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

Before we get started, for important disclosures, see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. Please note that taking of photographs and the use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. Well, thanks, everyone, for joining us at the Morgan Stanley Financials Conference. I'm Michael Cyprys, equity analyst covering brokers, asset managers and exchanges for Morgan Stanley Research. And we are thrilled to have with us here this afternoon, Scott Kleinman, the Co-President of Apollo. With nearly $600 billion of assets under management, Apollo is one of the world's largest alternative investment managers. Scott, thanks so much for joining us.

Thanks for having me, Mike.

Great. Well, why don't we dig in -- start big picture on the macro. A lot of concerns and debate. Clearly, whether it's around inflation, interest rates, credit cycle, consumer health, you list your -- you pick your poisons there. I guess, so what's your view on the macro economy here through the backdrop and lens of your portfolio companies? And when you look at the broader portfolio, which areas would you say are holding up? And are there any pockets of weakness you're seeing?

Yes. Look, I'll start broadly. The -- I mean, you're right, there's a lot of confusing or conflicting signals coming out of the market, the economy. I mean, look at the S&P, for example, right, up 10%. But when you peel that onion, right? The 10 stocks are up 45%, the other 490 on average down, right? That tells me the market somewhat concerned about where the economy is going. When you talk to CEOs, whether it's our CEOs or just other public company CEOs, there's generally a concern if you catch them in a moment of honesty, they're concerned about their '23 forecast where things are headed. And we see it. We see it. The economy -- I would say the consumer economy, which has really propelled the economy in '22 is still positive right now. But the rate of growth is definitely slowing down. So we see Q2 growing but slower growing than Q1, for example, on B2B type businesses, look, companies are tightening their belts. They're spending less on capital there. You can see backlog starting to slow down for a lot of businesses. So there's definitely a trajectory towards something. But look, we've been shocked after a 500-basis point rate move, just how resilient the economy has been. We're still forecasting some sort of an economic slowdown later this year, into next year, like negative recession zone. And then you have to overlay all that with rates, right? Because that's, I think, the biggest driver here. Our view ultimately is -- the Fed has moved rates 500 basis points in order to induce a recession. They are not going to stop until they get their recession. Inflation is still real. I mean the print today was nice, but it kind of still tells you that there's real inflation. You can see that disparity between goods and services, right? So the services being much, much higher, and that's coming from wages, right? We're still seeing real wage pressure, particularly at the lower end of the labor market. So things like supermarkets and hotels and where there's still pressure to try to fill those spots and see wages go up. So all in all, I'd say that's sort of my spin through the economy. Everything we do has this forecast or this model of a light recession end of this year, into next year. The one thing I'll say about rates is that the market has been forecasting rate declines almost as fast as the Fed has been raising rates, and they've obviously been wrong. We suspect the Fed is going to continue to hold rates. Even if we see a recession, [ Fed's ] going to hold rates at least through year-end to allow that inflation to really, really simmer down. So that's what we're sort of building our world towards.

Great. And with that sort of backdrop there, you guys have $50 billion of dry powder. So that's a lot of money to be able to put to work. So how does the environment feel today in terms of putting that capital to work? Where do you see the most interesting opportunities now to lean into? And then in PE, private equity specifically, how have you been able to deploy capital at such a strong pace this year, just given the traditional sources of deal financing are a bit tougher. And we hear others talking about slower activity levels.

