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

Good morning, everyone. It's good to see everyone. This is Craig Siegenthaler, North American Head of Diversified Financials at Bank of America. So we're very pleased to introduce Jim Zelter, President of Apollo. So Jim joined Apollo back in 2006. He ran their most successful business over that period, the credit business. He currently sits on the Board of Directors and the management team. We also have Noah Gunn in the front row, who's Head of Investor Relations. Guys, thank you very much for joining us.

Glad to be here, and thanks for the great audience this morning. I appreciate it.

So since we're sitting here in London, I thought maybe we could start with Europe. So you've been very public about being active in Europe and the significant investment opportunities that are here. So what are the most -- what are some of the most important changes taking place that you're really excited about?

Well, I would say that the current U.S. administration, politics aside, certainly has sent a pretty strong message about their desire to support other governments around the world in a variety of activities. And so that -- I think that memo has landed on the desk of a lot of leadership across Europe. And as we sit here in 2025, contrasting the last 25, 30 years, a lot of the growth CapEx in the last couple of decades have been around companies that were -- or industries that were coming out of either regulatory or technology change. Again, the gaming industry, the cable industry, the telecom industry, health care and such, they were all noninvestment grade. In Europe, you're now looking for the next 3 to 5 years, 10 years of massive CapEx global industrial renaissance of investment-grade companies. And so that's what gets us excited about the ability to bring our toolbox, you need to really have the right long-term liabilities to be able to be an appropriate counterparty for these conversations. And so whether what we've done for BP, what we've done for RWE, what we've done for Air France, for Vonovia, it's not -- it's private credit, but it's investment-grade private credit. So taking that all what I've just described, it's a tremendous time as the -- in the backdrop of those massive capital needs for the most part, corporates and consumers are in relatively good shape, it's governments that have too much debt right now for the most part. And so when you're Germany and you're trying to take a $4 trillion economy and turn it into a $6 trillion economy to get back on the growth trajectory, they've been saying that they need almost $1.5 trillion of CapEx, of which the government can do $500 billion to $600 billion. So where is the rest of the money coming from? So in real summary, we look around the globe right now and in terms of our ability to help fund and finance and be part of those conversations, it's incredibly interesting. We'll see how much the actual reforms go in place, but we're excited. And also the backdrop of how the European banking system, how those banks that are emerging as leaders have refined their business model. And so the idea of social policy lending or uneconomic activity, that's not existing like it did a decade ago. So the combination of all that is it's just a great place for Apollo to be operating both our origination business, our capital formation as well as our retirement services business.

Jim, sticking with the reindustrialization theme. Are there any particular sectors in Europe that you think are particularly compelling at this moment?

Well, certainly, the overwhelming demand for how Europe responds to AI and data centers, this is not going to be a U.S.-only activity. So that's a big one. Second is utilities and transmission lines, tremendous amount of needs for energy and transmission lines. And a lot of deferred CapEx that has not been spent and invested around the continent. Certainly in Germany, a variety of defense spending, rearmament of the country. And so I do think that a variety of those will be the starting one. So utilities, transmissions, AI, data, energy sustainability pipelines are all areas of focus and activity.

So as you look at Europe and compare it to the U.S., what are some differences between the capital markets market structure? Does that give you some opportunities in Europe? Does that present some challenges?

When you look around Europe right now, in the U.S., the noninvestment grade corporate lending market is about $4.5 trillion. It's about $1.5 trillion high yield, $1.5 trillion leverage loans and $1.5 trillion private credit direct lending. In Europe, it's about $1 trillion to $1.4 trillion, something like that. So it's a much smaller addressable market. The European market is -- the U.S. economy is $29 trillion, $30 trillion. The U.S. ABS securitization market is like a $15 trillion market. In Europe, it's a $18 trillion economy with a $500 billion securitization market. So there are big parts of the marketplace that have not been financed in the markets and are very captive to banks. Broadly speaking, in the U.S. if the banking system provides credit for about 1/3 to 40% of the lending market, in Europe, it's around 70%. So I think there's a long-term generational evolution where private capital, alternative capital, investor capital is filling a larger gap and it depends on the product. But again, back to the Draghi report, only 11% of the proposals have been put into place. And I think over time, as more of those are put into place, more of our toolbox will be embraced.

Jim, sticking with that, what specific reforms or policy changes do you think have to happen in Europe to really unlock or accelerate this potential?

