Earnings Call Transcript - APO Q4 2023

Operator, Operator

Good morning, and welcome to Apollo Global Management's Fourth Quarter and Full Year 2023 Earnings Conference Call. 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 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 an interest in any Apollo fund. I will now turn the call over to Noah Gunn, Global Head of Investor Relations. Please go ahead.

Noah Gunn, Global Head of Investor Relations

Great. Thanks, Donna. And welcome again, everyone, to our call. Earlier this morning, we published our earnings release and financial supplement on the investor relations portion of our website. And in short, fourth quarter results rounded out an exceptionally strong year for both our asset management and retirement services businesses. Our two primary earnings streams, fee-related earnings and spread-related earnings, grew more than 25% to a record $4.9 billion in 2023. Combined with principal investing income, HoldCo financing costs, and taxes, we reported record adjusted net income of $4.1 billion or $6.74 per share for the full year. One change to highlight in our financial reporting included with this morning's results. Beginning this quarter, within retirement services, you'll see spread-related earnings excluding notable items. And further down the page, we provide additional information highlighting the delta to arrive at our long-term return expectation for Athene's alternative investments. This information is useful in order to understand how we think about Athene's earnings power on a multiyear basis excluding quarterly mark-to-market fluctuations. Importantly, this change has no impact on historically reported SRE or the magnitude of historically reported notable items. So joining me to discuss our strong results in more detail and outlook for the year ahead are Marc Rowan, CEO; Scott Kleinman, co-President; and Martin Kelly, CFO. And with that, I'll hand over to Marc.

Marc Rowan, CEO

Thanks, Noah. I'm excited to share that we had a very strong year in terms of growth and execution. At the year's start, I wouldn't have expected to see over 25% growth in FRE and 26% in SRE, and our successful performance feels like a victory lap, which I assure you we're enjoying. While I wish those growth rates were a regular occurrence, they aren't typically what we expect as a business. We've consistently guided our investors towards a long-term growth rate of 15% to 20% in FRE during non-flagship years, along with low double-digit growth in SRE. The year 2023 was exceptional; we ended with over $12 billion in cash and utilized our strong results to start building a countercyclical portfolio, including significant investments in treasuries for the first time in a while. This move may have impacted our near-term SRE, but it positions us well to reinvest into robust origination volumes, which you will hear more about. In the fourth quarter alone, we achieved over $30 billion in originations, and we aim to maintain that momentum. Our significant cash reserves and treasury holdings will help us continue to achieve low double-digit growth in SRE. Beyond earnings, our margins improved by over 200 basis points, assets under management reached a record $651 billion, and we experienced inflows of $160 billion, with Athene contributing record inflows of $66 billion. While Athene isn’t focused on short-term profit maximization, we are using this time to shape the business and distribution strategy we envision. We expect to surpass these origination numbers for Athene as we move into 2024, which we see as a year of sustained momentum, albeit one that will take a slightly different shape than 2023. We anticipate that credit will be a significant theme in 2024, along with growth in Athene and equity strategies, excluding private equity. Martin will discuss the outlook for 2024 and provide insights on Q4. Recently, we gathered at our partners retreat where we reflected on historical growth. Back in 2008, we had $44 billion in AUM; we've since grown 14 times that amount, outperforming major players like Apple and Microsoft. While I’d like to credit our management, much of our success is due to favorable macroeconomic conditions. Factors such as Dodd-Frank, extensive money printing, and the commoditization of public markets propelled our growth, but these conditions differ now from what will drive us in the future. A key change underway is the shift in perception between public and private investments. Historically, private investments were considered risky and public ones safe. However, we are starting to see institutions evaluating private investments as viable options with less liquidity, which augurs well for our industry. We're also witnessing an ongoing commoditization of returns in public markets characterized by extreme levels of indexation and concentration. Investors are becoming aware that to seek alpha, they'll need to explore options beyond traditional public markets. We are still in the early stages of high-net-worth and individual investor engagement in private markets, which is a $65 trillion opportunity as these investors reshape their asset allocations. Moreover, our aging population creates an urgent need for better retirement savings solutions, where firms like ours can optimize savings and provide guaranteed lifetime income. We are positioned to capitalize on several markets, including fixed income replacement, high-net-worth investments, and retirement services, all of which could help us double our firm over the coming years. To do this successfully, we need to scale our origination efforts. We've been averaging around $100 billion in annual origination, with $30 billion occurring in the fourth quarter. Our goal is to ramp that up to between $200 billion and $250 billion over the next five years, as our growth hinges on our ability to create investments that deliver excess return per unit of risk. If we grow too rapidly without scaling properly, we risk diluting our business. Capital formation is another key area where we need robust sales strategies, particularly for private investment grade. Building a sales force that resonates with this market is crucial. Lastly, innovation in product development is essential for financial services. Looking back at my career, products like leveraged loans and ETFs were once new concepts, and we must remain vigilant about evolving market needs. Clients will likely move away from public equities towards more hybrid investment solutions, creating a demand for new products that balance risk and return. As we implement our five-year plan, we are positioning ourselves to navigate the emerging trends. While the growth we experienced in the past may look different in the future, I remain optimistic about our opportunities ahead. We’re planning a comprehensive Investor Day in October, during which Martin and Noah will share further details. Now, I'll hand it over to Scott.

