Q3 2024 Apollo Global Management Inc Earnings Call
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Speaker Change: Good morning, and welcome to Apollo Global management's third quarter 2024 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 our this call may include forward looking statements and protections, 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 a solicitation of an offer to purchase any interest in interest in any Apollo fund I will now turn the call over to Noah Gunn Global head of Investor Relations.
Noah Gunn: Thanks, Operator, and welcome again, everyone to our call earlier. This morning, we published our earnings release and financial supplement on the Investor Relations portion of our website. We reported strong third quarter financial results that included record fee related earnings of $531 million or <unk> 87 per share near record spread related.
Speaker Change: Earnings of $856 million or $1 40 per share and adjusted net income of $1 1 billion or $1 85 per share, which reached the second highest level on record. Additionally.
Additionally, I'd like to take a moment to thank you all for participating in our Investor Day last month, we were thrilled to have fantastic attendance with over 3000 people participating lives. In addition to another 54000, who have access the replay since then.
Speaker Change: Our proximity to this comprehensive event today's call will be a shorter update.
I'm joined this morning by Marc Rowan CEO, Jim <unk>, our co President and Martin Kelly, CFO, Mark and Barton, who will cover our prepared remarks, and Jim will be available for Q&A and with that I'll hand, the call over to Mark.
Mark: Thank you Noah and good morning.
Mark: I want to Echo <unk> sentiment that we take nothing for granted and we deeply appreciate your willingness to spend three to four hours with us on Investor day to truly dig into the unique business that we are building.
Speaker Change: Hopefully, we outlined a clear vision for our five year plan as well as the upside drivers in summary for those who did not suffer through the three to four hours.
Speaker Change: <unk> talked about average annual FRE growth of 20%.
Average annual FRE growth of 10%.
Speaker Change: Sorry in FRE, reaching $10 billion 5 billion, each in 2029, and a and a more than doubling to $15 a share by 2029 capital generation of 21 billion.
Speaker Change: In short, we laid out ambitious targets, but their targets the management team and I are fully behind and believe we can meet.
Speaker Change: Third quarter was a solid start in that direction in short everything worked the team made all of us look good.
Speaker Change: We will open the frozen yogurt bar today.
Mark: To reward the team for that it's one of the tools, we joked about on Investor day, but it's part of the culture of Apollo.
Mark: Yes.
Mark: Let me spend a second as to how the long term business plan in the quarter relate to each other.
Mark: In terms of our five year plan, we laid out for macro trends or tailwind that we thought were going to drive ourselves on our industry forward over the next five years.
Mark: The so called global industrial Renaissance in this massive need for capital to rebuild infrastructure energy transition and next generation power and data the.
Mark: Second retirement.
Mark: Third is the growth of individuals.
Mark: Complementing institutions, who have long been the sole source of capital for private assets and.
Mark: And finally, the notion of public and private convergence.
Mark: In short.
Mark: Any of these four times.
Mark: Could double our business over the next five years.
Mark: It is up to us to execute against this opportunity set and to position the franchise squarely in front of these very strong tailwind.
Mark: We're fortunate in many ways that even at our size and scale in the scheme of the asset management industry. We.
Mark: A relatively small player.
Speaker Change: And while we project that we will double our business over the next five years.
Speaker Change: That is not all that large, particularly compared to the enormous Tam in front of us bringing.
Speaker Change: Bringing it down to the quarter in terms of global industrial Renaissance in the massive need for capital. This was a record origination quarter 62 billion of originations for the quarter of $194 billion year to date platforms really strong quarter Atlas in particular had a really strong quarter 50 billion of.
Speaker Change: Cumulative originations to date $5 billion of equity capital raised.
Speaker Change: <unk> 5 billion facility from BNP 350 person strong.
Speaker Change: In short the cylinder cylinders were all firing at Atlas.
Speaker Change: And we expect great things from them going forward.
Speaker Change: In retirement.
Speaker Change: Athene had another $20 billion organic growth quarter.
Speaker Change: We continue to widen the funnel through distribution expansion.
Speaker Change: Just launched with Bama last week.
Speaker Change: Other top 15 platform.
Speaker Change: Way from Athene, we continue to make inroads into the retirement space in particular in the D. C market, we have our first mandate for our AAA product on <unk> platform. We are in the equity sleeve of our <unk> offering and we launched in October.
Speaker Change: While technical this is an enormous milestone for us and I believe portends well for the future in front of us.
Speaker Change: In adding private assets to help bulk and accelerate retirement solutions for those in need.
Speaker Change: In terms of individual investors and progress against retail fundraising is on pace to increase 50% year over year and 24 without a flagship fund.
Speaker Change: The team here has done an extraordinary job a b C or asset based companies now distributing on two large wire house platforms.
Speaker Change: S. P M. Our evergreen multi asset secondary strategy launched globally.
Speaker Change: Yeah.
Speaker Change: We now have post these 211 wealth products focused on the market six of which have been in the market for a year or less but I wanted to really call out here what the potential of what this can be recall that our strategy here is to be seen as an innovator in this marketplace.
Speaker Change: So triple a which we talked about a year and a half ago, we've now crossed $18 5 billion and.
Speaker Change: And we expect to be circa 20 billion by year end.
Speaker Change: Strong returns here now at approximately 10, 5% with a fraction of the volatility of public equity markets and public debt markets. This is the kind of product that has multiple uses across portfolios and I stick by what I said, when we launched the product I expect this to be the largest funded Apollo within a very.
Speaker Change: Short period of time, and I think next year will be when that happens.
Speaker Change: A S R.
Speaker Change: Also really strong performance durable yield taking advantage of trends in private credit, but done and in Apollo esque way lowest leverage all first lien. We expect this strategy to be circa $15 billion at year end.
Speaker Change: I cite the size of this because I think it's important to show just how fast this channel is developing and the channel development is about product. It is about performance, but it is also about the capability to serve this large and growing market and the capability to continue to innovate.
