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APOLLO GLOBAL MANAGEMENT, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction withApollo Global Management, Inc.'s condensed consolidated financial statements and the related notes within this quarterly report. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in the section of this report entitled "Item 1A. Risk Factors." The highlights listed below have had significant effects on many items within our condensed consolidated financial statements and affect the comparison of the current period's activity with those of prior periods. Target returns included in this report are presented gross and do not account for fees, expenses and taxes, which will reduce returns. Target returns are neither guarantees nor predictions or projections of future performance. There can be no assurance that target returns will be achieved or that Apollo will be successful in implementing the applicable strategy. Actual gross and net returns for funds managed by Apollo, and individual investors participating directly or indirectly in funds managed by Apollo, may vary significantly from the target returns set forth herein. General Our Businesses Founded in 1990, Apollo is a high-growth, global alternative asset manager and a retirement services provider. Apollo conducts its business primarily inthe United States through the following three reportable segments: Asset Management, Retirement Services and Principal Investing. These business segments are differentiated based on the investment services they provide as well as varying investing strategies. Asset Management Our Asset Management segment focuses on three investing strategies: yield, hybrid and equity. We have a flexible mandate in many of the funds we manage which enables our funds to invest opportunistically across a company's capital structure. We raise, invest and manage funds on behalf of some of the world's most prominent pension, endowment and sovereign wealth funds, as well as other institutional and individual investors. As ofMarch 31, 2022 , we had total AUM of$512.8 billion . Our Asset Management segment had a team of 2,336 employees as ofMarch 31, 2022 , with offices throughout the world. This team possesses a broad range of transaction, financial, managerial and investment skills. We operate our asset management business in a highly integrated manner, which we believe distinguishes us from other alternative asset managers. Our investment teams frequently collaborate across disciplines and believe that this collaboration enables the funds we manage to more successfully invest across a company's capital structure. Our objective is to achieve superior long-term risk-adjusted returns for our clients. The majority of the investment funds we manage are designed to invest capital over periods of seven or more years from inception, thereby allowing us to seek to generate attractive long-term returns throughout economic cycles. We have a contrarian, value-oriented investment approach, emphasizing downside protection, and the preservation of capital. We believe our contrarian investment approach is reflected in a number of ways, including: •our willingness to pursue investments in industries that our competitors typically avoid; •the often complex structures employed in some of the investments of our funds; •our experience investing during periods of uncertainty or distress in the economy or financial markets; and •our willingness to undertake transactions that have substantial business, regulatory or legal complexity.
We have applied this investment philosophy to identify what we believe are
attractive investment opportunities, deploy capital across the balance sheet of
industry leading, or "franchise," businesses and create value throughout
economic cycles.
The yield, hybrid, and equity investing strategies of our Asset Management
segment reflect the range of investment capabilities across our platform based
on relative risk and return. As an asset manager, we earn fees for providing
investment management services and expertise to our client base. The amount of
fees charged for managing these assets depends on the underlying investment
strategy, liquidity profile, and, ultimately, our ability to generate returns
for our clients. We also earn transaction and advisory fees as part of our
growing capital solutions business and as part of monitoring and deployment
activity alongside our sizeable private equity franchise. After expenses, we
call the resulting earnings stream "Fee Related Earnings" or "FRE", which
represents the primary performance measure for the Asset Management segment.
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Yield
Yield is our largest asset management strategy with$372.7 billion of AUM as ofMarch 31, 2022 . Our yield strategy focuses on generating excess returns through high-quality credit underwriting and origination. Beyond participation in the traditional issuance and secondary credit markets, through our origination platforms and corporate solutions capabilities we seek to originate attractive and safe-yielding assets for our investors. Within our yield strategy, we target 4% to 10% returns for our clients. Since inception, the total return yield fund has generated a 6% gross Return on Equity ("ROE") and 5% net ROE annualized throughMarch 31, 2022 . The investment portfolios of the yield-oriented funds Apollo manages include several asset classes, as described below:
•Corporate Fixed Income (
investment grade corporate bonds, emerging markets investments and investment
grade private placement investments;
•Corporate Credit (
investments, including income-oriented, senior loan and bond investments
involving issuers primarily domiciled in the
investment grade asset-backed securities;
•Structured Credit ($67.8 billion of AUM), which includes corporate structured and asset-backed securities as well consumer and residential real estate credit investments;
•Real Estate Debt (
broad spectrum of property types and at various points within a property's
capital structure, including first mortgage and mezzanine financing and
preferred equity; and
•Direct Origination ($31.3 billion of AUM), which includes originations (both directly with sponsors and through banks) and investments in loans primarily related to middle market lending and aviation finance.
Hybrid
Our hybrid strategy, with$53.7 billion of AUM as ofMarch 31, 2022 , brings together our capabilities across debt and equity to seek to offer a differentiated risk-adjusted return with an emphasis on structured downside protected opportunities across asset classes. We target 8% to 15% returns within our hybrid strategy by pursuing investments in all market environments, deploying capital during both periods of dislocation and market strength, and focusing on different investing strategies and asset classes. Our flagship hybrid credit hedge fund has generated a 12% gross ROE and 8% net ROE annualized and our hybrid value funds have generated a 28% gross IRR and a 23% net IRR from inception throughMarch 31, 2022 . The investing strategies and asset classes within our hybrid strategy are described below: •Accord and Credit Strategies ($8.7 billion of AUM), which refers to the investment strategy of certain funds managed by Apollo that invest opportunistically in both the primary and secondary markets in order to seek to capitalize on both near and longer-term relative value across market cycles. The investment portfolios of these funds include credit investments in a broad array of primary and secondary opportunities encompassing stressed and distressed public and private securities including senior loans (secured and unsecured), large corporate investment grade loan origination and structured capital solutions, high yield, mezzanine, derivative securities, debtor in possession financings, rescue or bridge financings, and other debt investments. •Hybrid Value ($10.8 billion of AUM), which refers to the investment strategy of certain funds managed by Apollo that focus on providing companies, among other things, rescue financing or customized capital solutions, including senior secured and unsecured debt or preferred equity securities, often with equity-linked or equity-like upside, as well as structured equity investments. •Infrastructure Equity ($5.1 billion of AUM), which refers to the investment strategy of certain funds managed by Apollo that focus on investing in a broad range of infrastructure assets, including communications, midstream energy, power and renewables, and transportation related assets.
•Hybrid Real Estate (
plus investment strategies. In our net lease strategy, we seek to build net
lease investment portfolios for our clients that are diversified by both
geography
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and tenancy, while targeting attractive risk-adjusted returns. In our core plus
strategy, we seek to build investment portfolios for our clients that include
stabilized real estate investments with attractive fundamentals in select cities
in Europe .
Equity
Our equity strategy manages $86.4 billion of AUM as of March 31, 2022 . Our
equity strategy emphasizes flexibility, complexity, and purchase price
discipline to drive opportunistic-like returns for our clients throughout market
cycles. Apollo's equity team has experience across sectors, industries, and
geographies in both private equity and real estate equity. Our control equity
transactions are principally buyouts, corporate carveouts and distressed
investments, while our real estate funds generally transact in single asset,
portfolio and platform acquisitions. Within our equity strategy, we target
upwards of 15% returns in the funds we manage. We have consistently produced
attractive long-term investment returns in our traditional private equity funds,
generating a 39% gross IRR and a 25% net IRR on a compound annual basis from
inception through March 31, 2022 . Our equity strategy focuses on several
investing strategies as described below:
•Flagship Private Equity ($60.4 billion of AUM), which refers to our investment
strategy focused on creating investment opportunities with attractive
risk-adjusted returns across industries and geographies and throughout market
cycles, utilizing our value-oriented investment approach. Through this strategy,
we seek to build portfolios of investments that are created at meaningful
discounts to comparable market multiples of adjusted cash flow, thereby
resulting in what we believe are portfolios focused on capital preservation. The
transactions in this strategy include opportunistic buyouts, corporate carveouts
and distressed investments. After acquisition by an Apollo-managed fund, Apollo
works with its funds' portfolio companies to seek to accelerate growth and
execute a value creation strategy.
Included within flagship private equity are assets related to our impact
investing strategy, which pursues private equity-like investment opportunities
with the intention of generating a positive, measurable, social and/or
environmental impact while also seeking attractive risk-adjusted returns. The
impact investment strategy targets investment opportunities across five core
impact-aligned investment themes including: (i) economic opportunity, (ii)
education; (iii) health, safety and wellness; (iv) industry 4.0; and (v) climate
and sustainability.
•European Principal Finance ("EPF") ($8.4 billion of AUM), which refers to our
investment strategy focused on European commercial and residential real estate,
performing loans, non-performing loans, and unsecured consumer loans, as well as
acquiring assets as a result of distressed market situations. Certain of the
European principal finance vehicles we manage also own captive pan-European
financial institutions, loan servicing and property management platforms that
perform banking and lending activities and manage and service consumer credit
receivables and loans secured by commercial and residential properties.
•Real Estate Equity (
strategy that targets investments in real estate and real estate-related assets,
portfolios and platforms located in primary, secondary and tertiary markets
across
Included within our investing strategies above is$301.6 billion ofPerpetual Capital , out of the$512.8 billion of AUM as ofMarch 31, 2022 .Perpetual Capital refers to assets of Perpetual Capital Vehicles that are of indefinite duration and where there is generally no requirement to return capital to investors upon realization of investments or through redemptions. As ofMarch 31, 2022 ,Perpetual Capital includes, without limitation, certain assets in our Yield strategy, including assets relating to publicly traded and non-traded vehicles, certain origination platform assets and assets managed for certain of our insurance clients.Perpetual Capital assets may be withdrawn under certain circumstances. Retirement Services Our retirement services business is conducted by Athene, a leading financial services company that specializes in issuing, reinsuring and acquiring retirement savings products designed for the increasing number of individuals and institutions seeking to fund retirement needs. Athene provides retail annuity retirement solutions to policyholders, and reinsures fixed indexed annuities ("FIA"), multi-year guaranteed annuities ("MYGA"), traditional one-year guarantee fixed deferred annuities, immediate annuities and institutional products from reinsurance partners. In addition, Athene offers institutional products, including funding agreements and pension group annuities. Apollo's asset management business provides a full suite of 97 --------------------------------------------------------------------------------
services for Athene's investment portfolio, including direct investment
management, asset allocation, mergers and acquisition asset diligence and
certain operational support services, including investment compliance, tax,
legal and risk management support. As of
employees.
Our retirement services business focuses on generating spread income by
combining the two core competencies of (1) sourcing long-term, generally
illiquid liabilities and (2) using the global scale and reach of our asset
management business to actively source or originate assets with Athene's
preferred risk and return characteristics. Athene's investment philosophy is to
invest a portion of its assets in securities that earn an incremental yield by
taking measured liquidity risk and complexity risk and capitalizing on its
long-dated and persistent liability profile to prudently achieve higher net
investment earned rates, rather than assuming solely credit risk. A cornerstone
of Athene's investment philosophy is that given the operating leverage inherent
in its business, modest investment outperformance can translate to outsized
return performance. Because Athene maintains discipline in underwriting
attractively priced liabilities, it has the ability to invest in a broad range
of high-quality assets to generate attractive earnings.
Our asset management expertise supports the sourcing and underwriting of asset
classes for Athene's portfolio. Athene is invested in a diverse array of
corporate bonds and more structured, but highly rated, asset classes. Athene
establishes risk thresholds which in turn define risk tolerance across a wide
range of factors, including credit risk, liquidity risk, concentration risk and
caps on specific asset classes. In addition to other efforts, we partially
mitigate the risk of rising interest rates by strategically allocating a
meaningful portion of Athene's investment portfolio into floating rate
securities. Athene also maintains holdings in less interest rate-sensitive
investments, including collateralized loan obligations ("CLO"), commercial
mortgage loans, residential mortgage loans, non-agency residential
mortgage-backed securities ("RMBS") and various types of structured products,
consistent with its strategy of pursuing incremental yield by assuming liquidity
risk and complexity risk, rather than assuming solely credit risk.
Rather than increase Athene's allocation to higher risk securities to increase
yield, we pursue the direct origination of high-quality, predominantly senior
secured assets, which we believe possess greater alpha-generating qualities than
securities that would otherwise be readily available in public markets. These
direct origination strategies include investments sourced by (1) affiliated
platforms that originate loans to third parties and in which Athene gains
exposure directly to the loan or indirectly through its ownership of the
platform, and (2) our extensive network of direct relationships with
predominantly investment-grade counterparties.
Athene uses, and may continue to use, derivatives, including swaps, options,
futures and forward contracts, and reinsurance contracts to hedge risks such as
current or future changes in the fair value of its assets and liabilities,
current or future changes in cash flows, changes in interest rates, equity
markets, currency fluctuations and changes in longevity.
Products
Athene principally offers two product lines: annuities and funding agreements.
Annuities
Athene's primary product line is annuities, which include Fixed Indexed
Annuities, Registered Index-Linked Annuities, Fixed Rate Annuities, Payout
Annuities and Group Annuities.
Fixed Indexed Annuities ("FIAs"). FIAs are the majority of Athene's net reserve
liabilities. FIAs are a type of insurance contract in which the policyholder
makes one or more premium deposits which earn interest, on a tax deferred basis,
at a crediting rate based on a specified market index, subject to a specified
cap, spread or participation rate. FIAs allow policyholders the possibility of
earning interest without significant risk to principal, unless the contract is
surrendered during a surrender charge period. A market index tracks the
performance of a specific group of stocks or other assets representing a
particular segment of the market, or in some cases, an entire market. Athene
generally buys options on the indices to which the FIAs are tied to hedge the
associated market risk. The cost of the option is priced into the overall
economics of the product as an option budget. Athene generates income on FIA
products by earning an investment spread, based on the difference between (1)
income earned on the investments supporting the liabilities and (2) the cost of
funds, including fixed interest credited to customers, option costs, the cost of
providing guarantees (net of rider fees), policy issuance and maintenance costs,
and commission costs.
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Registered Index-Linked Annuities ("RILA"). A RILA is similar to an FIA in
offering the policyholder the opportunity for tax-deferred growth based in part
on the performance of a market index. Compared to an FIA, a RILA has the
potential for higher returns but also has the potential for risk of loss to
principal and related earnings. A RILA provides the ability for the policyholder
to participate in the positive performance of certain market indices during a
term, limited by a cap or adjusted for a participation rate. Negative
performance of the market indices during a term can result in negative
policyholder returns, with downside protection typically provided in the form of
either a "buffer" or a "floor" to limit the policyholder's exposure to market
loss. A "buffer" is protection from negative exposure up to a certain
percentage, typically 10 or 20 percent. A "floor" is protection from negative
exposure less than a stated percentage (i.e., the policyholder risks exposure of
loss up to the "floor," but is protected against any loss in excess of this
amount).
Fixed Rate Annuities. Fixed rate annuities include annual reset annuities and
MYGAs. Unlike FIAs, fixed rate annuities earn interest at a set rate (or
declared crediting rate), rather than a rate that may vary based on an index.
Fixed rate annual reset annuities have a crediting rate that is typically
guaranteed for one year. After such period, Athene has the ability to change the
crediting rate at its discretion, generally once annually, to any rate at or
above a guaranteed minimum rate. MYGAs are similar to annual reset annuities
except that the initial crediting rate is guaranteed for a specified number of
years, rather than just one year, before it may be changed at Athene's
discretion. After the initial crediting period, MYGAs can generally be reset
annually.
Withdrawal Options for Deferred Annuities. After the first year following the
issuance of a deferred annuity, the policyholder is typically permitted to make
withdrawals up to 5% or 10% (depending on the contract) of the prior year's
value without a surrender charge or market value adjustment ("MVA"), subject to
certain limitations. Withdrawals in excess of the allowable amounts are assessed
a surrender charge and MVA if such withdrawals are made during the surrender
charge period of the policy. The surrender charge for most Athene products at
contract inception is generally between 7% and 15% of the contract value and
decreases by approximately one percentage point per year during the surrender
charge period, which generally ranges from 3 to 20 years.
At maturity, the policyholder may elect to receive proceeds in the form of a
single payment or an annuity. If the annuity option is selected, the
policyholder will receive a series of payments either over the policyholder's
lifetime or over a fixed number of years, depending upon the terms of the
contract. Some contracts permit annuitization prior to maturity. A fixed annuity
policyholder may also elect to purchase an income rider.
Income Riders to Fixed Annuity Products. Athene's income riders on its deferred
annuities can be broadly categorized as either guaranteed or participating.
Guaranteed income riders provide policyholders with a guaranteed lifetime
withdrawal benefit ("GLWB"), which permits policyholders to elect to receive
guaranteed payments for life from their contract without having to annuitize
their policies. Participating income riders tend to have lower levels of
guaranteed income than guaranteed income riders but provide policyholders the
opportunity to receive greater levels of income if the policies' indexed
crediting strategies perform well. As of March 31, 2022 , approximately 36% of
Athene's deferred annuity account value had rider benefits.
Payout Annuities. Payout annuities primarily consist of single premium immediate
annuities ("SPIA"), supplemental contracts and structured settlements. Payout
annuities provide a series of periodic payments for a fixed period of time or
for the life of the policyholder, based upon the policyholder's election at the
time of issuance. The amounts, frequency and length of time of the payments are
fixed at the outset of the annuity contract. SPIAs are often purchased by
persons at or near retirement age who desire a steady stream of payments over a
future period of years. Supplemental contracts are typically created upon the
conversion of a death claim or the annuitization of a deferred annuity.
Structured settlements generally relate to legal settlements.
Group Annuities. Group annuities issued in connection with pension group
annuities transactions usually involve a single premium group annuity contract
issued to discharge certain pension plan liabilities. The group annuities that
Athene issues are non-participating contracts. The assets supporting the
guaranteed benefits for each contract may be held in a separate account. Group
annuity benefits may be purchased for current, retired and/or terminated
employees and their beneficiaries covered under terminating or continuing
pension plans. Both immediate and deferred annuity certificates may be issued
pursuant to a single group annuity contract. Immediate annuity certificates
cover those retirees and beneficiaries currently receiving payments, whereas
deferred annuity certificates cover those participants who have not yet begun
receiving benefit payments. Immediate annuity certificates have no cash
surrender rights, whereas deferred annuity certificates may include an election
to receive a lump sum payment, exercisable by the participant upon either the
participant achieving a specified age or the occurrence of a specified event,
such as termination of the participant's employment.
