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

All right. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley sales representative. Great. Good afternoon, everyone. I'm Mike Cyprys, equity analyst covering brokers, asset managers and exchanges for Morgan Stanley Research. And we're excited to have with us here, Jim Zelter, Co-President of Apollo Global Management. With over $500 billion of assets under management, Apollo is 1 of the world's largest alternative investment managers. Jim, thanks for joining us.

Always a pleasure to be here.

Yes. Welcome back.

This is the third or fourth year in a row, I think.

Indeed, indeed. So why don't we kick off with the macro sort of big picture. It's been a bumpy start to the year and past couple of months, in particular, with higher inflation rising rates, volatility, growth, recession concerns, so forth and so on, not to mention geopolitical tensions and such, navigating a goal of pandemic as well. So how is Apollo adapting as a firm through all of these sort of challenges here? And what would you say are some of your top priorities here as you look out?

Well, we really -- good to be here. Certainly, it's -- I'm not going to -- we've all seen the headlines the last couple of days. It's -- I guess, we've taken the approach that it's not a surprise we're here. We're finally at a point in time with -- that we would say the purchase price finally matters. It's been 10 years, the more risk you took with the quantitative easing around the globe and the monetary authorities creating that kind of risk environment. And candidly, we think this is our time. The firm is much different today than it was over the last 30 years. And while it's really our time in our equity in our opportunistic businesses, and our hybrid businesses, that's about a sixth or seventh of what we do. But in terms of our retirement services balance sheets, we can execute that strategy without taking a lot less risk right now. And I'm not surprised that we're seeing this volatility out there right now. So for us, we think with what we do and our investors are -- we've never been as busy as we are in the last 30 to 45 days.

Now despite the volatility that we've seen in public markets, if you look at your first quarter marks, they were fairly resilient despite some of the volatility there. So can you talk a little bit about how your portfolio investments are navigating this environment? What are the areas that are holding up better? And are there any areas of particular softness that you'd point out?

Well, in our PE book, we've assembled Fund IX at around 6x enterprise value to EBITDA, which is arguably 5 turns less than the market. I think the second quarter is going to look fairly resilient as well. And I think that which is not a surprise to us as being an investor that's been quite disciplined in the last several years. So we think our opportunistic business, our equity business, our hybrid business, we didn't take a lot of subordinated risk. We didn't do a lot of second liens, didn't do a lot of mezz, very little. So I think we're very comfortable with how our portfolio is navigating this, which is a big issue, because these firms have gotten -- we've all gotten a lot bigger. And as you approach the new opportunity, you want to make sure you're not spending all your time protecting the flanks from yesterday's mistakes. So for us, and I'm sure we'll get to it, spend a lot of time on Athene Day yesterday. Did a massive deep dive in the portfolio. Reminder is 95% investment grade, high-quality assets. So I feel for us, we are a proven investor in the equity business for 3 decades.

And we'll get to the Athene Day in just a moment. But before we do, maybe just against that macro backdrop that you outlined there. What's the pace of deal activity and capital deployment? How is that trending? We've been hearing from some folks that there were some pipelines of deals that had been announced that are still going to be completed and executed, but then it's a concern around the kind of the roll forward from here as you look out 12 months. So how would you characterize the environment today to put capital work?

There's a lot of private equity capital that's been raised and financing markets are more challenged. I think you'll see in the first -- in the second quarter, a variety of commitments that got made by various firms, are going to be a little bit painful in terms of some marks. And I think that people ask us, private credit, is it real? Is it robust? We're seeing as much deal activity on the financing side as we are on the equity side. And so we're finishing Fund IX. We're in the middle of fundraising Fund X, which I'm sure we'll get to. But I think when you think about our direct origination business, our CRE business, our asset-backed finance business, those are all really robust even though things like the CLO market have closed down. So on the equity side, it's a question of how much the financing markets open back up. Really, the private financing markets are really the option right now and a lot of the origination platforms, it's making sure we just continue. We can actually take a little bit less risk because spreads have winded out, go up to capital structure. I would argue the IG market is pretty good still for Athene. So in that perspective, there's some opportunities from both financing as well as the equity side.

