Q2 2020 Apollo Global Management Inc Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin momentarily until that time in life will again be placed on musical. Thank you.
[music].
During today's presentation, all speakers will be placed all callers will be placed no listen only mode and following management's prepared remarks. The conference calls 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 oppose this most recent SEC filings, including the 8-K Apollo filed this morning risk factors related to these statements.
Apollo will be discussing certain non-GAAP measures on this all which management believes a relevant in assessing the financial performance of the business.
These non-GAAP measures are reconciled to GAAP figures and the Polish earnings presentation, which is available on the company's website.
Also note that nothing on this call constitute an offer to sell our solicitation of an offer to purchase any interest in a politician.
I would now like turn call over to Gary Stein head of Investor Relations.
Welcome to our second quarter 2020 earnings call.
We hope you and your families are doing well in these challenging time.
Joining me. This morning are Leon Black founder Chairman and Chief Executive Officer, Josh Harris, Co founder and Martin Kelly, Chief Financial Officer, and co Chief operating Officer.
Gary Par senior managing director is also on the line and will be available during the Q1 I session.
Earlier. This morning, we reported distributable earnings of 46 cents per common share pretax fee related earnings or F., Ari a 59 cents per share a cash dividend of 49 cents per share for the second quarter.
With that I'll turn the call over to weigh on black.
Thanks, Gary.
Thank you all for joining us.
I'd like to express my wishes to everyone, let things that this find you and your family's healthy and say.
And to our employees, who have continued to work tirelessly on behalf of our clients other shareholders.
To convey my appreciation and gratitude, we're not working under a typical circumstances to say the lead and you have all continue to go above and beyond to drive the strong results. So we're reporting today.
I think this speaks to the tenacity and spirit of our employees as well as the collaborative in advance of culture, we have at Apollo.
Globally companies continue to operate any incredibly challenging circumstances as we face what started as a health crisis, but has progressed into an economic crisis is well across the firm. We have responded quickly to this changing landscape with a focus on engagement and operate.
Runs across our investment professionals client and product solutions team and enterprise solutions group, which has helped this transition into a work from home environment smoothly.
This quarter marks the achievement of a significant milestone as apollo's AIU grew by approximately $100 billion to surpassed $400 billion for the first time in our history.
This growth was driven by a theme a thorough and strong inflows during the quarter and represents 33% growth year over year.
With $414 billion of AIU M. As of June Thirtyth, we're well on our way towards the 600 billion dollar goal that we provided in debt. That's true day. This past November.
We continue to see robust demand for Apollo products had a strong pipeline for insurance transactions over the next few years.
As a further indication of the breadth of our platform and our activity level through the pandemic gross purchases were $45 billion across the platform in the second quarter with some of this related to the repositioning of insurance company balance sheet, we continue to dynamically navigate through this challenging.
The environment on behalf of all our investors.
Now I would like to spend some time talking about the remarkable depth of leadership that resides at Apollo and continues to evolve.
Since our founding we have intensely focused on the strategic growth in evolution of Apollo as a leading world class alternative investment manager in recent years, we've broadened the firm's executive team most notably by name Scott climbing then Jim Zelter as co presidents.
Got it Jim have shown strong corporate leadership, taking on responsibility for apollo's revenue generating an investment businesses. Additionally, we continue to elevate and higher exemplary individuals to run the day to day operations across all lines of our business.
Including credit private equity in real assets and our insurance platforms. Our recent hires and the evolution of our leadership structure demonstrate our commitment towards growth progression and the ongoing modernization of our firm.
Today, we're announcing that on the back of an almost unprecedented quarter, adding $80 billion of insurance assets and liabilities to the portfolios that we manage Mark Rowan co founder who oversees this area has decided he will take a step back from his day to day.
Oversight of the business and enjoy a semi sabbatical mark will continue to work with Josh and I driving the strategic direction of the firm, especially for our financial institutions and insurance related businesses Mark will remain a member of the Apollo Board and Executive Committee.
Well continue to serve on the board and Executive Committee of a scene and will remain on the board of authority.
Got climb and will assume the day to day operational responsibility of leading our financial institutions and insurance activities. Jim Zelter will continue to focus on asset management and credit investment activities across our insurance clients.
Together with Gary Park, or not laundromat, michelini, and Josh She's saying they will lead a broad team of over 100 professionals, who are dedicated to our insurance clients.
Josh Mark and I maintain the utmost confidence in this team to lead us into the next phase of growth and development for these platforms and for the from more broadly we are excited for what the future holds.
[laughter], we're also actively engaging on the topics of citizenship diversity and inclusion.
We recently completed our latest annual social responsibility report, which highlights that since the inception of our ESG program. In 2008. The combined efforts have resulted in more than 10 million tons of waste recycled by portfolio companies.
Over a million volunteer hours by employees of portfolio companies and approximately $1 billion of charitable donations just to name a few achievements.
We have brought on some exceptional talent to assist with our citizenship efforts, including lower end Cope Arnold who joined late last year as global head of citizenship. This year, we introduced a formal charitable matching program for employees, which included special initiatives for covert with fifth.
$10 million in relief effort contributions globally from Apollo, it's founders and portfolio companies and also for racial injustice reform. These initiatives were well supported by our employee base.
