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

Thank you all for joining Bank of America's 33rd Annual Financial Services Conference. This is Craig Siegenthaler, North American Head of Diversified Financials, and it's my pleasure to introduce Scott Kleinman of Apollo. Scott is Co-President and serves on Apollo's Executive Committee and also sits on the Board of Directors of both Apollo and Athora. He co-leads Apollo's day-to-day operations, including all of Apollo's revenue-generating businesses and enterprise solutions, across its integrated alternative investment platform. Scott, thank you for joining us in Miami.

My pleasure.

So Apollo was founded in 1990 by several partners from Drexel Burnham with a focus on private equity. Apollo also pioneered the alternative insurance model with the creation of Athene, and many of its large-cap peers have since replicated its strategy. The firm now manages more than $700 billion in assets under management and is 1 of the 5 largest alt managers in the world. And from 2018 to '24, Apollo more than doubled its fee-earning AUM. So Scott, maybe we get started with the macro setup. We've entered year 3 of the bull market. IPOs are expected to take off. Credit spreads are quite thin. There's record money marketing in the sidelines. What are your expectations for both transaction activity and fundraising this year?

Yes. Sure. So look, maybe just starting by -- as we look out into the market and the underlying fundamentals, things still seem pretty strong here in the U.S. across our 50-odd portfolio companies. We're not really seeing any signs of a drop-off or a slowdown yet. And so we feel reasonably good about the year, like we did, quite frankly, last year. In fact -- but that's really only half the story. The flip side of that, of course, is that, that means that inflation, which I think the Fed has wanted to declare victory over, we think is still bubbling underneath. It's not cured yet, it's just suppressed, which then leads you to think about, well, then where rate's going to be. Rates probably are going to stay in this higher-for-longer ZIP code. We've been pretty vocal about that for the last year, and we see that continuing, whether it's housing prices, food prices. I'm sure every flight that every one of you came down on was packed. The consumer is still spending, right? The consumer is still spending. So -- but that was true last year, too. And so I think this euphoria of, oh, there's going to be lots more IPOs, there's going to be lots more M&A is not a function of a shift in the markets or a shift in the economy, but simply more hopes and desires than actuality. I do think there'll be a modest pickup. I mean the new administration certainly is more pro-growth, pro-business than the last administration. But the reason M&A wasn't busy last year wasn't because of the administration. It was because there's still a pretty wide gap between buyers and sellers for lots of assets. Same thing on the IPO side, you can take companies public, you could take companies public last year. You just might not have gotten the valuation that you were hoping for. I think that's more a function of the interest rate environment than it is the fundamentals because the fundamentals have been robust last year and they continue to be robust this year. So I do think with the passage of time, there's a little more positivity and you'll see a little bit more. But I don't think it's the step-function expectation that people had coming into the year. And I'd just contrast the U.S., by the way, to the rest of the world. So I've been to Europe a couple of times in the last few months, and it's pretty grim out there. Germany is entering their third year of 0% growth. I mean -- and that's the best part of Europe. U.K. is worse. France is struggling. Like it's pretty tough environment. Asia, ex India, is also having a tough time. So the other thing we're keeping an eye on is, how long can the U.S. go in this direction and the rest of the world going that direction, either -- something's got to give. Either the rest of the world has got to start picking up where that's going to start dragging the U.S. down a little bit. So look, we're cautiously optimistic on the year, but it's been 16 years since we've had a real recession. I'm not one of these people who believe, like this time it's different, we've cured recessions. And so we're watching but cautiously optimistic, I would say.

So private credit has been the big outperformer in terms of investment performance and flows the last couple of years. But a few things have changed. Base rates have come down a little bit, spreads have contracted. And last year in the retail side was the first time private equity outperformed private credit in a very long time. So what I'm getting at is flows. Do you expect to see a pivot start to occur from private credit to private equity, infrastructure equity, maybe not today but down the road, real estate equity? Or is these conversations still too early?

