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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 Second Quarter 2018 Earnings Conference Call. During today's presentation all callers will be placed in a listen-only mode. And following management's prepared remarks, the conference will be open for questions. This conference call is being recorded.
I would now like to turn the call over to Gary Stein, Head of Corporate Communications.
Great. Thanks operator. Welcome to our second quarter 2018 earnings call. Joining me this morning are: Leon Black, Founder, Chairman and Chief Executive Officer; Josh Harris, Co-Founder and Senior Managing Director; and Martin Kelly, our Chief Financial Officer. Also joining me in the room are: Co-Presidents Jim Zelter and Scott Kleinman as well as Gary Parr, Senior Managing Director.
Jim, Scott and Gary will be available during the Q&A portion of today's call. We'd like to remind you that, this call may include forward-looking statements and projections, which do not guarantee future events or performance. Please refer to our most recent SEC filings for Risks Factors related to these statements. We'll 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 our earnings presentation, which is available on the Apollo website. Also note that nothing on this call constitutes an offer to sell or purchase an interest in any Apollo fund.
Earlier this morning, we reported distributable earnings to common and equivalent holders of $0.53 per share, which drove a cash distribution of $0.43 per share for the second quarter. The quarter's distributable earnings were primarily driven by fee-related earnings or FRE of $0.45 per share.
Lastly, we reported an economic net income of $0.27 per share for the first quarter of 2018. With that, I'd like to turn the call over Leon Black.
Thanks, Gary, and thank you all for joining us this morning. With our stock being hit this morning, I'm especially looking forward to our Q&A to figure out what you all know that we don't know. But for now, we're going to first give our formal presentation and then we'll get to the Q&A.
This call provides us with an opportunity to highlight the continued momentum that is driving growth across all of our businesses. To that end, I'd like to provide some commentary regarding our significant asset growth and opportunities we see for continued capital deployment. Josh will then provide you with details regarding the increasing earnings power of our business and our latest thoughts on corporate structure. Martin will conclude our prepared remarks with some brief comments regarding Apollo's financials, before we take your questions.
First and foremost, we believe the combination of our strong investment performance, the depth of our relationships with prominent investors worldwide and our expertise in building scalable businesses are the primary catalysts of Apollo's continued asset growth. In addition, we believe we are benefiting from several secular tailwinds in the asset management industry, including: one, the search for yield in a still low-rate environment; two, the consolidation of relationships among the most successful asset managers with broad product suite; and three, the migration away from traditional active equity and fixed income strategies to a more barbelled approach oriented towards passive and alternative strategies.
We have now reached $270 billion of total assets under management. And our integrated platform is serving us well, as we drive the business forward through our traditional fundraising efforts and strategic capital initiatives. We saw significant growth in the second quarter, driven by gross inflows of more than $27 billion, including $23 billion in credit, and nearly $3 billion in private equity.
The strong credit inflows in the quarter were primarily driven by the closing of the previously announced transaction with Voya Financial, which occurred one month ahead of plan. As a reminder, we were able to create a win-win-win solution for Apollo, Athene and Voya, through the acquisition of Voya's fixed and variable annuity business by Athene and Venerable respectively.
This transaction added $18 billion of fixed annuities to Athene's balance sheet and together with several strategic investors, we established a new permanent capital vehicle called Venerable that acquired the variable annuity piece of the transaction. Athene is our largest permanent capital vehicle. And following the Voya transaction, their balance sheet is approximately $100 billion, a phenomenal success story for a business that did not exist 10 years ago.
Through the strength of our strategic relationship with Athene, where we serve as the investment manager for their assets, we've helped them to consistently deliver leading returns within the life insurance industry. The total amount of AUM in all the permanent capital vehicles we manage is nearly $125 billion or approximately 45% of Apollo's total AUM.
We believe this is a significant differentiator of our model versus other asset management businesses, since these permanent capital vehicles have a number of attractive characteristics: they are management-fee driven; they are scalable; their market volatility is lower; and they are less dependent on particular economic environments to deploy capital.
As we've discussed previously, we're assisting Athene in replicating its success by establishing Athora as the solutions provider for the European life insurance market. Athora is pursuing accretive acquisitions to grow their business, which similar to Athene has the added benefit of growing Apollo's business, since we are their strategic asset management partner.
