Q2 2023 Apollo Global Management LLC Earnings Call
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Good morning, and welcome to Apollo Global management's second 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 include 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 on this call, 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 company's website 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 call over to Noah Gunn Global head of Investor really.
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Great. Thanks, Donna and welcome again, everyone to our call, we're really thankful for the opportunity to spend some time with you. This morning.
Earlier, we published our earnings release and financial supplement on the Investor Relations portion of our website within these documents to see that we generated very solid results that included record quarterly fee related earnings of $442 million or <unk> 74 per share and record quarterly normalized spread related earnings of $874 million.
Principal investing income and other holdco items, we reported normalized adjusted net income of $1 1 billion or $1 80 per share up 60% year over year.
Joining me from our team to discuss our results in further detail, our Marc Rowan CEO , Jim <unk>, our co President and Martin Kelly CFO .
And we've received some feedback from some of you that we should attempt to shorten the length of our prepared remarks, so at the risk of making a false promise mark himself has ensured us that will be endeavoring to do that today.
So with that I'll turn it over to Mark Thanks, Noah and we all can wish for certain things and hope that they come through.
In any event.
No I said it was truly a very very strong quarter nor.
$5 billion, plus minus for the year, which Martin will detail.
Just to put in context, Athene has now grown or will grow 30% FRE two years in a row.
And they actually have hit their 2026 financial targets as laid out in our Investor day. Some two years ago in just two years.
In addition to financial results, we had record inflows for the quarter on an organic basis, we had some 43 billion of inflows, including $8 billion that closed shortly after the quarter end.
Closing shortly after our quarter end is actually a feature of the alternatives business. Many of our institutional investors prefer to close on the first of the month and have something in another out another quarter from an allocation point of view rather than in the prior month.
And for many of our retail high net worth focus funds. They also close on the first of the month. So I expect that we will be a little more careful in giving guidance quarter by quarter to account for how this business actually operates.
From my point of view and as Martin and we have discussed previously we generated positive operating leverage and margin expansion. This quarter and we expect this to continue over the next couple of years as we benefit from the investments that we've made in people and facilities and in upgrading our business over the past few years and short.
Our strategic positioning is excellent and anchored by three really simple principles, one purchase price matters.
Second excess return per unit of risk that is what we do and full alignment with our clients, both our institutional and our retail clients.
It actually feels pretty good having not chase the hot dot during an era of money printing and zero rates.
Our opportunity set is just different than that of our peer group.
Apollo has momentum.
In terms of the business, let me start.
For the quarter and with the equity business in the equity business. This year has really mark the end of in Europe . So if I think about what happened over the prior decade, perhaps longer than a decade. There were these incredible tailwind in the equity business tailwind for money printing pulling forward of demand in fiscal stimulus and certainly from zero rates.
We now find ourselves in an absence of tailwind rates or higher growth is slower.
Globalization is in retreat.
We'll have to go back to investing the old fashion way they'll actually have to be very good investors they will need to produce alpha.
I believe that's what we've been doing.
Demonstrated by the recent private equity results. The final close for fun 10 in mid July brought in capital just around $20 billion over a 12 month marketing period versus extending over versus continuing to market over an extended timeline. The fund is now closed fund nine generated 36.
<unk> percent gross IRR of 24% net IRR.
In the quarter.
Just a really interesting time in the private equity business between haves and have nots are konica and univar to very large financings, which certainly came at a time that was challenging for the market.
<unk> executed better than expected, giving us increased confidence in the ability to get transactions, we like done.
Let me move on from the equity business and talk about the two drivers of the quarter and what I expect to drive the rest of the year.
First private credit.
But as I've said previously private credit.
These are two words that actually mean nothing.
Private credit can be investment grade.
Private credit can be Triple C.
Barriers to entry in the private credit business are either quite low anyone with a fund and a staff capable of evaluating investments can truly enter the private credit business.
Or barriers to entry can be extraordinarily high and.
And building a full ecosystem that allows you to serve the needs of your clients in a very sophisticated way.
Think of the difference between a hotdog stand in a Michelin star restaurants, both are in the food business and both serve food that is how we think about private credit and where people are positioned.
Financial markets financial literacy around private credit has actually gotten quite sloppy.
What is private credit well, if we start in the abstract everything that is on a bank balance sheet.
Is private credit.
But most of the time.
Markets market pundits talk about private credit, they're talking about a very small sliver.
