Good morning, and welcome to Apollo Global Management's First Quarter 2023 Earnings Conference Call. This call may contain 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. Please 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 this morning. Earlier, we published our earnings release and financial supplement on the Investor Relations portion of our website. First quarter results were strong and outperformed on a number of fronts, which we believe few others can say amid this backdrop of market volatility. We'll discuss further over the course of the call, but it's quite apparent that our purchase price matters approach is shining, allowing us to be very front-footed in executing our strategic objectives. The proof is in the numbers. We reported record quarterly FRE of $397 million or $0.67 per share and normalized SRE of $811 million or $1.36 per share which together increased a remarkable 45% year-over-year. This powerful combination of fee and spread-related earnings, coupled with principal investing income, drove normalized adjusted net income of $942 or $1.58 per share in the first quarter, up 18% year-over-year, which is indicative of the type of consistent, compound earnings growth we believe we can deliver to our shareholders. Joining me this morning to discuss our results in further detail are Marc Rowan, CEO; Scott Kleinman, Co-President; and Martin Kelly, CFO. And with that, I'll turn the call over to Marc.

Thank you, Noah, and good morning to everyone. I want to build on what Noah mentioned and discuss the two different strategies we've implemented compared to our industry. The first strategy is based on our investment approach. With our $600 billion in assets under management, you can always trust that we prioritize purchase price in our strategies. This principle is based on factual data, cash flow, and business prospects. In our equity business, which Scott will elaborate on, this focuses on securing low purchase prices for the quality of businesses we acquire. In the credit markets, this approach emphasizes being at the top of the capital structure, particularly with senior secured and floating rate instruments. In this quarter’s results, you can see how our purchasing strategy has worked amidst market instability. In our corporate credit sector, we've seen an increase of 3%, while structured credit rose by the same percentage and direct origination was up 5%. A majority of our corporate credit book, at 98%, is senior secured and floating rate, primarily originated in 2022 and 2023, which have been excellent years for origination. In terms of our equity business, private equity increased by 5% and European nonperforming loans through EPF rose by 2%. Overall, the principle of purchase price matters has proven beneficial during this turbulent period. It can be challenging to resist the allure of momentum and liquidity in the market, especially given the extended period of money printing, but we adhered to our strategy, which is why we are in our current position. The second strategy I want to mention goes back to our Investor Day in October 2021. At that time, we committed to taking a different route than most in our industry. While others placed their bets on real estate equity, infrastructure, subordinated debt in BDCs, or growth, we opted for fixed income replacement, focusing primarily on private investment grade assets. Rather than the typical discussions around private credit, which often involve leveraged loans and below investment grade assets, we stand as the investment grade alternative. This quarter, our yield AUM was about $440 billion. While that number might seem substantial—it is indeed the largest within private credit—this still pales in comparison to the $40 trillion market we estimate we should be targeting. We have a significant presence, but we aren't dominant in the market, which is a favorable position. It allows us to strategically navigate competition. The media often portrays private credit as a threat to the banking sector. However, considering our approach, we've strategically placed ourselves where we intend to overlap with the banks' non-preferred assets. We are more interested in acquiring assets rather than clients, as we lack the capability to cross-sell various products like equity, M&A, FX, derivatives, hedging, payments, or credit cards. Conversely, many banks seek clients but may shy away from assets, especially during market stress when regional banks reconsider their strategies. I appreciate our position within the industry and believe we are poised for success. During uncertain market conditions, there is a growing demand for reliable yield. Insurance companies, including our own, Athene and Athora, alongside competitive firms, Japanese banks, pension funds, endowments, and sovereign wealth funds are all searching for safe yield. This reliable yield serves as a potential replacement for traditional fixed income, particularly publicly traded investment grade. I'm confident in our position, and optimistic about our strategy's outcome. Regarding our asset management business, we anticipated that 2023 would be a year focused on execution, emphasizing results from our previous investments. We projected a growth of approximately 25% year-over-year in FRE, a goal that I believe we are on track to achieve. We saw $57 billion in inflows during the quarter and expect to exceed last year's total of $130 billion, with a likely record or near-record asset management fundraising in the second quarter. The principle of purchase price matters has never been more relevant, setting us up for a strong year. In terms of capital deployment, we've been very active in our buyout activities, particularly in a time when we previously had limited engagement due to heightened purchase prices. Our attention in credit has also intensified given the ideal entry point in private IG. An essential aspect of our current growth, which I’ve mentioned previously, is our ability to originate assets that deliver superior returns per unit of risk, through both direct lending and specialized platforms dedicated to credit production. We currently operate 16 platforms, with Midcap, Wheels, and Atlas being some of the largest. MidCap has reported $3.5 billion in originations so far this year, typically producing around a 14% ROE, but currently approaches 17%. Wheels, our fleet leasing entity, has not faced any credit losses since acquiring Donlen and is achieving an ROE nearing 19%, significantly above the typical range of 13% to 15%. Atlas integration is progressing well, and the timing for its acquisition was perfect for capitalizing on the current market stress. In summary, our origination business is thriving due to market tensions, allowing us to capitalize on opportunities that arise while obtaining better spreads. Our underwriting process is robust, focusing on top capital structures, floating rates, and senior secured transactions. On the Capital Solutions front, I have previously shared our guiding philosophy—aiming for 25% of everything rather than 100% of nothing has been beneficial as we've expanded our capabilities as a diverse originator. Most of our anticipated growth in this business stems from this approach. As for retirement services through Athene, 2022 was a historic year for us, marked by record inflows and earnings, and I expect 2023 to outperform, having started strong. Every metric from Q1 has shown promising results: a normalized spread of 160 basis points, attractively priced new business, leading market shares, and ongoing capital formation, which we will update following further closings. In the first quarter alone, inflows reached $12 billion, matching the previous year. We are currently witnessing what could be termed the golden age of annuities as consumers gravitate toward 5% yields over 2%. Our international insurance partnerships continue to expand, with three notable reinsurance ties in Japan and a goal of five by year-end. This could yield about $5 billion annually from those channels, with flow reinsurance expected to reach between $9 billion and $10 billion this year alone. Pension buyout activities have gained momentum with rising rates, including a recent $8 billion solution offered to a blue-chip client. I anticipate second-quarter inflows at Athene will exceed $17 billion, placing us on track to surpass last year's record inflow of $48 billion. For this quarter, we recorded a normalized spread totaling $811 million. This is part of what we internally termed as a Goldilocks scenario, with wider spreads and higher rates than initially anticipated. We retained more business in-house than expected, which will normalize in the latter half of the year but drive higher overall earnings. Atlas has proven beneficial in this context. Additionally, as Martin will detail, our conservative reserving approach has led to favorable adjustments under LDTI. Reflecting on our performance, rather than projecting $811 million annually, we should consider our projected 20% growth in SRE, which may have room for upside, especially while maintaining a sizable cash reserve of $12.7 billion. We’re strategically prepared to capitalize on market opportunities as they arise, and with a healthy balance sheet, we're confident in our approaches moving forward. Before I transition to Scott, I want to address concerns we've received regarding surrenders in light of recent banking sector activities. To be clear, there is no impact on the retirement services industry from these events. Annuity owners are generally saving for retirement and do not typically view their funds as easily accessible. When they do decide to surrender or shift their investments, it is usually towards another policy to avoid tax penalties. We structure our investments to align with long-term, locked-in liabilities, with 80% of our portfolio being nonsurrenderable or protected through market value adjustments and surrender charges. We have faced challenges like this before and have effectively managed them over time. In our recent materials, we've included a breakdown of the different types of outflows we experience. The first category is maturity-driven outflows, which occur as contracts reach their terms and is predictable from quarter to quarter. The next category represents policyholder-driven outflows, mostly income-oriented withdrawals, as retirees take minimum distributions when they reach a certain age. Lastly, we encounter two other withdrawal types related to surrender charges. In examining the weeks surrounding the Silicon Valley Bank situation, there was no observable change in call volume, surrender activity, or other related metrics. Our business operations remain predictable, with aligned durations and interest rates, providing us confidence to invest against these obligations and earn consistent spreads over extended periods. In summary, we view 2023 as a year of implementation, where we believe focusing on fixed income replacement and adhering to our principles around purchase price will yield results. There’s considerable potential for growth in executing our established business plan, and our strategic approach is focused—not on introducing new initiatives—but rather on optimizing existing areas of growth in origination, capital solutions, and global wealth management, while striving for operating efficiency. We concluded the quarter with $600 billion in assets under management, $500 billion of which is in yield and hybrid. The team is performing well, and I look forward to Scott sharing more insights.