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Athene earns income on group annuities based upon the spread between the return
on the assets received in connection with the pension group annuity transaction
and the cost of the pension obligations assumed. Group annuities expose Athene
to longevity risk, which would be realized if plan participants live longer than
assumed in underwriting the transaction, resulting in aggregate payments that
exceed Athene's expectations.
Funding Agreements
Funding agreements are issued opportunistically to institutional investors at attractive risk-adjusted funding costs. Funding agreements are negotiated privately between an investor and an insurance company. They are designed to provide an agreement holder with a guaranteed return of principal and periodic interest payments, while offering competitive yields and predictable returns. The interest rate can be fixed or floating. Athene also includes repurchase agreements with a term that exceeds one year at the time of execution within the funding agreement product category.
Distribution Channels
Athene has developed four dedicated distribution channels to address the
retirement services market: retail, flow reinsurance, institutional and
acquisitions and block reinsurance, which support opportunistic origination
across differing market environments. Additionally, Athene believes these
distribution channels enable it to achieve stable asset growth while maintaining
attractive returns.
Retail
Athene has built a scalable platform that allows it to originate and rapidly
grow its business in deferred annuity products. Athene has developed a suite of
retirement savings products, distributed through its network of approximately 53
independent marketing organizations ("IMOs"); approximately 68,000 independent
agents in all 50 states; and a growing network of 18 banks and 119 regional
broker-dealers. Athene is focused in every aspect of its retail channel on
providing high quality products and service to its policyholders and maintaining
appropriate financial protection over the life of their policies.
Flow Reinsurance
Flow reinsurance provides another opportunistic channel for Athene to source liabilities with attractive cost of funds and offer insurance companies the opportunity to improve their product offerings and enhance their financial results. As in the retail channel, Athene does not pursue flow volume growth at the expense of profitability, and therefore tends to respond rapidly to adjust pricing for changes in asset yields. Reinsurance is an arrangement under which an insurance company, the reinsurer, agrees to indemnify another insurance company, the ceding company or cedant, for all or a portion of certain insurance risks underwritten by the ceding company. Reinsurance is designed to (1) reduce the net amount at risk on individual risks, thereby enabling the ceding company to increase the volume of business it can underwrite, as well as increase the maximum risk it can underwrite on a single risk, (2) stabilize operating results by reducing volatility in the ceding company's loss experience, (3) assist the ceding company in meeting applicable regulatory requirements and (4) enhance the ceding company's financial strength and surplus position. Within its flow reinsurance channel, Athene generally conducts third-party flow reinsurance transactions through its subsidiary,Athene Life Re Ltd. ("ALRe"). As a fixed annuity reinsurer, ALRe partners with insurance companies to develop solutions to their capital requirements, enhance their presence in the retirement market and improve their financial results. The specific liabilities that ALRe targets to reinsure include FIAs, MYGAs, traditional one-year guarantee fixed deferred annuities, immediate annuities and institutional products. For various transaction-related reasons, from time to time, Athene's US insurance subsidiaries will reinsure business from third-party ceding companies. In these instances, the respective US insurance subsidiary will generally retrocede a portion of the reinsured business toAthene Annuity Re Ltd. or ALRe. Institutional
The Institutional channel includes pension group annuity transactions and
funding agreements.
Pension Group Annuity Transactions. Athene partners with institutions seeking to
transfer and thereby reduce their obligation to pay future pension benefits to
retirees and deferred participants, through pension group annuities. Athene
works with
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advisors, brokers and consultants to source pension group annuity transactions
and design solutions that meet the needs of prospective pension group annuity
counterparties.
Funding Agreements. Athene participates in a funding agreement-backed notes
("FABN") program through which it may issue funding agreements to a
special-purpose trust that issues marketable medium-term notes. The notes are
underwritten and marketed by major investment banks' broker-dealer operations
and are sold to institutional investors. The proceeds of the issuance of notes
are used by the trust to purchase one or more funding agreements from Athene
subsidiaries with matching interest and maturity payment terms. Athene has
established a funding agreement-backed repurchase program, in which a
special-purpose, unaffiliated entity may enter into a repurchase agreement with
a bank and the proceeds of the repurchase transactions are used by the
special-purpose entity to purchase secured funding agreements from Athene
subsidiaries. Athene is also a member of the FHLB and Athene has issued funding
agreements to the FHLB in exchange for cash advances. Finally, repurchase
agreements with an original maturity exceeding one year are also included within
the funding agreement channel.
Acquisitions and Block Reinsurance
Acquisitions. Acquisitions are an important source of growth in our retirement
services business. Athene has a proven ability to acquire businesses in complex
transactions at favorable terms, manage the liabilities acquired and reinvest
the associated assets. Athene plans to continue leveraging this expertise in
sourcing and evaluating transactions to profitably grow its business. Athene
believes its demonstrated ability to source transactions, consummate complex
transactions and reinvest assets into higher yielding investments as well as its
access to capital provide it with distinct advantages relative to other
acquisition candidates.
Block Reinsurance. Through block reinsurance transactions, Athene partners with
life and annuity companies to decrease their exposure to one or more products or
to divest of lower-margin or non-core segments of their businesses. Unlike
acquisitions in which Athene must acquire the assets or stock of a target
company, block reinsurance allows the Retirement Services segment to
contractually assume assets and liabilities associated with a certain book of
business. In doing so, Athene contractually assumes responsibility for only that
portion of the business that it deems desirable, without assuming additional
liabilities.
Capital
We believe that Athene has a strong capital position and that it is well
positioned to meet policyholder and other obligations. Athene measures capital
sufficiency using an internal capital model which reflects management's view on
the various risks inherent to its business, the amount of capital required to
support its core operating strategies and the amount of capital necessary to
maintain its current ratings in a recessionary environment. The amount of
capital required to support Athene's core operating strategies is determined
based upon internal modeling and analysis of economic risk, as well as inputs
from rating agency capital models and consideration of both NAIC risk-based
capital ("RBC") and Bermuda capital requirements. Capital in excess of this
required amount is considered excess equity capital, which is available to
deploy.
Athene's deployable capital is comprised of capital from three sources: excess equity capital, untapped debt capacity and available undrawn capital commitments fromAthene Co-Invest Reinsurance Affiliate Holding Ltd. ("ACRA"). As ofMarch 31, 2022 , we believe that Athene had approximately$7.3 billion in total excess equity capital, untapped debt capacity and available undrawn ACRA commitments available to be deployed, subject, in the case of debt capacity, to favorable market conditions and general availability.
ACRA
In order to support growth strategies and capital deployment opportunities,
Athene established ACRA as a long-duration, on-demand capital vehicle. Athene
owns 36.55% of ACRA's economic interests and 100% of ACRA's voting interests,
with the remaining 63.45% of the economic interests being owned by ADIP, a
series of funds managed by Apollo. ACRA participates in certain transactions by
drawing a portion of the required capital for such transactions from third-party
investors equal to ADIP's proportionate economic interest in ACRA. This
strategic capital solution allows us the flexibility to simultaneously deploy
capital across multiple accretive avenues, while maintaining a strong financial
position for Athene and its subsidiaries.
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Uses of Capital
Capital deployment includes both the payment for a business opportunity, such as the payment of a ceding commission to enter into a block reinsurance transaction or the payment of cash to acquire our shares on the open market, and the retention of capital based on our internal capital model. Currently, we deploy capital from our retirement services business in four primary ways: (1) supporting organic growth, (2) supporting inorganic growth, (3) making dividend payments to AGM from time to time, and (4) retaining capital to support financial strength ratings upgrades. Athene generally seek returns on its capital deployment of mid-teens or higher.
Internal Reinsurance
Subject to quota shares generally ranging from 80% to 100%, substantially all of the existing deposits held and new deposits generated by Athene's US insurance subsidiaries are reinsured to itsBermuda reinsurance subsidiaries. Athene maintains the same reserving standards for itsBermuda reinsurance subsidiaries as it does for its US insurance subsidiaries. Athene also retrocedes certain inorganic transactions, pension group annuity transactions and certain flow reinsurance transactions to ACRA, and effectiveJanuary 1, 2022 , it began to retrocede a quota share of its retail business to a subsidiary of ACRA. Athene's internal reinsurance structure provides it with several strategic and operational advantages, including the aggregation of regulatory capital, which makes the aggregate capital of itsBermuda reinsurance subsidiaries available to support the risks assumed by each entity, and enhanced operating efficiencies. As a result of its internal reinsurance structure and third-party direct toBermuda business, the significant majority of Athene's aggregate capital is held by itsBermuda reinsurance subsidiaries.
Ratings
As ofMarch 31, 2022 , each of Athene's significant insurance subsidiaries is rated "A" or "A+" by the three rating agencies that evaluate the financial strength of such subsidiaries. To achieve financial strength ratings aspirations in the Retirement Services segment, Athene may choose to retain additional capital above the level required by the rating agencies to support operating needs. Athene believes there are numerous benefits to achieving stronger ratings over time, including increased recognition of and confidence in the financial strength by prospective business partners, particularly within product distribution, as well as potential profitability improvements in certain organic channels though lower funding costs.
Principal Investing
Our Principal Investing segment is comprised of our realized performance fee
income, realized investment income from our balance sheet investments, and
certain allocable expenses related to corporate functions supporting the entire
company. The Principal Investing segment also includes our growth capital and
liquidity resources at AGM. We expect to deploy capital into strategic
investments over time that will help accelerate the growth of our Asset
Management segment, by broadening our investment management and/or product
distribution capabilities or increasing the efficiency of our operations. We
believe these investments will translate into greater compounded annual growth
of Fee Related Earnings.
Given the cyclical nature of performance fees, earnings from our Principal
Investing segment, or Principal Investing Income ("PII"), is inherently more
volatile in nature than earnings from the Asset Management and Retirement
Services segments. We earn fees based on the investment performance of the funds
we manage and compensate our employees, primarily investment professionals, with
a meaningful portion of these proceeds to align our team with the investors in
the funds we manage and incentivize them to deliver strong investment
performance over time. We expect to increase the proportion of performance fee
income we pay to our employees over time, and as such proportion increases, we
expect PII to represent a relatively smaller portion of our total company
earnings.
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The diagram below depicts our current organizational structure following the
Mergers:
[[Image Removed: apo-20220331_g1.jpg]]
Note: The organizational structure chart above depicts a simplified version of the Apollo structure. It does not include all legal entities in the structure. (1)Includes direct and indirect ownership by AGM.
Business Environment
Economic and Market Conditions
Our asset management and retirement services businesses are affected by the condition of global financial markets and the economy. Price fluctuations within equity, credit, commodity, foreign exchange markets, as well as interest rates, which may be volatile and mixed across geographies, can significantly impact the performance of our business including but not limited to the valuation of investments, including those of the funds we manage, and related income we may recognize. We carefully monitor economic and market conditions that could potentially give rise to global market volatility and affect our business operations, investment portfolios and derivatives, which includes global inflation. We have seenU.S. inflation continue to rise during 2022, which has been driven by various factors, including supply chain disruptions, consumer demand, employment levels, low mortgage interest rates and a severely distorted supply/demand housing imbalance, and residential vacancy rates. During the first quarter of 2022, theU.S. Federal Reserve indicated its plan to be more aggressive at the beginning of the tightening cycle to lessen inflation transpiring widely through theU.S. economy, resulting in considerable market volatility. As a result, theFederal Reserve voted to increase the federal funds rate during the first quarter of 2022. TheU.S. Bureau of Labor Statistics reported that the annualU.S. inflation rate increased to 8.5% as ofMarch 31, 2022 , compared to 7.0% as ofDecember 31, 2021 , and continues to be the highest rate since the 1980s. Adverse economic conditions may result from domestic and global economic and political developments, including plateauing or decreasing economic growth and business activity, civil unrest, geopolitical tensions or military action, such as the armed conflict betweenUkraine andRussia and corresponding sanctions imposed bythe United States and other countries, and new or evolving legal and regulatory requirements on business investment, hiring, migration, labor supply and global supply chains. In theU.S. , the S&P 500 Index decreased by 4.9% during the first quarter of 2022, following an increase of 10.6% during the fourth quarter of 2021. Global equity markets have also been impacted, with theMSCI All Country World exUSA Index decreasing 4.7% during the first quarter of 2022, following an increase of 3.2% in the fourth quarter of 2021. 103 --------------------------------------------------------------------------------
Conditions in the credit markets have a significant impact on our business.
Credit markets are negative in 2022, with the BofAML HY Master II Index
decreasing by 4.5%, while the S&P/LSTA Leveraged Loan Index decreased by 0.2%.
The
In terms of economic conditions in theU.S. , theBureau of Economic Analysis reported real GDP decreased at an annual rate of 1.4% in the first quarter of 2022, following an increase of 6.9% in the fourth quarter of 2021. As ofApril 2022 , theInternational Monetary Fund estimated that theU.S. economy will expand by 3.7% in 2022 and 2.3% in 2023. TheU.S. Bureau of Labor Statistics reported that theU.S. unemployment rate decreased to 3.6% as ofMarch 31, 2022 . Foreign exchange rates can materially impact the valuations of our investments and those of the funds we manage that are denominated in currencies other than theU.S. dollar. Relative to theU.S. dollar, the Euro depreciated 2.7% during the quarter, after depreciating 1.8% in the fourth quarter of 2021, while the British pound depreciated 2.9% during the quarter, after appreciating 0.4% in the fourth quarter of 2021. The price of crude oil appreciated by 33.3% during the quarter, after appreciating by 0.2% the fourth quarter of 2021. Although some pressure on oil prices eased in late 2021, oil price per barrel rose during the first quarter, and is expected to continue to rise throughout 2022. Institutional investors continue to allocate capital towards alternative investment managers for more attractive risk-adjusted returns in a low interest rate environment, and we believe the business environment remains generally accommodative to raise larger successor funds, launch new products, and pursue attractive strategic growth opportunities.
Interest Rate Environment
Interest rates are expected to rise in 2022. A period of sharply rising interest
rates could increase the cost of debt financing for the Company, the funds we
manage, as well as their portfolio companies, which can lead to reduced
investment returns and missed investment opportunities. Rising interest rates
may also contribute to a sustained period of decline in the equity markets and
make it more difficult to realize value from investments, including portfolio
investments of the funds we manage.
With respect to Retirement Services, Athene's investment portfolio consists
predominantly of fixed maturity investments. If prevailing interest rates were
to rise, we believe the yield on Athene's new investment purchases may also rise
and Athene's investment income from floating rate investments would increase,
while the value of Athene's existing investments may decline. If prevailing
interest rates were to decline, it is likely that the yield on Athene's new
investment purchases may decline and Athene's investment income from floating
rate investments would decrease, while the value of Athene's existing
investments may increase.
Athene addresses interest rate risk through managing the duration of the
liabilities it sources with assets it acquires through asset liability
management ("ALM") modeling. As part of its investment strategy, Athene
purchases floating rate investments, which we expect would perform well in a
rising interest rate environment and which we expect would underperform in a
declining rate environment, which was experienced in the prior year.
If prevailing interest rates were to rise, we believe Athene's products would be
more attractive to consumers and its sales would likely increase. If prevailing
interest rates were to decline, it is likely that Athene's products would be
less attractive to consumers and Athene's sales would likely decrease. In
periods of prolonged low interest rates, the net investment spread may be
negatively impacted by reduced investment income to the extent that Athene is
unable to adequately reduce policyholder crediting rates due to policyholder
guarantees in the form of minimum crediting rates or otherwise due to market
conditions. A significant majority of Athene's deferred annuity products have
crediting rates that it may reset annually upon renewal following the expiration
of the current guaranteed period. While Athene has the contractual ability to
lower these crediting rates to the guaranteed minimum levels, its willingness to
do so may be limited by competitive pressures.
See Item 3. Quantitative and Qualitative Disclosures About Market Risk, which
includes a discussion regarding interest rate and other significant risks and
our strategies for managing these risks.
Overview of Results of Operations
Key Financials Measures under
The following discussion of key financial measures under
Apollo's asset management business as of
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Revenues Management Fees The significant growth of the assets we manage has had a positive effect on our revenues. Management fees are typically calculated based upon any of "net asset value," "gross assets," "adjusted par asset value," "adjusted costs of all unrealized portfolio investments," "capital commitments," "invested capital," "adjusted assets," "capital contributions," or "stockholders' equity," each as defined in the applicable limited partnership agreement and/or management agreement of the unconsolidated funds or accounts.
Advisory and Transaction Fees, Net
As a result of providing advisory services with respect to actual and potential
investments, we are entitled to receive fees for transactions related to the
acquisition and, in certain instances, disposition and financing of companies,
some of which are portfolio companies of the funds we manage, as well as fees
for ongoing monitoring of portfolio company operations and directors' fees. We
also receive advisory fees for advisory services provided to certain funds. In
addition, monitoring fees are generated on certain structured portfolio company
investments. Under the terms of the limited partnership agreements for certain
funds, the management fee payable by the funds may be subject to a reduction
based on a certain percentage (up to 100%) of such advisory and transaction
fees, net of applicable broken deal costs ("Management Fee Offset"). Such
amounts are presented as a reduction to advisory and transaction fees, net, in
the condensed consolidated statements of operations (see note 2 to our condensed
consolidated financial statements for more detail on advisory and transaction
fees, net).
Performance Fees
The general partners of the funds we manage are entitled to an incentive return
of normally up to 20% of the total returns of a fund's capital, depending upon
performance of the underlying funds and subject to preferred returns and high
water marks, as applicable. Performance fees, categorized as performance
allocations, are accounted for as an equity method investment, and effectively,
the performance fees for any period are based upon an assumed liquidation of the
funds' assets at the reporting date, and distribution of the net proceeds in
accordance with the funds' allocation provisions. Performance fees categorized
as incentive fees, which are not accounted as an equity method investment, are
deferred until fees are probable to not be significantly reversed. The majority
of performance fees are comprised of performance allocations.