Athora's balance sheet will be approximately $15 billion following the pending Generali Belgium transaction, which will expand their European footprint beyond Germany and Ireland. That transaction is expected to close around yearend, subject to regulatory approvals. In terms of traditional fund raising activities, we have numerous initiatives in the market today. And others are expected to launch in the coming months.
First, the second quarter included a $2.2 billion first close for our new Hybrid Value strategy, a strong indication of investor receptivity to this product offering, which is starting at $3 billion in total commitments by sometime around yearend. As a reminder, Hybrid Value will more formally integrate the expertise of our private equity and a liquid credit investment teams by focusing on capital solutions, structured equity, and non-controlled stressed and distressed investments.
The strategy will target net returns in the low- to mid-teens with downside protection, which we believe provides a highly differentiated solution to investors' portfolios. In addition, into holding its first close Hybrid Value also completed its first deal during the second quarter. And we expect the investment period for this strategy will continue for several years.
Secondly, our Natural Resources franchise is continuing to perform very well with ANRP II experiencing very strong returns to date. Since the $3.5 billion fund is more than 75% committed or invested, and we recently launched fundraising for a successor fund, that we'd anticipate the first close to occur around yearend.
Third, in credit, our Financial Credit Investments or FCI Fund franchise is performing well and is continuing to deploy capital with the current vintage FCI III already 85% invested. Accordingly, we recently launched fundraising for a successor fund and expect the first close sometime in the second half of this year.
Four, as we mentioned on our prior call, we are also seeing heightened interest for customized long-dated managed accounts across our credit business as well as the broader platform. These dialogues are occurring with a mix of new investors, as well as with current investors that are seeking to expand their existing managed accounts.
Five and lastly, our flagship evergreen total return strategy continues to see interest and is gaining more traction. This unconstrained credit strategy allows us to navigate the opportunity set across the liquid and performing spectrum of our integrated platform, to help our fund investors in their search for yield.
Total Return was launched just over 4 years ago and the performance track record has been strong. Assets for this strategy are now approaching $6 billion from a diverse range of Apollo's clients, including more than 40 different pension accounts and the pipeline for additional investors remain robust.
Turning to capital deployment, I'd like to focus my comments on private equity, where we are transitioning from one flagship fund to another, following the commencement of the investment period for Fund IX during the quarter.
I'm pleased to report that we're just about fully deployed in the predecessor Fund VIII, the $18 billion fund, which began investing in late 2013. This includes the incremental capital Fund VIII has committed to invest in connection with a large take-private transaction of LifePoint Health, which was announced last week.
Most importantly, despite the high priced environment in which we have been operating, we have been able to create Fund VIII at an average enterprise value to adjusted EBITDA multiple of less than 6 times in a market where the average private equity deal multiple has been more than 10 times.
We believe our value-oriented discipline is a key driver behind the fund solid early returns, which currently has gross and net IRRs of 25% and 17%, respectively. While this fund has been active for almost five years, it's still a relatively young fund with the average life of an investment at just over two years versus our historical average hold period of approximately four years.
As Josh will discuss in more detail, we believe Fund VIII is still building value in its portfolio, which we expect will be monetized over a multi-year period and drive meaningful cash distributions in the process.
Looking ahead, as we seek opportunities to begin deploying Fund IX, the $25 billion fund just activated. We expect to use the same value-oriented approach and multiple transaction pathway, that if led to our leading investment returns over the last 28 years. We believe, we possess several competitive advantages that enable us to source and complete transactions including: one, a willingness to embrace complexity; two, a proven ability to creatively finance transactions in a variety of market environment; three, the significant scale of Fund IX, which will allow us to commit to larger investments; and four, finally an expertise in distressed investing, they will be particularly advantageous, if we experience market turbulence.
Since founding Apollo nearly three decades ago, we have traversed four economic cycles, and we have demonstrated time and again the ability to successfully navigate the environment at hand. While we do not have a crystal ball to predict the investing landscape over the coming years, as we invest Fund IX, we are confident that we have an excellent team and proven investment process, which we believe will continue to guide our decisions and produce strong returns for our fund investors.
I'd like to turn this over to Josh.
