Apollo's total after-tax distributable earnings in 3Q, which refers to the amount of cash the firm has on hand to pay shareholders, remained flat YoY at 54 cents per share. While this fell short of analyst expectations of 57 cents per share, the picture could have looked worse.
Based on the distributable earnings metric, Apollo beat out competitors Blackstone, KKR and Carlyle, all of whom reported YoY declines in the third quarter. Carlyle and KKR saw the most dramatic drops, both down about 23%. The metric has become essential in evaluating the performance of the major publicly traded private equity firms, as they've phased out economic net income as a measure.
Fewer exits in the third quarter—and therefore less realized performance fees—could be behind the earnings lag. Today's competitive stock market has left some PE firms reluctant to part ways with portfolio companies at lower prices than they originally modeled.
The earnings report also acknowledged Apollo's controversial ties with Athene Holding, a Bermuda-based insurance giant. The company was born in 2009 out of a partnership between Apollo and James Belardi, a former American International Group executive. In the aftermath of the financial crisis, Athene was able to gobble up cheap fixed-annuity assets and let Apollo manage them—improving the firm's credit business in the process. Apollo took Athene public in 2016 in an IPO that raised $1.1 billion.
However, the insurer's valuation has struggled lately, threatening Apollo in the process.
On Monday, Apollo announced a complex equity exchange with Athene, altering the structure of their connection. Apollo will acquire an additional 18% in Athene via a $1.55 billion cash-and-stock deal that more than doubles the firm's total stake in Athene to 35%. Likewise, Athene will acquire a 7% stake in Apollo to further intertwine the two entities and better align their economic interests. Athene will also convert from a dual-class to a single-class share structure to broaden ownership and ultimately boost the insurer's stock.
In other words, Apollo's success relies substantially on Athene. A large portion of Apollo's permanent capital harkens from Athene. The insurance juggernaut comprised $125.5 billion of Apollo's assets under management in 3Q—nearly half of Apollo's $322.7 billion total AUM.
"We got rid of the super vote and increased the economic ownership, which we think is more highly sustainable," CFO Martin Kelly said on the earnings call.
Overall metrics reflected positively. Revenue leaped nearly 36% from a year ago to $702.7 million. Net income totaled $363.3 million, up from $171.5 million in 3Q 2018.
The firm's healthy credit business helped buoy revenue, with the unit's distributable earnings up 20%. However, private equity income fell 6% YoY related to an approximately $9 billion slide in fee related earnings—driven in part by the exit decline. Likewise, earnings from Apollo's real estate business dropped about 16%.
Credit became Apollo's largest unit in terms of capital deployed in 3Q. $1.3 billion out of nearly $3 billion was deployed via Apollo's credit arm. Yet over the last 12 months, private equity took the largest portion—accounting for $9 billion out of a total $16.8 billion. These sizable credit assets lead to more stable income, making them a more attractive bet to investors than other public PE firms.
Additionally, 3Q earnings reflect the early effects of Apollo's September conversion from a publicly traded partnership to a C-Corporation, which exposed it to more indexes and investors. The firm's average daily volume has already more than doubled from pre-conversion levels, to 2.6 million shares currently.
"We've been very pleased with the reaction since we announced our conversion, and we believe the positive effects are already becoming evident," Apollo co-founder and senior managing director Josh Harris said on the call.
Apollo's private equity unit appreciated 3.6% during the quarter. The gains were largely driven by its Fund VIII, which closed in 2013 with more than $18 billion in commitments. In contrast, Blackstone's private equity funds appreciated 2.6%, while Carlyle's appreciated just 1%.
Apollo's stock jumped nearly 3% on Thursday morning upon the earnings release, but leveled off to close up about 0.4%.
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