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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to Apollo Global Management’s First Quarter 2018 Earnings Conference Call.
During today’s presentation, all callers will be placed in listen-only mode and following management prepared remarks, the conference call will be open for questions. This conference call is being recorded.
This call may include forward-looking statements and projections, which do not guarantee future events or performance. Please refer to Apollo’s most recent SEC filings for risk factors related to these statements.
Apollo will be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in Apollo’s earnings presentation, which is available on the company’s website. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Apollo fund.
I would now like to turn the call over to Gary Stein, Head of Corporate Communications.
Great. Thanks, operator. Welcome to our first quarter 2019 earnings call. Joining me this morning are Leon Black, Chairman and Chief Executive Officer; Josh Harris, Co-Founder and Senior Managing Director; and Martin Kelly, Chief Financial Officer and Co-Chief Operating Officer. Three other senior members of our team are also participating on this call, including one of our Co-Presidents, Scott Kleinman; and Jim Zelter; as well as Gary Parr, Senior Managing Director. Scott, Jim and Gary will be available during the Q&A portion of today’s call.
Earlier this morning, we reported distributable earnings to common and equivalent holders of $0.50 per share which led to a cash distribution of $0.46 per share for the first quarter. The quarter’s distributable earnings were primarily driven by pre-tax fee related earnings or FRE of $0.51 per share.
With that I'll turn the call over to Leon Black.
Thanks Gary and thank you all for joining us this morning. I’m pleased to announce this morning that after much consideration Apollo has decided to convert from a publicly traded partnership to a C corporation. The decision that we believe will allow a much broader set of shareholders to participate in the exceptional growth trajectory that Apollo has demonstrated not only since our IPO eight years ago but since our inception nearly 30 years ago.
As we've highlighted in the past, we believe Apollo's culture of excellence in conjunction with the strong secular trends across the alternative asset management industry have been the catalyst for meaningful growth across our integrated global platform. Since our IPO in 2011, we have grown our AUM at a 20% compound annual growth rate and this quarter we surpassed $300 billion dollars in AUM.
We continue to grow our fee related earnings or FRE, at a similarly strong pace and our FRE has been a predictable underpinning of the significant cash distribution to our shareholders supported by solid margins and high levels of permanent and long dated capital, at the same time the funds we manage have meaningful capital in the ground that should drive further cash generation as assets are monetized.
All while continuing to invest in what we believe are attractive opportunities setting the stage for future value creation, we believe there are a limited number of companies in the public markets that have been able to generate the same pace and quality of growth as Apollo and then our view the modest tax friction that we expect to experience by converting to a C Corp should be more than outweighed by the variety of benefits we expect to gain by moving away from our current partnership structure.
Throughout our history we have prided ourselves on our relentless focus towards creating value for our investors and we believe that converting to a C Corp is consistent with that goal. We continue to believe our stock is a compelling investment opportunity at current valuations and we hope that by converting to a C Corp we can reduce the barriers to owning our stock and close the gap between where we trade today and where we see intrinsic value for Apollo.
We analyzed a variety of factors in reaching the position to convert and we believe there are a number of benefits including one a simplified structure and the elimination of the K-1 form, two and enhance liquidity and the potential for reduced volatility for our stock. Three, the potential for inclusion in the number of indices such as the CRSP MSCI and total market indices which is particularly important given the increasing flow of assets into index and passive funds. Four as a C Corp we believe it will be easier for many new investors to own our stock.
And finally we have seen an increase in the valuations of our peers that have already converted or announced the conversion and we believe that our conversion presents an opportunity for value creation for all of our shareholders. We look forward to continuing this discussion with our current and prospective shareholders. And with that I'll hand it over to Josh for some additional thoughts. Around the conversion as well as our quarterly results.
Thanks Leon. And let me also express my excitement for this significant step in Apollo’s journey as a public company. In conjunction with our earnings release, we also published some material this morning related to announced C Corp conversion.