More recently as tragic events have further brought the issue of systemic racial injustice in this country to the forefront we've been spending a great deal of time listening and thinking about how we can engage to a greater degree on this issue as leaders in their industry, we need to be honest.
In acknowledging that we can do more to help combat. These in equities and we're committed to enhancing our diversity and inclusion strategy in all aspects of our business. We're very excited to welcome our new head of leadership development in diversity, Jonathan Simon who joins US next month.
In addition, we have expanded our existing partnerships with organizations that work with students of color and communities in need.
Finally before turning this over to Josh will speak more extensively on the subject.
You should know that I'm, particularly proud of the strong performance delivered by the Apollo team in the second quarter.
During challenging times Apollo has generated dramatic growth in both eight U M and fiery in fundraising and didn't deployment as well as raising the bar on social consciousness.
This is truly been a prime example of grace under pressure or the whole Apollo enterprise getting going when the going was getting ticket tougher.
With that I'd like to turn this over now to Josh to provide an overview of our business operations for the first quarter Josh.
Thanks, Lee I, Yeah, we're really pleased to further evolve our leadership team and I look forward to <unk> continuing to drive growth for power alongside you anymore.
I apologize responded as Lynn mentioned to the challenges of working through the global pandemic exceptionally well.
Our utmost priority. During this time has been to focus on the health and safety of our people.
And their families which include our 15 offices around the world, we have challenged ourselves to innovate and adapt new technologies.
To make this work a remote work environment as efficient as possible looking forward. We're approaching the returned to office with an emphasis on ensuring the ongoing well being and productivity of our employees.
Now turning to our results.
Our business is done exceptionally well over the last six months.
For many years, we've been making four key points about how our business would perform during a period of severe market dislocation or a recession.
Number one our every growth and margins would be durable unstable.
To our fund raising would be resilient and potentially accelerate driving a U.M. growth.
Three we would find attractive risk reward investment opportunities for our investors and for the majority of our markdowns in our funds portfolios would be trends yet.
All of these are proving out during this period of time, reflecting the strength of our platform.
I'd like to briefly highlight the two notable transactions that reflect our continued market leadership in serving our insurance clients.
These transactions closed during the second quarter, despite a backdrop of continued market volatility and uncertainty.
The beginning of the second quarter, a thora closed on its acquisition of a VAT.
As assets now stand at $60 billion.
This transaction is transformative fourth or.
As it creates meaningful scale diversifies its doors business further geographically.
And adds a significant and add significant operational talent and the distribution capability to the store a platform in the Netherlands.
In addition in June at CN announced and closed its reinsurance transaction with Jackson National.
Which is the largest reinsurance transaction in recent history.
Through these transactions a scene and sorry, I've added 73 billion of assets.
We believe that substantial consolidation opportunities remain across the insurance industry.
Following these two transactions our insurance clients continue to have a strong capital position with over $85 billion of buying power and aggregate.
This capital serves as a key strategic differentiator for our clients as they do unique asset management transaction and origination capabilities.
Of more than 150 employees at Apollo focused on serving them.
Paul permanent capital vehicles now represents 60%.
Were approximately $250 billion of our a U M and over 90% of our a U M is either derived from permanent capital vehicles.
Or has a contractual life from five years or more from inception.
It's stable base of AIU, and CTU and AIU M. continues to underpin our durable and growing fee related earnings.
Which we have successfully grown through all market environments and expect to continue to do so.
For the first half of 2020.
<unk> for Ari grew at 9% compared to the first half of 2019, despite multiple periods of market dislocation.
And the impact of an ongoing global health and economic crisis.
We continue to remain highly committed to growing fiery at a robust pace over the long run.
And remain very confident in our ability to achieve the goals, we set for a long term peppery growth.
At our Investor Day last November.
All right I'm, sorry margin was 55% for their first half of 2020.
In line with our 2019 fiery margin.
Turning to fund raising total inflows during the second quarter, where a robust $89 billion inclusive of seeing an historic growth.
Over the last 12 months.
Total inflows have been hundred $19 billion a record for Apollo.
This include $73 billion of growth of insurance client mergers and acquisitions.
35 billion capital raising and other inflows from our fund investors and $11 billion from organic growth at our insurance clients.
In the second quarter, the breadth of our platform investment capabilities and strength of our global relationships with investors drove fund raising that was significantly above our average quarterly level.
Notably this momentum was achieved during a time of nearly all virtual interaction.
During the quarter, we announced in closed on $17.4 billion in fund commitments.
Key initiatives include the lots of Apollo strategic origination partners platform.
<unk>, which will target in emerging opportunity in large scale direct origination solutions.
For high quality businesses, a market currently underserved by private credit.
The origination partnership will leverage apollo's incumbency with borrowers.
Rising our credit platforms relationships with approximately 3300 issuers of both corporate and sponsor backed companies.
Also contributing to inflows was a 1.75 billion dollar close for our accord three be this is our dislocation strategy that we were able to launch in close within.
Actually eight weeks and we're now in the market for the next series of the accord strategies.
Looking forward, we remain confident that we would be able to meet or exceed the $20 billion fund raising go we discussed on our last earnings call, which consisted of increasing the target size for certain funds.
Accelerating the timeline for other fund raises lodging new strategies to address opportunities driven by market dislocation.
