All right, good morning, everyone. Welcome to day two of our 23rd Global Financial Services Conference. I'm Ben Budish. I cover the U.S. brokers, asset managers, and exchanges here at Barclays. With us for this next fireside chat, really delighted to have Jim Zelter from Apollo. Jim, thanks so much for being here.
Appreciate it. Always good to be here. We're not going to let the fire alarm be a distraction, right?
Exactly. Exactly. Maybe just to kick it off at a high level, you know, can you share your latest thoughts on the macro environment? How are you feeling about credit quality, origination, transacting activity going into the back half of the year?
If one landed from Mars today and notwithstanding all the headlines, you know, let's take a look at the macro economy. You've got a major CapEx cycle. You've got a...
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We're all good. We're all good.
Macro economy, you've got a massive CapEx cycle. Look at second quarter numbers for the S&P, and in credit quality, pretty strong. The consensus was up 4%. It came up 11%. Personal and corporate balance sheets are in pretty good shape. You have an administration leaning towards rate deregulation and economic growth. You've got an environment where rates are going to be a little bit lower. They're pushing them lower. You've got an M&A cycle that, exception of 2021, it's the second best year on record. Strong backdrop. For us, we want to have exposure. The commentary about U.S. exceptionalism being over and the sovereign debt crisis being a massive issue since Liberation Day, 10-year numbers have been, 10-year prices are higher and yields lower. Pretty good backdrop of an economy. That being said, I do worry about the inflationary pressures of what's going on with the environment.
You've got pretty high valuations. We're finding it a good investment environment in the world of credit. If you look at the credit quality of our underlying portfolios, and again, we've leaned away from direct subordinated consumer risk. That's not what we do. It's all secured consumer or very much asset-based. We feel pretty strong about what we're seeing right now. Origination, we had a very, very strong second quarter. That pace is continuing for the rest of the year, maybe not quite as elevated. We've not had spread compression. If you look at our IG book, it's mid to high 200s. If you look at our non-IG book, it's in the mid 400s. Overall, it's in that 325, 350. Between Athene and our third-party insurance and our third-party clients and ACS syndication, we sort of have a check the box on all those pieces. The FRE machine is firing on all cylinders.
Great. Let me dig into the business a little bit. One of the big themes we've been hearing from you has been replacement, fixed income and equity, creating this tailwind for private markets to replace a portion of public assets within portfolio allocations. What are the signposts you're seeing? How are those opportunities being prioritized strategically?
In the world of fixed income, it's a longer-term trend. I mean, people, you know, first, and they had their high investment grade allocation and their fixed income benchmark and duration and such. Over the last 10 years, whether it's loans or high-yield bonds and now private credit, there's more allocations. When I got to Apollo 20 years ago, credit was a very binary conversation. It was, you know, is the market attractive? Time to buy high yield or spreads wide enough? Or is it time to do distress at the beginning of a cycle? Now, credit is a permanent allocation. It's a question of how to deliver the breakdown, what's really beta and what's really, really alpha. The ability to have ratings is a huge help in that area. We suspect that what we saw in the area of credit is going to happen in the world.
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Thank you.
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Exactly. I think what we see going on with what's going on with the equity market, with such concentration in the S&P, is you also have an environment where there are less and less public companies, from 7,000 to 3,000. What we see going on right now is what used to be a great diversifier was equity market exposure, but it is just not as readily a tool for exposure to the equity market because of the indexes. Our dialogue with investors, whether we have our credit products or our equity products, shows more and more DC plans and global wealth plans wanting to diversify their exposure. The whole public-private, we are working with State Street. There is a very large private PRIV that they lead, and we are a component in partnership with them.
I saw one of our peers is doing something in the CLO liability space, again, as an ETF. There are lots of points that would make us believe that the 60/40 model is going to a model, a 60/40 with alts, a small allocation to an equity alpha, equity beta, fixed income, equity, and beta, and alts. We are going to have a bigger seat at that table over time. We see it around the globe with asset allocators.
Maybe talking about fixed income replacement specifically, as well as, you know, ABF and hybrid capital solutions. Apollo's talked about these many times as sort of major opportunities. Maybe give us an update on these addressable markets. You know, what are you hearing from traditional LPs regarding allocation shifts from fixed income to private IG?
