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

Good afternoon, everyone. Thanks for being here. I'm Ben Budish. I cover the U.S. brokers, asset managers and exchanges. And with us for this afternoon session from Apollo Global Management, Martin Kelly, CFO. Martin, thanks so much for being here.

Ben, thanks for hosting. It's pleasure.

You bet. So you guys reported earnings last week. I definitely want to talk about that a little bit. But maybe just to start out, can you talk about what you're seeing in the environment in the wake of some of the recent tariff announcements? How is the change in the macro outlook impacting credit performance, demand to borrow, allocations from LPs, retail buyers and the broader investment-grade private credit strategy? Yes. It's lot in there.

It's a complicated question.

What do you seeing?

It's actually a really interesting environment because -- and it's hard to connect all the pieces. I think macro-wise, markets have obviously stabilized a bit from where they were in March. And you see that in spreads and equity markets in the VIX. Spreads were literally at all-time highs in most asset classes, in most ratings of most asset classes in most of the first quarter. And spreads, generally speaking, are about halfway back -- halfway between where they gapped out to and where they were in the first quarter. So the credit markets -- and that's -- to call that like the 20th percentile more or less relative to history. So the credit markets are not indicating much sign of stress. The agencies have downgraded about 20 companies, which are most exposed to tariffs in the last week or 2. But then the business that we're seeing is really quite -- is really attractive. The underlying need for what we do in providing capital is creating some really interesting opportunities. And so like if we look at the pipelines today, they are as rich, I think, as they've ever been, and it really is broad from our equity business down -- all the way down to investment-grade credit, including our syndication business. And there have been some puts and takes in there, things that we thought may materialize or pushed off a bit, but others have materialized in the context of the environment. So the business is really strong. The fundamentals of the business and the strategy is not really affected by this. It is hard to connect the concern in the market and the uncertainty about the magnitude and duration of tariffs with the credit markets. And so that's the more difficult part to work through, but it's pretty constructive and flows across institutional channels, wealth channels are in line our Capital Solutions business. And obviously, Athene had a very strong first quarter in terms of top line flows. So the business is well positioned and -- but notwithstanding the fact that there's, I think, a lot of uncertainty ahead of us.

Got it. Maybe now circling back to kind of results from last week, an environment quite dynamic. In the Retirement Services segment, you've got a long history of kind of navigating these kinds of environments through different periods. What are the kind of headwinds you're seeing right now that resulted in your full year SRE guidance revision? Does this alter the strategy in any way going forward? What's kind of your outlook for spreads, specifically within that business? How does this impact your longer-term kind of financial targets? Unpack what's going on there.

Yes. So we provided guidance of 10% growth over time over a 5-year period last October. And the strategy is unchanged. The strategy -- it's our responsibility to deliver mid-teens, call it, 15% return on equity to investors in that business. That's us and it's our investors to invest in the equity sidecar, the ADIP series. And so we will make decisions that are sensible relative to the long-term orientation of the business. And I think what you've seen is a little bit of what I just touched on. We've been in a period of extraordinarily tight spreads. We are going through an interest rate transition. And so as we benefited, as rates backed up, there is a headwind in earnings as rates normalize. Now we'll see how many rate cuts actually materialize beyond the 4 that have already happened. The curve -- the markets would suggest another 3.5% this year and another 5% in total by sometime next year. And then tight spreads bring with them asset behavior in terms of prepayments, which was a bit more than we expected. So it's all what I view to be transitionary relative to a long-term plan, which is unchanged. We still expect the business to grow 10% over the same time period. And the strategy is the same. It's to access liabilities and invest appropriately against them. And I think we did the right thing in the quarter. We were able to access cheap spread liabilities principally in the form of funding agreements. And we didn't think it was appropriate to invest that in tight-spread assets at the same time. So Athene has today about $20 billion of cash and liquid assets awaiting deployment. And so that reflects April business as well as Q1 business. But that's the orientation around the business. So we'll put that to work as conditions permit as we think is appropriate.

Well, on the liability side, how should investors be thinking about Athene's potential inflow profile this year versus your over $70 billion target, $70 billion -- or I think last year was $71 billion. And I'm particularly curious, one of the factors you called out on the earnings call was competition in the retail market. So what are you seeing? And how is that manifesting? And then more -- like more broadly, to what degree do you think a decline in rates could have some -- could be a headwind to potential demand?

