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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 2020 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 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, including the 8-K Apollo filed this morning 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 solicitation of an offer to purchase any interest in Apollo fund.
I would now like to turn the call over to Gary Stein, Head of Investor Relations.
Welcome to our second quarter 2020 earnings call. We hope you and your families are doing well in these challenging times.
Joining me this morning are Leon Black, Founder, Chairman and Chief Executive Officer; Josh Harris, Co-Founder; and Martin Kelly, Chief Financial Officer and Co-Chief Operating Officer. Gary Parr, Senior Managing Director is also on the line and will be available during the Q&A session.
Earlier this morning, we reported distributable earnings of $0.46 per common share, pretax fee-related earnings or FRE of $0.59 per share and a cash dividend of $0.49 per share for the second quarter.
With that, I will turn the call over to Leon Black.
Thanks, Gary, and thank you all for joining us. I'd like to express my wishes to everyone listening that this finds you and your families healthy and safe. And to our employees who have continued to work tirelessly on behalf of our clients and our shareholders, I'd like to convey my appreciation and gratitude. We are not working under typical circumstances, to say the least. And you have all continued to go above and beyond to drive the strong results that we're reporting today. I think, this speaks to the tenacity and spirit of our employees, as well as the collaborative and adventive culture we have at Apollo.
Globally, companies continue to operate in incredibly challenging circumstances as we face what started as a health crisis, but it progressed into an economic crisis as well. Across the firm, we have responded quickly to this changing landscape with a focus on engagement and operations across our investment professionals, client and product solutions teams, and enterprise solutions group, which has helped us transition into a work-from-home environment smoothly.
This quarter marked the achievement of a significant milestone as the Apollo’s AUM grew by approximately $100 billion to surpass $400 billion for the first time in our history. This growth was driven by Athene, Athora and strong inflows during the quarter and represents 33% growth year-over-year.
With $414 billion of AUM as of June 30th, we are well on our way towards the $600 billion goal that we provided at Investor Day this past November. We continue to see robust demand for Apollo products and a strong pipeline for insurance transactions over the next few years.
As a further indication of the breadth of our platform and our activity level through the pandemic, gross purchases were $45 billion across the platform in the second quarter, with some of this related to the repositioning of insurance company balance sheets. We continue to dynamically navigate through this challenging environment on behalf of all our investors.
Now, I would like to spend some time talking about the remarkable depth of leadership that resides at Apollo and continues to evolve. Since our founding, we have intensely focused on the strategic growth and evolution of Apollo as a leading world-class alternative investment manager. In recent years, we’ve broadened the firm's executive team, most notably by naming Scott Kleinman and Jim Zelter, as co-presidents. Scott and Jim have shown strong corporate leadership, taking on responsibility for Apollo's revenue generating and investment businesses. Additionally, we continue to elevate and hire exemplary individuals to run the day-to-day operations across all lines of our business, including credit, private equity and real assets, and our insurance platforms.
Our recent hires and the evolution of our leadership structure demonstrate our commitment towards growth, progression and the ongoing modernization of our firm. Today, we are announcing that on the back of an almost unprecedented quarter, adding $80 billion of insurance assets and liabilities to the portfolios that we manage, Marc Rowan, co-founder, who oversees this area, has decided, he will take a step back from his day-to-day oversight of the business and enjoy a semi sabbatical. Marc will continue to work with Josh and I, driving the strategic direction of the firm, especially for our financial institutions and insurance-related businesses. Marc will remain a member of the Apollo Board and Executive Committee, will continue to serve on the Board and Executive Committee of Athene and will remain on the Board of Athora.
Scott Kleinman will assume the day-to-day operational responsibility of leading our financial institutions and insurance activities. Jim Zelter will continue to focus on asset management and credit investment activities across our insurance clients. Together, with Gary Parr, Gernot Lohr, Matt Michelini and Jasjit Singh, they will lead a broad team of over a 100 professionals who are dedicated to our insurance clients.
Josh, Marc and I maintain the utmost confidence in this team to lead us into the next phase of growth and development for these platforms and for the firm more broadly. We are excited for what the future holds.
