Earnings Call Transcript
Apollo Global Management, Inc. (APO)
Earnings Call Transcript - APO Q4 2022
Operator, Operator
Good morning and welcome to Apollo Global Management's Fourth Quarter and Full Year 2022 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. Please go ahead.
Noah Gunn, Global Head of Investor Relations
Thanks, Donna, and a special thanks to a couple of members of the research community who selected two of the three songs for our hold music jukebox that was playing before we got on the line today. Earlier this morning, we published our earnings release and financial supplement on the Investor Relations portion of our website. In short, we’re very pleased to deliver a strong set of results for 2022 that featured record fee-related earnings of $1.4 billion or $2.36 per share and record normalized spread-related earnings of $2.3 billion or $3.88 per share. This strong combination of fee and spread-related earnings alongside principal investing income drove total adjusted net income of $3.1 billion or $5.21 per share for the full year. Joining me this morning to discuss these results and our positive outlook on the business in further detail are Marc Rowan, CEO; Jim Zelter, Co-President; and Martin Kelly, CFO. With that, I’ll turn the call over to Marc.
Marc Rowan, CEO
Thank you, Noah, and good morning to all. 2022 was a transformational year for the firm. At the end of 2021, we held our first Investor Day and we set out our five-year targets and laid out what we needed to accomplish internally to achieve those targets. The end of 2021 seems like a lifetime ago or at least a Fed regime or two ago. However, in 2022, we met or exceeded those targets. Record FRE of $1.4 billion was in line with our target and record normalized SRE of $2.3 billion was meaningfully ahead of target. As important and as we suggested, we restarted the growth engine. Inflows in 2021 were $75 billion. Inflows this year, $128 billion. Inflows for '23 will be higher. We expect a record year of capital raising in 2023. As I've often cautioned, capital raising is the reward for good performance; it is not actually the goal that we set out. AUM ended the year at $548 billion, or X rates, and FX would have been about $565 billion, all in meaningful progress against our five-year targets. Recall that in Investor Day, we laid out three key objectives or three key pillars that we had to focus on to achieve our plan: global wealth, origination, and capital solutions. Global wealth had a really strong 2022. We ended the year with approximately $30 billion of AUM in our global wealth segment, including $6 billion of capital raised in 2022, accounting for and implementing successfully the Griffin acquisition during the mid part of the year. We are on track to meet or exceed our $50 billion target at the end of 2026. When we laid out these targets, we had zero perpetual products in the marketplace. By year end, we expect nine perpetual products in the marketplace. In short, we've had tremendous receptivity to our product and to our franchise in the global wealth community. Our goal here, like the goal elsewhere in our organization, is not to be the biggest. We will not necessarily be the fastest growing. We will be seen and are seen as the innovator in this marketplace, showing the global wealth community the kinds of products that they have never seen before and addressing the unique needs of this interesting constituency. Origination volume totaled north of $100 billion on a 12-month basis. We now have 15 platforms, including seven platforms which were new additions during 2022. You will hear later in the call the most recent edition, Atlas, formerly known as the Credit Suisse securitized products group. We are definitely on track here to meet or exceed our $150 billion annual target at the end of 2026. Having a steady source of unique credit production every year really enables us to power our business to make the kind of projections and predictability and the client commitments that are necessary for us to grow. This is good for our FRE business and particularly good for our SRE business, in that we produce reliable amounts of excess spread, particularly in investment-grade private credit. I'm going to spend a second just on that term. We hear the term private credit a lot. We actually have no idea what the words private credit mean. They're just two words that follow each other. What we have focused on in our platform and what we have done uniquely is to create a source of private investment-grade credit. Very few people, very few organizations have that capability. This is in addition to the strength that the franchise has always had in more generic private credit. Jim will spend a lot of time on this in his remarks, and it is a very important part of our franchise going forward and a huge differentiator. The third pillar that we set out was our capital solutions business. Capital solutions in 2021 was approximately $250 million of annual revenue. And we suggested that at the end of 2026, we wanted that to be north of $500 million of annual revenue. In 2022, we exceeded $400 million of annual revenue. It gives me great confidence that we are on track to meet or exceed the five-year projections that we laid out at the beginning of 2021. The team has been fully built out globally. We have a massive pipeline that we executed on partially in 2022 and will carry over into the first quarter of 2023, which Martin will touch on. Most importantly, we need to help explain the ecosystem that we are creating. 15 platforms, 15 companies whose only job is to produce credit wake up every day and do what they do; they produce credit. We, as a diversified buyer of credit for our own balance sheet in SRE, we want 25% of everything and 100% of nothing. And what that means is we are creating every day credit that needs to be syndicated into the marketplace. Some of that goes into funds or to SMAs of clients who have previously come to the Apollo platform. The rest of it goes into our capital solutions business. This is a strategic imperative for us and does two very interesting things. One, as we place credit with third parties, we earn fees. Earning fees is a fundamental part of our business model. But as important, they are expanding our ecosystem. We have done business in the alternative community with investors with circa 3,500 counterparties for a long period of time. This is an opportunity with unique products side-by-side with aligned products, with recurring products for our capital solutions group to go out and build new relationships. Sometimes those new relationships will result in one-off transactions, which is just fine. But oftentimes those new relationships will open up clients’ eyes as to what we can do, and we will turn those into SMAs and recurring revenues. This is an ecosystem that is picking up tremendous traction and the team here is doing an unbelievable job. As excited as I am about the '22 performance against the three initiatives, I now want to turn to Athene who had just an amazing year. Inflows at Athene on an organic basis were around $48 billion. Athene was the number one provider of annuities in the United States, despite not being represented in a lot of annuity markets. New business was put on the books in the fourth quarter at about 145 basis points of spread versus about 120 basis points of spread for the full year. Both of those targets are meaningfully ahead of what we would consider normal levels of business. I believe 2023 will also continue to be very strong. I doubt it will continue at the same levels that we saw in the fourth quarter, but new business is being put on the books very profitably. Athene’s alternative portfolio, which as many of you also understand forms the foundation for AAA, our retail product, our equity replacement product, was up 10% during the year versus the S&P benchmark, which was down almost 20%. Very strong performance and an indication that Athene