Earnings Call Transcript
Apollo Global Management, Inc. (APO)
Earnings Call Transcript - APO Q3 2022
Operator, Operator
Good morning and welcome to Apollo Global Management's Third Quarter Earnings Conference Call. During today’s discussion, all callers will be placed in listen-only mode. And following management’s prepared remarks, the conference call will open for questions. Please limit yourself to one question and then rejoin the queue. This conference call is being recorded. This call may include forward-looking statements and projections, which do not guarantee future events or performance. Please refer to Apollo's most recent SEC filings for risk factors related to these statements. Apollo will be discussing certain non-GAAP measures on this call; which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the company's website. Also, note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Apollo fund. I would now like to turn the call over to Noah Gunn, Global Head of Investor Relations.
Noah Gunn, Global Head of Investor Relations
Thanks, operator, and welcome again to our call this morning. Earlier today, we published our earnings release and financial supplement on the Investor Relations portion of our website. For the third quarter, we reported fee-related earnings of $365 million, an increase of 14% year-over-year or $0.61 per share and spread-related earnings of $578 million or $0.96 per share. Together, fee and spread-related earnings totaled $943 million or $1.57 per share. In total, we reported adjusted net income of $801 million or $1.33 per share for the third quarter. 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 will turn the call over to Marc.
Marc Rowan, CEO
Thank you, Noah. Good morning to all. Apologies in advance for sounding like a losing Texas football coach. I will do my best. I thought where I'd start is really to begin with the macro or the market backdrop. I have a chart on my office wall that traces the movements of the S&P following the 2008 financial crisis and following the beginning of tightening in this round by the Fed. They are almost on top of each other. That is not to imply that we are going to have or experience the same sort of events that followed 2008, but I do believe it is important to comment on market psychology and investor sentiment. What did we expect would happen when we printed $8.1 trillion for the country? Well, exactly what should have happened, happened. Assets almost across the board elevated in price to multiples and levels we had never seen before. Risk was up, everything went up, interest rates went down. Now that we have begun tightening, we are resetting to more normal levels. We act in the market backdrop as if low interest rates and excess liquidity are the norm. They are not. Certainly not over my nearly 40-year career and not over any sort of long-term investment cycle. We have an entire generation of investors, investment analysts who have really grown up just seeing the market go in one direction. And we now all know it goes both ways. If I just chart what's happened so far this year, venture capital valuations are down 60%. Nasdaq down 30%, S&P down nearly 20%, Barclays AG down 17%. This is an amazing time for alternatives, particularly for credit. Investors have now discovered that everything is correlated to the Fed. They are also discovering that most, if not all, of last decades investment acumen was really nothing other than market beta and in some cases nothing other than levered market beta. Over the past decade, investors kind of got a free ride. There was not much need for alternatives as markets moved primarily in one direction. Yet, as an industry, alternatives grew tremendously. When I think about the market backdrop we are in today, alternatives should shine. After all, as an industry, we exist because we produce excess return per unit of risk. And for the first time in a decade, investors are asking not just about the reward but about the risk associated with investments. Alternatives offer diversification, in many instances, downside protection and an escape from correlation and indexation. That is the backdrop that I see for our industry. For us, this is a particularly good time. We did not chase a hot dot of growth at any price over the past decade. Our business continues to be guided by three fundamental principles: purchase price matters, excess return per unit of risk and aligned investing. As a result, we are on offense. Just in Q3, we deployed $37 billion, $175 billion in the last 12 months. Dry Powder now exceeds $50 billion. We excel in this kind of market. We are leaning in, we are out talking with investors and we are apologizing for nothing. By and large, we did what we were supposed to have done in a period of market access, which was avoid potholes. Scott will take you through some detail of our activity across yield hybrid and equity, and in particular, how active we were in the U.K. as a result of LDI, which is the first, I believe, of many market hiccups. The proof ultimately of the strength of a franchise shows up in the numbers. As Noah already mentioned, record FRE of 365, up 14% year-over-year, record Apollo capital solutions revenues north of $100 million, as Martin will take you through, record normalized SRE of nearly $600 million, as Martin will take you through again. $100 billion of year-to-date inflows, well exceeding the $80 billion target that we put out for all of 2022 at our Investor Day last year. In terms of performance, top tier investment performance. Fund IX gross and net were 40 and 26. Direct origination strategies were up 10% year-to-date. Our Athene alternatives portfolio was up 8% in Q3, first of nearly 21% down for the S&P 500. Let me now back up a little bit and talk about each of the individual businesses. Retirement Services is generating more volume and higher spreads. Consumers prefer 4% and 5% guaranteed yields versus 2% and 3% guaranteed yields. We have nearly $37 billion of year-to-date inflows. We expect to exceed $45 billion during fiscal '22. It would not surprise me if we got really close to $50 billion. The momentum in the business is overwhelming. Not only is the business good, but we are underwriting new business at really nice spreads. Whereas we used to underwrite around 100 to 110, 115 basis points, we were at 130 basis points in Q3 and I expect the basis point spread to increase going into Q4. In addition, we are experiencing increasing profitability from our net floating rate position of $30 billion. This is a strategic portfolio for us. The decision and the willingness to hold $30 billion of floating rate securities means that we have foregone income that we could have maximized in prior periods in order to set ourselves up with this form of downside protection. This notion of downside protection and not being a current-period earnings maximizer is what allows us to be on offense in markets like this. Martin will take you through the direct effects of being long $30 billion floaters in a highly increasing rate environment. The other nice thing about what's happening in the business is on average, the credit quality of the portfolio is going up market. We have been able to earn these spreads by taking less risk rather than more risk. We've seen minimal impact of capital on capital from ratings migration. 