Q3 2024 Earnings Summary
- Apollo Global Management expects to double its third-party insurance assets under management from approximately $100 billion to $200 billion over the next five years, indicating strong growth prospects in this segment.
- Apollo reported a record $62 billion in originations for the quarter, with spreads on products remaining strong at mid-300s to 400 basis points over, despite market volatility. This supports future growth and profitability.
- Apollo is expanding into the individual investor and retail market, identifying it as a significant growth opportunity without incurring substantial additional expenses, which supports margin stability and future earnings growth.
- Compression of spreads in Apollo's origination business may pressure profitability. Spreads have tightened from approximately 410 basis points a year ago to around 375-380 basis points today, reflecting a 60-70 basis point compression in their traditional credit platforms, which could impact margins.
- Limited penetration in the wealth management channels could hinder Apollo's growth ambitions. Despite entering certain channels, they are still only selling to 5-10% of financial advisers and their clients, indicating challenges in fully penetrating these systems and potential associated costs.
- Lack of visibility into 2025 liability outflows in the retirement services business may pose risks. Apollo has not yet updated their forecast for 2025 outflows, and although trends are expected to continue as anticipated, the absence of detailed guidance could create uncertainty.
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SRE Guidance and Earnings Beat
Q: What drove the better-than-expected SRE performance?
A: The company had a $20 billion quarter, which was very strong and drove earnings. They were able to invest at the margin, with spreads slightly better than expected. They expect Q4 SRE dollars to be similar to Q3, assuming an 11% return on notes, leading to a 5% growth rate for the year, slightly above the 4% predicted at Investor Day. -
Origination Levels and Capacity
Q: Can origination exceed the $275 billion annual goal?
A: Although current origination levels annualize close to $250 billion, it's too early to adjust the $275 billion per annum goal over the next 5 years. Spreads have remained compelling, with mid-300s to 400 basis points over. There's significant potential from syndication, global wealth, and third-party insurance. -
Alternative Allocation in Retirement Services
Q: Are changes to alternative allocations complete for 11% returns?
A: Yes, the repositioning is complete. AAA now represents about 80% of the old portfolio, with 10% in retirement services platforms like Athora, and another 10% in hybrid fund investments. This will help achieve sustained circa 11% returns over time. -
Sidecar Vehicle and Athene Dividends
Q: How will ADIP participation and Athene dividends evolve?
A: ADIP's participation can be increased or decreased over time within set parameters, aiming for mid to high 30%-40% participation. Athene's dividend remains at around $750 million per year, with no expected changes unless there's a significant business downturn. -
Impact of Rate Moves on Hedges
Q: Do higher rates affect hedges and spreads?
A: The company maintains a net floating rate position of around $15 billion, and recent rate moves won't change the hedge posture. They modeled expectations for 6 rate cuts this year and another 4 next year. No changes to hedging or outlook. -
Equity Origination and Platforms
Q: Where does new equity origination come from?
A: The $62 billion origination this quarter is mostly debt. The equity component reflects substantial growth in their equity business, particularly in hybrid equity, as part of their 5-year plan. The 16 origination platforms are performing well, with no plans for further rationalization. -
Retail Distribution Costs and Margins
Q: Are retail distribution costs pressuring margins?
A: They are not seeing margin degradation from retail distribution costs. Some distribution channels incur no costs, and where costs exist, they are either netted against revenues or expensed upfront. Most costs will be netted against revenues over time. -
Retirement Opportunity in DC Plans
Q: How will you tap into the $15 trillion DC opportunity?
A: Inclusion of private assets in DC plans isn't budgeted in the 5-year plan, but over time, there's potential for significant growth. They aim to rethink retirement products, focusing on simplifying offerings and pursuing guaranteed lifetime income. -
Retail Platform Expansion and Expenses
Q: How do you see the retail opportunity and related expenses?
A: The company is in the early stages of expanding their retail platform. Costs are as expected and contemplated in budgets; they don't see unique cost pressures. The focus is on providing appropriate products and services, with potential growth in portfolio solutions. -
Third-Party Fundraising in Insurance
Q: What progress have you made in third-party insurance fundraising?
A: They have always run a third-party business, partnering with competitors on the asset side. Collaborations, particularly in investment-grade activities, are additive to the franchise and are in early growth stages. -
Retirement Outflows and 2025 Trends
Q: How will liability outflows trend in 2025?
A: Runoff of insurance liabilities is highly predictable and tracking as expected. They plan to update the 2025 forecast, but no significant changes are anticipated. -
AAA Platform and Wirehouses
Q: Can AAA expand to wirehouses and model portfolios?
A: AAA is expected to reach $20 billion by year-end. It serves as an equity replacement with lower volatility. While adoption is still early, there is potential for inclusion in portfolio solutions and model portfolios in the future.