We are appreciative of the trust and support from both existing and new investors as they commit to a range of strategies currently available on our platform, including our origination strategy accord hybrid value infrastructure, U.S. and age or real estate managed accounts and various evergreen strategies.
[noise] during the second quarter turning to deployment.
We deployed $7.2 billion of capital across our drawdown funds.
Three shifting market landscape, we remain active looking for attractive asymmetric risk reward and investing.
And high quality top of the capital structure opportunities.
As a public markets have recovered driven by massive but necessary federal stimulus.
Fundamentals.
It's been more challenging to find these attractive risk reward opportunities. However.
We've been able to successfully navigate these markets to date and are increasingly focused on providing bespoke capital solutions for brand name franchise is pacing liquidity constraints or looking to capitalize on growth opportunities.
Capital deployment for the quarter included originations led by our hybrid value in credit businesses for companies such as Expedia.
Albertsons Air Bnb, M.F. Bay, Cimpress, NGL energy and Delta.
As of the second quarter.
Hybrid values stood at 71% committed or invested.
And we were back in the market for this strategy.
These transactions highlight the benefits of our globally integrated platform and the deep pools of capital cross our clients, which allow us to structure bespoke financing solutions quickly and with certainty of execution going.
Going forward. We believe these factors will continue to make Apollo a premier financing partner for companies.
As we see and we see strong pipeline I had for hybrid value, our various credit vehicles, and our new strategic origination partnership.
In addition, our private equity fund fun nine.
Recently closed on the 6 billion dollar take private transaction protect data.
Representing the largest public to private transaction completed this year.
Tech data is a global leader in information technology distribution, which we believe is well positioned to.
To continue to benefit from the secular I T spending tailwind.
We created this investment in attractive creation multiple approximately seven times EBITDA prior to cost savings.
As of the ended the second quarter by nine has reached 40% committed or invested.
Looking ahead, we remain.
The view that technicals are well ahead of fundamentals.
And therefore, we are prepared for continued volatility in a wide range of outcomes over the coming quarters powers, leading investment returns through cycles.
Reflective of both our focus on preserving capital for investors.
Preserving capital for our investors.
ER and our ability to pivot quickly and opportunistically to invest during leading market dislocations.
Our private equity and credit pipelines are robust and we believe there will be many opportunities for us to identify and capture mispriced risk on behalf of our investors in the months headquarters to calm.
Finally, as as we've discussed in recent quarters, we remain focused on increasing the accessibility and liquidity profile of our stock as a result of the changes made to date.
We're now included in the Chris SMP total market M., Sci and Russell indices to.
Through our existing shareholders. We are grateful that you have been along for the ride.
Interest prospective new shareholders, we look forward to engaging with you.
To conclude my comments.
Our strong results for the second quarter in first half of this year are a testament to the strength of Apollo global integrated platform.
And resiliency of our team.
Against a very challenging market backdrop, we have demonstrated the durability of arc wrong, a ferrari and the stability of our margin.
Three severe market dislocation.
Our funds invested meaningfully during a short window, a very attractive risk reward opportunities.
Creating what we believe will be a substantial value for investors.
We also demonstrate our ability to pivot quickly in reaction to shifting market landscape.
And are now increasingly focused on providing capital solutions for franchise businesses, and we see a growing pipeline a private equity.
We've grown our AIU I'm in a substantial pace over last year and continue to see strong demand for our products, putting aside taste to achieve or exceed communicated goals of raising over 20 billion of new capital over the next year.
And being well on our way to surpassing 600 billion of AOL.
[noise] operator.
It looks like the line has dropped comes to play to reconnect.
I'll finish that's that he is at the tail and I'll finish his comments and then go into one.
Something being well on the way to surpassing $600 billion a value Lam.
Over a five year period, and calling out here for you at a mid chains and average annual right as we outlined.
And lastly them as Investor day.
To help achieve these goals, we continue to invest meaningfully across the platform building out our investment talent and infrastructure.
So it's Martin I'll pick up on a on his comments I, especially like to Echo Josh as appreciation for all our employees, whose hard work has resulted in.
A seamless transition into a current remote working environment.
So on on dividend for you in D. for that for the second quarter, we announced the dividend of 49 cents per share supported by our after tax Jeffery.
Reliable.
Sorry stream supports a dividend at a level above our stated minimum 40 cents per quarter.
And in quarters of more meaningful transaction sees the dividend can be substantially higher even without the benefit of performance fees.
We generated every 59 cents per share on a pre tax basis, so the quarter driven by growth in management fees and some higher transaction fees.
Transaction and advisory fees were $62 million in the quarter, driven by transactions, including tech data as well as Albertsons and other capital solutions transactions.
The increase in compensation cost reflects continued investment in building out our capabilities across the areas of close to Josh Josh highlighted.
Including in infrastructure hybrid capital business and our Fig platform.
As well as as well as in technology and various support functions across the songs.
Turning to incentive realizations, we had a very low level of gross realized performance fees in the quarter.
Which drives negative pre tax incentive earnings for the quarter after accounting for the profit share interest in realized carry and financing costs associated with that debt and preferred securities.
As a result dividend of 49 cents per share for the quarter was fully supported by our after tax and sorry.
