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

Okay. Great. Thanks, everybody. We're going to get going with the next session. Thank you, and welcome. Next up, it's my pleasure to welcome Marc Rowan, CEO of Apollo Global Management. Marc is a co-founder of Apollo and the architect behind some of the most significant growth initiatives at Apollo over the years, particularly when it comes to the insurance business. Apollo clearly seen a lot of change in the last year to say the least. Obviously, Marc became the CEO of the company earlier in the year. You announced an acquisition of Athene. You launched a ton of new growth initiatives. And of course, you had an Investor Day only, I guess, a couple of weeks ago, outlining significant growth plans, planning to double the business essentially over the next several years. So lots to talk about. So welcome.

Thank you.

Thank you. Let's jump in. So Look, I mean, the first question is really kind of going back to the introductory point, you guys have a lot going on. So I'm curious, looking back for kind of the first almost year in the CEO role, key observations and ultimately, key priorities for next year as you guys do have quite a lot to balance for '22?

Look, I'd say it's an amazing year. The team definitely is a little tired in December. If you look at the scale of what we've done, not only as the plan out and articulated and well understood internally, but we significantly reset how we run the business, how we compensate people and have achieved a tremendous amount. I kind of boil the plan down relatively simply. We are circa $0.5 trillion of assets under management today. We expect to double the business over the next 5 years. Revenue will be slightly better than that. FRE will be slightly better than that due to operating leverage. But if you dissect what can be a very dense plan, there are really 3 bets other than business as usual. Bet one is that we will continue to originate yield assets. In our Investor Day, we said we were originating roughly at a rate of $80 billion on an annual basis. For us to double our yield business, we need to originate at $150 billion on an annual basis. You will see us likely exit the fourth quarter close to $100 billion. We've done 5 significant add-ons in origination over the past 4 months. So we're making good progress. So bet 1 is origination. Bet 2 is retail. Retail is just a really interesting phenomenon. It's not the flavor of the day. It's the intersection of a whole bunch of trends, technology, regulation, low yields and maturation of the market. We've been in the retail business for a long time. But if you think about how a high net worth -- even a really high net worth investor accessed our business, they paid 2 levels of fees. They have no privity. It was not a very good experience. And what we're seeing is institutional quality product come to retail, and I'm very bullish as to how that's going to happen both in guaranteed yield and non-guaranteed yield, we'll talk about that. Most recently, we announced the acquisition of Griffin, which really takes us about 18 months sooner to our retail build-out. The third bet for us or third key initiative is our capital solutions business. Capital solutions is very much the DNA of Apollo. Capital solutions at its core tells our firm not to think so much about fund size or trade size but every asset that is a good asset today has a home. The world is fundamentally short assets and long capital and liabilities. Sometimes they're mismatched. It is up to us as a firm to correct those mismatches. But every asset has a home. That business is about $275 million of revenue for us today. And we've said in our Investor Day plan, it will be $500 million. I personally think the 3 bets are not all that much bets. We're going to execute the plan. It's limited only by hours in the day.

Yes. Great. Well, look, lots to go through. Let's start with the fixed income replacement as a theme. You guys have been talking about this for a while, and it's again -- it's the core...

Well, I actually heard Bruce Flatt is starting to use it. So success has been achieved.

There we go. So you guys have certainly spent a lot of time talking about this. And the thing that send out the most is that to think of replacement expense beyond just the traditional alternative products, right? This is not just levered loans and high yields, you've spoken a lot about fixed income replacement, all the way up and down the capital structure, including investment grade. So what parts of the market fall within your TAM? And I guess what type of investment vehicles would be most suitable and you cut to you holding some of these newer sort of assets?

