Behind Apollo and Citigroup’s $25 Billion Bet

You could say the big push by Citigroup Inc. into private credit was a yearlong effort. But in a sense, its ties to Apollo Global Management Inc. have been decades in the making — ultimately leading toward a pact of doing $25 billion worth of direct-lending deals together.

In 2006, Jim Zelter hopped over from the mega-bank to Apollo, and now serves as the firm’s co-president. There has been a spate of other major hires who have come over from Citigroup to Zelter’s firm, including trading veteran Carey Lathrop, who has more recently helped morph Apollo’s direct-lending business into a more-than-half-trillion-dollar juggernaut.

That has translated into a flurry of transactions involving Apollo and Citigroup in the past several years. Executives at both firms describe “dozens upon dozens” of deals.

Now, Apollo and a subset of partners are in an exclusive arrangement with Citigroup for private-credit deals, which they expect to be sourced by 1,700 Citigroup corporate and commercial bankers. They expect $5 billion to be put to work in year one. The sticker shock of the deal has investors across Wall Street talking. (For a sense of how large that is, $25 billion represents almost 5% of Apollo’s credit assets at the end of the second quarter.)

“We could expand this beyond the $25 billion over time,” Richard Zogheb, Citigroup’s head of debt capital markets, said in an interview this week. “We wanted to put a number out there that we felt we could invest, and that wasn’t a number that is going to be pie in the sky.”

Zogheb had once counted Zelter as his own boss at Citigroup. The bank is the No. 2 underwriter on investment-grade debt, but has more recently fallen off the top five for high-yield debt and leveraged-loan underwriting in the US, according to data compiled by Bloomberg. The deal with Apollo is an attempt to break into more competitive positioning.

“Rich and I used to work together a couple decades ago, we’ve known each other for 30 years and the institutions have had very close working relationships,” Zelter said in an interview this week. “It was out of that working relationship that showed we had a common view on risk, a common view on product.”

Building Ties

Big banks have long kept the private-credit industry at an arm’s length.

More recently, however, the industry has been caving to the reality that direct lending not only can’t be ignored, it has become an essential part of an investment bank’s toolkit for clients. Goldman Sachs Group Inc. has been further expanding its own private credit business at its asset-management unit, while its investment bankers also seek to provide clients with traditional financing and direct lending.

Citigroup has long offered private equity and corporate clients the ability to tap syndicated-loan markets and ways to issue high-yield bonds. Now, the tie-up with Apollo presumably adds fire power through a fresh avenue of financing with private credit.

Private credit firms have also been looking to banks to borrow their large staffs of investment bankers, which have tended to be expensive talent. Some direct lenders, like KKR & Co., have spun up their own origination engines and increasingly compete with banks to underwrite deals.

But other private credit players — large and small — have been leaning on banks to source deals. Months ago, Barclays Plc struck a deal with AGL Credit Management to originate transactions.“ AGL will benefit from more information than other pure-play direct lenders and asset managers,” AGL Chief Executive Peter Gleysteen told Bloomberg at the time.

What’s clear is that the once-fierce rivalry between banks and direct lenders is starting to break down. The lines have become blurry and complex.

But, on Wall Street, for every action there’s a reaction. What’s unclear still is how clients and rivals will react.

The Apollo deal is “yet another example of the rapid growth of private credit into mainstream finance,” Moody’s Corp. analyst Ana Arsov said in a note this week. “This arrangement benefits both entities: Citigroup retains its fees and clients while moving the responsibility for originating non-investment-grade credit and capital to Apollo and its partners.”

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