Q1 2023 Apollo Global Management LLC Earnings Call
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Good morning, and welcome to Apollo Global management's first quarter 2023 earnings conference call.
During todays discussion all callers will be placed in listen only mode and following management's prepared remarks, the conference call will be opened for questions.
Please limit yourself to one question and then rejoin the queue.
This conference call is being recorded.
This call may contain forward looking statements and projections, which do not guarantee future events or performance.
Please refer to Apollo's most recent SEC filings for risk factors related to these statements.
Apollo will be discussing certain non-GAAP measures during this conference.
Which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the Companys website.
Please also note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Apollo fund.
I will now turn the conference over to Noah Gunn Global head of Investor Relations.
Great. Thanks, Donna and welcome again, everyone to our call. This morning earlier, we published our earnings release and financial supplement on the Investor Relations portion of our website first quarter results were strong and outperformed on a number of fronts, which we believe few others can say amid this backdrop of market volatility.
We will discuss further over the course of the call, but it's quite apparent that our purchase price matters approach is shining, allowing.
Allowing us to be very front footed and executing our strategic objectives.
The proof is in the numbers, we reported record quarterly FRE of $397 million or <unk> 67 per share and normalized sorry of $811 million or $1 36 per share, which together increased a remarkable 45% year over year.
This powerful combination of fee and spread related earnings coupled with principal investing income drove normalized adjusted net income of $942 million or $1 58 per share in the first quarter.
Up 18% year over year, which is indicative of the type of consistent compound earnings growth. We believe we can deliver to our shareholders. Joining me. This morning to discuss our results in further detail our Marc Rowan CEO , Scott Kleinman co President and Martin Kelly, CFO and with that I'll turn the call over to Mark.
Thank you Noah and good morning Tal.
Noah started down the path that I'd like to pick up on and really talk about the two different bets, we have made versus our industry.
The first is an investment style that.
If you look across our 600 billion of.
AUM.
Ever have to worry about what strategy were following.
Every strategy is purchase price matters.
Purchase price matters is grounded in facts its grounded in cash flow, it's grounded and business prospects.
In the equity business, which Scott will talk about it manifests itself in a maniacal focus on low purchase price for the quality of business that we are buying.
In the credit market it manifest itself at being top of the capital structure senior secured and floating rate.
If I ticked through just this quarter's results and how purchase price matters plays into this amid this market dislocation and volatility in our credit business corporate credit up 3% structured credit up 3% direct origination up 5% I hosted a webcast earlier this month.
For Etfs, and Earl Hunt <unk>.
98% of the book senior secured floating rate originated in 'twenty, two and in 'twenty three great years in which to originate.
If I turn to our equity business private equity up 5% European nonperforming loans through EPS up 2% literally across the board against the backdrop of instability purchase price matters has paid off it is really hard not to chase the hot dot of momentum and liquidity.
Especially when it goes on for so long against the backdrop of money printing, but that in fact is what we did and why we are where we are today.
The second bet I'd like to talk about goes back to our Investor Day in October 2021.
We told you at the time that we were going to make a different bet.
And then almost everyone else in our industry and if you look across our industry.
Some have bet on real estate equity.
Some have bet on infrastructure.
Bet on subordinated debt Bdcs.
Some have bet on growth.
None of these in and of themselves are bad strategies and in fact, some of our competitors execute against these strategies quite well.
But these are not our strategies that we told you at the time that we were making if you looked at the vast majority of our AUM growth was on fixed income replacement.
Think of that as private investment grade.
We made a really big push into private IGT.
Different in private credit is power is how private credit is normally talked about which normally means levered loans and below investment grade we are the investment grade version.
This quarter, our yield AUM was some $441 billion.
And while that sounds quite large and it is the largest of the private credit businesses. This is against the backdrop of a $40 trillion market that we estimate that we would otherwise be looking at.
We are simply not significant in the market and this is the best news, we are large but not significant.
That's our position.
I would like to work from.
Think about who we compete with and who we don't compete with.
The press likes to frame private credit as an enemy of the banking system in.
In fact, if we think about our businesses and how we've positioned our private <unk> franchise.
You want.
The banks don't want and vice versa. So let me articulate that very clearly because I think it is important that had come out.
At the end of the day, we want the asset.
We actually don't want the client.
Because we are not prepared to cross sell the client anything we can't sell them equity, we counsel and M&A, we can't sell them FX derivatives hedging.
Payments or credit cards.
Ironically for much of the banking system the banking system once the client.
But not the asset.
Particularly in a world of market stress, where many banks, particularly regional banks are rethinking their strategy.
I like where we sit in the food chain.
Like what were focused on and I believe we are very well positioned.
In a time of market instability against a backdrop of a good entry point for credit at higher rates.
The World is looking for safe yield insurance companies, including our own insurance company Athene and a thorough each safe yield.
Competitive insurance companies need safe yield Japanese banks need safe yield pension funds endowments sovereign wealth funds need safe yield.
Safe yield is as I suggested a potential replacement for fixed income, particularly publicly traded Iga.
Again, I like the hand, we're playing and I like the bet we've made.
If I turn now to the two businesses.
Told you for asset management that 2023 was going to be year of execution and a recognition and achieving of all of the investments that we have made in prior years.
In addition, we projected that we would grow some 25% year over year in the FRE.
I believe we will meet that metric, we are well on our track to doing it.
We experienced 57 billion of inflows in the quarter and we're on track to far surpassed last year's $130 billion I would expect a record.
As the scripts as near record of asset management fund raising in Q2.
I believe purchase price matters resonates now more than ever and I expect a very strong year.
Equally interesting is capital deployment.
Those who have followed closely over the past few weeks, we will see just how active we've been in the buyout business a place we've had not had tremendous amounts of activity during the run up in purchase price Scott will walk you through the market activity, we have been equally busy in credit.
As this is a perfect entry point for what we do in private Iga.
An important part of our growth today and in fact as I've said previously a limit of our growth is our capacity to originate assets that offer excess return per unit of risk.
We do this both directly in terms of direct lending, but we also do it via platforms think of platforms as businesses, whose only business is the production of credits.
