Apollo Global Management

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Apollo Global Management, Inc. is a global alternative asset manager, primarily focused on generating capital for investment through credit, equity, and real assets strategies, with a history of significant involvement in private equity and related assets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The below analysis is based on the most recent data available, including earnings call transcripts through 2024 Q2, press releases and SEC filings.

Business Overview

Apollo Global Management, Inc. (APO) operates within the alternative asset management industry, a complex landscape that requires deep sector knowledge and long-term relationships with both investors and portfolio companies.

  • Revenue Streams: APO’s revenue streams can be categorized as follows:
  • Asset Management: Generating fees for managing assets in various strategies, including credit, equity, and real assets. Performance allocations or “carried interest” are dependent on fund performance. The company emphasizes that AUM growth drives long-term fees.
  • Retirement Services: Revenue through Athene’s retirement services, particularly their high margin payout and accumulation annuities.

  • Principal Investing: Generating profits through investments on their balance sheet. Gains on investments have become a larger share of revenue.

  • Industry Trends:
    • Growing Sophistication and Institutionalization: The industry is witnessing greater sophistication and sophistication in how capital markets and institutional investors are structured.
    • Shift Towards Private Assets: Investors are increasing their allocations to alternative assets in search of higher returns.
    • Complexity and Regulations: Increased complexity and regulatory oversight in areas such as tax, financial reporting, and accounting are creating an increased demand for sophisticated managers.
    • Global Reach: The global landscape has become increasingly interconnected, requiring a deep understanding of various regions and economies.
    • Interest Rate Environment: Higher interest rates tend to be beneficial for asset managers, who can put cash to work at higher rates, but rising rates also have a knock-on effect to increased cost of capital.
  • Competitive Landscape:
    • The asset management industry is extremely competitive, with many firms seeking to capture capital. High performance can quickly turn into an asset inflow. The risk of overexpansion is very present in this market. There are a number of large private equity firms that are aggressively expanding as well as more niche players competing for allocations.
    • There is growing pressure to generate higher returns as low-cost or passive products gain steam.

  • The industry has seen increased regulatory oversight in several jurisdictions, potentially adding to compliance costs and other operational issues.

  • What Makes Apollo Different:
    • Large scale origination platform: APO is creating an origination-first platform where new deals are proprietary, not market based.
    • Credit Platform: They specialize in a wide range of credit investments and utilize a long-term strategy that has them focus on investments with higher yield profiles.
  • Hybrid-Investment Management: They have actively expanded into hybrid investment management and alternative capital markets to benefit from multiple capital structures and opportunities. * Insurance as an Asset-Generating Business: The Athene acquisition has helped APO tap into a stable source of capital that they use for deployment and has given the company access to more data for risk analysis.

Financial Deep Dive

Here is an overview of key financial metrics. All figures are in millions of dollars unless otherwise stated.

  • Profitability:

    • The firm’s fee income is highly dependent on market trends and client flows as well as overall market activity.

    • Net income has been volatile, driven more by investment performance rather than stable management fee income. In the recent quarter, gains were primarily from strong private equity performance, driven by valuation increase and distributions from holdings.
    • Operating profit has been on a rising trajectory in the recent quarters due to strong performance from both private credit and retirement services, which is not consistent with prior quarters.
  • Debt and Liabilities:
    • Net debt has been fluctuating, but currently, the company has slightly more debt than cash.
    • Unfunded retirement liabilities are also significant to note, it may increase or decrease as a direct result of market action.

  • Capital & Equity:

    • Equity was affected by the conversion of preferred stock by equity-linked shares.
    • The company has been re-purchasing shares. However, despite these repurchases the overall outstanding share count is consistently increasing in the long term.

Moat Analysis: 3 / 5

While Apollo presents some compelling competitive advantages, it is not impenetrable. Hence, I have given it a “Narrow” moat rating of 3/5:

  • Sources of Moat:
    • Intangible Assets: The firm’s brand name recognition and a reputation for performance. * Switching Costs: Limited for many asset managers, as institutional investors seek different opportunities based on their needs and goals; more present for investors in long-term private credit or retirement services products who have less flexibility.
    • Network Economics: It has a strong distribution network and has successfully scaled the Athene business.
    • Cost advantages: APO has a large pool of available capital as well as a large operating platform.
  • Moat Strength:
    • Semi-Durable Moats: Although it is difficult for many firms to replicate APO’s capital raising ability, large asset managers with similar skill sets can replicate the strategies and structures used by the company.
    • The moat is very sensitive to changes in the perception of the company’s brand name due to controversy or operational mistakes.
    • As seen by their foray into the REIT industry, the company can create new business arms.

  • Risks to the Moat:

    • Increased Competition: The rise of alternative investments and the influx of new entrants, as well as expansion of existing incumbents, can intensify competition.
    • Market Disruption: Adoption of newer asset management technologies or trading strategies can make the firm’s assets harder to manage, reducing fee earnings.
    • Increased Regulatory Scrutiny: Increased regulatory oversight could affect profitability and add to operational costs.
  • Performance issues: Periods of underperformance can result in the clients selling their positions in Apollo and decreasing its AUM, which is the main determinant of the firms revenues.
  • Management Instability: Changes in key management can affect the firms ability to attract talent, retain clients, and create value through acquisitions.
  • Economic Instability: Instability, higher rates, and other market turmoil can result in a decreased amount of deployed assets, decreased performance, and lower valuations of the assets that Apollo already has deployed.

Business Understandability: 4 / 5

While a detailed understanding of specific financial metrics or instruments requires specialized knowledge, the overall business of alternative asset management and the role of Athene is relatively easy to grasp for most investors.

  • The key components of returns and revenue are straightforward- fees from managing capital, profits from investment strategies, and fees from insurance products.
  • The cyclicality of the financial markets and the general market perception and valuation of these products require a good understanding of macroeconomics.
  • The firm’s strategy is complex, it can involve numerous different operations and investment strategies that require additional understanding.

Balance Sheet Health: 4 / 5

APO’s balance sheet presents a solid outlook, but also some items that should be noted.

  • Strengths: The balance sheet is supported by the large scale of assets that it manages. Furthermore, its own equity capital is of a high magnitude.
  • Weaknesses: APO has liabilities through debt and retirement obligations. These represent a potential vulnerability, but are manageable within the firm’s capital structure.
  • The company’s liquidity is strong, and it has a high access to capital through debt markets and through its banking relationships.

Recent Concerns and Management View

  • High Inflation and Interest Rates: The current economic conditions have led to some issues regarding the rate at which they can grow assets and have reduced the valuation of assets currently held, particularly fixed-income securities.
  • Market Volatility: The market for large deals has been volatile and has slowed down. Furthermore, the company’s returns have been impacted by volatility in different markets. However, Apollo’s management contends that this only offers a great buying opportunity.
  • Unfunded Retirement Obligations: The large size of these obligations (around $12.5 Billion) presents a potential issue. Management has been restructuring the obligations, but any unexpected issue can have large impacts to the balance sheet.
  • Management transition: Recently, Apollo has gone through a transition in upper management. How well new management is able to execute strategy and allocate capital effectively will take time to ascertain.