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

Yes. Well, look, I started to allude to it. I do think you will see -- a closing of the number of managers and maybe some of the managers that grew really rapidly over the last decade we'll have to contract back down as a result of just not being able to return capital or having the investments in growth in your sector, is that just turns out we're more dependent on 0% interest rates than they were on anything else. And so I think that will be the natural outcome of that. But looking back to the '08, '09, GFC that's as a whole. That takes a number of years for that to play through. Look, I do think you are continuing to see evolution in just private equity and equity in general, whether it comes down to how investments are made, CFO or other structures. I think like every other asset class, the financialization of everything, the ability to break things into risk and return layers and provide more creative financing our capital solutions to different asset classes. I think you're going to continue to see that. I also think we've started to talk about this concept of owning companies for longer. I mean this concept of -- it sounds a little bit like maybe a decade ago, folks were talking about core private equity. Core private equity was potentially a concept, but that got for lack of a better word, bastardized because folks tended to use it just to pay more for assets, put more leverage on it because they were more stable assets. We see a direction to travel in a different direction where good assets that might be want to be held for longer. Why don't you put less leverage on it, more stable, deliver private equity style oversight and an operational improvement, but on a more lower levered capital structure with a certain subset of companies that have potential ownership in staying power for decades to come. And so I think you're going to start seeing just more different flavors PAUSE of the equity ownership. Put another way, what is active equity management meant not actively picking stocks per se, but actively owning and managing companies the way private equity actively owns and manages but in a more market-like format, with market level leverage, and something that might be more tradable than traditional private equity. So these are just some of the innovations that I think are coming down the pike.

Is something you're picking up at a power or just more pontificating on...

We're always cooking at Apollo. We're always kicking at a poll.

Fair enough. Maybe moving to the fixed income side. Where would you say we are in the fixed income replacement journey? Are you seeing more tangible signs that allocators are rethinking their portfolios like on a first principles basis?

Yes. We are just just pulling out a New York Harbor like heading into the Atlantic Ocean, right? It is still early days when it comes to true fixed income replacement, right? The -- I think you're seeing early adopters see the value of what private assets can bring to a fixed income portfolio -- but whether that's on the corporate side or the asset-backed side. But it is still, like I said, in the first -- I don't even want to say the second in the first inning of what is a massive, massive journey. And -- but the rewards are also massive. The rewards are also massive. Every time you see another pension fund, or institution talk about TPA or total portfolio solutions. That's another way of thinking about fixed income replacement how do I stop fixating on asset class by asset class, by sub-asset class and start thinking in terms of factors like risk and return and duration liquidity and look at all the things that might meet those and how do I triangulate on a formula of different assets that give me that type of set of outcomes that I'm looking for. That's what fixed income replacement is built for. And as models of private assets become more pervasive, as TPA becomes more pervasive, I think you're just going to see more and more and more of this. So we're really excited about it. I do believe it is -- I mean, it's not going to entirely replace obviously. But even if it captures 10%, right? 15% of the fixed income market, it is a massive, massive TAM. And I feel like we're well on our way to head down that path.

Got it. Let's talk about the wealth business for a second. So I guess first, I think ADS is coming to the end of its tender period for U.S. investors. Just curious, based on what you've seen so far, I'm curious in particular about the mix of U.S. versus onshore. How do you think redemptions are trending over the next few quarters? And on the sales side, what do you think is required to reaccelerate inflows?