and AAA are doing something other than buying and providing clients with market beta. As we step back and we think about our positioning in this marketplace, one of the questions we ask the team is who has the fortress balance sheet in our industry? And the answer is we are the fortress balance sheet in our industry. We are rated A+ across all three agencies. We ended the year with $2 billion of excess capital and more than $1 billion ahead of S&P AA. Some years ago, we introduced what was the first sizable reinsurance sidecar for our industry, affectionately known as ADIP1, with $3.25 billion of capital. That sidecar has now been nearly fully deployed. And yesterday, or earlier this morning, we announced the first closing for ADIP2 of some $2 billion, and we expect that ADIP2 will be larger than ADIP1. Further, we expect that ADIP2 will take an increased share of the new business that Athene puts on the books. This is good all around. This is good for Athene from a capital generation point of view and a capital efficiency point of view, even though it will mean that some of their assets now essentially belong to investors and they will realize the benefits of SRE growth. It is good for FRE and it is good for our origination franchises, creating additional capacity that needs to be filled, which will further spur the flywheel of our capital solutions and other businesses. In short, an amazing year for Athene. Our success in this business of retirement solutions has not gone unnoticed. By some measure, there are now over 100 asset management entities or insurance entities who have become asset managers pursuing a strategy similar to that which Athene started on 13 years ago. To be successful in this business and to understand where we sit relative to the rest of the industry, I believe there are four things that contribute to success. First is capital, massive amounts of capital in an industry that has not been able to raise capital. The second is the ability to create investment grade spread every day. This is a skill set that does not traditionally resonate within the alternatives industry or, quite frankly, within traditional asset management. It is a skill that we have built up. The third is a really attractive cost structure. You need scale, because ultimately, spread is a function of your net interest margin, but it's also a function of a very efficient cost base. Finally, you need a very attractive cost of funds. If your cost of funds is low, because you're efficient and because your products are well-designed, you do not need to take investment risk to earn good returns. And if you're a good investor, returns can actually be quite high. Everything goes in reverse if your cost of funds is very high. What we are watching in our industry is the haves, like Athene, where we have some $48 billion of organic origination versus the have-nots, the market entrants, who are paying up for inorganic blocks at very high costs. I believe that the vast majority of new entrants, although not all, will not be successful and will learn an expensive lesson along the way. We are also in a period where the increased activity by asset managers has resulted in increased regulatory interest in what we are doing. We have spent 13 years creating the types of regulatory dialogues and transparency and establishing a best-in-class set of standards. We are, to my knowledge, not just a fortress balance sheet, but the most transparent of the companies. We regularly publish stress tests, although we are not required. We regularly publish details of assets that we are not required to disclose. We regularly engage regarding our reinsurance so that people understand there is no arbitrage between the U.S. regulatory standard and the Bermuda regulatory standard. All of the things I've mentioned are not generally followed by many, although some are good actors among the new entrants. What you will see from us in 2023 is an increased effort to lead this regulatory dialogue to ensure we arrive at the right place with appropriate transparency and oversight. This is an amazing business driven by powerful trends, but it is also a business of promises to retirees. We expect that we will be included among a group of companies as internationally active insurance groups at some point in 2023, giving us an opportunity and a seat at the table to participate in shaping the regulatory future for our industry, which is changing very fast. FRE for us is the flipside of SRE. The ability to generate safe yield is something very few people possess. Who needs safe yield? Retirees need safe yield; pension funds replacing a portion of their fixed income need safe yield; banks need safe yield; Japanese insurance companies and international investors need safe yield. The world is short safe yield, and we are very good at producing it. When we produce it in an asset that is short, we want to maximize the profitability of our capability. That is why I say SRE is the flipside of that. We are FRE for the safe yield we produce for third parties and for Athene. On top of that, we are SRE or spread-related earnings by matching the safe yield with long-term sticky liabilities. In 2022, a number of other forms of so-called permanent capital went in reverse. 2022 was an incredible year for Athene. Let me step back and now return to a higher level view of our business. Our business, as I've suggested previously, exists and our industry exists to provide investors excess return per unit of risk. It does not exist for us to grow or pursue that which we want. We are fundamentally responding to investor needs. Fortunately, we have very strong tailwinds as a firm and as an industry for the need for income, excess return per unit of risk. Our business strategy is driven by areas where we believe we can continue to produce excess return per unit of risk. Our business is guided not just by this but also by an aligned investing philosophy. The combination of Athene and Athora in our balance sheet, alongside our investors, ensures investors at all times that we are fully aligned with them. Finally, as I'm sure Jim will pivot on, purchase price matters. The strategy of purchase price is very hard to pursue in a risk-on everything rally. Nonetheless, we did that, and the reward for doing so was certainly available and shown in 2022. But I believe the positioning we've taken out and the industry tailwinds bode well for us moving forward. 2023 will be a very good year for Apollo. We are on offense. We have $50 billion of dry powder across the platform. We deployed $160 billion in 2022. Fundamentally, we perform better when markets are uncertain and when there is economic uncertainty. We expect FRE and SRE in 2023 to be up more than 20% over 2022, as I'm sure Martin will detail in his remarks. But we also have an amazing opportunity in our business to really focus on operating leverage. We have enough in front of us with the initiatives that are currently on our plate to not just meet our 2023 goals but to meet our five-year targets. Alongside the three pillars of global wealth, origination, and capital solutions, we have added several growth initiatives, and I will not steal Jim Zelter's thunder as he lays out the things in front of us to focus on. Suffice it to say, 2023 will be a year of execution. We will return the business to operating leverage in both 2023 and 2024. The team here feels great. There's tremendous momentum. We are incredibly engaged and energized. At the end of the day, what makes this a great place is the people. This is a group of hardworking, charitable individuals where the majority of the team, 93%, are involved in our giving programs. Our job is to be the single best place to be a partner in the financial services industry. And with that, I want to thank the employees for an incredible year and the investors and analysts for all the time you've given us to understand what we're trying to do. And with that, let me turn it over to Jim.
