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

Two important disclosures on the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Well good morning, good afternoon, everyone. Welcome back to the Morgan Stanley's Financials Conference. I'm Mike Cyprys, equity analyst covering brokers, asset managers and exchanges for Morgan Stanley Research, and welcome to our fireside keynote discussion here with Apollo Global Management. And we're thrilled to have with us Jim Zelter, co-President of Apollo Global Management. With $461 billion of client assets under management, Apollo is one of the world's largest alternative asset managers. Jim, thanks so much for joining us, and welcome back to our conference.

Mike, I'll always appreciate being part of this. You've run a great show here and look forward to always having a good chat. So the floor is yours, and let's jump right into it.

Great. So we're going to jump right into the current environment, and we'll come to some investor questions towards the end. So investors, feel free to submit your questions on the web portal. We'll come to it.

So kicking off with the current environment here, Apollo was certainly very active on the deployment front in the first quarter. Maybe you can just talk about how you see that opportunity set shifting here in the second quarter. Has that momentum continued? And maybe you could talk about both the credit and also the private equity side. Any sort of perspectives you're willing to share about the return for large LBO transactions?

Well, I think certainly starting -- going back to last March and April, we have been on a pretty determined plan to really put capital in the ground. And we did so in the first part of last March and April of '20 with regard to the dislocation. But it really has continued to the fourth quarter, third and fourth quarter. Last year, we put about $90 billion to work in LTM capital. And certainly, a big portion of that was in the credit area, around $70 billion. But in the last several months, year-to-date, between Venetian and Michaels and Verizon and EmployBridge, we have found great opportunities in the PE landscape. Certainly in commercial real estate and a theme, we've put some capital to work across the board in structured credit and things of that nature. I mean, certainly, as yields continue to compress, and there was some rate volatility based on the Fed, we've definitely continued to take our exposure and credit up to more senior levels and this fixed income replacement. But it's been surprisingly a pretty good robust market to put capital to work. We were, over the last 12 months, very active in Hertz between the distressed angle, securitization, the dip, the Diamond sale. And then backstopping the consortium's purchased for the company out of bankruptcy, we committed to $1.5 billion. So it's surprising, Mike. Even though it's been a growth and tech-backed environment, we certainly have found ways to put capital to work in a unique period of time. So valuations are high, technicals are strong, but fundamentals have come through. So we're just keeping our powder on a lot of larger companies where we control the dynamic.

Great. So it sounds like the momentum is continuing. If I could put words in your mouth here out for just a moment, it sounds like continuing -- any sort of thoughts or color around where you see spreads and yields as you're putting capital to work on the credit side there?

Absolute yields have definitely come down. Where we saw spreads tighter a decade ago in high-yield and loans, but absolute yields are pretty low right now. So we've been a voracious issuer in the structured credit area of CLO issuance. We've been a voracious buyer of CRE debt and structured credit liabilities. Certainly it gets -- it's getting a bit harder here as we get into the days of summer. And it gets -- a little bit of the enthusiasm is waning. So to answer your question, I think we saw a good deployment in the second quarter. And listen, there's obviously been some larger transactions out there on the PE side. But our calendar still looks pretty solid.

Great. And you mentioned interest rates. Certainly that's a topic that gets a lot of attention these days just around interest rate sensitivity. Hoping you could talk a little bit about how your portfolio is positioned for either a steepening yield curve, rising front end. How do you think about that? What's the overall sensitivity to your portfolio?

Well, for us, we don't take a macro view on any one quarter on rates. If you think about -- really, we have 2 distinct portfolios. We have the Apollo portfolio ex-Athene, we have the Athene portfolio and an aggregate. On the Apollo portfolio, we have a tremendous amount of floating rate exposure. We're probably 15% -- actually 20% fixed and 80% floating in Apollo. At Athene, it's a bit different. In Athene, it's about 75% fixed. So when you combine the 2, we're about 55%, 60% fixed versus floating. We -- the Athene book is pretty well duration matched, so we're not really taking the interest rate risk there. I do think we'd like to see rates a bit higher. I suspect -- and my economics was my college degree, but I'm not an economist. My sense is we're seeing really transitory impacts in the economy, obviously in travel and autos and some food stuffs and things of that nature and supply kinks. So I think we'll be sitting here a year from now, notwithstanding the volatility of the Fed messaging about a different regime in terms of the tapering -- taper tantrum. But I think long term, this will be looked at more transitory as we look at our overall portfolio and the impact of demographics and technology and other broader, broader, longer-term macro thematic schemes.

