Apollo Global Management Inc. executives sought to allay investor concerns about the performance of alternative investments held at its Athene annuities business after that unit weighed on earnings in the second quarter.
Athene’s profit dropped 11% to $710 million, driven by a decline in income from alts. That resulted from under-performance of certain equity investments in other insurance companies held by Athene, including Catalina, a property and casualty insurer that will be wound down because the business is less attractive, Chief Executive Officer Marc Rowan said Thursday in a conference call with analysts.
“The vast majority of the alts portfolio is doing exactly what it’s supposed to do, and you’re watching lumpiness in some of the strategic stakes,” he said, noting that Catalina is the only such holding that’s not performing. “It’s a relatively small stake and it is in the process of transitioning its business.”
Shares of Apollo tumbled 7.5% to close at $115.97, the biggest drop since March of last year.
Interest rate hedging costs and the roll-off of higher annuities contracts issued in recent years also weighed on Athene during the three months ended June 30, and that trend is expected to continue in the current quarter, Rowan said. The firm expects mid-single-digit earnings growth for Athene this year and a return to double-digit growth next year, he said.
Adjusted net income was $1.01 billion, little changed from a year earlier, Apollo said in a statement. That equated to $1.64 a share, falling short of the $1.75 average estimate of analysts surveyed by Bloomberg.
Optimistic Tone
Apollo executives struck an optimistic tone on private equity, noting that the firm announced multiple acquisitions in the past 30 days — including Travel Corp., parcel-delivery company Evri and a simultaneous deal for IGT Gaming and Everi Holdings Inc. The firm expects to fully deploy its 10th flagship private equity fund by the end of next year and begin fundraising for its 11th, Apollo Co-President Scott Kleinman said on the conference call.
AAA, the firm’s equity product for individual investors, has a net asset value of $17 billion and returned about 10% over the past 12 months, Rowan said. Apollo expects AAA will eventually become its largest fund.
Apollo’s fee-related earnings rose 17% to $516 million, fueled by higher management fees and record revenue at its capital-solutions business. The firm invested $70 billion during the quarter, more than double a year earlier, joining rivals Blackstone Inc. and KKR & Co. in capitalizing on an improving dealmaking environment.
Assets under management grew 13% to $696 billion, with $39 billion of inflows during the second quarter. Credit assets rose 16% to $521 billion. Apollo raised $6 billion for the second iteration of a strategy that co-invests alongside Athene.
Income from selling private equity assets improved, with Apollo reporting $33 million of principal investing income for the period, a 65% increase from a year earlier.
Other second-quarter highlights:
- Equity AUM were flat at $105 billion, while hybrid AUM rose 13% to $70 billion
- Direct origination rose 3.8%, while European principal finance fell 1.6%
- The hybrid value portfolio increased 4.8% and flagship private equity gained 1.6%
- Dry powder was $68 billion at midyear