What are your Wham as Liana, Josh plus reference we saw growth was $98 million in how you want them as a result of the strategic close at the same store as well as strong fundraising organic growth sort of saying and positive mark to market adjustments.
For the second quarter fee generating AUM grew by 36% or $88 million to $330 billion.
Supported by those same factors as well as robust capital deployment.
Gross redemptions in the first half the year with just $1.2 billion, well well less than 1% of L.A. your web through a period of significant volatility.
Reflecting the largely long dated nature of that funds capital.
Moving on to investment performance during the second quarter private equity funds portfolio appreciated by 12% primarily due to strong performance across our funds public holdings.
The portfolio remains in good shape overall, despite the challenging economic environment.
Fund eight is now out of pullback, having appreciated by 17% during the quarter.
We invested fund eight with an emphasis on durable business models and strong free cash flow.
And with a focus on purchase price.
Fund eight portfolio companies report at a 6.5 times enterprise value to EBITDA multiple on average excluding cost savings. We've done a three 3.6 turns of leverage on average well below industry levels.
Given our value orientation, and the high quality funds portfolio companies, we remain confident in our platform's ability to generate meaningful realized returns over time.
We recorded impairment charges of approximately $1 billion during the second quarter across a handful of investments that we had previously identified on out watch list.
These investments will focus on energy or were heavily impacted by covered.
We are required to recoup these impairments before future performance fees may be distributed.
We continue to expect a gross realized performance fees will be very modest over the course of 2020.
As portfolio companies manage the impacts of coven on their operations and as we prioritize through China LP capital as a consequence of them fans.
In credit how funds aggregate portfolio appreciated by 7.4% during the quarter supported by the rebound in public credit markets.
On a year to date basis, our credit funds portfolio in aggregate is down 2.5%.
Outperforming both the SNC leveraged on index and the Bank of America Merrill Lynch High yield index by roughly 2%.
Our credit strategies fund is also up by 16% year to date.
In real assets are over over time for the quarter was positive 1.4%.
And as you continue to have a de Minimis in fact on that portfolio performance in both private equity and credit this quarter.
And that economic balance sheet value at the end of the second quarter after debt and preferred equity financing obligations was approximately $2 per share.
Growing meaningfully from the prior quarter.
On that performance fee receivable in crisis increased by approximately 40 cents per share.
Reflecting in taught the four is a swift pulled back in fund.
Apollo remains in a very strong liquidity position with approximately $1.75 billion of liquidity available on our balance sheet.
In June we raised $500 million through a debt offering to further bolster our capital position in light of accommodating and attractively priced markets.
Now dry powder for investments across our fund complex was $47 billion at the end of the quarter and increase subset of $6 billion driven by fundraising during the quarter.
And with that we'll now turn the call back to the operator I know from the line for any of your questions.
At this time, if you'd like to ask an audio question you may do so by pressing star and the number one on your telephone keypad again, not a star one.
Well pause for just a moment.
And Josh Harris has returned to the conference.
Our first question will come from the line of Alex I think with Goldman Sachs.
Great Thanks, and good morning, everybody.
So first maybe just to touch on Mark's decision to step away from the business I'm on a sabbatical, we and I guess as we described is this a bigger picture section succession plan upward or is this more temporary change and mark will be looking to reengage and are there any for patients on the pace of dealmaking within insurance space.
We should anticipate on the back to that.
I think it's a it's really that you know we've been told it locked down now for five months.
Yes, Mark has just quarter back to transactions in the quarter, the second quarter, which we've we've talked to you a bunch about what you're aware of.
And you know he wants to take a little time off from from day to day operations, especially with the confidence that the team their in house.
Over 100, who are totally focused on insurance.
And Scott crime and spin on the board of of a theme that has been very involved.
More increasingly on on day to day.
And as we've mentioned in the reason we call. It a semi sabbatical is mark is still very very engaged.
In in the firm and on the strategic planning with Josh and myself.
Remains on the Executive Committee.
We remain.
On on the Apollo Board as well as the theme.
Board and Executive Committee and are not far off.
So I I would really just take it faces.
What we've said and not read.
More into it.
I think he has a a well deserved [laughter].
No.
Desire.
To to not.
Be involved in so much day to day.
Given the great team, that's been built up and how much that's already been accomplished but I think he would tell you.
He thinks we're still in.
Early innings in terms of what he is really a masterminded over the last 12 years in building.
Insurance operations to you know over 200 billion and I think believes that.
There's no reason that can double over the next.
Three three for four years than I think he plans to be a major part of the.
Our next question will come from the line of Craig Siegenthaler with credit Suisse.
Good morning, everyone and congratulations completing two very sizable transactions per quarter just on the two transactions.
As we look forward can you remind us on the level field capacity at both the scene in the U.S. and if there were in Europe and also can you update us when they carry M&A enrich reinsurance backdrop in both markets as we try to estimate the potential future transactions.
Yeah, you want to take that.
Yeah, I'd be happy too.
Hi.
Let me just let me to address the second one first and that is just the.
Tivity level.
Could be available there's several ways to look at it one is the market opportunity and the second is held Paulo is is positioned to address the issue the market opportunity today is as robust as it has been over the last four years, they're low interest rates continue to look a lot of pressure on tradition.
