Earnings Call Transcript
Apollo Global Management, Inc. (APO)
Earnings Call Transcript - APO Q1 2021
Operator, Operator
Good morning and welcome to Apollo Global Management's First Quarter 2021 Earnings Conference Call. During today's discussion, all callers will be placed in a listen-only mode and following management's prepared remarks, the conference call will be open for your questions. 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 solicitation of an offer to purchase any interest in any Apollo Fund. I would now like to turn the call over to Peter Mintzberg, Head of Investor Relations.
Peter Mintzberg, Head of Investor Relations
Thanks operator and welcome to our first quarter 2021 earnings call. Joining me this morning are Marc Rowan, CEO and Co-Founder; Scott Kleinman, Co-President; and Martin Kelly, CFO and Co-COO. I would like to turn it over to Marc to kick off our comments for today.
Marc Rowan, CEO and Co-Founder
Good morning. Thank you, Peter, and welcome everyone. The first quarter of 2021 was strong for Apollo, featuring record FRE of 287 million, or $0.65 a share, which is up 26% year-over-year and 4% sequentially. We achieved total inflows of 13 billion, driven by 5 billion from fundraising and 4 billion from Athene's organic growth. Our AUM stands at 461 billion, an increase of 145 billion year-over-year, 46% year-over-year, and 6 billion quarter-over-quarter, reflecting the inflows and 9 billion in positive marks on the private equity portfolio, despite some reductions in yield portfolios at Athene and Athora due to rising rates and changing Euro positions. Our opportunistic businesses performed particularly well as they are well-positioned for a strong recovery in the U.S. and Europe. The private equity portfolio increased by 22%, compared to the S&P at 5.8%. Scott will provide more details on deployment and realizations, and Martin will cover the financials. As I mentioned on our last earnings call, I have some straightforward observations regarding our business and strategy. We are in a growth business, and this quarter's year-over-year results confirm that. We offer a product that is highly sought after, providing excess returns to investors on a risk-adjusted basis. Our market is expanding, primarily driven by the need for retirement income. We serve this market directly via our Athena and Athora affiliates and indirectly through institutional clients, including pension funds, retirement systems, sovereign wealth funds, and others. Demographic trends, such as an aging population, low rates, and the increasing need for retirement income suggest that our business will continue to improve over time. We recognize our fortunate position in this growth sector. If we examine our largest segment, the yield business, which comprises over 330 billion of our AUM, its growth is limited not by capital or liabilities but by assets, a limitation that is only temporary. Our strategy is to enhance our ability to generate assets that offer attractive risk-reward profiles for this segment. In our hybrid and opportunistic businesses, there's a more balanced distribution; some strategies still have room to expand by increasing access to capital due to their strong front-end performance. Apollo’s unique value proposition lies in our ability to consistently generate excess returns across a wide risk-return spectrum, from investment grade to private equity. Over a long time frame, our private equity returns illustrate this remarkably well; for instance, our 31-year gross return is 39% and net is 24%, with all core private equity funds generating carry, which far surpasses top quartile PE performance. It's not about any single fund or investment cycle; it's about the discipline within our franchise and our overall approach, which Scott will further elaborate on regarding recent fund performance and our opportunistic businesses. In our yield business, Athene serves as a prime example of our ability to generate excess returns. Since its inception over the past decade, Athene has maintained a ROE of 22% in its insurance operations and an average of 15% on a consolidated basis, greatly exceeding comparable companies or indexes. Against this backdrop, this quarter focused on reinforcing our strategy, enhancing our capacity to generate additional assets, and positioning ourselves for faster growth. A key milestone this quarter was our agreement to merge with Athene, a move that significantly strengthens our position in the retirement income market, adding nearly a million clients with an average age in the high 60s. This merger enhances our capability and coordination to develop yield platforms through closer alignment between Apollo and Athene. Reflecting on our past achievements while not fully aligned, we've excelled in mid-cap corporate credit, triple-net lease ventures, aircraft finance, and other structured products, and I'm excited about our potential with full alignment. In our hybrid and opportunistic sectors, this merger enhances our ability to access products and teams, launch new funds, and improve our market entry speed. Historically, we've seen this with initiatives like our hybrid value fund and infrastructure fund. This merger also strengthens our connections to various distribution channels, including retail banks, independent broker-dealers, and other wealth management channels. These distribution avenues are significant growth sources for us as we anticipate 2021 to be a record year in these channels, even prior to closing the Athene transaction. The merger is not the sole action we took this quarter to bolster our strategy; we've also made notable strides in our high-grade alpha business. Apollo has developed a unique platform to provide capital to large corporations globally in the investment-grade market. Our ability to offer creative and semi-liquid solutions has enabled us to execute multi-billion-dollar transactions quickly as a sole counterparty to these corporations. Alongside our partners and our 400-plus investment professionals, we expect to generate 15 billion to 20 billion in these transactions throughout 2021. Additionally, we launched our Credit Secondaries business this quarter, leveraging our insurance affiliates' interest in this asset class within the rapidly growing private credit secondaries market. This fund represents one of the pioneering efforts in this fast-evolving space, and we anticipate raising substantial capital for this strategy as we enhance our general partnership solutions capabilities. In summary, this is a year of investment for us. We aim to set up the business for accelerated growth over the next five years, and Scott will outline the investments we're making during 2021 in his remarks. Beyond the business's financial aspects and strategic direction, we have initiated governance changes as discussed during my initial conference call. We are implementing a simplified and more transparent corporate structure that we believe will enhance our eligibility for S&P index inclusion. In closing, our business is performing exceptionally well, and I’m optimistic about our growth trajectory. I want to extend my gratitude to over 1,700 Apollo employees worldwide, including 59 new hires in Q1, who have worked tirelessly to achieve these results. Culturally, our senior management team is committed to authentically discussing our capabilities and making a meaningful impact. We are dedicated to expanding access to opportunities, especially for broader segments of society. We can achieve this at Apollo as well as through our portfolio companies. More updates on this will be provided soon. Our commitment to citizenship, diversity, equity, inclusion, and ESG is central to our value proposition and we continue to raise awareness on these critical issues. In January, we received a perfect score of 100% from the Human Rights Campaign Foundation for being the best workplace for LGBTQ equality. Recently, we announced a significant donation to United Way India's Partner Act to deploy crucial medical equipment to those in need. Our thoughts are with the Apollo community in India and their families affected by the crisis. Now, I will turn it over to Scott.
