Earnings Call Transcript - APO Q1 2024

Operator, Operator

Good morning, and welcome to Apollo Global Management's First Quarter 2024 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 performances. 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 measures 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 for an offer to purchase an interest in any Apollo fund. I will now turn the call over to Noah Gunn, Global Head of Investor Relations.

Noah Gunn, Global Head of Investor Relations

Thanks, operator, and welcome again, everyone, to our call. Earlier this morning, we published our earnings release and financial supplement on the Investor Relations portion of our website. We report strong first quarter financial results, which included FRE of $462 million or $0.75 per share and SRE of $817 million or $1.32 per share. Together, these two earnings streams totaled $1.3 billion, increasing 18% year-over-year. Combined with principal investing income, HoldCo financing costs and taxes, we reported adjusted net income of $1.1 billion or $1.72 per share, up 26% year-over-year. Additionally, we declared a quarterly cash dividend of approximately $0.46 per share for the first quarter, reflecting the new higher annual run rate level of $1.85 per share as previously announced. Joining me this morning to discuss our results in further detail are Marc Rowan, CEO; Jim Zelter, Co-President; and Martin Kelly, CFO. Before handing it over, I'd like to formally announce that we are hosting an Investor Day in New York on Tuesday, October 1. We will provide additional detail in the coming months and hope that you will join our broader team as we discuss the exciting long-term growth opportunities in front of us. And with that, I'll now hand it over to Marc.

