Apollo Global Management, Inc. (New)

Since our IPO in 2011, we have grown our AUM at a 20 percent compound annual growth rate, and this quarter we surpassed $300 billion in AUM. We continue to grow our fee-related earnings, or FRE, at a similarly strong pace, and our FRE has been a predictable underpinning of the significant cash distribution to our shareholders. supported by solid margins and high levels of permanent and long-dated capital. At the same time, the funds we manage have meaningful capital in the ground that should drive further cash generation as assets are monetized, all while continuing to invest in what we believe are attractive opportunities, setting the stage for future value creation. We believe there are a limited number of companies in the public markets that have been able to generate the same pace and quality of growth as Apollo. And in our view, the modest tax friction that we expect to experience by converting to a C Corp should be more than outweighed by the variety of benefits we expect to gain by moving away from our current partnership structure. Throughout our history, We have prided ourselves on our relentless focus towards creating value for our investors, and we believe that converting to a C-Corp is consistent with that goal. We continue to believe our stock is a compelling investment opportunity at current valuations, and we hope that by converting to a C-Corp, we can reduce the barriers to owning our stock and close the gap between where we trade today and where we see intrinsic value for Apollo. We analyzed a variety of factors in reaching the decision to convert, and we believe there are a number of benefits, including, one, a simplified structure and the elimination of the K1 form, two, an enhanced liquidity and the potential for reduced volatility for our stock, three, the potential for inclusion in the number of indices, such as the CRSP, the MSCI and total market indices, which is particularly important given the increasing flow of assets into index and passive funds. Four, as a C-Corp, we believe it will be easier for many new investors to own our stock. And finally, we have seen an increase in the valuations of our peers that have already converted or announced a conversion. And we believe that our conversion presents an opportunity for value creation for all of our shareholders. We look forward to continuing this discussion with our current and prospective shareholders. And with that, I'll hand it over to Josh for some additional thoughts around the conversion as well as our quarterly results.