Speaker Change: We learned something almost every day in this marketplace.
Speaker Change: Just one example, we talked a year ago about an insurance wrap product to be take advantage of the unique tax situation of individual investors are altitude series, which encompasses our insurance wrap product, we expect to be circa $1 billion at year end.
Speaker Change: And now active in two significant wire houses.
Speaker Change: Yeah.
Speaker Change: Those three trends global industrial Renaissance retirement.
Speaker Change: And growth in the retail channel are three of the four cylinders that we expect two or three of the four tailwind that we expect to power our business going forward. The fourth is this whole notion of public and private convergence, we see this as fixed income replacement.
Speaker Change: What we're watching take place is investors, who have historically allocated to private markets solely out of their alternative bucket are beginning to allocate out of their fixed income bucket, which historically has been a 100% public investment grade.
Speaker Change: We expect that over time investors will begin to divide this bucket between beta public investment grade and Alpha private investment grade and they will consume that in a number of different formats. Some will consume it directly as pure private assets some will consume it in fund format and yet.
Speaker Change: Others will consume it in products that are more familiar to them for more familiar names such as the partnerships and the relationships, we've announced with Lord Abbott.
Speaker Change: And with State Street.
Speaker Change: More on that product when it is approved because it is currently in registration.
Speaker Change: Those four tailwind I believe.
Speaker Change: We'll push our business forward and they will push our industry forward.
Speaker Change: But all of them ultimately depend on one factor they depend on our capacity to originate assets that offer excess return per unit of risk or alpha we are not solely an asset manager if we behave like an asset manager and simply gather funds, we will simply integrate our business integrate our franchise that.
Speaker Change: It's not our intention is that it's not where you're going to do our capacity to grow is limited as I've said previously by our ability to originate and we are keenly focused on how we go about doing this.
Speaker Change: We have a number of platforms. Some 16, which we've spent roughly $8 billion building over the past 15 years that now employ circa 4000 people.
Speaker Change: This is a very significant investments.
Speaker Change: And a bar than many of our competitors will need to cross.
Speaker Change: To compete with us in this area some will do that and we expect them to do that but make no mistake. This market is enormous.
Speaker Change: But one has to originate good risk to be able to grow their business and offer their clients excess return per unit of risk.
Speaker Change: In the three and a half hours that we talked during our Investor day.
Speaker Change: I wish we could have covered everything, but we felt too.
Speaker Change: One area I really want to drive home and talk about our recent promotion is our third party insurance.
Speaker Change: We have built.
Speaker Change: For Athene.
Speaker Change: Capacity to originate good assets and have proven over the past 15 years that we can scale our retirement services business.
Speaker Change: Call that as an originator of assets, we want 25% of everything at 100% of nothing in.
Speaker Change: In some ways be ideal partners for US are other insurers people, who are trying to amortize the same sorts of liabilities that were seeking to amortize and deal with the same capital and regulatory regimes.
Speaker Change: Our third party insurance business is approximately $100 billion of AUM as of this date and we expect it to double over the next five years, but it will not double on its own and so we've taken one of our most senior partners, Jeff Jacobson at Jeff to become the CEO of our third party insurance business with all of the resources.
Speaker Change: The firm at his disposal this is important to us.
Speaker Change: Not just in the capacity to add AUM, but also to support an industry into support retirement.
Speaker Change: To make sure that there's a broad understanding of.
Speaker Change: The regulatory and capital regimes associated with private assets, particularly private investment grade and it's an area that will receive lots of attention from us.
Speaker Change: In short we're playing to win.
Speaker Change: Lots of the terms, we've introduced across the industry. This notion of origination fixed income replacement and an industrial Renaissance now seem to be major mainstream. We believe we are building something unique in the context of our industry.
Speaker Change: And we believe we are uniquely positioned for this opportunity with the capacity to originate the right cost and form of capital.
Speaker Change: And the right culture to succeed in short we get to do this with that I'll turn it over to Mark.
Speaker Change: Thanks, Bob and good morning, everyone.
Mark: So our third quarter financial results across FRE, FRE, NPI exceeded expectations and position us well to close out 2024, consistent with our expectations and some move confidently into the first year of our latest five year plan.
Speaker Change: I'll make some very brief comments on this quarter's results before opening up to Q&A.
Speaker Change: Fee related earnings within asset management, FRE reached a new quarterly record and surpassed $1 $5 billion on a year to date basis supported by strength in feed related revenues from our credit business.
Speaker Change: Credit management fees increased 20% year over year with growth in third party credit management fees exceeding that type of thing and a Thor.
Speaker Change: Over the last 12 months, we've generated more than $140 billion of inflows to support continued management fee growth in.
Speaker Change: In the third quarter credit inflows totaled $39 billion inclusive of the robust flows of the thing that Mark mentioned as.
Speaker Change: As well as broad based fundraising activity across direct lending opportunistic and multi credit.
Speaker Change: And further enforced related to financing our Atlas business.
Speaker Change: Our capital solutions business posted its second highest quarter of fees on record supported by approximately 80 underlying transactions.
Speaker Change: B related performance fees were also strong increasing more than 40% year over year.
Speaker Change: This fee stream is primarily driven by stable spread based income from certain credit products and vehicles, including a D. S.
Speaker Change: Going into the fourth quarter, we expect these revenue growth trends to largely persist.
Speaker Change: Ported by our previously discussed organic capital formation target of $120 billion for full year, 2024, and a strong diversified origination pipeline.
Speaker Change: At the same time with right. We've remained focused on cost discipline with total expenses, increasing 11% year to date versus the prior nine months period, excluding the impact of $15 million of fund merger costs in the second quarter that we previously commented on.
Speaker Change: Turning towards assignment services, sorry results reflect robust organic growth trends of $20 billion in the quarter and solid levels of spread profitability.
Speaker Change: Net spread excluding notable items increased by 16 basis points quarter over quarter.
Speaker Change: And was roughly flat with Q2, when adjusting for our long term expectations.