Another multiplier. Yes. So we wrote about $25 billion of business in the first quarter, plus another $10 billion in the month of April. And we discussed that on the call last week. The $25 billion was roughly $10 billion of retail annuities, $10 billion of funding agreements and then $5 billion through a reinsurance channel. And that's all relative to an actual last year of $70 billion and an expectation this year that we'd be slightly north of that. So our long-term guidance is that top line growth should average $85 billion over 5 years. So I think $70 billion becomes $100 billion if you interpolate that. We're obviously at a faster pace today based on 4 months, but I would not run rate that. I would still sort of anchor back to a bit north of $70 billion for the year, but it's going to be entirely dependent on the marketplace. We are able to be very flexible about the volume of funding agreement business that we write. And so there are periods of time like we've seen in the first part of this year where, as I said, spreads were really tight and that was attractive financing and so we leaned in. I don't think we've written that much business in a single quarter before. So that was our largest funding agreement quarter. Annuities, the comment around annuities and spread pricing pressure is really relative to where you can invest against that. So I would look at the net spread that you earn from real growth relative to the asset allocation that goes with that. And it was tighter in the quarter. But we always want to be in the channel. We can modulate the volume that we write through pricing, which is quite flexible. But I would think $10 billion plus or minus for the quarter, I think $35 billion to $40 billion for the year as a guide and some reinsurance flow on top of that. And then funding agreements will be probably the bigger variable in where we get to.

And maybe can you talk a little bit more about the competitive pressure? Is it sort of -- is there -- do you see incremental pricing pressure from other providers? In the past, you and Mark have talked about like a rational behavior in the channel. Can you just unpack that a bit a little bit more?

Yes, it's actually -- it's not the first time we've seen this. We've had times in the past where we've had competition and rates on annuities reflect that. And really, it's -- so we expect it will pass. And so is it 3 months? Is it 6 months? It's hard to know. But it really is dependent on when asset spreads are at a level that you can write a business that made sort of long-term return expectations. It is a little perplexing that others are doing what they're doing without what I think are 2 of our key strengths, which is a really efficient cost structure. Our cost structure is 20 basis points and is one of, if not the lowest in the business, reflecting the scale that we have and what we've done over the last 15 years. And then origination capability. If you can't originate interesting risk return adjusted and, therefore, spread the assets to invest against, then you're dependent on accessing the market and buying what's available in the market. And so when you put all of that together, a mid-teens-type ROE for those businesses feels unsustainable, if they're writing business at current pricing without the cost advantage and without the origination advantage. So it should sort of take care of itself.

Got it. Well, that's a good segue. I'd like to ask now about origination, fixed income replacement. So maybe just to start growing proprietary origination capacity is clearly central to your longer-term growth plans. How would you characterize recent borrowing demand? Are you seeing tariff-related uncertainty causing delays? Like what does the team look like?

It's actually really strong. So we originated -- last year, we originated $220 billion of total origination across principally debt. First quarter, we wrote $55 billion of origination, and that was -- it was very diverse. It was platforms, which was close to half, and the platforms is both consumer credit and wholesale credit. It was our broad credit businesses, real estate debt, CLO, other forms of large high-grade origination. And then it was origination across our hybrid and our equity businesses. And so it feels like we are at this stage, given the strength of the pipelines that we see across all of our businesses, we're at least on track to meet what we did last year, if not exceeded. So I think if you look at how is it -- how is the construction of the business changed and the pipeline changed in view of tariffs, not by much. I think we've seen a couple of things delayed, which may have been done more quickly and amid uncertainty, the borrowers decided to push back a bit. But at the same time, the pipeline has been replaced with other financing opportunities that we hadn't contemplated, which have filled that in. So it's a little fluid, but it feels robust and it feels like the origination capability across the whole platform is really healthy.

Yes. So what about high-grade corporate solutions? So another kind of unique sort of capability at Apollo that gets a lot of attention. How should we think about similarly demand there? And one of the key debates is sort of this ongoing topic of competition with the traditional bank lending market. How do you see -- what are your expectations there for the year? What are you seeing from the kind of behavior from banks?