The easiest one to identify is some of the limitations on securitization and having it be appropriate for the Solvency II balance sheets. I think there's a lot of consternation still amongst the ECB about was it structure or was it underlying assets. I think we've all learned in the U.S. right now that the problems of '07, '09 were not securitization per se, but just really bad collateral in the resi and the CRE space. And so I think there's been a greater understanding of that. And I don't think it's any surprise that the economy that's growing the fastest and is a capital -- is one that has really embraced the role of private capital across the board. And again, for this audience, I really want to make sure we talk about -- when we talk about private capital, it's not just debt but also equity, but also, it's really far exceeds just the idea of private credit amongst direct sponsor lending. That's an interesting market. It's a very good tool for sponsors to buy companies, but they're much, much broader, what's really going to create much more economic growth across Europe is the embracing of private capital by investment-grade companies. Obviously, if they can access the public markets and do a public IG deal, a company always should, but depending on the business line, depending on the assets, depending on the scale of economic growth sometimes the public IG markets don't -- just don't embrace that type of activity. And so companies really need to be able to have the complete toolbox, and it's really the investment-grade side of private credit, which is what's driving the European opportunity.

What does the private IG credit market look like in Europe today? I assume it's a lot smaller than the U.S. Could it benefit by getting a lot bigger? And then also, you've had some recent transactions like with HGCS with EDF and RWE. Maybe talk about why they selected Apollo in each of those transactions?

Well, each one -- and we've actually done -- Europe has been very well represented in our high-grade capital solutions. Naming: Intel, Vonovia, Air France, RWE is just a handful. RWE, large German utility. They, part of the consortium of a variety of companies, own a variety of transmission activities. They're like a 25% owner with a variety of other countries of an integrated transmission lines and they wanted to maintain their 25% ownership, but they didn't really want to fund all the CapEx. And so our ability to lend money to allow them to fund their appropriate capital call on the CapEx, but to retain their 25% was a very critical attribute. So we were able to actually provide capital that allowed them to, when the capital call came up for their CapEx investment in the Continental Consortium, they could post their 25% and retain the optionality from their ownership, and so that was a very intriguing opportunity for them. Same with Vonovia. Vonovia is a large commercial real estate firm in Germany. They had funded themselves in a low-rate environment with public IG debt. As the rates have risen dramatically and in real estate values have come down, we were able to attach ourselves to some collateral on their holding company balance sheet and create an SPV, if you would. So again, there's a degree of flexibility, complexity, duration that the high-grade capital solutions are a tool for other companies. But again, this is, I want to tie it back to our business, no company wakes up saying, "We want to do an HGCS deal." Company wakes up and says, "We have a capital need. We have a CapEx need that we prefer not to fund. We prefer to focus on more growth over here." So when you're in our business, which is 2 businesses, we're in the asset management business and we're in the retirement services business. When you're in the retirement services business, you can add value with 3 levers. You can add value by originating assets that have a higher spread versus buying public investment grade. And hence, our huge focus on origination, origination partnerships, origination platforms, anything we can do that does not make us count on buying the Ag at 95 basis points over. Second area is in your operating costs. What can you do versus your competitors? We believe in the U.S., in particular, we have a 25 to 30 basis point advantage versus our peers. And then the third is the breadth of your liabilities. How you bring annuities in, how you bring other liabilities in, whether it's retail annuities, whether it's block annuities that you buy, fixed asset -- fixed annuity-backed notes or reinsurance. And you're trying to optimize the lowest cost and the greatest flexibility. So origination, operating expenses and your liabilities. And so all these things in high-grade capital solutions on the origination side, you try to maintain, you must maintain an investment-grade rated balance sheet. And so in doing so, you go to these larger companies and you try to find financing solutions because what we're able to provide is we don't need the liquidity because of the fixed nature of our liabilities, we can go a bit longer, 5, 10, 15, 20 years versus a typical either mutual fund or a bank that can go 3 to 5 years. And so it's about having that right capital base from which to offer these solutions. So you need to understand the complete flywheel or else you sort of go down a rabbit hole of like, why would you want to lend money to RWE or Vonovia. If you ran a big public investment-grade mutual fund, that's probably not where you'd want to find because although it's a premium, it might not have the liquidity that you need because you're offering daily liquidity. So understanding the overall business in terms of how you're trying to outperform and what's going on in the banking system you need to look at it in a holistic manner.

