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

All right. Good morning, everyone. Welcome to day 2 of our 23rd Global Financial Services Conference. I'm Ben Budish. I cover the U.S. brokers, asset managers and exchanges here at Barclays. With us for this next fireside chat. Really delighted to have Jim Zelter from Apollo. Jim, thank you so much being here.

Appreciate it. Always good to be here, and we're not going to let the fire alarm be a distraction, right? Exactly.

Exactly. Well, maybe just to kick it off at a high level, can you share your latest thoughts on the macro environment? How are you feeling about credit quality, origination, transacting activity going into the back half of the year?

Well, if one landed from Mars today and notwithstanding all the headlines, let's take a look at the macro economy. You got a major CapEx cycle. You've got a... We're all good. So macro economy, you've got a massive CapEx cycle, look at second quarter numbers for the S&P and credit quality, pretty strong. The consensus was up 4%. It came up 11%. Personal and corporate balance sheets are in pretty good shape. You have administration leaning towards deregulation and economic growth. And you've got an environment where rates are going to be a little bit lower. They're pushing them lower. And you've got an M&A cycle exception of '21, it's the second best year on record. So strong backdrop. So for us, we want to have exposure that the commentary about U.S. exceptionalism being over and the sovereign debt crisis being a massive issue since liberation day, 10-year numbers have been -- 10-year prices are higher and yields lower. So pretty good backdrop of an economy. That being said, I do worry about the inflationary pressures of what's going on with the environment, and you've got pretty high valuations. But we're finding it a good investment environment in the world of credit. If you look at the credit quality of our underlying portfolios -- and again, we've leaned away from direct subordinated consumer risk. That's not what we do. It's all secured consumer or very much asset-based. We feel pretty strong about what we're seeing right now. So origination, we had a very, very strong second quarter. That pace is continuing for the rest of the year, maybe not quite as elevated and we've not had spread compression. So if you look at our IG book, it's mid- to high 200s. If you look at our non-IG book, it's in the mid-400s. Overall, it's in that 325, 350. And between Athene and our third-party insurance and our third-party clients and ACS indication we sort of have a check the box on all of those pieces. So the FRE machine is firing on all cylinders.

Great. Let me dig into the business a little bit. So one of the big themes we've been hearing from you has been replacement, fixed income and equity, creating this tailwind for private markets to replace a portion of public assets within portfolio allocations. What are the signposts you're seeing? How are those opportunities being prioritized strategically?

Well, in the world of fixed income, it's a longer-term trend. I mean people first, they had their investment-grade allocation in their fixed income benchmark and duration and such. And over the last 10 years, whether it's loans or high-yield bonds, and now private credit, there's more allocations. And when I got to Apollo 20 years ago, credit was a very binary conversation. It was -- is the market attractive, time to buy high yield or spreads wide enough? Or is it time to do distress at the beginning of the cycle? Now credit is a permanent allocation, and it's a question of how to deliver the breakdown, what's really beta and what's really alpha. And the ability to have ratings is a huge help in that area. We suspect that what we saw in the area of credit is going to happen in the world.

Now we have a good story about that.

Exactly. So I think what we see going on -- with what's going on -- what's going on with the equity market with such concentration in the S&P. And you also have an environment where less and less public companies, 7,000 to 3,000. So what we see going on right now is what used to be a great diversifier, was equity market exposure is just not as a readily ready tool for exposure to the equity market because of the indexes. And so our dialogue with investors, whether we have our credit products or our equity products, we just see more and more DC plans, global wealth plans wanting to diversify their exposure. And the whole public private, we are working with State Street. There's a very large private PRIV that they lead. And then we are a parts component in partnership with them. I saw one of our peers is doing something in the CLO liability space, again, as an ETF. So I think there's lots of points that would make us believe that the 60-40 model is going to a model, a 60-40 with alts, a small allocation to an equity alpha, equity beta fixed income, equity and beta and alts. And we're going to have a bigger seat at that table over time. We see it around the globe with asset allocators.