I think that most investors in fixed income, when they're allocators, have made a decade-long push into a narrow definition of private credit. That narrow definition is the activities in direct lending to non-investment grade sponsors. That tool, that product, has gone from zero to about $1.5 trillion over the last decade. Now, as a financial sponsor, there are three tools. You can go to the high-yield market, leveraged loan market, or the direct lending market. For most fixed income investors, they don't want to make that leap to the non-investment grade side. The good thing for us is with the CapEx needs and the changing role of how banks are using their balance sheet, there's a wide window in the whole asset-based finance business. For us, we see that's the largest area of institutional as well as insurance company activity into the world of private credit.
They want to be in, they want to maintain investment grade exposure, but they want to pick up more than 90 basis points versus the ag. In terms of scale of market opportunity, I suspect that the $1.5 trillion in direct lending marketplace will be surpassed three or four times over by the end of this decade by private credit in the asset-based world. We've been fairly public saying that the private credit universe is not a $1.5 trillion or $2 trillion opportunity. It's really a $40 trillion. We see it right now with aircraft finance, resi mortgages, commercial mortgages, inventory finance, ABF, as I've mentioned, and see what's going on with all the European banks, how they've changed their business model, and Tesla, UniCredit, HSBC, BNP.
In our mind, the investment grade side of private credit is going to be multiples, massive multiples of the non-investment grade side of the business.
Interesting. Maybe let's talk about origination a little bit. With this replacement happening, origination of private assets has become an extremely important focus for Apollo. It's been trending very strong in the second quarter and generally run rating ahead of your 2029 target. Maybe just talk about what drove the outperformance this quarter, despite the massive pickup in volatility. How do you see the forward pipeline? You kind of alluded to this earlier, but how do you see the back half of the year picking up?
I think origination, what we're finding is all the points that I made earlier about the robust economy and the capex cycle, I think that's a major backdrop. What I'll point out to everybody in the room, you know, I've been doing this, this is my 39th year. I would say for the most part, from the mid '80s up until a handful of years ago, most of the scaled massive origination happened in the non-investment grade side of the world in sectors that were going through massive capex or regulatory relief. Think the cable industry, think the telecom industry, think the airline industry, think the shale business. All of those industries were non-investment grade. Today, 2023, 2024, in the next decade, massive capex needs, but they're all investment grade industries. It's the transmission. It's the AI data centers. It's energy sustainability.
I'm not suggesting that the needs of the non-investment grade marketplace are not going to be there, but the capex needs of the investment grade world are so large and so vast. Even as well, even as strong as the balance sheets of the Mag 7R, they're not going to do all of this alone on their balance sheets. In data centers alone, there's a couple trillion of capital needed. A lot's going to get funded out of the banks, some out of direct lending, some out of ABS, but just massive capital needs out of the investment grade world for this capex super cycle. Then you turn around what's going on with this administration and how they push Germany. Germany wants to go take a $4 trillion economy to a $6 trillion economy. They need like $1.5 trillion to do it.
They've got $500 billion that they want to put in themselves. Yesterday we announced a transaction with RWE, which is a very well-established traditional utility in Germany. There's a multi-billion dollar program that we're leading that instead of buying investment grade paper 90 over, we're getting a substantial premium in a deeply embedded domestic enterprise in Germany because of their need to invest in transmission. I think these things are 10 and 20-year secular trades and opportunities. That's what really gives us the opportunity with our liabilities from not only our regulated balance sheets, insurance companies, but in others. Instead of just going out and buying that Barclays Agg or Bloomberg Agg at 90 over, you can create investment grade risk, long duration at a substantial spread. That's really the key to our business model.
If you're counting on public markets or the dialogue you have with your firm or your peers to generate that day in and day out, that's a tough row to hoe. Whereas if you come in every day as an equal opportunity investor, investing in public, private, primary, secondary, we were able to navigate that over Liberation Day to do a lot of public investing. The key to our business is being able to really navigate and pivot, if you will, and to be that type of capital supplier.
Got it. Maybe switching gears, talk about capital formation. You're starting off, you know, with respect to demand across your various different capital formation pools. You know, where are you seeing the most growth? Where are you investing the most time and resources?
Broadly speaking, we have three areas where we have capital formation. We have our traditional alts business, we have all the areas of these fixed income and equity replacement, and then we have our growth areas with Athene and what we call new markets. For the traditional alts business, you know, we're fortunate. We have a brand with great investment history, and strong fundraising across our credit business, strong raising across our hybrid business. We'll soon, later this year, launch fund 11 in our PE business with our performance. The investor universe continues to change in traditional alts, not so much from maybe the traditional U.S. public and pension players, but certainly around the globe, Middle East, Asia, Latin America, a lot of growth. Strong growth in the fixed income replacement and the global wealth channels, voracious appetites.
