Apollo Global Management, Inc. (APO) Earnings Call Transcript & Summary

All right, let's get started. Good afternoon, everyone. This is Craig Siegenthaler from Crédit Suisse. It is my pleasure to introduce Josh Harris, Co-Founder of Apollo Global Management. Josh co-founded the firm with Leon Black and Marc Rowan in 1990, and the firm will be celebrating its 30th anniversary this year. In addition to Apollo, Josh is also the Founder of Harris Blitzer Sports & Entertainment, a sports and media company which owns several sports franchises, including, most importantly, the Philadelphia 76ers. Outside of the business, Josh serves on the Boards of Mount Sinai Medical Center, Harvard Business School, The Wharton School of Penn, the NBA and the NHL. He is also the Founder and Chairman of the Harris Family Charitable Foundation. Now moving on to Apollo. Apollo is a global leader in the alternative asset management industry with more than $330 billion of assets under management. It has grown its assets by an impressive 6x over the last 10 years and plans to roughly double AUM over the next 5. The firm is also a leader in insurance and pioneered private credit investment. With that, let's begin. Good afternoon, Josh. It's great to have you here.

Great to be here.

So just starting off with that 6x AUM growth number over 10 years. It's actually pretty amazing and highlights how well you're positioned for the secular migration to illiquid ops. How far along do you think we are in the secular migration?

Yes, so I think you have to go sector by sector, but generally speaking, there's a long way to go. So if you think about private equity, which is $70 billion of our $300 billion -- roughly $350 billion of assets, private equity and all -- private equity used to be about 7% of pension fund allocation. This year, it will be 26%, right? So that is -- it's experienced enormous growth. And I would say that we're not expecting a massive expansion in private equity. We think that's sort of gotten to the point where it's going to keep growing but at a much slower pace. But where there's real opportunity obviously is credit, where if you add up -- if you look at the -- we're the largest in alternative credit at around $230 billion to $250 billion. And when you look at everyone, you're less than $0.75 trillion. And you compare that to bank balance sheets around the world of over $100 trillion, so you're really at a very small beginning category. And increasingly, with the Central Bank's quantitative easing, the public markets are -- it's really difficult to come by return. So you've got the 10-year treasury at an all-time low. And so insurance companies, LPs, everyone has this enormous quest for yield. And so people are quickly going into the private markets and try to find alternative credit, alternative real estate, sale leasebacks, asset-backed financing, anything they can find. And so that area is going to experience enormous growth and will provide significant expansion to our platform over the next decade or so.

So Josh, how does all the increased competition and record levels of dry powder, how does that not dilute the ability to generate double-digit returns? And how does it affect your ability to invest?

Yes. So if you look at -- again, you got to take it by sector. But certainly, in the context of private equity, we're investing -- we invested Fund VIII, $18 billion fund. Fund IX, we're a quarter through a $25 billion fund. And you might look at the public markets and say, wow, they have a 19 P/E and that's really above average. But when you go through it, the bottom 25% of the public markets traded under 11x, the top 25% traded 30x. And so that bottom 25% -- the markets have really changed. They're bifurcated. And public companies really are growth companies. Things that category killers, things that are easy to understand, they trade at very, very high multiples. Anything that generates cash flow that might not be growing or has a story about it trades at a very low multiple. And so we've done -- we've invested about $18 billion in capital over the last 3 years in these public to private, the latest one being Tech Data. Tech Data is a fantastic company. It's massive. It's got very high cash flow margins. Public markets didn't appreciate it. And so we're able to put together these funds at, like, literally 6.5x cash flow and generate very attractive private yield opportunities. We can buy a company at 6.5x cash flow, put about 3x debt on it to have it be less leveraged than the traditional private equity investment and then create a 15% levered cash flow yield. That might never be a public company again. Increasingly, the private markets are developing and kind of -- it used to be that there were 8,000 public companies. Now there is just over 4,000. And so you're seeing LPs, other GPs, very large family options are increasing. They want to own these companies that have very stable cash flow, like Tech Data, are very leverageable. May not grow that much, but you can bank on that 15% return. In today's world, that's a very attractive thing. And so ultimately, there is competition in private equity. We do have this all-time kind of dry high powder -- dry powder high. We have average multiples that everyone else is paying at 11x. But we're still kind of pretty focused and value oriented. And we feel like everyone else has sort of vacated that space. We think it's really quite interesting and sustainable. In the private credit markets, which is the other massive place that we play, it's just beginning. I mean, literally, as I said, at $200 billion-ish -- $200-plus-billion, we are uniquely -- we're the largest. We have the most investment professionals. We're certainly linked with a lot of permanent capital vehicles that -- insurance-based permanent capital vehicles with very low-cost liabilities. And so the asset-backed credit opportunities, yield origination opportunities that we can generate are very large and almost limitless at this point. And so that area, even though you've got a little bit of competition, it's just beginning. And so the 2 are different, but they both -- we continue to see the ability to earn above-average returns in both those areas. The reality is, if you talk to the pension system, they don't -- and you talk to the sovereign wealth fund, even though the public markets have generated 15% returns over the last 10 years, that no one is projecting 15% returns out of public markets. They're projecting 5% returns, 7% returns. The media and private equity -- the median private equity GP has generated about a 400 basis point spread over the public markets during the last 12 years. The top-quartile GP is close to 20% returns. And then our returns are in the mid-30s. I don't think that's -- that it's hard to project that being repeatable. But we continue to believe we can generate those 20% returns and the industry can as well if you're with the good players.

