Apollo Global Management, Inc. (New)

Good morning and welcome to Apollo Global Management's first quarter 2023 earnings conference call. During today's discussion, all callers will be placed in listen-only mode and following management's prepared remarks, the conference call will be opened for questions. Please limit yourself to one question and then rejoin the queue. This conference call is being recorded. This call may contain 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 during this conference, 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. Please 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 will now turn the conference over to Noah Gunn, Global Head of Investor Relations.

Great. Thanks, Donna, and welcome again, everyone, to our call this morning. Earlier, we published our earnings release and financial supplement on the Investor Relations portion of our website. First quarter results were strong and outperformed on a number of fronts. which we believe few others can say amid this backdrop of market volatility. We'll discuss further over the course of the call, but it's quite apparent that our purchase price matters approach is shining, allowing us to be very front-footed in executing our strategic objectives. The proof is in the numbers. We reported record quarterly FRE of 397 million, or 67 cents per share, and normalized SRE of $811 million, or $1.36 per share. which together increased a remarkable 45% year over year. This powerful combination of fee and spread related earnings coupled with principal investing income drove normalized adjusted net income of $942 million or $1.58 per share in the first quarter, up 18% year over year, which is indicative of the type of consistent compound earnings growth we believe we can deliver to our shareholders. Joining me this morning to discuss our results in further detail are Mark Rowan, CEO, Scott Kleinman, co-president, and Martin Kelly, CFO. And with that, I'll turn the call over to Mark.

Thank you, Noah, and good morning to all. Noah started down the path that I'd like to pick up on and really talk about the two different bets we have made versus our industry. The first is an investment-style bet. If you look across our $600 billion of AUM, you never have to worry about what strategy we're following. Every strategy is purchase price matters. Purchase price matters is grounded in facts, it's grounded in cash flow, it's grounded in business prospects. In the equity business, which Scott will talk about, it manifests itself in a maniacal focus on low purchase price for the quality of business that we are buying. In the credit market, It manifests itself at being top of the capital structure, senior secured, and floating rate. If I tick through just this quarter's results and how purchase price matters plays into this amid this market dislocation and volatility, in our credit business, corporate credit up 3%, structured credit up 3%, direct origination up 5%. I hosted a webcast earlier this month for ADS and Earl Hunt, 98% of the book, senior secured, floating rate, originated in 22 and in 23, great years in which to originate. If I turn to our equity business, private equity up 5%, European non-performing loans through EPF up 2%. Literally across the board against a backdrop of instability, purchase price matters has paid off. It is really hard not to chase the hot dot of momentum and liquidity. especially when it goes on for so long against a backdrop of money printing. But that, in fact, is what we did and why we are where we are today. The second bet I'd like to talk about goes back to our investor day in October 2021. We told you at the time that we were going to make a different bet than almost everyone else in our industry. And if you look across our industry, some have bet on real estate equity. Some have bet on infrastructure. Some have bet on subordinated debt, BDCs. Some have bet on growth. None of these in and of themselves are bad strategies. And in fact, some of our competitors execute against these strategies quite well. But these are not our strategies. The bet we told you at the time that we were making, if you looked at the vast majority of our AUM growth, was on fixed income replacement. Think of that as private investment grade. We made a really big push into private IG. Different than private credit is how private credit is normally talked about, which normally means levered loans and below investment grade. We are the investment grade version. This quarter, our yield AUM was some $440 billion. And while that sounds quite large, and it is the largest of the private credit businesses, this is against the backdrop of a $40 trillion market that we estimate that we would otherwise be looking at. We are simply not significant in the market. And this is the best news. We are large, but not significant. That's a position I like to work from. Think about who we compete with and who we don't compete with. The press likes to frame private credit as an enemy of the banking system. In fact, if we think about our businesses and how we've positioned our private IG franchise, We want what the banks don't want and vice versa. So let me articulate that very clearly because I think it is important that it come out. At the end of the day, we want the asset. We actually don't want