While I don't intend to run through each of the slide, there are a handful of items, I'd like to highlight in addition to the ones that Leon just discussed first in connection with the conversion our dividend policy will remain unchanged, capital return has been a cornerstone of Apollo’s value proposition since we went public and our shareholders have consistently expressed their appreciation for the ongoing quarterly cash flow.
Turning to the economics of the conversion at the corporate level, on a pro forma basis for 2018 the delusion to Class A shareholder cash earnings would have been approximately 5%, if Apollo had been a corporation for the full year, given a year with low taxable income in our incentive business, looking out over a cycle as realization increased, we expect that the dilution could be in the range of 7% to 9% per year.
For many of our shareholders we expect that the ultimate after tax impact will be lower than the corporate level of dilution, on an important note the bulk of the tax increase will be driven by our performance fees. While the impact to our after tax fee related earnings should be minimal, since our FRE is already taxed at the corporate rate. We believe that this is a significant given that FRE is the most valuable component in the sum of the parts valuation methodology applied to our business.
At the end of the day, we felt the argument for conversion was compelling and we believe that the impact to our financial result should be more than offset by increased investor ability to those shares an Apollo among other benefit. As we note on slide 6 of the supplemental materials, share ownership of Apollo and its peers among passive and index fund average less than 1% for publicly traded partnerships versus nearly 7% for C-Corp and this figure continues to grow. We expect that the conversion will occur during the third quarter of this year.
Moving on to our results for the quarter, which highlights the continued growth and diversification across our business, I'd like to start with some comments around asset growth which has consistently remained strong and has created a stable base for increasing management fees and ultimately fee related earnings.
During the first quarter, Apollo saw growth inflows of $25 billion which included advisory assets from Fund IX’s Aspen acquisition, assets from stores acquisition of Generali Belgium flows from the thin capital raised across various funds such as hybrid value and total return fund and ongoing flows into managed accounts. Over the past four quarters, growth inflows have exceeded $80 billion. During a period in which we did not raise a flagship private equity fund over that timeframe.
We've grown AUM by 22% to $303 billion. The robust level of asset raising we have achieved which consistent with the growth trends we've been able to demonstrate, not just over the past three to five years, but since our IPO eight years ago. Looking ahead we remain confident in our ability to drive strong AUM growth across the platform, fueled by AUM growth across the platform fueled by fundraising among strategic capital initiatives and a variety of vehicles focused on strategy - strategies such as Natural Resources, credit and real estate as well as managed accounts. We have experienced particularly robust growth across insurance which has been driven by a combination of internal growth acquisition and reinsurance transaction
Over the last four quarters Athene, and Athora have contributed a total of $44 billion inflows. In addition our third party fundraising efforts through the more traditional channels have generated inflows of $15 billion over the last four quarters. I would also like to highlight that following the segment changes Martin will discuss further our real asset business now has $32 million in assets as of March 31 which is a strong reflection of the diversification of our investment platform and robust capabilities in real estate and infrastructure
Turning to capital deployment we had another solid quarter with $4.3 billion of capital invested across the Apollo platform in private equity our funds committed an additional $2.3 million of capital in the first quarter. We closed our first investment for private equity fund IX Aspen Insurance during the quarter. Fund IX also announced two additional transactions. The acquisition of a number of TV stations and other assets from Cox Enterprises and the tape drive that [Indiscernible] of food retailer Smart & Final
Hybrid value just recently held its final close at approximately $3.25 billion. And we're pleased to announce that the fund is already 15% committed to our invested and the pipeline remain solid. A methodical in patient approach of embracing complexity combined with our ability to source and structure investment in a creative and flexible fashion has enabled our funds to deploy capital in what we believe are attractive opportunities. We continue to identify and evaluate an active pipeline of investments across a broad spectrum of asset classes and we are optimistic about our ability to deploy capital at a solid pace.
