Earnings Call Transcript - APO Q2 2023

Operator, Operator

Good morning, and welcome to Apollo Global Management's Second Quarter 2023 Earnings Conference Call. This conference call is being recorded. This call may include forward-looking statements and projections, which do not guarantee future events or performance. Please refer to Apollo's most recent SEC filings for risk factors related to these statements. Apollo will be discussing certain non-GAAP measures during this conference, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the company's website. Also note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Apollo fund. I will now turn the conference over to Noah Gunn, Global Head of Investor Relations.

Noah Gunn, Global Head of Investor Relations

Great, thanks Donna and welcome again everyone to our call. We're really thankful for the opportunity to spend some time with you this morning. Earlier, we published our earnings release and financial supplement on the investor relations portion of our website. Within these documents, you'll see that we generated very solid results that included record quarterly fee-related earnings of $442 million or $0.74 per share, and record quarterly normalized spread-related earnings of $874 million, or $1.47 per share. Together, these two earnings streams totaled $1.3 billion in the second quarter, increasing more than 40% year-over-year, demonstrating the strong, resilient and fully aligned growth characteristics of our asset management and retirement services businesses. Combined with principal investing income and other HoldCo items, we reported normalized adjusted net income of $1.1 billion, or $1.80 per share, up 60% year-over-year. Joining me from our team to discuss our results in further detail are Marc Rowan, CEO, Jim Zelter, Co President, and Martin Kelly, CFO. And we've received some feedback from some of you that we should attempt to shorten the length of our prepared remarks. So at the risk of making a false promise, Marc himself has ensured us that we'll be endeavoring to do that today. So with that, I'll turn it over to Marc.