So I hear you that your perspective is that it's transitory. But I think there's some perspectives out there or views that -- or debate that maybe it's not. So I guess if we wake up in a year from now and rates are substantially higher, is there a level of interest rates at which it begins to impact demand for private credit where other strategies, maybe IG or high-yield become more competitive in your view?

I think we still see voracious demand for private credit. And again, Mike, our business versus many of our peers, we really think about the world as a fixed income replacement. And we started IG and go up versus many of our peers have distressed businesses and others, which we have as well, but because of the sheer scale of our business. So a lot of our products now and a lot of our strategies are focusing on this 5% to 7%, which -- and things we did last year in high-grade alpha for ADNOC or Hertz and otherwise. So we'd like to see rates 100 to 200 basis points higher. I think you're seeing stickiness in the loan market and in the private credit market, in terms of some decent spreads. But we would embrace and applaud a little bit of a higher rate environment across our portfolio. And again, thinking about it, really for Athene, which is really the retirement services business, it really is a spread business. And if our objective is to make that 4.5% to 5%, if we have a bit higher rate environment to do so, we would really welcome that. And the same degree on the Apollo side for our institutional clients, it's a majority floating rate product business. So we would really embrace that in terms of the longer-term opportunity for us to create value and to harvest returns.

Why don't we shift gears a little bit and talk about Athene. That's been a big success story for you guys at Apollo. And in March, you announced the agreement to acquire 100% all-in stock -- 100% stock transaction. Can you talk about the strategic rationale for increasing your ownership from 35% roughly to about to 100%? And how does this acquisition affect Apollo's overall trajectory?

Sure. So we -- there's a long history with Athene and Apollo. Over a decade ago, it was a handful of investors and $400 million of capital that got it started. And as you mentioned, we announced that -- over that 10 years, a lot of success of Athene, private raises, public going public, we went from 10% to 35% about 18, 24 months ago. And then the transaction you announced. For us, we think it's a very logical evolution of our platform. From our perspective, we're prolific generators of investment returns and investment opportunities. They bring a set of liabilities. It's unique to the industry. And bringing the 2 together, we think, makes a tremendous amount of sense. It wasn't a surprise. We knew a lot about each other. We've been, if you will, dating for 10 years plus, so it's appropriate that we formalize that relationship. But in all candor, I mean I think that we think, when we look at our ability to -- as 2 separate companies, while we really worked very, very well together and we were affiliates, there was some time-appropriate friction as their management team and Board had their objectives that were very well aligned but were not 100% aligned. So when you put the 2 Venn diagrams together, the ability to bring our skill set to the Athene balance sheet, to bring -- to partner our investors with the Athene investors in terms of bringing products to market quicker, in more scale and more substance, we think it's going to be a collective win for us. At the same time, that was -- it's a fast-growing franchise, massive organic growth. They raised $20 billion last year from their channels. Very little overlap between how we raise capital and how they raise capital. And in our underwrite, it was not done with any synergies or view that we would create operational synergies. So we think there's a lot of upside from that. I would also say, for us, I think there's operating synergies, but there's also a chance for us to -- capital accumulation will be a really critical aspect of it. But also a variety of evolutionary changes, Mike, that I need to mention in terms of the "one share, one vote", corporate governance, which really is the -- goes well beyond any of our peers in terms of lead independent director, in terms of what the founders, in terms of their rights and our going forward post the merger, we believe we put ourselves in a position in terms of potential S&P inclusion, if they were ever afforded to us. And as you saw last week, we announced the filling out of our Board post the Athene merger for some representation there. So in terms of the strategic industrial logic, in terms of the execution and the evolution of governance, I really think it checks, really, 3 very critical aspects for us.

And what would you say is the most misunderstood, misappreciated about the Athene acquisition and its impact?

