Q4 2019 Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lunch will again be placed on musicals. Thank you for your patience.
[music].
During today's presentation, all callers will they placed in listen only mode and following management's prepared remarks, the conference call will be open for questions.
This conference call is being recorded.
This call May include forward looking statements and projections, which do not guarantee future events or performance. Please refer to upon his most recent SEC filings for risk factors related to these statements.
And we'll be discussing certain non-GAAP measures on this call, which management believes are relevant assessing the financial performance of the business.
non-GAAP measures are reconciled to GAAP figures and Apollo's earnings presentation, which is available in the company's website.
Also note that nothing on this call constitutes an offer to sell or select solicitation of an offer to purchase an interesting any Apollo fund.
I'd now like to turn the call over to Gary Stein head of Investor Relations.
Great. Thanks, operator, welcome to our fourth quarter of 2019 earnings call. Joining me. This morning, our Leon Black Chairman and Chief Executive Officer, Josh Harris Co founder and senior managing Director and Martin Kelly, Chief Financial Officer, Co Chief Operating Officer, Gary Par Senior managing director, there's also here with us.
Well during the Q and a portion of our call.
Earlier. This morning reported distributable earnings of $1.10 cents per share, which led to a cash dividend of 89 cents per share for the fourth quarter.
The quarters distributable earnings were driven by pre tax fee related earnings wherever sorry, 59 cents per share and strong performance fee generation from our private equity and credit businesses.
With that I'll turn the call over to Leon Black.
Thanks, Gary good morning.
Thank you all for joining us.
I'd like to first.
Focus my remarks. This morning on the extremely productive year, we had in 2019 that Apollo.
Following that I'd like to briefly highlight the continued strong growth trajectory that we see a head for the firm.
From there Josh will spend a few minutes discussing the firm's recent operating performance and then Martin will provide greater detail our strong financial performance for the year.
And the quarter.
As I reflect on the past year, it's quite remarkable to consider the many meaningful changes that have taken place with respect to Apollo and the positive impact. These changes have had on our firm and our shareholders.
Just to recap a few key events during the course of the last few quarters, one we've announced and completed our conversion from a publicly traded partnership to a C Corporation effective last September fit.
Pursuant to our conversion we have already been included in some major indices, such as the Chris and the S&P total market indices [noise].
C and over 50% increase and our long only and passive ownership.
We have also benefited from greater liquidity in our stock as our average daily volume has doubled since our conversion.
Two.
In October we announced an important transaction to strengthen the strategic relationship between Apollo and a theme.
Through this transaction Apollo in certain limits related parties and employees will nearly double their ownership stake in the theme to approximately 35% with an option to purchase an additional 5%.
A theme will be eliminating its dual class structure and taking on approximately a 7% stake in the follow marking the first time they will have a direct economic interest in our financial success and further increasing the alignment between our two companies.
Third in November we hosted in Investor day, the key points, we communicated course to the day were firstly, the fact that Apollo offer shareholders, both high growth and an attractive yield.
In addition, we offered a robust view of our long term growth objectives and laid out the path for how we expect to achieve them.
Specifically over the past five years, we've been able to double or a U.M. and the f. already and we believe that we won't be able to do so again over the next five years.
We also felt that we were significantly undervalued and while investors have begun to recognize the value of our franchise. We believe Apollo is still an extremely attractive investment.
I'd also mention that our Investor day provided us with an excellent opportunity the showcased many leaders from across our organization. We're very proud of the deep bench of talent, we have at Apollo and they're pleased that we were able to feature a handful of the many people would have helped drive apollo's great success.
Finally during our Investor day in response to recommendations.
Many of you our shareholders, we unveiled a new minimum cash dividend of 40 cents per quarter or $1.60 cents per year. We believe this minimum dividend is reflective of the strong and growing cash generating power of our business and is supported by our stable in repair.
Fee related earnings without including any upside from our incentive business.
We were optimistic that by undertaking these actions throughout the year, we'd be able to unlock meaningful shareholder value and that has certainly come to pass as Apollo stock returned approximately 100% during 2019.
Connection with our corporate conversion, we have also seen a significant shift in our shareholder base towards larger longer term focused investors and we believe this transition is still in early innings.
When I look at our business today I see a franchise that has tremendous secular tailwinds at its back as low interest rates globally have made an increasingly difficult for investors to meet their income in return requirements and the public arena.
