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

Thanks, everyone, for joining. Of course, Brennan Hawken, I cover the capital markets space here at UBS. Pleased to say, joined by Jim Zelter, co-President of Apollo Asset Management. Jim also serves on Apollo's Management Executive Committee and the -- Management and Executive Committee, pardon me, and the forms -- firm's Board of Directors. Since joining in 2006, Jim led the broad expansion of Apollo's credit platform, which now oversees over $0.5 trillion in assets and supports the growth of the business globally. Jim, thanks so much for joining.

Glad to be here. As we have mentioned earlier, a lot going on with UBS, so appreciate the support and the dialogue today. Absolutely. We value the partnership. Thank you.

So there are QR codes on the tables. If you guys would like to support -- submit a question, I can check the iPad, but I've got a bunch to get through here. Maybe starting on the macro, let's get your views on the macro outlook and the outlook for credit markets. Why don't you think we've seen a credit cycle materialize that so many had expected? And are you seeing any emerging pockets of credit stress in the U.S. economy?

Well, if I was sitting here a year ago, I would certainly -- we were certainly of the view that we had seen inflation stabilize on the goods side. The supply chain issues had been sort of dealt with, and they were working themselves out post-COVID. You still, on the services side, had a bit of inflation, and we would have thought that the aggressive Fed activity would have created tighter financial conditions. In retrospect, they haven't, as we all know. When we think why that's been the case, if you look at the average mortgage in the U.S., the average mortgage of all the folks who have mortgages, which is about 60% of homeowners, it's 3.8%. So we've not seen the impact of lower -- of higher rates on consumers in the U.S. thus far. Very resilient economy. You have to think that some of the inputs that the Fed is using on all their dot plots have been wrong. But I guess, as we sit here in 2024, let's separate enthusiasm for risk for the underlying economy. There's massive enthusiasm for risk. The U.S. is the place to be. With base rates higher, it's a great time to be in credit. With an underlying economy growing, it's a great time to be in credit. It's very unusual. I've been doing this for close to 40 years. It's very unusual to have an environment where, at the end of last year, you had non-investment-grade defaults approach 4.5%, 5%, which is a pretty high number, but it just got masked from a tremendously strong underlying economy. So there are some strains. If you look at the subprime auto, there are some strains, multifamily housing. But fundamentally, this is the place to be. This is the place to invest, and you're getting paid like you've never gotten paid in credit. So while the -- I think the indexes are a very, very poor barometer of reality. The high yield and loan indexes are very, very tight. A lot of macro players play in those multi-strategy hedge funds. No one in credit trades in, buys the index. They may hedge with the index. But -- so I think that while we do see a couple of concerns on the economy with -- in terms of consumer activity, overall, it's a pretty strong place, and we like putting money to work right now.

Got it. One of the things that I think is interesting is that the market structure in the "liquid markets" has actually resulted in less consistent liquidity writ large. So what many people think of as liquid really is not that liquid. Has that market structure change made the private investment-grade pitch or fixed income replacement that Apollo is so on top of any easier?

Well, I think it's really one of the untold stories out there. When I started my career, I was a high-yield trader, a junk bond trader. And if you looked at the size of the asset class in the mid- to late-'80s, it was a $200 billion asset class, which was a big number back then. And there was probably $30 billion to $40 billion of trading capital or inventory. Today, the U.S. high-yield market is $1.9 trillion, $2 trillion, and there's probably $20 billion of trading capital. So this has been a 30- to 40-year evolution tying back to ROEs, regulatory, business risk, all the things we can talk about. So there's no doubt we are big believer of this idea that high quality is safe and low quality is risky, and that high quality is liquid and low quality is illiquid. We just think that, that is a -- it's not correct. If you look at how long it takes to trade an IG bond these days, it could take a lot longer. So there's no doubt that the whole definition of what an alternative is, it's not just that little small corner office buying private equity. It's going to be a whole array of activities where people are saying to themselves or coming to the conclusion, "Why am I paying for liquidity that I don't need?" So we think that's a massive trend when we go out and see the largest investors in the globe that have these very large investment-grade or liquidity vehicles, and they say to themselves, "We're a 100-year investor. Why do we need this much liquidity?" I think there's a lot of questions like that, that are impacting the dynamics of our business.