I think it's looked at -- for those who don't know the Athene situation and story, insurance is one of those question marks. It just sounds confusing. And when you really peel the onion back, we're really a retirement services business. We're really a spread provider of retirement services. We have really no duration, no health care risk. Mortality or morbidity are really not part of the equation. So I think it just takes explaining of really what the Athene business model really is. And that's our opportunity through events like this. But also in the fall, we plan on doing an Investor Day to really dig into that. But it really is for us -- it's the understanding of what the basic business is. And then giving a guide and a path for how we're going to be thoughtful about the capital accumulation that takes place, and really showing folks that we are really aligned to be very thoughtful about how we execute that capital in a very, very thoughtful manner.

Speaking of the capital accumulation there, the acquisition has been a source of debate with investors, as it does shift the business away from being capital-light toward one that's being more capital intensive. I guess, how do you think about the cost benefit there with the business becoming more capital intensive?

Well, I think it's a very efficient use of capital. I mean, it is capital intensive, but I think it's a very efficient use of its capital. And again, when we think about what is going on between the evolution of the markets, the evolution of savers, the evolution of borrowers, the changing regulatory landscape, we think the combination of all those and the combination of these 2 platforms makes a tremendous amount of sense. We've run the business in a very -- or I should say, Athene. And Athene's management team has run the business in a very conservatively managed manner over the last decade in terms of -- if you think about their stat capital to reserves, it's well in excess 12% versus 8%, 9% for our peers. It's been lowly levered compared to its peers, about 10% to 15% levered versus 25% debt-to-cap versus its peers. And if you look at the credit losses, it's been low single digits, low to mid-single digits, 7% to 8% -- 7 to 8 basis points versus 13 to 15. So I think it's a well-managed capital box. We feel very comfortable that we know it intimately. There's really no change in the business operations. So we feel very comfortable that when the market really sees the breadth of the flexibility that it provides us, they will be as excited as we are.

Now as that insurance balance sheet portfolio comes over to Apollo's balance sheet, what metrics would you be looking at to assess risk in the portfolio? Understandably, something you guys already do today, just given you already manage the book. But as it comes over to Apollo's balance sheet, what metrics can we, from the outside as investors see if there, say, were a deterioration in credit quality or deterioration or challenges emerging in the portfolio, how could we see that from the outside?

Well, I think -- historically, what Athene has been able to do, and they did it with our help as the asset manager last March and April, we were very, very transparent with our book. We were very transparent with our exposures to structured credit, commercial real estate, other corporate assets and how we were navigating that market. So I think they've really led the industry in terms of timely and accurate engagement with rating agencies, with regulators and investors on a real-time basis. I think the market -- we need to make sure that we're really being very, very clear with the Apollo historical investors, how and what was looked at as a unique portfolio is now being embraced more mainstream across the insurance landscape. And we have a lot of folks who are following our lead in terms of trying to create that type of spread in the insurance business. So I feel very comfortable that what Athene has done historically, we're going to continue to our investors. And we'll give very, very transparent guidepost towards credit quality transition, portfolio construction and rating and otherwise.

Between the capital that you have on hand, or that Athene has on hand, sidecar with ADIP, what would you say is the capital deployment capacity of Athene today? And how do you think about the time frame for putting that capital to work? And maybe you could also touch upon what the financial impact would be to your AUM and for Apollo.

Yes. When you take a look at the excess capital that Athene has today, some of their borrowing capacity as well as their -- as well as what ADIP provides, it's north of $7 billion, $7.5 billion of excess capital, which any kind of metrics is close to $100 billion of assets that you could potentially -- liabilities which you could engage with, which the asset management contract files along with that. So it's a very, very strong number. It allows us to be involved in any material conversation out there, which we are always involved in the cutting-edge there. Certainly, I think it's -- if you see what last year we did with VIVAT and the other acquisitions, and the ability for us to bring in that type of capital and assets underneath our balance sheet in aggregate, were led to 25% AUM growth last year. Now I think that's an extraordinary number that I wouldn't want to keep on annualizing it, but we've talked about growing the FRE of our business in the mid-teens. We feel very, very comfortable with that, and I do think that the ability for us in this -- as you have periods where you have compressed spreads and other areas. The other thing I'd point out, Mike is for Athene, not only are they -- have the M&A opportunity, but organically they grew almost $20 billion last year. They grew their PRT business. They've been an issuer in the FABN market. So I think there's plenty of leverage for us to pull, that we feel like it will be a strong value proposition for us to run that business on a combined basis going forward. And Jim -- Jim Belardi and his team have done an amazing job. So we look forward to having them be part of us going forward.