Thanks, Leon. I'd like to continue the call by operating some perspective on Apollo's growing earnings power, and also provide a few comments regarding our latest thoughts on corporate structure. The continuing growth of our fee generating assets that Leon just described, combined with strong investment formats across Apollo's platform is a directing positive impact on the trajectory of our cash earnings power and ongoing value creation for our shareholders through both fee related earnings and distributions from realization.
Last quarter, I indicated that to do a significant momentum in our strategic capital initiatives such as Athene, Athora and Venerable. And in our various fund raising efforts across the Apollo platform. We are well positioned to continue to grow our management fee revenues and fee related earnings.
I'm pleased to note that as a result of the commencement of Fund IX investment period, beginning of the second quarter and the closing of the Voya transaction on June 1. Our management fees grew by 20% quarter-over-quarter and our fee related earnings, FRE, grew by 40% to $0.45 per share. It's important to recognize that we believe this higher level of quarterly FRE, which annualizes to $1.80 per share, is both sustainable and predictable, because of a long dated nature of the funds and permanent capital vehicles we manage. In addition, we expect that our FRE will continue to trend higher over time. As we grow our fee-generating asset under management across the platform.
As we've said before, we believe FRE is a critical financial metrics, and it is the foundational component of our quarterly and annual cash distribution. And it is largely based on recurring management fees from the assets we manage. Management fees have comprised approximately 90% of our fee related revenue historically, and have been growing at a compound annual rate of 12% during the last five years.
The growth in management fees has been augmented by an ongoing focused on efficiency, cost discipline and operating leverage, which is driven margin expansion across the platform and led to a 17% compound annual growth in core few related earnings over the same time frame.
In addition to FRE, another important component of Apollo's cash earnings profile is from the distribution of net realized performance fees, otherwise known as cash carry from realization activity. In recent months, we represented a valuation framework that is available on our website and in that framework we illustrate the scenario that generated average annual cash carry of approximately $2.50 per share based on what we believe are several straightforward assumptions.
Looking back over the last six years, the average annual net realized performance fee has been approximately $1.50 per share. However, we expect realized performance fee to increase in the coming years, particularly since there is approximately one-third more private equity fund capital invested today versus the average level during the previous six years. Although, the timing of realization events is difficult to predict from quarter-to-quarter, with a 28-year track record of generating significant cash distributions for investors.
Clearly, you can tell from my remarks, we believe continued growth in fee related earnings and the upside provided by cash performance fees representing powerful combination of earnings potential. In fact, our view on this earning stream provides a basis for how we manage the business day-to-day forecast growth, allocate capital and compensate our talented team of professionals.
Before I hand the call off to Martin. I wanted to address a topic that we know is on many of your minds, which relates to our current views regarding our structure as a publicly traded partnership and a potential conversion to a C corporation. As we noted in our last call and in meetings and conversations with many of you over the last few months, we continue to analyze the pros and the cons of a C-corp conversion.
On the one hand, there is no question, that our current structure is tax efficient, and then conversion would lead to a higher tax cost. On the other hand, we recognized the potential benefit that could be derived from a conversion such as an expansion in valuation multiples, broader investment investor ownership and index inclusion.
To that end, we are closely monitoring the market's reaction to our peers, which have already been converted. However, it's important to note that each alternative asset management had a different earnings mix and strategy, so the analysis around conversion varies by company. One of the items we're continuing to monitor very closely, is the sustainability of any value creation. Since converting to a C-corporation, it's essentially a one-time decision. We do not have a specific timetable for siding, but we remain committed to maximizing long-term shareholder value. As we noted before, we welcome your feedback on this important topic.
With that, I'll turn it over to Martin for some additional comments.
Thanks, Josh, and good morning again, everyone. Starting with distributable earnings the $218 million or $0.53 per share, we generated during the second quarter was driven by strong growth and stability of our fee related earnings, as Josh highlighted. Fee related earnings of $186 million or $0.45 per share. We're complemented by realized performance fees and realized investment income, principally generated by monetization activity in Fund VIII, and our European Principal Finance business.
In terms of our economic financial performance with the second quarter, the FRE, we generated was partially offset by two factors. One, Athene related depreciation, which amounted to $0.17 per share of unrealized losses; and two, lighter net performance fees to the modest investment performance and elevated profit share expense. The net result of these items drove economic net income of $108 million or $0.27 per share post-tax.
