AI Disruption Revives Credit Fears for Apollo's Core Business

What happened

Artificial intelligence is creating new uncertainties in the $3 trillion private credit market, with software firms facing heightened disruption risks. Apollo Global Management, a major player in private credit with $222 billion in 2024 originations and a focus on this sector, is directly exposed to these emerging threats. The firm's growth strategy, centered on scaling private credit through bank distribution and perpetual capital, could be challenged if AI-driven pressures impair borrower quality. This adds to existing risks like regulatory scrutiny and macro volatility that Apollo already faces, as noted in its filings. Consequently, investors must reassess the durability of Apollo's earnings growth amid these sector-specific headwinds.

Implication

The AI-driven disruption in software sectors threatens to reduce attractive origination opportunities for Apollo, potentially dampening fee- and spread-related earnings growth central to the BUY thesis. Credit quality deterioration could lead to higher defaults or performance allocation givebacks, impacting profitability and investor sentiment. Regulatory attention on private credit might intensify if sectoral risks escalate, adding compliance burdens. Apollo's integrated model and P/E discount offer some buffer, but sustained origination weakness or credit losses could erode its competitive edge. Therefore, a cautious stance is warranted until clearer data on AI's impact emerges, with a focus on quarterly credit metrics and origination volumes.

Thesis delta

The AI disruption introduces new sector-specific risks to Apollo's private credit portfolio, particularly in software, which could impair origination volumes and credit performance. This necessitates a more guarded view of the growth assumptions underpinning the BUY recommendation, though the firm's integrated model and valuation discount may provide partial mitigation. Investors should await evidence of Apollo's underwriting resilience in AI-exposed sectors before confirming the thesis.