Thanks, Marc. This is certainly an exciting time to be in our business. As you can see from our results, purchase price matters is succeeding in this environment as demonstrated by strong investment performance in several strategies including flagship private equity, direct origination and opportunistic credit portfolios. We believe we're one of the few firms who can play offense in these periods of uncertainty, which was quite clear by the level of deployment activity in the first quarter. We signed four private equity deals since our last earnings call, and our current pipeline of opportunities is about three times a year ago and growing. We announced the first acquisition from our latest flagship fund just last fall. And since then, Fund X has invested or committed approximately $6 billion of capital. The strength of our relationships and ability to structure complex financing solutions are really what set us apart when traditional funding sources are limited. For example, in the wake of market turmoil surrounding bank failures in March, we announced an $8 billion acquisition of chemical company Univar Solutions, an industry vertical in which we have long-standing expertise. And just last week, we announced the $5 billion acquisition of aluminum products manufacturer Arconic by our private equity funds. Our hybrid business is also thriving in this backdrop of higher rates, earnings pressure and lack of appetite for bank-led syndicated credit. With corporates focused on deleveraging in the face of upcoming debt maturities and sponsors seeking exit alternatives amid tepid IPO markets, we're seeing increased demand for private market solutions via structured equity and credit. Accordingly, our investment pipeline for hybrid value is robust, and we expect the deployment environment to remain attractive for quite some time. With the dislocation we've seen in the banking sector over the past couple of months, we've been leaning into a wide range of investing opportunities across private credit platforms. We believe the breadth of our platform and the depth of our expertise puts us in a unique position to provide creative, flexible capital solutions to a range of borrowers, especially to those that may not be as widely serviced by traditional lenders. We're able to generate a low double-digit yield for first lien debt backed by good collateral. As a recent example, we agreed to invest EUR 1 billion in a portfolio of high-quality assets controlled by Vonovia, a leading global residential real estate company, which provided a long-term cost-effective solution for the company. Inclusive of this investment, we've originated over $18 billion of high-grade alpha transactions since the start of 2022. The pipeline of these types of high-quality attractive investments is already significant today. And longer term, we think the opportunity to gain market share is even greater and spans an even wider range of asset classes from corporate lending to all sorts of asset-backed finance. As it relates to fundraising trends, the long-term secular tailwinds driving growth in allocations to private markets remain intact, and momentum across our platform is strong. While recent market disruption has caused some observable shifts in market behavior, particularly with U.S. and European institutional investors, investors based in the Middle East and Asia actually turned up their focus and seem to have viewed it as an opportune time to allocate capital. Individual investors were also quite level-headed, and we saw no material increase in redemptions from global wealth offerings and a steady build in new capital in the first quarter. On the product level, fundraising trends in traditional private equity are still facing some headwinds, but with a total of approximately 30 commingled and perpetual capital vehicles expected to be in the market this year, we still feel confident in our ability to raise more capital than we did in 2022. We expect second-quarter inflows to be particularly robust given the line of sight we have to several sizable mandates and fund closes in the near-term pipeline as Marc mentioned. On Fund X specifically, we've received total commitments of approximately $16 billion through the end of March. Throughout the marketing process, we've experienced solid demand from repeat investors off the back of very strong Fund IX performance, which appreciated 23% in 2022 and 8% in the first quarter. Looking forward, we have a great queue of investors in the final stages of documentation and currently expect total commitments to be in the low $20 billion range with a final close expected over summer. The amount of capital positions us with one of the largest funds in the industry and with the flexibility to lean into a range of interesting opportunities in today's markets. We're also making meaningful progress on the six additional growth initiatives we highlighted in February. These six areas: AAA, Athene Altitude, third-party insurance, sidecars, clean transition and sponsor and secondary solutions position us to tackle huge white space opportunities. These initiatives are natural extensions of our three key growth pillars and therefore, play to our strengths including complex product structuring, proprietary asset origination and, of course, generating excess return per unit of risk. As these businesses scale over the next few years, we expect our third-party fundraising will grow in size, diversity and consistency. Here are some highlights. For AAA, an innovative core equity replacement vehicle, we're continuing to broaden distribution to both institutional and global wealth clients. In addition to the over 40 approvals in place with independent distributors, we have a handful of new wirehouse and bank relationships geared to come online in the coming months, and conversations with family offices are also ramping up. Just last week, we announced the launch of a Luxembourg-based product platform that provides individual investors in Europe, Asia and Latin America, access to two investment strategies, including AAA in their local currency with lower investment minimums than traditional alternative product offerings. The proposition of equity-like returns with downside protection is proving especially attractive in this highly volatile public market backdrop, and we remain very bullish on the long-term outlook for this fund. For Athene Altitude, an innovative tax-deferred annuity wrap product, we've received positive initial feedback from several retail distribution partners. We have a few firms in late stages of due diligence and expect to launch the product more broadly in the coming months. Within clean transition, we recently announced the launch of Apollo Clean Transition Capital or ACT Capital, with $4 billion to deploy into yield and hybrid investments in support of corporate transition to clean energy. Meaningful seed investment from a strategic partner and our aligned pools of capital should enable us to build a diversified portfolio and investment track record from which we can eventually raise additional third-party capital. We also expect to launch the Apollo Clean Transition private equity strategy in the third quarter, which will continue to expand the scope and scale of our activity in the sustainable investing area. And lastly, we began raising third-party capital for our inaugural equity secondaries vehicle in the second quarter, which is part of our sponsor and secondary solutions, or S3 business. As a reminder, we began investing for this strategy last fall with a chunk of seed capital from a long-term strategic partner and AAA to help anchor the broader fundraise. Deployment activity has been strong since then, and the vehicle has committed over $1 billion of capital in transactions led by S3. Combined with our three strategic growth pillars, these next six initiatives provide significant runway for growth. We look forward to providing updates as these exciting initiatives develop.