Scott Kleinman, Co-President

Thanks, Marc. Echoing Marc's sentiment. We entered 2023 focused squarely on executing the growth plan we set forth, and we achieved those goals. Both our asset management and retirement services business proved resilient and often opportunistic as we navigated an uncertain investing backdrop, a changing rate paradigm and an evolving financial ecosystem. One thing that stayed constant, though, was our commitment to delivering excess return per unit of risk for our clients. Investment performance across our product suite was strong, with particularly robust returns in certain yields and hybrid strategies. For example, our direct origination portfolio appreciated 20% over the full year, while our hybrid value portfolio, credit strategies and accord funds all returned more than 15% in 2023. In our private equity business, our flagship fund performance remains very solid, with Fund IX generating a gross IRR of 32% and 22% net life to-date through year-end. Importantly, we've been able to generate these attractive returns while prioritizing senior secured investment grade credit quality and a 'purchase price matters' investment philosophy. Off the back of this strong investment performance, we're seeing growing demand for our investment solutions in the marketplace. We raised $44 billion of third-party capital in 2023, an annual record when excluding flagship private equity activity, reflecting the increasing breadth of our product suite. Athene's organic inflows continued to height, totaling $63 billion in 2023, driven by strong secular tailwinds and leading market share. Approximately $23 billion or 35% of Athene's inflows were supported by continued growth through third-party sidecar capital. Altogether, organic inflows totaled $107 billion across the platform during the year. As we look to 2024, we expect momentum across all avenues of capital formation to continue. In our third-party asset management business, we expect to raise a record $50 billion of capital, including annual fundraising records from both the institutional and global wealth channels. Coupled with the $70 billion of expected inflows from Athene, we expect to raise approximately $120 billion of capital this year organically, which would represent an increase of 20% on a comparable basis excluding flagship private equity. In a higher interest rate backdrop and with lingering impacts of the effect on traditional private equity allocations, institutional investor focus has pivoted to asset classes that offer current income, inflation protection, and access to areas of secular growth, namely credit, infrastructure, and sustainability. We believe we're well positioned to capture this demand with our direct lending, asset-backed finance, opportunistic credit, and infrastructure equity strategies currently in the market in addition to our first-time clean transition equity fund. We're also focused on building upon the success we've had with third-party insurers last year, who entrusted us with $13 billion of capital, and view this as an important client segment as we continue to scale our third-party credit platform. Overall, we've entered 2024 with a lot of momentum and expect a very strong first quarter for institutional fundraising. Turning to global wealth. We closed out a transformative year for the business from launching new products, expanding distribution, and educating the marketplace on the benefits of alternative assets. We raised over $8 billion of capital from this channel in 2023, up more than 30% from 2022 levels, and expect to grow off that base in 2024 despite not having a flagship private equity fund in the market. We believe our growing suite of semi-liquid perpetual products is important to that success, with a few to highlight in particular. We've seen steadily growing inflows for Apollo Debt Solutions, the non-traded BDC we manage, which totaled $875 million in the fourth quarter, in addition to approximately $345 million for January 1 subscriptions, a recent monthly record. These strong inflows follow industry-leading investment performance, with Class I shares delivering an approximate 16% net return for 2023; as well as expanding distribution, with ADS now live on five global wirehouse platforms and 60-plus selling agreements in place with independent advisers. Looking forward, we're focused on expanding our private credit offering from corporate direct lending to asset-backed finance, which we believe will provide global wealth investors more fulsome and diversified access to our proprietary asset origination capabilities. Additionally, we're pleased with the growth we've seen in AAA, our innovative core equity replacement vehicle. Inflows from global wealth investors totaled $1.5 billion in 2023, though weighted towards the second half of the year. Looking ahead, we're focused on expanding shelf space to additional key distributors in the U.S. and Europe as well as launching additional points of access to reach different parts of the retail market. And lastly, Apollo Infrastructure Company recently launched in November to capture growing demand for private infrastructure assets. We believe the company offers differentiated access to the full spectrum of our infra platform investing across sectors and the capital structure. Initial feedback from RIAs has been positive so far, and AIC is on track to expand distribution more broadly over the course of this year. Turning to investment activity. We had an active year of capital deployment totaling approximately $150 billion in 2023. Looking forward, we expect many of the same themes that informed our investment pipeline last year to remain pertinent in 2024, a shrinking global banking industry, lack of public market liquidity, and the need for structured financing alternatives, among others. With $58 billion of dry powder at year-end, we're well equipped to capitalize on this robust opportunity set. Relatedly, debt origination volume totaled almost $100 billion in 2023, as Marc said, including $30 billion in the fourth quarter alone. It's worth mentioning that about half of this volume in both the fourth quarter and full year originated from our ecosystem of 16 proprietary platforms. Over the next couple of years, we're focused on reaching our $150 billion debt target, origination debt target, that we first laid out at Investor Day. To reach that target, scaling our origination platform volume is essential and should encompass around 50% of that longer-term goal. We think we can achieve this platform volume goal by scaling our existing portfolio, especially through some of the larger platforms like Atlas and MidCap and mid-sized platforms like Wheels. Importantly, growth in debt origination volume has helped fuel our capital solutions business. In 2023, more than 80% of capital solutions fees were debt related, up from only 55% in 2021. Our growing high-grade alpha business is one of the important contributors to this fee mix shift, which generated approximately $10 billion of volume over the full year. In the fourth quarter specifically, we announced three transactions with repeat borrowers, Air France, and Vonovia, showcasing the power of incumbency for large-scale structured investment-grade financing demand. So with that, I'll turn the call over to Martin to go through our financials.

