Q1 2021 Apollo Global Management Inc Earnings Call
Good morning, and welcome to Apollo Global management's first quarter 2021 earnings conference call.
During todays discussion all callers will be placed in listen only mode and fall.
Management's prepared remarks, the conference call will be open for your question.
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 Apollo. This most recent SEC filings for risk factors related to these statements.
Apollo will be discussing certain non-GAAP measures on this call, which management believes are relevant and assessing the financial performance of the business.
These non-GAAP measures are reconciled to GAAP figures and Apollo earnings presentation, which is available on the company's website.
Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest and any Apollo from.
Oh, My God, let's turn the call over to Peter Ginsberg head of Investor Relations.
Thanks, operator, welcome to our first quarter 2021 earnings call. Joining me this morning, and remarkable and see you and cofounder Scott Kleinman co President and Martin Kelly, CFO and COO CLO.
Turning it over to Mark to kick off our comments for today.
Good morning, Thank you Peter and.
And welcome all.
Q1, 'twenty, one was a strong quarter for Apollo.
Record FRE up $287 million or 65 cents per share up 26 per cent year over year up 4% sequentially.
Total inflows of $13 billion.
100, and excuse me up funds driven by 5 billion of fund raising and $4 billion of Athene organic growth.
AUM of 461 billion up 145 billion year over year at <unk> 46 per cent year over year.
And 6% 6 billion quarter over quarter.
Reflecting 13 billion of inflows 9 billion and a positive marks on the P. E portfolio, partially offset by reductions in the yield portfolios at Athene and a thorough due to rising rates and change and position of the euro.
Our opportunistic businesses.
Had a particularly strong quarter as they are positioned for a strong U S and European recovery. The P E portfolio in particular was up 22%.
Versus and S&P, a five 8%.
Scott I know will take you through more details, including deployment and realizations and Martin and will take you through the financials.
And as I discussed on our last earnings call I had some simple observations on our business and by extension our strategy.
We are and our growth business.
This quarter and the year over year results make this abundantly clear.
We provide a product that is in high demand.
And we provide excess returns to investors on a risk adjusted basis.
We serve a growing market driven primarily by the need for retirement income.
We serve this market directly through our athene and a thorough affiliates and indirectly through our institutional clients are pension funds retirement system sovereign wealth funds and others.
Demographics and market trends of our market aging indexation low rates need for retirement income mean that in general the business gets better every day.
We recognize how fortunate we are to be and a growth business.
If you dig down to the next level.
If you look at our largest business our yield business, which is more than 300 and.
And 30 billion of AUM.
That business.
He is not limited and its growth by capital or liabilities. It is limited and its growth by assets.
And that limitation is only temporary.
It is our job and therefore, our strategy to expand our capacity to generate assets that provide interesting risk reward for this segment of the market.
In our hybrid and opportunistic businesses.
It is a little bit more balance some of our strategies still still have substantial room to expand by expanding their access to capital because the front and of those businesses is just show so strong.
And.
Apollo's unique value proposition is that we are exceptionally good at generating excess returns across a very broad swath of the risk return spectrum from investment grade two.
To private equity.
Examples of excess return across this very broad spectrum not over one year, but over a very long period of time I think are instructive.
And private equity are 31 year return is 39% gross 24 net with every core private equity funds having generated Kerry.
And incredible track record, which puts us substantially ahead of the top quartile PE performance.
It's not any one fund it's not size of fund, it's not any one investment cycle. It is the discipline of the franchise and what we do and I know Scott will spend time walking you through the returns of the most recent fund and how we approach our opportunistic businesses.
And our yield business.
I believe the best example of our capacity to generate excess return is manifested by examining our largest client athene.
If you look at Athene since inception over more than the past decade, there Aro and their insurance businesses is 22% and on a consolidated basis, 15% on average over this period of time.
This is substantially in excess of any comparable company or comparable index.
And the context of this background.
This quarter was all about reinforcing strategy building, our front end or capacity to generate additional assets and positioning us to grow faster.
The biggest step and the quarter was obviously our decision to enter into an agreement to merge with Athene.
This transaction massively reinforces our position serving retirement income and retirees, adding almost a million clients, including our pension and retirement transfer business and average age and the high Sixty's.
This transaction adds to our capacity and coordination to develop additional yield platforms.
True aligning Apollo and Athene.
And thinking back to what we have been able to achieve with us not fully aligned whether it is our mid cap corporate credit business, our triple net lease business, our aircraft finance business, our Redding Ridge structured products business. The list goes on and on and I'm excited as to what we can achieve with full alignment.
And our hybrid and opportunistic businesses. This transaction increases our ability to seed products and to see teams and to launch new funds and simply to get to market faster.
Some examples of what we've done historically include our hybrid value fund.
Our infrastructure fund and numerous others.
The transaction also represents a significant strengthening of our connection to additional forms of distribution, including retail banks independent broker dealers and other wealth channels. These wealth distribution channels represent a significant source of growth for us and we expect 2021 even prior to the closing of the transact.
And with Athene to be a record year for Apollo in these channels and a source of significant future growth.
The merger was not the only step we took in the quarter to reinforce our strategy significant progress was made and are high grade Alpha business. Apollo has developed a unique platform to provide capital and funding to large corporations globally and the investment grade market.
Our unconstrained appetite for long dated creative and semi liquid solutions have allowed us to execute multibillion dollar transactions and a short timeframe as they sole counterparty to these corporations.
Working with our partners with.
With our 400 plus investment professionals, we expect to generate $15 billion to $20 billion of these transactions in 2020 one.
Also in the quarter, we announced the launch of our credit secondaries business, a new platform of levering.
Our insurance affiliates appetite for this asset class.
Into a very fast growing private credit secondaries market.
This is one of the first funds and this rapidly growing split space and we plan to raise substantial additional money in the future for this strategy as we continue to build out our general partnership solutions capabilities.
In summary.
This is an investment year, we're focused on setting the business up.
So that it grows faster over the next five years and Scott will take you through some of the investments we're making during 2021 in his prepared remarks.
Away from that.