Marc Rowan, CEO

Thanks Noah, and we all can wish for certain things and hope that they come through. In any event, as Noah said, it was truly a very strong quarter, with normalized SRE and FRE of $1.3 billion for the quarter. We are on track to earn FRE and normalized SRE of approximately $5 billion for the year, which Martin will detail. One thing worth calling out is just how exceptionally strong SRE has been. To put it in context, Athene has now grown SRE by 30% for two consecutive years and they have actually hit their 2026 financial target as laid out in our Investor Day some two years ago, in just two years. Not only are they doing an exceptional job, but clearly Jim, Grant, and the team have sandbagged everyone, and the business continues to be very strong. In addition to financial results, we had record inflows for the quarter on an organic basis, with approximately $43 billion of inflows, including $8 billion that closed shortly after the quarter end. This timing is actually a feature of the alternatives business, as many institutional investors prefer to close on the first of the month and have something in the next quarter from an allocation perspective. So I expect that we will be a little more careful in giving guidance quarter by quarter to account for how this business operates. From my perspective, as Martin and I have discussed previously, we generated positive operating leverage and margin expansion this quarter. We expect this to continue over the next couple of years as we benefit from the investments we've made in people, facilities, and upgrading our business over the past few years. In short, our strategic positioning is excellent, anchored by three simple principles: One, purchase price matters; two, excess return per unit of risk; and lastly, full alignment with our clients, both institutional and retail. It actually feels pretty good having not chased the hot dot during an era of money printing and zero rates. Our opportunity set is different from that of our peer group. Apollo has momentum. In terms of the business, let me start with the equity business, as this year has really marked the end of an era. If I think about what happened over the prior decade, and perhaps even longer, there were incredible tailwinds in the equity business, from money printing, pulling forward of demand, and fiscal stimulus, to zero rates. We now find ourselves in an absence of tailwinds: rates are higher, growth is slower, and globalization is retreating. Investors will have to go back to investing the old fashioned way and will need to produce alpha. I believe that's what we've been doing, as evidenced by the recent private equity results. The final close for Fund X in mid-July brought in approximately $20 billion over a 12-month marketing period versus continuing to market over an extended timeline. The fund is now closed. Fund IX generated a 36% gross IRR and a 24% net IRR. It is an interesting time in the private equity business, reflecting a split between those who have and those who have not. Our Arconic and Univar financings, which were very large, exceeded expectations, giving us increased confidence in our ability to complete transactions we like. Let me move on from the equity business and discuss the two main drivers of the quarter and what I anticipate will drive the rest of the year. First, private credit. As I've mentioned before, private credit is a term that can be widely interpreted. Private credit can be investment grade or it can be Triple C. Barriers to entry in private credit can be low—anyone with a fund and capable staff can get into private credit—or they can be quite high, requiring a robust ecosystem to serve clients' needs in a sophisticated manner. Think of the difference between a hotdog stand and a Michelin-star restaurant; both serve food, but they operate very differently. In our current landscape, financial market literacy around private credit has become sloppier. What is private credit? Everything on a bank's balance sheet is private credit. Most discussions around private credit focus on a narrow sliver of the market that's centered around leveraged lending. We do appreciate the leveraged lending business; it can be lucrative at the right time but it's cyclical and has low barriers to entry. What we’ve aimed to build is an ecosystem. Over the last decade, we invested approximately $8 billion into building 16 origination platforms. There are about 4,000 people working within these platforms, all focused on originating private credit. Much, if not most, of what they do is investment grade. That’s significant because the investment grade market is at least eight times larger than both the high yield and leveraged lending markets. This is a prime opportunity for private credit. It’s not just a great time this quarter; we anticipate a secular shift in how credit is provided to businesses, which I believe will accelerate. To thrive in this market, you need a steady supply of unique origination. During this quarter, we originated approximately $23 billion, with 50% coming from our platforms. Jim Zelter will detail some of these transactions, but in addition to the names you would expect in private credit, like AT&T and Air France, borrowers value certainty, scale, and speed of execution. In addition to origination, you need an integrated capital markets business because, ultimately, we want 25% of everything and 100% of nothing. Our ACS business, led by Craig Farr, has done a phenomenal job expanding our reach in private credit to both clients and non-clients. In fact, this represents one of the best ways for us to introduce the firm to prospective clients. This quarter, we raised about $7 billion of capital from third-party insurers, and we expect