We're out there right now with the leading product in the global wealth channel in the asset-based space, Apollo ABF or Asset Back Corporation, and that's doing very, very well. Athene on their multiple channels in terms of the retail products, the funding agreements, strong growth there. We're very fortunate that the only thing that really has not been large volume this year for us is the pension risk transfer, PRT, and there's some industry litigation issues that we're dealing with. We suspect that the fog is lifting there a little bit into 2026.
Okay, great. Maybe on the wealth side, as we think about replacement and capital formation, we've seen a lot of these new public-private partnerships get announced, Apollo among others. How do you see this kind of convergence reshaping investor expectations around returns, liquidity? You have a couple of different products out there, the ETF, the public-private fund with Lord Abbett. How do you see expectations changing from that investor base?
I think investors want to have choice. They want to go with investment firms that have a strong history of success in an asset class. Just having a partnership and putting a new tag on it doesn't assure success. We believe we want to find out, like, what's our right to win, but also we believe in open architecture. From our perspective, while we are supremely confident of our ability to create excess yield, thinking that it's only going to get done with Apollo Global Management and Apollo Global Management only, I don't think is realistic. That's why we have chosen to partner with State Street and Lord Abbett and a variety of others, because I think what the original thought was of just putting Apollo Global Management products through a different distribution channel, that's potentially interesting.
What has evolved is marrying our product expertise, marrying our parts provider capabilities with folks that already have dedicated products and distribution. What we're doing in Lord Abbett is a great example of that. They're really well known for short duration investment grade credit. We're known for public-private credit, investment grade and non-investment grade. Marrying those two together is a natural partnership. Again, I think we're big believers in open architecture. I think that we're fortunate. We have an amazing brand with a track record and bringing technology and education and insight along to it. We're a big believer in the open architecture success. I think that's what's going to differentiate the universe of players going forward.
You mentioned distribution in terms of the public-private. Maybe just for Apollo specifically, how would you describe the current distribution footprint? In terms of priorities, is there more focus on distribution expansion or product creation to demand? Are there any kind of new initiatives here you think are worth highlighting?
I take a step back and I think about all the industries that have evolved and how they developed, and they usually end up with a handful of winners. There may be 20, 30 participants to start, but over time, you know, scale wins. Success goes with scale. For us, we were a bit arrogant six, seven years ago. We thought it was just about investment returns, we're Apollo and there will be a line out the door. There is a line, but it's because we have added all these other things that I talked to you about. The RIA, we thought it was just the big wirehouses. Certainly, those are an important part, but it's not only those, but it's also the RIA channel, the independent channel. It's also global. Big, big demand for our products in Europe and in Asia and in Latin America to some degree.
It's surprising to us. This feels like it is buying beachfront property in the Hamptons 40 years ago. If you were there early, that was pretty, there was a power of incumbency. We see that. We've been able to pick up some very strong share. There's not one channel in particular. I will say that between Apollo Global Management and Athene, there's a variety of products that are in the R&D lab in our joint groups, being able to sell guaranteed lifetime income or other products that we think are going to be very, very, very, very critical to the long-term growth of our business. While we're supremely focused on executing our plan, there is a fair amount in the R&D space that we get excited about with the backdrop of a massive retirement crisis around the globe. 12,000 people a day in the U.S. turning 65.
For the most part, many economies have not done a great job solving the retirement conundrum of many people. Fortunately for us, that backdrop of more and more folks needing these products is really important to us.
You mentioned retirement a few times. That's a good maybe segue into the DC 401(k) market, just clearly opening, in the process of opening up to alternatives. How do you see this playing out? Maybe talk about how you see Apollo as positioned to take advantage of this opportunity.
I think it's a growing channel. It hasn't happened overnight. This has been several years in the making. The reason why it's several years in the making is, for investors that have been exposed to alternatives over 10, 20 years and done so in a logical, methodical manner, alternatives have worked. They've enhanced returns and lowered volatility. If you go with that premise that you're on the right side of history and it's how you deliver this product in a logical, scalable, diverse manner with education, there's a variety of activities that need to take place right now. There's no prohibition right now other than you just not doing something that's not very wise because litigation is very powerful. Working with the Department of Labor, working with the SEC to make sure you have the appropriate safe harbors to operate.
You'll see us do things that we think are safer, robust yield, more on the investment grade side than leaning into the more volatile, equity-only strategies. We'd like to see a methodical approach. I think it's about having brand, technology, education. Those are all going to be really important. We suspect we're going to be, we're determined to be a winner in that space, but it's a very long journey. I don't think there's going to be 100 winners. I think it'll be a consolidated group of investors.