Yes. And then liquidity, to your point about the amount that's actually held in inventory.

People think when we do -- obviously, we have a theme, which is one of our massive drivers. We're trying -- our objective is to make 30 to 40 basis points more than the traditional player in that space. Because we are traditionally a PE alts firm, they think you guys must be trying to make 12 or 15. No, no. On the actual investment-grade portfolio, if you were to underwrite new annuities today, your -- and that investment-grade portfolio is $0.25 to $0.30 of every dollar that you invest, if you make 30 to 40 basis points incremental spread on that, on that type of regulatory capital, it's tremendous. And so we're willing to give up for great companies like AT&T, Vonovia, AB InBev, where we've done very, very large financings, we're making well in excess of that 30 to 40 basis points. So we think that this is the topic of the future in terms of how people run these portfolios.

Yes. Makes a ton of sense. As you continue to build out the fixed income replacement origination capabilities, what have you learned? And how have you adjusted your approach as a result of that?

Well, I think when you're on the sell side, which I was on for a couple of decades, you are in the classic moving business as everybody in the audience knows. When you're on the buy side, you're on the classic -- you're in the warehouse business. You own stuff forever. And I think when you are on the origination business, you've got to make sure that you have the right structure in place, the right incentives, the right alignment of people, such that you want to have folks bring an investor hat first and not a distribution hat first. So we look at everything. Everything we do -- and Marc has been famous for quoting a few things, purchase price matters and we want 25% of everything and 100% of nothing. Everything that we do in our business model is different than our peers. We want to own a big slug. Now a big slug may be 25% on a $4 billion tranche. It may be 70% on a $500 million tranche. So what we've learned is it's all about investment first, and then distribution is the overlay or a participant. But what do we want to own? We want to come at this thing from a principal approach. And I think borrowers actually and folks that are coming in to raise capital, that actually rings a tone with them that I think is incredibly undervalued. And when we go out to folks and say, "We think this can get done here at this rate and this kind of size and these terms. And oh, by the way, we want to own and hold x amount," I think that last comment is what really cements us in a very different light. But I think we're still -- this is going to sound strange because we even talked about it, but as much as we've built our origination and we've created that origination flywheel, I don't want to say we're early days, but I see a tremendous amount of inherent growth in the flywheel. We've got our 16 platforms. We've got a variety of partnerships with investors as well as banks and other capital providers, and we're just seeing more and more opportunity for us to use those tools in that toolbox. And so, again, when we think about being able to create that flywheel with bringing in liabilities and then investing it wisely through origination, that's where I personally spend a vast majority of my time.

All right. Well, one of the questions that I get from investors a lot is on the originations that you sold last year, 2023, probably benefited from slower investment banking and DCM activity across the calendar. Do you think that, that provided tailwinds to the platforms last year? And how do you expect that, that market would be impacted if we see traditional DCM issuance ramp back up with the investment banks, like so many expect?

I've been asked that. I mean, I think, certainly, when there's a market dislocation or a lack of confidence or a lack of ability to go to market, we are an extremely differentiated platform. I'd rather have a robust marketplace where there's a lot of activity. And so when I think about the close to $1.8 trillion that's been invested in private equity by private equity in capital structures the last 4 years, typically, by 2024, you would have seen 1/2 of that money get repaid with monetizations. The reality is you've only gotten 1/10 of that money returned. So there's a tremendous amount of capital structures that need attention, need extension, need an equity slug to help roll the debt. So to answer your question, listen, I think there might be a little bit of that, but I don't think -- it's a much bigger secular opportunity than the tactical opportunity that might have existed because some folks were a little bit flat on their foot. And I would also say, all you need is to have one transaction get stuck that is in a commitment pipeline, and the risk appetite will continue to go back to its secular change. So I think if you look at where -- collectively, I'll point some numbers out, in '08, '09, Wall Street got stuck with almost $500 billion of leveraged loans in high yield at the peak of the crisis. Last year or 2 when it got clogged up, The Street was long $100 billion. So $500 billion to $100 billion, and I suspect that the new UBS, and I know your management team, the new Morgan Stanley, they're just not going to open up the doors and say, "Bring on the risk." That's just not their business model with the global wealth and other things. So I think this is a much broader secular trend that we're encountering.