Great. Thanks, Scott, and good morning, everyone. Our asset management and retirement services businesses continue to generate stable and growing income streams, even through significant market disruptions like those we experienced in the first quarter. Nearly 60% of our assets under management consist of perpetual capital, with the rest in long-term locked-up structures. The retirement services businesses, as Marc pointed out, are funded by highly persistent sources with predictable long-term liabilities. This leads to a resilient earnings profile, particularly amid pressures in the broader financial sector. In our asset management business, first quarter FRE rose by 28% year-over-year, supported by strong growth in both management fees and capital solutions fees. These increases reflect asset management inflows over the past year and the expansion of our capital solutions capabilities, with several significant growth investments translating into top-line revenue. The first quarter included $20 billion in fee-generating inflows from an investment management agreement with Atlas, where we will earn a 10 basis point fee. Fee-related expenses increased by 26% year-over-year and 3% quarter-over-quarter. After several years of platform investment, we expect the pace of headcount growth and the rise in non-compensation costs to slow significantly in 2023, marking 2022 as a pivotal year for FRE cost growth. As Marc mentioned, we anticipate delivering operating leverage this year while aiming for 25% FRE growth. Turning to retirement services, Athene's early-year performance was outstanding and exceeded our expectations, partly due to a more favorable investing environment and also due to episodic gains. We reported a normalized net spread of about 160 basis points in the first quarter, the highest in a decade. The initial part of the year presented an attractive investing environment, allowing us to deploy incoming flows at higher on-margin yields than expected. The average yield on total fixed income purchases surpassed the BBB corporate bond index by more than 150 basis points in the first quarter compared to only around 25 basis points throughout 2022. The higher interest rates also boosted net spread accretion from Athene's floating rate position and cash holdings. Episodic benefits included fees related to financing arrangements for the Atlas transaction, elevated fees from specific fixed rate loans, and potential benefits from strategic third-party sidecar capital anticipated to support around 40% of total Athene inflows this year. Additionally, we expect about $3 billion in outflows in the third quarter due to the recapture of older annuity liabilities by one of our affiliated partners. This will allow Athene to redeploy capital in an attractive investing environment while diversifying our partner’s portfolio, similar to last year’s Catalina transaction. Following the new insurance accounting standard, Athene modified 2022 SRE results, resulting in a favorable impact of $220 million, entirely reflected in the cost of funds and translating to a 12 basis points benefit in normalized net spreads. We expect this advantage to persist in 2023 and beyond, at around 10 basis points in normalized spread terms, raising our normalized net spread target for 2023 from 135 to 140 basis points to a new range of 145 to 150. There are several other factors that might affect the SRE outlook this year. Given the current deployment opportunities, we expect to achieve better yields on new investments than initially forecasted. However, as Marc described, we've prudently increased Athene's cash balance this quarter to provide added stability amid heightened market volatility in March. Normalizing for the LDTI benefit and with an improved deployment backlog offset by higher cash balances, we anticipate normalized SRE to slightly exceed $3 billion this year, with an estimated normalized net spread range of 150 to 155 basis points. Regarding capital allocation, we plan to use our free cash flow to fund the base dividend, return excess capital to shareholders through opportunistic buybacks and dividend increases, and invest in strategic growth. Each quarter or year, we evaluate how to allocate capital based on the highest returns. For dividends, we aim for a yield that matches or exceeds the S&P 500, currently yielding about 2% versus 2.8%. For opportunistic share repurchases, we target a high teens IRR over the medium term. For strategic growth investments, we seek returns equal to or exceeding those from opportunistic share repurchases with potential strategic benefits. All of these capital allocation priorities are weighed against growing Athene, which is currently achieving an estimated low 20% pre-tax ROE. This return profile improves with increased ADIP utilization. In the first quarter, we allocated $160 million for opportunistic share repurchases, and we plan to be more selective with strategic investments given the numerous organic growth initiatives being developed. As mentioned last quarter, we expect to consistently buy back our stock as we advance through our 5-year plan. In conclusion, our first quarter financial results position us well to achieve our strategic and financial objectives for the year. We're more focused than ever on the significant opportunities ahead. With that, I'll turn the call back to the operator for Q&A.

