To understand what makes private equity (PE) effective without leverage or a traditional fund structure, we have to look past the financial engineering of the last decade.
Marc Rowan, CEO of Apollo Global Management, Inc — speaking to Nicolai Tangen of Norges Bank Investment Management — highlights a critical shift: the transition from Private Markets Beta — relying on cheap debt and rising markets — to Private Markets Alpha: generating returns through skill, structure, and operations.
What makes PE effective without leverage or a fund?
When you strip away debt and the 10-year exit clock, the “effectiveness” of PE shifts from financial manipulation to compounding & operational excellence.
- Operational Alpha over Financial Engineering: Without leverage, you cannot “juice” your Return on Equity using debt. To get a 20% return, the business must actually grow or become 20% more efficient. This forces a focus on “Mastering the Craft” — improving margins, supply chains, and talent.
- Removal of Maturity Mismatch: As Rowan points out, banks fail because they “borrow short and lend long.” Traditional PE funds fail when they are forced to sell a great company in a bad market because the “fund life” is over. Without a fund, you have Permanent Capital, allowing you to hold assets for 20+ years and ignore short-term market volatility.
- Anti-Fragility: Leverage makes a company fragile. In a “risk-off” event — like the UK LDI crisis or COVID-19 — debt-heavy companies go bust. Unleveraged PE companies become the “predators,” using their cash flow to acquire distressed competitors while others are fighting for survival.
- Direct Origination: Instead of buying what is “for sale” (and paying a premium), effective PE without a fund focuses on origination — finding or creating deals that don’t exist in the public index.
Your entry price is the most significant lever you have
- The Purchase Price Matters: Rowan’s core philosophy. In a world of “indexation and correlation,” the only way to beat the market is to pay a price that allows for a margin of safety. If you don’t use leverage, your entry price is the most significant lever you have left.
- Asset-Liability Matching: Using long-term capital — like retirement savings or personal wealth — to fund long-term assets eliminates the “Daily Liquidity” trap that makes public markets risky.
- The “One Strategy” Rule: Treating debt and equity as a single spectrum. If a company is too expensive as an equity play, you “originate” a senior secured credit position instead. You seek the best “excess return per unit of risk,” regardless of the instrument.
You hold onto mediocre businesses because there’s no pressure to exit
- The ROE Gap: You must acknowledge that without leverage, your return on equity will almost certainly be lower than a successful “levered” peer in a bull market. Are you okay with 12-15% compounding for 20 years vs. a 30% “pop” followed by a 0% fund?
- The “Lazy Capital” Risk: Traditional funds have a “ticking clock” that creates urgency. Without a fund deadline, there is a risk of “owner complacency,” where you hold onto mediocre businesses because there’s no pressure to exit. Having no deadline, how do you maintain the “Lion Tamer” intensity Rowan occasionally alludes to?
Why the Future of Hyperlocal Business is Permanent Capital
For the last decade, private equity felt like a magic trick: borrow cheap money, buy a company, wait for the market to rise, and sell. But the “magic” just ran out. As the CEO of Apollo notes in the podcast In Good Company, hosted by Nicolai Tangen, CEO of Norges Bank Investment Management, we are entering a “Shakeout.” The era of “Private Markets Beta” — where anyone could look like a genius by using leverage — is over.
For the entrepreneurs and investors building in our 5,000 cities, the future isn’t about how much debt you can stack; it’s about Permanent Equity. It’s about building businesses that don’t just survive the next “risk-off” event but thrive because they aren’t tied to a 10-year fund clock or a bank’s short-term whims.
The Shift from a “PE without the fund” model
In the world of local small and medium businesses, we’ve been told to emulate the “big guys.” But Rowan points out that the big guys are actually moving away from the old model. Public markets have become “indexed and correlated” — essentially a giant bucket of the same ten stocks.
The real opportunity is in Private Alpha:
- Mastering the Craft Buying businesses where you have a “judgment” advantage.
- Avoiding the Liquidity Trap: Public markets offer “daily liquidity,” but as we saw in 2008 and 2020, that liquidity disappears exactly when you need it. By using a “PE without the fund” model, you trade daily pricing for long-term stability.
- Seniority in the System: Instead of just being an “owner,” the new framework suggests being an “originator.” Whether you’re providing the credit or the equity, you want to be the one structuring the deal, not just taking what the market gives you.
The 5,000 Cities Framework for Permanent Growth
- Purchase Price is the Only Protection: In a high-interest world, you cannot “fix” a bad entry price with debt.
- Alignment over Assets: Around the time he was interviewed by Nicolai Tangen, Mr Rowan managed $700B, yet he said his goal isn’t asset management — it’s “Alpha Generation.” If your local investment group is focused on Assets Under Management instead of “Returns per Unit of Risk,” you are building on a shaky foundation.
- The “Get To Do This” Culture: Success in private markets is a knowledge-based business. If you don’t have the Apollo’s 200 partners — or in our case at 5,000 Cities, local operators — who are in it for the career, the knowledge leaves, and the business reverts to the mean.
The “Shakeout” is coming for the middle market. Don’t get caught in the middle with a levered balance sheet and a short-term mindset.
