High Hopes for Apollo's Athene Acquisition
Positioned to benefit from the shift to nontraditional lenders, narrow-moat Apollo now needs to ensure the success of the Athene merger.
Over the past two decades, Apollo Global Management (APO) has grown into one of the asset management industry's most powerful private equity players and its strongest credit-focused firm. Its specialization in illiquid credit instruments offers substantial potential in the coming years. Banks of all sizes, under tough regulatory scrutiny following the Great Recession, are shedding risky and complex credit assets to shore up their capital ratios. We see this as a secular trend, particularly as Basel III rules force banks to shed risk, and Apollo's relationships and deep expertise in the market position the firm to earn lucrative returns.
The acquisition of fixed-annuity provider Athene in late 2013 differentiates Apollo from its peers, in our view. Apollo's permanent capital base with Athene is just over $60 billion in assets under management, almost 40% of Apollo's overall AUM. Unlike private equity funds, which have a life cycle of seven to 10 years, Athene's AUM does not need to be returned to investors, meaning that Apollo can earn steadily greater fees from Athene as it invests more of Athene's AUM in Apollo funds. Furthermore, there is substantial opportunity to reposition Athene AUM toward the type of illiquid credit investments that Apollo has been buying up in its own funds, boosting Athene's returns and, more important, generating capital to be used for further acquisitions of insurance float (and thus Apollo AUM). Finally, as Athene is a fixed-annuity provider, its costs are generally fixed, whereas Apollo's investments for Athene are generally in variable-interest securities, meaning it should benefit from higher interest rates through a wider spread.
Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.