I think it's actually much the same. I can't remember a time when the pipeline has been as full as it has been today. And so that is mostly investment grade, corporate solutions, big -- large corporate financings that we are able to provide because we have access to long-duration capital. And so why do people come to us versus go either to the market or to the bank? They tend to have a particular structuring need or complexity that they're trying to solve for. They tend to be wanting financing insights, and they want to be dealing with one party. And so we were able to do that, given the structuring capabilities we have and the balance sheets we have, both Athene's balance sheet, other insurance balance sheets and other third-party balance sheets that we syndicate to. So the whole notion of competition with the banks and does deregulation create a headwind around that? On some level, at some margin, it does make the banks more competitive. And so -- but the scale of the financing that's needed across the -- particularly the industrial renaissance that we talk about, the data centers, the infrastructure to the data centers, power supply, energy transition and now I think, increasingly, defense spending is just enormous. And the banking system just cannot provide the quantum of financing that's required to do that. So we have relationships with banks, partnerships with banks. The flow is strong. And so I think it's just an example. The whole ecosystem is developing. We will finance our competitors. We will syndicate to our competitors. We will partner with banks. We will do self-source. It's just the whole financing of the private marketplace is evolving sort of real time, and we've got a front row seat to that.

Staying sort of in this area on the institutional side, you guys have talked about an opportunity with traditional LPs to service the fixed income portion of their balance sheets, not just the alternatives bucket. So where would you say we are in this evolution? And are there any kind of helpful anecdotes you can share from initial conversations you've had with these clients?

We're at like infancy stage, like we are on a number of the initiatives we're working on. I think the thesis is in the notion of fixed income replacement, why would you not have a portion of your portfolio invested in private investment grade and spread your assets if it sits in a part of the portfolio that is able to take long-term risk? And that doesn't need to be interest rate duration. It just may mean the tenor of the loan. And so I think the more sophisticated institutions have realized that. And it's starting to happen with third-party insurance accounts. It's started to happen with select LPs. But this is at the infancy in just the investment-grade fixed income piece. Where does it go from here? It should evolve into hybrid equity, and it should evolve ultimately to equity. Equity at some point in the future in private form should be a partial replacement for public equity given the scale of the markets and the amount of the markets that are private and not public. So we don't think that's today's business. But we're definitely focused on this public-private convergence specific to investment-grade credit. And we're putting a lot of time into it and think it's got a lot of runway ahead.

Kind of wrapping up the conversation on IG Credit. There's been a number of media reports indicating Apollo is building out broader fixed income trading capabilities to kind of help in view more liquidity into private markets. Clearly, something you'd be doing with State Street, although I think, I'm sure there are many different flavors of what you're doing. So can you talk about your activities here? And what are your -- what are Apollo's broader ambitions in terms of like market making for private credit?

Right. So the question is why do we need to do this? And so we believe we need -- there needs to be a mechanism to trade credit, which is private for it to be as a use case to make it a more accepted asset class for institutions. And even though it may be sitting in a part of the portfolio where there's not a liquidity need, the notion that you can't sell it and you'd have to sort of go and try and find a buyer is something that I think creates an impediment to owning it. So if there's a mechanism in exchange, a liquidity facility that's being provided, then it makes it an asset class, which is ownable in the event that it needs to be sold. So we don't expect that we'll be the only ones doing this. We expect -- and we're talking to others about partnering with them. We expect others will do their own trading. But it's another example of sort of infancy stage. We've traded to date with about 60 counterparties. We've traded $2 billion of credit, which is a start, but small relative to the scale of what we think is in front of us. I think you mentioned State Street and the ETF. Some of this is also required. If we are providing investment-grade credit to State Street, then their investors have liquidity rights and, therefore, there needs to be a liquidity mechanism on the credits that we're providing to them. So we are with State Street providing daily pricing 3x a day on each asset that we've provided to them. And so this is -- this will just continue to build out over time. But I would expect, given the real illiquidity in the public fixed income markets, if you're not -- we saw it here with LDI a few years ago. We saw it in the gilts market. In the last month, if you were trying to buy or sell an off-the-run bond, corporate bond, it was extremely difficult to do that. The only bonds that were really trading were on-the-run bonds. And so that's just, I think, an indication that the amount of dealer capital that supports fixed income trading desks relative to the size of the market is just insufficient. So over time, that just creates the need for there to be more -- the delineation between private and public fixed income becomes less and less, but the need to have a liquidity mechanism in place to make it acceptable and ownable is part of the overall thesis.