Of a private credit universe, that's focused on Levered lending.
Don't get me wrong, we liked the Levered lending business Levered lending is actually a terrific business right now it.
It will not always be a terrific business. It is a cyclical business with low barriers to entry, but one that at the right point in time can be very lucrative.
What we have tried to build it.
There's not a single fund is not a single opportunity we've tried to build an ecosystem.
If I reflect on the past decade, we've invested some $8 billion building 16 origination platforms. There are 4000 people who work in these platforms non Apollo employees, who are solely focused every single day on originating private credit.
And as you know much much if not most of what they do is investment grade.
That's important because the investment grade market is at least eight times larger than the high yield market and eight times larger than levered lending market.
This is a great time for private credit this is not.
A quarter that is a great time for private credits. This is secular change not only do we have higher base rates and regulatory change and change in market dynamics.
We are in the beginning of a secular shift in how credit is provided to businesses and a shift.
That I believe we will continue to gather speed.
To be successful in this market you need a recurring supply.
Of unique origination.
This quarter, we originated some $23 billion with 50% of that from platforms Jim's Elster will detail. Some of these transactions, but in addition to the names you would expect that are traditionally associated with private credit.
TNT Air, France and LVL.
Borrowers value certainty scale and speed to execution.
In addition to origination you need an integrated capital markets business, because after all we want 25% of everything at 100% of nothing.
Our Acs business led by Craig far has done an extraordinary job extending our reach of private credit to clients and non clients and in fact this is among.
The greatest ways that we introduced the firm to people who are not yet clients of Apollo and show them, what we're capable of.
This quarter, we raised some $7 billion of capital from third party insurers.
And we expect this to gather speed.
As the market continues to improve.
For private credit, particularly investment grade the way that consumers and businesses borrow is traditionally through the asset backed market.
Asset backed is for the most part private credit.
This is a 20 trillion dollar market and.
And one in which we have been playing for a very very long time more than 220 billion of volume to date better than 200 relationships.
We have currently more than 100 billion of AUM associated with ABF 55 billion of which is third party.
Most of what happens for us in ABF.
Is investment grade.
And it is a key driver of our insurance business for Athene.
And for our third party insurance clients and increasingly for fixed income replacement for our traditional institutional clients.
One of the single most important factors in this market is that we are completely aligned with our client base, we own what they all at the same time at the same price. There is nothing that is more confidence inspiring and alignment.
Let me move on from private credit to talk a little bit about the job Athene did in the quarter.
<unk> results are in part driven by the ability of our pollo to source attractive investment grade credit.
But also by the incredibly talented team.
That has been building athene for the past 14 years normalized FRE for the quarter was $874 million and normalized net spread was 166 basis points truly the widest I can remember.
$19 billion of organic inflows in the quarter up more than 50% year over year number one annuity market share.
We now have line of sight to more than $60 billion of organic inflows this year.
And we are leaving by some estimates between 10 and $20 billion of annual originations on the table.
Truly we have an opportunity now to be selective and to build recurring franchises.
We've made progress this quarter in Japan through our reinsurance business and elsewhere in Asia and I believe the business at Athene is gathering speed, although as Ive cautioned in private as in prior quarters as I'm sure Martin will detail. These are truly exceptionally good times and we are beneficiaries of the large floating rate position that we.
Have carried for more than a decade.
Also recall that our business is built at the top of the capital structure on a senior secured basis, and we sleep better at night.
Credit experience in the quarter was incredibly benign.
Less than two basis points, which I'm sure Martin will detail.
Surrenders or outflows also came in better than forecast and if you recall from the chart. We've included in this quarter as well as private prior quarters as well as the education. We've been doing the primary driver of surrenders is not what happens at any point in time in interest rates. It is the timing of the exploration.
Programs that we put on three and five years ago and for the most part.
Is highly predictable.
It is difficult to imagine going from startup or new business to where athene is today.
Right now we have not we have not done an inorganic transaction.
For a number of years, but we are the beneficiary of four very diverse channels retail PRT reinsurance and funding agreements all four of those channels are dependent on a stable and high quality credit rating and.
And having an infrastructure and a scale and an operating expense ratio that allow you to lever the business.
We could not have built the business we have today.
Inorganically in a high rate environment.
We were fortunate in a low rate environment to have been able to purchase inorganic blocks.
At a time when their contract rates were above market rates. Therefore, our risk of surrender was very low.
