as dominant? We will end up with a new set of products. And a new set of markets that reflect differing market conditions and different regulatory conditions and different conditions of financial institutions. It's just change.

How stable is all this as a political equilibrium? If you think about the four major banks, as you well know, there are very serious stress tests applied to them, capital requirements. The Fed is a major regulator, at least for insurance. It tends to be at the state level. One can reinsure through Bermuda. Capital requirements are very different. Competence of the state regulators arguably is lower than that of the Fed. Whether or not one wants more regulation, and generally I don't, but is this a stable situation? How's it going to evolve?

Well, first I would have to correct almost everything you've said along the way to set the table for what I'm going to talk about. So first, the difference between not so much the banking system and insurance, but the banking system and the investment marketplace. There are plenty of ways. Let's start with this. There are plenty of ways for investors to lose money. Investors can buy speculative stocks. They could buy the S&P. They can speculate in almost anything. So the making or losing of money is not in and of itself a systemically risky activity because we allow, and for good reason we allow, speculative investing every single day. Things go up, things go down. You can lose money in credit as well as in equity. Now we come to mutual funds. If a mutual fund, which is daily liquid, owns credit And investors want to get their money back, you're right, price just adjusts. Mutual funds are not price guarantors. Are they regulated? Mutual funds are regulated. Are they disclosed and transparent? Yes, they're disclosed and transparent. The holdings of a mutual fund are completely visible and they're delevered. Is that a risky activity because it moved out of the banking system and into a mutual fund? I don't think so. I actually think it has de-risked. It's made our economy and our financial system more resilient. So now I'll come to your question on political equilibrium. Premiums, insurance, if you just focus on insurance, has no federal guarantee, does not borrow short and lend long, has no access to the Fed, and does not do liquidity transformation or maturity mismatch. And they are forced to hold amounts of capital. So if you look, and I'll give you a comparison just for us, not for the whole industry, who holds more capital, Athene? Our insurer as a percentage of assets or the typical bank? You would think the typical bank, but you would be wrong. We hold more capital per dollar of assets than anyone else. Who holds more investment-grade assets? 90% of our book is investment grade. The typical bank is two-thirds investment grade.

Sure, but that's all time slicing.

Let's keep going.

Money market funds have been a source of systemic risk. AIG has been.

I can't tell you there's not risks in the economy. We have a choice. We can have risk dispersed. Among lots of institutions, or we can have it concentrated in the government-backed borrow short, lend long government-guaranteed banking system. Every time we disperse that risk, we make the system more resilient. If you want to focus on insurance, which is your question on political equilibrium, there's more capital, there's no ALM mismatch, there's more investment grade, and there is appropriate state-based regulation for institutions that do not have government guarantees or borrow from the Fed or do anything else. Insurance is very slow moving. We're talking about, on average, 10-year assets. This is a very slow-moving process. And again, most of the issues that have happened in the insurance industry have not been asset issues. They've been liability issues, exactly the kind of thing that insurance specialist regulation is designed to detect.

But say you're a risk-averse regulator, maybe too risk-averse. You're worried about off-balance sheet risk. You're not very good as a regulator at monitoring off-balance sheet risk. So you overreact by extending your own reach, wanting to impose capital requirements on everyone. Then you want to monitor them more. And eventually these private institutions, which are basically healthy, they become more and more like banks. No?

So we have this example. We have Solvency II in Europe. Solvency II in Europe has been terrible for the retirement services industry. Capacity, just the mere availability of product, is down almost 40%. That's an outcome. That's not the outcome we've chosen. And the question and credit at the end of the day, which is really what we're talking about, credit is a function of GDP. If you want GDP, credit can only come from two sources, the government-backed, government-guaranteed borrow short, lend long banking system or the investment marketplace. There's no third choice. Make your choice. If we want less GDP. That's a choice. It doesn't seem like a good choice given the other options that are available.

Will crypto play a role in the future of the US financial sector?

Um, out of my depth. Just don't— absolutely no idea.

But you interact with plenty of financial institutions that have opinions on crypto, right? You, you face the possibility of investing in crypto yourselves. You might not do it, but that itself is a step.

I'll give you my, my uneducated Tyler Cowen: Spectator from the sideline view, things like stablecoins, things like on-ramp, things that are convertible back into fiat currency are absolutely going to play a view. I see every opportunity for them to reduce the cost, to reduce the friction of dealing with the financial system, to be an amazing on-ramp. For the US, I don't really see in a KYC/AML world a value of an alternative currency. If you are in other parts of the world, maybe an alternative currency has more appeal.