Yes, I'll start with PE, and then I'll hit some other asset classes. But on the PE side, why don't I bifurcate between just traditional private equity and then Apollo. For traditional private equity, you generally need 2 things to be busy. You need an upwardly sloping expectation of corporate earnings because you're levering that corporate earnings stream. And you need availability of loose leverage, lots of liquidity to be able to do that. And right now, we have neither, right? Banks have dramatically pulled back over the last 6, 9, 12 months. And so availability of leverage is difficult. And well, corporate earnings are sideways at best, maybe even starting to head south. And so it's no surprise. You've seen just M&A volumes massively down. Now contrasted to Apollo, we tend to like this environment, right? Rates are inversely correlated to valuations. And so this is just a much more interesting time to be deploying capital. And as a result as long as you can acquire a company at a price based on modeling assumptions that assume the type of forecast we were talking about and still gives you private equity rates of return, and you can find a way to structure it, which, again, Apollo is very good at, very creative. This is what we do really well. It's just been a very interesting time to be doing deals. I do hear a lot. And I read a lot from our peers about, well, there's still a big bid-ask spread between buyers and sellers. And I would say in the tech and health care sector, where so much of deal flow has been over the last few years, yes, there is a big bid-ask spread. If you were trading here and now you're trading here and you don't need the money, you probably think you're going back to there. You're not, but you probably think you're going to. And so you've seen a real bid-ask gap. But in the industrial and consumer and media sectors, I think a lot of those companies, those CEOs see the same storm clouds I'm talking about and are thinking about this is not a terrible time to be going private and get out of the public eye, do some of the things they wanted to do and ride out the storm for the next few years in private. So it's been actually a pretty good time to be doing deals from our perspective. Just other asset classes, the one I'll touch on. I'm sure this will be a question you talk about because everybody is talking about it. But from a private-credit standpoint or just a credit in general standpoint, you're finally seeing yields that make sense for lots of investors to be deploying capital. You can make a reasonably attractive rate of return in a variety of credit spaces now. And so that is a particularly interesting time. And I think even now over the next 9, 12 months, if we think rates are -- base rates are at kind of a peak, then being able to lock in -- this is going to be a particularly good vintage, we'll put it that way.

Okay. And you've been vocal on this theme of offering fixed income replacement solutions. I think you've sized the opportunity as a $40 trillion TAM. So I guess the question here is this still appealing in a higher interest rate environment? And where are we in the build-out of the fixed income replacement origination capabilities? And what's still left on your to-do list there?

Yes. So the answer is, for a lot of fixed income investors like true IG fixed income investors, absolute yield is interesting, but spread is really the magic. And when you think about our retirement services balance sheet, other insurance companies, base rates are nice, but it's really the spread where their profit comes from. And so being able to capture excess spread is what's critical, excess spread over the market benchmark because the market benchmark typically going back to clients or going back to the underlying liability. And so fixed income replacement is as important as ever from that perspective. And as far as the buyer universe, well at higher base rates, that just opens up even more interested parties. So we think it's a great time right now. As far as the build-out, as we've talked about in the past, and Apollo has said very publicly, we've been building this business for the last decade, right? We've been building it for our own balance sheet, our own Athene and other controlled balance sheets because this has been a critical part of the asset strategy we have. What's changed over the last year for us has just been the pace at which we've now accumulated asset origination platforms now exceeds the dollar volume we need internally. And so we have more capacity to start offering this to third parties, third-party insurance clients, third-party credit investors. And we've been much more active in marketing to those other clients, both on a bespoke basis like an SMA basis, but also productizing it into some asset-backed funds or asset-backed finance funds that are consumable for credit investors.

Maybe that's a good segue to talk about the capital solutions business, but seems to be running ahead of your 2026 goals. I don't know if you're going to offer up any sort of updates here on expectations there. But maybe just delving a little bit deeper into sort of what's turbocharging the growth. Is it just as simple as to your earlier point on the origination platforms, where you're now you're originating more than what you need. Is there any more to that? And maybe just talk about sort of your expectations on the go forward from here.

Yes. So we set our 5-year plan in this based on what we thought was just some thoughtful but aggressive build-out forecast. We were relatively new to the capital solutions activity. We had always had a small group doing this. But as we just started to develop not only origination platforms, although that's a big part of it, but origination platforms, more products, more flow. It just became -- it has become a bigger and bigger just part of doing business, right? When you look at the numbers we've been posting over the last few years, it's not so much about the 1 or 2 mega trades we've done. It's just a dramatically increase in volume running through the Apollo system. And each time, a chunk of that is just getting clipped and sold off and syndicated, and that's what's creating this interesting flow. And so -- no, I'm not going to update the forecast or the long-term forecast, but I will say, we are incredibly pleased with how this is building and it kind of is going the way we had imagined before we really knew how this would all build out.

