Apollo Global Management, Inc. (New)

During today's discussion, all callers will be placed in listen-only mode, and following management's prepared remarks, the conference call will be open for questions. Please limit yourself to one question, then rejoin the queue. 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 to purchase an interest in any Apollo fund. I would now like to turn the call over to Noah Gunn, Global Head of Investor Relations.

Thanks, Operator, and welcome again to our call this morning. Earlier today, we published our earnings release and financial supplement on the investor relations portion of our website. For the third quarter, we reported fee-related earnings of $365 million, an increase of 14% year-over-year, or 61 cents per share, and spread-related earnings of $578 million, or 96 cents per share. Together, fee and spread-related earnings totaled $943 million, or $1.57 per share. AND IN TOTAL, WE REPORTED ADJUSTED NET INCOME OF $801 MILLION, OR $1.33 PER SHARE FOR THE THIRD QUARTER. JOINING ME THIS MORNING TO DISCUSS OUR RESULTS IN FURTHER DETAIL ARE MARK ROWAN, CEO, SCOTT KLIMAN, CO-PRESIDENT, AND MARTIN KELLY, CFO. AND WITH THAT, I'LL TURN THE CALL OVER TO MARK.

THANK YOU, NOAH. GOOD MORNING TO ALL. APOLOGIES IN ADVANCE FOR SOUNDING LIKE A LOSING TEXAS FOOTBALL COACH. I WILL DO MY BEST I thought where I'd start is really to start with the macro or the market backdrop. I have a chart on my office wall that traces the movement of the S&P following the 2008 financial crisis and following the beginning of tightening in this round by the Fed. They are almost on top of each other. That is not to imply that we are going to have or experience the same sort of events that followed 2008. But I do believe it is an important comment on market psychology and investor sentiment. What did we expect would happen when we printed $8.1 trillion as a country? Well, exactly what should have happened, happened. Assets almost across the board elevated in price to multiples and levels we had never seen before. Risk was off. Everything went up. Interest rates went down. Now that we have begun tightening, we are doing nothing other than resetting to more normal levels. We act, and the market backdrop is somehow that low interest rates and excess liquidity are the norm. They are not, certainly not over my nearly 40-year career and not over any sort of long-term investment cycle. We have an entire generation of investors, investment analysts, who have really grown up just seeing the market go in one direction. And we now all know it goes both ways. If I just chart what's happened so far this year, venture capital valuations are down 60%, NASDAQ down 30, S&P down nearly 20, Barclays Ag down 17. This is an amazing time for alts, alternatives, particularly for credit. Investors have now discovered that everything is correlated to the Fed. And they are also discovering that most, if not all of last decade's investment acumen was really nothing other than market beta. And in some cases, nothing other than levered market beta. Over the past decade, investors kind of got a free ride. There was not much need for alternatives as markets moved primarily in one direction. Yet as an industry, Alternatives grew tremendously. When I think about the market backdrop we are in today, alternatives should shine. After all, as an industry, we exist because we produce excess return per unit of risk. And for the first time in a decade, investors are asking not just about the reward, but about the risk associated with investments. Alternatives offer diversification, in many instances downside protection, and an escape from correlation and indexation. That is the backdrop that I see for our industry. For us, this is a particularly good time. We did not chase a hot dot of growth at any price over the past decade. Our business continues to be guided by three fundamental principles, purchase price matters, excess return per unit of risk, and aligned investing. As a result, we are on offense. Just in Q3, we deployed 37 billion, 175 billion in the last 12 months. Dry powder now exceeds $50 billion. We excel in this kind of market. We are leaning in. We are out talking with investors, and we are apologizing for nothing. By and large, we did what we were supposed to have done in a period of market access, which was avoid potholes. Scott will take you through some detail OF OUR ACTIVITY ACROSS YIELD, HYBRID, AND EQUITY, AND IN PARTICULAR, HOW ACTIVE WE WERE IN THE U.K. AS A RESULT OF LDI, WHICH IS THE FIRST, I BELIEVE, OF MANY MARKET HICKUPS. THE PROOF ULTIMATELY OF THE STRENGTH OF A FRANCHISE SHOWS UP IN THE NUMBERS. AS NOAH ALREADY MENTIONED, RECORD FRE OF 365 UP 14% YEAR OVER YEAR. RECORD APOLLO CAPITAL SOLUTIONS REVENUES NORTH OF $100 MILLION, AS MARTIN WILL TAKE YOU record normalized SRE of nearly $600 million, as Martin will take you through again. $100 billion of year-to-date inflows, well exceeding the $80 billion target that we put out for all of 2022 at our Investor Day last year. In terms of performance, top-tier investment performance, Fund 9 gross and net were 40 and 26. Direct origination strategies were up 10% year-to-date, Our Athene alternatives portfolio was up 8% in Q3 versus nearly 21% down for the S&P 500. Let me now back up a little bit and talk about each of the individual businesses. Retirement services is generating more volume and higher spreads. Consumers prefer 4% and 5% guaranteed yields versus 2% and 3% guaranteed yields. We have nearly $37 billion of year-to-date inflows. We expect to exceed $45 billion during fiscal 22, and it would not surprise me if we got really close to $50 billion. The momentum in the business is overwhelming. Not only is the business good, we are underwriting new business at really nice spreads. Whereas we used to underwrite around 100 to 110, 115 basis points, we were 130 basis points in Q3, and I expect the basis point spread to increase going into Q4. In addition, we are experiencing increasing profitability from our net floating rate position of 30 billion. This is a strategic portfolio for us. The decision and the willingness to hold 30 billion of floating rate securities means that we have foregone income that we could have maximized in prior periods in order to set ourselves up with this form of downside protection. This notion of downside protection and not being a, quote, current period earnings maximizer is what allows us to be on offense in markets like this. Martin will take you through the direct effects of being long 30 billion floaters in a highly increasing rate environment. The other nice thing about what's happening in the business is, on average, the credit quality of the portfolio is going upmarket. We have been able to earn these spreads taking less risk rather than more risk. We've seen minimal impact of capital on capital from ratings migration. 