Q2 2019 Earnings Call
Until that time your lines will again be placed on me as a cold. Thank you for your patience.
Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily.
Until that time your line call. It can be placed on music hold thank you for your patience.
Good morning, and welcome to Apollo Global Management second quarter 2019 earnings Conference call.
During todays presentation, all callers will be placed in a listen only mode and following management's prepared remarks, the conference call will be opened for questions.
This conference call is being recorded.
This call May include forward, looking statements and projections, which do not guarantee future events or performance.
Please refer to 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 and oppose 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 of purchase an interest in any Apollo fund.
I would now like to turn the call over to Gary Stein head of corporate communications.
Great. Thanks, operator, welcome to our second quarter earnings call. Joining me. This morning are Leon Black Chairman and Chief Executive Officer, and Martin Kelly, Chief Financial Officer, and co Chief Operating Officer, I Co Presidents, Scott climate and Jim Zelter are also here with us and will be available during the Q and a portion of today's call.
Earlier. This morning, we reported distributable earnings or 56 cents per share, which led to a cash distribution of 50 cents per share for the second quarter.
The quarters distributable earnings were primarily driven by pre tax fee related earnings or 40, or 58 cents per share.
As a reminder, we'll be hosting an investor day on November seven and we look forward to sharing more details with you in the near future.
With that I'll turn the call over to Leon Black.
Thanks, Gary and thank you all for joining us.
I'd like to focus my remarks this morning.
On a handful of topics, starting with apollo's ability to generate a stable and growing stream of cash earnings there were a variety of market conditions.
Next I'd like to highlight some strategic capital transactions announced during the quarter and provide you with some details on our approach towards responsible investing in conjunction with the report we published yesterday.
Finally, I'd like to give you an update on our C Corp conversion, which we announced during our prior earnings call.
From there Martin will discuss current quarter results and forward drivers of growth for Apollo before we take your questions.
[noise] over the past 12 months, we have seen significant volatility across various equity and debt markets, including a 20% decline from peak to trough in the S&P 500 before rebound above prior prior market highs also more than 200 basis points of widening in high yield bond spreads before recovering to pre stress levels.
And finally, the U.S. market interest rate consensus, which has swung quickly from expecting more rate hikes to now anticipating multiple rate cuts.
In contrast to these fluctuations over the last year Apollo has continued to demonstrate steady growth in a U M, which has reached $312 billion, reflecting a 16% increase from the prior year with strong visibility into future growth led by as far as pending acquisition of the that.
They say you I'm growth has been driven by strong fund raising and a substantial base of permanent and long dated capital.
Over the past 12 months gross inflows of totaled $65 billion, and we have deployed $15 billion across our commitment based funds alone.
Together this has driven $51 billion of inflows to fee generating AUM.
Against the volatile market backdrop during the last four quarters, our management fees have grown during every quarter, reaching $1.4 billion for 12 months ended June Thirtyth 2009 team supported by strong fund raising and very modest sensitivity to interest rate and credit market movements.
This growth in management fees combined with an ongoing focus on expense control has resulted in fee related earnings of $901 million over the same period, representing 35% growth over the prior year.
We believe the significant growth reinforces the strength of our robust business model, which has enabled us to deliver durable and growing fee related earnings throughout market cycles.
The funds, we manage also have approximately $44 billion of dry powder, approximately half of which will begin to earn fees as capital is invested providing some visibility into F. Fiery growth just from the U.M., we already have available across our platform today.
In addition to the strong Tailwinds, we see in the fiery we expect performance fees to become a much larger contributor to earnings over the next few years as we begin to monetize the substantial portion of the 32 portfolio companies in private equity fund eight assuming markets remain accommodating.
We believe the powerful combination of continued strong fr a growth and a significant increase in performance fees should set the stage for meaningful earnings and distribution growth ahead.
Now I'd like to highlight two strategic capital events that will be additive to our earnings over the intermediate term.
Last month, a thora, which is one of Apollo strategic capital initiatives focused on consolidating the European life insurance market.
And it's signed an agreement to acquire the life insurance business of fee that Dutch insurer. This transformative transaction, which is akin to a themes 2013 acquisition of a veeva USA in terms of its scale will more than Triple authority as assets under management. The acquisition is expected to close in the first quarter of 2020 subject to customary closing conditions, including regulatory approvals.