Josh, post the C-corp conversion, there's a lot of new investors looking at the space, looking at Apollo, looking at your peers. What really differentiates Apollo versus your peers? Why should they choose Apollo when they're looking at which stock to buy?

Sure. So I think Apollo has a lot of unique advantages relative to our peers. I mean you start with our investment cell, we simply just have the best returns of our peers over the long term. And so we have this very deep value-oriented culture. And culturally, we attract really great people. And so there's other softer things. I think that we integrate across private equity, credit and real estate, so we have this integrated platform. And in times like this where there's a lot of volatility, that is very helpful. You don't have to have the phone all morning talking about kind of the information coming out, our portfolio of companies and what's going on there and the credit markets and how to move and take advantage of opportunities that might present themselves because people are concerned about the virus and they might be selling broadly instead of kind of really focused on the fundamentals. And so that integration allows us to be very agile and move across economic environments and shift the dial. If debt is interesting, we'll be buying debt. If equity is interesting, we'll be buying equity. And that seamless -- we don't have information walls. That seamless approach to investing is unique to Apollo. And then, obviously, at this point, $180 billion of our capital is permanent. That's a unique advantage. Most of our -- if you look at our management company, which is what drives our stock valuation, we have the most revenue growth over the last 5 years of any of the alternatives, the highest FRE margins of any alternatives in mid-50s, any alternative managers. And we have the highest percentage of our earnings coming out of these permanent capital vehicles, close to 7 -- over -- the majority of our earnings are now permanently in place. And we're uniquely linked with these insurance companies. So in essence, we're an asset-light Berkshire Hathaway. We view that as a real advantage, the strategic partnership we have with Athene and Athora. The reality is that the ability to buy liabilities -- insurance companies create liabilities, and then they have to create a spread of assets into liabilities. Our ability to create liabilities at a very, very low cost is unique in the industry. And so -- and linking that with an asset management capability provides us with the opportunity to grow that part of our business. Really, in terms of large-scale insurance transactions, we compete with Berkshire Hathaway. We don't really compete with very many other players. In the sort of smaller transactions, certainly, a couple of the alternative firms are getting into it. So all of these things make us unique, and we're looking forward to the next decade growing our platform.

So your C-corp conversion has been very well received by the markets, by investors. What are your thoughts on maybe going another step further and getting potentially added to several other larger indexes like the Russell 1000, S&P 500?

Right. So we want to become -- look, we have a great company. We have a great franchise. We've been in business 30 years, very -- a lot of longevity of the team and all the attributes we talked about. We want to be increasingly a great stock to own. And in order to be a great stock to own, you need to be easy to own for the people in this room and the portfolio managers. And we recognize that being added to indexes that they're tracked against is important from their point of view. And so we're very focused on getting -- expanding the index inclusion for Apollo. If you look at -- when we C-corp converted, our long-only and passive ownership went from 30% to 55%. We think that's got a long way to go. And the next index that we're very focused on is Russell. Russell decides in May who to include, and they're very technical requirements. And we're very focused on making the changes that we need to make to be included in Russell in May. And we think that will significantly expand our long-only and passive ownership and the ability of the shareholders in this room to own our stock. I mean, obviously, S&P -- so that's Russell, and I think that's next up, and we're very focused on it. S&P, we would expect over time that -- financial services is underweighted in the context of S&P. Alternatives, there are no alternatives included. When you look at the market caps, some of the alternatives are getting quite large. And so logically, you would expect alternatives firms to move into S&P. S&P has a committee process where they decide. You have to make some changes to your corporate structure. But we're going to look -- once we get into Russell, which we're hoping to do in the short run, we're going to look towards S&P next.

At the Investor Day, you provided a 5-year AUM target of $600 billion. You're among your peers -- you're unique among your peers in contributing a lot of that to growth in the insurance business. How do you see growth opportunities across your business, including insurance?

Right. So if you think about it, we're at $330 billion today. We have between organic growth opportunities in the insurance companies, plus announced acquisitions like we have -- Athora is -- has an announced acquisition of VIVAT, which should add between $30 billion and $40 billion of AUM to our platform. And then as we've talked about, we raised the aided fund from our investors, which provides Athene with over $70 billion of buying power. So when we add all of that up, we would expect that between the aided money before acquisition that's already announced and organic growth consistent with past trends at Athene, that we would expand our insurance businesses a couple of hundred billion over the next 5 years. So when you look at the $330 billion and the doubling of our insurance business roughly, that would leave another $70 billion of growth to get to the $600 billion from the $330 billion. And we're growing our platform pretty consistently outside the insurance companies at $15 billion a year. So we look at it, we think that the $330 billion to $600 billion is extremely doable. And what it doesn't include is any new capital raising or acquisitions in the insurance business. And over the last 3 years, we've raised $12 billion of new capital, $4 billion a year on average, and that's provided another $100 billion of acquisition opportunities. And so we've excluded that in that number. It also excludes a stairstep in our noninsurance company assets. And if we look at the last -- we tend to stairstep our assets in financial volatility. And in the last financial crisis, we doubled our AUM. So we haven't included that in that $600 billion. Certainly, I don't wish any crisis on the world, but I think that our platform and our investors is very agile and people look to us. And we're one of the few people. We probably did brought more debt during the financial crisis than anyone else. So there is volatility, we'll expand our platform. And lastly, that excludes any acquisitions that Apollo might make. And so when I look at the $600 billion, I see that as a conservative case that is achievable just based on our existing trends and our existing capital and excludes all this other stuff.