this trend to grow as the market improves. For private credit, particularly investment grade, the way consumers and businesses traditionally borrow is through the asset-backed market, which constitutes a $20 trillion sector where we have a long-standing presence, having facilitated more than $220 billion in volume to date. Most of our activity within asset-backed financing is investment grade, making it a core driver of our insurance and traditional institutional clients' businesses. One critical factor in this market is that we are fully aligned with our client base—we own what they own at the same time and price. There’s nothing more confidence-inspiring than that alignment. Now let’s discuss the job Athene did this past quarter. Athene's results partly stem from Apollo’s ability to source attractive investment grade credit but are also reflective of the incredibly talented team that has built Athene over the past 14 years. The normalized SRE for the quarter was $874 million, and the normalized net spread was 166 basis points—the widest I've experienced. We saw $19 billion of organic inflows during the quarter, which is up more than 50% year-over-year, giving us the number one annuity market share. We are now looking at over $60 billion in organic inflows this year. By some estimates, we are leaving between $10 billion to $20 billion of annual originations on the table. We now have the luxury of being selective and building recurring franchises. We've made progress this quarter in Japan through our reinsurance business and elsewhere in Asia, and I believe Athene's business is gaining momentum. However, as I've previously cautioned—something Martin will detail—these are exceptionally good times currently. We are beneficiaries of a large floating rate position that we've maintained for over a decade. Remember, our business operates at the top of the capital structure on a senior secured basis, allowing us to sleep better at night. Credit performance this quarter was incredibly benign, with impairments below two basis points. Surrenders or outflows also came in better than forecasted. Recall, the primary driver of surrenders isn’t directly related to interest rates but is tied to the timing of programs we implemented three to five years ago, which is largely predictable. It's difficult to imagine the journey from a startup or new business to where Athene stands today. We haven't engaged in any inorganic transactions for several years but benefit from four distinct channels: retail, PRT, reinsurance, and funding agreements. All channels depend on quality and stability in credit ratings and an operating expense ratio allowing us to leverage our business. We couldn't have built what we have today through inorganic means in a high-rate environment. We were fortunate during a low-rate phase to acquire competitive blocks at a time when contract rates were above market rates, resulting in low surrender risks. In contrast, purchasing inorganic blocks in today’s market involves significant risks, as surrender charges and market value adjustments have adversely affected their stability. Essentially, it's a challenging base to build on and will hinder others from achieving our level of scale. Recall that we acquired Athene for about $11 billion, and they are projected to earn around $3.1 billion in normalized SRE for the fiscal year. The team is doing an excellent job, and both distribution and maturation of products have yet to fully mature. Lastly, I'd like to touch on a topic that has sparked interest—our current market environment, particularly the regulatory landscape and our banking peers. We have never had such a collaborative dialogue with the banking system, moving from being simply great customers to true collaborators. The structure of our business, especially our willingness to execute large investment-grade transactions, has made us an invaluable partner to the banking sector. While there’s chatter about this being a prime time for private credit, I've noticed there’s movement on both sides—amongbanks and private credit firms—as most banks are having an extraordinarily good quarter and are set for a remarkable year. We operate symbiotically—we seek the assets while banks want the customers. The banking system is diverse, with participants engaging in various capital structures while largely borrowing short and investing long. Institutions like pension systems and insurance companies have long-term liabilities, making them ideal partners for short-term capital sources. Overall, long-term locked-in liabilities contribute to market stability and are somewhat counter-cyclical for our financial system. Our overall financial system is the envy of the world; we raise 50% of the world's capital. The reason for this global admiration is the structure of our system, with various participants including banks and funds. Importantly, the majority of participants engage in maturity transformation, having no access to the Fed window or US government guarantees, yet maintaining robust positions in capital—our Retirement Services balance sheet holds more Tier 1 and Tier 2 capital than most of the top 10 banks in the US. We conduct cash flow and scenario testing that few institutions can match, leading to a balance sheet that is significantly more investment-grade than most depository institutions. Our model complements the banking system, fostering unprecedented collaboration—a trend I expect to only strengthen as regulatory frameworks evolve in the US, Europe, and Asia. As we near summer's end, our team is in excellent shape and focused on executing our plan. We're committed to steering clear of unnecessary distractions—the potential from simply executing our current strategy is incredibly strong.