So opportunities there, both PE side, just maybe the financing gets a little bit harder, opportunities on the credit side. Any areas you're avoiding? And when you think about some of the opportunities, any particular themes that...

Well, I would say we're definitely of the view that the U.S. is probably a bit more robust and a bit ahead of Europe. So if you're asking where I'm putting incremental dollars in the U.S. versus the European market, that's probably the case. Certainly, when you can look at investment-grade market versus the high yield or leveraged loan market, that looks very attractive on the IG space. Recent transactions are going to come behind 6%, that's very attractive on the IG world. EM is still a little bit of a challenge. We've sort of not really accelerated the deployment in the EM world and large cap direct origination is still a big growth area for us. So...

Great. Where do you see risks building up excesses in the system, if any, at some point to private credit, others point to venture? What are you watching closely?

Well, I mean I think the evidence is in. There's no doubt there was a valuation accident waiting to happen in the broad technology space. And probably the baby has been thrown out with the bathwater. So there's probably some great companies. There's a handful that we've been involved with in financing, but there's no doubt there was a lot of valuation bubble in that space. There's no doubt there was a lot of leverage in the crypto environment when you see the volatility in that marketplace, a lot of retail leverage in that space. I think the resi space is a little bit challenging. No doubt with mortgages going from low 3s on 30-year fixed to high -- mid- to high 5s, it's going to slow down some residential purchases on a regional or area basis, but we still have -- we're still short 3.5 million homes in the U.S. So I think there's a lot of cross currents right now. The consumer's still in pretty solid shape. And so we're not -- while I am expecting a slowdown in '23 and a recession in '23, I'm not expecting or we're not expecting a massive credit cycle to be nasty and draconian. That's not what we see in our business right now.

Any concerns on leveraged loan side or broader private credit markets?

It's more market structure than it is on the leverage loan side and CLO formation. But private credit, I think, is going to be shown to be quite robust. Markets spread probably may be a little bit stickier than they probably should be in reality. But I think that even in a lot of the tech lending in the software space, yes, valuations have come down from 20x to 10x, but you probably attach on the leverage side of like 6x, 7x, 8x. So I don't think -- if you have a credit issue in your portfolio today, it's a company that has secular challenges. Like you shouldn't be having credit issues in this kind of environment.

Let's talk about fixed income replacement. That's kind of a big theme for you guys at Apollo. Where would you say you are in building out those capabilities today and what's still to be built out?

Well, let's take a step back. So fixed income replacement is the ability to get investment-grade returns by providing really wholesale bespoke solutions. We've done transactions for Hertz, for Abu Dhabi National Oil Company, for many others, AB InBev. And I think you're going to find situations where companies have stranded strategic assets that are not cash flowing like they'd like, and as we've gotten more organized around rolling out that product to the Fortune 500 in the U.S. and in Europe, we're finding actually a great reception. I think there will be some large transactions in the automobile sector and other sectors that are doing major transitions in terms of what's going on with ESG. So a massive reception in that space. And we just need to make sure that we're pricing that accordingly when the primary investment-grade market has repriced itself. But there's no doubt that as we've -- we were very clear last fall in our Investor Day about the North Star, the firm, and that origination is a big part of it. So we actually think where we are the market leader in that space. We also did a variety of fund finance transactions in the last 6 months that have gotten some -- the SoftBank, the Vision Fund, in particular. So those are all areas where we think we're creating really, really safe yield, top of the capital structure, not taking second lien or mezzanine risk. And we think that's an amazing opportunity for us still.

So those are some interesting transactions that you pointed out, where you have built out the teams, the platforms. Any other platforms that you think about that would make sense to build out in the sort of fixed income replacement theme that you don't have today?

Those -- it's fixing really comes with a lot of different industries. I mean, I really want to focus on the U.S. first then we'll get to Europe and the EM. But it really -- it's multi-industry, but it really is that product. It's really an origination tool that we can use to scale up and to put our against our insurance -- our retirement services liabilities.

Now the other question that comes up often with fixed income replacement is that a lot of that growth, you mentioned insurance has been to help support the Athene balance sheet. So I guess how do you think about bringing in third-party capital into fixed income replacement? How meaningful of an opportunity could that be? And what are some of the initiatives to accelerate growth there?