Our fee related earnings were up 40% quarter-over-quarter, reflecting a significant rise in fee related revenues, driven by the 20% increase in management fees, which was due to the commencement of Fund IX and the completion of the Voya transaction. Importantly, our ongoing discipline around cost management was particularly evident, as fee related expenses declined slightly quarter-over-quarter.
The net impact of rising the related revenues and well managed expenses resulted in meaningful FRE margin expansion of approximately 800 basis points to 53%. As it relates to the quarterly mark on Athene, the fair value decreased by 7.5% quarter-over-quarter, due to the low trading levels of it stock, partially offset by a modest reduction in the liquidity discount on the shares held on our balance sheet.
As I mentioned, the net impact of the decline in value on our economic earnings was an unrealized loss of $0.17 per share for the quarter, which was felt in both credit and private equity segments given the nature of how we acquired the shares we hold. Despite the depreciation in the quarter, we believe strategic investments like a 10% economic stake in Athene, serve to strengthen our balance sheet and further align ourselves with a strategic partner.
Next, I'd like to provide some context behind the quarter's net performance fee-generation. Total performance fees for the quarter were $141 million or $44 million net of profit share. Notably, each of our business segments delivered positive returns in the second quarter. In credit, on an aggregate basis, the funds we manage generated a blended gross return of 1.3% during the quarter and approximately 7% over the last 12 months.
In an environment, where lower interest rates and negative nominal rates continue to persist, we believe Apollo's credit platform is delivering a compelling and differentiated value proposition to its clients through a diverse product set expands the risk and return spectrum. In private equity, the portfolio appreciated by 1.7% in the quarter, and 16% over the last 12 months. The second quarter mark was driven by 3% appreciation in publicly traded holdings and 1% appreciation in private holdings.
Fund VIII, which currently represents approximately 75% of the remaining fair value of all the traditional fee funds we managed appreciated by 2.1% in the second quarter. As Leon and Josh noted, the portfolio continues to season, is performing well, and the team is optimistic about the long-term value proposition offered by the nearly three dozen companies in Fund VIII. In real assets, our investment performance as measured by the U.S. real estate equity business was up 3.7% during the quarter, and this segment continues to perform well.
Finally, as it relates to the elevated profit share expense, the above average ratio of nearly 70% during the quarter was principally due to two factors: first, a higher incentive full accrual, which can vary quarter to quarter as we progress through our calendar year; and second, higher equity-based profit share arising from certain grants, which will continue to amortize at seminal levels for the remainder of the year, before stepping down in 2019 and again in 2020.
With that, we'll turn the call back to the operator and open up the line for any of your questions.
Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from line of Michael Carrier of Bank of America Merrill Lynch.
Hi, thanks, guys. To me, first question, if I look at the growth in the business, that's been obviously robust across the different segments. But if I look at their performance this quarter, last quarter, it's been a bit more muted. The longer term, you guys mentioned Fund VIII with a 25% IRR. So it seems like things are still pressing very well.
But just wanted to get your sense, like when you look at the first half of the year, what has been driving maybe some of the weaker performance metrics? And then, when you think about the portfolio seasoning going forward, what's the outlook? And especially when we start thinking about the distributions, heading into 2019 and 2020, in realizing the performance fees? How confident are you that you can generate the same that you have seen historically?
Right, right, so just to clarify, because the management company DNI and - or the metric there are actually quite positive. So I think what you're really talking about is the private equity portfolio company performance in one particular quarter. And I guess, in my view - and I'm going to turn it over to Scott Kleinman, who runs private equity to provide some details - is that, there's always idiosyncratic marks in any one quarter.
But we feel highly, highly confident that finding is continuing to build value and going to deliver. In fact, over the 12 months, obviously, it's 25 gross, 17 net. So the notion that we've had - we had a couple things related to retail and Canadian natural gas that we had to mark down. But like relative to the overall portfolio, we're very positive and excited about where it is.
And in our track record over the last 20 years we have no reason to believe we're not going to continue to do what we've done over the last 20 years, which is generate - their high 30s gross and high 20s net. But, Scott, do you want to talk more specifically about the Fund VIII?