Leave that represents a significant step in the expansion of the thoracic platform, adding size and scale, a new geographic market and organic growth capabilities in the important Dutch market.
Importantly, we continue to see significant opportunity for future growth in European insurance. In addition, we continue to raise capital for the Athena Apollo dedicated investment program or Eightyp, a vehicle, which will invest side by side with the theme for sizable insurance acquisitions as well as pension risk transfer and other transactions.
To date, we have closed on nearly one $5 billion of commitments and we are targeting $4 billion of commitments in total by year end.
My remarks up to this point have been focused on certain strategic capital initiatives as well as the strong economic results that Apollo has generated throughout the years.
I also want to spend a few moments discussing our firm's longstanding commitment to responsible investing.
Last night, we published our 10th annual SG report, highlighting a decade of consideration into how environmental social and governance or ESG issues impact the from the companies in which Apollo managed funds invest the communities in which they operate and the world at large.
At Apollo.
We believe in the importance of incorporating ESG factors into our investment management strategy and have worked closely with the portfolio companies of the private equity funds, we manage to help introduce or implement best practices in many respects.
The portfolio companies of the private equity funds, we manage employ more than 350000 employees in aggregate and a firm with the combined revenue of all of these companies would rank as the 33rd largest company among the S&P 500 together. These companies have employed more than 15000 veterans during 2018 alone. The companys made charitable donations of nearly $300 million and their employees volunteered more than a 120000 hours.
These are just a handful of many constructive items highlighted in our SG report, which we are excited to now make available to everybody on Apollo's website.
Lastly, as Apollo approach approaches its conversion from a publicly traded partnership to a C Corporation.
We look forward to sharing our exceptional 29 year growth story with a broader set of investors as we noted on our last earnings call. We continue to expect that our conversion will take place during the third quarter following the receipt of regulatory approvals.
As a reminder, we believe our conversion to a C corp, and create a number of benefits for shareholders, including one a simplified structure and the elimination of the K, one form to enhance liquidity and the potential for reduced volatility for a stock three have the potential for inclusion in the number of indices such as the CR SP. The M.C.I. and total market indices, which is particularly important given the increasing flow of assets into index and passive funds for as a C Corp. We believe it will be easier for many new investors to own our stock and finally five women. We already have seen an increase in the valuation of a PEO as well as the valuation of our peers that have already converted and we believe that our conversion presents a further opportunity for value creation for all of our shareholders.
We believe our stock is a compelling investment at current valuations and we hope that with this conversion to a C Corp. We can continue to reduce the barriers to owning our stock and close the gap between where we trade today and where we see the true intrinsic value of Apollo.
With that I'll hand, it over to Mark to discuss Apollo second quarter results and ongoing drivers for growth across the firm Orton right. Thanks, Leon and good morning, everyone.
I'd like to start with the results for the quarter, which we believe reinforce the strength and stability of our fee related earnings as well as continued growth and diversification across the Apollo franchise.
We reported distributable earnings of $230 million or 56 cents per share for the second quarter, driven primarily by fee related earnings.
Pretax fee related earnings of $239 million or 58 cents per share were complemented by a modest amount of realized performance fees and realized investment income.
Principally generated by monetization activity in private equity and credit.
This growth was supported by 21% management fee growth over the same period.
And an emphasis on efficiency and cost discipline driving margin expansion, despite ongoing investment as we grow across each of our segments.
Revenues from management phase of comprised approximately 90% of our total fee related revenues historically.
And have been supported by a durable base of fee generating assets under management.
More than 90% of which is permanent capital or in funds, where the contractual life of five years or more.
At inception.
We remain focused on growing our efforts since it is a reliable source of cash each quarter.
Regardless of whether we have any significant realizations from the funds we manage.
Advisory and transaction fees of $31 million in the quarter included coinvest fees related to hybrid values direct, especially linked transaction and some capital deployment in credit and real assets.
Transaction fees can be variable on a quarterly basis since they are generally tied to the pace of capital deployment.
However for the last three years transaction and advisory fees have been more than $100 million annually.
And we remain confident in our ability to put money to work with a value oriented buyers. Despite generally elevated market values.
I want to note that during the quarter the launch amended fee arrangement with the same formally went into effect retroactive to January one 2019.
