Apollo Global Management - Q2 2023

Transcript

Operator (participant)

Good morning. Welcome to Apollo Global Management's second quarter 2023 earnings conference call. During today's discussion, all callers will be placed in listen-only mode, and following management's prepared remarks, the conference call will be opened for questions. Please limit yourself to one question and then rejoin the queue. This conference call is being recorded. This call may 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.

Note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Apollo fund. I will now turn the call over to Noah Gunn, Global Head of Investor Relations.

Noah Gunn (Global Head of Investor Relations)

Great. Thanks, Donna. Welcome again, everyone, to our call. We're really thankful for the opportunity to spend some time with you this morning. Earlier, we published our earnings release and financial supplement on the investor relations portion of our website. Within these documents, you'll see that we generated very solid results that included record quarterly fee-related earnings of $442 million, or $0.74 per share, and record quarterly normalized spread-related earnings of $874 million, or $1.47 per share. Together, these two earning streams totaled $1.3 billion in the second quarter, increasing more than 40% year-over-year, demonstrating the strong, resilient, and fully aligned growth characteristics of our asset management and retirement services businesses.

Combined with principal investing income and other HoldCo items, we reported normalized adjusted net income of $1.1 billion, or $1.80 per share, up 60% year-over-year. Joining me from our team to discuss our results in further detail are Marc Rowan, CEO, Jim Zelter, Co-President, and Martin Kelly, CFO. We've received some feedback from some of you that we should attempt to shorten the length of our prepared remarks. At the risk of making a false promise, Marc himself has ensured us that we'll be endeavoring to do that today. With that, I'll turn it over to Marc.

Marc Rowan (CEO)

Thanks, Noah, and we all, we all can wish for certain things and hope that they come true. In any event, as, as Noah said, it was truly a very, very strong quarter, normalized SRE and FRE of $1.3 billion for the quarter, and we are on track to earn FRE and normalized SRE of $5 billion plus minus for the year, which Martin will detail. One thing worth calling out is just how exceptionally strong SRE has been. Just to put in context, Athene has now grown or will grow 30% SRE, two years in a row. They actually have hit their 2026 financial target as laid out in our Investor Day some two years ago in just two years.

Not only are they doing an exceptional job, but clearly Jim and Grant and the team have exceptionally sandbagged everyone, and the business continues to be very strong. In addition to financial results, we had record inflows for the quarter on an organic basis. We had some $43 billion of inflows, including $8 billion, that closed shortly after the quarter end. This closing shortly after a quarter end is actually a feature of the alternatives business. Many of our institutional investors prefer to close on the first of the month and have something in another another quarter from an allocation point of view, rather than in the prior month. For many of our retail high net worth-focused funds, they also close on the first of the month.

I expect that we will be a little more careful in giving guidance quarter by quarter to account for how this business actually operates. From my point of view, and as Martin and we have discussed previously, we generated positive operating leverage and margin expansion this quarter, and we expect this to continue over the next couple of years as we benefit from the investments that we've made in people and facilities and in upgrading our business over the past few years. In short, our strategic positioning is excellent and anchored by three really simple principles. One, purchase price matters. The second, excess return per unit of risk, that is what we do, and full alignment with our clients, both our institutional and our retail clients. It actually feels pretty good.

Having not chased the hot dot during an era of money printing and zero rates, our opportunity set is just different than that of our peer group. Apollo has momentum. In terms of the business, let me start for the quarter with the equity business. In the equity business, this year has really marked the end of an era. If I think about what happened over the prior decade, and perhaps longer than a decade, there were these incredible tailwinds in the equity business. Tailwinds from money printing, pulling forward of demand, fiscal stimulus, and certainly from zero rates. We now find ourselves in an absence of tailwinds. Rates are higher, growth is slower, globalization is in retreat. People will have to go back to investing the old-fashioned way. They'll actually have to be very good investors. They will need to produce alpha.

I believe that's what we've been doing, demonstrated by the recent private equity results. The final close for Apollo Investment Fund X in mid-July brought in capital just around $20 billion over a 12-month marketing period versus continuing to market over an extended timeline. The fund is now closed. Apollo Investment Fund IX generated 36% gross IRRs, 24% net IRRs. In the quarter, just a really interesting time in the private equity business between haves and have-nots. Arconic and Univar, two very large financings, which certainly came at a time that was challenging for the market, both executed better than expected, giving us increased confidence in the ability to get transactions we like done. Let me move on from the equity business and talk about the two drivers of the quarter and what I expect to drive the rest of the year. First, private credit.

As I've said previously, private credit, these are two words that actually mean nothing. Private credit can be investment grade. Private credit can be CCC. Barriers to entry in the private credit business are either quite low. Anyone with a fund and a staff capable of evaluating investments can truly enter the private credit business, or barriers to entry can be extraordinarily high, and building a full ecosystem that allows you to serve the needs of your clients in a very sophisticated way. Think of the difference between a hot dog stand and a Michelin star restaurant. Both are in the food business, both serve food. That is how we think about private credit and where people are positioned. Financial markets, financial literacy around private credit has actually gotten quite sloppy. What is private credit?

