Apollo Global Management, Inc. (APO) is heading for significant growth with a CAGR of 10-15% in the coming years, calculated with moderate numbers. Almost all external factors are in favor of the company with the exception of rising short-term interest rates. APO posted good results in the third quarter and assets under management are also expected to increase in the fourth quarter. However, a market downturn can strongly affect investment performance, and so far January’s numbers don’t look great. That’s why I’m adding APO to my watchlist but not buying yet. For income investors seeking exposure to the alternative investment sector, APO may be a fair choice with a stable dividend, but more courageous growth investors might find APO a more suitable choice.
Apollo Global is an alternative asset manager. The company invests in assets other than conventional assets such as stocks and bonds. The company has 3 main segments: Credit, Private Equity and Real Assets. The lion’s share of APO’s assets under management is in the credit segment with $341 billion in assets under management, $86 billion in the private equity segment and $54 billion in the assets segment. real. Apollo recognizes income from several sources, but the two main sources are management fees and investment income or loss. The other two sources are advisory fees and performance-based fees. Since Apollo and Athene Holding Ltd. (ATH) have joined forces, APO also has an insurance part. The company also has a close relationship with Apollo Investment (AINV) (a business development company) as Apollo raised $930 million through an IPO for Apollo Investment in 2004.
Finances and income
Apollo recorded growth in almost all of its segments compared to third quarter 2020 results. The company will announce its fourth quarter results on February 11, 2022. Management fees increased by 9.5%, performance allocations remained the same and total investment income exceeded third quarter 2020 results by 5.3%. Total assets under management were $481.1 billion, compared to $471.8 billion in Q2 2021. (To be fair, this growth was primarily driven by the growth of their retirement services customers. ) Fee-earning assets under management increased compared to Q2 2021 results, while assets under management eligible for performance fees decreased slightly. Fee-bearing assets under management were $361.3 billion and performance fee-eligible assets under management were $141 billion, while in the second quarter fee-bearing assets under management were 353. $6 billion and assets under management eligible for performance fees were $142.3 billion. APO recorded strong capital inflows in the third quarter with $18.1 billion in capital inflows, compared to only $12.4 billion in the second quarter.
Marc Rowan, CEO of Apollo, said, “Our business is thriving and we are accelerating on all fronts…we continue to attract great people to join our team, strengthening our ability to create meaningful value for all of our stakeholders. . On December 2, 2021, Apollo announced the acquisition of the US wealth distribution and asset management businesses of Griffin Capital, a Los Angeles-based investment manager. Griffin Capital has real estate investment expertise with nearly $5 billion in assets under management in retail real estate products. Nevertheless, APO has experienced an incredible compound annual growth rate of 21% over the past 5 years and management intends to continue this trend in the coming years.
According to visualcapitalist.com alternative investment vehicles are on the rise and they estimate that their assets under management will almost double by 2025. Global assets under management in alternative investments are expected to increase by 62% from 2020 to 2025. Compound annual growth rate private equity is expected to grow 15.6% while alternative investments are expected to grow 9.8% through 2025. This is more than good news for APO and means we can easily calculate with a CAGR 13 to 15% for the years to come. The company may increase its book value over the long term and, based on external factors, management will be able to continue this trend in the future.
The company has an operating expense ratio of 58.97%, indicating that despite multiple and regular acquisitions, the company can remain competitive among its peers. Equitable Holdings, Inc. (EQH), which focuses more on retirement in the alternative investment segment, has an operating expense ratio of 62.61% and ORIX Corporation (IX) has an operating expense ratio of 53.66%. Based on the P/E ratio, APO might look slightly overvalued with a forward non-GAAP P/E ratio of 14.53 compared to the industry median of 11.69. Based on these factors mentioned above, APO is trading close to its fair value and looking at its dividend yield, we can see that over the past 3 years, at almost any date, an investor could have done a better deal than today. The other factor that investors should consider when assessing APO’s value is the company’s significant future growth.
Company specific risks
The investment management industry is extremely competitive. They face competition both in finding outside investors for their funds and in acquiring investments in attractive portfolio companies and making other investments. Overall external factors look favorable for APO in the coming years, but there are some risk factors.
APO’s business and the business of the companies in which its funds invest are materially affected by global financial market and economic conditions. Financial market volatility can significantly impede the initiation of large new deals for their private equity segment and, coupled with volatility in equity and debt valuations, can negatively impact their operating results . As more than 50% of their income comes from investment results, an economic downturn will hurt the business, just like in 2020.
Rising interest rates will impact APO’s profit margin. The largest segment is the credit segment with more than two-thirds of the company’s total assets under management and a rise in interest rates will reduce short-term interest yield. For the insurance segment, this rise in rates will have a lesser impact and could even result in a positive result, but for the credit segment, the short-term results may decline. The investment portfolio contains a decent number of variable rate loans, but there are also fixed rate loans. The illiquidity of credit assets may also be a potential risk factor. However, the company has managed this risk factor perfectly over the past few years, so I don’t consider this a major risk, but it’s still worth noting.
My take on the APO dividend
Apollo has paid a variable dividend for 10 consecutive years, but has no history of consecutive dividend increases. As previously announced, following the closing of Apollo’s merger with Athene Holding, Apollo intends to distribute an annual dividend of $1.60 per common share, with increases based on business growth. . Calculating with the minimum dividend payout, we can expect a dividend yield of at least 2.46%, but calculating with the current APO of $0.5 per share, we get 3.07%
The company’s payout ratio is excellent and the dividend threshold of $1.6 per share is sustainable. I calculated the current dividend payment of $0.5 per share with a temporary increase in Q2 2022. The payout ratio is stable, secure and well within the sustainable range and also leaves room for future growth. With moderate projections, I expect APO’s dividend to be between $2 and $2.3 per share in 2022. If I make an optimistic estimate and based on previous years’ dividend policy , I would expect a dividend of $2.5 per share for 2022. Nonetheless, growth factors may be fueling the company’s EPS, and in addition, APO has consistently outperformed previously estimated EPS numbers.
Apollo Global is currently trading at fair value but has exceptional growth potential in the coming years due to the rise of alternative investment funds. Rising interest rates may temporarily slow down its credit segment, but in the long term, due to variable rate loans, growth will also be supported by this segment. The company may be a good choice for income-seeking investors who want exposure to a rapidly growing industry with a stable but variable dividend. I’m not buying yet due to the current fair valuation, but APO is on my watch list.