Yeah, sure. So, look, as Leon mentioned earlier the fund is still fairly young with an average age of only about two years for the investments in it. Fund is off to an extremely strong start. If you remember, our performance last year was around 30% appreciation. We've seen a little slowdown as Josh alluded to, a little bit of noise in a couple of names. But otherwise, the portfolio is in extremely strong shape, would expect to see more normalized appreciation going forward from here.
And as far as your question around monetization, the portfolio is shaping up. I mean, we see 2019 and then again into 2020 as being pretty strong realization years, as that fund really seasons and gets ready for realization. So we feel really confident about the portfolio. But as you all know, private equity marks don't move linearly. And so, after an extremely robust 2017, we have seen a little slowing in the first half this year. But I feel extremely confident about the portfolio as a whole.
Okay, thanks a lot.
Our next question comes from the line of Bill Katz of Citigroup.
Okay. Thank you very much. So you had a sort of a lead on building out the opportunity set into insurance segment. And subsequent to what you've done, you had a couple of your competitors, both Blackstone and Carlyle stepping into the space as well. It seems like each of the companies has a bit of a different strategy.
Could you talk more broadly about the competitive backdrop for related assets and how you sort of see the growth? I mean, I think you spent a lot of time in your prepared remarks about that. So where could we see some of that incremental opportunity? And is there any sort of risk to that thesis, just given the bit of a crowding by some of your peers? Thank you.
So it's Gary Parr speaking. And you made a good point, and that is a lot of different approaches from others, including ours, so it's useful to go back. We saw the opportunity, Apollo saw the opportunity in the insurance industry 9 years ago, as to the repositioning and the restructuring that was taking place, and through that began to build Athene.
Over that timeframe, we've then done the strategic capital initiatives to also build out Athora, Venerable. We have Catalina that we're invested in, that does property casualty. And then, as Leon addressed we have FCI, which shows life settlements and structured settlements. So firstly, it'd be a point that we have a platform that gives us the ability to provide solutions across a lot of different segments of the insurance industry. That gives us a lot of optimism about what we can do and where we can do things that are win-wins for ourselves, for our partners.
The second part would be interestingly with others coming in, if anything we've seen the opportunity set grow over the last five years. The pressures on margins and annuities, the difficulties in Europe by country and consolidation have actually opened up more opportunities than was the case 5 years ago in terms of numbers.
So we can see it and say that you got no one group, ourselves or anybody else would ever do all transactions in any sector. We've known that. We continue obviously to get things done with the Generali and Aegon in Europe, and the Voya transaction in the U.S. And we continue lastly to be in a number of conversations that are complex. They suit our abilities in terms of our expertise and their number of lines where we can employ those skills.
So we - I think others in our peer group have also referenced the size of the opportunity and there we'd agree we see a lot more than any one group could do.
Yeah, I mean, I would just say like, obviously, Athene chugs along at $10 billion of AUM a year in terms of its growth, plus or minus. And you can look at those numbers yourself. Athora is now in Europe, right, we're up to about $15 billion of AUM as Gary mentioned. But our capital base would indicate a capital that would allow us to get to $50 billion there.
And then, now you have Catalina, which is a P&C related insurance. And, look, at the end of the day, we're also innovating across other lines of insurance. And as people come into the easier less complicated spaces, we're doing what we do, which is we're looking at things that are a bit complicated.
For example, in Voya, obviously, we split the fixed annuities and created a company to acquire the variable annuities. And so, it allowed us to do a transaction that other people couldn't. But there's a lot of growth left to go. And those would be some of the near term areas.
Thank you.
Our next question comes from the line of Alex Blostein of Goldman Sachs.
Great. Thanks. Good morning. So, Josh, you've spoken about the importance of FRE, and obviously, the progress you guys made here. And you obviously saw the step-up in the second quarter through various initiatives. Can you talk a little bit about the prospects of FRE growth from here? But really more on an organic basis kind of assuming that, the Voya type of deals, if we see more of those, obviously that's great. But from an organic opportunity, what do you guys see is the biggest drivers for all over the next 12 months.
And as a kind of question to that on Hybrid Value, maybe you guys can hit on the opportunity to potentially upsize the fund, kind of given the stronger first close you had. Thanks.
Yes, I'll take the first one and then I'll turn the second one over to Scott. But if you look at FRE growth over the last five years, right, we've grown revenues at 12% and FRE at 17%. And I think that, and we've achieved a lot, we've achieved so the - the management company growth is being driven by, obviously, the step-up in IX, but also really significant growth in credit. And that growth is continuing in credit.
