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

And then let's just spend a minute on ASOP too now that you brought it up. I mean, can you just give us a little bit of background on it and how it came about? Is this something that is kind of generated from the LP level? Or did you guys sit your boardroom and kind of said, hey, there's an opportunity we think we can fill out there?

Yes, yes. No, this was definitely a homegrown idea that grew legs and for a lot of reasons. I mean this is really our direct origination -- larger-cap, direct origination platform. It really came out of the fact that we were actually a senior management sitting around thinking about all of the companies we touch and all of the ways we bring solution capital to companies and recognizing that not every situation, not every company can just sort of go-to-market and hit the syndicated market. Or maybe they can, but they'd rather have a more bespoke financing that needs -- may not be exactly what the market wants, but it's -- they can trade x for y and have a more relevant financing for them. Apollo had gotten to a scale -- between the relationships we have plus the scale that we are, we started to realize we don't have to be reliant on the traditional bank model of make a commitment and then go out and syndicate it and hope you end up with nothing left at the end. Our own balance sheets, between our insurance balance sheets, between our client balance sheets, between our fund balance sheets, we actually have demand to speak to these transactions and not have to worry about is this exactly what the market wants at this moment. We can do something that's much more bespoke and attractive for a particular company, and that's what -- so that put the business together, then we had to sort of test the water to see would investors be interested in a product like that. And clearly, when you explain it that way, it makes a ton of sense. And so we thankfully have had a lot of investor interest. And so it's -- we're really excited about this. We've started down the path of doing some of these directly originated transactions, and they were kind of exactly the way I described.

And just as a quick update for you, we're now at 20% overweight. So I don't know if new people are registering their votes now or you just sold a lot of Apollo stock in the past 2 minutes in that.

Well, keep it coming. Keep it coming.

All right. So I guess I wanted to spend some time on private equity since we have you with us, Scott, as well. So just maybe some background on how the PE business has performed through the recent market volatility. Did it create new opportunities to invest? Or was kind of the recovery a bit too fast for you guys to be really able to capitalize on the dislocation in a meaningful way?

Sure. Sure. So you asked 2 things there. Like, how is the business doing? And then where is the opportunity set? So I'll kind of try to hit each of those. Look, the business has -- our existing portfolio has sort of held up really quite well. In Q1, right when the virus hit and the lockdown hit, our portfolio marked the way I think a lot of the market moved. We did take a mark-to-market down. In Q2, we saw a pretty substantial recovery there, and while we haven't reported Q3 yet, I think you'll see an additional meaningful step-up as well in the portfolio. And that's really a function of the fact that, fortunately, the way we approach investing is a more value-oriented event. And so we had paid just generally lower prices for our portfolio and, therefore, had less absolute TEV risk on our portfolio. We also -- that means we put less leverage on the companies. And so we had less problem investments. And then perhaps most importantly, call it smart, call it fortuitous, but at the current time, we didn't have a particularly COVID-exposed portfolio. And so that's not to say we didn't have any companies that were impacted by this. We -- on prior calls, we've talked about a few. But for the most part, we had a pretty defensive portfolio that has carried through the real volatility in pretty good shape. And so all told, for the existing portfolio, we feel really good about where we are. As far as the business opportunity, yes, I would say it's sort of twofold. I'd say the first month of the crisis, it was '08, '09 over again. You had markets in free fall, really, fear in the market, a real opportunity to deploy capital in some very -- if you were prepared, which thankfully we were to deploy capital in a pretty interesting way, consistent with other downturns. This go-around though, the Fed acted a lot quicker than it did in '08, '09. What took 8 or 9 months in the GFC took 4 weeks -- 3 to 4 weeks in this crisis, as everybody knows. And so that -- a lot of the low-hanging fruit dried up very, very quickly. That's not to say there wasn't still and isn't still a lot of opportunity out there, either companies that might have grabbed some temporary liquidity but are still struggling and will continue to or even just other situations that -- where companies haven't revalued back to precrisis levels. And so I'd say it's a pretty interesting time. Yes. I mean, from an investing standpoint, the cycle -- the deep cycle was quick, but it favored the prepared.

Great. And then as you kind of look from here and looking at the different sectors in the market, I mean, which ones are looking kind of attractive to you? And then also maybe, what would it take to get some comfort level around some of the more COVID-impacted sectors like events and things like that? We tend to think of you guys as a value manager. So maybe a kind of look at the opportunities within that one would be great.