Martin Kelly, CFO

Great. Thank you, Scott. And good morning, everyone. So as demonstrated by our results, 2023 was a very successful year of growth and execution for Apollo. We delivered on the financial targets that we laid out more than a year ago despite operating in a vastly different macro environment. In the asset management business, we achieved our 25% FRE growth target through fee revenue growth of more than 20%, coupled with decelerating expense growth, which drove the 200 basis points of margin expansion. In retirement services, we grew SRE by 26%. As Noah mentioned, you'll note a new presentation this quarter, on Page 10 of the earnings release, to separate SRE excluding notable items, which this quarter is $748 million or 141 basis points of net spread, from the difference between actual alternatives returns and the 11% long-term expectation, which this quarter is $132 million or 25 basis points of net spread. This change in presentation reflects both where the industry is moving to and is being required to move to, as a presentation format. Importantly, we still continue to manage the portfolio expecting the same 11% long-term returns. On this basis, our net spread, excluding notable items, for the year was 144 basis points. Considering our long-term expectations for alternatives returns, our net spread would be an additional 21 basis points higher and, combined, 30 basis points higher in 2023 versus 2022. Assisted by higher rates, this increase was driven by record organic growth, a favorable deployment backdrop and floating-rate income. With these strong results across the business, we expect to exceed our stated goal of doubling our total earnings to $5.5 billion by 2026. And we expect a mid-teens-plus compound earnings growth trajectory over the next few years. Executing on our plan for 2024 is the next important milestone to achieving that target. Before I get into the forward look, I'd like to discuss a few puts and takes in our fourth quarter results that will help form a better view of our run rate earnings power. On management fees: Management fees declined modestly quarter-over-quarter due to Fund X catch-up fees of approximately $25 million earned in the third quarter. Athene's alternatives portfolio returned 6.5% annualized in the fourth quarter, below our long-term expectation of 11%, with strong performance by the strategic origination platforms partially offset by other investments held outside AAA. Our operating tax rate benefited from large deductions related to employee stock compensation due to a higher share price as well as one-time benefits related to Athene's redomicile and new corporate tax legislation in December. Going forward, we expect our effective tax rate to remain approximately 20% over the long term, subject to quarterly variability. And then lastly, Athene's cost of funds in the third quarter included a 17-basis point benefit from two items that we previously adjusted out as notable items. Q4 also included the full year costs of a new performance fee, which amounted to 7 basis points of costs in Q4. Combining these items provides a more appropriate comparison of the quarter-over-quarter change in cost of funds, which including these adjustments was similar to the change in fixed-income returns for the quarter. So turning to our FRE outlook. We expect 15% to 20% growth, as Marc communicated. I'll walk through the key building blocks. Excluding $45 million of cyclical catch-up fees we earned in 2023 related to our flagship PE fund raise Fund X, we expect low- to mid-teens fee revenue growth in 2024 primarily driven by increasing management fees and fee-related performance fees. We expect management fee growth to be supported by the $120 billion of total organic