In contrast in todays market someone buying an inorganic block is actually buying a block where surrender charges and market value adjustments have degraded.
And is that much greater risk of a melting ice cube.
In short it is not a stable base on which to build the business and we'll make it very difficult for people to achieve the kind of scale we have achieved.
Recall that we bought in Athene for some $11 billion at acquisition and Athene will earn $3 1 billion plus minus of normalized <unk> for the fiscal year <unk>.
In short the team is doing an incredible job.
And distribution and maturation and product has not yet even matured there is more to come.
In an effort to keep on time.
Let me focus on one last topic, which I know it's been of interest to people really want to talk about the market environment, particularly the regulatory environment and the environment as it relates to our banking peers.
In short we have never had such a collaborative dialogue with the banking system.
We have gone from not only being a great customer and partner of the banking system to a true collaborator.
The shape of our business, particularly our willingness to do very large investment grade transactions has made us an indispensable partner.
And I do mean partner with the banking system.
While some talk about the dancing of this being a great time for private credit.
I've noticed that theres actually been dancing on both sides. Both on the bank on the private credit side as most banks put in an extraordinarily good quarter and are on their way to an extraordinarily good year.
We are also very symbiotic.
Recall that we want the asset.
But do not want or the bank typically wants which is the customer.
The bank launched the customer.
Typically does not want.
Most of or any of the asset.
If I step back.
In the U S financial system is the envy of the world.
We raised 50% of the world's capital.
And part of the reason we are the envy of the world as the structure of our system.
Banks have their role in the investment marketplace has its role our system has all types of participants, but the vast vast majority of those participants.
Borrow short.
And invest long or have short term money.
Think of an open ended mutual fund.
Which has daily liquidity, many hedge funds quarterly liquidity.
Daily liquidity at least on deposits.
The ability to bring institutional investor's retirement systems and insurance companies, who have long dated liabilities or long dated assets to this market.
Make them ideal partners.
For the short dated capital of the banking system and the open ended mutual funds.
Short long term locked in liabilities are a source of stability.
And somewhat counter cyclical for our financial system. It does not matter whether they are in funds, which are themselves very stable.
Or they are on retirement services balance sheet.
Totality of the market from the Investor side does no maturity transformation.
Has no access to the fed window.
It does not benefit from U S government guarantee.
And in our case, if you look at the retirement services balance sheet.
We hold more tier one capital and more tier two capital.
And the vast majority of the top 10 banks in the U S.
We do cash flow testing and scenario testing and provide a granularity to our portfolio that very few institutions if any can match.
Our balance sheet is much more investment grade.
Then the typical depositary institutions.
In short.
Our model is highly complementary of the banking system, we have never been more collaborative and I expect this collaboration to increase.
As regulatory change gathers pace, both in the U S Europe , and even the beginnings of regulatory change in Asia.
We're nearing the end of summer the team is in great shape and focus on executing the plan. We are sticking with no new toys, the upside from simply executing one of what's in front of us is.
He is incredibly strong and with that I'll turn it over to Jim.
Thanks Mark.
A market of great job outlining our competitive positioning and our vision and now I'll spend a few minutes translating how some of these important themes are playing throughout our firm with an investment environment, our investment performance and fundraising.
It's clear to us and like many of you as well the demand for private credit solutions has risen significantly.
Higher cost of capital have reduced the availability of traditional financing sources.
We believe we're uniquely positioned to address this need for a few reasons the scale of our capital resources, the speed of execution and the sophistication and creativity of our investment underwriting.
We are continuing to diligently build the largest alternative credit business in the industry and our success to date is attributable to the expansive capabilities or what we call the Apollo toolbox.
From corporate sponsors and everything else in between we can flexibly serve clients need capital in a collaborative and bespoke manner.
Crossword Paolo we're helping healthy and growing companies, who are hamstrung by a limited open public market.
The second quarter was a Prime example of this a period that started with the fall off from the regional Bank crisis and ended with the market is feeling a bit more accommodating.
As you might expect we were particularly active in and deployed nearly 35 billion of capital across our platform during the quarter. Much of this activity was driven by yield business across our various sourcing channels, including financial financing solutions to corporates, which we call high grade Alpha our origination platform.
<unk> as well as more traditional origination through strategies, such as large cap direct lending or leverage lending CRE debt and a variety of structured credit CLO origination.
And an extremely active quarter one of the signature financing solutions, we provided which for a company wolf speed of silicon carbide materials and device manufacturer.