Marc Rowan, CEO

Thank you, Noah, and good morning. As Noah detailed, first quarter results were strong. Personally, I was very pleased. FRE was $462 million, up 16% year-over-year. You will hear a little bit from me, but mostly from Jim; there is momentum in every part of the business. For SRE, we reported $817 million, up 19% year-over-year. A key note for the quarter, we had a record inflow of $20 billion for the quarter. I'm going to spend some time providing color on the quarter but then quickly move to the outlook for the year. In the quarter, particularly with respect to SRE, we had three things going on. First, the team generated, as I suggested, $20 billion of inflows diversified across their funding channels, particularly three of their funding channels. While they generated what they needed to, and origination was very strong, they were somewhat mixed in terms of timing. The generation of liabilities took place at a relatively even pace, whereas most of the origination was back-end loaded, resulting in higher cash balances for the quarter, which we expect to even out across the year. The second, alternatives had a slight underperformance versus what we historically have normalized or come to expect. But the biggest action in the quarter was our move to significantly derisk the floating rate book. Recall that we run a common-sense strategy. When rates are very low, we have been able to earn very nice rates of return without maximizing current period SRE and putting on significant floating rate exposure, which gives us upside as rates normalize. You should expect, as rates have returned to more normalized levels, we use this as an opportunity to significantly reduce our exposure. Exposure now is about $16 billion, probably where we're going to leave it for the near term. Sensitivity of a 100 basis points move at floaters at this point is less than 5% of SRE. You should expect us to continue to move floating rate exposure up and down, reflecting first, the nature of our business; and the fact that while on the upside, we have linear participation in rates, on the downside, we do not have linear participation in rate falls. And second, there is a nice hedging element to having a certain amount of floating rate exposure vis-a-vis performance of liabilities during changes of interest rates. All in all, a really strong quarter and one that gives me increased confidence that the outlook we sketched out for all of you coming into this year will be met. I view this as on-trend. For FRE, we're expecting 15% to 20% growth versus the 25% we grew in '23. We have plenty of opportunities to invest in the business. The trade-off as to where we end up between 15% and 20% will be based on how much we choose to invest in the future. For SRE, we are targeting low double-digit growth, which we believe reflects the long-term run rate growth rate of our Retirement Services business. We do expect to still meet or exceed the $70 billion of organic inflows in 2024. If I were to highlight momentum in the business, I'll pick out the 2 or 3 things that I think are really exceptional. The first, the lifeblood of our business is origination. $40 billion of originations for the quarter, roughly half from our platforms. Platforms, as you recall, are unique to Apollo and represent a recurring, enduring, and growing source of origination. We can only grow as fast as we can originate assets that provide excess return per unit of risk, and this is a significant focus for the firm. Capital formation was also very strong for the quarter. Before I touch on the numbers, I'll touch on the philosophy. Capital formation is an important part of our business, but we have to be very careful to be measured in capital formation and not simply accept money at all costs at all times. We need to invest it prudently, particularly in new and growing segments where we are building investor trust. For the quarter, capital formation was $40 billion, roughly $20 billion coming from Retirement Services and $20 billion coming from asset management. In the asset management business, there was a lot of momentum in global wealth, particularly strong performance at ADS. Recall that ADS is our 100% first lien, lowest leverage, run defensively, direct lending business. The team there has done a spectacular job. There's also momentum in institutional. I'd pick out asset-based finance and third-party insurance as highlights for the quarter. Asset-backed finance is directly tied to our capacity to originate as many of the products that come off our platforms end up or are consumed in asset-backed form. It is also tied to our philosophy of wanting 25% of everything and 100% of nothing, which produces unique alignment with our third-party insurance and third-party institutional clients. ABF is particularly well-suited to insurance company balance sheets. There were $8 billion of ABF flows in Q1, including a multibillion-dollar strategic investment from a like-minded leading financial institution. In summary, momentum has been building in the quarter, and I believe we are set for and on track, consistent with guidance here. While this year is interesting, and Noah has already highlighted our Investor Day, share with you how the team thinks about the future. We are in a really exciting industry. The two big pillars of growth that we see ahead of us are first, retirement. Like it or not, we are all getting older. The need for guaranteed lifetime income, guaranteed retirement income everywhere in the world exceeds what is currently provided. Whether you look at aging of the population, the decline of defined benefit plans, or the inadequacy or lack of preparation of governments around the world, I continue to believe that retirement is going to be a massive driver of our business. Retirement is ultimately built on a foundation of fixed income. The second and perhaps bigger trend in our business is a wholesale revisiting by investors of the ABCs of portfolio construction. And when I say investors, I mean institutions and individuals. We are an industry that has been built out of the smallest asset allocation of our institutional clients. In a very simple way, I think of our institutional clients as being primarily allocated, at least half to publicly traded equities; 30% allocated to publicly traded fixed income; and 20% allocated to everything else, meaning alternatives. Our entire industry growth has been out of that 20% bucket. 