No companies, notably the tight spreads on public securities they get very difficult in the spread business for other companies. We of course invest so much in originating.
Good investments and creating extra spread the others does their capital rules continue to create pressure, particularly in Europe solvency II is problematic for some back books the old books of companies and then lastly, a lot of companies continue to be more try to focus more on line.
Where do they can win business or just be winners and that means you're exiting lines of business were entire geographies and we're seeing that level of flow. So I'd say sitting today comparing to any point in time in the last four years. We are in his many substantive conversations we have no idea exactly.
What's the timing of transactions will be but.
As an overall backdrop, it's every bit as attractive today's it's been at any point in time over the last four years and in that four years, we've announced five material transactions three in the U.S. two in Europe.
Oh, sorry, probably you asked about the capacity sorry, you asked about capacity.
We sent a as we said it so over $85 billion of buying power.
Basically relates to the excess capital at a theme plus borrowing capacity eight different course still has a quite a lot of capacity and oral.
Also has quite a half a billion capacity of equity and I think last point on this growth potential that's or existing capacity to do transaction. So over 85 billion, but as a reminder, as we said at Investor day.
We're very appreciative of our investors believe in US we've raised over $12 billion in the last three and a half years of equity capital to do transactions and we continue to see that is our ability to raise capital when we see opportunities. We think we have the credibility leased up to this point, we've proven it and we think where we will continue.
You too.
Yeah, I would just to add to that.
Yes, very simply a low interest rate environment.
But.
Much of the industry is going to be challenged and will will revert to shedding assets, we not only have the referenced capital to do sizeable transactions, but we've also shown with both voice.
And and with the recent Jackson.
But that we can do highly complex.
Deals that provide holistic solutions to to sellers. So I think one that it's in our favor that there should be real supply as long as theyre going to be low interest rates, which I think we all agree.
Certainly in the near to medium term outlook and to that there's really no buddy.
Out there that that has both the combination of capital and ability to deal with complexity and come up with holistic solution and the hundred 150 people.
But that we have incredible depth.
Of managements in this specific area.
So so I I think this all augurs very positively for us in the years to come.
Our next question will come from the line as Bill Katz with Citigroup.
Okay. Thank you very much for taking the questions and Mark best of luck in your short so those Ah stay over question for maybe a Martin just on the billion dollars I Wonder if you could just maybe peel that back little bit and help us understand a you know what were which portfolios are affected by that and then just relabeling I apologize for a 90 day. This question.
In your supplement sort of mentioned that only 18 to 47 billion a dry powder has the potential in management piece. Once you could just expand on that a little bit. Thank you.
Yes sure Bill so so the billion dollars is specific to fund I. It and it's also contained to the we provided a statistic.
Last call last quarter.
Approximately 5%.
Sunday was going to watch list. These are the these impairments related exclusively too so that and it also includes and impairment that we referenced two quarters ago.
On our Q4 call. So combined the impact of all of its all of the impairments are.
A delay in carry distributions of about 25 Centsfive a share.
And as I said in my comments, it's partly energy and it's partly a one or two other names that have just been severely affected by.
By the time to me.
And then as far as your second question you know, we we when we raised capital we either.
Management fees as its committed which is typical so most drawdown funds, including a fun day 29.
Or we own management fees as we deploy the capital and so the $18 billion that your references is capital that's that's being committed to us, but that one of the management fees.
Until its investment and that's that's more a more specific to the credits.
So the credit business the remainder of the.
The dry powder has been committed and is there any management season is typically and in drawdown funds of funds fund nine being you know the most prominent example of that.
[laughter].
The next question will come from lineup Glenshire with Evercore.
Hi, Thanks, very much one quick follow.
A follow up after all your comments on CNN insurance is just curious in your view rates have been low for whilst regimens type.
What what interest that gets insurance company to pull the trigger I know there's lot of Conversely sat there and then how important are your proprietary origination platforms for them to to choose Apollo over the others in the space.
Well ultimately there are I think ultimately its idiosyncratic and each insurance company transaction is highly customized and so.
There's not a there's not really a one size fits all answer to that relative to.
You know kind of what the factors that have been laid out previously or what sort of driving.
And then the insurance company decision I think our ability to invest the our ability but to create but customized bespoke deal situations and.
Transactions that are are highly engineered as well as our asset management capability our ability earn.
The extra yield I mean, we continue to earn.
And we continue to target dinner, and you know 50 basis points extra and that that extra juice on the asset management side also provides.
You know unique a unique secret sauce that.
You know allows us to add value. So it's both our ability to originate very idiosyncratic deals and it's the asset management capability that we have.
The next question will come from the line of Ken Worthington with JP Morgan.
Hi, Good morning, first I'm pretty impressed you guys know each other so well that Martin can finish chaucer's sentences.
And presentations that even pausing high technology remote doesn't always work [laughter] College, you, but I hear that hot.
So Adam maybe just on the outlook for the pace of deployment you know first maybe what kind of economic recovery do you see a week or are you were in l. or maybe pick the letter that best describes what you think and then on the last call. You guys described three phases of deployment with bespoke capital solutions being sort of in the.
Second phase I do you see it being sort of early days or later dates with regard to bespoke solutions opportunities.
And ultimately do you see the out or what do you see it the outlook for deployment.