As a reminder, a fuller has been recognizing management fees from a thing under the terms of the new fee arrangement since the first quarter.
And we have provided disclosures in connection with the revised arrangement on slide 10 of our earnings presentation.
Turning to investment performance, our net accrued performance fee balance grew 20% in the quarter supported by positive marks across our credit private equity and real assets businesses.
If I have an equity funds private portfolio company holdings appreciated by 4.1% during the quarter.
While the funds public portfolio company depreciated by 8.9%.
In aggregate the private equity funds, we managed appreciated by 2.5% during the quarter.
As revenue and EBITDA growth remains consistent with long term trends.
Fund appreciated by 4.2% in the quarter, bringing 2019 year to date appreciation to 8.9%.
In credit we generated positive performance across the board with gross returns of 2.3% for corporate credit.
Office infrastructure credit and 3.3% for direct origination.
Outperforming the S&P leverage loan index total return of 1.7%.
And the Merrill Lynch high yield index return of 2.6%.
During the quarter, there was negligible impact to credit results from energy.
And within our credit business energy constitutes 2% of our credit.
Extra thing.
In real assets the aggregate appreciation across the portfolio, excluding real estate debt was 0.3% for the quarter.
And 4.8% for the 12 months ended June 30.
Completing a $325 million private placements are secured by balance sheet assets.
And upsizing of prior debt offering by an additional $125 million.
Although we have an asset light business model, we remain focused on optima optimizing our access to liquidity that we can use to take advantage of opportunities that may present themselves during the next downturn.
In addition, we continue to buy back shares with the intention of immunizing share count from employee related issuances.
I'd now like to move on to asset growth, which forms the basis for growing management fees and ultimately fee related earnings.
During the second quarter Apollo's saw gross inflows of $12 billion, primarily driven by same flaws and capital raising across a number of credit and other funds.
Over the last four quarters gross inflows totaled $65 million during a period in which we did not raise a flagship private equity fund and over that timeframe with Brian AUM by 16% and fee generating AUM by 17%.
The robust level of asset raising we've achieved is consistent with the growth trends, we've been able to demonstrate not just over the past three or five years, but since our IPO.
Eight years ago.
Looking ahead, we remain confident in our ability to drive strong AUM growth across the platform.
Fueled by fundraising at costs across the capital strategic capital initiatives and a variety of vehicles focused on strategies within each of our businesses as well as ongoing capital raising for managed accounts.
With regard to deployment, which remained robust in the second quarter funds managed by Apollo put $5 billion of capital to work across commitment based funds and over the 12 months ended June 30 capital deployment and commitment based funds has been $15 billion.
This is in addition to capital we put to work across managed accounts evergreen funds and other investment structures and in spite of a market environment in which valuations have remained elevated.
During the quarter private equity fund that nine closed on its acquisition of smart and final, which marks the second time Apollo funds have owned that business Fund nine also announced the take private of Internet consumer retail Shutterfly and the simultaneous acquisition of Snapfish as well as the acquisition of a number of radio stations and a national advertising business from Cox media.
Which is in addition to the previously announced acquisition of Cox TV stations and other assets.
Our hybrid value fund also closed on the acquisition acquisitions of direct CESI link and blend.
Employable.
And combined with racing commitments hybrid value is now approximately 30% committed or invested.
After having just held its final close in March reflecting the strong investment pipeline in place for our newest private equity strategy.
Looking ahead, we continue to identify and evaluate an active pipeline of investment opportunities across a broad spectrum of asset classes and are optimistic about our ability to deploy capital at a solid pace in various market environments.
Finally, as it relates to realizations weeks, we continue to expect the carry realized in 2019 will be higher than it was in 2018 and 2020 should be higher than 2019.
We expect the 20 929 to exit activity in fund eight will be concentrated in Q4.
With that we'll now turn the call back to the operator and open the line for any of your questions.
Thank you the floor is now open for questions. If you wish to ask a question at this time. Please press Star then the number one on your telephone keypad.
If a question has been answered you may remove yourself from the queue by pressing the pound key.
And to the extent there are follow up questions. We ask that you. Please reenter the queue again by pressing Star then the number one on your keypad.
Our first question comes from the line of Alex Blostein of Goldman Sachs.
Hey, good morning, everybody.
Ill.
Good morning, I was hoping for a second the current environment.