And is there any appetite for a successor fund to ADIP at some point?

Pretty much. ADIP -- ADIP 1, plus or minus 2/3 deployed, have some dry capital. But ADIP will certainly be a tool for us to use going forward. So again, between the excess capital, the potential ability to take on some debt, ADIP, and then also you can throttle up and down your -- our Alts portfolio is in the appropriate range for our ratings, mid- to high-4s in terms of percentage of assets. So we have ways that we can toggle up and down that to get greater exposure and greater capital. So we feel very comfortable with the flexibility that we do have.

Great. Why don't we shift gears and talk a little bit about the direct origination platforms that you have. Maybe you could talk about how you think about further scaling those platforms, going forward. And which part of the ecosystem would you say your platform is, dare I say, lacking in any way today? Or shall I say, what opportunities do you see that lie ahead for expanding your origination platforms? And any thoughts around any, sort of, dedicated commingled funds as well to sort of monetize that, too.

So I think we're still very focused on continuing what we announced last year with Mubadala on the large-cap origination. Now certainly, the strength of the syndicated loan market has probably impacted a little bit of our ability to put some work money there over the last 3 to 6 months. But again, we think over 3 to 5 years, that's still going to be a very strong strategy for us. This whole high-grade alpha, our ability to bring really creative but scalable solutions to the IG market, whether what we did in ADNOC and Hertz and AB Inbev at year-end, big focus internally on that in terms of garnering resources internally to focus on that joint origination overall. MidCap. MidCap continues to grow very nicely. We did an equity and debt raise there over the last several months, which got some notoriety and brought in some new investors. And that -- the last couple of days, there's been some announcements about our CLO incubation with Redding Ridge, with what we did with Diameter Capital. So that's -- we've done 3 or 4 of those incubation strategies, which allow us to take on liabilities and equity in third parties. And then yesterday we announced with Victory Park, a successful manager out in the Midwest, the whole area of fintech and how the fintech universe is really taking on a new and innovative role with the -- in the financial services landscape. And we really used our balance sheet to augment their front end in terms of they -- they do a variety of activities with their facilities, with a variety of online merchants. And a way to bring capital to those smaller, medium-sized business in aggregate. We announced a $500 million facility there. So I think there's still a lot in our existing book. There's a lot in our new book. Obviously, we've talked -- we got a lot of attention earlier this year about trade finance and activities around Greensill. I think you'll see us doing activities in that space. So we're as excited today about our credit platform as we ever have been. I mean, scale begets opportunities, a variety of open dialogues we're having with folks, and I think the breadth and the flexibility of that capital. And again, I really highlight, Mike, our ability and our focus of this 5% to 7%, 5% to 8%, we're not trying to garner 10% to 12% in today's market. And we do it on an appropriate size in appropriate vehicles. But for the $20 billion, $30 billion, $50 billion of growth we're talking about, it's more to that middle to single-digit -- mid- to high-single digits, which we think is still flushed with opportunity.

And how much runway would you say is left at this point for raising and managing third-party capital on the credit side? And what strategies and vehicles would you say have the biggest runway for growth there? And does the Athene merger alter those fundraising dynamics in any way?

No. I think it -- we believe it accentuates it. What Athene needs and what Athene wants, there is a Venn diagram with our institutional clients. But in fact, we're finding when we did those transactions for some of the high-grade alpha situations, we found a variety of insurance companies. While Athene was the lead buyer, we found some other partners to deal with us on the insurance space, which has led to them coming into our ecosystem, not only in high-grade alpha, but the opportunistic business in the yield business. So it's really broadening -- it truly broadens our area. Certainly, we feel our client third-party business is robust. Whether it's our Accord strategy, our Hybrid Value strategy, our infra strategy, our credit strategies platform, great returns last year. It's currently closed, but we're still very committed. Our LPs play a critical role in our business and will always continue to do so. So we really believe that's a win-win of bringing both those together in our ecosystem.