20% is the so-called private or alternative bucket made sense in a world where private was risky and public was safe. I believe we are revisiting the most fundamental concepts that underlie our financial markets. Private now goes from AA to levered equity; and public, which was 8,000 public companies, now comprises 4,000 public companies. And the reality is 10 represents 35% of the S&P 500 and unique concentration to 2 or 3 companies. Investors are already looking to their fixed income bucket, which historically has been off limits, and starting to ask questions about what is the difference between public and private? If both are safe and risky, this is just a question of liquidity trade-off. Liquidity trade-off is actually getting much closer. Liquidity in publicly traded fixed income is at record lows, whereas liquidity for private credit is actually increasing daily. I'm not saying that we're going to pass each other, but the notion that investors will begin to allocate to private markets, an entire asset bucket that they have not historically allocated to private markets, presents our entire industry with just an unusual path toward extreme growth. I believe the same will happen in the equity bucket. An investor who wants exposure to the economy used to get it in public markets. Now more than half the economy is in private markets. While that allocation may not be to private equity, private equity being a product, a 10-year locked-up fund seeking very high rates of return with leverage. I believe investors increasingly will seek out equity exposure in private markets in other forms that exist today. And it is our job, as an industry, to create the products for the future to allow investors to access 100% of the economy, given that it is no longer in public markets. For us to succeed, this is not really a question of opportunity; this is a question of execution. Execution starts with origination. We can only grow our business as fast as we can originate. As you heard, $40 billion for the quarter. We have discussed publicly a $125 billion goal of origination for the year. Our original 5-year plan had us getting to $150 billion by 2026, which I hope we will exceed. And no doubt, Investor Day will exceed $200 billion as our midrange target for where we need to be in origination. Again, growth in our business is limited only by our capacity to originate good risk. The second thing we need to do is to prepare for a change in how capital is formed. The change is already happening, given the importance of global wealth to our industry. And we will be one of the successful players in that industry. We value these relationships and run the business on a long-term basis. We are essentially needing to build different ways of communicating with our clients. Historically, as you know, we've raised money from our institutional clients out of their alternatives bucket. Increasingly, we will need to cover their fixed income bucket and eventually their equity bucket. I believe we are well positioned to do this, and this is coming at a good time for us and for our industry. And if one steps back and thinks about where capital need is in the world, whether it's infrastructure, energy transition, or adapting to new technologies of data centers and the need for power, all three of these things represent long-term financing. I do not believe that long-term financing is well suited to the shorter-nature balance sheets of the banking system nor to the daily liquid fund market. Increasingly, these long-term capital needs will be matched with long-term funding from our retail and institutional clients. So again, number one, origination; number two, capital formation; and finally, product development, particularly in equity. The migration of the fixed income bucket to private markets is already happening, and it's happening faster than I thought. In some ways, we expect that because there are signposts there. Rating agencies rate things in public markets and private markets. And so investors, as they begin to think about this transition, can look to credit ratings and others as a sign of comparability between public market and private market risk. Equity markets lack the same sort of signposts. It is up to us as an industry to develop those kinds of products, and I'm excited about what the future looks like, not just in transition in the credit bucket but also in the equity bucket. In summary, I like the hand we're playing. We are incredibly well positioned in Retirement Services with a decade-long lead over most of our competition. The work we have done on fixed income replacement and private investment grade, I believe, is particularly well suited for the transition that is taking place as institutions and individuals migrate their historically 100% public fixed income exposure to public and private. I also believe we are well positioned with our hybrid business to begin to address the migration that I expect to take place in equity. Jim, over to you.