So in the last 12 to 18 months, we brought in over $7 billion of, what we call, these high-grade alpha opportunities from institutions in the U.S. I suspect you will see the ability for us to capture that investment-grade spread and continue to expand the third-party business. A few select hires we've made and creating those products, whether it's an SMA form or otherwise, but those are incredibly scalable for us, Mike. And again, I think that when we think about the different levers for us to show the growth in addition to what we've had at Athene and Athora, this is going to be a big driver to that.

And you mentioned large-cap lending platform, right? You've done a whole host of high-profile investments there. I guess, how do you think about building that out from here as you kind of roll forward? Where would you like that platform to be in 5 years?

Well, for us, certainly, we've been very vocal in the private credit business. It really -- a lot of the dialogue goes around middle market sponsors. We think the privatization of credit will be these larger cap sponsors, the top 30, 40 sponsors, which we're targeting from the Apollo side of the balance sheet. We have mid-cap that does the smaller side. And for us, we announced a formation of our nontraded BDC ADS. We've got over $2 billion of equity in the last several months. It's accelerating. And we think that can be a multiple time size as it is today. For us, that's just the first of many of our products in the whole global wealth, which we pushed last fall as one of our 3 big corporate initiatives in terms of global wealth. So there's no doubt. And I would also add that we've always tried to bring an approach of bringing lower and lower cost capital to the solution. So when you just have private equity, it's arguably a 20% capital solution. What we have with all of our other products right now, we can go to a financial sponsor, do fund finance, do leverage finance, do triple net lease, do a variety of activities, do our hybrid value, and that's a more meaningful conversation. It takes the commoditization of that dialogue out of the equation.

So we're heading into an already higher yield environment. So I guess, why does demand for alternative fixed income, not become lesser in that environment, why does that not shrink?

Well, I think in the past, you've just got demographics of savers around the globe or areas that are doing very well. Certainly, with what's going on in the energy complex, a lot of the sovereign capital in the Middle East is doing quite well right now, has a lot of excess capital. And I think they see versus traditional fixed income garnering 6% to 8% versus 4.5 is very attractive for them. So there's a tremendous demand upon us to create a variety of yield solutions that are with a 3% starting point versus 0, that 8% is much more attractive. And certainly, it's much more achievable. So I think there's a tremendous backlog of demand for that type of yield and yield solutions on the investment side.

So even as rates yields are going higher, yields on high-yield and investment-grade, bonds and new issues are also going higher. It sounds like your point is that you're still going to -- there's still a relative spread.

No doubt.

And that's still going to persist.

For 10 years, you and I would talk about how can you keep taking money as rates go 0, 0, 0, we end up growing our business. And I said, I welcome the day when the risk-free rates at 3%, then I can make 8% a lot easier. And I think you're going to see it happen in our business over the next 24 months. I mean, again, you're right, people should readjust their expectations. But right now, if you look at where IG spreads are, they've sort of normalized nowhere near where they were in March of '20, but even 200 over in IG spread is still a 5% number. That takes the basic business model of Athene and makes it a much more achievable enterprise. You don't have to reach for yield. I can take less risk and execute my business plan.

Speaking of that, how do we think about the impact of the overall business from higher rates, the sensitivity across your different businesses that you have at Apollo? What's the impact? And how is the book positioned?

So with regard to half -- of the roughly $500 billion of assets, on the retirement services side, about $30 billion is in floating rate assets. That was painful to carry the last 3 or 4 years. But every -- since the beginning of the year, every 25 basis parallel shift in the curve is around $30 million more of income for us. So you can do the math. It's certainly a reason why in our Athene Day yesterday, we talked about the numbers at the beginning of the year versus now, normalizing from that $3.35 to probably $4 a share. So it's real dollars and cents for us on the retirement services side. On the third-party side, we still have a large floating rate exposure to our whole loan business, our CLO business. So a lot of that is hedged by liabilities. So I just think it garners us greater yield to hit our bogeys and to hit our incentives, but it's -- we don't have a lot of -- there's not a lot of notice on that side of the balance sheet.

Anything to speak of on the private equity side in terms of the higher rate?

