Good morning, and welcome to Apollo Global Management's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] 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. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Apollo Fund. I would now like to turn the call over to Peter Mintzberg, Head of Investor Relations.

Thanks, operator. Welcome to our second quarter 2021 earnings call. Joining me this morning are Marc Rowan, CEO; Jim Zelter, Co-President; and Martin Kelly, CFO and Co-COO. I'd like to turn it over to Marc to kick off his comments for today.

Thanks Peter. Good morning to all. Pleasure to be here. Q2 '21 was a particularly strong quarter for Apollo. Business as you saw from our results is performing well across all metrics. Record quarterly FRE of $0.68 a share, the highest DE since 2013 of $1.14 per share strong and performance across the PE portfolio, up 9.5%, credit up 2.6%. The numbers speak for themselves. And Jim and Martin, I don't want to steal their thunder, they will review specifics of the quarter with you. In terms of other corporate housekeeping, our merger timing with Athene is on track. We expect that to close in January of '22. During the quarter, we continue to make progress across the governance and cultural enhancements. We welcome David Simon to our board. As we are on track to simplify our voting structure in connection with the merger that would again will happen in January of '22. For those who didn't see it, we recently published our 12th edition of our annual ESG report detailing how we take a holistic approach across all of the communities we operate in, and how important this is to our franchise. We also announced during the quarter our commitment to all finance and important initiative designed to diversify the alternative industry and expand opportunity to historically black colleges and universities. Additionally, during the quarter, the key person clauses in our private equity business have been satisfactorily approved and addressed. Having gotten through the housekeeping, let me do as I often do on these calls, take a step back and look at the big picture. The demand for our end product, access return remains incredibly strong. Drivers of this are persistently low rates, a growing retirement market, both for retail and institutional. Importantly, the disappearance of spread in almost…

Thanks Marc. And thank you all for joining us this morning. I want to echo Marc sentiment; we continue to deliver strong results across all key metrics. And we expect the momentum to continue and build as we make tangible progress on our growth focused agenda. Strategic growth is at the forefront of everything we do, but we are still maintaining a strong focus on execution as our quarterly results demonstrate. As Marc highlighted, overall investment performance remains strong, with a PE portfolio of 9.5% in the quarter and the credit portfolio is up 2.6%. In private equity, Fund IX is leading the way with exceptional performance, driving a gross IRR of 49% and 28% net with a gross MOIC of 1.5x. In credit, with spreads tight, we have been moving up in credit quality and finding returns to superior asset selection and origination. We've seen particularly strong performance out of a Core IV with appreciation 20% to the first half of the year, including 8% in the second quarter. Elsewhere within the opportunistic side of the business, our inaugural hybrid value fund is delivering strong performance with a gross IRR of 29% and 23% net. Moving to our deployment results. Our ability to find attractive investment opportunities, even during periods of elevated valuations has proven both critical and fruitful. Total deployment across the platform, up $28 billion was a quarterly record. In our private equity business, our drawdown funds invested $5 billion and have additional commitments to invest a further $6 billion as of quarter end, including Fund IX investments in Yahoo and Employee Bridge. Yesterday, our private equity business announced a 7.5 billion carve out of Lumen's ILEC business across 20 states with a strategy to bring faster, more reliable internet service to underserved markets and accelerate upgrades…

Thanks Jim. In the second quarter, as you've heard, Apollo recorded very strong results across all key financial and operating metrics. We generated FRE of $0.68 per share on a pretax basis. On dollar basis FRE increased 5% quarter-over-quarter and 16% year-over-year, driven by growth in management fees and an uptick in transaction and advisory fees. Fee related earnings exceeded $300 million for the first time, illustrating our continued progress in growing this highly valuable earnings stream. Management fees grew 3% sequentially and 15% over the prior year quarter driven by the growth of our retirement services clients as well as strong investing activity across our platform broadly. Transaction and advisory fees were $83 million in the quarter, up $28 million over the prior quarter and totaled $139 million over the first half of the year. These strong results reflect the build out of our large cap lending business; including a significant financing transaction with Hertz and co invest capital for the Michaels transaction within Fund IX. Compensation expense was up 4% over the prior quarter, largely driven by the strategic hiring activity Marc discussed earlier. These additional resources are critical to support the abundant growth opportunities in front of us, as well as to position the platform for increased efficiency in the future. Looking forward, we expect compensation expenses will continue to trend higher, reflecting this hiring investment. However, we remain confident that this cost growth will be managed in line with our long term mid teens or better FRE growth expectations. Non compensation costs increased $18 million sequentially due to higher recruitment costs and occupancy expenses as we expand our global real estate footprint to adequately accommodate our growing team. Turning to DE, for the second quarter, we generated after tax distributable earnings of $1.14 per share, supported…

Thank you, Martin. That concludes our remarks for today. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Alex Blostein from Goldman Sachs.