Sure. And for UBS, I can say that's definitely true.

Yes. Your CEO has not been shy about -- that's right. He's not been shy.

No. The Chairman neither. So growth in the Capital Solutions business has exceeded expectations. Fee growth of over $500 million in 2023, already basically at your 5-year target. So how were you able to achieve that so quickly? And what do you think the outlook for the growth looks like from here?

Well, I think what it proves to us is that the pieces were all there. It just was a -- I mean, this is a business that 4 or 5 years ago, we were doing $50 million to $100 million in revenue. And we knew that all the incumbent pieces, when you have a platform with north of $650 billion of assets and almost $500 billion in credit, there's enough activity. Even if there's no big waves, the tide's coming and going every day on activity. So what gives us a lot of excitement is the fact that the 16 origination platforms, Atlas, the old CS platform is relatively new. MidCap is really hitting its stride right now. PK Aviation is hitting its stride. So we're convinced that the new way of looking at the world, and what I mean by that is we look at the world as our 2,500 LPs around the globe. What we now look at the world is we have 3,000 current LPs, but we've got 5,000 potential LPs. So the syndication activity, the activity where we show co-investments, that -- it's a flywheel. We show transactions. They say, "Wow, we like this flow. We'll buy these 2. Let's talk about an SMA. Let's talk about a mandate, a combing of funds." So I think we're just confident that as this gets more and more embraced around the firm, and we had a partner's offsite last month, I spent half a day talking about origination and distribution as big themes because, I would say, of our 200 partners, many, many, many of them know what we do, but there's still a portion that we can still have help position that business. And I believe we can.

Yes. One of the things in talking about LPs over the past 1.5 years or so is the need to return the capital. So there seems to be growing confidence in that a recovery in the capital markets activity getting started would allow for that. So have we started to see transactions that allow capital to be returned to LPs? And if not, what set of circumstances do you think needs to happen in order to allow that to improve?

Well, I think the biggest issue is of the close to $1.7 trillion that got invested between '17, '18 and '21, that -- as I said, that number, we would normally have returned 1/2 that, $800 billion. Only about $200 billion's been returned. So what's going to have to happen is if you are a financial sponsor, a PE firm and you're confronted with a capital structure that has impending debt maturities that may be at a higher magnitude than the market can finance, you're going to have to either throw in some more equity or delever that with some equity from a convert or a preferred. So I think as the stalemate continues and those financial sponsors want to go out and raise the subsequent fund, they're going to have to deal with the nature of reality of their existing portfolio, and they can't just sit on their hands. So it's -- that's what gets us excited about deploying capital in a higher rate environment. The natural gravity of them -- those sponsors wanting to go out to raise more capital in a subsequent fund that there has to be a break in the dam. It's [ natural that these ] folks won't. You can't fund your PE business by not fundraising every 3 or 4 years. It's just the economics don't work.

Right. Right. You guys expect -- speaking of fundraising, you expect pretty strong fundraising third party in 2024 with a $50 billion target. Can you talk about what channels and strategies you think will drive that fundraising outlook?

Well, certainly, I mean, credit is a -- is the dominant fundraising conversation these days. And with rates at these levels, we built our business assuming that the rates were not going to be much higher than they were for a decade long, this is a huge bonus to us. So between the -- the first is the institutional channel. And between Asia, the Middle East, now Latin America, I was in Mexico City a couple of weeks ago and even in the U.S., there's strong institutional demand across the board for a variety of performing credit products, not just direct origination, but the whole world of asset based and asset-based finance, which we think we are the leader in that area because of our purchase of Atlas. The second is the whole global wealth channel. Last year, we did around $9 billion. This year, we'll increase that dramatically up 30%. We've got 7 or 8 products right now, a lot of evergreen products or perpetual products really focused on robust yield. That's going to be a good 1/3 of our fundraising, I suspect, this year. And between those 2 -- and again, most of them, probably 2/3 will be in the area of credit. The other 1/3 will be in the hybrid or equity area. So we feel very good about the fundraising on the Apollo side as well as on the Athene side. Certainly, in a higher rate environment, people buy more annuities. And so we had both engines working well last year for our business.

Yes. Yes. And I guess, even if we see rates come down a bit, the expectation is that's still going to stay robust.

