Apollo Global Management Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to Apollo Global Management's Third Quarter 2023 Earnings Conference Call. This conference call is being recorded. This call may include forward looking statements and projections, switch do not guarantee future events or performance. Please refer to Apollo's most recent SEC filings for risk factors related to these statements. Call, Apollo will be discussing certain non GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business.

Operator

These non GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the company's website. Also note that nothing on this call constitutes an offer to sell or a solicitation 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. Please go ahead.

Speaker 1

Great. Thanks, Donna, and welcome again, everyone to our call. Earlier this morning, we published our earnings release and financial supplement on the Investor Relations portion of our website. We reported strong Q3 financial results, which included record quarterly FRE of $472,000,000 or $0.77 per share call, together these two earnings streams totaled $1,300,000,000 in the 3rd quarter, increasing more than 30% year over year Holdco financing costs and taxes, we reported adjusted net income of $1,000,000,000 or $1.71 per share, up fiscal year 2020, we are pleased to announce our results and strong relative positioning in further detail call are Mark Rowan, CEO Scott Kleinman, Co President and Martin Kelly, CFO. And one quick plug before we proceed.

Speaker 1

Call. In a couple of weeks on the afternoon of November 14, we will be hosting a deep dive presentation on our platform origination strategy, discussion, a top area of investor focus, which will provide insights into various platforms and detail how, A live video cast of this session will be available through our Investor Relations page. And with that, now back to our regularly scheduled earnings programming. Mark?

Speaker 2

Thanks, Noah, and good morning, Tal. Another great quarter amidst interesting financial markets and certainly a challenging year quarterly SRE, 36 percent year over year, margin expansion 3 quarters in a row now, inflows for the Q3, dollars 33,000,000,000 100 and $25,000,000,000 year to date, deployment $36,000,000,000 fundamentally momentum both sides of the business. Our business model is very robust as I will track for you. We expect another $30,000,000,000 plusminus Obviously, a quarter is not done yet, but everything we see tells us the momentum will continue. In Global Wealth, which I'll just do a quick shout out to given how hard the team has been working, there are now 7 perpetual wealth products in the market today, Scott will go through this in detail.

Speaker 2

And just to close out, origination volume tracking North of the $100,000,000,000 on an annualized level. Fundamentally, everything in the business is working, and I believe we're set up appropriately To benefit from the current market, almost everything in our business works better with higher rates. Credit, as you know, is a much bigger part of our business mix than most of our peer group, something we've built Over a long period of time and to remind you, we are focused on senior secured top of the capital structure. This is a big difference between what people normally think of as private credit and otherwise, but we want a business that lasts, one that has duration, one that is set up for a difficult economy notwithstanding all the positives happening in the credit market. To give you a sense, impairments at Athene On the equity side of our business, purchase price matters, which is our strategy, has really paid off.

Speaker 2

Past decade has left us with a very small number of situations that will require fixing and therefore we have been on offense, Tremendous deployment, which Scott will detail in our Private Equity business, and in our Hybrid business. Discussion, given the high rate environment, given what is generally very difficult financing conditions, you really like it. On the margin deployment into the equity business, I think for all of 'twenty three will prove for our industry to be very, very attractive. So what's really happening, let me step back and give you my view at least on what I think is happening in markets and in private markets. And I'll start, I look at my career, which is now 39 years, and I think we have benefited from 4 tailwinds We have borrowed forward future demand through fiscal stimulus and fiscal borrowing, and we've had the benefit of globalization.

Speaker 2

It does not surprise me with those Over the past years as well, the most significant of which happened in 2,008. 2,008, we came very close to an absolute debacle in our financial system and the rules of how our financial markets work were fundamentally rewritten. We, not just Apollo, but all of us, we just didn't notice because right after we changed the rules, we printed $8,000,000,000,000 and everything went up into the right. Well, now that we are no longer doing that, now that rates are up, now that there are headwinds, we are starting to notice Some of these changes and I'll stick to 3 and I'll talk about their implications. 1 is liquidity, public market liquidity.

Speaker 2

By some estimates, dealer capital, capital that facilitates trading is roughly 10% today of what it was in 2,008. Markets are 3 times their size. That tells me we have just less liquidity in public markets. We have already seen the first complete breakdown public markets challenge and investors beginning to understand that liquidity only exists on the way up and does not exist on the way down, We should expect a more volatile less liquid world in public markets. The second is the role of banks, not just in our economy, but in economies around With the banking system in general, guess what it worked.

