Okay. Before we get started, for important disclosures, see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. Please note that taking of photographs and the use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. Well, thanks, everyone, for joining us at the Morgan Stanley Financials Conference. I'm Michael Cyprys, equity analyst covering brokers, asset managers, and exchanges for Morgan Stanley Research. We are thrilled to have with us here this afternoon, Scott Kleinman, the Co-President of Apollo. With nearly $600 billion of assets under management, Apollo is one of the world's largest alternative investment managers. Scott, thanks so much for joining us.
Thanks for having me, Mike.
Great. Well, why don't we dig in, start big picture on the macro? A lot of concerns and debate, clearly, whether it's around inflation, interest rates, credit cycle, consumer health, you list your pick of poisons there. I guess, what's your view on the macro economy here through the backdrop and lens of your portfolio companies? When you look at the broader portfolio, which areas would you say are holding up, and are there any pockets that we'd miss?
Yeah. Yeah, look, I'll start broadly. The, I mean, you're right. There's a lot of confusing or conflicting signals coming out of the market, the economy. I mean, look at the S&P, for example, right? Up 10%, but when you peel that onion, right, the 10 stocks are up 45%, the other 490 on average down, right? That tells me the market's somewhat concerned about where the economy is going. When you talk to CEOs, whether it's our CEOs or just other public company CEOs, there's generally a concern, if you catch them in a moment of honesty, they're concerned about their 2023 forecast, where things are headed. you know, we see it. We see it. The economy...
I would say the consumer economy, which has really propelled the economy in 22, is still positive right now. The rate of growth is definitely slowing down. We see Q2 growing, but slower growing than Q1, for example. On B2B type businesses, look, companies are tightening their belts. You know, they're spending less on capital. They're, you can see backlogs starting to slow down for a lot of businesses. There's definitely a trajectory towards something. Look, we've been shocked, you know, after a 500 basis point, you know, rate move, just how resilient the economy has been. We're still forecasting some sort of an economic slowdown later this year into next year, like negative, you know, recession zone.
You know, then you have to overlay all that with rates, right? You know, that's, I think, the biggest driver here. You know, our view ultimately is, you know, the Fed has moved rates 500 basis points in order to induce a recession. They're not going to stop until they get their recession. Inflation is still real. I mean, the print today was nice, but it kind of still tells you that there's real inflation. You can see that disparity between goods and services, right? The services being much, much higher, and that's coming from wages, right? We're still seeing real wage pressure, particularly at the lower end of the labor market.
Things like supermarkets and hotels and, you know, where there's still pressure to try to fill those spots and, and see, you know, wages go up. All in all, I'd say that's sort of my spin through the, through the economy. Everything we do, you know, has this forecast or this model of a, of a light recession, end of this year into next year. The one thing I'll say about rates is that, you know, the market has been forecasting rate declines almost as fast as the Fed has been raising rates, and they've obviously been wrong. We suspect the Fed's going to continue to hold rates, even if we see a recession, gonna hold rates at least through year-end, you know, to allow that inflation to really simmer down.
You know, that's what we're sort of building our world towards.
Great. With that sort of backdrop there, you guys have $50 billion of dry powder, that's a lot of money to be able to put to work. How does the environment feel today in terms of putting that capital to work? Where do you see the most interesting opportunities now to lean into? In PE, private equity specifically, how have you been able to deploy capital at such a strong pace this year? Just given the traditional sources of deal financing are a bit tougher, and we hear others talking about lower activity levels.
Yeah. I'll start with PE, and then I'll hit some other asset classes. On the PE side, why don't I bifurcate between just traditional private equity and then Apollo? For, you know, for traditional private equity, you generally need two things, you know, to be busy. You need a upwardly sloping expectation of corporate earnings because you're levering that corporate earnings stream. And you need availability of loose leverage, you know, lots of liquidity to be able to do that. Right now, we have neither, right? Banks have dramatically pulled back over the last, you know, six, nine, 12 months. So availability of leverage is difficult. Well, corporate earnings are, you know, sideways at best, maybe even, you know, starting to head south.