James Zelter, Co-President

Great. Thanks, Marc. Let me dive into a few more details. The foundation of our business is built upon delivering strong investment returns for our clients, and we have historically done so by upholding a purchase price matters investment philosophy across market cycles and strategies, which embrace downside protection structure in return for excess return per unit of risk. Most recently, the industry has evolved into a paradigm marked by higher for longer rates, tighter spreads, and extreme valuations, and we've responded accordingly. Over the last several quarters, we focused on larger companies and transactions at the top of the capital structure while employing less leverage than others in the industry. Marc mentioned the ADS, Apollo Debt Solutions. There's a great example of that, where we produced a 14.5% return over the last year, but a conservatively levered balance sheet of 0.6 with a 100% corporate loan portfolio. Additionally, we continue to generate meaningful excess return in this intersection of equity and credit, which we define as hybrid, driven by a variety of structural changes and inefficiencies in the market. Our two flagship strategies in this area, the Accord series and the Hybrid Value series, have generated particularly strong returns, appreciating 4% in the first quarter and more than 16% over the last year. Alongside investment performance, capital formation is a critical driver of our growth. We generated strong inflows across the business in the first quarter, as Marc highlighted, which included $20 billion from our asset management business and $20 billion from Athene. Organic inflows, excluding any leverage or segment transfers, totaled $33 billion, which is on track with our $120 billion target for the year. Double-clicking on this third-party fundraising, credit-oriented strategies were very much in focus and accounted for more than 80% of capital raised in the quarter. Some of the more significant contributors included $3 billion to broadly support the growth of the Atlas ecosystem, $3 billion for high-grade alpha separately managed accounts, $2 billion for large-cap direct lending, and our recently launched asset-based finance fund. As Marc mentioned, it is worth double-clicking on the fact that we've raised $6.5 billion of the capital from third-party insurers, reflecting the significant inroads we've made in this important growth area over the last handful of years. We're focused on delivering strategies that sit at the intersection of Athene's unique SRE playbook and Apollo's broad asset management capabilities, namely investment-grade private credit, which we believe is ideally suited for these insurance company investment portfolios. To illustrate the scale of our alpha-generating capabilities, we've originated close to $80 billion of assets through platforms and corporate solutions over the last 12 months, which has generated between 150 and 200 basis points of excess spread versus comparatively rated liquid credits. As we continue to grow in these debt origination capabilities, we expect there will be growing interest from third-party insurers to invest alongside in the full spectrum of our ecosystem, a dynamic we've started to see. And all this works because of our alignment with Athene, which is critical to our value proposition. Moving on to global wealth, which is a strategic and growing contributor of our capital formation activity. Our journey in building out this business, we've realized there are five crucial components in order to succeed: investment performance, education, distribution capabilities, technology, and a diversified product list, all of which we've successfully established over the last 24 months. We believe that only a small group of firms can deliver on all five. With continued strategic focus and investment, we see ourselves among the best positioned for long-term success. The numbers bear this out as we've more than doubled our run rate fundraising level with our holistic suite of products. Monthly inflows approached $1 billion in April, a meaningful increase from approximately $650 million just a quarter ago and less than $400 million a year ago. As I mentioned, one of the primary drivers of this activity has been our flagship corporate direct lending offering, ADS. April subscriptions totaled over $500 million, bringing year-to-date subscriptions to approximately $1.7 billion. This represents approximately a 400% increase in flows year-to-date compared to last year. Part of the step-up reflects recent market share gains in the non-traded BDC space with ADS capturing 17% of total inflows in 2024 so far compared to only 10% at the run rate in the fourth quarter. This overall growth has been enabled by leading investment performance combined with our expanding distribution footprint and attractive yield. The next step in the expansion of our credit-focused product set within the global wealth channel is on track to launch a new asset-backed finance vehicle in the coming weeks. Apollo Asset-Backed Credit Company, or ABC, is a semi-liquid turnkey solution designed to provide our credit investors access to our differentiated origination capabilities and builds on the initial traction we've seen in our broader asset-backed franchise. We believe the breadth and scale of our proprietary origination ecosystem, not just for sourcing from Wall Street, will position us to be a market leader in this nascent and important growth area of the global wealth market. Importantly, we structured ABC as an operating company, enabling us to access our full range of origination capabilities versus other traditional private credit structures. Finally, Apollo Aligned Alternatives, better known as AAA, our semi-liquid equity replacement strategy continues to be an important part of our global wealth offering. We raised $700 million of capital in the first quarter and continue to see strong fundraising momentum. We have a pipeline of new distribution partners preparing to launch the fund over the next course of the year. Interestingly, we are also seeing growing interest from the consultant community and insurance companies as a cost-effective, scaled solution for private markets exposure. Stepping back for a moment, we've observed that many in our industry have discovered the language of origination. Our definition of fixed income replacement and private credit, a $40 trillion addressable market, has become mainstream and distinct from the traditional view of private credit. We were pioneers of these concepts 36 months ago and expect to continue blazing the path forward for this important area of secular growth. As part of that, scaling our debt origination volume production is a strategic focus, and our quarterly results highlight that we're continuing to make meaningful progress. As Marc mentioned, total debt origination volumes of nearly $120 billion over the last 12 months is up almost 40% compared with our prior year period. As a reminder, we originate assets across our yield ecosystem through three main channels: the traditional channel, platforms, and corporate solutions. More recently, we've identified partnerships with other financial institutions as the fourth avenue that we plan to expand over time. Additionally, we have expanded our focus on a fifth leg, the broad equity and hybrid ecosystem as well, which you will hear more from us in the future. Over the past year, our platform ecosystem has been the primary driver of origination growth, having roughly doubled volume production over that period. ATLAS SP, our warehouse finance and securitized products business, has been the major driver of that activity. One notable win to highlight in the first quarter was the $8 billion purchase of seller financing facilities from UBS. We acquired this portfolio at an attractive excess spread for IG-equivalent risk, which also proved accretive and attractive to third-party investors as we materially oversubscribed on half the trade and distributed accordingly. Looking forward, with the ATLAS business fully operational, independent, and armed with a significant amount of strategic capital, both debt and equity, we're focused on meaningfully scaling that platform. While platforms are an essential component of our origination ecosystem, we're also highly focused on growing our corporate solutions platform and business. We're investing a tremendous amount of time with a broad array of the largest, most sophisticated companies to educate them on the benefits of our multifaceted credit toolkit or toolbox and the benefits it can provide, namely speed, certainty, size, and customization. And we're beginning to see those efforts bear tremendous fruit. Lastly, we believe partnerships will become a growing contributor to our origination capacity over time. Historically, and especially over the last several years, we believe we've been on the cutting edge of strategic dialogue with various financial institutions. We're seeking to extend our vast array of solutions to these firms in a partnership manner which in turn will help expand our platform. Importantly, as we scale our debt origination capacity and expand newer areas of equity-focused investing, we're creating more consistent and diversified deal activity that feeds into our Capital Solutions business. While quarterly variability in fee revenue should be expected, we're observing that the business is reaching a point of consistency amid continued growth potential. In the first quarter specifically, Capital Solutions fees were solid, supported by record quarterly gross capital deployment of nearly $60 billion across the platform.