Today, we have 16 platforms.
Three of the largest our midcap wheels, and Atlas just to give you a feel for how business is progressing.
Capped at $3 5 billion of originations year to date.
Normally mid cap would produce about a 14% Roe.
For the most recent period of time mid caps ROE approaches 17%.
Wheels, which is our fleet lessor.
His experience is no credit losses since the acquisition of Donlin.
Again wheels would normally produce about a 13% to 15% Roe in.
In the most recent period of time wheels ROE is approaching 19%.
Atlas integration well underway.
I appreciate whoever road Atlas hugs versus Atlas Shrugs and in fact, I think the timing for the purchase of Atlas could not have been better.
What is better than being a lender to other lenders during a time of market stress.
Our position of secured.
<unk> top of the capital structure floating rate with widespread.
We have a tremendous amount of work to do there, but we are very excited about what we've seen to date.
In short the origination business is better.
Because of the market stress, we are filling in where the market now is suffering certain lapses and we are earning higher spread we are able to underwrite with a negative credit mindset, we are able to protect the downside.
Most of what we're doing is top of the capitals structured floating rate and senior secured.
Let me turn a bit to our capital solutions business.
In prior quarters, I've, given you a little bit of our philosophy.
We want generally in capital solutions, particularly in our debt business, 25% of everything at 100% of nothing.
As we have become an increasingly large originator and in an increasingly diverse originator. This business is becoming a recurring business. The vast majority of this business and the growth I expect in the future. We will be around this philosophy of we want 25% of everything in 100% of nothing we are becoming peoples <unk>.
But stop to fill out what they need in terms of yield in their AG book without compromising credit during a period of market stress and concerned about the economic future.
Save the best for last.
<unk> services in Athene two.
<unk> 2022 was the best year in at Athene history record inflows in earnings.
2023, I expect to be better and has started off even stronger every metric worked in Q1 normalized spread of 160 basis points, new business priced very attractively leading market share.
Strong sidecar capital formation, which we will update you as we have further closings.
In short inflows were 12 billion in the first quarter roughly about the same as 2022 and I see this a little bit as the Golden age of annuities consumers simply prefer 5% to 2%.
Excuse me.
Not more complicated than that.
We built and have continued to build our international insurance relationships. We now have three significant reinsurance relationships in the Japanese market and I expect that to be five before year end.
I expect that we will generate some $5 billion a year annually.
<unk> reinsurance from this market and I expect this year in terms of flow reinsurance to be the single best year in our history somewhere between nine and $10 billion of flow.
Pension activity in pension buyout activity with higher rates is ramping.
We recently announced an 8 billion solution for our Blue chip client.
And I expect second quarter inflows at athene to be north of $17 billion.
In short we are on track to exceed last year's record annual inflows of 48 billion.
For the quarter normalized spread was $811 million.
This was as we've set internally a bit of a goldilocks scenario.
Fred's were wider than expected rates were higher than expected, we kept more business in house, meaning that we did not give as much to the sidecar that will correct itself in the second half of the year, but will result in higher earnings for the year.
Atlas was a net positive in short it all worked in addition, as I am sure Martin will walk through Conservative reserving methodology led to positive L. L DTI adjustments.
I think as we step back we should not multiply 811 by four.
But relative to the 20% growth and SRT that we had projected at year end I would expect us to have upside to that target.
That is even holding some $12 7 billion of cash at $3 31.
We positioned ourselves defensively, we positioned ourselves to take advantage of widespread and now we are taking advantage of widespread when your book is in good shape, you were able to take advantage of opportunities offered in the marketplace.
Before I turn it over to Scott and I am anxious to turn it over to Scott because he has lots to say I thought I would spend a minute on surrenders.
Given the activity we've seen in the banking sector.
Received lots of questions about how this impacts or in fact does not impact.
The retirement services industry, let.
Let me start with the punch line.
This does not impact the retirement services industry.
People, who own annuities are saving for retirement.
This is not money. They think is accessible when they do surrender or move it theyre typically moving to another policy.
Otherwise they incur.
Tax burden and tax efficiency finally from our point of view, we run our book and we invest against long term locked in liabilities, 80% of our portfolio is non <unk>.
Or is protected by market value adjustments sensor under charges.
This is not the first time, we've confronted these issues we've been doing this for a long time.
In the materials that we put out this morning.
Asked the team to put out a table that really goes through the four different types of outflows that we experience in terms of our book.
Uh huh.
The first and I'm, referring to a table that is in the materials.
The first is what we call maturity driven our contractual outflows.
This is exactly what you what it sounds like we entered into an SDN. It hasnt maturity, we originate a meager it hasnt maturity those numbers are fully predictable and you will see them from quarter over quarter and I know when athene does its deep dive call you will see not just what they what has happened, but you will see a <unk> <unk>.
<unk> for the next few quarters.
The next few categories I'll, what I'll call policy, driven outflows or policyholder driven outflows.
The largest of which is income oriented withdrawals.
Recall that for retirees when they get to a certain age they're required to take minimum amounts out of their policies.
Those minimum amounts of their policies are in fact, what come out on a on a planned and on a budgeted basis.
We then are left with two other types of withdrawals.
From those out of surrender charge, where we would expect to see more withdrawals and for those in surrender charge, where we would expect to see very few withdrawals in fact that.
That is what we are experiencing.
So I look at the weeks surrounding Silicon Valley Bank and the run on Silicon Valley Bank.
When I compare our call center volume surrender activity or any other form of activity.
Simply no change.
This business continues to be very very predictable. We are matched in terms of duration. We are matched in terms of interest rates and it gives us the confidence to invest against these liabilities and earn spread which we then lock in for long periods of time.
In short <unk>.
2023 for Us is.
As a year of execution.
And one where I believe both the strategy of <unk>.
Focusing on fixed income replacement and the investment dynamic of purchase price matters will pay off.
For us there is so much upside for executing the base business plan that the simple shorthand for what we intend to do in 2023 is no new toys.
The bar is extremely high to do something new given the opportunity in front of us.