Speaker 2

Banks today in the U. S. Markets are roughly 20% of debt capital to consumers and businesses. All of you, investors now supply 80% of debt capital to businesses. In addition, the changes that are now proposed to occur following the debacle at SVB and First Republic and Credit Suisse will further lead to debanking.

Speaker 2

When Europe moves to Basel from Basel III to Basel IV, they're asking banks to shrink. This is happening around the world. Debanking is not something that is periodic. It is at its very early infancy. It does not mean that banking is a bad business.

Speaker 2

It does not mean that 4 big banks don't have amazing businesses. They do, but it means on the margins, they will continue to play less and less as a percentage of the total and new investors will play more and call, that tells me as investors that you will see over the next decade a series of financial products that you've never seen before The 3rd and I focus on is this notion of indexation and correlation. 80% of volume today of trading is S and P five 160% of our markets are ETFs, 10 stocks make up nearly 35% of the S and P five These ten stocks are responsible for 100% of year to date returns. These ten stocks have We feel really comfortable with a massive portion of our country's retirement systems assets and fiduciary assets in 50 PE stocks, we have literally never had so much concentration in so few instruments since the Nifty 50. Going back and predates my career, but if one looks at the data from that period of time, a decade later, investors lost nearly 90% of their money.

Speaker 2

I'm not saying that's what's happening here. What I'm pointing out is we had this perception historically that public was safe and private was risky. I do think that that is the conclusion and that's where investors will move to. Let me dig in a little bit on private credit. Private credit is the flavor of the day in our industry.

Speaker 2

You can look at press mentions. You can look at all the articles. You can look at call, colleagues and peers have had to say on their various calls, private credit for us has been the mainstay of our business. We are nearly $500,000,000,000 in private credit away from the 2,600 people who work in Apollo Asset Management and the more than 2,000 people who work at work at one of our 16 platforms that Noah referenced where we will do a deep dive and their job every single day We have to date as a financial press and as an industry talked about private credit as if it meant to be is this levered lending, Sometimes called direct lending was private credit. Let me tell you this is a fraction Sometimes it's a very good business.

Speaker 2

It is about to get commoditized. Lots of capital is coming to this area. There are low barriers have long track records of risk and reward that will not chase the hot dot in this market because yes, there will be a hot dot in this market as well. When I talk about private credit, I'm really talking about the secular change as a result of B Banking. I start with the notion that everything on a bank balance sheet is actually private credit.

Speaker 2

What we've seen so far and what the press has focused on is levered lending, which as I said is a fraction of a fraction. I think we're going to be talking about this for the next 10 years and the vast, vast majority of what we're interested in private credit is actually investment grade. The difference between where we are today and where I think we will be If it's an alternative because it is private and that's how they think about the world, they're not going to buy it because they need 15% 20% rates of return out of their discussion, but if it is fixed income because it is rated the same as fixed income and it offers 200 to 300 basis points of excess return for the same risk, institutional investors, family offices, wealthy individuals should be able to tolerate some degree of illiquidity if they're getting paid for it, Particularly if I go back to my secular themes of liquidity is not so good in the public market. Most of what's out there has been commoditized. I do think this is our future.

Speaker 2

I do think we as a group will be talking about private credit and I expect the conversation to become much, much more sophisticated. Away from the business, I sometimes joke that we raise money, we invest money, and we compensate people. The raising of money, the investing of money seems to be in very good shape. I'm fortunate that Scott and Jim live and breathe this Every single day, I therefore get to focus on compensating people. And it's not just compensating people, it's also about the culture.

Speaker 2

As I've said previously, our North Star is to build the best partnership in financial services. If we can be the best place for our 200 partners to work, We will retain their judgment throughout their whole career. We will also send a message to our next generation of principals partnership at Apollo is what it's all about. And then throughout the organization, younger people entering our firm, no matter how hard they are working, We also are trying to do something for shareholders. We understand that shareholders value more highly those things that are highly predictable, FRE and SRE, Reflecting market conditions is down very significantly for what we would expect as a long run average.

Speaker 2

Our goal over time And that is the trend we are on. At our Investor Day some 2 years ago, we laid out a trajectory of how we're doing. Today, Martin will update you and tell you we are not only on that trajectory, we are now pivoting to actually exceed that trajectory. What Martin will detail for you is not just a financial transaction, but also focused on the next generation of leadership. We have, and as Martin will detail, decided to fundamentally change the compensation for 4 of our next generation of leaders.