Jim Zelter, Co-President

Thanks, Marc. Marc did a great job outlining our competitive position and vision. Now I'll spend a few minutes discussing how these important themes play out within our firm, focusing on the investment environment, performance, and fundraising. It's clear that demand for private credit solutions has risen significantly as higher capital costs have limited the availability of traditional financing. We believe we're well-positioned to meet this need for several reasons: our scale, speed of execution, and the sophistication of our investment underwriting. We're diligently building the largest alternative credit business in the industry. Our success today is attributable to our comprehensive capabilities or what we call the Apollo toolbox. We serve a wide range of clients, providing flexible and bespoke capital solutions across various segments. In the second quarter, which started with the regional bank crisis, we deployed nearly $35 billion of capital across our platform. Much of this activity was enhanced by yield-driven business across our various sourcing channels, including high-grade Alpha financing solutions. One notable financing from the quarter involved Wolfspeed, where we led an investment group in providing a $1.2 to $1.25 billion secured note to aid in their growth initiatives. Recently, we also partnered with Air France-KLM, offering a EUR 1.5 billion capital solution through our managed funds and insurance affiliates for their Flying Blue Loyalty program. This transaction would further strengthen Air France-KLM's capital position while increasing our total capital support to the airline to over EUR 2.5 billion within a year. Amid our expanding opportunity set for investment-grade assets, our debt origination across 16 platforms remains robust. The acquisition of Atlas SP Partners, our largest asset-backed financing platform, is now fully closed, meeting expectations for client and employee retention while executing over 30 securitizations since March. As we actively deploy capital, we remain focused on generating excess return per risk unit. We reached strong and consistent investment performance in this quarter; portfolios across our direct origination, corporate credit, and structured credit strategies achieved returns of 4%, 3%, and 2% respectively, each outperforming their respective benchmarks over the same period. Notably, our hybrid strategies also performed solidly, with our hybrid value and more opportunistic credit strategies each returning over 4% for the quarter. The past year has not been easy due to weaker public market performance and some instability in the first half, yet we've managed to deliver strong investment performance, partly because of strategies like ADS, our non-traded BDC, as well as Redding Ridge and our CLO originator. Turning to fundraising, we achieved a record organic inflow of $35 billion, propelled by robust momentum at Athene and our third-party asset management business. Specifically, we raised $15 billion this past quarter, with an additional $8 billion slipping into the early weeks of the current quarter. The investments made over the last 24 months into adjacent opportunities, such as secondaries and those where we have a strategic advantage, have started paying off. Notably, our third-party insurance market shows significant promise, aided by a comprehensive client coverage network to ensure coordination across the firm and offering curated solutions tailored for this fast-growing client segment. We continue to see momentum with our sidecar initiative, which has raised over $4 billion across four vehicles this year. Sidecars allow institutional investors to invest alongside various credit-related strategies with greater scale and flexibility than via traditional fund structures. This is a growing trend and an effective method to engage more sophisticated investors. Additionally, we've made strides with individual investors, developing a diverse global wealth platform across asset classes, product structures, distribution channels, and geographical outreach. This breadth has helped us navigate some recent market-driven challenges while broadening our retail-focused product suite and expecting to launch one to two products each quarter through 2024. We have also made significant progress with Apollo-aligned alternatives, which are now available on five bank platforms, with more US and non-US banks, including RIAs and other wealth channels expected in the latter half of the year. The monthly inflow into Apollo Debt Solutions has strengthened over the past two years due to consistent investment performance. We're confident in our capacity to raise global wealth capital this year compared to last. Furthermore, our Capital Solutions Business has seen strong and stable fee revenue generation over recent quarters—this aspect of our flywheel effect is working well for us, driven by increasing demand for custom financing solutions and improved organizational coverage of corporate clients. In the first half, we syndicated over $6 billion across 100-plus institutional investors and are currently marketing over 30 transactions. This initiative is helping us reach many investors who are new to the Apollo platform.