As we look forward relative to Twoq levels is it going to pick up this slowdown or just generally stay the same.
Well, let's let's break the business into private equity and opportunistic and credit I think on an overall basis.
The economy is you know behind the fundamentals of the economy are behind the technicals are the economy.
You know the big run up in the markets is driven by a very significant fiscal and monetary stimulus.
And you know the S&P 500 earnings outlook continues to be.
Prizing Lee that 21 earnings are gonna be ahead of 19 earnings like we don't when we look at the underlying economy and try to compare.
That to the forecast S&P earnings like we don't we don't see yet.
Therefore, we think there's just gonna be volatility as you know the market absorb.
Our earnings that are coming in a little softer than maybe it would they would have expected.
As well as as well as you obviously you have significant volatility around coated.
Around a political environment here in the U.S.
And so and then the U.S. China relationship those four factors are going to lead to just volatility.
And so we expect that we're gonna have opportunities across our platform as it relates to discrete pipeline.
Private equity at pipelines actually picking up and so even though.
The markets are.
You know look to be priced at a premium.
When you when you bifurcate the markets on the bottom 25% of the S&P trades that 10 P.
The top.
25% trade you know above 30.
And so there continues to be a value oriented opportunities and power sweet spot.
And and so private equity you know for the first time, we are looking at other than tech data, which we announced most of what we've done all of what we've done as Dan.
In DAT and in our private equity businesses and I think you know, we're seeing that change a bit as our pipeline is building more traditional private equity on the credit side, you know, we're seeing a very robust flow of opportunities.
In terms of both bespoke capital solutions that you mentioned, where companies are you know uniquely impacted by co head and need capital either to overcome leverage issues or to grow.
As well that both in the investment grade space.
And in the <unk> and in the non investment grade space and and so private capital.
You know can take public in the public markets continued to be hospitable for some of the larger companies, but in many cases, you know that sort of private capital sector that we operate in and it is continuing to step in and be able to de transactions and so we see our pipeline across everything really being very.
The robot.
The next question will come from the line of Patrick that it was economists research.
Hi, good morning. Thanks.
A quick follow up on those questions just to make sure. We've got the understanding right. So the 25 cents needed.
To Phil I guess, the netting holder that would just be realized cash carry 25 cents a realized loss carry that anything beyond that would flow through D.
Yeah, that's that's right Patrick it's.
It's it's a tough it's a timing impact so the next.
Set of realizations that are required to Phil what to cover that impairment.
Devoted.
Exclusively to the El Pais.
And thereafter it would then.
Flowing back into entity and the distribution and so you know everything else thing on change.
It it pays down LP capital more quickly and that creates more more more kerry.
After that to the south.
The next question will come from light of Robert Lee with came BW.
Great. Good morning, Thanks for taking my questions.
I guess, maybe sticking with the insurance Im just curious with a store specifically.
And what is the what is the opportunities there or.
Redeployment of.
The bought assets, if I think historically.
Yes, I presented this way with the theme it seem like on a new block business from over current roughly about 20% of that's what's kind of where.
Made their way to bears a problem credits.
What is the same opportunity there for the work work doesn't exist regulatory rules there is not as much.
Potential to shut the portfolio.
Well.
Gary wants to take this month Vicki I can do a part of it and then handoff to Martin and a few things as you know our arrangement with a thorough is do we have a standard see our base be where we provide a variety of services to a floor and all the parts of it.
Sure for asset liability management risk management, mergers and acquisitions and so on so that'd be species in place as relates to the rest of the Thor and the various parts of the floor, we sub advise on various asset classes, where we have expertise.
And I'm a big headline of course is good in Europe, roughly 50% of it ensures balance sheet is gonna be sovereigns governments and that's just a part of managing asset liability insolvency too. So that's not something that we do we're applying so by definition theres a smaller pool.
The total of assets, but that's exactly then what we can provide her expertise and overtime assets or will in those segments with expertise. We have those would be that you'll be and the floor, a generally well be looking to wants to provide.
Maybe Martin I know you as to how we communicate yeah I mean in numbers over the next 12 to 24 months, we would expect that the to be redeployed redeploying authorities assets.
Into higher yielding assets and.
And and Apollo will be sub advised anymore of those assets. We haven't really said, specifically I put a target out there specifically, but what weve. Ultimately said is that the economics, there are lots of nuances and differences between and seen NSR and what we've always said is that the economics I'm on the are you.
Of authority to Apollo should be similar to the scene.
And we left ourselves 24 months or so to get there.
The next question will come from the line of Devin Ryan with JMP Securities.
Great Good morning.
Good question here on the out what for realizations and appreciating that capital markets of reopened I think which has been a positive but really trying to get a sense of whether you feel like there's going to be an ability to sell assets through M&A. You know were I guess I'm curious if virtual processes are starting.
Yeah, and an ability to do that and whether there's any kind of efficiencies that are being learned today that the may last beyond the pandemic, obviously ever ones using technology quite a bit more so I'm curious kind of how that.
Next is well and then just anything more you can say about kind of the realization outlook would be appreciated.
Yeah, I mean, the realization outlook is a difficult to predict and I think that we hesitate you know given all the volatility to predict how that's going to go right now I would say that it.