<unk> original growth drivers original origination capital solutions and global wealth are well on track Scott will detail. The next six.
We're driving toward operating leverage this year. It is a key point of our focus it occupies a lot of our mindshare, we achieved a little of it this quarter, but theres more to come.
Today, we ended the year or in the quarter at 600 billion of AUM $500 billion of that and yielding hybrid.
Team is in great shape momentum is good and with that I'd like to pass it to Scott.
Thanks, Mark this is certainly an exciting time to be in our business as you can see from our results purchase price matters is succeeding in this environment as demonstrated by strong investment performance and several strategies, including flagship private equity direct origination and opportunistic credit portfolios. We believe we are.
One of the few firms who can play offense in these periods of uncertainty, which was quite clear by the level of deployment activity in the first quarter.
We signed four private equity deals since our last earnings call and our current pipeline of opportunities is about <unk>, a year ago and growing.
We announced the first acquisition from our latest flagship fund just last fall and since then <unk> has invested or committed approximately $6 billion of capital the.
The strength of our relationships and ability to structure complex financing solutions are really what set us apart when traditional funding sources are limited.
For example in the wake of market turmoil surrounding bank failures in March we announced an $8 billion acquisition of chemical company Univar solutions and industry vertical in which we have long standing expertise and.
And just last week, we announced the 5 billion acquisition of aluminum products manufacturer or chronic by our private equity funds.
Our hybrid business is also thriving in this backdrop of higher rates earnings pressure and lack of appetite for bank led syndicated credit.
With corporates focused on deleveraging in the face of upcoming debt maturities and sponsors seeking exit alternatives amid tepid IPO markets, we're seeing increased demand for private market solutions be your structured equity and credit.
Accordingly, our investment pipeline for hybrid value is robust and we expect the deployment environment to remain attractive for quite some time.
With the dislocation we've seen in the banking sector over the past couple of months, we've been leaning into a wide range of investing opportunities across private credit platforms.
We believe the breath of our platform and the depth of our expertise puts us in a unique position to provide creative flexible capital solutions to a range of borrowers, especially to those that may not be as widely serviced by traditional lenders.
We're able to generate a low double digit yield for first lien debt backed by good collateral.
As a recent example, we agreed to invest 1 billion euros and a portfolio of high quality assets controlled by <unk>, a leading global residential real estate company, which provided a long term cost effective solution for the company.
Inclusive of this investment we've originated over $18 billion of high grade Alpha transactions since the start of 2022.
Pipeline of these types of high quality attractive investments is already significant today.
Longer term, we think the opportunity to gain market share is even greater and spans an even wider range of asset classes from corporate lending to all sorts of asset backed finance.
As it relates to fund raising trends, but long term secular tailwind driving growth in allocations to private markets remain intact and momentum across our platform is strong.
While recent market disruption has caused some observable shifts in market behavior, particularly with U S and European institutional investors.
Investors based in the Middle East and Asia actually turned up their focus and seem to have viewed it as an opportune time to allocate capital.
Individual investors were also quite level headed and we saw no material increase in redemptions from global wealth offerings.
Steady build in new capital in the first quarter.
On the product level fundraising trends in traditional private equity are still facing some headwinds, but with a total of approximately 30 co mingled in perpetual capital vehicles expected to be in market. This year, we still feel confident in our ability to raise more capital than we did in 2022.
We expect second quarter inflows to be particularly robust given the line of sight, we have to several sizable mandates and fund closes in the near term pipeline as Mark mentioned.
On form 10, specifically, we've received total commitments of approximately 16 billion through the end of March throughout the marketing process, we've experienced solid demand from repeat investors off the back of very fun nine very strong fund performance, which appreciated 23% in 2022 and 8% in the first quarter.
Looking forward, we have a great to have investors in the final stages of documentation and currently expect total commitments to be in the low $20 billion range with a final close expected over summer.
The amount of capital positions us with one with one of the largest funds in the industry and with the flexibility to lean into a range of interesting opportunities in today's markets.
We're also making meaningful progress on the six additional growth initiatives, we highlighted in February .
Six areas AAA Athene altitude third party insurance side cars clean transition and sponsor and secondary solutions position us to take tackle huge white space opportunities.
These initiatives are natural extensions of our three key growth pillars, and therefore play to our strengths, including complex product structuring proprietary asset origination and of course generating excess return per unit of risk.
As these businesses scale over the next few years, we expect our third party fundraising will grow in size diversity and consistency here are some highlights.
We are AAA and innovative core equity replacement vehicle, we're continuing to broaden distribution to both institutional and global wealth clients.
In addition to the 40 plus approvals in place with independent distributors, we have a handful of new wire houses bank relationships geared to come online in the coming months and conversations with family offices are also ramping up.
Just last week, we announced the launch of our Luxembourg based product platform that provides individual investors in Europe Asia, and Latin America access to two investment strategies, including Triple play in their local currency with lower investment minimums than traditional alternative product offerings.
The proposition of equity like returns with downside protection is proving especially attractive in this highly volatile public market backdrop, and we remain very bullish on the long term outlook for this fund.
For Athene altitude and innovative tax deferred annuity wrap product. We've received positive initial feedback from several retail distribution partners. We have a few firms in late stages of due diligence and expect to launch the product more broadly in the coming months.
Within clean transition, we recently announced the launch of Apollo clean transition capital or act capital with $4 billion to deploy into yield and hybrid investments in support of corporate transition to clean energy.
Meaningful seed investments from a strategic partner and are aligned pools of capital should enable us to build a diversified portfolio and investment track record from which we can eventually raise additional third party capital.
We also expect to launch the Apollo clean transitioned private equity strategy in the third quarter, which will continue to expand the scope and scale of our activity in the sustainable investing area.
And lastly, we began raising third party capital for our inaugural equity secondaries vehicle in the second quarter, which is part of our sponsor and secondary solutions or <unk> business.
As a reminder, we began investing for this strategy last fall with a chunk of seed capital from long term strategic from a long term strategic partner and AAA to help anchor of the broader fundraise.
Deployment activity has been strong since then and the vehicle has committed over $1 billion of capital in transactions led by S. III.