And the financials of the business and the strategy of the business, we delivered the changes and governance that we had set out and our first in the first conference call I had done with you we began to implement changes to our governance to establish a simpler more transparent corporate structure, we believe ultimately positions us to be eligible for S&P index.
Conclusion.
And closing.
The business is firing on all cylinders.
We're making tremendous progress and I'm very optimistic about growth.
I want to take this moment to thank over 1700, Apollo employees around the world, including 59, new hires in Q1, who worked tirelessly to achieve the results we have announced today.
Culturally.
The senior management team is focused on positioning the firm to speak authentically.
About what we can achieve.
And what we can particularly have an impact on and we.
We are very focused.
An expanding opportunity, particularly for broader segments of society that hereto for and May not have had access to the same opportunities.
We can do this at Apollo we can also do this through our portfolio companies.
More to come on this and the near future.
Our efforts around citizenship diversity equity and inclusion and ESG are core to our value proposition for our people.
And we continue to raise awareness and deepen education on the key issues in.
In January we received a score of 100 per cent from the human rights campaign Foundation with regard to being the best place to work for L. G. P T Q and quality.
Yesterday, we announced a significant donation to United way, India's partner Act to immediately deploy thousands of oxygen concentrations and other critical life saving medical equipment to those and most need our haps Hearts go out to the Apollo community and India and their loved ones, who are experiencing the impact of this crisis with.
With that I will now turn it over to Scott.
Thanks, Mark and thank you all for joining US this morning, as Marc mentioned Apollo differentiates itself by the ability to generate excess returns across the entire risk reward spectrum.
And this quarter, we again demonstrated the strength of this proposition across our platform.
And I think about the overall performance of the business I break it down into five key factors.
Finding good investments to deploy capital.
Having the portfolio accrete in value.
Monetizing our investments and raising more capital and investing in and growing both our existing platforms as well as our new ones.
So far in 2020, one and Apollo has made very good progress across all of these areas.
So let me get through them one by one.
Regarding deployment, our ability to find attractive returns at all points, along the risk spectrum shines and an environment like the one we're in now where valuations are seemingly high for private equity and yields are painfully Finn from most credit products.
Total deployment for Q1 was $24 9 billion.
Our private equity funds deploy $2 4 billion and capital in the quarter and.
Additionally, we committed to deploy a further $3 3 billion and the quarter.
Driven by two large fund nine investments Michaels and the Venetian and since quarter and we've continued to commit to significant additional transactions.
We continue to see a strong recovery and the economy, particularly in those sectors hardest hit by COVID-19, such as leisure travel gaming and specialty retail and we continue to invest in those spaces.
Our hybrid value business continues to be active with over half a billion dollars deployed in the quarter.
Strong deployment of $19 1 billion and our credit business in the first quarter was in line with fourth quarter levels and includes strong insurance balance sheet growth on insurance inflows and pension risk transfer transactions with.
With spreads tight others are going down and quality to earn returns, but we've been moving up and credit quality and finding our returns through superior asset selection and origination this will set us up well in the future.
We're preparing for but not predicting higher rates to come.
Our initiatives to see increased high grade Alpha origination transactions continues to grow and has a robust pipeline. We continue to see substantial opportunities to provide capital and funding solutions to corporations and financial institutions globally with the ability and expertise to find innovative solutions and structures.
So we are now fully and the European direct loan market committing to $1 billion and the first quarter. This is a space we weren't present a year ago.
And lastly, a jcpenney has agreed to transfer $2 8 billion and pension obligations for roughly 30000 participants and JC penney's pension plan to athene as part of a pension transfer transaction.
Being utilized at strategic cap capital vehicle Acura to support the completion of this transaction.
In terms of value creation, and this has been an exceptional quarter for Apollo.
Mark just mentioned are very strong track record and private equity for over 31 years. We continue to show that we have and ability to find attractive returns in any market environment. We continue to believe that purchase price matters, and we will utilize our expertise to creatively source structure and optimize assets add value add.
And value and partnership with our growing and house operations team of experts.
This can clearly be seen and our most recent and largest fun fun nine we're seeing very strong performance and this fund with the current marks up 33% leading to an IRR of 49% growth, 26% net and a mole wake up 1.7 times, while we expect these numbers to converge over time towards historic levels.
And we see the results as a validation of our investment expertise and the fact that this continues to be a very high return business if done the right way and.
And a market characterized by indexation correlations and volatility apollo's investment discipline and really stands out.
During the quarter, our overall private equity segment appreciated by 22% as compared to the S&P at five 8% driven by exceptionally strong performance across our funds public and private holdings fun day, eight and fund I and appreciated by 19% and 33%, respectively, driving an increase and the net carry assets to three.
$2.04 per share up from $1 82 per share and the fourth quarter.
Importantly fund date returned to paying cash carry and the netting hole of the funds has been eliminated.
<unk> is now marked at a multiple of invested capital of one eight times and we expect it to continue to grow and create value as the portfolio matures.
As a reminder, non cross into carry and the fourth quarter of last year and as of the first quarter. It is and full carry.
Our hybrid value fund is delivering strong performance with gross IRR of 31% and 25 per cent net and bulk of 1.3 times. We also experienced strong performance with our infrastructure equity fund and the quarter up 15%.
And credit our funds aggregate portfolio returned and 4% during the quarter, 1.9% above the benchmark.
Notably our global corporate credit business generated a 3% total return in the quarter, reflecting over 80 basis points of outperformance. So its benchmark. In addition, the performance of structured credit exceeded the index by approximately 400 basis points for the quarter and our credit strategy fund generated 5% and the quarter 150 basis.
Points above its index, our strong credit performance has been driven in part by the excess spread we've been able to generate for our insurance and other clients, which stems from our differentiated and expanding origination capabilities.
Regarding realizations, we saw strong monetization of our investments with $3 $7 billion of capital return to Lps and the first quarter. The total capital return to Lps over the last 12 months adds to $10 $4 billion.
We announced several large transactions this quarter, including the highly successful IPO of Sun country, a fund eight portfolio company. The merger of Tech data a fun nine portfolio company with Cynics, the sale of a mirror home owned by Athene and several Apollo funds to Western Alliance and NGL energy partners through our yield business.