Jim Zelter, Co-President
Thank you, Marc. As we mentioned previously, one of our main principles is to achieve excess return relative to risk. After over 12 years of low interest rates and abundant capital, the top investors will start to distinguish themselves. Strong investment performance is the cornerstone of our business, and we are committed to delivering unique returns for our clients. As we look ahead to 2023, we feel this is an opportune time for Apollo to generate excess returns. While other managers might take a defensive stance, we have been patiently preparing for this kind of market and believe there will be significant opportunities to invest amid increased volatility and an uncertain capital markets environment. Marc provided an overview of our three key growth pillars, and I’d like to elaborate on origination. As we discussed at our Investor Day just 16 months ago, a significant part of our focus is on the high-grade, fixed income area. Central to our strategy is our ability to continuously originate durable assets. A key method for this is through our platforms, which are real operating businesses across various industries. Platform origination enables us to source investment-grade assets at scale, essential for the profitable growth of our retirement services business and increasingly to third-party accounts seeking similar returns. Importantly, instead of increasing our HoldCo balance sheet resources, we can fund the acquisition of these origination platforms through the regular purchasing power of Athene's alternative portfolio as well as AAA. By year-end, our platform ecosystem was generating around $35 billion in annual volume and yielding approximately 425 basis points of excess spread compared to similar investment-grade benchmarks. We have built a portfolio of 16 platforms across multiple asset classes and sectors, acquired through various funds we manage and also developed organically, and we are now concentrating on scaling and executing these initiatives. To put it metaphorically, we are investing in the education needed to develop this crucial scaling capability, which we see as a significant competitive advantage. This advantage will be further enhanced following the recent announcement of our CS securitized products group platform, now named Atlas SP. This platform stands out as a top asset-backed warehousing business, effectively a finance company for other finance companies, boasting a vast client network and a remarkable 20-year track record with minimal losses. The exceptional team at Atlas is eager to collaborate with Apollo. During the closing process, it has become apparent that numerous counterparties are also interested in joining the Apollo ecosystem. Several investors are reaching out as they look to broaden their private credit portfolios beyond just direct lending into a wider array of asset-based finance solutions. We believe this area represents largely unexploited potential within the $40 trillion investment-grade fixed income replacement market. In straightforward terms, we see the prospect of sourcing reliable yield in asset-based finance as akin to what sponsor finance and private credit opportunities looked like a decade ago. Besides our three growth pillars, we have started to implement six additional strategic initiatives that we have previously discussed. We have organized our resources and efforts around these initiatives, and 2023 is focused on their execution. In this competitive fundraising environment, we believe our innovative and unique product offerings will be distinctive, and we are already witnessing positive early signs of this team. For example, we are very optimistic about the growth of AAA or Apollo Aligned Alternatives. We are expanding our distribution network in the U.S. through added bank platforms and various independent channels while also reaching out globally in Asia and Europe. Notably, we are set to launch our European product platform in the coming months, which will provide a comprehensive suite of options for individuals in Europe, with AAA being the first product available. We have also begun promoting Athene Altitude, a product intended to provide a range of Apollo-managed funds across varying risk-reward profiles in a tax-efficient vehicle. Although it is still early, we secured $300 million in the fourth quarter from our first client, a third-party insurance company, for investment in AAA via Athene Altitude. Moreover, we have made strides with several organic initiatives in emerging asset classes. Our sponsor and secondary solutions platform, known as S3, has gained traction following a significant investment from a key partner last year. This business has committed over $13 billion since 2020, focusing primarily on fund finance, and has allocated over $1 billion to equity and credit secondaries in the last six months. We anticipate formally launching fundraising for an equity secondaries fund in the second quarter and will look to raise capital opportunistically for our credit secondaries fund ahead of a dedicated fundraising effort in 2024. We’re experiencing similar growth in our clean transition initiatives. Since kicking off our sustainable investing platform about a year ago, we have allocated over $6 billion into these investments. Later this month, we will be establishing a dedicated team for climate and infrastructure yield to enhance our origination abilities across the board. We plan to initiate fundraising for clean transition finance and opportunistic vehicles in the latter half of this year. Next, we're providing the investment tools that have made Athene and Athora successful to others in the retirement services field. Our proprietary origination output has seen, as Marc noted, increased consistency and diversity. We are at a stage now where we can distribute a greater number of these assets to third parties who share the same fundamental needs. We are leveraging our strong existing relationships in this area. Over the next year, we aim to raise over $10 billion in capital from others within the retirement services sector. Lastly, we are replicating the successful sidecar structure we have with MidCap and ADIP in various other sectors of our business, and we plan to do this in a simplified, cost-effective way to scale and collaborate with investors in the Apollo ecosystem. Turning to our overall fundraising activities outside of these new six initiatives, our momentum is strong across different fronts. In asset management, we experienced robust inflows, including $46 billion raised from third-party investors, which doubled the levels seen in 2021. Specifically, in the fourth quarter, total fundraising was $9 billion, driven by new capital for Athora income and additional investments for various drawdown fundraisers, co-investment capital, and in our global wealth channel, which included $800 million for AAA. Looking ahead to 2023, we anticipate a record amount of capital from third-party investors, surpassing the substantial levels achieved last year. We are already in the market with a plethora of drawdown funds, including our fourth vintage European principal finance fund, our third infrastructure fund, as Marc mentioned, ADIP2, and our 10th vintage of our flagship private equity fund. Additionally, numerous funds and manager accounts focused on yield strategies are raising capital or will be later this year, similar to our Accord series, as well as various perpetual products mentioned by Marc in the global wealth channel, including non-traded BDCs, non-traded REITs, and two interval funds. Regarding Fund X fundraising, I am pleased to say we are seeing strong support from our existing shareholder base and gaining new traction from investors, especially from non-U.S. regions and through our global wealth channel. By January, we had secured roughly $15 billion in commitments. Given the congestion in the market, it's challenging to predict the final size of the fund and the exact timing. However, we expect to finalize most of the additional commitments by the latter part of the second quarter, and we believe the fund will come close to our target. As we enter the new year, we believe investors are prioritizing managers with healthy portfolios that exhibit less vulnerability to growth-oriented sectors, which certainly aligns well with our long-established strategy. It's important to note our private equity fund portfolios exceeded the S&P index by over 25% in 2022, and our flagship PE Fund IX appreciated by 22% throughout the year. Revenue and EBITDA trends in those portfolios continue to demonstrate strong year-over-year growth in the mid-teens percentage. Historically, as we’ve mentioned, we have achieved some of our best returns for investors during midmarket downturns, and we are one of the few funds equipped with a complete product toolbox. Our exclusive financing capabilities have enabled us to execute transactions even when traditional markets are more constrained, as they are at present. Our flexible mandate allows us to adapt to opportunities in corporate carve-outs, public-to-private transactions, and distressed situations. For instance, Fund X started its investment phase in October and has already deployed $1 billion into nine distressed investments by year-end, along with $2 billion into a take-private deal and significant capital towards structured financing. Moving to retirement services, as Marc mentioned, Athene achieved an outstanding year with organic inflows totaling $48 billion, which included $11 billion in the fourth quarter. The retail channel was a major contributor, reaching a quarterly record of $7.5 billion. Retail annuities are in high demand across the industry, as principal-protected products with appealing guaranteed yields are especially attractive in the current environment. However, Athene's success is not just a reflection of industry trends; it also stems from our expanding distribution, unique asset origination, and sufficient capital resources which have supported our impressive growth and allowed us to generate record inflows while maintaining favorable spreads. Looking to 2023, we expect another successful year of organic growth for Athene across all channels, with gross inflows surpassing 2022 levels. Retail and flow insurance should remain the strongest, further supported by a solid pipeline of new distribution partnerships in both the U.S. and Asia. We also anticipate pension group annuities to remain elevated as many corporate pension plans exceed 100% funded status. While the public FABN market is less appealing, we are identifying more opportunities in private transactions that require our overall adaptability. Reflecting on last year, we have reinstated growth in all parts of our business and established the necessary foundations to execute our five-year plan. As stated, 2023 is set to be a crucial year for execution and optimization. We are already experiencing significant momentum. With that, I will hand it over to Martin.
