Estimating Apollo’s Value And Expected Long-Term Returns
Apollo Global ($APO) has just reported its Q4 and given us food for thought. I will mostly avoid repeating APO’s presentation and earnings call - they are readily available. Our analysis will focus on the long-term quantitative returns APO investors can expect, as well as the qualitative and/or strategic factors that underpin those returns.
I have just posted a concise review of my performance and method (“My Long-Term Performance”). In the table in this post, “Compounder 3” refers to APO, which has delivered for me a 23% IRR over 4.7 years, including dividends but assuming no dividend reinvestment. Although past performance is not indicative of future results, it is worth asking whether similar returns can be expected over time. We will answer this question.
ANI growth
Many of my readers are APO’s investors and know the company well. Still, I ought to explain some basics for new readers.
Apollo Global Management combines Apollo Asset Management with Athene, a life insurer, focused on fixed annuities and similarly structured products. Its non-GAAP income statement consists of fee-related earnings (“FRE”) from AAM, spread-related earnings (“SRE”) from Athene, and Principal Investing Income (“PII”) from AAM that is mostly carry.
The combined earnings from the three segments (FRE, SRE, and PII) are partially offset by Holdco financing costs (primarily interest expense) and taxed at approximately 20%. The result is called Adjusted Net Income (ANI). Many consider ANI per share the most important KPI and value the company via the P/ANI ratio.
I have developed a simplified valuation method by noticing three things. First, PII (i.e., carry) is typically several times smaller (often 10 times smaller) than either FRE or SRE. Secondly, being fickle and unpredictable, it deserves a much smaller multiple, which further lessens its importance. And thirdly, it is always bigger than Holdco financing costs.
Combining these observations allows us to drop both PII and Holdco costs from consideration and approximate ANI with the sum of after-tax FRE and SRE. Our approximation slightly errs on the conservative side, but it is much simpler and captures nearly everything that matters.
Under this framework, pre-tax ANI = FRE + SRE. Apollo plans to grow FRE at ~20% (or slightly higher) and SRE at 10%, and has done accordingly. What is the projected ANI growth?
Using elementary math, it is straightforward to show that
