2Q 2023 Earnings Transcript

the Investor Relations portion of our website. Within these documents, you will see that we generated very solid results that included record quarterly fee-related earnings of $442 million or $0.74 per share, and record quarterly normalized spread related earnings of $874 million or $1.47 per share.

Together, these two earnings streams totaled $1.3 billion in the second quarter, increasing more than 40% year- over-year, demonstrating the strong, resilient and fully aligned growth characteristics of our Asset Management and Retirement Services businesses. Combined with principal investing income and other holdco items, we reported normalized adjusted net income of $1.1 billion or $1.80 per share, up 60% year-over-year.

Joining me from our team to discuss our results in further detail are Marc Rowan, CEO; Jim Zelter, Co-President;

and Martin Kelly, CFO. And we've received some feedback from some of you that we should attempt to shorten the length of our prepared remarks. So at the risk of making a false promise, Marc himself has ensured us that

we'll be endeavoring to do that today.

So with that, I'll tuit over to Marc.

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Marc Jeffrey Rowan

Chief Executive Officer, Co-Founder & Director, Apollo Global Management, Inc.

Thanks, Noah. And we all can wish for certain things and hope that they come true. In any event, as Noah said, it was truly a very, very strong quarter. Normalized SRE and FRE of $1.3 billion for the quarter and we are on track to eaFRE and normalized SRE of $5 billion plus-minus for the year, which Martin will detail. One thing worth calling out is just how exceptionally strong SRE has been.

Just to put in context, Athene has now grown or will grow 30% SRE, two years in a row, and they actually have hit their 2026 financial target as laid out in our Investor Day some two years ago. In just two years. Not only are they doing an exceptional job, but clearly Jim and Grant and the team have exceptionally sandbagged everyone and the business continues to be very strong.

In addition to financial results, we had record inflows for the quarter on an organic basis. We had some $43 billion of inflows, including $8 billion that closed shortly after the quarter end. This closing shortly after a quarter end is actually a feature of the alternatives business. Many of our institutional investors prefer to close on the first of the month and have something in another quarter from an allocation point of view rather than in the prior month. And for many of our retail high net worth focused funds, they also close on the 1st of the month.

So I expect that we will be a little more careful in giving guidance quarter-by-quarter to account for how this business actually operates. From my point of view, and as Martin and we have discussed previously, we generated positive operating leverage and margin expansion this quarter and we expect this to continue over the next couple of years as we benefit from the investments that we've made in people and facilities and in upgrading our business over the past few years.

In short, our strategic positioning is excellent and anchored by three really simple principles. One, purchase price matters. The second, excess retuper unit of risk that is what we do, and full alignment with our clients, both our institutional and our retail clients. It actually feels pretty good, having not chased the hot dot during an era of money printing and zero rates. Our opportunity set is just different than that of our peer group.

Apollo has momentum. In terms of the business, let me start for the quarter with the equity business. In the equity business, this year has really marked the end of an era. So if I think about what happened over the prior decade and perhaps longer than a decade, there were these incredible tailwinds in the equity business, tailwinds from

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money printing, pulling forward of demand, fiscal stimulus, and certainly from zero rates. We now find ourselves, in an absence of tailwinds. Rates are higher. Growth is slower. Globalization is in retreat.

People will have to go back to investing the old-fashioned way. They'll actually have to be very good investors. They will need to produce alpha. I believe that's what we've been doing, demonstrated by the recent private equity results. The final close for Fund X in mid-July brought in capital just around $20 billion over a 12-month marketing period versus continuing to market over an extended timeline. The fund is now closed.

Fund IX generated 36% gross IRRs, 24% net IRRs. In the quarter, just a really interesting time in the private equity business, between haves and have-nots. Arconic and Univar, two very large financings which certainly came at a time that was challenging for the market both executed better than expected, giving us increased confidence in the ability to get transactions we like done.

Let me move on from the equity business and talk about the two drivers of the quarter and what I expect to drive the rest of the year. First, private credit. As I've said previously, private credit, these are two words that actually mean nothing. Private credit can be investment grade. Private credit can be CCC.

Barriers to entry in the private credit business are either quite low. Anyone with a fund and a staff capable of evaluating investments can truly enter the private credit business. Or barriers to entry can be extraordinarily high. And building a full ecosystem that allows you to serve the needs of your clients in a very sophisticated way. Think of the difference between a hot dog stand and a Michelin Star restaurant. Both are in the food business and both serve food. That is how we think about private credit and where people are positioned.