Today, we have built the largest alternative credit platform in the world with over $215 billion of eight you and more than 20 different credit strategies to meet these investor needs.
As we continue to scale, our broad insurance capabilities, we have continued to expand our differentiated yield capabilities in order to drive strong performance across the platform.
We have also delivered industry, leading private equity returns.
39% gross and 25% net IR ours since apollo's founding in 1990 30 years ago.
In addition, investors are increasingly consolidating their relationships with trusted partners like Apollo driving driving continued growth of our a U M half of our a U M is now permanent capital, which is the most stable and sticky kind of capital there is an over 80% of.
Hey, you EM is in permanent capital vehicles or has a contractual life of seven years or more from inception.
As a firm we've been able to deliver exceptional performance over 30 years and develop a world class brand name driven by our integrated global platform, our deep bench of talent and our continued commitment to excellence.
As we've discussed before embedded within our culture of excellence is our commitment toward socially responsible investing which has been a cornerstone of our investment process for many years as a reminder, a few months ago, we published our 10th annual SG report in which we disclosed.
In great detail the many ways that we've engaged with portfolio companies of Apollo managed funds across environmental social and governance factors. We encourage everyone to review that report and we look forward to engaging further with our investors on this very important topic.
With that I'd like to turn the call over to Josh to provide some color around the firm's recent operating results.
Actually I.
Starting with that.
Flows.
Ended the year with total assets under management of $331 billion, reflecting an increase of 18% year over year.
As of yearend are.
Permanent capital vehicles grew to $166 billion, representing about half of our total assets under management, while fee generating AUM grew $246 billion up 15% year over year.
Our strong growth in a AUM was driven by gross inflows of 64 billion.
For the year and 10 billion for the fourth quarter.
During the quarter flows were anchored by organic growth. It is seen in mid cap as well as a number of new innovative investment strategies didnt exist a year ago, including eight.
Our revolver fine and the acquisition of GE Capital's PK Air Finance aircraft lending platform.
Which closed during the quarter.
Our culture of innovation has continued to resonate strongly with investors.
I'd like to take a moment to provide a little more color on two of the strategic vehicles I just mentioned PK Air Finance native.
Decaire finance, which we and the team just acquired from GE capital is the most recent example of our ongoing effort to expand the breadth of our direct origination capabilities.
Within our credit business.
PK as an industry, leading aviation lending business, which is scalable and highly complimentary to the existing merck's aircraft leasing platform.
Across the Apollo platform, we now manage aviation related assets of nearly $7 billion.
Regarding ADF to date, we've closed on more than $3 billion capital commitments.
Which when combined with the teens Standalone capital.
Represents over $70 billion of cumulative buying power.
For potential incremental assets through M&A and pension risk transfer restrictions transactions.
While the timing of M&A is always difficult to predict we're very optimistic that the potential to transact within the insurance space remains strong.
And through Ada and our other insurance capabilities. We believe we entertain possess a unique capital solution and comprehensive and holistic set of tools to dress industry opportunities.
As a result of a power strong asset under management and fee generating AUM growth throughout the year management fees grew steadily to wanting to have billion dollars for the full year 2019.
Reflecting 16% growth year over year.
For 2019, we generated 902 million of fee related earnings or fiery.
Representing a 17% increase over the prior year.
As we highlighted during our recent Investor day, we.
We have demonstrated consistently strong FRB growth throughout the years I.
I believe we can continue to achieve robust growth going forward or combination of organic capital raising and strategic capital initiatives.
Funds, we manage also have approximately $46 billion of dry powder.
Approximately half of which.
We'll begin to earn management fees as capitals invested providing some visibility.
Yeah very growth just from the area, we already have available across our platform today.
Finally authorities to work constructively with regulators regarding its previously announced acquisition of a VAT.
Which remains subject to regulatory approval.
Moving onto deployment, despite an elevated valuation environment over the past year.
Funds managed by pile up more than $15 billion capital to work.
In our drawdown funds across our platform and across credit private equity in real assets businesses, which is an increase from deployment over the last few years.
During the fourth quarter, the private equity funds, we manage entered into a definitive agreement to acquire tech data.
Leading global distributor of technology products services and solutions inclusive inclusive of tech data and certain other acquisitions announced during the quarter, our private equity fund at nine is now 24% committed or investing.