So I'll give you a little more than you wanted. So if you think about how all of us got into these businesses. We were in the private equity business. We were very good at analyzing equity. We said how hard can it be to do mezzanine and leveraged loans and those sorts of things. And so most businesses were built from private equity up and very sensible. We like those businesses. We're in those businesses. We're good at those businesses. We just don't call those yields. Those are hybrid or opportunistic businesses for us. 12 years ago, we really embarked on a different journey. And we embarked on a journey to serve 2 retirement services balance sheets. And what goes on to the balance sheet of a retirement services company is different than what goes into a fund. What they want is they want excess spread, but they don't want to take a lot of risk. So if you think about what a retirement services balance sheet is good for, it's a terrible place to take credit risk. It's a terrible place to take equity risk. It is a wonderful place to take liquidity and structure risk. Because unlike a bank, which has long assets and short liabilities, retirement services vehicle has long assets and long liabilities. It's perfectly matched. Market cycles don't really matter. It's all about collectability at the end of the day. And so what we've done is we have built a $350 billion-ish fixed income replacement yield business that serves 2 very large affiliates, Athene and Athora, and roughly $100 billion of third-party money side-by-side with Athene and Athora, the vast majority of which comes from competitive insurers. And we like that because it gives us diversification. We don't want to be too concentrated in any one product or credit, and they like it because we have perfect alignment. We own half of every trade. That's a very comfortable place to be. But if you think about the connection of this to retail, income replacement is actually the core of the retail market. Sometimes, we think of it as BDCs or nontraded REITs or credit products. But if you think about it, individuals and institutions want nonguaranteed yield, credit products, but they also want guaranteed yield. And so there's 2 flavors. And we've spoken so much about that the retirements are sort of separate from the retail world. It's actually not. They're very much side by side. Someone -- an institution or an individual puts money into our BDC or our credit fund, Apollo gains an asset under management and it manages assets. Someone decides they want guaranteed yield, they put money into an annuity or some other product, Apollo manages the asset. There may be different mix, different emphasis. But fundamentally, having 2 flavors, chocolate and vanilla is better than having just Vanilla. And that's really as simple as the business is. That is what we see happening in our market.

Got it. So in terms of some of the enabling factors when it comes to this, we've spoken a little bit about direct origination earlier. Let's dig a little bit deeper into that. That definitely feels like a core focus of the organization, as you mentioned, you've made a number of deals in the space. Can you talk a little bit about what the plan is to integrate them all together? Or are they expected to run completely separately? And then how do you manage enterprise level credit risk when you have multiple and growing number of kind of separate origination platforms?

So there's no easy answer to it, but it's somewhere between the 2. So we'll start with that. We are circa 10 origination platforms today. Some of them are at scale, mid-cap and some of them are not at scale but are growing quickly. We do not want 20 separate platforms. What we're increasingly doing is taking the really good management teams, the really good infrastructures, the really good systems and giving them more to do. I mean the best example of that is MidCap, which started out as primarily a health care lender is fully diversified across all sectors today. And then when we bought the P&C Franchise Finance business, it had enough similar characteristics to MidCap's core business, but that was also put under mid-cap. So if you look, we owned Donlen, which was a fleet finance business, financing corporate fleets. We bought Wheels, we put the 2 of them together. So I think what you're going to see is some themes emerge. You're going to see a corporate finance business. You're going to see a structured finance business, a consumer finance business, the transportation finance business, a trade finance business, but you're going to end up with a series of platforms with similar characteristics of how they operate under great management teams with scale. And we are very far down this journey of doing it, but there's still a lot of work to do. Each of these, of course, runs on their own risk budget, risk management. It's something we're actually quite good at.

Great. Let's pivot a little bit and focus on fundraising for a second. 2021 is expected to be a record year for Apollo's fundraising in terms of third-party capital in a year where you'd not have a flagship fund in the market. Looking out into '22, obviously, Fund X is expected to be in the market, as you discussed. Outside of that, what are some of the other things you guys are focused on in terms of third-party fundraising? I'm sure retail is going to be part of that. But what else is on the focus list?

We have the continuation of a number of things that launched late in the year, Hybrid Value, Accord, European Financial Solutions, our nonperforming loan business in Europe. So there are 3 or 4 large offerings of repeat product, along with the flagship fund, along with a significant number of products at retail. We are already 4 products launched at retail. We will certainly bring investors up to speed, but we're seeing really good early traction and really good early success there for our brand and our distribution. But I would expect next year to be nearly a double of this year. I think people have us at $35 billion to $40 billion of organic fundraising. And I would expect as much, if not more out of Athene as well, getting back to this notion of yield in 2 flavors in guaranteed and non-guaranteed. So I expect next year to be a very strong organic growth year. And inorganic is more opportunistic. We'll have to wait and see.

Great. Great. And $35 billion to $40 billion I'm assuming without Fund X as you think about that separately, right?