Thanks, Leon. And let me also express my excitement for this significant step in Apollo's journey as a public company. In conjunction with our earnings release, we also published some materials this morning related to our announced C-Corp conversion. I don't intend to run through each of the slides. There are a handful of items I'd like to highlight in addition to the ones that Leon just discussed. First, in connection with the conversion, our dividend policy will remain unchanged. Capital return has been a cornerstone of Apollo's value proposition since we went public, and our shareholders have consistently expressed their appreciation for the ongoing quarterly cash flow. Turning to the economics of the conversion, at the corporate level, on a pro forma basis for 2018, the dilution to Class A shareholder cash earnings would have been approximately 5% if Apollo had been a corporation for the full year, given a year with low taxable income in our incentive business. Looking out over a cycle, as realizations increase, we expect that dilution could be in the range of 7% to 9% per year. For many of our shareholders, we expect that the ultimate after-tax impact will be lower than the corporate level delusion. On an important note, the bulk of the tax increase will be driven by our performance fees, while the impact to our after-tax fee-related earnings should be minimal since our FRE is already taxed at the corporate rate. We believe that this is significant given that FRE is the most valuable component in the sum of the parts valuation methodology applied to our business. At the end of the day, we felt the argument for conversion was compelling, and we believe the impact to our financial results should be more than offset by increased investor ability to own shares in Apollo, among other benefits. As we note on slide six of the supplemental materials, share ownership of Apollo and its among passive and index funds averaged less than 1% for publicly traded partnerships versus nearly 7% for C-Corps, and this figure continues to grow. We expect that the conversion will occur during the third quarter of this year. Moving on to our results for the quarter, which highlight the continued growth and diversification across our business, I'd like to start with some comments around asset growth, which has consistently remained strong and has created a stable base for increasing management fees and ultimately fee-related earnings. During the first quarter, Apollo saw gross inflows of $25 billion, which included advisory assets from Fund9's Aspen acquisition, assets from Athora's acquisition of Generali Belgium, flows from Athene, capital raised across various funds such as hybrid value and total return fund, and ongoing flows into managed accounts. Over the past four quarters, gross inflows have exceeded $80 billion during a period in which we did not raise a flagship private equity fund over that timeframe. We have grown AUM by 22 percent to $303 billion. The robust level of asset raising we have achieved is consistent with the growth trends we've been able to demonstrate, not just over the past three to five years, but since our IPO eight years ago. Looking ahead, we remain confident in our ability to drive strong AUM growth across the platform, fueled by fundraising among strategic capital initiatives and a variety of vehicles focused on strategies such as natural resources, credit, and real estate, as well as managed accounts. We have experienced particularly robust growth across insurance, which has been driven by a combination of internal growth, acquisitions, and reinsurance transactions. Over the last four quarters, Athene and Athora have contributed a total of $44 billion to inflows. In addition, our third-party fundraising efforts through the more traditional channels have generated inflows of $15 billion over the last four quarters. I would also like to highlight the following the segment changes Martin will discuss. Further, our real asset business now has $32 billion in assets as of March 31st, which is a strong reflection of the diversification of our investment platform and robust capabilities in real estate and infrastructure. Turning to capital deployment, We had another solid quarter with $4.3 billion of capital invested across the Apollo platform. In private equity, our funds committed an additional $2.3 billion of capital in the first quarter. We closed on our first investment for private equity fund nine, Aspen Insurance, during the quarter. Fund nine also announced two additional transactions. The acquisition of a number of TV stations and other assets from Cox Enterprises, and the take private of food retailers smart and final. Hybrid value just recently held its final close at approximately $3.25 billion, and we're pleased to announce that the fund is already 15% committed or invested, and the pipeline remains solid. Our methodical and patient approach of embracing complexity, combined with our ability to source and structure investments in a creative and flexible fashion, has enabled our funds to deploy capital in what we believe are attractive opportunities. We continue to identify and evaluate an active pipeline of investments across a broad spectrum of asset classes, and we are optimistic about our ability to deploy capital at a solid pace. As we've said previously, we believe the valuation of Apollo is closely tied to our FRA, which is largely based on recurring management fees which we view as predictable and a predictable growing component of our quarterly cash distribution. The strong AUM growth we've achieved in conjunction with a meticulous approach to cost control have together created the path for robust FRE growth that we have demonstrated through various market environments, with core FRE growing 17% on a compound annual basis over the past five years, and margins which are in the mid-50s. We expect to continue driving meaningful AUM and FRE growth across segments to organic capital raising and continued strategic capital initiatives. In addition, we have approximately $45 billion of dry powder, some of which will begin to earn fees as capital is invested, providing some visibility into FRE growth just from the AUM we have available across our platform today. Going forward, we will remain focused on driving our FRE higher since it is a reliable source of cash each quarter, regardless of whether we have any significant realizations from the funds we manage. We declared a $0.46 per share cash distribution during the quarter, bringing the total cash distribution over the past four quarters to $1.91 per share despite light realization activity over that period. Lastly, before I turn the call over to Martin, I want to mention we'll be hosting an Apollo Investor Day on November 7th, where we will be providing our current and prospective shareholders with an update on our strategic objectives and growth expectations over the coming years and showcasing the deep bench of talent we have here at Apollo. We hope to see you all there.