Yes. I'd say it's not a zero-sum game like you're laying it out, right? The inflows from private credit, I don't think came from private equity. They came from traditional credit. The -- last year was really the first year in a decade where all of a sudden, you started seeing attractive returns in credit again, right? And so investors, pension funds, sovereign funds, et cetera, were so under-allocated to credit. They had allowed their credit allocations broadly defined to drift down because in a world where they have liability growth, they had to find return somewhere else, so they had pushed into other asset classes. Now they can actually earn high single-digit, low double-digit returns in credit. You're just seeing dollars flowing back to credit broadly defined, of which private credit is a growing and important asset class. So I would expect private credit allocations to continue to grow even, as you said, with tightening spreads and slightly lower base rates because it's still a fundamentally good risk return, certainly as compared to years ago where people were just dramatically under-allocated to credit. Now the second part of your question, I think you saw under-allocations to private equity or new allocations to private equity in the last couple of years because people have gotten so long in the '18, '19, '20, '21 time frame at the top of the market. There is a readjustment of valuations, and so people had to let their books catch up. I think we're still not in back to that top of the market or even average of the market allocations, but I do see allocation starting to pick up to more equity-oriented strategies, private equity infrastructure, things like that. So I do think you will see improvement in those areas over the next year and the year beyond. But private credit, I think, is still getting a fairly healthy allocation.

Scott, what are your biggest focus areas this year?

Yes. Look, I mean, I think we've been pretty clear. We were -- fortunately, we had a great Investor Day in the late fall, where we laid out our objectives for kind of this year and beyond. And for us, you can't hear it enough. I know we sound like a broken record, but it's all about origination, right? At the end of the day, we think the next leg of alternatives growth, private asset growth is upon us as -- moving from institutional to retail really hits its middle innings and as you start pushing into 401(k), so you start pushing into real mass affluent, right? The demand for alts is going to double, triple, quadruple over the next decade. Having quality alts, right, being able to earn that excess return, that excess spread is what keeps us differentiated from traditional asset managers, right? How can I charge 100 basis points for my product rather than 5 basis points for my product, right? By earning alpha, by delivering alpha. And so the way you're going to do that is by originating good, interesting new product. And so for us, being able to build that -- continue to grow that front end, continue to find new ways to originate product from private equity to hybrid, to private investment-grade, private credit -- really finding that excess alpha is the name of the game, and that's what's going to differentiate the winners from the losers over the next 5 or 10 years. And so we are spending massive amounts of time, really making sure we're organized to optimize that origination capability and then continue to grow it.

So if we look beyond 2025 and we think about your long-term growth targets, maybe just refresh us on what are the key targets and what are the key things you need to do to get to those targets.

Yes, yes, yes. So we put out -- at that Investor Day, we put out some specific, call it, 5-year-type numbers, 20% FRE growth on average. That will be higher in some years, lower in others, depending on what products are coming to market that year and other flagship and other things in there, but averaging 20% -- 10% SRE growth. So our Athene retirement service spread earnings growing around 10%. We have a 5-year ANI target of $15. And -- I wouldn't call it a target, but the output of all of that is about a $1.5 trillion AUM in 5 years. And so those are the, I'd say, the high-level destinations. The -- what we need to do that is really just execute on the plan we're talking about it. There is no real inorganic in that. There's no fundamentally new businesses that we're not in today. It really is executing against the pillars we're talking about, growing -- continuing to grow and scale our origination, continuing to scale our capital formation capabilities around the wealth market, and presumably, doing a good job investing. So that's what we have to do, yes.

Scott, one follow-up there. If you do -- if you would announce a large acquisition or something sort of unusual, would that impact your targets? Would you have to raise your targets because of that?

Can I say no? The -- it really -- obviously, if there's a step-functional acquisition, we'd have to revisit. I don't anticipate we're going to do step-functional transactions, but if we find some bolt-on tuck-ins, does that move things around the edges? I mean maybe. You sharpen the pencil a little bit. But for the most part, if we do bolt-ons, it's to fill in certain gaps or accelerate what we would otherwise just be building out over the next few years in sort of capabilities.

So your biggest flagship fundraise is starting to come into site, maybe not the first half of this year but maybe sort of 12 months from now. The last one you raised, this is buyout Fund X, I think, around $20 billion. You raised it in a tough backdrop. I mean there's a number of factors, including denominator effect and sort of not a lot of liquidity out there. What is your thought on this one? Could this one be a lot bigger than the last one, especially given the long-term track record you have that's very good?