We have a strong pipeline and expect to continue generating strong monetization for our investors.
And fundraising this quarter, we raised a significant amount of capital from third party investors near the high end of the $15 billion to $20 billion annual range, we have discussed in the past.
All in all we've made great progress with our investors over the quarter and for the most part they have been incredibly supportive of all the recent changes at Apollo.
We have several funds raising capital and the market now and closed on $4 $8 billion and the quarter.
In addition, we saw inflows of $4 2 billion from our insurance affiliates with total inflows for the quarter of $13 4 billion. We also see a huge opportunity to expand our distribution and the wealth management channel and are building now the capability to do that we are confident and our fund raising targets for the year and have already raised over 2 billion since.
And.
Lastly, with respect to investing and our platform and growth to Echo Mark's comments, we see incredible opportunities to accelerate growth and are investing and the business. It is an exciting time to be and the asset management business capital flows are concentrating towards a select few players who can provide the breadth of products and services that investors are looking for and.
That trend is only accelerating and creating new winners and losers, we see an enormous opportunity ahead of us and we're planting and the right seats to take advantage of many of these growth opportunities, we're adding over 400 employees. This year across all parts of our business, we're growing our core product teams and building capabilities to scale, our platform and increase our ability to generate.
<unk> excess returns across several areas, including infrastructure impact investing credit and G. P secondaries direct origination capital markets and syndication and Spacs just to name a few.
As we build these growth engines. We're also continuing to build the enterprise solution seems to support this growth.
We're confident confident that this type of investment will produce at least mid teens growth and FRE over the long term with some fluctuations between low teens and high teens, depending on investment opportunities in any given year.
We believe the path forward is bright for Apollo and we're excited to continue on a strong trajectory I speak for the entire management team and expressing our gratitude for our deep bench of talent, who have come together to drive the success that we've experienced so far this year, so with that I'll turn it over to Martin.
Thanks, Scott for.
For the first quarter Apollo recorded exceptional results across all relevant financial and operating metrics. Our GAAP net income to common shareholders was $670 million or $2.81 per share and the first quarter.
As compared with 44 cents per share for the full year, 2020 and $3.71 per share for the full year 2019.
We generated record FRE of $16 65 per share on a pretax basis up 26% year over year, and 4% quarter over quarter, driven by growth and management fees, and an uptick and FRE performance fees related to our CLO manager.
Management fees grew 3% over the prior quarter and 17% over the first quarter of 2020.
Driven by growth and fees for investing and the assets of our insurance clients and deployment across our platform broadly.
Transaction and advisory fees were $56 million and the quarter.
Driven by capital solutions transactions and private equity activity.
Though this represents a more normalized level and in recent quarters. It has nearly doubled the pre 2020 quarterly average up 51% year over year and is more representative of the run rate, we expect as our origination business further scales.
Compensation expense was flat over the prior quarter. However, we expect this to grow over the next few quarters as we continue to invest and the growth initiatives that Scott outlined.
Non compensation costs fell 21% over the prior quarter as a result of this bus and seasonality and the absence of any one time items.
As a reminder, in the fourth quarter non comp was elevated due to costs related to the independent review.
For the first quarter, we announced a dividend of <unk> 50 per share and after tax distributable earnings of 66 cents per share supported by both our strong pretax FRE and net incentive earnings of 10 cents per share.
After tax distributable earnings of $294 million were up 78% over the first quarter of 2020.
And reflects the return of funds to paying cash carry.
Turning to AUM, we ended the first quarter at $461 billion up $6 billion quarter over quarter and $146 billion year over year.
Inflows totaled $13 billion for the quarter, reflecting robust fund raising a $5 billion from numerous strategies across the platform organic growth at athene and growth and our CLO platform.
The third party capital raised and the quarter is an indication that our relationships with Lps remained strong and we expect the majority of capital raise headwinds to and that will be behind us.
For the first quarter and fee generating AUM fell nominally.
Due to interest rates, you have and Mark downs on Athene and authorities balance sheets.
However, our fee generating AUM grew 43% year over year supported by continued inflows and capital deployment.
The impact on management fees of the Mark Downs of these balance sheets is largely reflected in the first quarter numbers and.
And represents approximately one per cent of management fees on an annualized run rate basis.
And while higher rates to reduce management fees on our existing assets. We believe that higher rates are a net positive for athene and Apollo given increased origination volumes and a pen and ability to own and higher income on deployment into new assets.
Turning to incentive realizations, we recognized $107 million of gross performance fees for the first quarter, primarily related to monetization monetization activity and fun to aid and our hybrid value fund and our private equity business.
As Scott mentioned, the impairment netting hole and fund eight is pain and eliminated as at the end of the first quarter.
Driven principally by secondary transactions of Onemain for RIDEA and Sun country.
Founded as a multiple on invested capital of $1 eight and.
And our current gross and net IRR of 18% and 13% respectively.
The callback obligations of 17 cents per share that we report and our earnings release are related to older legacy funds, including fund five and some older credit funds and <unk>.
Specific to those funds and not cross collateralized and across other funds.
We do not expect these callback amounts if materialized to become cash obligations for at least several years from now.
Deployment, and our drawdown funds was $2 $7 billion and the first quarter and our pipeline across the platform remains robust as we have significant equity commitments on announced transactions and our private equity business.
And a broader measure of deployment, which reflects the breadth of our origination business was again strong at $25 billion and the first quarter dip.
And deployment was driven by strong growth and insurance clients, including repositioning the assets acquired from Jackson investments and our syndicated loan business as well as middle market and commercial real estate lending activity.
And our dry powder for investments across our phone complex was $50 billion at the end of the quarter of which $24 billion has the potential to drive management fees upon investment.
Apollo remains and a very strong liquidity position with approximately $1 $7 billion of liquidity available on our balance sheet.
Our net economic balance sheet value after debt and preferred stock was approximately $8 per share at March 31 up over $3 quarter over quarter, primarily due to and increasing our total net performance fees as well as an increase and value of our investment and venerable a variable annuity platform related.
To a transaction with with equitable.
To Echo Mark and Scott, we're very pleased with our first quarter earnings driven by exceptional investment performance growing fee earnings and continued deployment and realization activity across the platform.