Our first question today is coming from Alex Blostein of Goldman Sachs.

So Marc, maybe we could start with the current environment. Apollo clearly built a really broad set of origination capabilities. We talked about that a bunch in the past, but the dislocation in the regional bank space is amplifying and amplifying really the supply-demand imbalance against that we see in the market. So given that backdrop, maybe spend a minute on areas you expect to be more active in among the existing platforms. Are there any new asset classes in a way that you could further lean into? And then maybe talk a little bit about third-party fundraising that could get accelerated by what's going on in the credit space, call it, over the next 12 months.

Okay. We are, as you know, broadly focused on scaling our private credit business. Our private credit business is different than most other private credit businesses in that the majority, and the vast majority of it is fixed income replacement or private investment grade. This fits very well with the space that is currently in retrenchment by the banking system because the banking system historically was not a risk taker. They were an accommodation, top of the capital structure senior secured. We, in fact, are top of the capital structure, senior secured and floating rate. If I step back, de-banking has already been happening across our country. Following Dodd-Frank, which essentially encouraged the development of bank replacement by investors, banks, we estimate are less than 20% of all debt capital in U.S. capital markets. Given what's happened in regional banking, I expect that to become more of an investor marketplace. The way the U.S. banks today in the investment marketplace is indirectly through securitization. If you look at growth in CLO, growth in ABS, growth in other forms of securitization, you're seeing essentially how America banks today. Atlas, the Credit Suisse Securitized Products group, along with Redding Ridge, along with MidCap, along with Wheels, Donlen, and the other platforms we have built are all focused on this marketplace. I would expect, Alex, that you will see a tremendous tick-up in securitized product relative to traditional direct lending, and it's a space that I believe has a lot of white space and where we are incredibly well positioned. And I would expect in later quarters that we will see fundraising develop around this. Investors, particularly those who have essentially invested in the first round of private credit are meaningfully underexposed to structured products and don't have great ways to have access to it. So I think this is actually a really interesting time for the platform and one in which we're well positioned.

