Apollo Global Management, Inc. (New)

Good morning, and welcome to Apollo Global Management's third 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 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 a solicitation of an offer to purchase an interest in any Apollo fund. I will now turn the call over to Noah Gunn, Global Head of Investor Relations. Please go ahead.

Great. Thanks, Donna, and welcome again, everyone, to our call. Earlier this morning, we published our earnings release and financial supplement on the investor relations portion of our website. We reported strong third quarter financial results, which included record quarterly FRE of $472 million, or 77 cents per share, and record quarterly SRE of of $873 million, or $1.43 per share. Together, these two earnings streams totaled $1.3 billion in the third quarter, increasing more than 30% year-over-year and reflecting solid execution from both our asset management and retirement services businesses. Combined with principal investing income, hold co-financing costs and taxes, we reported adjusted net income of $1 billion or $1.71 per share, up 23% year over year. Joining me this morning to discuss our results and strong relative positioning in further detail are Mark Rowan, CEO, Scott Kleinman, co-president, and Martin Kelly, CFO. And one quick plug before we proceed. In a couple weeks, on the afternoon of November 14th, we will be hosting a deep dive presentation on our platform origination strategy, a top area of investor focus. which will provide insights into various platforms and detail how, in aggregate, we believe they provide a competitive and sustainable advantage to Apollo in sourcing excess spread. A live videocast of the session will be available through our investor relations page. And with that, now back to our regularly scheduled earnings programming. Mark.

Thanks, Noah, and good morning to all. Another great quarter amidst interesting financial markets and certainly a challenging year for many in our industry. Just to highlight performance, quarterly FRE up 29% year-over-year, quarterly SRE 36% year-over-year, margin expansion three-quarters in a row now, inflows for the third quarter $33 billion, $125 billion year-to-date, deployment $36 billion, fundamentally momentum both sides of the business. Our business model is very robust, as I will track for you. We expect another $30 billion plus minus of inflows for Q4, bringing total inflows for the year to $150 billion. The momentum we see in the business tells me we will have an on-track continued good performance heading into Q4. Obviously, a quarter's not done yet, but everything we see tells us the momentum will continue. In global wealth, which I'll just do a quick shout out to, given how hard the team has been working, there are now seven perpetual wealth products in the market today. Scott will go through this in detail. And just to close out, origination volume tracking north of the $100 billion on an annualized level. Fundamentally, everything in the business is working. And I believe we're set up appropriately to benefit from the current market. Almost everything in our business works better with higher rates. Credit, as you know, is a much bigger part of our business mix than most of our peer group, something we've built over a long period of time. And as to remind you, we are focused on senior secured top of the capital structure. This is a big difference between what people normally think of as private credit and otherwise. But we want a business that lasts, one that has duration, one that is set up for a difficult economy, notwithstanding all the positives happening in the credit market. To give you a sense, impairments at Athene, at or below last year's level, we expect for the year and year to date, notwithstanding some back and forth quarter to quarter. Fundamentally, the book is in very good shape. On the equity side of our business, Purchase price matters, which is our strategy, has really paid off. There's lots of dry powder in the equity business in private markets, but many people are sitting on the sidelines. They have no idea how much of their existing capital is going to need to be used to solve problems in their existing portfolio to get refinancings done. Purchase price matter and being disciplined over the past decade has left us with a very small number of situations that will require fixing, and therefore we have been on offense. Tremendous deployment, which Scott will detail in our private equity business and in our hybrid business. If you like something now in the equity business, given all the geopolitical implications, given the concerns over recession, given the high rate environment, given what is generally very difficult financing conditions, you really like it. On the margin deployment into the equity business, I think for all of 23 will prove for our industry to be very, very attractive. So what's really happening? Let me step back and give you my view at least on what I think is happening in markets and in private markets. And I'll start. I look at my career, which is now 39 years, and I think we have benefited from four tailwinds over this period of time. We've had rates generally going from high to low. We have printed a massive amount of money. We have borrowed forward future demand through fiscal stimulus and fiscal borrowing. And we've had the benefit of globalization. It does not surprise me with those four tailwinds that risk assets, equities, growth, real estate, things like that did really well. But I ask myself, are any of those four things true today? I think there's an argument as to whether they're headwinds or just the absence of tailwinds. But everything that I see tells me that looking backward is not likely to be a good indication of what needs to be done going forward for investment success. In particular, looking backward over the past 10 years, which I view as an absolute aberration, will not be a good guide going forward. And the strategies that performed over the past period of time with these tailwinds are not going to perform in the new environment that we have. I also think there have been fundamental changes that have happened to markets and market structure over the past years as well, the most significant of which happened in 2008. 