Speaker Change: The 11% alternatives for China.
Speaker Change: As part of this things alternatives portfolio generated an eight 2% annualized return in the third quarter within which AAA generated a 10, 5% annualized return approaching 11% long term expectation.
Speaker Change: We took several actions with respect to where things alternatives portfolio within Q3 to align the allocation more closely with AAA, which now accounts for approximately 80% of the portfolio at quarter end.
Speaker Change: Starting in January and going forward, we intend to pre release return information around the first business day following quarter end in an effort to provide more near term visibility into this line item.
Speaker Change: Turning to the year to date view SRT totaled $2.4 billion up 5% versus the prior year comparable period when excluding notable items.
Speaker Change: As we described in detail at Investor Day, we expect SRT to approximate.
Speaker Change: Approximately $3 $2 billion for the full year, which implies a similar level of history in the fourth quarter versus third quarter results on an as reported basis.
Speaker Change: Principal investing income benefited from some monetization by phone line during the quarter.
Speaker Change: Our net accrued performance fee balance at September 30 was $1 $4 billion and continues to be supported by strong investment performance.
Speaker Change: We generated double digit returns across a variety of credit strategies and hybrid value over the last 12 months as well as more than 30% for P Fund 10 over the same period.
Speaker Change: While we expect near term realizations activity to be more in line with recent quarterly trends based on our current pipeline.
Speaker Change: We're optimistic that <unk> will increase meaningfully over the next couple of years as the exit environment improves.
Speaker Change: In terms of capital allocation, we deployed more than $400 million within Q3 to opportunistically repurchase more than 4 million shares at an average price of $105 amid heightened volatility during the quarter.
Speaker Change: And with that I'll turn the call back to the operator for Q&A.
Speaker Change: Thank you the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time.
Speaker Change: Formation total indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star key as a reminder, we do ask that you. Please ask one question.
Speaker Change: Our first question today is coming from Alex <unk> of Goldman Sachs. Please go ahead.
Alex: Hi, Good morning. Thank you for the question everyone. So I was hoping we could start with the progress you guys are making on third party fundraising and particularly with respect to the insurance channel Mark as you mentioned earlier.
Speaker Change: A couple of specifics maybe you can give us an update on the flows you're seeing there year to date I heard $100 billion in total AUM, but curious on the growth and the type of fee rates, you're seeing in the channel and just broadly when you think about the addressable market there what sort of changed.
Speaker Change: That sort of enables some of these insurance companies partner with you guys as a competitor in some way and in terms of the liabilities that you are looking for in this channel is strictly an annuity kind of writer channel or sort of broad insurance space.
Speaker Change: So I'm gonna, it's Mark Alex I'm going to start more generally and then Jim will pick up specifically.
Speaker Change: A bunch of the things you've said really don't track with how things have done we have always started and always run a third party business.
Speaker Change: People, who you would think would be who are our competitors and the liability we partner with on the asset side regularly not only do we partner with them in an aligned fashion for the assets themselves, but you know from our public announcements that a number of people you would consider our direct competitors own pro rata side by side.
Speaker Change: <unk> pieces of our origination platform.
Speaker Change: We intend to continue to do this going forward.
Speaker Change: Unlike certain very constrained markets for instance, like private equity.
Speaker Change: The market for private investment grade I believe to be fast and this is about having the capital to go after them and also recall that we although we originate a risk we want some of that risk for the athene balance sheet.
Speaker Change: We want some of that risk for our credit funds and the other accounts that we manage on behalf of our third party clients.
Speaker Change: At this point in time and for the foreseeable future, having like minded institutions, particularly insurers who have the same risk reward the same regulatory and the same capital regimes is additive to our franchise and it's additive to their franchise competitively.
Speaker Change: Competitively.
Speaker Change: We still take a very very large share of these assets and no. One competitor has anything near it and we but we view this as beneficial to our franchise and in turn if one of our peer insurance companies originates risk that we think is interesting and they want us to take participate with them.
Speaker Change: We will it's a very different ecosystem than people have historically thought of in the private equity where it's a winner take all mentality.
Speaker Change: Time's joking credit, but if you originate a risk and own 100% of it. It means you made a mistake.
Speaker Change: Rather than you won something.
Speaker Change: The second part before I turn to Jim.
Speaker Change: As we have two.
Speaker Change: Two or three different types of insurance accounts and by the way, they're mostly life and annuity not P&C just to touch on that.
Speaker Change: Some of third party insurance are direct placements with.
Speaker Change: Peter insurance companies, either through programmatic investments, one off investments or in the context of funds or SMS very big part of our business.
Speaker Change: But increasingly we actually see people partnering with us institutions.
Speaker Change: Some cases other financial institutions side by side with us in eight eight.
Speaker Change: <unk> gives that gives participants not just the share of the assets, but a share of the liabilities.
Speaker Change: And they left yet to leverage off the athene cost structure, although we didn't talk about it this quarter. When you have a chance to go back and look Athene continues to do an unbelievable job on the efficiency of operations.
Speaker Change: Some numbers from the quarter I quite frankly, what's impressed so with that I'm going to turn it over to Jim.
Jim: Yeah, not a lot to add Alex, but I would say that you know what Mark has described is open architecture flywheel and whether it's in firms whether it's in Asia, whether it's sharing views on.
Speaker Change: How cielo, we should be looked at and calculated from a regulatory perspective, there's a whole variety of activity that takes place and.
Jim: We have always been a player in this space, but as Mark mentioned by putting one of our senior individuals who have really been at the intersection of the Athene portfolio with leadership.
Speaker Change: During that same insight sourcing portfolio construction.
Speaker Change: Ross the environment is helpful and again this is mostly investment grade activity and the reason why we think it can grow so large is for the most part all of this activity if you get into investment grade in fixed income replacement. This is really dispersion of credit risk across the platform and across the ecosystem not just the creation.
Speaker Change: Which is really more the traditional direct origination so the scale and substance of these activities. We think as we're still in the early days.
