Good morning, and welcome to Apollo Global Management's Second Quarter 2023 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 during this conference, 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 solicitation of an offer to purchase an interest in any Apollo fund. I will now turn the conference over to Noah Gunn, Global Head of Investor Relations.

Great Thanks Donna and welcome again everyone to our call. We're really thankful for the opportunity to spend some time with you this morning. Earlier, we published our earnings release and financial supplement on the investor relations portion of our website. Within these documents you'll see that we generated very solid results that included record quarterly fee related earnings of $442 million or $0.74 per share, and record quarterly normalized spread related earnings of $874 million, or $1.47 per share. Together, these two earnings streams totaled $1.3 billion in the second quarter, increasing more than 40% year-over-year, demonstrating the strong, resilient and fully aligned growth characteristics of our asset management and retirement services businesses. Combined with principal investing income and other HoldCo items, we reported normalized adjusted net income of $1.1 billion, or $1.80 per share, up 60% year-over-year. Joining me from our team to discuss our results in further detail are Marc Rowan, CEO, Jim Zelter Co President, and Martin Kelly, CFO. And we've received some feedback from some of you that we should attempt to shorten the length of our prepared remarks. So at the risk of making a false promise, Marc himself has ensured us that we'll be endeavoring to do that today. So with that, I'll turn it over to Marc.

Thanks Noah, and we all can wish for certain things and hope that they come through. In any event, as no Noah said it was truly a very, very strong quarter, normalized SRE and FRE of $1.3 billion for the quarter. And we are on track to earn FRE and normalize SRE of ,$5 billion plus minus for the year which Martin will detail. One thing worth calling out is just how exceptionally strong SRE has been. Just to put in context, Athene has now grown or will grow 30% SRE two years in a row, and they actually have hit their 2026 financial target as laid out in our Investor Day some two years ago, in just two years. Not only are they doing an exceptional job, but clearly Jim and Grant and the team have exceptionally sandbagged everyone, and the business continues to be very strong. In addition to financial results, we had record inflows for the quarter on an organic basis, we had some $43 billion of inflows including $8 billion that closed shortly after the quarter end. This closing shortly after quarter end is actually a feature of the alternatives business. Many of our institutional investors prefer to close on the first of the month, and have something in another out -- another quarter from an allocation point of view rather than in the prior month. And for many of our retail High Net Worth Focused Funds, they also close on the first of the month. So I expect that we will be a little more careful and giving guidance quarter by quarter to account for how this business actually operates. From my point of view, and as Martin and we have discussed previously, we generated positive operating leverage and margin expansion this quarter. And we…

Thanks, Marc. Marc did a great job outlining our competitive positioning and our vision. And now we'll spend a few minutes translating how some of these important themes are playing throughout our firm with investment environment, our investment performance and fundraising. It's clear to us and like many of you as well, the demand for private credit solutions has risen significantly, as higher cost of capital has reduced the availability of traditional financing sources. We believe we're uniquely positioned to address this need for a few reasons, the scale of our capital resources, the speed of execution and the sophistication and creativity of our investment underwriting. We are continuing to diligently build the largest alternative credit business in the industry. And our success today is attributable to the expansive capabilities, or what we call the Apollo toolbox. From corporate sponsors and everything else in between. We can flexibly serve clients that need capital in a collaborative and bespoke manner. Across Apollo, we are helping healthy and growing companies who are hamstrung by a limited open public market. The second quarter was a prime example of this, a period that started with the fallout from the regional bank crisis and ended with the markets feeling a bit more accommodating. As you might expect, we were particularly active and then deployed nearly $35 billion of capital across our platform during the quarter. Much of this activity was driven by the yield business across our various sourcing channels, including financing solutions to corporates, which we call high grade Alpha. Our origination platforms, as well as more traditional origination through strategies such as large cap direct lending, or leveraged lending, CRE debt and a variety of structured credit CLO origination. In an extremely active quarter, one of the signature financing solutions we provided was…

Great, thanks, Jim. I'll provide a bit more context on our financial results and outlook before we open it up for questions. So as Marc and Jim have both referenced, our second quarter results completed a very strong first half, and position us well to meet or exceed our 2023 financial targets. We've discussed how this year is one of execution, and you're seeing these efforts materialize in in a meaningful way. In the Asset Management segment, FRE revenues for the first half of the year, increased by 26% over the comparable period, FRE costs by 22% and overall FRE by 29%. The FRE margin increased by over 100 basis points as a consequence. In Retirement Services, Athene’s business continues to exceed all our estimates with normalized SRE year-to-date growing in excess of 50% over the comparable period, aided by strong organic growth trends and an expanding net investment spread. Focusing on the second quarter and starting with our asset management business, our record quarterly FRE was anchored by fee related revenue growth of approximately 25% quarter-over-quarter. Within that management fees increased almost 20% and capital solutions fees remained very strong and tracking well ahead of our initial expectations for the full year. Total fee related expenses increased only modestly on a sequential basis, reflecting our commitment to disciplined expense management this year. Following growth in the comp expense line reflects a declining pace of hiring with just over 100 net new Apollo employees added in the first half of the year, some 40% of the headcount growth in the same period last year. The combination of strong revenue growth and decelerating cost growth drove more than 200 basis points of FRE margin expansion quarter-over-quarter, bringing our FRE margin to 55% in the first half of the year. Moving to…

