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

Yes. Thank you very much. Good afternoon, everybody. My name is Bill Katz. I cover the asset managers and retail brokers for Credit Suisse. On behalf of the firm and my team, we're very pleased to be hosting the management team from Apollo Global. With us today is CFO, Mr. Martin Kelly. And in the audience, we have Noah Gunn and Melinda Roy, both of the IR team. Founded in 1990, Apollo has now nearly $550 billion of assets under management across yield, hybrid and private equity platforms. APO has been the leader in fixed income replacement and insurance outsourcing, including differentiated and broad-based origination capabilities. Martin joined Apollo back in 2012 and served as the Co-CEO from 2017 to 2019. Noah, many of you know, started Apollo, went over, ran the Athene IR for [indiscernible] and then came back to the Apollo side. And one housekeeping item from our side, just due to the ongoing completion of the Credit Suisse securitization product group, we're not able to cover that as a topic today for compliance reasons. With that, it's a pleasure to have everyone here today. And welcome, Martin. Thank you so much for coming.

Thanks, Bill. Thanks for having us.

Okay. Wonderful. So I think we'll have -- I have a bunch of questions here, but if I can do any questions in the audience as we get a little toward the end of the presentation, we'll try to get a microphone around to those that would like to ask a question. All right. First question, just to get started from a very big picture perspective. Apollo has been really early, I think, to identify the powerful trend of the fixed income replacement, increasingly global, and elevated demand for income at the same time. How would we think about the opportunity for the next several years? And what are the pros and cons associated against higher rates?

Good. Thanks, Bill. So it's interesting. Fixed income replacement is, I think, a better term than private credit. It's a vast marketplace. And it's interesting. As rates have backed up in the last year or so, credit -- fixed income credit is more attractive relatively than equities. And so I think we've seen a shift at the margin from equities to fixed income. At the same time, fixed income replacement offers a yield outperformance relative to public sort of queues of credit. So what we're building, including with the transaction we can't really talk about, but that's a piece of the overall puzzle, is a whole ecosystem of credit origination that creates a yield outperformance, and it's -- it brings 100 to 200 basis points of yield outperformance relative to comparable credit risk. And the yield outperformance is provided through both structure and liquidity risk that's taken in, in originating that. So I actually think it's the most important part of what we're doing as a firm. I think this whole fixed income replacement is a trend that will take many years to play out. And the platforms that we're creating, we have 15 platforms today, and between them before the CS transaction, they originate about $35 billion of credit every year. That will increase a lot once this transaction is fully closed. And that's just differentiated product. And it's hard to source. It helps -- it has multiple impacts around our ecosystem. It's put on to Athene's balance sheet so it creates spread-related earnings. It's put onto Athora's balance sheet where it creates something similar. And then it's attractive to other insurance companies for the same reasons that Athene finds it attractive. And so it helps us and will help us, from here on out, grow our third-party insurance business. And ultimately, it creates an asset-backed financing ecosystem. So super interesting, early stage, highly capital efficient, highly differentiated. And the other thing I should mention is it helps our capital solutions business, which is the business that securitizes -- packages tranches and securitizes risk in asset-backed form. And so it brings with it differentiated production of yield and it creates spread earnings, fee-related earnings, transaction fees and helps grow our adjacent businesses. So for us, I think high rates help, and it's a really exciting time for us as we continue to evolve the platform.

Great. Maybe just a follow-up to that. You mentioned you have sort of $35 billion of origination this past year before thinking about the transaction, which you can't speak to. How important is the origination platform when you're out with clients, talking to them about protecting capital, asset quality perhaps? And now pro forma everything you've done, do you think you're at scale? And if so, how scalable can we go from here?

Yes. So we -- no, we're not at scale. We have 15 platforms, give or take, today. I'd say 5 of those 15 are at scale. When we did our Investor Day 15 months ago, we said we should be originating about $150 billion of credit per year at the end of year 5. These platforms are a piece of that. And so -- an important piece of that, but not all of it. But I think each of the 10 or so platforms that are not scaled yet have room to go, and so that's a big focus of ours. And what we're really focused on is making sure that there's appropriate liquidity risk management and credit risk management within each of the platforms so that there's not -- if there's a dislocation in the market, then the platforms can survive both from a funding perspective and a credit perspective.