Our methodical and patient approach of embracing complexity combined with our expertise in sourcing and structuring investments in a creative fashion have enabled our funds to continue deploying capital at what we believe are very attractive valuations.
Finally.
We continue to feel very good about the prospects for fund eight.
Put to work at an average creation multiple of six and a half times prior to cost savings and that's nearly five turns below industry average multiples.
The ongoing seizing amex and maturation of portfolio companies within the fund should drive meaningful monetization activity over the next few years that I will turn the call over to Martin to cover some of the financial highlights of the quarter in the year.
Thank you.
Great. Thanks, Josh starting with the results for the fourth quarter, we continued to demonstrate the strength stability and growth of our fee related earnings which increased to 59 cents per share on a pre tax basis for the quarter.
The higher fee related earnings were supported by advisory and transaction fees from activity across our private equity and credit segments.
This growth in F. Three combined with meaningful realization activity in private equity and performance fee generation across various credit funds led to an increase in distributable earnings to $455 million for $1.10 cents per share.
Private equity performance fees, which are driven by a handful of realization events, most notably for Freya Presidio and 80.
Performance fees in credit, a well diversified and generated from multiple opportunistic corporate credit funds as well as mid cap.
Hi strategy and several other credit funds.
Approximately 20 cents per share of performance fees recognized in the fourth quarter.
We are associated with transactions that we had previously expected to close in early 2020.
For the 12 months ended December 30, 129, saying, if I read totaled $2, a 19 cents per share, reflecting 17% growth over the prior year.
This growth was supported by 16% management fee growth.
And a continued emphasis on efficiency and cost discipline.
Allowing for some modest margin expansion year over year to 55% on a full year basis.
Distributable earnings, which utilize and 71 cents per share for 29, saying, 28% higher than the prior year.
Driven by a combination of fiery growth and higher performance fees.
We declared an 89 cents per class a share dividend for the fourth quarter.
Bringing the total costs a cash distribution for the 12 months ended December 30, 120 on chain to $2.35 per share.
Turning to investment performance in private equity funds, we manage appreciated by 4% in the quarter as gains in our public portfolio outweighed some headwinds in our private energy portfolio.
Our funds public equity portfolio accompany holdings appreciated by 20.6% during the quarter.
Led by portfolio holdings, such as HC.
Yeah, and watches a Switzerland.
While the funds private equity portfolio company holdings depreciated by 1.9%.
Primarily impacted by Mark to market adjustments on energy investments that offset appreciation in the remainder of the private portfolio.
Notably performance for fund eight remains strong with a fund appreciating by 5.9% in the quarter, bringing 29, saying total appreciation to 21% to 24.1%.
In credit we generated another quarter of strong performance across the board with gross returns of 2.2% for corporate credit.
0.5% for structured credit and 2.6% for direct origination.
Facing the SNC leverage loan index total return of 1.7%.
For the full year 29 chain gross returns were also very strong.
With performance of 10.6% for corporate credit.
This infrastructure credit and 12.2% for direct origination.
As compared to the S&P leverage line index total return of 8.6%.
We're very pleased with the performance across our credit businesses as we benefited from our decision over the last few years to move into more senior components of capital structures and to selectively reduce energy and retail exposure.
As our credit platform continues to grow in breadth and depth.
We've been able to utilize our scale and global integrated platform to find what we believe to be attractive high grade opportunities to generate returns as opposed to reaching for yield in lower rated or distressed situations.
In real assets performance was very strong for the quarter with aggregate appreciation, excluding real estate that of 7.5%.
And by robust appreciation in our European principal finance infrastructure equity and us real estate funds.
For the year I realize it's funds, excluding real estate debt returned 16.2%.
During the fourth quarter net accrued performance fees balance declined by 4% as positive marks across our private equity credit and real assets businesses offset by the high level of realizations during the quarter.
On a year over year basis, net accrued performance fees grew by 60%.
The underlying growth in net accrued performance fees in conjunction with continued strong performance across our private equity business and fund eight in particular continued to provide us with confidence that we are in the early stages of a period of higher realization activity.
However in terms of niche net performance fee realizations. We currently expect that net realized carry in 2020 will approximate 29 chain levels driven by two factors.
Yes, as I mentioned earlier during the fourth quarter, we recognized approximately 20 cents per share of net performance fees.