It's no surprise you've seen just M&A volumes, you know, massively down. Now, contrast that to Apollo, we tend to like this environment, right? You know, rates are inversely correlated to valuations, and so this is just a much more interesting time to be deploying capital. As a result, you know, as long as you can, you know, acquire a company at a price based on modeling assumptions that assume the type of forecast we were talking about and still gives you private equity rates of return, and you can find a way to structure it, which again, Apollo is very good at, very creative. This is what we do really well. It's just been a very interesting time to be, doing deals.
I do hear a lot, you know, I read a lot, you know, from our peers about, well, there's still a big bid-ask spread between buyers and sellers. I would say in the tech and healthcare sector, where so much of deal flow has been over the last few years, yeah, there is a big bid-ask spread. If you were trading here, and now you're trading here, and you don't need the money, you probably think you're going back to there. You know, you're not, but you probably think you're going to. You've seen a real bid-ask gap.
In the industrial and consumer and media sectors, I think a lot of those companies, those CEOs, see the same storm clouds I'm talking about and are thinking about, you know, this is not a terrible time to be going private and get out of the public eye, do some of the things they've wanted to do, and, you know, ride out the storm for the next few years in private. It's been actually a pretty good time to be doing deals from our perspective. Just other asset classes, the one I'll touch on, I'm sure this will be a question, you know, you talk about because everybody's talking about it.
You know, from a private credit standpoint or just a credit in general standpoint, you know, you're finally seeing, you know, yields that make sense for lots of investors to be deploying capital. You can make a reasonably attractive rate of return, you know, in a variety of credit spaces now. That is a particularly interesting time. You know, and I think even now, over the next nine, 12 months, if we think base rates are at kind of a peak, you know, then being able to lock in, you know. This is gonna be a particularly good vintage. We'll put it that way.
Okay. You've been vocal on this theme of offering fixed income replacement solutions. I think you've sized the opportunity as a $40 trillion TAM. I guess the question here, is this still appealing in a higher interest rate environment? Where are we in the build-out of the fixed income replacement origination capabilities, and what's still left on your to-do list there?
Yes. The answer is, for a lot of fixed income investors, like true IG fixed income investors, absolute yield is interesting, but spread is really the magic. When you think about our retirement services balance sheet, other insurance companies, you know, base rates are nice, but it's really the spread where their profit comes from. Being able to capture excess spread is what's critical. Excess spread over the market benchmark, because the market benchmark, typically going back to clients or going back to, you know, the underlying liability. Fixed income replacement is as important as ever, you know, from that perspective. As far as the buyer universe, well, at higher base rates, that just opens up even more interested parties. We think it's a great time right now.
As far as the build-out, you know, as we've talked about in the past, and Apollo said very publicly, we've been building this business for the last decade, right? We've been building it for our own balance sheet, our own Athene, and other, you know, controlled balance sheets, because this has been a critical part of the asset strategy we have. What's changed over the last year for us has just been the pace at which we've now accumulated asset origination platforms now exceeds the dollar volume we need internally. We have more capacity to start offering this to third parties, third-party insurance clients, third-party credit investors.
You know, we've been much more active in marketing to those other clients, both on a, on a bespoke basis, like an SMA basis, but also productizing it into some asset-backed funds, or asset-backed finance funds, that are consumable for, you know, credit investors.
Maybe that's a good segue to talk about the capital solutions business, which seems to be running ahead of your 2026 goals. I don't know if you're going to offer up any sort of updates here on expectations here, but maybe just delving a little bit deeper into sort of what's turbocharging the growth. Is it just as simple as, to your earlier point on the origination platforms, where now you're originating more than what you need? Is there any more to that? You know, maybe just talk about sort of your expectations on the go forward from here.
You know, we set our five-year plan in this, based on what we thought were just some thoughtful but aggressive build-out forecasts. We were relatively new to the capital solutions activity. We had always had a small group doing this, but as we just started to develop, not only origination platforms, although that's a big part of it, but origination platforms, more products, more flow, it has become a bigger and bigger just part of doing business, right? When you look at the numbers we've been posting over the last few years, it's not so much about the one or two mega trades we've done.
