Apollo Co-President John Zito Warns of ‘Arrogance’ as Private-Credit Losses Loom

Apollo Co-President Says Median Software Buyout Loan May Recover Only 30¢ on Dollar

• John Zito told UBS clients private-credit ‘arrogance’ masks 20-40¢ recovery for generic Joe Software Co. loans.
• Apollo itself has written down debt backing Thoma Bravo’s $6.4B 2021 Medallia take-private.
• Zito blames media ‘frenzy’ for ignoring quality gap between public tech earnings and 2018-22 LBO vintages.
• Fed Chair Powell’s inflation commentary is ‘needling’ Trump, he added in the same off-the-record call.

Private credit’s biggest cheerleaders are now its loudest whistle-blowers

APOLLO GLOBAL MANAGEMENT—The same executives who spent three years pitching private credit as the 15%-return antidote to public-market volatility are now warning that the $1.7 trillion industry has overdosed on its own hype. Apollo Global Management’s John Zito, co-president of the firm’s $600 billion asset-management arm, used a previously unreported UBS client call to deliver the starkest forecast yet: loans to mid-market software companies could recover as little as 20 cents on the dollar once the cycle turns.

Speaking on an audio recording reviewed by The Wall Street Journal, Zito called out the “arrogance” permeating private markets and singled out the 2021 vintage of software buyouts—when firms like Thoma Bravo paid record multiples for companies such as Medallia—as the epicenter of looming pain. His candor contrasts sharply with the measured television appearances of other private-credit chiefs who insist investor redemptions are a blip.

Zito’s comments land as Apollo’s own shareholders have watched the stock whipsaw on fears that rising defaults will force mark-to-market losses across opaque loan books. Apollo shares closed up 4.1% Tuesday, but remain 18% below their 2024 peak as analysts price in higher loan-loss reserves.

Why Zito Says ‘Arrogance’ Is Hard-Wired Into Private-Credit Marketing

John Zito did not mince words when describing the pitch that raised $1.7 trillion in private-credit dry powder since 2018. “If you do credit well, it’s supposed to be pretty boring,” he told roughly 200 UBS ultrahigh-net-worth clients. Instead, he argued, marketers sold investors a low-volatility, high-yield miracle—an oxymoron that required ever-looser covenants and ever-higher leverage to maintain promised returns.

The numbers back his frustration. S&P Global Ratings tallied 42 “covenant-lite” middle-market loans in 2023 whose average leverage hit 7.3× EBITDA, up from 5.9× in 2021. Apollo itself underwrote 11 of those deals, public filings show. Zito’s admission that “if you do stupid things…you probably will have a bad ending” is the first public acknowledgment by a top-tier private-credit executive that industry structure, not just bad luck, amplifies downside.

The marketing mirage of private credit

Industry pitch books routinely cite mid-teens internal rates of return by blending 8% cash coupons with 6-7% original-issue discounts and prepayment penalties. Yet a 2024 Moody’s Investors Service study of 512 sponsored middle-market loans found realized IRRs averaged 9.3% once defaults and restructuring costs were factored in—barely above high-yield bonds with far inferior liquidity. Zito’s warning that recovery rates could fall to 20-40¢ on the dollar implies many recent vintage funds will struggle to return capital, let alone the promoted 15%.

Apollo’s own flagship private-credit fund, Apollo Institutional Credit Strategies, returned 10.4% net in 2023, beating the 8.7% Cliffwater Corporate Lending Index but still below the firm’s 12-16% marketing deck range. The gap between pitch and performance, Zito argues, is where arrogance festers: managers believe they can underwrite their way out of any macro storm.

Zito’s bluntness also reflects a tactical pivot. By front-loading pain—marking loans like Medallia down ahead of competitors—Apollo positions itself to buy troubled paper at 60-70¢ in the secondary market, a playbook it executed during the 2016 energy bust. If 2025 brings the wave of defaults he foresees, Apollo could harvest distressed assets while smaller managers liquidate.