Credit secondaries. I think that's something that you guys have mentioned more recently. Can you talk about that a little bit more, the opportunity set there? And also, how you think about extending that into secondaries within private equity and real assets as well as credit?

Sure. Well, as I say, the private equity -- if you look at the last 15, 20 years, steady growth in allocations to private equity around the globe from institutional investors of all shapes and sizes, that was sort of mirrored in what's happened in private credit the last 10 years, $100 billion to arguably almost $1 trillion today. And then if you go back to that private equity universe, and your plot is the growth of funds and the growth of commitments, as a result of that, CIO changes, CEO changes, mandate, strategic allocation changes, there's always going to be some fund that has a vehicle or some fund that wants to change our strategy. So today, there's a certain amount of liquidity in the inherent PE marketplace from the aggregate funds, which is well documented and well executed. We think a portion of that will probably be in the credit secondaries as well. If you have plus or minus $1 trillion of assets, does it seem conceivable that you'd have 2% to 3% on an annual basis that may be an addressable market? And with our credit platform, the ability to be a large first mover and have insight on the valuation of those, we think it's just a natural progression for us. So I think you'll see us very active in credit secondaries. In terms of the PE secondaries business, pretty mature business, some great players out there. I don't think that there -- the world is not screaming for another PE secondary player. But what it certainly is looking for, and we've been active, is in these GP continuation situations. Where a GP will have a large investment, it will -- in the past, it was the closing down. If a GP was on Fund VI or Fund VII, they wanted to sell the remaining assets of Fund III or IV, well that's still going on. But what's also happening is that GP will have a successful investment. They -- it will come time to monetize, but they are the inside, they know the opportunity set very well. And they'll make a conscious choice to work with their LP base or with other folks like ourselves to take that investment and put it in a continuation vehicle. So we're finding a tremendous amount of inquiry knocking on our door because they know of our ability to navigate across capital structures and do it in a complementary fashion with our 3,500 investing and lending relationships. So we think that GP continuation is going to be a big theme. And we feel we have an opportunity to be a scalable player in that area as well.

Great. We're going to turn to investor questions in just a moment. I see a number coming in here, so continue to submit any questions if you have. Why don't we talk a little bit about retail growth, high net worth growth? I know Apollo recently announced a new dedicated global wealth management solutions vertical that's focused on individual investors. So Jim, hoping you could talk a little bit about your aspirations here. What sort of strategies and vehicles could make sense? And more broadly, if you could also touch upon the distribution strategy too.

Great. So over the last number of years, if you look at our fundraising on the institutional and so-called retail side, it's been 90-10, 95-5 institutional retail. We've been -- we've had a variety of folks knocking on our door, and we just see the overwhelming demand for a firm like ours with our brand and our investment acumen. So from our perspective, we really want to make sure we set the right resources on the field. So in continuing with our elevation of bringing up that next group of management team, we elevated a few folks, Chris Buchanan and Heather Berger on the ICPS side. And asked Stephanie Drescher who -- a long-standing partner to take on a broader role in our wealth channel. We've made a number of hires in the last 12 months in that space. We're out with products already, really that are really products that we have today in our system, some on the opportunistic side, some on the yield side. And so we're -- that's the first check mark, what I'd call the low-hanging fruit on the larger scale, upper high net worth channel. Obviously -- parking that for a second, on the other side of the equation I mentioned earlier, Athene raises $20 billion a year, largest annuity distributor in the U.S. And while it is a different coverage model, we see the benefits of doing that. So whether it's a non-traded REIT or other yield products, I think you'll see us going out with the broader, not only the ultra-high net worth and high net worth, but the mass affluent channels. Stephanie has a multiyear plan. We'll get into that more in our Investor Day in the fall. But certainly, it doesn't -- we've taken notice of the breadth and scale and demand from that channel. And again, really think with a well laid out distribution plan, really on the wholesale side, not the retail side per se, that's something that we want to make sure that we get our appropriate share of. And we feel very comfortable that if we do it logically over many years, you'll see that contribute mildly to our fundraising in aggregate.

Great. I'm going to flip over here to some questions that we're getting in from investors. The question here is how are third-party fundraising conversations going? Are you still being impacted by prior governance questions?