Right. It's a transactions that we had originally expected to close in the first quarter of 2020.
And second we recognize some impairments in fund a during the fourth quarter, principally on Fundacion investment income stellus, which needs to be recruit in early 2020, the for future performance fees may be distributed.
Due to both of these factors, we expect the first quarter of 2020 to be a light quarter for net realized performance fees.
After considering higher financing costs related to AG, Ams 2019 debt transactions and taxes on net performance fees, resulting from S. C Corp conversion. We currently expect net after tax earnings generated by incentive income to be lower in 2020.
Over the medium term. However, we continue to feel very good about the prospects for fund.
And expect that the continued seasoning and maturation of portfolio companies within the fund will drive meaningful monetization activity.
Before I conclude my prepared remarks, I'd like to make a few comments regarding our expectations regarding expenses tax rate and share count as we head into 2020.
Comp and non comp expenses grew during the fourth quarter, driven by a combination of investment and certain nonrecurring items.
From a comp perspective, there was a ramp in the fourth quarter as we've continued to bring in new talent to support our growing businesses.
Within our Noncompliant, there were certain nonrecurring professional fees that impacted the fourth quarter.
As we look out into 2020, we expect to continue investing across the Apollo platform and therefore anticipate that every margins over the next year should be in line with 2019 levels.
The around 55%.
We are highly committed to maintaining a best in class Jeffery margins.
And believe we have a high level of control over the leave us that drive our expense base, while we continue to invest for long term growth.
Regarding taxes, our full year tax rate was low impacted by the split publicly traded partnership and C Corp. Here.
Therefore, we continue to point you to the comments, we previously provided in conjunction with assay co conversion, which is that over a realization cycle. We believe our effective tax rate should be in the mid to high teens.
Regarding our share count subsequent to the closing of the Athene transaction, which we expect to close this quarter and considering expected net employee share vesting and delivery during the first quarter.
We expect to that diluted share count at the end of the first quarter will approximate 443 million shares.
Finally, as a reminder, we issued $300 million of fixed rate resettable sub notes during the quarter.
This marks the first time that we've raised debt in the structure.
And represents a further diversification of our sources of liquidity across various structures and a favorable credit market.
With that we'll now turn the call back to the operator and open the line for any of your questions.
Thank you Sir the floor is now open for your questions. At this time if you have a question. Please press Star then the number one on your telephone keypad.
Any point your question has been answered and you wish to remove yourself from the Q press the pound cake.
Our first question comes from the line of Bill Katz of Citi.
Thank you very much taking the questions I appreciate it so maybe big picture, one, though we had just sort of.
Building on sort of your I think the migration of the company has been over last couple of years, including a conversion. The C Corp could talk a little bit about other things you might be other due to broaden out the potential for index and other sort of passive oriented investments to the by the stock I guess, maybe the specific question is whether or not you'd be willing to move to more single class.
Share class of give up some voting rights.
The board not that it beyond that then I've a follow up question.
Yes, I think I'll take that one.
Look where we're very focused on making the stock easier to on and creating more liquidity and being very investor focus. So we're looking at all that I don't think we have any specific conclusions yet.
So.
Appreciate the question.
Okay, and just follow up and one thanks, so much for the Guidances and we level said exiting the fourth quarter of what may have been sort of a run rate level of comp Andrew a non comp just given some of your prepared comments and then can you sort of flesh out way, where you're looking to spend as you think about 2020.
Sure so.
It's principally driven by bringing new talent into the phone.
That is related to the opportunities that we see.
In front of us that we that we laid out at the Investor day.
So so last year year from start to when we added close to 20%.
Of new head count on a net basis.
And that's that's for all the reasons that we spoke a bit we've spoken about opportunities.
Billing platforms and building out the support functions and enterprise solutions to support that.
So we are we're very committed to our best in class margins. We are very disciplined at how we make investment decisions.
Investment decisions piano cost for us.
And so.
As we look forward.
As I as I mentioned, we would expect margins to.
To maintain around current levels as we set a foundation for the future growth it's in front of us.
Just to have been on this one I mean, obviously, we had 55%.
That's very margins EBITDA margins thats, the best of the industry.
We are investing north of $100 million, we're expecting to invest north of $100 million in everything from.
Infrastructure investing capability to large cap lending capability to direct lending capability.