Let it investment group that provided a $1 2 billion to $1. Two 5 billion secured note to the company as they undertook a significant growth initiative to meet accelerating demand and.
In this case, we work with will speed to structure, a non dilutive and flexible credit solution, which resulted in a unique win win for the company's debt and equity investors.
And another example of capabilities that happened more recently, we partnered with our clients and our partner a air France KLM one of the world's leading airlines.
Yup and wheels are writing business that attractive spreads in January are always in the mid to high teens range.
Well, we've been actively deploying capital we continue to prioritise generating excess return per unit of risk.
Investment performance remains strong and consistent in the quarter.
Mark touched on the equity business and I'd like to add that are direct origination corporate credit and structured credit strategies portfolios appreciated for three and 2% respectively. In the second quarter with each category outperforming indexes, we benchmark in the same period <unk>.
Performance across hybrid strategy is also have been solid with hybrid value and are more opportunistic credit strategies eat returning in excess of 4% for the quarter.
Through a period of weaker public market performance last year and some instability in the first half of the year driving strong investment performance over the past year has not been easy.
Through that lens, it's worth highlighting a few strategies in particular age.
D. S. R. Nontraded BDC, we manage renting ridge R Cielo originator.
Plus our multiasset opportunistic fretted offering and structured credit recovery fund for have all outperformed relevant index over the last 12 months.
Turning our focus to fund raising we generated a record organic inflows of 35 billion driven by strong momentum to the theme as well as a third party asset management business across third party. We raise 15 billion in this specific quarter within an additional 8 billion slipping into the first.
Few weeks of this current quarter.
These are the investments we made over the last 24 months to expand into Adjacencies and white space opportunities, such as secondaries and clean transition and ones, where we believe we have a strategic edge such as third party insurance and global well have begun to pay off.
Some of the areas, where we've seen recent momentum include third party insurance, where we've developed a comprehensive client coverage network to ensure coordination across all parts of the firm and establish a curated solution set for this fast growing client tight.
We think our expertise in managing retirement service balance sheets on both the asset and liability side as a meaningful differentiator in this market and we're continuing to be very bullish on the long term global growth opportunities in this business.
<unk> R. Scheid cars initiative, where we raised over 4 billion across Foreside cards. So far this year and sighed cars enable institutional investors to invest alongside various investment strategies, mostly credit we related with greater scale and flexibility than they would otherwise achieve commingled funds.
This type of structure is growing trend and a great way to partner with more sophisticated investors. We have a strong pipeline in the sidecar opportunities across the global institutional investor base for the remainder of twenty-three supported with a dialogue of over 60 investors.
And finally capital raised from individual investors continues to be a strategic priority.
A substantial investment we've made in the new product creation and distribution expansion, we built a diverse global wealth platform by asset class product structure distribution channel and geographic reach all of which have helped migrate recent market driven headwinds.
We're focused on continuing to broaden our retail focused product suite and continue to expand expect launching one to two products each quarter into 2024.
In terms of distribution expansion, we've made some notable progress for Apollo aligned alternatives Triple a specifically, which is now offered on five bank platforms and has additional global U S and non U S banks as well as our I as in other wells channels in the second half of the year.
We've also seen a monthly inflows into apologize solutions I mentioned are nontraded credit BDC, we manage.
Ramp following the strong investment performance and has occurred over the last 24 months. All this progress makes us confident in our ability to raise more global wealth capital this year versus last so they had a budget.
A final note on our capital solutions business Acs.
With fee revenue generation has been strong and stable over the last several quarters.
This business, which is part of the flywheel is clicking for a variety of reasons, including greater demand for bespoke financing solutions, increasing integration of deployment across activity across the platform and more organized and effective coverage of a variety of corporate clients.
Through the first half of this year, we syndicated over $6 billion across 100, plus institutional investors and are currently in the market with in excess of 30 transactions as a bonus we're reaching many investors who are new to the Apollo franchise through this indication as many of our syndication partners have never invested in.
Paolo Fund prior.
<unk> has really been the integral integral part of our flywheel and I want to emphasize one of Mark themes from earlier is one of the ways, we partner with banks across a broader financial landscape.
With that I'll turn it over to Martin to go through our financial results.
Great. Thanks, Jim all provide a bit more context on F natural results and an outlook before we open it up for questions. So as Mark and Jim Ah buds reference out a second quarter results completed a very strong first half.