Yes. Well, let me take a step back. A lot of ink has been spilled and a lot of stage time has been given, I know, over the last couple of quarters to the private credit, the semiliquid private credit market. I guess what I'll say there is it's actually not a huge surprise that there was a bit of a slowdown or a backup in this market, right? Enormous amount of capital has been raised over the last few years from the semi liquid market in private credit. There are times where you would expect to PAUSE redemptions, right, i.e., when you're in a credit cycle. As we started this conversation, we are not in the credit cycle. And so at some point, we suspect the the wet market will start to see. We're not in the credit cycle and that demand will start to reignite. We certainly know we're not in the credit cycle, I mean, we see where credit spreads are. We see the underlying credits we look at. We know institutional capital is actually accelerating into private credit and direct lending. And so there is good reason to believe that the wealth market will start picking back up again. I do think the system has constructed actually worked largely the way it was supposed to, right? The redemption caps were not a bug. They were a feature of this. I mean there was no magic to 5% a quarter other than the industry convention sort of formulated around trying to find the right balance between the rights of redeeming investors and the rights of remaining investors and 5% a quarter felt right. And as far as I can tell, the system is working, right? The system is working and there was an initial spike. It's working its way down. I would imagine over the -- and we are continuing to see that clear itself. Over the next couple of quarters, I would think that starts to turn itself back around again. So that's my time line. Obviously, this is all conjecture. I have no crystal ball on that, but it does feel like that's the direction that things are moving.

Any color on U.S. versus offshore?

No, look, they ebb and flow at different times and offshore tends to be a little more volatile or in some cases, a lot more volatile. But PAUSE -- at the end of the day, it's responding to the same stimuli just in different orders of magnitude. And so -- but yes, directionally, I think it's all moving in the right direction.

Maybe on the innovation front. So you guys have been busy between market making, daily pricing. I think recently, you announced the partnership with ICE along with the same line. So let me talk a bit about good, continental exchange, if anybody is just wondering. So what do you think the ultimate benefits of these innovations are going to be? What are you trying to accomplish? And at the end of the day, how does Apollo benefit?

Yes. Look, the purpose of focusing on daily pricing on greater transparency of creating an ICE ID, similar to lacusib. All of these things is really about trying to recognize that PAUSE -- we -- there is a massive, massive market opportunity as we and others have talked about as 401(k) starts to open to private assets as traditional mutual fund long only starts opening to private assets. Going back to fixed income replacement as the traditional -- as the fixed income and public equity buckets of institutional investors, start opening to private assets. The rationale for why private assets should be part of those portfolios is enormous, right? The public equity markets, for example, right, are growing more concentrated. They represent a smaller and smaller percentage of the GDP of employment, et cetera, et cetera. And what even if you don't believe that private assets deliver excess return, which obviously, I do believe that private assets deliver excess return for every equivalent asset category. But even if you didn't, just the diversification effects alone the need to build a more diversified portfolio should lead you towards private assets. I think historically, our industry has taken the position that, great. We have these great private assets. We're originating amazing private assets. So all of those other buckets, you come over here and take your private assets like we're hyper to sell to you but you've got to come here. And I think it's becoming apparent in our dialogues, in our travels in our discussions with all of these players that ultimately incumbent upon us to meet some of those buyers closer to where they are. start to package and create these products in ways that look and smell and feel more like the type of products they're used to buying. And that does involve having things be daily, liquid, having there be more transparency, having an ICE identifier, which provides multiple fields of other information that they can go look at and understand. And if we do that and do that right, we believe that this will accelerate the opening of that ginormous TAM that we're all as an industry talking about. Now it's interesting because I think a lot of our industry. A lot of our peers are just taking a wait-and-see approach. And that's never really stopped Apollo. When we have conviction about something, we march towards that until facts dictate that we should take a left of a return. And PAUSE that's what we are doing. And I think you're going to continue to see us drive in that direction. We've made commitments over the course of this year as to what portion of our book is going to be priced on a daily basis. I think that will continue to expand in time. That may or may not lead to certain categories moving from daily pricing to daily liquidity. We are really trying to explore all of these things and seeing what is going to resonate with these potential buyer universe is? And what can we do to make these products more understandable to those markets.

Okay. Maybe we have a last bit of time, talk a little bit about the theme. Maybe first, I want to ask you about aMabs. So you guys have been quite clear about migrating Athene's CLO exposure over to this product. So maybe just for investors who are less familiar, what is AMAP. Can you give us a little color on third-party receptivity? And how are regulators looking at and thinking about this product?