inflows Scott highlighted as well as solid levels of capital deployment, further supported by $46 billion of fee-eligible AUM not yet earning management fees. For capital solutions, we expect another strong year of fee revenue generation currently similar to 2023 levels. The revenue from this business has grown approximately 80% in two years and has already exceeded our five-year target. For expenses, we estimate our growth rate in total fee-related expenses will moderate this year to a low double-digit level. We added approximately 350 people to our total headcount in 2023, at the asset manager, with approximately half the net new hires located in North America and Europe and the other half in Mumbai. We expect very targeted headcount growth this year in our business, with a continued focus on growing our India team. As the pace of growth in our headcount declines, we should experience a commensurate favorable slowdown in the pace of non-comp expense growth. Combining this expense outlook with a solid revenue growth picture, we expect to derive an additional 100 basis points improvement in our FRE margin to approximately 57 basis points this year, on a path to 60%-plus by 2026. Moving to retirement services. We expect to generate low double-digit growth in SRE this year based on a few underlying criteria. In terms of basis, the growth outlook is built upon the exclusion of any notables and assumes an 11% return on Athene's alternatives portfolio in line with historical experience, adjusting for the approximate $70 million of excess earnings we earned in 2023 on assets related to the ADIP buydowns and the Venerable recapture, both as we previously communicated; of organic inflows funded with existing capital resources, including third-party sidecar capital; and net spread, excluding any notable items and assuming an 11% return, of between 160 and 165 basis points, based on the current forward rate curve which implies approximately five rate cuts by the end of 2024. As it relates to interest rates and sensitivity. Athene has had a long-standing and intentional allocation to floating-rate securities while remaining duration matched. Holding floaters has and will continue to serve a range of strategic purposes, including assisting with asset-liability matching, enabling offensive positioning within the asset portfolio during periods of market stress and cushioning against any downturns. With the prospect of a Fed easing cycle on the horizon, we have reduced the amount of net floating-rate assets to $25 billion at year-end; and we expect it to further decline to $20 billion by the end of the first quarter. Turning to principal investing briefly. We expect our PII earnings stream to be below our multiyear average target of $1 per share in 2024, with clear dependencies on both the public and private markets for monetizations and outcomes. On capital allocation, our priorities remain unchanged. We're focused on investing in our existing capabilities to drive continued organic growth rather than making strategic investments. We also expect to continue immunizing regular-way employee stock comp grants and to begin taking steps to reduce our share count to 600 million shares by the end of 2026. We have also announced an increase in the annual dividend by 7.5% to $1.85 per share, beginning with the first quarter of 2024, implying a dividend yield of 1.8%, slightly above the average dividend yield of the S&P 500 of 1.5%. Finally, our GAAP earnings totaled $2.9 billion for the quarter and $5.1 billion for the full year, retaining our eligibility for S&P 500 index inclusion. And with that, I'll turn the call back to the operator for Q&A.

Operator, Operator

The first question today is coming from Bill Katz of TD Cowen.