Scott Kleinman, Co-President
Thanks Marc and thank you all for joining us this morning. As Marc mentioned, Apollo differentiates itself by the ability to generate excess returns across the entire risk-reward spectrum. In this quarter, we again demonstrated the strength of this proposition across our platform. When I think about the overall performance of the business, I break it down into five key factors; finding good investments to deploy capital, having the portfolio accrete and value, monetizing our investments, raising more capital, and investing in and growing both our existing platforms as well as our new ones. So far in 2021, Apollo has made very good progress across all of these areas. So let me get through them one by one. Regarding deployment, our ability to find attractive returns at all points along the risk spectrum shines in an environment like the one we're in now where valuations are seemingly high for private equity and yields are painfully thin for most credit products. Total deployment for Q1 was 24.9 billion. Our private equity funds deployed 2.4 billion in capital in the quarter. Additionally, we committed to deploy a further 3.3 billion in the quarter driven by two large Fund IX investments Michaels and the Venetian. And since quarter-end, we've continued to commit to significant additional transactions. We continue to see a strong recovery in the economy, particularly in those sectors hardest hit by COVID such as leisure, travel, gaming, and specialty retail and we continue to invest in those spaces. Our hybrid value business continues to be active with over $0.5 billion deployed in the quarter. Strong deployment of 19.1 billion in our credit business in the first quarter was in line with fourth-quarter levels and includes strong insurance balance sheet growth on insurance inflows and pension risk transfer transactions. With spreads tight, others are going down in quality to earn returns but we've been moving up in credit quality and finding our returns through superior asset selection and origination. This will set us up well in the future. We're preparing for, but not predicting higher rates to come. Our initiative to seek increased high-grade alpha origination transactions continues to grow and has a robust pipeline. We continue to see substantial opportunities to provide capital and funding solutions to corporations and financial institutions globally with the ability and expertise to find innovative solutions and structures. Also, we are now fully in the European direct loan market committing to $1 billion in the first quarter. This is a space we weren't present a year ago. And lastly, JCPenney has agreed to transfer 2.8 billion in pension obligations for roughly 30,000 participants in JCPenney's pension plan to Athene as part of a pension transfer transaction. Athene utilized its strategic capital vehicle ACRA to support the completion of this transaction. In terms of value creation this has been an exceptional quarter for Apollo. Marc just mentioned our very strong track record in private equity for over 31 years. We continue to show that we have an ability to find attractive returns in any market environment. We continue to believe that purchase price matters and we will utilize our expertise to creatively source structure and optimize assets, adding value in partnership with our growing in-house operations team of experts. This can clearly be seen in our most recent and largest funds Fund IX. We're seeing very strong performance in this fund with the current marks up 33% leading to an IRR of 49% gross, 26% net, and a MOIC of 1.7 times. While we expect these numbers to converge over time towards historic levels, we see the results as a validation of our investment expertise and of the fact that this continues to be a very high return business, if done the right way. In a market characterized by indexation, correlation, and volatility, Apollo's investment discipline really stands out. During the quarter our overall private equity segment appreciated by 22% as compared to the S&P at 5.8% driven by exceptionally strong performance across our funds public and private holdings. Fund VIII and Fund IX appreciated by 19% and 33% respectively, driving an increase in the net carry asset to $3.04 per share up from $1.82 per share in the fourth quarter. Importantly, Fund VIII returned to paying cash carry and the netting hole of the funds has been eliminated. Fund VIII is now marked at a multiple of invested capital of 1.8 times and we expect it to continue to grow and create value as the portfolio matures. As a reminder, Fund IX crossed into carry in the fourth quarter of last year and as of the first quarter, it is in full carry. Our hybrid value fund is delivering strong performance with gross IRR of 31%, 25% net, and MOIC of 1.3 times. We also experienced strong performance with our infrastructure equity fund in the quarter up 15%. In credit, our funds aggregate portfolio returned 4% during the quarter, 1.9% above the benchmark. Notably, our global corporate credit business generated a 3% total return in the quarter, reflecting over 80 basis points of outperformance to its benchmark. In addition the performance of structured credit exceeded the index by approximately 400 basis points for the quarter and our credit strategy fund generated 5% in the quarter, 150 basis points above its index. Our strong credit performance has been driven in part by the excess spread we've been able to generate for our insurance and other clients, which stems from our differentiated and expanding origination capabilities. Regarding realizations, we saw a strong monetization of our investments with $3.7 billion of capital returned to LPs in the first quarter. The total capital return to LPs over the last 12 months adds to $10.4 billion. We announced several large transactions this quarter, including the highly successful IPO of Sun Country, a Fund VIII portfolio company, the merger of Tech Data, a Fund IX portfolio company with Synnex, the sale of AmeriHome owned by Athene and several Apollo Funds to Western Alliance, and NGO Energy Partners through our yield business. We have a strong pipeline and expect to continue generating strong monetization for our investors. On fundraising, this quarter we raised a significant amount of capital from third party investors near the high end of the $15 billion to $20 billion annual range we have discussed in the past. All in all, we've made great progress with our investors over the quarter and for the most part they have been incredibly supportive of all the recent changes at Apollo. We have several fundraising capital in the market now and closed on $4.8 billion in the quarter. In addition, we saw inflows of $4.2 billion from our insurance affiliates with total inflows for the quarter of $13.4 billion. We also see a huge opportunity to expand our distribution in the wealth management channel and are building now the capability to do that. We are confident in our fundraising targets for the year and have already raised over $2 billion since quarter-end. Lastly, with respect to investing in our platform and growth, to echo Marc's comments, we see incredible opportunities to accelerate growth and are investing in the business. It is an exciting time to be in the asset management business. Capital flows are concentrating towards a select few players who can provide the breadth of products and services that investors are looking for and that trend is only accelerating and creating new winners and losers. We see an enormous opportunity ahead of us and we're planting the right seeds to take advantage of many of these growth opportunities. We're adding over 400 employees this year across all parts of our business. We're growing our core product teams and building capabilities to scale our platform and increase our ability to generate excess returns across several areas, including infrastructure, impact investing, credit and GP Secondaries, direct origination, capital markets and syndication, and SPACs just to name a few. As we build these growth engines we're also continuing to build the enterprise solutions teams to support this growth. We're confident, confident that this type of investment will produce at least mid-teens growth in FRE over the long term, with some fluctuations between low teens and high teens, depending on investment opportunities in any given year. We believe the path forward is bright for Apollo and we're excited to continue on this strong trajectory. I speak for the entire management team in expressing our gratitude for our deep bench of talent who've come together to drive the success that we've experienced so far this year. So with that, I'll turn it over to Martin.
