The private sector in the US is in really good shape. Households have been deleveraging since the 2008 financial crisis, see the first chart. The corporate sector has been deleveraging since COVID, see the second chart.
Unfortunately, the government balance sheet is not in good shape. Government debt to GDP has increased steadily from 40% of GDP in 2007 to more than 100% today, see the third chart.
A unicorn is a privately owned company valued at more than $1 billion, and over the past decade, the number of unicorns has increased from 114 to 857, see chart below.
With a growing number of privately owned large companies, today there is a bigger need than ever before for private debt and equity solutions for both performing and distressed firms.
Private markets are playing a growing role in wealth portfolios. And understanding where opportunities are emerging has never been more important.
In this episode of The View from Apollo, we introduce Allocation Insights, a recurring series focused on how private markets are reshaping wealth portfolios. To kick off the series, hosts Alex Wright and Diana Sands are joined by Partner and Global Head of Structured Credit Investing Michael Paniwozik to discuss one of the fastest-growing areas of private markets: asset-backed finance.
They break down what asset-backed finance is, why it’s gaining momentum, and why investors are paying attention.
Looking at the entire global universe of public bonds outstanding shows that almost 90% trade at a yield lower than 5%, see chart below.
With inflation at close to 3%, this means that investors in public fixed income only get a 2% real return each year.
Japan’s population growth has slowed and moved into sustained decline, as births continue to fall and the demographic gap widens.
After the Global Financial Crisis (GFC), the P/E ratio for US equities was similar to that of the rest of the world, but the surge in tech valuations has now pushed the US P/E ratio 40% higher, see chart below.
The Nobel Prize–winning economist Robert Solow said in 1987, “You can see the computer age everywhere but in the productivity statistics.” This observation is the so‑called Solow productivity paradox.
The same can be said today: AI is everywhere except in the incoming macroeconomic data.
Today, you don’t see AI in the employment data, productivity data or inflation data. Similarly, for the S&P 493, there are no signs of AI in profit margins or earnings expectations.
Maybe there is a J‑curve effect for AI, where it takes time for AI to show up in the macro data. Maybe not.
Whether there is a J-curve effect depends on the value creation from AI. There is fierce competition between the builders of large language models (LLMs), which is driving the price of LLMs toward zero for end-users. This is the opposite of what the finance textbook says, namely that an innovator will have monopoly pricing power until others arrive with a similar product. This is what we saw during the computer age in the 1980s.
In other words, from a macro perspective, the value creation is not the product, but how generative AI is used and implemented in different sectors in the economy. The academic literature is still inconclusive about the potential macro effects of AI, see table below.
After three years with ChatGPT and still no signs of AI in the incoming data, it looks like AI will likely be labor enhancing in some sectors rather than labor replacing in all sectors.
For many years, the rest of the world invested significant amounts in China to build factories and assembly lines.
But that has changed in recent years.
China now invests more abroad than the rest of the world invests in China, see chart below.
There are no signs of AI boosting profit margins for companies outside the tech sector, see chart below.
The incoming data has surprised significantly to the upside in recent weeks, but long rates have not moved higher, see chart below.