And maybe just coming back to the origination capabilities. Can you just maybe speak to some of the white space, the opportunities that you still see left in terms of building out those capabilities? What's on the to-do list as you think about that from here?

Yes. So from the platform-origination standpoint, the asset-based origination platforms, I would say at this point with 16 platforms, we're not saying we're not going to keep -- we will inevitably continue to find interesting teams, interesting businesses that we can keep adding to, I would say the core foundation is built. And now it's just a matter of continuing to add, diversify, find new areas, new corners. So I wouldn't say there's any major holes at this point. It's just a matter of continuing to improve, refine. We recently just added a project finance team who source interesting infrastructure project finance, credit, loans. And so it's -- we're just -- we're now sort of filling in some small white spots and things like that.

Great. Why don't we turn to fund raising? Maybe you can just give us some color on the broader fund raising environment, which we've -- heard a little bit more pessimism from some others in the marketplace, but it seems like your progress on your next 6 growth initiatives is contributing to your very strong fund raising outlook, particularly here for the second quarter and into the rest of the year. So which one of these growth -- of these initiatives, you'd say you're most excited about? And maybe just give us a little bit of color more broadly on fund raising.

Yes. I'd say, look, the LPs in general are still allocating to the market. If you break it down, PE, which is very visible, you have a double whammy of last 18 months, the market has just seen or LPs have just seen less inflows, so they have less dollars to deploy, and then you have this numerator-denominator effect happening where folks are still fairly at the high end or outside of their strategic asset allocations for PE. That's the reality of where we are. That typically means your typical public pension system here in the U.S. or Europe is -- they're still allocating to private equity. They're just doing it at a smaller dollar amount per clip than they were in the past. And so yes, the -- so PE, there definitely has been pressure, and there probably will be for another year or so until that whatever proverbial pig moves through the python. But other asset classes are still pretty robust. In general, investors are increasing their allocations to infrastructure, the secondaries. And as I mentioned earlier, to private credit. And so investors are moving allocations around their SAA to try to lean into those. So across the board, we're feeling pretty good about fund raising this year. Believe me, it's a lot of work, like we're -- we spend a lot of time doing it. But it's really because we just happen to have a bunch of products in the market this year. And we're getting some real momentum on the credit side, both the private credit, the asset-backed credit and other credit products.

Why don't we shift and talk about retail. You've recently launched several products over the past couple of months, including AAA and then also Athene Altitude. Where are you in the process of the distribution rollout? I know it's probably early days, but what are you hearing in terms of reception and demand from customers?

Yes. So it's been great. As we highlighted at our Investor Day, 18 months ago, we were embarking on this global wealth and retail strategy. I think at the time, we might have had single-digit number of employees who are focused on that market. And really sold in this single-digit hundreds of millions per year in that space. We put a 5-year target out of $15 billion per year by year 5. So $50 billion cumulatively over that time frame. Last year, our first year really in earnest looking at the retail sector, we raised about $6 billion out of that. This year, we haven't put a number out, but we said it will be a fair bit above that number, and we're still tracking towards that. So feeling pretty good there. The key to retail is not just taking a bunch of institutional products and trying to shove it through the retailer global wealth system. It's -- you need specialized pipes, the ability to touch -- those clients just consume product in a different way. You need specialized products that at the very least are institutional products that are adjusted to be consumed by individual investors. But in many cases, like some products you mentioned AAA or Altitude, products developed specifically for retail investors. And then you need the technology support, again, to do all that. And so we've invested extensively in all of that. We are really pleased with the progress we're making there. And so yes, we are definitely tracking that 5-year plan, again, not officially raising anything, but feel pretty good. We're on our way towards that.

