Of the 133 stocks on Barchart.com’s 52-week high list, Apollo Global Management (APO) has the second-most 52-week highs over the past year with 67. Its shares are up nearly 81% over this time.
Although the alternative asset manager works with asset classes other than private equity, the stock’s strength suggests that the private equity industry isn’t doing as badly as people might think. Higher interest rates don’t have to be the death knell for private equity businesses.
Most importantly, Apollo remains an excellent long-term investment that you should be considered for any portfolio. Here’s why.
It’s Trading Within 5% of an All-Time High
APO is up nearly 81% in the past year, up 22% in 2024, more than double the S&P 500, and 284% over the past five years. Since going public in March 2011, its shares have gained 522%. That doesn’t include its returns from a dividend that now pays out $1.72 annually per share.
The company reported its Q4 2023 results in February. They were excellent. CEO Marc Rowan said as much.
“Amid a volatile market backdrop in 2023, Apollo was firing on all cylinders. We generated exceptional results highlighted by Fee and Spread Related Earnings growth exceeding 25% and nearly $160 billion of inflows,” Rowan stated in its Q4 2023 press release.
Apollo is divided into two businesses: Asset Management and Retirement Services. The former has over $651 billion in assets under management (AUM). Its private equity business has generated an annual IRR (internal rate of return) of 24% after fees since its inception in 1990. The latter has $22 billion in regulatory capital and is number one in U.S. annuity sales.
Private Equity Delivers for Shareholders
The company’s Flagship Private Equity business accounts for 71% of Apollo’s $108 billion in equity strategy and accounts for 17% of the company’s total AUM. Since its inception in 1990, Flagship Private Equity’s net IRR of 24% is 10 percentage points better than its private equity benchmark.
Apollo looks for investments in these five areas: Economic opportunity, education, health, safety and wellness, industry 4.0, and climate and sustainability.
In the past three years, its equity AUM generating fees have grown from $40.0 billion in 2021 to $53.4 billion in 2023, a compound annual growth rate of 15.5%. The company’s equity AUM grew by more than 9% in 2023. Private equity was responsible for most of that growth.
Since 1990, the company has created 10 private equity funds with net IRRs varying from 9% for its 2006 fund (valued at $21.14 billion) to 44% for its 2001 fund (valued at $12.72 billion).
Apollo’s 2013 and 2018 funds had more than $37 billion of total invested capital, with most of it invested in opportunistic buyouts. The firm’s private equity business has over 190 portfolio companies.
A recent example of a portfolio company is Apollo’s acquisition of Arconic Corp. in August 2023. Apollo funds acquired the provider of aluminum products and technologies for an enterprise value of $5.2 billion. The company’s products' end markets include ground transportation, aerospace, building and construction, and industrial and packaging.
Arconic was a sister company to Howmet Aerospace (HWM) until it was spun off on April 1, 2020. Apollo stepped in and acquired it a year later. Howmet stock is up more than 55% over the past year.
By 2028, Apollo will likely take Arconic public or sell it to a larger strategic investor or, quite possibly, another private equity firm.
The Three-Legged Bucket
One of the ways to evaluate Apollo’s growth is through its three-legged bucket of income.
The company’s reportable segments are fee-related earnings (36% of its 2023 segment income of $4.96 billion), spread-related earnings (63%), and principal investing income (1%).
Fee-related earnings (FRE) evaluate the performance of its Asset Management business, spread-related earnings (SRE) assess the performance of its Retirement Services business, and principal investing income (PII) is used to determine the performance of its Principal Investing business, which are used to evaluate the investments it makes from its balance sheet.
While Asset Management is built around growing FRE, its Retirement Services business is built on its ability to generate a positive net investment spread from fixed-income investments. These investments ensure it has the money to make annuity payments.
In 2023, the Asset Management business grew FRE by 25.4%, to $1.77 billion, while the Retirement Services business grew SRE by 25.9%, to $3.11 billion. The segment’s net investment spread was 1.93%, 22 basis points higher. If that’s higher, SRE will be too.
On the other hand, PII's actual earnings are much more sporadic. In 2021, PII was $1.11 billion, or 47% of Apollo’s segment income.
But then Apollo acquired Athene, one of the country’s largest annuity providers, in January 2022, paying $11 billion in stock for the company. It was a game-changer.
It created the three-legged bucket.
Apollo remains an excellent long-term investment.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