As of March 31, 2022 , approximately 52% of the value of our funds' investments
on a gross basis was determined using market-based valuation methods (i.e.,
reliance on broker or listed exchange quotes) and the remaining 48% was
determined primarily by comparable company and industry multiples or discounted
cash flow models. See "Item 1A. Risk Factors-Risks Relating to Our Asset
Management Business-The performance of the funds we manage, and our performance,
may be adversely affected by the financial performance of portfolio companies of
the funds we manage and industries in which the funds we manage invest" in this
report for discussion regarding certain industry-specific risks that could
affect the fair value of our private equity funds' portfolio company
investments.
In our equity strategy funds, the Company does not earn performance fees until
the investors in the fund have achieved cumulative investment returns on
invested capital (including management fees and expenses) in excess of an 8%
hurdle rate. Additionally, certain of our yield and hybrid strategy funds have
various performance fee rates and hurdle rates. Certain of our yield and hybrid
strategy funds allocate performance fees to the general partner in a similar
manner as the equity funds. In our equity, certain yield and hybrid funds, so
long as the investors achieve their priority returns, there is a catch-up
formula whereby the Company earns a priority return for a portion of the return
until the Company's performance fees equate to its incentive fee rate for that
fund; thereafter, the Company participates in returns from the fund at the
performance fee rate. Performance fees, categorized as performance allocations,
are subject to reversal to the extent that the performance fees distributed
exceed the amount due to the general partner based on a fund's cumulative
investment returns. The Company recognizes potential repayment of previously
received performance fees as a general partner obligation representing all
amounts previously distributed to the general partner that would need to be
repaid to the Apollo funds if these funds were to be liquidated based on the
current fair value of the underlying funds' investments as of the reporting
date. The actual general partner obligation, however, would not become payable
or realized until the end of a fund's life or as otherwise set forth in the
respective limited partnership agreement of the fund.
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The table below presents an analysis of Apollo's (i) performance fees receivable
on an unconsolidated basis and (ii) realized and unrealized performance fees:
As of
March 31, 2022 Performance Fees for the Three Months Ended March 31, 2022
Performance Fees
Receivable on an
Unconsolidated
(In millions) Basis Unrealized Realized Total
AIOF I and II $ 15.2 $ (0.8) $ 5.0 $ 4.2
ANRP I, II and III1,2 90.9 1.0 - 1.0
EPF Funds 135.9 0.5 8.6 9.1
FCI Funds 132.2 (7.1) - (7.1)
Fund IX 1,176.0 405.2 54.0 459.2
Fund VIII 653.1 (73.1) - (73.1)
Fund VII1,2 82.5 (18.4) 23.6 5.2
Fund VI 16.1 (0.1) - (0.1)
Fund IV and V 1 - (0.2) - (0.2)
Hybrid Value Fund 122.0 15.9 14.6 30.5
Real Estate Equity Funds1 68.1 24.5 2.9 27.4
Corporate Credit 7.9 1.2 4.4 5.6
Structured Finance and ABS 73.9 3.2 5.1 8.3
Direct Origination 116.8 9.5 9.2 18.7
Other1,3 408.4 81.5 14.0 95.5
Total $ 3,099.0 $ 442.8 $ 141.4 $ 584.2
Total, net of profit sharing payable4/expense $ 1,602.3 $ 252.9 $ (3.5) $
249.4
1 As ofMarch 31, 2022 , certain funds had$80.2 million in general partner obligations to return previously distributed performance fees. The fair value gain on investments and income at the fund level needed to reverse the general partner obligations was$1.3 billion as ofMarch 31, 2022 . 2 As ofMarch 31, 2022 , the remaining investments and escrow cash of ANRP II was valued at 100% of the fund's unreturned capital, which was below the required escrow ratio of 115%. As a result, the fund is required to place in escrow current and future performance fee distributions to the general partner until the specified return ratio of 115% is met (at the time of a future distribution) or upon liquidation. As ofMarch 31, 2022 , ANRP II had$60.8 million of gross performance fees or$38.7 million net of profit sharing, in escrow. With respect to ANRP II, realized performance fees currently distributed to the general partner are limited to potential tax distributions and interest on escrow balances per the fund's partnership agreements. Performance fees receivable as ofMarch 31, 2022 and realized performance fees for the three months endedMarch 31, 2022 include interest earned on escrow balances that is not subject to contingent repayment. 3 Other includes certain SIAs. 4 There was a corresponding profit sharing payable of$1.5 billion as ofMarch 31, 2022 , including profit sharing payable related to amounts in escrow and contingent consideration obligations of$110.5 million . The general partners of certain of our funds accrue performance fees, categorized as performance allocations, when the fair value of investments exceeds the cost basis of the individual investors' investments in the fund, including any allocable share of expenses incurred in connection with such investments, which we refer to as "high water marks." These high water marks are applied on an individual investor basis. Certain of the funds we manage have investors with various high water marks, the achievement of which is subject to market conditions and investment performance. Performance fees from certain funds we manage are subject to contingent repayment by the general partner in the event of future losses to the extent that the cumulative performance fees distributed from inception to date exceeds the amount computed as due to the general partner at the final distribution. These general partner obligations, if applicable, are included in due to related parties on the condensed consolidated statements of financial condition. 106 --------------------------------------------------------------------------------
The following table summarizes our performance fees since inception through
Performance Fees Since Inception1
Total Undistributed Maximum Performance
Undistributed by Distributed by Fund and Distributed by General Partner Fees Subject to
Fund and Recognized and Recognized2 Fund and Recognized3 Obligation3 Potential Reversal4
(in millions)
AIOF I and II $ 15.2 $ 36.6 $ 51.8 $ - $ 36.9
ANRP I, II and III 90.9 156.6 247.5 12.0 113.6
EPF Funds 135.9 455.7 591.6 26.2 326.1
FCI Funds 132.2 24.2 156.4 - 132.2
Fund IX 1,176.0 440.6 1,616.6 - 1,440.2
Fund VIII 653.1 1,638.8 2,291.9 - 1,693.2
Fund VII 82.5 3,181.6 3,264.1 - 27.1
Fund VI 16.1 1,663.9 1,680.0 - 0.3
Fund IV and V - 2,053.1 2,053.1 31.9 0.4
Hybrid Value Fund 122.0 99.7 221.7 - 168.3
Real Estate Equity 68.1 57.8 125.9 - 77.0
Corporate Credit 7.9 925.7 933.6 - 7.8
Structured Finance and ABS 73.9 52.1 126.0 - 68.6
Direct Origination 116.8 62.4 179.2 - 107.6
Other5 408.4 1,610.8 2,019.2 10.1 558.7
Total $ 3,099.0 $ 12,459.6 $ 15,558.6 $ 80.2 $ 4,758.0
1 Certain funds are denominated in Euros and historical figures are translated into U.S. dollars at an exchange rate of €1.00 to $1.11 as of March 31, 2022 .
Certain funds are denominated in pound sterling and historical figures are translated into U.S. dollars at an exchange rate of £1.00 to $1.31 as of March 31,
2022 .
2 Amounts in "Distributed by Fund and Recognized" for the Citi Property Investors ("CPI"), Gulf Stream Asset Management, LLC ("Gulf Stream"), Stone Tower Capital
LLC and its related companies ("Stone Tower") funds and SIAs are presented for activity subsequent to the respective acquisition dates. Amounts exclude certain
performance fees from business development companies and Redding Ridge Holdings LP ("Redding Ridge Holdings "), an affiliate of Redding Ridge.
3 Amounts were computed based on the fair value of fund investments on March 31, 2022 . Performance fees have been allocated to and recognized by the general
partner. Based on the amount allocated, a portion is subject to potential reversal or, to the extent applicable, has been reduced by the general partner
obligation to return previously distributed performance fees at March 31, 2022 . The actual determination and any required payment of any such general partner
obligation would not take place until the final disposition of the fund's investments based on contractual termination of the fund.
4 Represents the amount of performance fees that would be reversed if remaining fund investments became worthless on March 31, 2022 . Amounts subject to potential
reversal of performance fees include amounts undistributed by a fund (i.e., the performance fees receivable), as well as a portion of the amounts that have been
distributed by a fund, net of taxes and not subject to a general partner obligation to return previously distributed performance fees, except for those funds
that are gross of taxes as defined in the respective funds' governing documents.
5 Other includes certain SIAs.
Expenses
Compensation and Benefits
The most significant expense in our asset management business is compensation
and benefits expense. This consists of fixed salary, discretionary and
non-discretionary bonuses, profit sharing expense associated with the
performance fees earned and compensation expense associated with the vesting of
non-cash equity-based awards.
Our compensation arrangements with certain employees contain a significant
performance-based incentive component. Therefore, as our net revenues increase,
our compensation costs rise. Our compensation costs also reflect the increased
investment in people as we expand geographically and create new funds.
In addition, certain professionals and selected other individuals have a profit
sharing interest in the performance fees earned in order to better align their
interests with our own and with those of the investors in funds we manage.
Profit sharing expense is part of our compensation and benefits expense and is
generally based upon a fixed percentage of performance fees. Profit sharing
expense can reverse during periods when there is a decline in performance fees
that were previously recognized. Profit
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sharing amounts are normally distributed to employees after the corresponding
investment gains have been realized and generally before preferred returns are
achieved for the investors. Therefore, changes in our unrealized performance
fees have the same effect on our profit sharing expense. Profit sharing expense
increases when unrealized performance fees increase. Realizations only impact
profit sharing expense to the extent that the effects on investments have not
been recognized previously. If losses on other investments within a fund are
subsequently realized, the profit sharing amounts previously distributed are
normally subject to a general partner obligation to return performance fees
previously distributed back to the funds. This general partner obligation due to
the funds would be realized only when the fund is liquidated, which generally
occurs at the end of the fund's term. However, indemnification obligations also
exist for realized gains with respect to Fund IV, Fund V and Fund VI, which,
although our Former Managing Partners and Contributing Partners would remain
personally liable, may indemnify our Former Managing Partners and Contributing
Partners for 17.5% to 100% of the previously distributed profits regardless of
the fund's future performance. See note 16 to our condensed consolidated
financial statements for further information regarding the Company's
indemnification liability.
The Company grants equity awards to certain employees, including RSUs,
restricted shares of common stock and options, that generally vest and become
exercisable in quarterly installments or annual installments depending on the
award terms. In some instances, vesting of an RSU is also subject to the
Company's receipt of performance fees, within prescribed periods, sufficient to
cover the associated equity-based compensation expense. See note 13 to our
condensed consolidated financial statements for further discussion of
equity-based compensation.
Other expenses
The balance of our other expenses includes interest, placement fees, and general, administrative and other operating expenses. Interest expense consists primarily of interest related to the 2024 Senior Notes, the 2026 Senior Notes, the 2029 Senior Notes, the 2030 Senior Notes, the 2048 Senior Notes and the 2050 Subordinated Notes as discussed in note 12 to our condensed consolidated financial statements. Placement fees are incurred in connection with our capital raising activities. In cases where the limited partners of the funds are determined to be the customer in an arrangement, placement fees may be capitalized as a cost to acquire a customer contract, and amortized over the life of the customer contract. General, administrative and other expenses includes occupancy expense, depreciation and amortization, professional fees and costs related to travel, information technology and administration. Occupancy expense represents charges related to office leases and associated expenses, such as utilities and maintenance fees. Depreciation and amortization of fixed assets is normally calculated using the straight-line method over their estimated useful lives, ranging from two to sixteen years, taking into consideration any residual value. Leasehold improvements are amortized over the shorter of the useful life of the asset or the expected term of the lease. Intangible assets are amortized based on the future cash flows over the expected useful lives of the assets. Other Income (Loss)
Net gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in our investment portfolio between the opening reporting date and the closing reporting date. Net unrealized gains (losses) are a result of changes in the fair value of unrealized investments and reversal of unrealized gains (losses) due to dispositions of investments during the reporting period. Significant judgment and estimation goes into the assumptions that drive these models and the actual values realized with respect to investments could be materially different from values obtained based on the use of those models. The valuation methodologies applied impact the reported value of investment company holdings and their underlying portfolios in our condensed consolidated financial statements.
Entities
Changes in the fair value of the consolidated VIEs' assets and liabilities and related interest, dividend and other income and expenses subsequent to consolidation are presented within net gains (losses) from investment activities of consolidated variable interest entities and are attributable to non-controlling interests in the condensed consolidated statements of operations.
Other Income (Losses), Net
Other income (losses), net includes gains (losses) arising from the
remeasurement of foreign currency denominated assets and liabilities,
remeasurement of the tax receivable agreement liability and other miscellaneous
non-operating income and expenses.
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Key Financials Measures under
The following discussion of key financial measures under
Apollo's retirement services business which is operated by Athene as of
Revenues Premiums
Premiums for long-duration contracts, including products with fixed and
guaranteed premiums and benefits, are recognized as revenue when due from
policyholders. Insurance revenues are reported net of amounts ceded.
Product charges
Revenues for universal life-type policies and investment contracts, including
surrender and market value adjustments, costs of insurance, policy
administration, GMDB, GLWB and no-lapse guarantee charges, are earned when
assessed against policyholder account balances during the period.
Net investment income
Net investment income is a significant component of Athene's total revenues. Athene recognizes investment income as it accrues or is legally due, net of investment management and custody fees. Investment income on fixed maturity securities includes coupon interest, as well as the amortization of any premium and the accretion of any discount. Investment income on equity securities represents dividend income and preferred coupons interest.
Investment related gains (losses)
Investment related gains (losses) primarily consist of (i) realized gains and losses on sales of investments, (ii) unrealized gains or losses relating to identified risks within AFS securities in fair value hedging relationships, (iii) gains and losses on trading securities, (iv) change in the fair value of the embedded derivatives and derivatives not designated as a hedge, and (v) allowance for expected credit losses recorded through credit loss expense.
Expenses
Interest sensitive contract benefits
Universal life-type policies and investment contracts include fixed indexed and traditional fixed annuities in the accumulation phase, funding agreements, universal life insurance, fixed indexed universal life insurance and immediate annuities without significant mortality risk (which includes pension group annuities without life contingencies). Liabilities for traditional fixed annuities, universal life insurance and funding agreements are carried at the account balances without reduction for potential surrender or withdrawal charges, except for a block of universal life business ceded to Global Atlantic which is carried at fair value. Fixed indexed annuities and fixed indexed universal life insurance contracts contain an embedded derivative. Benefits reserves for fixed indexed annuities and fixed indexed universal life insurance contracts are reported as the sum of the fair value of the embedded derivative and the host (or guaranteed) component of the contracts. Liabilities for immediate annuities without significant mortality risk are calculated as the present value of future liability cash flows and policy maintenance expenses discounted at contractual interest rates. Changes in the interest sensitive contract liabilities, excluding deposits and withdrawals, are recorded in interest sensitive contract benefits or product charges on the condensed consolidated statements of operations.
Future policy and other policy benefits
Athene issues contracts classified as long-duration, which includes term and
whole life, accident and health, disability, and deferred and immediate
annuities with life contingencies (which includes pension group annuities with
life contingencies). Liabilities for non-participating long-duration contracts
are established using accepted actuarial valuation methods which require the use
of assumptions related to expenses, investment yields, mortality, morbidity and
persistency at the date of issue or acquisition.
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Changes in future policy benefits other than the adjustment for the OCI effects
of unrealized investment gains and losses on AFS securities, are recorded in
future policy and other policy benefits on the condensed consolidated statements
of operations.
Amortization of deferred acquisition costs, deferred sales inducements, and
value of business acquired
Costs related directly to the successful acquisition of new or renewal insurance or investment contracts are deferred to the extent they are recoverable from future premiums or gross profits. These costs consist of commissions and policy issuance costs, as well as sales inducements credited to policyholder account balances. Deferred costs related to investment contracts without significant revenue streams from sources other than investment of the policyholder funds are amortized using the effective interest method. Deferred costs related to universal life-type policies and investment contracts with significant revenue streams from sources other than investment of the policyholder funds are amortized over the lives of the policies, based upon the proportion of the present value of actual and expected deferred costs to the present value of actual and expected gross profits to be earned over the life of the policies. VOBA associated with acquired contracts is amortized in relation to applicable policyholder liabilities.
Policy and other operating expenses
Policy and other operating expenses includes normal operating expenses, policy acquisition expenses, interest expense, dividends to policyholders, integration, restructuring and other non-operating expenses, and stock compensation expenses.
Other Key Financial Measures under
Income Taxes
Significant judgment is required in determining the provision for income taxes and in evaluating income tax positions, including evaluating uncertainties. We recognize the income tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the positions. The tax benefit is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If a tax position is not considered more likely than not to be sustained, then no benefits of the position are recognized. The Company's income tax positions are reviewed and evaluated quarterly to determine whether or not we have uncertain tax positions that require financial statement recognition or de-recognition. Deferred tax assets and liabilities are recognized for the expected future tax consequences, using currently enacted tax rates, of differences between the carrying amount of assets and liabilities and their respective tax basis. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Non-Controlling Interests
For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than Apollo. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in non-controlling interests in the condensed consolidated financial statements. non-controlling interests primarily include limited partner interests in certain consolidated funds and VIEs. Prior to the Mergers onJanuary 1, 2022 , the non-controlling interests relating toApollo Global Management, Inc. also included the ownership interest in theApollo Operating Group held by theFormer Managing Partners andContributing Partners through their limited partner interests inAP Professional Holdings, L.P. and the non-controlling interest in theApollo Operating Group held by Athene. The authoritative guidance for non-controlling interests in the condensed consolidated financial statements requires reporting entities to present non-controlling interest as equity and provides guidance on the accounting for transactions between an entity and non-controlling interests. According to the guidance, (1) non-controlling interests are presented as a separate component of stockholders' equity on the Company's condensed consolidated statements of financial condition, (2) net income (loss) includes the net income (loss) attributable to the non-controlling interest holders on the Company's condensed consolidated statements of operations, (3) the primary components of non-controlling interest are separately presented in the Company's condensed consolidated statements of changes in stockholders' equity to clearly distinguish the interests in theApollo Operating Group 110 --------------------------------------------------------------------------------
and other ownership interests in the consolidated entities and (4) profits and
losses are allocated to non-controlling interests in proportion to their
ownership interests regardless of their basis.