Thanks, Josh, and good morning, everyone. In addition to this morning's C Corp news, our earnings presentation issued earlier today reflects some changes which were made in order to simplify our reporting and make it easier for investors and analysts to interpret our results. We also made some changes at the segment level as we have recategorized certain assets and their associated income and expenses among segments. to better align our reporting with the way these businesses are now being managed under Scott and Jim. Turning to our results, starting with distributable earnings, the $207 million or 50 cents per share we generated during the first quarter was driven primarily by fee-related earnings. Pre-tax fee-related earnings of $210 million or 51 cents per share were complemented by a modest amount of realized performance fees and realized investment income principally generated by monetization activity in private equity. FRE declined by 18 percent versus the prior quarter, but grew 58 percent versus the first quarter of 2018. The lower quarter-over-quarter FRE was driven primarily by lighter transaction and advisory fees. However, we continued to grow base management fees, which increased 4 percent versus last quarter and 32 percent versus the year-ago quarter. Advisory and transaction fees of $19 million in the quarter included co-invest fees related to Fund 9's Aspen transaction. As a reminder, transaction fees can be variable on a quarterly basis since they are generally tied to the pace of capital deployment. However, for the last three years, transaction and advisory fees have been over $100 million annually. And as Josh highlighted in his remarks, we remain confident in our ability to put money to work with a value-oriented bias despite generally elevated market values. I also want to note that as of the first quarter, we are recognizing management fees from Athene under the terms of the proposed amended fee arrangement. As we have noted previously, we believe the revised fee arrangement we announced together with Athene last September maintains the strong alignment of interest that has endured since Athene was founded more than a decade ago. There is no meaningful near-term financial impact under the proposed amended fee arrangement as compared to the previous arrangement. But under the revised arrangement, Apollo will now earn a base management fee and a sub-allocation fee as opposed to a base management fee and sub-advisory fees under the prior arrangement. We've presented some new disclosures in connection with the revised arrangement on slide 10 of our earnings presentation. As a reminder, we have moved to a focus on distributable earnings, or DE, as our primary earnings metric, as we feel this better represents our underlying operating performance and how we manage the business. However, as you saw in our earnings release from this morning, we continue to disclose pertinent information related to returns by strategy and accrued performance fees in order to provide our shareholders with what we believe is the most complete view of performance across the Apollo platform. Our net accrued performance fees balance grew 12% in the quarter, supported by positive marks across our credit, private equity, and real estate businesses. In private equity, the public market's rebound in the quarter drove 16% appreciation in our fund's public portfolio companies. Combined with positive mark-to-market of 2% for the fund's private portfolio, our aggregate private equity funds appreciated by 4.6% during the quarter. In credit, we also participated in the rebound experienced across credit markets during the quarter, with positive performance across the funds we manage in corporate credit, structured credit, and direct origination. We believe our patient and thoughtful approach to investing in conjunction with our ability to deploy capital quickly when the opportunity arises, helped our funds perform well over the past six months, a period during which there was significant market volatility. In times of market dislocation, we believe our integrated platform and expertise in navigating various parts of the credit risk spectrum are important competitive advantages, particularly as our business model affords us meaningful liquidity and patience to invest behind our conviction. Finally, in real assets, the aggregate appreciation across the portfolio was 4% for the quarter and 6.7% for the 12 months ended March 31, and this segment continues to perform well. With that, we'll now turn the call back to the operator and open the line for any of your questions.

Thank you. The floor is now open for questions. If you wish to ask a question at this time, please press star, then the number 1 on your telephone keypad. If a question has been answered, you may remove yourself from the queue by pressing the pound key. For today's call, we will be taking only one question per person initially, and to the extent there are follow-up questions, we ask that you please re-enter the queue, again by pressing star, then the number one on your keypad. Our first question comes from the line of Alex Blilstein of Goldman Sachs.

Hey guys, good morning. So maybe just to get the C-Corp conversion questions out of the way and some of the cleanups, can you guys just walk us through what the effective tax rate is going to be on the business now, maybe starting 2020 as kind of the first clean year and how that's going to evolve over the next couple of years? I know you guys talked about dilution, but just in terms of the actual tax rate.

Yeah, sure, Alex. It's one. So over the medium term through the cycle, we would expect the blended cash tax rate to be in the range of 16% to 18%. And that reflects both the, you know, what are today the blocked and the unblocked pieces. Most of the increase in the tax costs and the dilution is being incurred on the carry and balance sheets out of the house with just a modest uptick on the FOE tax rate.

Thanks.

Sure. Thanks.