And physician as well to meet or exceed 2023 financial targets.
We've discussed how this year is one of execution and you're saying these efforts materialize in a material in a meaningful way.
In the asset management segment FRE revenues for the first half of the year increased by 26% over the comparable period.
FRE costs by 22% and overall effort by 29%.
Yeah for a margin increased by over 100 basis points as a consequence.
And retirement services things business continues to exceed all our estimates with normalized S. Every year to date growing in excess of 50 per cent over the comparable period.
Focusing on the second quarter, and starting with our asset management business Ah record quarterly FRE was anchored by C related revenue cause of approximately 25% or over quota.
Within that management phase increased almost 20 per cent and capital solutions phase remains very strong tracking.
Oh Faye related expenses increased only modestly on a sequential basis, reflecting out our commitment to disciplined expense management this year.
Slowing growth in the comp expense line reflects a declining place of hiring with just over 100 net new Apollo employee is added in the first half of the year, some 40% of the head count clause in the same period last year.
The combination of strong revenue growth and decelerating cost-plus drive more than 200 basis points of FRE margin expansion quarter over quarter.
Bringing a refereeing margin to 55% in the first half of the year.
Moving to retirement services Ah record normalized SRA of $874 million increased 8% quarter over quarter.
Resulting in 166 basis points of normalized net spread.
On a sequential basis normalized net spread increased by five basis points due to higher flooding income.
On the margin on the margin deployment spreads and yields on cash balances net apply a new business in financing costs.
Earnings equation from a higher interest rate environment has exceeded our initial projections in the first two quarters of this year.
Looking forward, we expect normalized esarey in the second half of the year to approximate the amount we owned in the first half reflecting for primary components. One continued strong organic growth at a 60 billion plus annual pace.
Two current interest rate conditions interest rate levels and tough shape.
Three eight of the strategic third party capital Sidecar capital that we manage supporting approximately 40% of total of St inflows this year, including buying down origination from the first half.
And for a transaction with Venerable, which closed in July where venerable recaptured approximately $3 billion of older pay out annuities.
This transaction will be reflected as an outflow in the third quarter and will release capital for deployment into the strong new business environment and.
In connection with this transaction will recognize the benefit within a salary and the order of $50 million that we will trade as a one time notable item and exclude from normalized SRA.
Corresponding to this SRA profile, we expect normalized net spread to range between 160, and 165 basis points in the third and fourth quarters.
This spread in earnings profile would result in approximately 30% year over year growth and normalized necessary in 2023.
Assuming account level and shape of the Ford interest rate of holds and ate up supports a full pro-rata share of of things incremental growth.
We currently expect normalized SRA clause in 2024 to be in line with a longer term guidance of low double digit annualized course.
As it relates to credit quality I think continues to experience a very low level of asset impairments across its portfolio.
Which alliance with its focus and high concentration and senior secured south of the capital structure credit.
Since the beginning of 2020 a period that has included COVID-19, the Russia, Ukraine War, the regional bank crisis, and the significantly higher than rates.
<unk> could average annualized impairments of on the 11th basis points include.
Including just two basis points annualize and the most recent quarter.
Which is consistent with his long term average of nine basis points.
Overall, we we believe the same credit profile remains very strong and is well positioned to withstand a more difficult credit backdrop, if one more to them too much.
In terms of capital allocation, we continued to assess how to best to play free cash flow on a regular basis based on its highest returning as for shareholders.
So far this year, we've allocated more capital towards share repurchases, then strategic investments given the long term value, we see in a stock price as.
As well as the abundance of organic growth initiatives with highlighted which create revenue growth without the need for capital.
We've deployed over 200 $270 million of capital towards opportunistic share repurchases in the first half of 2023.
In addition to immunizing employee stock issuance.
With a resulting reduction in osha count over the past two quarters from 599 to 595 million shares.
And lastly in response to some index eligibility questions. We have received it.
It's worth noting that we reported positive GAAP earnings in the second quarter as well as cumulatively over the last four quarters.
This is the final S&P index eligibility criteria that needs to be satisfied.
In terms of market taxonomy of fall always included within the financial services industry group. According to the global industry classification standards.
Reflecting out differentiated business mix. This classification places us within AGC geographically unique position relative to add directs alternative asset management management P. As in.
Underway sector relative to the total market index.