Speaker 2

Conference call, all 4 of them have taken on increasing amounts of responsibility over the years. What we've decided to do is to take the compensation of FRE and SRE and PII that they would have received And that I believe is how it should be. Employees, particularly our partners are well suited to understand PII I will also tell you, we are committed to immunizing the stock that we intend to grant and Martin will detail that So Noah is already tapping his watch and telling me that my time is almost up. Fundamentally, we are on track to hit our 5 year plan. Athene, as you know, has already exceeded its 5 year plan.

Speaker 2

Of the 3 big bets To meet their 5 year plan. So fundamentally, we're confident to meet or exceed the goals that we laid out in our first 5 year plan. And it feels almost like it's time for the next update. There are so many interesting things happening in asset management, So many interesting fundamental changes in market, and so we are committed to hosting our next Investor Day later in 'twenty four, which Noah will detail to really talk about where we go from here. With that, remind you, the goal that we're after, Deliver the targets that we've told you plus a little while maintaining our culture.

Speaker 2

We are not seeking to be the biggest. We're not seeking to be the fastest growing. Call, we're seeking to build something that is sustainable over a very long period of time. With that, I'm going to turn it over to Scott.

Speaker 3

Thanks, Mark. Unlike many in the industry, the current market backdrop marked by higher interest rates, heightened volatility and economic uncertainty Not momentum or volume traders. It's also good for Athene's business, where higher for longer rates drive more volume and better profitability. And it can be good for our Capital Solutions business, where companies can access creative financing solutions when traditional sources of capital are less plentiful. This is the true power of our aligned asset management and retirement services business model, which should only increase as we continue executing on growth objectives.

Speaker 3

As you've heard us say before, the foundation of our business is providing excess return per unit of risk, And this is evident in our strong investment performance. In the yield business, our corporate credit, structured credit and direct origination strategies all appreciated in certain underlying strategies, including Apollo Debt Solutions, which posted a total net return of 16.5% for Class 1 shares over the last 12 months. Performance in our hybrid value franchise also remains robust, with the portfolio appreciating 4% in the 3rd quarter and 11% year to date. And in Private Equity, our flagship strategy appreciated 3% in the 3rd quarter and 16% over the last 12 months, Including 22 percent LTM for Fund 9 specifically, as the underlying portfolio companies continue to generate healthy earnings growth and are actively managing inflation by achieving greater operational efficiencies. The portfolio is well diversified and has an average purchase multiple In terms of investing activity, we remained active during the quarter, putting $36,000,000,000 of capital to work across the platform.

Speaker 3

Investing activity across the yield platform accounted for the vast majority of capital deployment in the quarter as we continue to capitalize visibility and certainty has made us a lender of choice in today's backdrop. With that said, we're picking our spots and remaining highly disciplined in our underwriting criteria strong defense during times of uncertainty, leading to effective offense during periods of dislocation. For our hybrid business, the pipeline of deployment opportunities is also expanding. Sponsors and corporates alike are seeking structured financing alternatives to access liquidity and refinance capital structures, which is driving heightened demand. This trend is especially evident within our hybrid value strategy, discussion, we remain very busy with capital deployment activity reaching $11,000,000,000 over the last 12 months, with reductions in broad market valuations, we're seeing a wider opportunity set that fits our strategy, particularly in take privates and carve out transactions.

Speaker 3

As a leading franchise with a long standing track record, we remain confident in our ability to source financing, deploy capital and appropriately capitalize During challenging market environments, which was recently showcased by the sizable closings of Univar and Arconic in August. Moving to our capital raising results, we generated $33,000,000,000 of total inflows in the quarter, primarily comprised of the $13,000,000,000 of inflows from Athene go anywhere opportunistic credit through Accord and Accord Plus and our newly launched asset backed finance franchise. All of these are important to our growth objectives in the yield business over the next 12 months and beyond, which will position us with even more dry powder for what we expect to be and attractive credit investing backdrop. Additionally, we spent a lot of time and resources positioning ourselves for the next wave of growth in our asset management business, Which we've discussed is concentrated in 6 complementary areas where we believe we have a competitive edge. Fundraising for these initiatives accounted for more than 25% discussion of total third party capital raised in the Q3, including capital for direct origination and multi credit sidecars and for AAA.