Our next question comes from the line of Michael Carrier of Bank of America, Merrill Lynch.

All right. Thanks, and good morning. Just on the FRE growth and the asset growth, you know, it's been strong over the years. The realized performance fees, obviously a bit later this quarter, but the outlook, you got the higher net accrued performance fees. You guys showed the incentive generating AUM, you know, growing. So maybe just some color on the portfolio progress and the outlook on the real ICs. I know it's tough to predict, but just given where things are situated.

Sure, sure. So as I've said in prior quarters, and it still remains true, the fund continues to build value. 2019 realizations will exceed, you know, 2018 realizations. And, you know, and our big flow years will be, you know, 20 and 21. So, yeah, I mean, nothing's really different from what we've previously said, continuing to sort of build value there in the private equity business. Obviously, you know, some of that's going to be market dependent. And, you know, but for the most part, you know, continuing to build value in the funds.

I just add the average investment's about three years old, so it's starting to mature, but still a little early in the fund's life.

Okay, thanks.

Thanks.

Our next question comes from one of Bill Katz of Citi.

Thank you very much, and congrats on the conversion. Just maybe on margins, you had a really strong FRE margin this quarter, and you have just seems like a ton of momentum on the AUM side and the fee rate side. How should we be thinking about the trajectory now for the FRE margin as you look at over the next 12, 24 months?

Yeah, I mean, I think we continue to think that there's some operating leverage left in the business. Obviously, we've made a lot of headway, and I don't think that sustainably – um, we can, you know, kind of keep, continue to say we're not, we don't continue to think that those, that type of increase is going to be continuing to happen, but we feel like margins are sustainable and going up a little.

Yeah. And I just, I just say like, we're, we're really pleased with the progress we've made over the last number of years. And, and we're now, you know, we're balancing investing in the platform, um, with, uh, with future revenue growth and, and, uh, And oftentimes the cost comes before the revenue. So that's the balance that we work through. And we're pretty good about that.

Thanks.

Our next question comes from one of Devin Ryan of JMP Securities.

Hey, great. Good morning, guys, and congratulations on the conversion announcement. Question here just on PE deployment. So, you know, it feels like there's a lot in the hopper right now. You've invested, I think, $1.6 billion in Fund 9, and it sounds like a pretty healthy pipeline. So I don't want to get, I guess, too far ahead of ourselves here, but can you maybe just give a little more granularity on kind of deployment expectations there and then kind of the scenarios for maybe even being in the market for Fund 10 just based on how quickly you're kind of moving on Fund 9?

Sure, sure. So as Josh alluded to in his comments, we do have a number of deals that are pending to close and should be closing in the coming one to two quarters. You know, from a continued deployment, you know, our teams are quite busy, as we've said in the past. You know, it's a tricky environment, and, you know, we're remaining very disciplined on the investments we do make. And it's inherently unpredictable, and so I'd hate to really try to pinpoint exactly how fast deployment is in any quarter or even in the next 12 months. As far as Fund 10, I think it's premature to be talking about exactly when that will come. You guys know we're incredibly opportunistic, and so when opportunities arise, we will lean aggressively into them, and when conditions aren't right for what we're looking for, we'll pull back. So I think it's tough to sort of give a very detailed quarter-by-quarter flow, but I'll end with the deal teams are quite busy. There's a lot of stuff to look at.

Yeah, so we're approximately 15% committed in nine, and our pace has been, on average, plus or minus $5 billion a year. So if you think about that, it gives you some context as to how you might think about Fund 10, but the reality is that it's going to be market-dependent. If you back out five stocks, um you know the fags the market's trading below 15 times and the economy's healthy and so there's good value opportunity right now um financial markets are open so we're going to try to continue to do our thing the the only thing i would add is that uh

There's been very little on the distress side over the last five years in the fund. When you look at Fund 7, two-thirds of it was in distress. Fund 8, it was less than 5%. You know, your guess is as good as ours, but we're in the 11th year of a recovery, and probably with a reasonable probability somewhere during Fund 9's life that there's going to be a heavier emphasis on distressed. And when that window opens, there should be a lot more capital deployment in that area. And clearly one of the activities of the PE team right now has been to be reviewing literally many hundreds of companies in the industries that we pay a lot of attention to and where we want to be in the capital structure and at what prices. In some industries, we're getting closer, but not quite there, and in others, not. But clearly that's a component that has not been active for the last five years, but somewhere in the next two or three years may become a lot more active.