Martin Kelly, CFO and Co-COO
Great. Thanks, Scott. For the first quarter, Apollo recorded exceptional results across all relevant financial and operating metrics. Our GAAP net income to common shareholders was $670 million or $2.81 per share in the first quarter, as compared with $0.44 per share for the full year 2020 and $3.71 per share for the full year 2019. We generated record FRE of $0.65 per share on a pretax basis, up 26% year-over-year and 4% quarter-over-quarter, driven by growth in management fees and an uptick in FRE performance fees related to our CLO manager. Management fees grew 3% over the prior quarter and 17% over the first quarter of 2020, driven by growth in fees for investing the assets of our insurance clients and deployment across our platform broadly. Transaction and advisory fees were $56 million in the quarter, driven by capital solutions transactions and private equity activity. Though this represents a more normalized level than in recent quarters, it is nearly double the pre-2020 quarterly average, up 51% year-over-year and is more representative of the run rate we expect as our origination business further scales. Compensation expense was flat over the prior quarter. However, we expect this to grow over the next few quarters as we continue to invest in the growth initiatives that Scott outlined. Non-compensation costs fell 21% over the prior quarter as a result of both the seasonality and the absence of any one-time items. As a reminder, in the fourth quarter, non-comp was elevated due to costs related to the independent review. For the first quarter, we announced a dividend of $0.50 per share and after-tax distributable earnings of $0.66 per share, supported by both our strong pre-tax FRE and net incentive earnings of $0.10 per share. After-tax distributable earnings of $294 million were up 78% over the first quarter of 2020 and reflect the return of Fund VIII to paying cash carry. Turning to AUM, we ended the first quarter at $461 billion up $6 billion quarter-over-quarter and $146 billion year-over-year. Inflows totaled $13 billion for the quarter reflecting robust fundraising of $5 billion for numerous strategies across the platform, organic growth at Athene, and growth in our CLO platform. The third-party capital raised in the quarter is an indication that our relationships with LPs remain strong and we expect the majority of capital raised headwinds to now be behind us. For the first quarter fee generating AUM fell nominally due to interest rates driven markdowns on Athene and Athora’s balance sheets. However, fee generating AUM grew 43% year-over-year supported by continued inflows and capital deployment. The impact on management fees of the markdowns of these balance sheets is largely reflected in the first quarter numbers and represents approximately 1% of management fees on an annualized run rate basis. While higher rates do reduce management fees on Athene’s existing assets, we believe that higher rates are a net positive for Athene and Apollo given increased origination volumes and an ability to earn higher income on deployment into new assets. Turning to incentive realizations, we recognized $107 million of gross performance fees for the first quarter, primarily related to monetization activity in Fund VIII and our hybrid value fund in our private equity business. As Scott mentioned, the impairment netting hole in Fund VIII has been eliminated as of the end of the first quarter, driven principally by secondary transactions of One Main, and Sun Country. Fund VIII has a multiple of un-invested capital of 1.8 and a current gross and net IRR of 18% and 13% respectively. The callback obligations of $0.17 per share that we report in our earnings release are related to older legacy funds, including Fund V and some older credit funds and specific to those funds and not cross collateralized across other funds. We do not expect these callback amounts, if materialized, to become cash obligations for at least several years from now. Deployment in our drawdown funds was $2.7 billion in the first quarter and our pipeline across the platform remains robust as we have significant equity commitments on announced transactions in our private equity business. Our broader measure of deployment, which reflects the breadth of our origination business was again strong at $25 million in the first quarter. Deployment was driven by strong growth in insurance clients, including repositioning the assets acquired from Jackson, investments in our syndicated loans business, as well as middle market and commercial real estate lending activity. Now dry powder for investments across our fund complex was $50 billion at the end of the quarter of which $24 billion has the potential to drive management fees upon investment. Apollo remains in a very strong liquidity position with approximately $1.7 billion of liquidity available on our balance sheet. Our net economic balance sheet value after debt and preferred stock was approximately $8 per share at March 31, up over $3 quarter-over-quarter primarily due to an increase in our total net performance fees, as well as an increase in value of our investment in Venerable, our variable annuity platform related to a transaction with Equitable. To echo Marc and Scott, we're very pleased with our first quarter earnings, driven by exceptional investment performance, growing fee earnings, and continued deployment and realization activity across the platform. We look forward to further accelerating growth in our platform, including via our announced merger with Athene and creating a corporate structure which will create flexibility to allocate capital to further growth at any of our businesses, which are returned to shareholders. Lastly, we understand the desire for more specifics surrounding the announced merger with Athene, including performance segment financials and we look forward to providing that to you in conjunction with an Investor Day which we can anticipate holding in the fall. With that I'll turn the call back to Peter.