Martin Kelly, CFO
Great. Thanks, Jim, and good morning, everyone. As Marc and Jim have highlighted, 2022 was a very successful year of growth and execution for Apollo. Amid a backdrop of significant market choppiness, our financial results demonstrate the strength and resiliency of our earnings streams. In our first full year post-merger, the combination of our asset management and retirement services businesses proved increasingly valuable. FRE and SRE comprised 93% of total pre-tax earnings in 2022. On average, we expect 90% or more of our earnings to be driven by stable, recurring, predictable earnings streams over the long term. This translates to a meaningfully less potential for volatility compared to other businesses that may be more reliant on incentive and investment-based income streams. Our business model is fully aligned with the growth of FRE and SRE, which are inextricably linked and highly correlated. We intend to drive consistent and attractive earnings growth, regardless of the macro backdrop, in line with our stated goal from Investor Day of doubling earnings by 2026. 2022 was a solid proof point of our progress toward this goal, as we met or exceeded nearly all of our key financial and business targets, which we outlined on Page 4 of our earnings release. FRE of $1.4 billion in '22 grew 11% year-over-year, in line with our expectations, while we absorbed costs associated with significant investments in our next chapter of growth. Management fees increased 14% year-over-year, supported by strong fundraising from both our asset management and retirement services clients, as well as a solid pace of capital deployment. As Marc mentioned, capital solutions fees reached a record quarterly $142 million in the fourth quarter, bringing full-year revenue to $414 million, up approximately 40% year-over-year; an incredible result amid a turbulent capital markets backdrop highlighting the quality of our team and the capabilities we've built. Finally, full-year FRE margin of 54% was in line with our previously communicated guidance. In retirement services, normalized net spreads reached 140 basis points and 123 basis points in the fourth quarter and for the full year '22, respectively, well above our initial 110 to 115 basis point guidance as the higher interest rate backdrop, more interesting investing climate, and robust organic growth trends drove upside to our expectations. Athene’s alternative investment portfolio returned 10.4% in 2022, very close to our 11% normalized assumption, driven by a broad-based strength across strategic retirement services platforms, origination platforms, and fund investment returns. Entering 2023, we expect another year of strength across the businesses. I'll walk through some of the key building blocks. As previously communicated, we expect fee-related revenue growth of more than 20% in 2023. The bulk of this growth should be driven by management fees resulting from a variety of new strategic growth initiatives that Marc and Jim walked through, robust organic inflows from Athene, strong capital deployment in yield and hybrid strategies, and additional capital raised for Fund X. Turning to capital solutions, fee revenue from this business far exceeded our expectations in 2022, growing approximately twice as fast as we originally expected. Given the strong outperformance, we currently see last year's level providing a good baseline for 2023, which is tracking very nicely versus our $500 million target by 2026. We see a healthy pipeline of transactions to support this revenue. Moving to expenses, we expect our rate of growth in total fee-related expenses to moderate as we progress through 2023, driving positive operating leverage versus our full-year 2022 margin. We added almost 400 Apollo employees to our total headcount in 2022 following several previous years of significant headcount expansion. We've been fortunate to attract top talent in the industry across investing, fundraising, product development, capital markets, and enterprise solutions. This has helped drive strong 2022 financial results and solid progress as we look forward on our growth initiatives. We expect that the bulk of our senior hiring is now behind us. Relatedly, we've seen a meaningful increase in our non-comp expenses to support this higher run rate level of employees as well as our strategic initiatives, which has materialized principally through growing occupancy and technology costs. Additionally, our travel and entertainment expenses have normalized back to pre-COVID levels. We're prudently managing discretionary expenses as we enter the new year, which should help drive a lower growth rate year-over-year in 2023. However, you should expect the fourth quarter of 2022 non-comp to be a good jumping-off point for 2023. Altogether, we expect FRE growth of 25% in 2023, equating to approximately $1.75 billion or slightly under $3.00 per share. Turning to retirement services, we expect another strong year of growth in spread-related earnings as Athene continues to fire on all cylinders. We generated extraordinary normalized SRE in the fourth quarter, which was driven by another year of record organic inflows, underwritten to spreads above our target returns, as well as historic interest rate tailwinds. These ingredients led to a truly remarkable performance. As we look forward, we have the flexibility to choose how much we want to grow and how we want to fund that growth. Given the rising rate, wider spreads, and strong demand environment of last year, we leaned in and added tens of billions of dollars of highly profitable business that we believe will drive predictable and durable spread-related earnings for years to come. We are finding Athene’s growth in a highly capital-efficient manner, utilizing its fortress balance sheet resources, which includes third-party capital via the ADIP equity sidecars that Marc referenced. For every $100 of inflows sourced, we put up approximately $8 of capital. Last year, Athene contributed approximately 80% of that capital as ADIP deployed most of its remaining dry powder. As ADIP2 comes online, we expect greater utilization of third-party capital to support incremental growth, likely doubling 2022's level or approximately 40%, which will make the business even more capital-efficient than it is today. In addition to increasing capital efficiency, ADIP provides external validation by sophisticated third-party investors of Athene’s core business, risk framework, fee