Combined with our three strategic growth pillars. These next six initiatives provides significant runway for growth, we look forward to providing updates as these exciting initiatives developed.
So with that I'll turn the call over to Martin to go through our financial results in more detail.
Great. Thanks, Scott and good morning, everyone.
So our asset management and retirement services businesses, clearly continue to create recurring and growing income stream. So demonstrates stability through significant market disruptions like we saw in the first quarter.
Almost 60% of our assets under management.
Is comprised of perpetual capital with the remaining concentrated in long term locked up structures and the funding source for our retirement services businesses as Mark highlighted is highly persistent with predictable long term liabilities.
Combined this creates a very resilient earnings profile, particularly when considering pressures on the broader financial sector.
Within our asset management business first quarter, FRE increased by 28% year over year.
Driven by strong growth in both management fees and capital solutions fees.
These increases reflect the approximate $100 billion of ash.
Asset management inflows over the last 12 months.
As well as the broadening of our capital solutions capabilities as several of the substantial growth investments we've made over the over the past couple of years.
Translating into top line revenue.
Fee generating inflows in the first quarter included $20 billion related to an investment management agreement with Atlas for which we will earn a 10 basis point fee.
<unk> related expenses grew by 20%, 26% year over year, and 3% quarter over quarter.
After several years of investment in our platform the pace of head count growth and the rate of increase in non compensation costs will decelerate materially in 2023.
2020 to an inflection point for FRE cost growth.
Altogether as Mark suggested we expect to deliver some operating leverage this year, while targeting 25% FRE growth.
Moving to retirement services are things performance to begin the year with stellar and exceeded our expectations.
The outperformance reflects a more favorable investing environment, while part reflects more episodic gains or timing benefits.
We reported normalized net spread of approximately 160 basis points in the first quarter.
Highest level the business has seen in a decade.
In the first part of the year, the investing environment was very attractive and we were able to deploy in coming close at higher on the margin yields than we had anticipated.
The weighted average yield on total fixed income purchases exceeded the triple B corporate bond index by more than 150 basis points in the first quarter.
It is only approximately 25 basis points and all of 2022.
The higher rate environment also drive drove net spread accretion from things floating rate position and cash holdings.
Episodic or timing benefits in the quarter included.
Fees related to financing arrangements for the Atlas transaction, and some elevated fees related to certain fixed rate loans.
And sorry benefits in advance of the second vintage of strategic third party sidecar capital.
Sumit its proportionate share of inflows from the first half of 2023 early in Q3.
And we continue to expect sidecar capital to support approximately 40% of total obtained inflows this year in aggregate.
And then lastly, we expect an approximate $3 billion outflow in the third quarter related to the recapture of some older annuity liabilities by one of our affiliated partners.
This will free up capital for Athene to redeploy in attractive investing environment.
While providing portfolio diversification for our affiliated partner similar to the Cadillac the transaction in the fourth quarter of last year.
Due to the New York insurance accounting standard, commonly referred to as <unk> last week, the <unk> recast results for 2022.
These new requirements drove a favorable impact to normalized <unk> of $220 million in 2022, which was entirely reflected within our cost of funds and translates to 12 basis points of normalized net spread benefit.
We expect this benefit to persist in 2000, 22023, and the use beyond although at an approximate 10 basis point in normalized terms.
This effectively increases our normalized net spread target for 2023 from 135 to 140 basis.
Basis points.
Up by 10 basis points to $1 45 to $1 50.
In addition, there are a few other moving pieces that should impact the outlook for SRT This year.
Given the deployment opportunities we're seeing in the market today, we do expect to put new money to work at better yields than we had originally forecast.
And then but on the other hand as Mark described we prudently increased the same cash balance this quarter to provide an extra layer of stability amid heightened market volatility in March.
Normalizing for the benefit of LDC I, considering an improved deployment backlog.
Offsets from higher cash balances, we expect normalized <unk> to slightly exceed $3 billion. This year with an estimated normalized bedspread branch of 150 to $1 55 basis points.
Let me spend a moment on capital allocation.
We expect our free cash flow to be utilized to fund the base dividend return on incremental capital to shareholders through opportunistic buybacks and dividend increases and to invest in strategic growth.
In any given quarter or year, we determine how to best allocate capital based on its higher highest returning use.
We use the following framework in making this determination.
For the dividend, we aim to generate a yield in line with or better than the S&P 500, which is currently yielding approximately 2% today versus our two 8%.
For opportunistic share repurchases, we target at least a high teens IRR over the medium term and that's signaling closer to 20% at current trading multiples.
For our strategic growth investments, we underwrite a target returns equal to or better than opportunistic share repurchases with the potential for strategic upside benefits.
And all of these Holdco capital uses are weighed against growing at the same.
Even without using any.
Third party sidecar capital for growing Athene is very compelling as it is generating an estimated low 20% pre tax Roe today.
This return profile is further enhanced with increasing utilization of <unk>.
In the first quarter, specifically, we deployed $160 million of capital for opportunistic share repurchases and our current orientation is to spend less on strategic investments given the large number of organic growth initiatives are the development and the high bar in which we are using to consider these new opportunities.
As we communicated last quarter, we expect to be a buyer of our stock on a more consistent basis as we move through our five year plan.
In conclusion, our financial results in the first quarter position us very well to execute on our strategic and financial goals for the year.
We're busier than ever we're highly focused on the significant opportunity in front of us.
With that I will turn the call back to the operator for Q&A.
Yes.
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Our first question today is coming from Alex Blaustein with Goldman Sachs. Please go ahead.
Hi, Good morning, everybody. Thank you for the question.
Mark maybe you could start with the current environment Apollo clearly build a really broad set of origination capabilities, we've talked about that a bunch in the past, but the dislocation in the regional bank spaces, amplifying and amplify and really the supply demand balance I guess that we see in the market. So.
Given that backdrop, maybe spend a minute on Aries do you expect to be more active in amongst the existing platforms.
Are there any new asset classes in a way that you could further lean into and then maybe talk a little bit about third party fundraising that could get accelerated by what's going on in the credit space.