And we look forward to further accelerating growth and our platform, including via our announced merger with Athene and.
And creating a corporate structure, which will create flexibility to allocate capital to further growth and.
Any of our businesses, what's your return to shareholders.
Lastly, we understand the desire for more specifics surrounding the announced merger with a thin, including pro forma segment financials and.
And we look forward to providing that to you and in conjunction with an Investor day, which we currently anticipate holding in the fall.
With that I'll turn the call back to Peter.
That concludes our remarks from the day operator, please open the line for questions.
If you'd like to ask a question at this time, please press the star and the number one key on your Touchtone telephone.
Withdraw your question press the pound key.
Again that in Florida, and one if you'd like to ask a question at this time.
Our first question comes from Bill Katz with Citigroup.
Okay.
Okay, Alright, thank you very much for taking the questions. This morning I was wondering if you could maybe start with the day flushing out a little bit of the incremental spend into the retail channel what that might look like and then how quickly you think you could maybe leverage some of that investments.
Sure. So as you probably understand the retail channel is.
Somewhat different than the traditional institutional channel are requiring additional.
<unk> sales force additional product development and that's really the.
And that's really the crux of it investing in and in that space to support both existing products as well as new products to to flow through those channels. So that's really the crux of the investment.
Okay, and then Mark just a follow up for you I was wondering as intrigued by the opportunity and to an investment grade something if you could maybe flesh that out a little bit it sounds like a pretty big opportunity. This year, but maybe help us understand maybe the broader opportunity set and then sort of how the economics compare to the the back book.
Well a lot there bill I'll do my best.
First if you if you step back and think about what we're trying to do the yield business that we have built a.
You should think of as a fixed income replacement business, rather than and opportunistic credit business.
We like that notion because what we're doing is we're trying to provide to our clients Athena thorough as well as our third party clients and credit funds.
And and 50 to 200 basis points of excess return.
Round, the high and particularly the investment grade and.
Of that fixed income marketplace.
The way, we do that is not by taking incremental credit risk and not by taking equity risk. We derive that return from two factors one is structure.
And the other is the willingness to accept illiquidity.
For a regular way plain vanilla transaction.
Issuers will go to the investment grade market, the corporate market and a very methodical easy easy to access way and there is not excess return.
But if you look at the end of last year.
And you look at the Hertz transaction.
You look at the AD not transaction and.
And you look at the Anheuser Busch bottling transaction once you see our three different issuers all approaching different problems, all and the investment grade and to the spectrum that required a solution.
We are one of the few participants who have the size scale and capacity to take down and sizable investment grade transactions and.
So that is what we are seeking to do I mean, it and the most fundamental we want 150 to 200 basis points of excess return over the comparably traded public I G and were willing to provide flexibility and structure and willing to accept illiquidity.
This is a role that heretofore might have been provided by some of the largest banks or investment banks.
And I think increasingly we will get our share of this marketplace and it represents a very attractive marketplace and fits very synergistically.
With all that we do and fixed income replacement given that we cover.
Very large swath of the investment grade market anyway, it's a very different business than the peer set.
As a result of our unique client base.
Our next question comes from Craig Siegenthaler with Credit Suisse.
Thanks, Good morning, everyone I had several follow ups with.
On the merger with Athene. So my first one was do you know how GAAP will treat the athene management fees. After the merger is closed.
Yes, GAAP GAAP like and everything else will eliminate all intercompany transaction.
Got it got it and then.
And going to continue to report distribution of our earnings after the merger closes.
And will it include total earnings from Athene as life insurance free cash flow and GAAP earnings you don't always match up.
And we will give you a detailed we've taken our best guess at providing our view as to how we're going to report in the through our lens that because that is on our website and that we've previously disclosed we anticipate that from a management view financials. We will report the way everyone else and the industry and the broader financial services industry reports.
Intercompany segments, which is the fair value of management fees will be reported on the asset management side and the yield less the cost of these management fees will be.
Reported on the insurance side, we do anticipate at this point continuing to report D E.
And as you see and the through Ireland's deck.
We're envisioning. The addition of and additional operating line of retirement services earnings.
Great. Thank you.
Our next question comes from Patrick Davitt with Autonomous research.
Hey, good morning, everyone. My questions on kind of how to think about capital return post transaction.
And with funding kind of through the netting hole now it's clear obviously the cash realization out like look for the kind of legacy Apollo business is looking increasingly strong so with Athena and cash flow theoretically enough to kind of fund their growth.
Do you have any thoughts around the use of the excess cash likely to be generated from from this very strong realization outlook on the legacy Apollo business.
So I'm going to give you a broader answer it's Marc I and if it doesn't suffice you'll have the follow up so.
Apollo itself, just the asset manager.
He is a highly cash generative business as you know we have announced the reset of our dividend to initially a $1 60 per share, which we've said will grow along with the growth and the business.
Just on that basis, the distributable earnings of Apollo more than covers the dividend and it makes it very clear the Apollo business is very cash generative.
And you're starting point on Athene I believe to be too Conservative. If you look back and history Athene is actually distributed and immense amount of capital. They have just not distributed as dividends and they've done and in terms of buybacks.
Distributed I don't have my notes in front of me, but call. It 1 billion $2 50, plus or minus over a period of time.
So now you have to step back and think about how athene produces cash on a go forward basis.
And as you've said, yes, it and finance has its own growth, but it also starts and a different place. It does not start at zero Athene starts with $5 2 billion of excess equity capital, which is approximately $3 8 billion of excess equity on a teens balance sheet plus one seven and a just in time.
L P driven side by side funding vehicle called Aden.
In addition, athene has less than 15% debt to cap, whereas it's double a peers would have about 25% debt to cap again, approximately another two and a $5 billion. So athene starts with about 758 billion of excess deployable capital.
And what's your also watching as a maturation of the structure.
And the business Rolling off Athene is generally business that is rolling off that was financed 100% with Athene capital. That's how athene began life the business going on the books is generally going onto books, particularly the inorganic and PRT business, but likely over time, the totality of Athena business will.
Approximately one third of themes capital and two thirds day dip capital and what we have tried to do.