95% of the fixed income assets continue to be investment grade. Having excess capital, which again is a luxury in our industry, allows us to be opportunistic and on offense. Let me move from Retirement Services to Apollo Asset Management. Simply said, we are on track to exceed targets from last year's Investor Day. Martin will also give you some insight into what we expect for 2023. As you recall, we made three key bets, which were driving our Asset Management business forward. One was global wealth, AUM at the end of 5 years of $50 million. The second was Apollo Capital Solutions revenue in excess of $500 million, again at the end of 5 years, and origination volume of $150 billion annually. Let me review each of those three bets. But if you intend to tune us out, the shorthand is we're well ahead on all of those three bets. In global wealth, this market is actually showing financial advisors and it's showing clients that the 60-40 portfolio is not relevant anymore. I expect and our team expects that 50% of a high net worth individual's portfolio over the next 5 to 10 years will be alternative. It will not be alternative in the narrow depth definition of private equity or hedge funds. It will be alternative in the way that we mean alternative, which is an alternative to publicly traded stocks and bonds. In this kind of volatile market where people are focused on risk and reward, we are increasing mindshare as an aligned partner. If you look back and you think about what's transpired so far this year, Global Wealth AUM is up $17 billion, $8 billion from Griffin, $5.5 billion from ADS and $3.5 billion from other fundraising initiatives. $17 billion is great progress on the way to a 5-year goal of $50 billion, which I fully expect that we will exceed. Our positioning in this market is not to be the largest. Our positioning in this market is to be the most innovative, known for purchase price matters, excess return per unit of risk and aligned investing. The same bargain that we have with our institutional clients is the bargain we intend to strike with our high net worth clients. AAA, which I discussed in our last conference call, is our core equity replacement product. Think of this as an alternative to S&P 500 exposure. We're already seeing great early traction. We've been approved by three bank platforms, where we expect to launch at the end of this year, the beginning of next year, and we see tremendous interest from independent registered investment advisors, family offices, and independent broker-dealers. We have already seen, as I detailed on our last call, significant corporate interest. To give you a sense, this portfolio is up on an annualized basis, more than 10% against the backdrop of a pretty negative S&P 500. We have been positive in all three quarters in 2022. What we are trying to do is replicate S&P 500 returns plus a little, yet with fixed income-like volatility. On ADS, our Apollo Debt Solutions vehicle, we were up 2.2% in the quarter, outperforming investment grade bonds, high yield bonds and levered loans. 90% of our portfolio has been put to work in 2022. Very little of the portfolio is exposed to the hot dot period of 2020 to 2021. We are on offense in this vehicle, the same way we are on offense across our business. 99% of this portfolio is first-lien, which we continue to believe for high net worth investors and others is the right place to be in an uncertain market with an uncertain government backdrop and uncertain inflation expectations. Uncertainty is not a time not to invest. Uncertainty is a time to make sure you are getting paid and going in with your eyes wide open as to a range of outcomes. Furthering Global Wealth, we are seeing continued expansion and you will see us in the coming quarters discuss with you what we're doing in Asia Pacific. But suffice it to say we are not only hiring, but we are seeing good leverage out of our FWD Insurance and Challenger relationships in Australia. FWD Hong Kong, Asia and Challenger in Australia, where we own majority stakes in both. To get from where we are to where we think this market is going to be, is going to require time and education. We view ourselves as innovators in this market. For those who are interested to see what we're doing, just log onto Apollo Academy. It is a powerful tool for us to engage audiences, allow financial advisors to earn continuing education credits, and to bring thought leadership and expand the knowledge of what an alternative is to the investing public. The early engagement is really strong, and we continue to receive accolades from our channel partners for all that we are doing to move this market along. Apollo Capital Solutions, I'll just spend a second on. As an aligned investor, we want 25% of everything and 100% of nothing. That means we are ideally situated to work with our investors to syndicate into sidecars, into managed accounts and other flexible vehicles. Revenue this quarter was very strong. We had a goal of $500 million of revenue by 2026. It will likely be north of $400 million of revenue for 2022. I'm very optimistic, just like with Global Wealth, where I think we're likely to exceed our $50 billion AUM target, we are likely to exceed our $500 million revenue target for Apollo Capital Solutions. Somehow I get the sense that the leaders of these teams have sandbagged us, but that's all good. Our job is to execute our plan not to chase the hot dot of growth. Let me now turn to the third and perhaps most important of our key bets, origination. If you run a business that is focused on excess return per unit of risk, you do not focus on growing AUM. You focus on growing your capacity to create investments that provide excess return per unit of risk. And you believe, as we have seen, that AUM will follow. That is how, in my opinion, one generates recurring revenue, a long-term lasting franchise that investors can trust. Much of what we do in origination, as you will recall, is what we call fixed income replacement. Most of this is investment grade. We are occupying a slightly different space than most of our alternative peers, and we're occupying it because we think this is the most attractive space and we are advantaged in this particular area, and we are at scale. Currently, we own or operate 13 different platforms. A platform to us is a way of generating the kinds of investment grade yield the assets that we require to consistently grow our business to feed our growing retirement services and third-party credit mandates. During the quarter, we announced the signing of a framework agreement for the Credit Suisse SPG business. This would be our 14th platform. We believe that asset-backed origination has the potential to be as large a market as corporate credit. This is a product set that is primarily investment grade that fits extraordinarily well into our requirements for both our retirement services business and the third-party business we are building. It would give us extra access to flow from more than 200 direct clients and accounts. Should we close on this transaction, which we believe we will, this would allow us to be marginally accretive going into 2023, but strategically very accretive. It will be up to us to turn this into a huge success. So we are optimistic about what this business can be in our hands, and are incredibly enthusiastic about moving to a quick closing on this transaction. Having gone through the business, let me now talk a little bit about what we're trying to build and remind how we differentiate from most other firms in the alternatives industry. Our business model is built for the long term. The vast majority of our capital comes from our yield business, and the vast majority