Peter Mintzberg, Head of Investor Relations
That concludes our remarks for today. Operator, please open the line for questions.
Operator, Operator
Our first question comes from Bill Katz with Citigroup.
William Katz, Analyst
Okay, alright, thank you very much for taking the questions this morning. I was wondering if you could maybe start with maybe flushing out a little bit of the incremental spend into the retail channel, what that might look like, and then how quickly you think you could maybe leverage some of that investments?
Martin Kelly, CFO and Co-COO
Sure. So as you probably understand, the retail channel is somewhat different than the traditional institutional channel, and requiring additional sales force, additional product development, and that's really the crux of it, investing in that space to support both existing products as well as new products to flow through those channels. So that's really the crux of the investment.
William Katz, Analyst
Okay. Marc, I wanted to follow up with you about the opportunity to invest in the investment grade. Could you elaborate on that? It seems like a significant opportunity this year, but I would appreciate your insights on the broader opportunity set and how the economics compare to the existing portfolio.
Marc Rowan, CEO and Co-Founder
Well, a lot there Bill, I'll do my best. First, if you step back and think about what we're trying to do, the yield business that we have built, you should think of as a fixed income replacement business, rather than an opportunistic credit business. We liked that notion because what we're doing is we're trying to provide to our clients Athena, Athora, as well as our third-party clients and credit funds 150 to 200 basis points of excess return around the high-end, particularly the investment-grade end of that fixed income marketplace. The way we do that is not by taking incremental credit risk, not by taking equity risk. We derive that return from two factors; one is structure, and the other is the willingness to accept illiquidity. For a regular way plain vanilla transaction, issuers will go to the investment-grade market, the corporate market in a very methodical, easy to access way and there is not excess return. But if you look at the end of last year, and you look at the Hertz transaction, you look at the ADNOC transaction and you look at the Anheuser-Busch bottling transaction what you see are three different issuers, all approaching different problems, all in the investment-grade end of the spectrum that required a solution. We are one of the few participants who have the size, scale, and capacity to take down sizeable investment-grade transactions. And so that is what we are seeking to do. I mean, the most fundamental we want 150 to 200 basis points of excess return over the comparably traded public IG, and we're willing to provide flexibility and structure and willing to accept the liquidity. This is a role that Q4 might have been provided by some of the largest banks or investment banks and I think increasingly we will get our share of this marketplace and it represents a very attractive marketplace and fits very synergistically with all that we do in fixed income replacement given that we cover a very large swath of the investment-grade market anyway. It's a very different business than the peer set as a result of our unique client base.
Operator, Operator
Our next question comes from Craig Siegenthaler with Credit Suisse.
Craig Siegenthaler, Analyst
Thanks. Good morning, everyone. I had several follow-ups with on the merger with Athene. So my first one was, do you know how GAAP will treat the Athene management fees after the merger is closed?
Martin Kelly, CFO and Co-COO
Yes. GAAP, like in everything else will eliminate all intercompany transactions.
Craig Siegenthaler, Analyst
Got it, got it. And then are you going to continue to report distributor earnings after the merger closes and will it include total earnings from Athene as life insurance, free cash flow, and GAAP earnings don't always match up?
Martin Kelly, CFO and Co-COO
We'll provide a detailed overview based on our best estimate of how we plan to report, which is available in our lens deck on our website. We expect to report our management view financials in line with standard practices in the industry and the wider financial services sector. Specifically, the fair value of management fees will be shown on the asset management side, while the yield, minus the cost of these management fees, will be reflected on the insurance side. At this time, we also plan to continue reporting DE, and as indicated in our lens deck, we are considering the inclusion of an additional operating line focused on retirement services.
Craig Siegenthaler, Analyst
Great. Thank you.
Operator, Operator
Our next question comes from Patrick Davitt with Autonomous Research.
Patrick Davitt, Analyst
Hey, good morning everyone. My question is on kind of how to think about capital return post-transaction. With Fund VIII kind of through the netting hole now it's clear, obviously the cash realization outlook for the kind of legacy Apollo businesses looking increasingly strong. So with Athene’s cash flow theoretically enough to kind of fund their growth, do you have any thoughts around the use of the excess cash likely to be generated from this very strong realization outlook on the legacy Apollo business?
Marc Rowan, CEO and Co-Founder
So I'm going to give you a broader answer, it's Marc and if it doesn't suffice, you'll have to follow-up. So Apollo itself, just the asset manager is a highly cash generative business. As you know, we have announced the reset of our dividend to initially $1.60 per share, which we've said will grow along with the growth in the business. Just on that basis the distributable earnings of Apollo more than covers the dividend and makes it very clear that the Apollo business is very cash generative. Your starting point on Athene I believe to be too conservative. If you look back in history, Athene has actually distributed an immense amount of capital. They've just not distributed it as dividends, they've done it in terms of buybacks. They've distributed, I don't have my notes in front of me, but call it 1.250 million plus or minus over a period of time. So now you have to step back and think about how Athene produces cash on a go-forward basis. Athene as you've said yes, it finances its own growth, but it also starts in a different place. It does not start at zero. Athene starts with 5.2 billion of excess equity capital, which is approximately 3.8 billion of excess equity on Athene’s balance sheet plus 1.7 in a just-in-time LP driven side-by-side funding vehicle called ADF. In addition, Athene has less than 15% debt to cap whereas its AA peers would have about 25% debt to cap again, approximately another 2.5 billion. So Athene starts with about 7.5 billion to 8 billion of excess deployable capital and what you're also watching is a maturation of the structure. The business rolling off Athene is generally business that is rolling off that was financed 100% with Athene’s capital. That's how Athene began life. The business going on the books is generally going on the books, particularly the inorganic and PRT business, but likely over time the totality of Athene’s business will be approximately one third of Athene’s capital, and two thirds ADF capital. What we have tried to do is balance, is to take what here-to-for may have been a capital-intensive business, make it less capital intensive through the introduction of third-party capital, which as an aside, the ADF One investors should be very happy. I'll leave it there and you should anticipate that we'd be very focused on ADF too, to support this growth. And so it is my expectation that we will get excess capital from the Athene leg of the business and excess capital from the Apollo leg of the business against an announced $1.60 dividend. I think for Investor Day, we will do our best to go through this in detail, but suffice it to say that capital allocation is one of the things that is fully within our control and is something we should be judged on and we are all very large shareholders. But what it does is it creates options and that option is to reinvest in the business, adding additional capacity, and/or buy back stock. And we will look at that and now have the flexibility to do that every quarter and every year.