His balance is to take what here to four and May have been a capital intensive business make it less capital intensive through the introduction of third party capital, which as an aside the Ada from one investors should be very happy I'll leave it there and you should anticipate that we'd be very focused on Egypt.
To support this growth and so it is my expectation that we will get excess capital from the athene leg of the business and excess capital from the Apollo leg up and the business against a unannounced Buck 60 dividend.
I think for Investor Day, we will do our best to go through this in detail, but suffice it to say that capital allocation is one of the things that is fully within our control and it's something we should be judged on and we are all very large shareholders.
And what it does is it creates options.
And that option is to reinvest and the business.
Adding additional capacity.
And or buy back stock.
And we will look at that and now have the flexibility to do that every quarter and every year.
Got it makes sense. Thank you.
Our next.
<unk> comes from Glenn score with Evercore.
Hi, Thanks very much.
Love to learn a little bit more about your thoughts on the credit secondaries market overall.
I'm curious if you're seeing the same reasons for the development that you saw on the private equity fund and other meeting L. P. Seeking liquidity from the same reason is.
Is it the same kind of bid ask spread do you see similar trends of that addressable market.
Any color there would be great.
Try and see how big this can get near mine building and that 25 years.
Yes sure sure. So I think you're you're basically exactly right. The the growth in credit funds over the last 567 years has really been meteoric is as you all know and.
And the reality is a cio's funds pension funds are.
Ultimately needing liquidity as day balance their portfolios just the way this occurred for the private equity business 10, or 15 years ago. The you know the real secret sauce. If you will in a secondaries business is having the knowledge of the underlying.
And investments to be able to move rapidly and thoughtfully around around making investment decisions and.
And because of Apollo is the largest alternative credit lender, we have views and visibility on essentially you know every credit product.
Every underlying security and the markets and.
So our ability our library of knowledge to be able to.
You know smartly access to this market is really unparalleled. The you know there's really no one of scale in this space right now, but we can already start to see the demand from you know pension funds others, who hold these are these these credit funds to be able to.
To seek liquidity. So we think this is a a.
Massively scalable market, where we have real first mover advantage and real.
Real expertise to allow us to be the category a category killer in the space.
Maybe just one follow up.
Traditionally and some other.
Verticals, you might have a fund one raise money and put it to work show some performance and weight and then that's a range fun too.
Theoretically given what you just laid out this morning.
Sure.
Relatively quickly and we could see another funds relatively quickly is that and you know.
And where you offer is that okay.
No I think Directionally Directionally, that's right remember.
When we think about this this type of business is very applicable for some of our existing insurer insurance clients and and otherwise so it gives us the ability to scale.
Scale rapidly and Opportunistically, but but you are right. The third party demand should be pretty enormous and and would expect to see this business scale.
You know faster than like say, a PDE type one.
Okay. Thanks, so much appreciate it.
Our next question comes from Alex <unk> with Goldman Sachs.
Thank you Greg good morning, everybody.
I was hoping you could spend a minute and on your guys is.
Sort of bigger picture growth and management and fee outlook over the next couple of years. So it sounds like there is a number of new initiatives in the business. Some of them are kind of be and accelerated potentially by the athene deal you talked about wealth management a couple of other platforms.
Can you give us a sense of kind of excluding or not sort of relying on reinsurance related partnerships and just really thinking about third party investor base.
What's sort of the sustainable management fee growth you expect to see.
Now over the next call. It three years as you go through this investment cycle.
So Alex it's Mark I'll give you the broader overview and then I'll turn it to Martin and so on.
I think we've said broadly first we will update our targets.
And our next Investor day, but the way at least some of us think about the business.
And the yield business.
We think we can double over the next five years.
That's circa 350 billion today, I think that'll be a $700 billion plus business and I'll come back to why and how.
And the opportunistic business and.
And the hybrid business is about 110 115 billion and at least at first blush.
Personally think they will be 50% larger over the next five years.
So now to dig down and then I will turn it over to Martin for a bit.
If you look at the strategy, we've chosen and yield it's in many ways a different strategy than our comparable peer set we've chosen as I alluded to on an earlier question and fixed income replacement.
This was driven by the need to serve our insurance affiliates.
It also if you look at roughly the 350 billion of AUM about 60% of that is driven by the insurance affiliates.
And 40% is driven by third party clients and credit funds.
I have no reason to expect that to change all that much as the business doubles, but let me get into what I mean by doubling the business. If you dig down and the 350 billion and my Best guess is it's 125 to 150 billion of Alpha with the remainder of beta.
For us to double that business.
We need to double $125 million of Alpha.
That is a large number but it does not appear daunting to me because a lot of it is focused on platforms, providing repeatable origination.
So to give you a sense of scale, we originated 17 billion of credit in the first quarter. We're on a pace to do circa 70 580 billion for the year and that's up from last year, where we did 47 billion of credit origination for the year. So we kind of seem to have the building blocks and place.
On the opportunistic side.
And I laid out the larger returns Scott laid out some of the more specific returns.
And we've made a lot of progress with announced private equity transactions I would expect that next year will be and the market.
For fund 11.
<unk> excuse me and Scotts correcting me.
And we are in the process of scaling and number of other strategies, where we see origination capacity in excess of funds that we currently have Asian real estate on our Asian instruction product business infrastructure social impact.
So all and all I see really interesting ways to grow the business.
Some of this and you've asked for excluding insurance affiliates.
I don't really think of the business in that context, because increasingly what our limited partners and third party investors like on the yield side of our business is the ability to co invest side by side with our senior notes or a same time same price same risk we present ourselves to the market as an asset manager who is not only interested and fee, but it's interesting.
And the underlying asset and therefore full alignment on.
On the opportunistic and the hybrid side of the business.
We are also in the same position, although not to the same degree, whereas we might be 60 per cent of the yield from affiliates.
And on the yield side of our business, we're probably I'll use the back of the envelope 15 to 30 per cent of the business on the hybrid and opportunistic side of the business again. These are accelerants to growing because limited partners and other third party investors like that we have skin in the game and we eat our own cooking whatever your best analogy is.
When we have previously come to talk to you we speak to this business as a business that is roughly a.