Yes. Look, I mean, talking about Fund XI, just we are approaching, I don't know, 16% probably, deployment in our current fund, Fund X. So yes, by the -- by fourth quarter of this year, we'll probably launch, which basically means the bulk of the fundraise comes in '26. The -- look, performance has been quite good in Fund IX, quite good in Fund X. Our -- you're right, when we were raising Fund X, it was right at the tail -- the denominator effect was going into play, but people were still sort of looking back on their paper profits that they had seen from growth managers and otherwise and felt pretty good about that. They didn't sort of like our Cassandra cries of like, you guys are enjoying false prophets here. A few years on, it's become pretty clear that we had the right -- or certainly the right strategy at the right time and there was more truth to what we were saying. So our performance has been quite good. And I do think there's interest. Like I said, you also have just the private equity allocations coming out from the forest into the sort of open air, and you're seeing that pick back up. So we're cautiously optimistic on fundraise, expect at least as good as our Fund X and potentially a little bit better. But I think too early to put a pin in what our specific forecast is. We feel good about it. We feel good about it.

So this year, your FRE growth targets, 15% to 20%, a little bit below average because no flagship in there. Next year, you do have a flagship. I mean that fund is a step-wise, step-up in your sort of FRE at that moment. So I think '26 looks pretty good. Besides Fund XI, are there any other kind of sizable fundraisings that we should be thinking about the next couple of years, whether it be AAA or ADS or a drawdown like Hybrid Value?

Yes. Look, I think in this year, we have -- in '25, you have Hybrid Value get raised. That will be a nice step-up from our last fund, I would expect. Beyond that, a lot of our credit products have moved to evergreen-type products, whether they be on the institutional or the wealth side. So you'll continue to just see dollars flowing in. We are leaning heavily into the fixed income replacement component of that. And so things like our total return investment-grade product, our ABS product, I think you'll see some pretty big -- I mean, it's not $20 billion, $25 billion in a year type things, but you'll start to see those scale up in dollars raised this year and next year. So in total, we do expect when you add it all up this year's fundraise to actually be north of last year's fundraise. And then next year, with our flagship, it will be even a step-function above that.

So let's move into retirement. So Marc Rowan had this amazing idea more than 15 years ago, and he used the old AmerUs business out of Aviva to sort of create this, put a good management team together with Belardi, Wheeler. And that's done tremendously well for you guys. Now since then, some of your peers have replicated your model. Arguably, maybe only one has origination capabilities that are close to yours. But what's important now, I think, what are your competitive advantages in that model to sort of fend off competition?

Yes, yes. Look, the -- I've explained this to some folks just this morning. The -- you do have a lot of entrants into that space. But here's the thing. We have scaled Athene in such a way that it's really playing a different game than just about everybody else. Whereas -- we started live 15 years ago really as an acquirer of runoff. And that was -- because that was just a quick, easy way to buy a bunch of liabilities. Now to be fair, even 15 years ago, Marc, as visionary as he was, I don't think he anticipated what we would have been able to scale to today. What started to make that clear is once we bought some of these runoff books, we realized, hey, we're actually really good at this. This is if you're buying the right type of liabilities and keeping them clean, not getting sucked into a whole variety of exotic things, then at the end of the day, you can hedge out much of the -- or all of the insurance-y-type stuff, the mortality and morbidity. And really, this is just a spread lending business. And we happen to be really good generators of excess alpha. And so if we run a really tight ship, we can do this job really well. And so we did that for a while. We grew by acquisition. But ultimately, we scaled our business to the $300-plus billion that it is today, making us a huge force. We entered a bunch of years ago the retail market, so the ability to sell new annuities into the market. We became an attractive counterparty on the flow side. We pushed into the PRT market. So we entered these markets that were not dependent upon just buying more runoff liabilities. And in fact, most of our peers are still in that phase of their life. And we haven't done an inorganic at Athene in several years because quite frankly, that's where the competition is. They pushed relative pricing on that to a point where the returns haven't been that attractive from our perspective. And we can get much better ROEs from the retail market or the FABN market, generating liabilities in other ways. We're now the largest writer of fixed index and fixed annuities in the U.S. It's been a phenomenal business for us. But the magic, what we do and how we do it, is a few simple rules: clean liabilities, efficient operations and amazing asset origination. And that -- the last one being the large -- the first 2 were we think table stakes. The last one is what differentiates us from the rest of the industry. And we are -- we just feel like we've built such a broad footprint that it -- not to say that no one else can ever do it, but I mean, we are years and years, decade ahead of most of our competitors, and it will just take a long time. Plus, we're continuing to innovate, continuing to grow, continuing to find new places to originate. That's the secret sauce. That's what's allowing us to continue to write attractive, profitable business year in, year out.