Maybe talking about fixed income replacement specifically as well as ABF and hybrid capital solutions. Apollo has talked about these many times as sort of major opportunities. Maybe give us an update on these addressable markets? What are you hearing from traditional LPs? Regarding allocation shifts from fixed income to private IG?

Well, I think that most investors in fixed income when they're allocators, they have made a decade-long push into a narrow definition of private credit. And that narrow definition is the activities in direct lending to non-investment-grade sponsors. And that tool, that product has gone from 0 to about $1.5 trillion over the last decade. And now as a financial sponsor, there's 3 tools, you can go to the high-yield market, leverage loan market or the direct lending market. For most fixed income investors, they don't want to make that leap to the non-investment-grade side. And the good thing for us is with the CapEx needs and the changing role of how banks are using their balance sheet. There's a wide window in the whole asset-based finance business. For us, we see that's the largest area of institutional as well as insurance company activity into the world of private credit. So they want to be -- they want to maintain investment grade exposure, but they want to pick up more than 90 basis points versus the ag. And so in terms of scale of market opportunity, I suspect that the $1.5 trillion in direct lending marketplace will be surpassed 3 or 4 times over by the end of this decade by private credit in the asset-based world. And we've been fairly public saying that the private credit universe is not a $1.5 trillion or $2 trillion opportunity. It's really a $40 trillion. And we see it right now with aircraft finance, resi mortgages, commercial mortgages, inventory finance, ABF, as I mentioned and see what's going on with all the European banks, how they've changed their business model, Intesa UniCredit, HSBC, BNP. So in our mind, the investment-grade side of private credit is going to be multiples, massive multiples of the non-investment-grade side of the business.

Interesting. Maybe let's talk about origination a little bit. So with this replacement happening, origination of private assets has become an extremely important focus for Apollo. It's been trending very strong in the second quarter and generally run rating ahead of your 2029 target. Maybe just talk about what drove the outperformance this quarter, maybe despite the massive pickup in volatility. And how do you see the forward pipeline? You kind of alluded to this earlier, but how do you see the back half of the year shaking out.

Well, I think origination, what we're finding is all of the points that I made earlier about the robust economy and the CapEx cycle, I think that's a major backdrop. And what I'll point out to everybody in the room, and I've been doing this, this is my 39th year. And I would say, for the most part, from the mid-80s up until a handful of years ago, most of the scaled massive origination happened in the non-investment-grade side of the world in sectors that were going through massive CapEx or regulatory relief, think the cable industry, think the telecom industry, think the airline industry, think the shale business. All of those industries were non-investment-grade. Today, 2023-2024 and the next decade, massive CapEx needs, but they're all investment-grade industries. It's the transmission. It's the AI data centers. It's energy sustainability. And so I'm not suggesting that the needs of the non-investment-grade marketplace are not going to be there. But the CapEx needs of the investment-grade world are so large and so vast and even as well -- even as strong as the balance sheets of the MAG 7 they're not going to do all of this alone on their balance sheets. And so in data centers alone, there's a couple trillion of capital needed. Now a lot going to get funded out of the banks, some out of direct lending, some out of ABS. But just massive capital needs out of the investment-grade world for this CapEx super cycle. And then you even -- then you turn around what's going on with this administration and how they push Germany. Germany wants to go take a $4 trillion economy to a $6 trillion economy, they need like $1.5 trillion to do it, and they've got $500 billion that they want to put in themselves. So yesterday, we announced a transaction with RWE, which is a very well-established traditional utility in Germany. And there's a multibillion-dollar program that we're leading that instead of buying investment-grade paper 90 over, we're getting a substantial premium in a deeply embedded domestic enterprise in Germany because of their need to invest in transmission. So I mean, again, I think these things are 10- and 20-year secular trades and opportunities, and that's what really gives us the opportunity with our liabilities from only -- not only our regulated balance sheets insurance companies, but in others, instead of just going out and buying that Barclays Ag or Bloomberg Ag at 90 over, you can create investment-grade risk, long duration at a substantial spread. And naturally the key to our business model. If you're counting on public markets or the dialogue you have with your firm or your peers, to generate that day in and day out, that's a tough row to hoe, whereas if you come in every day as an equal opportunity investor investing in public, private, primary, secondary, and we were very -- we were able to navigate that over Liberation Day to do a lot of public investing. But the key to our business is being able to really navigate and pivot, if you will, and to be that type of capital supplier.