Martin Kelly, CFO

Thanks, Jim. Good morning, everyone. Let me close out with some brief comments on our financial performance. Our first quarter results positioned us well to deliver on the financial targets we've communicated for 2024, which signal an attractive mid-teens earnings growth trajectory. We view the sustainability and predictability of our earnings profile as highly valuable and increasingly appreciated by the market, especially against the backdrop of macroeconomic uncertainty that has impacted more cyclical revenue streams. Starting with the asset management side of the business, FRE trends remained solid with 16% growth year-over-year, reflecting revenue growth of 13% and cost growth of 9%. As we look toward the remainder of the year, we're on pace to generate the fee-related revenue growth, margin expansion, and overall FRE dollar growth we have indicated. We expect growth in fee revenue to be supported by strong and diversified capital formation, a record $50 billion of dry powder with future management fee potential, and a robust capital solutions outlook that should deliver a strong second and third quarter based on the pipeline we see today. For expenses, we will continue to manage our cost base prudently while selectively investing in key areas, principally global wealth and our credit business. We also expect to recognize a $15 million one-time non-comp expense related to the previously announced merger of two closed-end funds into MidCap Financial Investment Corp., a publicly traded BDC we manage, which will most likely occur in the second quarter on the closing of these transactions and which was contemplated in our original expense growth guidance for the year. Altogether, we expect to generate between 15% and 20% FRE growth, as Marc indicated, in line with our growth expectations for a year in which we do not raise a flagship PE fund. Turning to Retirement Services, we reported SRE of $817 million at a 147 basis point net spread. Adjusting for long-term expectations for alternative returns, net spread would have been 10 basis points higher in the first quarter; and on a comparable basis, 9 basis points lower than fourth quarter levels. This sequential decline was driven by two factors: one, higher on the margin cost of new business in the higher interest rate environment, together with the delayed deployment into higher-yielding assets that Marc highlighted; and two, an approximate 5 basis point in-quarter spread impact associated with hedging a portion of Athene's net floating rate position and higher hedging costs on certain in-force business. As Marc suggested, we reduced the net floating rate portfolio by $9 billion to $16 billion during the first quarter, which resulted in 7% of net invested assets being subject to floating rate indices. As part of this hedging effort, we swapped $8 billion of fixed rate liabilities to floating and issued $4 billion of additional floating rate funding agreements with the negative carry associated with each recognized as part of our cost of funds in the quarter. We believe this level of floating rate securities will adequately equip us from a strategic standpoint while also protecting future earnings power should rates decline materially. Our floating rate income sensitivity has commensurately decreased to approximately $30 million to $40 million of annual SRE for every 25 basis point move in short-term rates, down from the $45 million to $55 million that we previously indicated. We expect the timing differential between origination and deployment of capital to normalize through net spread in coming quarters. More specifically, there were two large asset transactions that closed towards the end of March which, had they closed midway through the quarter, would have created a further 3 basis points of higher net spread in quarter. Considering key components of Athene's earnings growth outlook versus our fourth quarter call, namely first quarter net spread results, a smaller floating rate portfolio, and fewer expected rate cuts as implied by the forward curve, we continue to expect a net spread of approximately 160 to 165 basis points for the full year, which excludes notable items and assumes an 11% annualized alts return. We expect this range of net spread, coupled with robust organic growth, to support low double-digit SRE growth this year versus the comparable 2023 base. Turning to PII, PII has been an expectedly modest contributor to our earnings base in recent quarters as we await a more favorable backdrop to monetize investments. First quarter realized performance fees were also impacted by an impairment on a position held in Fund IX. Looking to the second quarter, we currently expect to generate a similar amount of PII as the first quarter. An important catalyst to reignite realization activity is a reopening of the IPO market, as only around 10% of our fund's total PE portfolio is publicly traded today. We've seen early signs of this happening and see a path for an acceleration in PE realizations into 2025 and beyond. Increasing amounts of realized carry would generate additional cash flow to deploy into opportunistic share repurchases, enabling us to execute on our plan to reduce our share count to approximately 600 million shares by the end of 2026. Finally, on taxes, after a large non-recurring benefit in the prior quarter, which reduced the 2023 annual rate, we experienced a 17% effective tax rate in the first quarter. For the full year, we expect our tax rate to approximate 20%, consistent with our long-term guidance, with a rate slightly above 20% expected in the second quarter. In closing, we are generating significant momentum as we continue executing on our business plan, which is setting the stage for our next phase of growth. The earnings power of the business has tremendous potential, and we look forward to delivering on the opportunity in front of us. And 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.

Glenn Schorr, Analyst

I appreciate the updates on the wealth channel. In the asset management segment, I noticed that non-comp was higher. You mentioned increased placement fees in the footnote, which points to good expenses. I'm interested to know if this is reflected in your 15% to 20% FRE projections for the year. I've also heard discussions about some distributors wanting to transition from placement fees to a more consistent revenue share. Is that currently being considered as part of your FRE expectations?

Martin Kelly, CFO

I can share a few points, Glenn. This is Martin. Firstly, we're nearing the end of the financial effects from the decisions we've made to adjust our cost structure, both for compensation and non-compensation. Therefore, you should anticipate that the first quarter, which was an improvement from the fourth quarter, will represent our normal performance moving forward. This aligns with our annual guidance, which targets a 100 basis point margin increase from 2023 to 2024. Regarding your specific question, we have several ways to distribute our products. Some require an upfront placement fee, which is generally recorded as an expense in our financials. Others use a trailer fee based on revenues. So, it really depends on the distributor and the product, and there are no significant changes—just different structures that suit different products. We have offerings that utilize both types of trailer or cost structures.

