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

All right. Good afternoon, everyone. Let's get started. This is Craig Siegenthaler from Credit Suisse. And it is my pleasure to introduce Marc Rowan, Co-founder and newly appointed CEO of Apollo Global Management. Marc, it's great to have you here with us, and congrats on being named CEO.

Thank you. Sorry not to be there in person. I hope to be invited back.

Yes. Definitely next year. So Marc co-founded the firm with Leon and Josh Harris in 1990, and the firm just celebrated its 30th anniversary last year. Prior to being named CEO, Marc was on the firm's management and executive committees and also is responsible for forming the firm's insurance platform, which now manages $250 billion AUM. Before Apollo, Marc worked in the M&A department at Drexel Burnham, which is where he met and worked with both Leon and Josh Harris. Marc is very active with his philanthropic endeavors, which includes the youth renewal program, the National Jewish outreach program, the New York Foundation and the Wharton School at Penn. Now a quick intro on Apollo. Apollo is a global leader in alternative asset management with more than $455 billion in AUM. It has grown its assets by an impressive 7x over the last 10 years and plans to reach its $600 billion AUM Investor Day target in 3 to 4 years. The firm is also a leader in insurance and has pioneered private credit investing. With that, let's begin.

Marc, let's start with the elephant in the room. You were on a semi-sabbatical for the second half of 2020, and just recently came back to run Apollo as CEO. What motivated you to come back?

The opportunity nothing other than that. That, and I failed at sabbatical 101. In the middle of a pandemic, taking a sabbatical is never a good idea. But if I back up 10 years prior, I remember a meeting with Leon and Josh, and 3 people bogged down the firm when they can't make a decision. And I said, gentlemen, we have 3 choices. I can run the firm, and you 2 can go to make money. Josh, you can run the firm and so on so. And Leon, so and so. Josh stepped up and has been running the firm day-to-day for the past 10 years, and I've been off running insurance, which also includes building out our yield platform. That business -- so with no direct reports, no compensation, no management committee, no management meetings. Somehow I managed to fill my day for the past decade. And that really culminated in the, as you said, roughly a $250 billion insurance business. But by June of last year, it was time for a break. The first half of the year, I worked like a young associate. And it was clear that while I was engaged day-to-day, the team, particularly on the insurance and yield side, who is way more talented than I am, was just not going to step up and reach their full potential. So while the sabbatical was a failure from my enjoying it, it actually has been a success in that the team that I have built and put in place there day-to-day is now fully ensconced. The team had an absolutely spectacular year. And in many ways, I'm very well positioned, now that my time has been freed up, to take on the challenge as CEO.

So Marc, now that you're back and running the firm, what will be changing at Apollo?

So I think this is now a question of style. So I am fortunate in that I have 2 amazing partners Jim Zelter and Scott Kleinman, who really run the business day-to-day, and will continue to run the business day-to-day. They will do a better job operating the business than I ever could. And so I have been careful to define those places where I think I can add value and the so-called lanes. Two of the most obvious, one is strategy, the other is culture. I can go down the others if it's helpful. But I think strategy is really the place to start. And it's pretty simple when you really get to it. We are, in many ways, fortunate. We serve a market that is growing every day. The demographics are in our favor. The need for income is in our favor. Low rates are in our favor. Indexation and commoditization of return is in our favor. And so the market that we serve is growing, and you kind of check the box on that. Then if you look at our business. And I look at our business specifically, but also the business of all the ALTs firms. If you think about what is needed to grow, because a lot of what we're talking about is about growth. We are in a growth business. It is not a shortage of capital that is the carburetor or governor of our growth rate. It is our ability to find interesting reward per unit of risk at every point in the capital structure, whether that is investment-grade credit to the most opportunistic of private equity transactions. There has never been an investment, that I've been in Apollo, that we have turned down because we don't have the capital. If we find something that's interesting, it can go on an insurance balance sheet. It can go in an SMA. It can go in our public vehicles. It can go on our LP driven funds. It can go through syndication. Or in the worst case, it can be shared with one of our competitors. The ability to grow is really centered around scaling the front end. So if you buy those 2 things, one is that we're in a growing market, and that the limiter of our growth is not the ability to raise money, but the ability to scale the front end, I'm doing and I intend to do, and Apollo will do that which makes sense, which is focus on massively scaling our front end. AUM will follow, but that is not the primary way we think about the business, grow the business, govern the business. And if you then dive down one level further, each of the 3 broad buckets of our business in terms of how I divide it, needs to be scaled differently. And the way, again, I divide our business is the opportunistic business, private equity and its like, yield and then a nice interesting business in the middle.