In any case, Apollo's not doing it.

Apollo is not engaged in crypto.

Why would you spend a given free day in Japan and where in Japan and what would you do?

Well, first, Japan is an amazing place, as you know, it's just so different and I, I'm surprised by something every time I'm there. But as, as a financial matter, you look at a, at a society that is older, that has needs for retirement, that has lived through repressed yields for more than 20 years. And so you have a yield-starved society in an older population nearing retirement. They need yield. They are very comfortable in dollars. And to the extent we are providing safe yield, total return, investment-grade private credit, whatever buckets you want to talk, Japan is absolutely the perfect market for what we do. And I think it's a matter of education and that education is taking place. Japan also has an insurance industry that is in the middle of a capital transition, has had a very, very difficult time raising capital. And so that's also a fabulous reinsurance market. So between my, my love of culture, my love of the food, the need for safe yield, and the need for reinsurance capital, it feels like a highly productive place to be.

As you know, Japan has a total fertility rate of 1.3. South Korea now is at 0.7 and falling. That's astonishing. Do any financial models work when your total fertility rate is 0.7?

You know, again, I want to stick to that which I think I'm good at. So over the horizon, as a country as a matter, probably not. The population projections I have seen for lots of places in the world are just shocking. But in the little corner of the universe that Apollo participates in, a 10-year period, a 20-year period is not really all that different than it is today.

Your grandfather, Emanuel Stein, he was an economist. He taught at NYU labor economics, labor relations. What did you learn from him?

He was my, uh, first job. I was living in South Florida. I would come to New York for the summer and he was a labor arbitrator. And so I would come work for him the summer. He would dump a bunch of briefs on me, and I would summarize the arguments, and then I would debate the cases with him, and then he would go off and write the opinions. So it was a pretty good way to get a good view of the world as between labor and management.

What made him a good labor arbitrator?

Patience. He was just a remarkable individual, multilingual, a Torah scholar. Just had incredible amounts of patience and humility.

Your free day in Japan, when the work is done, where do you eat? What's the best food in Tokyo?

You know, I, I kind of take it from the concierge at wherever I'm staying. I look for one traditional Japanese experience and one, give me the latest, newest, greatest, because Japan does create new and great in addition to traditional.

The best French food I've ever had was in Tokyo, in fact. It's amazing, isn't it?

You never know what you're going to find.

That's right. Your interest in architecture. Is brutalist architecture overrated or underrated? Is it actually good?

So I don't know that I would say I'm interested in brutalist architecture, but I am interested in building things. So for whatever reason, I am not a collector of anything. I don't collect wine. I don't collect art. I don't collect cars, but I do like building things and have always liked building things starting from my late 20s when I built my first house. I've built lots of houses, lots of restaurants, lots of stores, small office buildings, and I just keep going. Whatever itch it scratches, I find it to be just an incredibly creative outlet, really enjoyable. And everyone always says, don't you get aggravated building these things? And I said, well, only if you have to move in on a certain date. But if you're flexible, as it relates to brutalist architecture, you're referring to the apartment in New York City.

On Fifth Avenue. Yeah.

The answer is, I don't know that I would have chosen it, but there's something about it that I just found incredibly appealing. This was a full apartment built with no right angles. Everything curved in very simple materials, but very beautiful materials.

And you feel it's held up visually.

It's had to be redone. Visually, it's held up beautifully, but—

But maintenance.

Every surface that was— everything that was used to build in the 1950s, 1960s, 1970s is now gone. It's been rebuilt. In the traditional, in the same style, but with new materials and new techniques.

How do you think about whether or not there should be a red hawk nest at that building?

I don't think about it at all. I've rarely see the hawk or hawks, and it does not interfere with my life.

And you just never worried about the red hawk nest?

Oh, there's so much else to worry about, but I never worry about the red hawk nest at 927 Fifth.

Here's a question I've asked a number of guests. Both Patrick Collison and I both have made the observation, it seems there are really very, very few attractive residential neighborhoods built after World War II in this country. Or if you look at Europe, places rebuilt after wartime damage, they're mostly ugly or mediocre, or maybe at best, okay. You might challenge the premise, but why do you think we've lost the ability to build beautiful neighborhoods? Plenty of lovely homes, lovely individual corporate buildings, but neighborhoods, all the good ones are old. Why?