Martin Kelly, CFO

Great, thanks, Jim. I'll provide additional context on our financial results and outlook before we open the floor for questions. As Marc and Jim mentioned, our second-quarter results capped off a very strong first half, positioning us well to meet or exceed our 2023 financial targets. We've asserted this year is one of execution, and you're witnessing the results manifesting themselves meaningfully. In our Asset Management segment, FRE revenues increased by 26% year-over-year, while FRE costs rose by 22% and overall FRE experienced a growth of 29%. Consequently, our FRE margin expanded by over 100 basis points recently. In the Retirement Services sector, Athene’s performance continues to surpass our projections with normalized SRE year-to-date up by over 50%, propelled by solid organic growth trends. Focused on the second quarter, our record quarterly FRE was buttressed by fee-related revenue growth of roughly 25% quarter-over-quarter. Management fees surged almost 20%, with capital solutions fees staying robust and exceeding our initial full-year expectations. Total fee-related expenses modestly increased comparatively, underscoring our commitment to disciplined expense management this year. The growth in the compensation expense line reflects the decelerating pace of hiring, with slightly over 100 net new Apollo employees added during the first half, only 40% of the headcount growth seen in the same period last year. The strong revenue growth and decelerating cost growth yielded over 200 basis points of FRE margin expansion, bringing our FRE margin to 55%. Moving to retirement services, Athene's normalized SRE increased 8% quarter-over-quarter, translating to 166 basis points in normalized net spread. On a sequential basis, the normalized net spread rose by five basis points due to higher floating rates and investment margins net of new business and financing costs. The accretion from heightened interest rates has surpassed our projections for the first two quarters of the year. Looking ahead, we anticipate the normalized SRE in the second half of the year to align with the figures earned in the first half. This assumption is based on four primary factors. First, sustained strong organic growth at a projected pace exceeding $60 billion. Second, current interest rate conditions, including levels and curve shapes. Third, ADIP and the third-party capital sidecars we manage, which are backing around 40% of total Athene inflows this year, including buy-down origination upfront. Fourth, a transaction with Venerable, which closed in July, where Venerable recaptured around $3 billion in older payout annuities. This transaction will be reflected as an outflow in the third quarter and will yield capital for deployment into the thriving new business landscape. In conjunction with this transaction, we expect to realize a benefit within SRE estimated at $50 million, which we will categorize as a one-time notable item. For normalized net spread, we expect it to stay between 160 and 165 basis points in the latter half of the year. This results in about 30% year-over-year growth in normalized SRE for 2023, assuming the current forward interest rate curve holds and supporting a pro-rata share of Athene’s additional growth. We anticipate normalized SRE growth in 2024 will align with our longer-term guidance of low double-digit annualized expansion. Regarding credit quality, Athene continues to demonstrate minimal asset impairments throughout its portfolio, maintaining its focus on high-quality, senior secured top-of-the-capital-structure credits. From the start of 2020, Athene reported average annual impairments of just 11 basis points, including just two basis points in the most recent quarter, which aligns with our historical average of nine basis points. Overall, we believe Athene's credit profile remains solid, positioning it to withstand any challenging credit environments, should they arise. Regarding capital allocation, we continue to assess how best to deploy free cash flow, with an eye on the highest returns for shareholders. This year, we've directed more capital towards share repurchases than strategic investments, considering the long-term value in our stock price and the numerous organic growth opportunities previously highlighted. We've used over $230 million for opportunistic share repurchases during the first half of 2023, in addition to covering employee stock issuances, resulting in a decreased share count from 599 to 595 million shares over the last two quarters. To address questions about index eligibility, it's essential to note we reported positive GAAP earnings in the second quarter and cumulatively over the last four quarters, which fulfills the final S&P index eligibility requirement. In terms of market taxonomy, Apollo is classified within the Financial Services Industry Group, according to the Global Industry Classification Standard, showcasing our differentiated business mix. This classification positions us uniquely concerning our direct alternative asset management peers and underweights sector relative to the total market index. Coupled with our distinguished governance, shareholder rates, earnings growth, and long-term stock performance versus the broader market, we believe Apollo is well-suited as a core holding in investor portfolios. With that, I’ll turn the call back to the operator for Q&A.

Operator, Operator

Today's first question is coming from Glenn Schorr of Evercore ISI.

Glenn Schorr, Analyst

Hi, thanks very much. Just a quick question regarding the originations. I understand you have 16 for a reason, and not all of them will be performing simultaneously, but Atlas has been sitting in the $100 billion origination range on an annualized basis. What do you think will push us to the $150 billion mark? Can you achieve this with your current suite of platforms or is it dependent on the market environment? I'm just curious about your thoughts there.

Marc Rowan, CEO

Thanks, Glenn. I think it's a combination of both. We are satisfied with the progress across the 16 platforms; we have not emphasized the consumer side significantly, focusing instead on corporates. There are secular opportunities available. As we integrate these platforms over time, through consistent risk reporting, and holistic approaches, we're confident that we can reach our five-year objective of $150 billion with the existing platforms. We believe they exhibit organic and secular growth. While there may be some consolidation among categories for optimization, we feel secure in our strategic lead and organizational structure to achieve our five-year goals.

Operator, Operator

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

Alexander Blostein, Analyst

Hey, guys, good morning. Thanks for the question. The supply of investment opportunities is evidently increasing due to the banking crisis, as discussed last quarter, and further supported this quarter. Can you provide additional commentary on the demand for destocked investment strategies, specifically regarding private investment-grade credit, historically taken on primarily by insurance clients? Marc, you highlighted the potential to expand beyond the non-insurance client base. Could you elaborate on that and how it shapes your third-party fundraising strategy?

Jim Zelter, Co-President

Yes, let's delve deeper into that, and perhaps Marc has some additional comments. As Marc pointed out, private credit is a broad term that has often been narrowly executed with leveraged lending. With the issues facing banks due to funding crises, we see substantial opportunities in two main areas. First, there are assets that don't deserve to remain on their balance sheets—take the portfolios that PacWest sold. We provided secured financings representing essentially AAA risk and about a 10% return. The process of disposing portfolios is one strategy that is likely to continue over the next several years, as financial institutions optimize their balance sheets. Second, there are sectors where they've been the daily originators of credit, and due to rising capital costs and liquidity changes, it may not make sense for them to remain in that space. We are poised to be active participants in both asset origination and disposals.