Pretty Robertson.
Sure and just thinking about whether that could accelerate collagen current activity with the like we've been waiting on for for a little bit of time, now whether with Sascar kind of risk transfer in fixed annuities and variable annuities or are there kind of longer dated insurance product that's good.
Accelerate some of the growth.
Youre at some of your primary capital products.
Alex This is Jim Zelter.
I would say as you as you pointed out there was that theres been a pretty strong reversal and expectations from last fall interest rate rising to what's happening or was proposing which suggested today when by the fed in terms of lowering rates.
I would say that we have been active.
In our acquisition pipeline I don't I do think that the.
This rate environment overall.
And the success of companies that have made the decision to sell either fixed or variable annuities, they've been rewarded by the equity market for making that call, but we're not seeing a dramatic shift in activity. It's there is a strong pipeline, but I would not.
I guess I Wouldnt say that the change in the rate outlook dramatically has increased that since last fall.
There is a variety of of assets in products for sale, we've been successful in some of them in the us and in Europe , but I think overall the rate environment.
The dramatic change in expectations is not has not caused a rapid increase in the portfolios or the businesses lines for sale.
Our next question comes from the line of Robert Lee of KBW.
Great. Thanks for taking my questions.
Maybe going back to the conversion to make that kind of a two parter.
If I may.
First thing is.
Question, while in understanding expectations as to.
Sometime this quarter.
I just kind of curious why.
Most peers are able to kind of pinpoint a specific date like June 1st or whatever may be kind of.
Should we be thinking this is like last day of the quarter first to the fourth and just kind of trying to get a clear sense of like an actual conversion date.
Sure Robert as one not all oncologist at this point, so so with respect to the dividend we.
We don't expect any changes from what was previously cited which is we expect to pay up substantially all of that cash earnings subject to what we need to.
Sure its eye into to operate the business.
We are constantly evaluating alternatives.
And meeting with shareholders and listings where finch.
And on balance what we've heard is that the.
The more favored form of capital return is through several high a payout.
Then through.
Then through repurchases.
So thats our composition.
We will continue to evaluate it but we don't plan to.
To make any changes on that as we go through the conversion.
And then with respect to the date.
We are subject to a couple of regulatory approvals, which are.
As a consequence of our.
Affiliations with insurance companies and so that yes.
Within or by the end of the third quarter.
And so we continue to monitor that but it's a process that is largely outside our control.
While we expect while we hope that we could get done before the Chris.
No.
Multiple times, but clearly there are some investor reticence or.
Or push back against the.
The athene relationship so could you maybe just.
Maybe help us again kind of walk through kind of how you view not just the.
Other services, maybe you're bringing into a theme that are not as widely appreciated whether it's the co invest vehicle or M&A whatever it may be.
I think that we have been consistent the the holistic broad historic relationship which has allowed a theme to.
As you alluded to though it's really a multifaceted relationship certainly.
In terms of our ability to help them with the capital structure and capital formation like we are doing what meant Leon mentioned in the Apollo at Theend diversified insurance partnership creative ideas on how to give them capital that's competitive versus those their peers. We have consistently provided vehicles, which have allowed them to do that.
Secondly, I would say is the strategic M&A pipeline.
There have been numerous transactions over the decade, where.
Either we at Apollo led in terms of the structuring sourcing the analytical or even the ability to source exclusively.
Whether it was the Lincoln transaction last year, the the Voya transaction, So weve time, and time again been able to show great value on the on the formation of liabilities, which is really led to the size of a theme today. The third thing I would mention is the the creative platforms that we put together.
Exclusive platforms, such as mid cap.
Such as our activities in aviation.
And a variety of other platforms residential mortgages, which has allowed them to.
Really bring on assets visa be there appears in a scale manner, but to do so in a risk adjusted basis, which does not.
As skin asset liability and other skills, we provide so very holistic across the board and we look forward on November seven getting into greater detail on all these activities.
Our next question comes from the line of Michael Carrier of Bank of America Merrill Lynch.
Good morning, Thanks for taking the question.
So maybe just on the insurance side of the business post the.
The announced deal with us or they increased the scale is how are you.
Looking at are seeing the organic growth opportunity in Europe versus what we've seen.
Within the U.S., meaning just given maybe some of the differences in.
Some of the complexities, but what you have in place now and then on the transaction side, whether its in New York in Europe or the us.