Combined with al leading governance characteristics shareholder rights earnings growth and long term stock outperformance relative to the board of market. We believe that Apollo is well suited to be a core holding within investor portfolios.
And with that I'll turn the call back to the operator for Q&A.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time, a confirmation tunnel indicate your Linus and the question queue. You May <unk>. If you would like to move your question comes to queue for participants using speaker appointment it may be necessary to pick up the handset.
Before pressing the star Keys again, that's star Once you Register a question at this time, we do ask you. Please send me your cost up to one question you may reach you for any additional questions.
Today's the first question is coming from Glenn sure of Evercore. Please go ahead.
Hi, Thanks, very much just a quickie on on on their originate from I mean, you have 16 for a reason and not all of them are gonna be clicking at once but you had a full quarter of Atlas. We're hanging in 100 billion of origination range on Annualised basis, what do you think takes us to the hundred.
50, and you do it with the current suite of platforms. You have is is just an environment thing just curious on your thoughts that thanks.
Thanks, Thanks, Glenn I think it's a combination of both I think there is you know all all 16.
We are happy with the progress as you know, we really have not leaned into the consumer we've really lean in to watch more of the corporate.
I I think there's a secular opportunity, but I think the 16, we feel as we integrate them over time, you know consistent risks reporting funding financing and the holistic approach Ah we still very we still feel comfortable that the the five year objective of the 150.
That the 16 in our stable today, we think that they have the organic and secular growth. We don't really feel we need to add a lot more there may be some consolidation them and a few of those for optimization, but we feel very comfortable that we have the strategic lead and the strategic organization from which.
To get through our five year goals with what we've put together today.
Thank you. The next question is coming from Alex <unk> Goldman Sachs. Please go ahead.
Hey, guys. Good morning, thanks, Thanks for the questions. So.
I have an investment opportunities is clearly rising from the banking crisis, we talked a little bit about that last quarter and clearly there's there's more of it and said that this quarter can you can you talk a little more about the demand for the stop of investment strategy, specifically for I guess private investment grade credit historically, that's largely been picking up my insurance.
Clients I think Mark you highlighted that there's an opportunity to extend beyond noninsurance client base. So I was wondering if you could elaborate a little bit more than that and how that informs you'll go forward dark by your phone or your strategy.
Yeah, let let let me let me take a deep diving me Mark is a couple of comments Alpha is Mark described you know history private credit it's a big word big concept, it's been narrowly executed with leverage lending when you see what's going on with the banks and the funding prices, which became than really a profitability challenge.
<unk>, there's really two large areas of opportunity. One is there are clearly assets that do not belong today on their balance sheet look at the dispositions at Pac West made we did a secured financing there was literally triple a rescued almost 10% a few other folks balk portfolio.
So the the selling our portfolios as one activity and that will continue over the next several years as they optimize their balance sheets. The larger opportunity is the secular business organization. There are lines of business, where they are and where they had been the day to day originator and purveyor of credit to companies.
And those are businesses because their cost of capital change and has changed and their liquidity in the regulatory changes that this do not make sense as a operating business. So you have a business sector, which is origination you have a disposition, we're going to be active in both of those and there's partnerships.
Insurance companies have for a very long time and buyers of private placements, but they've done it in a very very narrow way if.
If you are in the retirement services business day on more broadly in the insurance business and your opportunity is solely investment grade carpets, you have no competitive edge in the investment landscape.
You are looking for a solution and that solution is beyond what I'll call. The traditional private placement market, but the insurance market is growing it's well acceptance of investment grade private credit and this is about execution.
The other interesting opportunity is we as an industry have basically spent the last 35 years, serving the small alternative as bucket of our large institutional clients.
We have an opportunity at the investment grade side too.
To serve the fixed income bucket of our large institutional clients. This is in the very early stages and.
It's always interesting to go in and see these accounts.
First question, we ask is a single a rated private credit an alternative.
They haven't been confronted with that question today, if they think it's an alternative they're not right for the opportunity because then they're comparing it against things that are in 20 per cent rates of return.
If they think it is not an alternative and they think it is just fixed income than it is offering two to 300 basis points above their fixed income. We are in the early days of an education process and I believe that the market for private investment grade could be as large outside the insurance industry as it is inside the insurance industry.
Thank you. The next question is coming from Patrick debit of Autonomous Research. Please go ahead.
Hi, good morning, everyone.