95% of the fixed income assets continue to be investment grade. And having excess capital, which again is a luxury in our industry, allows us to be opportunistic and on offense. Let me move from retirement services to Apollo Asset Management. Simply said, we are on track to exceed targets from last year's investor day. Uh, Martin will also give you some insight to what we expect for 2023. And as you recall, we made three key bets, which were driving our asset management business forward. One was global wealth AUM at the end of five years of 50 billion. The second was Apollo capital solutions revenue in excess of 500 million. Again, at the end of five years and origination volume of 150 billion annually. Let me review each of those three bets, but if you intend to tune us out, the shorthand is we're well ahead on all of those three bets. In global wealth, this market is actually showing FAs and is showing clients that the 60-40 portfolio is not relevant anymore. I expect and our team expects that 50% of a high net worth individual's portfolio over the next five to 10 years will be alternative. It will not be alternative in the narrow definition of private equity or hedge funds. It will be alternative in the way that we mean alternative, which is an alternative to publicly traded stocks and bonds. In this kind of volatile market where people are focused on risk reward, we are increasing mindshare as an aligned partner. If you look back and you think about what's transpired so far this year, global wealth AUM is up $17 billion, $8 billion from Griffin, $5.5 billion from ADS and $3.5 billion from other fundraising initiatives. $17 billion is great progress on the way to a five-year goal of $50 billion, which I fully expect that we will exceed. Our positioning in this market is not to be the largest. Our positioning in this market is to be the most innovative, known for purchase price matters, excess return per unit of risk, and aligned investing. The same bargain that we have with our institutional clients is the bargain we intend to strike with our high net worth clients. Triple A, which I discussed in our last conference call, which is our core equity replacement product. Think of this as an alternative to S&P 500 exposure. We're already seeing great early attractions We've been approved by three bank platforms where we expect to launch the end of this year and the beginning of next year. And we see tremendous interest from RIAs, family offices, and IBDs. We have already seen, as I detailed on our last call, significant corporate interest. And just to give you a sense, this portfolio is up on an annualized basis more than 10% against a backdrop of a pretty negative S&P 500. We have been positive in all three quarters. in 2022. This is what we are trying to do is to replicate S&P 500 returns plus a little, yet with fixed income like volatility. On ADS, our Apollo debt solutions vehicle, we were up 2.2% in the quarter, outperforming investment grade bonds, high yield bonds, and levered loans. 90% of our portfolio has been put to work in 2022. Very little of the portfolio is exposed to the, quote, hot dot period of 2020 and 2021. We are on offense in this vehicle the same way we are on offense across our business. 99% of this portfolio is first lien, which we continue to believe for high net worth investors and others is the right place to be in an uncertain market with uncertain government backdrop, with uncertain inflation expectations. Uncertainty is not a time not to invest. Uncertainty is a time to make sure you are getting paid and going in with your eyes wide open as to a range of outcomes. Further in global wealth, we are seeing continued expansion, and you will see us in coming quarters discuss with you what we're doing in Asia Pacific. But suffice it to say, not only are we hiring, but we are seeing good leverage out of our FWD insurance and challenger relationships in Australia, FWD in Hong Kong, Asia, and Challenger in Australia, where we own minority stakes in both. To get from where we are to where we think this market is going to be is going to require time and education. We view ourselves as innovators in this market. For those who are interested to see what we're doing, just log on to Apollo Academy. This is a powerful tool for us to engage audiences, allow FAs to earn continuing education credits, and to bring thought leadership and expand the knowledge of what an alternative is to the investing public. The early engagement is really strong, and we continue to receive accolades from our channel partners for all that we are doing to move this market along. Apollo Capital Solutions, I'll just spend a second on. As an aligned investor, we want 25% of everything and 100% of nothing. That means we are ideally situated to work with our investors to syndicate into sidecars, into managed accounts, and other flexible vehicles. Revenue this quarter was very strong. We had a goal of $500 million of revenue by 2026. We will likely be north of $400 million of revenue for 2022. I'm very optimistic. Just like with global wealth, where we think we're likely to exceed our $50 billion AUM target, we are likely to exceed our $500 million