Got it. And maybe switching gears, talk about capital formation. Maybe starting off with respect to demand across your various different capital information pools, where are you seeing the most growth? Where are you investing the most time and resources?

Well, in broadly speaking, we have 3 areas where we have capital formation. We have our traditional alts business. We have all the areas of these fixed income and equity replacement. And then we have our growth areas with Athene, what we call new markets. So for the traditional alts business, we're fortunate we have a brand with great investment history and so strong fundraising across our credit business, strong raising across our hybrid business. We'll soon later this year, launch Fund XI in our PE business, which with our performance. So the investor universe continues to change in traditional alts, not so much from maybe the traditional U.S. Public and Pension players. But certainly around the globe, Middle East, Asia, Latin America, a lot of growth. Strong growth in the fixed income replacement and the global wealth channels, voracious appetites were out there right now with the leading product in the global wealth channel and the asset base space, Apollo ABF or ABC Corporation, asset-backed corporation, and that's doing very, very well. And then Athene, on their multiple channels in terms of the retail products, the funding agreements, strong growth there. So we're very fortunate that the only thing that really has not been large volume this year for us is the pension risk transfer or PRT. And there are some industry litigation issues that we're dealing with, but we suspect that the fog is lifting there a little bit into '26.

Okay. Great. Maybe on the wealth side, as we think about replacement and capital formation we've seen a lot of these new public-private partnerships get announced. Apollo among others. How do you see this kind of convergence reshaping investor expectations around returns, liquidity? You have a couple of different products out there, the ETF, the public private fund with Lord Abbett. But how do you see expectations changing from that investor base?

Well, I think investors want to have choice. They want to go with investment firms that have strong history of success in an asset class, just having a partnership and putting a new tag on it doesn't assure success. And so we believe we want to find out like what's our right to win, but also we believe in open architecture. So from our perspective, while we are supremely confident of our ability to create excess yield, thinking that it's only going to get done with Apollo and Apollo only, I don't think is realistic. And so that's why we have chosen to partner with State Street and Lord Abbett and a variety of others because I think what the original thought was of just putting Apollo products through a different distribution channel, that's potentially interesting. But what has evolved is marrying our product expertise, marrying our parts provider capabilities with folks that already have dedicated products and distribution. And so what we're doing with Lord Abbett is a great example of that. They're really well known for short duration IG. We're known for public private credit, IG and non-IG. And so marrying those 2 together is a natural partnership. And again, I think we're big believers in open architecture. I think that, we're fortunate we have an amazing brand with a track record and bringing technology and education and insight along to it. So we're a big believer in the open architecture success. And I think that's what's going to differentiate the universe of players going forward.

You mentioned distribution in terms of the public private. Maybe just for Apollo specifically, how would you describe the current distribution footprint. And in terms of priorities, is there more focus on distribution expansion or product creation to demand? And are there any kind of new initiatives here you think are worth highlighting?