Did you over to change in the kind of retail annuity sales channels I think worse than many expected given what we've seen and others in the market place and you mentioned, you're you're leaving some business on the table for various reasons. So do you think this is a sure loss issue or is there something else you can point to that explains the divergence what what we've seen from some of the <unk>.
[noise] annuity guys. Thanks.
This is a high quality problems Patrick Uhm, we have as I mentioned four channels, we have the retail channel we have the PRT channel we have the reinsurance channel and we have the funding agreement child, all of which are organic and one can also look at reinsurance as being onshore and offshore given the progress, we're making in Japan and Asia.
We have therefore make choices about business.
We thought we would do substantially more business this year than last year recall that last year with some $48 billion of organic inflows, where now confirming and essentially provided guns that we will just north of $60 billion and I believe that we are leaving between 10 and $20 million on the table, but in the context of the budget that we put out that internally.
Some $60 billion, we have the luxury of choosing the highest quality business. The right business next the right profile of liabilities and the right net spread so most of the business that was left on the table in the corner was I'll call transactional transactional does not mean bad it just means we elected to do other business versus transactional business.
And my guess I, primarily transactional business anytime we want to add my guess, we can add my guess, we chose not to for the quarter given that we were already doing $19 billion of organic and plus.
Thank you. The next question is coming from Michael Brown K P. W. Please go ahead.
So I appreciate the updates on the other views on the normalized necessary as you look out to 2024, obviously, the the activities and really robust across the platform. It I guess kind of following up on that retail channel question. How do you expect activity tend to hold out as you get into the kind of right.
Cutting cycle that the that Ford curved does expect I understand that.
They tend to your guidance today, but is it fair to assume that the demand stays high and then you know obviously the parakeet business has been picking up and just interested to hear thoughts about how the opportunity there could I could've ball.
Okay. It is clear to us that consumers prefer higher rates to lower rates consumers have not particularly retirees.
I have not had good options to finance our retirement now they do and you are seeing it across the board and the annuity market to think that annuities are not impacted by interest rates is just to ignore the the obvious what's happening to us is actually quite interesting.
We are growing and growing annuity market, but we're also in the midst of growing our distribution.
Each of the last few years, we have added immense new distribution banking partners, we will add.
And that will not mature until a year from now and then we have two or three other very large providers coming on so I do think the overall market share for retail will be impacted by rates. If in fact rates go down that doesn't mean negative or substantially negative, but it will at on the margin B a negative force having said that are.
Abuse and is still building so quickly and I doubt, we will see any real decline in retail <unk>.
More interesting to me is also the diversity of channels P. R. T is gathering speed.
Hi rates are higher rates are really causing all plans who are close to fully funded status to consider derisking.
And even those that were in equity are thinking of taking chips off the table given the you know very.
Shallow rally, let's say in.
In equities, so I expect PRT to be very very active over the next few years U S. An overseas.
Japan as I've mentioned on previous quarters is exactly where we want it to be and it's on track.
And I think reinsurance is also going to be a very important part of our business. So in summary, I think we're leaving business on the table this year and I am optimistic that notwithstanding the forward curve, we will see continued increases in business.
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Thank you. The next question is coming from Michael Cyprus, If Morgan Stanley . Please go ahead.
Hi, good morning, Thanks for taking the question, maybe just circling back to private wealth I was hoping you could elaborate a bit more on the tracks and that you're seeing your cross products in the private wealth channel all the distribution build out as well as how you were thinking about the pipeline of strategies to bring to the market next would also be curious any sort of lessons learned that you take away from someone.
The earlier products that you have brought it to the private wealth channel.
Yeah, Michael Let me, let me give you a little bit of a tour I mean, you know, it's been 36 months plus or minus since we really laid out the objectives and you know certainly in terms of products you know I think bucketing them into three areas the existing flagship products that we had and creating the right type.
The vehicles in theaters for the large wires and others.
And then there was a second obviously, creating a variety of of yield products, whether private BDC and private read and others, but again not only for the traditional global wealth channels Morgan Stanley and V. A V et cetera, but also the the independent IBD channels. The RIAA channels and then the third big bucket is newer products.
Like like R. A triple a product, which we are very excited with the momentum. So I think we feel we have the product set not only in the U S, but globally, but I think the lessons really are I mean, certainly we we want to when we expect in the clients expect strong investment performance like we've done for 33 years.
But the use of technology the use of education Apollo Academy in particular those are all in the ability to service. Those are all the the full service products that are partners are expecting out of US you know, we we see the puck going in global wealth, having a tremendous impact on our business, it's a big secular.