15% annual growth business.
In years like this.
And my gut tells me FRE will be double digits, but below 15.
As and this is an investment year and and years. Once we've made the investment it'll be beyond 15%, but that's kind of the metrics we hold ourselves to.
Subject to update.
At Investor Day.
The things we are doing are generally designed to.
To help us get beyond that Martin anything you want to add something.
No the only thing I'd add is so and.
Translating that into the components of FRE and management fee growth should be changed in line with what we've produced we saw and see no reason to that one.
And in the future we are very focused on growing our origination businesses and growing and growing and transaction fees as you say and and we expect book to continue and then we make decisions about investing and the platform and so and that.
That translates into low double digits or high change FRE growth.
Year to year and.
And Mark sort of indicated what we expect this year, but you know, but looking forward. We're confident that we'll be able to produce every dollar growth consistent with what we've produced.
And in the Pos.
And regardless of the channel and it comes from.
Yeah.
Our next question comes from Devin Ryan with JMP Securities.
Okay, Great. Good morning, everyone wanted to come back to the conversation on the retail channel and and the opportunity as you guys lean and Theyre more it sounds like and <unk>.
Maybe just to talk a little bit about where you are on some of the product development that you referenced.
What we should be expecting over the next few quarters and and it would seem like this is a good landscape for innovation.
And so luggage and maybe get some updated thoughts around how you're thinking about the addressable market for Apollo and this channel relative to the institutional channel longer term.
Sure so.
I would say obviously when we look at our Apollo's you know product platform.
Certainly yield products are going to be the place. We you know we lead into the.
And so the global wealth channel and.
And that we're already making making inroads there I think it's still early days to see a sort of a substantial move the move the line item type results, but you know really we look at this over a 234 year and investment period, where you know by day.
That timeframe Youll see meaningful you know a meaningful progress there, but in the meantime, it's about.
And taking products, we have getting it through through the retail channel and continuing to develop and tailor products that you.
You know, we we learn or more specifically targeting targeting and those components, maybe maybe it's mark I'll add and I'll step back book there is a trend.
Toward the what we say is democratization of finance.
That trend was more pronounced under Republican administration, it likely will be less pronounced under a Democratic administration, but nonetheless, it is a trend and it's a trend we expect to continue.
We see increased sophistication.
In the retail and high net worth channels.
And so if you step back and you look at it from our point of view, we have for a very long time been a distributor of opportunistic product to the high net worth channel through private equity and a number of the other funds.
What you will see us do and that channel is continuing to do what we've been doing to build it out to redouble. Our efforts we have made significant hires and these areas.
And we intend to follow through and I would think on balance you will see.
Radar fundraise and coming out of this channel this year.
And next year and and in the future and I do think that this is a trend when we look back over the next five or 10 years, we will see retail high net worth is a larger percentage of total opportunistic fund raised and it has been over the past decade.
And then I go to completely to the other end of the spectrum.
And let's talk about Athene.
Athene is now the number one underwriter of retail annuities and the U S.
It has a substantial footprint the footprint includes.
Independent broker dealer.
It includes bank.
It includes other forms of distribution and I would say are more retail and less high net worth.
They have made the investments and systems and infrastructure necessary to support a complex product set and insurance is a complex products and even if these fees. This product set is all income base.
What Scott is focused on us and between the two.
I believe and Escarp leaves and Jim believes and the whole team believes that we have the opportunity.
To continue to package our yield oriented products.
In ways that can go through the high net worth and retail channels.
And the investments there have also been made and people.
And teams and we will continue to be made.
You will see us launch at the second half of this year at.
And at least two products through this channel that our yield based.
Again, when we look back over the next five or 10 years and compare it to the past decade, we will see continued democratization of finance.
Our job I believe has to come at this channel with our unique value proposition, which is not simply to sell as much as we can is to focus on what I believe the franchise does extraordinarily well, which is excess return at every point along the risk reward curve from private equity down to investment grade.
The product set that we ultimately.
Spanned and high net worth and retail.
He is a product that we can have our own designs, but it is ultimately up to the channel and the end consumer.
As to which of those products are more applicable and it's our job to make them available and make our capabilities available and support them with the requisite infrastructure and be a technology infrastructure or people and wholesale infrastructure to do.
This should not be unknown, others, and our industry have done it others have quite frankly been there first and are bigger.
And there's plenty of road map for us to follow for us to use this as an accelerant to what we otherwise are doing.
And it seems very logical and obvious to us.
Our next question comes from Ken Worthington with Jpmorgan.
Hi, good morning.
The total AUM and the store has stepped down from four Q1, Q and the non sub advised area and you mentioned in the prepared remarks that rates had a negative impact on and Athene and <unk> this quarter.
And one of your store assets was more than 10% is it possible to get a bit more color here.
And if it was just rates or if there were other factors as well.
Okay and it was you know that's a long duration portfolio. So its its more sensitive to right back up and so it was it was a combination of rates and.
And the euro given that most of the portfolios in Europe, but as I said the impact was pretty muted. It's all it's all in the numbers for the quarter and.
And then when you get away from that and that.
And at higher rates are better for the platform both in terms of investing assets and originating through the insurance platforms.
And I'd say as you know assets and liabilities are matched so equity in both and both those businesses continued to grow through the quarter.
When you report assets, you're just looking at one half of one half of the equation.
Understood. Okay. Thank you very much.
Our next question comes from Chris Harris with Wells Fargo.
Okay.
Great. Thanks can you guys just gave us and update on your views on consolidation opportunities and insurance.
And I'm wondering how you think higher rates might impact that outlook.
So I'll do my best it's Mark So in general as Martin said higher rates are better for our business.
First we have an investment portfolio that has a decent amount of floaters and it on the athene and balance sheet.
And second.
Higher rates can also help and pricing of new business, including.
Excuse me.
Company to company and new business.
So, but I don't actually think that rates themselves have a material impact on the ability or willingness of people to transact.
What we are watching.
Is in my opinion, a realignment of the guaranteed or as we say and the U S. Annuity led insurance business Youre seeing companies, particularly companies who.
May not have the ability to create asset alpha which is ultimately what drives the business.