Operator, Operator

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

Alexander Blostein, Analyst

I was hoping we could start maybe with your outlook for third-party fundraising. You guys are obviously off to a really good start here in the first quarter. So maybe update us on what you're expecting for the rest of the year with respect to third-party fundraising. What are some of the key drivers behind that? And as you sort of think about some of these larger insurance companies coming in into your offering, how should we be thinking about the fee rate, particularly within the yield bucket, on the blended basis going forward?

James Zelter, Co-President

Thanks, Alex. I think Marc and Martin hit it. Like we think the first quarter sets the level for great trend growth throughout the year. We're very comfortable that what we've seen in terms of the last 24 months, bringing the products together, being very thoughtful about our product suite, really delivering a holistic package. So we're very comfortable taking the first quarter and looking at that as the year grows out. In our mind, the numbers we've put forth in terms of full year target of $50 billion, we still feel very comfortable with that. The traction across all of our channels gives us great comfort. Certainly, a lot of the conversations are going on around the yield businesses. Whether it's what we're doing in direct origination, the pioneer moves we're making in asset-based finance, Marc alluded to the insurance company in terms of the ecosystem, and the broad breadth there. So in our simple summary, we love the trend. We're hitting on all cylinders, and it's across products. But certainly, yield is the primary, but we also have solid fundraising in a variety of our hybrid, whether it's the Accord Plus, whether it's HVF later in the year, or in our equity businesses, AAA and infrastructure and such. So we feel very comfortable with the trend, and we're comfortable with the pipeline.

Operator, Operator

The next question is coming from Brennan Hawken of UBS.

Brennan Hawken, Analyst

I'd love to hear updated outlook on capital solutions. Really strong revenue momentum there, building on last year's strengths. So were there any particular platforms that were notable contributors? And given the building momentum behind capital markets activity, why shouldn't we see those revenues continue to show robust growth?

James Zelter, Co-President

Well, this is Jim again. I think there are a number of questions there. We do get excited about our capital solutions because it ties into not only distribution of great ideas, and as Marc said, 25% of everything and 100% of nothing, but it increases the dialogue that we have in our capital formation. Investors see the product that they're seeing from us, and it opens the door to get closer. We're seeing momentum. I think taking a broad step back, some of the themes that Marc talked about, whether it's the transition from equity that's private versus private equity, a variety of these asset-based solutions like the seller financing from UBS, these are all trends that we believe are going to continue to expand on the existing business. And when you think about what's going on domestically with large, whether it's the Infrastructure Act, the CHIPS Act, what's going on in EV, there are many, many investment-grade companies that are going to be confronted with massive growth initiatives. It's not obvious that they should do it through the traditional channels of investment-grade public debt or equity. We're just finding ourselves at the intersection of those conversations. Certainly, you've seen what's happened in the past several months with what we did for Air France and Vonovia and many other companies. But again, our model is based on making sure that we are an investor first. But this ACS, the flywheel of origination, distribution, getting closer to your clients, and then finding new avenues from which companies will fund and finance, that flywheel is working. So while we do expect growth, we want to do it in a very measured manner.

Operator, Operator

The next question is coming from Bill Katz of TD Cowen.

William Katz, Analyst

Look forward to seeing everybody in October, if not sooner. So Marc, not to steal any thunder from a couple of months from now. But when you laid out your goals for the sort of 15% to 20% FRE growth and the low double-digit growth for SRE, your flywheel that Jim was just talking about was substantially smaller. How do we triangulate between the rapid growth of your ecosystem to the financials in terms of thinking through the earnings growth? It would seem to me that you should be able to support either or both faster asset management growth and/or higher ROE in the insurance business. Or is there an elevated expense offset to some of that flywheel acceleration?

Marc Rowan, CEO

Thanks for the question. I don't believe any of the points mentioned. I want to revisit our outlook for the industry. Our industry possesses remarkable potential. The argument for private markets is increasingly persuasive. People once turned to private markets solely for excess returns, but now they also seek diversification. I noticed a recent note from our Chief Economist indicating that over 80% of employment in the U.S. is tied to private markets. While we often think about the S&P 500 and public markets, investors are starting to realize that their exposure through the S&P 500 represents only a small segment of the economy. My joke is that they are largely dependent on NVIDIA, Apple, and Amazon. I anticipate strong growth in private markets. However, as an industry, we must remain vigilant in adhering to our commitment of delivering excess returns relative to the risks involved. This is why investors are willing to pay us premium fees and why they place their trust in us. It's crucial for them to navigate private markets with trustworthy firms. We recognize our limitations, and I believe the industry will realize that our constraints will not stem from capital flows. Accepting capital simply because it is available and then investing it poorly is a surefire way to jeopardize a business. We have observed numerous examples of this and the early signs of such trends. Our focus is on growing our business while ensuring excess returns for each unit of risk taken, which, in my view, is influenced by our ability to originate opportunities and our organizational culture. We are balancing these aspects well. I feel positive about our current position. Being a $670 billion asset manager may sound substantial, but in the context of the markets we operate in, we are relatively small. The idea of doubling our business in the next five years does not seem overly challenging. We need to concentrate on origination, culture, and education. We are not interested in building something unsustainable. Our aim is to achieve sustainable, predictable growth of 15% to 20% in the long term for asset management and low double digits in SRE. If we encounter periods of market volatility where assets are mispriced, as we've historically seen at least once or twice a decade, we can deploy significant capital effectively, which will accelerate our growth. For us, the key focus is on origination, origination, origination.