The next question is coming from Patrick Davitt of Autonomous.

Do you have any updated thoughts on the annual origination capacity expected to come online with Atlas? Additionally, considering your third-party insurance business, do you foresee any challenges in developing that segment as insurance companies may view Athene as a significant competitor?

So regarding Atlas, it's challenging to provide a definitive outlook. Atlas represented a $70 billion business that I estimate turns over annually or every 1.5 years. When we acquired it, we took on approximately a $40 billion business. Therefore, I expect annual originations to fall between $30 billion and $40 billion. Before Atlas, our originations were nearing $100 billion. Our five-year target is $150 billion in annual originations, and with the addition of Atlas, as well as the overall growth of our platform and the banking sector, I anticipate that we will surpass that $150 billion target well ahead of our initial projections. In terms of competition, we abide by a philosophy of sharing—aiming for a 25% stake in everything rather than 100% of nothing. Some of Athene's perceived largest competitors are actually our partners in origination platforms. We not only do not seek to dominate any transaction, but we are also willing to collaborate with those seen as competitors. Looking at our overall business, over $500 billion of our $600 billion in assets under management (AUM) is partner capital, indicating our engagement with the marketplace. While private equity and transaction-based sectors can be competitive, the majority of our business thrives on collaboration. If a competitor in asset management or insurance wishes to establish a CLO business in opposition to Apollo’s, we will not hesitate to offer equity and warehouse support. We will even assist in funding a broker-dealer that competes with our capital solutions. Our stance isn’t about competing with a single entity but rather existing in a market where our $440 billion AUM is significant yet not the predominant player that the largest U.S. bank CEOs are concerned with. We are in a fortunate but expansive market where our role is still developing.

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

So I'm curious, you're in the business of capturing spreads, obviously, but I'm curious if you think you benefited as much as you thought you'd benefit from this big move up in rates? And the flip side of that is, how are you thinking about what to do with the portfolios and your investment in your deployment as the forward curve is now expecting some rate cuts along the way? Just curious on how you're pivoting as we might be pivoting on the rate cut side.

Thank you, Glenn. It’s Marc. First, I want to clarify that interest rates alone do not change the fundamental nature of our business. They do affect how appealing our products are, as consumers tend to favor higher rates. However, our business model adapts to the market opportunities available, unless there are extraordinary circumstances like what we saw in the first quarter, when we achieved excess spread. Therefore, fluctuations in rates don't directly influence spreads. We have benefited from maintaining a significant floating rate position thanks to the adequate spreads from previous business. This floating rate position has performed as expected, providing additional earnings during the transition from low to higher rates. Currently, we have normalized this position at Athene to align with the prevailing market conditions. It’s also crucial to understand the context of how we built Athene. We scaled the business through acquiring existing blocks of business. In a low-rate environment, purchasing these blocks can be advantageous because they tend to have high guarantees. Typically, when acquiring a block, it is close to the end of its surrender charge and market value adjustment period, which poses a risk in making inorganic deals unless there is a significant gap between the current rate environment and the guarantees of the policy. During our expansion, spreads were sufficiently wide, allowing us to manage that risk with floating rates. However, we haven’t engaged in any inorganic acquisitions for about three years now. The costs associated with such deals due to heightened competition have become significantly higher compared to the cost of funds from newly issued products that come with new surrender charges and market value adjustments. What we're seeing now is an intense effort within our industry to scale, often driven by concerns around surrenders and policyholder behavior. When someone purchases a block of business today, they are typically acquiring older surrender charges and market value adjustments that are phasing out, in a high-rate environment that offers consumers other options. Consequently, effective hedging on that block may be challenging. I believe it will be quite difficult to achieve scale in this rate environment unless there is a strong organic origination engine, as investing in policies lacking adequate protections from surrender charges and market value adjustments, or other economic incentives, would not be wise.

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

I was hoping you could spend a moment on the ramp of AAA and maybe give us your thoughts on what you think the run rate inflows could be for that product around year-end. And was also curious on Athene Altitude and the potential there for tax advantage products. Specifically, I suppose, what products can you house within one of these VA wrappers and what limitations are there? Because it seems to me like a no-brainer to defer your taxes, if it's possible.

Sure. I'll start with the AAA question. So as I mentioned in my comments, we are really starting to hit the sweet spot of adding distribution partners to the AAA offering. To your question of where this could be on a retail basis, we could be approaching $0.5 billion to $1 billion a quarter, I think, by the end of the year. Retail plus one of the surprises we found is that this is more attractive to certain institutional investors than we would have expected when we created the product and that, of course, is a little bit lumpier, but we're starting to see real progress on that. So in due course, we've said in the past, this could very well be Apollo's largest product. And I do really believe that over the next few years, this could be a product, $20 billion, $30-plus billion.

