Author: the_red_deer

Note: This is hard pasted from a Google doc located here.

Summary:

• Acquisition of FIA franchises will likely go down as “home run” standalone and strategic investments
• Apollo is the only player pushing “all in” to becoming a GE Capital versus alternative asset manager peers
• New Apollo is not “asset light” – but not “asset heavy”; Athene’s float funds strategic investments in origination vehicles, not cash flow
• Apollo’s 5 year guidance is a downside case if no economic shock is realized over time period; base case may be far higher
• Expect $5B in growth capital to be spent on more annuity platforms and financial technology

Acquisition of FIA franchises will likely go down as “home run” standalone and strategic investments

• FIA franchises have been trading at book value +/- 20% for the past 3-4 years in part due to worry that low rates reduce earnings spread
• Apollo purchased Athene at 1x book value while Athene has printed ~16% ROE including excess capital (23% excluding) since 2009 inception¹
• Rare in this market to purchase simple businesses at mid single digit P/E with market leadership position (in all organic channels) and double digit growth profile²
• Athene is estimated to contribute ~52% of group ‘22E pre-tax earnings ($3.35 of $6.50) while owning 24% (133m of 578m PFSO) of the merged group
• Acquisition risk is negligible as Apollo founded company, controls board, dual employs CEO, manages entire asset book, and controls M&A strategy³
• Athene will grow book value at mid-teens via organic liability origination, any inorganic transactions would accelerate growth as assets are plugged into Apollo platform⁴

Apollo is the only player pushing “all in” to becoming a “GE Capital” versus alternative asset manager peers

• As insurance platform growth continues to dwarf legacy opportunistic investment platforms, over a 5-10 year period Apollo will resemble a bank / insurer vs alt. firm⁵
• Apollo is often hiring origination teams from money center banks, a different human capital profile than legacy Apollo majority of alt. firm talent pipe⁶
• Apollo is utilizing “decentralized” business structure for origination teams with aligned incentives, governance, and separate entity – with opportunity for buyout in future⁷
• Current origination headcount is 1300 going to 2000 shortly⁸; more than 300 on Apollo investment team focused exclusively on Athene M&A and portfolio management⁹
• Via Athene’s float growth, Apollo will spend ~$10B over next five years on strategic investments to bolster origination, likely dwarfing competitor efforts¹⁰

New Apollo is not “asset light” – but not “asset heavy”; Athene’s float funds strategic investments in origination vehicles, not cash flow

• I believe New Apollo isn’t a pure play “asset light” company – it does require incremental regulatory capital against liability growth, but it also is not “asset heavy” 
• Unlike most businesses, New Apollo can use the 5% equity sleeve (currently $10B) of the float to make strategic growth investments; only additional capital required is statutory capital against further liability growth
• New Apollo must put up only ~$8 for every $100 in OPM or float that it holds¹¹ and invests, and as such equity capital is leveraged similar to any vanilla bank or insurer – and in some ways similar to GP commitments in its fund business¹² 
• New Apollo can and plans to reduce capital drag of regulatory capital required on group by expanding ADIP program, which may fund up to 40-45% of regulatory capital in the future¹³

Apollo’s 5 year guidance is a downside case if no economic shock is realized over time period; base case may be far higher

• Apollo guided base case growth at 18% over the next 5 years from organic growth only
• Guidance ignored incremental value from growth capex, buybacks, M&A, inorganic block transactions, geographic expansion, product expansion, and fintech investments¹⁴
• Scott Kleinman indicated both hybrid segment targets and retirement services targets are conservative ^{15, 16} 
• Marc Rowan indicated that annual origination target of $150B by ‘26 has a dose of conservatism in it and tracking currently faster than plan¹⁷
• $10B in growth investments and buybacks alone may add multiple dollars to ‘26E $9.00+ DE target¹⁸

Expect $5B in growth capital to be spent on more annuity platforms and financial technology

• Explicit guidance on growth capital was indicated to be on “asset management or platform acquisitions”¹⁹
• Investor day highlighted Apollo opinion of deep undervaluation in FIA franchises²⁰; conflicts and valuation notwithstanding, potential plays may emerge for international platforms (e.g., Athora, Challenger, or Japanese FIA franchise) if stars align²¹
• I expect growth capex to likely exceed $5B if opportunities allow, as Rowan has clear track record (prior via Athene, now via Apollo) of preference for franchise growth over buybacks and dividends ^{22, 23}

¹ “As I said, Athene has earned really high returns over time. If you include the excess capital, we’ve earned about a 16% ROE over time. If you look at just the capital required in the business, if you compare us to the peer Group, we would actually have a 23% ROE”. – Marc Rowan ‘21 Investor Day

² “You can see here, to be able to buy something that is strategic and recurring and important to us between 5 and 6x cash flow, almost unheard of. One thing we have not forgotten at Apollo is when the market does not understand something. We are supposed to back up the truck and buy the cheap asset. We backed up the truck and bought the cheap asset.” – Marc Rowan ‘21 Investor Day

