Oppenheimer is out with a new note on the alternative asset managers this morning. I’ve discussed Oppenheimer’s views in the past, arguing that I believe that they are conservative.
Here’s the summary of today’s note:
The effect of rates on Apollo specifically is something that I’ve thought a lot about, and believe that my view differs than the majority of people that discuss the business. However in this case, Oppenheimer aligns with my view. The consensus is that alts have been the beneficiary of low rates as institutional LPs are forced to grab more “alpha” via opportunistic equity vehicles and more yield via private credit vehicles. That is not wrong.
However, in the case of Apollo, the current business makeup is distinct from its past. The funding base has shifted largely to its captive insurance balance sheets versus institutional LPs. In the future, I expect its insurers to continue to take higher share of the funding base, further reducing the role of institutional LPs as a funding source. But specifically on interest rate exposure, a couple notes:
- Apollo’s insurer balance sheets hold about 20% of their portfolio in floating rate senior debt. Most are tied to 3mo LIBOR (the rest 6-12 month LIBOR), which has widened by ~100bps already since the prior earnings call, in which they indicated every 25bps wider is ~$25m in income to the bottom line.
- As rates rise, legacy annuity blocks that were deep in loss, underwritten by multi-line insurance giants start to reverse in total projected loss. Like a stock that has been a deep loss for a long time and gets close to even – it’s more palatable for that investor to part with it. Same goes for insurers. Thus there’s a higher likelihood that these blocks will trade and Apollo will be the buyer (especially in Europe / Asia as in the US, competition has become fierce).
- Annuities become more attractive to retirees as rates go up. Who wanted to lock in guaranteed income at the lowest rates ever? Some, but more will as rates rise. One can simply expect greater amounts of demand for Apollo’s annuity products (via Athene), and Athene being the low cost provider of this commodity product allows them to underwrite more volume at high rates of return.
Last, the note indicated that when markets are volatile / down, is when these sorts of companies do their best work. Apollo cleared $12B on a $2B investment in LyondellBasell and seeded Athene in the great financial crisis (GFC). Their 2008 vintage PE vehicle did 33% gross / 25% net (2.1x MOIC), and their 2001 vintage did 61% gross / 44% net (2.5x MOIC).
Overall, I’m excited to see how this year plays out, and while others bemoan short term movements in its share price, I believe that the business will do some its best work in the coming years.
Disclosure: We own shares of Apollo Global, this is not investment advice. Do your own work.