structure, and strong returns on capital. Importantly, Apollo earns management fees on total gross assets within the Athene complex, including those managed on behalf of third-party investors in ADIP. Because of this mechanism, we are agnostic to the method of funding for Athene’s growth from an asset management perspective, as fee-related earnings benefit dollar-for-dollar in either scenario. As we have emphasized before, SRE is a highly attractive running stream, and the economics of growing it represent a highly attractive return on group capital as we evaluate the highest and best uses of capital across the complex. The returns on capital are even more attractive with more equity sidecar funding, and that's another reason we intend to utilize it to a greater degree. We expect this effort will result in Athene’s net invested assets growing by a mid-single-digit rate in 2023. As you know, we have benefited from higher rates due to an allocation to floating rate assets and the positive impacts on new money yields. With the forward curve signaling a flatter trajectory, we currently expect our normalized net investment spread to remain in the vicinity of the strong fourth-quarter level, which we expect will underpin a normalized net spread of 135 to 140 basis points for the full year 2023. Combining our expectations for organic growth, the use of ADIP equity, the investing environment, and the interest rate backdrop, we expect normalized SRE growth of approximately 20% in 2023. When combining FRE and normalized SRE, we expect year-over-year earnings growth of more than 20% in '23. As it relates to principal investing, we expect continued equity market volatility and relatively muted capital markets activity, at least in the first half of '23. Although it's difficult to predict market trends accurately, based on the visibility we have into our pipeline through the first half of the year, we currently expect PII to be below our multi-year average target of $1 per share in '23. If markets continue to improve, it's entirely possible we'll move more actively into a monetizing phase in the back half of the year. Lastly, let me spend a minute on capital. As a reminder, we expect to generate $15 billion of capital to invest over 2022 to 2026, including $5 billion to fund the base dividend of $1.60 per share, $5 billion for additional capital returned via opportunistic buybacks and dividend increases, and $5 billion for strategic growth investments. In 2022, we spent nearly $1 billion of capital on the base dividend, about $350 million on strategic investments, and over $300 million for opportunistic share repurchases above ongoing stock compensation. Given the line of sight we have into a strong earnings growth year, we intend to raise the annual dividend by 7.5% to $1.72 per share, starting with the first quarter 2023 dividend declaration. We also expect to be a regular buyer of our stock as we believe the intrinsic value remains highly compelling. In conclusion, we ended the year on a very strong note in what was a very difficult market backdrop. We’re refreshed and focused on executing the next leg of our strategic five-year plan with great enthusiasm. And with that, I’ll turn the call back to the operator for Q&A.
Operator, Operator
Thank you. The floor is now open for questions. As a reminder, please limit yourself to one question before rejoining for any additional inquiries. The first question today is from Glenn Schorr of Evercore. Please go ahead.
Glenn Schorr, Analyst
Hi. Thank you. Appreciate all the detail, particularly on retirement services. I have a quick question, both little and big picture on retirement services. On Slide 24, you go through $11 billion of inflows attributable to Athene on the gross inflows, but you also have $11 billion gross outflows. It looks like half was a sale and half was actually policy-driven withdrawals. So I’m curious if you could just talk to that, and then what you're assuming on surrenders? And then maybe you could just expand a little bit more on your comments regarding just investment grade and the credit portfolio holding up in this backdrop? Thank you. I appreciate it.
Marc Rowan, CEO
Glenn, it’s Marc. I'll take the first piece of it and then Martin will pick up. So surrenders basically continue at normal levels. What you're observing in the fourth quarter is a normal level of surrenders, the maturity of one FABN, which is a scheduled maturity of the FABN. During the year, we reinsured just under $5 billion to Catalina. Catalina is our closed block P&C business. We do not believe the closed block P&C market to be that attractive. Thus, we are in the process of diversifying Catalina’s business from fully closed block P&C to 50% closed block P&C, more in runoff, but with a long tail, and 50% annuity. It is another source of capital. Think of it like ADIP and it participates alongside ADIP2 and ADIP1 in these transactions. However, it is modest in its capital base. So maybe it grows to $10 billion or $15 billion over a number of years. It is more just a sideshow to what else is going on in the business. Regarding credit, there's just nothing going on in the portfolio. Impairments were around 2 to 3 basis points. There's nothing we see, Glenn, that gives us cause for concern across the portfolio. And again, it goes back to this notion. We speak a lot about the words private credit. As you’ve heard me say, there are two words that are both English that actually don't mean anything. Private credit can be AA and private credit can be below investment grade. Both have their place in a portfolio. On a regulated balance sheet, it is investment-grade private credit, excess spread over publicly traded corporates but without excess risk.
Operator, Operator
Thank you. The next question is coming from Alex Blostein of Goldman Sachs. Please go ahead.
Alexander Blostein, Analyst
Thanks for all the detail as well. Marc, I had a question for you around the origination ecosystem that you guys have built. That continues to be a really powerful engine for the whole organization. So $100 billion annual origination this year, very good run rate while kind of on your way to your goals. My question is over the course of '22, how much of that has been placed with third-party clients that pay your management fee, whether it's a separate account or through a commingled fund? How much is being placed at Athene or Athora? Ultimately, as you look forward, what would you want that mix to look like ideally?