You got here first. Whoever got here first took the good physical location. I think we're in a rebuilding mode, certainly in most of this country and certainly in Western Europe. There are beautiful things and beautiful neighborhoods being created. I'm back from 12 days in the Middle East. We can like or not like the style of what's being built, but the scale The ambition, the new neighborhoods, the ability to create new is extraordinary.

And where impressed you there?

So to see what's happening in Riyadh, in Diriyah, which is their traditional neighborhood, there's 9 million people on the way to 13 million people. To see what's going on in Abu Dhabi on Museum Island and Saadiyat and other places. The scale of ambition there is actually quite impressive. I don't love everything, but I am impressed of their ability to get things done. And to actually re-envision on a grand scale something we really haven't done in this country in a very long time.

In the United States, do you think we're on the verge of building a new Shaker Heights, which is not on a spectacular plot of land, right? It's outside of Cleveland. Gorgeous homes, wonderful neighborhoods, trees, perfectly integrated. And they were quite poor compared to us. Why no Shaker Heights today? Or do you think we're doing one?

Don't know. I mean, I certainly, I look at the places where you have population increases. Most of what, what I've seen that I really like Austin, Texas. We're going to have whole new neighborhoods in Austin, Texas, places that are physically beautiful that were just outside the core and now are being built. Again, we can say that's progress or not progress. If you're commuting into the downtown Austin, you're, you're not so excited about that. But I think in places that are still growing, it is pretty dynamic.

And will we, or should we, repurpose these big box, big glass modernist office buildings? Are they permanent, or they've passed their due date, or how should we think about those?

I worry less about the look and feel of the office. I think an office is an internal thing. Does it encourage the kind of collaboration, the kind of working environment that you ultimately want for a company? I look at you, you've just come from our cafeteria, and The productivity increase that we've experienced from the casual collisions of people seeing each other every day needs to happen inside a physical space in this office. Does the exterior of the building really matter to me? No, not really.

So what else have you done here at Apollo, where we're sitting at the moment, to make it a better internal office? How do you think about that design?

Well, first, you're going from a very low bar. To a much better situation. We were spread throughout this office building on non-contiguous floors with separate cafeterias in what I would call, you know, traditional executive offices for the more senior people and bullpens for the more junior people. Nothing that I've just said is now true. We are now in a contiguous low-rise of this building on 9 contiguous floors, all connected by staircase. We have lots of places where casual collisions take place. We have our coffee bar, we have our cafeteria, and for the most part, we've become much more egalitarian with respect to offices. One of the things that I've done when I took over as CEO, I have a windowless office off the trading floor, and next to me is Jay Clayton, former head of the SEC. He has the same size windowless office off the— It's given me tremendous moral authority when it comes to the arrangement of people's offices to say, "You're welcome to take mine." And I think that culturally, leadership here has embraced it. We now sit not with each other, we sit with our teams. We are spread throughout this building in a good way.

If you need to hire a new person to make major decisions, significant commitments of funds, what non-obvious quality do you look for in that hire?

I wish it were that straightforward and we could test for this and do it.

But you must use your intuition at some level, right? We all do. What does your intuition tell us that I wouldn't learn from someone else?

No one gets hired to make major decisions right away. So let's start with that. I will say jokingly, your first year at Apollo is mostly useless. Your second year, you're at 30% capacity. By the third year, you feel like you've been here 10 years. We have lots of smart people, and there are lots of smart people in financial services. This is about cultural fit, and it's understanding where we're going and whether the organization can absorb the specific decision, the amount of change, or whether it has to be prepped in a certain way. We are not chess pieces that can be moved around. And I just got back from an offsite with all 201 Apollo partners in Abu Dhabi. Really interesting way to get together. 3 most valuable days of the year for me. First thing I said, a small group of us cannot run this business. There are too many important decisions, to your point, that are taking place at levels that I will never see and that could never absorb. I have to get the buy-in of 200 people to successfully run this organization. And so when I present or the leadership here presents a strategic plan, we're in debate mode. There's very little that gets done in the way of dicta here.

You're hiring a 22-year-old for an entry-level position. But a potentially significant one. What non-obvious qualities do you look for? Yes, they're smart, they work hard, maybe went to a good school. What else?