It will be with Fund X.

With Fund X.

Yes.

Yes. Perfect. So let's talk a little bit about retail. So again, retail, a big part of the story. I wanted to dig into Griffin acquisition a little bit more. Clearly, wait for you to accelerate some of the initiatives there. I think you said that kind of pulled forward your ambitions there by about 18 months earlier. What are some of the key products that you're looking to sort of tackle the market with? So we talked about [ A cred ] the non-traded BDC. What else is on the to-do-list that will resonate in the retail channel?

So if you think of just what we've experimented with this year, so we've done something in SPAC very successfully with Morgan Stanley. Hybrid Value, [ A cred ] and you will see us also put Fund X in part into the retail channel as we have with every prior fund. With Griffin, and to get to it specifically, this is not -- there's no one solution. So the U.S. market by itself is a very complex retail market. It is a wire house market. It is an RIA market. It is an IBD market. Griffin primarily serves IBDs. And so what we did is we significantly expanded our capacity to service IBDs. We bought an infrastructure. We bought selling agreements. We bought a call center. We bought customer support. And we bought 2 scaled products, 1 in credit and 1 in real estate. But the totality -- and so that's a piece of it, way more to do in RIA, way more to do in wirehouses, Oh, by the way, Europe and Asia. There's a lot -- just a lot to do. But I don't think this is a cyclical fact. As I alluded to in my opening comments, I think this is the coming together of a lot of different trends. So I touched on technology. But 2, 3 years ago, you sold a product to a client. That product did not show up on that client's statement. That was just the inability of technology to talk seamless right now. The ability to onboard from an anti-money laundering and from a know your client point of view, technology has made the ability for us to serve these clients in a dispersed way, much more personal and much easier. Low rates have forced advisors and have forced clients to actually seek out different solutions. Because after all the promise of alternatives, we may think of private equity when we think alternatives. The promised alternatives is nothing other than giving up some liquidity in return for a better risk reward. And that's what we're seeing. The vast majority of alternatives going into the retail marketplace are yield. Yield is where it is at. Yield is where the scale is. Yes, there will be some amount of opportunity in equity and infrastructure and all manner of things. But I think the sizable opportunity is going to be yield. And again, coming back to it will be in both the nonguaranteed format, meaning BDCs and funds and other things, but also in the guaranteed format with insurance wrappers and insurance products.

Right. Right. Well, let's talk about insurance a little bit more. Starting with Athene's growth, super strong growth, organic growth, I should say, in 2021, $35 billion. I think you alluded to the fact that you might do the same in '22, maybe even a little bit more than that. So what are sort of the build blocks for continued success in their origination and organic growth initiatives? And on the inorganic side, maybe you can hit on some of the pipelines or things you're seeing on that front?

Sure. So if you think about what it's taken, so we now have $35 billion this year, pretty sizable last year. I think we're close to $100 billion of organic that is currently on the books of Athene. It is clearly there. So what was it? It was rating. It was maturation of system and systems, significant technology spend, product design, sales force, all of the things that you think of, but we are -- we've now -- I think we'll end the year #1 in all segments of the market, whether it's pension risk transfer or its annuities or it's FABNs or whatever else. It was being there and having excess capital during the pandemic when everyone else deserted the marketplace. It really ratcheted up our market share. And so what we're seeing is given the A+ rating, given the excess capital, we are right now watching the maturation of some very large distribution systems that are hitting just at the end of the year that are going to be full year annualized next year. But if I end there, I think you won't get what I think we see. We and the industry sell products to 62-year-olds. And we have done a really good job by reengineering those products and tinkering around the edges, but we fundamentally sell products to 62-year-olds. And if I ask the people in this room, the #1 advantage of buying guaranteed yield from a retirement services company, people would probably say, tax deferral. Half of the people in the industry, half of our clients do not buy guaranteed yield and have accounted benefits from tax deferral. That's a shocking number. So we have yet to actually exploit the promise of product creation. Just like alternatives had not really exploited the notion of yield to retail, retirement services has been basically doing the same thing for a very long period of time. We need to look younger than 62. We need to look older than 62. We need to learn to tax wrap the products and services that we offer on the nonguaranteed side. There is a whole wave of innovation coming across this business that is only possible through coordination. Too many people who want a piece of everything lead to bad outcomes. And again, none of this is in our business plan, but this is what gets us excited about what's in front of us.