It's just a dramatically increase in volume running through the Apollo system, and each time, a chunk of that is just getting clipped and sold off and syndicated, and that's what's creating this interesting flow. No, I'm not gonna update the forecast or the long-term forecast, but I will say we are incredibly pleased with how this is building. It kind of is going the way we had imagined before we really knew how this would all build out.
maybe just coming back to the origination capabilities, can you just maybe speak to some of the white space, the opportunities that you still see left in terms of building out those capabilities? What's on the to-do list as you think about that from here?
Yeah, so from the platform origination standpoint, the asset-based origination platforms, you know, I would say at this point, with 16 platforms, we're not saying we're not gonna keep around. We will inevitably continue to find interesting teams, interesting businesses that we can keep, you know, adding to. I would say the core foundation is built, and now it's just a matter of continuing to add, diversify, you know, find new areas, new corners. I wouldn't say there's any major holes at this point. It's just a matter of, you know, continuing to improve, refine. We recently just added a project finance team who source interesting infrastructure project finance, you know, credit, you know, loans.
You know, we're now sort of filling in some small white spots and things like that.
Great. Why don't we turn to fundraising? Maybe you can just give us some color on the broader fundraising environment, which we've heard a little bit more pessimism from some others in the marketplace. It seems like your progress on your next six growth initiatives is contributing to your very strong fundraising outlook, particularly here for the 2nd quarter and into the rest of the year. Which one of these initiatives would you say you're most excited about? Maybe just give us a little bit of color more broadly on fundraising.
Yeah, I'd say, look, the LPs in general are still allocating to the market. If you break it down, you know, PE, which is very visible, you have a double whammy of last 18 months, the market has just seen or LPs have just seen less inflows, so they have less dollars to deploy. You have this numerator-denominator effect happening, where, you know, folks are still fairly at the high end or outside of their strategic asset allocations for PE. That's the reality of where we are. That typically means, your typical, you know, public pension system here in the U.S. or Europe is they're still allocating to private equity. They're just doing it at a smaller dollar amount per clip, you know, than they were in the past.
Yes, PE, there definitely has been pressure, and there probably will be for another year or so until that, you know, whatever proverbial pig moves through the python. Other asset classes are still pretty robust. You know, in general, investors are increasing their allocations to infrastructure, to secondaries, and as I mentioned earlier, to private credit. You know, investors are moving, you know, allocations around their SAA to try to lean into those. Across the board, you know, we're feeling pretty good about fundraising this year. Believe me, it's a lot of work. Like we spent a lot of time doing it.
It's really because we just happen to have a bunch of products in the market this year, and we're getting some real momentum on the, on the credit side, both the private credit, the asset-backed credit, and other credit products.
Why don't we shift and talk about retail? You've recently launched several products over the past couple of months, including AAA, and then also Athene Altitude. Where are you in the process of the distribution rollout? I know it's probably early days, but, what are you hearing in terms of reception and demand from customers?
It's, it's been great. You know, you know, as we highlighted at our Investor Day 18 months ago, we were embarking on this global wealth and retail strategy. I think at the time, we might have had, you know, single-digit number of employees who were focused on, you know, that market. You know, really sold, you know, in this single-digit, hundreds of millions of dollars per year, you know, in that space. We put a five year target out of $15 billion per year by year five, so $50 billion cumulatively over that timeframe. Last year, you know, our first year, really in earnest, looking at the retail sector, we, you know, we raised about $6 billion out of that.
This year, we haven't put a number out. We said it will be a fair bit above that number, and we're still tracking towards that, so feeling pretty good there. The key to retail is not just taking a bunch of institutional products and trying to shove it through the retail or global wealth system. You need, you know, specialized pipes, you know, the ability to touch. You know, those clients just consume product in a different way. You need specialized products that, at the very least, are institutional products that are adjusted to be consumed by individual investors. In many cases, like some products you mentioned, Apollo Aligned Alternatives or Altitude, they are products developed specifically for, you know, into retail investors.