As we've said previously, we believe the valuation of Apollo’s is closely tied to our FRE which is largely based on recurring management fees which we view as predictable – and a predictable and growing component of our quarterly cash distribution. The strong AUM growth we've achieved in conjunction with a meticulous approach to cost control had together created the path for robust FRE growth that we have demonstrated through various market environment with core FRE growing 17% on a compound annual basis over the past five years and margins which are in the mid-50.
We expect to continue driving meaningful AUM and FRE growth across segments to organic capital raising and continued strategic capital initiatives. In addition, we have approximately $45 billion of dry powder some of which will begin to earn fees as capital invested providing some visibility into FRE growth just from the AUM we have available across our platform today.
Going forward we will remain focused on driving our FRE higher, since it is a reliable source of cash each quarter regardless of whether we have any significant realizations in the funds we manage. We declared a $0.46 per share cash distribution during the quarter bringing the total cash distribution over the past four quarters to $1.91 per share despite like realization activity of that period.
Lastly before I turn the call over to Martin, I want to mention we will be hosting an Apollo Investor Day on November 7 where we will be providing our current and prospective shareholders with an update on our strategic objectives and growth expectation over the coming year and showcasing how we have you at Apollo. We hope to see you all there.
Thanks Josh and good morning everyone. In addition to this morning's Seekonk news, our earnings presentation issued today reflects some changes, which were made in order to simplify our reporting and make it easier for investors and analysts to interpret our results. We also made some changes at the segment level as we have re-categorized certain assets and their associated income and expenses among segments to better align our reporting with the way these businesses are now being managed under Scott and Jim.
Turning to our results, starting with distributable earnings the $207 million or $0.50 per share we generated during the first quarter was driven primarily by fee-related earnings. Pretax fee related earnings of $210 million or $0.51 per share. We're complemented by a modest amount of realized performance fees and realized investment income principally generated by monetization activity in private equity. FRE declined by 18% versus the prior quarter, we grew 58% versus the first quarter of 2018.
The lower quarter-over-quarter FRE was driven primarily by lighter transaction and advisory fees. However, we continue to grow based management fees which increased to 4% versus last quarter and 32% versus a year ago quarter. Advisory and transaction fees of .$19 million in the quarter included co-invest fees related to Fund IX’s Aspen transaction.
As a reminder, the transaction fees can be variable on a quarterly basis since they are generally tied to the pace of capital deployment. However for the last three years, transaction and advisory fees have been over $100 million annually. And as Josh highlighted in his remarks, we remain confident in our ability to put money to work with the value [indiscernible] despite generally elevated marketplace.
I also want to note that as of the first quarter, we are recognizing management fees from Athene under the terms of the proposed amended fee arrangement. As we have noted previously, we believe the revised fee arrangement we announced together with Athene last September, maintains the strong alignment of interest that has endured since Athene was founded more than a decade ago.
There is no meaningful near-term financial impact under the proposed amended fee arrangement as compared to the previous arrangement. But under the revised arrangement, Apollo will now on a base management fee and a sub-allocation fee as opposed to a base management fee and sub-advisory fees under the prior arrangement. We’ve presented some new disclosures in connection with the revised arrangement on slide 10 of our earnings presentation.
As a reminder, we have moved to a focus on distributable earnings or DE as our primary earnings metric as we feel that this better represents our underlying operating performance and how we manage the business. However, as you saw in our earnings release from this morning, we continue to disclose pertinent information related to returns by strategy and accrue performance fees in order to provide our shareholders with what we believe is the most complete view of performance across the Apollo platform. Our net accrued performance fees balance grew 12% in the quarter
supported by positive marks across our credit private equity and real estate businesses. In private equity the public markets rebound in the quarter drove 16% appreciation in our fund’s public portfolio companies combined with positive mark to market of 2% for the fund’s private portfolio. Our aggregate private equity funds appreciated by 4.6% during the quarter. In credit we also participated in the rebound experienced across credit markets during the quarter with positive performance across the funds we manage in corporate credit, structured credit and direct origination.
We believe that patient and thoughtful approach to investing in conjunction with our ability to deploy capital quickly when the opportunity arises helped their funds perform well over the past six months a period during which there was a significant market volatility.