2008, we came very close to an absolute debacle in our financial system, and the rules of how our financial markets work were fundamentally rewritten. We, not just Apollo, but all of us, we just didn't notice. Because right after we changed the rules, we printed $8 trillion, and everything went up and to the right. Well, now that we are no longer doing that, now that rates are up, now that there are headwinds, we are starting to notice some of these changes. And I'll stick to three, and I'll talk about their implications. One is liquidity, public market liquidity. By some estimates, dealer capital, capital that facilitates trading, is roughly 10% today of what it was in 2008. Markets are three times their size. That tells me we have just less liquidity in public markets. We have already seen the first complete breakdown of functioning in market, which was UK LDI last year. It will not surprise me going forward to see liquidity challenged, public markets challenged, and investors beginning to understand that liquidity only exists on the way up and does not exist on the way down. We should expect a more volatile, less liquid world in public markets. The second is the role of banks, not just in our economy, but in economies around the world. Dodd-Frank, in theory, was targeted at constraining the power of the four big banks in the US following the financial crisis, but the banking system in general. Guess what? It worked. Banks today in the US markets are roughly 20% of debt capital to consumers and businesses All of you, investors, now supply 80% of debt capital to businesses. In addition, the changes that are now proposed to occur following the debacle at SVB and First Republic and Credit Suisse will further lead to debanking. When regulators ask banks in the U.S. to put up 15% more capital, they're asking the banks to shrink or to shrink lines of business. When Europe moves from Basel III to Basel IV, they're asking banks to shrink. This is happening around the world. Debanking is not something that is periodic. It is at its very early infancy. It does not mean that banking is a bad business. It does not mean that four big banks don't have amazing businesses. They do, but it means on the margin they will continue to play less and less as a percentage of the total, and you investors will play more and more. That tells me as investors that you will see over the next decade a series of financial products that you've never seen before. because they have historically been resident only on the balance sheets of large banks, and they are on their way to you as investment product. The third that I focus on is this notion of indexation and correlation. Eighty percent of volume today of trading is S&P 500. Sixty percent of our markets are ETFs. Ten stocks make up nearly 35 percent of the S&P 500. These ten stocks are responsible for 100 percent of year-to-date returns. These 10 stocks have traded between 52 and 44 PE over the last few weeks. Not many of you come in every day looking to buy 50 PE stocks. Yet we feel really comfortable with a massive portion of our country's retirement system assets and fiduciary assets in 50 PE stocks. We have literally never had so much concentration in so few instruments since the Nifty 50. Going back predates my career. But if one looks at the data from that period of time, a decade later, investors lost nearly 90% of their money. I'm not saying that's what's happening here. What I'm pointing out is we had this perception historically that public was safe and private was risky. I ask, is that even the right framework to think about how markets structure today? Is public safe and is private risky? Or are public and private both risky and safe? I do think that that is the conclusion. And that's where investors will move to. Let me dig in a little bit on private credit. Private credit is the flavor of the day in our industry. You can look at press mentions. You can look at all the articles. You can look at what our colleagues and peers have had to say on their various calls. Private credit for us has been the mainstay of our business. We are nearly $500 billion in private credit. Away from the 2,600 people who work in Apollo Asset Management and the more than 2,000 people who work at Athene, there are 4,000 people at Apollo who do not carry an Apollo business card, who work at one of our 16 platforms that Noah referenced where we will do a deep dive. And their job every single day is to create credit, create private credit, which I'll come to. And that's what they come in and do every day. We've assembled this over the last decade plus for between $6 and $8 billion. Truthfully, our ecosystem is second to none in this business. As I mentioned, I believe we are in the first inning or the infancy of private credit. Private credit is a secular trend, and it follows the debanking that I mentioned. And it is not just a US phenomenon. It is a worldwide phenomenon. We have to date, as a financial press and as an industry, talked about private credit as if it meant to be levered lending, sometimes called direct lending, was private credit. Let me tell you, this is a fraction of a fraction of what debanking will produce. This piece of the business of lending to buyout sponsors sometimes is a very good business. It is about to get commoditized. Lots of capital is coming to this area. There are low barriers to entry. And investors understand this. They are moving toward firms that have established ecosystems, that have long track records of risk and reward, that will not chase the hot dot in this market. Because yes, there will be a hot dot in this market as well. When I talk about private credit, I'm really talking about the secular change as a result of debanking. I start with the notion that everything on a bank balance sheet is