You has the opportunity set.
Changed much I think over the past you said there has been a handful of opportunities that you've been either in conversations are looking at.
But with the rate environment has that changed or is that actually.
Accelerated that.
Well, let's say, there's a bunch of questions in there, let's let's separate them I would say in the us.
Fairly active consistent pipeline over the last 12 to 18 months.
Fixed variable and a variety of other areas that have been mentioned long term care.
We have been pretty judicious about processes, we've been very clear that.
What we like about one of the benefits of our scale is that we can be a scale solution provider. So on the smaller more competitive transactions, we've probably shied away from those and have not lead in leaned in as much but where we can provide like we did with boy a multitude of solutions to one counterparty, that's where we've really chosen to spend our time.
And certainly a theme can comment about that but they've seen a steady growth in that business.
And as someone pointed out earlier the whole PRT sector. We've made some nice head roads inroads into that sector and brought on a few.
Transactions and I think we'll continue to do so so we the theme in the U.S.. There's there's a multitude of drivers organic PRT different lines of business, along with a pretty steady M&A pipeline.
Switching over to Europe , you know for the most part.
We've really been focusing on the.
In.
The environment in terms of large scale acquisitions like we like like Leon mentioned with the VAT.
The organic business is a bit different over there and I think in a broader forum in November we can get into that a little bit better we're still in a regulatory.
Approval process with that but.
You to your point I think that will we be should we be assuming that broader opportunities in the us a multifaceted and Europe , a little bit more of the M&A pipeline with some organic growth to follow.
Our next question comes from the line of Devin Ryan of JMP Securities.
Hi, great good morning, everyone.
Question, just on the credit side of the business.
Obviously, it was a nice quarter.
On investment performance, but realizations in the business had been a little bit lighter recently, so maybe just if you can give us a little bit of perspective on the backdrop for some of the credit strategies.
The outlook for realizations in the business moving forward and then also just kind of given some of the macros and credit it would seem that potentially a little bit less opportunity given the markets aren't quite dislocated. So I'm just curious kind of where you are seeing pockets of opportunity to deploy capital there as well. Thank you.
Okay. So just on the realization so there was a bit of internal and we when we.
When Scott NIE, and Martin and team have realigned some of our business lines. Some of our principal real estate activities as active going now into private equity so a little bit of geography, there that vehicles still generates some nice realization. So for the most part mostly most of our realizations.
Have been.
Measured in that in that business I mean, we've capitalized on a lot of opportunities in that space in credit. So I think we're seeing steady opportunities, but we've been cautious in putting a variety of risk capital to work in the in the opportunistic funds in credit.
Broadly speaking in credit we remain cautious for the last couple of years, we've continued to upgrade the portfolio in our broad vehicles and add a theme.
You've heard me mentioned before that on a typical year.
The overall high yield and loan markets in terms of the new issue market. We historically had bought around 20% of the issues. If you look at the last six to 12 months that number has continued to go down sub 15% of the market and if you look at some of our flagship vehicles like Trs.
The overlap versus loans and bonds versus the index is less than 10%. So we've certainly been been striding away from the indexes and the beta risk.
I think when you think about credit right now you know three ways that I evaluated evaluated.
Technically.
I evaluate it valuations and fundamentals I mean, I would say technicals remain extremely strong a lot of solicitation from investors seeking solutions.
And good flows other than in the loan in the bank loan area, which has been a lot of withdrawals of capital not with us, but we are in the market because of rates.
Valuations are certainly high in terms of overall valuations and I would say fundamentals when we listen to other portfolio companies in the credit side, we're seeing a little bit more muted.
Excitement from the Ceos and Cfos about future growth so.
You are a little bit of cautionary wind certainly economic growth off the peak in the us. So we've been very much focused on top of the capital structure Senior notes no very little subordinated exposure.
Same thing with in our real estate debt business much more mortgages versus mezz. So.
We expect there will be a more cautionary environment have positioned ourselves, but we were very very fleet of foot in the fourth quarter, we put a lot of money to work in senior loans did quite well.
And were seeing the benefit of that this year with the compression in spreads.
I might just add a little bit back on the first point so.
In 2017 in credit we did about 30 cents per share that Kerry last year was last it was about half that because of a tough Q4 in the markets.