I take a step back and I think about all the industries that have evolved and how they developed and they usually end up with a handful of winners. There may be 20, 30 participants to start. But over time, scale wins, success goes with scale. And so -- for us, we were a bit arrogant 6, 7 years ago. We thought it was just about investment returns. We're Apollo and there will be a line out the door. And there is a line, but it's because we have added all these other things that I talked to you about. So the RIA -- we thought it was just the big wire houses. Certainly, those are important part, but it's not only those, but it's also the RIA channel, the independent channel. And it's also global, big demand for our products in Europe and in Asia and in Latin America to some degree. And it's surprising to us, this feels like it is a buying beachfront property in the Hamptons 40 years ago, if you were there early, that was pretty. There was a power of incumbency. And we see that. And we've been able to pick up some very strong share, but there's not one channel in particular. But I will say that between Apollo Asset Management and Athene, there's a variety of products that are in the R&D lab on the -- in our joint groups, being able to sell guaranteed lifetime income or other products that we think will be going to be very, very critical to the long-term growth of our business. So while we're supremely focused on executing our plan, there is a fair amount in the R&D space that we get excited about. With the backdrop of massive retirement crisis around the globe, 12,000 people a day in the U.S. turning 65. And for the most part, many economies have not done a great job solving the retirement conundrum of many people. So fortunately, for us, that, that backdrop of more and more folks needing these products is really important to us.

You mentioned retirement a few times. That's a good maybe segue into the DC 401(k) market, which is clearly opening -- in the process of opening up to alternatives. How do you see this playing out? And maybe talk about how you see Apollo is positioned to take advantage of this opportunity?

Yes. Well, I think it's a growing channel. It hasn't happened overnight. This has been several years in the making. And the reason why is several years in the making is for investors, that have been exposed to alternatives over 10, 20 years and done so in a logical, methodical manner, alternatives have worked. They've enhanced returns and lower volatility. And so if you go with that premise that you're on the right side of history and it's how you deliver this product in a logical, scalable, diverse manner with education. There's a variety of activities that need to take place right now. It's actually -- there's no prohibition right now other than you just not doing something that's not very wise because litigation is very powerful. And so working with the Department of Labor, working with the SEC to make sure you have the appropriate safe harbors to operate, but you'll see us do things that we think are safer, robust yield, more on the investment-grade side than leaning into the more volatile equity-only strategies we'd like to see a methodical approach. And again, I think it's about having brand, technology, education, those are all going to be really important. So we suspect we're going to be -- we're determined to be a winner in that space, but it's a very long journey. And I don't think there's going to be 100 winners. I think it will be a consolidated group of investors.

Maybe pivoting into your insurance business. Athene has built an impressive track record over the course of its 16-year history across many different environments. More recently, what we're hearing is a pickup in competition. No doubt, everyone wants to replicate your successful model. How do you think about competitive forces in the marketplace? Is this something we've heard about from you guys earlier in the year? What's the latest? How sustainable do you think this trend is? How intense is this competition?

Well, like many businesses, there's not a tremendous barrier to entry, a lot of things in financial services. But just because there's no barrier to entry doesn't mean it's a great economic outcome. And it's our view that you need to have a broad distribution channel. You need to be able to price products, whether it's the retail or the runoff or PRT or FABN, you better have access to all those channels. You better have low operating costs. We believe our operating cost at Athene are 25 to 30 basis points below our peers. You need to have a highly rated counterparty balance sheet. We're a single A, on the way to AA. And you need to have massive origination. So while there's lots of folks who have entered the marketplace those who will be able to sustain a mid-teens ROE. I think we sort of scratch our head a little bit. We definitely have leaned into more of the funding agreements because of the economics of that. But I think over time, if people are underwriting business at a sub or an unacceptable ROE that doesn't last forever. And so not surprised because of the success of a few of us that there's a lot of imitators. But that doesn't mean they're going to have success over time. So it's not a secular issue. It's more of a shorter-term issue.

Got it. Maybe in terms of volumes and flows, so your multiyear target at Athene calls for $85 billion on average through 2029. What are the levers to get there? It sounds like you're maybe cautiously optimistic that the PRT market could start to come back? How much are newer products like [indiscernible] and stable value expected to contribute?