So they have to love their job. You can't fake this job for very long. You know, people say, like, isn't it really hard? Isn't it, you know, take over your life and everything else? Absolutely. And so if you don't like it, this is probably not a good place for you. At the end of the day, though, being able to take a blank piece of paper and think about what's not there is the skill that gets them from mastery of numbers, of analytics, to actually decision-making. And I think back, and I'll relate it personally for me, I started at Drexel Burnham. And at Drexel, we financed companies where there was a non-zero chance their business would not exist. You spend an awful lot of time thinking about the future, the business plan, the specifics. We were not banking Exxon. Exxon was there then, it's there now. We— that's a process of, of maximizing the efficiency of Exxon's particular corporate action that's needed. Something that forces you to think about where something is going, whether the business will exist, how things will change. How you make capital commitments in the context of uncertainty is really what you want to see. You don't see that in a 22-year-old because you see them as masters of their craft. You don't actually know till a number of years after someone's here whether they possess that ability, which is to bring all their outside influences, their knowledge of what's going on in the world to bear in the business. Along with relationship. At the end of the day, this is a complex business, but it's also a really easy business. People do business with people they like. Are you likable? Are you relatable? Are you good at building relationships? Having the right answer is helpful. Being able to convey that answer in a way that someone else will absorb and to engage in a dialogue with them, much more important.

Here's a quotation from you. I think if you could explain it to us, our business, like the real estate business and some other business, is hours of boredom followed by moments of terror. We really only make 20 decisions a year. What are you getting on about there?

Well, I was really talking about— it's taken out of context, but it is what I said.

But give us the context. Yeah.

So the context is I was talking about the difference between being an equity investor and a debt investor. So in the private equity business, you work incredibly hard. But if you look at what we do as a firm, and we're one of the largest in the private equity area, we make 10 or 20 decisions a year. Everything else is ceremony. And so hours of boredom followed by moments of terror when you actually have to decide. But if you think about that business, if I come in on Monday and I don't like what I see, I go home. Tuesday, same thing. And I keep doing that until I like what I see. And then I make an investment because I'm only making 10 or 15 investments a year. And now I'll contrast that with the credit business. In the credit business, I come in on Monday and I take the least bad alternative on Monday and the same on Tuesday and the same on Wednesday. So my job in the credit business is to create more least bad alternatives, to create more origination, to create more diversification, to create more options. Because I know if I'm serving insurance companies, our own insurance company or someone else, a thing needs $6 or $7 billion a month. That's what I need to create. And so it's two different speeds. It's two different ways of looking at the business. It's two different ways of thinking. But I also want people to know that in the equity business, hours of boredom followed by moments of terror.

Given recent developments, and you've been involved in some of these Do you ever feel that Apollo and other top firms in the New York financial sector, that they're just hiring too many people from so-called top schools? Are you rethinking that?

I really don't think that because we, we as a firm, we've branched out so much, and I'm sure the other firms have branched out as well, which is, yes, when we started, it was easy to hire from a core number of schools into the private equity business. And it was very self-selecting. So I came from the University of Pennsylvania, and it would not surprise you that when I ran recruiting, 50% of the firm came from the University of Pennsylvania. Then, you know, we democratized. We had a few people from Duke and a few people from Virginia, and now it is complete democratization from all over the country, all over the world. The fastest growth in our business right now is taking place in India. People say, "Well, that's back office." No, it's just an office. We're 500 people in Mumbai. We'll be 1,000 people in Mumbai in 3 years. Those people are coming from all over the world.

What makes you bullish on the India office?

It's just an incredible labor pool. We have a place that grew up as a back office for everyone where it's now just become another office. The English speaking, the time zone, the work ethic, quality of people. And we're scaling almost every business in India— professional businesses, risk businesses, technology businesses, and what you would consider traditional back office. It's all happening.

What's the biggest obstacle to doing business in India?

The biggest obstacle is just capital markets. I'm not sure we're going to deploy all that much in India. So if I think again about the Indian economy, like many other Asian economies, You have equity and you have bank debt. So now I'll talk about our strategy, particularly in India. It used to be that we were there supplying equity, but guess what? Local Indian entrepreneurs, the wealthy families, they have amassed significant amounts of capital. There is no shortage of equity in India. And my guess is if there's an interesting opportunity in India, we would not be the first ones to see it. Therefore, it tells me we're not a great equity investor in India other than around the margins. On the other hand, in the banking system, banking system is very low cost. And if the bank is willing to supply something, we should let the bank do it and not compete with them. So our business plan in India is to be between equity and between bank because there is virtually nothing that exists of size and scale. So when Adani buys the Mumbai airport, we lend him $750 million US. When families in Mumbai want to consolidate their real estate holdings, We lend them $400 million US. There's a lot of business to do, but it is not— we can go there and say we're in the equity business or we're in the bank debt business, but that's not the opportunity. It's also not the opportunity in most of Asia.

