Business Breakdowns
· Matt Reustle
[00:00:00] S0: Apollo is very interesting to me because before we went into this recording, I just viewed Apollo more or less the same from a prestige factor as I did in the mid-2000s when I was graduating. And they were this private equity powerhouse known for big deals. That was a very particular era. But if I actually look at some of these numbers, they had $8 billion of AUM in 2002, $70 billion when they IPO'd in 2010–2011. So we're talking about something that has scaled 10x versus what it was at the IPO just a little more than 10 years ago. The prestige still feels as strong. That's something that can wane the more large and oversized you become. So what are the differentiating factors that led to that real scaling of the asset base?
· Hunter Hopcroft
[00:00:00] S1: Well, of course, over that time period, as you cited, private capital and alternative assets in general experienced tremendous growth. If you look at the closest competitors of Blackstone or KKR, everyone found a niche that became their powerhouse of growth. I think it's undeniable that for Blackstone, real estate was a powerhouse of growth. For KKR, they stayed very focused on private equity and LBOs, and that's been their powerhouse of growth. Apollo focused on credit, which, if you go back to the 2000s—especially during that era when their IPO rates were very low—probably seemed like a less attractive bucket. But it looks a lot more fortuitous now as these alternative managers have gotten so big. There has been a focus where every alternative manager wants to get off the vintage fund treadmill, where you have a closed-end fund with a fixed life. And so you're always in market fundraising. If you go to the filings of any pension fund that publicly discloses its investments, you'll find they're basically invested in every vintage of every alternative asset manager's funds. And so that means that the available capital had been adequately squeezed for all of these managers. They all started looking at ways to raise perpetual capital, and they've all pursued this in various forms of open-ended vehicles, with almost all of these managers having publicly traded BDCs in the market while also pushing into the private wealth channel with products like non-traded REITs and other offerings that don't have a fixed fund life. Apollo has some of those as well. But it's really been their focus—doubling down on insurance, more specifically retirement solutions, or what we might think of as annuities—that was the strategic breakthrough for Apollo. And today, that perpetual capital bucket is $450 billion of Apollo's total $750 billion AUM. Apollo merged with Athene in 2022, which was an annuity provider. And since then, the stock has basically doubled. But if you go back to the IPO of Apollo, the stock's annualized return was around 16% since 2011. But to get there you really have to go back to the very beginning and understand where that strategic initiative came from and why it was such a cultural product of where Apollo started, And the founders of the firm.
· Matt Reustle
[00:00:00] S0: Yeah, let's get into that. There are three founders here who each have their own legacies. Can you just bring us back to that period of time and the environment and put some context around these three founders and who they were when they came out and launched Apollo.
· Hunter Hopcroft
[00:00:00] S1: Okay, Apollo was founded in 1990, and canonically, the folks that came to be thought of as the founders of Apollo are Leon Black, Joshua Harris, and Marc Rowan. But there's a lot of Drexel and Burnham Lambert alumni who were in this group that founded Apollo. Tony Ressler, who would go on to establish Ares, was in this initial group. All of them were Drexel and Burnham Lambert alumni who came up under Michael Milken. I really can't overstate how this background is foundational to the firm. To do a quick history lesson, Milken established the junk bond market. Prior to Milken, bonds were for blue-chip, safe companies. Milken realized that there was a market for lower-rated, higher-yielding debt. And it was this innovation that sparked the private equity LBO boom. To begin with, high-yield bonds were such a boon for Drexel that the firm's success became closely tied with Milken and high-yield bonds in general. So when Milken goes down, down goes Drexel and down goes the high-yield market. If you think of some of the other alternative asset managers, like Blackstone or KKR, they were very entrepreneurial—they wanted to go out on their own. Apollo, obviously, was entrepreneurial, but it's a little bit different. Apollo was formed opportunistically. There was this vacuum left by the collapse of Drexel Burnham Lambert after the high-yield bond market collapse. And Leon Black specifically saw an opportunity to step into a lot of interesting situations. Black was the most senior of the Apollo founders at Drexel. He was head of M&A and worked closely with Milken. Marc Rowan, who's now the CEO, was actually just an associate at Drexel, but he was in the corporate finance department focusing on bankruptcies and restructuring. Josh Harris is the youngest of the three, but he was also in M&A. This has been described as a dysfunctional family, for all that means. Leon Black is known as an incredibly tough negotiator. Marc Rowan is much more professorial and even-keeled, and then Josh Harris is a deal maker. That is where Apollo comes from. And that's how they got their start—by stepping into the opportunistic opportunity left after Drexel Burnham Lambert collapsed.
· Matt Reustle
[00:00:00] S0: Yeah, it's a really interesting contrast. Think of Blackstone, which went out on its own in the mid-'80s. And you don't have this vacuum necessarily in the market. You have Peter Peterson and Steve Schwarzman going out and raising, I think, $400,000 initially to get their fund off the ground. And here, I think you had something like a $400 million initial fundraise for Apollo. Is that the right number?
· Hunter Hopcroft
[00:00:00] S1: Right. Here's where we have to caveat this entire discussion. Again, Apollo is drawn to complexity, but the Drexel Burnham Lambert background obviously gives them a fantastic network. What really gets Apollo off the ground is basically a mandate from the largest French bank at the time, Credit Lyonnais, to manage through some of the distressed debt situations that arose after the collapse of Drexel. And what sets Apollo on its course to being one of the largest alternative asset managers is this keystone deal. Executive Life is a California life insurance company that faced insolvency in 1991 due to its own junk bond portfolio. Credit Lyonnais wanted to get its hands on some of the assets in that portfolio, but there was a law prohibiting foreign banks from owning U.S. insurers. What Credit Lyonnais did was set up a shell insurance company called Aurora and a U.S. subsidiary called Altus. Altus provided the financing for Aurora to win the bid to buy Executive Life. And then, through a series of transactions, this distressed debt portfolio that was hidden in Executive Life slowly got transferred to Apollo's management to fill the mandate from Credit Lyonnais. This again speaks to a recurring theme in Apollo's life cycle. This deal is considered highly controversial. In fact, there's decades-long legal fallout when it becomes apparent that Credit Lyonnais was effectively secretly controlling Aurora. Apollo was never found to have committed any wrongdoing. Ultimately, Credit Lyonnais pled guilty to fraud and paid over $771 million in settlements. But the deal was a blockbuster for Apollo and really set them on their course.