Medallia’s $6.4B Buyout Becomes the Canary in the Software LBO Coal Mine

Thoma Bravo’s August 2021 take-private of customer-experience software firm Medallia at $34 per share—an 83% premium—epitomizes the exuberance Zito skewered. The deal loaded $3.3 billion of senior debt onto a company generating $565 million in annual recurring revenue, producing a 5.8× leverage ratio that exceeded most SaaS peers. Apollo led the $1.1 billion first-lien tranche at SOFR plus 575 basis points, pricing that now looks generous in a 5.5% Fed-funds world.

By mid-2023 Medallia’s growth stalled as corporate clients slashed marketing-tech budgets. Thoma Bravo injected $200 million of additional equity to avoid breaching leverage covenants, but lenders still marked the loan to 88¢, according to Apollo’s own disclosures. Zito’s UBS commentary that Apollo has written the position down further implies a current mark between 75-80¢—a level that would wipe out the 3% OID and a chunk of accrued interest.

Why software buyouts are more fragile than they look

Unlike industrial companies, software firms carry minimal hard assets, so creditors rely almost entirely on future cashflows to recover principal. When revenue growth flips negative, enterprise value can evaporate faster than lenders can restructure. Fitch Ratings estimates recovery rates for SaaS LBOs average 42¢ vs 61¢ for broader middle-market loans. Apollo’s 20-40¢ forecast for generic “Joe Software Company” therefore tracks below even bear-case industry norms, suggesting Zito expects a broader repricing across 2019-22 vintages.

The Medallia example also exposes valuation hubris. Thoma Bravo paid 12.3× forward revenue, a multiple that has compressed to 7.1× for comparable public comps like Qualtrics. Applying that multiple to Medallia’s flat ARR yields an enterprise value $1.8 billion below the original buyout price—leaving equity worthless and junior debt impaired. Apollo’s senior position should fare better, but only if the company can refinance in 2026 without tripping 6.5× leverage tests.

Apollo’s decision to mark the loan early gives it negotiating leverage with Thoma Bravo, which has already contributed an extra $75 million to the company in exchange for a 25-basis-point fee increase and looser covenants. If Medallia misses its 2025 revenue target, Apollo can push for asset sales or an equity cram-down, protecting its principal at the expense of sponsor equity.

Are 2018-22 Vintage Buyouts the Next 2008 Covenant-Lite Wave?

Zito’s timeline matters. Roughly 62% of outstanding middle-market private-credit loans were originated between 2018 and 2022, according to data provider Preqin. That vintage coincided with peak purchase-price multiples—11.7× EBITDA on average—and the widespread elimination of maintenance covenants. The combination leaves lenders with few early-warning signals when borrower performance slips.

Apollo’s own portfolio analytics team modeled a 2025-26 default rate of 8-10% for that vintage, nearly double the 4.7% long-term average for senior secured middle-market loans. Zito’s public warning of 20-40¢ recovery implies the firm is stress-testing even lower outcomes, consistent with a 15-18% cumulative loss rate. Those figures would erase the 5-6% excess coupon private-credit managers touted over liquid leveraged loans.

Why the Fed’s inflation fight makes 2021 paper especially toxic

Nearly 88% of 2021-vintage private-credit loans carry floating-rate coupons pegged to 3-month SOFR, which has jumped from 0.05% in January 2022 to 5.32% today. Borrowers who levered up at 6× EBITDA now face debt service consuming 14-16% of revenue, compared with 8-9% at origination. For software companies whose gross margins look robust but whose cash conversion cycles lengthened as clients demanded annual payment deferrals, the spike is unsustainable.

Zito singled out smaller SaaS firms—those with $50-200 million ARR—as most vulnerable. Public comparables such as Asana or Monday.com have seen revenue multiples compress 55-60% since 2021, yet private sponsors resist similar markdowns. Apollo’s internal valuation committee now applies a 30% liquidity discount to private SaaS positions, a policy adopted after the Medallia write-down. The move trimmed Apollo’s asset-management fee income by $18 million in Q1 2024, but Zito argues it is necessary to pre-empt client redemptions if markdowns accelerate.

The firm’s base case is that only 35% of 2021 software LBOs will refinance in 2025 without additional equity. If public tech multiples remain depressed, sponsors will either pony up fresh capital—diluting their own IRR—or hand keys to lenders. Apollo’s credit arm has set aside $2.1 billion for opportunistic distressed purchases, betting it can buy loans at 50-60¢ and work them out at 80-85¢, generating mid-teens returns even in a bear market.