I mean, last year, we - part of it is acquisition, but without acquisitions, we're sort of adding $20 billion of $25 billion of AUM every year, just organically across our platform. And so - and then, I'd say on the margins, right, there's still going to be operating leverage in this business. I mean, obviously, we're cognizant at a 53% EBITDA margin. We made a tremendous stride and we can still make strides, but it will be increasingly incremental in terms of margin improvement as we reinvest in some of the business. Before Scott comment, Jim you want to comment on credit growth, because that's the primary driver.
Sure. So - and some of the things were already mentioned by TRF was a concept four years ago that that strategy collectively now is over $6 billion that's a management fee business, which we think about our business inorganically grow that drops right to the bottom line, because of how we're structured and the ability for that to be an incremental FRE contributor.
Certainly, the activities we're doing in the FCI franchise, which Gary mentioned in terms of expanding our insurance capabilities, our structural credit franchise SCRF IV off to a great start we announced closings of over $2 billion in that franchise, hitting on the EPF. So those are all critical drivers to our to our FRE margins.
Great. And just answer the Hybrid Value question. No, you're right. We've been - I think very pleased with the amount of investor interest in that product. We - as you mentioned we had a first close of $2.2 billion, we're targeting $3 billion. I think we have investor demand in excess of that. But, I think rightly with our fund here we wanted to grow this business sensibly. This is based on the demand we see for the actual underlying product. Our pipeline is fantastic in Hybrid Value right now.
As we mentioned, we already had our first deal close, we expect to have a few more announced in the coming weeks, and so. This is a great product we see the sort of medium term growth here pretty extraordinary, and so would expect in coming quarters, in years to continue to grow this platform pretty meaningfully. But for the time being we are targeting around that $3 billion market.
I mean, bottom line is, we don't there's no reason why we can't continue to grow revenue is a double-digit and FRE in the mid-teens. And that, without any big acquisitions, like, if you have another Voya and the R&D lab is always chugging here or another something else that we start, that would be additive to that.
Our next question comes from line of Devin Ryan of JMP.
Good morning, everyone. So question here just on some of the headlines around the departure of the head of the relapse of segment, it's a smaller area for you guys. But it should be great to get an update on what you're thinking there strategically just given that I know that was an area that I think there are some building enthusiasm around the potential? And just what areas of growth you're focused on and any additional expectations from where the segment could go?
Yeah, sure, sure. So real assets and infrastructure is a space that we since Jim and I have taken on the Co-President's role. As it space that we're looking to really get reorganized and really use as a platform to continue growth. We are in the process of reorganizing that business, and will be coming out with more specifics in the coming quarters there. But as far as how that goes, we would fully expect to continue to not only be putting additional focus into the traditional real estate platforms that we have.
But we are still looking at infrastructure as an interesting platform to grow and we're really just finding the right way to get that launched.
Yeah, but I would say that right now infrastructure investing is across our platform in the real distinction that we may, is that we haven't yet decided to raise a carve out fund, based on the competitive nature of the field. And so that's just probably the difference, and so that would the only clarification, I would make. But as we said that, we have a debt infrastructure team, we have an equity infrastructure team. We've got funds that it's going to add, we may very well decide to do that, but we haven't yet.
Got it. Thank you.
Okay. Thanks.
Our next question comes from the line of Chris Harris of Wells Fargo.
Thanks, guys. Just a question regarding the C-Corp conversion opportunity. You mentioned, you want to evaluate the sustainability of any success that your peers may or may not be having there. Can you help us maybe determine how you guys are thinking about that exactly, I mean, how do you really know whether something is sustainable or not, I guess, this is my question? And there's some a surface it seems like a might take a while to evaluate that, but maybe that's not right?
Well, I think, you're right. I mean, the reality is, when you've obviously been watched actions at KKR and Ares. And certainly in the case KKR is more pronounced. We've seen that it, is that amongst a lot of things has had an impact on the multiple on our view. But at the end of the day one quarter is one quarter, and once you make this decision you're permanently constraint cash earnings. And we put out some numbers there last year as to what that would be, so I think that from our point of view, it's not something that you rush, that you got to see how things trend over a cycle, how people trade, whether there is broad bay [ph].