If we start in the abstract, everything that is on a bank balance sheet is private credit. Most of the time, markets, market pundits talk about private credit. They're talking about a very small sliver of a private credit universe that's focused on levered lending. Don't get me wrong, we like the levered lending business. Levered lending is actually a terrific business right now. It will not always be a terrific business. It is a cyclical business with low barriers to entry, but one that at the right point in time, can be very lucrative. What we have tried to build is not a single fund, is not a single opportunity. We've tried to build an ecosystem. If I reflect on the past decade, we've invested some $8 billion building 16 origination platforms.

There are 4,000 people who work in these platforms, non-Apollo employees, who are solely focused every single day on originating private credit. And as you know, much, if not most, of what they do is investment grade. That's important because the investment grade market is at least eight times larger than the high yield market, and eight times larger than the levered lending market. This is a great time for private credit. This is not a quarter that's a great time for private credit. This is secular change. Not only do we have higher base rates and regulatory change and change in market dynamics, we are in the beginning of a secular shift in how credit is provided to businesses, and a shift that I believe will continue to gather speed. To be successful in this market, you need a recurring supply of unique origination.

This quarter, we originated some $23 billion, with 50% of that from platforms. Jim Zelter will detail some of these transactions, but in addition to the names you would expect that are traditionally associated with private credit, AT&T, Air France, and Vonovia. Borrowers value, certainty, scale, and speed to execution. In addition to origination, you need an integrated capital markets business, because after all, we want 25% of everything and 100% of nothing. Our ACS business, led by Craig Farr, has done an extraordinary job extending our reach of private credit to clients and to non-clients. In fact, this is among the greatest ways that we introduce the firm to people who are not yet clients of Apollo and show them what we're capable of.

This quarter, we raised some $7 billion of capital from third-party insurers. We expect this to gather speed, as the market continues to improve. For private credit, particularly investment grade, the way that consumers and businesses borrow is traditionally through the asset-backed market. Asset-backed is, for the most part, private credit. This is a $20 trillion market. One in which we have been playing for a very, very long time. More than $220 billion of volume to date, better than 200 relationships. We have currently more than $100 billion of AUM associated with ABF, $55 billion of which is third party. Most of what happens for us in ABF is investment grade. It is a key driver of our insurance business for Athene and for our third-party insurance clients. Increasingly for fixed income replacement for our traditional institutional clients.

One of the single most important factors in this market is that we are completely aligned with our client base. We own what they own at the same time, at the same price. There is nothing that is more confidence-inspiring than alignment. Let me move on from private credit to talk a little bit about the job Athene did in the quarter. Athene's results are in part driven by the ability of Apollo to source attractive investment grade credit, but also by the incredibly talented team that has been building Athene for the past 14 years. Normalized SRE for the quarter was $874 million, and normalized net spread was 166 basis points. Truly the widest I can remember.... $19 billion of organic inflows in the quarter, up more than 50% year-over-year. Number one, annuity market share.

We now have line of sight to more than $60 billion of organic inflows this year. We are leaving, by some estimates, between $10 billion-$20 billion of annual originations on the table. Truly, we have an opportunity now to be selective and to build recurring franchises. We've made progress this quarter in Japan through our reinsurance business and elsewhere in Asia, and I believe the business at Athene is gathering speed. Although, as I've cautioned in prior quarters, as I'm sure Martin will detail, these are truly exceptionally good times, and we are beneficiaries of the large floating rate position that we have carried for more than a decade. Also recall that our business is built at the top of the capital structure on a senior secured basis, and we sleep better at night.

Credit experience in the quarter was incredibly benign, less than two basis points, which I'm sure Martin Kelly will detail. Surrenders or outflows also came in better than forecast. If you recall from the chart we've included in this quarter, as well as private prior quarters, as well as the education we've been doing, the primary driver of surrenders is not what happens at any point in time in interest rates. It is the timing of the expiration of programs that we put on three and five years ago, and for the most part, is highly predictable. It is difficult to imagine going from startup or new business to where Athene is today. Right now, we have not, we have not done an inorganic transaction for a number of years, but we are the beneficiary of four very diverse channels: retail, PRT, reinsurance, and funding agreements.

All four of those channels are dependent on a stable and high-quality credit rating, and having an infrastructure, and a scale, and an operating expense ratio that allow you to lever the business. We could not have built the business we have today inorganically, in a high-rate environment. We were fortunate in a low-rate environment to have been able to purchase inorganic blocks at a time when their contract rates were above market rates, therefore, our risk of surrender was very low. In contrast, in today's market, someone buying an inorganic block is actually buying a block where surrender charges and market value adjustments have degraded, and is at much greater risk of a melting ice cube. In short, it is not a stable base on which to build a business, and will make it very difficult for people to achieve the kind of scale we have achieved.