Speaker Change: Thank you. The next question is coming from Craig Siegenthaler of Bank of America. Please go ahead.
Craig Siegenthaler: Hey, good morning, hope everyone's doing well.
Craig Siegenthaler: My question is on retirement outflows. So after a pick up of last quarter. They improved back down to the 10% range annualized kind of right in line with your target from the Athene presentation from August.
Craig Siegenthaler: But from the same disclosure they are expected to decline again modestly in <unk> 'twenty four but we actually don't have any visibility into 2025. So I'm wondering if you could share with us how liability outflows are expected to trend in 2025 and for the full year is it generally in line with 2012.
Craig Siegenthaler: For with some quarterly deviations.
Speaker Change: It's mark for one second so during during the VAT the substantial run up in interest rates. There was a tremendous amount of interest from the research community and from shareholders into the behavior of liabilities and so we began to publish.
Craig Siegenthaler: The statistics that we used actually to run our business the run off.
Craig Siegenthaler: Insurance liabilities is actually highly predictable and one of the things. We wanted to do by publishing is to show that we actually have a pretty good sense of win period end business macro business is going to run off we have a regular flow of pension risk transfer business and a regular flow of runoff.
Speaker Change: Fixed income annuities as well as policy loans and other out of period surrenders.
Speaker Change: I think the easiest thing to do is probably update our 25 forecast.
Speaker Change: But with Investor day, we didn't get around to it I think.
Speaker Change: So hard to do left with it's high up the list we plan to I would say I'm not aware of anyone else in the industry that publishes this information and so it's another area where we.
Speaker Change: We strive to be transparent and we track very closely against the metric and.
Speaker Change: As Mark said the.
Speaker Change: The ups and downs from any one quarter to the next tends to be driven by contractual.
Speaker Change: <unk> policies and so theyre highly predictable.
Speaker Change: Looking ahead I wouldn't expect any different trend from what we were saying, it's just tracking exactly as we expected.
Speaker Change: Thank you. The next question is coming from Bill Katz of TD Cowen. Please go ahead.
Bill Katz: Okay. Thank you very much for the comments and taking the questions. This morning.
Bill Katz: Mark I'm intrigued by to your comments, just your notions of retirement opportunity.
Bill Katz: As well as the retail.
Bill Katz: Think I wanted to ask about retiring, but I'm going to ask about retail.
Bill Katz: In terms of the retail platform. You mentioned you are learning a lot. So I was wondering if you could maybe help us understand how you see the opportunity set evolving for the industry in apollo's role in that and then secondarily a number of your peers have been sort of speaking to higher expenses to build out the wealth management footprint could you share with us where you are.
Bill Katz: In terms of the expense cycle. Thank you.
Speaker Change: So I'm tempted to answer your retail question with a retirement answer, but I'm actually going to go after the retail side of it.
Speaker Change: So we're in the very early stages I think one of the things we tried to do at Investor Day was to present. This pyramid of how we think about the retail channels at the top of the pyramid, We think about family office family office to US is really nothing other than institutional we cover them like institutions.
Speaker Change: Behaved like institutions as best we can tell they are now close to 50% private which does not mean alternative but if you're in a traditional sense, but 50% private.
Speaker Change: At the bottom of the pyramid I call that mass affluent I hypothesized that we were not likely to serve these people directly that we were likely to be a parts provider to incumbent asset managers traditional asset managers, who were going to blend in a number of different formats.
Speaker Change: Private assets into.
Speaker Change: Products that are more easily understood by the vast majority of investors, who will not on their own to go through the educational process and perhaps are not closely advised by a financial adviser.
Speaker Change: The channel that we I think you're referencing is really talking about the advisor channel, which let's call that high net worth which has lots of different definitions for us I think that this is a question of appropriate products and services. They generally do not byproducts that have binary outcomes. They buy things that are more yield oriented that tend to pull to par.
Speaker Change: Par or have more predictable behavior, although episodically they do buy.
Speaker Change: Traditional alternative products in fund format, but that that is not the vast majority of what we're talking about.
Speaker Change: If you think about these institutions serving these institutions is going to be in my opinion.
Speaker Change: An opportunity for a handful of firms the scale that one needs to put together of people technology products systems to serve one of the large wealth channel participants.
Speaker Change: Really only makes sense. If you are multiple products at a large scale and are capable of generating alpha let's not forget that at the end of the day, we're not just an asset manager we have to develop excess return.
Speaker Change: We're better or worse I think we envisioned the cost of doing this I don't see you have the cost as a surprise.
Speaker Change: They have been contemplated in the context of the budgets and forecast. We've given you. So I would not call out anything unique I think.
Speaker Change: The interesting thing that's happening in this business is when we enter a certain channel we say Oh, we're partnered with <unk>. So the reality is we're still selling to five or 10% of their financial advisers and their clients. We have we all of us have yet to fully penetrated any of these systems to <unk>.
Speaker Change: <unk> penetrated system, we have to make our products simpler we have to be able to serve qualified and non qualified investors and we have to be able to do it with technological lease and so we are not so much seen cost pressure. What we're seeing is request for services. This can be educational services. This can be.
Speaker Change: Nickel services. This can be ease of doing business services and perhaps one of the most intriguing and something we've referred to previously.
Speaker Change: Is the addition of regular way low cost leverage.
Speaker Change: And with that I'll turn it to Jim to see if he wants to add anything yeah and remarks, when you're talking about is taking a product dialogue and making it much more of a portfolio of solutions dialogue.
Speaker Change: And we're ahead of the pack in terms of the breadth of products that we've created as Mark said you know.
Speaker Change: The clients don't want they don't want a binary outcomes. They werent a lot more evergreen products, but the latest no Mark mentioned, whether it's you know certainly in the equity business in the public equity business the ability to buy things on margin.
Speaker Change: Certainly there'll be a time in the future, where whether it's pharma finance or other or even portfolio of solutions in terms of S. A a strategic asset allocation, how a client looks at a variety of these options. So it's much more holistic there'll be a few winners we plan to be we have planted our flag with <unk>.