Marc Rowan, CEO
So Alex, I'll size the business, and it's not a statistic I have in front of me, but I'll give you a feel and we'll get back to you with the detail. Of the $100 billion of origination, as Jim mentioned, $35 billion this year came off platforms and $65 billion came from what I would call more traditional sources of origination, like us calling on companies, high-grade alpha, or other methods of origination. The run rate of the platforms, given that we added seven new platforms in '22 plus the addition now of Atlas means that the run rate will be materially above the $35 billion. The vast majority of what’s being originated, by the way, is investment grade. My gut tells me that about a third of that ends up in the Apollo ecosystem, meaning Athene and Athora. Another chunk of that, maybe 20% to 25%, goes into SMAs. Somewhere in the balance is going through our capital solutions business as we build the business. Going forward, we will always be expanding into new clients. I think the Athene-Athora share is kind of where it needs to be. As I jokingly said on the call, Athene wants 25% of everything and 100% of nothing; Athora wants 5% to 10% of everything. The balance, therefore, is available to clients. Our job is to build the third party recurring client business to another 35% or 40%, leaving 15% or 20% as capital markets. We clearly view capital solutions as both a moneymaker in the fee business but also as important as a client generator. New clients, particularly investment-grade clients, who have never come to the alternatives industry, much less Apollo, are for the first time seeing that they can come and pick up 200, 300, 400 basis points over the comparable publicly traded IG rating. A portion of their portfolio is doing it. While we're having this discussion, and it sounds relatively normal, this is not a product they can buy. They are experiencing the product for the first time through capital solutions. As they become comfortable with the product, we're moving them into sidecars and into recurring sources of revenue. I’m going to turn it to Jim.
Jim Zelter, Co-President
The only double-click I'd say on that, Alex, and it's truly the core of our business. In our securitized products Atlas, in the past, investors only had access to the end results, i.e., the asset would be in a warehouse platform and they'd have access to the securitized product. What we're doing for our retirement services balance sheets and a few others now is offering that interim role where they can have access to that pre-securitized product. Again, that ecosystem creates a flywheel. It started several years ago with our high-grade alpha and what we did in ADNOC and Hertz and AB InBev, but that's opened an amazing number of doors for us of folks coming into our ecosystem, giving us sidecars or SMAs, and then they'll come into commingled funds. But we will put a little bit finer pin on that. But it really creates an ecosystem, as Marc said.
Operator, Operator
Thank you. The next question is coming from Patrick Davitt of Autonomous Research. Please go ahead.
Patrick Davitt, Analyst
Hi. Good morning, everyone. I have a follow-up on the origination discussion. Could you maybe more specifically frame what the annual origination volume of the Atlas team has been running at? More broadly, the release seems to suggest this is kind of the first announcement related to the Credit Suisse transactions. Does that mean there are more incremental things that are going to be announced here, like this beginning?
Jim Zelter, Co-President
Yes, so this is a group that has historically originated in excess of $50 billion a year over the last several years. Sometimes it was chunky, sometimes less, but it's a massive platform with over 250 underlying financing facilities or partnerships. The reason you're seeing the release as stated is it's a bit of a staged closing. There needs to be investor consents as well as a variety of international licenses and regulatory approvals. The bulk of what we announced in the last 24 hours is the initial closing. You'll see some rolling closes over the next several months. It will all be done by midyear. The fact is that the team is engaged. They've been rebranded. They're operating as an appropriate entity. For us, it's really the first stage. What’s interesting is there will be not only assets and facilities we manage on behalf of our retirement services, but as we roll out a variety of commingled or SMA sidecars, there will be a residual portfolio that we manage on behalf of Credit Suisse over the next several years.
Marc Rowan, CEO
Patrick, it’s Marc. I want to give you a way of thinking about this. Again, we always have to execute first. What do we see here? This is a business that has not previously existed outside of the banking system. Each of the banks that own one of these businesses is competitive with the other banks. We are not a competitor to the banking system. We actually don't want what the banking system wants. I'm saying it in a confusing way. But we can’t sell the client equity, advice, M&A, treasury, payments, FX, and derivatives. The banking system wants to sell all those things. What they don't want, for the most part, is the asset. We are an incredible partner to the banking system. But if you're in a competitive bank or a boutique, you historically have not wanted to bring your client to this business because you're bringing it to a competitor who's interested in the same things you are. Our job here is to represent a capital box, which will serve as an investment-grade capital box, as Jim suggested. We will build and have a massive warehouse business. The warehouse business is a good business. The stat in my mind is more than $350 billion of origination over the last seven to eight years with de minimis losses. The spreads, we believe, are single A credit spreads but at very wide spreads, which are then cleaned out through securitization, broadly available to a variety of investors. Our job is to scale that, but also to become the financing partner to lots of boutiques who have clients where they're nervous about bringing them to banks that are their full-fledged competitors. Also, we're a great partner to the existing banking system on hold positions. People who have securitizing businesses where they just don't want the hold or the capital, are bringing us in to be side-by-side with them. They are bringing in someone who is not a competitor for their client. That's our job. We have a lot of work in front of us. Jay Kim has built an amazing team, and we're very excited about what can be done here. We expect, as I suggested previously, this will be accretive financially in 2023. But it's up to us to make it strategically accretive to our platform in 2023.
Operator, Operator
Thank you. The next question is coming from Craig Siegenthaler of Bank of America. Please go ahead.
Craig Siegenthaler, Analyst
Thank you. Good morning, everyone.
Marc Rowan, CEO
Good morning.
Craig Siegenthaler, Analyst
Just a follow-up to Glenn's question on retirement and OTTIs. Your historical loss rate has been very low at 7 basis points annualized. But what was the loss rate in Q4? And do you have any view on how this should trend this year, especially in light of the prospects for an economic recession?
Martin Kelly, CFO
Yes. So Craig, it’s Martin. The loss rate was right on target in Q4. As we go through every asset class and conduct a rigorous process, we're just not seeing any uptick. If you look at the headline, there were some peak-up CECL adjustments, which were just sort of accounting required but don't reflect actual credit losses. The actual changes in the reserves, incidence of stress, and realized losses coming through, we're not seeing it across residential loans, commercial loans, asset backs, or any other asset class.
Jim Zelter, Co-President
If I can just highlight, Craig, I know there's lots of questions about the credit cycle and a concern from our perspective, and we're not the economists. We'll leave that to Torsten. We’re just following our discipline of purchase price matters. The reality is certain sectors are doing very well post-COVID. Certain sectors are having a bit of a challenge. Hotels, entertainment, lodging, and airlines are doing very well; hard industrials or the auto sector are having a tough time. Our IG book is largely composed of major financial institutions with stable IG credit, a strong CLO book. We really feel like we have a very well thought-out strategic asset allocation and how we assemble it is showing the robust nature of the portfolio.