So another competitive question, but some of your peers are out there with very high-growth targets. And when they say grow, they're really focused on similar businesses of Athene, fixed annuities, fixed indexed annuities. Now sales have grown a lot for this industry in the last couple of years because interest rates are higher, it's more attractive. We don't know where the 10-year is going in the future. But as all your peers try to grow, how do you think about the risk of competition intensifying from here? And could that put pressure on ROEs or your spreads down the road?

Yes. Look, the -- break that down. The -- it took us a long time to build the retail position that we have today, right? When we started life, we were a BBB player. We were on some small RIAs, but the likes of BofA would not -- you would not sell us on your wealth platform. Today, we are A+-rated. We carry AA+ capital. We are the largest annuity rider now on most platforms like in BofA, Wells, JP -- so it's just -- you don't just get to show up. You bought some pool of liabilities. You hire a couple of guys to start writing policies. You knock on BofA or JPMorgan, they're like -- they're not just letting you in saying, great, we're happy to go -- that is a long, long journey. So on the liability side, sure, you always have to pay attention to what your competition is doing. And we're -- in addition to just being there, being big, being well capitalized, we also have amazing products that I think, hands down, are just better than competitors. And so on the liability generation side, we think we're pretty far ahead from others. And again, I'm sure a few will be creeping in, but most of our competitors are not pushing in that direction yet. On the asset side, this is -- we're in an asset world that's not like -- yes, the insurance competitors are a small part of that. But this is a huge multitrillion-dollar asset origination that we're just continuing to innovate, continuing to grow. And like I said, the real value comes from being able to generate that excess alpha on safe assets, and that's what we do day in and day out.

So I wanted to pivot into the international markets. You have Athora in Europe, you have some other partnerships, including Challenger, FWD. Now at this moment, I think excluding Japan, where I think things are going very, very well, rest of those markets are a little more uncertain. And I know you've moved those states also to a different location. I'm just wondering, what's the state of the union in Europe and Asia? Can you really replicate this model and grow successfully there? Because there's different characteristics in each of those markets.

For sure, for sure. I mean -- so in Europe, you have a different regulatory regime, which in some ways is almost opposite the U.S. one, which means different -- you need different assets and different ways of creating excess alpha. We've done a good job sort of building that and building the capabilities to drive that. The difference also there is Europe is not Europe. Europe is 25 small-ish markets, small to medium markets. And so unlike the U.S. where you develop a killer app and then sell it, you have to develop 25 killer apps or 5 killer apps. And so it just -- the scale of the retail opportunity is going to be smaller. We're spending a lot of time now trying to really develop those products. In fact, in Athora, last year was the first year where new policies exceeded runoff for the first time in Athora's history. So we are moving the needle that way, but we're a long way from the juggernaut that Athene is on the retail side. That is still very much more an acquisition market, and there's still a lot of acquisitions to do. And so we're still pretty optimistic about what we can do over in Europe. And I think you will see some interesting acquisitions that Athora does. Asia is just even sort of years behind that market, and we're still in the learning and figuring out where we can play. We've made, as you mentioned, a couple of footholds and getting to know the players in that market. We're doing a lot of interesting things. Some of it may involve actually buying an insurance platform in a particular country. Others may be partnering with the local insurers to bring not only assets but also liability construction and how do you create new interesting products that we can reinsure, we can do other things to help them grow their markets. And so it's -- this is a -- Asia is probably a decade journey, which we're just on the front end of. But obviously, an enormous market and one which we're going to find the right ways for us to bring our skill sets and be relevant there.

Scott, I have to hit on retirement because I think Marc Rowan is probably one of the earliest to talk about the opportunities for privates going into the retirement channel. So post the election, I wanted your thoughts on this. What do we need to see on the regulatory front first? And what could that open the doors to? And if we don't see that, you're still working on some things now like in interval and trust vehicles. What could we see absent rulemaking from the Department of Labor, the SEC?