Speaker Change: Horses, and commitment and vision to be a successful player.
Speaker Change: Thank you. The next question is coming from Steven Chu Bank of Wolfe Research. Please go ahead.
Steven Chu: Hi, good morning.
Speaker Change: So.
Steven Chu: I'm actually going to ask a question around the retirement opportunity.
Steven Chu: At Investor Day, Mark you did make a compelling case for a rethink of the future state.
Speaker Change: Target date fund allocations around the 15 trillion D C opportunity.
Speaker Change: As we think about what is tangible.
Speaker Change: On a near term basis in terms of volatile locations and how that might evolve.
Speaker Change: The percentage that's in target date funds it looks like less than half of D. C. Assets are currently held in target date funds. The majority of those fund assets are held by folks in higher age cohorts. So I wanted to get your perspective on how you see that opportunity evolving over time, how much of that 15 trillion do you believe.
Speaker Change: You can service on a more near to medium term basis once that new market opportunity hopefully opens up to you and your peers.
Speaker Change: Okay. So I'll start by saying that I did pointed out but it is not something we've budgeted in our plan or to get to our five year plan, but I think we have to just look around the world for solutions and I did mentioned in Investor day.
Speaker Change: In.
Speaker Change: Places in the world, where private assets and I'm not talking about alternate but private assets have been added to portfolios.
Speaker Change: Societies have gotten superior outcomes.
Speaker Change: Australia is probably the most visible place where superannuation has achieved very very successful returns for retirees in Australia and one can demonstrate that if you look at the inclusion of private assets along with traditional assets in a blend.
Speaker Change: We're talking about outcomes that are not slightly better talking about 40% to 60% better outcomes.
Speaker Change: Over time, I believe people will see the light and we will eventually have the inclusion of private private assets in.
Speaker Change: What would be traditionally public only portfolios.
Speaker Change: Right now record keeping.
Speaker Change: Rule of law or practice really have kept significant allocations out of that for the time being to the detriment I believe of the participants in these plants.
Speaker Change: But the retirement opportunity is not just about the 12% to 13 trillion, a 401, K and having a slice of that.
Speaker Change: Participate in private assets.
Speaker Change: It is also about rethinking retirement more generally if I look at our 15 years, so far at Athene I have to really commend the team they have done an incredible job they took.
Speaker Change: Startup.
Speaker Change: And they turned it into the largest organic originator of retirement products in the U S and I believe in the world and they do it really efficiently they do it really well and they earn.
Speaker Change: Very nice rates of return.
Speaker Change: But if we're honest what they've done is they have taken a traditional product set that has not really been updated all that much over the past 15 years and they've just done a better job and they've offered consumers a piece off the private market's alpha to create better outcomes and it turns out consumers prefer more to less I.
Speaker Change: I believe there was an opportunity to rethink the product set itself.
Speaker Change: And we had a little discussion of Investor day, the notion of simplification and getting to guaranteed lifetime income.
Speaker Change: I believe to be the North star for where we would like to go whether we get all the way there in a simple product that offers guaranteed lifetime income.
Speaker Change: A little back and forth at Investor day, but that.
Speaker Change: That is what we're pursuing but this notion of rethinking the products at <unk>.
Speaker Change: I believe to be the single biggest opportunity in front of us and that is what is baked into our five year plan over the next few years should we get access to 401K through broad based reform or regulatory change or regulatory encouragement I believe that would be upside not just for us but for the entire industry.
Speaker Change: Limited of course by all of our capacity to originate at.
Speaker Change: At the end of the day this comes back to origination.
Speaker Change: Thank you. The next question is coming from Mike Brown with Wells Fargo. Please go ahead.
Mike Brown: Hi, good morning, Thanks for taking my question.
Mike Brown: I guess building on that discussion I wanted to ask about the triple a sleeve and CIC offering that you flagged Mark do you have a pipeline of other opportunities building on other platforms.
Mike Brown: And I guess, how do you see this expanding eventually move to wire houses for example on comp like model portfolio structures.
Mike Brown: Thank you.
Speaker Change: So I'll start in reverse.
Speaker Change: AAA today is circa 18 5 billion, we expect it to be circa 20 billion at year end.
Speaker Change: It is broadly it's an equity product, but it is a hybrid type equity, meaning it has lower volatility than traditional equities.
Speaker Change: Its notion is to produce low double digit rates of return with much less volatility than public equities recall that public equities over a long period of time with volatility offer 9% to 10%.
Speaker Change: So the use case here is.
Speaker Change: In part equity replacement.
Speaker Change: And in part risk reduction through through hybrid without yet moving to fixed income and lower rates of return.
Speaker Change: We are seeing it adopted in portfolio allocation.
Speaker Change: Right now it is still being purchased as a product.
Speaker Change: Someone comes in subscribes to AAA, because they want to be in AAA, but I do envision a day when we will be talking about 60 40 portfolios that are comprised of public and private.
Speaker Change: I do think the future of.
Speaker Change: The retail business will in part be portfolio of solutions.
Speaker Change: In the retirement space in this first city that is essentially what is happening it is an equity.
Speaker Change: Part of the equity sleeve that is the default offering.
Speaker Change: For equity for this group and plan of retirees.
Speaker Change: Pipeline I believe would overstate the progress to date.
Speaker Change: I am very happy to see the first in first couple.
Speaker Change: Of.
Speaker Change: Individuals and firms who are beginning to look at this as part of an overall solution.
Speaker Change: Let's let us do a good job doing this and we will grow from there, but it's too early to say pipeline.
Speaker Change: Thank you. The next question is coming from Patrick Davitt of Autonomous Research. Please go ahead.
Patrick Davitt: Hi, good morning, everyone.
Patrick Davitt: I went back to Bill's question. It sounds like obviously youre getting a lot of traction, adding retail distribution, but on that another manager last week is seemingly talking down near term margin expectations, primarily as a result of the ramp of payments directly to the distribution platforms.