You need the technology support again to do all that. We've invested extensively in all of that. We are really pleased with the progress we're making there. Yeah, we are definitely tracking that five-year plan. Again, not officially raising anything, but feel pretty good, we're on our way towards that.
Great. Maybe moving on to the retirement services business. Maybe you could talk about how Athene has performed so far this year amid rising interest rates and volatile market backdrop. How is the credit quality holding up here, and how do you expect credit losses to trend this cycle versus the, I think, 9 basis points that you guys have had on average over the past five years?
Yeah. Yeah, it's been, as you've seen from the results, I mean, it's been incredibly strong. you know, the rising rate environment is absolutely good for the annuity business, right? If somebody liked to go buy an annuity at 3%, they're gonna love it at 5.5%. it's just been good for the market. Athene continues to really fire on so many cylinders across a number of its various channels of sourcing. Retail has been incredibly strong this year as it's been building year by year. Some of that's a function of the rate environment, but some of that is also a function of, you know, since the Apollo merger with Athene, we've expanded the retail distribution base, or we've helped Athene expand the retail distribution base.
Athene historically focused on the independent broker channel. Apollo, given its relationships with the big wirehouses, have really helped Athene break into that market. That's just a whole set of new channels that they have not previously served, and that's creating some really interesting volumes there. The pension guarantee business has been just a great business as that industry just becomes more and more accepted in corporate America, which it should be. It's a fantastic opportunity for corporations to get out of an aspect of their business that they really don't have, you know, that's not their core competency. This has been a real positive for Athene.
Athene, just like the fixed annuity, where we are the number one player in the U.S., on the pension side, we also have become the number one player over the last few years. That's, that's a great, you know, business for us as well. Flow reinsurance has been strong, particularly overseas, where we've, you know, continue to sign up, flow partners in Asia and elsewhere. Business is really strong, and the rate environment is really helping. I mean, as far as, you know, the credit portfolio goes, you know, it's nice. We actually had a dress rehearsal back in March of 2020, when we had an opportunity to really dig in, spend the time, crawl through the portfolio.
came away then feeling really, really good about the book, also used the intervening opportunity to clean up and get out of anything we might not wanted to have been holding. We feel really, really good about the portfolio right now. No, I don't see why this cycle is gonna look any different than, you know, our long-term historic averages.
Okay. Maybe you could update us on the plans to use the sidecar capital vehicle to more efficiently fund Athene's organic growth. How are you thinking about that? Longer term, how efficient can the business become?
Yeah. Look, it's. We're making good progress on the raising of our second, you know, AOF II. That's going well. We'll finish raising that this year. You know, we're just about finishing up the remaining capital in AOF I. You know, sometime later this year, AOF II will start, you know, start deploying, you know, alongside of Athene. The arrangement works very similar to the way it did, you know, previously. We expect, you know, when you cut through all the numbers, about 40% of the capital comes from this sidecar vehicle. It's, you know, it's incredibly efficient to be able to carry this capital in sidecar format.
Look, over time, you know, we can turn the knobs and potentially dial up, dial down, how we think about this, but this is a level we're actually very comfortable with right now. It's the right, you know, balance of alignment and volume and flow and FRE, SRE, and so it works. We're happy with how it's working right now.
We've seen some large block activity across the industry. Curious, you know, your perspective on that sort of broader competitive backdrop. Are these deals that you guys were interested in, involved with in any way? Just curious what you can share on that. What are you seeing in terms of pricing? Are there any sort of expectations or pipeline that we can be thinking about for Athene?
Right. I'm at the end of the day, right? Not the beginning of the day. No, the We've obviously looked at every trade that's gone by where, I mean, the reality is Athene can acquire any of these, you know, assets if it really wanted to. You know, as we look at these, you know, we run a very specific, you know, capital return model, and we're looking at all the sources of liabilities, the various organic ones I talked about, inorganic. You know, when we line up the opportunity set and think about, well, we have X amount of capital we want to deploy and where these acquisitions have not stacked up.