Operator, Operator

The next question is coming from Ben Budish of Barclays.

Benjamin Budish, Analyst

I wanted to ask about some of the nuances on the retirement services flows. It looks like your FABN issuance was a bit better than what we would have expected from what we saw publicly. The PRT side was a little bit lower. Just any nuances there. On the PRT side in particular, any concerns related to some of the shareholder lawsuits that have materialized in the last several months? Do you think that sort of increases the concern that a corporate might give some pause before engaging in a transaction with Athene? Or do you feel like this is something that will blow over, and Athene will shake out just fine?

Marc Rowan, CEO

Thanks, Ben. It's Marc. The business is a two-sided business, and I've said this a lot. Our business is about creating spread. If we don't have wide spreads, we're not interested in doing business. We have better uses for the capital. We have built, and Jim has spent significant time talking about the asset pipeline, private investment grade, excess spread on the asset side. I'll focus now on the liability side and get to your question. We have built, over the past 15 years, different channels in which we can originate. In various periods of time, some of those channels are really attractive, and some of them are not that attractive. Last year, FABN was not all that attractive. This year, FABN is very attractive. Reinsurance, particularly international insurance from Japan, is an attractive business. FIA is also very attractive. In PRT, PRT was one of the most attractive segments of business last year. This year, prior to any lawsuits, we saw cost of funds associated with PRT at levels that reduced spread to places where we just didn't think the business was all that attractive. A win is only a win if you have wide spread. The lawsuit is actually going to, in my opinion, chill PRT volume across the industry. This is not an Athene-specific issue. Athene is the strongest of the companies in the industry with the most capital, and other things. There are and have been other lawsuits relating to this. Any time you have noise, however undeserved or poorly drafted, it needs to be disposed of first. I think we will see a decline in expected PRT volume this year. I'm not sure that's a bad thing from our point of view given that, at the moment, spreads in PRT are not all that attractive. I encourage all of you to look not so much at flow, but to look at cost of funds and spread. Cost of funds is a very tricky measure. There are lots of ways management teams across industries have been surprised by the cost of various options and features that they have built into their products. For us, we have built this business in partnership with Jim Belardi and Grant and the team from the very get-go. As owners, for owners, it's our equity. We want high-spread business. Thank you.

Operator, Operator

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

Patrick Davitt, Analyst

My question is on the ATLAS-MassMutual partnership. Firstly, any framework you can give on how to think about the impact on ATLAS's origination volumes and thus Apollo earnings? And then secondly, the press release suggested there was also some sort of separate flow or management agreement with your ABF business. Is that a fair read? And how should we think about that secondary agreement as well?

Marc Rowan, CEO

I have previously mentioned that MassMutual is our primary competitor. I admire their approach to asset management and the strength of their team. This doesn’t preclude us from partnering with them; in fact, we want to convey that message, which is being well received. Our goal is to secure 25% of everything rather than 100% of nothing. MassMutual is a similarly aligned, reputable financial institution that recognizes the same opportunities we do, and they were among the early adopters in the industry. Regarding the specifics of ATLAS, I will let Jim provide more details, and I understand there is significant interest in ATLAS.