Jim, I want to turn the page over to originations. And in the U.S., I believe you have 16 separate asset origination vehicles today. Can you replicate that playbook in Europe and will it work sort of the same way?

Yes. Well, to be clear, we own 16 origination platforms, 2-3 of them are primarily Europe right now. And probably of the top 4, Redding Ridge, which is our CLO originator; Wheels, which is our auto fleet finance business; ATLAS, which is our securitized products business; and MidCap. Redding Ridge, Wheels and ATLAS all have some degree of activity in Europe. So you don't need to set up a new platform. The largest 4, it's just how you sort of expand the remit of the ones you have in place today. And the most interesting platforms right now in Europe are activities like in ATLAS, which is securitized products; and then a variety of our CRE, commercial real estate and resi lending platforms in the U.K. and the Netherlands, which are interesting. And then we have a smaller midsized corporate lender, SME lender in the U.K. that we've owned for a while. So I do think there's opportunity for us to create more origination platforms on the continent. But we need to make sure that there's a reason for them to be able to compete. What is the product that they're offering that takes the incumbents and brings business our way? Are we going 6 months longer? We just don't want to be just cheaper pricing, that's not really an economic industrial logic. You want to have something that you bring to the table that allows you to create outsized return for unit of risk.

So let's change the subject to the global retirement opportunity. So serving retirees is a massive global opportunity. And in July, Athora announced a transaction to acquire the Pension Insurance Corporation group, PIC. Can you provide an overview of PIC with some high-level metrics and give a sense of PIC's recent trajectory and market share? And also, how big is the market and how fast is it growing?

Yes. So before I talk about PIC, I got to talk about Athene and Athora for a second. So Athene, obviously, it's in the retirement services business in the U.S., a variety of liabilities, which I mentioned, retail annuities, PRT, FABNs and reinsurance. In Athora, Athora on the continent is really a book of business that buys runoff books of business, mostly in annuities, but also to some degree in life. The only real new annuities that are being written out of Athora today are for the most part in the Netherlands. And also in Europe, on the continent, Solvency II requires you to own a variety of sovereign debt as part of your critical portfolio, 50%, 60%-plus of sovereign debt. And so the only choice you can make there is, do I want to buy the core or noncore and how much do I want to lever that? So your ability to have a great impact on the outcome on the continent is a bit more limited. You arrive back at the U.K. U.K. is a bit of a hybrid, a matching adjustment concept with your assets and your liabilities. And we find in the U.K. fairly mature pension system. With the backup in rates, a lot of pension plans are fully funded. And there's been an industry developed with 3 leading players that are all pretty rational in the pension risk transfer and it's more mainstream for corporates and others to sell and to engage in 1 of these 3 players. So it's a well-established business. It's operated some pretty healthy margins. For us, traditionally, PIC has kept a pretty traditional portfolio where they have not used some of the other tools of origination. And so for us, we see a business that has double-digit growth over the next several years across the U.K. And if you're looking at Athora as a business, we could see the U.K. being a bigger part of that going forward. But certainly, the growth organically of the business is in excess of what we see at Athora today on the continent.

So what do you think are the most compelling aspect specifically of the PIC transaction? What opportunities does this unlock for you, for Athora? And then how could Athora and Apollo-Athene really accelerate the growth of PIC from what it was doing before?

Well, I think what you have, as I said before, I think you get at a point in time right now where government balance sheets are probably have the least amount of flexibility than they had in the past. And so also, if you are a corporate right now, you want to focus on your core activity because of this global industrial renaissance. And so limiting your need for funding pension obligations is probably not one of your key focus items, you want to remove that. And so in the U.K., it's a very rational business, it's a well-established business. The biggest thing that we can add over time with Athora and with PIC is our asset management skills. Certainly, not wholesale, but on the edge, getting a portion of their book to buy a variety of fixed income, matching adjustment assets that have a higher yield and infrastructure or other activities would be a first-mover opportunity for us. And we plan to do that in time, but we need -- Athora needs to get approval first, they need to onboard the business, make sure they do it in a very judicious manner, but that's the opportunity for us to outperform.

So the investment came from Athora, but not Athene. So is Athene going to really kind of stay in the U.S. going forward or maybe a little bit Japan and Athora will be all Europe...

