Apollo’s John Zito Warns of Overstated Private-Equity Valuations and Looming Market Strain
A Stark Assessment from a Leading Credit Investor
John Zito, co-president of Apollo Global Management’s asset-management arm, has issued a striking critique of the private markets, warning that valuations across private equity remain broadly inflated and detached from fundamentals. Speaking during a recent client discussion, Zito described what he called “arrogance” in private markets and cautioned that the repricing now underway could intensify throughout 2026 if credit conditions tighten and economic growth slows.
His remarks, previously unreported, reflect growing unease among institutional investors about whether the private-market boom that defined the late 2010s and early 2020s has run its course. Zito suggested that the real test is yet to come for leveraged buyouts completed in the final years of ultra-low interest rates.
Warning on Software Valuations and Credit Recoveries
Zito focused his criticism on technology take-private transactions completed between 2018 and 2022 — a period marked by sky-high valuations and intense deal competition. According to his analysis, many transactions in that window involved “lower-quality, smaller-scale” software firms purchased at multiples exceeding those of comparable public peers.
He warned that the private-credit loans funding such deals may face severe mark-to-market pressure in a downturn. Zito estimated that debt tied to a typical small or midsize software company could recover just 20 to 40 cents on the dollar under stress scenarios. The comments signal rising awareness that parts of the private-credit market — once heralded as a safer alternative to public debt — may not be immune to restructuring cycles.
Zito singled out loans associated with Medallia, a software company taken private in 2021, suggesting that lenders could face steeper losses than the market currently expects. Though Apollo clarified that his remarks referred specifically to software-sector valuations and not to broader credit exposures, the market read the comments as a cautionary note from one of the industry’s most seasoned voices.
A Shifting Cycle for Private Credit
The private-credit market, valued globally at more than $1.7 trillion, has expanded rapidly in recent years as regulatory constraints limited traditional banks’ ability to lend to riskier borrowers. Fund managers such as Apollo, Blackstone, KKR, and Ares have built vast lending platforms that compete directly with syndicated leveraged loans.
Zito criticized how parts of the media have celebrated private credit as a stable and endlessly profitable strategy. In his view, that narrative obscures the deeper cyclicality of credit markets. “There’s been a frenzy built around private credit,” he said, emphasizing that true strength comes not from hype but from disciplined underwriting and conservative loan structures.
Nevertheless, Zito expressed confidence that loans originated over the next 12 to 18 months could form some of the strongest vintages in recent history. With funding costs normalizing and deal quality improving, he expects new loans to feature lower leverage, tighter documentation, and better borrower fundamentals than those structured during the zero-rate years.
Enforcing Redemption Limits to Protect Investors
Turning to the issue of investor liquidity, Zito reaffirmed his preference for maintaining strict redemption gates. He advocated for enforcing quarterly withdrawal limits — typically capped at 5 percent of fund net asset value — to safeguard remaining investors from being diluted during periods of heavy outflows.
The stance reflects lessons from recent episodes of market stress, when several private credit and real estate funds faced redemption requests exceeding limits. Zito argued that easing those mechanisms for short-term fundraising would compromise long-term performance and stability.
The Paradox of Private Equity Demand
In a broader reflection on market sentiment, Zito questioned what he described as an inconsistency among institutional investors: strong appetite for purchasing secondary stakes in private-equity holdings, coupled with skepticism toward the credit that finances up to 80 percent of those portfolios.
That paradox, he implied, underscores how investors often separate risk categories in theory while being exposed to the same underlying cash flows in practice. For Apollo — which maintains relatively limited direct exposure to traditional buyout equity — the focus remains on senior secured credit that can benefit from tighter spreads in volatile markets.
Economic Outlook: “Recession More Likely Than Not”
Zito projected that a U.S. recession remains “more likely than not” within the next year, citing weakening consumer sentiment and declining household balance sheet strength after a decade of cheap credit. He argued that economic momentum could deteriorate as the post-pandemic savings cushion erodes and wage growth loses pace with inflation-adjusted spending.
Adding to his caution, he said that companies across sectors now face mounting investor pressure to demonstrate progress in artificial intelligence adoption — often ahead of proven business results. According to Zito, that premature race toward perceived innovation could squeeze budgets, distort capital allocation, and accelerate deflationary forces in sectors already straining to maintain pricing power.
Deflationary Undercurrents and Policy Ambiguity
In a candid aside, Zito remarked that Federal Reserve Chair Jerome Powell appeared to emphasize inflation data “almost daily,” which he framed as a distraction from emerging deflationary pressures. While critics interpreted his comment as political, Zito’s larger argument centered on the idea that markets may be underestimating the risk of a sharp disinflationary turn if credit and consumption weaken simultaneously.
The Federal Reserve is widely expected to consider rate cuts later in 2026 if inflation continues to normalize below its 2 percent target. However, businesses that levered heavily during the low-rate environment are unlikely to see immediate relief, as credit spreads and capital costs remain elevated.
Historical Context: Echoes of Past Repricing Episodes
Zito’s remarks evoke parallels with prior downturns in private-market valuations. The 2000–2002 dot-com correction and the 2008 global financial crisis both exposed how exuberant pricing can unravel abruptly when liquidity dries up.
In both historical cases, asset managers that maintained disciplined valuation and underwriting practices emerged stronger during recoveries. The difference today, Zito noted, lies in the dominance of private credit — a market that now rivals traditional banking in both scale and influence. This structural shift means that any broad repricing could echo through pension portfolios, endowment funds, and insurance company assets worldwide.
Regional comparisons highlight these vulnerabilities. European direct-lending markets, while growing, maintain slightly lower leverage ratios than their U.S. counterparts, reflecting stricter bank co-lending frameworks. In Asia, meanwhile, slower adoption of private credit has limited exposure to similar risks, though valuations in late-cycle technology sectors remain stretched across several economies.
Apollo’s Positioning and Market Strategy
Apollo, among the largest alternative asset managers globally, operates extensive credit, equity, and hybrid investment platforms. Zito stated that roughly 95 percent of Apollo’s private and public credit holdings fall within investment-grade ratings, a composition designed to provide defensive ballast against market volatility.
By maintaining liquidity flexibility, he explained, Apollo aims to pivot toward distressed opportunities should a broad repricing occur in private equity or corporate credit markets. Historically, such periods have produced double-digit excess returns for patient capital willing to supply liquidity when others cannot.
Zito’s emphasis on prudence reflects the firm’s legacy of navigating dislocations — from the post-Lehman recovery to the 2020 pandemic shock — through disciplined risk management and opportunistic deployment.
A Cautious but Opportunistic Outlook
The broader theme running through Zito’s commentary is dual: caution about inflated valuations in legacy portfolios, but optimism about the prospects for new lending. Private markets, in his view, are now entering a phase where fundamentals will again matter more than momentum.
For investors, his warning may serve as a reminder that the cycle of easy credit — stretching from the aftermath of the global financial crisis to the pandemic stimulus years — has reached its natural end. In its place lies a more selective environment, where sound underwriting, patient capital, and transparent valuations will determine who thrives when private-market exuberance gives way to economic reality.
In Zito’s words and through Apollo’s strategy, the message is clear: the era of effortless returns has passed, but disciplined investors could find the next great opportunity amid the coming correction.