Baron Funds - Apollo Global: Tightening Bank Capital Requirements A Multi-Trillion Dollar Opportunity

seekingalpha05-10

We initiated a new position in Apollo Global Management, Inc.CEO and co-Founder Marc Rowan observed the existence of a substantially larger opportunity to offer lower-risk, lower-return alternatives ...

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Apollo Global Management, Inc. (NYSE:APO) During the quarter, we initiated a new position in Apollo Global Management, Inc., one of the world's largest alternative asset managers. While Apollo is perhaps best known for its success as a private equity investor, the biggest driver of growth over the last 15 years has been its investment grade credit business, which has scaled rapidly alongside the growth in Athene, Apollo's wholly owned insurance company. Today, credit is $480 billion out of Apollo's $651 billion AUM. This credit business was spearheaded by visionary CEO and co-Founder Marc Rowan, who observed that while the private equity industry had typically focused on offering high-risk, high-return products, there existed a substantially larger opportunity to offer lower-risk, lower-return alternatives that could still deliver excess return over liquid alternatives. Insurance companies in the retirement space are natural consumers of these products given their need to hold largely investment grade debt and the long duration of their liabilities, which allows them to invest in illiquid assets, thus capturing an illiquidity premium as compared to publicly traded bonds. In Rowan's words: \"this is a fixed income replacement business. This is not an opportunistic credit business. Our goal in our yield segment is to produce 150 to 200 basis points of excess return over the equivalent CUSIP across the capital structure. We want to get paid in our yield business for illiquidity and complexity and origination, not for taking additional credit risk or assuming other risks that we do not intend.\" Apollo founded Athene to capture this opportunity and scaled its credit offerings to source proprietary private investment grade credit at scale. Following a multi-year build out, Apollo now originates around $100 billion of debt annually, that in turn funds growth at Athene. We believe that Apollo's head start, scale, and proprietary origination will continue to differentiate the company from peers. Besides this innovation, Apollo has been a beneficiary of the retrenchment in lending by banks following the Global Financial Crisis of 2008-2009. As banks withdrew from certain lending markets in favor of larger borrowers and more fee-related business, loans found their way to companies such as Apollo, which could fund the assets with long-duration liabilities that matched the duration of the assets. We believe that Apollo's ability to fund these long-duration illiquid loans with long-duration liabilities is a more stable funding model than banks, which tend to fund long-duration loans with short-duration deposits that can evaporate during times of stress, as we saw during the March 2023 banking crisis. Continued tightening of bank capital requirements should provide a multi-year tailwind for Apollo to continue taking lending share away from banks, which could be a multi-trillion dollar opportunity, driving durable earnings growth for Apollo, both from the excess returns generated by Athene, and from management fee growth as Apollo's AUM grows towards $1 trillion.   Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectus contain this and other information about the Funds. You may obtain them from the Funds' distributor, Baron Capital, Inc., by calling 1-800-99-BARON or visiting Baron Funds - Asset Management for Growth Equity Investments. Please read them carefully before investing. Risks: The Fund invests primarily in equity securities, which are subject to price fluctuations in the stock market. In addition, because the Fund invests primarily in large-cap company securities, it may underperform other funds during periods when the Fund's securities are out of favor. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. The discussions of the companies herein are not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed in this report reflect those of the respective portfolio managers only through the end of the period stated in this report. The portfolio manager's views are not intended as recommendations or investment advice to any person reading this report and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Fifth Avenue Growth Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. Free cash flow ('FCF') represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets. Return on invested capital ('ROIC') is a calculation used to determine how well a company allocates its capital to profitable projects or investments. BAMCO, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Baron Capital, Inc. is a broker-dealer registered with the SEC and member of the Financial Industry Regulatory Authority, Inc. (FINRA).  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