Financial markets, financial literacy around private credit has actually gotten quite sloppy. What is private credit? Well, if we start in the abstract, everything that is on a bank balance sheet is private credit. But most of the time, market pundits talk about private credit. They're talking about a very small sliver of a private credit universe that's focused on levered lending. Don't get me wrong. We like the levered lending business. Levered lending is actually a terrific business right now. It will not always be a terrific business. It is a cyclical business with low barriers to entry, but one that at the right point in time, can be very lucrative.

What we have tried to build is not a single fund, is not a single opportunity. We've tried to build an ecosystem. If I reflect on the past decade, we've invested some $8 billion building 16 origination platforms. There are 4,000 people who work in these platforms, non-Apollo employees, who are solely focused every single day on originating private credit.

And as you know, much, if not most of what they do is investment grade. That's important because the investment grade market is at least eight times larger than the high-yield market and eight times larger than levered lending market. This is a great time for private credit. This is not a quarter. That's a great time for private credit. This is secular change. Not only do we have higher base rates and regulatory change and change in market dynamics. We are in the beginning of a secular shift in how credit is provided to businesses and a shift that I believe will continue to gather speed.

To be successful in this market. You need a recurring supply of unique origination. This quarter we originated some $23 billion with 50% of that from platforms. Jim Zeltzer will detail some of these transactions, but in addition to the names you would expect that are traditionally associated with private credit, AT&T, Air France, and Vonovia. Borrowers value certainty, scale, and speed to execution.

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In addition to origination, you need an integrated capital markets business, because after all, we want 25% of everything and 100% of nothing. Our ACS business, led by Craig Farr has done an extraordinary job extending our reach of private credit to clients and to non-clients. It in fact, this is among the greatest ways that we introduce the firm to people who are not yet clients of Apollo and show them what we're capable of.

This quarter, we've raised some $7 billion of capital from third-party insurers and we expect this to gather speed as the market continues to improve. For private credit, particularly investment grade, the way that consumers and businesses borrow is traditionally through the asset-backed market. Asset-backed is for the most part private credit. This is a $20 trillion market and one in which we have been playing for a very, very long time. More than 220 billion of volume to-date and more than 200 relationships.

We have currently more than $100 billion of AUM associated with ABF, $55 billion of which is third-party. Most of what happens for us in ABF is investment grade and it is a key driver of our insurance business for Athene and for our third-party insurance clients and increasingly fixed income replacement for our traditional institutional clients.

One of the single most important factors in this market is that, we are completely aligned with our client base. We own what they own at the same time, at the same price. There is nothing that is more confidence inspiring than alignment.

Let me move on from private credit to talk a little bit about the job Athene did in the quarter. Athene's results are in part driven by the ability of Apollo to source attractive investment grade credit, but also by the incredibly talented team that has been building Athene for the past 14 years. Normalized SRE for the quarter was $874 million and normalized net spread was 166 basis points. Truly the widest I can remember.

$19 billion of organic inflows in the quarter, up more than 50% year-over-year. Number one annuity market share. We now have line of sight to more than $60 billion of organic inflows this year. We are leaving, by some estimates, between $10 billion and $20 billion of annual originations on the table. Truly, we have an opportunity now to be selective and to build recurring franchises.

We've made progress this quarter in Japan through our reinsurance business and elsewhere in Asia. And I believe the business at Athene is gathering speed, although, as I've cautioned in prior quarters, and as I'm sure Martin will detail, these are truly exceptionally good times. And we are beneficiaries of the large floating rate position that we have carried for more than a decade.

Also recall that our business is built at the top of the capital structure on a senior secured basis and we sleep better at night. Credit experience in the quarter was incredibly benign. Less than 2 basis points, which I'm sure Martin will detail.

Surrenders or outflows also came in better than forecast. And if you recall from the chart we've included in this quarter as well as prior quarters as well as the education we've been doing, the primary driver of surrenders is not what happens at any point in time in interest rates. It is the timing of the expiration of programs that we put on three and five years ago and for the most part is highly predictable.

It is difficult to imagine going from startup or new business to where Athene is today. Right now, we have not done an inorganic transaction for a number of years, but we are the beneficiary of four very diverse channels, retail, PRT, reinsurance, and funding agreements. All four of those channels are dependent on a stable and high- quality credit rating and having an infrastructure and a scale and an operating expense ratio that allow you to lever the business.

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