Really interesting. Well, I want to come back to the State Street partnership in a little bit, and maybe spending a little time on the asset management business. Just we started out talking about the environment. Just a similar question here in terms of deployment, like how would you describe the deployment environment? Where are you finding the most compelling opportunities today?

It's the same question as the origination. It's sort of -- it's obviously connected. Deployment is a function of origination. And so it is across the board from the purest form of private equity down to investment-grade credit. By dollar value, it's investment-grade credit and then it's below investment grade. But like we're deploying in -- across the platform in renewables, in climate, in infrastructure, GP-led secondaries. The equity pipeline is strong, and we've talked a lot about credit. So deployment, it's really the same question as origination, but it's exceedingly healthy.

How about on the private equity side? So in traditional private equity, less of a growth driver these days, but your performance has been quite strong. How should we think about firstly, the evolution of your private equity franchise and some of the newer equity adjacent franchises longer term within Apollo?

So PE, it's a great business, and we expect it will be. And it's had very strong returns over time. It's -- and we've been quite public about the fact that it's not going to grow as the private equity sort of flagship strategy will not grow as much as most other businesses because the opportunity is not as great. And so -- but that being said, our private equity team, it's a talent source. Most of the -- many of the people running businesses today came out of private equity. Matt Michelini runs Asia, private equity partner; Rob Seminara, runs Europe, private equity partner; Neil Mehta, running what we're calling new markets, a former private equity partner; David Sambur, now runs private equity, was co-running it with Matt Nord. He's now responsible for real estate and the Bridge acquisition and integrating that. Matt Nord moved over to run the hybrid business. So it is a massive talent creator and many of the people to that point, go on to run important parts of the firm. I think it's also important that they are then able to take their investment orientation that they've learned over a couple of decades in private equity and apply it to adjacent strategies. And so that's where we are seeing growth in our secondaries business, in our infrastructure business and in our climate business, all of which are equity-like businesses, obviously, with a specific focus. But that's -- it's partly because of the people, it's because of the investment process that's been honed over a long period of time. But I would expect the PE business in and of itself will always be a core part of who we are. And it's one of the things we're obviously known for. But the adjacent businesses to private equity, the ones I just mentioned, and that doesn't count the hybrid businesses where we'll see the real growth in the equity strategy.

Maybe just lastly on the asset management within that kind of business. Q1 ACS fees were quite solid, a little bit better than people were expecting amid all the market volatility. How do you think the rest of the year should shape up? And what are the kind of key like swing factors that we should be thinking about?

So this is partly connected to the high-grade question that you asked. I think in a quarter when the markets really sort of locked up, the fact that we did a 100 transactions that contributed to that $150 million and that $150 million was right on the average of the last 12 months, I think, is a testament to the franchise. So this business has -- relative to where it was 3 years ago under the leadership of the guys that run that business has become a really important part of our franchise. I think the interesting thing is we talked about pipelines before. The interesting part about the business is we have a pretty good line of sight into what we'll get done this quarter. We have a decent line of sight into the opportunity ahead for Q3 and partly for Q4. So a lot of these transactions are complex, require a significant amount of structuring. There's always borrower dependencies that they're trying to solve for and work through. And so they're not like -- they're not sort of drive by transactions where someone wants to do a financing and you can get it done the next week. They tend to have like a structuring incubation period to get them put together. So as we build out the team and we build our teams to cover corporate borrowers as well as sponsors borrowers, you develop -- with the right metrics and sort of tracking, you develop a good line of sight into what's coming for the next couple of quarters. So -- and then you turn into repeat borrowers. We're seeing already transactions that were financed by us 2 or 3 years ago and need to be refinanced for some reason. So we're seeing the start of repeat business in that franchise.

Great. All right. Let's talk about wealth a little bit. So I recall the messaging from your earnings call was really no change in April in terms of flows. What about just like general conversations with wealth advisers? I mean how have those changed over the past few months? Could it be that maybe what could have been some softness was offset by just ongoing organic growth, penetration of the adviser base? Like what are you sort of hearing from that distribution channel?