To building a lot of the platforms that we've already been talking about and are continuing to expand on our.
Insurance and financial services capability as well as like looking much harder at our platform more generally answer including.
Acknowledge the data.
And.
Analytics risk.
So.
Ultimately I think.
We would expect our margins next year to be similar to the this year, we have a lot of control over what we do.
But we.
We still have opportunities.
Okay.
And ladies and gentlemen until such time, please limit yourself to one question.
Next question comes from the line of Craig Seigenthaler of Credit Suisse.
Thanks, Good morning, everyone.
Just a follow up to the first question.
Are there any negatives that maybe we could be missing as we think about the very small corporate governance changes that are required.
For a Russell 1000 that.
Yeah, I mean, I mean, I think ultimately right.
We don't think you're missing anything.
Okay. Thank you Josh.
I would add to that look we we've done this the comparison.
We have gotten a few indexes we see.
How powerful that is in terms of expanding.
Fair holder.
Base with with long only shareholders.
And and that's something that we'd like to be.
To be able to.
Continue and extend that momentum.
Yeah.
And so its something were looking at and we're very focused.
And and would like to get too.
The place where where that momentum.
Can be significantly expanded with things like the inclusion.
Of of Russell, but but.
Lastly on.
On the call such as.
We can't commit APC before we get there.
But but it's something we think springleaf seriously.
And I think would be to the benefit of of most of the stakeholders.
Our next question comes from one of Michael carrier of Bank of America.
Good morning, Thanks for taking the question.
Maybe just on the performance fee Im calling for 2020.
Yes, I get the the accelerated.
Comment in terms of Fourq, you 19 coming in better into that.
Impact 2020, maybe just a little color on some of the comment on the impairment and some of the catch up let me how significant that is and then maybe tie that in.
I think Josh what you were saying just at Investor Day, and I know you didn't say year, you said over the next few years or multiple years of just that dollar 50 to two dollar number in performance fees. The potential just given where we are you in that cycle. Thanks.
So sorry, Mike I'll hit the first one so the impairment is.
We think likely contained within Q1, it's around 13 cents of of net carry that needs to be made up before before and that within finite before they can.
Sort of get back to distributor.
Yes, I mean, and then you had that 20 cents if slip from one year to wait for it for first quarter fourth quarter, but I mean, I'd say look I mean, I think we still continue to believe that that's the right range for performance fees. So I think like obviously, our quarterly predicting quarterly realizations and.
Highly complicated ever changing markets is difficult.
But.
Site, so having said that long run or medium round, we see we see value building in the fun.
We're well into the carry their the decline is three and half years old.
We bought it at.
Six and at times EBITDA pre cost savings under six post cost savings.
And we see a lot of progress in the underlying companies and so we're expecting that that fund will generate a lot of carry and I think we put those numbers out there and continue to believe them.
Okay. Thanks, a lot.
I think our view is that.
That that funds should achieve.
The two acts that.
Our funds have achieved over 30 years.
It's a high quality following that we feel very good at about and.
No the monetizations will be heavier in our view over the next year in two to two years.
Our next question comes from the line of Alex Blostein of Goldman Sachs.
Hi, guys, just maybe digging a little bit further into the performance fee commentary. So I guess, one can you help us size how much.
Q4, net carry benefited from utilization of margin loans I think there as of early one that I, maybe another one but I think overall it was the only one and more importantly, as we think about the capacity to do more of those type of transactions. I think you have went out for one main what could that look like in the first half of the year because that feels maybe a little bit within your control.
Yes so.
Alex.
It's it's.
The impact of the margin lines on Q4 was around the same number not not for the same reasons that I mentioned, but the margin line pull forward was about 20 cents a share.
And then the the margin line that you're referring to on one main it's not it's not unusual for us to do margin lines on public securities, we've done that going going back a long time.
Right.
I would take some some risk off the table.
Most of that particular margin line is return of capital so that that itself.
What's on much carry and certainly not.
It doesn't cover the.
The impairment shortfall that I referred Sir you have anything.
Generally were.
When we when Martin in Martin's comedy C. said that last year will look similar to this year in our best guess.
Obviously, it's difficult difficult to predict but you got you should assume that were.
You know at every at every turn looking to return capital as quickly as possible to.
Magnifier returns, it's really a return management issue.
Relative to our investors and trying to generate the highest returns.