[Operator Instructions] Today's first question is coming from Glenn Schorr of Evercore ISI.

Hi, thanks very much. Just a quickie on the originations. I mean, you have 16 for a reason, and not all of them are going to be clicking at once, but yet a full quarter of Atlas were hanging in the $100 billion of origination range on an annualized basis. What do you think takes us to the 150? Can you do it with the current suite of platforms you have, isn't just an environment thing. Just curious on your thoughts there. Thanks.

Thanks Glenn. I think it's a combination of both. I think there is all 16 we are happy with the progress as you know, we really have not leaned into the consumer, we've really leaned into much more of the corporate. I think there's a secular opportunity. But I think the 16 we feel as we integrate them over time consistent risk, reporting, funding, financing, and the holistic approach, we still feel comfortable that the five year objective of the 150 that the 16 in are stable today, we think that they have the organic and secular growth, we don't really feel we need to add a lot more. There may be some consolidation in a few of those for optimization. But we feel very comfortable that we have the strategic lead, and the strategic organization from which to get to our five year goals with what we put together today.

The next question is coming from Alexander Blostein of Goldman Sachs.

Hey, guys, good morning. Thanks for the question. So the supply of investment opportunities is clearly rising from the banking crisis. We talked a little bit about that last quarter. And clearly there's more evidence of that this quarter, can you talk a little more about the demand for destock of investment strategies specifically for I guess, private investment grade credit, historically, that's largely been taken out by insurance clients, I think Marc, you highlighted that there's an opportunity to extend beyond non-insurance client base. So I was wondering if you could elaborate a little bit more on that, and how that informs your go forward third party fundraising strategy? Thanks.

Yes, let me take a deep dive. And maybe Marc has a couple comments, Alex. Like as Marc described history, private credit, is a big word big concept. It's been narrowly executed with leveraged lending. When you see what's going on with the banks and the funding crisis, which became then really a profitability challenge. There’re really two large areas of opportunity. One is there are clearly assets that do not belong today on their balance sheet. Look at the dispositions that PacWest made. We did a secured financing, there was literally AAA risk and almost 10%. A few other folks bought portfolios. So the selling of portfolios is one activity, and that will continue over the next several years as they optimize their balance sheets. The larger opportunity is the secular business organization, there are lines of business where they are in, where they have been the day to day originator and purveyor of credit to companies. And those are businesses because their cost of capital change, and has changed, and their liquidity and the regulatory changes that this do not make sense as an operating business. So you have a business sector, which is origination, you have a disposition, we're going to be active in both of those. And there's partnerships that we are in and that will create on both sides of the ledger.

And Alex, just to complete the thought, insurance companies have for a very long time been buyers of private placements, but they've done it in a very, very narrow way. If you're in the retirement services business, they are more broadly in the insurance business. And your opportunity set is solely investment grade corporates, you have no competitive edge in the investment landscape, you are looking for a solution. And that solution is beyond what I'll call the traditional private placement market. But the insurance market is growing, it's well acceptance of investment grade private credit. And this is about execution. The other interesting opportunity is we as an industry have basically spent the last 35 years serving the small alternatives bucket of our large institutional clients. We have an opportunity at the investment grade side to serve the fixed income bucket of our large institutional clients. This is in the very early stages. And it's always interesting to go in and see these accounts. First question we asked is a single A rated private credit an alternative? They haven't been confronted with that question today. If they think it's an alternative, they're not right for the opportunity, because then they're comparing it against things that are in 20% rates of return. If they think it is not an alternative, and they think it is just fixed income, then it is offering 200 to 300 basis points above their fixed income. We are in the early days of an education process. And I believe that the market for private investment grade could be as large outside the insurance industry as it is inside the insurance industry.

The next question is coming from Patrick Davitt of Autonomous Research.

Hi, good morning, everyone. The Q-over-Q change in the kind of retail annuity sales channels, I think worse than many expected, given what we've seen in others in the marketplace. And you mentioned you're leaving some business on the table for various reasons. So do you think this is a share loss issue or there's something else you could point to that explained the divergence with what we've seen from some of the other annuity guys? Thanks.