Okay. Just changing gears a little bit. The other theme that I think you've been early to adopt into or adapt into has been sort of the insurance outsourcing. Initially in the United States and then more recently I think outside the United States, I think management has talked about the opportunity for both. As you look out into this year and maybe into '24 and beyond, where are we in terms of that opportunity set? And then a lot of your competition is talking about doing exactly what you're doing, if you will. How are you different? How is Apollo differentiated versus that rising competition?

Yes. It's interesting. I actually think we're quite distinct from all our peers. There's -- we started Athene 15 years ago. And so we started Athene with $20 million of capital. It's now a $240 million business. It was built in the initial 8 or 10 years through block transactions, inorganic add-ons. And that market has become incredibly competitive. There's actually 120 companies out there that we see bidding for blocks of transactions today in that space. So prices are high. Return on capital is not what it was. Athene's business model has evolved in the U.S. to be an organic producer. Last year, Athene produced almost $50 billion of gross, and there's no one else that's doing that. And so we have 4 different growth platforms within Athene or channels, I should say. One is retail origination of annuities; two is pension risk transfer transactions; three is reinsurance transactions with others, mostly flow reinsurance; and four is funding agreements. And so we are able to toggle those channels up or down based on the relative return on equity that we see based on pricing in the market and the capital that's consumed. So I would say, we're second generation, third generation in that we have all of the organic growth that we need to satisfy the overall firm's growth objectives without the need to be dependent on any inorganic transactions. It's different outside the U.S. It's much less developed in both Europe and Asia. We have a platform in Europe called Athora, which has just raised another close to EUR 3 billion of equity to give it capital to see the next leg of growth in that business. And Athora's -- if you look at the timeline of Athora, which we started, I don't know, 6 or 7 years ago, versus that of Athene, which we started 15 years ago, they're actually tracking on very similar progressions. Athora is now about EUR 60 billion of assets with some announced transactions that have not yet closed, which will take it closer to EUR 100 billion. And over time, Athora will develop organic growth capabilities as well. So we don't see much competition in Europe. We don't see much competition in Asia. And the addressable market for both is really significant, but with a focus in Europe on Germany, France, Italy, Belgium, the Netherlands, which is where we've been playing today. So a lot more to do inorganically first outside the U.S., but within the U.S., we have all the organic growth that we need in today's pricing market.

When you think about -- it seems like this is still early days in terms of the denominator of the opportunity to sort of take share either from the entrenched lenders or in terms of a better yield than what's on an insurance balance sheet. What's the risk to the story here? Is it just a credit cycle? Is it interest rates? How should we think about what could be the monkey wrench to the story?

Look, we want to be good stewards of policyholders' capital. So I think there are rate risks. There's regulatory risk. There's political risk. We manage Athene's business at a low leverage and a high capital level. And so we're very focused on making sure Athene has a fortuitous balance sheet, and it maintains capital at a higher rating level than its current rating. It has higher equity to reserves than the industry average by a meaningful amount, 11% versus 8%. It has less leverage, 15% versus 25% across the industry. So we want to -- and we have a very active and transparent dialogue with regulators to make sure that they understand what Athene's business model is and what it's not. So it's -- there, from a credit risk perspective, we've built the balance sheet. We've created every asset that went on Athene's balance sheet. We merged the asset manager and Athene 15 months ago, and so it is our balance sheet. So we're very mindful of that. And then from a liquidity perspective, we're very careful to have excess liquidity that we can draw on more offensively actually than defensively, given the position of the balance sheet. So we focus on all the risk factors that you would expect us to. We spend a lot of time on each of them, but we think it's a very sound balance sheet with transparent reporting. I don't think anyone in the industry has as transparent a disclosure framework as Athene in terms of stress testing, risk analysis, credit risk stratification. We want to be as transparent as we can so that we have the confidence of different constituents that they know what Athene is.