Results of Operations
Below is a discussion of our condensed consolidated results of operations for the three months endedMarch 31, 2022 and 2021. For additional analysis of the factors that affected our results at the segment level, see "-Segment Analysis" below: For the Three Months ended March 31, Total Percentage 2022 2021 Change Change (In millions) Revenues Asset Management Management fees $ 336$ 457 $ (121) (26.5)% Advisory and transaction fees, net 66 56 10 17.9 Investment income 701 1,778 (1,077) (60.6) Incentive fees 6 4 2 50.0 1,109 2,295 (1,186) (51.7) Retirement Services Premiums 2,110 - 2,110 NM Product charges 166 - 166 NM Net investment income 1,731 - 1,731 NM Investment related gains (losses) (4,217) - (4,217) NM Revenues of consolidated variable interest entities (21) - (21) NM Other revenues (3) - (3) NM (234) - (234) NM Total Revenues 875 2,295 (1,420) (61.9) Expenses Asset Management Compensation and benefits: Salary, bonus and benefits 218 176 42 23.9 Equity-based compensation 156 56 100 178.6 Profit sharing expense 360 655 (295) (45.0) Total compensation and benefits 734 887 (153) (17.2) Interest expense 32 35 (3) (8.6) General, administrative and other 148 100 48 48.0 914 1,022 (108) (10.6) Retirement Services Interest sensitive contract benefits (41) - (41) NM Future policy and other policy benefits 2,085 - 2,085 NM
Amortization of deferred acquisition costs, deferred
sales inducements and value of business acquired
125 - 125 NM
Policy and other operating expenses 308 - 308 NM
2,477 - 2,477 NM
Total Expenses 3,391 1,022 2,369 231.8
Other income (loss) - Asset Management
Net gains from investment activities 34 353 (319) (90.4)
Net gains from investment activities of consolidated
variable interest entities
367 113 254 224.8 Other income (loss), net (23) (17) (6) 35.3 Total Other Income (Loss) 378 449 (71) (15.8)
Income (loss) before income tax (provision) benefit (2,138)
1,722 (3,860) NM Income tax (provision) benefit 608 (203) 811 NM Net income (loss) (1,530) 1,519 (3,049) NM Net (income) loss attributable to non-controlling interests 660 (840) 1,500 NM Net income (loss) attributable to Apollo Global Management, Inc. (870) 679 (1,549) NM Preferred stock dividends - (9) 9 (100.0) Net income (loss) available to Apollo Global Management, Inc. Common Stockholders$ (870) $ 670 $ (1,540) NM
Note: "NM" denotes not meaningful. Changes from negative to positive amounts and positive to negative amounts are not considered
meaningful. Increases or decreases from zero and changes greater than 500% are also not considered meaningful.
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In this section, references to 2022 refer to the three months ended
2022
Asset Management
Revenues
Revenues were$1.1 billion in 2022, a decrease of$1.2 billion from$2.3 billion in 2021 due to lower investment income and management fees. The decrease in investment income was due to a decrease in performance allocations as a result of equity market volatility in 2022. Performance allocations were higher in 2021 due to fund appreciation leading to higher unrealized performance allocation gains. Management fees in both 2022 and 2021 were primarily driven by the yield funds due to Fee-Generating AUM inflows from our Perpetual Capital Vehicles. The decrease in management fees in 2022 is due to the elimination of management fees, in consolidation, between Apollo and Athene as a result of the Mergers.
Expenses
Expenses were$0.9 billion in 2022, a decrease of$108 million from$1.0 billion in 2021 due to a decrease in profit sharing expense of$295 million resulting from lower performance allocations during 2022. In any period, the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance allocations in the period. This decrease was partially offset by increases in equity-based compensation of$100 million and an increase in salary, bonus and benefits of$42 million due to accelerated headcount growth in 2021, including for certain senior level roles, as the Company strategically invests in talent that will seek to capture its next leg of growth. In addition, equity-based compensation increased as a result of: i) performance grants which are tied to the Company's receipt of performance fees, within prescribed periods and are typically recognized on an accelerated recognition method over the requisite service period to the extent the performance revenue metrics are met or deemed probable, and ii) the impact of one-time grants awarded to the Co-Presidents which vest on a cliff basis subject to continued employment over five years and the Company's achievement of FRE and SRE per share.
General, administrative and other expenses were
increase of
driven by increases in professional fees, travel and entertainment expenses, and
absorption of occupancy and technology expenses to support the Company's
increased headcount.
Other Income (Loss)
Other Income (loss) was$378 million in 2022, a decrease of$71 million from$449 million in 2021. This decrease was primarily attributable to a decrease in net gains from investment activities, largely offset by an increase in net gains earned from investment activities of consolidated VIEs. Net gains from investment activities in 2021 were primarily attributable to a gain from Apollo's investment in Athene during 2021.
Retirement Services
Revenues
Retirement Services revenues were$(234) million in 2022. Revenues were adversely impacted by investment related gains and losses, partially offset by pension group annuity premiums and net investment income. Investment related losses of$4.2 billion were primarily driven by unfavorable changes in the fair value of reinsurance assets, mortgage loans, trading securities, FIA hedging derivatives and provision for credit losses as well as realized losses on AFS securities. These were mainly driven by the increase inU.S. Treasury rates and credit spread widening as well as the unfavorable equity market impact decreasing the FIA hedging derivatives.
Expenses
Retirement Services expenses were$2.5 billion in 2022. Expenses were primarily driven by pension group annuity obligations, interest credited to policyholders and policy and other operating expenses, partially offset by the favorable change in FIA embedded derivatives. 112 --------------------------------------------------------------------------------
Income Tax Provision
The income tax benefit (provision) totaled$608 million and$(203) million in 2022 and 2021, respectively. The change was primarily related to the decrease in pre-tax income and a tax benefit from the derecognition of a deferred tax liability related to the Mergers. The provision for income taxes includes federal, state, local and foreign income taxes resulting in an effective income tax rate of 28.4% and 11.8% for 2022 and 2021, respectively. The most significant reconciling items between theU.S. federal statutory income tax rate and the effective income tax rate were due to the following: (i) a benefit realized from the derecognition of a deferred tax liability related to the Company's historical holdings in Athene (ii) foreign, state and local income taxes, including NYC UBT, (iii) income passed through to non-controlling interests and (iv) equity-based compensation net of the limiting provisions for executive compensation under Internal Revenue Code Section 162(m) (see note 11 to the condensed consolidated financial statements for further details regarding the Company's income tax provision).
Managing Business Performance - Key Segment and Non-
Measures
We believe that the presentation of Adjusted Segment Income supplements a
reader's understanding of the economic operating performance of each of our
segments.
Adjusted Segment Income and Adjusted Net Income
Adjusted Segment Income, or "ASI", is the key performance measure used by
management in evaluating the performance of the Asset Management, Retirement
Services, and Principal Investing segments. Adjusted Net Income ("ANI")
represents Adjusted Segment Income less HoldCo interest and other financing
costs and estimated income taxes. For purposes of calculating the Adjusted Net
Income tax rate, Adjusted Segment Income is reduced by Holdco interest and
financing costs. Income taxes on FRE and PII represents the total current
corporate, local, and non-U.S. taxes as well as the current payable under
Apollo's tax receivable agreement. Income taxes on FRE and PII excludes the
impacts of deferred taxes and the remeasurement of the tax receivable agreement,
which arise from changes in estimated future tax rates. Certain assumptions and
methodologies that impact the implied FRE and PII income tax provision are
similar to those used under U.S. GAAP. Specifically, certain deductions
considered in the income tax provision under U.S. GAAP relating to transaction
related charges, equity-based compensation, and tax deductible interest expense
are taken into account for the implied tax provision. Income Taxes on SRE
represent the total current and deferred tax expense or benefit on income before
taxes adjusted to eliminate the impact of the tax expense or benefit associated
with the non-operating adjustments. Management believes the methodologies used
to compute income taxes on FRE, SRE, and PII are meaningful to each segment and
increases comparability of income taxes between periods.
We believe that ASI is helpful for an understanding of our business and that
investors should review the same supplemental financial measure that management
uses to analyze our segment performance. This measure supplements and should be
considered in addition to and not in lieu of the results of operations discussed
below in "-Overview of Results of Operations" that have been prepared in
accordance with U.S. GAAP. See note 18 to the condensed consolidated financial
statements for more details regarding the components of ASI and management's
consideration of ASI.
Fee Related Earnings, Spread Related Earnings and Principal Investing Income
Fee Related Earnings, or "FRE", is a component of ASI that is used as a
supplemental performance measure to assess the performance of the Asset
Management segment.
Spread Related Earnings, or "SRE", is a component of ASI that is used as a
supplemental performance measure to assess the performance of the Retirement
Services segment, excluding certain market volatility and certain expenses
related to integration, restructuring, equity-based compensation, and other
expenses.
Principal Investing Income, or "PII", is a component of ASI that is used as a
supplemental performance measure to assess the performance of the Principal
Investing segment.
See note 18 to the condensed consolidated financial statements for more details
regarding the components of FRE, SRE, and PII.
We use ASI, ANI, FRE, SRE and PII as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation or as a substitute for net income or other income data prepared in accordance withU.S. GAAP. The use of these measures without consideration of their relatedU.S. GAAP measures is not adequate due to the adjustments described above. 113 --------------------------------------------------------------------------------
Net Invested Assets
In managing its business, Athene analyzes net invested assets, which does not correspond to total Athene investments, including investments in related parties on the consolidated statements of financial condition. Net invested assets represents the investments that directly back its net reserve liabilities as well as surplus assets. Net invested assets is used in the computation of net investment earned rate, which is used to analyze the profitability of Athene's investment portfolio. Net invested assets includes (a) total investments on the consolidated statements of financial condition with AFS securities at cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) VIE assets, liabilities and non-controlling interest adjustments, (f) net investment payables and receivables, (g) policy loans ceded (which offset the direct policy loans in total investments) and (h) an allowance for credit losses. Net invested assets also excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). Athene includes the underlying investments supporting its assumed funds withheld and modco agreements in its net invested assets calculation in order to match the assets with the income received. Athene believes the adjustments for reinsurance provide a view of the assets for which it has economic exposure. Net invested assets includes Athene's proportionate share of ACRA investments, based on Athene's economic ownership, but does not include the proportionate share of investments associated with the non-controlling interest. Net invested assets are averaged over the number of quarters in the relevant period to compute a net investment earned rate for such period. While Athene believes net invested assets is a meaningful financial metric and enhances the understanding of the underlying drivers of its investment portfolio, it should not be used as a substitute for Athene's total investments, including related parties, presented underU.S. GAAP. Segment Analysis Discussed below are our results of operations for each of our reportable segments. They represent the segment information available and utilized by management to assess performance and to allocate resources. See note 18 to our condensed consolidated financial statements for more information regarding our segment reporting.
In this section, references to 2022 refer to the three months ended
2022
references to 2020 refer to the three months ended
Asset Management
The following table presents Fee Related Earnings, the performance measure of
our Asset Management segment.
Three months ended March 31,
2022 2021 Total Change Percentage Change
(In millions)
Asset Management:
Management fees - Yield $ 333.4 $ 281.1 $ 52.3 18.6%
Management fees - Hybrid 48.3 39.2 9.1 23.2
Management fees - Equity 123.7 133.6 (9.9) (7.4)
Management fees 505.4 453.9 51.5 11.3
Advisory and transaction fees, net 64.1 55.4 8.7 15.7
Fee-related performance fees 14.2 8.8 5.4 61.4
Fee-related compensation (175.4) (154.4) (21.0) 13.6
Other operating expenses (98.3) (62.0) (36.3) 58.5
Fee Related Earnings (FRE) $ 310.0 $ 301.7 $ 8.3 2.8
114
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Three months ended March 31,
2021 2020 Total Change Percentage Change
(In millions)
Asset Management:
Management fees - Yield $ 281.1 $ 214.5 $ 66.6 31.0%
Management fees - Hybrid 39.2 30.1 9.1 30.2
Management fees - Equity 133.6 137.8 (4.2) (3.0)
Management fees 453.9 382.4 71.5 18.7
Advisory and transaction fees, net 55.4 36.7 18.7 51.0
Fee-related performance fees 8.8 2.4 6.4 266.7
Fee-related compensation (154.4) (118.5) (35.9) 30.3
Other operating expenses (62.0) (62.1) 0.1 (0.2)
Fee Related Earnings (FRE) $ 301.7 $ 240.9 $ 60.8 25.2
FRE was $310.0 million in 2022, an increase of $8.3 million compared to $301.7
million in 2021. This increase was primarily attributable to continued growth in
management fees and advisory and transaction fees. The increase in management
fees was driven by our yield funds due to increased Fee-Generating AUM inflows
primarily from Perpetual Capital Vehicles. The growth in revenues was offset, in
part, by higher fee-related compensation expenses and other operating expenses
as we continue to invest in our talent, expand our global team, and absorb
occupancy and technology costs.
FRE was $301.7 million in 2021, an increase of $60.8 million compared to $240.9
million in 2020. This increase was primarily attributable to growth in
management fees and advisory and transaction fees. The increase in management
fees was primarily driven by our yield funds due to increased Fee-Generating AUM
inflows primarily from Perpetual Capital Vehicles. The growth in revenues was
offset, in part, by higher fee-related compensation expense due to an increase
in headcount as we continued to expand our global team in 2021.
115
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Asset Management Operating Metrics
We monitor certain operating metrics that are common to the alternative asset management industry and directly impact the performance of our Asset Management segment. These operating metrics include Assets Under Management, gross capital deployment and uncalled commitments.
Assets Under Management
The following presents Apollo's Total AUM and Fee-Generating AUM by investing
strategy (in billions):
[[Image Removed: apo-20220331_g2.jpg]] [[Image Removed: apo-20220331_g3.jpg]]
The following presents Apollo's AUM with Future Management Fee Potential by
investing strategy (in billions):
[[Image Removed: apo-20220331_g4.jpg]]
116
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The following tables present the components of Performance Fee-Eligible AUM for
each of Apollo's three investing strategies:
As of March 31, 2022
Yield Hybrid Equity Total
(In millions)
Performance Fee-Generating AUM 1 $ 37,000 $ 18,187
AUM Not Currently Generating Performance Fees 7,637 6,250
4,231 18,118
Uninvested Performance Fee-Eligible AUM 4,396 14,896
18,711 38,003
Total Performance Fee-Eligible AUM$ 49,033 $ 39,333 $ 64,424 $ 152,790 As of March 31, 2021 Yield Hybrid Equity Total (In millions) Performance Fee-Generating AUM 1$ 31,302 $ 15,061 $ 35,898 82,261 AUM Not Currently Generating Performance Fees 6,760 4,701 3,147 14,608 Uninvested Performance Fee-Eligible AUM 2,526 15,113 28,323 45,962 Total Performance Fee-Eligible AUM$ 40,588 $ 34,875 $ 67,368 142,831 As of December 31, 2021 Yield Hybrid Equity Total (In millions) Performance Fee-Generating AUM 1$ 37,756 $ 17,663 $ 37,447 $ 92,866 AUM Not Currently Generating Performance Fees 2,355 4,971 3,614 10,940 Uninvested Performance Fee-Eligible AUM 2,644 16,478 21,075 40,197 Total Performance Fee-Eligible AUM$ 42,755 $
39,112
1 Performance Fee-Generating AUM of
and
periods when the fees are probable to not be significantly reversed.
The components of Fee-Generating AUM by investing strategy are presented below:
As of March 31, 2022
Yield Hybrid Equity Total
(In millions)
Fee-Generating AUM based on capital commitments $ - $ 3,580 $ 27,348 $ 30,928
Fee-Generating AUM based on invested capital 2,448 7,533 12,790 22,771
Fee-Generating AUM based on gross/adjusted assets 275,373 4,913 546 280,832
Fee-Generating AUM based on NAV 33,497 7,475 216 41,188
Total Fee-Generating AUM $ 311,318 $
23,501
1 The weighted average remaining life of the traditional private equity funds as of
As of March 31, 2021
Yield Hybrid Equity Total
(In millions)
Fee-Generating AUM based on capital commitments $ 100 $ 2,150 $ 30,764 $ 33,014
Fee-Generating AUM based on invested capital 1,622 6,073 13,376 21,071
Fee-Generating AUM based on gross/adjusted assets 252,582 3,038 994 256,614
Fee-Generating AUM based on NAV 27,161 7,115 271 34,547
Total Fee-Generating AUM $ 281,465 $
18,376
1 The weighted average remaining life of the traditional private equity funds at
117 --------------------------------------------------------------------------------
As of December 31, 2021
Yield Hybrid Equity Total
(In millions)
Fee-Generating AUM based on capital commitments $ - $ 3,580 $ 27,277 $ 30,857
Fee-Generating AUM based on invested capital 2,321 6,826 12,075 21,222
Fee-Generating AUM based on gross/adjusted assets 273,695 4,293 406 278,394
Fee-Generating AUM based on NAV 31,290 7,146 192 38,628
Total Fee-Generating AUM $ 307,306 $
21,845 1
1 The weighted average remaining life of the traditional private equity funds as of
Apollo, through its consolidated subsidiary, ISG, provides asset management
services to Athene with respect to assets in the accounts owned by or related to
Athene ("Athene Accounts"), including asset allocation services, direct asset
management services, asset and liability matching management, mergers and
acquisitions, asset diligence, hedging and other asset management services and
receives management fees for providing these services. The Company, through ISG,
also provides sub-allocation services with respect to a portion of the assets in
the Athene Accounts. Apollo, through its asset management business, managed or
advised $217.6 billion , $212.6 billion , and $185.8 billion of AUM on behalf of
Athene as of March 31, 2022 , December 31, 2021 and March 31, 2021 , respectively.