In times of market dislocation we believe our integrated platform and expertise in navigating various parts of the credit risk spectrum are important competitive advantages particularly as our business model affords us meaningful liquidity and patients to invest behind that conviction. Finally in real assets the aggregate appreciation across the portfolio was 4% for the quarter and 6.7% for the 12 months ended March 31. And this segment continues to perform well
With that we'll now turn the call back to the operator and open the line for any of your questions.
Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Alex Blostein of Goldman Sachs.
So maybe just to get the C Corp conversion questions out of the way and some sort of the clean-ups. Can you guys just walk us through what the effect of tax rate is going to be on the business now maybe starting 2020 as kind of the first clean year and how that's going to evolve over the next couple of years and I know you kind of talked about dilution but just in terms of the actual tax rate.
Yeah sure Alex its Leon. So over the medium term through the cycle, we would expect the blended cash tax rate to be in the range of 16% to 18% and that reflects both the – today the blocked and the unblocked pieces most of the increase in the tax costs from the dilution is being incurred on the carry and the balance sheet side of the house with just a modest uptake on the FRE tax rate.
Thanks.
Our next question comes from the line of Michael Carrier, Bank of America Merrill Lynch.
All right thanks and good morning. Just on the FRE growth and the asset growth, it's been strong over the over the years, the realized performance fees obviously a bit later this quarter but the outlook you got the higher net accrued performance fees, you guys showed the intent of generating AUM, growing so maybe just some color on the portfolio progress and the outlook you realize I know it’s tough to predict but just given where things are situated?
Sure, sure. So as I've said in prior quarters and it still remains true, the fund continues to build value 2019 realizations will exceed 2018 realizations. And our big flow years will be 2020 and 2021. So, yeah, I mean nothing's really different from what we've previously said continuing to sort of build value there in the private equity business. Obviously, some of that's going to be market dependent. And but for the most part continuing to build value in the funds.
I just add the average investments about three years old. So it's starting to mature but still a little early in the funds life.
Okay, thanks.
Okay, thanks.
Our next question comes from the line of Bill Katz of Citi.
Thank you very much and congrats on the conversion. Just maybe on margins, you had a really strong FRE margin this quarter and you have just – it seems like a ton of momentum on the AUM side and fee rates side. How should we think about the trajectory now for the FRE margin as we look out over the next 12, 24 months?
Yeah. I mean, I think we continue to think that there’s some operating leverage left in the business obviously made a lot of headway and I don't think that sustainably we can kind of keep continue to take – we don't continue to take that type of increases kind of continue to happen but we feel like margin is sustainable and going up a little.
Yeah. And I just say we’re really pleased with the progress we've made over the last number of years and we’re now – we’re balancing investing in the platform with future revenue growth. And oftentimes the cost comes before the revenue so that’s the balance that we work through and we’re pretty concerned about that.
Thank you.
Our next question comes from the line of Devin Ryan of JMP Securities.
Hey great. Good morning guys and congratulations on the conversion announcement. Question here just on PE deployment so it feels like there's a lot in the hopper right now you've invested I think $1.6 billion in fund IX and it sounds like a pretty healthy pipeline so I don't want to get I guess too far ahead of ourselves here but can you maybe just give a little more granularity on kind of deployment expectations there and then kind of the scenarios for maybe even being in the market for fund X just based on how quickly you're kind of moving on fund IX.
Sure. Sure. So as Josh alluded to in his comments you have a number of deals that are pending to close and should be closing in the coming one or two quarters, you know from our continued deployment our teams are quite busy as we've said in the past, it's a tricky environment and you know we're remaining very disciplined on the investments we do make. And it's inherently like you know unpredictable and so I hate to really try to pinpoint exactly how fast deployment is in any quarter or even in the next 12 months.