Okay. Super. Another big theme I want to talk a little bit about is maybe turn to global, global wealth opportunity. I think we and many other investors expect it to be a very long tail opportunity, could be [ $200 trillion ] denominated, [ $300 trillion ] denominated, it doesn't matter which one it is, it's both very large. But also I think we've seen in the news flow for the industry some place we follow some outside our coverage universe that there's no more procyclicality to the business. Your CEO, Marc Rowan, on the call a little while ago, fourth quarter call, really, I thought spoke very bullishly around the momentum into 2023. And unlike many of your peers, you don't really have any sort of legacy assets that you have to deal with any elevated redemptions, if you will. So can we dig in a little bit in terms of what products and how you think about expanding distribution potential, penetrating new clients, existing clients, how to think about the multi-vector growth of product versus distribution?

Yes, complicated question, complicated business. So I would say when we did our Investor Day 15 months ago, we had 3 big priorities at the time, and we've since announced another 6 actually. But of those 3, this is the most complex. And so capital solutions business is doing extremely well, and we can talk about that. The origination platform business, I spoke about to start with. Global wealth is -- there's no question that the addressable market for global wealth is larger than the combined institutional market. And so over time, as retirees need safe retirement income, the opportunity is really significant. So we think we are -- despite the growth and the successes of others in the industry, in the business, we're still very, very early stage in the development of it. So the way we think about retail is it's an ecosystem. You need to have the right products. You need to have the right distribution capabilities. You need to have the right team and technology. And you need to be accessing each of the geographies. And so we're doing all of the above. It's -- I don't think that the sell-off in the markets last year and the capping of some funds out there will affect the attractiveness of the product to the retail community over time. I think properly structured, properly sold in a proper part of a portfolio, it has a home that we feel as strongly about today as we did 6 or 12 months ago. So we're not concerned about that. The build-out requires -- it requires products that can both be an alternative to a product that's already out there. So as you look for shelf space on distributors, you need a product that's going to be something that can sit side-by-side product that's already there as a choice for investors. But you also need product which is a differentiator. And so we're working on both. Our focus is on creating differentiated products that we think is appealing to retail investors. And so we have said that we have 5 different products in the market today aimed at retail investors. By the end of next year, we expect that to be 9. And that's across both North America and increasingly into Europe. And so some of the product development that we have that we think is distinct is a product we call AAA, Apollo alternatives, which is a sort of credit profile like equity portfolio, which has been the -- a large part of the reason that Athene has done so well over the last decade. It's had this equity portfolio, which is really investments, equity investments in credit businesses like the platforms. And so we are in the process of rolling that out to retail investors. And we've recently unveiled a product called [ Apollo Altitude ], which is a variable annuity wrapped set of Apollo funds. So think about a tax deferred credit -- Apollo credit fund in an annuity with tax deferral over some lengthy period of time. There are other products that we are -- so they are part of the 5. There are others that we are working on that mirror the development of some of the new initiatives that we're working on that we'll unveil over the next quarter or 2, but we expect between accessing distribution, getting shelf space, accessing it both in the U.S. and Europe, we'll have meaningful penetration over time. And I would argue that our ambition is pretty modest. We said we raised $50 billion of capital cumulatively over 5 years. We said we'd do $6 billion in '22, which we did. It sort of -- it increases to an annual rate of $15 billion annually by year 5. I think that's a very realistic and feasible target.

When you -- just going back to the AAA for a moment. That seems like it's -- we're talking about the wealth management side, but it also seems like a great opportunity on the institutional side. How are you marketing that into sort of the network, if you will? How does that like differentiate itself versus some of the either existing businesses that are out there? Or are there yield portfolios that you're trying to compete for those shelf space?

So the good thing about AAA is it has a track record. It has a 10-year-plus track record, because it is, what has been up until now, the equity portfolio of Athene, what we call the alternatives portfolio. And it has, over that period of time, generated 12% to 13% returns. And so that is -- the construct is all of that portfolio was dropped into this AAA structure, and now we're bringing in third-party capital side by side, so pari passu with Athene's interest. So it has stood the test of a decade of performance and has performed nicely in that period of time. So it's offered as an equity product, which has the profile of credit risk. And so that's something that we're finding is very attractive. And so how we're accessing it, we're accessing it largely through the large wire houses, who find it a distinct product.