Yes. I think you should think about -- we were very clear when we set up Athene to make it very focused on retirement services and insurance. We had opportunities in the past to do other things, whether it was P&C or variable annuities, which we chose not to. We kept a very defined, identifiable business sandbox from which to play in, which they've done very, very well. And again, in the past, when we bought a book of business -- a broad book of business to be a solution to a seller, we chose to take some of the businesses that we thought were not consistent, i.e., the variable annuity business and we created a sidecar for that called Venerable because it's just a different risk-reward. And many of our peers have been public about wanting to expand other areas of insurance that they think are easy or adjacencies. And I think you've seen us instill with discipline about what Athene is going to do in the U.S. and what Athora is going to do here in Europe. And we think that clarity of accountability is pretty important.

In the ashes of the financial crisis, Apollo was first with this retirement model. Now you fast-forward to today, and there's different variations of the model. Some look similar to yours, but some are very different. Maybe talk about what you think is most valuable with your model, maybe what's underappreciated and why you think your model is the best?

Yes. What you're really getting at is the -- our model versus one that's just really a third-party manager. And I think we adopt to the and not the or. We are in the third-party business, it's a growing business, it's a growing priority for us. And if you take the premise that origination is key to what you do, you really need to be able to, if you speak and if you understand the dynamics of how this origination occurs and how you really want to use your platform, you have to have the ability to commit. And running a pure third-party business, some third party, you do have a mandate where you can actually do things without their approval, but a variety of third-party businesses, while you have an SMA, you need the individual entities to approve each transaction, each investment, which we find quite cumbersome. And so in the ability for us really to outperform on the origination side, it's the ability to -- I don't think it's any surprise that our model is the one, over the last several years, that been the vast, vast leader in making, finding investments in high-grade capital solutions or in platforms that we are able to direct the traffic and call the ball from day 1 rather than lining an opportunity up and calling 10, 20, 30 investors and to see where they care. So I think is the time frame to actually make commitments, the time frame to actually put assets on your balance sheet, we believe our model through good markets right now, and especially in more volatile markets, that's a very valuable capital box that we'll be able to direct to a greater degree. So the fact is we've really been operating in a very buoyant credit environment for the last 15 years. Certainly, there's been air pockets between COVID and the euro crisis. But we are supremely confident that over a longer period, there's a great desire for third parties to want to be aligned with us on the outcome. And I think a pure third-party business; heads you win, tails you win, hopefully, the client does well, we think that's going to be a much more robust alignment to our business over time. So it's a very -- again, we -- just to summarize: It's about being a principal, it's about origination, it's about an and not an or. And I think that business model for us -- again, the last thing I would say is based on how we've used the -- our business model, we've been able to create a variety of origination platforms. And as you and I have spoken, we've been able to do so in a very capital-efficient manner without issuing equity at the holdco. And so I think that's an underappreciated aspect of our business.

So I have a question here, and I think this is an important one because it's been my biggest inbound from clients for the last couple of months. But after that, we can take a pause and see if there's any questions in the audience. Now President Trump had an executive order in early August, which is going to have the Department of Labor look at privates entering the 401(k) channel. And this is actually a topic that Apollo and your CEO, Marc Rowan, have been very visible on for a long time. How do you think this plays out? And when do you actually think flows will start to come to private market managers like Apollo?

Well, I'll take a step back. First of all, why does it make sense? The facts are in. I mean, over the last 30 years, having alternatives, whether it's credit or equity or infrastructure, they produce better returns, higher returns and lower volatility. And so this is a product set that if we think about retirees around the globe right now in the U.S. and other places, in the past, the equity market was the great diversifier, but now when you get the S&P, it's 35%, 40% concentrated on one sector, you're really leveraging your retirement system to the success of a handful of companies. Does that make sense? I don't think so. And so the adoption is logical. And as you pointed out, there's a process that's going on in the U.S. right now. I think the market is underestimating the longer-term impact. I think there's going to be a handful of firms that between brand, technology, product set, investment performance, education are going to be the lion's share winner, and we expect to be part of that. Is it going to happen overnight? I don't think so. I think it's going to happen slowly and then very quickly over the next 2 or 3 years. And hence, a lot of the investment that we've made, the product creation we've made, the partnerships we've made to be able to respond to that. And I think that we are -- again, I don't think there's going to be 100 firms that are going to benefit. I think it's going to be a more limited audience. And we have positioned ourselves from the top, but tactically as well to capture that.