Recall that we bought in Athene for some $11 billion at acquisition. Athene will earn $3.1 billion ± of normalized SRE for the fiscal year. In short, the team is doing an incredible job, and distribution, and maturation, and product has not yet even matured. There is more to come. In an effort to keep on time, let me focus on one last topic, which I know has been of interest to people. I really want to talk about the market environment, particularly the regulatory environment and the environment as it relates to our banking peers. In short, we have never had such a collaborative dialogue with the banking system. We have gone from not only being a great customer to partner of the banking system, to a true collaborator.

The shape of our business, particularly our willingness to do very large investment-grade transactions, has made us an indispensable partner, and I do mean partner with the banking system. While some talk about the dancing of this being a great time for private credit, I've noticed that there's actually been dancing on both sides, both on the bank and the private credit side, as most banks put in an extraordinarily good quarter and are on their way to an extraordinarily good year. We are also very symbiotic. Recall that we want the asset, but do not want what the bank typically wants, which is the customer. The bank wants the customer and typically does not want most of or any of the asset. If I step back, the U.S. financial system is the envy of the world.

We raise 50% of the world's capital, and part of the reason we are the envy of the world is the structure of our system. Banks have their role, and the investment marketplace has its role. Our system has all types of participants, but the vast, vast majority of those participants borrow short and invest long or have short-term money. Think of an open-ended mutual fund, which has daily liquidity. Many hedge funds, quarterly liquidity. Banks, daily liquidity, at least on deposits. The ability to bring institutional investors, retirement systems, and insurance companies who have long-dated liabilities or long-dated assets to this market, make them ideal partners for the short-dated capital of the banking system and the open-ended mutual funds. In short, long-term, locked-in liabilities are a source of stability and somewhat countercyclical for our financial system.

It does not matter whether they are in funds, which are themselves very stable, or they are on retirement services balance sheet. Totality of the market, from the investor side, does no maturity transformation, has no access to the Fed window, does not benefit from U.S. government guarantee.... In our case, if you look at the retirement services balance sheet, we hold more Tier one capital and more Tier two capital than the vast majority of the top 10 banks in the U.S. We do cash flow testing and scenario testing, and provide a granularity to our portfolio that very few institutions, if any, can match. Our balance sheet is much more investment grade than the typical depository institution. In short, our model is highly complementary to the banking system.

We have never been more collaborative, I expect this collaboration to increase as regulatory change gathers pace, both in the US, Europe, and even the beginnings of regulatory change in Asia. As we're nearing the end of summer, the team's in great shape and focused on executing the plan. We are sticking with no new toys. The upside from simply executing one of what's in front of us is incredibly strong. With that, I'll turn it over to Jim.

Jim Zelter (Co-President)

Thanks, Marc. You know, Marc did a great job outlining our competitive positioning and our vision, and now I'll spend a few minutes translating how some of these important themes are playing throughout our firm with the investment environment, our investment performance, and fundraising. It's clear to us, and like many of you as well, the demand for private credit solutions has risen significantly as higher costs of capital have reduced the availability of traditional financing sources. We believe we're uniquely positioned to address this need for a few reasons: the scale of our capital resources, the speed of execution, and the sophistication and creativity of our investment underwriting. We are continuing to diligently build the largest alternative credit business in the industry, and our success to date is attributable to the expansive capabilities or what we call the Apollo Toolbox.

From corporates to sponsors and everything else in between, we can flexibly serve clients that need capital in a collaborative and bespoke manner. Across Apollo, we are helping healthy and growing companies who are hamstrung by a limited open public market. The second quarter was a prime example of this, a period that started with the fallout from the regional bank crisis and ended with the markets feeling a bit more accommodating. As you might expect, we were particularly active and then deployed nearly $35 billion of capital across our platform during the quarter.

Much of this activity was driven by the yield business across our various sourcing channels, including financing solutions to corporates, which we call High-Grade Alpha, our origination platforms, as well as more traditional origination through strategies such as large cap direct lending or leverage lending, CRE debt, and a variety of structured credit CLO origination. In an extremely active quarter, one of the signature financing solutions we provided was for a company, Wolfspeed, a silicon carbide materials and device manufacturer. We led an investment group that provided a $1.2 billion-$1.25 billion secured note to the company as they undertook a significant growth initiative to meet accelerating demand. In this case, we worked with Wolfspeed to structure a non-dilutive and flexible credit solution, which resulted in a unique win-win for the company's debt and equity investors.

In another example of capabilities that happened more recently, we partnered with our client and our partner, Air France-KLM, one of the world's leading airlines. Following the execution of two successful, innovative equity capital transactions with Air France, we announced last week that we have entered into an exclusive discussion to provide a EUR 1.5 billion capital solution through funds we manage and insurance affiliates to Air France-KLM's Flying Blue loyalty program. Flying Blue is one of Europe's leading loyalty programs, and this transaction would further bolster the company's already strong capital position. We are proud to say that this would be the third of a unique series of capital solutions to Air France-KLM, increasing our total capital support to the company to more than EUR 2.5 billion over the last 12 months.