Call it over the next 12 months thanks.
Okay.
We are as you know.
Broadly focused on scaling our private credit business, our private credit business is different than most other private credit businesses in that the majority in the vast majority of it is fixed income replacement or private investment grade.
This fits very well with the space that is currently in retrenchment by the banking system is the banking system historically was not a risk taker. They were on accommodation top of the capital structure Senior secured we in fact are top of the capital structure senior secured and floating rate.
If I step back.
D banking has already been happening across our country.
Following Dodd, Frank which essentially encouraged the development of bank replacement by investors banks, we estimate are less than 20% of all that capital in U S capital markets.
Given what's happened in regional banking I expect that to become more of an investor marketplace. The way the U S banks today in.
In the investment marketplace is indirectly through securitization. If you look at growth in CLO growth in ABS growth in other forms of securitization Youre seeing essentially how America banks today.
Atlas The credit Suisse Securitized products group, along with Redding Ridge, along with mid cap along with the wheels Donlin and the other platforms. We have built are all focused on this marketplace.
I would expect Alex that you will see a tremendous pickup in securitized product relative to traditional direct lending and it's a space that I believe has a lot of white space and where we are incredibly well positioned and I would expect in later quarters that we will see.
The fund raising develop around this investors, particularly those who are.
Essentially invested in the first round of private credit or meaningfully underexposed structured product and don't have great ways to have access to it. So I think this is actually a really interesting time for the platform.
And one in which we're well positioned.
Thank you. The next question is coming from Patrick Davitt of Autonomous. Please go ahead.
Hi, Thanks for the question.
On that point.
Do you have any kind of updated thoughts on how much annual origination capacity, you think will come online with Atlas and through that lens as we look to Youre doing more third party insurance business is there any risk that it'll be harder for you to build that part of the business out as insurance companies might see Athene is too big a competitor. Thank you.
So it's hard to say on Atlas Atlas had been a $70 billion book of business that I view as turning annually or every year and a half.
At the time of acquisition, we purchased roughly a $40 billion book of business and so I would expect you should see somewhere $30 $40 billion of annual originations we.
<unk> had prior tablets had originations running at close to 100 billion.
As you know our five year target is 150 billion of annual originations and I believe certainly with Atlas, but also with the growth of the platform and whats happening with banking generally.
I would expect that we would exceed that $150 billion of annual originations well before the date that we had projected with respect to the competitive nature of our business.
We really do honor this 25% of everything in 100% of nothing philosophy.
Some of the people you would perceive as Athene is largest competitors are actually our partners in these origination platforms not only do we not want 100% of any transaction. We actually are prepared to share. The means of origination with people, who you would have sensibly view as <unk>.
Our competitors.
When I step back and again think about our business.
More than $500 billion of our $600 billion of AUM is partner capital, where we're essentially working with the marketplace, yes, private equity and transaction based businesses are somewhat zero sum someone wins and someone loses but for the vast majority of business.
You are our competitor either in asset management or insurance and you want to build for instance, a CLO business and competition with Apollo CLO business not only we will give you equity will give your warehouse will warehouse collateral for you will by your liabilities and will put your <unk> business. If you want to start a broker dealer in competition with our capital solutions business will fund your broker dealer.
We are simply not in competition.
With any one company we are in a market, where we are 440 billion of AUM, which sounds really large but I assure you that the Ceos of the four big banks in the U S do not like wake up everyday wondering what the Mighty Apollo is doing we are fortunate to be really large but at the same time.
Vas C, where we are not yet a relevant player.
Thank you. The next question is coming from Glenn Schorr of Evercore ISI. Please go ahead.
Thanks very much.
Yeah.
So I'm curious you're in the business with capturing spread obviously, but I'm curious if you think you benefited as much as you thought you would benefit from this big move up in rates and the flip side of that is how are you thinking about what to do with the portfolios in your investment and your deployment as the forward curve is now expecting.
Some rate cuts along the way just curious on how you're pivoting as we might be pivoting in the right side.
Okay. Thanks, Glenn it's Marc so first.
Rates in and of themselves do not fundamentally alter the shape of the business. They alter the attractiveness of the product as I've said, because consumers prefer higher rates to lower rates, but in terms of our business model our cost of funds pretty much adjust with the opportunities available in the marketplace absent unusual events like in the first quarter, where we earn.
Excess spread so right moves don't really affect spread in and of themselves.
We have had the luxury because we earned adequate spread on.
On prior books of business of holding a large floating rate position and I'll come back to this because it's important to know that the floating rate position did exactly what it was supposed to do it provided excess earnings during a period of low rates moving to higher rates.
You should assume that we have maintained about normalized the floating rate position at athene, reflecting the current market environment.
The important thing I think and you didn't ask the question, but I think it's important to understand our business.
When we were building athene.
We built scale inorganically by buying books of business when rates are low buying blocks of business is actually just fine because the business thats on the books is generally has high guarantees in a low rate environment.
When you buy a block of business it generally outside our near the end of its surrender charge a market value adjustment period, and so you take a big risk doing inorganic deals.
Unless theres a huge differential between the rate environment and the guarantee in the policy.
We where spreads were so wide when we were building that business that we could actually afford to hedge that risk through floating rate.
What's happening today, we haven't done an inorganic deal in about three years.
Cost of inorganic deals given the competition in the marketplace exceeds meaningfully the cost of funds with newly issued newly protected surrender charges and market value adjustments.
What we are seeing today is the last desperate attempt of people in our industry trying to build scale.
Think about what's happening all the concerns that investors have about surrenders and policyholder behavior.
Someone who buys a block of business today is buying generally old surrender charges old market value adjustments that are burning off and theyre buying into a rate environment that is high where consumers have alternatives. So you would not expect to be able to hedge that block in a meaningful way.
So I view this as kind of the interesting thing in our industry I think it's going to be very hard to get to scale in this rate environment absent a meaningful organic origination engine, because you simply do not want to invest or put capital behind policies that are not protected by surrender charges market value adjustments or other contraction.
<unk>.
Economic incentives.
Okay.