Patrick Davitt, Analyst
Got it. Makes sense. Thank you.
Operator, Operator
Our next question comes from Glenn Schorr with Evercore.
Glenn Schorr, Analyst
Hi, thanks very much. I would love to learn a little bit more about your thoughts on the Credit Secondaries market overall. I'm curious if you're seeing the same reasons for the development that you saw on the private equity side, another meaning LP seeking liquidity for the same reason, is it the same kind of bid-ask spread, do you see similar trends of that addressable market, any color there would be great, like just trying to see how big this can get in your mind over the next 25 years?
Marc Rowan, CEO and Co-Founder
Yeah, sure. So I think you are basically exactly right. The growth in credit funds over the last five, six, seven years has really been meteoric as you all know. And the reality is CIO's funds, pension funds are ultimately needing liquidity as they balance their portfolios is just the way this occurred for the private equity business 10 to 15 years ago. The real secret sauce if you will in a Secondaries business is having the knowledge of the underlying investments to be able to move rapidly and thoughtfully around making investment decisions. And because Apollo is the largest alternative credit lender, we have views and visibility on essentially every credit product, every underlying security in the market. And so our ability, our library of knowledge to be able to smartly access this market is really unparalleled. There's really no one of scale in this space right now, but we can already start to see the demand from pension funds, others who hold these credit funds to be able to seek liquidity. So we think this is a massively scalable market where we have real first mover advantage and real expertise to allow us to be the category killer in this space.
Glenn Schorr, Analyst
Maybe just one follow up. Traditionally in some other verticals, you might have a Fund I raise money, put it to work, show some performance then wait and then start to raise Fund II. Theoretically, given what you have just laid out, this money could get put to work relatively quickly and we could see another fund relatively quickly, does that scare you off or is that okay?
Marc Rowan, CEO and Co-Founder
No, I think directionally that's right. Remember, when we think about this, this type of business is very applicable for some of our existing insurance clients and otherwise. So it gives us the ability to scale rapidly and opportunistically. But you are right, the third-party demand should be pretty enormous and would expect to see this business scale faster than like say a PE type fund.
Operator, Operator
Okay. Thanks so much. Appreciate it. Our next question comes from Alex Blostein with Goldman Sachs.
Alex Blostein, Analyst
Thank you, great. Good morning, everybody. I was hoping we could spend a minute on your guys's, sort of bigger picture growth and management fee outlook over the next couple of years. So it sounds like there's a number of new initiatives in the business, some of them are being accelerated potentially by the Athene deal. You talked about wealth management in a couple of other platforms. Can you give us a sense of kind of excluding or not sort of relying on insurance related partnerships and just really thinking about third party investor base, what sort of the sustainable management fee growth you expect to see over the next call it three years as you go through this investment cycle?
Marc Rowan, CEO and Co-Founder
So Alex, this is Marc. I'll provide an overview and then pass it to Martin. We've stated that we plan to update our targets at our upcoming Investor Day. Our perspective on the yield business is that we believe it can double in the next five years, growing from approximately 350 billion to over 700 billion. The opportunistic and hybrid business currently sits at about 110 billion to 115 billion, and I personally anticipate they will also increase by 50% in five years. If we examine the yield strategy we've selected, it's quite distinct from our competitors. We've focused on fixed income replacement, primarily to serve our insurance affiliates. Of the 350 billion in assets under management, around 60% is generated by the insurance affiliates and 40% by third-party clients and credit funds. I don't expect this to change significantly as the business expands. Diving deeper into that 350 billion, my estimate is that 125 billion to 150 billion is alpha, with the rest being beta. To double the business, we need to double that alpha amount. While that sounds substantial, it doesn't seem overwhelming, as much of it hinges on platforms that facilitate repeatable origination. For context, we originated 17 billion in credit in the first quarter and are on track to reach approximately 75 billion to 80 billion for the entire year, which is a significant increase from last year's 47 billion in credit origination. We have established a solid foundation. On the opportunistic front, we've made substantial progress with private equity transactions. I anticipate we will be entering the market for Fund XI next year. Additionally, we are scaling several strategies where we see opportunities for origination exceeding our existing funds, particularly in Asian real estate and infrastructure. Overall, I see many promising avenues for business growth. In terms of excluding insurance affiliates, I don't often frame the business this way because our limited partners and third-party investors appreciate the opportunity to co-invest alongside Athene and Athora at the same time, price, and risk. We position ourselves as an asset manager focused on not just fees but also on the underlying assets, ensuring full alignment. In both opportunistic and hybrid segments, we maintain a similar stance, although the dynamics differ. On the yield side, around 15% to 30% of the business stems from hybrids and opportunistic sources. This involvement can accelerate growth since limited partners and third-party investors value our commitment. Historically, we have characterized this business as one expected to grow around 15% annually. In investment years like this one, I suspect free revenue will be in double digits but below 15%. However, in subsequent years, after these investments take hold, growth should exceed 15%. That's the framework we use, although it is subject to revision at the Investor Day. Our current initiatives aim to push growth beyond that. Martin, would you like to add anything?
