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

So let's talk about private credit and wealth, which received an exhaustive amount of media attention in the last 12 months. There's a lot of debate around credit quality, the cycle, new entrants with less discipline, 2021 vintage. I'm wondering if you could hone in on your product, ADS. How is its underwriting approach different? And what is your outlook for this one?

So I'm going to do it in reverse order. Let's start with outlook. So across the entirety of the industry without regard to credit quality, you have gating. The normal expectation you would have when an investor group says that it wants its money back is you would expect the underlying asset spreads to widen. That's exactly what hasn't happened. Spreads have tightened. And it shows that there is institutional demand, CLO demand that is more than offsetting the lack of demand on the high net worth side. So this is not a question of product. The other thing I think we need to do is we need to put this in perspective. The private equity industry is more than 40 years old. It experienced a massive spurt of growth. Over the last decade, it has been flat to sideways. Why would the private credit industry as you're using it, direct lending, levered lending, why would we expect it to be anything other than flat? I think that's what we're seeing. The size of the market is flat. And so you're seeing spreads tighten. And I believe what we witnessed over the last decade was more bank retreat from the market and direct lenders filling their share than some bonanza in the marketplace. It is now a mature market and that you're seeing the dynamics of that play out. Not everyone in the market will be treated the same way. And this will go to your -- the first of your questions. You had a choice when you entered the high net worth marketplace as to how to market yourself to consumers since none of the consumers know anything about any of the brands, like we're important, but just to ourselves, Blackstone and KKR, TPG, Iceberg, Steinberg, no one knows. And you were selling a dividend and a risk award. And if you decided to sell a high dividend, you work with a lot of leverage, you invested more in technology, you did more PIK, you went smaller companies because that's where you got excess compensation. On the other hand, if you were approaching this as a principal where it was just a piece of your business and you own everywhere across your structure, you did large cap, you did first lien only, you did cash pay and you went with low leverage. That's the choice we made. Others made other choices. And I think what you'll see over time is you'll see a divergence in performance as people figure out, as consumers figure out who is who in this crisis. Every time we've seen a financial crisis or a financial setback or market correction, the responsible players tend to pick up share. We view ourselves as a responsible player in the marketplace. We're not the only one. And I think we'll do just fine. And the product is performing and doing what it needs to do. But I'll end where I started. The fundamentals of the market are not driven by the queue of investors at high net worth who have asked for their money back. The fundamentals of the market are driven by tightening spreads and the demand for a flat product from CLO and from institutions because it still represents a better risk reward than high yield and a better risk reward than BSL. And that's been the history over the last decade.

So Marc, your presence in Europe has been growing. You announced several marquee acquisitions, including Atlético de Madrid. Can you give us an update on where your European business stands today and what it could look like in 5 years?

So I'll start with, if you think about the big trends driving the world, they require lots of capital. And I've said this and Jim and others have said this, I think that Europe, writ large, will be the best private credit market in the world on a percentage basis because Europe needs to do and is interested in building everything that the U.S. is doing, but it starts from a more constrained position. Governments are more constrained. The financial system is more constrained. The investor marketplace is more limited. The banking system is full and much more dominant here and not the right direct lender of capital. And so on a percentage basis, Europe will grow faster in direct lending, not levered lending, but mostly investment grade than anywhere else in the world. And the other benefit is you're seeing the borrowers, they're quasi sovereign. Yes, Air France is an independent company. EDF is an independent company. RWE is an independent company, BP, Shell, but they are so intertwined with the business of their home country and state and local municipality that it is very difficult sometimes to separate the creditworthiness and the scale of capital that is needed is off the charts. And so I think this is a matter of education, whereas CFOs in the U.S. in capital-heavy industries fully understand the 3-product dynamic of bank, public and private. Europe is a little bit behind in that understanding. And the more time we spend here, the better. A couple of marquee deals is the single best way to market. The other is you have difference in regulatory approach in insurance regulation, which has made the guarantee market in Europe for guaranteed lifetime income and guaranteed income of any kind, very hard to deal with. And so we have increased our presence particularly in the U.K. with the acquisition through Athora of Pension Investment Corp. (sic) [ Pension Insurance Corp. ] And we see the market pretty much in the same way we've seen in the U.S. market, which is if you have product that fits matching adjustment that is of the right credit quality, you can provide significant value to the consumer and increase your presence and market share in a market that is already going through significant growth of restructuring of the retirement system. The same thing is happening in Germany, but not through insurance, it's happening through noninsurance PRT. And so any amount of time we spend here is generally productive.