Amid our expanding opportunity set to originate investment-grade assets, debt origination activity across our 16 platforms remains strong. Notably, the acquisition of Atlas SP Partners, the former CS business, the newest and largest asset-backed financing platform in our portfolio, is now fully closed, with both client and employee retention rates exceeding our expectations. Atlas has been extremely active in the market, executing over 30 securitizations since March, and as it has substantial near-term pipeline. Some of the larger, other larger platforms, namely MidCap and Wheels, are writing business at attractive spreads and generating ROEs in the mid to high teens range. While we've been actively deploying capital, we continue to prioritize generating excess return per unit of risk. Investment performance remains strong and consistent in the quarter.

Marc touched on the equity business, and I'd like to add that our direct origination, corporate credit, and structured credit strategies portfolios appreciated 4%, 3%, and 2% respectively in the second quarter, with each category outperforming indexes we benchmark in the same period. Performance across hybrid strategies also have been solid, with hybrid value and our more opportunistic credit strategies, each returning in excess of 4% for the quarter. Through a period of weaker public market performance last year and some instability in the first half of the year, driving strong investment performance over the past year has not been easy. Through that lens, it's worth highlighting a few strategies. In particular, ADS, our non-traded BDC we manage, Redding Ridge, our CLO originator, Apollo Accord+, our multi-asset opportunistic credit offering, and Structured Credit Recovery Fund IV, have all outperformed relevant indexes over the last 12 months.

Turning our focus to fundraising, we generated a record organic inflows of $35 billion, driven by strong momentum to Athene, as well as the third-party asset management business. Across third party, we raised $15 billion in this specific quarter, with an additional $8 billion slipping into the first few weeks of this current quarter. These and the investments we made over the last 24 months to expand into adjacencies and white space opportunities, such as secondaries and clean transition, and ones where we believe we have a strategic edge, such as third-party insurance and global wealth, have begun to pay off. Some of the areas where we've seen recent momentum include third-party insurance, where we've developed a comprehensive client coverage network to ensure coordination across all parts of the firm and establish a curated solution set for this fast growing client type.

We think our expertise in managing retirement service balance sheets on both the asset and liability side, is a meaningful differentiator in this market, and we're continuing to be very bullish on the long-term global growth opportunities in this business. Next is our sidecars initiative, where we raised over $4 billion across four sidecars so far this year. Sidecars enable institutional investors to invest alongside various investment strategies, mostly credit-related, with greater scale and flexibility than they would otherwise achieve in a commingled fund. This type of structure is growing the trend and a great way to partner with more sophisticated investors. We have a strong pipeline in the sidecar opportunities across the global institutional investor base for the remainder of 2023, supported with a dialogue of over 60 investors. Finally, capital raised from individual investors continues to be a strategic priority.

Through the substantial investment we've made in the new product creation and distribution expansion, we've built a diverse global wealth platform by asset class, product structure, distribution channel, and geographic reach, all of which have helped migrate recent market-driven headwinds. We're focused on continuing to broaden our retail-focused product suite and continue to expect launching one to two products each quarter into 2024. In terms of distribution expansion, we've made some notable progress for Apollo Aligned Alternatives, AAA specifically, which is now offered on five bank platforms and has additional global US and non-US banks, as well as RIAs and other wealth channels in the second half of the year. We've also seen the monthly inflows into Apollo Debt Solutions. I mentioned our non-traded credit BDC we manage, ramp following the strong investment performance that has occurred over the last 24 months.

All this progress makes us confident in our ability to raise more global wealth capital this year versus last, so ahead of budget. A final note on our capital solutions business, ACS, with fee revenue generation, has been strong and stable over the last several quarters. This business, which is part of the flywheel, is clicking for a variety of reasons, including greater demand for bespoke financing solutions, increasing integration of deployment across activity across the platform, and more of organized and effective coverage of a variety of corporate clients. Through the first half of this year, we've syndicated over $6 billion across 100+ institutional investors and are currently in the market with in excess of 30 transactions. As a bonus, we're reaching many investors who are new to the Apollo franchise through the syndication, as many of our syndication partners have never invested in Apollo fund prior.

ACS has really been the integral part of our flywheel, and I want to emphasize one of Marc's themes from earlier, is one of the ways we partner with banks across a broader financial landscape. With that, I'll turn it over to Martin to go through our financial results.

Martin Kelly (CFO)

Great. Thanks, Jim. I'll provide a bit more context on our financial results and outlook before we open it up for questions. As Marc and Jim have both referenced, our second quarter results complete a very strong first half and position us well to meet or exceed our 2023 financial targets. We've discussed how this year is one of execution, and you're seeing these efforts materialize in a meaningful way. In the asset management segment, FRE revenues for the first half of the year increased by 26% over the comparable period, FRE costs by 22%, and overall FRE by 29%. The FRE margin increased by over 100 basis points as a consequence.