of our yield business is fixed income replacement. Fixed income replacement is top of the capital structure, senior secured, and that's where we want to be in uncertain times. It's why we can play offense. That does not mean we are not interested in the below investment grade market or direct origination; we are. It is just not the lion's share of our business. I step back and think about again our industry. Indexation is ramping across fixed income markets and equity markets, and indexation and correlation, its cousin, are just a huge source of differentiation for us as an alternative manager. The shift from defined benefit to defined contribution is another huge source of growth. Demographics are another huge source of growth. And something not fully appreciated is the changing role of banks post Dodd-Frank. Many of the fixed income originating assets are the kinds of assets that in prior periods might have ended up on bank balance sheets. Securitization is now how American banks operate. We estimate that less than 20% of debt capital to U.S. businesses and consumers is provided directly by the banking system. The vast majority of capital is provided by all of you through intermediaries like us and our peers. This does not mean we are replacing the banks. Quite frankly, we are now partners with the banks. If you think about what a bank wants, for the most part, a bank wants the client. They can sell the client payments and FX, hedging, M&A, equity and a whole range of services that we and our peers are not equipped for and do not aim to offer. What we want is the asset. We want the asset on good terms without fees taken out in advance, where we can have a direct look at credit quality and control the documentation pen. Fixed income replacement is a vast market, where we are still in early stages of its development. I am confident that we can, as a firm, adhere to excess return per unit of risk while growing our business. That is the challenge that I see. There is growth everywhere in the alternatives marketplace. The key is to grow while maintaining the core tenet of what an alternative is. Let me close by saying we're on offense. A year ago, almost to the day, we laid out a 5-year plan. I am confident that we're going to meet our targets which were a doubling of earnings by 2026. The three key bets are well underway, and we have already identified the next level of growth initiatives, whether it's AAA, GPLP solutions, and more to come. The accelerated hiring of the past few years is now behind us, and now it is our job to focus on simplification. The entire alternatives industry has gone from a small industry to a relatively large industry over a decade. Much of the industry has grown by adding people. We now, as an industry and as a firm, must take time to ensure we are building the systems and operating procedures that will allow us to scale the business and return to operating leverage. Make no mistake, a return to operating leverage is in the cards, and we expect that to happen for us as early as 2023. The talent we've added most recently with our COO addition Byron Vielehr and others gives us the confidence that we are well set up to both grow and to be efficient as we grow. Energy level at the firm is very high. I want to use this opportunity not just to speak to all of you, but to thank the team, many of whom are listening, for the tremendous work they have done so far in 2022. And with that, let me turn the call over to Scott.
Scott Kleinman, Co-President
Thank you, Marc. Apollo is recognized for its ability to succeed in difficult and intricate economic situations. Over the past ten years, during a period of low interest rates, we focused on identifying appealing investment opportunities to secure excess returns for our fund investors and retirement services clients. We maintained a measured patience and prepared diligently along the way. Now, however, we've entered a particularly promising phase for our investment strategy to excel. We are actively engaging in a market filled with opportunities, systematically deploying capital across our platform. In credit, particularly in the fixed income replacement and senior secured segments where we primarily operate, conditions are still favorable. The recent market disruption is generating numerous appealing investment opportunities for those capable of making sizeable investments. We're witnessing pricing structures reminiscent of the period before the financial crisis, enabling us to achieve higher returns with diminished credit risk. For instance, the yield on the CCC index from a year ago now mirrors that of an Investment Grade index. We are acquiring newly issued 10-year Investment Grade corporate bonds with yields ranging from 6.25% to 6.75%, and there are A-rated opportunities in sterling yielding between 7.25% and 7.5%. These appealing high-grade assets are being effectively integrated into our platform, especially at Athene, where the investment portfolio is benefiting directly from rising interest rates and widening spreads. In the third quarter, the average yield on total fixed income purchases for Athene surpassed the BBB Corporate Bond Index by over 80 basis points. Additionally, our size and speed enabled us to provide stability to the U.K. market during LDI-related sell-offs, taking advantage of a favorable entry point. Trading volumes surged to 800% beyond average levels as selling commenced, and we accounted for about one-third of overall liquidity. During this three-week period in October, our trading desk acquired $1.1 billion of AAA and AA rated CLO paper yielding over 8%. We believe that none of our competitors could have reacted as swiftly or significantly amid such volatility. In terms of origination, we achieved a debt origination volume of $20 billion in the third quarter, totaling approximately $100 billion over the last year, showcasing our significant capability in generating attractive proprietary assets. With reduced competition in the market, we have raised pricing and tightened credit standards across various origination platforms, as our financing capabilities become increasingly valuable. A prime example of this is our recent high-grade partnership with Air France, where we provided a tailored asset-backed capital solution to enhance liquidity and optimize borrowing costs. Apollo utilized our cross-platform expertise, including aviation, asset-backed finance, and multi-asset credit, to facilitate a long-term investment of €500 million. In private equity, our focus on downside protection, disciplined purchasing, and flexibility across diverse strategies enables us to pursue the best risk-adjusted returns in any market. The current market dislocation is presenting numerous unique opportunities to engage and is likely to serve as a significant advantage for our franchise. Our pipeline is currently three times larger than it was at the same time last year, and we anticipate committing a substantial amount of capital in the next quarters. The credit markets are more vulnerable to rising interest rates than ever, and we are proactively preparing for distressed debt investment opportunities. With the supply of sub-investment grade debt at three times the levels seen during the financial crisis, coupled with suppressed default rates for nearly 15 years, we believe many corporations will face the need to deleverage. Our financing tools are proving to be a key differentiator, allowing us to acquire companies at favorable valuations when many competitors struggle