Apollo Global Management, Inc. (New)

Good morning and welcome to Apollo Global Management's second quarter 2019 earnings conference call. During today's presentation, all callers will be placed in a listen-only mode, and following management's prepared remarks, the conference call will be open for questions. This conference call is being recorded. This call may include forward-looking statements and projections, which do not guarantee future events or performance. Please refer to Apollo's most recent SEC filings for risk factors related to these statements. Apollo will be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the company's website. Also note that nothing on this call constitutes an offer to sell or solicitation of an offer of purchase of interest in any Apollo fund. I would now like to turn the call over to Gary Stein, head of corporate communications.

Great. Thanks, operator. Welcome to our second quarter earnings call. Joining me this morning are Leon Black, chairman and chief executive officer, and Martin Kelly, chief financial officer and co-chief operating officer. Our co-presidents, Scott Kleinman and Jim Zelter, are also here with us and will be available during the Q&A portion of today's call. Earlier this morning, we reported distributable earnings of 56 cents per share, which led to a cash distribution of 50 cents per share for the second quarter. The quarter's distributable earnings were primarily driven by pre-tax fee-related earnings, or FRE, of 58 cents per share. As a reminder, we'll be hosting an Investor Day on November 7th, and we look forward to sharing more details with you in the near future. With that, I'll turn the call over to Leon Black.

Thanks, Gary, and thank you all for joining us. I'd like to focus my remarks this morning on a handful of topics, starting with Apollo's ability to generate a stable and growing stream of cash earnings through a variety of market conditions. Next, I'd like to highlight some strategic capital transactions announced during the quarter and provide you with some details on our approach towards responsible investing in conjunction with the report we published yesterday. Finally, I'd like to give you an update on our C-Corp conversion, which we announced during our prior earnings call. From there, Martin will discuss current quarter results and forward drivers of growth for Apollo before we take your questions. Over the past 12 months, we have seen significant volatility across various equity and debt markets, including a 20% decline from peak to trough in the S&P 500, before a rebound above prior market highs. Also, more than 200 basis points of widening in high yield bond spreads before recovering to pre-stress levels. And finally, a U.S. market interest rate consensus, which has swung quickly from expecting more rate hikes to now anticipating multiple rate cuts. In contrast to these fluctuations over the last year, Apollo has continued to demonstrate steady growth in AUM, which has reached $312 billion, reflecting a 16% increase from the prior year, with strong visibility into future growth led by Athora's pending acquisition of VVAT. This AUM growth has been driven by strong fundraising and a substantial base of permanent and long-dated capital. Over the past 12 months, gross inflows have totaled $65 billion, and we have deployed $15 billion across our commitment-based funds alone. Together, this has driven $51 billion of inflows to fee-generating AUM. Against the volatile market backdrop during the last four quarters, our management fees have grown during every quarter. reaching $1.4 billion for 12 months ended June 30th, 2019, supported by strong fundraising and very modest sensitivity to interest rate and credit market movements. This growth in management fees, combined with an ongoing focus on expense control, has resulted in fee-related earnings of $901 million over the same period, representing 35% growth over the prior year. We believe the significant growth reinforces the strength of our robust business model, which has enabled us to deliver durable and growing fee-related earnings throughout market cycles. Looking ahead, we expect to continue to generate this robust FRE growth through a combination of organic capital raising and strategic capital initiatives. The funds we manage also have approximately $44 billion of dry powder, approximately half of which will begin to earn fees as capital is invested, providing some visibility into FRE growth just from the AUM we already have available across our platform today. In addition to the strong tailwinds we see in FRE, we expect performance fees to to become a much larger contributor to earnings over the next few years as we begin to monetize a substantial portion of the 32 portfolio companies in Private Equity Fund 8, assuming markets remain accommodating. We believe the powerful combination of continued strong FRE growth and a significant increase in performance fees should set the stage for meaningful earnings and distribution growth ahead. Now I'd like to highlight two strategic capital events that will be additive to our earnings over the intermediate term. Last month, Athora, which is one of Apollo's strategic capital initiatives, focused on consolidating the European life insurance market, and it signed an agreement to acquire the life insurance business of Vivat, a Dutch insurer. This transformative transaction, which is akin to a theme's 2013 acquisition of Aviva USA in terms of its scale will more than triple Athora's assets under management. The acquisition is expected to close in the first quarter of 2020, subject to customary closing conditions, including regulatory approvals. Vivat represents a significant step in the expansion of Athora's platform, adding size and scale, a new geographic market, and organic growth capabilities in the important Dutch market. Importantly, we continue to see significant opportunity for future growth in European insurance. In addition, we continue to raise capital for the Athene Apollo Dedicated Investment Program, or ADEP, a vehicle which will invest side-by-side with Athene for sizable insurance acquisitions, as well as pension risk transfer and other transactions. To date, we have closed on nearly $1.5 billion of commitments, and we are targeting $4 billion of commitments in total by year end. My remarks up to this point have been focused on certain strategic capital initiatives as well as the strong economic results that Apollo has generated throughout the years. I also want to spend a few moments discussing our firm's longstanding commitment to responsible investing. Last night, we published our 10th annual ESG report, highlighting a decade of consideration into how environmental, social, and governance, or ESG issues, impact the firm, the companies in which Apollo Managed Funds invest, the communities in which they operate, and the world at large. We believe in the importance of incorporating ESG factors into our investment management strategy and have worked closely with the portfolio companies of the private equity funds we manage to help introduce or implement best practices in many respects. The portfolio companies of the private equity funds we manage employ more than 350,000 employees in aggregate, and a firm with the combined revenue of all these companies would rank as the 33rd largest company among the S&P 500. Together, these companies have employed more than 15,000 veterans. During 2018 alone, the companies made charitable donations of nearly $300 million, and their employees volunteered more than 120,000 hours. These are just a handful of many constructive items highlighted in our ESG report, which we are excited to now make available to everybody on Apollo's website. Lastly, as Apollo approaches its conversion from a publicly traded partnership to a C corporation, we look forward to sharing our exceptional 29-year growth story with a broader set of investors. As we noted on our last earnings call, we continue to expect that our conversion will take place during the third quarter, following the receipt of regulatory approvals. As a reminder, we believe our conversion to a C-Corp can create a number of benefits for shareholders, including, one, a simplified structure in the elimination of the K-1 form, two, 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, five, we... already have seen an increase in the valuation of APO, as well as the valuation of our peers that have already converted. And we believe that our conversion presents a further opportunity for value creation for all of our shareholders. We believe our stock is a compelling investment at current valuations, and we hope that with this conversion to a C-Corp, we can continue to reduce the barriers to owning our stock and close the gap between where we trade today and where we see the true intrinsic value of Apollo. With that, I'll hand it over to Martin to discuss Apollo's second quarter results and ongoing drivers for growth across the firm.