Apollo, through ISGI, provides investment advisory services with respect to
certain assets in certain portfolio companies of Apollo funds and sub-advises
the Athora Accounts and broadly refers to "Athora Sub-Advised" assets as those
assets in the Athora Accounts which the Company explicitly sub-advises as well
as those assets in the Athora Accounts which are invested directly in funds and
investment vehicles Apollo manages. The Company refers to the portion of the
Athora AUM that is not Athora Sub-Advised AUM as "Athora Non-Sub Advised" AUM.
See note 16 to the condensed consolidated financial statements for more details
regarding the fee arrangements with respect to the assets in the Athora
Accounts. Apollo managed or advised $54.8 billion , $59.0 billion , and $61.5
billion of AUM on behalf of Athora as of March 31, 2022 , December 31, 2021 and
March 31, 2021 , respectively.
The following tables summarize changes in total AUM for each of Apollo's three
investing strategies:
For the Three Months ended March 31,
2022 2021
Yield Hybrid Equity Total Yield Hybrid Equity Total
(In millions)
Change in Total AUM(1): Beginning of Period$ 360,289 $ 52,772 $ 84,491 $ 497,552 $ 332,880 $ 42,317 $ 80,289 $ 455,486 Inflows 26,859 2,439 1,359 30,657 11,628 2,806 889 15,323 Outflows(2) (9,547) (453) - (10,000) (7,645) (196) (58) (7,899) Net Flows 17,312 1,986 1,359 20,657 3,983 2,610 831 7,424 Realizations (626) (1,640) (2,246) (4,512) (477) (936) (2,298) (3,711) Market Activity(3) (4,279) 622 2,803 (854) (7,603) 1,451 8,091 1,939 End of Period$ 372,696 $ 53,740 $ 86,407 $ 512,843 $ 328,783 $ 45,442 $ 86,913 $ 461,138 1 At the individual segment level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions, and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income. 2 Outflows for Total AUM include redemptions of$0.6 billion and$0.7 billion during the three months endedMarch 31, 2022 and 2021, respectively. 3 Includes foreign exchange impacts of$(2.5) billion and$(3.3) billion , during the three months endedMarch 31, 2022 and 2021, respectively.
Three Months Ended
Total AUM was$512.8 billion atMarch 31, 2022 , an increase of$15.3 billion , or 3.1%, compared to$497.6 billion atDecember 31, 2021 . The net increase was primarily due to subscriptions across the platform and growth of our retirement services AUM. More specifically, the net increase was due to:
•Net flows of
118 -------------------------------------------------------------------------------- •a$17.3 billion increase related to funds we manage in our yield strategy primarily consisting of (i)$9.7 billion of subscriptions mostly related to the corporate credit funds we manage and (ii) a$3.8 billion related to the growth of our retirement services clients; •a$2.0 billion increase related to funds we manage in our hybrid strategy primarily due to subscriptions across the hybrid credit and hybrid value funds we manage; and •a$1.4 billion increase related to funds we manage in the equity strategy. •Realizations of$(4.5) billion primarily related to: •$(1.6) billion related to funds we manage in our hybrid strategy primarily consisting of distributions from the illiquid opportunistic and hybrid credit funds we manage; and •$(2.2) billion related to funds we manage in our equity strategy primarily consisting of distributions across our Core PE funds. •Market activity of$(0.9) billion , primarily related to: •$(4.3) billion related to funds we manage in our yield strategy primarily consisting of$(3.0) billion relating to Athene andAthora and$(1.2) billion relating to our corporate credit funds; •$0.6 billion related to funds we managed in our hybrid strategy primarily across our hybrid value funds; and •$2.8 billion related to fund we manage in our equity strategy primarily due to an increase in Fund IX.
The following tables summarize changes in Fee-Generating AUM for each of
Apollo's three investing strategies:
For
the Three Months ended
2022 2021
Yield Hybrid Equity Total Yield Hybrid Equity Total
(In millions)
Change in Fee-Generating AUM(1):
Beginning of Period $ 307,306 $ 21,845 $ 39,950 $ 369,101 $ 285,830 $ 17,622 $ 45,222 $ 348,674
Inflows 16,453 2,510 1,309 20,272 9,335 1,701 438 11,474
Outflows(2) (8,773) (299) (70) (9,142) (6,334) (978) (83) (7,395)
Net Flows 7,680 2,211 1,239 11,130 3,001 723 355 4,079
Realizations (309) (582) (263) (1,154) (309) (359) (149) (817)
Market Activity(3) (3,359) 27 (26) (3,358) (7,057) 390 (23) (6,690)
End of Period $ 311,318 $ 23,501 $ 40,900 $ 375,719 $ 281,465 $ 18,376 $ 45,405 $ 345,246
1 At the individual strategy level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions
and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations
represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income.
2 Outflows for Fee-Generating AUM include redemptions of $0.4 billion and $0.7 billion during the three months ended March 31, 2022 and 2021, respectively.
3 Includes foreign exchange impacts of $(1.9) billion and $(2.8) billion , during the three months ended March 31, 2022 and 2021, respectively.
Three Months Ended
Total Fee-Generating AUM was$375.7 billion atMarch 31, 2022 , an increase of$6.6 billion , or 1.8%, compared to$369.1 billion atDecember 31, 2021 . The net increase was primarily due to growth of our retirement services AUM, fundraising, and deployment. More specifically, the net increase was due to: •Net flows of$11.1 billion primarily related to: •a$7.7 billion increase related to funds we manage in our yield strategy primarily consisting of (i) a$4.9 billion increase in AUM related to the growth of our retirement services clients, (ii)$2.4 billion of fee-generating capital deployment and (iii)$1.8 billion of subscriptions mostly related to the corporate credit funds we manage; and •a$2.2 billion increase related to funds we manage in our hybrid strategy primarily due to fee-generating capital deployment. •Net flows were offset by: •$(3.4) billion of market activity related to funds we manage in our yield strategy primarily consisting of$(2.1) billion relating to Athene andAthora and$(1.1) billion relating to our corporate credit funds; and 119 --------------------------------------------------------------------------------
•$(1.2) billion realizations primarily related to the funds we manage in the
hybrid strategy.
Gross Capital Deployment and Uncalled Commitments
Gross capital deployment represents the gross capital that has been invested in investments by the funds and accounts we manage during the relevant period, but excludes certain investment activities primarily related to hedging and cash management functions at the firm. Gross Capital Deployment is not reduced or netted down by sales or refinancings, and takes into account leverage used by the funds and accounts we manage in gaining exposure to the various investments that they have made. Uncalled commitments, by contrast, represent unfunded capital commitments that certain of Apollo's funds have received from fund investors to fund future or current fund investments and expenses. Gross capital deployment and uncalled commitments are indicative of the pace and magnitude of fund capital that is deployed or will be deployed, and which therefore could result in future revenues that include management fees, transaction fees and performance fees to the extent they are fee-generating. Gross capital deployment and uncalled commitments can also give rise to future costs that are related to the hiring of additional resources to manage and account for the additional capital that is deployed or will be deployed. Management uses gross capital deployment and uncalled commitments as key operating metrics since we believe the results are measures of investment activities of the funds we manage.
The following presents gross capital deployment and uncalled commitments (in
billions):
[[Image Removed: apo-20220331_g5.jpg]] [[Image Removed: apo-20220331_g6.jpg]]
As ofMarch 31, 2022 andDecember 31, 2021 , Apollo had$47.9 billion and$47.2 billion of dry powder, respectively, which represents the amount of capital available for investment or reinvestment subject to the provisions of the applicable limited partnership agreements or other governing agreements of the funds, partnerships and accounts we manage. These amounts exclude uncalled commitments which can only be called for fund fees and expenses and commitments from Perpetual Capital Vehicles.
Retirement Services
The following table presents Spread Related Earnings, the performance measure of
our Retirement Services segment.
120 --------------------------------------------------------------------------------
Three months ended March 31, 2022
(In millions)
Retirement Services:
Fixed income and other investment income, net $
1,206.8
Alternative investment income, net
447.7
Strategic capital management fees 12.4 Cost of funds (826.4) Net investment spread 840.5 Other operating expenses (108.7) Interest and other financing costs
(61.6)
Spread Related Earnings (SRE) $
670.2
SRE was$670 million in 2022. SRE is comprised of investment income from Athene's fixed income and other and alternative portfolios as well as strategic capital management fees less cost of funds on Athene's liabilities, other operating expenses, and interest and other financing costs. SRE in 2022 was mainly attributed to fixed income and other investment income and strong alternative investment income, partially offset by cost of funds, other operating expenses and financing costs. Fixed income and other investment income benefited from strong growth in organic inflows. As a result of purchase accounting, the book value of Athene's investment portfolio was marked up to fair value resulting in an adverse impact to fixed income and other investment income. Alternative investment income benefited from strong performance throughout the portfolio, including healthy returns on real estate, private equity, Venerable,Athora and Wheels/Donlen. Cost of funds was primarily driven by interest credited and option costs on annuity products, pension group annuity benefits, income rider reserve and DAC and VOBA amortization as well as other liability costs. As a result of purchase accounting, Athene marked its reserve liabilities to fair value resulting in a favorable impact to cost of funds. Net Investment Spread Three months endedMarch 31, 2022 Fixed income and other investment earned rate 2.83 % Alternative investment earned rate 16.61 % Net investment earned rate 3.65 % Strategic capital management fees 0.03 % Cost of funds (1.82) % Net investment spread 1.86 % Net investment earned rate of 3.65% in 2022, is comprised of a fixed income and other net investment earned rate of 2.83% and alternative investment earned rate of 16.61%. The fixed income earned rate was adversely impacted by unfavorable purchase accounting impacts. The alternative investment earned rate was driven by strong performance throughout Athene's portfolio.
Strategic capital management fees of 0.03% in 2022 is comprised of a management
fee for ADIP's portion of the business ceded to ACRA.
Cost of funds of 1.82% in 2022, was primarily driven by interest credited and option costs on annuity products, pension group annuity benefits, income rider reserve and DAC and VOBA amortization, as well as other liability costs. As a result of purchase accounting, Athene marked its reserve liabilities to fair value. Cost of funds was favorably impacted by these purchase accounting adjustments as well as favorable actuarial experience.
Investment Portfolio
Athene had investments, including related parties and VIEs, of$214.2 billion as ofMarch 31, 2022 . Athene's investment strategy seeks to achieve sustainable risk-adjusted returns through the disciplined management of its investment portfolio against its long-duration liabilities, coupled with the diversification of risk. The investment strategies focus primarily on a buy and hold asset allocation strategy that may be adjusted periodically in response to changing market conditions and the nature of Athene's liability profile. Athene takes advantage of its generally illiquid liability profile by identifying investment opportunities with an emphasis on earning incremental yield by taking liquidity and complexity risk rather than assuming solely 121 -------------------------------------------------------------------------------- credit risk. Athene has selected a diverse array of corporate bonds and more structured, but highly rated asset classes. Athene also maintains holdings in floating rate and less rate-sensitive instruments, including CLOs, non-agency RMBS and various types of structured products. In addition to its fixed income portfolio, Athene opportunistically allocates approximately 5%-6% of its portfolio to alternative investments where it primarily focuses on fixed income-like, cash flow-based investments. 122
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The following table presents the carrying values of Athene's total investments
and investments in related party and VIEs:
March 31, 2022
(In millions, except percentages) Carrying Value Percent of Total
AFS securities
US government and agencies $ 2,961 1.4 %
US state, municipal and political subdivisions 1,092 0.5 %
Foreign governments 1,011 0.5 %
Corporate 60,239 28.1 %
CLO 14,028 6.6 %
ABS 9,284 4.3 %
CMBS 2,747 1.3 %
RMBS 5,537 2.6 %
Total AFS securities 96,899 45.3 %
Trading securities, at fair value 1,852 0.9 %
Equity securities 1,154 0.5 %
Mortgage loans, net of allowances 23,696 11.1 %
Investment funds 1,243 0.6 %
Policy loans 296 0.1 %
Funds withheld at interest 41,173 19.2 %
Derivative assets 3,668 1.7 %
Short-term investments, at fair value 175 0.1 %
Other investments, net of allowances 1,214 0.6 %
Total investments 171,370 80.1 %
Investments in related parties
AFS securities - related party
Corporate 932 0.4 %
CLO 2,569 1.2 %
ABS 4,660 2.2 %
Total AFS securities - related party 8,161 3.8 %
Trading securities, at fair value 254 0.1 %
Equity securities, at fair value 166 0.1 %
Mortgage loans, net of allowances 1,456 0.7 %
Investment funds 3,088 1.4 %
Funds withheld at interest 11,431 5.3 %
Short-term investments, at fair value 53 - %
Other investments, net of allowances 255 0.1 %
Total related party investments 24,864 11.5 %
Total investments including related party 196,234 91.6 %
Investments owned by consolidated VIEs
Mortgage loans 1,880 0.9 %
Investment funds 13,568 6.3 %
Other investments 2,567 1.2 %
Total investments owned by consolidated VIEs 18,015 8.4 %
Total investments including related party and VIEs $ 214,249 100.0 %
Athene's investment portfolio consists largely of high quality fixed maturity
securities, loans and short-term investments, as well as additional
opportunistic holdings in investment funds and other instruments, including
equity holdings. Fixed maturity securities and loans include publicly issued
corporate bonds, government and other sovereign bonds, privately placed
corporate bonds and loans, mortgage loans, CMBS, RMBS, CLOs and ABS. A
significant majority of Athene's AFS portfolio, 95.0% as of March 31, 2022 , was
invested in assets considered investment grade with a NAIC designation of 1 or
2.
Athene invests a portion of its investment portfolio in mortgage loans, which
are generally comprised of high quality commercial first lien and mezzanine real
estate loans. Athene has acquired mortgage loans through acquisitions and
reinsurance arrangements, as well as through an active program to invest in new
mortgage loans. It invests in CMLs on income producing properties including
hotels, apartments, retail and office buildings, and other commercial and
industrial properties. The RML portfolio primarily consists of first lien RMLs
collateralized by properties located in the U.S. Funds withheld at interest
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represents a receivable for amounts contractually withheld by ceding companies
in accordance with modco and funds withheld reinsurance agreements in which
Athene acts as the reinsurer. Generally, assets equal to statutory reserves are
withheld and legally owned by the ceding company.
While the substantial majority of Athene's investment portfolio has been
allocated to corporate bonds and structured credit products, a key component of
Athene's investment strategy is the opportunistic acquisition of investment
funds with attractive risk and return profiles. Athene's investment fund
portfolio consists of funds that employ various strategies including real estate
and other real asset funds, credit funds and private equity funds. Athene has a
strong preference for assets that have some or all of the following
characteristics, among others: (1) investments that constitute a direct
investment or an investment in a fund with a high degree of co-investment; (2)
investments with credit- or debt-like characteristics (for example, a stipulated
maturity and par value), or alternatively, investments with reduced volatility
when compared to pure equity; or (3) investments that Athene believes have less
downside risk.
Athene holds derivatives for economic hedging purposes to reduce its exposure to
the cash flow variability of assets and liabilities, equity market risk,
interest rate risk, credit risk and foreign exchange risk. Athene's primary use
of derivative instruments relates to providing the income needed to fund the
annual indexed credits on its FIA products. Athene primarily uses fixed indexed
options to economically hedge index annuity products that guarantee the return
of principal to the policyholder and credit interest based on a percentage of
the gain in a specific market index.
Net Invested Assets
The following summarizes Athene's net invested assets:
Net Invested Asset Percent of Total
(In millions, except percentages) Value1
Corporate $ 79,006 42.9 %
CLO 18,036 9.8 %
Credit 97,042 52.7 %
RMBS 7,240 3.9 %
CML 23,164 12.6 %
RML 8,442 4.6 %
CMBS 3,551 1.9 %
Real estate 42,397 23.0 %
ABS 20,332 11.0 %
Alternative investments 11,506 6.2 %
State, municipal, political subdivisions and foreign
government 2,722 1.5 %
Equity securities 824 0.4 %
Short-term investments 212 0.2 %
US government and agencies 2,636 1.4 % Other investments 38,232 20.7 % Cash and equivalents 5,238 2.8 % Policy loans and other 1,362 0.8 % Net invested assets$ 184,271 100.0 %
1 See Managing Business Performance - Key Segment and Non-
invested assets.
Athene's net invested assets were$184.3 billion as ofMarch 31, 2022 . In managing its business, Athene utilizes net invested assets as presented in the above table. Net invested assets do not correspond to Athene's total investments, including related parties, on the consolidated statements of financial condition, as discussed previously in Managing Business Performance - Key Segment and Non-U.S. GAAP measures. Net invested assets represent Athene's investments that directly back the net reserve liabilities and surplus assets. Athene believes this view of its portfolio provides a view of the assets for which it has economic exposure. Athene adjusts the presentation for funds withheld and modco transactions to include or exclude the underlying investments based upon the contractual transfer of economic exposure to such underlying investments. Athene also adjusts for VIEs to show the net investment in the funds, which are included in the alternative investments line above, as well as adjust for 124
-------------------------------------------------------------------------------- the allowance for credit losses. Net invested assets includes its proportionate share of ACRA investments, based on its economic ownership, but excludes the proportionate share of investments associated with the non-controlling interest. Net invested assets is utilized by management to evaluate Athene's investment portfolio. Net invested assets is used in the computation of net investment earned rate, which allows Athene to analyze the profitability of the investment portfolio. Net invested assets is also used in Athene's risk management processes for asset purchases, product design and underwriting, stress scenarios, liquidity, and ALM.
Principal Investing
The following table presents Principal Investing Income, the performance measure
of our Principal Investing segment.
Three months ended March 31,
2022 2021 Total Change Percentage Change
(In millions)
Principal Investing:
Realized performance fees $ 127.2 $ 106.8 $ 20.4 19.1%
Realized investment income 226.4 30.0 196.4 NM
Principal investing compensation (156.0) (68.2) (87.8) 128.7
Other operating expenses (10.6) (7.5) (3.1) 41.3
Principal Investing Income (PII) $ 187.0 $ 61.1 $ 125.9 206.1
Three months ended March 31,
2021 2020 Total Change Percentage Change
(In millions)
Principal Investing:
Realized performance fees $ 106.8 $ 65.8 $ 41.0 62.3%
Realized investment income 30.0 9.9 20.1 203.0
Principal investing compensation (68.2) (73.9) 5.7 (7.7)
Other operating expenses (7.5) (23.1) 15.6 (67.5)
Principal Investing Income (PII) $ 61.1 $ (21.3) $ 82.4 NM
As described in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - General", earnings from our Principal
Investing segment are inherently more volatile in nature than earnings from our
Asset Management segment due to the intrinsic cyclical nature of performance
fees, one of the key drivers of PII performance.