Thank you. The next question is coming from Rufus Horn of BMO capital markets. Please go ahead.
Alright, thanks, very much good morning, I was hoping you could spend a moment on the ramp of AAA and maybe give us your thoughts on what you think the run rate inflows could could be for that product around year end.
And was also curious on athene altitude.
And the potential tax advantaged products, specifically I suppose what products can you house within one of these VA wrap is and what limitations are that because it seems to me like a no brainer to defer your taxes, if it's possible. Thank you.
Sure I'll start with the AAA question.
So as I mentioned in my comments, we are really starting to hit the sweet spot of.
Adding distribution partners.
The AAA offering.
To your question of where this could be on a.
On a retail basis, we could be approaching.
$5 billion to $1 billion, a quarter I think by the end of the year retail.
Plus.
One of the surprises. We found is that this is more attractive to certain institutional investors than we than we would've expected when we created the product.
And that of course is a little bit lumpier, but we're starting to see real progress on that so.
In due course, we've said in the past this could very well be apollo's largest product.
And I do really believe that over the next few years.
This could be a product 2030 plus billion.
Maybe I'll hit Athene altitude. So we've articulated previously and I certainly have been quoted publicly stating that over the next five years I expect that high net worth investors will be better than 50% allocated to alternatives.
That always elicits.
Certainly I'll look because it is not where the people are today, but I start with the definition of an alternative to Asa and alternative is nothing other than an alternative to publicly traded stocks and bonds and I believe alternatives go from double a to equity.
When I say, 50% allocated to alternatives I do not believe they will be allocated to private equity or venture capital or risk, but to alternatives in the newer definition that I've suggested.
Today.
You can buy from Apollo investment grade only yield.
You can buy total return.
You can buy opportunistic credit.
You can buy REIT you can buy BDC, you can buy our credit strategies headphone and you can buy a AAA.
All wrapped.
In an altitude annuity.
For an excess cost of 30 basis points with no further restrictions.
We as an industry are in the early stages of addressing the needs of high net worth and retail investors versus versus institutions. One of the key differences is institutions are not taxpayers. They generally are pension funds endowments or other tax types of tax exempts. So our industry has not historically been as tax sensitive.
So if you think of the experience of our BDC investor in a high tax state an 8% dividend yield it looks like three eight to the consumer that is not as attractive as 77.
But we are in an education phase and the whole growth of alternatives is about education and retail investors and their financial advisors first need to understand the products.
And they are getting an education and products and we are doing our part in other firms in the industry are responsibly doing their part.
This next layer of altitude and wrapping is yet another bit of education. So we are selling this product today.
Mostly to high net worth individuals and family offices.
And this product will get increased amounts of traction as Martin or Scott in their remarks suggested I believe we will have our first broad distribution of this at some point this year and you should expect us as new products come online, we will continue to build out the family of products under the altitude Brad.
Thank you. The next question is coming from Michael Cyprus with Morgan Stanley . Please go ahead.
Great. Thank you. Good morning, just a question on the retirement services business, you mentioned, an increase in cash balances, adding an extra layer of stability, how meaningful is that and what do you see in the marketplace and when you look at your outflow profile, that's leading you to do that.
We saw an 11% outflow rate in the quarter. So I guess the question there how do you expect that to trend over the next couple of years and you mentioned a recapture of some older annuities coming up in the third quarter, what's the expectation to see more of those following Catalina that we saw last year.
So it's mark.
Normalized basis, we hold about 12% 12, <unk> six $6 5 billion of cash. So this is about $6 billion of extra cash for those of you I've seen in person or have attended the call with us.
I remember in the early days of the banking crisis, calling out to gimbal already and asking him to give me the benefit of some leeway I was going to ask him to do something that had no justification other than feel which was to massively increase our cash balances at the point of instability, we were watching credit Suisse and signature and SBB.
And Jim did that and ironically, it's positioned him to take advantage of wider spread.
So in hindsight.
I think it's been no harm no if Alan I'd expect to see cash balances come down the.
Question on outflows I hope, we answered better in terms of the table that we disclose but I'll I'll come back to you and I'll I'll speak philosophically first.
When we construct a product we put a lot of benefits into the product we strip away. The excess features that give rise to volatility that consumers really don't know how to value anyway.
And we put it into the price and yet we create a very low cost of funds and we've gone from a start up to the largest provider and the largest market share in the U S market.
That is no mean feat.
But when a product comes out of surrender charge.
Or it's a market value adjustment burns off.
We take the contracts, we take the product to its contractual minimums, we want the product to surrender, because we cannot invest.
And earn spread against a product that is redeemable at any point in time.
This is true across the industry. It is not just US who follows this as a point in time and recall policies generally do not leave the industry. They recycle.
Because otherwise people suffer tax consequences and this is a retirement product. This is not a demand deposit.
What's happening to us and we are seeing the benefit of is.
We were zero market share and now we're the largest market share.
We are the benefit of this recycling at a point in time in the industry when rates are higher and therefore consumers are more interested in annuities and the whole industry is up we're just up more than about anyone else.
So I come back to the specifics now in how surrenders work.
The maturity cycle of contractual based outflows will go up and down based on the business that we see 357 years ago.
We can tell you pretty much quarter by quarter, and Athene will do that in their deep dive what the contractual maturity driven outcomes will be in some quarters it'll be upward some quarters. It will be down you can actually look back to this quarter that maturity driven was 3% Q3 in 2022. It was five 7% you should expect.
Back to see a lot of volatility in that line based on business down three five and seven years ago.
Income.
Policyholder driven outflows the three categories for income oriented withdrawals you should see this as a steady amount of money that goes out based on the age of policyholder and their proclivity or need or legal requirement to take income. This is also planned.
The next line is from policies out of surrender charge. This is also planned this gets to the point I just made we take contractual minimums on policies that burn off their surrender charges to as low as we possibly can we want these people to surrender.
This is a relatively small amount because the vast majority of policyholders surrender at maturity.
10% approximately of the people forget they have a policy.
And some point in the future they wake up and discover they have a policy that's out of surrender charge.
And so this number you can see bumps around.