Got it. So with all the changes, the most important variable from our seat is how your limited partner clients reacted to the governance changes. And so like if you were raising large funds today, how would that be impacted by the changes?

So look, I'll repeat a little bit of what I've said on the call now, informed by another month of conversation with large limited partners. The vast majority have accepted what we've done. They appreciate the seriousness and the transparency, and we're back to business as usual. There are some that will need to see the changes we've announced implemented, and there are some that it will take more time. To the best of my knowledge, we have not experienced a single redemption since the beginning of the year. In fact, I would go back and say, since the issues in the fourth quarter. And if you look at the business and broadly, over 5 years, any year where we are not raising a flagship private equity fund, we typically take in $15 billion to $20 billion of LP capital. This year, we will take in $15 billion to $20 billion of LP capital. We're in the market with 5 opportunistic equity strategies and 5 credit strategies, in addition to the perpetual vehicles that are out there. And I think we're in the right place at the right time on all of them. And I have nothing but confidence that we will see those raises accomplished very, very efficiently. But again, I want to come back and I'm going to harbor on it a little bit. The ability to raise AUM, whether it's from LPs or from an insurance company or from a -- is not really the governor on our growth. We have learned that anytime we want to raise more money, we can sell another annuity, buy another block, enter into an SMA, syndicate more out of our portfolio. And so I really want to come back and anchor it. LPs are incredibly important because they support the opportunistic portion of our franchise, primarily. That is where not just a lot of economics come, but also a lot of intellectual capital that is spread around the firm. And also, LP capital is long-term long-dated capital. And a lot of what we do relies on illiquidity, playing cycles or stepping back from the day-to-day traded markets. So it's not to diminish the importance of it. It's just to step away and, again, the focus that -- the shorthand that we've developed in this industry to talk about AUM, in many ways, is misplaced. AUM growth will follow expansion of the front end.

Got it. So one of the positives to come out of the changes potentially for the stock is that Apollo is now evaluating a full C-corp conversion. In this scenario, the partners would give up some voting rights, but this could provide a path to the S&P 500 Index, which no other alternative is in right now. So from your seat, what do you see as the pros, but also maybe the cons to this decision? And how could we think about timing?

Okay. So I'll start with our mix of business. Our business is a little bit different business than almost every other alternative manager, in a sense that if you look at the balance, and I'll do some rough justice to the numbers, roughly $350 billion of our business is yield, roughly $70 billion of our business is opportunistic and $30 billion is in the middle, between yield and opportunistic. Most of that yield business has grown up around serving 2 large regulated balance sheets. We are, in many ways, a part of the financial ecosystem of the U.S. Think about the difficulty that the Fed and the treasury had, reaching Main Street businesses through Main Street lending in the most recent crisis. The center of activity of providing credit to these small and medium-sized businesses is now no longer in the banking community. It's in the investment marketplace, of which we're a very large participant. For us to play the role that we play, both as a financial intermediary and also as a regulated entity itself, we are a regulated insurance company, moving from a private partnership, founder-controlled entity to something that is more easily understood by the regulatory and governance community is only a positive. What we have done thus far is to move to a 2/3 independent Board, which we have announced. We've started to name members, and we will fill those out in the near future. We've moved to an independent lead, independent director. Jay Clayton has just taken that spot, former -- recent Head of the SEC. And we have left 2 important decisions with our independent Board. One decision is 1 share, 1 vote. The other is, as you've referenced, the full C company converse. And I think as we left it with the independent committee, we said it promptly. I would expect that this will resolve itself one way or another by the time we have our first quarter call. I see a lot of potential benefits to being eligible for the index, and it is eligible because S&P makes their own decision as to who they want in the index, but there aren't eligibility requirements. And I think for our business, it really will not matter in any way. The notion that we, as a founder-led business, should be able to override a decision as a result of super voting stock, really, is just unnecessary. The 30-plus years of experience in the business, a large adjacent stock ownership where we're side-by-side with investors, if we can't carry the day with the force of our arguments, I'm not sure we should carry it by the ability to outload people.