PII was $187.0 million in 2022, an increase of $125.9 million , as compared to
$61.1 million in 2021. This increase was primarily attributable to realized
gains on certain of Apollo's general partner fund co-investments transferred to
Athene that are expected be transferred to a fund managed by Apollo with
third-party capital. Realized performance fees increased moderately by 19.1% to
$127.2 million in 2022 from $106.8 million in 2021 as equity market volatility
delayed monetization activity from Fund VIII and Fund IX.
Principal investing compensation expense increased as a result of a
corresponding increase in realized performance fees. In any period the blended
profit sharing percentage is impacted by the respective profit sharing ratios of
the funds generating performance fees in the period. Additionally, included in
principal investing compensation are expenses related to the Incentive Pool , a
compensation program through which certain employees are allocated discretionary
compensation based on realized performance fees in a given year. The Incentive
Pool is separate from the fund related profit sharing expense and may result in
greater variability in compensation and have a variable impact on the blended
profit sharing percentage during a particular period.
PII was $61.1 million in 2021, an increase of $82.4 million , as compared to
$(21.3) million in 2020. This increase was primarily attributable to increases
in realized performance fees and decreases in operating expenses. Realized
performance fees increased by 62.3% to $106.8 million in 2021 from $65.8 million
in 2020 driven by private equity fund appreciation of 22% in 2021. In 2020, the
pandemic resulting from COVID-19 and the actions taken in response caused severe
disruption to the global economy and financial markets. In line with public
equity and credit indices, the Company experienced significant unrealized
mark-to-market losses in underlying funds.
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The Historical Investment Performance of Our Funds
Below we present information relating to the historical performance of the funds we manage, including certain legacy Apollo funds that do not have a meaningful amount of unrealized investments, and in respect of which the general partner interest has not been contributed to us. When considering the data presented below, you should note that the historical results of funds we manage are not indicative of the future results that you should expect from such funds, from any future funds we may raise or from your investment in our common shares. An investment in our common stock is not an investment in any of the Apollo funds, and the assets and revenues of our funds are not directly available to us. The historical and potential future returns of the funds we manage are not directly linked to returns on our common stock. Therefore, you should not conclude that continued positive performance of the funds we manage will necessarily result in positive returns on an investment in our common stock. However, poor performance of the funds that we manage would cause a decline in our revenue from such funds, and would therefore have a negative effect on our performance and in all likelihood the value of our common stock. Moreover, the historical returns of our funds should not be considered indicative of the future results you should expect from such funds or from any future funds we may raise. There can be no assurance that any Apollo fund will continue to achieve the same results in the future. Finally, our private equity IRRs have historically varied greatly from fund to fund. For example, Fund VI generated a 12% gross IRR and a 9% net IRR since its inception throughMarch 31, 2022 , while Fund V generated a 61% gross IRR and a 44% net IRR since its inception throughMarch 31, 2022 . Accordingly, the IRR going forward for any current or future fund may vary considerably from the historical IRR generated by any particular fund, or for our private equity funds as a whole. Future returns will also be affected by the applicable risks, including risks of the industries and businesses in which a particular fund invests. See "Item 1A. Risk Factors-Risks Relating to Our Asset Management Business-Historical performance metrics are unreliable indicators of our current or future results of operations" in this report. 126 --------------------------------------------------------------------------------
Investment Record
The following table summarizes the investment record by strategy of Apollo's significant commitment-based funds that have a defined maturity date in which investors make a commitment to provide capital at the formation of such funds and deliver capital when called as investment opportunities become available. The funds included in the investment record table below have greater than$500 million of AUM and/or form part of a flagship series of funds. All amounts are as ofMarch 31, 2022 , unless otherwise noted: Total Vintage Committed Invested Remaining Gross Net (in millions, except IRR) Year Total AUM Capital Capital Realized Value Cost Unrealized Value Total Value IRR
IRR
Yield:
Apollo Origination Partners8 N/A$ 2,250 $ 2,221 $ 1,252 $ 93$ 1,194 $ 1,197$ 1,290 NM1 NM1 Hybrid: Apollo Infrastructure Opportunity Fund II 2021 2,609 2,542 579 17 569 698 715 NM1 NM1 Apollo InfrastructureOpportunity Fund 2018 609 897 802 999 225 260 1,259 25 % 20 % FCI IV 2021 1,462 1,123 154 2 154 181 183 NM1 NM1 FCI III 2017 2,592 1,906 2,981 2,148 1,825 1,791 3,939 17 13 FCI II 2013 2,085 1,555 3,329 2,659 1,700 1,442 4,101 7 5 FCI I 2012 - 559 1,516 1,975 - - 1,975 12 8 HVF II 2022 4,578 4,592 884 2 882 889 891 NM1 NM1 HVF 2019 4,098 3,238 3,607 1,773 2,510 3,249 5,022 29 24 SCRF I, II, III, IV6 Various 2,391 3,962 8,282 8,268 1,007 1,174 9,442 14 11 Accord+7 2021 1,584 1,577 472 19 454 463 482 NM1 NM1 Accord V7 N/A 1,444 1,441 92 1 349 94 95 NM1 NM1 Accord IV7 2020 1,456 2,337 804 911 76 - 911 36 28 Accord I, II, III & III B7 Various - 3,733 3,961 4,225 - - 4,225 20 15 Total Hybrid$ 24,908 $ 29,462 $ 27,463 $ 22,999 $ 9,751 $ 10,241$ 33,240 Equity: Fund IX 2018$ 32,055 $ 24,729 $ 15,276 $ 5,663$ 12,410 $ 19,778$ 25,441 52 % 34 % Fund VIII 2013 14,102 18,377 16,091 19,455 6,191 10,380 29,835 17 13 Fund VII 2008 2,132 14,677 16,461 34,141 65 139 34,280 33 25 Fund VI 2006 639 10,136 12,457 21,135 405 2 21,137 12 9 Fund V 2001 259 3,742 5,192 12,721 120 2 12,723 61 44 Fund I, II, III, IV & MIA2 Various 9 7,320 8,753 17,400 - - 17,400 39
26
Traditional Private Equity Funds3$ 49,196 $ 78,981 $ 74,230 $ 110,515 $ 19,191 $ 30,301$ 140,816 39 25 ANRP III 2020 1,757 1,400 603 78 603 1,008 1,086 NM1 NM1 ANRP II 2016 1,973 3,454 2,923 2,739 1,321 1,405 4,144 17 10 ANRP I 2012 231 1,323 1,149 1,167 477 56 1,223 2 (2)Impact Mission Fund (8) N/A 876 886 414 - 414 411 411 NM1 NM1 EPF IV4,8 N/A 1,652 1,652 24 - 24 24 24 NM1 NM1 EPF III4 2017 5,120 4,491 4,652 2,654 2,600 3,623 6,277 20 12 EPF II4 2012 953 3,427 3,429 4,562 531 286 4,848 13 8 EPF I4 2007 223 1,433 1,883 3,177 - - 3,177 23 17U.S. RE Fund III5 2021 1,072 935 396 28 385 547 575 NM1 NM1U.S. RE Fund II5 2016 1,289 1,264 1,043 625 746 1,034 1,659 16 13U.S. RE Fund I5 2012 115 653 637 855 115 83 938 12 9Asia RE Fund II5,8 N/A 972 975 512 178 354 364 542 NM1 NM1Asia RE Fund I5 2017 718 691 461 235 288 480 715 17 13 Total Equity$ 66,147 $
101,565
$ 39,622
1Data has not been presented as the fund's effective date is less than 24 months prior to the period indicated and such information was deemed not meaningful. 2The general partners and managers of Funds I, II and MIA, as well as the general partner of Fund III, were excluded assets in connection with the reorganization of the Company that occurred in 2007. As a result, Apollo did not receive the economics associated with these entities. The investment performance of these funds, combined with Fund IV, is presented to illustrate fund performance associated with Apollo's investment professionals. 3Total IRR is calculated based on total cash flows for all funds presented. 4Funds are denominated in Euros and historical figures are translated intoU.S. dollars at an exchange rate of €1.00 to$1.11 as ofMarch 31, 2022 . 127 -------------------------------------------------------------------------------- 5U.S. RE Fund I,U.S. RE Fund II,U.S. RE Fund III,Asia RE Fund I and Asia RE Fund II had$157 million ,$792 million ,$260 million ,$348 million and$515 million of co-investment commitments as ofMarch 31, 2022 , respectively, which are included in the figures in the table. A co-invest entity withinU.S. RE Fund I is denominated in pound sterling and translated intoU.S. dollars at an exchange rate of £1.00 to$1.31 as ofMarch 31, 2022 . 6Remaining cost for certain of our hybrid funds may include physical cash called, invested or reserved for certain levered investments. 7Accord funds have investment periods shorter than 24 months, therefore Gross and Net IRR are presented after 12 months of investing. 8Vintage Year is not yet applicable as these funds have not had their final closings.
Equity
The following table summarizes the investment record for distressed investments
made in our traditional private equity fund portfolios, since the Company's
inception. All amounts are as of
Total Invested
Capital Total Value Gross IRR
(In millions)
Distressed for Control $ 7,795 $ 18,872 29 %
Non-Control Distressed 6,281 10,980 71
Total 14,076 29,852 49
Corporate Carve-outs, Opportunistic Buyouts and Other
Credit1 60,154 110,964 21
Total $ 74,230 $ 140,816 39 %
1 Other Credit is defined as investments in debt securities of issuers other than portfolio companies that are not considered
to be distressed.
The following tables provide additional detail on the composition of the Fund IX, Fund VIII and Fund VII private equity portfolios based on investment strategy. Amounts for Fund I, II, III, IV, V and VI are included in the table above but not presented below as their remaining value is less than$100 million or the fund has been liquidated and such information was deemed not meaningful. All amounts are as ofMarch 31, 2022 : Fund IX1Total Invested Capital Total Value (In millions) Corporate Carve-outs $ 4,082$ 6,426 Opportunistic Buyouts 10,431 16,459 Distressed2 763 2,556 Total $ 15,276$ 25,441 Fund VIII1Total Invested Capital Total Value (In millions) Corporate Carve-outs $ 2,704$ 6,899 Opportunistic Buyouts 12,820 22,182 Distressed2 567 754 Total $ 16,091$ 29,835 Fund VII1Total Invested Capital Total Value (In millions) Corporate Carve-outs $ 2,539$ 4,846 Opportunistic Buyouts 4,338 10,799 Distressed/Other Credit2 9,584 18,635 Total $ 16,461$ 34,280 128
-------------------------------------------------------------------------------- 1Committed capital less unfunded capital commitments for Fund IX, Fund VIII and Fund VII were$13.5 billion ,$16.1 billion and$14.4 billion , respectively, which represents capital commitments from limited partners to invest in such funds less capital that is available for investment or reinvestment subject to the provisions of the applicable governing agreements. 2The distressed investment strategy includes distressed for control, non-control distressed and other credit. Other Credit is defined as investments in debt securities of issuers other than portfolio companies that are not considered to be distressed. During the recovery and expansionary periods of 1994 through 2000 and late 2003 through the first half of 2007, our private equity funds invested or committed to invest approximately$13.7 billion primarily in traditional and corporate partner buyouts. During the recessionary periods of 1990 through 1993, 2001 through late 2003 and the recessionary and post recessionary periods (beginning the second half of 2007 throughMarch 31, 2022 ), our private equity funds have invested$72.6 billion , of which$21.8 billion was in distressed buyouts and debt investments when the debt securities of quality companies traded at deep discounts to par value. Our average entry multiple for Fund VIII, VII and VI was 5.7x, 6.1x and 7.7x, respectively, as ofMarch 31, 2022 . Our average entry multiple for a private equity fund is the average of the total enterprise value over an applicable adjusted earnings before interest, taxes, depreciation and amortization, which may incorporate certain adjustments based on the investment team's estimates and we believe captures the true economics of our funds' investments in portfolio companies. The average entry multiple of actively investing funds may include committed investments not yet closed.
The following table summarizes the investment record for ourPerpetual Capital Vehicles, excluding Athene-related andAthora -related assets managed or advised by ISG and ISGI: Total Returns1 For the three For the three months months ended March IPO Year2 Total AUM ended March 31, 2022 31, 2021 (In millions) MidCap3 N/A$ 11,188 5 % 10 % AIF 2013 355 (5) 4 AFT 2011 384 (8) 5 AINV/Other4 2004 8,442 6 32 ARI 2009 8,853 6 % 28 % Total$ 29,222 1Total returns are based on the change in closing trading prices during the respective periods presented taking into account dividends and distributions, if any, as if they were reinvested without regard to commission. 2An initial public offering ("IPO") year represents the year in which the vehicle commenced trading on a national securities exchange. 3MidCap is not a publicly traded vehicle and therefore IPO year is not applicable. The returns presented are a gross return based on NAV. The net returns based on NAV were 4% and 8% for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively. 4Included within total AUM of AINV/Other is$3.8 billion of AUM related to a non-traded business development company and$1.8 billion of AUM related to a publicly traded business development company from which Apollo earns investment-related service fees, but for which Apollo does not provide management or advisory services. Total returns exclude performance related to this AUM. 129
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Summary of Non-
The table below sets forth a reconciliation of net income attributable toApollo Global Management, Inc. Common Stockholders to our non-U.S. GAAP performance measure: Three months ended March 31, (In millions) 2022 2021
GAAP Net Income (Loss) Attributable to
Inc.
$ (870)$ 670 Preferred dividends - 9 Net income (loss) attributable to non-controlling interests (660) 840 GAAP Net Income (Loss) $ (1,530)$ 1,519 Income tax provision (benefit) (608) 203 GAAP Income (Loss) Before Income Tax Provision $ (2,138)$ 1,722 Asset Management Adjustments: Equity-based profit sharing expense and other1 97 35 Equity-based compensation 56 16 Preferred dividends - (9) Transaction-related charges2 (1) 9 Merger-related transaction and integration costs3 18 11 (Gains) losses from change in tax receivable agreement liability 14 (2)
Net income attributable to non-controlling interests in
consolidated entities
651 (71) Unrealized performance fees (445) (1,290) Unrealized profit sharing expense 191 589 HoldCo interest and other financing costs4 39 43 Unrealized principal investment (income) loss 82 (364)
Unrealized net (gains) losses from investment activities and
other
(18) (326) Retirement Services Adjustments: Investment (gains) losses, net of offsets 2,494 -
Change in fair values of derivatives and embedded derivatives -
FIAs, net of offsets
81 - Integration, restructuring and other non-operating expenses 34 - Equity-based compensation expense 12 - Adjusted Segment Income 1,167 363 HoldCo interest and other financing costs4 (39) (43) Taxes and related payables (213) (26) Adjusted Net Income $ 915$ 294 1 Equity-based profit sharing expense and other includes certain profit sharing arrangements in which a portion of performance fees distributed to the general partner are required to be used by employees of Apollo to purchase restricted shares of common stock or RSUs, which are granted under the Equity Plan. Equity-based profit sharing expense and other also includes performance grants which are tied to the Company's receipt of performance fees, within prescribed periods, sufficient to cover the associated equity-based compensation expense. 2 Transaction-related charges include contingent consideration, equity-based compensation charges and the amortization of intangible assets and certain other charges associated with acquisitions, and restructuring charges. 3 Merger-related transaction and integration costs includes advisory services, technology integration, equity-based compensation charges and other costs associated with the Mergers. 4 Represents interest and other financing costs related to AGM not attributable to any specific segment.
The table below sets forth a reconciliation of common stock outstanding to our
Adjusted Net Income Shares Outstanding:
As of March 31, 2022 As of March 31, 2021 As of December 31, 2021
Total GAAP Common Stock Outstanding 570,353,554 232,222,572 248,896,649
Non-GAAP Adjustments:
Participating Apollo Operating Group Units - 202,098,812 184,787,638
Vested RSUs 15,624,235 153,379 17,700,688
Unvested RSUs Eligible for Dividend 14,386,357 8,300,659 9,809,245
Equivalents
Adjusted Net Income Shares Outstanding 600,364,146 442,775,422 461,194,220
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The table below sets forth a reconciliation of Athene's total investments,
including related parties, to net invested assets:
(In millions) March 31, 2022 December 31, 2021 Total investments, including investment in related parties$ 196,234 $ - Derivative assets (3,668) - Cash and cash equivalents (including restricted cash) 9,357 - Accrued investment income 885 -
Payables for collateral on derivatives and other secured
transactions
(3,105) - Reinsurance funds withheld and modified coinsurance 2,800 - VIE and VOE assets, liabilities and non-controlling interest 10,485 - Unrealized (gains) losses 7,985 - Ceded policy loans (158) - Net investment receivables (payables) 410 - Allowance for credit losses 495 - Total adjustments to arrive at gross invested assets 25,486 - Gross invested assets 221,720 - ACRA non-controlling interest (37,449) - Net invested assets$ 184,271 $ -
Liquidity and Capital Resources
Overview
The Company primarily derives revenues and cash flows from the assets it manages and the retirement savings products it issues, reinsures and acquires. Based on management's experience, we believe that the Company's current liquidity position, together with the cash generated from revenues will be sufficient to meet the Company's anticipated expenses and other working capital needs for at least the next 12 months. For the longer-term liquidity needs of the asset management business, we expect to continue to fund the asset management business' operations through management fees and performance fees received. The principal sources of liquidity for the retirement services business, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets. AGM is a holding company whose primary source of cash flow is dividends from its subsidiaries, which are expected to be sufficient to fund cash flow requirements based on current estimates of future obligations. AGM's primary liquidity needs include the cash-flow requirements relating to its corporate activities, including its day-to-day operations, common stock dividend payments and strategic transactions, such as acquisitions. AtMarch 31, 2022 , the Company had$9.8 billion of unrestricted cash and cash equivalents and$0.9 billion ofU.S. Treasury securities as well as$2.0 billion of available funds from the AMH credit facility and AHL credit facility.