No. When you buy companies at 6, 6.5x, we probably overequitize a lot. We have caps on it. We really don't have a lot of leverage in our PE companies these days. It's the manner how we run the business. So not concerned about those extra incremental costs hitting our business. I would say in some of our origination platforms that do securitizations, the funding cost of AAAs have gone up from 100 over to 200 over. So a little bit of incremental funding costs on some of the liabilities, but not a meaningful number for us.

Why don't we talk about the Athene teach-in that you did yesterday? What are the say, 2 to 3 takeaways you want investors to have coming out of that and any particular key data points you want to flag for people? It's a busy day in the market today.

Yes. I know people have some distraction. So I think we're going to have to make sure that we do that 4 or 5 times. But I think just taking a step back, I think thematically, we clearly heard from investors that there's questions about Athene as an insurance company and even though we think of it as a very simple spread lending business. And so we really deconstructed in great detail, 170 page deck, 8 speakers, what the real cost of our liabilities, the structural stickiness of those liabilities, even in the case where you had surrender charges, 5 and 10x any historical numbers, how it's a nonmaterial impact to our bottom line. So I think there was a whole approach about transparency, about detail, and that was really on the asset gathering and the liability side. We also dug into the 4 ways we bring liabilities into the balance sheet, organic, inorganic, or organic and inorganic M&A, organic being our retail, FABNs as well as PRT, the pension risk transfer. We talked about those 4 levers and how we can push and pull those as needed. And then the final part was really a deep dive into our CLO book, our ABS book and our CRE book. We showed the real transition of our CLO book from BBs 4 years ago to virtually no 1% BBs today, all investment grade. We talked about really stressing that book under a variety of scenarios, same with our CRE book. And so I just think this is the first of many. We organized this in a pretty short period, about 45 days. I think it is something we'll come back to over the next several quarters as people really want to see what we say in terms of coming through the practice. But I think it just gave a lot more in-depth detail and color to how the business actually works in great detail and great practice.

Great. And then you also had the guidance update as well from the...

Yes. We talked about a little bit -- again, because we have been -- it's not been free to carry around $30 billion of floaters for the last 7 -- 6, 7 years or 5 years. And now it's actually paying tremendous dividends and so giving some further guidance on that. But again, I think there's -- we have been very, very clear how the whole thesis of doing the Athene transaction was, we thought it was an ideal spot to hold many high-quality assets. We still believe that's the case. We still believe that there can be more education and insight in looking at these spread-related earnings and the robust nature of the risk that we own under investment-grade assets versus a lot of the common widely accepted FRE multiples of other products that are a bit lower down the capital structure. Yes, they're senior secured, but we think there's a great -- as we've said before, we love both businesses, but we think the SRE business is really not appreciated appropriately. And I think it also ties back into when you think about Apollo as a whole, the earnings volatility of our platform, I think, is underappreciated, because of the robust stickiness of the retirement services earnings. And certainly, there will be great FRE growth from deployment in our industry. Certainly, I think some of the incentive revenue and incentive benefits will be pushed off, because of the equity markets or the IPO markets, but I think that gives a robust narrow band to the outcomes of our earnings, which I don't think is appreciated right now.

Staying with the Athene topic, some look at the Athene balance sheet and look at the risk or question the risk that may be on there, right, just because you're taking a little bit more illiquidity risk, if you will. So I guess, how do you think about that relative to the credit risk? Is there more credit risk that you're taking? I think there's sort of a viewpoint out there that clearly if you're taking a liquidity risk, then there must be more credit risk that comes alongside that.

I think in time, we'll prove that to be an ill-fated concern. Again, when you look at our -- we're 95% investment-grade rated. Even if you believe there's some investment grade, grade inflation like there was in '07, '08 because of structural credit. You can hammer the CLOs, the single As and the BBBs pretty hard. You can hammer some of our CRE investments. We feel like the next 4 to 8 quarters, we will be -- it will be demonstrated about the robust nature and we're not taking incremental risk.

What gives you confidence on that?