Yes. So to piggyback on that growth trajectory, let's talk a little about spread income. It's a bit of a, I guess, newer metric you introduced into the new Apollo reporting once we get through the closing of the Athene transaction. How should we think about the durability and the growth trajectory of spread-related income as well as the interplay of these growth rates with ADIP. That's obviously a unique component of the story for you guys?

So look, we have -- to be successful in the business, you need 4 pieces. You need capital, you need a really efficient operating platform, you need low-cost liabilities, and you need abundant access to appropriate spread assets. When we started that business, we had none of the 4, 0. But we had one thing going for us. We were in a market where spreads were wide. So we could actually get to scale and make every mistake and still earn really high rates of return. No one coming behind us today has any of those advantages. No one has those 4 pieces, and they certainly don't have wide spreads. And so when you say the durability of spread income, we fund ourselves really efficiently. We have a really efficient platform. We put business on the books at mid-teens rates of return. I think we said publicly during 2020, the totality of the organic book was locked in for the next 7, 8 years at 20% cash on cash returns. This year, I think we've said, and I'm looking for Noah to nod his head, we've given numbers for better than 15% cash on cash returns. We are earning significantly better returns than the industry, holding more capital, taking less risk, having lower defaults and just running the business. It's -- and so I think about it, and I said these things at Investor Day. If you think about the alternatives business generally, in the private equity business, everyone understands it, 20% above 8. In the nontraded BDC, the nontraded REIT business, 12.5% over 5 or some metric like that. In the retirement services business, I get 100% over 2.5, but I have to put up $0.08 in capital. Now that $0.08 in capital earns 15% rates of return. So to your point, I can decide whether to hold all that myself or I can through ADIP allow my limited partners to take 2/3 of it. How fast we decided to grow spread income is a function of what the opportunity set is in asset management because as good as that spread income is asset management is even better. And so we get to rebalance it, but that choice comes from having high returns.

Right. Right. Shifting gears a little bit. I want to touch on the Asia strategy that you guys talked about at the Investor Day, maybe not getting too much attention just given everything else going on, there is probably more topics that people are more familiar with, but it did sound like a pretty big area of focus. So you made a couple of acquisitions in that market as well. So maybe we could spend a couple of minutes on expanding what your views there? Would you see attractive about those markets? And sort of the role you see Apollo playing there?

Sure. So it starts with people. We convinced one of our most talented partners to move to Asia and run the business, and he made a 10-year commitment to go. I, of course, told him he'd be going to Singapore. His wife told him he's going to Hong Kong. So lo and behold, he thought he was going to Hong Kong, but since they won't let him and he's going to Singapore. And so I won the first round. But the view that we have is we have a global private equity fund. It is mostly a U.S. fund, it's a Europe fund, but it also has done from time to time, 10%, 15% in Asia. I personally don't think the world needs another opportunity fund in Asia, China focused or otherwise. And if it does, it's likely not going to be us. But if you think about the market there, U.S. is 20% banks of financing for the economy. Europe is 60%. Asia is better than 80%. I think the ability to go to Asia on yield and retirement services is just unbelievable. I've said to my partner, Matt Michelini who's going, your job is solely to get people from 80% to 79%. If you do that, we've won. This is a massive market. And the same is true for the retirement services market. So you've seen us do reinsurance deals in Japan. You've seen us make some hires in Japan. You've seen us buy into a stake in Australia. Regulatory change, demographic change yield desirability is changing, and there are not indigenous providers in that area. So I think yield retirement services is going to be the largest of the tools that we use to access the Asian market and it is something different than what's being offered by our peer institutions. And the second is Hybrid. Hybrid is, for us, partnership capital, lower risk, lower reward equity, structured products of various forms. The applicability given the inefficiencies in the Asian market, including India, just off the charts. So I would expect that we will end up with a sizable hybrid and yield and retirement services business with the occasional equity deal. And I'll declare victory, I think that will be success.

Great. Let's go back to one of the topics you hit on earlier on as kind of the key pillars for growth over the next several years for you guys, which is around capital solutions. As you said earlier, it's a business you're planning to double to about $500 million over the next 5 years. I was hoping you could spend a bit more time on sort of the opportunity set you see within Apollo's portfolio companies and what that could do for that business versus really thinking about third-party capital markets business?