As far as fund X I think it's premature to be talking about exactly when that'll come. As you guys know you know we're incredibly opportunistic and so when opportunities arise we will lean aggressively into them and when conditions aren't right for what we're looking for we'll pull back. So I think it's tough to sort of give a very detailed – you know, you know a quarter-by-quarter flow, but you know they the – I'll end with you know the deal teams are quite busy, there's a lot of stuff to look at.
Yes, so we're probably 15% committed and nine and our pace has been on average plus or minus $5 billion a year. So with – so you know if you think about that it gives you some context but you know as to how you might think about front end, but the reality is that it's going to be market dependent if you back five star, you know the fact is the market's trading below 15 times and the economy is healthy and so there's good value opportunity right now. The financial markets are open. So we're going to try to continue to do our thing.
And the only thing I would add is that there's been very little on the distressed side over the last five years in the Fund. When you look at Fund VII, two thirds of it was in distress Fund one day, it was less than 5%. You know your guess is as good as ours but we're in the 11th year of recovery and probably with a reasonable probability somewhere during Fund IX’s life that there's going to be a heavier emphasis on distressed and when that window opens, there should be a lot more capital deployment in that area.
And clearly one of the activities of the PE team right now has been to be reviewing literally many hundreds of companies in the industries that we pay a lot of attention to and where we want to be in the capital structure and at what prices and in some industries where we're getting closer but not quite there and others not but clearly that's a component that has not been active for the last five years but somewhere in the next two or three years may become a lot more active.
Great, thank you guys.
Thanks.
Our next question comes from long of Glenn Schorr of Evercore.
Hi thanks very much. Obviously with all the growth being put – produced from the insurance and credit sides of the business, I have a question on the debt – your view on debt markets, maybe public versus private valuations, competition structuring, things like that where you see value because $900 million of capital deployment in the quarter is okay but you have plenty of dry powder and a lot of growth coming there. So curious where you see value as it relates to how much we can expect deployment there?
Sure Glenn, this is Jim. Certainly we were active in the fourth quarter when we had the opportunity, when the market sold off and there was opportunity in the liquid markets, leverage loans in particular and structure credit, in terms of the most recent quarter is [indiscernible] numbers.
We participated in the rally and for the most part there's probably a little bit better value in the private markets right now than the public markets, we continue to hone our business and grow our business very well in midcap, midcap continues to grow and as you know that’s all senior secured assets with covenants and those companies and that portfolio grew 13% last year.
So we're finding opportunities in MidCap and direct origination in our business. Scott mentioned that we've done three investments in Hybrid Value to date. And certainly, we're also finding opportunities in our bespoke opportunities in structure credit in our real assets business. So for us right now we – we’re not macroeconomist, but we suspect the environment that Scott and Leon and Joshua described is going to continue the rest of the year, lower rates, probably muted inflation look forward to opportunities with market dislocations, but we probably prefer private opportunities than public.
Got it. If I could - on slide 10, I like the bottom of - the bottom right of the slide where you give the Athene and AUM breakdown. Could you give just some examples of which assets fit into which of those buckets and importantly which ones drive the higher fees for Apollo?
Yeah. So the yield assets and hire offer assets include real estate lending, mass lending and sort of yield year assets and then as you work your way up to get into COO liabilities, an array of other sort of mid-market type lending exposures. So – and the range on the fees there which we've discussed previously goes - there's a large range around that sort of 6.5 bps at the bottom end, up to 70 bps at the high end. And that just reflects the yield profile of the assets that we're investing on behalf of Athene.
Yeah. Just to provide a little bit more color, like the core assets or your investment grade public and private book, your core plus assets or some of your mortgages your mortgage first mortgage paper your yield assets or in real estate your senior [ph] and the higher alpha maybe some things like you know a variety of CLO equity and CLO liability. So along the risk curve and along the liquidity curve itself
Our next question comes from the line of Gerald O'Hara of Jefferies.