Now, is this your correct title? You're chairman of the board of overseers at the Wharton School at UPenn? Is that correct?

We no longer use the word overseer.

Okay. What is it?

I'm chairman of the board of advisors at the Wharton School at the University of Pennsylvania.

Why have so many university boards— they seem to have fallen asleep on the job, or they're even part of the problem, or it's hard to reform them structurally. What's gone wrong?

Guilty as charged. So I was, and, you know, I've been very public in this, I was a member not just of the chair of the Wharton board, but also a trustee of the University of Pennsylvania. There were approximately 50 trustees, and the way you get to be a trustee for the most part is you put in service at one of the other boards.. And then you are graduated over time to the trustee board. Every other board at a university is a non-fiduciary board. It's an advisory board, including the board that I chair at the University of Pennsylvania's Wharton School. It's an advisory board. When you move to the trustees, you actually become a fiduciary. No one tells you that. The boards don't behave any differently. With 50 members, it's very difficult to engage in substantive debates, and for the most part, and I put myself in the negatives here as well, trustees have actually not fulfilled their duties. So if you take UPenn as an example, UPenn's charter is actually quite interesting. If you look at the questions that I've written to the trustees about and questions that I think they should answer in thinking about where the university goes and who— how they choose the next president, Those are, for the most part, not questions that Mark Rowan dreamed up. These are questions posed directly from Penn's charter. Trustees are supposed to set standards for admission. They're supposed to set standards for faculty promotion. They're supposed to set a strategy for the school. They're supposed to evaluate the efficacy of various academic departments.

Can they actually do that?

The answer is, sure they can. Can 50 people do that? No, 50 people cannot do that.

So the boards are too big. You think they should be smaller on average?

I think boards have to be of a level where people can actually have a debate and set a series of guidelines. And like every board of directors, they are not doing and micromanaging these universities, just like boards of directors do not micromanage companies. They set strategy, they set tone, they set policy, and they pick a leader. So imagine if you were the past president of the University of Pennsylvania. You arrive after two very long-serving presidents. You are hired by this board of trustees and you go to work. What's your goal? What's your plan? How is success judged? What's the university's policy on viewpoint diversity? What's the university's policy on free speech? The board of trustees, myself included, we never actually provided a roadmap for the president to be judged against. So it does not surprise me when confronted with difficult situations that there was no guide. I can't imagine that's a recipe for success. And so my own view, and this is what I've written at the— at UPenn, is trustees should first Answer fundamental questions about policy and where they want the university to go in partnership with their academic peers, because the academy also has a series of rights and responsibilities. And once the university knows where it wants to go, hire the next president against a business plan, a strategic plan, as to what they should do and what they should accomplish. It's unfair to leave them directionless. Now, fortunately, UPenn is in a very good place right now. It's a very stable pair of hands in Larry Jameson, who's the interim president. So they'll have time to do this.

Why are academics as a whole so cowardly and conformist?

You said that, not me.

That's fine. I'll say it. Look, but it is true in my opinion.

The answer is, I think it's career risk. I do think that they've bet their careers on achieving tenure and achieving the notoriety reputation amongst their colleagues, and they're loath to lose that. So what's been interesting about this entire process, the number of professors, department heads, department chairs who have reached out and just said, "Thank you.

Thank you for saying what needed to be said." And I'll say thank you while we're on the record, but please continue.

I say to them, I said, "Well, you don't know how many of you there are." If you are a, a Wharton faculty member, what are you interested in? You're interested in academic excellence and research. If you're an engineering faculty member, same thing. If you're a doctor in the med school, you're a professor, same thing. There's such a large group that is actually interested in getting to the core mission of a university, academic excellence and research. And without a guiding set of principles, Every day the university is facing some sort of crisis. Where do they stand on free speech? Are there any limits to academic freedom? What is the goal of the university? Is the university viewpoint neutral? There is no policy, and in the absence of policy, many things seem arbitrary.

And say you're talking to your grandkids or your kids or someday your great-grandkids, and they ask you, where should I think about going to school? And I put aside UPenn, which obviously you might recommend for a bunch of reasons, but what insight do you have into this? Where should they go?

What do you need to learn? If you think about how much the world has changed, the world has changed massively in almost every sector. Not so much in academia. We still have professors standing in front of classrooms, and while the tools are better, It's not like high-yield bonds, right?

