As government officials fight to prevent an economic depression by setting up emergency lending programs to keep credit flowing to taxpayers and small businesses, a prominent private equity firm is pushing to ensure that a broader spectrum of investments are included.
Apollo Global Management, the large private-equity and financing firm, has been pressing government officials in recent weeks to expand the types of assets eligible to be offered as collateral in a Federal Reserve lending program, according to six people who have been briefed on the firm’s initiative and a draft of an Apollo presentation that was reviewed by The New York Times.
The presentation, which was drafted by Marc J. Rowan, a co-founder of Apollo, on March 29, and shared widely within the investor community, argues that a Fed lending program called the Term Asset-Backed Securities Loan Facility, or TALF, should become “a broad program” that would allow a wider array of assets to participate. Doing so, he argued, could be essential to keeping the economy afloat.
TALF, which was deployed during the 2008 financial crisis to help stabilize markets and keep loans flowing to businesses and households, was revived by the Fed on March 23 as part of a package of programs. While it is not yet up and running, the program will offer cheap loans in exchange for bundles of debt, called asset-backed securities.
Those securities must be built on certain types of borrowing, like credit cards, auto loans, or small business loans. To qualify for Fed assistance, those asset-backed securities must hold the highest possible credit rating — a particularly high bracket of investment-grade, or extremely safe, credit — meaning the loans those securities back are highly unlikely to default.
In the presentation, Mr. Rowan argues that the program should be expanded to include “all investment-grade” or relatively safe “market participants” including mortgages and commercial real estate, certificates of deposit, and many other types of assets.
In a statement late on Friday, Apollo confirmed that it had been arguing for a “broad application” of TALF. “The investment-grade market provides funding to U.S. consumers and businesses of all sizes,” the company said. “It is integral to the proper functioning of the U.S. economy and must be restarted.”
Other private-equity firms, including the large investor TPG, have backed Apollo’s push, according to two of the people who were briefed on the initiative, and Apollo noted in its statement that “insurance companies, retirement plans, and industry organizations” shared its concerns.
A spokesman for TPG declined to comment, and the Fed and the Treasury Department declined to comment.
Since the coronavirus began spreading across the United States, the Fed has scrambled to keep credit flowing through an increasingly turbulent economy, dusting off 2008-era programs like TALF to backstop troubled markets. Those efforts received a booster shot last week, when Congress appropriated an additional $454 billion in rescue lending, which could be leveraged to back more than $4 trillion in cheap loans and asset purchases.
Apollo has argued that additional aid for the underpinning of the economy — notably including real estate — is needed.
“Too little attention” wrote Mr. Rowan in the March 29 presentation draft, “has been paid to the financial plumbing of the economy,” including the markets for both complex assets known as structured products and for real estate. “These financial markets have seized up,” he added, “and already are starting to exhibit patterns of a full-blown panic.”
The presentation argues that TALF should be broadened to include all investment-grade structured products — basically financial products built on underlying securities — and a type of short-term debt, known as commercial paper, that real-estate and other firms use, among other securities.
Apollo also argued against limits on executive compensation and other restrictions tied to those who use the facility saying that “would render the program unpalatable.”
The degree to which Apollo could benefit from Mr. Rowan’s recommendations are not clear. The firm oversees $331 billion in assets, including a range of companies in its private-equity portfolio, but none of those carry investment-grade ratings, according to its spokeswoman.
The firm manages a significant portfolio of products known as collateralized loan obligations, which could be protected in Mr. Rowan’s proposed scenario if they were investment grade. Apollo also invests in and finances real estate around the country, though that is a relatively small part of its overall business mix. And it has a stake in the insurance company Athene, which allows Apollo to manage the money of its annuity holders, providing it with a valuable source of cash to invest in its fund.
“Better functioning capital markets and potentially more support in asset prices would be beneficial for them as an organization,” said Devin Ryan, a research analyst at JMP Securities who covers banks and alternative-investment firms. The potential benefits of Mr. Rowan’s recommendations were hard to gauge, Mr. Ryan said, without having much more detail on both his proposals and Apollo’s many holdings.
Apollo, whose presentation was initially reported by Bloomberg News, and TPG aren’t alone in pushing for more out of the emergency lending program. The Structured Finance Association, an industry trade group, has previously urged the Fed to include older securities, not just newly-issued assets.
Members of the House Financial Services Committee, which helps to oversee the central bank, wrote to the Fed Chair, Jerome H. Powell, on Wednesday to urge him to expand TALF to include additional types of consumer credit as collateral to help keep credit flowing as non-bank lenders and financial technology firms struggle.
The Fed and the Treasury Department face a tough trade-off when it comes to broadening TALF, which remains a possibility, according to a person familiar with the matter. It could make the program riskier for the central bank, requiring more backup from Treasury and siphoning the backstop away from other programs — including one that could help midsize businesses and others that can help state and local government debt markets.
Helping out slightly riskier companies could also reward firms that have not carefully minded their credit ratings, putting a floor under them even if they made less-responsible choices when times were good.
Yet the Fed’s programs are meant to improve market functioning and if corporate debt markets come under extended strain, it could prove bad for the economy as a whole.
“The policy goal should be to address the parts of the market that are the most critical and require the most help,” according to the draft presentation.
The document states that given the severity of the coronavirus shock, and compared to economic packages rolled out in Europe and China, Congress’ $2 trillion rescue package “is severely underestimating the size of the required response.”