Great. Thank you, guys.

Thanks.

Our next question comes from one of Glenn Shore of Evercore.

Hi. Thanks very much. Obviously, with all the growth being produced from the insurance and credit sides of the business, I have a question on your view on debt markets, maybe public versus private valuations, competition, structuring, things like that, where you see value. Because $900 million of capital deployment in the quarter is okay, but you have plenty of dry powder and a lot of growth coming there. So I'm curious where you see value as it relates to how much we can expect deployment there.

Sure, Glenn. This is Jim. You know, certainly we were active in the fourth quarter when we had the opportunity when the market sold off and there was opportunity in the liquid markets, leveraged loans in particular, and structured credit. You know, in terms of the most recent quarter, as Martin said in his numbers, we participated in the rally. And for the most part, there's probably a little bit better value in the private markets right now than the public markets. We've continued to hone our business and grow our business very well in MidCap. MidCap continues to grow, and as you know, that's all senior secured assets with covenants, and those companies in that portfolio grew 13% last year. So we're finding opportunities in MidCap and direct origination in our business. Scott mentioned that we've done three investments in hybrid value to date. And certainly we're also finding opportunities in our bespoke opportunities in structured credit in our real assets business. So for us right now, we're not macroeconomists, but we suspect the environment that Scott and Leanne and Josh have described is going to continue the rest of the year. Lower rates, probably muted inflation. Look forward to opportunities with market dislocations, but we probably prefer private opportunities than public.

Got it. If I could, on slide 10, I like the bottom right of the slide where you give the Athena and Athora AUM breakdown. Could you give just some examples of which assets fit into which of those buckets and, importantly, which ones drive the higher fees for Apollo?

We're all slipping.

Yeah, so I'll start. So the... The yield assets and higher alpha assets include real estate lending, like MES lending and sort of yieldier assets. And then as you work your way up, you get into CLO liabilities and an array of other sort of mid-market type lending exposures. And the range on the fees there, which we've disclosed previously, goes – there's a large range around that, sort of 6.5 pips at the bottom end up to 70 pips at the end. And that just reflects the yield profile of the assets that we're investing on behalf of a thing.

Yeah, just to provide a little bit more color, like the core assets are your investment grade public and private book. Your core plus assets are some of your mortgages, your mortgage, first mortgage paper. Your yield assets are your in real estate, your senior mezz. And the higher alpha may be some things like, you know, a variety of CLO equity and CLO liability. So along the risk curve and along the liquidity curve as well.

Perfect. Thank you.

Our next question comes from one of Gerald O'Hare of Jefferies.

Great. Thanks for taking the question. I guess just actually staying on slide 10 for a moment, perhaps you could touch a little bit on the growth outlook for, you know, Athene and the authority business and then you know, to the extent you have any visibility or perhaps even preference, how you think these asset allocation buckets might look several years down the road. Thank you.