It's it's it's more difficult, but but things are changing on a daily basis and I do I think that you know, it's certainly in terms of transactions.
People are getting used to doing diligence buys them.
Virtual data rooms, virtual management meetings actually experienced one myself.
And then ultimately you know the face to face interaction that you need when you're partnering with the team.
You know that that gets more limited, but you know and has to be done carefully.
So it's a the M&A markets out we'll work around.
The pandemic, but I think that it's not I would say, it's it's not certainly it makes it a little bit more cumbersome, but but as manageable.
So I think we continue to focus on.
So so we will hesitate from predicting realizations I think that.
We continue to look for opportunities and we do have.
Some public companies that are and able to you know kind of take advantage of the public markets.
But by and large we're focused right now and growing and continue to deliver you know very significant and durable laferrari.
And high margins and continue to grow RF restrain, which is much more predictable and I think we think over a cycle our realizations will be there.
We're building value in our portfolio.
The next question will come from the line of Gerry O'hara with Jefferies.
Great. Thanks for taking my question. This morning, perhaps one on the strategic origination business and if you could maybe add a little context or color on the opportunity set.
What a pause competitive advantages there and perhaps even how you see that a that platform scaling going forward. Thank you.
Yes, so our competitive advantage I mean, obviously, we have the largest alternative credit business in the world and we have hundreds of.
Hi, investors and originators and we have a really significant capital bad.
And so what that.
Allows us to do.
Is is to commit you know a billion to up to $2 billion of capital to too.
Sort of larger companies you know in that you know one to 5 billion dollar TV that.
Need capital solutions very quickly.
I'm very in a very bespoke way and I think that.
You know, we because of our site that's the size of our platform and the size of our.
Capital base really puts us in a very unique position.
In today's markets, where the need for capital is quite large and so you know I don't think there's very many people they can.
That have those advantages and so we're in a very small group.
So it's going to be a really interesting capability that not a lot of other people have.
Our next question will come from the line of Chris Harris with Wells Fargo.
Oh, great can you guys, maybe give us an update on trends you're seeing in your and your underlying portfolios.
The past I think you've talked about a about 5% of the portfolio on watch.
That has that changed at all since the last quarter.
Yes, the at this point, it's about 3% and.
I think that right now you know weve.
Obviously as we mentioned in the last call 'em, we definitely.
Our heads in energy.
And then you know we've had one or two other situation that you know have been or in Cove. It affected a industries certainly restaurants.
Being you know front and center.
And and and and those have all been marked down and therefore, a or mark or mark to zero and that's part of you know what Martin is talking about are pretty much all of what Martin is talking about on the 26 cents because going forward. We we don't we don't see a lot of issues I mean.
Obviously, a and works and sort of so we expect the portfolio to improve from here subject to you know in a in a very and heading in a very positive direction subject. Obviously, you know kind of.
Economic downturn that goes the other way, which we don't really forecast right. Now. So we think kind of a lot of our issues are behind us and we're going to build value from here.
Oh.
She will come from line of Michael Cyprys with Morgan Stanley.
Hi, Good morning, Thanks for taking the question just wanted to follow up a little bit on the strategic origination platform I would just hoping maybe you could elaborate a little bit more on your aspirations there longer term and maybe talk about how you're approaching planning to originates in.
In this larger part of the marketplace, maybe what are you building out in terms of head count and I know a lot of the private credit space has been more sponsor finance. It sounds like this is maybe a little bit less so maybe just talk little bit about the hurdles or be up in terms of moving beyond sponsor finance, how you're approaching Matt.
Yeah, I mean, I think like basically we're building out you know we have a significant origination at mid cap that's in the lower middle market.
And and then we're making significant hires a in you know the middle and upper and middle and upper market and this desal relates to you know the the sort of withdrawal or sort of the pullback.
The banks from being willing to.
Make significant underwriting and capital commitment and we set up a situation, where we have you know the but.
With a client balance sheets that are able to hold as well as.
A vehicle that allows us to.
Underwrite and then and then sell in so we're building up.
No kind of you know a whole team you know to do that and we've already made a series of hires and I expect that team to be in.
In excess of 20 odd to just be out calling on companies and on sponsors. It's really that simple and then we're building up a capital markets effort.
We are adding to our broker dealer and our capital markets effort to be able to you know kind of syndicate, a little bit you know where we're committing to.
You know a little more than we ultimately want to own for our clients and so the ability to you know underwrite and and and sort of quickly underwrite up to $2 billion alone.
Is something that is gonna be unique or you know amongst the very small group of people and so we expect that to be be highly.
Needed in the marketplace and so we're we're hiring on both fronts capital markets and.
Origination and ultimately we expect there there to be a lot of action there.
And I mean, it's no different I mean, you literally I, just calling on companies and calling on sponsors and it's it's you know a lot of the same skillsets. Your yeah. You know we have and you know across our platform because were integrated we have hundreds of professionals.
In private equity and and credit.
You know that are that are now have just greater tools in their tool kit.
So because of the integration across our from private equity credit real estate. A this just that we now have a lot more capability a private equity team member that might be calling on a company now knows well maybe you don't want to go private maybe you don't want to sell your company.
But but we you know we've got to other opportunity to offer you and so increasingly I'm under the leadership of.