So it's -- I would say the Apollo portfolio company is about optimization. So having us participate in our deals, we generally don't do it as lead because we want to make sure that the tension of getting best price is always there. But being a willing buyer, being a willing market participant and being a knowledgeable player is hands down just a great way to run the business. But that is not the total. The business really is about third parties and about funds. So I'll start with the one that's easy to understand. So I think 4 years ago, we did $2 billion or $3 billion commitments. This year, we'll end the year between $50 billion and $60 billion. We don't necessarily always want $1 billion in size in our yield business. Speaking about yield for the moment. So we'll take down what we need to take down and we have built enough of a network to know if it works for us on our retirement services balance sheet and in our credit funds and for our clients, it's going to work for others. And so rather than serving a network of a few thousand clients, capital solutions offers us the opportunity to serve people who have never invested with Apollo before because they're not fund investors, right? And so to be in that ecosystem, it just gets better and better. The second place I'll say is on the fund side. So funds go through life cycles. Some of our funds, private equity franchise, very mature, hybrid value scale, European nonperforming loans scaled. Others of the funds are not as scaled, Asian real estate, infrastructure, social impact. How do you get those funds to scale? Well, traditionally, you would have had a slog through Fund I, Fund II and so on and so. Our message is if we're willing to hold the equity and we've underwritten it, think bigger, if your fund is $2 billion, underwrite like a $3 billion or $4 billion fund. Capital Solutions, the number of family offices of people who are looking for directs, people who want to co-invest, but are otherwise not fund investors, is much bigger than the number who are co-investors. So I think that this is an accelerant. As much as we say, Capital Solutions is a revenue outcome, it's as much an accelerant to our own business on the credit side and on the equity side as we scale our franchise. It's opening up entire new markets to us.

I wasn't sure if you -- so I wanted to ask a question about deployment.

Steve said it all before I got here anyway.

I wanted to ask a question about deployment. So when I look at the pace of activity in the space and obviously accelerated significantly. Apollo was seen a pickup and deployment as well out of private equity, I think you did $5 billion. And on the call, I think you've committed another $6.5 billion or something along those lines. So given where valuations are today, no one Apollo is more of a contrarian kind of value-oriented investor, that feels a little counterintuitive. So maybe speak to kind of where are you guys finding opportunities to [ build ] capital and especially as you're starting to fund raise for the next series -- for the next fund which will require quite a bit on the deployment side?

So as a strategy, I would say, rather than a label of value or growth at a reasonable price, I would say purchase price matters, and it's always mattered to us. It has not mattered for the past 10 years in terms of market performance. So far, buying everything has been a very good strategy. It's not our strategy then. And so if you're in a market where purchase price matters, you have to look for spots where you can create growth at a reasonable price. So one way we create growth for reasonable price is complexity. The number of firms who are willing to take on Yahoo AOL from Verizon was quite limited. No deal is a good deal until it has gone full cycle, buying it is not victory, selling it at the end is declared success. I think we're in a pretty good spot. I think this is one of those things where you'll do work and you'll get to a core, which you will own almost for nothing of a massive infrastructure of the third or fourth largest web ecosystem with dominant franchises in finance, in gaming, in sports. I think that's going to turn out to be one of the great deals. So complexity is a theme. The other and the shocking one is public market activity. So as much as markets are high, everyone is correlated to the same trade. Think of indexation and other forms of correlation. And if you're not in the index, we have dispersion. And so the valuation of the market as a tool, as a common measure is off the chart time. But lots of dispersion and lots of interesting opportunity. And so those 2 themes of complexity and dispersion as well as being just really good operators have put us in a really good spot. The most recent fund is in the high 40s growth, high 20s net. And I keep telling people this is not a technology fund. It's actually gone great.

Great. All right. Let's pivot a little bit to the balance sheet and really the excess capital. That was another, I think, really important point from the Investor Day that stood out. You talked about clearly a path for higher earnings power, but also a lot of excess capital that you're going to generate along the way, $5 billion of additional capital for kind of capital returns, another $5 billion for kind of strategic initiatives. Let's unpack maybe both of those a bit. So dividend growth, obviously a priority. How are you thinking about the buyback along this path and maybe even more importantly, M&A? We've seen some degree of transactions in the alternative space. Actually, some of the traditionals are now kind of playing in this corner of the market as well. What's sort of missing in your toolkit from a product perspective where M&A could make sense?