William Katz, Analyst at TD Cowen

So Marc, a lot of really good big picture type of views as you sort of think through the new order here. One thing that I sort of picked up on your comments was the fact that you thought that there could be an opening in the 401(k) market. I'm just sort of wondering if you could expand your views there. And then maybe underneath that, can you talk a little bit about how you're sort of seeing the competitive landscape developing in the wealth management channel as everyone is sort of positioning?

Marc Rowan, CEO

So you are absolutely correct, Bill. I do see an opening in the 401(k) market. The 401(k) market is not limited by legal restriction. It's limited by a risk mentality as a result of substantial litigation over a long period of time, but I think we're seeing a stabilization, particularly as the suite of private products is no longer all high fee, high carry, locked away in funds. You're watching the first baby steps as fiduciary managers in 401(k) begin to mix-in private into their heretofore public solutions simply to get better outcomes and better diversification. The other thing we're seeing is we're seeing a focus on guaranteed lifetime income or guaranteed income, where annuities are going into target date funds for the same purpose. I believe we're going to see a continued migration. I don't have the number in front of me, but my memory is kind of plus $1 billion this year in 401(k) and fiduciary retirement products. I think again we're at the very beginning of this, just like I feel we're at the very beginning of wealth. And I'll pivot to wealth: Much of what's happened in our industry, whether it is regulation, which has been a negative, or it's been the opening of the high net worth market, which has been a positive, has for the most part benefited the large multiproduct firms. To serve the wealth channel, to serve RIA channels, to serve a global market, this is not a small exercise. This is 150 people in the field, product, infrastructure. It does not make sense to do product but only if you are firmly committed to moving your business and you see a future of a multiproduct variety. And so I think that there are a handful of firms who have a right to play in this market and have made the investment. It's not two and I don't think it's more than ten. This market is growing. We are at the infancy of it, and firms coming at this in their own way. I think there are good and bad that is being done. I'll just give you our way. We are focused on taking in money from this market not as quickly as we can but as quickly as we can deploy. Ultimately, producing good returns, not having extreme volatility, and thinking long and hard about whether we offer this market binary outcome products, is how we're going to approach it. We want to position ourselves as the innovator in this marketplace rather than the largest in this marketplace, and I think we've made good progress in doing it. We have a lot of work to do, but I remain very optimistic.

Operator, Operator

The next question is coming from Glenn Schorr of Evercore.

Glenn Schorr, Analyst at Evercore

One small one, one big one, if I could. The small one is if you could dive into the return differential in alternatives of your 11% over time versus what you've actually been experiencing lately. You talk about good performance on the origination platforms. When I look at your performance across the board ex-European Principal Finance, everything is really good, so I'm curious what's falling short within the Athene portfolio. And then the bigger...

Marc Rowan, CEO

Let me address that briefly. I know you have a larger question to ask, but let's look at it this way: AAA, which encompasses all platforms and investments, was around 10% this year, slightly below the 11% we were aiming for. However, it's still a positive trend considering we are not concentrating on the volatility of public markets and are leveraging technology and AI. The variance between this and Athene's performance is impacted by certain insurance holdings. Athene, aside from AAA, has investments in Challenger, Catalina, and Venerable. This year, we saw less appreciation in those investments compared to the overall portfolio, and that explains the difference. There aren't any other significant differences to note.

Glenn Schorr, Analyst at Evercore

All right, cool. And then my violation part B is you said $200 billion to $250 billion. I kind of remember $100 billion to $150 billion, getting to $150 billion. I know you were at a $30 billion run rate and I know you bought Atlas but curious how you bridge that extended and larger origination scale...

Marc Rowan, CEO

When we established our five-year targets just over two years ago, the goal was to reach $150 billion in origination by 2026. I believe we are on track to achieve that target. The $30 billion run rate we achieved in the fourth quarter, which is of high quality, was very encouraging. This year's plans also foresee an increase in origination volumes. Origination is essential to our business. As we look ahead to the next five years, we need to enhance our origination efforts to better serve the fixed income replacement market and offer private investment grade options to institutions instead of their current fixed income allocations. We also need to increase our hybrid origination if we want to assist high-net-worth and institutional investors in transitioning from active equity management. Ultimately, our business growth is not limited by the amount of capital raised, although that is certainly important. A firm that provides excess returns, like we do, is only as strong as its capacity to generate investments that yield excess returns relative to risk. This is crucial to our business. We aim to not only surpass the original $150 billion goal but also work towards a target of around $250 billion, which I believe is realistic. We will provide more details at Investor Day in October, but this is our top priority to ensure sustained growth for our firm and for the industry as a whole.