Maybe pivoting into your insurance business. Athene's built an impressive track record over the course of its 16-year history across many different environments. More recently, what we're hearing is a pickup in competition. No doubt everyone wants to replicate your successful model. How do you think about competitive forces in the marketplace? This is something we heard about from you guys earlier in the year. What's the latest? How sustainable do you think this trend is? How intense is this competition?
Like many businesses, you know, there's not a tremendous barrier to entry. A lot of things in financial services. Just because there's no barrier to entry doesn't mean it's a great economic outcome. You know, it's our view that you need to have a broad distribution channel. You need to be able to price products, whether it's the retail or the runoff or PRT or ABF, and you better have access to all those channels. You better have low operating costs. We believe our operating costs at Athene are 25 to 30 basis points below our peers. You need to have a highly rated counterparty balance sheet. We're a single A on the way to double A. You need to have massive origination.
While there's lots of folks who have entered the marketplace, those who will be able to sustain a mid-teens ROE, I think we sort of scratch our head a little bit. We've definitely leaned into more of the funding agreements because of the economics of that. I think over time, if people are underwriting business at a sub or an unacceptable ROE, that doesn't last forever. Not surprised because of the success of a few of us that there's a lot of imitators, but that doesn't mean they're going to have success over time. It's not a secular issue. It's more of a shorter-term issue.
Got it. Maybe in terms of volumes and flows, your multi-year targets at Athene call for $85 billion on average through 2029. What are the levers to get there? It sounds like you're maybe cautiously optimistic that the PRT market could start to come back. How much are newer products like Wila and StableValue expected to contribute?
Yeah, just to level set with everybody in the audience, we fund liability. We gather liabilities at Athene in really four different ways. What was originally a runoff business or called inorganic has slowed down dramatically because the price to buy new or runoff portfolios is very steep from new competitors. If you don't have anything, that's all you can just buy your way into the card game. This year, we'll be a leading annuity retail seller in the U.S. with about a 12% market share. We're also a large, we've leaned into the funding agreement back note business. That's also now one where we're a counterparty with a variety of the banks.
To your point, what used to be the MIGA business, a multi-year guaranteed annuity, a fixed annuity, a very generic one, we've taken our foot off the pedal in the shorter duration threes and fives and pushed the duration of those out. We've also leaned into some of these newer products, like you mentioned, like the Wila product or the StableValue product, which give a bit more return and the investor takes on a little bit of market or index risk. We think those are the right way to go for us. They offer great economics. I do think the PRT market will be attractive because the stickiness of those PRT pension risk transfer is a very attractive liability for us. We suspect that'll start hitting our balance sheet into 2026 and beyond.
Maybe switching gears a little bit just on the M&A side. You recently closed your acquisition of Bridge Investment Group. Can you talk a little bit about this acquisition? What does it do for Apollo?
I think for us, when you look at our business, we're a dominant player in the equity ecosystem. We're clearly the dominant player in the credit ecosystem. When you look at our natural liabilities and what our investors need, they need safe, robust yield. Bridge happens to be a firm that in residential and multifamily housing, they've shown a great historical capacity to generate those types of assets. We bought Bridge not to be an opportunistic real estate player, but to be a multifamily player that manages the whole value chain of acquisition, development, build-out, management services, whatever. It fit a gap for us. I don't suspect you'll see us doing a lot of acquisitions on the origination side, but this happened just to fill a gap for us that was attractive. We knew the team. They have their base in Salt Lake City.
They have a lot of embedded infrastructure. That's why we're creating a subsidiary for that, not to bring them all on the Apollo balance sheet. It just fit a real need for us. I don't suspect you'll see a lot of acquisitions, but if something is of scale and substance and it's logical to our business, certain areas I've been asked about, certain credit opportunities in Asia or India, on the non-investment grade side, those are just not large enough to make interesting markets. There's a chance to make some real alpha, but it's not really consistent with our business model. I think Bridge is really what you'll see us do of the size and scale. I think acquisitions are hard in the asset management business. They're easy to announce. They get the excitement from investors. After two, three, four years, let's see who sticks around.
Let's see what the performance is. I think it's just a heightened level of scrutiny, and it changes the demand of the marketplace.
You kind of answered what I was going to follow up on, which is to say that, you know, you've used M&A sparingly. It's not a huge portion of, I think, your capital allocation expectations for the next couple of years. How do you think about, you know, opportunities to do more sort of tuck-ins like this? Does it kind of make sense to do more or depends on the opportunity?