I think so. I mean, I do not suspect we're going to go back to where we were for the historic lows. Could I see rates lower 50 to 100 basis points in any kind of economic slowdown? I definitely can, but I don't think we're going to be back in a one-handled world anytime soon.

Right, right. So just a higher baseline.

I think it's a higher baseline, yes.

Yes. On the wealth side, I mean, this is a persistent topic around Apollo, can you walk us through your global wealth product suite and distribution capabilities today? And how do you feel -- your distribution capabilities outside the U.S., how do you feel about that? And would you consider an inorganic transaction in either Europe or Asia to extend the global reach?

Well, I think -- let's talk about products and distribution. Products, the world really wants robust, repeatable yield products that are quite simple to understand. And when you go to them and say, "We are in a direct origination product, Apollo Debt Solutions, XYZ competitor, KKR goes on and buys a business at 9 times. They put 4.5x of equity, and we are the top 4.5x of debt, and we make 10% to 11%," that's a very simple story. That product right now for us is almost $9 billion of assets. We started raising it 2.5, 3 years ago. So I think between the Apollo Debt Solutions and the other areas of large-scale lending in the U.S. and Europe, those work all channels, all geographies. We took our Athene portfolio and pulled it out in terms of the Alt portfolio. It's AAA. It's really a turnkey alternatives portfolio with no J curve, no double fees. That has been one where we've raised quite a bit. So we've got 7 or 8 products that really fit those either flagship or robust yield themes. And to your point, while we've had great success in the U.S., Europe and Asia and even Latin America continue to show great promise for us in the wealth channels. Now in the Asia, it's really the large wirehouses folks, like our host today. In Europe, you have a much different backdrop because of the geography and the regulatory geography. But again, the large international names work well, and then the large trust banks or private banks. In the U.S., the RIA channel is growing leaps and bounds. And then we have out there that massive opportunity, the 401(k) channel, the DC, and that is going to be a huge opportunity as well. It's early days. The issues really are more so valuations and marking, but I think you're seeing right now those conversations you started about liquidity and the idea of having a retiree who wants to retire in 20 or 30 years be focused on value liquid products, that's -- I think we're going to look back at that and say, "What were we thinking?" That seems like a bizarre mandate that we put on these. And so I think what you're hearing me say is between robust yield, robust scale flagships, we're open for business in the major geographies around the globe with a particular focus on the U.S., Asia and Europe. But I'd also say to you, it's -- this is a bit of a race in terms of the places where you will be able to cement the business over the next decade. And what we have clearly learned, we were of the view that if you have great investment performance, everything will happen. Well, that's table stakes. But you need to have product innovation, you need to have boots on the ground. You need to have technology and education. And we've invested a tremendous amount, 200 people, bought Griffin, created Apollo Academy, all of those activities, which for us now, I think that's going to be an embedded brand that we build up, that people underestimate the value of our brand in terms of the scalability of that and the replicability. It's -- there will only be shelf space for a handful of these names. And it's a little bit of a fight in the trenches, but we're confident we're going to be one of the folks that stand up tall at the end.

So not really feel good about the distribution capabilities.

I could spend all of my time just focusing on global wealth distribution 7 days a week. And I focused a lot on origination and syndication, so -- but there's no doubt, global wealth is a big focus for us. And Stephanie and the team have done a great job.

Excellent. Yes. So turning to Athene, that merger has gone well for sure. The growth in both flows and earnings are pretty self-evident at this point. What inning do you think we're in, in the development for Athene as far as the product distribution network?