Yes, yes. So look, to maybe answer the first part of that question about sectors, right, you've clearly got some -- the last week notwithstanding, you've got some sectors that are definitely very fully valued. I mean you can just pull apart the S&P 500 and see what I'm saying, right? The 5 FAANG stocks are up, what is it, 30% from pre-COVID levels. The other 495 (sic) [ 395 ] stocks are down, what, 7% or 8%. The bottom 100 in that S&P 500 are down 40%. So huge dispersion in the markets now that doesn't follow a strict sector by sector pattern. You have leaders and laggards in most sectors. And that's really where Apollo is spending time. We're really looking for those companies that have either been misjudged by the market or misunderstood where there is opportunity. As far as the sectors that are in the direct line of fire from a COVID standpoint, look, you're right, we haven't shied away from them, where we believe that there's fundamental staying power through the other side. Think travel and leisure, aircraft, airlines, aerospace, those things. People are going to fly again. People are going to travel again. The real key, though, is if you're a value investor, I'm not prepared to predict when. Is it first quarter, second quarter? No. Actually, the way we're looking at it, we want to make sure that if it takes until 2023 or 2024 to reach pre-COVID levels, we're making an adequate return. And so that's how we've approached these type of directly COVID-hit situations. I think there's some sector -- some COVID sectors that are just -- all COVID did was accelerate an underlying trend already, some retail subsegments, for example, where it's not -- COVID didn't make it worse. It just brought the endgame a lot closer. And so those are ones, obviously, you have to be much more careful about.

And then I guess, within the way you guys approach the market, obviously, in the public markets, there's been a massive trend toward growth-momentum-type stocks and sectors. You kind of even see that some of your peers have extended their PE business into higher-growth areas like life sciences, technology, among others. So when you kind of look at the lens with a growth value dynamic going on, does that change how you think about approaching the market? Or do you think we're just kind of into the more of elongated kind of momentum trade at the moment?

Look, it's a fair question. And several years ago, we really started asking ourselves that, so way pre COVID. And look, I think you've started to see Apollo even, I'd say, inch -- others would say inch. I'd say step -- into growthier areas. Apollo is never going to be on the bleeding edge of growth or technology investing. But certainly, with -- in our PE fund, we've been inching towards some growthier investments. Certainly, some of our other products, our credit business, our Hybrid Value business has been financing much more growth-oriented companies, and we've been sort of developing views around that. And then lastly, I'd say, look, we are going to have a few products coming out. I can't sort of specifically say what, but in the relatively near term that start to address, like I said, that sort of next step of growth. I wouldn't say the, like you said, the life science or the sort of bleeding edge technology side but certainly growthier aspects than what Apollo traditionally had focused on.

Well, I mean even within your current book, right, we've seen your ADT and Rackspace getting interest partnerships from big tech firms like Google and Amazon. So I mean, as you look forward, is there kind of a confluence here around what you're buying and maybe augmenting a growth stock even if you're not in it?

Yes. No, look, that's a great point. While we are value investors on the buy, part of what we do is buy these good, quality companies at value prices but then implement a lot of growth and a lot of things to really try to drive -- change the trajectory of those companies and seek to get better exit valuations than when we entered. A great way to do that is some of the examples you just threw out there. The -- I'm not going to speak to any specific company, but it does make sense. We're buying these, really, blue chip companies with great customer bases, great reach, great products. Technology companies have other great products, but what they really need is that reach into the customer, into the home, into things like that. And it really has proven to be a great marriage when you start putting some of these together. So I think you'll see -- we have a lot of these types of dialogues going on. I'm sure we're not the only ones doing it, and I think you'll see more and more of that.

Great. And then I think when you think about the alt for the group, and I think you guys have spoken to this in the past call and other areas like that. I think, many times, you've talked about how this market environment right now is a little bit difficult for monetization, maybe not as much today as it was a couple of months ago but still a little tricky. I guess, what are you seeing on that front? Can you give us any update? And has there really been any improvements in the private area as we've seen kind of a recovery in the public market area?

Yes. Well, look, you're right. We pointed out earlier this year once sort of COVID hit that folks should assume a pushout of the monetization curve, especially for Fund VIII. I think given the last couple of months and the strength in the market, you are starting to see opportunities to bring that forward. But the general stance that we had highlighted, whatever it was last quarter, still holds, which is '21 and '22 -- particularly if the trends continue, '21 and '22 are going to be the years where we really seek to heavily monetize Fund VIII, and that will -- I think that still stands. You may pull a little bit of that forward later this year, but it's -- I wouldn't count on it much.

Got it. And then maybe if we just broaden this discussion out a little bit more. I know like on the credit side of the business, and I know -- and Jim runs that piece of it. But can you -- in your seat right now, can you provide like some perspective about what opportunity Apollo see in credit? And then now you guys got like $15 billion of dry powder in credit, and which obviously drives a lot of meaningful management fees for the firm, what's kind of keeping you guys in the sidelines in that area right now?

Yes. So look, I think the biggest single opportunity for us is what we were touching on earlier, which is the direct origination strategy. I really think the sky is the limit there. As we start to scale up, we're going to do it in a thoughtful, measured way. But I really do believe we've got a pretty unique engine here to be able to just do a fantastic job with that. I still think some of our dislocation products on the credit side are going to be periodically active. I don't believe we're really out of the woods yet. And there will be pockets of extreme volatility. And there will be periods where the market starts to realize that some of the growth or return to normal expectations for lots of companies aren't what people have been modeling at this point in time. And so that will create some interesting dislocation for our credit funds as well. To your question about capital on the sidelines, right? I mean it's a funny concept, right, because our job is to opportunistically seek out interesting situations and then have the capital available to take advantage of them when they arise and not have to go run around and try to raise the money to do it. And so for us, it's always about keeping capital in our wallet so that we don't come to a situation empty-handed. And so I think it'll always -- it's not so much that, that money's sidelined. I think the money is getting deployed. It's -- the money is getting deployed, and we continue to reload in other products. I mean that's our job. And part of what we've learned at the scale we are is that when you can come in and speak for much larger checks, you create these differentiated opportunities that others just can't take advantage of, others can't can hit, and that allows you to really skew the risk, return in your favor. So ensuring that we have some pretty sizable dollars available to go when we need it is part and parcel of our business line, and I don't think that should ever change. In fact, if you see that changing, that's when you start to worry.