Train big secular trend it really parallels what we see going on in private credit and one if you look at the takes it take a broad step back around the globe in terms of demographics in terms of favors in terms of vehicles. We think there's a massive amount of white space. We had been broadly embraced all the market wants alternatives.
As for alternatives and providers.
As well as products. So I you know I think the early lessons or it's not just about performance and say you need to bring all your skills to the to the marketplace. You you cannot underestimate the service needs of technology needs and the education needs. So it's really a full service effort across our.
From and everything we've done we've had to replicate and and and but but huge huge opportunity globally.
Thank you. The next question is coming from your <unk> of BMO capital markets. Please go ahead.
Alright. Good morning, Thanks, very much wanted to get your thoughts around the potential longer time outlook for the normalized net spread you're expecting it to any trend down slightly in the second half of the year I guess I'm. Most curious around where exactly you think then that spreads can settle out longer time, and whether you can offset potential spread compression.
<unk> with a higher percentage of originations from platforms for being more selective around new business and the backlog running off that low and that spreads.
<unk> that would be great. Thank you.
So Rufus <unk>, we I guess, we just still the spread conversation ensues and to normalize top line spread which is 160 basis points plus or minus.
And then that pulls through often costs and financing and so on so 115 basis points.
And so.
Clearly seen.
We do too we target business, which at the margin drives and that spread in the order of 115 basis points.
We have a question, which we're we're addressing internally now which is which is the right exposure and how do we hedge it which which will walk through an update.
On but.
We look at and that spread and so so that's what we that's what we focus on and given the given the course profile and given the contribution for made up and give them. The way we think we can deploy incremental growth.
That also that combines two E S or a dollar guidance number of my double digit which is which was what we focus on next year.
And they're often.
Next year. We will also include the full benefit or full detriment, depending on your point of view of agent being fully ramped and taking its full share.
So more of the business World Laura Sorry, we'll we'll go to a depth.
On a comparable basis in 24 versus twenty-three and all that is factored into Martin as guidance.
Thank you. The next question is coming from Benjamin punish Barclays. Please go ahead.
Hey, there good morning, Thanks for taking my question I wanted to ask him. You know you mentioned some white space opportunities earlier in the prepared remarks, and you know it's been a hot summer I'm just thinking about you know the clean energy transition strategy and I was wondering if you can kind of give us a refresh of like where you are but more importantly, how do you think that can up all over the next say like 510 years as a potential strategy that could really scale.
And the way that some of your other like major drawdown fun strategies upscaled.
And so we sat back and we think about what that is what kind of money is an equity is it that is it hybrid when we look at the market most of what we see is that in hybrid.
Our goal is to build the leading financier.
Of energy transition sustainability worldwide.
By having put together a.
Perpetual evergreen.
And focused on doing that.
And I expect.
This vehicle.
To have the potential to be among the largest vehicles on our platform.
But I am equally optimistic that there is a great opportunity here, but it said that in hybrid opportunity primarily.
Thank you. The next question is coming from Adam BT of U P. S. Please go ahead.
<unk>, so I'm wondering what you're seeing and kind of the near term outlook for that and then maybe some details on how it Pablo was positioned and how much you might want to read into that opportunity. Thank you.
Well I mean, I I would just start off by saying we agree it's been the credit markets have been overall, the nine and when we see where the economy is going in terms of cost of capital. R. View is you are going to see more companies, having a bit of a challenge in 2425 <unk>.
Especially with the maturity well, but as we've talked about in this call you know so much of our business right now the Lions Lions share of our business vast majority are two investment grade Counterparties and we feel very good about the health and robust nature of those companies certainly we have roots in history.
Our in our hybrid in our equity business of doing things is the market in terms more challenging we expect to be at the top of the he'd been doing that but in a measured thoughtful way like we've done for 30 years.
Thank you at this time I'd like to turn to fly back over to Mr gun for closing comment.
Thanks very much for your help this morning, Donna and thanks to everyone else for joining in your continued interest in our business.
You have any follow up questions regarding anything discussed on today's call. Please feel free to reach out to us and we look forward to speaking with you again next quarter enjoys.
Enjoy the rest of your summer.
Ladies and gentlemen, thank you for your participation. This concludes today's event, who may disconnect your lines or lock off the web cast at this time and enjoy the rest of your day.
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Yesterday.
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