Just the scale -- for example, when we do something like the Vision Fund opportunity where we're lending at 10% LTV. When we do the Alliant inventory finance where we're underneath BNP. These are businesses that have been around 10, 20, 30 years, especially in that inventory finance business or other areas in our fleet, auto finance and Wheels and Donlen, they've had 10 basis points of default a year for the last 30 years. I mean these are robust businesses. These are not -- we're not doing pay now, lend later or lend now, pay later. We're not doing a variety of those strategies that are really questionable on the consumer side. So they've lived through robust cycles.

One of the shifts post the Athene merger is to run a more capital-efficient balance sheet at Athene using more capital from the sidecar vehicles. So can you just talk about how that's progressing, how capital efficient can the business become over time?

Well, I think a few things. I think that we were very clear that we wanted to continue the sidecar, which is known as ADIP. That is a $3.5 billion sidecar. We're getting to the end of that. There will be the natural progression from the success of that and the returns that investors have achieved, that will be continued. And again, I think from our perspective, for us to be able to make various investments in these origination platforms and not have to use capital at the holding company or equity at the holding company, but to do it out of our alternatives bucket or alternative allocation is a very wise and capital efficient. So from our perspective, we're going to continue that trend. It's our ability when you look at the excess capital we have right now, plus the -- what we have over the period of the next several years, we're comfortable that excess capital will be used in a variety of ways to derisk for shareholders. But we're continuing to think that when you look at our model, it really is extremely capital efficient, which we highlighted again and again at our Investor Day.

And M&A has been another big theme for Athene. So can you just remind us how much excess capital you guys have at the Athene side? We'll come to Athora a bit later. But just how does it fit into the...

Depending on how you define as anywhere between $3.5 billion and $7 billion between capital, cash and excess borrowings. So that number between $3 billion and $7 billion gets us another $100 billion of liabilities. So certainly, in the last couple of years, there have been a lot of imitation -- followers, imitators. I do believe that's -- everybody wants to have their own Athene. Once you buy the liability, then you actually have to put the assets to work. You have to grow -- or create an organic business, create ratings, create funding. So for us, we've tended to focus on the larger, more complicated M&A opportunities. Those are out there. They're going to happen in the second half of 2022, no doubt. So from our mind, while it's been a while, while we've digested a few things, I think we're -- certainly feel like there's a robust M&A pipeline.

And how does the current market environment impact? Does it accelerate? Does it prolong...

I think it's going to accelerate. I think you're going to have to find folks who have been hoping for a higher rate environment, but then find their underlying portfolio has underperformed and they're going to be capital constrained from and have to -- and probably be forced to make an M&A sale rather than being an opportunistic about it.

So you're optimistic on second half of the year?

I am. We were very candid that we -- $80 billion of growth of assets, $30 billion, $35 billion on the Athene side, $50-plus billion on the Apollo side, we're still good even -- listen, we have to be cognizant of the environment that we're in, but we had great headway. The liability side of our business is a bit stickier. It has rerated no doubt, but we're still seeing good inflows in our business. We're not seeing a dramatic sell-off. We see great interest in our Fund X. We see great interest in our Accord and Accord Plus. So I think investors know this is our time and we want to be aligned with Apollo right now.

Great. Maybe the last thing on Athene for the moment. To your point earlier on the market, maybe not fully appreciating the SRE and the stability there that you have. I guess how do you sort of bridge that mindset gap? What will it take?

I think we are convinced, leadership, the Board, our employees where we did a massive reset of the company in the last 24 months. Leadership, governance, North Star business model. And now it's just execution and education. And sometimes you're in a market where the market is going to be very receptive. We think it's a very -- it's a much simpler story. It's a very unique positioning versus our peers. That in and of itself is a little bit of a challenge, because of the uniqueness. But if we are able to execute throughout '22 and into '23, we expect the market will reward us as we are able to distance our model from some of the skeptics.

Can we talk about retail? A topic that gets a lot of interest from investors, just given the large TAM and the opportunity set there. So maybe you could talk about Apollo's approach to retail, what are some of the unmet needs that you see out there where Apollo can help address?