to transact. This was exemplified by the recent announcement of our acquisition of Atlas Air through a take-private transaction, valued at $5.2 billion. While most banks have effectively ceased new LBO commitments, we collaborated with our capital solutions team to create and anchor a preferred equity tranche that minimized the necessary debt commitment while enhancing potential returns and downside protection. This is just one of many examples illustrating how our ability to deploy capital in the current market environment is significantly bolstered by our integrated capital solutions business. It’s also worth noting that over the past year, we have strategically invested in this business and now have a dedicated team of approximately 40 professionals, aligning them with emerging growth areas across our platform. As Marc mentioned, this investment is beginning to pay off, as we recorded a record quarterly transaction fee of $105 million in the third quarter, with the majority arising from capital solutions fees. In this market environment, we are acting as a stabilizing force, providing liquidity in stressed segments and assisting our banking partners in navigating a backlog of stalled deals. While we recognize that transaction fees can vary significantly from quarter to quarter, we are optimistic about the strategic advancements we have made and remain confident in our team's ability to foster growth. The strong ecosystem of asset origination, capital deployment, and market connectivity is vital to generating the excess returns we aim to deliver for our clients. Our third-quarter results exemplify how the core principles of our investing philosophy, including purchase price discipline and downside protection, clearly distinguish us from our competitors. In a public equity market that declined by 5% in the third quarter and by 17% over the past year, our private equity portfolio maintained flat returns and achieved an 8% appreciation during the same periods. Revenue and EBITDA metrics at our funds' portfolio companies are significantly improving year-over-year, with active management of margin risk through cost-saving measures and price adjustments. Our hybrid value portfolio has also performed well, with a 1% appreciation in the third quarter and over 4% year-to-date. In our yield strategy, we focus on performing credit investments, aiming to provide sensible loans and receive repayment. Our corporate credit and structured credit strategies appreciated by 1% in the third quarter, while our direct origination portfolio saw over a 3% increase, reflecting disciplined credit assessment and superior asset selection. Athene's alternative portfolio yielded an 8% annualized return in the third quarter, benefiting from its historically diversified and defensive characteristics. Within this portfolio, origination platforms and strategic retirement service investments returned 12% and 4%, respectively, while fund investments returned 8%, driven by robust performance in real assets and increased cash flows from structured deals in our yield funds. Several attributes of Athene's alternative portfolio contribute to its resilience amidst challenging equity markets, including high current cash flow from origination platforms, structured underlying assets for faster paydown and amortization, and timely capital redeployment. These structural features provide downside protection during periods of public market volatility, which is increasingly valuable given today's market conditions. Regarding our fundraising efforts, third-quarter inflows of $34 billion were robust and diversified across our platform. Asset Management inflows amounted to $21 billion, which included $17 billion from third-party fundraising, notably from Fund X and our recently launched S3 platform. In late September, we commenced third-party capital fundraising for our non-traded REIT, Apollo Realty Income Solutions, or ARIS. As we approach the end of the year, we anticipate further healthy fundraising, including additional capital for Fund X and a successful equity capital raise for Athora. Thus far, we have assisted Athora in raising over €2 billion in new common equity this year, with strong potential to exceed €2.5 billion in the coming weeks. We believe Athora is exceptionally positioned to take advantage of significant near-term market opportunities in Europe, and this new capital will facilitate their strong pipeline for both inorganic and organic growth, allowing for continued rapid expansion. Concerning the ongoing Fund X capital raise, our discussions and due diligence with limited partners have been very positive, as our distinctive investment philosophy and solid long-term performance are differentiating us from other funds in the space. By the end of October, we had secured commitments of approximately $14.5 billion. Due to factors such as the denominator effect and the high number of general partners in the market this year, we have decided to keep the fund open until the first half of 2023 to accommodate our investors’ annual allocation strategies. We remain confident in meeting our target fund size of $25 billion, and importantly, all capital raised in the remaining months of 2022 or early 2023 will accrue fees back to the fund’s fee commencement date, which began on October 1. Shifting to our retirement service inflows, Athene achieved a remarkable quarter with record inorganic growth. The value proposition of principal protected, yield-focused products is increasingly appealing in the current market. Total inflows for the third quarter reached $13 billion, which included a record $6 billion from the retail annuity channel, driven by high demand for fixed-rate products. Expansion of our distribution within large financial institutions further contributed to this success. Flow reinsurance also benefited from these trends and achieved its second-best inflow quarter ever, aided by our growing partnerships in the Asia Pacific region. Importantly, the duration and stability of Athene's funding remain predictable, and there has been no noticeable change in customer behavior thus far this year. Before turning it over to Martin, I would like to revisit a discussion I presented at our Investor Day around a year ago. We see numerous growth opportunities adjacent to our existing businesses that can drive accelerated growth beyond our baseline targets. There are several large and expanding sectors, typically trading at higher multiples, where we have not historically engaged, such as fintech, life sciences, and software. Over the last 18 months, we have deliberately fostered strategically aligned partnerships with top-tier managers in these markets to broaden our platform’s expertise. Our investment in Motive, a fintech private equity firm, was our first venture into this growth area. This partnership has already yielded several tangible benefits, including proprietary investment sourcing, aiding in transaction due diligence for specialized sectors, enhancing retail distribution technology, developing product innovations with Apollo and Athene, and improving efficiency across Apollo's operational structure. More recently, we announced strategic financial partnerships with SoFi Nova, a leading European life sciences venture capital firm, and Haveli, a premier enterprise software and gaming private equity firm. We anticipate that these recent investments will yield as much success as our collaboration with Motive has achieved over the past year. With that, I’ll hand it over to Martin.