So yes, just to level set with everybody in the audience. We can -- we fund the liability, we gather liabilities at Athene in really 4 different ways. What was originally a runoff business or called inorganic is slowed down dramatically because the price to buy new runoff portfolios is very steep from new competitors. If you don't have anything, that's all you can just buy your way into the card game. This year, we'll do a -- we'll be a leading annuity retail seller in the U.S. with about a 12% market share. We're also a large -- we've leaned into the funding agreement back note business. And that's also now a one where we're a counterparty with a variety of the banks. But to your point, what used to be the MYGA business, a multiyear guaranteed annuity, fixed annuity, a very generic one, we've taken our foot off the pedal in the shorter duration 3s and 5s and push the duration of those out. And we've also leaned into some of these newer products, like you mentioned, like the [ Riga ] product or the stable value product, which give a bit more return and the investor takes on a little bit of market or index risk. We think those are the right way to go for us. They offer great economics. I do think the PRT market will being attractive because the stickiness of those PRT, pension risk transfer is a very attractive liability for us. And so we suspect that will start hitting our balance sheet into '26 and beyond.

Maybe switching gears a little bit just on the M&A side. So you recently closed your acquisition of Bridge Investment Group. Can you talk a little bit about this acquisition? What does it do for Apollo?

Yes. Well, I think for us, when you look at our business, we're a dominant player in the equity ecosystem. We're clearly the dominant player in the credit ecosystem. And when you look at our natural liabilities and what our investors need, they need safe, robust yield, Bridge happens to be a firm that in residential and multifamily housing, they've shown a great historical capacity to generate those type of assets. And so we bought Bridge not to be a opportunistic real estate player, but to be a multifamily player that manages the whole value chain of acquisition, development, build out management services, whatever. And so it fit a gap for us. And so I don't suspect you'll see us doing a lot of acquisitions on the origination side, but this happened just to fill a gap for us that was attractive. We knew the team. They have -- they're based in Salt Lake City. They had a lot of embedded infrastructure, and that's why we're creating a subsidiary for that not to bring them all on the Apollo balance sheet. But it just -- it fit a real need for us. So I don't suspect you'll see a lot of acquisitions. But if something is of scale and substance and is logical to our business, certain areas I've been asked about certain credit opportunities in Asia or India on the non-investment grade side. Those are just not large enough to make interesting markets and there's a chance to make some real alpha, but it's not really consistent with our business model. So I think Bridge is really what you'll see us do of the size and scale. But I think acquisitions are hard in the asset management business. I think they're easy to announce. I think they get the excitement from investors. But after 2, 3, 4 years, let's see who sticks around, let's see what the performance is. And I think it's just a heightened level of scrutiny and it changes the demand of the marketplace.

You kind of answered what I was going to follow up on, which is to say that you've used M&A sparingly. It's not a huge portion of, I think, your capital allocation expectations for the next several years. But how do you think about opportunities to do more sort of tuck-ins like this? Does it kind of make sense to do more or kind of the opportunity?

Well, I guess I would -- maybe I might surprise you, the best thing for our business was what BlackRock did with HPS and GIP. It wakened the entire traditional world to the role of private capital, private markets and how they are going to deliver that product. So we've been fortunate as a counterparty, our phone, we've been extremely busy in terms of the -- what you talked about earlier, partnerships, JVs, parts providers. And I think that there's -- I don't want to say there's an arms race going on right now, but I think people see the benefit that inures to scale players that have the 4 or 5 tools that I've talked about. And so yes, we're not opposed to it, but I think delivering a toolbox in very logical fashion is very, very appealing to a lot of our partners. And that's worked well for us. And I think that's why we're so confident on our 5-year plan which we announced 5 years ago and even last year announced a new 5-year plan, a lot of momentum to our back, a lot of momentum to our back.