Great. Good morning, everybody. Thanks for taking the question. So in the prepared remarks, I heard lots of growth initiatives really across a pretty wide spectrum of initiatives, which is great to hear on top of Athene, I guess, taking a step back, can you help us maybe with a framework and sort of the growth algorithm for management fees outside of the insurance partnerships, call it over the next two years, especially as realizations from private equity vintages start to accelerate.

Maybe, it's Marc, maybe I'll provide a framework for it, and then turn it to Martin and to Jim to fill in. So broadly, what we've said, and again, we will be more specific in Investor Day, we expect our yield business to double. And we expect our opportunistic and hybrid business to be 50%, larger over the next five years. That is a doubling of the business, doubling of FRE, doubling of AUM and that is without significant acquisitions, or any real acquisitions, from the capital that we have accumulated in the capital that we will accumulate at the combined entity. So I think that provides at least some backdrop and framework for how we're going to grow. I'll dig into a little bit on without Athene question. And this will carry over to remarks I expect from other questions. 100% of any asset that we originate in the yield business has a home. In fact, 150% of any asset that we originate in the yield business has a home, we as an asset manager, have a choice. And that choice is do we derive a pure asset management fee from that? Or do we derive a pure asset management fee plus spread related earnings? What we have done and what the merger with Athene reiterate is that we believe given that asset scarcity is the limited on our growth in the yield business rather than liability accumulation, we should earn as much money as possible from assets that we originate. That does not mean at the expense of third party business, because we can't take concentrated positions on to a retirement services balance sheet. But and so what we have done is we have built an expanding ecosystem of similarly situated companies, all of whom face the same challenge that Athene and others face, which is the absence of spread in public markets. So long as we increase the origination capacity, 100% of those assets have a home, they can go onto Athene and Athora's balance sheet, they can go to third parties, they can go as we've already suggested into a mix, as opposed to looking at it as one or the other. So Jim, Martin?

No, I would echo that I think, well, what we've -- a great example, Alex, is the high grade alpha where those transactions were very -- were critical, and Athene or Athora or other insurance balance sheets with the lead buyer, but a combination of other third parties augmented that demand side, so they go hand in hand, the growth goes hand in hand, the creation and the development of these origination goes hand in hand. And certainly we look at them as multi year growth. The critical aspect is the origination angle. But the balance sheets of the insurance companies as well as third party institutions grow and certainly as you grow wealth management, that retail democratization will be at the trough as well.

Maybe I'll just -- I'll close out because I think we're -- one point that I do want to emphasize the go-to-market strategy asset origination is key. But it also is followed by alignment. There is nothing more reassuring to a third party client, then the affiliated balance sheet owns the same security and size same time same price. That is in fact a unique selling proposition and why in particular in things like high grade alpha and we expect other areas. We will see significant growth in third party business side by side with Athene.

Our next question comes from the line of Glenn Schorr from Evercore ISI.

Hi, thanks. Maybe we can continue the conversation on the origination side. So I hear you loud and clear 100% of the assets originate at home. So my questions are, and I know that may we'll talk generically because each one's probably different. We look at something like Victory Park or the UK mortgage lender. What percentage of their production are you getting? Who controls the underwriting? Is it exclusive? And does Apollo take on any risk in these transactions? I know the assets are going in the funds. But I know that's a lot, but I want to learn more. Thanks.

Okay. So first, Glenn, thank you. These are not your droids either. Just to show you that we actually, we could publish. But let's come back to what origination is. Origination gives us control of documentation. It gives us control of diligence. It gives us control of structure. And it gives us improved economics. But one thing it does not give us is liquidity. We think that is the right trade off for a fixed income replacement business, which are the general characteristics of our yield business. There is no one size fits all with respect to the platform. But the reason to do this is to control the credit process and the diligence process and not expose yourself to undue risks. In some of the platforms and I won't just stop there because there are Donlin, PK Aviation, mid cap, net lease, and a number of others. In some of the platforms we derive as Apollo or as the broader Apollo, Athene and third party management ecosystem 100% of the production. In others, we also securitize and participate in capital markets, at least for a portion. This is all about optimization of the specific risk reward in platforms we own, and platforms we partner with, which is another way for us to acquire a platform. Now let Jim address what we do with Victory Park.