It's interesting. It does feel different. And obviously, conscious of what others are saying on the same question, it does feel different relative to SVB and First Republic in terms of just the reaction of retail investors to invest in the product. And I don't think anyone is seeing the redemptions tick up the way that they were 2 or 3 years ago. So I think the real answer is the aperture around the business. It's another one of these early-stage sort of infancy stage businesses where the aperture is just continuing to increase. And so as we bring new products through new distribution points to all 3 regions, and you see the pickup in demand for different products and you see the regional appetite for different products. The whole -- the aperture is increasing, the whole ecosystem is increasing because of the product set that we can bring, the distribution of that to clients and then the ultimate demand for that from end investors. So it's just -- and look, we spend a lot of time on this. This is the area we invest the most amount of sort of OpEx. It's the area where we are hiring the most people. And so we have a strong conviction that this is a growth business for us for many years. But you also learn a lot as you do it. It's how you get products in an appropriate format brought to market is really important. And this then connects to partnerships with traditional firms. It's similar. If we have a global wealth product, that may be appropriate for a traditional asset manager, then you're sort of solving 2 problems at the same time. But yes, it does feel, again, infancy stage, not everything will go right. We'll learn from that, but it feels like an early-stage opportunity.

I want to come back to your partnership comment, but maybe just on the product side. The last couple of years, you've been launching quite a few. There's a dozen maybe more products in the market. How do you feel about the suite? Any asset classes or any structures or anything like that, that's missing? Or do you feel like it's pretty fully built out?

I think it's pretty fully built out. I don't think there's anything that's obviously missing. It's certainly possible we bring others to market. But if we look at our 3 strategies: equity, hybrid and credit, we have at least 3 products represented in each of those sleeves, if you like. And so we have an infrastructure variant, a secondaries variant in equity. We have AAA. And we have other variants in hybrid value, and we have a series of credit products. So it may be that existing structures are tweaked, but it's really now about getting them to market in a way that's most acceptable for a local market. And so the 12 -- 11 or 12 products that we have represented in multiples of that of structures that come to market. And in Europe, is it Lux or is it Cayman? Is it an LTIP structure? For D.C., is it a CIT structure? There's just -- there's a lot of structuring effort that goes into it. But no, I think we're pretty well rounded out on product capability. And now -- and then it comes back to, can you originate and get it to the right place? Can you fulfill the demand for it? And then can you partner with firms to make it as efficient an investable product as possible? Technology is obviously a part of that. And so we're making investments in technology platforms that allow us to do that. So exciting. And it feels, like, again, relative to where we were not even 2 years ago in terms of product capability, a completely different place.

Maybe come back to the partnerships now. Can you maybe just to start, can you walk through some of the larger partnerships that you forged on the wealth side? What are the current public -- sorry, hybrid public-private products that you offer today?

So the partnerships that we've announced, we have 2 products with State Street and 1 with Lord Abbett. And so in there, there's an ETF, an interval fund and a target date fund. And they are focused on credit, so providing private credit to a traditional asset manager to then be combined with public credit in some sort of a mix. And the mix could be 30-70, it could be 10-90. But -- so -- and as I mentioned on the question you just asked me before this, the delivery mechanism to get products through the traditional asset managers may well be a semi-liquid type fund structure where you offer that to the traditional asset manager. I think model portfolio is an important part of this. I think the industry is spending time on how do you work to develop a model portfolio where there's a default investment into an agreed product for every incremental dollar of capital that's raised. And so -- and you see this across our peer set with other partnerships that have been announced. So I think everyone has sort of agreed that this is a strategy that needs to be pursued. And it's -- and it won't be exclusive. There won't be -- a large traditional is exclusive with a large old. I think you'll find our capabilities are needed in different ways to complement what they're able to bring.

We'll talk about State Street for a minute. And so you mentioned before, we talked about fixed income liquidity and that partnership. Maybe just kind of give us an update on early kind of progress. Like what are your reads on sort of initial fund flows, asset levels? How is the product being distributed, initial reception from advisers, that sort of thing?

It's off to a good start, but it's one of these things where it will probably take 6 or 12 months to get real traction. So I think we're pleased with the early success of the products had. I think it's being viewed to be innovative. It's a first of its kind. And so I think with that comes education. But it's just part of our continuing effort to bring product that we think is attractive to investors that need that. So that's sort of the current state with State Street.

