Business Breakdowns
· Matt Reustle, Hunter Hopcroft
[00:00:00] S0: Yeah, he remains a deal guy. It's been fun to watch him negotiate for the new stadium in Philadelphia. And he was bringing some of the Apollo tactics with him, that's for sure. [00:00:00] S1: I do think we need to keep drawing parallels to these top-tier alt managers that were all founded in the '70s and '80s and have an original old guard that is starting to come to the end of their careers. And again, this is a business that relies so much on reputation, talent, and how they have handled succession planning. I think Blackstone is probably the exemplar here of really elevating Jon Gray's profile ahead of that transition. KKR goes with co-CEOs, which has seemed to work okay, but they have a lot less visibility than Gray. And then, on the other side, you have Carlyle, who fumbled their succession planning. Apollo was very close to falling into that bucket. But to me, if you go back to this era—2021, 2022—you have this big headline risk of Black. He leaves, there's a brief spat over whether it is going to be Harris or Rowan, and then when Harris eventually steps away, you have this very de-risk situation. Okay, it's going to be Marc Rowan. And that's where we get to the modern day and what I call "Marc Rowan Unleashed."
· Matt Reustle
[00:00:00] S0: Yes, he is putting his stamp on the company in a way that feels different. I think the comparisons that you made there are perfect. You take someone like Jon Gray with Blackstone, where he is leaving his stamp on the company, but to me it's mostly in the form of creative social media videos or an effort to be more playful with the general public. Marc Rowan seems to be taking an almost capital-allocator type approach, where it's very interesting when you have somebody who's running a business who is also a really thoughtful investor because it turns your presentations, your remarks, and the way you think about the business into a language that resonates with some of the people on the other side of the table. So I always find it interesting when you get situations like this. Bring us just into the early days of Rowan and some of the evolution that he's made for this business and what you think entails. Rowan unleashed.
· Hunter Hopcroft, Matt Reustle
[00:00:00] S1: And you bring up a good point. Jon Gray has become a personality that has softened and humanized Blackstone's image to a degree, especially recently. If you look at how Marc Rowan has taken on the role, he's become a preacher, an evangelist for what they're doing in a way that Jon Gray hasn't. So Rowan ascends to CEO. Mid-'21, Apollo does an investor day in December of 2021. That investor day—and the deck, which is still available online—really redefines Apollo and the industry around this idea of asset origination. This is a five- to six-hour investor day with a 300-page deck that accompanies it. It clearly reflects decades of thought and vision by Rowan about what he wanted to make Apollo. It's around this time that Apollo is beginning to socialize the idea of merging with Athene. This is really where we get into Apollo today as an alternative asset manager with an insurance arm that is fully on the balance sheet. [00:00:00] S0: What that immediately brings to mind with insurance—and how valuable that business can be—is Berkshire. So, with just the very cheap seats take, is Apollo taking the Berkshire approach to running a business and having this float? What does that mean? And just a little bit more backstory because it goes back well beyond the 2021 timeframe. This is a long historic relationship that they've had.
· Hunter Hopcroft
[00:00:00] S1: In fact, in 2022, Financial Times runs a headline, "Apollo Athene: The New Berkshire Hathaway." The headline ends with a question mark. I think we've seen many times where this type of headline can be a curse, but Athene is really a different animal. This was another opportunistic trade for Apollo that turned into a full-fledged business. A lot of Apollo's success seems to come from them getting into a jam and then figuring out a very creative, financially engineered way to get out of it. I think Athene is really no different. Athene begins its life as an Iowa-based insurer called American Equity Life. Here I think we have to do a quick insurance industry primer. Another very complex industry. It has a historical role in the alternatives space, and it helps illustrate why Apollo's approach was so bold. Insurance—everyone's basically familiar with the business model. People pay premiums, the insurer invests those premiums, and those investments help support liabilities that come from the insurance product being sold. There is a spectrum of insurance liabilities from somewhat simple to complex. Complex would be things that are very actuarially difficult to underwrite—things like crop insurance or even some property and casualty. Simple liabilities are more actuarially certain. Something like an annuity where you're promising a stream of payments in the future, or even life insurance where they have a pretty good actuarial idea of what their life insurance liabilities are going to be. Post-GFC, this creates issues because especially in the annuity business, annuities were struck at higher rates. So someone might be promised a payout of 4, 5, or 6%. Post-GFC, yields come way down and insurers face a giant mismatch—they're no longer making spread because they owe people a certain rate, but they can only reinvest at lower yields. Additionally, their bond portfolios are way down and the new assets are not yielding enough to create that spread. So insurers start unloading insurance assets—which really are insurance liabilities—to alternative managers. Alt managers, in this desire to get off the vintage fund treadmill, are attracted to this long-duration capital that, for them, is at reasonably low cost. Insurance is highly regulated, and basically 90 to 95% of that capital must be invested in investment-grade fixed income, AAA, or cash.
· Hunter Hopcroft
5 to 10% of that becomes equity that you can take more risk with. That's really what these alt managers are attracted to. They can maybe earn a little bit of spread on that 90–95% portion, but that 5 to 10% is a great source of long-term, low-cost capital—capital that allows them to grow their businesses and seed other strategies or funds. All alt managers post-GFC make varying degrees of investment into the insurance business. Some are joint ventures, some are equity, some are just management agreements. But they're all playing in this space a little bit. Apollo buys American Equity Life in 2009, and it's such a great opportunity because they load the balance sheet with mortgage-backed securities, the prices of which have collapsed, but they're still paying out nonetheless. By 2010, the fixed income markets normalized and now Apollo's biggest client is this insurance company that needs to make money from spread—not risky LBOs and buyouts. Athene goes public in 2016 and Apollo owns 35% of it. This is where I talk about Apollo getting into a jam. The stock is struggling because it's seen as just this fee pick for Apollo. It's paying out tons of fees to Apollo to manage its assets. But at the same time, Athene is 30% at this point of Apollo's asset base. So they can't lose the account. Rowan realizes they have to merge. This is really risky. This is what the next Berkshire Hathaway question mark speaks to. Insurance is a highly regulated, capital-intensive business that typically trades at a much lower multiple than alternative managers do. There's actually a great quote from an unnamed Apollo executive. He goes, "I get why this is good for them, but I'm not totally clear on why this is good for Apollo." As a private equity firm, Apollo earned enormous fees by tying up little capital of its own. Now the firm will be in this capital-intensive insurance company, overseen by regulators watching for risk, given its hundreds of billions of dollars of assets.
· Matt Reustle
[00:00:00] S0: Yeah, it's interesting to hear that previous relationship where you had two publicly traded companies with a lot of interaction. It's like the real-world version of a circular reference that you get in your model when you're trying to adjust for the different dynamics there. One thing I just wanted to zero in on, in terms of that initial move where insurance portfolios have liabilities that you need to invest to offset, is that 90% is going to be investment-grade. That other 10% has a little bit more flexibility. Would you say with alt managers that it's essentially that 10% portion of the portfolio that really makes the difference in their ability to manage those assets and liabilities, or could it be both? But in terms of where the difference is made—between Apollo managing that versus it being on the insurance balance sheet—is there anything in that 90% where they can make a difference?