Great, thanks for taking the question. I guess just actually staying on Slide 10 for a moment. Perhaps you could touch a little bit on the growth outlook for Athene and the Athora business. And then you know to the extent you have any visibility or perhaps even preference how you think these asset allocation buckets might look several years down the road. Thank you
Hi it’s Gary just from an industry point of view. Part of the overlay of the fill in but it's similar to even two years ago we see a number of opportunities we continue to be active in the looking at these opportunities. Interestingly as things advance one is stable and that is the pressures on the insurance industry, are about the same today as they have been over the last few years.
Low interest rates and a lot of big companies needing to reposition within their portfolios by geography or by line of business. So that exists. There are more financial sponsors that are buying the simple annuity blocks. Interestingly there are still very few strategic buyers in the insurance industry so we don't run into that type of competition. And as you'll recall what we really focus on is our comparative advantages and those are two things one is really trying to understand the insurance industry and a lot of verticals within insurance.
We’re know operating in six different verticals of the insurance industry in Europe and the U.S. we have about 150 people working in insurance and financial services. And so that area, we think we have a comparative advantage to deliver solutions on the second side that's equally important. We begin continue to build out the investment capability for insurance company balance sheets and we think we have a comparative advantage there, we can add enhanced yield for similar risk and we know the regulatory landscape for both NAIC and Solvency II.
And as we build out those capabilities that plus our insurance expertise we're in just as actually Scott alluded to and Leon in the private equity. On the insurance platform side we're in a number of active dialogues when the timing will be how we'll come out we never know. But the flow is as good today as it was two years ago. And in that subsequent period we found ways to get things done.
I would just add on the asset allocation side I wouldn't expect would growth to see a dramatic change in the large buckets. We're talking about monetizing and trying to get incremental basis points out of various assets but the core structure of the team portfolio, the core structure of the Apollo portfolio you know there's going to be some changes around the edge but they're not going to be dramatic shifts in the buckets as you model the business.
Great. Thank you.
Our next question comes from line of Robert Lee, KBW.
Great. Thanks and congrats on pulling the trigger on the conversion. Could you maybe just updates we haven't heard much about and with all the Solvency and credit and obviously and Athora. But kind of where you are seeing in the strategic separate account area, I mean you know [indiscernible] going back, is that still, is that part of the funds flow, I mean maybe any update there would be helpful.
I mean obviously the investors now, pretty good larger investors want customization, customized reporting, customized – particularly in credit customized risk allocation among various asset classes and geographies and so certainly that is you know credit is growing – grew at 14% over the last four years and you know there's definitely I can't tell you that's a faster growing segment in credit.
Yeah and I would just add you know, our focus last year, you know when you think about the margin contribution of a commingled fund versus an SME, you know we are focused last year was on hybrid value which was very successful for us. We're going to continue to add SMEs in the size and scale that make a difference for us, but certainly we have – you know if you look at our SME, as a percentage of interim or an actual raw numbers, it's around $25 billion. So we think that's, we were a leader early, we've continued to keep that dialogue, we will do so but we're going to make sure we focus on the comingled fund, the sizable, scalable comingled fund as well.
And you just want to give investors, the way to express their view in whatever structure they want or feel as is right for them.
Great. Thank you.
Thanks.
Our next question comes from the line of Patrick Davitt of Autonomous Research.
Hey, good morning. Thanks for the time. Scott I want to go back to your discussion on the kind of the realization outlook, just curious if that view that 2019 will be better than 2018. It's just kind of a view of the volume of realizations or do you think the cash flow from realizations can be higher than 2018? And within that could you frame the completed and in the announced pipeline of sales expected to come through over the next couple of quarters?
Sure, sure. And so again I'll start with the caution of all market dependent. But to answering the first part of your question around what's coming down – what's coming down from a monetization standpoint. Yeah, look, I think that's ultimately based on our bottoms up build of what coming to maturity, what dividend recaps we’re aware about, what expected – what expected exits that where companies are now ready to be exited.
We have things that have been in the press to – that are on their way to – should be starting their exits. So I'm not going to name specific names but so it's from – it really is a bottoms up build based on when these companies are – we've created the value we're going to create in these companies and are now moving to an exit path.
Thank you.