Speaker 3

We also expect to hold closes for our inaugural Equity Secondaries and Clean Transition Equity Funds over the next couple of quarters, Which are 2 exciting areas of expansion within our Equity business. And of course, an important component of our capital raising efforts this year and going forward Everything we're building in Global Wealth. This area continues to be a steady march for us as we roll out product, expand distribution, invest in technology and continue to educate the marketplace. We believe all these components have led to a differentiated platform offering for several reasons. 1st excess return, as I mentioned earlier, our primary goal is to drive excess return per unit of risk for our clients.

Speaker 3

To meet this need, we've taken institutional like offerings and adjusted them into structures for the retail market and in some cases, design products specifically with the individual investor in mind. We offer 7 families of perpetual products today for both U. S. And non U. S.

Speaker 3

Global Wealth Investors I'd have a handful more in the pipeline. 3rd, education. We believe the benefits that alternatives bring to a diversified portfolio are still widely misunderstood by retail investors and are often equated with high risk, high fee products. To combat this mischaracterization, And lastly, commitment. As a leadership team, we've made an internal and external commitment to this initiative, Which is translated into a couple of important benefits, including allocation of resources, both organically and via M and A, And with speed to market that allowed us that has allowed us to grow as quickly as we have.

Speaker 3

Despite all the progress we've made thus far, it's still early days and we see a long runway of growth ahead of us in what we view as a massive addressable market. Given our emerging growth Even if faced with a more challenging retail market backdrop. Turning to Athene, organic inflows totaled $13,000,000,000 in Q3, bringing year to date inflows to $44,000,000,000 retail annuity sales drove half of the quarterly activity with businesses that were Under with business that was underwritten to very strong returns. Volume has been increasing in that channel to begin the Q4 with approximately $2,500,000,000 of annuities sold in October. In flow reinsurance, Athene is continuing to see a steady build in volumes Driven by new distribution partnerships in Japan and the U.

Speaker 3

S. As well as strong volumes from existing counterparts. We expect flow reinsurance inflows to exceed $10,000,000,000 this year, implying healthy inflows again next quarter. For Pension Group Annuities, despite the lull in activity in the Q3, we see a solid pipeline of opportunities, including one deal that already closed in October. It's worth noting that this business now has generated $50,000,000,000 of cumulative volume since Athene entered the channel in 2017, leading the industry during that timeframe.

Speaker 3

Based on the momentum we see across Athene's business, we remain on pace to generate $60,000,000,000 plus of total inflows this year. Call. So with that, I'll turn the call over to Martin to go through our financial results.

Speaker 4

Thanks, Scott, and good morning, everyone. So as Mark previewed, we reported another very strong quarter of results, as we continue to execute against the financial targets we laid out at the beginning of this year. Markets have changed call, quite significantly since then, marked by even higher interest rates and increased economic uncertainty, yet we've remained confident throughout 2023 call, in meeting or exceeding our initial financial targets for the year as further evidenced today. With these results, we believe that we're beginning to gain recognition discussion for the predictability, consistency and differentiated growth of our earnings profile anchored by our 2 primary earnings streams, FRE and SRE. I'll address 5 topics in my remarks today.

Speaker 4

1, earnings growth and outlook in our asset management business 2, the financial impact of the compensation awards we announced today 3, earnings growth and outlook in our Retirement Services business Starting with our Asset Management business, our 7% increase in quarterly FRE continued to be driven by solid revenue growth and expense discipline. Year to date, FRE revenues are higher by 25% against the 21% increase in FRE Expenses. Our Capital Solutions business achieved a new high in the 3rd quarter amid a robust year of growth. We're very pleased with the expansion of this business, Which is on track to meet its 5 year revenue plan in just 2 years. We'll spend some time during our platform origination presentation on November 14, discussion, the breadth of this business and its importance to our fixed income replacement strategy.

Speaker 4

Specific to Fund 10 in the quarter, management fee growth of 5% included a $24,000,000 catch up for Fund 10 and its final close, with Fund 10 fees Our focus on scaling the asset management business is evident in our compensation costs, which were flat in the quarter and up 14% on a year to date basis. Underpinning this is a moderation in our headcount growth and an emphasis on building our team in India, Combined, this has driven strong positive operating leverage, resulting in more than 150 basis points of margin expansion year to date fiscal year 2019, we expect FRE growth conference call, the outcome is somewhat dependent on the environment with current expectations around the middle of that range. This outlook is guided by a strong fundraising outlook, our holding more than $45,000,000,000 of uninvested capital with management fee potential, our current plan to repeat the very successful year in Capital Solutions in 2023 and low double digit expense growth. We anticipate a further approximate 100 basis point improvement in our FRE margin next year as a result. The compensation awards we announced today amount to approximately $550,000,000 of award value at Grant, equating to approximately 1% of our share count and include 2 components.