James Zelter, Co-President

Yes. Taking a wide perspective and then narrowing down, ATLAS represents our understanding of private credit, distinguishing it from its historical definitions regarding the $40 trillion market. ATLAS serves as a platform where 6 or 7 of our 16 components drive our activities. Recent announcements highlight ATLAS as a finance lender to finance companies, which attracts a substantial amount of equity and debt financing, complemented by SMAs, partnerships, and offtake facilities, forming what we refer to as the ATLAS ecosystem. This ecosystem will continue to expand. Since its launch, we've seen significant success; it is fully ramped and funded. We expect to bring in more participants, and this flow enables us to manage the ABF institutional fund and the ABC vehicle I previously mentioned. I want to emphasize the distinction because recent discussions have frequently mentioned SRT. Our focus is on controlling origination in a systematic and structural long-term manner, rather than engaging in isolated SRT trades that, while interesting and tailored, are seen as tactical approaches. Each day, we consider how we can support Marc's focus on liability and spread, ensuring a substantial pool of long-term assets to balance our liabilities. ATLAS is a critical component in this strategy, offering more impact than the quarterly activities linked to SRT trades, which remain just one of the 40 tools we utilize. We have been active in this sector since 2009, with recent transactions being somewhat blind pools that are strongly leveraged but represent solid investment-grade assets. It's important to note that these are typically sourced from third parties, while ATLAS enables us to source directly.

Operator, Operator

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

Michael Cyprys, Analyst

I wanted to circle back to the new Apollo asset-backed company, ABC, that you guys are launching. I was hoping you could elaborate a bit on the product, the return profile. Interesting, you're structuring as an operating company. I hope you could elaborate a bit around that. And maybe just talk about your vision and how big this could be over time.

James Zelter, Co-President

When we consider our activities in consumer finance and hard assets, we have our institutional product, ABF, which has attracted significant investment and will continue to be a cornerstone of our yield and credit infrastructure. This product was designed to provide global wealth channels with an opportunity; as investors recognize their concentration risk in sponsor buyout activities, there is a growing demand for diversification. This offering will be a first-mover product set, predominantly featuring investment-grade risk and debt risk, while also including some non-investment-grade debt and equity exposures. Our goal is for this to function similarly to ADS, our flagship product, which targets high-quality growth in the sector and aims for high single-digit to low double-digit returns. We intend to achieve this without using leverage, relying instead on effective product sourcing. Therefore, this will serve as our flagship product in asset-based finance, just as ADS does for corporate credit.

Marc Rowan, CEO

I want to emphasize this point, particularly given the current environment and concerns about credit quality. Jim and I have been in this business for 40 years, which is hard to believe. For instance, we manage ADS with a 100% first lien and, I believe, with the lowest leverage in the industry. We could offer higher returns or dividends, but we feel it's important for both institutional and retail investors to experience private markets as the most astute institutions do, without artificially inflated returns through leverage. It’s wise to leverage when assets are cheap and abundant, and avoid it when markets are tight with plenty of liquidity. It can be tempting to chase high returns, but our focus has always been on generating acceptable returns relative to risk. The same strategy we apply to ADS will be used to develop this area in asset-backed securities, ensuring that this category eventually grows as large as corporate credit, and introducing it to investors in the best way possible. We aim to take the lead in sharing this narrative.

Operator, Operator

The next question is coming from Kenneth Worthington of JPMorgan Chase.

Alexander Bernstein, Analyst

This is Alex Bernstein on for Ken. I know there was a question previously around ATLAS and the MassMutual relationship, so apologies if any of this is repetitive. But I do think there are a couple of other points we're hoping to draw out. Firstly, do you see this type of arrangement accelerating your ability to reach the $200 billion-$250 billion long-term origination target that you communicated previously? And then secondly, how are you managing these platforms as a portfolio to reach your goals? How are you thinking about the mix of outside capital, Apollo Capital, bolt-ons that best help you reach your growth goals and those of Athene?

James Zelter, Co-President

Thanks for the question. This will be a great conversation at our October day. But basically, we have these 16 platforms. The top 5 to 7, namely MidCap, ATLAS, PK, and Wheels, are the great drivers. Yes, as we think about running those as a portfolio, optimizing the financing on those, and bringing in third parties, whether it's in SMAs on the production side or even in many instances where we've brought in investors to own the equity along with us, that's all part of the flywheel. So certainly, we think that when we look at what's going on with our platforms and with bringing this integrated toolbox of solutions to companies, we think that gives us the confidence to take our numbers up from our 5-year plan. As Marc said, when we did our first Investor Day, it was $150 billion in debt by '26. We'll achieve that. But we've sort of now changed the definition of the equity and hybrid. So in our mind, hitting those $200 billion-plus numbers, the driver really will be how we integrate those platforms. Again, how investors deal with us, whether it's an SMA, a commingled vehicle or owning part of the equity, it's all part of the same equation.

Operator, Operator

Thank you. That concludes the Q&A portion of today's call. I will return the floor to Noah Gunn for any additional or closing comments.

Noah Gunn, Global Head of Investor Relations

Great. Thanks, everyone, for your time and attention this morning. If you have any follow-up questions on anything we discussed on today's call, please feel free to follow up with us. We look forward to speaking with you again next quarter.

Operator, Operator

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