Martin Kelly, CFO and Co-COO
No Marc, so translating that into the components of FRE management fee growth should be changed in line with what we've produced, we see no reason that that won't continue in the future. We are very focused on growing our origination businesses and growing our transaction fees as you have seen and we expect that to continue. And then we make decisions about investing in the platform. And so that translates into low double-digits or high teens for growth year-to-year and Marc has sort of indicated what we expect this year but looking forward where we're confident that we'll be able to produce every FRE dollar growth consistent with what we've produced in the past, regardless of the channel that it comes from.
Operator, Operator
Our next question comes from Devin Ryan with JMP Securities.
Devin Ryan, Analyst
Okay, great, good morning everyone. I want to come back to the conversation on the retail channel and the opportunity as you guys lean in there more it sounds like and maybe just to talk a little bit about where you are on some of the product development that you referenced, what we should be expecting over the next few quarters and it seemed like this is a good landscape for innovation and to leverage maybe get some updated thoughts around how you're thinking about the addressable market for Apollo in this channel relative to the institutional channel longer-term?
Martin Kelly, CFO and Co-COO
Sure, so I would say obviously when we look at Apollo's product platform, certainly yield products are going to be the place we lead into the global wealth channel. And that we're already making inroads there. I think it's still early days to see sort of substantial move in the line item type results, but really we look at this over a two, three, four-year investment period, where by that timeframe you'll see meaningful progress there. But in the meantime, it's about taking products we have, getting it through the retail channel, and continuing to develop and tailor products that we learn are more specifically targeting those components.
Marc Rowan, CEO and Co-Founder
Maybe, it's Marc, I'll add and I'll step back. Look, there is a trend towards what we say is democratization of finance. That trend was more pronounced under Republican administration, it likely will be less pronounced under a democratic administration. But nonetheless, it is a trend and it's a trend we expect to continue. We see increased sophistication in the retail and the high net worth channels. And so if you step back, and you look at from our point of view, we have for a very long time been a distributor of opportunistic products to the high net worth channel, through private equity and a number of the other funds. What you will see us do in that channel is continue to do what we've been doing, to build it out to redouble our efforts we have made significant hires in these areas. And we intend to follow through and I would think on balance, you will see greater fundraising coming out of this channel this year, next year and in the future. And I do think that this is a trend, when we look back over the next five or ten years, we will see retail high net worth as a larger percentage of total opportunistic fundraise than it has been over the past decade. Then I go to completely to the other end of the spectrum and let's talk about Athene. So Athene is now the number one underwriter of retail annuities in the U.S. It is a substantial footprint. The footprint includes independent broker-dealers, it includes banks, it includes other forms of distribution that I would say are more retail and less high net worth. They have made the investments in systems and infrastructure necessary to support a complex product set and insurance is a complex product set, even if this product set is all income based. What Scott is focused on is in between the two. I believe and Scott believes and Jim believes and the whole team believes that we have the opportunity to continue to package our yield-oriented products in ways that can go through the high net worth and the retail channels. And the investments there have also been made in people and teams and will continue to be made. You will see us launch at the second half of this year, at least two products through this channel that are yield-based. Again, when we look back over the next five or ten years and compare it to the past decade, we will see continued democratization of finance. Our job I believe is to come at this channel with our unique value proposition which is not simply to sell as much as we can, it is to focus on what I believe the franchise does extraordinarily well, which is excess return at every point along the risk-reward curve from private equity down to investment grade. The products that we ultimately expand in high net worth in retail is a product set we can have our own designs, but it is ultimately up to the channel and the end consumer as to which of those products are more applicable and it's our job to make them available and make our capabilities available and support them with the requisite infrastructure via technology infrastructure or people in wholesale infrastructure to do. This should not be unknown. Others in our industry have done it. Others have quite frankly been there first and are bigger. And there's plenty of roadmap for us to follow, for us to use this as an accelerant to what we otherwise are doing and it seems very logical and obvious to us.
Operator, Operator
Our next question comes from Ken Worthington with J.P. Morgan.
Ken Worthington, Analyst
Hi, good morning. The total AUM in Athora decreased from the fourth quarter to the first quarter in the non-sub advised area. You mentioned in your prepared remarks that interest rates negatively affected Athene and Athora this quarter. The decline in Athora assets was more than 10%. Could you provide more details on whether this was solely due to interest rates or if there were other contributing factors as well?
Scott Kleinman, Co-President
No Ken it was, that's a long-duration portfolio. So it's more sensitive to a rate backup. And so it was a combination of rates and the Euro given that most of the portfolio's in Euro. But as I said, like the impact was pretty muted. It's all in the numbers for the quarter. And then when you get away from that net, net higher rates are better for the platform, both in terms of investing assets and originating through the insurance platforms.
Martin Kelly, CFO and Co-COO
The other thing I'd say is, assets and liabilities are matched. So, equity in both of those businesses continue to grow through the quarter. When you report assets, you're just looking at one half of the equation.
Ken Worthington, Analyst
Yup, yup, understood. Okay, thank you very much.
Operator, Operator
Our next question comes from Chris Harris with Wells Fargo.
Christopher Harris, Analyst
Great, thanks. Can you guys give us an update on your views on consolidation opportunities and insurance and I'm wondering how you think higher rates might impact that outlook?