Speaker 4

1, for senior leaders, call, and 2, the reallocation of those savings and the expected issuance of a modest amount of additional carry call, this exchange and reallocation is accretive in value discussion, we believe are well aligned with shareholders as Mark described. Turning to our Retirement Services business, This included some offsetting items that when adjusted for resulted in normalized SRE being roughly in line at $879,000,000 In terms of balance sheet growth, net invested assets ended the quarter at $208,000,000,000 down $6,000,000,000 versus the 2nd quarter, Invested assets attributable to 3rd party investors in ADIP now exceed $50,000,000,000 representing 20% of Athene's total invested assets. As third party capital, ADIP has multiple benefits, including validating Athene's business model, providing capital support, call, we expect to close out 2023 with a normalized SRE growth rate exceeding 30%, reflecting our expectations for strong organic inflows in the 4th quarter, discussion, as you are aware from comments we made when we issued the mandatory convertible preferred stock in August SRE growth in 2024 after adjusting for the ADIP buy down and Venerable recapture, driven by: 1, continued scaling of asset growth due to an abundance of organic growth opportunities across our 4 business channels, cumulatively we expect that to And 3, on spreads, expected normalized net spreads of around 165 basis points for the year, assuming the current forward curve.

Speaker 4

And as a reminder, higher rates benefit our floating rate assets and achievable return on our underlying capital. Athene supports every dollar of liability growth with approximately $0.08 to $0.10 of capital, which we invest alongside the dollars of cash taken in from policyholders. So while Athene continues to underwrite new business to historical targets of around 115 basis points or better at the product level, As it relates to credit quality, Athene's portfolio continues to be in a very strong position. Total impairments over the last 12 months have amounted to just 13 basis points, close to Athene's long term average. Athene's investment portfolio is concentrated in high quality senior secured assets with an approximate 95% allocation to fixed income, of which 95% or so is rated investment grade.

Speaker 4

It's noteworthy that Athene's credit losses have been disproportionately concentrated in investment grade corporate bonds purchased in the market We believe that Athene has the most transparent financial disclosure amongst its peers. And in line with that philosophy, Athene began publishing historical credit losses fiscal year 2019, we expect to be in the range of $1,000,000 in the fixed income investor presentation last quarter, which will be updated in conjunction with our next call next week on November 9. Call, as it relates to capital allocation, the construct we laid out 2 years ago at our Investor Day remains largely intact Meanwhile, Athene has been maintaining its consistent dividend up to the holding company in a significantly more attractive growth backdrop amid rising rates. Discussion, we've increased participation from ADIP and issued the mandatory convertible preferred stock in August, the proceeds of which were downstreamed call, at the same time, the sheer number of organic growth opportunities at the asset manager and a targeted 20% discussion, we will be conducting a share count of 600,000,000 shares outstanding. We anticipate additional capacity within our current 5 year plan, but back ended to consider opportunistic for share repurchase in addition to.

Speaker 4

And with that, I'll turn the call back to the operator for Q and A.

Operator

Thank you. The floor is now open for questions. Our first question today is coming from Patrick Davitt of Autonomous Research. Please go ahead.

Speaker 3

Hey, good morning, everyone. I know early days, but could you address your view of the potential risks discussion, we will discuss our business from the new DOL rule published yesterday. And within that, remind us, if at all, how dependent Athena is on distributors that might be charging The quote unquote junk fees they're talking about. Thank you.

Speaker 2

Okay. Thanks, Patrick. It's Mark. So this What came out yesterday is not much different than what the industry saw 7 years ago. 7 years ago, we and the rest of the industry prepared and actually made changes, extensive changes to how products and fees and features were disclosed.

Speaker 2

And so Truthfully, not much new. In terms of your question on exposure of the business, about 10% of our business is through wholesalers. Another 10% is also to accounts, but it's through banks that would have a very easy time adjusting to this because they essentially already charged that way anyway. So specifically roughly 10% of the business is focused And not really worked up about it. This is where we were prepared to be 7 years ago.