In retirement services, Athene's business continues to exceed all our estimates, with normalized SRE year to date growing in excess of 50% over the comparable period, aided by strong organic growth trends and an expanding net investment spread. Focusing on the second quarter and starting with our asset management business, our record quarterly FRE was anchored by fee-related revenue growth of approximately 25% quarter-over-quarter. Within that, management fees increased almost 20%. Capital solutions fees remained very strong and are tracking well ahead of our initial expectations for the full year. Total fee-related expenses increased only modestly on a sequential basis, reflecting our commitment to disciplined expense management this year.

Growing growth in the comp expense line reflects a declining pace of hiring, with just over 100 net new employees added in the first half of the year, some 40% of the headcount growth in the same period last year. The combination of strong revenue growth and decelerating cost growth drove more than 200 basis points of FRE margin expansion quarter-over-quarter, bringing our FRE margin to 55% in the first half of the year. Moving to retirement services, our record normalized SRE of $874 million increased 8% quarter-over-quarter, resulting in 166 basis points of normalized net spread.

On a sequential basis, normalized net spread increased by five basis points due to higher floating rate income on the margin, on the margin deployment spreads, and yields on cash balances, net of higher new business and financing costs. Earnings accretion from a higher interest rate environment has exceeded our initial projections in the first two quarters of this year. Looking forward, we expect normalized SRE in the second half of the year to approximate the amount we earned in the first half, reflecting four primary components. 1, continued strong organic growth at a $60 billion+ annual pace. Two, current interest rate conditions, both interest rate levels and curve shape. Three, ADIP, the strategic third-party capital, sidecar capital that we manage, supporting approximately 40% of total Athene inflows this year, including buying down origination from the first half.

Four, a transaction with Venerable, which closed in July, where Venerable recaptured approximately $3 billion of older payout annuities. This transaction will be reflected as an outflow in the third quarter and will release capital for deployment into the strong new business environment. In connection with this transaction, we will recognize a benefit within SRE in the order of $50 million that we will treat as a one-time notable item and exclude from normalized SRE. Corresponding to this SRE profile, we expect normalized net spread to range between 160 and 165 basis points in the third and fourth quarters. This spread and earnings profile would result in approximately 30% year-over-year growth in normalized SRE in 2023.

Assuming the current level and shape of the forward interest rate curve holds and ADIP supports a full pro rata share of Athene's incremental growth, we currently expect normalized SRE growth in 2024 to be in line with our longer-term guidance of low double-digit annualized growth. As it relates to credit quality, Athene continues to experience a very low level of asset impairments across its portfolio, which aligns with its focus and high concentration in senior secured, top of the capital structure credit. Since the beginning of 2020, a period that has included COVID-19, the Russia-Ukraine war, the regional bank crisis, and a significant move higher in rates, Athene has incurred average annualized impairments of only 11 basis points, including just two basis points annualized in the most recent quarter, which is consistent with its long-term average of nine basis points.

Overall, we believe Athene's credit profile remains very strong and is well positioned to withstand a more difficult credit backdrop if one were to emerge. In terms of capital allocation, we continue to assess how to best deploy free cash flow on a regular basis based on its highest returning use for shareholders. Far this year, we've allocated more capital towards share repurchases than strategic investments, given the long-term value we see in our stock price, as well as the abundance of organic growth initiatives we've highlighted, which create revenue growth without the need for capital.

We've deployed over $230 million of capital towards opportunistic share repurchases in the first half of 2023, in addition to immunizing employee stock issuance, with a resulting reduction in our share count over the past two quarters from 599 million to 595 million shares. Lastly, in response to some index eligibility questions we've received, it's worth noting that we reported positive GAAP earnings in the second quarter, as well as cumulatively over the last four quarters. This is the final S&P index eligibility criteria that needs to be satisfied. In terms of market taxonomy, Apollo is included within the financial services industry group, according to the Global Industry Classification Standard.

Reflecting our differentiated business mix, this classification places us within a geographically unique position relative to our direct alternative asset management peers in an underweight sector relative to the total market index. Combined with our leading governance characteristics, shareholder rights, earnings growth, and long-term stock outperformance relative to the broader market, we believe that Apollo is well suited to be a core holding within investor portfolios. With that, I'll turn the call back to the operator for Q&A.

Operator (participant)

Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that's star one to register a question at this time. We do ask you please limit yourself to one question. You may re-queue for any additional questions. Today's first question is coming from Glenn Schorr of Evercore. Please go ahead.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Hi, thanks very much. Just a quickie on, on, on the originations. I mean, you have 16 for a reason, and not all of them are going to be clicking at once, but you had a full quarter of Atlas. We're hanging in the $100 billion of origination range on an annualized basis. What do you think takes us to the $150 billion? Can you do it with the current suite of platforms you have? Is it just an environment thing? Just curious on your thoughts there. Thanks.