Speaker Change: We aren't really hearing that message from you or others for that matter. So this is a headwind we should expect to see more of and in that vein.
Speaker Change: Maybe expand on how you account for those and why it might be different than others are thank you.
Speaker Change: Good morning, Patrick it's one so we're not seeing that headwind.
Speaker Change: I would say.
Speaker Change: If you look at.
Speaker Change: How retail product is distributed.
Speaker Change: In whatever and through whatever channel there's a.
Speaker Change: A reasonably large segment of the distribution, which in carcinoid costs. So I think family office, we cover family office ourselves. So it's not a sort of external cost to distribute that product.
Speaker Change: And there are a couple of other channels, which are which is similar.
Speaker Change: Within the channels that we do incur a cost the cost can come in one or two of performance it can be either a trailer against revenues.
Speaker Change: Which is just netted against the revenue line or it can be an upfront placement fee and that's expense as incurred.
Speaker Change: And we're still early days in this this whole evolution, but what we're seeing is a.
Speaker Change: Migration of the costs from upfront fees to trailer fees and I think that reflects the quality of the products and the stickiness of the product.
Speaker Change: But you'll see we did all of this is contemplated in the plan that we've laid out.
Speaker Change: We don't expect to see margin degradation from it and I think youll see a majority of the costs over time will be that netted against revenues versus an explicit.
Speaker Change: Non comp costs.
Speaker Change: So hopefully that helps put the pieces together.
Speaker Change: I'll add a little bit to it.
Speaker Change: This is part of a broader outlook.
Speaker Change: Part of what is implicit in the discussion that we've been having of origination is that we expect private assets to be have lots of demand and to be in shorter supply.
Speaker Change: If we're right about that we would expect fees to be stable over a long period of time.
Speaker Change: Unless there is something unexpected that happens in the industry. We historically, we've built this entire business our industry out of the smallest bucket of our institutional clients called alternatives.
Speaker Change: All of a sudden we have three new sources of demand for private assets.
Speaker Change: Retirement is full swing into into private assets insurance companies and others have been for a long period of time and youre seeing them broaden out what they do.
Speaker Change: The second is individuals' individuals' both through the retail channels that you've been talking about but also through the convergence of public and private the inclusion of private assets in public products.
Speaker Change:
Speaker Change: So we see that as really interesting growth.
Speaker Change: As to what's happening and then we see our institutions, who historically have only invested in private assets out of their alternative business beginning to invest in private assets out of their much larger adhere to for untapped fixed income bucket.
Speaker Change: If we're right we expect there to be significant demand for private assets and the supply of private assets is not the same as the supply for an asset manager. It is up to each of the firms in their respective areas and where they have expertise to generate these assets that offer excess return per unit of risk that's app.
Speaker Change: Or all of the promise of private markets.
Speaker Change: Thank you. The next question is coming from Brennan Hawken of UBS. Please go ahead.
Brennan Hawken: Good morning, Thanks for taking my question so.
Brennan Hawken: So thanks for the adjusted metric of origination it looks get largely maps to the prior debt origination disclosure, but maybe can you speak to the equity.
Speaker Change: That you added this reflected now in the new.
Speaker Change: Number and where that's largely sourced from <unk>.
Speaker Change: And then also you have 16 origination platforms and I believe historically you guys have talked about rationalizing that foot print and reducing the number of platform. So could you give us an update on those efforts and maybe updated expectations for <unk>.
Speaker Change: How many platforms do you expect and what impact that will have on the P&L.
Jim: Sure This is Jim.
Speaker Change: I'll just go through some basic numbers and Martin can give some color as well, but 62 billion as the origination number for the quarter and it's really you know a vast majority of is the debt origination you know mid to high fifty's as debt origination and that split.
Speaker Change: On the debt side between the.
Speaker Change: The platforms and the core credits, that's a lion's share of that.
Speaker Change: Also our high grade capital solutions.
Speaker Change: You know certainly it's our view the 16 platforms, we've organized and in <unk> and how is the person who runs our global origination business bornemann altogether.
Speaker Change: Have it run in.
Speaker Change: Three or four buckets, where there is a rationalization of oversight there is symmetry and risk in sourcing and analytics and so we're not tied to the number we did sell one of them in the past and it really was a question of the size of the flow that we received versus the equity investor.
Speaker Change: <unk> got out of out of balance but for the most part we're very very happy with the 16 today. They are diverse in terms of product set are diverse in terms of.
Speaker Change: Our regional and global coverage. They do have one similarity senior secured top of the capital structure risk.
Speaker Change: The four biggest being Atlas mid cap Redding ridge in wheels.
Speaker Change: So we're very focused on those 16.
Speaker Change: Don't see any more rationalization other than how we oversee and direct the business and again this is where the Apollo ecosystem and our historic private equity mentality, we bring that mentality that oversight of centralized analytics to these capital markets and <unk>.
Speaker Change: <unk> activities and we've been very successful in the other areas. The core credit large cap origination CLO CRE are all going along we do have a number you know north of 12 origination partnerships only a couple of which are public.
Speaker Change: Obviously, namely city was a quite a large name and so from our perspective the.
Speaker Change: The business is we feel we are a market leader following the nomenclature.
Speaker Change: <unk> used by many of our peers in the conversations in these conference calls.
Speaker Change: It seems like there is a you know a lot of Renaissance and insight into this strategy, but we feel we are the market leader and it's all about capture.
Speaker Change: Capturing that that that rate yield on a risk adjusted basis. So no no big change in the strategy. So I'm going to just pick up on two two tangents want the first on cost recall that these platforms are standalone entities, we generally.
Speaker Change: We may start owning 100% of them, but we generally do not own 100% of the sizable platforms over time, we own them as I suggested earlier in partnership with institutional investors in partnership in some cases with what people would view competitive peer insurance companies.