Back and forth.
Neither high nor low it's a relatively small number the thing that we watch pretty closely because it is the basis of our business. We look at policies and surrender charge. These are to some extent unplanned. These are what I would call life life issues. This is health issues death.
Divorce or other change in life circumstances, we generally don't see changes in these kinds of surrenders as a result of interest rates or financial markets activity and if you go back and you look in time.
This quarter Unexceptional and you should expect and we budget that number to be kind of unexceptional on a go forward basis.
So again I step back and I look at this industry and it's not the first time we've done this this.
This industry has been resilient over a really long period of time you go back to the financial crisis, and you think about how central AIG was to the finance in the financial crisis in 2008 really no move do you think about Genworth, who also had its troubles in the financial crisis also know move.
Don't see anything really going on here that changes the way I think about the business and I think we will do the best job, we possibly can to give you a prediction.
<unk> outflows.
And the primary thing that varies is maturity driven contractual based outflows.
Quarter by quarter.
Thank you. The next question is coming from Michael Brown of <unk>. Please go ahead.
Great. Thank you very much.
So mark capital solutions have been running north of $120 million or so for the last three quarters. It seems like it's playing a more important role in the broader business here could you just expand a little bit more about what's driving on that growth here in this.
Very challenging backdrop and is there potential to actually hit your $500 million target before 2026. It seems like you are certainly trending that way.
Yeah I'll answer that.
It's exactly what we broadcast over the last year.
Year year plus.
As we've continued to scale that that Acs business right. It's about inputs and outputs. We've continued to grow the number of origination platforms the number of products flowing into that.
Combined with as we've scaled the Acs business and the number of Syndicators, we have we touch more clients more market participants. So it's not surprising we're seeing this steady progression.
As Mark alluded to particularly on the credit side, we really do want to own 100% of nothing and so by definition that continues to feed our Acs platform.
No.
Directionally. This is heading exactly the way we would have predicted.
Your to your point about hitting that target early it's certainly possible that I.
I think that that fee.
Five year plan was a little bit conservative.
Thank you. The next question is coming from Craig Siegenthaler of Bank of America. Please go ahead.
Thanks, Good morning, everyone.
I wanted to better understand the quarterly valuation process for the equity Stakes.
Credit origination vehicles that are held in AAA and then for the AAA stake held me back as a team and my question really is it's driven by the fact that athene no longer hold the equity stakes directly because it was a swap for AAA a couple of quarters ago.
So I'll do I'll start and then I'll turn it over to Martin.
Mark So the evaluation process, whether it was on Athene balance sheet are in AAA Hasnt changed and makes no difference.
The vast majority of the origination vehicles are held or valued at a basis of book value and Roe.
And as you would imagine in this environment. They are on the margin moving up but theres not a tremendous amount of volatility because these are for the most part book value based entities that track, how they're doing in ROA and ROE are have been very stable over a long period of <unk>.
Time.
Good morning.
Just add.
The only difference between the valuation in.
On the alternatives portfolio, which was 6% for the quarter and what AAA shows is just due to certain positions that.
But a lot.
They're not in AAA.
Copy for various reasons, but otherwise I think it just you think a thorough or Catalina other insurance companies.
Can't be for regulatory and other reasons in AAA and those positions are held out otherwise 100% of the alternatives portfolio was in fact in AAA. So there's no. There's no difference in any way between the valuation methods and then and then within the <unk> portfolio for the quarter.
Connecting back to the common stock right on on the platforms.
Platforms generated close to 10% return within that 6% for the quarter. So you know the origination business is healthy and higher always are translating into.
So upward upward marks in our portfolio.
Thank you. The next question is coming from Brian Bedell of Deutsche Bank. Please go ahead.
Great. Thanks, good morning folks.
If I can come back to a response you had to a question earlier on growth in securitized products and maybe just to compare with direct lending.
To the extent, obviously, if we get a.
A substantial pullback over the medium and long term from from.
The banking system, especially regional banks.
Can you talk about that opportunity and direct lending, but then obviously contrast, it with your sort of optimism on securitized product and is that going to sort of.
You take some of the share from direct lending or do you see them, both growing pretty pretty substantially and your participation obviously in both.
I'll start at the top of the ecosystem I'll invite Scott to add as we go so I start at the top of the ecosystem. The U S economy needs credit consumers and businesses as a result of GDP and GDP growth how that credit has provided has been in a secular change, particularly since dodd Frank with more of that.
Credit coming from the from investors, who are the new banks versus from the banking system current government guaranteed government back deposit insured banks.
As a general matter investors are supplying more credit relative to the banking system.
Then we have this growth of something we call private credit, but those are two words that don't really mean anything they just sound like they mean something because private credit can be double a or private credit can be highly risky triple C.
For the most part popular press has taken private credit to mean Levered lending.
Which is below investment grade, which is a relatively small part of the private credit ecosystem, yet when investors talk about private credit and their allocations to private credit.
And they use sometimes use the term direct lending almost all of that is focused on the below investment grade.
Levered lending or direct lending.
And people also think about lending in corporate format because that is the most familiar are the most common way people think about it.
For our ecosystem.
We love the direct lending below investment grade Levered lending business, sometimes right.
Right now we happen to love it.
Theres not a lot of providers.
Funds are still needed.
We can make commitments underwriting and a negative mindset, we can earn widespread and.
And there is a shortage of capital. So we have good deal selection now is a good entry point to below investment grade leverage lending private credit direct lending. However, you define it.
The point I was making is when you look at the macro of how.
The country is now banking in the invest toward marketplace. It doesn't bank, primarily by selling loans indirect forum to investors at banks indirectly through securitization.
When you look at the growth in ABS. When you look at the growth in other forms of structured product that is now how America banks and if you go to our website and you actually look at performance not just put out by us by put out by others you would see that a fair read of all of the information available is that if you look at an investment grade corporate book.
And today versus an investment grade securitized product you would conclude that at the same ratings point the investment grade securitized product is a better credit.