Speaker 2

And I think we're still a ways away

Operator

The next question is coming from Glenn Schorr of Evercore ISI. Please go ahead.

Speaker 5

Hi, thanks very much. I wonder if we could just revisit 2 things that you said. You gave us Good guidance or thought process on next year, so the $70,000,000,000 for next year. I'm curious if you could talk about that shift that we saw in the quarter, inflows into Athene were low because the shift over to ADIP. What should we expect Of that $70,000,000,000 next year, should we and should we even be focused on it?

Speaker 5

Because I think in line with this DOL question, I think there's this notion that the retail flows are higher quality, and some of the other funding agreements Our stop gaps, but I wonder if you could talk to the quality of the 4 channels and if you debunk any of that and how we should think about that shift So

Speaker 2

Glenn, it's Mark. So we've been watching this for the last 14 years. Fundamentally, there is no difference in the quality of People need retirement solutions. If you look at the vast pools of capital in the U. S, for instance, in 401 where there's $8,000,000,000 to $10,000,000,000,000 We force people who need returns the most to be daily liquid for 50 years.

Speaker 2

What we're doing as a country makes little sense and consumers know that. And so what they've done as soon as they have access to their funds, Increasingly, they are in higher rate environments seeking out guaranteed lifetime income. The demand we're seeing on annuities Either directly or through reinsurance is fundamental. Reinsurance, again, no different to us direct business other than it tends to be in markets or in market segments we don't serve or don't serve yet. So I don't view there is any difference one way or the other in the way these things go.

Speaker 2

As it relates to the broader question, we have a choice. We have a choice of the capital intensity of our business. If we want to be more capital intensive, We put up $0.08 to $0.10 of every dollar and we retain 100% of the business. If we do that, SRE grows faster because we're retaining more business and it grows faster because we tend to earn 15% year in and year out on the capital that we put up, really good option. We have, as you know, made a business decision On the margin, we tend to fund around a third between 30% 40% depending on the mix of business And the regulatory source of the business of every new deal, which means that we put up 30% to 40% of that 8% to 10% And that will alter the SRE growth rate.

Speaker 2

I think what we've said to you over the long term is that we expect The retirement services business to be a low mid double digit rate of return grower. At every quarter, Jim Belardi, Groundfelheim and team are embarrassing us. And this year, as you know, it's up 30%. What we're seeing this year is what Martin detailed. Not only are we seeing fundamental demand for guaranteed income, which is driven by secular trends like You and I are getting older, but we're also seeing widening spread.

Speaker 2

We are reluctant to budget historically, but if we continue to see the scale of debanking in the investment grade segment of the market, We think the prudent thing is to budget the way we have historically and let the performance speak for itself.

Operator

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

Speaker 6

Hi, good morning. So I appreciate the commentary on the net spreads within Athene. I guess one thing I was trying to think through is The higher short term rates have been a meaningful tailwind for the earnings on the floating rate asset side. As we perhaps get closer The end of the Fed's rate hiking campaigns, are you thinking about taking any actions there to reduce that downside risk if short term rates do start to come down? Thank you.

Speaker 2

So we are plusminus $30,000,000,000 of net floating rate assets. If you look at the growth of the business over the next 2 or 3 years and you consider the mix of our liabilities, We will want to be 2, 3 years from now $30,000,000,000 of net floating rate assets. Having said that, We probably are relative to our liability position $10,000,000,000 to $15,000,000,000 excess floating rate assets over what we would want to or consider a long term prudent position, you should expect that we will take action over the near term to reduce the short current mismatch reflecting that and that's factored into everything that we've discussed with you today.

Operator

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

Speaker 7

Thanks. Good morning. I was hoping we could dig in a little bit more into some of the retail products you mentioned, which would seem to have pretty good momentum here in the quarter, in particular, AAA, I know the product is a bit complicated. So maybe give us sort of a breakdown of composition across various channels and sort of fee paying AUM between kind of 3rd party and Athene as well as how the kind of gross sales conversations are unfolding on that side of the channel? Thanks.

Speaker 3

Sure. So on the AAA side, we've been actually very pleased at how sales are progressing there. So we had our best quarter yet, a little over $700,000,000 in the last quarter For AAA, so week by week, month by month, we are getting AAA onto Progress is good there on the retail side. We expect this to discussion, we're seeing more selling agreements and for not only AAA, but all our products ADS, ARRIS, This is how we are progressing. This is why in my prepared comments, I just talked about we're in we're finishing up year 2 of our Global Wealth Focus and we just see so much more positive momentum as we get these Selling agreements signed up in place product by product, area by area, region by region, just Huge opportunity.