³ “Many mergers are associated with risk of execution, and I want to repeat what Jim has already said. This Transaction is about coordination, not consolidation. There is no plan to consolidate the businesses. There is no need to consolidate the businesses. The same people who are running the businesses, the same processes by which we run the business, the same focus in which we run the business will continue. And we all know each other very, very well.” – Marc Rowan Athene M&A Call

⁴ “So now when you look at the growth prospects of the business, this starts to look actually incredibly conservative.” Scott K., ‘21 Investor Day

⁵ “We have institutionalized the willingness to accept liquidity risk and structure risk, but not credit risk or duration risk or any of these other risks in scaling the business. And if you think about where this fixed income replacement opportunity exists, it historically has existed inside of banks. It has not been an investable products for all of you or for your clients or really for institutions more generally. It was in the GE Capitals of the world. It Was within the big money center banks.” Marc Rowan, ‘21 Investor Day

⁶ “This is not, again, a smart person behind the screen business. This is the business of originating credit. The kinds of businesses that GE Capital once owned, the kinds of businesses that are resident within the money center banks.” – Marc Rowan ‘21 Investor Day

7 “When you leave your job at Deutsche Bank, Citi, BofA, JPM, BNP, SocGen, whoever else, and you come to Apollo with your team, we want you to feel like you own your own business. If you ran trade finance at BNP, you had 2career options, you and your 20-person team had 2 career options. You can go to a U.S. bank, you go to aJapanese bank. Those were your career options. Now you and your 20-person team can set up an independent entity, Apollo trade finance, you can own a piece of it. We will compensate you based on production net of credit losses over a long period of time, and you can retire 5, 10, 15 years with a piece of the business liquefied, bought out rather than a watch. We are simply an amazing home for talent. But part of this is the culture.

We are not intending to integrate the front end of these businesses. We are intending to bring integrated funding where needed to these businesses, integrated risk management. But the front end of these businesses, the culture of these businesses is very distinct.” – Marc Rowan ‘21 Investor Day

⁸ “Finally, we are a massive retirement services yield-focused franchise. Inside of Apollo, I’ve used a number and you saw on the first slide, 2,000 people. So 10% of the firm wake up every day and do nothing other than retirement services. In addition, not included in that 2,000 headcount are another 1,100 people today, soon to be close to 2,000 who work in our origination vehicle. This is a massive undertaking. No hedge fund attacks this market given the scale of what’s here. No alternative firm dabbles in this market. There will be others who seek entry into this market, and they will make the investments, and they will pay the tuition, and they will learn how to source and how to rate and how to structure to get things on NAIC and Solvency II balance sheet. I like where we are. I like where we stand, and I like that we can scale this market.” – Marc Rowan ‘21 Investor Day

⁹ “We have a full suite of capabilities with(inaudible) every asset class, with 300 dedicated professionals that come in every single day and focus on notonly executing our business and deployment, but where the business is going.” -Chris Edson ‘21 Investor Day

¹⁰ “Then if you look down in the equity bucket, what is the equity bucket on? As I said, it tends not to own traditional private equity and hedge funds. It owns asset origination platforms. It owns PK Aviation. It owns Donlen. It ownsRedding Ridge, which you’ll hear a lot about from Chris today. Our future is funded by Athene’s equity account.The best and clearest way I can say this. This is the total win-win. The equity of an origination platform has beena lower risk, better returning asset, less volatility than a private equity or hedge fund. Athene wants more of this,and we want more of this. This is the growth in our yield business. This is the growth in our asset management business. Athene’s equity account also holds capital-raising platforms. The stake in Athora is primarily held byAthene, not by Apollo. The stake in Jackson, the stake in Venerable, the stake in Catalina, the stake in FWD, they are all held primarily in Athene’s equity account and not at Apollo.” – Marc Rowan ‘21 Investor Day

¹¹ “I have to put up 8% of the capital. And for putting up 8% of the capital, I get to earn 15% cash on cash. And because I get to earn 15% cash on cash, if I want to, I can give half of that away to LPs and charge them a fee.” – Marc Rowan ‘21 Investor Day

¹² “We run, at the end of the day, a relatively simple business. We raise money, we invest money, and we take care of ourpeople. Those are the 3 things that we do, and we try not to make it any more complicated than that.” – Marc Rowan ‘21 Investor Day

¹³ “And so it is up to us, but my gut tells me that we will end up taking in enough ADIP 2 money, so that of each dollar of capital going forward, somewhere between $0.55 and $0.60 will be Athene’s and the rest will come from outside investors. Again, this is totally our choice to decide how much spread earnings we want to keep versus how much capital we want to release.” – Marc Rowan ‘21 Investor Day