the client because we are not prepared to cross-sell the client anything. We can't sell them equity. We can't sell them M&A. We can't sell them FX, derivatives, hedging, payments, or credit cards. Ironically, for much of the banking system, the banking system wants the client. but not the asset, particularly in a world of market stress where many banks, particularly regional banks, are rethinking their strategy. I like where we sit in the food chain. I like what we're focused on. And I believe we are very well positioned. In a time of market instability against a backdrop of a good entry point for credit at higher rates, the world is looking for safe yield. Insurance companies, including our own insurance company, Athene and Athora, need safe yield. Competitive insurance companies need safe yield. Japanese banks need safe yield. Pension funds, endowments, sovereign wealth funds need safe yield. Safe yield is, as I suggested, a potential replacement for fixed income, particularly publicly traded IG. Again, I like the hand we're playing, and I like the bet we've made. If I turn now to the two businesses, we told you for asset management that 2023 was going to be a year of execution and a recognition and achieving of all of the investments that we have made in prior years. In addition, we projected that we would grow some 25% year-over-year in FRE. I believe we will meet that metric. We are well on our track to doing it. We experienced $57 billion of inflows, in the quarter and we're on track to far surpass last year's $130 billion. I would expect a record, or as the script says, near record, of asset management fundraising in Q2. I believe purchase price matters resonates now more than ever and I expect a very strong year. Equally interesting is capital deployment. Those who have followed closely over the past few weeks will see just how active we've been in the buyout business, a place we've not had tremendous amounts of activity during the run-up and purchase price. Scott will walk you through the market activity. We have been equally busy in credit, as this is a perfect entry point for what we do in private IG. An important part of our growth today, and in fact, as I've said previously, a limiter of our growth, is our capacity to originate assets that offer excess return per unit of risk. We do this both directly, in terms of direct lending, but we also do it via platforms. Think of platforms as businesses whose only business is the production of credit. Today, we have 16 platforms. Three of the largest are MidCap, Wheels, and Atlas. Just to give you a feel for how business is progressing, MidCap did $3.5 billion of originations year to date. Normally, MidCap would produce about a 14% ROE. For the most recent period of time, MidCap's ROE approaches 17%. Wheels, which is our fleet lessor, has experienced no credit losses since the acquisition of Donwin. Again, Wheels would normally produce about a 13% to 15% ROE. In the most recent period of time, Wheels' ROE is approaching 19%. Atlas, integration well underway. I appreciate whoever wrote Atlas Hugs versus Atlas Shrugs. And in fact, I think the timing for the purchase of Atlas could not have been better. What is better than being a lender to other lenders during a time of market stress from a position of secured IG, top of the capital structure, floating rate with wide spreads? We have a tremendous amount of work to do there, but we are very excited about what we've seen to date. In short, the origination business is better because of the market stress. We are filling in where the market now is suffering certain lapses and we are earning higher spread. We are able to underwrite with a negative credit mindset. We are able to protect the downside. Most of what we're doing is top of the capitals, structured floating rate and senior secured. Let me turn a bit to our capital solutions business. In prior quarters, I've given you a little bit of our philosophy. We want, generally in capital solutions, particularly in our debt business, 25% of everything and 100% of nothing. As we have become an increasingly large originator and an increasingly diverse originator, this business is becoming a recurring business. The vast majority of this business and the growth I expect in the future will be around this philosophy of we want 25% of everything and 100% of nothing. We are becoming people's favorite stop to fill out what they need in terms of yield in their IG book without compromising credit during a period of market stress and concerned about the economic future. Save the best for last. Retirement services in Athene. 2022 was the best year in Athene's history. Record inflows and earnings. 