Sell large blocks of business they sell this through reinsurance they sell this true through company sales.
And for the most part it is being sold to people who have the capacity to generate alpha amongst assets that are appropriate for insurance company balance sheets, which tend to be investment grade or quasi investment grade assets.
I see no, let up and that trend and I think this rotation out of guaranteed yield and.
And into mortality P&C and fee for service in.
And both the U S and Western Europe is healthy.
Our business in my opinion will not be limited and growth by our ability to source liabilities only by prudent with respect to returns and here I will give you a little more color.
Athene last year and when they announced their fourth quarter. They gave gave some indication as to the profitability.
Of the retail business they were generating.
Typically they have done between 15 and 20% cash on cash Unlevered for new retail annuity business last year was at the higher end of that range.
And we'll report on Friday, and we will give some notion of the profitability of business and the first quarter.
If we are.
Return maximize or we are trying to build a long term sustainable business, we should want to garner the lowest cost of funds and therefore, the highest level of repeat profitability for a decade for our retirement services business.
Our ability to generate.
Profitability at retail, which is the lowest risk most repeatable most franchise nature.
Does put a floor on our willingness as to what were prepared to pay for.
For large blocks.
Annuities, it's not just about growth, it's about sustainable profitable growth and not simply just growing the business for the sake of growing the business.
So the message I would convey.
There are immense blocks of business that will trade hands blocks and business in the U S are well known the.
And the blocks of business in Europe.
And my opinion are larger and less well known and very few people have the platform that we have to be able to consolidate those blocks of business.
And any one quarter, you can see block trade or not trade.
But we will continue to be focused on underwriting profitable new business, rather than new business.
Our next question comes from Mike Carrier with Bank of America.
Good morning, Thanks for taking the questions.
Apollo has had a you said a lot of change over the past six months and with that roles and responsibilities can shift around.
Josh was and on the call and Leon and no longer the mix just can you provide and update on leadership and our responsibilities like across segments and with Lps and then any additional expected changes ahead.
And all it's Mark I'll lead off always uncomfortable to talk about myself, but we will do our best.
So.
I am the CEO of the business.
The lanes I have picked out for myself and our strategy.
Culture, which includes compensation.
Communications.
Urgent strategic initiatives.
And dealing with problems.
I am fortunate to be able to rely on and incredibly talented group led by Jim Selter and Scott Kleinman.
Who run the day to day of the Apollo business.
They in turn have their own and next generation that makes their job easier.
At retirement services.
And pro forma for consolidation you have a business that is led by Jim Boulardii.
Bill Wheeler.
Marty Klein Grant Waldheim, all of whom have been there a long period of time and I have worked with on a day to day basis.
If you step back and really think about the business theres been a lot of external change, but I try not to lose sight that we actually grew the business by 145 billion and a year.
Most of the change Thats taken place has actually taken place within the business.
And what is external is mostly noise for us.
This is now my 31st year at Apollo My 36 year and business I grew up and the opportunistic side of the business.
20 of those years and I've grown up on the retirement services on the yield side of the business for the last decade plus.
This is not a new job.
It's very clear what we need to do we are.
We're very focused on what it is we did that we define the FERC, we define the firm as providing excess return at every point along the risk rewards reward spectrum that we choose to participate in.
We have really good tailwind, whether it's demographics market structure or otherwise.
We have a strategy that is focused on the three business segments I've outlined opportunistic, which I think this group and on the phone and understands the best <unk>.
Hybrid, which is the middle between opportunistic and yield and.
And then yield yield is by far and away the largest segment of our business and the fastest growing segment of our business and we have chosen a strategy that plays to our strengths fixed income replacement.
This is a trend that is it makes our business in many ways totally different.
And then our peer set.
First.
It is and easier business to scale just by the nature of its business.
And 60% of that scaling to date has been through our affiliates.
Third we present ourselves to the market and a unique way as aligned with our partners because we take 50 60 cents of every trade same time same price.
So for the most part.
We go about our business and we execute yes.
Yes, we have had changes in roles Josh is less involved and compensation, which seems like a natural given that I am now the CEO.
Josh is and active and productive and senior member of the Apollo team. He's on the board is on the Executive Committee. He chairs our transaction committee, which reviews, our largest opportunistic deals.
We get up for business every day and we execute the plan.
Our next question comes from Robert Lee with K B W.
Great. Good morning, Thanks for taking my question.
And I guess it may seem a bit odd.
Question, just given that there is some you have to have so many new initiatives going on with the <unk>.
Standing and origination platforms and.
And the secondaries business, but can you talk a little bit more broadly and regional basis and.
A lot of your peers have been pretty vocal and aggressive yourselves and spansion.
And the Asia, and Asia Pac and particular, some position mostly organic.
And the area, where you haven't presence and I haven't spoken about as much but maybe just some fees and how youre thinking.
Down the road kind of reached your global and regional footprint and the opportunities there.
Okay.
Take a shot at it and it's Mark and then I'll I'll hand, it to Scott.
And so when you step back and you look at our business. There is no denying that our business is primarily focused on the U S and western Europe, with a little bit in Australia, and a little bit and Japan.
That is the outline of our business and within the context of our strategy.
And what I've outlined up doubling our yield business and a 50% increase and our opportunistic business I believe we can accomplish that within our geographies.
Having said that we have been active in the broader Asian market for a long period of time, but we have not elected to move large opportunistic funds into those marketplaces.
The unique calling card that I believe that we have leverages the strength of the firm to provide capital where there is excess return for me I believe that excess return to be primarily and yield and and structured products and.
And you should expect us to use the things that we do best to differentiate ourselves and markets that are not short of capital.
And function quite differently than the U S and western European marketplace.
Yeah look I would agree with I would agree with Mark V. A while historically Asia has not been a huge target area for Apollo because we've been able to pursue all of the growth, we want and and.
Find the market opportunities, we're looking for in North America and Western Europe.
Not blind to the opportunity set and we are starting to make small inroads is as Mark said in places like Japan.
And Australia.
But I would expect to see more overtime, but on a measured basis and thought something.
And that you know we feel like we have to jump in tomorrow, but.