Look, from the things that we've -- first, maybe to set the stage, we've said we're going to generate $15 billion of free cash flow over the next 5 years. $5 billion of it supports the dividend that we've declared. Another $5 billion, we've said we're going to segment for investments in the business, which I'll come back to. And the third $5 billion is for either dividend increases -- either or dividend increases and stock buybacks. But this is a 5-year plan. We would like to do both, and I think you will see us do both. But if I pivot back to your question, we -- the money we have earmarked at the holding company is to build the asset management and asset distribution franchise. Things that add to our franchise like Griffin are bought by the holding company. Things that would add to, for instance, real assets where we are light relative to our scale, would make a ton of sense for us. Other tools and capabilities like what we did with Motive and fintech also makes sense on the asset management side. So at $5 billion, I think we have plenty of fire power to do what we need to do to fill in the spots we have in asset management and in something like Griffin, whereas we earmarked that for holding company cash, the seller elected to take all stock. So we've been able to grow the business. The other piece of it that came out really, I think, for the first time at Investor Day is for investors to understand just how capital efficient the model is because Athene and Athora have big balance sheets. Apollo is just an asset management company. And working the 2 side by side, the origination platforms, the Aquas of the world that we just bought, the Wheels, they're actually bought by the insurance company retirement services balance sheets. And so the 5 or 6 acquisitions we announced in the quarter, almost nothing came off the holding company balance sheet. And those balance sheets will go from about $10 billion to $20 billion over the next 5 years. So capital is -- I come back to -- we have put forward a plan that is not heroic in my view, that does require us to execute on these 3 key initiatives. We have lots of tools to add to it, product creation, Asia, $5 billion of capital to invest. The limiter is not going to be capital, the limiter is not going to be anything other than ours in the deck. It is up to us to have the culture and support to do it.

Great. Makes sense. We've got, I think, about 2 minutes left. So if anybody has a question, we've got one upfront. We actually have an audience who could ask questions...

I love that...

So one up front, please? Put the mic.

Marc, I think at Investor Day, you talked a little bit about changes in compensation structure a little bit away from the things that are fee-based and more towards performance. I'm just curious how is that going over with the employee base? And culturally, is it working? Are you vulnerable to other institutions that do it differently, trying to pick some of your people off? Just talk a little bit about that, if you would?

So there's nothing wooden I can knock on. This has been a great year. We have attracted amazing people to the platform. There's never been better momentum and [ esprit de corps ]. One of the first things we did is to recognize what should be obvious to all in a 2,000-employee organization, how do we make sure that being a partner at Apollo is the single best thing to be in financial services? And we spend a lot of time reimagining what it meant to be a partner at Apollo to look forward because we all started as small intimate, very tight knit groups, and you heard from lots of all managers today, we've all gone to a different place. How do we make sure we don't lose that field? So if we can get the top 140, 150 people on board, now I have 140, 150 ambassadors. And if they're happy, the principles will be happy because they'll see that it's worth to stay. And the associates are always happy because the work is really interesting. And if the principals and partners are happy, it all works. So making sure that we did a complete redo of what it means to be a partner, not just compensation, culture, autonomy, how we would communicate, how we relate to each other, there was so much good of what we do. It just needed to be updated. It needed to be updated for the scale we've got at. And when I think about what we have to do going forward, it's the same job. We know the business is going to double. The business should not have to double the number of people, which means we're going to have to change the way we work. But how do we every day maintain the small intimate village that we are? That falls with me. The pick -- I pick strategy, culture, communication and unfortunately, dealing with c*** as the things I do. Jim and Scott got everything else. But this culture piece, and I alluded to it, I joked about it in hours in the day, it is the #1 thing that needs to be managed in our firm, and I would assume the firms like us, the business is a really good business. The trends are great. It's hours in the day, people happy. There's a war for talent. We're a really good employer. And we just have to keep being a really good employer and be a good partnership.

Right. So on that note, I think we'll leave it there, Marc. Thanks so much. Great to see you. Thanks for being here. Thank you, again.

Okay.