Speaker Change: There is no expense drip if you will from the platforms the platforms bear their own expenses and it's part of the ROE of our platform and by the way of the ROE on the platform are generally quite good.
Speaker Change: And they form the bulk of what is inside of AAA at this point in time. So you can see the synergy of how the business works together.
Speaker Change: The part we didn't talk about was equity and I think it's interesting to talk about equity.
Speaker Change: Our five year plan envisions very substantial penetration of fixed income replacement recall, the five year plan calls for a doubling of the size of our credit business, which is already our largest business but.
Speaker Change: But in contrast to our first five year plan. The second five year plan also.
Speaker Change: Forecast that we will substantially grow our equity business, particularly in hybrid equity hybrid being not a hybrid like a bank hybrid but hybrid being the midpoint between debt and equity think of it as lower risk lower reward equity starting to measure that holding the teams responsible for that is a key part of the <unk>.
Speaker Change: The business is run and so putting it out there and having a report card with all of you that shows how we're doing I believe to be very important.
Speaker Change: I'd say I thought the team did a very good job and presented a very compelling case for the growth of the equity franchise over a period of time and that's a key plank in our strategy and measuring it is where it starts.
Speaker Change: Thank you. The next question is coming from Brian Bedell of Deutsche Bank. Please go ahead.
Brian Bedell: Great. Thanks, Good morning folks. Thanks for taking my question, maybe just back on the origination at.
Brian Bedell: At 62 billion Youre, obviously annualized that's almost 250 and your goal is 275 per annum over the next five years. So just wanted to get some context on.
Speaker Change: Where this level could go if there are any significant capacity constraints that would limit you from going you know materially higher than the $2 75 run rate and then as you distribute that I think the template has been up 25% third party, 50% Athene and <unk> 25 per cent syndication.
Speaker Change: How might any kind of overage of if you exceed your goals on 275.
Speaker Change: And as you think about the allocation through the different parts of that of those businesses how might those change if a if the origination exceeds two schools.
Speaker Change: Well thank you Jim.
Speaker Change: Since we're a broad 60 days into our five year plan, we're not going to adjust the number at this point in time, but I guess I'll give you, but let me give you a little bit more color on the business in terms of spread in scale and breadth.
Speaker Change: I'd also before getting that like this is the whole.
Speaker Change: The philosophy of the third party business the third the philosophy on syndication open architecture evergreen products. These all tie into the notion of expanding the footprint expanding origination having partnerships and wanting 25% of everything in 100% of nothing.
Speaker Change: This all is very consistent with that theme.
Speaker Change: I will give you a bit of color on what we have found year to date and over the last 24 months is on the origination platforms.
Speaker Change: Which have grown nicely and are a big contributor that the actual spreads on the products that we're creating has stayed in that mid 300, <unk> approaching 400 over on a spread basis and the notwithstanding the volatility in the treasury market and the compression of spreads spreads in.
Speaker Change: Public corporate credit.
Speaker Change: As Ben.
Ben: Very very strong over 150 basis points of compression spreads.
Speaker Change: Spreads have tightened maybe a 10 to 15 basis points out of the origination platform. So.
Speaker Change: Approximately 400 over to 385090 <unk>.
Speaker Change: On the traditional credit platforms, we've had a bit more compression if the public markets have compressed 150 basis points. We've got about 60 70 basis points of compression in spread and when you add that all up.
Speaker Change: We are we were in the in the 410 area about a year or so ago, where like in the $3 75, Reais ZIP code today. So.
Speaker Change: <unk> scaled value proposition, which is really feeding all of our business. It's feeding Etfs, it's beating AAA is feeding a S. P. C. All the products and we're also in the future. We're excited about the launch of ABC in terms of our asset backed Corporation.
Speaker Change: But again I think it would be presumptive to expand that estimate of our scale, but I don't want to underestimate the impact of the flywheel of syndication of Acs Global wealth of third party insurance, which it touches on all of those.
Speaker Change: Thank you. The next question is coming from Ken Worthington of Jpmorgan Chase. Please go ahead hi.
Ken Worthington: Good morning.
Ken Worthington: Rates have backed up subsequent to the end of the quarter, how does the move impacts the hedges that you called out last quarter and to what extent are you using the higher rates to engage to further fixture floating assets and is the move that we've seen in rates enough to impact spreads as we think about for Q.
Speaker Change: So our plan I think as we were clear as it is to maintain.
Speaker Change: Net floating rate position around $15 billion.
Speaker Change: And so.
Speaker Change: Our move in rates.
Speaker Change: One one change that hedge posture, so certainly within the context of what we're saying.
Speaker Change:
Speaker Change: And if you recall from the Investor Day, we had we had modeled our our expectation so we'd have six rate cuts for the equivalent of six rate cuts.
Speaker Change: In the estimates we provided through this year and another four before the end of next year. So that's looking more.
Speaker Change: You know more realistic today than I think it was back a month six weeks ago.
Speaker Change: So again no real change we're just it's a it's obviously a component of earnings.
Speaker Change: And we were pretty clear about extreme moves in rates on the up and the down and how that affects the the blended growth of the business off of the core earnings growth, but no change just to hedge posture or.
Speaker Change: Or outlook.
Speaker Change: Thank you. The next question is coming from Ben British with Barclays. Please go ahead.
Ben British: Hi, good morning, and thank you for taking the question.
Ben British: I wanted to ask about the Src guidance, if I if I just think back to last quarter can you unpack a little bit what went better than expected when I look at least at the street numbers. It looked like your cost of funds came in a little lower than expected.
Ben British: And then thinking through the Q4, you know your full year guidance is unchanged. So.
Speaker Change: Thinking about what perhaps went better this quarter is there some sort of reversal expected already kind of timing differences, how should we be thinking about those different factors. Thank you.
Speaker Change: Yeah. So we had a $20 billion quarter. So that's you know that's very strong and that drove.
Speaker Change: That drove earnings we also were able to invest.
Speaker Change: At the margin sort of using the metrics that Jim just walked through are the spreads that we're able to one on assets at the margin.
