Apollo Global Management, Inc. (New)

Good morning and welcome to Apollo Global Management's first quarter 2024 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 performances. 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 measures 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 for 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.

Thanks, Operator, 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 first quarter financial results, which included FRE of $462 million, or 75 cents per share, an SRE of $817 million, or $1.32 per share. Together, these two earnings streams totaled $1.3 billion, increasing 18% year over year. Combined with principal investing income, hold co-financing costs, and taxes, we reported adjusted net income of $1.1 billion, or $1.72 per share, up 26% year over year. Additionally, we declared a quarterly cash dividend of approximately 46 cents per share for the first quarter, reflecting the new higher annual run rate level of $1.85 per share, as previously announced. Joining me this morning to discuss our results in further detail are Mark Rowan, CEO, Jim Zelter, co-president, and Martin Kelly, CFO. Before handing it over, I'd like to formally announce that we are hosting an Investor Day in New York on Tuesday, October 1st. We will provide additional detail in the coming months and hope that you will join our broader team as we discuss the exciting long-term growth opportunities in front of us. And with that, I'll now hand it over to Mark.

Thank you, Noah, and good morning. As Noah detailed, first quarter results were strong. Personally, I was very pleased. FRE was 462 million, up 16% year over year. And you will hear a little bit from me, but mostly from Jim. there is momentum in every part of the business. For SRE, we reported $817 million, up 19% year over year. Keynote for the quarter, a record inflow of $20 billion for the quarter. I'm going to spend some time providing color on the quarter, but then quickly move to the outlook for the year. In the quarter, particularly with respect to SRE, we had three things going on. The first, really good. The team generated, as I suggested, $20 billion of inflows, diversified across their funding channels, particularly three of their funding channels. While they generated what they needed to, and origination, as you will hear, was very strong, they were somewhat mixed in terms of timing. The generation of liabilities took place at a relatively even pace, whereas most of the origination was back-end loaded, resulting in higher cash balances for the quarter, which we expect to even out across the year. The second, alternatives had a slight underperformance versus what we historically have normalized or come to expect and normalized. But the biggest action in the quarter was our move to significantly de-risk the floating rate book. Recall that we run a common sense strategy. When rates are very low, We have been able to earn very nice rates of return without maximizing current period SRE and putting on significant floating rate exposure, which gives us upside as rates normalize. You should expect, as rates have returned to more normalized levels, we use this as an opportunity to significantly reduce our exposure. Exposure now is about $16 billion. probably where we're going to leave it for the near term. Sensitivity of 100 basis points move at floaters at this point is less than 5% of SRE. You should expect us to continue to move floating rate exposure up and down, reflecting first the nature of our business and the fact that we do not have, while on the upside we have linear participation in rates, on the downside we do not have linear participation in rate falls. And second, there is a nice hedging element to having a certain amount of floating rate exposure vis-a-vis performance of liabilities during changes of interest rates. All in all, a really strong quarter and one that gives me increased confidence that the outlook that we sketched out for all of you coming into this year will be met. I view this as on trend. FRE, we're expecting 15% to 20% growth in a non-flagship PE year. versus the 25% we grew in 23. We have plenty of opportunities to invest in the business, and the trade-off as to where we end up between 15 and 20% will be, in my opinion, based on how much we choose to invest in the future. SRE, we are targeting low double-digit growth, which we believe reflects the long-term run-rate growth rate of our retirement services business. We do expect to still meet or exceed the 70 billion of organic inflows in 2024. If I were to highlight momentum in the business, I'll pick out the two or three things that I think are really exceptional. The first, the lifeblood of our business is origination. 40 billion of origination for the quarter, roughly half from our platforms. Platforms, as you recall, are unique to Apollo. and represent a recurring and enduring and growing source of origination. We, in my opinion, can only grow as fast as we can originate assets that provide excess return per unit of risk. And this is a significant focus for the firm. Capital formation was also very strong for the quarter. Before I touch on the numbers, I'll touch on the philosophy. Capital formation is an important part of our business. But we have to be very careful to be measured in capital formation and not simply accept money at all costs at all times. We need to invest it prudently, particularly in new and growing segments where we are building investor trust. For the quarter, capital formation was $40 billion, roughly $20 billion coming from retirement services and $20 billion coming from asset management. In the asset management business, there was a lot of momentum in global wealth. In particular, very strong performance at ADS. Recall that ADS is our 100% first lien, lowest leverage, run defensively, direct lending business. The team there has done a spectacular job. There's also momentum in institutional. I'd pick out asset-based finance and third-party insurance. as highlights for the quarter. Asset-backed finance is directly tied to our capacity to originate, as many of the products that come off our platforms end up or are consumed in asset-backed form. It is also tied to our philosophy of wanting 25% of everything and 100% of nothing, which produces unique alignment with our third party insurance and third party institutional and other clients. ABF is particularly well-suited to insurance company balance sheets. There were $8 billion of ABF flows in Q1, including a multi-billion dollar strategic investment from a like-minded