And Martin, let's get you some work here, bud. So Scott has really kind of robustly outlined all this interesting stuff from a top line perspective. We talked about the insurance opportunity as well. We got a lot of management fee growth kind of locked and loaded. Just maybe a quick one. How should investors that are listening into this webcast kind of think about margin on a go-forward basis?

Yes. So we've spent a lot of time over the last 3 to 5 years on growing our margin from 20s up to mid-50s. And we're really pleased with that margin level. It's always a balance between investing in future growth, and that brings the P&L cost today. The revenues come 2, 3, 4, 5 years later. And so we're comfortable where we are given the growth opportunities we see in front of us. And so every year, we go through a very extensive 5-year planning cycle, strategy sessions and annual budget. And we debate all this. But I wouldn't expect to see much expansion in the near term as we see opportunities to further grow the platform, to address all the opportunities that Scott spoke about, to grow origination platforms and so on. And over time, I think there's potential. And at times, you get a step-change in management fees with a [ big fee ] franchise fund. That would be a time for growth. But at our current level, we're best-in-class in the industry. It's hard to argue that mid-50s is not a good place to be from a margin perspective. And so that's where I expect we'd be for the foreseeable future.

I think a lot of people would be envious of that mid-50s margin. I guess just to finish the conversation up and wrap up today. On our end, we're still doing a lot of teach-ins, one-on-ones around alts as well as [ power ] in particular. I know with C-corp conversion, index and eligibility, you're bringing a lot of newer investors to the table that might be listening to you guys the first time on a webcast like this. So I just want to give you an opportunity to address those that are -- might be newer to the story. If you had to kind of leave them with kind of one takeaway or a couple of takeaways of what you want them to understand about Apollo's business and how you distinguish yourself versus peers, I think that would be a good way to wrap up.

Great. Thanks, Jeremy. Why don't I hit a few and then maybe, Martin, you can hit a couple as well. Look, the ones that come to my mind, I'd say, first off, it wouldn't be an Apollo presentation if we didn't spend a second talking about our integrated platform. The integrated platform really means that all of our businesses, credit, real assets, private equity, all sit on the same side of the Chinese wall. That is really unique for the large alternative asset managers. And it sounds sort of nice on paper. It's really tricky to execute in the real world. But having really gone that way over the last 30 years and then actively support it every day, it creates enormous opportunity. We've got 500 investment professionals across all these asset businesses that are really working for each other. When I look at the $80 billion of capital that Apollo has deployed in the last couple of quarters, particularly in like a post-COVID world, so many of those situations arose in one part of the firm and then were handed off. It turns out, came into a credit relationship but was a better equity deal than a credit deal or vice versa. The expertise carried over. So hugely valuable. We're really the only ones who really make the effort to make this integrated platform work. I think secondly would be scale, right, the scale from an asset gathering standpoint. LPs, investors really are looking to consolidate their relationships. And the biggest guys continue to gather more and more dollars at an accelerating pace. And that's just the nature of the situation where we are. And so I don't see anything that's going to change that. And really an important piece, being one of the largest managers, it's absolutely critical. And then, I guess, lastly, I'd just throw out our permanent capital platform. Today, over 50% -- I think it's approaching 60% -- of our capital comes from these permanent capital vehicles, these relationships. And that's just a very unique feature that is incredibly valuable. It's valuable to Apollo in that we don't have to be constantly fundraising for that half of the capital base. It allows us to make strategic, longer-term decisions around getting into really interesting, attractive businesses. I don't know, Martin. Anything else to add?

Yes. I mean -- 2 other things. Related to permanent capital, we have the largest credit business -- alt credit business. It's $300 billion of assets. That just -- that's a broad, deep business that just brings a lot of opportunities with it, and we continue to see a lot of areas to grow it. And I think the combination of permanent capital and stability of capital creates a durable fee stream. We had a really significant sell-off in the first quarter into the second quarter. And our management fee stream held up. It was up through that period. We've had healthy transaction fees. So I think we've shown that we can continue to grow even in really adverse market conditions. And that reflects a lot of the comments that Scott's made today, but we have a really robust FRE earnings profile and that -- and it's growing. And so I think that anchors, in our view, the stock price and creates a lot of value as an investment.

Great. Well, Scott and Martin, I speak for everyone tuned in saying thank you very much for being here today.

Great. Our pleasure.

Pleasure.

Thank you. Bye.