Is there a future state where -- I mean, you talked about fixed income replacement and equity replacement. Could we see private equity investments in ETF? Is -- I mean this may be quite a ways off, but it's clearly part of your ambitions to make these markets more liquid, more accessible. Is that something that could be in the cards 1 day or too difficult?

This is a -- it's a more difficult question to answer because -- and this gets into a conversation around what's appropriate for individual investors. And so is that an asset class that's appropriate for 401(k). And so I think there's different perspectives on that in the industry. I think we see a clear need for credit. Over time, may there be need for equity. I think others are trying that. But it's not a current emphasis of us to deliver on that. We're really focused on credit products in different formats.

Got it. One last question on this umbrella. On the earnings call, there was some discussion about your new markets unit. We talked a little bit about that earlier. Can you just maybe give us a high-level understanding like what this means? What are the strategic implications of that strategy?

So yes, so new markets is really an effort to formalize some things we've been doing in the last couple of years under the leadership of one individual who can really shepherd a number of these innovations and make it a full-time focus. So I look at the evolution of how do we raise capital. We started as an industry, and the bedrock for the last 30-plus years has been institutional capital. So raising capital from institutions around the world. Obviously, that's shifted to Asia and the Middle East over time. LPs have become much more sophisticated in terms of how they allocate capital. But that's one bucket. Global wealth is another bucket. And so bringing products to market that are appropriate and scalable and efficient is obviously a big focus for the industry. In our case and in the case of a couple of others, it's annuities and PRT through insurance captives. And so that's channel number three. Where do we go from here? There's 401(k). There's other forms of defined contribution. There's traditional asset managers, there's tax advantaged products. And so there's sort of lifetime income planning products for inside and annuity in the case of Athene. And so there's all these other products that have some connection to each other and are really important as sort of distribution channels, #4 and #5. And so the effort around new markets is to put structure around this effort and really formalize it under the leadership of a really senior partner of the firm who can then build a team around that. And this is less immediate sort of this year business, but really important, we think, to the long-term growth of the firm.

I have 1 or 2 more questions, but if anybody in the audience has anything they'd like to ask, happy to open it up. If not, I can acquire one more at you.

Fire away.

All right. Maybe just one more kind of wrapping it up in terms of like your longer-term targets. I mean it sounds like a lot of confidence in the pipeline and the sort of resumption of kind of normalized credit spreads. But maybe just talk a little bit about your scenario planning in your longer-term targets. How does a more potentially challenging macro backdrop like the one we may be entering impact sort of like the range of outcomes?

Yes. So the guidance hasn't changed. We were very clear about 20% FRE growth and 10% SRE growth over time. And so that's -- and that was only 6 months ago. And so then you look at that and say, "Okay, the world is the world different enough that it's changed that trajectory." And I come back to what are the 4 primary objectives or sort of tailwinds that we are benefiting from a business. One is -- and none of them are changed by the environment. So one is the industrial renaissance, the need for private capital to finance everything we just spoke about, data, infrastructure, AI, energy, energy transition, defense spending not changed, massive opportunity. So that's one. Two is public-private convergence and the marrying of yieldier, but equivalent risk private assets with public assets in a structure. So unchanged. Three is global wealth. And so the need for individual investors to have access to products that institutions and family offices have had access to for many, many years and done well from that hasn't changed. And then fourth, we haven't really spoken about this, but lifetime income planning, which is more an Athene focus. So is the population aging any differently now than it was 6 months ago? No. Is the population any better prepared for retirement today than 6 months ago? No, no. The most sophisticated retirement planning on the globe gets people to retirement and still does a poor job of getting people through retirement. So how do you get stable value income or guaranteed lifetime income through your retirement age so that you can live comfortably and know what you have to live on and plan your annual spending appropriately. So none of the 4 big TAMs that we think about that are relevant to growing the business that grow both FRE and SRE are any different from where they were 6 months ago. And so we're -- that's why we are highly confident. And so we'll take a slightly different path in some cases, yes, sure. But the opportunity is unchanged.

Great. Well, with that, we're just about out of time. So we'll leave it there. Martin, thank you so much.

Thanks, everyone, for your interest.