Nearly if you're a private equity investor you're expecting 20 plus percent returns.
We can borrow at 4% on say basis.
And leverage returns, we're going to do that and so we're looking at every opportunity that it's an ongoing continuous process. It's a tool in our two okay. So.
So I don't know that and it's a small part of the overall realizations I wouldnt be overly fixated on it.
Got it thanks.
Our next question comes from line of Glenn Schorr of Evercore.
Hi, Thanks.
Good morning.
Looking for an aggregate update I think on the origination platforms and my thought is from a supply demand standpoint, meaning what kind of growth are you seeing across things like PK, our equipment finance lease.
Trade finance mortgage and are you still seeing those hundreds of 300 that is spread basis points spreads and do you keep 100% of those originations sorry, if thats a multiple question in China, I'm trying to figure out how to add to that.
Well count it as one question [laughter].
I would say that we continue yes, so the secret sauce if you.
Of our origination direct origination.
Off to run credit capability continues to grow envy you know in essence, the rocket fuel.
One of the tools for.
The outperformance of our insurance platforms, and our LP investors on the credit side.
And we continue to make progress and grow that's a huge focus of the firm.
In terms of private credit and other aircraft lease that yes, we continue to see.
The better spreads and across all of those businesses relative to.
The broadly syndicated loan market or the high yield market, which.
Our very overvalued.
And so and you continue to see.
Everyone, our Lps and.
Our insurance platforms in particular turn Theres, a lot of demand, there's excess demand relative to supply so.
One of the things when we say, we're investing a lot of money $100 million and keeping our industry, leading EBITDA margins stable.
We're doing it part of that is investing in.
Finding you know and people and teams that find origination capability and we have lots of discussions out there and we continue to see that arbitrage.
And that is basically.
Part of the firm's strategy of displaying the largest alternative credit platform basically in the world today.
As long as we live in a low.
Yielding.
World There is a thirst for yield.
Most of our global relationships Theres also a thirst for spread and our insurance.
Platform relationships.
So it behooves us and we think it is the.
[music].
The right strategy in today's environment.
To keep expanding.
The credit platform into new originated.
Products and fields.
That is something I think we've we've been very successful.
And and we will fund the kind of double down and triple down in that area.
Alright, thanks very much.
Our next question comes from line of Ken Worthington of JP Morgan.
Hey, good morning.
So I wanted to follow up on sort of your brief comments on the store and maybe dig a little bit more into the environment in Europe . So can you talk about the environment for insurance restructuring in Europe . It seems like Theres more press about European Bank and financial company restructurings and it in a kind of feels like it that's an indication of more.
Cities for balance sheet repair and maybe more insurance blocks coming out. So how would you characterized the acquisition environment in European insurance today, or maybe in and outlook versus where the environment was say a year or a year and a half ago like is it the same is getting better as getting.
Worse I can't tell it feels like it's getting better but wanted to hear your comments.
Hi, sorry, Gary part.
I will you be right in the observing the pressures on the European ensures low interest rates.
Continue to create difficult few for the companies and interestingly in particular as their old assets roll off and they put them into new investments. So it's just an increasing problem as time passes with low interest rates. The other observation is it solvency II and the revisions to solvency II.
Are creating any number of problems for companies with particularly with our old blocks of business and that of course is where we spend our time. So we've seen two trends to continue to apply pressure to companies.
We're obviously enthused about our presence in multiple countries already so it gives us the platforms to do the consolidation.
And so the bottom line to your question is we see lots of activity in Europe , a number of large companies rearranging, but also interesting a lot of mid sized companies finally coming under pressure, where they just have to find some alternatives some way forward as a strategic move.
Awesome now is wonderful thank you so much.
Thanks.
Our next question comes from liners, Patrick Devin economists research.
Hi, good morning.
I think.
Credit performance fee I think came in much better than most people even elevated expectation could you kind of this aggregate about a bit for us and is there any portion in there.
It's something that we can bet on every year or does it kind of reset every January and finally does your guidance on flat year over year performance fees include or exclude credit performance fees. Thank you.
Sure so.
It was driven by a number of different funds most of which our annual.
Hi out funds and so.
There is not carry in cash terms and so you get to the end of the year and you have satisfies.
The hurdle right.
And so there was a small amount of Kerry away from that.
But.
By definition it makes it.