Marc, if you had to identify the single biggest catalyst for your business in Europe over the next 3 years, would it be an acquisition? Is it regulatory? What could it be?

I think it's passage of time. I see it every day in our business. And it's an interesting thing. And again, I may have said this to some of you, but I'm old and start repeating myself. We did a media event last night where we had a lot of the U.K. press, particularly the financial press. And the financial press refers to the entirety of our industry as private equity. And I said what percentage is private equity of our business? The numbers were like 40% and 50% as opposed to like 8%. And I joke with the reporter from the FT. It's like referring to the FT as a conference company. You picked the small part of their business, and that's what how you define it. And so it is our job now to define what private markets are in the context of Europe, where there's not a tremendous amount of knowledge of private markets. And what they do know is all about buyouts and leverage and transactions, and that's what the financial media wants to cover as opposed to a solutions provider for a fundamental missing piece of capital. And you've had the Draghi report, you've had any number of other respected individuals weighing in. This is neither a positive nor a negative on the European choices, but Europe is much more dependent on its banking system than the U.S. is. In the U.S., banks are 25% of lending, investors are 75%. In Europe, it's pretty much reverse. Given that the missing piece of capital is an investor piece of capital, it's not going to come from the public markets. Europe is going to need to make its peace with private markets. And part of that is firms like ours spending real time here, putting real European leadership in place and making sure that we are adding to the value of what they need to achieve as a country -- country by country.

So your retirement business in Europe is called Athora. It's Athene of Europe. You announced a landmark deal, PIC in the United Kingdom recently. Is that transformational? And how do you think about the U.K. market versus some of the other countries in Continental Europe in terms of growth?

Well, if you think about what Athora is, Athora has 2 sizable markets. Athora has the Netherlands and it has the U.K. The Netherlands, the local company in the Netherlands is growing very fast. It is among -- I believe it has the largest market share of the pension risk transfer market and new business in the Netherlands and is doing great. We have, in the U.K., a forecast of a really significant shift from corporate pensions to pension risk transfer over the next decade. The U.K. has expressed a strong preference not to have that done through reinsurance, to have it onshore. And so we had served this marketplace primarily from Bermuda in offshore reinsurance structures, while collateralized, the regulatory preference is that we do it onshore, and we've added a significant amount of capital to PIC. We have significant capital available to do it. If there is good business to do at reasonable spread, the business can be done onshore. Now what's interesting is this is -- this will force us to rapidly scale our U.K. origination. At the end of the day, these businesses are totally also origination dependent. If you do not have excess spread of investment-grade product, you cannot do appropriate business. And so it's forcing a renewed focus on Apollo to make sure we originate sufficient matching adjustment U.K. eligible assets to serve the U.K. insurance market. And we won't just serve ourselves, while we will be the largest participant, we will serve U.K. institutions and other U.K. insurers, which we do already.

So I want to hit on NAIC offshore regulation and capital arbitrage. You've been kind of very vocal on highlighting this. You're seeing this now with the Caymans. What do you think is the outlook for some of your peers and other insurance companies that are doing business there? What do they have to change? And does this create opportunities for Apollo?