Jim Zelter (Co-President)

Thanks. Thanks, Glenn Schorr. I, I think it's a combination of both. I think there is, you know, all, all 16, we are happy with the progress. As you know, we really have not leaned into the consumer. We've really leaned into much more of the corporate. I, I think there's a secular opportunity, but I, I think the 16 we feel as we integrate them over time, you know, consistent risk, reporting, funding, financing, and the holistic approach, we still very we still feel comfortable that the, the five-year objective of the 150, that the 16 in our stable today, we think that they have the organic and secular growth. We don't really feel we need to add a lot more.

There may be some consolidation in them, in a few of those for optimization, but we feel very comfortable that we have the strategic lead and the strategic organization from which to get to our five-year goals with what we've put together today.

Operator (participant)

Thank you. The next question is coming from Alexander Blostein of Goldman Sachs. Please go ahead.

Alexander Blostein (Managing Director and Equity Research of Capital Markets Asset Managers, Brokers, Exchanges, Trust Banks)

Hey, guys. Good morning. Thanks, thanks for the question. The, the supply of investment opportunities is clearly rising from the banking crisis. We talked a little bit about that last quarter, and clearly there's, there's more evidence of that this quarter. Can you, can you talk a little more about the demand for these type of investment strategies, specifically for, I guess, private investment-grade credit? Historically, that's largely been taken out by insurance clients. I, I think, Marc, you highlighted that there's an opportunity to extend beyond non-insurance client base. I was wondering if you could elaborate a little bit more on that and how that informs your go-forward third-party fundraising strategy. Thanks.

Jim Zelter (Co-President)

Yeah, let me take a deep dive, maybe Marc has a couple of comments, Alex. Like, as Marc described, you know, history, private credit, it's a big word, big concept. It's been narrowly executed with leverage lending. When you see what's going on with the banks and the funding crisis, which became then really a profitability challenge, there's really two large areas of opportunity. One is there are clearly assets that do not belong today on their balance sheet. Look at the dispositions that PacWest made. We did a secured financing. It was literally AAA risk at almost 10%. A few other folks bought portfolios. The selling of portfolios is one activity, that will continue over the next several years as they optimize their balance sheets. The larger opportunity is the secular business organization.

There are lines of business where they are in, where they have been the day-to-day originator and purveyor of credit to companies. Those are businesses, because their cost of capital change and has changed, and their liquidity and their regulatory changes, that this do not make sense as a operating business. You have a business sector, which is origination. You have a disposition. We're going to be active in both of those, and there's partnerships that we are in and that we'll create on both sides of the ledger.

Marc Rowan (CEO)

Yeah, I'll, Alex, just to complete the thought, insurance companies have, for a very long time, been buyers of private placements, but they've done it in a very, very narrow way. If you're in the retirement services business today, or more broadly in the insurance business, and your opportunity set is solely investment-grade corporates, you have no competitive edge in the investment landscape. You are looking for a solution, and that solution is beyond what I'll call the traditional private placement market. The insurance market is growing. It's well acceptance of investment-grade private credit, and this is about execution. The other interesting opportunity is we as an industry, have basically spent the last 35 years serving the small alternatives bucket of our large institutional clients. We have an opportunity at the investment grade side to serve the fixed income bucket of our large institutional clients.

This is in the very early stages, and it, it, it's always interesting to go in and see these accounts. First question we ask, "Is a single A-rated private credit an alternative?" They haven't been confronted with that question to date. If they think it's an alternative, they're not ripe for the opportunity because then they're comparing it against things that are in 20% rates of return. If they think it is not an alternative, and they think it is just fixed income, then it is offering 200-300 basis points above their fixed income. We are in the early days of an education process, and I believe that the market for private investment grade could be as large outside the insurance industry as it is inside the insurance industry.

Operator (participant)

Thank you. The next question is coming from Patrick Davitt of Autonomous Research. Please go ahead.

Patrick Davitt (Partner)

Hey, good morning, everyone. The Q-over-Q change in the kind of retail annuity sales channel was, I think, worse than many expected, given what we've seen in others in the marketplace. You mentioned you're leaving some business on the table for various reasons. Do you think this is a share loss issue, or is there something else you could point to that explains the divergence with what we've seen from some of the other annuity guys? Thanks.

Marc Rowan (CEO)

This is a high-quality problem, Patrick. We have, as I mentioned, four channels. We have the retail channel, we have the PRT channel, we have the reinsurance channel, and we have the funding agreement channel, all of which are organic. One could also look at reinsurance as being onshore and then offshore, given the progress we're making in Japan and Asia. We therefore, make choices about business. We thought we would do substantially more business this year than last year. Recall that last year was some $48 billion of organic inflows. We're now confirming to, and essentially providing guidance that we will do north of $60 billion. I believe that we are leaving between $10 billion and $20 billion on the table.