Marc Rowan, CEO

To complete that thought, insurance companies have historically engaged in private placements, but typically in a narrow capacity. For instance, if you're in the retirement services business, you only address investment-grade corporates without a competitive edge in the investment landscape. We believe the private investment-grade market offers an expansive opportunity beyond traditional bounds, especially in engaging with large institutional clients who have previously only considered alternatives in the context of higher returns. This shift presents an educational challenge—whether clients view private investment-grade credit as an alternative or simply fixed income will significantly influence the market's reception. We are in the early stages of this educational process, exploring the vast growth potential of private investment-grade assets outside of insurance companies.

Operator, Operator

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

Patrick Davitt, Analyst

Hi, good morning, everyone. We've seen a quarter-over-quarter change in retail annuity sales channels that was worse than expected, given broader market conditions. You mentioned leaving some business on the table for various reasons. Is this related to losing market share, or can you attribute it to other factors, which might explain the divergence compared to some of your peers in the annuity space?

Marc Rowan, CEO

This is a high-quality problem, Patrick. We have four channels to consider: retail, PRT, reinsurance, and funding agreements, all stemming from organic initiatives. We have strategically chosen to prioritize business quality over volume. Last year, we achieved $48 billion in organic inflows, and we project to surpass $60 billion this year, confirming our positive outlook while acknowledging that we're leaving between $10 billion to $20 billion on the table. This intentionality has allowed us to pick high-quality business, liability profiles, and spreads. Hence, most of the unutilized business in the recent quarter was transactional in nature. Transactional doesn't imply poor quality—it simply means we chose to pursue other business over transactional options, such as the low-margin MIGAS products. We can add MIGAS back anytime we want, but we opted against it this quarter given our existing strong inflows.

Operator, Operator

The next question is coming from Michael Brown of KBW.

Michael Brown, Analyst

Okay, great. Thanks for the updates on your normalized FRE projections for 2024. Activity has been quite robust across the platform. Following up on the retail channel question, how do you expect activity to sustain itself as we enter a possible rate-cutting cycle, given that this expectation is built into your current guidance? Do you assume that demand will stay elevated? Also, how do you perceive the Tier 2 business evolving in this context?

Marc Rowan, CEO

It's clear that consumers prefer higher rates over lower ones. Retirees, in particular, have struggled to find good financing options for their retirements, but now they have more options available, evident in the annuity market. To assume that annuities won't be affected by interest rates is to overlook a fundamental principle. What's occurring with us is fascinating: we're seeing growth within an expanding annuity market, but we're also rapidly enhancing our distribution channels. In recent years, we've onboarded several new distribution banking partners. We anticipate adding the largest or second-largest annuity provider in the country soon, although this partnership won't mature for another year. Additionally, two to three other significant providers are also in the works. Thus, while rates might affect retail share negatively on the margin, our rapid distribution growth may mitigate substantial declines. More importantly, the diversity of our channels is noteworthy. The PRT sector is gaining traction as many funding plans nudged closer to fully funded statuses are triggered to consider derisking. Even those with equities are reconsidering as they assess the market's vulnerability.

Operator, Operator

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

Michael Cyprys, Analyst

Hey, good morning. Thanks for taking my question. I want to revisit private wealth and would appreciate more details about the traction observed in your products through the private wealth channel, particularly the distribution developed and the upcoming strategy pipeline. Additionally, I'm curious about any lessons learned from earlier product launches in this channel.

Jim Zelter, Co-President

Yes, Michael, let me give you an overview. It's been about 36 months since we laid out our objectives. Regarding products, we can categorize them into three segments: First, our existing flagship offerings, which we’ve adjusted to create appropriate vehicles and feeders for major financial institutions. The second category includes a variety of yield-oriented products such as private BDCs and private REITs. We’ve also made sure these products target not just traditional wealth channels but independent broker-dealers and RIAs. The third category encompasses newer products like our AAA fund, which we’re excited about given its momentum. We feel we have a well-rounded product lineup globally. From our early experiences, we've learned that while robust investment performance is crucial—something we’ve consistently delivered for over 33 years—there's also a significant need for technology integration, education, and service. Our partners expect a full-service approach, and this comprehensive offering must be mirrored throughout our firm. We observe a substantial secular trend toward alternatives, and we believe there is a wealth of potential ahead.