Primary Uses of Cash
Over the next 12 months, we expect the Company's primary liquidity needs will be
to:
•support the future growth of Apollo's businesses through strategic corporate
investments;
•pay the Company's operating expenses, including, compensation, general,
administrative, and other expense;
•make payments to policyholders for surrenders, withdrawals and payout benefits;
•make interest and principal payments on funding agreements;
•make payments to satisfy pension group annuity obligations and policy
acquisition costs;
•pay taxes and tax related payments;
•pay cash dividends;
•make payments related to the AOG Unit Payment;
•repurchase common stock; and
•make payments under the tax receivable agreement.
Over the long term, we believe we will be able to (i) grow Apollo's Assets Under
Management and generate positive investment performance in the funds we manage,
which we expect will allow us to grow the Company's management fees and
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performance fees and (ii) grow the investment portfolio of retirement services,
in each case in amounts sufficient to cover our long-term liquidity
requirements, which may include:
•supporting the future growth of our businesses; •creating new or enhancing existing products and investment platforms; •making payments to policyholders; •pursuing new strategic corporate investment opportunities; •paying interest and principal on the Company's financing arrangements; •repurchasing common stock; •making payments under the tax receivable agreement; •making payments related to the AOG Unit Payment; and •paying cash dividends.
Cash Flow Analysis
The section below discusses in more detail the Company's primary sources and
uses of cash and the primary drivers of cash flows within the Company's
consolidated statements of cash flows:
For the Three Months ended March
31,
(In millions) 2022 2021
Operating Activities $ (3,993) $ (229)
Investing Activities 3,103 19
Financing Activities 11,240 1,177
Effect of exchange rate changes on cash and cash equivalents (4) -
Net Increase in Cash and Cash Equivalents, Restricted Cash and
Cash Held at Consolidated Variable Interest Entities
$
10,346
The assets of our consolidated funds and VIEs, on a gross basis could have a
substantial effect on the accompanying statement of cash flows. Because our
consolidated funds and VIEs are generally treated as investment companies for
accounting purposes, their investing cash flow amounts are included in our cash
flows from operating activities. The table below summarizes our consolidated
statements of cash flow by activity attributable to the Company and to our
consolidated funds and VIEs.
For the Three Months ended March
31,
(In millions) 2022 2021
Net cash provided by the Company's operating activities
Net cash used in the Consolidated Funds and VIEs operating
activities
(5,382) (641) Net cash used in operating activities (3,993) (229) Net cash provided by the Company's investing activities 1,974 3
Net cash provided by the Consolidated Funds and VIEs investing
activities
1,129 16 Net cash provided by investing activities 3,103 19 Net cash provided by the Company's financing activities 6,315 (324)
Net cash provided by the Consolidated Funds and VIEs financing
activities
4,925 1,501 Net cash provided by financing activities$ 11,240 $ 1,177 Operating Activities The Company's operating activities support its Asset Management, Retirement Services and Principal Investing activities. The primary sources of cash within operating activities include: (a) management fees, (b) advisory and transaction fees, (c) realized performance revenues, (d) realized principal investment income, (e) investment sales from our consolidated funds and VIEs, (f) net investment income, (g) annuity considerations and (h) insurance premiums. The primary uses of cash within operating activities include: (a) compensation and non-compensation related expenses, (b) interest and taxes, (c) investment purchases from our consolidated funds and VIEs, (d) benefit payments and (e) other operating expenses.
•During the three months ended
primarily includes net cash used in our consolidated funds and VIEs for
purchases of investments. Net cash provided by operating
132 -------------------------------------------------------------------------------- activities reflects cash inflows of management fees, advisory and transaction fees, realized performance revenues, and realized principal investment income, as well as cash received from pension group annuity transactions. •During the three months endedMarch 31, 2021 , cash used by operating activities primarily reflects the operating activity of our consolidated funds and VIEs, which include cash outflows for purchases of investments, offset by cash inflows from consolidated funds. Net cash used by operating activities also reflects cash outflows for compensation, general, administrative, and other expenses, offset by cash inflows from the receipt of management fees, advisory and transaction fees, realized performance revenues, and realized principal investment income.
Investing Activities
The Company's investing activities support the growth of its business. The primary sources of cash within investing activities include (a) distributions from investments and (b) sales, maturities and repayments of investments. The primary uses of cash within investing activities include: (a) capital expenditures, (b) investment purchases, including purchases ofU.S. Treasury securities, (c) equity method investments in the funds we manage and (d) purchases and acquisitions of new investments. •During the three months endedMarch 31, 2022 , cash provided by investing activities primarily reflects Athene cash acquired as a result of the merger and sale of investments. Net cash provided by investing activities also reflects the investing activities of our consolidated funds and VIEs, which primarily includes net proceeds from maturities ofU.S. Treasury securities. Net cash used by investing activities is due to purchases of investments.
•During the three months ended
activities primarily reflects the investing activity of our consolidated funds
and VIEs, which primarily reflects net contributions to equity method
investments.
Financing Activities
The Company's financing activities reflect its capital market transactions and transactions with equity holders. The primary sources of cash within the financing activities section includes (a) proceeds from debt and preferred equity issuances, (b) inflows on our investment-type policies, (c) changes of cash collateral posted for derivative transactions, and (d) capital contributions and proceeds from other borrowing activities. The primary uses of cash within the financing activities section include: (a) dividends, (b) payments under the tax receivable agreement, (c) share repurchases, (d) cash paid to settle tax withholding obligations in connection with net share settlements of equity-based awards, (e) repayments of debt, (f) withdrawals on our investment-type policies and contracts, and (g) changes of cash collateral posted for derivative transactions. •During the three months endedMarch 31, 2022 , cash provided by financing activities primarily reflects the high organic inflows from retail and funding agreements, net of withdrawals. Cash provided by financing activities by our consolidated funds and VIEs primarily includes proceeds from the issuance of debt. Net cash used by financing activities includes repurchases of common stock and common stock dividends paid, as well as repayment of debt by our consolidated funds and VIEs. •During the three months endedMarch 31, 2021 , cash provided in financing activities primarily reflects the financing activity of our consolidated funds and VIEs, which primarily include cash inflows from the issuance of debt and proceeds from issuance of securities of a SPAC, offset by payment of underwriting discounts.
Contractual Obligations, Commitments and Contingencies
For a summary and a description of the nature of the Company's commitments,
contingencies and contractual obligations, see note 17 to the consolidated
financial statements and "-Contractual Obligations, Commitments and
Contingencies." The Company's commitments are primarily fulfilled through cash
flows from operations and financing activities.
133 --------------------------------------------------------------------------------
Consolidated Funds and VIEs
The Company manages its liquidity needs by evaluating unconsolidated cash flows; however, the Company's financial statements reflect the financial position of Apollo as well as Apollo's consolidated funds and VIEs (including SPACs). The primary sources and uses of cash at Apollo's consolidated funds and VIEs include: (a) raising capital from their investors, which have been reflected historically as non-controlling interests of the consolidated subsidiaries in our financial statements, (b) using capital to make investments, (c) generating cash flows from operations through distributions, interest and the realization of investments, (d) distributing cash flow to investors, (e) issuing debt to finance investments (CLOs) and (f) raising capital through SPAC vehicles for future acquisition of targeted entities.
Dividends and Distributions
For information regarding the quarterly dividends and distributions that were made to common stockholders and non-controlling interest holders in theApollo Operating Group and participating securities, see note 14 to the condensed consolidated financial statements. Although the Company currently expects to pay dividends, we may not pay dividends if, among other things, we do not have the cash necessary to pay the dividends. To the extent we do not have cash on hand sufficient to pay dividends, we may have to borrow funds to pay dividends, or we may determine not to pay dividends. The declaration, payment and determination of the amount of our dividends are at the sole discretion of our board of directors. OnMay 5, 2022 , AGM declared a cash dividend of$0.40 per share of its common stock, which will be paid onMay 31, 2022 to holders of record at the close of business onMay 18, 2022 . Repurchase of Securities Share Repurchase Program
For information regarding the Company's share repurchase program, see note 14 to
the condensed consolidated financial statements.
Repurchase of
We may from time to time seek to retire or purchase our other outstanding debt or equity securities through cash purchases and/or exchanges for other securities, purchases in the open market, privately negotiated transactions or otherwise. Any such repurchases will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions and applicable regulatory, legal and accounting factors. Whether or not we repurchase any of our other securities and the size and timing of any such repurchases will be determined at our discretion.
Asset Management Liquidity
Our asset management business requires limited capital resources to support the working capital or operating needs of the business. For the asset management business' longer-term liquidity needs, we expect to continue to fund the asset management business' operations through management fees and performance fees received. Liquidity needs are also met (to a limited extent) through proceeds from borrowings and equity issuances as described in notes 12 and 14 to the condensed consolidated financial statements, respectively. From time to time, if the Company determines that market conditions are favorable after taking into account our liquidity requirements, we may seek to raise proceeds through the issuance of additional debt or equity instruments.
At
unrestricted cash and cash equivalents and
securities as well as
facility.
Future Debt Obligations
The asset management business had long-term debt of$2.8 billion atMarch 31, 2022 , which includes notes with maturities in 2024, 2026, 2029, 2030, 2048 and 2050. See note 12 to the condensed consolidated financial statements for further information regarding the asset management business' debt arrangements. 134 --------------------------------------------------------------------------------
Future Cash Flows
Our ability to execute our business strategy, particularly our ability to increase our AUM, depends on our ability to establish new funds and to raise additional investor capital within such funds. Our liquidity will depend on a number of factors, such as our ability to project our financial performance, which is highly dependent on the funds we manage and our ability to manage our projected costs, fund performance, access to credit facilities, compliance with existing credit agreements, as well as industry and market trends. Also during economic downturns the funds we manage might experience cash flow issues or liquidate entirely. In these situations we might be asked to reduce or eliminate the management fee and performance fees we charge, which could adversely impact our cash flow in the future. An increase in the fair value of the investments of the funds we manage, by contrast, could favorably impact our liquidity through higher management fees where the management fees are calculated based on the net asset value, gross assets or adjusted assets. Additionally, higher performance fees not yet realized would generally result when investments appreciate over their cost basis which would not have an impact on the asset management business' cash flow until realized.
Consideration of Financing Arrangements
As noted above, in limited circumstances, the asset management business may issue debt or equity to supplement its liquidity. The decision to enter into a particular financing arrangement is made after careful consideration of various factors including the asset management business' cash flows from operations, future cash needs, current sources of liquidity, demand for the asset management business' debt or equity, and prevailing interest rates.
Revolver Facility
Under the AMH credit facility, AMH may borrow in an aggregate amount not to exceed$750 million and may incur incremental facilities in an aggregate amount not to exceed$250 million plus additional amounts so long as AMH is in compliance with a net leverage ratio not to exceed 4.00 to 1.00. Borrowings under the AMH credit facility may be used for working capital and general corporate purposes, including without limitation, permitted acquisitions. The AMH credit facility has a final maturity date ofNovember 23, 2025 .
Tax Receivable Agreement
The tax receivable agreement provides for the payment to theFormer Managing Partners andContributing Partners of 85% of the amount of cash savings, if any, inU.S. federal, state, local and foreign income taxes that AGM and its subsidiaries realizes subject to the agreement. For more information regarding the tax receivable agreement, see note 16 to the condensed consolidated financial statements.
AOG Unit Payment
OnDecember 31, 2021 , holders of AOG Units (other than Athene and Apollo) sold and transferred a portion of such AOG Units to a wholly-owned subsidiary of the Company, in exchange for an amount equal to$3.66 multiplied by the total number of AOG Units held by such holders immediately prior to such transaction (such payment, the "AOG Unit Payment"). The remainder of the AOG Units held by such holders were exchanged for shares of AGM common stock concurrently with the consummation of the Mergers onJanuary 1, 2022 . As ofMarch 31, 2022 , the outstanding AOG Unit Payment amount was$482 million , payable in equal installments throughDecember 31, 2024 . See note 16 for more information.Athora OnApril 14, 2017 , Apollo made a commitment of €125 million to purchase new Class B-1 equity interests inAthora , a strategic platform that acquires and reinsures traditional closed life insurance policies and provides capital and reinsurance solutions to insurers inEurope which, as ofApril 2020 was fully drawn. InJanuary 2018 , Apollo purchased Class C-1 equity interests inAthora that represent a profits interest inAthora which, upon meeting certain vesting triggers, will be convertible by Apollo into additional Class B-1 equity interests inAthora . 135
-------------------------------------------------------------------------------- In connection withAthora's acquisition ofVIVAT N.V. , Apollo exercised its preemptive rights and made an additional incremental commitment of approximately €58 million to purchase new Class B-1 equity interests inAthora . In addition, inApril 2020 , Apollo purchased Class C-2 equity interests inAthora that represent a profits interest inAthora which, upon meeting certain vesting triggers, will be convertible by Apollo into additional Class B-1 equity interests inAthora . InNovember 2021 , Apollo made an additional commitment to purchase up to €120 million of new Class B-1 equity interests inAthora , to be drawn in connection with three separate offerings over a period of three years, with a commitment of up to €30 million in 2021, up to €40 million in 2022 and up to €50 million in 2023.Athora's other common shareholders may exercise preemptive rights to acquire common shares in connection with each offering and any such exercise will reduce the total amount of new Class B-1 equity interests ultimately purchased by Apollo. In connection with the 2021 offering, Apollo acquired approximately €21.9 million of new Class B-1 equity interests. In addition, Apollo purchased Class C-3 equity interests inAthora in connection with the 2021 offering that represent a profits interest inAthora which, upon meeting certain vesting triggers, will be convertible by Apollo into additional Class B-1 equity interests inAthora . The remaining commitments are drawable in four installments between 2022 and 2024. InDecember 2021 , Apollo committed an additional €250 million to purchase new Class B-1 equity interests to supportAthora's ongoing growth initiatives, of which €180 million was drawn as ofDecember 31, 2021 . Apollo expects the remaining €70 million will be drawn in 2022, pending regulatory approvals. Apollo and Athene are minority investors inAthora with a long term strategic relationship. Through its share ownership, Apollo has approximately 19.9% of the total voting power inAthora , and Athene holds shares inAthora representing 10% of the total voting power inAthora . In addition,Athora shares held by funds and other accounts managed by Apollo represent, in the aggregate, approximately 15.1% of the total voting power inAthora .
Fund Escrow
As ofMarch 31, 2022 , the remaining investments and escrow cash of ANRP II was valued at 100% of the fund's unreturned capital which was below the required escrow ratio of 115%. As a result, the fund is required to place in escrow current and future performance fee distributions to the general partner until the specified return ratio of 115% is met (at the time of a future distribution) or upon liquidation. Realized performance fees currently distributed to the general partner are limited to potential tax distributions and interest on escrow balances per the fund's partnership agreement.
Clawback
Performance fees from certain of the funds we manage are subject to contingent repayment by the general partner in the event of future losses to the extent that the cumulative performance fees distributed from inception to date exceeds the amount computed as due to the general partner at the final distribution. See "-Overview of Results of Operations-Performance Fees" for the maximum performance fees subject to potential reversal by each fund.
Indemnification Liability
The asset management business recorded an indemnification liability in the event that theFormer Managing Partners ,Contributing Partners and certain investment professionals are required to pay amounts in connection with a general partner obligation to return previously distributed performance fees. See note 16 to the consolidated financial statements for further information regarding the asset management business' indemnification liability.
Retirement Services Liquidity
There are two forms of liquidity relevant to our retirement services business, funding liquidity and balance sheet liquidity. Funding liquidity relates to the ability to fund operations. Balance sheet liquidity relates to the ability to liquidate or rebalance Athene's balance sheet without incurring significant costs from fees, bid-offer spreads, or market impact. Athene manages the liquidity position of our retirement services business by matching projected cash demands with adequate sources of cash and other liquid assets. The principal sources of liquidity for our retirement services business, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets.
Athene's investment portfolio is structured to ensure a strong liquidity
position over time in order to permit timely payment of policy and contract
benefits without requiring asset sales at inopportune times or at depressed
prices. In general, liquid assets
136 -------------------------------------------------------------------------------- include cash and cash equivalents, highly rated corporate bonds, unaffiliated preferred stock and unaffiliated public common stock, all of which generally have liquid markets with a large number of buyers. Assets included in modified coinsurance and funds withheld portfolios are available to fund the benefits for the associated obligations but are restricted from other uses. Although the investment portfolio of our retirement services business does contain assets that are generally considered illiquid for liquidity monitoring purposes (primarily mortgage loans, policy loans, real estate, investment funds, and affiliated common stock), there is some ability to raise cash from these assets if needed. Athene has access to additional liquidity through its$1.25 billion credit agreement, which was undrawn as ofMarch 31, 2022 , and$2.0 billion of committed repurchase facilities. Athene also has a registration statement on Form S-3 to provide it with access to the capital markets, subject to market conditions and other factors. Athene is also party to repurchase agreements with several different financial institutions, pursuant to which it may obtain short-term liquidity, to the extent available. In addition, through Athene's membership in the FHLB, it is eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. Athene proactively manages its liquidity position to meet cash needs while minimizing adverse impacts on investment returns. Athene analyzes its cash-flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, taking into account the provisions of its policies and contracts in force, its cash flow position, and the volume of cash and readily marketable securities in its portfolio. Liquidity risk is monitored, managed and mitigated through a number of stress tests and analyses to assess Athene's ability to meet its cash flow requirements, as well as the ability of its reinsurance and insurance subsidiaries to meet their collateral obligations, under various stress scenarios. Athene further seeks to mitigate liquidity risk by maintaining access to alternative, external sources of liquidity.