So when when you sit back from the carry potentially credit it's really driven by two.
Two things one is sort of annual style annual payout funds like hedge funds.
Which this year doing very nicely and then well above there.
Their return thresholds for carry payout.
And then this drawdown style funds like structured credit and life settlements.
Uh huh.
And within real assets, our MPF business, which depend on asset.
The accumulation growth and monetization so another way to sort of come at this is to is to refer back to the valuation framework that we published which tries to sort of look at the carry generating potential of the platform.
And apply different return assumptions to that and then translate that into a carry potential pressure.
Our next question comes from the line of Craig second color of Credit Suisse.
Thanks, Good morning, everyone.
All right.
I wanted to hear your thoughts on the potential of changing your hearing instrument with a store from a fixed rate to a tiered structure similar to what you did.
With the theme, which we think does a better job of compensating.
Apollo based on the return on risk profile for the underlying assets.
So let me start maybe Mark may have a comment but as you know we've had an evolution in our fee with a theme when it was a smaller balance sheet growing.
And the scale of services that we provide.
This is really the theme Apollo fee 3.0, which were really in right now.
You know and I would say that we're very we think that that fee is well structured and really aligns our short and long term interest is fiduciary isn't as partners with regard to Europe .
It's a bit different because as you know you are not in a any IC regulatory environment, you really insolvency too as a result, you have.
Your.
Big core of your book is.
Sovereign debt and which has a different fee construct so I think what we'll see is an evolution in our fee structure as we grow a thorough overtime.
And we really fine tune the needs of their balance sheets in terms of.
The sovereign oversight, which is really the duration, there's a big duration portion of that.
And then certainly the value add in terms of our multi credit solutions. So I think you'll see evolution of that but we're comfortable right now with how the authority is structured there is some different structures will some reimbursement, but overall, we think it's suits us right now but certainly.
It will evolve overtime.
And I think I was just add this or a fee contract today sort of I would say sort of in between a saying 2.0 and 3.0 in the sense that there's a there's a base fee component, which is lower reflecting the asset construction in Europe .
But there's also a scaled sub advisory fee, which seat which is dependent on the asset classes.
Thats the sub advised assets of winter. So so it fits the profile of the platform today, but obviously subject to revision overtime.
Thank you Mike.
Sure.
Our next question comes from the line of Patrick Davitt Autonomous research.
Hi, good morning, guys.
It looks like the private marks and private equity are suddenly starting to look a lot better relative to last year absent for Q of course.
Wrapping up from 2% in the first quarter to 4% in the second quarter could you maybe dig in a little bit more about what kind of physicians or any one position that might be driving that and should we take this as.
As a signal that fund the fund portfolio is finally getting to a seasoning level, where we can expect better positive private march they're coming through more consistently.
Yeah, Yeah look that.
That's a good question the the obviously last year as marks were affected by the Q4 volatility, which which had just a typically outsized movement for one quarter.
I mean, it's hard to sort of point to two quarters and call and call. It a trend.
But what I will tell you.
As fund eight is seasoning and as more and more of those investments are coming closer to monetization.
The the marks are moving towards I'd say more of a monetization level for a number of these investments. So there is no one name that sort of sprung up it really is across a wide variety of of the portfolio.
And consistent with what what Martin said earlier around realizations.
As we move into later parts of this year just based on what we have in the.
No pipeline for things in registration.
Positions.
Moving to sort of secondary trades and ultimately sale processes that we have going on right now.
You're going to start to see more monetizations.
In the back half of this year and then continuing on even more so in 2020. So I think it's as you as we move into the.
More seasoned are fully seasoned.
In a phase of fun day, that's what you're starting to see.
Our next question comes from the line of Bill Katz of Citi.
Okay. Thank you very much taking the question maybe a two part as well so just thinking on that last point I was wondering is any reason to believe that fund eight wouldn't have historical MOIC.
Associated with it and then secondly, similar lately made from one.
Just as you think about the fr Remodulin I Wonder if you could sort of right size, what the second quarter might have been absent some lumpy the transaction activity and maybe go forward outlook. Thank you.
Sure I mean look.
It's it's hard to make absolutely predictions, but.
Based on what we see in the portfolio today and the quality of.
Of the business isn't Monday, we feel very comfortable with the consistent consistent MOIC on that fund.
Great and.