Martin Kelly, CFO
Great. Thank you, Scott, and good morning, everyone. Echoing Marc and Scott's sentiment this morning, this is the type of environment where Apollo really shines. Our key business drivers, including capital deployment, investment performance and fundraising, remain strong. Our financial results reflect continued momentum across our primary earnings streams. The stability, quality and recurring nature of our earnings power provide comfort in these volatile markets. Management fees accounted for more than 80% of fee-related revenue, both in the third quarter and year-to-date periods. We experienced only an estimated 1% annualized drag on our management fees quarter-over-quarter from market value declines. Importantly, fee and spread-related earnings accounted for approximately 95% of total pre-tax earnings in the third quarter. As Marc said, we're on track to meet our 5-year targets that we laid out at Investor Day last year, which includes more than doubling both FRE and total earnings. Starting with our AUM results, third quarter AUM reached $523 billion, increasing 2% quarter-over-quarter and 9% year-over-year. Inflows totaled $34 billion in the third quarter as we raised significant amounts of capital from both our asset management and retirement services clients. Total outflows of $10 billion in the quarter included $6 billion from normal course of same runoff, which increased from the prior quarter due to several expected funding agreement maturities, as well as the first of its kind partial repurchase of existing notes in an effort to tighten our trading spreads. Realizations of $10 billion included $6 billion related to the reallocation of a limited partner's existing mandate to other strategies. In a similar dynamic to last quarter, most of the third quarter negative market activity was driven by unfavorable forex translation from Athora's portfolio due to a depreciation of the euro. Moving to FRE, we reported third quarter fee-related earnings of $365 million as previously referenced or $0.61 per share, which increased 14% year-over-year and reflected continuing momentum in our results after increases of 3% and 7% in the first and second quarters, respectively. Amid turbulent markets, fee revenue growth exceeding 20% year-over-year was very strong and included 16% growth in management fees. On a sequential basis, yield management fees benefited from a full quarter of Griffin fees and the expiration of a 6-month fee waiver for the non-traded credit BDC we manage, Apollo Jet Solutions. ADS contributed an incremental $5.5 million to each of management fees and fee-related performance fees in the third quarter. As Scott noted, we turned on management fees for Fund X on October 1, at which point the fee base for Fund IX stepped down from committed to remaining invested capital at a slightly lower fee rate. The combination of these two events will be modestly accretive to our fourth quarter equity management fees, and we will benefit from higher run rates and catch-up fees with successive closes. In terms of expenses, comp and non-comp expenses increased on a sequential basis as expected, as the impact of growth in our headcount continues to run through our cost base. Overall, we have good visibility into fourth quarter results and continue to feel confident in meeting our $2.35 per share FRE target for this year. As we look to 2023, we still expect fee revenue growth of more than 20%, driven by revenue accretion from new strategic growth initiatives, robust organic inflows from our retirement services clients, fees from additional capital for Fund X and continued progress in our capital solutions build-out. With our period of accelerated investment spending to support our fast growing platform behind us, we expect to generate positive operating leverage next year as we move toward our long-term FRE margin target of 60% plus by 2026. With a very strong revenue growth outlook and moderating expense growth, we are targeting FRE growth of around 25% in 2023, above our multi-year compound annual growth target of 18%. Moving to our Retirement Services segment, we generated SRE of $578 million or $0.96 per share in the third quarter, which represents a net spread of 120 basis points as a percentage of average net investment assets. Normalizing our alternative returns to 11% and excluding certain notable items, SRE, as Marc noted, was $598 million in the third quarter, translating to a normalized net spread of 124 basis points. On a sequential quarterly basis, our normalized net spread increased by 9 basis points, driven by 11 basis points of net accretion from higher floating rate income and higher on-the-margin purchases due to rising interest rates, partially offset by 2 basis points of higher operating expenses. The quarter-over-quarter increase in our operating expenses reflects higher costs associated with building our platform capacity, and we view this as a reasonable run rate in the near term. We've been a beneficiary of this rising rate environment, with higher short-term interest rates generating approximately $100 million of incremental SRE from our net floating rate income in the first 9 months versus the comparable period of 2021, with $60 million of this increase or $0.10 a share in the third quarter. We expect this amount to rise further due to the timing of rate basis resets. This dynamic, as well as attractive deployment opportunities, should continue benefiting the underlying profitability of our Retirement Services segment, translating to an expected normalized net spread of approximately 135 basis points in the fourth quarter. Just to underscore the strength of Athene's business, a year ago, we laid out an indication of $3.35 per share of spread-related earnings this year. We expect to report closer to $4 per share, with three benefits: higher rates on the floating rate portfolio, organic growth exceeding our plans, and a favorable investing environment. Looking ahead to 2023, we expect this favorable interest rate uplift, coupled