You have to sort of show up in January and then do the same again right. So so we have to we have to another way to to the preferred return and cross Sutton.
And drive the payout so we.
Our baseline includes an assumption of credit Kerry.
Recognizing that last year was a very strong year.
And may not be repeated.
But we'll see we'll see how to how the plays out it is actually in the numbers. It is actually part of the forecasting.
Thank you.
Yes, just just industry clear. This is this is old is on incentive and extract the comments around if I'm sorry that was made or we expect to be in the in the area with Mitsui Jeffery gross balancing.
Expense spend against the revenue.
As a as it matters.
Thank you.
Our next question comes on line of Michael Cypress of Morgan Stanley .
Hey, good morning, Thanks for taking the question just maybe coming back to your guidance for realizations appreciate the guidance there thanks for that around.
2020, being similar to 2019, I guess, if we're sitting here a year from now in 2020, ultimately turns up actually to be a bit higher.
2019, I guess, how are you thinking about the scenario were or something like that kind of merge and it's just more transactions number of deals that kind of pull forward from 2021 potentially into 2020, just trying to assess their how you're thinking about that possibility whether its number of deals and how how would that compare versus what you're expecting over the next couple.
The year say August 20.4.
Well first of all just to clarify I mean, we don't give guidance, particularly around incentive fee because of the unpredictable sort of what you're talking about which is incredibly unpredictable relative to a quarter on quarter year on year annual we do actually.
Lastly.
Calculate you know what were what we expect to do based on current market conditions and we've shared some of that flavor on this call.
Relative to predicting pull forward from 21 or 20.
It's all market conditions today is very very hard to do that we've given you.
Our best guess you know as to how this will we started with appropriate to sort of share some color on the call and we've done that I don't know and we've shared like long run how we feel.
Over over the life cycle.
Which is that will.
Do better than two times, which is below actually our historical average is in the low to mid two so on a conservative base, we've shared all that but relative to that do any sort of more predicting more specific predictions. We just can't we couldnt accurately d. that based on how volatile the markets are.
And I mean, right now by the way obviously the markets are.
Our high on the debt side and on the equity side just for whatever it is worth.
While the PE multiples are.
On the medium P. models are relatively high.
It's very bifurcated, so when you look at.
You know the top 20% of S&P 500 companies they trade in the mid to high Twentys RFP basis. When you look at the bottom 20 present day trade.
Under under 13 12.
So.
It's not necessarily the case at the equity markets are hospitable their hospital in certain situations. There not now there's I think for us obviously.
The it presents an injury say one of the big opportunities for US is and we continue to demonstrated as buying.
And then it is whether your question is buying public companies that are miss valued by the public markets in our opinion.
And on the sell side, we're going to take advantage of things that we.
I think are appropriate.
It doesnt apply holistically across our portfolio.
Just because things are public.
So the so the realization environment, even though you would expect it to be great. It's okay.
And mix.
But but again just underscoring what Martin said the.
The F. Ari expectations guidance was again growth of.
Yes.
Mid teens.
Maintaining.
Margins in the mid Fiftys.
But I agree with Josh that is the nature of PE and Thats why the multiple.
That you all put on fee is a lot lower then.
On on management fees.
Yes, there could be in M&A bull, depending on what happens in the election.
Next next year.
And so you could have an acceleration across the industry.
But but thats not something we feel is responsible way of baking in guide, but call it color not guidance right.
Oh.
Great. Thanks, so much appreciate all that commentary and color.
[laughter] like it.
Our next question comes from minus Chris Harris of Wells Fargo.
Thanks, guys.
Can you elaborate a little bit on the.
Write downs that occurred in energy. This this quarter and then related to that given what's happening to this industry does that change your appetite at all to really invest in energy.
On a go forward basis.
Sure I'm, obviously energy is a pretty small part of our overall assets, it's about 4% across.
Private equity and credit.
I'd say that.
Certainly.
The write downs relate to.
So a very very poor pricing environment in energy.
Across both.
Oil and gas and NGL.
And clearly.
Say that there's been a and the outside of capital away from energy.
Two.
Many factors that I say, everyone is aware of.
Actually the write downs just to be civic were contained within the context PE.
Credit.
Very good job.
Having not being involved with many situations.
So in terms of you know investing in energy the answer is that.
The bar, it's that we're not running away from investing in energy, we think there's still opportunities I mean clearly.