I guess I would, you know, maybe I might surprise you. The best thing for our business was what BlackRock did with HPS and GIP. It awakened the entire traditional world to the role of private capital, private markets, and how they are going to deliver that product. We've been fortunate as a counterparty. Our phone, we've been extremely busy in terms of what you talked about earlier, partnerships, JVs, parts providers. I think that there's, you know, I don't want to say there's an arms race going on right now, but I think people see the benefit that it ensures to scale players that have the four or five tools that I've talked about. We're not opposed to it, but I think delivering a toolbox in a very logical fashion is very, very appealing to a lot of our partners. That's worked well for us.
I think that's why we're so confident on our five-year plan, which we announced five years ago, and even last year announced a new five-year plan. A lot of momentum to our back. A lot of momentum to our back.
Good. Maybe moving to the traditional private equity side, you alluded to this earlier. Fund 11 will be coming back to market soon. Maybe just sort of expected timing. I think you mentioned next year. How would you describe early indications of LP interest?
I think we're fortunate. I think the private equity business, you know, my partners were very outspoken a year or two ago about the lack of performance on some of our peers. As strong as the economy is and as strong as valuations have been, if you bought a lot of businesses in your PE business at 12 to 15 plus times, you're having a hard time monetizing them. We've been fortunate. We stuck to a real purchase price matters discipline, and the performance of fund 9 and fund 10, our most recent funds, has been quite strong. While we are confronting a world with lower allocations, we believe we're going to be one of the handful of winners, especially in our PE strategy. Fund 10 has done very well, high IRR, industry-leading DPI.
I suspect when we go out late this year, beginning next year, we're going to get a strong reception for what we do. I think that's just sticking to our focus of large cap, sticking to our focus of value orientation has been the winning strategy. I also would add to this audience, I don't expect a massive monetization cycle to hit. I think there are many, many PE funds that are out there that have raised their most recent fund and don't realize it's their last fund. I think that's going to be a recognition of the challenges of what you are delivering to investors and clients. There will be some firms that just are not around in five to seven years. That's a natural washout, and investors and clients will be the determining factor beyond that.
Interesting. How would you describe the interplay between fund 10, a lot of confidence there, and the fund 11 raise? How do you feel that portfolio is positioned to realize in advance of the fund 11 raise? How important is that? How do you feel that portfolio is positioned given the state of today's IPO markets, which at least so far seems to favor fintech, crypto? It maybe seems to be broadening more recently.
I go back to the tried and true strategy of our firm about purchasing businesses less than seven, eight times EBITDA. That is a strategy that withstands the test of time. I don't think the IPO market is going to be the savior of the PE world. There's still a multi-trillion overhang. We have found ways to monetize our business, get paid back, or do strategic sales that I think are going to be key to our outperformance versus the peers. I think that's more of an industry statement. I stand by what we've created in fund 10. The reality is the private equity asset class has performed very well. As an asset class, it's generated superior returns, even notwithstanding the lack of capital. I do think that those who are at the top of the sector will be able to garner investor response.
Maybe just one final question on the asset management business. I remember your longer-term targets. I think the years where you have a major flagship, you're kind of expected to be above your medium-term FRE growth range. You're sort of trending to the high end of that range right now. Maybe just unpack what's been going well. I'm not expecting you to update guidance for the year, but what sort of pushes things, keeps it there maybe a little higher, a little lower as we talk.
I think in addition to the three big pillars of our growth, which were global wealth, origination, and Apollo Capital Solutions, third-party insurance has done very well. Other parts of our hybrid growth have done well. Our FRE business is just hitting on all cylinders. To your point, we were talking mid-high teens in the excess of 20%. I feel very, very comfortable with the higher range of those numbers. We're seeing it develop right now across the breadth of our business on the asset management side.
I'd love to ask you about the SRE outlook, but you do have an Athene investor update coming later at some point in the fall. I don't know if the date's been announced, but any preview you can share what to expect? I'm sure you're going to save any major news for that event, but how should we be thinking about what you're getting ready to talk about?
No, we're still committed. We've been very public with our multi-year 10% compounded growth. Certainly, with a little bit lower rates and the overflow of the benefit of the business we put on two, three years ago rolling off, it will be a little bit lower than that trend line, but we are still committed to the multi-year trend of 10% compounded. We see just lots of other lower cost capital products, or lower capital intense products, that will enable us to do that. Still very committed to the overall game plan.
Great, we're nearly out of time. We'll leave it there. Jim, thanks so much for being here.
Great. Thank you.
Thanks for your time.
Thank you.
Good. Thanks for hanging with us through these.
Exactly.