I think we're still in early innings. What people forget about Athene is we have 4 channels for raising capital. Obviously, they're -- how we started what we -- the so-called inorganic merger, buying runoff books of business, blocks, which many of our peers do know. But the fact is when you look at our business now between retail, between reinsurance blocks, between PRT and FABN, we're able to raise capital in 4 distinct channels. And I think that many of our peers are focused on like maybe 1 or 2 of those channels at most. So we have 4 access to the capital. I think if you look around the globe, between Japan, between Australia, between Western Europe, Western Europe has been a bit slower because while there are opportunities, the regulatory challenges have been numerous, we're working through them. Athora has grown nicely. But we think taking that -- between the 4 areas we raise capital, which gives us a lot of advantage versus our peers, but also the geography, we believe we're 1 of the 3 players that really is in the PRT market. And with the rise in rates, a lot of pensions are finding themselves in a much higher funded basis. And we are there to participate in that activity, especially in the U.K. So I think we're early innings. Jim and Grant have done an amazing job on this business. I would ask folks to go back and go into Bloomberg and look 3 or 4 years ago what the market cap is and what we bought it for and what it made last year, it was -- in retrospect, it was a very wise move for us because it was not valued appropriately in the markets. And we are really -- because we knew it so well, there were no real integration issues. And so I do think there's a bright future on the existing business. But then, as you talk about creating new products, guaranteed retirement income around the globe, other types of, I call it like the Reese's, the peanut butter and the chocolate, bringing Athene and Apollo together in insurance wrapped, I believe we're at the early days of that. And so not a huge baseball fan, but I think we're definitely early innings, definitely early innings.

Yes, yes. I mean, we -- I talk with the folks that manage the annuity business at UBS, and they just say the quality of the distribution partners that you guys are signing up just steadily improves.

Yes. The breadth -- it's -- we get together a few times a year and talk about distribution strategy. And while they are distinct and separate right now, how we distribute annuities and how we distribute global wealth products, I suspect there will be product integration that people don't even have as part of their models. And as you mentioned, I think the age, the demographic profile of savers going into retirement, how do they annuitize their savings once they get to be 55, 60, 65, I think that's early, early days yet. And we're spending a lot of time in the lab on trying to create the right type of products that would allow us to be a brand and an investment leader in those for clients.

Yes. Makes sense. I'd love to hear your thoughts on structured credit because this is a question that I get a lot from investors around Apollo. So it's sort of a nagging concern around the complexity involved in structured credit. And the track record of structured products in a downturn, right, it's -- it causes a little bit of anxiety. So what would you say to address those concerns?

I would say -- like, let's bring the facts to the forefront. I grew up in Rochester, New York. A lot of disruption between Kodak, Xerox and Bausch + Lomb, and I worry more about our investment-grade portfolio and single-name risk than I do at well-structured structured product portfolio. The fact is the last 15, 18 years, 20 years, you can look at the numbers, other than really poor RMBS and CMBS underwriting at the crisis, structured credit has performed amazingly well versus single name. If you look at the CLO market, it's performed through and through. And so the facts, there's a lot of information being put out by the NAIC and other, would show the stress of structured credit through a cycle, and it performs admirably well. And so -- and I also think you're seeing signs in Europe where they're coming to a conclusion right now that the lack of securitization market in Europe for the European banks has resulted in a lot more incumbency risk because of policy lending. So I would just say the facts don't bear out that concern. You give me a AAA or a AA CMBS or CLO structure, those are pretty hard to break with defaults and recoveries. Do I think that loan recoveries will be lower this time? Yes. Do I think that you have to be very careful about buying BBs and CLO equity? Yes, I do. But don't confuse poor assets going into these structures with the structures themselves. And so the math -- and we've done -- we've been very, very vocal. We've been very transparent stressing these portfolios between commercial real estate, residential real estate and corporate securities. And then I'd also say the whole ABS market, we purchased that from CS with the view that getting our hands on these warehouses, that when you look through that warehouse risk, it basically attaches its A type of risk. And we're getting paid 300 plus for that. And there's 30 or 40 years of history of lack of defaults and higher recoveries, if there is one. So we feel very comfortable. And I would also say is it's interesting, folks that might have been the detractors a decade ago are now big advocates, either independently or with us, where they've given us capital. And then you also see what's going on with the big banks right now buying a lot of AAA and AA CLO paper. So I think if you really -- there's the emotional response and then there's the investigative factual response. And the reality is somewhere -- it's closer to the facts.

Yes. And there's plenty of anchoring that can go on with those bad products.

That's right, that's right.

I want to maybe touch on one on financials, and then we can see if there's a question or 2 in the room. I'd love to end on thinking about impressive mid-20s percent FRE and SRE growth last year. Which opportunities do you think are most exciting for Apollo in the medium term to continue to drive the earnings trajectory?