I won't name names, but they've sort of been anywhere from modestly interesting to not interesting at all, and, you know, I'll let you guess which ones are which. That's, that's the... I mean, the reality is, Athene has been leaning much more into the retail and organic channels over the last couple of years because we just see materially better returns on capital from that channel because we spent the time and have built those channels. You know, for a lot of the other players in the space, they don't have those channels, and so they have to, you know, grow only by the inorganic path.
One question that had been coming up a bit back in March, just given some of the banking sector challenges, had been question around rescission, and sort of customer surrender. Just curious if maybe you could talk a little bit about what you're seeing from your customer set there at Athene? What, what trends are you seeing? Maybe you can remind us some of the puts and takes about the maturing policies and how you think about redeploying capital?
Sure, sure. we've, nothing I'm gonna say here is that, like, we actually heard the market loud and clear last quarter, and so we really, like we do all the time when we hear feedback, we just up the transparency, up the disclosure, and so all of this, you know, is on our website, and you can go through all this. The way the annuity cycle works, right, is, you know, when somebody buys an annuity, there's typically a period of time, think, you know, it could be one, could be three, could be five years of a period of no surrender, where there's real penalties if you try to surrender.
Then thereafter, there's a sort of actuarially predicted, you know, based on, you know, where rates are versus where the credited rate of the underlying is, but there's an actuarially predicted amount of how many people will redeem, you know, and what that looks like. Then, after a period of time thereafter, if you haven't redeemed, it's probably sitting in a drawer somewhere, or it's part of somebody's just long-term planning, and they put it away, and are holding onto it. So, you know, we put all of that out there. We predict every quarter, you know, for, you know, years in advance, you know, what that ins and outs, those flow look like. So we have a pretty good prediction.
Anything above or below that would be, you know, we'll say, unexpected, you know, benefit or detriment. We've put those forecasts, you know, out for the market. You know, we'll hold ourselves accountable against those forecasts. The thing I'll say is, in a world where we are the largest writer of new fixed annuities, you know, something like 70% - 80% of any type of surrenders aren't leaving the annuity system. They're simply just in an environment like this, they're saying, "Okay, well, my old policy has a rate of X. I can get a better rate now," they'll come back into the market.
As the largest writer of fixed annuities, we are the beneficiary, and in fact, we're gaining a disproportionate share of that new industry volume. It's been a net boon to us, quite frankly. We really haven't seen anything out of the ordinary, you know. We're just not seeing unpredicted behavior. You know, we're now committed to sort of sharing that information every quarter, and you'll be able to watch along with us.
Great. We're gonna open up to Q&A, audience Q&A, in just a moment, so get your questions ready. Before we do, maybe just move on to capital allocation. Just curious your latest thoughts there on capital priorities and balancing investments in the business for growth versus dividends and also versus buybacks. With the stock, undervalued, you know, should that lead to a shift toward more buybacks, would you say? How are you thinking about that?
Yeah. Look, I think we've been pretty clear in the five-year plan about, you know, the amount of excess capital we think we're gonna generate over that five-year period. We hypothetically earmarked a portion to dividend growth, a portion to buybacks, a portion to strategic investment. On any given year, any given quarter, you know, it ebbs and flows. I mean, we have said about 2023, because of the, you know, three core initiatives, the six growth initiatives that we had and that we really have started building out over the last 12, 18 months, we made a management decision this year that 2023 was the year of no new toys, where we are really focused on investing in what we've started, you know, really allowing the seeds that we planted to germinate and grow.
That has led to really raising the bar on strategic activity over the course of 23, which then you can reasonably assume leads to more capital being available for some of the other things. You know, we reported some healthy buyback in Q1, and, you know, we'll see what the future brings, but I think that gives you a sense of our mindset.
No update on buyback for the.
You'll have to wait. You'll have to wait for the earnings call.
That's great. All right, any questions in the audience? Quiet group. Here we go. Just wait for the mic.
Thanks for the question. Would love to know how Apollo differentiate on private equity. What do you do differently or better than your peers, KKR, Blackstone? How do you employ discipline through cycle, and what kind of things do you look for? What sectors do you really care about most on a go-forward basis? Thank you.