with robust organic inflow outlook, to drive above-average normalized SRE growth next year relative to our 11% multi-year compound annual growth expectations. Turning to Principal Investing, we reported PII of $50 million or $0.08 per share in the third quarter. Realized performance fees of $93 million were light, as expected, as we are being patient in monetizing investments to help maximize return potential for the benefit of our fund investors. Lastly, our business generates a substantial amount of free cash flow, and we expect to deploy $15 billion of capital through 2026 in strategic growth investments, funding the base dividend and both growing the base dividend and opportunistically repurchasing shares. In the third quarter, we spent approximately $200 million of capital on HoldCo investments to drive future FRE growth, as well as approximately $50 million on share repurchases. As a reminder, we spent $200 million on buybacks in Q2, and we would have engaged in additional share activity in Q3 if it weren't for restrictions during the quarter. Looking ahead, we expect to be more active in buying back our stock, particularly in times when, in our opinion, our stock is clearly undervalued. We remain comfortable with our strong liquidity position, including a net balance sheet value at the holding company of $2.1 billion or $3.50 per share, with cash and equivalents of more than $2 billion. In closing, I'd like to reiterate a central theme of our remarks this morning. We are very well-positioned to capitalize on a growing pipeline of opportunities in this market backdrop and generate excess return for our clients. A year removed from our milestone Investor Day, we are even more confident in our ability to achieve our long-term financial targets and are diligently executing against our attractive growth plan, aimed at benefiting all our stakeholders. With that, we thank you for joining the call, and we'll open up for questions.
Operator, Operator
Our first question comes from Patrick Davitt of Autonomous. Please go ahead.
Patrick Davitt, Analyst
Hey, good morning, everyone. I have a follow-up question on the Wealth Management business. I appreciate all the color, Marc, you gave us there. Could you give us a little more specifics on how the flows looked in all those major products in 3Q versus 2Q? And then more broadly, are you still confident in the ability to launch one or two products a quarter, ramp that business through much more volatile markets?
Scott Kleinman, Co-President
Yes, hi. This is Scott. So, yes, flows have actually been building quite nicely. As we had told you, we expected about $6 billion of inflows this year, the first year of our global wealth activities. And it's been building steadily quarter-on-quarter. So we feel quite good about that number, likely exceeding that number. That has been coming in through ADS, as Marc talked about. This quarter, we launched AAA. We just launched ARIS, our real estate product. And then, of course, some of the drawdown funds that are working through this global wealth system as well, namely Fund X, has been moving forward. So we continue to go quite well in that area. We do have some exciting launches early next year. We've talked to you about our ensuring that products that we'll be launching next year as well as a couple of others that will be coming more midyear. So yes, feeling very good about where we are going. Really, our first year in earnest in the global wealth channel has been a real success.
Operator, Operator
Thank you. Our next question comes from Michael Cyprys of Morgan Stanley. Please go ahead.
Michael Cyprys, Analyst
Hey, good morning. Thanks for taking the question. I wanted to circle back to some of the comments Marc you had made, and Scott as well. Marc, you had referenced the U.K. market hiccup as maybe being the first of many. I was hoping you might be able to expand on that, what you see potentially coming, where the next pickup might arise, what might cause that, and how Apollo might be able to capitalize on that opportunity? And then, Scott, you mentioned about distressed investing, that you're preparing for that. Can you maybe just expand upon your outlook and how you see that playing out this cycle?
Marc Rowan, CEO
Why don't I start on the macro side, and then I will let Scott add some color. So if you go back to Dodd-Frank and the changes that happened in our system, beginning in 2008, one of the changes that happened was an increase in the, I will say, penalty of the cost of providing trading capital. By our estimate, we have roughly the same amount of market-making capital in the system today as we had in 2008, with markets significantly larger. One of the things we're seeing across every market is a decrease in liquidity. This is not just a structured product phenomenon; this is a treasury market. There was an article yesterday talking about that. And as I like to say to our clients, we now are in a market where there's only liquidity on the way up. There is not liquidity on the way down. The public markets are less liquid. The private markets are more liquid. As a result, when you have short-term capital calls or short-term phenomenon, you end up with all manner of market-based kind of illiquidity, particularly when everyone is looking for the same door at the same time.
Scott Kleinman, Co-President
Yes. Let me expand on what Marc mentioned. While we can't precisely predict the movements, 14 years of 0% interest rates have led markets to adopt increasingly leveraged strategies to seek yield and returns. Now that we are in a rising rate environment, those leveraged trades will need to unwind simultaneously. The LDI transaction I referred to was not fundamentally flawed; it simply involved the most liquid asset those entities could sell to address their leverage and margin challenges. These situations illustrate the importance of being prepared and having the breadth and scale of our platform to capitalize on opportunities when we notice these cracks in the market.