This is a high quality problem, Patrick. We have as I mentioned, four channels. We have the retail channel, we have the PRT channel, we have the reinsurance channel, and we have the funding agreement channel, all of which are organic. And one could also look at reinsurance as being onshore and then offshore given the progress we're making in Japan and Asia. We have therefore made choices about business. We thought we would do substantially more business this year than last year. Recall that last year was some $48 billion of organic inflows, we're now confirming and essentially providing guidance that we will do north of $60 billion. And I believe that we are leaving between $10 billion and $20 billion on the table. But in the context of the budget, that we put out that internally, some $60 billion, we have the luxury of choosing the highest quality business, the right business mix, the right profile of liabilities, and the right net spread. So most of the business that was left on the table in the quarter was I call transactional. Transactional does not mean bad. It just means we elected to do other business versus transactional business. And [MIGAS] is our primarily transactional business. Anytime we want to add MIGAS, we can add MIGAS, we chose not to for the quarter given that we were already doing $19 billion of organic inflows.

The next question is coming from Michael Brown of KBW.

Okay, great. So appreciate the updates on the, updated views on the normalized FRE as we look out to 2024. Obviously, the activities have really robust across the platform, I guess, kind of following up on that retail channel question. How do you expect activity to hold up as you get into the kind of rate cutting cycle that the forward curve does expect? I understand that's baked into your guidance today. But is it fair to assume that the demand stays high and then obviously, the Tier 2 business has been picking up and just interested to hear thoughts about how the opportunity there could evolve?

Look, it is clear to us that consumers prefer higher rates to lower rates. Consumers have not particularly retirees have not had good options to finance their retirement, now they do, and you're seeing it across the board in the annuity market. To think that annuities are not impacted by interest rates, it's just to ignore the obvious. What's happening to us is actually quite interesting. We are growing in a growing annuity market. But we're also in the midst of growing our distribution. Each of the last few years, we have added immense new distribution banking partners, we will add the largest or second largest provider of annuities in this country. At some point, this, I think we this quarter, and that will not mature till a year from now. And then we have two or three other very large providers coming on. So I do think the overall market share for retail will be impacted by rates if in fact rates go down. That doesn't mean negative or substantially negative, but it will have on the margin be a negative force. Having said that, our distribution is still building so quickly, that I doubt we will see any real decline in retail. More interesting to me, is also the diversity of channels. PRT is gathering speed, high rates or higher rates are really causing all plans who are close to fully funded status to consider derisking. And even those that were inequity are thinking of taking chips off the table given the very shallow rally, let's say in equities. So I expect PRT to be very, very active over the next few years, US and overseas. Japan, as I've mentioned on previous quarters is exactly where we want it to be. It's on track. And I think reinsurance is also going to be a very important part of our business. So in summary, I think we're leaving business on the table this year. And I am optimistic that notwithstanding the forward curve, we will see continued increases in business.

The next question is coming from Michael Cyprys of Morgan Stanley.

Hey, good morning, thanks for taking the question. Maybe just circling back to private wealth, I was hoping you could elaborate a bit more on the traction that you're seeing across the products in the private wealth channel, the distribution builds out, as well as how you're thinking about the pipeline of strategies to bring to the market next. Would also be curious, any sort of lessons learned that you take away from some of the earlier products that you had brought it to the private wealth channel?

Yes, Michael, let me give you a little bit of a tour. I mean it's been 36 months plus or minus, since we really laid out the objectives. And certainly in terms of products, I think bucketing them into three areas, the existing flagship products that we had, and creating the right types of vehicles and feeders for the large wires and others. Then there was a second obviously creating a variety of yield products, whether private BDC, and private REIT and others, but again, not only for the traditional Global Wealth channels, Morgan Stanley and BVA, et cetera, but also the independent IBD channels, the RIA channels. And then the third big bucket is newer products like our AAA product, which we are very excited with the momentum. So I think we feel we have the product set, not only in the US, but globally. But I think the lessons really are I mean, certainly we want to and we expect and the clients expect strong investment performance, like we've done for 33 years. But the use of technology, the use of education, Apollo Academy, in particular, those are all and the ability to service. Those are all the full service products that our partners are expecting out of us. We see the puck going in Global Wealth having a tremendous impact on our business. It's a big secular trend, it really parallels what we see going on in private credit. And one if you look takes a broad step back around the globe. In terms of demographics, in terms of savers, in terms of vehicles, we think there's a massive amount of whitespace. We have been broadly embraced. The market wants alternatives, for alternatives in providers, as well as products. So I think the early lessons are it's not just about performance, it’s a, you need to bring all your skills to the marketplace, you cannot underestimate the service needs, the technology needs and the education needs. So it's really a full service effort across our firm and everything we've done we've had to replicate and but huge opportunity globally.