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

Let me ask a question. I guess, you described it as alternatives and obviously, superior returns from that. I guess with the -- further to the 401(k) question, how big before alternatives become mainstream? And I guess, on the liquidity characteristics of what all currently alternatives going to be acceptable when the asset class becomes so big that it's more mainstream in nature, I guess?

Well, there's a lot in that question. I guess I would say that we look at the way that a 60-40 portfolio right now or even a 55-35-10, where you have 10% traditional alternatives, private equity, real estate, infrastructure, BC. I think you're going to look at a portfolio in the future where you have public equity and equity alpha and equity beta, you're going to have fixed income beta and fixed income alpha and you're going to have a bit of alternatives. So the things that are going on right now in the asset-based business, asset-based finance, I think that will play a bigger role. So I think there's a lot of questions being asked about in the role of retirement, do you need all this perceived liquidity that's -- that you think you have, but you don't really have and what are you giving up for that? So it's -- I think it's been embraced that longer-term investors should take some degree of illiquidity in your book. And with real rates being where they are right now, the compounding impact of that is pretty important. So I do think that parts of -- when I -- 20 years ago, when I went to go see investors, it was -- credit was a very binary question. Is high yield attractive on spread and is it time for a distressed cycle? Now most investors have a permanent allocation in credit. To answer the question, if it is it 5% or 10% or is it 15%, 20%, 25%? So I think it's just a question of, over time -- the bank loans didn't trade 30 years ago, now they trade, now it's part of every portfolio. So it's just a question over time, and I do think investors are going to get used to how much liquidity do I need in my portfolio and what's the right adoption and diversity. So I just think it's a grinding evolution.

There are a lot of developments from a technology perspective, both in terms of GenAI as well as tokenization, DLT, things that will have a lot of potential impact on financial services. Do you see a world in the foreseeable future, so next 5 to 10 years, where Apollo's business and execution model is dramatically different?

It's a provocative comment. I do think that those -- there's many that in our industry that are saying that we're coming up with solutions that there's no problem. I would disagree. I think that as I've seen asset classes evolve in time, whether it's bank loans or securitized product, the more transparency, information, price activity, it's brought more investors into the market. And certainly, we, to date, there's a few of our products that we've tokenized, where blockchain participants are using some of our interval funds as part of their products offering. So could I see a time in 5 or 10 years, the foreseeable future, where as stocks become more tokenized, as bonds become more tokenized that a variety of our product set could dramatically evolve? Yes, I do. I think there could be a time in the future that we did start as a private equity firm, that was our roots and I haven't gotten one question today about private equity, which shows the development of our business and certainly the role of retirement services has a profound effect. But I think it's a question of and, and how we do this, not or. And so we believe, Marc, myself, our leadership team thinks that we want to preserve the attributes of being a very thoughtful, grounded, value-oriented investor, but doing so with a view of disruption coming across not only how we invest, but the packages that we deliver those solutions in.

Great. I'm looking at the desk, do we have time for 1 more? I think, yes. Okay. Let me ask one. We've seen these partnerships between alt managers and traditional firms emerge. In most cases, from your competitors, we saw one exclusive relationship, but not from Apollo. You've had 4 different partnerships, more of an open architecture setup. Why is this the right path? Why did you choose this path?

I don't think anybody has a crystal ball in terms of exactly how the world is going to work in 3 to 5 years. And so we want to make sure that we are -- have a chip on a variety of tables. And I guess what people thought was going to be the answer 2, 3 years ago is proving not to be the case right now. The view was: let's take a traditional manager, do a venture with an alts manager and that alts manager will distribute their product through our sales force. Well, I think that that's not really happened to date. Either the sales forces were not motivated, they're not confident, they didn't have the desire or the skills. And so many examples where it didn't get the acceleration of growth. I think what's occurring now is you want to be a potentially a parts provider, let them do what they do best with their clients and increase the ability for us to add products to have their solutions be more competitive solutions with their client base. So even in the last 3 years, what was perceived to be the game plan and what's evolving is different. And so to do things that are exclusive long term, it will tie you up, I think we've not found the obvious, "Aha, that's going to be the successor," and so whether it was what we did with State Street or what we're doing with Lord Abbett and other platforms, I think that's -- for our shareholders, that's the best interest in hand.

Great. So with that, we will end it there. But Jim, Noah, thank you very much for joining our 30th conference.

Thank you.