Operator, Operator

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

Alexander Blostein, Analyst at Goldman Sachs

So Marc, just to build on that. You talked about origination being the lifeblood of the business fairly consistently for quite some time now, which all makes sense. As you look to grow the business further or scale and accelerate your origination capabilities, what sort of needs to happen for you guys to get to those numbers? Is it more coverage? Is it more boots on the ground? Is it more capital, which I guess some of that will come in through AAA? Is it more product? Is it more acquisition of origination platforms? So I'm just trying to kind of again think about what's within your control to really accelerate this growth further.

Marc Rowan, CEO

Some of our strategy involves increasing our presence and developing what we refer to as high-grade alpha or high-grade solutions. As Scott mentioned, this has proven to be a strong business and a unique offering for us, one that makes sense in asset management only if you function as both an agent and a principal. We initially built this business to support Athene but later recognized the importance of diversification, leading us to support third-party insurers as well. We aim for 25% of everything and 100% of nothing. Recently, we've observed that institutions looking to enhance their performance in traditionally public-only investment-grade bond portfolios are willing to consider private options as long as they maintain the same rating. This trend is gaining momentum in conversations within consulting and among innovators, and I believe it will persist. Regarding the sources of volume, we expect more coverage, but we currently operate with 16 origination platforms, with only a few at scale. Our focus is on expanding these origination platforms; while we might not need a 17th, we won't rule it out. We're not lacking opportunities; our emphasis is now on focus, execution, and delivery. Even a platform like MidCap, with a $20 to $22 billion capacity, has significant growth potential, especially as they enhance their European operations and product offerings. Both MidCap and Atlas have the capacity to significantly grow their businesses, and we must scale our existing capabilities effectively. We're fortunate to benefit from regulatory preferences worldwide that favor debt capital originating from the investor marketplace rather than the banking system. This doesn't diminish the vital role of banks; it simply suggests that credit growth, typically aligned with GDP, is likely to occur more within the investment market. Some of this will come from pure-beta products like investment-grade and high-yield bonds, which we aren't particularly focused on, but it's a tremendous market where we still operate as a smaller player. To put it into perspective, we currently have a $500 billion private credit business, with approximately $150 billion to $200 billion of that being beta. For us to double our credit business, we need to effectively leverage this sector. I am optimistic about achieving this in the next five years, as the beta aspect comes at no extra cost.

Scott Kleinman, Co-President

I would add that the other half of our origination not coming from our platforms is sourced from the Apollo system. We have invested a significant amount of time and effort over the past year and a half to enhance our origination by linking our various business units, which enables us to improve our sourcing abilities for debt originations through the relationships we have across our equity, hybrid, and infrastructure sectors. We are beginning to see the positive effects of this effort, and we are still in the early stages of fully realizing our origination potential. There is a lot of positive momentum coming from various origination sources.

Operator, Operator

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

Michael Davitt, Analyst at Autonomous Research

My question is on the retirement services growth guide run rating at $80 billion in Q4 but guiding to $70 billion for 2024. So does that disconnect some restriction from available capital? Or are you just being conservative and the growth could actually continue to track from that higher Q4 run rate?