Maybe I'll hit Athene Altitude. So we've articulated previously, and I certainly have been quoted publicly stating that over the next 5 years, I expect that high-net-worth investors will be better than 50% allocated to alternatives. That always elicits certainly a look because it is not where the people are today. But I start with a definition of an alternative. To us, as an alternative is nothing other than an alternative to publicly traded stocks and bonds. And I believe alternatives go from AA to equity. So when I say 50% allocated to alternatives, I do not believe they will be allocated to private equity or venture capital or risk but to alternatives in the newer definition that I've suggested. Today, you can buy from Apollo investment-grade only yield. You can buy total return, you can buy opportunistic credit, you can buy REIT, you can buy BDC, you can buy our credit strategies hedge fund and you can buy AAA, all wrapped in an Altitude annuity for an excess cost of 30 basis points with no further restrictions. We, as an industry, are in the early stages of addressing the needs of high net worth and retail investors versus institutions. One of the key differences is institutions are not taxpayers. They generally are pension funds or endowments or other types of tax exempts. So our industry has not historically been as tax-sensitive. So if you think of the experience of a BDC investor in a high-tax state, an 8% dividend yield looks like 3.8% to the consumer. That's not as attractive as what we are in an education phase, and the whole growth of alternatives is about education. Retail investors and their financial advisers first need to understand the products. They are getting an education in products, and we are doing our part, and other firms in the industry are responsibly doing their part. This next layer of Altitude and wrapping is yet another bit of education. We are selling this product today mostly to high-net-worth individuals and family offices, and this product will get increased amounts of traction as Martin or Scott in their remarks suggested. I believe we will have our first broad distribution of this at some point this year. And you should expect us that, as new products come online, we will continue to build out the family of products under the Altitude brand.

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

Just a question on the retirement services business. You mentioned an increase in cash balances, adding an extra layer of stability. How meaningful is that? And what do you see in the marketplace? And when you look at your outflow profile that's leading you to do that, we saw an 11% outflow rate in the quarter. So I guess a question there: how do you expect that to trend over the next couple of years, and you mentioned a recapture of some older annuities coming up in the third quarter? What's the expectation to see more of those following Catalina that we saw last year?

So it's Marc. On a normalized basis, we hold about $6 billion, $6.5 billion of cash. So this is about $6 billion of extra cash. For those of you I've seen in person or have attended a call with, I remember in the early days of the banking crisis, calling out to Jim Belardi and asking him to give me the benefit of some leeway. I was going to ask him to do something that had no justification other than feel, which was to massively increase our cash balances at the point of instability we were watching Credit Suisse and Signature and SVB. And Jim did that. And ironically, it's positioned him to take advantage of wider spreads. So in hindsight, I think it's been no harm no foul, and I would expect to see cash balances come down. The question on outflows, I hope we answered better in terms of the table that we disclosed, but I'll come back to you and I'll speak philosophically first. When we construct a product, we put a lot of benefits into the product. We strip away the excess features that give rise to volatility that consumers really don't know how to value anyway and we put it into the price. And yet we create a very low cost of funds, and we've gone from a startup to the largest provider and the largest market share in the U.S. market. That is no mean feat. But when a product comes out of surrender charge or its market value adjustment burns off, we take the product to its contractual minimum. We want the product to surrender because we cannot invest and earn spread against a product that is redeemable at any point in time. This is true across the industry. It is not just us who follows this as a point in time. And recall, policies generally do not leave the industry; they recycle because otherwise, people suffer tax consequences, and this is a retirement product. This is not a demand deposit. What's happening to us, and we are seeing the benefit of is we were a zero market share, and now we're the largest market share. We are the benefit of this recycling at a point in time in the industry when rates are higher, and therefore, consumers are more interested in annuities. And the whole industry is up. We're just up more than about anyone else. So I come back to the specifics now in how surrenders work. The maturity cycle of contractual-based outflows will go up and down based on the business that we see 3, 5, 7 years ago. We can tell you pretty much quarter-by-quarter, and Athene will do that in their deep dive, what's the contractual maturity-driven outcomes will be. In some quarters, it will be up, some quarters it will be down. You can look back to this quarter; that maturity driven was 3%. Q3 in 2022, it was 5.7%. You should expect to see a lot of volatility in that line based on business done 3, 5, and 7 years ago. Income with policyholder driven outflows, the three categories, for income-oriented withdrawals, you should see this as a steady amount of money that goes out based on the age of policyholder and their proclivity or need or legal requirement to take income. This is also planned. The next line is from policies out of surrender charge. This is also planned. This gets to the point I just made. We take contractual minimums on policies that burn off their surrender charges to as low as we possibly can. We want these people to surrender. This is a relatively small amount because the vast majority of policyholders surrender at maturity. 10% approximately of the people forget they have a policy, and at some point in the future, they wake up and discover they have a policy that's out of surrender charge. And so this number, you can see bumps around back and forth. It's neither high or low. It's a relatively small number. The thing that we watch pretty closely because it is the basis of our business, we look at policies and surrender charges. These are, to some extent, unplanned. These are what I would call life issues. This is health issues, death, divorce or other changes in life circumstances. We generally don't see changes in these kinds of surrenders as a result of interest rates or financial market activity. If you go back and look in time, this quarter was unexceptional. And you should expect and we budget that number to be kind of unexceptional on a go-forward basis. So again, I step back and I look at this industry, and it's not the first time we've done this. This industry has been resilient over a really long period of time. You go back to the financial crisis and you think about how central AIG was in the financial crisis in 2008, really no move. If you think about Genworth, who also had its troubles in the financial crisis, also no move. Don't see anything really going on here that changes the way I think about the business. And I think we will do the best job we can to give you a prediction of outflows. The primary thing that varies is maturity-driven contractual-based outflows quarter-by-quarter.