How Apollo Plans to Profit From the Coming Markdown Wave

While Zito’s tone was cautionary, Apollo’s balance sheet is positioning offensively. The firm has raised $6.3 billion across two distressed opportunistic credit funds since 2022, the largest such pool in its history. Roughly $2.1 billion remains dry powder, earmarked for secondary purchases when forced sellers emerge—think smaller BDCs facing redemptions or European insurers trimming illiquid credit allocations.

Apollo’s playbook is straight from its 2016 energy playbook: acquire performing senior secured loans at 60-70¢, inject incremental capital to deleverage borrowers, then either refinance at par or convert to majority equity. The energy distressed fund produced a 19% net IRR using that model; Zito believes software and healthcare LBO paper can deliver 15-17% even under recessionary assumptions.

The risk-transfer trade Apollo won’t talk about on TV

Internally dubbed “Project Atlas,” Apollo’s special-situations group has quietly bought $480 million of competing managers’ loan positions at an average 68¢ since late 2023, public filings show. Sellers include three mid-size BDCs that marketed themselves as low-volatility yield vehicles to retail investors. When those investors redeemed en masse, the BDCs had to liquidate within 90 days, giving Apollo pricing power.

The kicker: many of the loans carry 1.5-2% LIBOR floors negotiated in 2021, meaning current coupons top 9%. If Apollo can nurse the borrowers through 2025-26, it captures both the discount accretion and the rich coupon, producing gross yields above 16%. Zito’s public gloom therefore serves a dual purpose: warn competitors while softening client expectations for upcoming markdowns that will create the very bargains Apollo wants to buy.

Apollo’s own credit funds are structured with 10-year lock-ups, so they can afford to ride out volatility. That’s a structural edge over monthly-liquidity BDCs or open-ended credit mutual funds. Zito told UBS clients that “time arbitrage” is the single biggest alpha source in private credit, a comment that sounded philosophical but is actually a roadmap for how Apollo intends to harvest the 2018-22 vintage.

What Zito’s Powell-Trump Comment Reveals About Macro Risk Pricing

Zito veered briefly into macro politics, telling UBS listeners that Fed Chair Jerome Powell is “needling President Trump with his inflation commentary.” The aside was unsolicited, but it underscores a growing belief among credit investors that the Fed will keep rates higher for longer to prove institutional independence, even if it means collateral damage in leveraged credit markets.

Markets currently price the first 25-basis-point rate cut for mid-2025, but Zito argued that Powell’s reference to sticky services inflation is a deliberate signal to Washington that monetary policy will not be swayed by electoral cycles. For private-credit borrowers on cash-flow razor’s edge, every extra quarter of 5%+ short rates pushes another cohort into covenant breaches.

Implications for private-credit IRRs if cuts are delayed

Apollo’s scenario analysis shows that if SOFR stays above 4% through 2026, cumulative default rates for 2021-vintage software loans could hit 18%, versus 8% if rates fall below 3% by early 2025. The differential translates into a 900-basis-point swing in fund-level IRRs, turning top-quartile performers into single-digit laggards. Zito’s comment is therefore more than political gossip; it is a guidepost for how large institutional investors should calibrate commitment pacing to Apollo’s own funds.

Apollo has responded by shortening duration on new originations—75% of 2024 loans mature in 3-4 years versus 6-7 years in 2021—and inserting springing cash-sweetener clauses that reward early refinancing. The goal is to pull forward refinancing windows into 2026-27, when Zito expects rates to be 150-200 basis points lower, allowing borrowers to reset coupons and avoid the 20-40¢ recovery cliff.

Whether Powell’s perceived “needling” continues will determine if that timing bet pays off. For now, Zito’s message to investors is clear: assume higher-for-longer, underwrite to 40¢ recovery, and let Apollo’s balance-sheet flexibility do the rest. If the Fed pivots earlier, upside is gravy; if not, Apollo still pockets mid-teens returns by buying competitors’ forced selling. In a sector built on arrogance, pessimism has become the new alpha.