And bill on the on the efforts so last year, we did.
Already seven.
Sorry.
At 54% margin. This year, if you run rate the first the first half.
We're running it through 20.
At a 57% margin. So it's it's clearly something we are happy with but also consistent with our long term growth, which is which is so teens to 20% for growth.
As we look forward.
We would expect to see that growth continued based on on what we have in the fund raising pipeline as well as provide.
And as far as the margin is concerned we are constantly evaluating investing events investments in the in the platform.
Investing for future growth against revenue as it emerges so I would say at 57%.
For the first half and a bit higher than that for the for the second quarter. It's it's in the range, but at the high end of the range of what I would expect to see in the next couple of years, but over time, we see potential for that to to continue to grow.
Our next question comes from the line of Ken Worthington of JP Morgan.
Hi, good morning.
I've received an elevated number of questions on Apollo and the risk around Jeff Epstein and was hoping you could comment.
There'd be media reports linking Apollo executives Epstein there have also been reports that certain Lps, including a story. This morning morning, highlighting calpers.
That they have concerns that executive ties are or could be a distraction for management.
So a couple of questions around this I guess first.
Is there any link between Apollo in Epstein.
Two how is Apollo managing the fall out.
From.
Potential executive ties to Epstein and is it possible at all to ring fence exposure here I think the story on Bloomberg. This morning suggested.
Toppers actually they're saying calpers is taking that matter seriously so.
Thats the catalyst for the question. Thank you.
Hey, there's leon.
Blacks I thought it's appropriate I answer this question or are those group of questions, which I think are very valid and.
Good questions.
The first thing I would say is.
You know, we're entering our thirtyth year of business right now.
And there's nothing that's more important to us.
Our relationship.
With with our investors. So we take this all extremely seriously.
Also.
There has been a.
Virtual tsunami in the press on the subject, it's it seems to be the gift that never stops giving.
For.
For the press it fallacious.
It involves elements of of politics of me to have rich and powerful people.
And and my guess is.
It will continue.
For a while.
Our our view right now.
Is that.
It it is not.
Affecting.
Our relationship with our investors I think we have a pretty open dialogue.
With them.
And our view is then that if if they do have any specific concerns.
As you know.
Our relationships have been in the last 30 years.
That we want to be able to talk to them about it and have them feel they have total.
Access.
To us as to.
The substance of the questions you've just related.
I'd like to just share.
With you.
A in response to.
All this press coverage.
I sent out.
An email.
Two of our to our 1200 50.
Employees.
Last Friday.
Which which covers.
A number of the things you've been asking about.
And I'm happy to share.
That with you now.
So I'm actually just going to read.
The email.
So quote given the intense press coverage of Jeffrey Epstein. Following his recent arrests, including stories concerning Mr. have seen his role as a director of my family Foundation.
I believe it is important for me to communicate with our valued partners and employees about my relation with Mr. Epstein as follows.
Number one Apollo has never done any business with Mr. Epstein at any point in time.
Number two from time to time, Mr. Epstein has provided professional services to my family partnership and related family entities involving tax estate planning and philanthropic advice.
Three on a few occasions I donated money to certain charitable organizations with which Mr. Epstein was affiliated and he made contributions to certain charitable organizations that are meaningful to me.
For the Black family Foundation was created in 1997 with seven trustees, one of whom was Mr. Epstein Mr. Amp seen resigned as a director of the foundation in 2007 and state tax filings in Delaware correctly removed Mr. EPS things name as a director in the years following 2007.
This trend seems name however was mistakenly maintained on section 990 tax filings for several years after his resignation.
Most five most important I was completely unaware of and I'm deeply troubled by the conduct that is now the subject of the federal criminal charges brought against them.
And then I finally ended it that as we embark on the Thirtyth year of a building Apollo into a world class business operating with integrity and the highest business standards, we should all take great pride in the work we do for our investors I look forward to the future and I'm sorry. If this recent media attention has been a distraction or caused you any concern.
That's the memo that was sent out the last last Friday, So our 1200 employees.
Which which I now.
Share with with all of you and again want to reiterate that.
We don't believe this is having an impact on our business.
And we look forward to discussing openly with any of our investors.
Any concerns they might have on the subject.
Our next question comes from the line of Michael Cyprys of Morgan Stanley .