Well, I think we've been public. SRE had an extraordinary year, Athene, with the backup in rates and the demand free annuities, which we think will continue. But I think we have to be practical about what we're saying. We've been pretty clear about the range of where SRE should grow 10% to 15% going forward, low double digits. On the FRE business, that's a 15% to 20% growth business. I think we're still at the -- I don't say early stages, but I think we're at the industry-wide secular period where there are many, many more allocators of capital to these business models. And so I think, this year, you'll see very strong performance out of FRE on a year-to-year basis. SRE had a really tough comparison. But I think we're well positioned in both. And we have to be very thoughtful about our sidecar and what we do in ADIP on SRE in terms of making sure that grows. But we're excited about both our kids, both -- they're both well positioned. And I think we feel that the flywheel of synergy and how they benefit one another will become more and more apparent, which takes the risk of execution from our business down dramatically. And the last thing I would say is to achieve the returns on SRE today, at Athene, we're taking less risk. We're buying higher-grade corporate securities. We're less relying on the Alts book, and that is just a fact of a higher rate environment and where yields and spreads are today. So feel confident on both, and it feels easier about the execution.

Great. Well, we haven't had any questions come through the platform, but is there any -- we have mics that can run around the room. If there's anybody who'd like to ask a question of Jim, we can certainly take that.

Too early.

Not enough coffee. All right. Well, I'll ask one more in the meantime, unless anybody decides to think of one. In Asia, right, the opportunity in Japan and then broader APAC seems to be quite attractive, particularly in retirement services. So could you speak about the inroads that you've made thus far and where you see the business going over the next few years?

Well, you're right. I mean, Japan is a very interesting market for us. If one foresees a higher rate environment, which we do, and demand for yield and retirement savings, we've done a variety of block reinsurance transactions. I think that will be a growth area. We can export our expertise in safe yield and robust investment fixed income replacement, which there's massive demand in Japan for right now. So -- but we're excited about Japan on the insurance side. We're also excited about what's going on in Hong Kong. We're excited about what's going on in Australia. We own a big stake in Challenger, which we think will be valuable. So those -- and also in Australia, you have a period where the banks are certainly in the same situation in the U.S. in terms of what the actions of the Royal Commission, and they're trying to refine their business models. So particularly excited about the breadth of our business in Japan, but also Australia.

Yes. And when you think about Japan, right now, you mentioned the blocks. Does it start with blocks and then expand out?

I think so. We're never going to be a retail name in Japan. That's not -- it makes no sense for us to even explore it. There's a lot of embedded names there that have done a great job. So we will really bring our capital toolbox and our annuity toolbox to them. Now we can be a -- with the banks and partnering with the banks be a solution for fixed income replacement and exporting our yield to the Japanese domestic market. But the idea of us creating a retail brand in Japan makes no sense.

Right. Yes. Great. One last call to see if there's any questions in the room. Okay. We've got one in the back.

You made a comment at the beginning there's sort of a race to cement the businesses and channels for the next 10 years. When you think about wealth and retail specifically, is it going to be the top 3 to 5 alternative matters that own that? Or is it going to be dozens and dozens?

I think it's clearly going to be a concentrated group of 80 -- it's going to be the 80-20 rule. There's 10,000 hedge funds. There's 10,000 PE firms. The largest -- we know the numbers, the concentration. So I do think there's going to be -- the big lesson for all of us has been it's not -- investment performance is table stakes. And the ability and need for you to bring Apollo Academy massive distribution of people, feet on the street, the technology and how people access it, the transparency, those are all critical attributes. And it also -- it becomes a little bit of a competitive moat. How many people -- how much can you invest? How much can you go out there and create that brand identity? So I do think it will be a limited -- I don't think you can assume, if you're #20 today, you might have a growing business, but I don't think you're going to pick up share. I think it's going to be the top 3 to 5 have more than a 50% share in those businesses. And I think it's also -- it's going to be, as you see what UBS has done with CS and their desire to have strategic partnerships, the desire for the other large global wealth managers to do things in a very -- I think open architecture is going to rule the day. And I think the -- and the idea of captive product and a captive channel, I don't think that's going to win. So I think -- and I think we have to all be very smart about the products that we create. And if we don't do -- we have to think long term about the client experience, but I think that will be the answer, yes.

Okay. Well, I think that's actually a pretty good note to end on. Jim, thanks a lot for your time.

Great. Thank you. Thank you. Good to see you. Thank you.

Likewise.