Speaker Change: <unk> was a bit better than we were expecting it to be so it's really it's really those two components I mentioned that we expect Q4 to be more or less the same as Q3 in terms of SMB dollars I'm, assuming 11% return on Oleds.
Speaker Change: That would get you to a 5% growth rate for the year like for like we said, 4% at the Investor day. So, it's it's sort of right on top of.
Speaker Change: Of of what we said what we suggested so no.
Speaker Change: No real change. It's just we had a we had a larger quarter in top line growth and that holds true.
Speaker Change: To reported a story.
Speaker Change: Thank you. The next question is coming from Dan Fannon of Jefferies. Please go ahead.
Dan Fannon: Alright. Thanks. Good morning, So just a follow up on that question. So are the changes to the alternative allocation for retirement services complete I think you mentioned AAA now represents 8%. So therefore getting to that 11% normalized return.
Speaker Change: Even triple A's performance is that what we should be expecting going forward.
Speaker Change: Yes. The answer is yes, they are completed.
Speaker Change: So I'll just I'll just provide some context around what the portfolio looks like today, so about 80% of the portfolio is represented by AAA.
Speaker Change: About 10% is as represented by.
Speaker Change: Retirement services platform, So we were saying.
Speaker Change: A thorough principally.
Speaker Change: At a small exposure to vulnerable.
Speaker Change: Other platforms have all been repositioned or sold within the group.
Speaker Change: In the third quarter.
Speaker Change: And the other 10% is other investments.
Speaker Change: Typically in hybrid type fund investments around the platform that we would expect would generate.
Speaker Change: Change, which SUNS overtime. So we we have done the repositioning that's behind us.
Speaker Change: And we obviously believe that that will help.
Speaker Change: In getting to a sustained sort of 11% circa 11% returns over time.
Speaker Change: Thank you. Our final question today is coming from Michael Cyprus with Morgan Stanley. Please go ahead.
Michael Cyprus: Hey, good morning, Thanks for squeezing me in I was hoping you could update us on the use of your sidecar vehicle ate up I recall in the past you guys had talked about eat up taking down about 40% to 45% or so of new funds overtime I think year to date.
Speaker Change: Less than that just curious if you could just update us on how you see that evolving over the next couple of years, what factors you consider and toggling, Egypt contribution higher and then in what scenario might you increase the dividend out of Athene relative to your guide for the consistent $750 million a year of dividends.
Speaker Change: Yeah.
Speaker Change: So we outlined the the yesterday growth is is governed by or driven by a couple of different components, obviously, the underlying core growth in the business. That's one.
Speaker Change: Rates too.
Speaker Change: Back book re positioning three and then the contribution of capital too so taking down your business as the fourth.
Speaker Change: There are some choices in there that we can make and we were pretty clear that that within parameters.
Speaker Change: We've established we can make choices too.
Speaker Change: To increase or decrease the participation that ate up has overtime and that's relevant not just in aggregate, but it's also relevant at the at the product level.
Speaker Change: And so so that's part of that's part of how we are able to achieve.
Speaker Change: The earnings press that with with with with outlined I think over time, you should expect that the rate of participation will be consistent with that long term average so I think things sort of mid to high thirty's, 40% as an appropriate return.
Speaker Change: As a percentage of participation in business over time.
Speaker Change: Maybe I'll just close it out with just two additional thoughts in terms of capital as you know, we take roughly a $750 million year dividend out of Athene. The forecast that we gave you does not have any real change in that because it is also tied to a substantial amount of growth in our retirement services business.
Speaker Change: And growth as Martin suggested can be organic growth in the business or Athena always has a choice to own more of the business that it creates rather than giving it out to the sidecar, which is not done on a deal by deal basis, It's done over a long period of time in over a vintage. So it's not something you can change immediately.
Speaker Change: But you should assume as Martin suggested that the dividend out of out of Athene remains the same absent.
Speaker Change: A real falloff in business, which we do not expect I do think it's worth a question on the sidecar.
Speaker Change: This is something that we've tried very hard to get to make the point on the insurance business the retirement services business.
Speaker Change: He is so attractive that we actually have clients, who pay us to be in the business with us.
Speaker Change: Not only do they pay in the sidecar the same asset management fees that athene pays.
Speaker Change: Also pay a fronting fee to athene for putting the business on the books and they pay a fee in terms of promote.
Speaker Change: On the overall.
Speaker Change: So the ability to put more than $6 billion into a sidecar reflects a belief that we will use this responsibly and we will generate high rates of return on a responsible basis over a long period of time.
Speaker Change: If you do that you get to raise the sidecar. If you don't do that you are forced to build the business solely with your own capital to subsidize that is a little bit of what we see going on in the industry today and.
Speaker Change: And recall that capital regimes in the U S and Bermuda on the one hand and capital regimes in places like came in and the other are totally different I do believe a word of caution in our industry anytime you hear people have gone to caymans, you should just divide the capital by two I do not personally I believe that is going to end well and it's not where we are.
Speaker Change: <unk> or how we run the business, we want to do things on a long term sustainable basis.
Speaker Change: <unk> good rates of return for people not having adequate capital in the business.
Speaker Change: Thank you at this time I would like to turn the floor back over to Mr. Gardner for closing comments.
Mr. Gardner: Great I, just like to close by saying on behalf of our entire team. We really appreciate again, all the time that you've given to us and focusing on our business between Investor day and today's call. If you have any follow up questions on anything we discuss feel free to follow up with us directly and we look forward to speaking with you again.
Speaker Change: Next quarter. Thank you.
Speaker Change: Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or log off the webcast and enjoy the rest of your day.
Speaker Change: Okay.
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Speaker Change: Right.
Speaker Change: Yeah.
Speaker Change: And at <unk> Com.
Speaker Change:
Speaker Change: Yeah.
Speaker Change: Thank God.
Speaker Change: <unk> right.
Speaker Change: Yeah.
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Speaker Change: Yes.