We are also actively engaging on the topics of citizenship, diversity and inclusion. We recently completed our latest annual social responsibility report, which highlights that since the inception of our ESG program in 2008, the combined efforts are resulted in more than 10 million tons of waste recycled by portfolio companies, over 1 million volunteer hours by employees of portfolio companies, and approximately $1 billion of charitable donations just to name a few achievements.
We have brought on some exceptional talent to assist with our citizenship efforts, including Lauren Coape-Arnold, who joined late last year as Global Head of Citizenship. This year, we introduced a formal charitable matching program for employees, which included special initiatives for COVID with $50 million in relief effort contributions globally from Apollo, its founders and portfolio companies, and also for racial injustice reform. These initiatives were well-supported by our employee base.
More recently, as tragic events have further brought the issue of systemic racial injustice in this country to the forefront, we've been spending a great deal of time listening and thinking about how we can engage to a greater degree on this issue. As leaders in the industry, we need to be honest in acknowledging that we do more to help combat these inequities. And we are committed to enhancing our diversity and inclusion strategy in all aspects of our business.
We are very excited to welcome our new Head of Leadership Development and Diversity, Jonathan Simon, who joins us next month. In addition, we have expanded our existing partnerships with organizations that work with students of color and communities in need.
Finally, before turning this over to Josh who will speak more extensively on the subject, you should know that I am particularly proud of the strong performance delivered by the Apollo team in the second quarter. During challenging times, Apollo has generated dramatic growth in both, AUM and FRE, in fundraising and in deployments, as well as raising the bar on social consciousness. This has truly been a prime example of grace under pressure or of the whole Apollo enterprise getting going when the going was getting to get tougher.
With that, I'd like to turn this over now to Josh to provide an overview of our business operations for the first quarter. Josh?
Thanks, Leon.
We are really pleased to further evolve our leadership team, and I look forward to continuing to drive growth for Apollo alongside you and Marc.
Apollo has responded, as Leon mentioned, to the challenges of working through the global pandemic, exceptionally well. Our outmost priority during this time has been to focus on the health and safety of our people and their families, which include our 15 offices around the world. We have challenged ourselves to innovate and adapt to new technology and to make this work -- a remote work environment, as efficient as possible. Looking forward, we are approaching the return to office with an emphasis on ensuring the ongoing wellbeing and productivity of our employees.
Now, turning to our results. Our business has done exceptionally well over the last six months. For many years, we've been making four key points about how our business would perform during a period of severe market dislocation or a recession. Number one, our FRE growth and margins would be durable and stable; two, our fundraising would be resilient and potentially accelerate, driving AUM growth; three, we would find attractive risk reward investment opportunities for our investors; and four, the majority of our markdowns in our funds portfolios would be transient. All of these are proving out during this period of time, reflecting the strength of our platform.
I'd like to briefly highlight the two notable transactions that reflect our continued market leadership in serving our insurance clients. These transactions closed during the second quarter, despite a backdrop of continued market volatility and uncertainty. At the beginning of the second quarter, Athora closed on its acquisition of VIVAT. Athora’s assets now stand at $60 billion. This transaction is transformative for Athora, as it creates a meaningful scale, diversifies Athora’s business further geographically, and adds significant operational talent and a distribution capability to the Athora platform in the Netherlands. In addition, in June, Athene announced and closed its reinsurance transaction with Jackson National, which is the largest reinsurance transaction in recent history. Through these transactions, Athene and Athora have added $73 billion of assets. And we believe that substantial consolidation opportunities remain across the insurance industry.
Following these two transactions, our insurance clients continue to have a strong capital position with over $85 billion of buying power in aggregate. This capital serves as a key strategic differentiator for our clients as they do unique asset management, transaction and origination capabilities of more than 150 employees at Apollo focused on serving them.
Apollo’s permanent capital vehicles now represent 60% or approximately $250 billion of our AUM. And over 90% of our AUM is either derived from permanent capital vehicles or has a contractual life of five years or more from inception. The stable base of AUM continues to underpin our durable and growing fee-related earnings, which we have successfully grown through all market environments and expect to continue to do so.
For the first half of 2020, our FRE grew at 9% compared to the first half of 2019. Despite multiple periods of market dislocation and the impact of an ongoing global health and economic crisis, we continue to remain highly committed to growing FRE at a robust pace over the long run and remain very confident in our ability to achieve the goals we set for our long-term FRE growth at our Investor Day last November. Our FRE margin was 55% for the first half of 2020, in line with our 2019 FRE margin.
