Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle and today we are breaking down Apollo. For this breakdown I am joined by Hunter Hopcroft, financial analyst and writer based in New York, and if you haven't read Hunter's work, please find links in the show notes. You will enjoy his coverage of how the financial markets are evolving. Now, I reflected on my personal experiences with Apollo for this episode and there's a saying that hard work can beat talent. When talent doesn't beat hard work, Apollo has talent and Apollo works really damn hard. They will do everything they can to protect their capital. So if you're on the other side of the table from them, you never feel fully comfortable. It's like having a 20-point lead in the fourth quarter against a team that you know will find a way to come back, and you can never take your foot off the gas. So we get into what makes Apollo, Apollo. Hunter shares the backstory of how it was born out of Drexel Burnham and Michael Milken's DNA. We get into some of the early deals, the theme of how they crave complexity and how they differ from some of the alt managers like KKR or Blackstone. And while we could have spent the entire episode covering the history, you could argue that modern-day leadership under Mark Rowan is even more interesting as Apollo evolves. They have the insurance arm, Athene, fully consolidated, and a piece of the operating system today. So we cover what that means for Apollo and the industry moving forward. So please enjoy this breakdown. All right Hunter, I am pumped we are finally getting to break down Apollo. It's one that we have discussed behind the scenes here for a few months and exchanged a lot of work, a lot of interesting research, a lot of framing of what Apollo is and what it means to the financial markets. And you sent me this great quote that I think is perfect for setting the table for this conversation. So maybe we could just start there with that quote and how it frames the conversation and the breakdown of Apollo that we'll get into.
· Hunter Hopcroft, Matt Reustle
[00:00:00] S1: Sure. So this is a quote I believe from Mark Rowan, now CEO of Apollo. And it says, "Our DNA, going back 30 years and even in our Drexel beginnings in the Milken school of studying balance sheets, is to find those areas where you're not compromising on credit risk, but you're willing to do something that may have a little more complexity in it or that has a little less liquidity, yet still maintains the same investment-grade rating." To me, this quote—and really the story of Apollo and its various phases of growth—illustrates that Apollo is a fascinating company. It is drawn to complexity, but in many ways the growth and evolution of Apollo very much tracks the growth and evolution of financial markets generally. And so, as we go through the history of the firm, I think you're going to see these themes of a focus on balance sheet strength, liquidity, and an attraction to complexity that really defines the culture of the firm. [00:00:00] S0: And one of the things you mentioned, which is interesting, is not to overstate it, but they have come full circle when you look at Drexel and where they came from in those days to where they are today. So we'll jump forward to today, we'll give a sense of what Apollo looks like, and then we'll trace it back from the beginning. But what is Apollo today? How would you break it down just in the most simple, understandable terms?
· Hunter Hopcroft
[00:00:00] S1: Sure. On the highest level, Apollo is a global alternative asset manager. It's up there with the echelons of KKR, Blackstone, and others. Today, Apollo has around $750 billion of total AUM and $570 billion of fee-earning AUM; that puts it second or third in terms of asset size compared to the others. Most alternative managers, if you go through their supplements when they release performance data and fee-related earnings by strategy, do this in an intuitive way where you have private equity, real estate, and credit. Apollo breaks theirs down a little differently. They break theirs down into yield, hybrid, and equity. And this is pretty differentiated from the other alt managers. Yield is their largest bucket—that's $480 billion of AUM. That is a pretty standard credit operation covering corporate fixed-income credit, structured credit like asset-backed securities and similar instruments, real estate debt, as well as direct lending or private credit. There's hybrid, which has $62 billion and is the smallest bucket. But it's probably more indicative of what Apollo is known for, which is basically this opportunistic investing through credit where there's some equity upside. And this segment also does some of the infrastructure and real estate equity investing. But again, opportunistic, more special situations. And finally there's the equity bucket, which has 107 billion of assets. And this is really your traditional private equity business. This houses their real estate strategies and things like that.
· 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.