revenue target for Apollo Capital Solutions. Somehow I get the sense that the leaders of these teams have sandbagged us, but that's all good. Our job is to execute our plan, not to chase the hot dot of growth. Let me now turn to the third and perhaps most important of our key bets, origination. If you run a business that is focused on excess return per unit of risk, you do not focus on growing AUM. You focus on growing your capacity to create investments that provide excess return per unit of risk And you believe, as we have seen, that AUM will follow. That is how, in my opinion, one generates a recurring revenue, long-term lasting franchise that investors can trust. Much of what we do in origination, as you will recall, is what we call fixed income replacement. Most of this is investment grade. We are occupying a slightly different space than most of our alternative peers. And we're occupying it because we think this is the most attractive space and we are advantaged in this particular area, and we are at scale. Currently, we own or operate 13 different platforms. A platform to us is a way of generating the kinds of investment-grade, yielding assets that we require to consistently grow our business and to feed our growing retirement services and third-party credit mandates. During the quarter, we announced the signing of a framework agreement for the Credit Suisse SPG business. This would be our 14th platform. We believe that asset-backed origination has the potential to be as large a market as corporate credit. This is a product set that is primarily investment grade, that fits extraordinarily well into our requirements for both our retirement services business and the third-party business we are building. would give us access to flow from more than 200 direct clients and accounts. Should we close on this transaction, which we believe we will, this would allow us to be marginally accretive going into 2023, but strategically very accretive. It will be up to us to turn this into a huge success, and we are optimistic about what this business can be in our hands incredibly enthusiastic of moving to a quick closing on this transaction. Having gone through the business, let me now talk a little bit about what we're trying to build and remind how we differentiate from most other firms in the alternatives industry. Our business model is built for the long term. The vast majority of our capital comes from our yield business, and the vast majority of our yield business is fixed income replacement. Fixed income replacement is top of the capital structure, senior secured, and that's where we want to be in uncertain times. It's why we can play offense. That does not mean we are not interested in the below investment grade market or direct origination. We are. It is just not the lion's share of our business. I step back and I think about, again, our industry. Indexation is rampant across fixed income markets and equity markets, and indexation and correlation, it's cousins. are just a huge source of differentiation for us as an alternative manager. The shift from defined benefit to defined contribution is another huge source of growth. Demographics, another huge source of growth. And something not fully appreciated is the changing role of banks post Dodd-Frank. Many of the fixed income originating assets are the kinds of assets that in prior periods might have ended up on bank balance sheets. Securitization is now how America banks. We estimate that less than 20% of debt capital to US businesses and consumers is provided directly by the banking system. The vast majority of capital is provided by all of you through intermediaries like us and our peers. This does not mean we are replacing the banks. Quite frankly, we are now partners with the banks. If you think about what a bank wants, For the most part, a bank wants the client. They can sell the client payments and FX and hedging and M&A and equity and a whole range of services that we and our peers are not really equipped, nor do I believe we will be equipped to offer. What we want is the asset. We want the asset on good terms, without fees taken out in advance, where we can have a direct look at credit quality, credit underwriting, control the documentation pen. Sixth income replacement, I believe to be a vast market where we are still in early stages of its development. And I'm confident that we can as a firm adhere to excess return per unit of risk while growing our business. That is the challenge that I see. There is growth everywhere in the alternative marketplace. The key is to grow while maintaining the core tenant of what an alternative is, Let me close by saying we're on offense. A year ago, almost to the day, we laid out a five-year plan. I'm confident that we're going to meet our targets, which were our more than double A of earnings by 2026. The three key bets are well underway, and we have already identified the next level of growth initiatives, whether it's AAA, GPLP solutions, and more to come. The accelerated hiring of the past few years is now behind us, and now it is our job to focus on simplifications, The entire alternatives industry has gone from a small industry to a relatively large industry over a decade. Much of the industry has grown by adding people. We now, as an industry and as a firm, need to take time to make sure we are building the systems and operating procedures that will allow us to scale the business and return to operating leverage. Make no mistake, a return to operating leverage is in the cards, and we expect that to happen for us as early as 2023. The talent we've added most recently with our COO addition, Brian Valliere, and others gives us the confidence that we are well set up to both grow and to be efficient in how we grow. Energy level at the firm is very high, and I want to use this opportunity not just to speak to all of you, but to thank the team, many of whom are listening, for the tremendous work they have done so far in 2022. And with that, let me turn the call over to Scott.