Apollo Global Management Inc. CEO Mark Rowan said the massive alternative asset manager is going "on offense" in a rocky macroeconomic environment that has led his firm to three consecutive down quarters and cumulative losses of nearly $3.8 billion in 2022.
Rowan said "alternatives should shine" against the dim backdrop of high inflation, interest rate hikes and slower growth. On the firm's Nov. 2 third-quarter earnings call, the CEO said that after a decadelong "free ride" supported by widespread growth, investors will increasingly turn to alternative assets for diversification and downside protection.
"As an industry, we exist because we produce excess return per unit of risk. And for the first time in a decade, investors are asking not just about the reward but about the risk associated with investments," Rowan said.
Apollo recorded an $876 million loss, or $1.52 per share, in the third quarter, compared with a profit of $249.2 million, or $1.01 per share, in the year-ago quarter—before it integrated Athene in early 2022.
Rising interest rates continued to hit investments tied to Athene, Apollo's retirement services business, which saw its portfolio depreciate by nearly $2.85 billion compared to the previous quarter. The firm's asset management business, which includes private equity, lost $31 million on its investments during the quarter.
Still, adjusted net income increased nearly 6.4% in the third quarter, compared with $800.5 million from the same period a year ago. Fee-related earnings increased to $365 million, up 14% year over year.
Apollo's total assets under management stood at a record $523 billion as of Sept. 30, as investors committed $34 billion in capital in the third quarter. That total included $13 billion of inflows for Apollo's retirement services business and $34 billion for its asset management business.
Private equity
Apollo's flagship private equity portfolio lost 0.3% of its value in the third quarter. That is a smaller decline than the firm registered in the second quarter when the private equity portfolio depreciated 4.9%. It was up 7.7% in the first quarter.
Co-president Scott Kleinman, who heads the firm's private equity business, noted that the private equity portfolio appreciated about 8% over the 12 months leading to Sept. 30, a performance he contrasted against declines in public markets. The S&P 500, for instance, shed nearly 16% of its value over that same period.
Apollo reported $51 billion in uncommitted capital at the end of the quarter. Kleinman indicated that the firm sees a growing opportunity to add new companies to its portfolio at discounted prices.
"[I]ncreased market dislocation is providing many unique opportunities to lean in, creating what we expect will be a significant tailwind for the franchise. We're operating with a pipeline that is three times as large as it was just this time last year, and we expect to commit a significant amount of capital in the coming quarters," Kleinman said.
The still-in-market Apollo Investment Fund X, the 10th edition of the firm's flagship buyout fund, "has started to accumulate positions in a few names so far" but has a "watch list" of hundreds of potential investments, Kleinman said.
"When the markets move, they move, and you can't start analyzing your names, your credits at that moment. You have to have a fully built-out investment thesis around not only which names but where in the capital structure or what prices you're interested in investing," Kleinman said, predicting dealmaking activity would pick up "early next year."
Slower fundraising
Apollo's buyout fund had investor commitments of about $14.5 billion as of the end of the third quarter, just over halfway to its $25 billion target. The firm is confident it can hit that target but is feeling the impact of a tougher fundraising environment, Kleinman said.
The executive referenced the "denominator effect" that has pushed institutional investors' portfolio allocations off target as the value of their public sector holdings fell much faster than their private equity holdings earlier this year. A crowded marketplace, with many private equity general partners in market with funds, is contributing to the stress on institutional investors, Kleinman said.
"We've agreed to keep the fund open until the first half of 2023 to accommodate our investors' annual allocation budgets," Kleinman said.