The next question is coming from Michael Brown of KBW.

So Marc, capital solutions has been running north of $120 million or so for the last three quarters. It seems like it's playing a more important role in the broader business here. Could you just explain a little bit more about what's driving that growth here in this still very challenging backdrop? And is there potential to actually hit your $500 million target before 2026? It seems like you're certainly trending that way.

Yes, I’ll answer that. It's exactly what we have communicated over the last year or so. As we continue to expand our ACS business, it focuses on inputs and outputs. We are increasing the number of origination platforms and products flowing in, and as we grow the ACS business and our network of syndicators, we engage with more clients and market participants. Therefore, it’s not surprising that we are witnessing consistent progress. As Marc mentioned, particularly on the credit side, our aim is not to own 100% of anything. This concept inherently supports our ACS platform. Overall, this progress aligns perfectly with our predictions. Regarding your question about achieving that target ahead of schedule, it’s definitely possible; I believe our 5-year plan might have been a bit conservative.

The next question is coming from Craig Siegenthaler of Bank of America.

I wanted to better understand the quarterly valuation process for the equity stakes of your credit origination vehicles that are held in AAA, and then for the AAA stakes that are held in the aux bucket of Athene. And my question really is driven by the fact that Athene no longer holds the equity stakes directly because it was swapped for AAA a couple of quarters ago.

So I'll do a start, and then I'll turn it over to Martin. It's Marc. So the valuation process, whether it was on Athene's balance sheet or in AAA hasn't changed and makes no difference. The vast majority of the origination vehicles are held or valued on a basis of book value and ROE. And as you would imagine, in this environment, they are on the margin moving up. But there's not a tremendous amount of volatility because these are, for the most part, book value-based entities that track how they're doing in ROEs, and ROEs have been very stable over a long period of time. And Martin...

I would just add, the only difference between the valuation in the alternatives portfolio, which was 6% for the quarter and what AAA shows is just due to certain positions that are not in AAA. But they can't be for various reasons. But otherwise...

I believe that companies like Athora or Catalina, along with other insurance firms, cannot participate in AAA due to regulatory and other constraints. Those positions are excluded. However, 100% of the alternatives portfolio is indeed in AAA.

Yes. So there's no difference in any way between the valuation methods. And then within the alts portfolio for the quarter, connecting back to the comments Marc made on the platforms, the platform has generated close to 10% return within that 6% for the quarter. So the origination business is healthy, and high ROEs are translating into upward markets in that portfolio.

The next question is coming from Brian Bedell of Deutsche Bank.

Marc, if I can come back to a response you had to a question earlier on growth in securitized product and maybe just to compare it with direct lending. To the extent, obviously, if we get a substantial pullback over the medium and long term from the banking system, especially regional banks, can you talk about that opportunity in direct lending, but then obviously, contrast it with your kind of optimism on securitized product? And is that going to sort of take some of the share from direct lending? Or do you see them both growing pretty substantially and your participation, obviously, in both?

I’ll begin with an overview of the current financial ecosystem. The U.S. economy relies on credit, which is essential for consumers and businesses, impacting GDP and its growth. The way credit is distributed has shifted significantly, particularly since the Dodd-Frank Act, with more credit now coming from investors acting like banks rather than traditional government-backed banks. Generally, investors are providing more credit compared to the banking system. We also see the rise of private credit, a term that can mean many things. Often, private credit is equated with levered lending, which is primarily below investment grade, but that represents only a small segment of the private credit landscape. Most of the time, when investors refer to private credit and direct lending, they are focusing on below investment grade levered lending. This form tends to be perceived as more familiar because it corresponds to corporate lending. In our case, we have a strong interest in direct lending and below investment-grade levered lending right now. There are fewer providers in this area, which creates a need for funds. We can make commitments to underwriting in a cautious environment, reap higher spreads, and benefit from a shortage of capital, which leads to better deal selection. The current market presents a good opportunity for entry into below investment grade, levered lending, whether you refer to it as private credit or direct lending. The point I want to emphasize is that the U.S. financial landscape primarily banks through indirect methods like securitization rather than by directly issuing loans to investors. The growth of asset-backed securities and other structured products illustrates this trend. Analyzing performance metrics demonstrates that an investment-grade securitized product often offers better credit quality compared to an investment-grade corporate bond at the same rating level. This trend aligns with the substantial technological and societal changes we've been witnessing, resulting in more isolated failures among single investment-grade corporate entities. In contrast, securitization provides the diversification benefits that are increasingly valuable. Most investors are now engaging with private credit and direct lending in below investment grade. They are beginning to shift their investment-grade portfolios towards alternatives that yield 200 to 300 basis points more while maintaining the same ratings. Insurance companies and others have long participated in this strategy, and I believe a significant shift by investors into this market is imminent, indicating substantial potential for growth in the securitized marketplace. However, it’s important to distinguish between the large investment-grade market and the more opportunistic below investment-grade market, which remains intriguing.