Turning the subject over to the insurance business. You were the innovator of the old insurance model, which you pioneered 5 to 10 -- I guess, more like 10 years ago now at Apollo. Now Athene is $184 billion of AUM. Athora is around $69 billion. Could you provide us an update on this business and how you think about the growth trajectory from here?

This is -- look, this is a very good story. Insurance for us has been a primary driver of our growth. It is not the only driver of our growth. But I think it's important to explain what it is and what it isn't. And if you think about what makes you successful in the insurance business we're in, it is really 3 things. One is sourcing very low-cost liabilities. The second is running a very efficient operation through scale. And then the third is alpha on the investment side. So think about what's happened in the debt markets, particularly the highly rated debt markets where most insurance companies play. Those markets have commoditized over the past decade. Think about indexation, ETFs, open-ended mutual funds, derivatives. And so the ability to earn alpha out of that business is very, very difficult. And if you can't earn spread, which is the primary governor of profitability in the kinds of insurance businesses that we're in, then you really can't be in the business long term. And so what we have done is we have built up this $350 billion credit business, which has really grown up to onboard assets efficiently to insurance company balance sheets. Highly rated at every point in the risk reward spectrum, we're looking to earn 150 to 200 basis points better than it's comparably rated, publicly traded, indexed peer. And the way we've done that primarily has been through origination. So we've built origination in aircraft. We've built origination in real estate. We've built origination in net lease. We've built origination in trust preferreds. We've built origination in operating and industrial leases and on and on and on. These businesses give us a competitive advantage, which allow Athene and Athora to meet their financial objectives without taking on undue risk. And I think it's going to be interesting to watch others who have come into the industry as to when -- as to how they approach it and whether they recognize what the issues are. So I start with where I started on strategy. The thing that is in short supply in today's market are investments, not funds. Anytime we or Athene or Athora want to grow, there is fixed annuities, there's FABNs, there's pension risk transfer, there's reinsurance, there's blocks of business, there's acquisition. There are a multitude of ways to grow. And there are a multitude of sellers. Because many of the large holders have concluded that they are not in the business of earning excess spread, and they'd rather extract their capital from this business and redeploy it into mortality or P&C or fee-for-service or some other business. So liabilities are going to come. What we have done, and I said somewhat fortuitously, not planned, we have been forced to build a credit business that is centered around originating for insurance company balance sheets. We also now make that available to our SMAs and our best clients and through our funds, but it is primarily, again, around insurance company balance sheets. Most of the marketplace today in the alternatives area has originated higher octane, higher risk reward, if you will, credit, which is generally not where insurance company balance sheets invest. Some, I believe, will be successful in getting this over time. I think KKR bought a very nice franchise with an excellent management team. And I think if they embrace what I've just said and understand what their management needs, I think, over time, they will be very successful. Others will be effective server -- providers of assets to the insurance company marketplace. But until you scale your front end, it's very hard to be all things to all people. If you're not delivering sufficient assets to your insurance company because you've spread it over lots of different vehicles, it's going to be hard to really get what you need to run your insurance business efficiently. If you want another word on it, the business is, certainly at Athene, has hit escape velocity, meaning that they generate so much capital each year through profitability that they are self-funding. Roughly $0.08 of capital is needed for every dollar of liability that you assume. So the businesses can be very capital intensive, but they also can be very rewarding. And I'll stop there.

Well, sticking to insurance...