And then I think you can also chart like different investors, and who owns with stocks, and you can look at index inclusion over time and whether things are really included in indexes or whether they're not. And so all these things you are researchable and available, but once you make the decision to do it. It's permanent station basically. So you want to measure twice and cut once, and then just and so we're following all of these things and studying it in great detail.
Our next question comes from line of Michael Cyprys of Morgan Stanley.
Hey, good morning. Thanks for taking my question. I circle back on the past one, you you're your guidance from building out Athora, Midcap, Venerable and so forth. If you could just talk a little bit about maybe more strategically, how you're thinking about the next set of platforms that Apollo can drive the next wave of management fee revenue growth over the next 5 to 10 years? What areas of the market are you seeing dislocations or opportunities for introducing new and other platforms?
Well, Michael, this is Jim. As you said, we - let's talk let's differentiate us to platforms, some of them are really the entity that holds the assets like Athene, Athora, Catalina, Venerable, et cetera. And then, those are the insurance assets for the permanent capital vehicle, and then the platforms underneath are things like MidCap, AmeriHome, a variety of our aircraft activities in Mercks [ph].
So when we think about those they somewhat go hand in hand, certainly, Gary articulated the opportunity on the platform side in terms of, what's going on with the insurance sector as a whole, the multi-trillions that are being evaluated in terms of disposals. So we have a very concrete upper going on there on the platform side. On the asset side, as we've talked about in the past, certainly continuing to garner spots in the capital markets, where we think banks are not reentering now staying the regulatory environment.
So as we think about SME lending, as we think about inventory finance; as we think about trade finance; as we think about EM Direct Lending, a variety of activities there are consistent with what we've done historically in credit. Where we are taking the role of what had been the role of the incumbent bank that those are exciting areas for us.
So we purchased a smile SME lender in the UK in the last 12 to 18 months, that is one that has a small platform right now, but a great track record. So a variety of those activities focus mostly on the U.S. and Europe, but you will see a couple of small activities for us in other regions of the globe. So that's really the theme. The one big areas of aircraft, I mean, we're excited about what's going on right now we have a tremendous track record in the five years in our entity called Merck's.
We certainly see a lot of activity at some competitors have come in, but the ability to expand that area is critical to us as well. So those are the breath of things that we're thinking about and Scott also mentioned at the end infrastructure debt and equity, I think you'll see us doing and pursuing activity in that space as well that would be a platform like.
Great, thanks very much.
Our next question comes from the line of Gerald O'Hara of Jefferies.
Great. Thanks for taking my question. Circling back for a moment, I guess, maybe digging in a little bit on the permanent capital vehicle platform has been clearly a lot of pressure on the demand from private debt, and perhaps you could share a few thoughts on how you see the opportunity for MidCap? And maybe even more importantly how - if some of the - maybe what some of the risks that might be on the horizon for a credit should we see a turn in the cycle? That's would be helpful. Thank you.
So just a reminder for those, the MidCap's a vehicle that we ended our ownership about four years ago, when we did five years ago, when we did the company had a balance sheet of about a $5 billion. Today that balance sheet directly is around $8.25 billion, with off balance sheet side cars and other vehicles of around $2 billion to $3 billion, so almost $10 billion. When we purchased that business, it was really a healthcare lender, focused on really ABLs, healthcare real estate and sponsor debt in the healthcare space.
The evolution that now, we have a breath of the business, ABLs, revolvers, life sciences, real estate, and general sponsor business, in a variety of industries. Healthcare is about 40% of the portfolio right now. So in general, industrial is about 60%. So a very, very wide platform almost when we purchased 50 employees and almost 200 today. Your question about private debt, private debt is a word where it's anywhere from senior secured sponsor at 3.50 over to mezzanine attaching it 7 to 8 times.
Certainly, we're pretty confident we have a view that on private debt, it's all about the size of your front end funnel. We focused tremendously on having a lot of folks knocking on doors, because it's a business of large numbers. And so we're excited and we're very happy in that platform, historically has had to fall to less than 20 basis points, and we feel very good about the portfolio today. Broadly speaking of private debt, there is going to be is a lot of capital has been raised. Certainly, we're a bit more cautious on subordinated debt in some of the newer vehicles. That if you're just a vintage 18 or vintage 17 on subordinated debt, that's a cause of concern.