Marc Rowan, CEO

I think you're hearing from us. In a week or two, on the fixed income call, you'll hear from Jim Belardi. Historically, the team in New York is a bit more conservative than the team in Connecticut, but I want to emphasize that this isn’t solely about volume. We can create as much volume as we want, but I encourage you to consider how that volume is generated. When purchasing a secondary block of business, you're acquiring something that has diminished value in terms of surrender charges, and I'm not convinced that's a wise investment. I'm wary of the potential risks associated with that business. We could celebrate growth, but that's not the kind of growth I want. Additionally, we could experience growth in 3-year products. While that may seem favorable now, it sets up a scenario that could lead to a decline in the future, and I might not appreciate 3-year products later on. We are focused on improving the quality of the business we conduct. I would prefer to do $70 billion in business rather than $80 billion or $85 billion. While many of you are still learning this business, we have been immersed in it for 15 years, and the headlines don’t always reflect the reality. This ties into our guidance on spread-related earnings. We had an exceptional 2023. Jim Belardi and Grant Kvalheim should be recognized for their achievements; they should celebrate our success. We accomplished what we set out to do. We concluded the year with over $12 billion in cash and a significant treasury portfolio, which is rare for us. We essentially refined the portfolio and increased our liquidity after growing 25%. If Apollo maintains a run rate of over $30 billion in origination, we can achieve our goal of investing in high-quality private credit that locks in high spreads on a matched basis. This will help mitigate what people typically expect to decline due to interest rates. It's also important to note that with fluctuating rates, when rates go up, our assets depreciate, which limits our flexibility in the portfolio. Conversely, when rates fall, our holdings gain value, allowing for greater flexibility. We can shift from investment-grade corporates to originated private investment grades. The pressure isn’t on Jim Belardi and Grant; it’s on us. We need to generate more of what they require. Keep in mind that they don’t want all of what we originate; they only want 25% of everything. Therefore, scaling their business and our third-party business relies heavily on origination. We must increase our origination efforts.

Operator, Operator

The next question is coming from Michael Brown of KBW.

Michael Brown, Analyst at KBW

So the mantra for 2024, no new toys. How can we expect the capital allocation to progress over the next 2 or 3 years? And then specifically in 2024, any way to maybe put some guide rails around how the share buybacks could be utilized this year?

Martin Kelly, CFO

Michael, it's Martin. I touched on some of this earlier. Our priority for allocation is to grow Athene, and there are many advantages to this growth, including the sidecars. The earnings leverage we gain from this is very beneficial, as we mentioned at the Origination Day last October. Growing Athene also enhances AAA, leading to a compounding effect on earnings. We don't see much opportunity for inorganic growth, so any investments will be modest and targeted. It's important for us to manage employee stock issuance, which is factored into our plans. The ability to reduce the share count relies on realizations, which is crucial. As realizations increase, we will have more flexibility to make those reductions. This depends on the market conditions for exits, especially in our private equity business. Ultimately, whether we're buying back stock or investing in Athene, both options offer attractive returns, and we strive to balance them. I would consider this a 3-year plan, but we need more near-term realizations to progress, making it more back-ended than front-ended.

Operator, Operator

The next question is coming from Brennan Hawken of UBS.

Brennan Hawken, Analyst at UBS

Martin, I'd like to maybe try and square your comments around the cost of funds in the fourth quarter and some of the adjustments you flagged to Slide 12. Is the one piece that's not one of the notable items the impact of the new performance fee? And given that performance fees are something I'd think you guys would be collecting on a regular basis, why is it that we should be adjusting that out? Can you please just maybe help us understand that impact a little bit more?

Marc Rowan, CEO

This is Marc. I will provide a conceptual response first, followed by specifics from Martin. When analyzing our portfolio history over the past 15 years, it is clear that the majority of losses in the investment portfolio have originated from the corporate investment-grade sector, which is typically viewed as safe. Many investors base their assessments on ratings, diversification, and industry classifications, but this approach is no longer sufficient. Athene has chosen to incentivize portfolio managers based on their performance, taking into account specific losses and impairments, including those from corporate investment-grade bonds. The adjustment for these changes was reflected entirely in one quarter instead of being spread over four quarters. The rationale behind this decision is that, on a net basis, it should ultimately benefit Athene, but we want to be transparent about why this change was implemented during the quarter.

Martin Kelly, CFO

I would also link it back to originations. This is a tool designed to encourage appropriate originations based on risk. The calculation is straightforward. The entire charge of 7 basis points was recorded in one quarter, but you can think of it as a performance-dependent dollar amount that would typically be spread over the entire year. If you adjust for that and the notable factors from Q3, you'll see that the changes in top line fixed-income income and cost of funds align closely with each other on a quarter-over-quarter basis.

Operator, Operator

The next question is coming from Ben Budish of Barclays.

Benjamin Budish, Analyst at Barclays

I was wondering if you can give an update on ADIP specifically and then maybe speak a little bit more generally about sidecars. You identified it last year as one of your strategic priorities going forward, so maybe a little more color on how you expect that opportunity to evolve and what we should see this year.