Hey, good morning, Thanks for taking the question just wanted to follow up on some of the index inclusion commentary I think earlier you mentioned expectations.
For Apollo shares to be included in the Kras pharmacy high and some of the total market indices I'm just curious around your expectations on potential for inclusion in the Russell I think your existing common units have some voting rights I was hoping you can.
Remind us on the extent of voting rights that are in the units today, how that might change if at all and a C Corp, and if you think thats sufficient to qualify for the Russell.
Yes, Mike the short answer is we're not sure.
We have their voting rights that are attached to the costs yesterday that that would need to be operationalized more and we need to engage.
With Russell as to whether Thats sufficient for for inclusion so that that's that's something we plan to do.
They rebalance once a year.
So it's it's likely not something were low.
Until we get closer to that next rebalancing date.
Q2 of next year.
Our next question comes from the line of Gerry O'hara with Jefferies.
Great. Thanks.
In your prepared remarks, you noted that you remain confident in the ability to deploy capital it somewhat similar levels as in kind of years past, perhaps you can add some color there as to what you're seeing other thematically or perhaps even geography geographically that gives you can see this confidence and I guess.
I'm kind of thinking specifically around private equity and perhaps real assets.
Thank you.
Sure sure so.
As noted in the materials.
Q2.
It was.
A reasonably strong deployment quarter.
On the back of Q1, which was also a pretty healthy corridor.
Based on what we have signed up.
That will continue into Q3 as we look at the as we look at the pipeline.
You know the schematically I would say.
It continues.
Where we've where we've been focusing quite frankly for the last 18 to 24 months.
Public to private it continue to be.
An interesting place for us from a valuation perspective.
Notwithstanding some of the indices.
Theres still enormous value in many many public companies.
As noted three of the last four transaction, we have executed in fund nine have been public to private so.
Probably from a broadest theme standpoint.
That's been the focus.
Geographically.
I'd say there is not any one one overriding.
Factor other than North America continues to look in a strongest to us.
From a just.
Health of the underlying economy standpoint.
And then I'd say you know just beyond private equity a number of our other strategies continues to.
Deploy at a very comfortable pace pace so.
On the real asset side.
Our North American and Asian, real estate funds as well as our MPF fund continue to find very attractive investments to make.
On a hybrid value as Martin mentioned in his prepared comments.
That.
Thats fine continues to deploy a incredibly.
Yeah, well, that's just that's a very attractive product for the marketplace right now.
And they're finding.
Many many opportunities I think and probably some of the best risk return, we see across the entire spectrum. So.
Overall, we feel.
For those reasons I feel pretty good that.
That will be able to keep marching along.
And our final question comes from the line of Chris Harris of Wells Fargo.
Thanks.
Can you help me understand how a solar as business model.
I was going to work in light of all the negative yielding debt in Europe .
Well yeah.
Good question I think to start with.
On top of the negative yielding environment the yield.
Which one needs to create for the liability visa BD you asked is a much lower level. So.
As you point out if you were.
Traditional insurance company.
And you are your sand box to invest is.
Sovereign debt and investment grade corporates, thats, a pretty challenging environment.
We have been able to do in spending the years of really understanding solvency too.
And what we can do in terms of yes, you have.
Low or negative yielding sovereign debt, but if you appropriately matched that with.
Middle market loans in Europe , if you.
Other types of.
Wholesaler bespoke.
Securitization or a variety of other clauses I investment grade yielding assets youre yield target. If it was in the us for a theme and may be in the mid to high fours that would be dramatically lower in Europe somewhere in the context of.
Hi, twos low threes so.
I think that we're confident that our.
Portfolio management.
Strategic asset allocation.
And our ability to bring multi credit solutions middle market loans real estate debt as I mentioned to achieve those high twos low three targets.
Notwithstanding the negative or low yielding sovereigns. The math does indeed work and again I think thats something when we sit down in November seven we can spend a bit more time on.
The pathway to get there.
And that was our final question I would now like to turn the floor back over to Mr., Gary Stein for any additional or closing remarks.
Great. Thanks, very much operator, and thanks, everyone for joining us on the call. This morning, we look forward to speaking with you again shortly.
Thank you, ladies and gentlemen for joining Apollo Global management second quarter 2019 earnings Conference call. You may disconnect. Your lines at this time and have a great day.
Okay.