Insurance Subsidiaries' Operating Liquidity
The primary cash flow sources for Athene's insurance subsidiaries include retirement services product inflows (premiums), investment income, principal repayments on its investments, net transfers from separate accounts and financial product inflows. Uses of cash include investment purchases, payments to policyholders for surrenders, withdrawals and payout benefits, interest and principal payments on funding agreements, payments to satisfy pension group annuity obligations, policy acquisition costs and general operating costs. Athene's policyholder obligations are generally long-term in nature. However, one liquidity risk is an extraordinary level of early policyholder withdrawals. Athene includes provisions within its annuity policies, such as surrender charges and MVAs, which are intended to protect it from early withdrawals. As ofMarch 31, 2022 , approximately 74% of Athene's deferred annuity liabilities were subject to penalty upon surrender. In addition, as ofMarch 31, 2022 , approximately 54% of policies contained MVAs that may also have the effect of limiting early withdrawals if interest rates increase, but may encourage early withdrawals by effectively subsidizing a portion of surrender charges when interest rates decrease. Athene's funding agreements, group annuities and payout annuities are generally non-surrenderable, which accounts for approximately 30% of Athene's net reserve liabilities.
Membership in
Through its insurance subsidiaries' membership in the FHLB, Athene is eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS, government or agency securities and guaranteed loans. As ofMarch 31, 2022 , Athene had no outstanding borrowings under these arrangements. Athene has issued funding agreements to the FHLB. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As ofMarch 31, 2022 , Athene had funding agreements outstanding with the FHLB in the aggregate principal amount of$3.2 billion . The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member's total statutory assets dependent on the internal credit rating assigned to the member by the FHLB. As ofMarch 31, 2022 , the total maximum borrowings under the FHLB facilities were limited to$43.3 billion . However, Athene's ability to borrow under the facilities is constrained by the availability of assets that qualify as eligible collateral under the facilities and certain other limitations. Considering these limitations, as ofMarch 31, 2022 Athene had the ability to draw up to an estimated$4.2 billion , inclusive of borrowings then outstanding. This estimate is based on Athene's internal analysis and assumptions, and may not accurately measure collateral which is ultimately acceptable to the FHLB. 137
--------------------------------------------------------------------------------
Securities Repurchase Agreements
Athene engages in repurchase transactions whereby it sells fixed income securities to third parties, primarily major brokerage firms or commercial banks, with a concurrent agreement to repurchase such securities at a determined future date. Athene requires that, at all times during the term of the repurchase agreements, it maintains sufficient cash or other liquid assets sufficient to allow it to fund substantially all of the repurchase price. Proceeds received from the sale of securities pursuant to these arrangements are generally invested in short-term investments, with the offsetting obligation to repurchase the security included within payables for collateral on derivatives and securities to repurchase on the condensed consolidated statements of financial condition. As per the terms of the repurchase agreements, Athene monitors the market value of the securities sold and may be required to deliver additional collateral (which may be in the form of cash or additional securities) to the extent that the value of the securities sold decreases prior to the repurchase date. As ofMarch 31, 2022 , the payables for repurchase agreements were$4.0 billion , while the fair value of securities and collateral held by counterparties backing the repurchase agreements was$4.0 billion . As ofMarch 31, 2022 , payables for repurchase agreements were comprised of$2.5 billion of short-term and$1.5 billion of long-term repurchase agreements.
Dividends from Insurance Subsidiaries
AHL is a holding company whose primary liquidity needs include the cash-flow requirements relating to its corporate activities, including its day-to-day operations, debt servicing, preferred and common stock dividend payments and strategic transactions, such as acquisitions. The primary source of AHL's cash flow is dividends from its subsidiaries, which are expected to be adequate to fund cash flow requirements based on current estimates of future obligations. The ability of AHL's insurance subsidiaries to pay dividends is limited by applicable laws and regulations of the jurisdictions where the subsidiaries are domiciled, as well as agreements entered into with regulators. These laws and regulations require, among other things, the insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay. Subject to these limitations and prior notification to the appropriate regulatory agency, Athene'sU.S. insurance subsidiaries are permitted to pay ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile. Any distributions above the amount permitted by statute in any twelve month period are considered to be extraordinary dividends, and require the approval of the appropriate regulator prior to payment. AHL does not currently plan on having theU.S. subsidiaries pay any dividends to their parents. Dividends from AHL's subsidiaries are projected to be the primary source of AHL's liquidity. Under the Bermuda Insurance Act, ALRe is prohibited from paying a dividend in an amount exceeding 25% of the prior year's statutory capital and surplus, unless at least two members of ALRe's board of directors and its principal representative inBermuda sign and submit to theBermuda Monetary Authority ("BMA") an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances, ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its relevant margins, ALRe is permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in excess of this amount require the approval of the BMA. The maximum distribution permitted by law or contract is not necessarily indicative of the insurance subsidiaries' actual ability to pay such distributions, which may be further restricted by business and other considerations, such as the impact of such distributions on surplus, which could affect our ratings or competitive position and the amount of premiums that can be written. Specifically, the level of capital needed to maintain desired financial strength ratings from rating agencies, including S&P,A.M. Best and Fitch, is of particular concern when determining the amount of capital available for distributions. AHL believes its insurance subsidiaries have sufficient statutory capital and surplus, combined with additional capital available to be provided by AHL, to meet their financial strength ratings objectives. Finally, state insurance laws and regulations require that the statutory surplus of Athene's insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries' financial needs. 138 --------------------------------------------------------------------------------
Other Sources of Funding
Athene may seek to secure additional funding at the AHL level by means other than dividends from subsidiaries, such as by drawing on its undrawn$1.25 billion AHL credit facility or by pursuing future issuances of debt or preferred shares to third-party investors. Certain covenants in the AHL credit facility prohibit Athene from maintaining debt in excess of specified thresholds. Specifically, the AHL credit facility prohibits Athene from permitting the Consolidated Debt to Capitalization Ratio (as such term is defined in the credit agreement) of Athene to exceed 35% as of the end of any quarter.
Future Debt Obligations
Athene had long-term debt of$3.3 billion as ofMarch 31, 2022 , which includes notes with maturities in 2028, 2030, 2031, 2051, and 2052. See note 12 to the condensed consolidated financial statements for further information regarding Athene's debt arrangements. Capital We believe that Athene has a strong capital position and that it is well positioned to meet policyholder and other obligations. We measure capital sufficiency using an internal capital model which reflects management's view on the various risks inherent to Athene's business, the amount of capital required to support its core operating strategies and the amount of capital necessary to maintain its current ratings in a recessionary environment. The amount of capital required to support Athene's core operating strategies is determined based upon internal modeling and analysis of economic risk, as well as inputs from rating agency capital models and consideration of NAIC RBC requirements. Capital in excess of this required amount is considered excess equity capital, which is available to deploy.ACRA ACRA provides Athene with access to on-demand capital to support its growth strategies and capital deployment opportunities. ACRA provides a capital source to fund both Athene's inorganic and organic channels, including pension group annuity, funding agreements and retail channels. This strategic capital solution allows Athene the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position.
Critical Accounting Estimates and Policies
Other than as described in this Item 2, there have been no material changes to the Company's critical accounting estimates and judgments from those previously disclosed in Apollo and Athene's 2021 Annual Reports. The following updates and supplements the critical accounting estimates and judgments in Athene's 2021 Annual Report. Investments Valuation of Mortgage Loans Athene has elected the fair value option on its mortgage loan portfolio. Athene uses independent commercial pricing services to value its mortgage loans portfolio. Discounted cash flow analysis is performed through which the loans' contractual cash flows are modeled and an appropriate discount rate is determined to discount the cash flows to arrive at a present value. Financial factors, credit factors, collateral characteristics and current market conditions are all taken into consideration when performing the discounted cash flow analysis. Athene performs vendor due diligence exercises annually to review vendor processes, models and assumptions. Additionally, Athene reviews price movements on a quarterly basis to ensure reasonableness.
Future Policy Benefits
The future policy benefit liabilities associated with long duration contracts include term and whole-life products, accident and health, disability, and deferred and immediate annuities with life contingencies. Liabilities for non-participating long duration contracts are established using accepted actuarial valuation methods which require Athene to make certain assumptions regarding expenses, investment yields, mortality, morbidity, and persistency, with a provision for adverse deviation, at the date of issue or acquisition. As ofMarch 31, 2022 , the reserve investment yield assumptions for non-participating contracts range from 2.3% to 4.1% and are specific to Athene's expected earned rate on the asset portfolio supporting the reserves. Athene bases other key assumptions, such as mortality and morbidity, on industry standard data adjusted to align with actual company 139 -------------------------------------------------------------------------------- experience, if necessary. Premium deficiency tests are performed periodically using current assumptions, without provisions for adverse deviation, in order to test the appropriateness of the established reserves. If the reserves using current assumptions are greater than the existing reserves, the excess is recorded and the initial assumptions are revised.
Liabilities for Guaranteed Living Withdrawal Benefits and Guaranteed Minimum
Death Benefits
Athene issues and reinsures deferred annuity contracts which contain GLWB and GMDB riders. Athene establishes future policy benefits for GLWB and GMDB by estimating the expected value of withdrawal and death benefits in excess of the projected account balance. Athene recognizes the excess proportionally over the accumulation period based on total actual and expected assessments. The methods used to estimate the liabilities have assumptions about policyholder behavior, which includes lapses, withdrawals and utilization of the benefit riders; mortality; and market conditions affecting the account balance. Projected policyholder lapse and withdrawal behavior assumptions are set in one of two ways. For certain blocks of business, this behavior is a function of our predictive analytics model which considers various observable inputs. For the remaining blocks of business, these assumptions are set at the product level by grouping individual policies sharing similar features and guarantees and reviewed periodically against experience. Base lapse rates consider the level of surrender charges and are dynamically adjusted based on the level of current interest rates relative to the guaranteed rates and the amount by which any rider guarantees are in a net positive position. Rider utilization assumptions consider the number and timing of policyholders electing the riders. Athene tracks and updates this assumption as experience emerges. Mortality assumptions are set at the product level and generally based on standard industry tables, adjusted for historical experience and a provision for mortality improvement. Projected guaranteed benefit amounts in excess of the underlying account balances are considered over a range of scenarios in order to capture Athene's exposure to the guaranteed withdrawal and death benefits. The assessments used to accrue liabilities are based on interest margins, rider charges, surrender charges and realized gains (losses). As such, future reserve changes can be sensitive to changes in investment results and the impacts of shadow adjustments, which represent the impact of assuming unrealized gains (losses) are realized in future periods. As ofMarch 31, 2022 , the GLWB and GMDB liability balance, including the impacts of shadow adjustments, totaled$5.7 billion . The relative sensitivity of the GLWB and GMDB liability balance from changes to these assumptions, including the impacts of shadow adjustments from hypothetical changes in projected assessments, changes in the discount rate and annual equity growth, has decreased following the business combination and purchase accounting described in note 3. Using factors consistent with those previously disclosed in Athene's 2021 Annual Report, changes to the GLWB and GMDB liability balance from these hypothetical changes in assumptions are not significant. Derivatives
Valuation of Embedded Derivatives on indexed annuities
Athene issues and reinsures products, primarily indexed annuity products, or
purchase investments that contain embedded derivatives. If Athene determines the
embedded derivative has economic characteristics not clearly and closely related
to the economic characteristics of the host contract, and a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is bifurcated from the host contract and accounted for separately,
unless the fair value option is elected on the host contract.
Indexed annuities and indexed universal life insurance contracts allow the
policyholder to elect a fixed interest rate return or an equity market component
for which interest credited is based on the performance of certain stock market
indices. The equity market option is an embedded derivative, similar to a call
option. The benefit reserve is equal to the sum of the fair value of the
embedded derivative and the host (or guaranteed) component of the contracts. The
fair value of the embedded derivatives represents the present value of cash
flows attributable to the indexed strategies. The embedded derivative cash flows
are based on assumptions for future policy growth, which include assumptions for
expected index credits on the next policy anniversary date, future equity option
costs, volatility, interest rates, and policyholder behavior. The embedded
derivative cash flows are discounted using a rate that reflects Athene's credit
rating. The host contract is established at contract inception as the initial
account value less the initial fair value of the embedded derivative and
accreted over the policy's life. Contracts acquired through a business
combination which contain an embedded derivative are re-bifurcated as of the
acquisition date.
In general, the change in the fair value of the embedded derivatives will not
directly correspond to the change in fair value of the hedging derivative
assets. The derivatives are intended to hedge the index credits expected to be
granted at the end of the current term. The options valued in the embedded
derivatives represent the rights of the policyholder to receive index credits
140
-------------------------------------------------------------------------------- over the period indexed strategies are made available to the policyholder, which is typically longer than the current term of the options. From an economic basis, Athene believes it is suitable to hedge with options that align with index terms of our indexed annuity products because policyholder accounts are credited with index performance at the end of each index term. However, because the value of an embedded derivative in an indexed annuity contract is longer-dated, there is a duration mismatch which may lead to differences in the recognition of income and expense for accounting purposes. A significant assumption in determining policy liabilities for indexed annuities is the vector of rates used to discount indexed strategy cash flows. The change in risk free rates is expected to drive most of the movement in the discount rates between periods. Changes to credit spreads for a given credit rating as well as any change to Athene's credit rating requiring a revised level of nonperformance risk would also be factors in the changes to the discount rate. If the discount rates used to discount the indexed strategy cash flows were to fluctuate, there would be a resulting change in reserves for indexed annuities recorded through the condensed consolidated statements of operations. As ofMarch 31, 2022 , Athene had embedded derivative liabilities classified as Level 3 in the fair value hierarchy of$6.7 billion . The increase (decrease) to the embedded derivatives on FIA products from hypothetical changes in discount rates is summarized as follows: (In millions) March 31, 2022 +100 bps discount rate $ (364) -100 bps discount rate 407 However, these estimated effects do not take into account potential changes in other variables, such as equity price levels and market volatility, which can also contribute significantly to changes in carrying values. Therefore, the quantitative impact presented in the table above does not necessarily correspond to the ultimate impact on the condensed consolidated financial statements. In determining the ranges, Athene has considered current market conditions, as well as the market level of discount rates that can reasonably be anticipated over the near-term. For additional information regarding sensitivities to interest rate risk and public equity risk, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Deferred Acquisition Costs, Deferred Sales Inducements, and Value of Business
Acquired
Costs related directly to the successful acquisition of new or renewal insurance
or investment contracts are deferred to the extent they are recoverable from
future premiums or gross profits. These costs consist of commissions and policy
issuance costs, as well as sales inducements credited to policyholder account
balances. Athene performs periodic tests, including at issuance, to determine if
the deferred costs are recoverable. If it is determined that the deferred costs
are not recoverable, Athene records a cumulative charge to the current period.
Deferred costs related to universal life-type policies and investment contracts
with significant revenue streams from sources other than investment of the
policyholder funds are amortized over the lives of the policies, based upon the
proportion of the present value of actual and expected deferred costs to the
present value of actual and expected gross profits to be earned over the life of
the policies. Gross profits include investment spread margins, surrender charge
income, policy administration, changes in the GLWB and GMDB reserves, and
realized gains (losses) on investments. Current period gross profits for indexed
annuities also include the change in fair value of both freestanding and
embedded derivatives.
The estimates of expected gross profits and margins are based on assumptions
using accepted actuarial methods related to policyholder behavior, including
lapses and the utilization of benefit riders, mortality, yields on investments
supporting the liabilities, future interest credited amounts (including indexed
related credited amounts on fixed indexed annuity products), and other policy
changes as applicable, and the level of expenses necessary to maintain the
policies over their expected lives. Each reporting period, Athene updates
estimated gross profits with actual gross profits as part of the amortization
process. Athene also periodically revises the key assumptions used in the
amortization calculation which results in revisions to the estimated future
gross profits. The effects of changes in assumptions are recorded as unlocking
in the period in which the changes are made.
Athene establishes VOBA for blocks of insurance contracts acquired through the
acquisition of insurance entities. The fair value of the liabilities purchased
is determined using market participant assumptions at the time of acquisition
and represents the amount an acquirer would expect to be compensated to assume
the contracts. Athene records the fair value of the liabilities assumed in two
components: reserves and VOBA. Reserves are established using best estimate
assumptions, as previously
141
-------------------------------------------------------------------------------- discussed in future policy benefits. VOBA is the difference between the fair value of the liabilities and the reserves. VOBA can be either positive or negative. Any negative VOBA is recorded to the same financial statement line on the condensed consolidated statements of financial condition as the associated reserves. Positive VOBA is recorded in DAC, DSI and VOBA on the condensed consolidated statements of financial condition.
VOBA and negative VOBA are amortized in relation to applicable policyholder
liabilities. Significant assumptions which impact VOBA and negative VOBA
amortization are consistent with those which impact the measurement of
policyholder liabilities.
Estimated future gross profits vary based on a number of factors but are typically most sensitive to changes in investment spread margins, which are the most significant component of gross profits. If estimated gross profits for all future years on business in force were to change, including the impacts of shadow adjustments, there would be a resulting increase or decrease to the balances of DAC and DSI recorded as an increase or decrease to amortization of DAC and DSI on the condensed consolidated statements of operations or AOCI. Actual gross profits will depend on actual margins, including the changes in the value of embedded derivatives. The most sensitive assumption in determining the value of the embedded derivative is the vector of rates used to discount the embedded derivative cash flows. If the discount rates used to discount the embedded derivative cash flows were to change, there would be a resulting increase or decrease to the balances of DAC and DSI recorded as an increase or decrease in amortization of DAC and DSI on the condensed consolidated statements of operations. Following the business combination and application of purchase accounting described in Note 3 - Merger with Athene, DAC and DSI balances exhibit less sensitivity to hypothetical changes in estimated future gross profits and changes in the embedded derivative discount rate as they are less material following the business combination. VOBA balances no longer amortize based on estimated gross profits, and accordingly, are not sensitive to changes to actual or estimated gross profits.
Recent Accounting Pronouncements
A list of recent accounting pronouncements that are relevant to Apollo and its
industry is included in note 2 to our condensed consolidated financial
statements.
142
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French National Health Insurance Reports Findings in Health and Medicine (Pediatric Outpatient Prescriptions in Countries With Advanced Economies in the 21st Century: A Systematic Review): Health and Medicine
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