leading financial institution. In summary, momentum has been building in the quarter, and I believe we are set for an on-track, consistent with guidance year. While this year is interesting and Noah's already highlighted our investor day, share with you how the team thinks about the future. We are in a really exciting industry. The two big pillars of growth that we see ahead of us are first, retirement. Like it or not, we're all getting older. The need for guaranteed lifetime income, guaranteed retirement income everywhere in the world. exceeds what is currently provided. Whether you look at aging of population, whether you look at the decline of defined benefit plans, whether you look at the inadequacy or lack of preparation of governments around the world, I continue to believe that retirement is going to be a massive driver of our business. Retirement is ultimately built on a foundation of fixed income. The second and perhaps bigger trend in our business is a wholesale revisiting by investors of the ABCs of portfolio construction. And when I say investors, I mean institutions and individuals. We are an industry that has been built out of the smallest asset allocation of our institutional clients. In a very simple way, I think of our institutional clients as being primarily allocated, at least half, to publicly traded equities, 30% allocated to publicly traded fixed income, and 20% allocated to everything else, meaning alternatives. Our entire industry growth has been out of that 20% bucket. 20% is the so-called private or alternative bucket, made sense in a world where private was risky and public was safe. I believe we are revisiting the most fundamental concepts that underlie our financial markets. Private now goes from AA to levered equity and public, which was 8,000 public companies is now 4,000 public companies. And the reality is 10 represents 35% of the S&P 500 and unique concentration to two or three companies. Investors are already looking to their fixed income bucket, which historically has been off limits And starting to ask questions about what is the difference between public and private? If both are safe and risky, this is just a question of liquidity trade-off and liquidity trade-off is actually getting much, much closer. Liquidity in publicly traded fixed income is at record lows. Liquidity for private credit is actually increasing daily. We are not saying that we're going to pass each other. But the notion that investors will begin to allocate to private markets an entire asset bucket that they have not historically allocated to private markets presents our entire industry with just an unusual path toward extreme growth. I believe the same will happen in the equity bucket. An investor who wants exposure to the economy used to get it in public markets. Now, more than half the economy is in private markets. While that allocation may not be to private equity, private equity being a product, a 10 year locked up fund seeking very high rates of return with leverage. I believe investors increasingly will seek out equity exposure in private markets, in other forms that exist today. And it is our job as in our industry to create the products for the future, to allow investors to access a hundred percent of the economy. given that it is no longer in public markets. For us to succeed, this is not really a question of opportunity. This is a question of execution. Execution starts with origination. We can only grow our business as fast as we can originate. As you heard, $40 billion for the quarter. We have discussed publicly $125 billion goal of origination for the year. Our original five-year plan had us getting to 150 billion by 2026, which I hope we will exceed. And no doubt investor day will exceed 200 million as our mid-range target for where we need to be in origination. Again, growth in our business is limited only by our capacity to eliminate, to originate good risk. The second thing we need to do is to prepare for a change in how capital is formed. Capital, the change is already happening. given the importance of global wealth to our industry, and we will be one of the successful players in that industry, and we value these relationships and run the business on a long-term basis. We are essentially needing to build different ways of communicating with our clients. Historically, as you know, we've raised money from our institutional clients out of their alternatives bucket, and increasingly we will need to cover their fixed income bucket and eventually their equity bucket. I believe we are well positioned to do this, and this is coming at a good time for us and for our industry. And also, if one steps back and thinks about where capital need is in the world, whether it's infrastructure, whether it's energy transition, or whether it is to adapt to new technologies of data centers and the need for power, all three of those things represent long-term financing. I do not believe that long-term financing is well suited to the shorter nature balance sheets of the banking system, nor to the daily liquid fund market. Increasingly, these long-term capital needs will be matched with long-term funding from our retail and institutional clients. So again, number one, origination. Number two, capital formation. And finally, product development, particularly in equity. The migration of the fixed income bucket to private markets is already happening, and it's happening faster than I thought. In some ways, we expect that because there are signposts there. Rating agencies rate things in public markets and private markets, and so investors, as they begin to think about this transition, can look to credit ratings and others as a sign of comparability between public market and private market risk. Equity markets lack the same sort of signposts. It is up to us as an industry to develop those kinds of products. And I'm excited about what the future looks like, not just in transition in the credit bin bucket, but also in the equity bucket. In summary, I like the hand we're playing. We are incredibly well positioned in retirement services with a decade long lead over most of our competition. The work we have done on fixed income replacement and private investment grade, I believe, is particularly well suited for the transition that is taking place as institutions and individuals migrate their historically 100% public fixed income exposure to public and private. And I believe we are well positioned with our hybrid business to begin to address the migration that I expect to take place in equity. Jim, over to you.