Sure, sure. I'm just going to say, right, like our whole industry has served the retirement market for 40 years, whether it's on the insurance side, whether it's on the -- the traditional asset management, the fat part of our client base, was the DB fund, the public and private pension plans. And so this -- what you're referring to is, hey, does the DC market ultimately open up to alts, the 401(k) market, the DC market. That's a $13 trillion market in the U.S., probably $20-plus trillion globally. But just focusing on the U.S., interestingly, there's nothing law-wise that prevents alts to be in the defined contribution market. It's really market convention and the sort of principal agency problem, right? You have a 401(k) market that is basically you have beneficiaries of better outcomes, i.e., individuals, retirees. But they're not the ones who actually get to pick what their 401(k) looks like, right? You have companies and you have administrators that have been really driven by things like ease of use, complexity, risk of getting sued, education. They're all these market conventions that have prevented and -- but if you think about it, you have $13 trillion of long-term money that's put away for 30 years being forced to invest in daily liquid products, right? Like it's kind of a messed-up system, like it's the wrong model. If you can earn an extra couple hundred basis points on that over 30 years, I mean, think about the trajectory of the retirement pools of capital. So I think we're getting close to seeing that flip. We actually don't need a whole lot of like legal change. What you need is a tone at the top and some guidance from the DOL to basically indicate what they think is sort of -- should be in the norms of what these plan administrators could and should be looking at. And I do think you'll get some of that guidance out of this current administration. And that's really the crux of what we're pushing on and what I think the industry needs to see happen. But it is a huge unlock and one which I think sky's the limit, right? You have basically 0 alts in a $13 trillion retirement portfolio. I don't think the answer is like Mrs. Johnson puts 100% of her 401(k) into XYZ private equity fund. And I don't think that's going to happen anytime soon. But I do think you will see 5%, 10% allocations to a basket of safer alts, more yieldy maybe less volatile alts. Those are huge numbers that could come into play over the next few to 10 years. That is just one massive unlock for our industry. In addition to that, right -- and by the way, you're starting to see that even without any regulatory guidance, you're starting to see early adopters start to put little programs in place to see how it goes. But we'll see. I mean it's one of these things where -- it's a snowball effect where once a few of the administrators start offering alts, you're going to ultimately have -- I think you're going to see everybody has to have alts in their mix in order to be competitive and win business. And so that's pretty exciting. But you're right, there are other things, other new product innovations, our insurance-wrapped product that we've been talking about for the last 18 months is finally starting to show legs. I think this will be -- I think you'll see a nice bit of growth in that product this year. These are educational products, like you have to educate markets because you're selling something completely new. But we're pretty excited about all of these new channels that are opening up.

I have one more question, then we're going to open it up to the audience. But I wanted to talk about the potential for deregulation in the financial services sector. For 15 years or so since the financial crisis, banks have had to give away a lot of businesses. They lost some people. And my entire coverage has kind of been a beneficiary of that. Do you expect some migration of that back? I know it's hard to put the genie back in the bottle in a lot of these. And I think Marc, on the earnings call, said something interesting. I think consensus was that if anything comes back, it might be more on the ABF side. I think Marc's view was corporate direct lending actually might be an area where the banks would compete more aggressively.