So what Marc just described is what we have with the names he mentioned, including Foundation where we'll take all those assets, put them onto our insurance or other balance sheets, and then the ongoing flow will exclusively come to us because we in essence, control and own that platform. Victory Park different; Victory Park, they have really spent a number of years really fine tuning their financing and funding to the growing expansion of online financial retail distribution. And in that case, we are a partner with that firm where we provide a senior facility, and they are the junior debt and equity underneath us. There is some alignment between warrants or otherwise. But again, we are aligning to their flow because as the ecosystem of finance and funding has evolved in the last 10 years, there are certain firms that are really connected with the consumer in other ways than traditional bank lending. And so we want to be the financing partner to those firms. And in those situations where we don't control all the aspects that Marc said, the ultimate control we have is to open or tighten the flow of product over a quarterly basis. So what we've actually found is the flexibility to go from 100% control to align partner around the US and around the globe. That's really allows us to create that incremental spread on that on that fixed income alternative is that Marc talked about.

And more broadly, Glenn, just to come back to this again, we as an industry, and often particularly we spent a lot of time talking about perpetual capital, we really are interested in perpetual asset origination. We need to start each year understanding that we have the capacity to generate significant amounts of yield the assets appropriate for the client base, internal and third party that we have elected to serve.

Our next question comes from the line of Michael Cyprys - Morgan Stanley.

Hey, good morning, and thanks for taking the question. Marc, I guess with nearly a year or half year under your belt running the firm. Can you just talk about how you are improving the governance structure of the firm? How the board structure is evolving? How are you seeing the culture of the firm evolving here? And can you also touch upon the key person point that you mentioned at the beginning of your remarks that was satisfied and address? Thank you.

Sure, let me work backwards. The key person again, I think as Scott suggested in his remarks last quarter, the PE franchise is a franchise that has been well institutionalized. The team that oversees our private equity business have Matt Nord and David Sambur have really been the primary contributors for the past three funds, the results in the business are nothing short of spectacular as you heard this morning, then the notion just to step back that a $25 billion fund is up high 40s, gross and high 20s net. And such a strong MOIC is itself astounding, almost sounds like venture numbers. So I do not believe that we really ever thought that this was an issue, and it simply reflects the evolution and maturation of the franchise where those people who are most important to the franchise are now I'll say key men, but I really mean key person, because that's increasingly where we're going. And those who are less important to the franchise, or are moving on as in Josh's case, are no longer key people. So not an issue. Culture is a big area of focus. So when I divided the tasks with my two partners, Scott and Jim, I said what you would expect, as CEO I get to choose first. So I'd like to do strategy, culture, communication, and dealing with problems. And I left most everything else to the two of them, including the day to day running of the business. But culture is key. Internally, Apollo's culture has really always worked. I mean I give these statistics but it sometimes it's helpful just to reframe it. We started 2020 as 1,300 person firm. We added 300 people remotely during 2020. And turnover went down, we will add between 300 and 400…

Our next question comes from the line of Bill Katz from Citigroup.

Okay, thanks very much taking the question, and good morning, everybody. You guys are going pretty quick in terms of what you're doing on the retail side. So wondered if you could give sort of maybe your recap where we are today? And as you look into 2022, it sounds like maybe where like the early opportunities might sit in terms of capital rising? Thank you.

Sure, Bill, it's Jim. So this just a level set. If you look over the last number of years approximately 95% of our fundraising had been through our traditional institutional channels. And we had raised with some -- with a higher net worth that the private banks and a large warehouses, some of our flagship products, whether it was EPF or fund, our PE funds, Those had been a traditional distribution channel for us. Starting actually, in the middle of last year, we embarked on a strategy to dramatically increase our global wealth distribution channel. And we really aligned our senior leadership to allow the next generation to come up and run our institutional business, and proven leadership under Stéphane to really focus on the global wealth channel. So we set it up about a year ago, part of the numbers that Marc and Martin went through about the hiring this year, we've hired a tremendous amount of folks. And so we believe that through the course of this year, we will have a team that can really feel the breadth of distribution across geographies, and products. So to your next question, a lot of the products we have are just really opening the spigot to what we have today. But it's also creating new products that fit the accredited marketplace. Obviously, we have non traded BDC that we expect to be out in the market in the latter quarters of this year, and to really ramp up in '22 and beyond. But there are a variety of other products in the lab, that we will focus really on the yield and the hybrid products for the mass retail agendas not only in the US, but in Europe and Asia. So that's the three part plan. We all have seen how large the marketplace is, we believe it's a whether the numbers are $40 trillion or $55 trillion; it's a massive total addressable market. We believe our brand, our track record, our product innovation, will be able to conquer our fair share, and go on from there. But it's an exciting growth tool for the firm. And we expect to have our participation.