Scott and Jim you know, we're seeing the whole from all 500 of our investment threshold you know do it you know taking up taking part in essence. So yeah. We are building up a unique people to do this but it's it's across our platform.
And our and our integrated platform is very different than how other people run their businesses.
Next question will come from lining Jeremy Campbell with Barclays.
Hey, great thinks that.
Just maybe one on the insurance landscape, obviously, given all your peers have jumped into the market you know relatively recently over the past year or so and then your relationship with the theme the capital side car and venerable sort and little bit differentiated just kind of wondering.
To this competitive market kind of really get you seem to partners to two more kind of big gain on thing here and insurance world as maybe the smaller deal get a little bit aggressively bid given the competition and then if so maybe just from the insurance executives side. What are some of the hurdle that you guys see to these executives doing a big deal like that.
So it.
Sales in it and its and its also like our ability to navigate complexity and and and structure. The school bespoke solutions that tackle big insurance portfolios.
That might not be discreetly fixed annuity or discreetly variable annuity and so it's those broad set of our broad set of capabilities and then it's our asset management capability. So it's all three of those things that make us unique, but but Gary you want to add to that.
Unlike do script briefly just say that we view, our breadth of <unk> expertise and our size as indeed wonder are big competitive advantage.
We have six segments of expertise U.S. spread business Europeans spread variable capability life settlements and structured settlements isn't a fund F.C. I, we're property casualty run off and then PNC flow with all those skills. We can then go to larger companies and talk about solutions.
So your question somewhat release too I think when asked earlier about the.
The comparative inventions in these transactions are there common themes and if you take three U.S. transactions, where you Lincoln and Jackson.
A common theme was the Beast companies were looking for a solution to something they actually weren't selling something per se their business wasn't for sale per se, but they were trying to solve for different strategic directions, and that's where we go in with her expertise and capital and we work with them. So the.
CEO dialogue actually if you would you enjoyed being in the room to hear the dialogue because his ceos talking about what they're trying to accomplish in their company Prudential being the most recent conversations with Mike Wells, which were just delightful and productive but.
But I was trying to figure out.
Win win win solutions and by that we mean that.
Another instance, prudential a theme and Apollo stocks, all outperformed their respective peers when the announcement of the transaction.
The same happened and boy I Wonder if you will actually wrote about that.
So that's what prompts a CEO to one new engages and now we actually have a track record so relative to our competition.
We've now established this singular track record of creating value for multiple parties involved in a transaction.
That's a comparative advantage that we will continue to.
These substantive conversations.
We're having today, that's the kind of conversation we have.
We have more permanent capital than anyone at Bert other than Berkshire Hathaway.
And the truth is a matter as were so deep and so well known in the insurance space and our regulatory relationships are positive.
That all of these things create.
A franchise for us that is that is that is unparalleled.
And we're attracting.
The ability attract talent is probably up is probably positively impacted by that.
[noise] Taski was Oppenheimer and company.
Hi, good morning. Thanks.
Josh you were talking about the.
Disconnect between the real economy in the market that was just looking at the statistics, which has a leveraged loans default rate at around 3.9% that's almost all in energy resources at retail.
If you had to guess.
Six to nine months from now where would that be and you know what is both a risk to existing investments and the opportunities to deploy against that.
Yeah. So I mean, obviously the answer that's going to depend on ultimately the liquidity that's provided by the.
Federal reserve that syndicated that it's all in.
And and the economy the recovery of the economy I think we expect.
That it'll go up from here and I think that.
That will that will kind of open up.
A series of opportunities for us and so.
<unk> do we get to double digit could.
For for a year.
For some period of time.
I think that that will open it's been speaking of opportunities for us as to kind of like our portfolio.
We're we're pretty much all first lien in top of the capital structure.
We've been very oriented towards.
The safest most high quality secured debt.
Across our platform and.
That did not serve us well and as well on a risk on environment, but it serves us very well and and environment like the one you're describing and so we expect that.
Our portfolio be quite robust a in that scenario and.
That our opportunities to pick it would open up a lot and so certainly we're not.
We're not you know for the World. Obviously, you know we're not we hope that were wrong in that the economy.
Does as well as the stock market thinks it will do but we're not we're not planning for that in terms of how we invest.
And so therefore, we think we would be pretty robust in that situation.
I think capital would also find out.
The next question will come online Adam Beatty with TV.
Hi, good morning, Thanks for taking the question I'm just wanted to follow up on the existing portfolio companies more so from the deployment angle how much of the you want to get a sense of how much of the deployment. So far this year has been with companies that you already owned and kind of the outlook on that and also if you could.
You know the mix within that deployment of kind of offense versus defense different depending on the specific company circumstances. Thank you, yes, so that's a zero or negligible. So very little in there. There may have been something that went into the exist anymore, but I want to see very very little has gone into the existing portfolio.
And nearly 100% has been on often.
So when we talk about a 3% we're not we're not we're not we're not we haven't had to deploy into existing situations to prop up company.
Sorry.
With that I'll now hand, the conference back over to Gary's time for closing remarks.
Great. Thanks, operator, thanks, everyone for joining us a if you have any questions. Please feel free to follow up with us and the team looks forward to catching up with you again next quarter.
This does conclude today's conference call.
We think there because patients are now could you. Please disconnect your lines.
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