And I will tell you, in our permanent capital vehicles in our insurance companies, while we have done things that are unrated, we have maintained our focus on senior and secured and floating. So, we've been very cautious about the type of private debt that we put into our capital in our permanent insurance vehicles. But we're excited about what we see going on at midcap.
Great. Thank you.
[Operator Instructions] Our next question comes from Brent Dilts of UBS.
Hey, good morning. Bit of a higher level question, could you talk about how the threat of trade wars impact how you deploy capital and its impact on the way you're thinking about harvesting some of the gains you're sitting on?
Yeah. I mean, I'll start. It hasn't really have - we haven't seen a significant impact in our portfolio. And when you look at the overall numbers, first of all, just for the U.S. economy in general, but then even as it relates to our portfolio, it's just not significant at this point, relative to an impact that's material. But, obviously, like if it drives the markets down, it creates volatility. It'll impact both our - it'll help our ability to buy. And there's certainly going to be sectors that are obvious, that are impacted by it.
So that any time there's dislocation, that's super helpful on the buy side. Clearly, on the sell side, it's a broad market - broad market confidence is affected and volatility is created. That will limit our ability to sell or to delay our ability to sell. But that would be my overview of it. Scott, I don't know if you have anything more specific.
No, I think you summed it up well.
Great. Thanks, guys.
Yeah, thanks.
Our next question comes from the line of Michael Carrier of Bank of America Merrill Lynch.
Thanks, guys. Martin, just two quick things. So the FRE margin, I think you mentioned 53%. How should we be thinking about that, as you continue to grow, whether it's the insurance business, the credit business? And then you're investing in the businesses. Just how should we think about that, maybe over the next few years?
And then, real quick, you mentioned like the incentive comp. I know it popped up. Sometimes it can happen on mix in accruals. But I just want to make sure I understood it more in terms of the outlook, like what we should be thinking about that, whether it's the rest of the year, this year, into 2019 and 2020? Thanks.
Sure, Mike. So, on the margins, so we hit 53% on FRE basis. We are obviously very happy with that. And looking forward, we would expect that we'd be sustainably above 50%. And so, I think - as Josh said, I think there's room for that to grow over time, probably not so much in a say-so [ph] fashion as we just experienced. But we have to balance that with investments in the platform. And so, that's - we'll make those decisions year by year as they come along.
And on the profit share, it's - the ratio is exacerbated in a period when there's lower levels of carry in the autumn [ph]. So looking at realized, profit share, the rate was 58% as we reported it. But if you deduct the incentive for, in a low carry quarter, it came down to the low 40%s. And then the second component, which I mentioned in my prepared remarks, is a non-cash charge related to some executive awards which will tail off over time.
So looking forward, when you sort of - when you look through the cycle on a more normalized period of time, we'd still expect the blended sort of aggregate profit share rates to be in the 40%s or mid-40% level.
Okay, thanks a lot.
Sure.
Our next question comes from the line of Glenn Schorr of Evercore.
Hi, this is Kaimon Chung in for Glenn Schorr. So more money moved from the non-sub-advised to the sub-advised, but the ratios have stayed roughly the same over the last couple years. Is there a limit to how much can be sub-advised and do you have any updated thoughts of where that number could go and how high the ratio could go.
Yeah, so we talked a lot about this in the past. The number is generally in the low 20 today and it goes up and down. Certainly, our alignment with Athene is such that they would like to have that number approaching the 30% number. So we're collectively in line. I think that the numbers today reflect the opportunity set. And certainly, with their compression of yields and the compression of returns, we're being judicious with the capital mix deployed.
But certainly, a very active aligned dialogue about increasing that sub-advised number, and certainly, that's good for Apollo and it's good for Athene. But it's done with the right prudence around it, to make sure that's done judiciously. But our goal would be to get that number substantially higher - mid to high 20s, if not, 30% over the next several years.
And that concludes the Q&A portion of today's call. I will now turn the floor back over to Gary Stein for any additional or closing remarks.
Right. Thanks, operator. Thanks everyone for joining us this morning and we look forward to speaking with you again next quarter.
Thank you, ladies and gentlemen, this does conclude today's conference call. You may now disconnect.