Marc Rowan, CEO
I'll just finish it, Craig. You're going to see a tremendous amount of additional activity from Athene this year in communicating its portfolio and what's going on. We have a tremendously good story to tell, and the team is anxious to tell it. They’re going to be very visible and very transparent in how that gets shared. I'll just echo where Martin and Jim started. We're just not seeing it in the portfolio. Absolute normalcy in terms of credit, and we're being compensated for structure and for illiquidity and for origination. We're not being compensated for credit.
Operator, Operator
Thank you. The next question is coming from Michael Cyprys of Morgan Stanley. Please go ahead.
Michael Cyprys, Analyst
Good morning. Thanks for taking the question. I wanted to circle back on the normalized SRE spread. If I heard Martin correctly, I think he was suggesting 135 to 140 for '23. Maybe you can correct me or not. But could you help unpack some of the moving pieces in your guidance? Clearly, you mentioned the benefit from higher rates; I think 20% of the book is floating, but also think a portion of the liabilities are floating. We're seeing cost of funds ticking up here in the quarter. I was just hoping you could elaborate on some of the moving pieces, where are cost of funds on new business? And as you look out three to five years, where do you see that net SRE spread settling over time? Thank you.
Martin Kelly, CFO
Yes. So Mike, that's the reason we provide a single net number to sort of get through the puts and takes that go into that. The benefit of interest rate increases on the floating rate assets is starting to diminish, as you'd expect, right? A lot of that benefit has come through the numbers. If we assume that today's rate curve at the short end holds for the year, over the next couple of quarters that will flatline out, right? That's a temporary benefit for the year. There are also option costs that are required to hedge rate features and policies, which are part of that. So we're seeing some headwinds there. We're assuming that the fourth quarter was extraordinary in terms of net spreads. We had 145 basis points of fully netted costs, 185 before OpEx and financing costs. We don't expect those levels to continue in our models. If you bring that down to a more normalized level and net all of the above, including what we think is an appropriate allocation to alts for the year, you get to that 135 to 140 basis points. That's the reason we're trying to anchor around a single metric, which we believe is the most appropriate view of spread for the year, given the components that go into it.
Marc Rowan, CEO
Maybe I'll tackle the two pieces of it that Martin didn't flush out. One is in alts. You have to step back and say that if I look at the relative attractiveness of asset classes, credit is simply more attractive than equity. You will see that reflected in the margin allocations from Athene. All of this nets down into the fact that credit requires less capital than equity, which allows us to do more business. The other piece, and it's important that you track this through the model, is we have a choice. We can keep 100% of the business on the books, realize the growth in SRE, and deploy our own capital as that’s Athene’s balance sheet capital, or allocate a portion of the business to sidecars and essentially receive a fee for fronting that at Athene, receive FRE at Apollo for managing that, and allow investors to earn the spread. Given the attractiveness of credit, this offers investors another opportunity to invest in private investment-grade credit with perfectly matched low-cost liabilities, which is why we've seen such good take-up at ADIP2, in addition to the strong performance of ADIP1. As Martin suggested, we expect a very strong origination here, organically. Not even looking at inorganic opportunities where the cost of funds is now not sufficiently attractive to justify spending any money. We will allocate more of that growth to sidecars than we will to the Athene balance sheet. It's not just about understanding the spread of the business; it's understanding how much of the business we elect to keep. The second number I think you need to anchor on is we're expecting SRE growth of about 20% year-over-year. Combination of basis points margin, which part reflects a decision between debt and equity, and then on the growth side, how much capital we want to deploy as principal versus how much we want to deploy through the sidecars. We're in a fortunate position where we have that choice.
Operator, Operator
Thank you. The next question is coming from Finian O’Shea of Wells Fargo. Please go ahead.
Finian O’Shea, Analyst
Hi, everyone. Good morning. Another on the Atlas partners’ origination. Will Athene provide the warehouse financing? If so, are you offering similar to what banks do on advanced rates, or go further? Regarding the equity of those deals, will you mainly sell to something like AAA internal or more to external parties? Thank you.
Jim Zelter, Co-President
Okay. Let's take a step back for a second. No, Athene is not offering warehouses. We’re going out. There's a consortium of global banks that you're familiar with offering us appropriate financing facilities for the commercial real estate, the residential real estate, and the consumer facilities, again, global banks, massive facilities. What Athene will take are those, in addition to other investors, they'll take either the mezzanine or the residual of that financing facility. Again, I contrast this to what we were discussing earlier. They're not taking residual securitization risk, which is a higher attachment and lower spread. What Athene and the other investors will have access to are those financing facilities with lower attachment points and higher spreads behind those senior banks. Think spreads 350 to 450 over; think attachment points 55% to 65%, where once those companies go to the securitization market, the attachment point goes to 80% to 85% at dramatically tighter spreads.
Marc Rowan, CEO
I think it's important to say we're not in the credit risk business in what we're talking about. There's nothing about the advanced rate that is going to be different than what is available commercially everywhere. We want to get paid for structure and direct origination. We are not looking to get paid for credit risk unless we're in a credit fund that is supposed to get paid for credit risk. This is about avoidance. Regarding the funding of this, very little equity funding is required during the upfront platform. It will be funded by AAA and by third-party investors alongside. The funding structure itself is all laid out in the 10-K coming up.
Operator, Operator
Thank you. The next question is coming from Rufus Hone of BMO Capital Markets. Please go ahead.
Rufus Hone, Analyst
Great. Good morning. Thanks very much. I wanted to come back to your comments about the capital efficiency at Athene. The sidecars' contribution is now stepping up to about 40% of the capital. I guess that's a fair amount of capital being freed up. I was curious about where you're looking to deploy that capital. I believe you mentioned buybacks were right at the top of your capital hierarchy in recent quarters. So how are you thinking about all that? Thank you.