Our next question comes from the line of Craig Siegenthaler of Credit Suisse.
Thanks. Good morning. So just given that the team’s balance sheet is now a $114 billion. I'm just wondering how challenging is it to help Athene fine which I think is $30 billion plus of new assets here. And also within that also help Athene migrate its balance sheet into one-third which I think you guys labels differentiated assets.
So if you take a step back – if you look at the core balance sheet now that we’re over $100 billion. We have about 35% to 45% allocation to core investment grade public and private. So the workhorse [ph] of the vehicle is what's going on in the IT market, we have a leading position in that spot as well as the private placement market. But to your question its success in a variety of areas, it's success not only in structured credit, commercial real debt, which we really have no CMBS for all CRE real origination and then certainly on the residential side as well as a variety of structured vehicles like MidCap.
So if the combination of all those that contribute to our focus still at Apollo to create more direct origination vehicles like we've done in aviation in the last 18 months. And there's a varieties that are in the R&D lab to help them out. But our focus our with them is obviously a primary focus and we feel comfortable that the M&A pipeline that Gary mentioned earlier that we're very comfortable our ability to add incremental basis points in returns and again it's been public with all the Athene numbers.
We're not talking about hundreds and hundreds of basis points of margin. If you look at the historic outperformance we've done versus other insurance companies, it's averaging that 40 basis point to 50 basis point. So it's a lot of large numbers in doing it day in and day out and we feel very comfortable with our ability to continue to do so.
And the size of the $115 billion by the way -- the size of AUM is actually in many cases an advantage in that, I mean I just point out that organically just to get through retail distribution/reinsurance/institutional. Athene is growing relatively healthy -- in a relatively healthy way. And on top of that we're finding that our ability to -- next to Berkshire Hathaway we have the largest – the large amount of permanent capital out there in this business and that becomes an advantage relative to helping other strategic player solve problem that other people really can't do?
And the macro opportunity is still very compelling. Yes, there are other players in the [Indiscernible] and are trying to get into the [Indiscernible] and that's fine that some competition is healthy but the macro picture is, we see over a $3 trillion of opportunity on the life side and probably, half of that on the P&C side. Gary mentioned we're now in six different insurance platforms.
And maybe there's been a reasonable amount of underperformance across the industry given the low rates and a lot of companies have used whatever cash they had for stock buybacks or dividends. And there's a dearth of capital now and the need for many of these big companies to sell-off non-performing assets. So hopefully we will get our share of the - of the targets that we're interested in. But we feel pretty sanguine and optimistic about the opportunity, especially given the platform we've built and the team we've put together.
Our next question comes from one of Chris Harris of Wells Fargo.
Thanks. I just want to follow-up on an earlier question about the tax rate, once the conversion goes into effect, should we be expecting an immediate step up in the 16% to 18% range or will it be kind of a phased in ramp up. And the reason I asked that question is I believe with some of the other all sort of
converted, it's been, it's been more of a phased in type thing.
Yeah, I’m going to get passed this year because it will be a split year. And – but once we get into 2019, I would expect that because carry Kerry is being taxed, you know for the most part where it wasn't previously, that will – that will be fully reflected and so that, that will get us into that range in the near term.
Okay. Thank you.
Sure.
Our next question comes from the line of Michael Cyprys of Morgan Stanley.
… can you hear me now?
Yeah.
Okay, great. Sorry about that. So on fee related earnings, you guys have touched some impressive growth over the past couple of years and since your IPO, 17% past five years or so. I guess what's the right level of fee related earnings growth that we can expect over the next couple of years and then also longer term and then on the FRE margin itself 55%, how do you think about the upper bound on that FRE margin and if you were in a couple of years from now and it's below 50% what would have happened?