I would just add that as you reflect on the growth of the direct lending or private credit market over the past decade, it has primarily been at the individual issuer level and mostly within the sub-investment grade sector. This is something we have been actively involved in at the investment-grade replacement level over the last few years. We anticipate that the asset-backed opportunity will undergo a similar evolution over the next 5 to 10 years. This has been a significant focus for our own balance sheet for many years and has been a key driver of the excess spread we have been able to achieve. Ultimately, we believe the broader market is beginning to recognize this potential, presenting a substantial market opportunity. However, it is crucial to have specialized origination and underwriting capabilities to effectively navigate this market, which is a significant advantage we have developed through hard work over the past 5, 7, and 10 years.

The next question is coming from Finian O'Shea of Wells Fargo.

Higher-level question on private investment grade. As you produce alpha there and now share that benefit between the asset manager, the annuity policyholder and outside owners of origination, for example, in AAA, do you see attention on claims to that excess return? And is there enough to go around in a more normal market environment?

So it's Marc. The short answer is no. But I have said previously, the capacity to produce excess spread or more broadly, excess return per unit of risk is the limiter of growth in our business. In alternatives, if we are true to what we're doing, we only exist to provide this excess return per unit of risk. Otherwise, investors should be public and shouldn't leave with any liquidity restrictions. So it is our job to grow it and not try to grow our AUM any faster than we have excess spread per unit of risk. So far, we have been good at balancing that. But we look at this all the time. This is ultimately the cap, if you will, on an intelligent way to grow a long-term alternatives franchise that meets investors' needs.

To address, so the three categories you highlighted, right, the underlying annuity holder gets the underlying rate plus some amount of excess that allows Athene's products to be attractive. Athene captures the excess spread inherent in our origination machine to be able to do that, and AAA captures the return on the platform for being a creator of this attractive product. So it's actually quite a pretty logical split as to how that waterfall works.

The next question is coming from Ben Budish of Barclays.

I wanted to ask about the private equity franchise. I know you expect to close Fund X this summer, and looking at the last several funds, you probably won't be back in the market for a while. However, I have a high-level question regarding how you view scaling in that business. What are the natural limits of a private equity drawdown fund? Additionally, understanding that scaling in your business is important, I'm curious about how to think about the forward trajectory for the next several funds in that sector.

In our core private equity business, we believe we are operating at the optimal size. A footprint of $20 billion to $25 billion provides us with the capacity needed to pursue the most attractive transactions. This range positions us among the largest capital pools in private equity, allowing us to capitalize on opportunistic public-to-private deals and potentially take advantage of stressed or distressed opportunities. Currently, our execution capacity is aligned to this level, which feels right in the current corporate environment. As we consider scaling, it will primarily come from our ancillary and related businesses, such as our S3, infrastructure, and hybrid value platforms. These are still maturing in terms of their scale and footprint, but we anticipate they will reach the next stages in the coming years. For core private equity, we believe our $20 billion platform is indeed in the sweet spot.

The next question is coming from Adam Beatty of UBS.

I wanted to ask about the pension group annuities channel for Athene. It sounds like you've got a healthy pipeline coming up there. Just wanted to get your thoughts on the impact of higher rates and maybe economic uncertainty on the level of demand and activity there? And then just how you view the attractiveness of that channel relative to other opportunities?

It's Marc. With higher interest rates, corporations that primarily engage in pension group annuity transactions find this more appealing since they need to contribute less to address any gaps in their underlying positions. However, the situation is not as straightforward as it seems. It largely depends on their positioning; for instance, if they are invested in long-duration bonds and rates increase, their gap may widen. Similarly, if they are in equities and those equities decline, their gap also expands. Generally, corporations looking at pension group annuities tend to lean towards strategies that lead to a more market-neutral state, favoring shorter-duration fixed income and less complex equity investments. Therefore, the overall impact of higher rates is beneficial for this business. This sector relies on substantial capital, the ability to navigate independent fiduciaries, and the expertise to onboard many clients simultaneously. Only a few companies in our industry meet all these criteria. While it remains competitive, it is less intense than the origination segment, which is significantly less competitive than the acquisition of blocks, a market that I believe is nearing its end. Personally, I am enthusiastic about pension group annuities, as I hold great confidence in the Athene team, and our pipeline appears strong.

Thank you. That concludes the Q&A portion of today's call. I will now return the floor to Noah Gunn for any additional or closing comments.

Great. Thanks for your help this morning, Donna, and thanks to everyone for joining our call. If you have any questions or feedback on our call today, feel free to reach out to us directly, and we look forward to speaking with you all again next quarter.

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