Marc Rowan, CEO
You have to, again, appreciate. We've lived in 10 years of a benign environment, with increasing liquidity and low rates. This mismatch of daily liquid products, with non-daily liquid assets, is across our financial system. We saw it in March of 2020, at the beginning of the pandemic, where it happened in open-end mutual funds and ETFs. We've now seen it in LDI. We will continue to see that because I step back again to the macro. Our system is designed today such that things are only liquid on the way up. They're not liquid on the way down. If you have any sort of event where investors all run for the same door at the same time, there is no longer the dealer capital in the system to serve as a buffer to allow for usual price expectations. To be willing and able to participate in that market, you have to have not done something over the past 10 years. You have to have not fully invested your balance sheet, fully deployed your capital, trying to maximize your earnings in a period that was very easy to try and do that. Many investors, many institutions today are offside. They are essentially fully deployed. I think about the insurance industry and the publicly traded insurers over the past decade. U.S. and Europe have raised closer to 0 than $1 billion of capital and have paid out roughly 90% of their current market cap as dividends. This means people are not overexposed, but they're not in a position to be net buyers in large sizes on market dislocation. We try to run our European, our U.S. business and our fund businesses such that in the once-a-decade or once or twice-a-decade opportunity, we can be really large buyers of mispriced risk. To do that, you have to be patient every day. The hardest thing to do in running a competitive investment firm is not to chase the hot dot, but to just sit and do nothing and wait.
Scott Kleinman, Co-President
And Mike, just to quickly answer your distressed question. As you look at the credit markets right now, if you were to look at the indexes per se, we are certainly not in distressed territory yet. Although, name by name, you are starting to find some interesting situations moving in that direction. Fund X has started to accumulate positions in a few names so far, but our watch list stretches into the hundreds. The key to successful distressed investing is to be ready. When the markets move, they move, and you can't start analyzing your names and your credits at that moment. You have to have a fully built-out investment thesis around which names, where in the capital structure, or what prices you're interested in investing. Our teams are, at this point, fully built up and prepared, awaiting for those moments to happen. Nobody has a crystal ball, but we will probably roll into early next year when you start to see that happen.
Operator, Operator
Thank you. Our next question comes from Finian O'Shea of Wells Fargo. Please go ahead.
Finian O'Shea, Analyst
Hi. Good morning. Thank you. A question on the Credit Suisse SPG business. Can you talk about the potential or expected impact to your direct origination volumes?
Marc Rowan, CEO
It's Marc. I think it's too early to say what direct origination volumes would be. But I will come back to what I see as the macro opportunity, and this is how I frame the opportunity. Dodd-Frank, sufficient in the accompanying regulatory reform in Europe, shrunk the size of the banking system, making more of the banking systems products investment products. The way I see U.S. consumers and companies banking today is through the structured products market, through people like us and like Credit Suisse. I believe that the structured product market can be the size of the corporate credit market. For us, this is a slice of it. This is the top of the capital structure, generally AAA, AA, and it has relationships with 200 different entities. The transaction will initially be funded by ourselves and by PIMCO. It is our job not just to take something that is already of size and scale, but to grow it from there. I think it's early to predict how much origination will come out of this. Suffice it to say, it is going to be up to us to build a franchise around this and to retain the clients and the people necessary to go do that. But we are very optimistic, and we would not have leaned in with all of the resources that we did if we didn't think this was a needle mover with respect to our origination capability.
Operator, Operator
Thank you. Our next question comes from Rufus Hone of BMO. Please go ahead.
Rufus Hone, Analyst
Hey, good morning. Thanks very much. I was hoping you could spend a minute on AAA specifically. You mentioned last quarter that you think this has the potential to be the largest single product or fund for Apollo. How are your conversations progressing with institutions, and what do you still need to do in order to get this into the retail channel? When could we start to see flows from retail come in? Thank you.
Marc Rowan, CEO
We launched with about $10 billion from Athene, $1.5 billion from SuMi TRUST, and $3.5 billion from other institutional commitments. I don’t have the exact number from global wealth and retail, but it's around $200 million to $300 million. I anticipate that we could exceed $500 million to $600 million in new money by the end of the year. We are now accepted for wealth distribution channels on several platforms, focusing on the first quarter, and I expect to see growth in 2023. It’s now our responsibility to present a product that we believe is valuable, explain it to the market, and demonstrate its success. The onus is on us. Looking at the bigger picture, we are providing investors with alignment alongside us for minimal or no additional fees on a fully diversified portfolio without a J-curve, allowing for 5% liquidity each quarter, while we do not have that same liquidity. Initial discussions have been very positive, but it’s essential for us to execute effectively.
Operator, Operator
Thank you. Our next question comes from Alexander Blostein of Goldman Sachs. Please go ahead.
Alexander Blostein, Analyst
Hey, good morning, everybody. Thanks for the question. I wanted to circle back on the capital return philosophy. The platform has gotten much bigger, you guys are exceeding your near-term earnings expectations and the excess capital continues to build. So I guess, near-term, I think Martin, you mentioned that you guys were blacked out in the quarter, and that's one of the reasons why you couldn't do much for buybacks. Was that for Credit Suisse or something else? More importantly, as you look out into 2023 with the dynamics that I mentioned, what are your expectations for total payout between dividends and buybacks? Thanks.