Right now the market is paying all forms of energy or other than renewables and green Green related energy with a pretty broad brush and Theres really no capital available.
So I think that you can.
We're not we have specific funds that are dedicated to energy investing and we're going to continue to do that but like probably.
Anyone is investing in energy today has to really be buying has to be very wary of what exit multiple you apply.
And.
Really get.
Nearly all your return from from the cash flow that energy generating generates.
Because there's just.
A dearth of capital going into the industry that creates an opportunity but on the other hand.
One needs to be pretty moved pretty carefully as they review it.
And the other thing I'd say lastly, I'd say on it is that certainly energy infrastructure midstream made a lot of this stuff is being affected.
And is our you know theres a lot theres a few diamonds in the rough as you move outside of just the resource itself the reserves itself.
You know Disney your but really need to buy cash flow and.
Really discount terminal value based on everything that's going on.
The in the environment.
Our next question comes on line as Devin Ryan of JMP Securities.
Thanks. Good morning, guys. Most have been asked but just wanted to follow up on that last question and maybe just get a little bit broader commentary on.
Deployment expectations in private equity fund nine specifically and just if you can talk a bit about the backlog what you're seeing there were.
You are seeing value in the markets and is it public investments at the moment or as a private or just.
Broadly where where's the value at the moment.
Yes, so what we're seeing I mean, as a continuation of you're talking about which is that yes, I see you know the bifurcation in the S&P 500 ends and the public markets is really affording us.
The opportunity to buy on cash flow cheaply.
And and and so the even though the overall indexes are high we're seeing.
You know relatively significant pipeline of public to private.
It's multiple industries.
And and.
Companies that.
No longer.
Our attractive to markets, because they're not growing at double digit rates or perhaps they are portfolios of assets that don't make sense that are harder to understand or perhaps they've missed.
Mr. missed and number two and the public markets have grown tired, but at this point, we're seeing a number of opportunities there and.
We're also seeing.
Continued opportunities in financial services to me Gary hit on it but.
You know with negative rates.
Existing it all over the world other than the us.
The and low rates in the us you're just seeing tremendous pressure.
On financial services companies banks insurance companies.
Other types of financial services companies.
And you're seeing the opportunity to the asset management capability that we've developed as a result of.
Some of things that we've talked about with the our ability to generate off the Ryan yards is tremendously attractive and have added value differentiator and and our and our and our reputation and our relationships with the regulatory authorities all over the world and our ability to assess liabilities as.
In assets all these things provide us.
With an incredible tool box to attack the financial services business.
And then the last thing it says that we're seeing increasing opportunities in.
And infrastructure.
And then.
Some of the demographic trends around real estate to exist.
Here, particularly in the U.S. in terms of affordable housing or the aging population and so that's also creating opportunities for us so.
The environment in the investing environment itself is difficult.
But there there's still stuff to do and you know that were so.
Hence the.
$15 billion deployment number on our drawdown funds.
Got it.
Thank you.
Hey.
I don't know final question will come from the line of Brian's Dell Deutsche Bank.
Great. Thanks, I. Most my questions have been answered maybe just one more on the management the looking into when Youre not did not just the every bit route the actual growth demand fees.
Billing.
That's not yet earning management fees what are your expectations for that.
The into you'd be paying a U.M. and and how should we think about even aside from a.
Future fund raising in inflows how should we think about the trajectory is that coming into the UN this year and expanding on that a 388 million management fee base right now.
So Brian .
That's a little more than half of that is is in the credit segment and the remainder split between.
Real assets and ph.
And in PD.
That includes things like hybrid value.
And so look it really it really depends on the on the climate for investing it's hard to predict we.
You know, we make certain assumptions around.
Deployment.
And that's both of that capital on raising new capital that we expect to raise but I think.
Absent some big opportunity on dislocation in the market I think I think we sort of we'll continue to deploy at current price.
And you will see again absent a big flagship fund raise management training or transaction, you'll see management fee growth.
You know along the lines of what with what we've done.
Okay.
Okay, great. Thank you.
And that was our final question I'd like to turn the floor back over to Gary sign for any additional or closing remarks.
Great. Thank you operator, thank you all for joining us for the calls. This morning. If you have any questions. Please feel free to reach out to Investor relations team or otherwise, we'll look forward to speaking with you again next quarter.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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