Our next question comes from the line of Patrick Davitt from Autonomous Research.

Hi, good morning, everyone. You mentioned the challenger state, could you help us understand a bit better how this could flow through earnings and value for Apollo shareholders? And is the endgame here having another insurance platform like Athene or Athora but in Australia?

So it's Marc, I think it will depend; we'll see how it develops. But just to recap, we over a roughly 12 year period, we're a minority shareholder of Athene, and only earlier this year did we decide to bring in 100%. We also have a significant but minority shareholding in Athora and so we look around the world. And there are a bunch of really interesting markets. And this is probably more than you want. But regulatory change and the absence of spread in public markets is creating opportunities in Japan and Taiwan, in Hong Kong and a number of other markets. Some of those markets are best access through reinsurance or through other types of entry strategies. But a market like Australia is best accessed, in our opinion, through a stake holding in an established company with its own strategy, its own regulatory and asset origination capability, and quite frankly, a mentality that is very similar to ours. So I think it's early days. But I'll come back to the growth in the retirement services business is not about liabilities. It is all about assets.

Our next question comes from the line of Robert Lee from KBW.

Great, good morning, everyone. Thanks for taking my question. Maybe just going to transaction fees and maybe taking into that a little bit. Obviously, we're -- I've been up a lot. And can you maybe give us a sense, as you ramp the origination capabilities. Now have -- kind of get a good sense, better sense of kind of the linkage of that to origination versus also maybe realization activity. If there's, if you see, as your realization activity ramps up also, if we should see that translate in some ways to the higher transaction fees doing, maybe just figure some of the build up.

Sure. So we think about our platform, as the landscape has evolved over the last decade and as our trends -- as our platforms evolve. As Marc and I and Martin have all said, origination is the key to our business. And so the ability for us to source product that we directly originate whether it's in the commercial real estate, residential, real estate, corporate world, it's critical to our long term growth on that spread business. The reality is the scale of our business today, the ecosystem of combining origination, structuring, and then in the need of syndication. It's like a flywheel, the larger transactions you get, there's a thinner universe of folks that can provide those capital solutions for the companies I mentioned Hertz being the one this year. And again, once that flywheel gets going, your ability to be important to borrowers, as well as not only our balance sheets, but third party, institutional clients and other LPs. It's a critical flywheel. So yes, as we ramp up our bespoke origination in the US, but globally, and our dialogue with all different types of industries expands, you will expect to see larger transaction fees. And as I said, interestingly enough, last year with our success of the transactions, the ADNOC and the AB InBev, our ecosystem with large, US insurers dramatically increased. And not only did they come in for vehicles and SMEs on those types of products, but it expanded back into our business and some of our opportunistic impact infrastructure. And I suspect you'll see a lot more activity on those investors in Fund IX. So the flywheel and the ecosystem are connected. The whole capital solutions, capital markets transactions have worked between all three are inherently connected. And it's a big growth area. And we brought in some great leadership. We think that our capital markets and integrated platform, the fact that we don't have any information barriers between all of our businesses, what's going on in the syndication, syndicated loan market with direct lending, which we've been a big player in with our JV with Mubadala, these are all connected, and you'll see us talk continuously about those in the quarters and Investor Day to come.

Our next question comes from the line of Gerry O'Hara from Jefferies.

Great, thanks. Maybe one for Martin. Appreciate the comments kind of around continued investment with respect to comp expense, but also, balanced against mid teens or better FRE growth expectations. And I suspect you'll probably flush a little bit this out during the Investor Day, but can you give us a little bit of a sense of how to think about FRE margin over the next kind of, I guess, six to 12 months? Or longer as it relates to those comments. Thank you.

Yes, so Gerry, we're actually -- we're really focused on FRE dollar growth, we're very comfortable with margins where they are, which are sort of low to mid-50s. And investment and building out the platform needs P&L, CapEx, and so you invest now for revenues later. So we are -- we've suggested using the numbers of Marc has outlined on doubling in yield and a 50% growth in opportunistic as sort of as a baseline. That's a 15% FRE growth rate. I would expect that the margin will sort of hold around current levels. And we'll always be investing for future growth opportunities that we see ahead of us.

Our next question comes from the line of Devin Ryan from JMP.