Operator, Operator

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

Rufus Hone, Analyst

Great. Good morning, and thank you. I wanted to gather your thoughts on the longer-term outlook for normalized net spread. You anticipate a slight decline only in the second half of the year. Where do you foresee net spreads stabilizing in the long term, and will you offset any potential spread compression by maintaining a higher percentage of originations from platforms through a selective approach?

Martin Kelly, CFO

Rufus, we generally instruct our spread conversations to be about normalized top-line spread of around 160 basis points and then how that falls through to net spread after addressing financing costs, etc. We've noticed some benefits from recent rates and higher growth, driving net spread to the range of about 115 basis points. Internally, we are deliberating about the appropriate exposure and our hedging strategies in this area. Looking at net spreads, which we focus on considering growth profiles makes sense, and we anticipate contributing to Argonne’s growth through beta adjustments. The thorough of our SRE guidance for the upcoming year reflects this perspective.

Marc Rowan, CEO

Going into next year, we will see the complete effects of ADIP, which will alter the SRE profile compared to this year. This factor has also been thoroughly factored into Martin's guidance.

Operator, Operator

The next question is coming from Benjamin Budish of Barclays.

Benjamin Budish, Analyst

Hello, good morning. Thank you for taking my question. You discussed some whitespace opportunities earlier in the call. With the summer heat, what’s the current status of your clean energy transition strategy? Furthermore, how do you envision it evolving over the next 5-10 years as a potential strategy that could scale like some of your other major drawdown fund strategies?

Marc Rowan, CEO

Thank you for the question. Look, we and our peer group—not to mention the banking system—are poised for decades of financing energy transition movements towards sustainability. The sheer scale of capital needed is unparalleled. We assess whether this involves equity, debt, or hybrid solutions. Most observed opportunities lean towards debt and hybrid. Our objective is to be the world’s leading financier for that energy transition. We've initiated a perpetual evergreen fund devoted to this mission, alongside provisions for bespoke drawdown equity funds on occasion, although these are likely to be smaller than the overall opportunity we see. We announced an initial funding with a few billion dollars, and that capital is currently being deployed rapidly, with our pipeline expanding. I expect this fund to potentially grow into one of our largest vehicles. But first, capital deployment needs to demonstrate our capability, allowing us to establish the types of investment opportunities and return expectations. I remain optimistic about this opportunity's growth, with a focus on debt and hybrid solutions.

Operator, Operator

The next question is coming from Adam Beatty of UBS.

Adam Beatty, Analyst

Thank you, and good morning. I'd like to broaden the discussion towards the potential opportunities in restructuring and distressed assets, as it appears to be a strength for Apollo. So far, the level of corporate distress has been less significant than anticipated. I'm curious about what you're observing and your near-term outlook in this regard, along with how Apollo is positioned to capitalize on these opportunities. Thank you.

Jim Zelter, Co-President

I would concur that the credit markets seem quite benign. However, given the economic conditions and capital costs, we anticipate a rise in business challenges for companies in 2024 and beyond, especially regarding approaching maturity deadlines. That noted, the majority of our current business is driven by investment-grade clients. We feel confident in the stability and robust health of these organizations. Our established reputation in equity and hybrid business positions us favorably in periods of market difficulty, and we plan to approach these changes in a prudent and thoughtful manner, consistent with our practices over the past 30 years.

Noah Gunn, Global Head of Investor Relations

Thanks very much for your help this morning, Donna. And thanks to everyone else for joining and your continued interest in our business. If you have any follow-up questions regarding anything discussed on today's call, please feel free to reach out to us, and we look forward to speaking with you again next quarter. Enjoy the rest of your summer.

Operator, Operator

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