Turning to fundraising. Total inflows during the second quarter were a robust $89 billion, inclusive of Athene and Athora growth. Over the last 12 months, total inflows have been $119 billion, a record for Apollo. This includes $73 billion of growth of insurance clients, mergers and acquisitions, $35 billion of capital raising and other inflows from our fund investors, and $11 billion from organic growth at our insurance clients.
In the second quarter, the breadth of our platform’s investment capabilities and strength of our global relationships with investors drove fundraising that was significantly above our average quarterly level. Notably, this momentum was achieved during a time of nearly all virtual interactions.
During the quarter we announced and closed on $17.4 billion in fund commitments. Key initiatives include the launch of Apollo Strategic Origination Partners platform, which will target an emerging opportunity in the large scale direct origination solutions for high quality businesses, a market currently underserved by private credit. The origination partnership will leverage Apollo's incumbency with borrowers, utilizing our credit platforms relationships with approximately 3,300 issuers of both, corporate and sponsor-backed companies.
Also contributing to inflows was a $1.75 billion close for our Accord III B. This is our dislocation strategy that we were able to launch and close within approximately eight weeks. And we are now in the market for the next series of the Accord strategies.
Looking forward, we remain confident that we will be able to meet or exceed the $20 billion fundraising goal we discussed on our last earnings call, which consisted of increasing the target size for certain funds, accelerating the timeline for other fundraisers, launching new strategies to address opportunities driven by market dislocation. We are appreciative of the trust and support from both, existing and new investors as they commit to a range of strategies currently available on our platform, including our origination strategy, Accord, Hybrid Value, infrastructure, U.S. and Asia real estate, managed accounts and various evergreen strategies.
During the second quarter, turning to deployment, we deployed $7.2 billion of capital across our drawdown fund. Through a shifting market landscape, we remain active looking for attractive asymmetric risk reward and investing in high-quality top of the capital structure opportunities. As public markets have recovered, driven by massive but unnecessary federal stimulus, instead of fundamentals, it's been more challenging to find these attractive risk reward opportunities. However, we have been able to successfully navigate these markets to date and are increasingly focused on providing bespoke capital solutions for brand name franchises, facing liquidity constraints or looking to capitalize on growth opportunities.
Capital deployments for the quarter included originations led by our Hybrid Value and credit businesses for companies such as Expedia, Albertsons, Airbnb, MFA, Cimpress, NGL Energy and Delta. As of the second quarter Hybrid Value stood at 71% committed or invested. And we were back in the market for this strategy.
These transactions highlight the benefits of our globally integrated platform and the deep pools of capital across our clients, which allow us to structure bespoke financing solutions quickly and with certainty of execution. Going forward, we believe these factors will continue to make Apollo a premier financing partner for companies, and we see a strong pipeline ahead for hybrid value, our various credit vehicles and our new strategic origination partnership.
In addition, our private equity fund, Fund IX, recently closed on the $6 billion take-private transaction for Tech Data, representing the largest public to private transaction completed this year. Tech Data is a global leader in information technology distribution, which we believe is well-positioned to continue to benefit from the secular IT spending tailwinds. And we created this investment in an attractive creation multiple of approximately 7 times EBITDA prior to cost savings. As of the end of the second quarter, Fund IX has reached 40% committed or invested.
Looking ahead, we remain of the view that technicals are well ahead of fundamentals, and therefore we are prepared for continued volatility and a wide range of outcomes over the coming quarters. Apollo’s leading investment returns through cycles are reflective of both, our focus on preserving capital for our investors and our ability to pivot quickly and opportunistically to invest during leading market dislocations.
Our private equity and credit pipelines are robust, and we believe there will be many opportunities for us to identify and capture misplaced risk on behalf of our investors in the months and quarters to come.
Finally, as we have discussed in recent quarters, we remain focused on increasing the accessibility and liquidity profile of our stock. As a result of the changes made to date, we are now included in the CRISP, S&P Total Market, MSCI and Russell indices. To our existing shareholders, we are grateful that you have been along for the ride; and to our prospective new shareholders, we look forward to engaging with you.