Martin Kelly, CFO
Good morning. It's Martin. So at the top of the house, we have choices, and the choices are to buy back stock, which we expect to be programmatic about. We think that’s a very attractive use of capital, given the business plan we see in front of us even at current multiples. I think a small portion is for increasing the dividend because we think that's important to be sort of an S&P-like company. Then, a portion is to invest in the business, which frankly I think we see less need to do right now given most of the growth is organic, and the three initiatives and the next six are being built out with people—not being acquired. This HoldCo capital benefits from a dividend up from Athene each year of $750 million. We expect that to continue at its current level. Looking at the capital efficiency at the Athene level, Athene is growing massively. Growth requires capital. Athene is creating meaningful earnings, $2.3 billion of SRE in the year just finished, anticipated to be up 20% next year. That will be used to fund growth that’s not retained by ADIP and to fund the $750 million dividend. As we look at the choice to spend $1 of capital from Athene, with or without the benefit of ADIP, it’s clearly more accretive across the group to leverage ADIP. ADIP validates the structure and provides terrific returns for its investors. Finally, there’s AAA, which gets to the platform strategy. Those are the key pockets of capital we consider, and we’re looking to optimize it, realizing that uses of capital for buybacks, dividend increases, and investments are all attractive in their own ways. But growth requires capital at Athene, and we're very focused on managing that appropriately to maintain low leverage and strong capital levels above what’s required to ensure that the balance sheet is robust.
Operator, Operator
Thank you. The next question is coming from Ben Budish of Barclays. Please go ahead.
Benjamin Budish, Analyst
Hi, guys. Thanks very much for taking my question. I wanted to dig in a little bit on the inflow outlook for Athene. It sounds like you guys have a lot of confidence that growth is going to continue pretty nicely into next year. I'm kind of curious, on the retail side, how much of that is coming from new distribution versus ongoing underlying strength given where rates are? And on the pension side, just kind of curious. You explained that it's somewhat seasonal, but what should we think of as a normalized run rate as we go into next year? Thanks.
Marc Rowan, CEO
We’ll get back to you on the absolute breakdown between new distribution and strong distribution. It is clear to me that consumers prefer higher rates over lower rates. So you’re seeing a tailwind to the industry. That said, new distribution openings we did at the beginning of last year have been incredibly strong. I won’t steal Athene’s thunder or their announcement, but they expect this year to be at least two massive launches. We are still early in our build-out phase of expanding distribution, not to mention new suites of products and everything else. The tailwind is really good across distribution. Based on what we’ve seen, at least so far, early dates, it appears that '23 is off to a solid start. Regarding PRT, there is a lot of volume to do out there. The only business worth doing is business that comes at acceptable spreads. We have a budget for how much we want to do for the year, roughly $10 billion. Our job is to optimize within the deals that are out there to provide us the greatest spread in terms and the best mix of business. We expect—we expect that we will exceed organically in '23 what Athene did in '22. We will have to make choices and temper our growth moving forward. This will not be about whether there’s business to do; it’s going to be about how much business we want to do.
Operator, Operator
Thank you. The next question is coming from Gerry O’Hara of Jefferies. Please go ahead.
Gerald O’Hara, Analyst
Great, thanks. Hoping maybe we could just get a little bit of an update on the outlook for global wealth. I appreciate it’s still early days, but hoping we could get a sense of how to think about the cadence and flows while balancing your comments regarding not looking to be necessarily the biggest or fastest growing kind of product generation? And also if you could just share some of what the incremental products are that we might expect as it pertains to the nine perpetual products you mentioned?
Jim Zelter, Co-President
Thanks for the question. To dimension it: like taking a step back, Marc talked about what we did last year—around $6 billion. We have about $30 billion in the entire platform right now of products within various global wealth channels in terms of our existing offerings. As you pointed out, of the $9 billion to $10 billion this year, probably two-thirds of that, $6.5 billion to $7 billion will be in the perpetual type of products we've created, which is AAA, Apollo Debt Solutions, ADS, as well as a variety of non-traded REITs. We also purchased a couple of products from Griffin; an interval fund in real estate and an interval fund in credit. We see broad growth across those products. The residual of the $9 billion will be a variety of our institutional offerings fitted into the appropriate wrappers. Our view is this is a long journey. Characteristics of those who will win are that not everyone will succeed. Distribution channels want only a handful of producers or providers. We have the track record, we have the brand now. What’s necessary is the technology and education. Those are how we want to solve the riddle, if you will. Our vehicles have been performing solidly. We haven't faced any redemptions at year end from Windows, so we're happy with the journey we're on. Between the retail perpetual funds from none a couple of years ago to almost nine at year-end to the variety of drawdown funds, more than five of those. We feel very comfortable with our product set.
Operator, Operator
Thank you. The next question is coming from Adam Beatty of UBS. Please go ahead.
Adam Beatty, Analyst
Thank you and good morning. Just a quick follow-up on retail wealth. Marc, I think mentioned some of the challenges that products elsewhere faced last year. I’m just wondering: has that kind of dampened sentiment? How do you view the take-up? Also, Jim just mentioned your education. How much recognition have you seen thus far that some of the Apollo products are just truly distinctive and a better mousetrap? Thank you.
Jim Zelter, Co-President
Certainly, as we've discussed, what we're doing on AAA, Apollo Aligned Alternatives, we believe, as Marc has publicly stated, could become the largest flagship vehicle of our firm over the next several years. We believe that what we're doing with some of the insurance products and Apollo Altitude offers incredible value and is somewhat unmatched regarding attributes. That being said, there has been some noise about other firms out there having some redemptions. First of all, I believe they're doing the right thing by engaging in the discipline of ensuring people don't think that incremental yield comes without cost. That being said, this is a mere hiccup in a long successful transition and journey, and we’re happy to be part of that transition. No doubt, it’s not just about having multiple resources to create all those things. We’ve launched this Apollo Academy, which is a wide education set available to those channels, and the take-up has been extraordinary. This goes beyond just product creation and execution returns; it also covers technology applications as well as education.
Noah Gunn, Global Head of Investor Relations
Great. Thanks again, Donna. Thank you everyone for your time and attention this morning. I appreciate your continued interest in Apollo. If you have any follow-up questions on what we discussed on today's call, please feel free to reach out. We look forward to speaking with you again next quarter.
Operator, Operator
Ladies and gentlemen, thank you for your participation. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.