So I think I'm going to give you a little more than you want because it's come up a lot in our private meetings today. The business is fundamentally 4 things. It is can you get a return on assets? Do you have origination? Do you have a good source of stable liabilities at a reasonable cost? Do you have reasonable OpEx? And do you have capital? So if I work up in that order, if you work on OpEx, Athene's OpEx is like 16 basis points now. It is orders of magnitude better than all the established companies and orders of magnitude better than any newcomer. From a liability origination, the cheapest source of liabilities today is organically originated liabilities that you originate in channel because they come with new surrender charges and they are now priced less than things you buy in the secondary market, which have degraded surrender charges. We haven't done an acquisition of note for a long time, not because they're not available because the cost of funds associated with acquisitions is not attractive. And if you are a new entrant and many of the incumbents, you lack the capacity to generate sufficient IG assets because that's not what you've done historically. So if you don't have any of the 3 indicia of success and what you have is capital, what you've done to try to get to scale in your business over the near term is you've taken your business to Cayman where you don't have to put up the same amount of capital and can take a little more risk. That is a gaping hole in the U.S. regulatory system to the extent certain providers get to hold -- are forced to hold certain amounts of capital and you can move offshore to jurisdictions that are nonreciprocal. I believe the NAIC and the regulatory bodies know this. The federal regulators are concerned about the size of this. The recent NAIC pronouncements tell me that this is about to be closed. Very significant movement by the NAIC to address this regulatory arbitrage and the race to the bottom. And by the way, it is not just with Cayman, you have a few U.S. states that in order to make their local companies more competitive, have kind of done onshore Cayman, and I believe that you will have that, too. The other piece of -- and so we're very focused on this, and we're focused on it selfishly. We are, in our industry, the largest -- and so when Lindberg, for those of you, when we have this situation in North Carolina, where someone steals and commits fraud with their company and goes under, we write $150 million check because we are the largest contributor to the guarantee association. We don't like writing $150 million checks. And therefore, allowing capital arbitrage where we are the guarantor makes little sense to us. The other piece we have is a bit from the speech I gave at the NAIC regulators convention this year. If you think about the positioning in our industry, we serve retirees and our market is going to keep growing until 2050. We are among the only sources of guarantee and guaranteed income and from an investment point of view, we are perhaps the largest pocket of long-term debt capital in the world. We should be financial giants striding the globe. Instead, we are dealing with the potential of loss of trust. Loss of trust comes from regulatory arbitrage. It also comes from allowing situations like have happened with Delaware Life. If one was not aware of affiliate transactions relating to 3 high-profile sports teams that we can all name, what are you doing as a regulator? And then we have pending in front of us a long-time transaction of a company that has had its issues, which is Brighthouse, also pending in Delaware. So I believe that this has been a wake-up moment for the U.S. regulatory system where it has the opportunity to really make sure the industry gets the benefit of where it sits today, which is a very, very positive place.

So we have time for, I think, one more question. I do want to get to your new Austin, Texas office. But before I do, I just want to see if there's a question from the audience. So if there's any questions, please raise your hand. But if not, we'll jump into Austin. Okay. So you have a new office in Austin, Texas. I believe it's focusing on AI and innovation internally. What is this office? Who works there? And what are you guys working on?

So we are opening in Austin, Texas. It will be a second headquarters for us, and most of the growth of the firm will take place in Austin. It will give us, in our opinion, access to a differentiated talent base that was not available with, for instance, some of your East Coast locations, even though they're easier for me. I think if you think about our business and about change coming, we're going to experience more change as an industry over the next 5 years than we have for the last 10. And if you think about the technology wave, almost everyone in Apollo can envision how technology shift will make their current job easier, and we're doing that. A large percentage of the people can actually envision how technology shift, software becoming virtually free can envision adjacent products and services and enhancements. Very few people can do their day job and envision wholesale change. In Austin, what we're trying to do is to isolate people and let them pursue wholesale change. What are the big opportunities around our business that are made available from technology, but they're not really technology opportunities. And if I give you a couple, like we already are a massive trader of private product. I think doubling down on the capacity to provide liquidity in the private markets and also adding capital to that, I think, gives us another profit center without adding new assets. I think a massive expansion of our lending business. Right now, you can borrow from Apollo programmatically against our nonequity product at 35% LTV at fixed rates over a number of years. How do we do that more broadly for the private asset industry? I think we need to build the capacity to do at the custody level. I think lending will be a big potential source of origination, again, without adding new assets. And if I think about the future of retirement, annuities, variable annuities, RILA, they are complex products that the vast majority of consumers are not capable of picking apart and really understanding the nuances of, those are products. Maybe the business eventually ends up as solutions. Maybe it's guaranteed 3x MOIC and that's the product or guaranteed lifetime income, and that's the product. To do that, we will need new ways of approaching it, new ways of marketing, new regulatory approval. And for me, that's where I think the future is. We've committed to the market when we lay out our 5-year plan to grow our asset management business at 20% a year, grow our retirement business at 10% a year and essentially $5 billion of earnings from each over the 5-year period. And we're on track to do that. We have the luxury now of asking what comes next. Is it more of the same? Or do we have the opportunity to innovate and create new revenue and profit sources around the business that we already do so well and have a right to win in? I think it's the latter. I think it's not just more of the same. I think it is the opportunity to innovate. And as I said, 95% of the companies in our industry literally don't want the world to change until they retire. It's a very small group of companies that is seeking to innovate. And we believe different things, and we're each pursuing different strategies. And maybe it will be a rising tide lifting all boats, but maybe there'll be more differentiation in our industry as well.

Well, Marc, thank you for sharing your perspective on the future. And on behalf of all of us at Bank of America, thank you very much for joining us.

Thank you. Appreciate it.

Thank you.