Apollo: On Its Way To $1 Trillion AUM While Displaying A Fair Valuation

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Apollo Global Management has exhibited impressive AUM growth over the past years, both organically and inorganically, and still expects AUM to hit $1 trillion by 2026.CAGR from fee-related and spread-...

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Valuation\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-19 21:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4699996-apollo-on-its-way-to-1-trillion-aum-while-displaying-a-fair-valuation><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Apollo Global Management has exhibited impressive AUM growth over the past years, both organically and inorganically, and still expects AUM to hit $1 trillion by 2026.CAGR from fee-related and spread-...</p>\n\n<a href=\"https://seekingalpha.com/article/4699996-apollo-on-its-way-to-1-trillion-aum-while-displaying-a-fair-valuation\">Source 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trillion by 2026.CAGR from fee-related and spread-related earnings have been of double digits, and based on company guidance, they still expect this momentum of double-digit growth in 2024.Despite elevated stock returns over the past year, the sum of parts valuation still sits within the band of fair value territory, making it a buy.   Zerbor Apollo Global Management (APO) is the world's largest private credit asset manager. As of Q1, they had $501 billion AUM of alternative credit, which is superior to Blackstone's exposure at $330 billion. Overall, in Q1 TTM, they achieved $5.464 million in net income, which helped them gain a market cap valuation of $66.17 billion. Importantly, Apollo's business not only comes from the asset manager but also from the retirement business as some years ago, they had a merger with Athene. This company offers the services of annuities and at the same time Apollo, has a significant minority position of 24.57% in the European insurance Athora. I personally believe that APO is a buy, and in this analysis, I will review its stock price action, growth metrics, targets, valuation, and risks to support my recommendation. APO Price Action Data by YCharts As with many companies in the financial industry (excluding several popular FinTechs), Apollo's stock performance over the past year has been extraordinary. From a year ago, the stock has appreciated 53.7% (including dividends), representing severe outperformance to its natural benchmarks. For example, the Capital Markets Index (KCE) and the Insurance Index (KIE) also obtained attractive returns of 29.6% and 25.1%, respectively. At the same time, credit-focused alternative asset manager Blue Owl (OWL) mimicked the 1Y return of Apollo, while KKR (KKR) surpassed all of them with a spectacular return of 94.3%, helped to a short extent by their entrance to the S&P 500.  KKR shares with Apollo the fact that it has an insurance business as part of its conglomerate, and Blue Owl matches most of Apollo's offerings in terms of high credit exposure. In the past, I have conducted analyses of Blue Owl and KKR, in case you want to have a further read.          APO KKR KCE KIE OWL   Risk Free Rate 4.23% 4.23% 4.23% 4.23% 4.23%   Annual Return 56.4% 96.4% 31.1% 26.9% 59.4%   Annual St. Dev. 26.3% 30.5% 16.0% 12.9% 28.2%   Sharpe Ratio 1.98 3.02 1.67 1.75 1.96   Click to enlarge Author's Calculations | Data: Seeking Alpha Now, going back to the stock performance, it's essential to consider risk-adjusted returns. Alternative Asset Managers, for example, tend to have elevated betas. This is the case for all the names mentioned above; Apollo's 24-month beta sits at 1.37, KKR at 1.70, and Blue Owl has the highest at 1.83. Yet, after calculating their respective Sharpe ratios, the performance positions remain the same as the yearly returns within the stock names. However, something worth noticing is that Capital Markets obtained a higher annual return than Insurance but a lower Sharpe ratio, as displayed in the table above.  Apollo's Growth Per Segment FinChat Different from all other big alternative players (except for Blue Owl), Apollo remains concentrated in credit products, with Yield representing the vast majority of their Fee-Generating AUM (FGAUM) at 84%. From here, their primary focus is on investment grade, representing more than 60% of the Yield AUM. At the same time, this private asset class has been experiencing the highest YoY growth at 15.3%. Following in size comes Equity products with roughly $53 billion in Fee-Generating AUM or 10% of the company. From Q1 2023 to Q1 2024, Equity FGAUM grew YoY at 9.2%. Finally comes Hybrid, which includes convertible debt and, as of Q1, weighted just 6% of the FGAUM. Meanwhile, it experienced little growth, with a modest YoY change of 0.40%.    ($ in millions) Management Fees Fee-Generating AUM   Yield 1,662 65% 424,522 84%   Hybrid 248 10% 29,594 6%   Equity 645 25% 52,981 10%   Total management fees 2,555 100% 506,097 100%   Click to enlarge APO Financial Supplement 1Q 2024 Something important to note is that Equity's FGAUM absorbs the most fees per unit of fee-generating AUM despite representing just 10% of the AUM. For example, in Q1, they accounted for 25% of the management fees. The same goes for Hybrid, where its management fee contribution is superior to its FEAUM. Therefore, one could conclude that the riskier the private asset is, the more management fees Apollo generates.       M 1Q'22 2Q'22 3Q'22 4Q'22 1Q'23 2Q'23 3Q'23 4Q'23 1Q'24 CAGR   FRE $310 $341 $365 $394 $397 $442 $472 $457 $462 22.1%   SRE $674 $455 $642 $698 $688 $799 $873 $748 $817 10.1%   F&SRE $984 $796 $1007 $1092 $1085 $1241 $1345 $1205 $1279 14.0%   Click to enlarge APO Financial Supplement 1Q 2024 From the side of earnings, over the past two years, fee-related earnings (FRE) have grown at a pace of 22.1%, far superior to the 10.1% CAGR of the Retirement Segment on its key metric, Spread Related Earnings. Yet, if the measurement were to be done as of 2Q 22, the result would've been entirely different at 36.6% CAGR. The previous is because SRE sank -32.5% from Q1 to Q2 of 2022, so the result got significantly distorted. However, both fee- and spread-related earnings sat in Q1 at $1.279 billion, representing 14% from two years ago. Also, different from other high market cap asset managers, Apollo derives most of its operating earnings from the side of their retirement business, which alone