Great. Maybe moving on to the retirement services business. Maybe you could talk about how Athene has performed so far this year amid rising interest rates and volatile market backdrop? How is the credit quality holding up here? And how do you expect credit losses to trend this cycle versus the, I think, 9 basis points that you guys have had on average over the past 5 years?

Yes. Yes, it's been -- as you've seen from the results, I mean, it's been incredibly strong. So the rising rate environment is absolutely good for the annuity business, right? If somebody like to go buy an annuity at 3%, they're going to love it at 5.5%. And so it's just been good for the market. Athene continues to really fire on so many cylinders across a number of its various channels of sourcing. So retail has been incredibly strong this year as it's been building year-by-year. Some of that is a function of the rate environment. But some of that is also a function of since the Apollo merger with Athene, we've expanded the retail distribution base or we've helped Athene expand the retail distribution base. Athene historically focused on the independent broker channel. Apollo, given its relationships with the big wirehouses have really helped Athene break into that market. And so that's just a whole set of new channels that they have not previously served, and that's creating some really interesting volumes there. The pension guarantee business has been just a great business as that industry just becomes more and more accepted in corporate America, which it should be. It's a fantastic opportunity for corporations to get out of an aspect of their business that they really don't have -- that's not their core competency. This has been a real positive for Athene, just like the fixed annuity, where we are the #1 player in the U.S. On the pension side, we also have become the #1 player over the last few years. And so that's a great business for us as well. Flow reinsurance has been strong, particularly overseas, where we've continued to sign up flow partners in Asia and elsewhere. So business is really strong and the rate environment is really helping. I mean as far as the credit portfolio goes, it's nice. We actually had a dress rehearsal back in March of '20 when we had an opportunity to really dig in, spend the time, crawl through the portfolio, came away then feeling really, really good about the book, but also used the intervening opportunity to clean up and get out of anything we might not wanted to have been holding. And so we feel really, really good about the portfolio right now. And I don't see why this cycle is going to look any different than our long-term historic averages.

Okay. Maybe you could update us on the plans to use the sidecar capital vehicle to more efficiently fund Athene's organic growth? How are you thinking about that? And then longer term, how efficient can the business become?

Yes. Look, it's -- so we're making good progress on the raising of our second ADIP 2. So that's going well. We'll finish raising that this year. And we're just about finishing up the remaining capital in ADIP 1. And so sometime later this year, ADIP 2 will start deploying alongside of Athene. The arrangement works very similar to the way it did previously. We expect -- when you cut through all, the number is about 40% of the capital comes from the sidecar vehicle, it's incredibly efficient to be able to carry this capital in sidecar format. Look, over time, we can turn the knobs and potentially dial up, dial down, how we think about this. But this is a level we're actually very comfortable with right now. It's the right balance of alignment and volume and flow and FRE, SRE. And so it just -- it works. We're happy with how it's working right now.

We see some large-block activity across the industry. Curious your perspective on that sort of broader competitive backdrop, are these deals that you guys were interested in and involved with in any way? Just curious what you can share on that? And what are you seeing in terms of pricing? And is there any sort of expectations or pipeline that we can be thinking about for Athene?

Right. So I'm at the end of the day, right, not at the beginning of the day. The -- we've obviously looked at every trade that's gone by where -- I mean, the reality is Athene can acquire any of these assets if it really wanted to. And so as we look at these, we run a very specific capital return model. And we're looking at all the sources of liabilities, the various organic ones I talked about, inorganic. And when we line up the opportunity set and think about what we have, x amount of capital we want to deploy and where we -- these acquisitions have not stacked up. I won't name names, but they've sort of been anywhere from modestly interesting to not interesting at all. And I'll let you guess which ones are which, but that's the -- I mean the reality is Athene has been leaning much more into the retail and organic channels over the last couple of years because we just see materially better returns on capital from that channel because we spent the time and have built those channels for a lot of the other players in the space, they don't have those channels. And so they have to grow only by the inorganic path.