It stayed the same.

It's not like technology. So I'll give you an analogy to what's happening. I am involved in academia in Israel. For the past 38 years, I have either chaired or co-chaired what has become Israel's best private school network. Public charter is probably a better way to describe it. We're 50 schools. We're roughly 30,000 kids in school. We're 3,000 teachers. We only work in the periphery of Israel. Ethiopians, Yemenis, Druze, Bedouin, Eastern Europeans. And we use union teachers. We teach the state curriculum. And our kids from these poor neighborhoods who have historical track record of not performing are now performing at among the best levels in Israel. Overall, the network is roughly 90% matriculation rate for their Bhagavad Gita, their university test. And we've wholesale changed communities. And I've, we've now seen this over 38 years. So this is not just—

And how did you do that?

That's, that's the punchline. So how? We have to teach the state curriculum with state teachers. The only way we can do this is we can teach it any way we want to teach it. If you go into a Dharca school, you are unlikely to find a teacher standing in front of a classroom in any class. Technology has been brought into the classroom. New ways of teaching has been brought in. Experimentation has been brought into the classroom. Games have been brought into the classroom. We trial lots of things and we double down on those things that work. We are essentially a laboratory for changes in academia. So I, I can't imagine the status quo is going to hold that 20 years from now, we're going to have professors standing in front of classrooms doing what they do. The tools are just so different. The amount of intelligence that people can gather from outside the class and research is so different. What do they need to know? How to figure out what's true, critical reasoning, how to use the resources and apply critical criteria to those resources. Is the memorization of dates and times and places and orders all that important? Probably not. Critical reasoning context.

If someone's doing a trip to Israel, they might typically go to Jerusalem, Tel Aviv. Where should they go that you know about and maybe they don't?

They need to go to the desert by Eilat. Of the things that I do, and I don't do all that many things well, but of the things I do well, age adjusted, I mountain bike pretty well in Timna Park near Eilat. Is a landscape that is otherworldly. Desert rock, sand formations, unbelievable. And beautiful new hotel there also.

How many restaurants do you own in Long Island?

3. Another, uh, as I joke, I'm the accidental restaurateur. 2 under the name Duryea's, one in Montauk, one in Orient Point, and then Lulu on the main street in Sag Harbor.

What have you learned about the economics of restaurants from those?

I actually learned that the restaurant business is a better business than most people give it credit for. And I make the following observation. It is the restaurant business. Most people who go into the restaurant business don't know anything about the business side of restaurants. Most people who go into the business are undercapitalized, and therefore the first time that they experience some sort of difficulty, They go under. And also a lot of it is very parochial. People haven't traveled the world to see what's out there. And the best thing I've learned is find the right partner who knows something about running a restaurant, because I know nothing about running a restaurant, but I know a lot about business.

How much of your profit do you make on wine and drinks compared to food? That's the old cliché, right?

No, it's not.

Food is break-even. Is it true or not?

No, it's not true. I mean, I think about the decisions we've made out in Montauk where reputationally we've decided only to serve wine and beer, no hard liquor. Could we make more money serving liquor? Absolutely. But it's not how we run. People want to come there for the experience and we do just fine on the food as well.

And what kind of food is it?

Think of Saint-Tropez meets Cape Cod.

Okay.

70% of it is some form of lobster. Which of course I don't eat, but that's a whole other story.

And the chef is French?

Partner is, is French, and my partner and the, the key chef who's overseeing all the culinary experience is French as well.

And what have you learned about design by having 3 restaurants in Long Island?

Each one is different. So Montauk, as I've suggested, is a very traditional Cape Cod style. Orient Point mixes a North Fork style with tidbits of Mykonos and what's been done there. And Lulu could be on the main drag in Tel Aviv.

And last question, what is the next thing you want to learn?

Well, language-wise, I'm 1,200 days into Spanish. And so I now need to go spend 30 days someplace where people just talk to me in Spanish. And I think I have a chance.

Where will you go? There's many candidate places, right? Latin America, the English proficiency is not that high.

I think sunny Spain.

Sunny Spain.

I can bring my mountain bike as well.

Uh-huh. So Spanish is the next thing you want to learn.

Spanish is the next thing I want to learn.

Mark Rowan, thank you very much.

Absolute pleasure. Thank you.

Thanks for listening to Conversations with Tyler. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other listeners find the show. On Twitter, I'm @TylerCowen and the show is @CowenConvos. Until next time, please keep listening and learning.