actually private credit. What we've seen so far and what the press has focused on is levered lending, which, as I said, is a fraction of a fraction. I think we're going to be talking about this for the next 10 years, and the vast, vast majority of what we're interested in private credit is actually investment grade. The difference between where we are today and where I think we will be is all about education and nomenclature. Investors are being asked really challenging questions today. Is a single A rated private security an alternative or fixed income? Sometimes I can stop a CIO at a big fund for an hour with that question. If it's an alternative because it is private and that's how they think about the world, they're not going to buy it because they need 15 and 20% rates of return out of their alternative bucket. But if it is fixed income because it is rated the same as fixed income, and it offers 200 to 300 basis points of excess return for the same risk. Institutional investors, family offices, wealthy individuals should be able to tolerate some degree of illiquidity if they're getting paid for it, particularly if I go back to my secular themes of liquidity is not so good in the public market. Most of what's out there has been commoditized. I do think this is our future. I do think we as a group We'll be talking about private credit, and I expect the conversation to become much, much more sophisticated. Away from the business, I sometimes joke that we raise money, we invest money, and we compensate people. The raising of money, the investing of money seems to be in very good shape. I'm fortunate that Scott and Jim live and breathe this every single day. I therefore get to focus on compensating people. And it's not just compensating people. It's also about the culture. As I've said previously, our North Star is to build the best partnership in financial services. If we can be the best place for our 200 partners to work, we will retain their judgment throughout their whole career. We'll also send a message to our next generation of principals that partnership at Apollo is what it's all about. And then throughout the organization, younger people entering our firm, no matter how hard they are working, and they are working hard, and I thank you, you will have two amazing generations of mentors to teach you the business. This is the ecosystem that we're trying to create. We also are trying to do something for shareholders. We understand that shareholders value more highly those things that are highly predictable, FRE and SRE, and value less highly those things that are volatile, PII. Just look at this year, where FRE and SRE are up nearly 30% each, and PII reflecting market conditions is down very significantly for what we would expect as a long run average. Our goal over time is to pay our people more PII and less FRE and SRE, and that is the trend we are on. At our investor day some two years ago, we laid out a trajectory of how we're doing. Today, Martin will update you and tell you we are not only on that trajectory, We are now pivoting to actually exceed that trajectory. What Martin will detail for you is not just a financial transaction, but also focused on the next generation of leadership. We have, as Martin will detail, decided to fundamentally change the compensation for four of our next generation of leaders. These are not the only leaders who, in my view, are capable of the next generation. but there are four who are very visible within our organization, Matt Nord, David Samber, John Zito, and Grant Qualheim. All four of them have taken on increasing amounts of responsibility over the years. They now see, not just oversee their individual departments, they oversee massive pieces of our firm that are integrated. And as such, we've decided to compensate them substantially in stock. That does not necessarily mean more, it just means different. What we've decided to do is to take the compensation of FRE and SRE and PII that they would have received and replace a very large portion of that with stock so they are aligned with Jim and Scott and myself, but also with all of you. This will create room for us to further give that PII that those four individuals hold to others in our firm in our constant battle and our constant direction to keep more of the F.R.E. and S.R.E. for the House and less of the P.I.I., and that, I believe, is how it should be. Employees, particularly our partners, are well suited to understand P.I.I. and to bear the volatility, up good and bad, of P.I.I. I believe this to be a good outcome for shareholders. I view it as a good outcome for me personally, and I know Jim and Scott view it as a good outcome for them. Having everyone aligned and being paid in the same way extraordinarily important. I will also tell you we are committed to immunizing the stock that we intend to grant, and Martin will detail that for you as well. So Noah is already tapping his watch and telling me that my time is almost up. Fundamentally, we are on track to hit our five-year plan. Athene, as you know, has already exceeded its five-year plan. Of the three big bets that we laid out, Capital Solutions in two years has already hit its five-year plan. Origination and Global Wealth are well on track to meet their five-year plan. So fundamentally, we're confident to meet or exceed the goals that we laid out in our first five-year plan. And it feels almost like it's time for the next update. There are so many interesting things happening in asset management, so many interesting fundamental changes in market. And so we are committed to hosting our next investor day. later in 24, which Noah will detail, to really talk about where we go from here. With that, I'll remind you, the goal that we're after, deliver the targets that we've told you, plus a little, while maintaining our culture. We are not seeking to be the biggest. We're not seeking to be the fastest growing. We're seeking to build something that is sustainable over a very long period of time. With that, I'm going to turn it over to Scott.