Yeah, so first of all, if you think about the AUM growth rate, right, I think our business you know grows at you know double digit. And then you know it's just that's historically what it's done just organically and then you've got things like Athora or acquisitions what I call the R&D lab and we just come up with you know the insurance platforms themselves and the ramp of Athora has gotten us you know to – you know in the last five years, 15%
AUM growth, so even if that – you know so I think in that range, the double-digit going up to 12% 13%, even you know you're going to get some operating leverage into the numbers. And so you're getting that 17% growth which is in excess of your revenue growth. And so I think, that that's likely to continue plus or minus, in terms of the upper – I mean I don't see the margins going, you know, we have industry leading margins and I think that you know it's hard to see the margins going into the 60-plus-percent range.
So I think, if we think about the mid-50s going into the high-50s, you know that feels like the right answer. And the reality is that you know the way the business works, it's you know you build the teams and then the revenue drops, but we tend to reinvest that we don't reinvest every last – we don't sort of distribute every last dollar of that operating leverage, we try to reinvest in the platform, we're investing a lot this year and in new teams, new products so we can keep that growth growing, keep that AUM growing.
And last thing I'll say, just so you start with the double digit and then you do some different things and the last thing, I'll say is that we have a fair amount of uninvested capital in credit where the fees turn on as you invest and so that could add, if we find good investment opportunities, that could add 200 basis points or 300 basis points to our fee generating AUM. And so you know we often talk about AUM, but you know the fee generating AUM is really what pays the bills.
And let – I'll just answer the last part of your question, which is you know what would have happened if margins dropped below 50%. I don't anticipate that being a scenario. I think, we have a highly durable management fee stream which capital and with little duration to it and so no matter what the markets do there's just not much volatility to the management fee stream and our costs are highly manageable and we play a lot of time and focus and attention looking at that so there could be one-off non-recurring type cost that would temporarily drop it but on a sustained basis I don't see that as a scenario we certainly don't plan for that.
Our next question comes from the line of Bill Katz of Citi.
Just a follow-up question, I know Josh you mentioned that there's no change in the dividend policy but looking down the road a little bit, I am just sort of curious you have a pretty fat yield right now on a highly visible earnings stream – a pretty durable business model, is there an argument to be made to actually lower the dividend a little bit and think about a different type of capital deployment that might catalyze more of a S&P type yield on that residual dividend, have we thought that through?
First-off we do have a fat yield. So I am glad you know that, we certainly know. Look I mean we're always thinking about how to maximize total shareholder returns and so we're always exploring that I think at this point – we think a tremendous amount about our dividend policy, at this point we feel like the distribution policy is appropriate, we're always looking at things that might enhance the value and if we were to be convinced about changing the dividend and we do have investment opportunities but right now we're convinced that we have heavy - generate a lot of cash flow and we're capital light and we don't – there's no need to retain the capital we're obviously well rated to retain the capital, where we're obviously well a well rated.
And we don't have a lot of leverage and so we feel like the right thing to do right now to pad out, if there was were to be some amazing opportunity or we would feel that the market would value us you know in a better way, if we would stat pay out, we would do that, but that's not how we feel right now.
And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Michael Carrier of Bank of America Merrill Lynch.
Hi. Thanks. Martin just one follow-up on the CCAR conversion, the delusion you know is better than expected and I think you know what you guys expected, you know in prior quarters, just curious what drove that and then is that for common or is it for the overall, for overall?
It's for overall, it’s – well it's the total cash dilution to a shareholder, across all parts of the structure. And the reason it came down from what we – is we suggested a year plus ago some comments based on -- I think what's changed since then is that we have – we’re we’ve incorporated a tax benefit from a 754 election in the numbers and our FRE mix relative to carry Kerry continues to increase. And so I think that over time, has reduced the dilution that you expect to see.
Got it. All right. Thanks a lot.
All right. Thanks.
And that concludes the Q&A portion of today's call. I will now return the floor to Gary Stein for any additional or closing remarks.
Great. Thanks everyone for joining us this morning. Remind you again to save the date for November 7th for our Investor Day. We'll look forward to speaking with you again soon.
Thank you, ladies and gentlemen. This does conclude Apollo Global Management’s first quarter 2019 earnings conference call. You may now disconnect and have a wonderful day.