It is obviously, a big dynamic market and one which overtime. We will we will continue to incrementally grow into.
Our next question comes from Michael Cyprus with Morgan Stanley.
Hey, good morning, Thanks for fitting me in here just a question on as insurance becomes a more meaningful business for you guys.
<unk> may want to better appreciate maybe potential balance sheet risk side. Just can you talk about how you think about and SaaS balance sheet risk on the insurance side and as that comes over with Athene, what metrics will you be tracking and if there is a problem or issue with one area of the portfolio how might we see that from the outside and I don't.
And it gets mark to market or at least through the P&L at least and what sort of sensitivities or scenario analysis do you look at that you might be able to share with us on the outside.
Okay. So far.
<unk>.
And for the retirement services business.
The issue and the risk has always been on the asset side.
That is where I believe investors should focus that is where we are focused.
And there's very little volatility around I'll call traditional measures of insurance type risk like mortality and longevity or unexpected optionality on the part of policyholders. It is.
And is primarily and asset risk game.
We have grown up and the entire firm has grown up with athene.
By a relatively simple philosophy.
Retirement services insurance companies are a terrible place to take credit risk.
And they are a terrible place to take equity risk.
But they are ideally situated to take some amount of liquidity risk since most of their liabilities are illiquid.
And and structure risk.
And that is what you find on the athene and balance sheet.
So we've now been through 12 years there.
And as 12 years of metrics, there's not whatever cycles have taken place and those 12 years, we have written out.
And you can look at our portfolio and I would encourage you to bench market not against other annuity companies take the highest quality best thought of peer group and.
And I gave some of this and the through Orlando deck take true take met take principle.
And you will see whether its a measure of losses.
Of capital buffer of use of leverage or anything else, we have outperformed the double a benchmarks.
We have always been Apollo has always been the residual equity holder of the risks that we take initially we were a 35% equity holder some $2 5 billion of value.
And now we are going to be 100% equity holder.
The risk mentality mindset has not changed.
Now I focus down into the specifics of your question, we do put out extensive credit decks. If you go back and you look at that from jet period, just after the Lockdowns and the U S. You will see and extensive deck on our CLO portfolio, you will see an extensive deck on our CRE portfolio, you will see one on <unk>.
Energy you will see one and aircraft lending and we will continue to do this the granularity of information that we put out.
And there's nothing else like it and the insurance industry that I am aware of.
And this is how we run and monitor the business. We report on a quarterly basis impairments, whether they run through the P&L or not so you will get that updated information, but I assure you. This is ware.
The magic happens if you get this wrong.
It is a big negative.
If you get this right it provides competitive advantage.
What we seek to do and retirement services across the entirety of the portfolio is to earn 40 basis points across the portfolio better.
Then the comparable publicly traded investment grade option set or opportunity set.
It's not 200, more it's 40 more and.
And it is primarily a fixed income investment grade portfolio that benefits from stepping back from the fully liquid markets.
The only thing I would add Mike is just as a reminder, Apollo today manages 100% of the left side of things balance sheet right. So there isn't a Paul professional who knows.
Every single thing is tied to every line item on the on the Athene asset our balance.
Balance sheet. So the same care and feeding we you know we provide across our entire credit business is already being done with respect to athene and so the actual closing of the merger nothing changes and in that respect.
I believe we are coming to our last question and the pipeline.
Our last question comes from Jerry O'hara with Jefferies.
Alright.
Thanks for thanks for taking the question and perhaps just to mix it up a little bit.
Maybe you can give us an update on just the real estate segment I think historically there has been some frustration around the growth trajectory of that business and Mark maybe you can kind of give us give us a sense of how you see this segment growing forward, whether there's still an appetite for inorganic growth or are just what youre kind of gen.
<unk> thoughts are on on real estate and thank you.
Okay. So I'll start and then I will pass and Scott and Martin if they have anything to add but I'm going to start with something that will be surprising we have an immense real estate business.
Martin will give you a better exact number but we're 50 billion of real assets.
They're just not located in one place.
A lot of it is located and lending.
And a lot of it is located and our European principal finance business.
And then and our net lease business.
And then and our U S opportunistic business and and our Asian.
And Indian.
Opportunistic and structured products business.
It's harder to find as one line item.
But it also goes back to a philosophy about how we think about the business we.
And we think about the business and three buckets opportunistic hybrid and yield.
Real assets cuts across all three of those buckets, you will find real estate across all three buckets.
I will say reflexively, we are sizable but not immense and opportunistic real estate.
That is primarily a function of our own risk reward and view of the marketplace.
And skill set.
You will find us really large and hybrid and and yield.
Across real estate, which is a function of our risk reward.
And our skill set.
I would expect real assets.
Broadly defined to continue to be and incredibly important part of what we do.
I think you will see real assets mixed into platforms, which we call you yield and yield you will see it and our hybrid business.
You will see and on our structured products business and.
And you will see it to a lesser extent.
In our opportunistic business and.
And we have absolutely no qualms about being acquisitive in this area and I would expect that we will be acquisitive in this area.
And I think one of the things that we will do on Investor day is dropped down below the broad line items of yield and hybrid and opportunistic.
And provide the requisite pie charts, which allow people to see just how big this real assets business is and how big the origination businesses are.
And otherwise because I think it will surprise people that we've just come out this and a different way and others, but the fact that we're coming out of differently shouldn't surprise anyone.
Yeah, the only thing I would add I mean, mark Mark summed it up well I mean, we see.
The opportunity set as actually really great in this space.
And.
When we do sort of break out the detail for you you'll see.
And this business will more than double in the timeframe.
And that we're talking about the you know the five year timeframe and so there's just.
We're seeing it and the opportunity set that each of these businesses that mark talked about.
Are the investment opportunities that that theyre approaching right now and so the ability for scaling is enormous and it's a place that we're focused on so I would expect to see that.
As we continue to report over the coming quarters and years.
And I want to thank you all for attending.
I'm glad we were able to.
Take everyone's questions I know we were.
14 minutes over deadline, and we try and be hyper punctual.
So we will take feedback as to whether the extension is something that you want to see us continue to do and the future and enjoy your day.
This concludes our call.
And for joining us today.
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