Which just makes sense because what we've seen in the economy, taking place is a significant pickup in the pace of technological change consumer change societal change cultural change and therefore, we've had more single points of failure in single investment grade corporate issues. Thank Seb Thank credit Suisse.
Versus what securitization gives you which is the benefit of diversification, which now has more value than ever.
And it's not just Apollo, saying. This this is almost everyone who has looked at the topic in an academic sense.
Investors are for the most part exposed to private credit indirectly lending and corporate format and below investment grade.
They are at the early stages of fixed income replacement of taking their <unk> portfolio and rotating into something that offers them at the same ratings 0.2 to 300 basis points more insurance companies others have been doing this for a really long time and I believe that investors will also enter this market and a.
Big way.
And therefore, I think there's a lot of running room.
In the securitized marketplace, but once again make a distinction between investment grade, which is a vast a large market and below investment grade, which is an opportunistic still really interesting market sometimes.
Yes, I would just add as you look back and think about the evolution of the direct lending private credit market over the last decade.
That's really been a single name issuer.
Level, mostly at the sub investment grade.
As we've certainly been doing over the last several years at the replacement level.
We look at the asset backed opportunity and see a similar type of evolution over the next five to 10 years. Its certainly what we've been doing with our own balance sheet for the last many years that that's been a key driver of the excess spread that we've been able to deliver but ultimately we think the rest of the market is.
Waking up to this and.
We'll be a just a huge massive market opportunity the.
The difference being you really do need the specialized origination specialized underwriting to really be able to.
Be in that market and that's just a huge.
A huge benefit that we have that we've built we've worked so hard to build over the last five 710 years.
Thank you. The next question is coming from Finian O'shea of Wells Fargo. Please go ahead.
Hi, everyone. Good morning.
Higher level question on private investment grade.
You produce alpha there and now share that benefit between the asset manager.
<unk> policyholder and outside owners of origination for example in AAA do you see attention on claims to that excess return.
Is there enough to go around in a more normal market environment. Thank you.
Okay.
Yes.
So it's mark.
The short answer is no, but I have said previously.
The capacity to produce excess spread or more broadly excess return per unit of risk is the limiter of growth in our business.
In alternatives, if we are true to what we're doing we only exists to provide this excess return per unit of risk otherwise investors should be public instantly with any liquidity and strict restrictions.
So it is our job to grow it.
And not try to grow our AUM any faster and we have excess spread per unit of risk. So far we have been good at balancing that but we look at this all the time. This is ultimately the cap. If you will on an intelligent way to grow our long term alternatives franchise that meets investors' needs.
To address though the three categories you highlighted right the underlying annuity holder.
Gets <unk>.
Underlying rate plus some amount of.
Of excess that allows athene products to be attractive.
Athene captures the excess spread inherent in our origination machine to be able to do that and AAA captures the return on the platform for being a creator of this attractive products. So it's actually quite a pretty logical split as to how.
How that waterfall works.
Thank you. The next question is coming from Ben <unk> of Barclays. Please go ahead.
Hi, there. Thanks, so much for taking the question I wanted to ask about private equity franchise. I know you indicated that you expect to close one tend to summer.
Looking at the last several quarters, you probably won't be back in the market for some time, but just a high level question. How do you think about scaling in that business what are the normal sort of natural limit.
To a private equity drawdown funds and then again understanding that the scaling and your business is tending to other places, but just curious about how we should think about the kind of forward trajectory in terms of the next several months in that business.
Yeah sure so in our core private equity business.
We think we're operating at the right size, you know a 20% to 25 billion dollar footprint gives us all the capacity we need to execute on the type of transactions that we think are most attractive.
Hey, it's among but it puts us among the largest pools of capital out there in the private equity business and certainly the types of opportunistic public to privates.
The scaled stressed or distressed opportunities should they arise that's the right size of capital meaningfully larger.
And.
Perhaps it's possible, but right now our capacity is sized our execution capacity is sized to that level and certainly the corporate environment that really does feel like the right size.
As we think about scaling right. It obviously will come from other ancillary and related businesses. So whether it's our S. Three business our infrastructure business, our hybrid value business just to name a few these are platforms that are still in the maturing fee.
As is of their of their scale and footprint and we do ultimately see those reaching the next stages in the coming years.
But for core private equity, we think were sitting at that sweet spot in the $20 billion size platform.
Thank you. The next question is coming from Adam Beatty of UBS. Please go ahead.
Thank you and good morning, I wanted to ask about the pension group annuities channel for Athene. It sounds like you've got a healthy pipeline coming up there.
Want to get your thoughts on.
The impact of higher rates, and maybe economic uncertainty on the level of demand and activity. There and then just how you view the attractiveness of that channel relative to other opportunities. Thank you.
So it's mark so with higher rates for the most part.
Corporates, who are the primary people, who execute pension group annuity transactions signed this more attractive because they simply have to contribute less.
To close the gap if there is a gap in the underlying now I wish the equation, where just that simple but of course it depends how they were positioned.
Because if they were positioned in long duration bonds and rates go up that gap gets wider if they were positioned in equities and equity sell off their gap gets wider but for the most part corporations considering pension group annuities have been guiding towards a strategy that gets them to a more market neutral place think shorter duration fixed income.
Less esoteric and the equity business and so the benefit of higher rates is for this business overall, a net positive.
This is a trust business that comes from having lots of capital by having an institutional capability to pass independent fiduciary is.
And by having the know how to do an onboard 100000 clients at a time there is a handful.
Of companies in our industry, who have met all those requirements.
Is a competitive but less competitive market than the origination business, which itself is significantly less competitive than the inorganic.
<unk> of blocks business, which I've already given you my comments on.
Which I think is in its final throes.
So I for one I'm excited about pension group annuities I think the team at Athene is second to none.
And the pipeline is as it should be.
Thank you that concludes the Q&A portion of today's call I will now return the floor to Noah Gunn for any additional or closing comments.
Great. Thanks for your help this morning, Donna and thanks to everyone for joining our call. If you have any questions or feedback on our call today feel free to reach out to us directly and we look forward to speaking with you all again next quarter.
Ladies and.
Gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time or lock up the webcast and enjoy the rest of your day.
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