Marc Rowan, CEO and Co-Founder
So I'll do my best, it's Marc. So in general, as Martin said, higher rates are better for our business. First, we have an investment portfolio that has a decent amount of floaters in it on the Athene balance sheet. And second, higher rates can also help in pricing of new business including, excuse me, company to company new business. But I don't actually think that rates themselves have material impact on the ability or willingness of people to transact. What we are watching is, in my opinion, a realignment of the guaranteed or as we say in the U.S. annuity led insurance business. You're seeing companies particularly companies who may not have the ability to create asset alpha, which is ultimately what drives the business. Sell large blocks of business, they sell this through reinsurance, they sell this through company sales. And for the most part, it is being sold to people who have the capacity to generate alpha amongst assets that are appropriate for insurance company balance sheets, which tend to be investment grade or quasi-investment grade assets. I see no lead up in that trend. And I think this rotation, out of guaranteed yield and into mortality, PNC and fee-for-service in both the U.S. and Western Europe is healthy. Our business in my opinion will not be limited in growth by our ability to source liabilities, only by prudence with respect to returns. And here I will give you a little more color. Athene last year when they announced their fourth-quarter, they gave some indication as to the profitability of the retail business they were generating. Typically, they have done between 15% and 20% cash on cash unlevered for new retail annuity business. Last year was at the higher end of that range. They will report on Friday and will give some notion of the profitability of business in the first quarter. If we are return maximizers or we are trying to build a long-term sustainable business, we should want to garner the lowest cost of funds, and therefore the highest level of repeat profitability for a decade for our retirement services business. Our ability to generate profitability at retail which is the lowest risk, most repeatable, most franchise nature, does put a floor on our willingness as to what we're prepared to pay for large blocks of annuities. It's not just about growth, it's about sustainable, profitable growth, and not simply just growing the business for the sake of growing the business. So the message I would convey, there are immense blocks of business that will trade hands. The blocks of business in the U.S. are well known. The blocks of business in Europe, in my opinion, are larger and less well known. And very few people have the platform that we have to be able to consolidate those blocks of business. In any one quarter you can see blocks trade or not trade but we will continue to be focused on underwriting profitable new business rather than new business.
Operator, Operator
Our next question comes from Mike Carrier with Bank of America.
Michael Carrier, Analyst
Hi, good morning, thanks for taking the questions. Apollo had a lot of change in the past six months and with that roles and responsibilities can shift around. Since Josh was on the call, and Leon no longer in the mix, just can you provide an update on leadership responsibilities like across segments and with LPs, and then any additional expected changes ahead?
Marc Rowan, CEO and Co-Founder
It's Marc, and I'll start. I'm not usually comfortable talking about myself, but I'll do my best. I am the CEO of the business. My focus areas include strategy, culture, which encompasses compensation and communication, urgent strategic initiatives, and problem-solving. I am fortunate to work with a talented group led by Jim Zelter and Scott Kleinman, who manage the day-to-day operations of the Apollo business. They have their own next generation of leaders that make their jobs easier. In retirement services, we have a strong team consisting of Jim Belardi, Bill Wheeler, Marty Klein, and Grant Kvalheim, all of whom have been with the company for a long time and whom I engage with daily. When you consider the business as a whole, there has been significant external change, but we must remember that we grew the business by 145 billion in a year. Most of the changes we've experienced have occurred internally, while external factors are often just noise for us. This marks my 31st year at Apollo and my 36th year in business. I spent 20 years on the opportunistic side and more than a decade on the yield side of retirement services. This is not a new role for me, and we have a clear understanding of what we need to accomplish. We are focused on defining the firm, which we do by delivering excess returns across different risk and reward spectrums we choose to engage in. We're supported by favorable trends in demographics and market structure. Our strategy centers around three business segments: opportunistic, which this group understands well; hybrid, which balances opportunistic and yield; and yield, the largest and fastest-growing segment of our business. We have adopted a strategy that accentuates our strengths, especially in fixed income replacement. This trend uniquely positions our business against our peers. Firstly, the nature of the business makes it easier to scale. Secondly, 60% of our growth has come through our affiliates. Thirdly, we present ourselves in a unique way to the market, aligning ourselves with our partners by taking $0.50 to $0.60 per trade, at the same time and price. Generally, we focus on executing our business. There have been some changes in roles; for instance, Josh is less involved in compensation, which is a logical shift with me as the new CEO. Josh remains an active, productive, and senior member of the Apollo team, serving on the Board, the executive committee, and our transaction committee that reviews our largest opportunistic deals. Every day, we get up and execute our plan.
Operator, Operator
Our next question comes from Robert Lee with KBW.
Robert Lee, Analyst
Great, good morning. Thanks for taking my question. I guess it may seem a bit odd question, you have to have so many new initiatives going on with standing origination platforms and Credit Secondaries business but can you talk a little bit more broadly maybe on a regional basis in a lot of your peers have been pretty vocal and aggressive about their expansion in Asia, Asia-Pac in particular, some through acquisition, mostly organic, that's not an area where you have a presence but you haven’t talked about as much, can you maybe do something as in how you're thinking of down the road, kind of reach your global regional footprint and the opportunities there?
Marc Rowan, CEO and Co-Founder
Okay, I'll take a shot at it, its Marc and then I'll hand it to Scott. So when you step back and you look at our business, there's no denying that our business is primarily focused on the U.S. and Western Europe, with a little bit in Australia and a little bit in Japan. That is the outline of our business and within the context of our strategy and what I've outlined of doubling our yield business and a 50% increase in our opportunistic business, I believe we can accomplish that within our geographies. Having said that, we have been active in the broader Asian market for a long period of time but we have not elected to move large opportunistic funds into those marketplaces. The unique calling card that I believe that we have leverage is the strength of the firm to provide capital where there is excess return. For me, I believe that excess return to be primarily in yield and in structured products. And you should expect us to use the things that we do best to differentiate ourselves in markets that are not short of capital and function quite differently than the U.S. and Western European marketplaces.
Scott Kleinman, Co-President
Look, I would agree with Marc. While historically, Asia has not been a huge target area for Apollo because we've been able to pursue all the growth we want and find the market opportunities we're looking for in North America and Western Europe, we're not blind to the opportunity set. We are starting to make small inroads, as Marc said, in places like Japan and Australia, but I would expect to see more overtime, but on a measured basis. It's not something that we feel like we have to jump in tomorrow. But it is obviously a big dynamic market and one which over time we will continue to incrementally grow into.
Operator, Operator
Our next question comes from Michael Cyprys with Morgan Stanley.