Yes. Look, I don't know -- look, at the end of the day, banks -- most banks have figured out that the -- with the advent of private lending, direct lending, it's a change just the way when high yield came into the market 35, 40 years ago, that was a change. It's not better, it's not worse. It just is. I think we've gone from a -- for sub-investment-grade, we've gone from a 2-product market, bank loans and high yields, to a 3-product market, bank, high yield and direct lending. I think there's, generally speaking, a right answer and a wrong answer for every situation. And sometimes it will use a little bit of each. But the difference with direct lending is you really need a balance sheet to be able to participate in it. Banks -- most banks have figured out that actually, at the end of the day, folks like Apollo, we don't actually want the same things they want, right? A bank wants the corporate services, the treasury services, the M&A, the IPO advice. They don't necessarily want the underlying asset. That's what -- we want the asset. We don't want all those other things. And so there's actually a symbiotic way to work together. And we've started to develop a number of banking relationships with banks to be the direct lender of choice so that they can go out and offer a bank deal, a bond deal or a direct lending solution. And quite frankly, on the direct lending solution, they love it because they put no capital up, share in some of the fees. So actually, from an ROE standpoint, as good as it gets from a bank lending situation. So I actually think the direction of travel is more in that than banks figuring how to use a bunch of balance sheet capital to play in the direct lending market. That's not really where -- so at the end of the day, I don't think our part of the world is -- I know a lot has been made in the press and otherwise. I mean banks have lost a lot more profit from the Jane Streets and the Citadels who have taken that part of the market, that market making that trading operation and have lifted whole teams, brought sort of the best people. And that's where you've -- I mean look at the profits of those platforms, literally tens of billions of dollars that have siphoned away from the banking system and now live on those ones. That, to me, is where I would suspect banks may try to start clawing some back to the extent there's any regulatory relief.

Great. At this moment, let's see if there's any questions in the audience. Please raise your hand, and we can get you a mic.

Don't be shy.

I'm curious, [indiscernible] the crisis, you've been doing this for decades. When you go to the retail market, retail [indiscernible] investor base [indiscernible]. This much money, you think about if you could get into [indiscernible]. When there's that much money chasing, at some point, somebody needs [indiscernible]. So -- and then it takes everybody down [indiscernible]. What are the things -- like what do you worry about, right, as you -- that you go down the path and retail [indiscernible] and allow money chasing, some more asset origination. How are you thinking about that?

Yes. Look, that's a really bad point. And certainly, as we enter more retail markets, we're being really -- we're trying to be really thoughtful, really cautious. And bringing products that we think will give a good customer experience, a good client experience to that. But look, inherently, investment products have volatility. I think we are trying to skew. And that's why you've seen, quite frankly, the more yielding products take off first in this space because they're just inherently more stable, inherently -- I think, though, at the end of the day, we are still in the earliest days of this retail evolution, right? So I mean I won't name names, right, but, right, we had a competitor that got really massive, really early in a particular product, right, right before rates moved. So was deploying multiple billions per month in a market that literally was the most affected by rates and saw a 500 basis point rate move in a relatively short period of time. I think they ultimately gated their product for, what, 8 or 9 quarters, something like that. But guess what, billions of dollars per month are now flowing back into that product, right? So that's because of where we are on the curve, right? We are so early days that even if you had a group of investors who had a horrible experience and said, "I'm never putting money in alts again," that's sort of a drop of water in the ocean of where -- fast forward 10 years when the retail universe has gone from like 0.5% allocation to alts to 10%, then you might say, okay -- enough people say, "I'm never putting money with that manager again. But for a long time, I just think you have so much dollars that need exposure that even will accept a little bit of volatility to get exposure to this broadly defined asset class. Now that's not to say somebody does something extremely stupid. And really, the one bad apple spoils a lot. Look, that's a risk. And you don't want to see such massive deregulation that it allows every Dick and Harry to come in and do crazy stuff. That's why when I was alluding to the 401(k), I said, I think you're going to see easing in if -- if you start seeing like literally, you can put your whole 401(k) into a single private equity fund, that's a bad outcome. Like we shouldn't allow that type of extreme volatility into the system. But if you can allocate 5%, 10% to a blend of alts products, like that's a good thing. We absolutely should be going in that direction. And I do think that's a -- we're going to crawl, walk, run as an industry into some of these markets before we get to just some of the extreme possibilities.

Any last questions?

Talk about Athene's massive growth in Japan. It's got a retirement system [ seems to be allowing ].

Sure. So Athene is actually quite active in Japan. We have a number of flow reinsurance relationships in Japan. We have a lot of asset management relationships in Japan. I mean Japan, you're right, is a massive insurance market, and we continue to invest, put more people on the ground over there. And I think we'll continue to grow there. Whether or not we set up shop as an insurer in Japan, TBD. But certainly, we're -- it's an area that's slated for more investment, more growth, more focus from us. We're already a multibillion dollar per year flow relationship from that region.

I think with that, we are out of time. So Scott, on behalf of all of us at Bank of America, thank you very much for joining us.

My pleasure. Thank you.