Hi, it's Gary. Just from an industry point of view, part of the overlay, I'll fill in, but it's similar to even two years ago. We see a number of opportunities. We continue to be active in looking at these opportunities. Interestingly, as things advance, one is stable, and that is the pressures on the insurance industry are about the same today as they've been over the last few years. Low interest rates and a lot of big companies needing to reposition within their portfolios by geography or by line of business. So that exists. There are more financial sponsors that are buying simple annuity blocks. Interestingly, there are still very few strategic buyers in the insurance industry, so we don't run into that type of competition. And as you'll recall, what we really focus on is our comparative advantages, and those are two things. One is really trying to understand the insurance industry and a lot of verticals within insurance. We're now operating in six different verticals of the insurance industry in Europe and the U.S., We have about 150 people working in insurance and financial services. And so that area we think we have a comparative advantage to deliver solutions. On the second side that's equally important, we've continued to build out the investment capability for insurance company balance sheets. And we think we have a comparative advantage there. We can add enhanced yield for similar risk. And we know the regulatory landscape for both NAIC and Solvency II. And as we build out those capabilities, that plus our insurance expertise, we're in, just as actually Scott alluded to and Leon in private equity, on the insurance platform side, we're in a number of active dialogues. When the timing will be, how it will come out, we never know. But the flow is as good today as it was two years ago. And in that subsequent period, we found ways to get things done.

I would just add on the asset allocation side, I wouldn't expect with growth to see a dramatic change in the large buckets. We're talking about monetizing and trying to get incremental basis points out of various assets, but the core structure of the Athene portfolio, the core structure of the Athora portfolio, there's going to be some changes around the edge, but there are not going to be dramatic shifts in the buckets as you model the business.

Great, thank you. Our next question comes from the line of Robert Lee of KBW.

Great, thanks, and congrats on pulling the trigger on the conversion. Can you maybe just, you know, update, so we haven't heard much about it in a while, but, you know, with all the solid fundraising and credit and obviously Athena and Thora, but kind of what you're seeing in the strategic separate account area, I mean, I know you'd had a bunch of success with that, you know, going back? Is that still, uh, you know, is that part of the current flow? I mean, maybe any update there would be helpful.

Yeah, look, I mean, obviously the, uh, investors now, uh, pretty larger investors want customization, customized reporting, customized, um, particularly in credit, customized, uh, risk allocation amongst various asset classes and geographies. And so certainly, um, that is, you know, credit, um, you know, is growing, grew at 14% over the last four years. And, you know, there's definitely, I can't tell you, that's a faster growing segment in credit.

Yeah, and I would just add, you know, our focus last year, you know, when you think about the margin contribution of a commingled fund versus an SMA, you know, our focus last year was on hybrid value, which was very successful for us. We're going to continue to add SMAs in the size and scale that make a difference for us. But certainly we have, you know, if you look at our SMAs as a percentage of our AOM in actual raw numbers, it's around $25 billion. So we think that's a – we were a leader early. We've continued to keep the dialogue, and we will do so. But we're going to make sure we focus on the commingled fund, the sizable, scalable commingled fund as well.

And you just want to give investors a way to express their view in whatever structure they want or feels right for them.

Great. Thank you. Thanks.

Our next question comes from the line of Patrick Devitt of Autominus Research.

Hey, good morning. Thanks for the time. Scott, I want to go back to your discussion on the realization outlook. Just curious if that view that 2019 will be better than 2018 It's just kind of a view of the volume of realizations, or do you think the cash flow from realizations can be higher than 2018? And within that, could you frame the completed and announced pipeline of sales expected to come through over the next couple of quarters?

Sure, sure. And so, again, I'll start with the caution of, you know, all market dependent. But, yeah. To answering the first part of your question around what's coming down from a monetization standpoint, yeah, look, I think that's ultimately based on our bottoms-up build of what's coming to maturity, what dividend recaps we're aware about, what expected exits where companies are you know, now ready to be exited. You know, we have, you know, things that have been in the press to, you know, that are on their, you know, way to, should be starting their exit. So I'm not going to name specific names, but so it's from a, it really is a bottoms-up build based on when these companies are You know, we've created the value we're going to create in these companies and are now moving to an exit path.

Thank you.

Okay, thanks. Our next question comes from one of Greg Siegenthaler of Credit Suisse.

Thanks. Good morning. So just given that a themes balance sheet is now $114 billion, I'm just wondering how challenging is it to help Athene find, which I think is $30 billion plus of new assets a year, and also within that, also help Athene migrate its balance sheet into one-third, which I think you guys label as differentiated assets?