I think for us, we've had a tremendous 12 months in '20. We've had a great start to '21. And I think we feel very, very comfortable and confident with the dialogue and the integrated dialogue we're having with our investors. Last week we had our annual meeting. We had our advisory boards. And I think -- led by the energy and the vision of Marc as our new CEO, they've really embraced the growth dynamic culture of our firm, they've embraced what we've done with Athene, and they've really embraced the evolution of the governance in terms of leadership and bringing up the new generation. So we feel extremely comfortable and confident, several thousand LPs. And whether -- certainly, all of us as alternative managers are going through an evolutionary change of leadership, ours are probably a bit noisy with the new cycle than we would have liked. But the reality is we feel very, very comfortable that we are on great standing and great foundation, going forward.

And another question here from the web. What will be your approach to capital allocation after the Athene merger and dividend change? How do you think about building up capital on the balance sheet versus growing Athene, versus ramping up buybacks with the increased float that you'll have?

Well, a great question. And I think it's better served by a very detailed Investor Day presentation, which are all topics that we know investors want to hear from us on. But certainly, the ability for us to have a strategy and discuss in great detail the manner in which we're going to accumulate the capital and what our metrics will be for reinvesting and return of capital to our investors. As you know, we have -- we've gone to a fixed dividend at this point in time. We think that suits us well. But again, all great Investor Day conversations that Marc and Martin and Scott and I look forward to, to talking to folks about in the fall.

Great. And another question here. How is Apollo looking at fintech opportunities in frontier markets?

Well, let's break those down, fintech and frontier. So we think fintech is a -- with our historic financial services acumen, widely known in insurance, we were very active in a lot of things in terms of residential mortgages and other platforms. So in terms of financial services, we think we are amongst the best in the world. Now when that comes to fintech, we certainly see the broad opportunity of those two coming together. We're very aware of what's going on in fintech disruption and the next series of innovation. And so we are focused on the opportunity set and have a bunch of work in the shop -- in the R&D shop, which we'll be looking forward to sharing. But I certainly think -- as I mentioned, what happened at Victory Park is a good example where that whole fintech ecosystem of the online universe and online resellers needing different types of financial capital models to help their business, I think you'll see us doing a lot more of that in the future. So exciting times when we share that as a real strategic objective of the firm.

On private equity, there's a question here just around -- the performance has been very strong in the private equity business. Any sort of outlook there on performance fees? And when do you expect to realize the numbers that you had outlined at your prior Investor Day, just in terms of performance fees and expectations there?

Well, I don't want to get ahead of public announcements. But I think the recent performance of Fund VIII in terms of monetizations and distributions of capital, I think the deployment of Fund IX successfully in the number of transactions I talked about. I think that we are excited about the incentive cycle we're coming into, first and foremost from PE, but also as people saw last year in other vehicles, whether it's credit strategies, whether it's our EPF and Hybrid Value platform. So I think we feel like we are -- it's been -- nothing has really changed the game plan since our last disclosure. The trend has continued. And look forward to having a detailed conversation in our next earnings with more detail around that.

Great. And we're almost out of time. Maybe just last question here on the insurance side. Athene, for you guys, have been very successful. It's now attracting more competition into the insurance marketplace. I guess, how do you see that impacting pricing and economics? What are you avoiding in this marketplace? And how do you sustain the success that you've had with Athene?

Well, I think that -- as I said, we never expected to have 100% market share. And what we continually try to do is bring a variety of tools to our toolbox. So a couple of years ago when we took on a portfolio that had not only fixed but variable annuities, we were able to be very successful and creative in that. So from our perspective, we just want to make sure that we are -- have the scale and the team on the field to be very responsive. Our suspicion is with rates probably being a little bit stubbornly low for a while, there's more insurance companies that are -- have made the conclusion that they should address or change their business model. And we are front and center in many of those conversations. And again, we've been very disciplined. We're -- it's not the goal to do every deal. It's the goal to do every deal that makes sense for us. And I think we'll be consistent. I think the raw scale of our business model creates a variety of very unique discussions which, in due course, will pay dividends.

Great. I'm afraid we'll have to leave it there, Jim. Thank you so much for joining us today. Appreciate the insights.

I appreciate your time, and thanks, and look forward to seeing all the investors in person in the coming months.

As do we. Thank you.

Thanks.