The next question is coming from Rufus Hone of BMO Capital Markets.

Great. Good morning. Thanks very much. Wanted to get your thoughts around the potential longer term outlook for the normalized net spread, you're expecting it to only trend down slightly in the second half of the year. I guess I'm most curious around where exactly you think the net spreads can settle out longer term and whether you can offset potential spread compression with higher percentage of originations from platforms through being more selective around new business, and the backlog running off at low at net spreads, any detail that would be great. Thank you.

So Rufus, it's one, we, I guess we just still the spread conversation into normalizes, top line spread, which is 160 basis points plus or minus. And then that falls through after costs and financing and so on. So 115 basis points. And so we've clearly seen some benefit in there from rates as well as higher growth and higher at the margin deployment. We do -- we target business, which at the margin derives, and that's spread in the order of 115 basis points. We have a question, which we're addressing internally now, which is the right exposure? And how do we hedge it which we'll walk through an update on but we look at net spread. And that's what we focus on given the growth profile, and given the contribution from beta. And given where we think we can deploy incremental growth that also combines to SRE dollar guidance number of low double digit, which is what we're focused on next year and thereafter.

Next year will also include the full benefit or full detriment depending on your point of, ADIP being fully ramped and taking its full share. So it's more of the business will-- more of the SRE will go to ADIP on a comparable basis in ‘24 versus ‘23. And all that is factored into Martin's guidance.

The next question is coming from Benjamin Budish of Barclays.

Hey, there. Good morning. Thanks for taking the question. I wanted to ask you mentioned some whitespace opportunities earlier in the prepared remarks. And it's been a hot summer, I'm just thinking about the clean energy transition strategy. And I was wondering if you can kind of give us a refresher of like, where you are, but more importantly, how you think that can evolve over the next say, like 5-10 years as a potential strategy that could really scale in the way that some of your other like major drawdown fund strategies have scaled?

Thank you. Thanks for the question. It's Marc, look, we look at this, and we and our peer group and the banking system, quite frankly, we're going to be financing energy transition movements towards sustainability for the rest of our professional careers. The scale of money required, just like nothing else we've ever seen. And so we step back, and we think about what that is, what kind of money, is it equity? Is it debt? Is it hybrid? When we look at the market, most of what we see is debt and hybrid. Our goal is to build the leading financier of energy transition sustainability worldwide. By having put together a perpetual, evergreen fund focused on doing that. In addition, we will raise bespoke drawdown equity funds from time to time. But those will be in my opinion, smaller than the opportunity that we see. We announced either last quarter or at the beginning of the year, that we had made an initial funding and initial capitalization with a few billion dollars of seed capital, that capital is getting deployed quite rapidly. A pipeline is growing. And I expect this vehicle to have the potential to be among the largest vehicles on our platform. But let's get the money invested that we have first, let's show investors that we've done a good job with it. Let's really define the types of opportunities and the return requirements. But I am equally optimistic that there's a great opportunity here but it's a debt and hybrid opportunity primarily.

The next question is coming from Adam Beatty of UBS.

Thank you. And good morning. Nice to deal with yellow and wanted to broaden that out into maybe potential opportunity in restructuring and distressed assets in situations. Which seems like it could be a sweet spot for Apollo. Firstly, in terms of the backdrop, so far, the level of corporate distress has been maybe a little bit more benign than folks expected. So wondering what you're seeing and kind of the near term outlook for that. And then maybe some details on how Apollo was positioned and how much you might want to lean into that opportunity. Thank you.

Well, I mean, I would start up I say we agree, we, it's been the credit markets have been, overall benign. And when we see where the economy is going in terms of cost of capital, our view is you are going to see more companies having a bit of a challenge in ‘24 and ‘25, especially with the maturity wall. But as we've talked about, in this call so much of our business right now, the lion's share of our business vast majority is to investment grade counterparties. And we feel very good about the health and robust nature of those companies. Certainly we have roots in history, in our hybrid and our equity business of doing things is the market in terms more challenging. We expect to be at the top of the heap and doing that but in a measured thoughtful way, like we've done for 30 years. Thank you. At this time, I'd like to turn the floor back over to Mr. Gunn for closing comment.

Thanks very much for your help this morning, Danna. And thanks to everyone else for joining and your continued interest in our business. If you have any follow up questions regarding anything discussed on today's call, please feel free to reach out to us and we look forward to speaking with you again next quarter. Enjoy the rest of your summer.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time. And enjoy the rest of your day.