Yes. Yes. So what is AMAP. AMAP is, we would say, just the next evolution of a CLO-like product for the market. Just as a quick refresher right, CLOs over the last, call it, 30 years have grown to be a $1.5 trillion product. They're consumed all around the financial system. No surprise, excess spreads have really been squeezed out of that market. But -- what's interesting about CLOs or the way they've been structured and optimized, I would say they've really been built around really optimizing for that top of the capital structure, that Triple A piece that they're built to optimize for big money center banks that are looking for AAA paper. That's the fattest tranche of the CLO, it's got very, very tight pricing, which makes the rest of the CLO work very attractively. We looked at that and have watched that market compress and felt like, well, what if we were able to create an asset category that was not optimized for the AAA but optimized, say, for the single A, where you had PAUSE which is where insurance companies, credit investors often like to exist. And so we structured an instrument that had that type of structuring PAUSE -- in addition, we said, well, what if instead of using 100% subinvestment-grade collateral, what if we put much higher quality collateral in the box PAUSE -- and so AMP thus far has been roughly 50% IG collateral. So improve the underlying credit quality, fatten the parts of the capital stack that are most interesting to PAUSE credit investors and can we create a very interesting product that way. And so that's what we've done. We've now done 5 issuances of these, about $25 billion. PAUSE our own balance sheet has taken about half of that, meaning third-party investors have taken the other half. It's been a pretty interesting diversified group of buyers who have been buying that. PAUSE And we think we are in the early days of what -- I mean whether it gets to $1.5 trillion asset class, TBD, we'll check back in 30 years. PAUSE But it certainly, I think, has a lot of legs to grow. We're starting to see PAUSE interesting receptivity from other issuers. We are going open source on the technology of this. So sharing this with other originators of credit because we'd love to see this PAUSE market develop. We don't obviously have 100% market share in origination. And so we'd love to access other people's MAP products to the extent there PAUSE producing maps. And so yes, we'll see where this goes. So the comment or question about on the regulatory side, of course, every step of this journey has been in lockstep with our regulators, making sure they understand the product. And have come along with them, have responded to their feedback and made adjustments along the way as such.

I want to squeeze in a little bit of a multiparter, but with a little bit of time we have left. Just thoughts on increased competition in the industry and how you see this competitive advantage standing up? And then there's sort of another question on A Maps. Given what you've observed in the CLO market, investors sort of think about like Athene's long-term spread opportunity. Do you see that perhaps stepping up structurally as AMAP becomes a bigger portion of the whole? Or does it make you more competitive and it sort of gets reinvested in the pricing. So I know there's a lot in there, not a lot of time left. But my 57 seconds, we'll see what I can do.

I would say from a competition standpoint, like I'll just repeat what our CEO, Grant Kvalheim, Athene says all the time, which is the annuity market has always been competitive, right? The fact that some financial players have come in and crowded out some traditional players. This has always been a competitive market, and you have to win based on client service, better products, better pricing, better excess spread delivery. So where we are today, I think, is no different than where we've been at various points over the last couple of decades in the annuity space. As far as AMAP affecting spread, we are always on the hunt. I mean, that's, again, the lifeblood of what we do is keep moving the origination, boundary keep coming up with better structural solutions, keep coming up with ways to create excess spread without taking excess risk. AMaps is one piece of that, but it is not the only piece of that. And yes, of course, our journey, we've seen spread compression just over the last couple of years given the markets in general. I think we've reached an inflection point. Again, third time I'm saying it, no crystal ball, but it does feel like things are starting to improve, just perhaps because of some of the interesting credits that are going on the Athene book because of AMAPS because of other things. But this is a battleship that moves sort of -- you don't sort of whipsaw up and down on our balance sheet, things move deliberately and a little bit at a time. So feeling cautiously optimistic there.

Okay. Great. Well, unfortunately, we're out of time. Scott, thanks again. Thanks so much for being here. With a pleasure to have you.

My pleasure. Thank you.