So if you take a step back, if you look at the core balance sheet now that we're over $100 billion, we have about a 35% to 45% allocation to core investment grade public and private. So the workhorse of the vehicle is what's going on in the IT market. We have a leading position in that spot as well as the private placement market. But to your question, You know, it's success in a variety of areas. It's success not only in structured credit, commercial real estate debt, which we really have no CMBS but all CRE origination, and then certainly on the residential side as well as a variety of structured vehicles like MidCap and AmeriHome. So it's a combination of all those that contribute. Our focus is still at Apollo to create more direct origination vehicles like we've done in aviation in the last 18 months. and there's a variety that are in the R&D lab to help them out. But, you know, our focus with them is obviously a primary focus, and we feel very comfortable that the M&A pipeline that Gary mentioned earlier, that we're very comfortable in our ability to add incremental basis points and returns. And, again, it's been public with all the Athene numbers. We're not talking about hundreds and hundreds of basis points of margin returns. If you look at the historic outperformance we've done versus other insurance companies, it's averaging that 40 to 50 basis points. So it's a lot of large numbers and doing it day in and day out. And we feel very comfortable in our ability to continue to do so.

I mean, the size of the $115 billion, by the way, the size of the AUM is actually, in many cases, an advantage. And I just point out that organically, just through... distribution slash reinsurance slash institutional is growing relatively healthy, you know, in a relatively healthy way. And on top of that, we're finding that our ability to, you know, next to Berkshire Hathaway, we have the largest amount of permanent capital out there in this business. And that becomes an advantage relative to helping other strategic players solve problems that other people really can't can't do.

And the macro opportunity is still very compelling. Yes, there are other players in the playpen trying to get into the playpen, and that's fine. Some competition is healthy. But the macro picture is we see over a trillion dollars of opportunity on the life side and probably half that on the P&C side. Gary mentioned we're now in six different insurance platforms. And, you know, maybe, you know, there's been a reasonable amount of underperformance across the industry given the low rates. And a lot of companies have used whatever cash they had for stock buybacks, for dividends, and there's a dearth of capital there. now, and the need for many of these big companies to sell off non-performing assets. So, you know, hopefully we will get our share of the targets that we're interested in, but we feel pretty sanguine and optimistic about the opportunity, especially given the platform we've built and the team we've put together.

Our next question comes from one of Chris Harris of Wells Fargo.

Thanks. I just wanted to follow up on an earlier question about the tax rate. Once the conversion goes into effect, should we be expecting an immediate step-up in the 16% to 18% range, or will it be kind of a phased-in ramp-up? And the reason I ask that question is I believe with some of the other alts that have it's been more of a phased-in type thing.

Yeah, I'm going to get past this year because it'll be a split year. But once we get into 2019, I would expect that because Cary is being taxed, you know, for the most part where it wasn't previously, that will be fully reflected. And so that will get us into that range in the near term. Okay, thank you.

Our next question comes from one of Michael Cypress of Morgan Stanley. Mr. Cypress, your line is open.

Hello, can you hear me now? Yes. Okay, great. Sorry about that. So on fee-related earnings, you guys have had some impressive growth over the past couple of years and since your IPO, 17% past five years or so. I guess what's the right level of fee-related earnings growth that we could expect over the next couple of years and then also longer term? And then on the FRE margin itself, 55%, how do you think about the upper bound on that FRE margin? And if you were in a couple of years from now and it's below 50%, what would have happened?