accounted for 63% of the segment income. Besides the aforementioned management fees, the company generates significant revenue from Capital Markets solutions within the Asset Management segment. Even though the Capital Markets business line didn't grow much from a year ago, in TTM Q1, it represented 31% of the fee-related earnings. And additionally, from TTM Q1 22 to TTM Q1 23, the business line passed from generating $64.133 million in fees to $138.435 million, portraying an outstanding 116% YoY growth. Last, Principal Investing is another reporting segment, but it is highly volatile and generally it doesn't represent much of the company's revenues, unless there is a substantial realized gain like in Q1 2022. Targets APO Investor Presentation – May 2024 Based on Apollo's presented plans, they intend to repeat their growth history. In terms of Yield and Hybrid, they aim to double their AUM by 2026 from the 2021 figure and reach the total AUM level of $1 trillion in the next two years, which is quite aggressive, in my opinion. KKR, for example, expects to reach this amount by 2029, as commented in my previous analysis.  Investor Presentation – May 2024 Other targets included at the end of the year contain the growth of FRE at around 15-20% with a slight margin expansion, together with a similar double-digit growth in Retirement Services. Next, they expect a decrease in total inflows of $120 billion, which is $37 billion less than the inflows obtained in 2023. Last, they continue to see optimism in their Capital Markets solutions, which have experienced 30% and 40% YoY growths over the previous years, and they probably expect elevated growth rates in 2024. Based on the EPS consensus, APO is expected to generate $7.53 EPS by year-end, which would represent an 11.73% YoY increase. Valuation APO Basing the valuation on a sum of part of the three reporting segments, I conclude that Apollo's stock sits within the 10% range of fair value territory. The distribution of per share items of Fee Related Earnings (FRE), Spread Related Earnings (SRE), and Principal Investing Income (PPI) has been available since Q1 22 and is all obtainable in the financial supplement that Apollo's Investment Relations team provides. From there, I 1. Gathered the daily closing prices on Seeking Alpha. 2. Calculated the non-GAAP metrics in TTM format per quarter.  3. Obtained the daily multiples by dividing the TTM non-GAAP metrics with the stock closing price, ensuring they matched correctly after the earnings announcement and not simply by the start of the quarter.  4. Computed the average of those multiples.  From there, I got the results that Fee-Related Earnings traded at an average of 13.6x, Spread-Related Earnings had a mean of 11.8x, and Principal Investing Income sat on average at 10.7x. The lower figure makes a lot of sense as it's the most volatile component since it's based exclusively on realized performance fees and investment income minus compensation and operating expenses. Now, multiplying the FRE of $3.00, SRE of $5.30, and PPI of $0.15 by their respective historical multiples gives an implied equity value of $104.7 per share. Apollo closed its Monday trading at $116.29, meaning the stock still falls within the 10% fair value range. Seeking Alpha When comparing Apollo's valuation against peers, the outcome depends on whom you are comparing it with. For example, when using insurers with classical asset managers on their company holdings, such as Prudential Financial (PRU), MetLife (MET), Principal Financial (PFG), and Voya (VOYA), the outcome derives in an overvaluation as all multiples fall significantly higher. Yet, when compared to its competitor, KKR (KKR), the story flips, and the valuation of APO becomes less expensive. Nonetheless, the insurance composition of KKR via Global Atlantic is far inferior to that of Apollo via Athene and Athora. So, overall, I would say there is still no perfect peer for Apollo, who comes from an alternative asset manager with high life insurance and retirement exposure. Apollo's Risks Even though Apollo mainly sits in the less risky spectrum of alternatives with predominantly high-quality debt, there are also risks encountered within this company.  The first one I just mentioned and is that 84% of the FGAUM comes from credit, a concentration in a single asset class. From their investor presentation, they seem to pitch about trends in de-banking and illustrate a graph of how banks' percentage of total corporate loans decreased considerably after the financial crisis. Ultimately, this is okay, but the debt will underperform shares in booming times, and Apollo's stock will likely follow suit. On the other hand, names with higher private equity exposure, such as KKR, Blackstone (BX), and StepStone (STEP), would outperform. Yet, Apollo would most likely be better positioned to cover losses once a recession comes.   Bloomberg Other risk coming from the success of private credit is the shared opinion that there is too much capital destined to private credit and far fewer opportunities, which has caused dry power to sit at record highs and alternative managers to fight for deals and give up on underwriting conditions. For example, one of the cheapest loans was recently granted, priced at 450 bps above the SOFR rate. The excess demand is an excellent problem, but if this means missing out on some yield, the investment will feel once the SOFR rates normalize.    Investor Presentation – May 2024 Last, more than 50% of Apollo's AUM is derived from the funds of Athene and Athora, which provides a client concentration risk. Of course, these holdings bring enormous synergies to the asset manager, but to an extent, Apollo's growth is dependent on the future contributions of Athene and Athora in terms of inflows. Takeaway  Despite the outstanding stock appreciation over the last year and the charming growth prospects, the sum of parts valuation stands at fair value territory and suggests a buy. As alternative funds become more accessible to individuals, wealth managers have the best interest in recommending alternative investments, not only because of the diversification characteristics that these provide but also because of lower perceived volatility due to infrequent pricing. From the company's side, they have created the Apollo Academy to provide education in the alts space to individuals beyond a classical 60/40 portfolio.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2444749654"}