In the context of the budget that we put out, that internally, some $60 billion, we have the luxury of choosing the highest quality business, the right business mix, the right profile of liabilities, and the right net spread. Most of the business that was left on the table in the quarter was, I'll call, transactional. Transactional does not mean bad. It just means we elected to do other business versus transactional business, and MYGAs are primarily transactional business. Anytime we want to add MYGAs, we can add MYGAs. We chose not to for the quarter, given that we were already doing $19 billion of organic inflows.

Operator (participant)

Thank you. The next question is coming from Michael Brown of KBW. Please go ahead.

Michael Brown (Managing Director and Senior Equity Research Analyst)

Great. So I appreciate the updates on the updated views on the normalized SRE as we look out to 2024. Obviously, the activity has been really robust across the platform. I guess, kind of following up on that retail channel question, how do you expect activity to hold up as you get into the kind of rate-cutting cycle that the forward curve does expect? I understand that's baked into your guidance today, but is it fair to assume that the demand stays high? You know, obviously, the PRT business has been picking up, and just interested to hear your thoughts about how the opportunity there could evolve.

Marc Rowan (CEO)

Look, it, it is clear to us that consumers prefer higher rates to lower rates. Consumers have not, particularly retirees, have not had good options to finance their retirement. Now they do, you're seeing it across the board in the annuity market. To think that annuities are not impacted by interest rates, is just to ignore the, the obvious. What's happening to us is actually quite interesting. We are growing in a growing annuity market, we're also in the midst of growing our distribution. Each of the last few years, we have added immense new distribution banking partners. We will add the largest or second-largest provider of annuities in this country at some point, this quarter, that will not mature till one year from now. We have two or three other very large providers coming on.

I do think the overall market share for retail will be impacted by rates if, in fact, rates go down. That doesn't mean negative or substantially negative, but it will, on the margin, be a negative force. Having said that, our distribution is still building so quickly, that I doubt we will see any real decline in retail. More interesting to me, is also the diversity of channels. PRT is gathering speed. High rates or higher rates are really causing all plans who are close to fully funded status to consider de-risking. Even those that were in equity are thinking of taking chips off the table, given the, you know, very shallow rally, let's say, in equities. I expect PRT to be very, very active over the next few years, US, and overseas.

Japan, as I've mentioned on previous quarters, is exactly where we want it to be. It's, it's on track, and I think reinsurance is also going to be a very important part of our business. So in summary, I think we're leaving business on the table this year, and I am optimistic that notwithstanding, the forward curve, we will see continued increases in business.

Operator (participant)

Thank you. The next question is coming from Michael Cyprys of Morgan Stanley. Please go ahead.

Michael Cyprys (Managing Director and Equity Research of Financials)

Hey, good morning. Thanks for taking the question. Maybe just circling back to private wealth, I was hoping you could elaborate a bit more on the traction that you're seeing across the products in the private wealth channel and the distribution build-out, as well as how you're thinking about the pipeline of strategies to bring to the market next. I would also be curious, any sort of lessons learned that you take away from some of the earlier products that you had brought into the private wealth channel?

Jim Zelter (Co-President)

Yeah, Michael, let me, let me give you a little bit of a tour. I mean, you know, it's been 36 months, ±, since we really laid out the objectives. You know, certainly in terms of products, you know, I think bucketing them into three areas. The existing flagship products that we had and creating the right types of vehicles and feeders for the large wires and others. There was a second, obviously, creating a variety of, of yield products, whether private BDC and, and private REIT and others. Again, not only for the traditional global wealth channels, Morgan Stanley and B of A, et cetera, but also the, the independent IBD channels, the RIA channels. Then the third big bucket is newer products like, like our AAA product, which we are very excited with the momentum.

I think we feel we have the product set, not only in the US, but globally. I think the lessons really are, I mean, certainly we, we want to, when we expect and the clients expect strong investment performance like we've done for 33 years. The use of technology, the use of education, Apollo Academy in particular, those are all, and the ability to service, those are all the, the full service products that our partners are expecting out of us. You know, we, we see the puck going in global wealth, having a tremendous impact on our business. It's a big secular train, big secular trend. It really parallels what we see going on in private credit.

One, if you look at the, take a broad step back around the globe in terms of demographics, in terms of savers, in terms of vehicles, we think there's a massive amount of white space. We have been broadly embraced. The market wants alternatives alternatives and providers, as well as products. You know, I think the early lessons are, it's not just about performance, it's that you need to bring all your skills to the marketplace. You cannot underestimate the service needs, the technology needs, and the education needs. It's really a full service effort across our firm, and everything we've done, we've had to replicate huge, huge opportunity globally.

Operator (participant)

Thank you. The next question is coming from Rufus Hone of BMO Capital Markets. Please go ahead.