2023 I expect to be better and has started off even stronger. Every metric worked in Q1. Normalized spread of 160 basis points. New business priced very attractively. Leading market share. Very strong sidecar capital formation, which we will update you as we have further closings. In short, inflows were $12 billion in the first quarter, roughly about the same as 2022. And I see this a little bit as the golden age of annuities. Consumers simply prefer 5% to 2%. Excuse me. It's not more complicated than that. We built and have continued to build our international insurance relationships. We now have three significant reinsurance relationships in the Japanese market, and I expect that to be five before year end. I expect that we will generate some $5 billion a year annually of flow reinsurance from this market. And I expect this year, in terms of flow reinsurance, to be the single best year in our history, somewhere between $9 and $10 billion of flow. Pension activity and pension buyout activity with high rates is ramping. We recently announced an $8 billion solution for a blue chip client, and I expect second quarter inflows at Athene to be north of $17 billion. In short, we're on track to exceed last year's record annual inflows of $48 billion. For the quarter, normalized spread was $811 million. This was, as we've said internally, a bit of a Goldilocks scenario. Spreads were wider than expected. Rates were higher than expected. We kept more business in-house, meaning that we did not give as much to the sidecar. That will correct itself in the second half of the year, but will result in higher earnings for the year. Atlas was a net positive. In short, it all worked. In addition, as I'm sure Martin will walk through, conservative reserving methodology led to positive LDTI adjustments. I think as we step back, we should not multiply 811 by 4. But relative to the 20% growth in SRE that we had projected at year end, I would expect us to have upside to that target. That is even holding some $12.7 billion of cash at 331. We positioned ourselves defensively. We positioned ourselves to take advantage of widespread. And now we are taking advantage of widespread. When your book is in good shape, you are able to take advantage of opportunities offered in the marketplace. Before I turn it over to Scott, and I'm anxious to turn it over to Scott because he has lots to say, I thought I would spend a minute on surrenders. Given the activity we've seen in the banking sector, we've received lots of questions about how this impacts or, in fact, does not impact the retirement services industry. Let me start with the punchline. This does not impact the retirement services industry. People who own annuities are saving for retirement. This is not money they think is accessible. When they do surrender or move it, they're typically moving to another policy. Otherwise, they incur tax burden and tax efficiency. Finally, from our point of view, we run our book and we invest against long-term locked-in liabilities. Eighty percent of our portfolio is non-surrenderable. or is protected by market value adjustments and surrender charges. This is not the first time we've confronted these issues. We've been doing this for a long time. In the materials that we put out this morning, I asked the team to put out a table that really goes through the four different types of outflows that we experience in terms of our book. The first, and I'm referring to a table that is in the materials, The first is what we call maturity-driven or contractual outflows. This is exactly what it sounds like. We enter into an FABN, it has a maturity. We originate a MIGA, it has a maturity. Those numbers are fully predictable, and you will see them from quarter over quarter. And I know when Athene does its deep dive call, you will see not just what has happened, but you will see in Athene's projection for the next few quarters. The next few categories are what I'll call policy-driven outflows or policyholder-driven outflows, the largest of which is income-oriented withdrawals. Recall that for retirees, when they get to a certain age, they are required to take minimum amounts out of their policies. Those minimum amounts of their policies are, in fact, what come out on a planned and on a budgeted basis. We then are left with two other types of withdrawals, from those out of surrender charge, where we would expect to see more withdrawals, and for those in surrender charge, where we would expect to see very few withdrawals. In fact, that is what we are experiencing. If I look at the weeks surrounding Silicon Valley Bank and the run on Silicon Valley Bank, and I compare call center volume, surrender activity, or any other form of activity, simply no change. This business continues to be very, very predictable. We are matched in terms of duration. We are matched in terms of interest rates. And it gives us the confidence to invest against these liabilities and earn spread, which we then lock in for long periods of time. In short, 2023 for us is a year of execution and one where I believe both the strategy of focusing on fixed income replacement and the investment dynamic of purchase price matters will pay off. For us, there is so much upside for executing the base business plan that the simple shorthand for what we intend to do in 2023 is no new toys. The bar is extremely high to do something new given the opportunity in front of us. The three original growth drivers, origination, capital solutions, and global wealth are well on track. Scott will detail the next six. We're driving toward operating leverage this year. It is a key point of our focus. It occupies a lot of our mind share. We achieved a little of it this quarter, but there's more to come. Today, we end the year, or we end the quarter, at $600 billion of AUM, $500 billion of that in yield and hybrid. Team is in great shape. Momentum is good. And with that, I'd like to pass it to Scott.