Speaker 3

So, really positive momentum across all the products we have in market right now. Like I said earlier, we have 7 product families Out there right now, we have a few more coming in 2024, where at that point we feel like we'll have a fairly complete lineup Across the asset classes, and so, yes, good progress.

Speaker 2

So I'm just going to leave you with the following sense, Alex. What we're trying to do here is similar to what we're doing in the rest of the business. As you know, I've said publicly, certainly for high net worth families, family I think they will be 50% plus alternatives over the next 5 years, and we're seeing that kind of uptake in traction. The difference between where we are and where I think we're going to be is only education. When we say we're on a platform, one of the big private banks, It may be 5% or 10% of the financial advisors.

Speaker 2

This is an education, an evangelical activity with more and more converts And so if you take AAA, I know you premise your question as a complex product. I'll make it an easier product. You can buy the S and P 500 at a 50 PE or you could buy roughly the same historical return at a much higher sharp ratio Something that many on this call and we are very familiar with. The vast majority of investors thinking back over the 40 years, they've been doing just tailwinds, people are going to get the same performance. I don't think what I'm saying is all that controversial.

Speaker 2

We're now just in a period of education where people consider What does the market look like? How do I invest without tailwinds? What does it mean that public markets are less liquid on the way down? What does it mean to have debanking? What does it mean to have indexation and concentration?

Speaker 2

I believe that when you look forward at asset management more generally over the next 5 years, I think you're going to see an asset management industry that is continuing to grow in its passive strategies. I think you will see boutiques who offer access to uncorrelated returns or at least non market correlated returns such as ourselves and others grow. I think the tougher part of our industry, which you're already seeing is active management. Harder and harder for active managers to produce good returns, Certainly in fixed income, I question whether there is any alpha left in publicly traded fixed income markets. And given indexation and concentration, I think it's very, very difficult in equity markets.

Speaker 2

So I like where we sit. I like our hand of cards. It does not mean, again, we're going to be the biggest or the fastest growing. In the retail market, we want to be thought of as

Operator

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

Speaker 8

Question, I just wanted to circle back to your commentary, Mark, on the DOL, proposed rule. I was hoping you might be able to just elaborate a little bit on what aspects of the rule You find most troublesome for the business and then what specific actions to products and features can be taken to address the rule? And then I think you mentioned about 10% of the business, maybe most impacted. I think it was in the wholesale channel. But what are other levers that you might be able to call, such as maybe altering the distribution strategy and maybe even thinking about going direct because it doesn't change the overall demand side to your earlier point Retail Investors still have a demand for income.

Speaker 2

So look, it starts with investor demand for guaranteed lifetime Products like annuities have been very complicated because they offer a variety of options and other things and therefore they have had more of a complex sale, therefore, you have needed advice and that advice has therefore a more expensive distribution than something you can buy off discussion, I remain skeptical on direct distribution, but I also see the proliferation of distribution. Increasingly, financial products like guaranteed income are being sold through the banking system, are being sold through RIAs. And if you focus in on the specific issue, these are not issues of disclosure. They're actually not issues of product features. We and many in our industry have already made the changes going back 7 years because that was just best practice.

Speaker 2

I think there will be more pressure on fee. That clearly is what it's at. And we can have both sides of that. I'm not system anywhere in the world, dollars 3,500,000,000,000 for $28,000,000 of population. Well, they have a big problem there.

Speaker 2

They actually legislated out all the fees. So now there's no advice. No one provides advice. And so at 65 when people get their big lump sum distribution from the superannuation product, They don't know what to do with it and people are dying with between 35% 40% of their retirement income intact. The government doesn't like Eventually, I believe we're going to come to a sensible place that may be lower fee and distribution.

Speaker 2

Truthfully, doesn't bother me Small piece of the business. I don't think this is going to result in fundamental changes in distribution. I think it may change how product is priced, And that's okay.

Operator

Thank you. The next question is coming from Brian Bedell of Deutsche Bank. Please go ahead.

Speaker 9

Great. Thanks. Good morning, folks. Thanks for taking my question. Maybe just to zoom in, Martin, on the FRE guidance, The 15% to 20% next year, for the higher end of that or getting close to the higher end of that, would it be capital markets or Capital Solutions fees is the biggest swing factor.