One question that had been coming up a bit back in March just given some of the banking sector challenges had been question around rescission and sort of customer surrenders. So just curious if maybe you could talk a little bit about what you're seeing from your customer set there at Athene? What trends are you seeing? And maybe you can remind us some of the puts and takes about the maturing policies and how you think about redeploying capital?

Sure, sure. And we've -- nothing I'm going to say here is -- like we actually heard the market loud and clear last quarter. And so we really, like we do all the time when we hear feedback, we just upped the transparency, upped the disclosure. And so all of this is on our website, and you can go through all this. So the way the annuity cycle works, right, is when somebody buys an annuity, there's typically a period of time. I think it could be 1, it could be 3, it could be 5 years of a period of no surrender where there's real penalties if you try to surrender. And then thereafter, there's a sort of actuarially predicted -- based on where rates are versus where the crediting rate of the underlying is, but there's an actuarially predicted amount of how many people will redeem and what that looks like. And then after a period of time thereafter, if you haven't redeemed, it's probably sitting in a drawer somewhere, or it's part of somebody's just long-term planning, and they put it away and are holding on to it. And so we put all of that out there. We predict every quarter for years in advance, what that ins and outs, those flow look like. And so we have a pretty good prediction. Anything above or below that would be we'll say, unexpected benefit or detriment. And so we've put those forecasts out for the market. We'll hold ourselves accountable against those forecasts. The thing I'll say is in a world where we are the largest writer of new fixed annuities, something like 70% to 80% of any type of surrenders aren't leaving the annuity system. They're simply just [ surrendering ] in an environment like this. They're saying, "okay, well, my old policy has a rate of x. I can get a better rate now." And so they'll come back into the market. As the largest writer of fixed annuities, we are the beneficiary. And in fact, we're gaining a disproportionate share of that new industry volume. So it's been a net boon to us, quite frankly. But we really haven't seen anything out of the ordinary when it comes to -- we're just not seeing unpredicted behavior. And -- but we're now committed to sort of sharing that information every quarter. And you'll be able to watch along with us.

Great. We're going to open up to Q&A -- audience Q&A in just a moment to get your questions ready. Before we do, maybe just move on to capital allocation. Just curious your latest thoughts there on capital priorities and balancing investments in the business for growth versus dividends and also versus buybacks and let the stock undervalue, should that lead to a shift toward more buybacks? Would you say, how are you thinking about that?

Yes. Look, I think we've been pretty clear in the 5-year plan about the amount of excess capital we think we're going to generate over that 5-year period. And we earmarked -- hypothetically earmarked a portion to dividend growth, a portion to buybacks, a portion to strategic investment. But on any given year, any given quarter, it ebbs and flows. I mean, we have said about 2023 because of the 3 core initiatives, the 6 growth initiatives that we have and that we really have started building out over the last 12, 18 months. We made a management decision this year that 2023 was the year of no new toys, where we are really focused on investing in what we've started, really allowing the seeds that we planted to germinate and grow. And so that has led to really raising the bar on strategic activity over the course of '23, which then you can reasonably assume leads to more capital being available for some of the other things. And we reported some healthy buyback in Q1. And we'll see what the future brings, but I think that gives you a sense of our mindset.

Then you'll update on buyback on the second...

You'll have to wait for the earnings call.

Great. All right. Any questions in the audience? [indiscernible] there we go, just wait for the mic.

Would love to know how Apollo differentiate on private equity. What do you do differently or better than your peers, KKR, Blackstone? And how do you employ discipline through cycle? And what kind of things you look for, what sectors do you really care about most on a go-forward basis?