¹⁴ “We forecast our business organically. We have the ability and we have the budget to grow it inorganically on top of it. We have never had the opportunity to run with $5 billion of growth capital. We are tremendously excited to put that to work, and we have a very high bar for putting that to work. We have historically used a 15% cash-on-cash unlevered cost of capital within retirement services. I would expect that to be the minimum for us at the holding company as we make growth capital investments versus returns to shareholders. Again, base plan, 18% FRE, plus the upside from $5 billion of capital, plus the embedded options, $10 billion returned to shareholders through base dividends and through excess dividends or buybacks.” – Marc Rowan ‘21 Investor Day

¹⁵ “So this business has also been a growing business for us. We’ve doubled this platform over the last 5 years. We look to grow it by 150% or more over the next 5 years. As we go through the slides in this section, I think you’ll see the assumptions underpinning that growth are actually quite conservative, and there’s probably a lot more upside as we’ll talk about.” -Scott Kleinman ‘21 Investor Day 

¹⁶ “Over the last decade, we’ve completed 12 sizable transactions, numerous smaller transactions. Every single one of these has been a win-win. A win for the seller. They got out of a business they can no longer operate profitably and are able to redeploy that capital elsewhere in their business.And we picked up some really interesting, really attractive liabilities that we were able to apply to our asset mix and enjoy that proper spread income.

So now when you look at the growth prospects of the business, this starts to look actually incrediblyconservative. We feel incredibly good. Jim Belardi will walk you through in more detail the buildup of this. But in my belief, there is massively more upside to what we’ve laid out in our base case here.” – Scott Kleinman ‘21 Investor Day

¹⁷ “So we have been prudently scaling the business, including, for a long time, not really taking third-party money,years ago, 3 years ago, 4 years ago, beginning to take third-party money, producing a $100 billion business in what will now become a $200 billion business. It’s growing slightly faster than the internal sources, but only slightly faster, and it’s really a function of a dose of conservatism into how much we think we can scale the origination on a recurring basis and be comfortable telling you that’s what we can do. If there’s more to do, we’re going to do more.” – Marc Rowan ‘21 Investor Day

¹⁸ “To be very granular, of — there’s $15 billion of cash flow coming off the business. $5 billion of it represents $1.60 times the share count. Another $5 billion is what we have mentally dedicated to dividend increases over time orto buybacks, and a further $5 billion is what we have seized as the holding company growth budget, for which we are planning a meaningful ROI, but it is not included in any of the numbers. So when Martin says that, on the one hand, the $5 billion — the return on the $5 billion of growth capital is not in there. And any share count shrinkage or excess dividend payment is also not in there.” – Marc Rowan ‘21 Investor Day

¹⁹ “But if you think about what we do at the holding company, we make strategic investments, and we add to our asset management and platform businesses.” – Marc Rowan ‘21 Investor Day 

²⁰ “In case I didn’t make the point, this is how we think about it internally. We think that the public market actually values the tail of the dog at better than 30x PE. And the meat, the 100% over 2.5%, the market values at 7 to 8x.We have already made our bet. We made our bet by issuing a massive number of shares to consolidate that piece of Athene that we did not own. And we did it willingly and joyfully, and we can’t wait till January 1 to get going.” – Marc Rowan ‘21 Investor Day

²¹ “Any free day that any of us have, my view is we should spend in Japan. Think about the characteristics of that market. Most of our peer group has gone there either to fundraise or to be an investor in private equity. We’re going there, yes, in those capacities, but we’re also going there as a retirement services company. There is a set of liabilities there that needs to earn a return that dwarfs the need in the U.S.and in Europe. There is no asset yield in the indigenous market. There are massive pools of savings, and we’re already starting to see the beginnings of this. We, through Athene, have already done our first 2 reinsurance transactions with Japanese counterparts. We have ongoing flow relationships.” – Marc Rowan ‘21 Investor Day

²² “I think I said to Jim Belardi when we were suffering on the Athene stock price, you rarely shrink your way to greatness, but you have to manage it. And so we historically have looked at long-term ROEs in the business.Long-term ROE for us and growth is — at the bottom end of that scale is 15% plus strategic. So Bill, I think we’re going to employ that same discipline and seek to earn better than 15% cash on cash and do things that are strategic at the holding company.” – Marc Rowan ‘21 Investor Day

²³ “We have 4 uses of capital, as we’ve outlined, to support organic, inorganic growth, ratings upgrades and then stock buybacks. Of those 4, the most franchise enhancing organic growth, and the least is buybacks.

Now even at today’s prices, the returns are compelling from stock repurchases, but you’re right. It was just a matter of we put a lot of capital to work supporting our record organic and inorganic deals this year. And since both of those, especially organic, are franchise enhancing, we think we should emphasize those as opposed to emphasizing stock buybacks, but it is a compelling value at these prices. So it’s in the mix going forward, but we’d rather do things that enhance our franchise.” -Jim Belardi Q121 Earnings Call.