Sure. That's a great question. Apollo really prides itself on its value orientation, you know, this belief that purchase price matters. Through a cycle, 100%, that has proven to be a top quartile strategy. The reality is, for the last 10 years, as interest rates went to zero and stayed there, purchase price mattered less, right? The old PE model used to be, find a good company, pay a reasonable price for it, fix it up, and you'll make a good return, right? When interest rates went to zero, that middle part fell out of the equation. It's just find a good company, pay whatever you want for it, and as long as you don't screw it up, you probably sold it for more than you paid for it, right? That worked until it didn't work anymore, right?
Apollo really was probably certainly the only large player and one of the few private equity players out there who really maintained that discipline through the run-up over the last decade and really worked very hard to find interesting companies, but at good prices. We probably worked twice as hard as the next guy to earn the same type of returns as other people who were just more focused on the velocity of capital. Like I said, that worked until it didn't. Then you had 2022 come along, and you have a portfolio. A lot of folks just have a portfolio of, you know, 15, 20x enterprise value to EBITDA companies that they're trying to defend valuations on.
Apollo the portfolio that we built from 2018 - 2022 was built at 6.5x, inside of 6.5x. We're sitting today with under 4x leverage on that portfolio. That portfolio appreciated 23% last year, right? Appreciated another 9% in the first quarter, right? Why? Because free cash flow and EBITDA, good old-fashioned private equity. The key, I mean, you said it's the discipline. It's in a world where everybody was just chasing growth, it was keeping that discipline that really differentiated ourselves. Quite frankly, that's why LPs. You know, LPs have the benefit of being able to allocate capital to different strategies, right? The thing that kills LPs is when folks are drifting all over the place and doing different things.
I'd say over the last five, seven years, so much of the private equity industry had shifted to become a growth investor, that what they thought they might have been getting, they were getting growth equity. You know, we're this constant for LPs of, you know, you will get a value-oriented purchase price matters strategy, creative, not only in the, you know, up markets, but now when the market rolls over, your portfolio is in good shape and the ability to deploy capital into this market when others really struggle, that's the real full cycle opportunity that Apollo brings.
Any other questions in the room here? Maybe AI, ChatGPT? Thought we'd get away without that question.
Sure.
Just big picture, how do you see that potentially changing the industry? Is it a revenue opportunity? Is it an efficiency opportunity? It would seem like there could be opportunities within, say, your diligence approach.
I would say, you know, we are starting, you know, to spend time. We have folks in our Apollo Portfolio Solutions team starting to figure out, okay, how can we utilize this, like you said, from a diligence standpoint, from a how can we offer turnkey solutions to our companies to help them from an efficiency standpoint there? We're still super early days of all this, you know, I wouldn't expect to see IRR differential or growth rate differential yet. You know, check back in a little bit of time, and I'm sure there'll be lots of use cases.
Okay. Final question: You guys are about... It's been a couple of years since the Athene combination, what, 18 months approximately?
Yeah, about two years. Yeah.
Two years. Do you think the market fully appreciates the Athene part of the Apollo story? What's still misunderstood, and how do you think about bridging that mindset gap there?
Yeah, look, you know, I've spent a lot of time talking to investors about the real benefits we've seen from the combination, whether that's I mean, I touched on it earlier, opening up new channels for Athene to sell product into, but also the new product development, things like AAA and Altitude. New products that we can only really do because we have the Athene and Apollo under one roof. The excess capital that comes out of Athene and what's that's allowed us to do, you know, as a alternative asset manager and the exciting things there, the ability to see new products. I mean, this merger has more than exceeded expectations. From that perspective, I'd say check.
The perspective of does this room fully understand just the power of Athene and what Athene's really doing? I'd say maybe we're 60% or 70% of our way on that journey. All we can do is continue to just try to be more and more transparent when questions from the gallery come up. We try to be super transparent, show you how we approach it, how we think about it, put it out there, spend the time to educate. We know we're onto something amazing here, and it's only going to keep getting better and better, and it's our job now just to bring, you know, this room along, and make sure they start to see it, you know, as fast as possible.
Great. Well, I'll have to leave it there.
Great.
Thank you very much, Scott.
Thanks.
Appreciate it.