Speaker 9

And then if you could just comment The trajectory of that definitely certainly much better again this year than last year. And I think your maybe if you could just confirm, I think your guidance was for flat solutions fees baked into that 15% to 20%. So maybe The trajectory of that and what drivers would increase the solutions fees a little bit faster.

Speaker 4

Great, Brian. So what I said is our sort of current best estimate, obviously. And so In an environment which we think is conducive to our investing orientation and then continuing to build out The Capital Solutions business. And so any of we've made assumption around each of the 3 of them. Any of them could be a plus or minus to the guidance I gave.

Speaker 4

And so we'll talk more about Capital Solutions on the 14th. That's one of the objectives of the day to connect that back to the origination strategy and our fixed income origination and distribution focus. But yes, in the comments I made, we are assuming it's flat. Is there upside? Potentially.

Speaker 4

But So we're really, really happy with the growth of the business. A 5 year plan in 2 years is pretty heroic. And so we're focused on building out that business further and repeating the success we've had. So with a primary emphasis on credit And then building it out to other to co invest over time.

Operator

Thank you. The next question is coming from Brennan Hawken of UBS. Please go ahead. Brendan, please make sure your phone is not on mute.

Speaker 3

Thank you. Thanks for taking my question. Appreciate it. Sorry if this is a bit remedial, but cost of funds came down quarter over quarter. I don't

Speaker 4

Yes, we had so you need to look at the normalized net spread. That's why we try to focus on The net of the 2, there was a benefit in cost of funds for the quarter that we telegraphed last quarter Related to the Venable Reinsurance transaction and so that impacted cost of funds which we then normalized out So I would look at the 165 basis points as the guide is our current best view and it takes account of things like that, the ACRA buy down during the quarter, which are sort of episodic but not recurring.

Speaker 2

But I'm going to use this to make a point, which I've made previously. When you originate new product, you originate product that is protected by surrender charge market value adjustment or in the case of PRT is fully locked in. You should therefore be willing to have a Higher cost of funds for fully protected product because you can invest against it. It gives you longevity. It gives you certainty.

Speaker 2

We have 4 different channels and we look at each of the 4 channels on a regular basis and we try to keep our cost of funds low because if we know if we have a low cost of funds, If we're not good investors, we can earn spread. And if we're good investors, we can earn a lot of spread. What's happened in our market You now have a number of entities who have seen what we have built and are late to the game. The way they intend to get into this business or trying to get into the business Maybe sensible, because in a low rate environment, the contract rate is above the rate in the market. Therefore, you expect the book to behave predictably.

Speaker 2

But in the market we're in right now, for someone to buy a secondary book of business and pay for a cost of funds in excess of that of retail, Kind of tells you all you need to know about the quality of the business that people are buying. And I encourage you to push as hard on cost of funds Across the board, it ultimately simplifies what is a very complex business. We're in the spread business.

Operator

Question is coming from Ben Budish of Barclays. Please go ahead.

Speaker 7

Hi, good morning and thanks for taking the question. I wanted to ask about the return of the Athene business, it's been below the sort of normalized 11% for several quarters. Anything in particular to call out there? I know we always spend some time trying what it might look like and there's many kind of components to that. And any color on sort of the key drivers over the past year or so?

Speaker 7

And what do you think might get that back to sort of the normalized expectation going forward? Thanks.

Speaker 3

Sure. As you know, the Alt portfolio origination platforms, about a third of the remaining quarter is about Funds and other, I would say, hybrid y type products and then the last quarter would be other bespoke and direct The last couple of quarters, given the environment, there's been a little bit of slower appreciation As you've just seen in the broader market, but really no fundamental concerns there about What's in that? As we've always said, that portfolio will sort of deliver you 8 in a really bad year, 2018 in a really good year and 12 to 15 expected and we see nothing deviating from that.

Operator

Thank you. This brings us to the end of the question and answer session. I will turn it back over to Mr. Gunn for closing comments.

Speaker 1

Great. Thanks for your help this morning, Donna, and thanks again everyone for joining the call. Just a couple of reminders, we would encourage you to participate in Athene's Fixed Income Investor Call next Thursday, November 9th and then our origination deep dive that we mentioned on November 14th. If you have any questions regarding anything call, as usual, please feel free to reach out to us. Thank you for your time.

Operator

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or lock off the webcast at this time and enjoy the rest of your day.

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Earnings Conference Call
Apollo Global Management Q3 2023
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