Yeah, so first of all, if you think about the AUM growth, right, I think our business, you know, grows at, you know, double digit. And then, you know, it's just that's historically what it's done just organically. And then you've got things like Athora or acquisitions, what I call the R&D lab. And we just come up with, you know, the insurance platforms themselves and the ramp of Athora. has gotten us, you know, to, you know, in the last five years, 15% AUM growth. So even if that, you know, so I think in that range, the double digit going up to 12, 13 even, you know, you're going to get some operating leverage into the numbers. And so you're getting that 17% growth, which is in excess of your revenue growth. And so I think that that's likely to continue plus or minus. In terms of the upper, I mean, I don't see the margins going, you know, we have industry-leading margins, and I think that, you know, it's hard to see the margins going into the 60-plus percent range. So I think if you think about the mid-50s going into the high 50s, you know, that feels like the right answer. The reality is that, you know, the way the business works, it's, you know, you build the teams and then the revenue drops, but we tend to reinvest that. You know, we don't reinvest every last, we don't sort of distribute every last dollar of that operating leverage. We try to reinvest in the platform. We're investing a lot this year in new teams and new products so we can keep that growth growing, keep that AUM growing. And last thing I'll say, just so you start with the double digit and then you do some different things and, The last thing I'll say is that we have a fair amount of uninvested capital in credit where the fees turn on as you invest. And so that could add, if we find good investment opportunities, that could add 200 or 300 base points to our fee-generating AUM. And so we often talk about AUM, but the fee-generating AUM is really what pays the bills.

And I'll just answer the last part of your question, which is what would have happened if margins dropped below 50. I don't anticipate that being a scenario. I think we have a highly durable management fee stream, which is anchored by permanent capital and with little duration to it. And so no matter what the markets do, there's just not much volatility to the management fee stream. And our costs are high. highly manageable, and we play a lot of time and focus and attention looking at that. So, you know, there could be a one-off, non-recurring type cost that would temporarily drop it, but, you know, on a sustained basis, I don't see that as a scenario. We certainly don't plan for that.

Great. Thanks. That's super helpful.

Thanks. Our next question comes from the line of Bill Counts of Citi.

Just a follow-up question. I know, Josh, you mentioned that there's no change in the dividend policy, but looking down the road a little bit, I was just sort of curious. You have a pretty fat yield right now on a highly visible earning stream, right, a pretty durable business model. Is there an argument to be made to actually lower the dividend a little bit and think about a different type of capital deployment that might catalyze more of a S&P type yield on that residual dividend? Have you thought that through?

First of all, Bill, we do have a fat yield, so I'm glad you noticed. We certainly noticed. Look, I mean, we're always thinking about how to maximize total shareholder returns. And so we're always exploring various things. At this point, we think a tremendous amount about our dividend policy. At this point, we feel like the distribution policy is appropriate. We're always looking at things that might enhance the value and if we were to be convinced that changing the dividend – and we do have investment opportunities, but right now we're convinced that we have a heavy – our model generates a lot of cash flow, and we're capital light. And, you know, we don't – there's no need to retain the capital. We're obviously a well-rated – we don't have a lot of leverage. And so we feel like the right thing to do right now is to pay it out. If there were to be some amazing opportunity – or we would feel that the market would value us in a better way if we stopped paying out, we would do that. But that's not how we feel right now.

Thank you. Thanks.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Michael Carrier of Bank of America, Merrill Lynch.

All right, thanks. Martin, just one follow-up on the C-Corp conversion. The dilution is better than expected, and I think what you guys – expected in prior quarters. Just curious what drove that. And then is that for common or is it for overall?

It's for overall. Well, it's the total cash dilution to a shareholder across all parts of the structure. And the reason it came down from what we suggested a year plus ago, some comments based on I think what's changed since then is that we've incorporated a tax benefit from a 754 election in the numbers, and our FRE mix relative to carry continues to increase. And so I think that, over time, has reduced the dilution that you'd expect to see.

Got it. All right. Thanks a lot. All right. Thanks.

And that concludes the Q&A portion of today's call. I will now return the floor to Gary Stein for any additional or closing remarks.

Great. Thanks, everyone, for joining us this morning. Remind you again to save the date for November 7th for our Investor Day. We'll look forward to speaking with you again soon.

Thank you, ladies and gentlemen. This does conclude Apollo Global Management's first quarter 2019 earnings conference call. You may now disconnect and have a wonderful day.