Drexel’s Second Coming
The Scene That Gave Rise to Private Credit
Every so often a group of people collide in a particular place, at a particular time, and go on to create great things. Brian Eno calls it a ‘scenius’: a kind of communal genius embedded in a cultural scene. History is rich with examples: Ancient Athens for philosophy; fifteenth century Florence for art, Elizabethan London for plays; nineteenth century Vienna for classical music; 1940s New York for jazz; late 1970s New York for punk, new wave and hip hop.1
Scenes emerge in business, too. In the mid 2010s, it was estimated that 70% of publicly-traded tech companies in Silicon Valley could be traced back to the founders and employees of Fairchild Semiconductor Corporation. And books have been written about the PayPal Mafia, a group of individuals who went off to establish a string of similarly successful companies in tech.
In finance, such scenes are rarer but they do exist. As in business, they require not only a concentration of talent but a catalyst to disburse that talent at the same time. In PayPal’s case, it was the acquisition by eBay in July 2002. Employees were young enough and, following their exit, rich enough to go off and do interesting things, informed by their shared experiences at PayPal.
The closest parallel in finance is Drexel Burnham Lambert. Three years after becoming the most profitable investment banking firm in America, the firm filed for bankruptcy. Since then, an entire generation of traders has passed through Wall Street, leaving few around today with first-hand recollections of dealing with the firm. Yet its legacy still lingers. Two of Drexel’s alumni now run investment banks (Jefferies and Goldman Sachs) and two of the firms that others went on to create – Apollo and Ares – are at the vanguard of the growing market for private credit.
This latter trend is interesting because it builds on what Drexel did many years ago to expand the size of the credit market. Private credit is currently one of the fastest growing asset classes in finance, much as high yield was in the days of Drexel. It comprises debt which is not issued or traded on public markets. Just as Drexel displaced banks by securitizing low-grade corporate loans, Apollo, Ares and others are displacing banks through the origination of private credit.
We’ve discussed Apollo’s role in the market here before, although since then the outlook has got rosier. “It’s a good time for the private credit product set,” said Apollo’s CEO in June (“a golden moment” according to the president of Blackstone). On his earnings call today, the CEO of JPMorgan, Jamie Dimon, name-checked Apollo as a beneficiary of reforms that would raise capital requirements on banks.
Apollo’s success stems partly from regulation but partly from its roots in the Drexel scene. “Our DNA going back 30 years, and even our Drexel beginnings and the Milken school of studying balance sheets,” said one of its founders a few years ago, “is to find those areas where you’re not compromising on credit risk, but you are willing to do something that may have a little more complexity in it or that has a little less liquidity, but it still has the same investment-grade rating.”
In an effort to understand more about these companies, it’s worth going back to the scene where they began.