Hi, thanks. This is Brian McKenna for Devin. It's probably a little early, but what are your initial expectations for private equity Fund X fundraising, do you think you'll be able to raise something similar to Fund IX which was about $25 billion? And there are clearly a lot of deployment opportunities across the market today. So how do you think about appropriately capping the fund relative to the current deployment backdrop?

That's our working plan. Our working assumption is that we will seek to raise a fund the same size or similar size to that which we have.

Our next question comes from the line of Adam Beatty from UBS.

Hi, good morning. Thank you for taking the question. I want to circle back to the third of the three themes that Marc laid out in the opening, specifically FinTech driven change in alternative management. We can infer something from the discussion of Victory Park and some of the other deals, but just wanted to give you the opportunity to frame out what you see as the two or three most important changes. The questions being asked if you will of the alternative management industry by FinTech and you might want to save the answers for later on. Thank you.

Look, we'll do a little of this now, but I think there are some of the obvious. First comes to me in balance sheet. Most of the FinTech providers do not want to be the owners of the assets; they want to be the pipe or the originator. And we are an excellent partner for platforms that we trust, whose underwriting we trust with full visibility and full credit, and documentation due diligence. And what you will see us do is what we've been doing backing those who we think are winners, taking stakes, where we think it's important to take a stake, and otherwise facilitating an infrastructure and an ecosystem that generates the kind of fixed income replacement 150 to 200 basis points over comparable and investment grade that we are looking for. And we have a huge appetite for this. And we are a relatively easy partner to work with, and very commercial. The second place is we are a massive user of FinTech services; look at our securitization business, which is the first area that we are attacking with Figure. This is an opportunity for cost reduction, documentation improvement, debt data gathering speed to market. And I doubt this will be the last of the partnerships that we have in terms of validation of blockchain or other types of services that offer these opportunities. And that's before we start thinking about our own business. Jim alluded to it. But if you think back to Jim's comments on the security, excuse me, the syndication business; the syndication business has existed in its existing form for forever. We generate in a centralized way, a clearinghouse of product, and it's sold salesperson to salesperson. My guess is you will see, over time, some amount of technology applied to that. And the pace of innovation is actually increasing. And what we're seeing is a lot of the most interesting innovation is taking place in the high net worth and ultra high net worth channels first. And I expect that to continue over the near term. And ultimately, to move into the institutional channel. Final thing I would point to is the entire documentation process, the subscription. And signing on for institutional partnerships is surprisingly antiquated. Probably the best word I could find. I think the streamlining of our business, through the use of technology, including through interactions with our investors, is just going to gather steam. But those would, I would say, the mundane, more to come.

Our next question comes from the line of Bill Katz from Citigroup.

Thanks so much. I think sounds like you are going to spend a lot more time on this in October, so perhaps leave it to then. But you obviously have one insider in particular, that's been selling rather heavily. Just given everything that you're doing in terms of funding growth elsewhere, any opportunity to remove some of that technical overhang, particularly given the overall change among the three original partners.

Yes, Bill, this is alternatives that we would do what we can to avoid a significant and persistent selling of stock, obviously subject to agreement, but there are the obvious structural transactions that we can look at to do that. My sense is he is comfortable with what he's done. And as he steps back from the business, he wanted to lighten up a bit. So it's not surprising. But he'll make his own decisions. And if we can facilitate that, then we will.

Our next question Patrick Davitt from Autonomous Research.

Hi, guys. Thanks for the follow up. The credit performance was pretty outsized for a non 4Q results. So could you give a little bit more color on the driver of that? And in that vein, as we look into 4Q, could you give us an idea of how the hedge funds that drove the big 4Q performance for you last year are tracking relative to last year?

Yes, so I'll let Martin get in this detail as well. But whether it was Accord or some of the other products that have continued to do well, Accord is the reminder is the product that has a limited drawdown window 12 to 18 months, and then it's monetized. We're on Accord IV for now. And there's been some great success of that platform over the last three or four years. Hence, the development of the new products, Accord plus which expands it, but that really was probably the key reason on a quarter-to-quarter basis.

Yes, it was a couple of different funds. But Patrick 90%, plus 90% of the total carry came from PE and that was across portfolio of funds. It's actually interesting that we're seeing the tail end of Fund VII, the Fund VIII to Fund IX and the bulk of the carry coming from Fund VIII and hybrids is contributing as well. So there's each of those funds has a diverse portfolio of investments which are starting to monetize principally in Fund VIII but Fund IX is helping around the hedges and so as we look forward, the main story will be Fund VIII realizations for the next handful of years and then Fund IX should pick up on the back of that in real size. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.