Maybe moving to the traditional private equity side. You alluded to this earlier. Fund XI will be coming back to the market -- back to market soon. Maybe just sort of expected timing. I think you mentioned next year, how would you describe early indications of LP interest?

I think we're fortunate. I think the private equity business, my partners were very outspoken a year or 2 about the lack of performance on some of our peers. And as strong as the economy and as strong as valuations have been, if you bought a lot of businesses in your PE business at 12 to 15 plus times you're having a hard time monetizing them. We've been fortunate. We've stuck to a real purchase price matters discipline and the performance of Fund IX and Fund X, our most recent funds has been quite strong. And so while we are confronting a world with lower allocations, we believe we're going to be one of the handful of winners, especially in our PE strategy. So we -- Fund X has done very well, high IRR, leading -- industry-leading DPI. And so I suspect when we go out late this year, beginning of next year, we're going to get a strong reception for what we do. And I think that's just sticking to our focus of large cap, sticking to our focus of value orientation has been the winning strategy. So I suspect. Now I also would add to this audience, I don't expect a massive monetization cycle to hit. I think there's many, many PE funds that are out there that have raised their most recent fund and don't realize it's their last fund. And I think that's going to be a recognition of the challenges of what you are delivering to investors and clients, and there will be some firms that just are not around in 5 to 7 years. But that's a natural washout and investors and clients will be the determining factor beyond that.

Interesting. So how would you describe the interplay between Fund X, a lot of confidence there and the Fund XI raise. How do you feel that portfolio is positioned to realize in advance of the Fund XI raise? How important is that? And how do you feel the portfolio is positioned, given I know the state of today's IPO markets, which at least so far seems to favor fintech, crypto but maybe seems to be broadening more recently.

Well, again, I go back to the true -- tried and true strategy of our firm about purchasing businesses less than 7, 8x EBITDA, that is a strategy that withstands a test of time. And I don't think the IPO market is going to be the savior of the PE world. There's still a multitrillion overhang. And we have found ways to monetize our business, get paid back or do strategic sales that I think are going to be key to our outperformance versus the peers. So I think that's more of an industry statement. But again, I stand by what we've created in Fund X and the industry. The reality is the private equity asset class has performed very well as an asset class. It's generated superior returns even notwithstanding the lock up capital. And so I do think that those who are at the top of the sector will be able to garner investor response.

Maybe just one final question on the asset management business. I remember your longer-term targets, I think the years where you have a major flagship you're kind of expected to be above your medium-term FRE growth range, but you're sort of trending to the high end of that range right now. Maybe just unpack what's been going well. I expect you to update guidance for the year, but what sort of pushes things -- keeps it there maybe a little higher, a little lower as we go.

I think in addition to the 3 big pillars of our growth, which were global wealth, origination and Apollo Capital Solutions, third-party insurance has done very well. Other parts of our hybrid growth have done well. So our FRE business is just hitting on all cylinders. To your point, we were talking mid-high teens in excess of 20%. I feel very, very comfortable with the higher range of those numbers. And we're seeing it develop right now across the breath of our business on the asset management side.

So I'd love to ask you about the SRE outlook, but you do have an Athene investor update coming later at some point in the fall, I don't know if the date has been announced, but any preview you can share what to expect? I'm sure you're going to save any major news for that event, but how should we be thinking about what you're getting ready to talk about?

No, we're still committed. We've been very public with our multiyear 10% compounded growth. Certainly, with a little bit lower rates and the overflow of the benefit of the business we put on 2, 3 years ago rolling off, it will be a little bit lower than that trend line, but we are still committed to the multiyear trend of 10% compounded. And again, we see there's lots of other lower-cost capital products that will -- or lower capital-intense products that will enable us to do that. So still very committed to the overall game plan.

Great. We're nearly out of time. We'll leave it there. But Jim, thanks so much for being here. What a pleasure to have you.

Thanks for your time. Thank you.

Thanks for being with us.