Maybe just staying on that theme for a moment. I've been sort of asked this. A bunch of management teams that are here today, I'm sure will come up tomorrow, think this sort of a dimension of the early success for some of your peers in 2020, 2021, was on the back of low interest rates, different correlations, higher yield on these portfolios. Rates have moved up a little bit. You mentioned earlier that you're looking through the short-termism. The long term is still pretty good. What are you hearing -- what is your team hearing from the field around financial behavior, financial adviser behavior and how to deal with sort of this fixed income replacement wave as rates are higher? Is it just easier to buy a cash management account, a short-duration bond fund with overnight liquidity versus maybe what you and others are trying to do?

You're still earning a few hundred basis points more than you would otherwise if you're in -- it's -- the spread differential between fixed income replacement is the same today as it was 6 months ago, 12 months ago. So you're still, for what we think is a similar credit risk profile, earning 100 to 200 basis points more than you would otherwise. So the attractiveness is -- in absolute terms, it's not as much of a pickup, but you would take it if you can get comfortable with the risk profile and the liquidity profile. And so we're not seeing any drop-off in appetite for that product.

Okay. And you had mentioned your target of getting to $50 billion. Is that simply -- like what were some of the inputs that went into that? Is that the same number of products you have -- what you expected to have at this point in time? And in the terms of the number of distributors that you're working with, is that better or worse relative to when you set those expectations back at the Investor Day?

Look, I think we're tracking out leases as well as we expected to. A number of the products that are now in the pipeline weren't conceived back then. And so it was a plan or an ambition that we would do that. It's now -- I think if you -- you could actually take that question and apply it much more broadly. If you look at our platform today and look at where we were at the Investor Day, we had 3 big priorities: capital solutions, originations and global wealth. And we had put out some targets around growth for fee-related earnings and spread-related earnings. We have now, I think, significantly derisked any growth, any revenue growth in the plan, not just in retail product capability but across the suite. We're now focused on -- and we talked about this on the call last week. With the original 3, we have another 6. We've got plenty to do. They each have, I think, significant upside potential. And so we're really focused right now on executing what we think is a really clear plan in front of us. So I would expect that the 5 products, which becomes 9, will grow a bit. But it's as important now to make sure we're getting access to not just the warehouses, but growing out the family office network, RIAs, IBDs in Europe as well as in the U.S. and in Asia as well. And so it would seem that getting to $15 billion of annual inflows by 2026 is a pretty achievable goal.

Okay. Can I ask just one more on this topic?

Absolutely.

Because your response just sort of triggered some other questions for me. And maybe we'll talk about later on margins, but I think you've been, in the last couple of years, between de novo and inorganically building a pretty strong distribution infrastructure. Can you just level set for where we are today in terms of how many people you have on the ground? Because it's a -- you have different distribution channels in the U.S. and outside the United States. So obviously, big fan. We can sort of talk about where you are today versus maybe where we started from and how to think about like the seasoning of that productivity opportunity set.

Sure. So we -- I mean, across the firm, we've had 2 or 3 years of meaningful investment in people, bringing senior people onboard, and that's largely behind us. We had the benefit in this space of buying Griffin Capital, and that transaction closed about a year ago. That significantly changed our capabilities in the U.S. As I look at where else we need to invest around the firm, this is one of the few areas where we need to make some more investments, not significant but some. And I think family office access is really important and has some really significant prospects. And we have the senior team in place, but need some more people on those teams. But for the most part, we have what we need. And we'll partner with third parties and enter into arrangements where we share economics or pay a fee to do that, but we're largely built out. We have -- between institutional and global wealth distribution, we have around 250 people today, up from less than 100 2 years ago. So the team size and shape has changed meaningfully, and our capabilities have along with them.

Right. So more product, more distribution, seasoning of the team on the ground.

Yes.

Okay. Let's switch gears a little bit more and talk about capital markets. It's another area you've sort of mentioned a couple of times today, the sort of growth opportunity, strategic opportunity. So first off, how diversified is the capital solutions revenue by asset class and now by transaction type? And then I think you said your stated goal is to double that revenue stream by 2026 to $500 million. I think you sort of reiterated that just on the earnings just a couple of days ago. So how much of that target is going to rely on deployment and then versus maybe the run rate of the business as you're scaling up?