Sure. That's a great question. So Apollo really prides itself on its value orientation, this belief that purchase price matters. And through a cycle, 100% that has proven to be a top quartile strategy. The reality is for the last 10 years, as interest rates went to 0 and stayed there, purchase price mattered less, right? The old PE model used to be find a good company, pay a reasonable price for it, fix it up and you'll make a good return, right? When interest rates went to 0, that middle part fell out of the equation. It's just find a good company, pay whatever you want for it. And as long as you don't screw it up, you probably sold it for more than you paid for it, right? And that worked until it didn't work anymore, right? So Apollo really was probably one of the -- certainly the only large player and one of the few private equity players out there who really maintained that discipline through the run-up over the last decade. And really worked very hard to find interesting companies, but at good prices. So we probably work twice as hard as the next guy to earn the same type of returns as other people who were just more focused on the velocity of capital. And like I said, that worked until it didn't. And then you had '22 come along and you have a portfolio -- a lot of folks just have a portfolio of 15, 20x enterprise value to EBITDA companies that they're trying to defend valuations on. Apollo created -- the portfolio that we built from '18 to '22 was built at 6.5x, inside of 6.5x. We're sitting today with under 4x leverage on that portfolio. That portfolio appreciated 23% last year, right? Appreciated another 9% in the first quarter, right? Why? Because free cash flow and EBITDA, good old-fashioned private equity. And the key -- I mean, you said it, it's the discipline. It's in a world where everybody was just chasing growth, growth, growth. It was keeping that discipline that really differentiated ourselves. And quite frankly, that's why LPs -- LPs have the benefit of being able to allocate capital to different strategies, right? The thing that kills LPs is when folks are drifting all over the place and doing different things. And I'd say over the last 5, 7 years, so much of the private equity industry had shifted to become a growth investor that what they thought they might have been getting, they were getting growth equity. And we're this constant for LPs of you will get a value-oriented purchase price matters strategy, creative, not only in the up markets, but now when the market rolls over, your portfolio is in good shape and the ability to deploy capital into this market when others really struggle, that's the real full cycle opportunity that Apollo brings.

Any other questions in the room here? Maybe AI, ChatGPT? Thought we'd get away without that question.

Sure.

But just big picture, how do you see that potentially changing the industry? Is it a revenue opportunity? Is it an efficiency opportunity? It would seem like there could be opportunities within, say, your diligence approach.

So I would say we are starting to spend time. We have folks in our Apollo portfolio solutions team starting to figure out, okay, how can we utilize this, like you said, from a diligence standpoint, from a -- how can companies -- how can we offer turnkey solutions to our companies to help them from an efficiency standpoint there. We're still super early days of all this. And so I wouldn't expect to see IRR differential or growth rate differential yet, but check back in a little bit of time, and I'm sure there'll be lots of use cases.

Okay. Final question. You guys are about -- been a couple of years since the Athene combination was 18 months...

Yes, 2 years.

2 years. Do you think the market fully appreciates the Athene part of the Apollo story? What's still misunderstood and how do you think about bridging that mindset gap there?

Yes. Look, I've spent a lot of time talking to investors about the real benefits we've seen from the combination, whether that's -- I mean, I touched on earlier, opening up new channels for Athene to sell product into but also the new product development, things like AAA and Altitude, so new products that we can only really do because we have the Athene and Apollo under one roof, the excess capital that comes out of Athene and what's that's allowed us to do as an alternative asset manager and the exciting things there, the ability to seed new products. So some -- I mean, this merger has more than exceeded expectations. So from that perspective, I'd say check. The perspective of does this room fully understand just the power of Athene and what Athene is really doing, I'd say maybe we're 60% or 70% of our way on that journey. And all we can do is continue to just try to be more and more transparent when questions from the gallery come up. We try to be super transparent, show you how we approach it, how we think about it, put it out there, spend the time to educate. And we know we're on to something amazing here, and it's only going to keep getting better and better. And it's our job now just to bring this room along and make sure they start to see it as fast as possible.

Great. We'll have to leave it there. Thank you very much, Scott. Appreciate it.

Great. Thank you.