Scott Kleinman, Co-President

Sure. So fundraising is going quite well. We expect to wrap it up this summer in the $4 billion to $5 billion range, so providing Athene the sidecar capital necessary for the next probably two years. So feeling really good about that. Part of what we're doing is just a big education campaign, right? This is not necessarily an intuitive product to investors, but once folks start to understand it, it's a pretty exciting product.

Marc Rowan, CEO

Yes. As you consider entering this business, I would highlight the reason we successfully raise sidecars. Investors buy into the business pro-rata with Athene and pay both Athene and Apollo fees for the opportunity to engage in retirement services. This approach works because investors have observed us consistently adhering to a principle of high cash-on-cash returns. We have the capability to generate over 15% cash-on-cash return growth in book value over time, while avoiding market risks and transactions that might offer growth but are not fundamentally sound. This is why we are trusted with their capital. It's crucial to understand that when this business is poorly managed, it becomes very capital intensive. However, when executed well, it is highly rewarding. On average, it costs about $0.08 of capital for every dollar of growth. If you fund all $0.08 on your own, you can calculate how large you can grow and how much capital you'll require. About two-thirds of that $0.08 comes from third parties who pay us a fee for the chance to fund, as they see the potential for excess returns relative to risk and trust us as stewards of their capital. Companies that fail to deliver high returns or make sound strategic decisions will find it difficult to gain trust for sidecars, and that distinction will determine success or failure.

Operator, Operator

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

Michael Cyprys, Analyst at Morgan Stanley

I wanted to ask more broadly on the retail annuities market with aging demographics and the need for income. I was hoping you could speak to the market growth that you expect from annuities over the next 5 to 10 years. And what sort of enhancements might you be able to make to the product set and overall customer experience to perhaps unlock some additional growth and expand the market?

Marc Rowan, CEO

The product set for annuities has seen limited evolution over a long period. We entered the market about ten years ago, and while the changes we made were significant within our industry, they weren't overly transformative in the broader financial services landscape. We removed many unused features, enhanced rates, and simplified both the product and its administration. As a result, consumers tend to favor simplicity over complexity. This approach, combined with good capital and asset availability, has helped us transition from a new market entrant to achieving our highest ever annuity sales in 2023, securing a leading market position. We anticipate modest innovations around traditional products, particularly with customized indices, as the nature of our product involves not only a set rate but also a percentage of an index's performance with a floor, which appeals to investors who appreciate a blend of potential gains and risks. A key goal in this business is to simplify and provide a clearer promise of guaranteed lifetime income. Currently, companies face significant investment risk, and moving towards guaranteed lifetime income adds the challenge of longevity risk. So far, we have chosen not to take on substantial longevity risk in our portfolio, but there are opportunities to collaborate with others in the market to hedge against this risk. Currently, the expense of hedging longevity might not support distributing a product that mitigates longevity risk in a standard sale. However, in fiduciary sales, where no commissions are involved, there is potential to offer guaranteed lifetime income and significantly reduce the costs associated with longevity hedging. I expect several firms in our industry to experiment with this approach this year. If we succeed collectively, it could open a large and appealing market that provides long-term capital while allowing us to concentrate on investment risk rather than longevity risk. In terms of market perspective, we are primarily considering the U.S. market. Europe is currently reassessing its focus in this industry, having experienced a 40% decline in guaranteed income availability primarily due to regulatory changes. A similar issue exists in Australia, which boasts a successful retirement market, yet has concentrated more on accumulation rather than decumulation. There are discussions about these topics being addressed in various regions worldwide, including Hong Kong. Adapting the successful strategies we've implemented in the U.S. to fit local regulations is a significant growth opportunity. Additionally, the growth of indices and customization within the indices, as well as the ongoing development of guaranteed lifetime income, represents further potential for growth in the early stages.

Operator, Operator

The next question is from Finian O'Shea of Wells Fargo Securities. I apologize, but it seems we have reached our allotted time for questions. I'll hand it back to Mr. Noah Gunn for closing comments.

Noah Gunn, Global Head of Investor Relations

Great. Thanks for your help this morning, Donna. And thanks to everyone, for your interest and time this morning. If you have any questions or clarifications about anything discussed on today's call or our results, please feel free to reach out to us. And we look forward to speaking with you again next quarter.

Operator, Operator

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