Well, for us, it was a build a distribution, create the product set. So we -- last year, we obviously brought a bunch of folks internally. Then we did the Griffin acquisition, which brought about 150 people to that business in terms of the wires, RIAs and IBD. So we feel like we've got our distribution in the U.S. and our footprint starting in Asia and Europe as well. Then there's the product set, and it starts with taking some of the products we've had for institutions, whether it was our PE product or our hybrid product or some of our credit products and creating wrappers that are appropriate for that global wealth channel, whether it's AI, a credit investor or QPs. At the same time, create new products, which we did Apollo Debt Solutions, ADS, our nontraded BDC. That's raised close to $2 billion of equity in a very short period of time. We're appropriately deploying that. And I would say the timing to do that is much better now with rates on loans, private loans from LIBOR 350, 400 at 98 to LIBOR 600. This is the time you want to be deploying that capital rather than having a big embedded portfolio of much tighter spreads. So we're getting great reception on that. I think you'll see other types of retail, global wealth products, not only in the yield, but infrastructure and possibly in something that really captures the essence of the entire of the Apollo ecosystem, if you would. So for us, I mean, there's going to be -- it is a large TAM. There's going to be a handful of winners, maybe 2 handfuls of winners. We clearly have the brand experienced distribution in the product to do so. So even, though, it's nice to be first, but if you can't be first, you want to be in that first cohort, and we're clearly spot and center in that.

So it sounds like there's more product to come. Any themes that you -- when you look at sort of that product road map?

No doubt. I think it's really trying to not stretch for risk. The institutional market is probably adept at reaching for risk as appropriate. But I think the global wealth market wants predictability and safety. And so a lot of focus on scalable, predictable yield and a product that really is robust under times of volatility.

Great. Maybe shift and talk about broader fundraising environment. We've heard from a number of managers about a more challenging backdrop for fundraising, just given crowding, denominator affected the markets. You have your Fund X that's in the market, among other strategies. So what's your take on the fundraising environment? What are you hearing from LPs?

Hearing from LPs that it's really crowded. Some folks have had great returns in '18 and '19, came back extremely quickly. I think there's a little bit of concern about those numbers look wonderful at December 31 or March 31, what are they really right now and this whole denominator effect. No doubt it's there, but it's probably not to the same degree. Obviously, the PE portfolio is down -- the public equity portfolio is down as well. So there's no doubt it's more crowded. There's a lot more folks looking to get allocations in calendar '22 and into '23. That being said, our strategy and how we've invested historically is folks are taking notice. We were in the unique select group of the first quarter that had positive returns in our portfolio. That trend, we feel very comfortable about what will be assembled. When purchase price matters, we're going to get a phone call. And so we feel really comfortable with our business model. We feel really comfortable with our strategy in private equity. And the good thing about being public as you see everybody's pay returns, and we feel very confident in what we created over 3 decades.

So Fund X raising this year is still happening?

It's going to happen. No doubt in our mind.

Okay, great.

And I would also add, we raised $24.5 billion, almost $25 billion from Fund X. The amount of folks that have raised $20 billion plus, it's 5 or 6 funds. We'll be 2 out of the 8 or 9 that do it. So it's still a very, very select group.

Great. We have just about 2 minutes left. And maybe before we wrap up here. Maybe you can just kind of give us your perspective on why it's now a good time to buy shares in Apollo, and as you kind of look out the next 3 to 5 years, maybe talk a little bit more about your vision.

Well, I think over the last 12 months, we have clearly put forth the North Star of our strategy. We were very clear with the capital generation of the business, the 3 or 4 priorities of the business. And for us, this kind of environment is where we've always shined over the last 30 years. So our business has never been as well positioned as it is today. The incredible amount of investor activity to come in and join us in this journey, as well as the organization of our business. And we're still committed to generating the $5 billion plus of excess capital, $15 billion in aggregate, $5 billion to pay the dividend, $5 billion to do M&A and $5 billion either to buy back stock or increase the dividend. And we still are convinced that's the right plan for us. So everything is in check. And there's a more volatile environment for us to actually bring our toolbox. So again, business models in check. It's not about execution. And usually a more challenging environment is one where we historically have shined. And we're cognizant of what the environment that we're in right now. There are a lot of cross currents. It's not going to be like other periods of time, everyone is a little bit unique unto itself. There are some lessons from history, but the discipline and the leadership is very focused on executing that model.

Great. [ Okay. Rapidly wrap up there.] Jim, thank you so much.

Thank you very much. Appreciate it. Appreciate it.