Martin Kelly, CFO
We faced restrictions that limited our ability to buy back stock this quarter, resulting in only a minimal amount. This year, we've invested approximately $1.8 billion in dividends and strategic initiatives, which included around $200 million in buybacks during the second quarter. We're working towards expanding our investment capacity to $15 billion over time. To utilize that capacity, we need to have ownership. As we assess our capital allocation, Athene's growth is outpacing our expectations. Each dollar of growth at Athene significantly enhances our financial results. Additionally, a dollar spent on stock buybacks is also beneficial given our earnings outlook. You can expect us to pursue both avenues simultaneously. We recognize the importance of maintaining a balance, particularly considering how equity investments can leverage our earnings without requiring additional capital. Early next year, we will provide further details on our capital return plans. Meanwhile, we aim to focus on growing Athene, which is highly beneficial, while also continuing stock repurchases and exploring strategic growth opportunities across the system, similar to our actions this year.
Operator, Operator
Thank you. Our next question comes from Brian Bedell of Deutsche Bank. Please go ahead.
Brian Bedell, Analyst
Good morning, everyone. Similar to the previous question about Apollo Realty Income Engine Solutions, could you explain how this new non-traded REIT product will stand out in a market that's seeing an increase in similar offerings? Additionally, what are your thoughts on the current risk-averse behavior being observed in retail? How are these discussions being received? Do you believe that a shift towards risk-taking is necessary to boost sales in the retail sector, or do you think your unique positioning will naturally lead to organic growth?
Scott Kleinman, Co-President
Yes. This is Scott. I will answer both of those. On the real estate product, we believe we do. Like every investment product we have, Apollo takes a slightly different approach than the rest of the market. A more value-oriented purchase price matters approach really seems to be early resonating with some of the channel partners that we've been talking to as we get this product launched. So I actually do think we have a differentiated product that should start to gain some real traction. As far as the market itself, the Global Wealth and retail market, look, fortunately for us, we are starting our journey this year in many of these products. We have only one direction to go, which is up. We do know that others have reported some suppressed or depressed volume levels, that's not what we are seeing right now. We are moving in kind of an up and to the right type of trajectory. I think it also helps the fact that we are building these portfolios today in a '22 rate environment and asset value environment, where we are not loaded with what I'll call, top of the market, huge asset purchase at the top of the market in '20 and '21. Investors see that as a real opportunity to put dollars to work. So all in all, like I said, we feel really good about where we are headed, albeit starting from a much lower base than others.
Operator, Operator
Thank you. Our next question comes from Benjamin Budish of Barclays. Please go ahead.
Benjamin Budish, Analyst
Hi there. Thanks for taking my question. I wanted to ask about the disclosure regarding the annualized outflow rates in the insurance business. It seems that the policyholder-driven withdrawals have not changed in the quarter and have remained consistent over the past 12 months. I'm curious about how this compares over a longer time frame. You also mentioned some seasonality with the maturity-driven contractual outflows. Should the normalized rate resemble the 2.5 we observed over the last year? Any insights on that would be helpful. Thank you.
Martin Kelly, CFO
Yes, Ben, you're exactly right on the first piece. I think of this as sort of contractual or within our control as one category. That will be more volatile. Then there's policyholder driven, which is sort of behavioral. We had a 7% annualized rate in the quarter. We had a 7% annualized rate for the last 12 months. It’s in line with our plans. Policyholders access their policies to get cash for various reasons, that's just part of the business. We are not seeing any real change in that relative to history or our expectations, and that's the higher focus point. The contractual is a combination of both some particular funding agreements maturing. We were in the market, as I mentioned, buying back funding agreements during the quarter, which was sort of a decision that we made. Funding agreements tend to have a shorter duration to them. You do need to be in the market issuing funding agreements, and we will access that more fully when the market is available. We much less concerned about that. That's a market where we're a leader in, and we've got good names and spreads. We've provided that extra disclosure on behavioral surrenders to provide more clarity and sort of comfort around that piece of the outpost.
Operator, Operator
Thank you. Our next question comes from Gerald O'Hara of Jefferies. Please go ahead.
Gerald O'Hara, Analyst
Great. Thanks for taking the question. Perhaps a tough one, but clearly a strong quarter from a transaction fee environment or a transaction fee, I guess, reported number. Is there anything you can sort of give us a sense of where the baseline for this might be? Or perhaps just kind of what to look for in terms of kind of puts and takes from a backdrop in the environment to kind of help us build this on a go-forward basis?
Scott Kleinman, Co-President
Yes. As I mentioned in my prepared comments, transaction fees naturally fluctuate. However, I view this more as a steadily increasing trend. In any given quarter, I can't specify exactly when a transaction will close, but I am confident that, given the scale and breadth of our operations, we are significantly increasing our volume and capacity to earn and generate fees. We are observing that upward trend. We set a 5-year target of $500 million in revenues and expect to reach about $400 million this year. Therefore, we are progressing up that trend more quickly than we had anticipated, and I expect that momentum to continue. While it's impossible to predict any specific transaction in any specific quarter, as our operations expand, we certainly see that upward trend.
Operator, Operator
And that concludes the Q&A portion of today's call. I will now return the floor to Noah Gunn for any additional or closing remarks.
Noah Gunn, Global Head of Investor Relations
Great. Thanks, everyone, for joining us this morning and for your continued interest in Apollo. If you have any questions on anything we discussed on today's call, please feel free to reach out to us, and we look forward to connecting with you.
Operator, Operator
And this concludes today's conference call. Thank you for participating. You may now disconnect.