Rufus Hone (Senior Equity Research Analyst of US Fintech/Payments)

Great. Good morning. Thanks very much. I wanted to get your thoughts around the potential longer-term outlook for the normalized net spread. You're expecting it to only trend down slightly in the second half of the year. I guess I'm most curious around where exactly you think the net spread can settle out longer term, and whether you can offset potential spread compression with a higher percentage of originations from platforms through being more selective around new business and the back book running off at lower net spreads. Any detail, that would be great. Thank you.

Martin Kelly (CFO)

Rufus, it's Martin. We, I guess we distill the spread conversation into, into normalized top line spread, which is 160 basis points, plus or minus, and then that pulls through after costs and financing and so on to 115 basis points. You know, we've clearly seen some benefit in there from rates as well as higher growth and higher at the margin deployment. We, you know, we target business, which at the margin derives a net spread in the order of 115 basis points. You know, we have a question which we're, we're addressing internally now, which is, which is the rate exposure and how do we hedge it, which, which we'll, we'll walk through an update on.

You know, we, we look at net spread, and so, so that's what we, that's what we focus on. Given the, given the growth profile, and given the contribution from ADIP, and given where we think we can deploy incremental growth, that, that all sort of combines to a SRE dollar guidance number of low double digit, which is, which is what we're focused on next year, and thereafter.

Marc Rowan (CEO)

Next year will also include the full benefit or full detriment, depending on your point of view, of ADIP being fully ramped and taking its full share. More of the business more of the SRE will go to ADIP, on a comparable basis in 2024 versus 2023. All that is factored into Martin's guidance.

Operator (participant)

Thank you. The next question is coming from Benjamin Budish of Barclays. Please go ahead.

Benjamin Budish (Senior Equity Analyst of Brokers and Asset Managers)

Hey there. Good morning. Thanks for taking the question. I wanted to ask, you know, you mentioned some white space opportunities earlier in the prepared remarks. You know, it's been a hot summer. I'm just thinking about, you know, the clean energy transition strategy. I was wondering if you can kind of give us a refresh of like, where you are, but more importantly, how you think that can evolve over the next, say, like five to 10 years as, as a potential strategy that could really scale in the way that some of your other, like, major drawdown fund strategies have scaled.

Marc Rowan (CEO)

Thank you. Thanks for the question. It's Marc. Look, we, we look at this and, we are, we and the, our peer group and the banking system, quite frankly, we're going to be financing energy transition movements towards sustainability for the rest of our professional careers. The scale of money required is like nothing else we've ever seen. So we step back, and we think about what that is. What kind of money? Is it equity? Is it debt? Is it hybrid? When we look at the market, most of what we see is debt and hybrid. Our goal is to build the leading financier of energy transition sustainability worldwide by having put together a perpetual evergreen fund focused on doing that.

In addition, we will raise bespoke drawdown equity funds from time to time, but those will be, in my opinion, smaller than the opportunity that we see. We announced, either last quarter or at the beginning of the year, that we had made initial funding and initial capitalization with a few billion dollars of seed capital. That capital is getting deployed quite rapidly. The pipeline is growing. I expect this vehicle to have the potential to be among the largest vehicles in our platform. Let's get the money invested that we have first. Let's show investors that we've done a good job with it. Let's really define the types of opportunities and the return requirements. I am equally optimistic, that there's a great opportunity here, but it's a debt and hybrid opportunity primarily.

Operator (participant)

Thank you. The next question is coming from Adam Beatty of UBS. Please go ahead.

Adam Beatty (Director of Equity Research)

Thank you, and good morning. Noticed the deal with Yellow Corporation and wanted to broaden that out into maybe potential opportunity in restructuring and distressed assets and situations, which seems like it could be a sweet spot for Apollo Global Management. Firstly, in terms of the backdrop, so far, the level of corporate distress has been maybe a little bit more benign than folks expected. Wondering what you're seeing and kind of the near-term outlook for that. Maybe some details on how Apollo Global Management is positioned and how much you might want to lean into that opportunity. Thank you.

Jim Zelter (Co-President)

Well, I mean, I, I would just start off by saying I we agree. We. It's been. The, the credit markets have been overall benign, and when we see where the economy is going in terms of cost of capital, our view is you are going to see more companies having a bit of a challenge in 2024 and 2025, especially with the maturity wall. As we've talked about on this call, you know, so much of our business right now, the lion's, lion's share of our business, vast majority, are to investment-grade counterparties, and we feel very good about the health and robust nature of those companies. Certainly, we have roots and history, in our, in our hybrid and our equity business of doing things.

As the market terms more challenging, we expect to be at the top of the heap in doing that, but in a measured, thoughtful way, like we've done for 30 years.

Operator (participant)

Thank you. At this time, I'd like to turn the floor back over to Mr. Gunn for closing comments.

Noah Gunn (Global Head of Investor Relations)

Thanks very much for your help this morning, Donna, and thanks to everyone else for joining and your continued interest in our business. If you have any follow-up questions regarding anything discussed on today's call, please feel free to reach out to us, and we look forward to speaking with you again next quarter. Enjoy the rest of your summer.

Operator (participant)

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.