Michael Cyprys, Analyst
Hey, good morning. Thanks for fitting me in here. I just a question on as insurance becomes more meaningful business for you guys, investors may want to better appreciate maybe potential balance sheet risks, can you talk about how you think about and assess balance sheet risk on the insurance side as that comes over with Athene, what metrics will you be tracking, and if there is a problem or issue with one area of the portfolio how might we see that from the outside as I don't think it's mark-to-market or at least through the P&L at least? And what sort of sensitivities or scenario analysis do you look at that you might be able to share with us on the outside?
Martin Kelly, CFO and Co-COO
Okay, so first, for the retirement services business, the issue and the risk has always been on the asset side. That is where I believe investors should focus, that is where we have focused. There's very little volatility around I'll call traditional measures of insurance type risk, like mortality and longevity or unexpected optionality on the part of policyholders. It is primarily an asset risk game. We have grown up and the entire firm has grown up with Athene by a relatively simple philosophy. Retirement services, insurance companies are a terrible place to take credit risk. They're a terrible place to take equity risk. But they are ideally situated to take some amount of liquidity risk since most of their liabilities are illiquid, and structure risk. And that is what you find on the Athene balance sheet. So we've now been through 12 years, there's 12 years of metrics. There's not whatever cycles have taken place in those 12 years we have written out. And you can look at our portfolio and I would encourage you to benchmark it not against other annuity companies, take the highest quality, best thought of peer group and I gave some of this through our lens deck, take proof, take met, take principle. And you will see whether it's a measure of losses, of capital buffer, of use of leverage, or anything else we have outperformed the double A benchmarks. We have always been, Apollo has always been the residual equity holder of the risks that we take. Initially, we were a 35% equity holder, some 2.5 billion of value. And now we are going to be 100% equity holder. The risk mentality mindset has not changed. So now I focus down into the specifics of your question, we do put out extensive credit decks. If you go back and you look at the period just after the lockdowns in the U.S., you will see an extensive deck on our CLO portfolio, you will see an extensive deck on our CRE portfolio, you will see one on energy, you will see one on aircraft lending. And we will continue to do this. The granularity of information that we put out, there's nothing else like it in the insurance industry that I am aware of. This is how we run and monitor the business. We report on a quarterly basis impairments, whether they run through the P&L or not. So you will get that updated information. But I assure you, this is where the magic happens. If you get this wrong, it is a big negative. If you get this right, it provides competitive advantage. What we seek to do in retirement services across the entirety of the portfolio is to earn 40 basis points across a portfolio better than the comparable publicly traded investment-grade option set or opportunity set. It's not 200 more, it's 40 more, and it is primarily a fixed income investment grade portfolio that benefits from stepping back from the fully liquid markets.
Scott Kleinman, Co-President
The only thing I'd add Mike is just as a reminder, Apollo today manages 100% of the left side of Athene’s balance sheet, right. So there's an Apollo professional who knows every single thing is tied to every line item on the Athene asset balance sheet. So the same care and feeding we provide across our entire credit business is already being done with respect to Athene. And so the actual closing of the merger, nothing changes in that respect.
Peter Mintzberg, Head of Investor Relations
I believe we are coming to our last question in the pipeline.
Operator, Operator
Our last question comes from Gerry O'Hara with Jeffries.
Gerald O’Hara, Analyst
Alright. Thanks for taking the question. And perhaps just to mix it up a little bit, maybe you can give us an update on just the real estate segment. I think historically, there's been some frustration around the growth trajectory of that business. And Marc, maybe you can kind of give us a sense of how you see this segment growing forward, whether there's still an appetite for inorganic growth, or just what your kind of general thoughts are on real estate? Thank you.
Marc Rowan, CEO and Co-Founder
Okay. So I'll start and then I will pass it to Scott and Martin, if they have anything to add. But I'm going to start with something that will be surprising. We have an immense real estate business. Martin will give you a better exact number but we're 50 billion of real assets. They're just not located in one place. A lot of it is located in lending and a lot of it is located in our European principle finance business, and then in our net lease business, and then in our U.S. opportunistic business, and in our Asian and Indian opportunistic and structured products business. It's harder to find as one line item. But it also goes back to philosophy about how we think about the business. We think about the business in three buckets; opportunistic, hybrid, and yield. Real assets cuts across all three of those buckets. I will say reflexively we are sizeable but not immense in opportunistic real estate. That is primarily a function of our own risk reward and view of the marketplace and skill set. You will find us really large in hybrid and in yield across real estate, which is a function of our risk reward and our skill set. I would expect real assets broadly defined to continue to be an incredibly important part of what we do. I think you will see real assets mixed into platforms, which we call yield and yield you will see it in our hybrid business, you will see it in our structure products business, and you will see it to a lesser extent in our opportunistic business and we have absolutely no qualms about being acquisitive in this area. And I would expect that we will be acquisitive in this area. I think one of the things that we will do on Investor Day is drop down below the broad line items of yield and hybrid and opportunistic and provide the requisite pie charts, which allow people to see just how big this real assets business is, and how big the origination businesses are. And otherwise, because I think it will surprise people that we've just come at this in a different way than others. But the fact that we're coming at it differently shouldn't surprise anyone.
Scott Kleinman, Co-President
I would add that Marc summarized it well. We see significant opportunities in this space. Once we break down the details for you, you'll notice that this business is projected to more than double over the next five years. We're seeing this potential across the various investment opportunities Marc mentioned. The capacity for scaling is substantial, and it's an area of focus for us. Therefore, I anticipate that you will witness this growth as we continue to report in the upcoming quarters and years.
Peter Mintzberg, Head of Investor Relations
I want to thank you all for attending. I'm glad we were able to take everyone's questions. I know we were 14 minutes over deadline and we try and be hyper punctual. So we will take feedback as to whether the extension is something you want to see us continue to do in the future and enjoy your day.
Operator, Operator
This concludes our call. Thank you for joining us today.