To conclude my comments, our strong results for the second quarter and first half of this year are a testament to the strength of Apollo's global integrated platform and resiliency of our team. Against a very challenging market backdrop, we have demonstrated the durability of our growing FRE and the stability of our margins. Through severe market dislocations, our funds invested meaningfully during a short window of very-attractive risk reward opportunities, creating what we believe will be a substantial value for our investors. We also demonstrated our ability to pivot quickly in reaction to shifting market landscapes and are now increasingly focused on providing capital solutions for franchise businesses. And we see a growing pipeline of private equity. We've grown our AUM at a substantial pace over last year and continue to see strong demand for our products, putting us on pace to achieve or exceed communicated goals of raising over $20 billion of new capital over the next year and being well on our way to surpassing $600 billion of AUM [Technical difficulty]
It looks like the line has dropped off.
I'll finish that -- he's at the tail end. I'll finish his comments and then go into mine.
So being well underway to surpassing $600 billion of AUM over a five-year period and growing our FRE mid-teens average annual rate, as we outlined in last November's Investor Day. To help achieve these goals, we continue to invest meaningfully across the platform, building out our investment talent and infrastructure.
So, it's Martin. I’ll pick up on the comments. I’d firstly like to echo Josh’s appreciation for all our employees whose hard work has resulted in a seamless transition into our current remote working environment.
So, on dividend, FRE&D. For the second quarter, we announced a dividend of $0.49 per share supported by our after tax FRE. Our reliable FRE stream supports the dividend at a level above our stated minimum of $0.40 per quarter. And in quarters of more meaningful transaction fees the dividend can be substantially higher, even without the benefit of performance fees.
We generated FRE of $0.59 per share on a pretax basis for the quarter, driven by growth in management fees and some higher transaction fees. Transaction and advisory fees were $62 million in the quarter, driven by transactions including tech data, as well as Albertsons and other capital solutions transactions.
The increase in compensation cost reflects continued investment in building out our capabilities across the areas of growth that Josh highlighted, including in infrastructure, our hybrid capital business and FRE [ph] platform, as well as in technology and various support functions across the firm.
Turning to incentive realizations. We had a very low level of gross realized performance fees in the quarter, which drove negative pretax incentive earnings for the quarter after accounting for the profit share interests in realized carry and financing costs associated with our debt and preferred securities. As a result, our dividend of $0.49 per share for the quarter was fully supported by our after-tax FRE.
On AUM, as Leon and Josh both referenced, we saw growth of $98 billion in AUM, as a result of the strategic growth at Athene and Athora, as well as strong fundraising, organic growth at Athene and positive mark-to-market adjustments. For the second quarter, fee generating AUM grew by 36% or $88 billion to $330 billion, supported by those same factors, as well as robust capital deployment.
Gross redemptions in the first half of the year were just $1.2 billion or well less than 1% of our AUM through a period of significant volatility, reflecting the largely long-dated nature of our funds capital.
Moving on to investment performance during the second quarter. Our private equity funds portfolio appreciated by 12%, primarily due to strong performance across our fund’s public holdings. The portfolio remains in good shape overall, despite the challenging economic environment.
Fund VIII is now out of holdback having appreciated by 17% during the quarter. We invested Fund VIII with an emphasis on durable business models and strong free cash flow and with the focus on purchase price. Fund VIII portfolio companies were bought at a 6.5 times enterprise value to EBITDA multiple on average, excluding cost savings with only 3.6 times of leverage on average, well below industry levels.
Given our value orientation and the high quality of our fund’s portfolio companies, we remain confident in our platform's ability to generate meaningful realized returns over time. We recorded impairment charges of approximately $1 billion during the second quarter, across a handful of investments that we had previously identified on our watch list. These investments were focused on energy or were heavily impacted by COVID. We are required to recruit patient payments before future performance fees may be distributed.
We continue to expect that gross realized performance fees will be very modest over the course of 2020 as portfolio companies manage the impacts of COVID on their operations and as we prioritize the return of LP capital, as a consequence of the impairments.
In credit, our fund’s aggregate portfolio appreciated by 7.4% during the quarter supported by the rebound in public credit markets. On a year-to-date basis, our credit fund’s portfolio in aggregate is down 2.5%, outperforming both the S&P Leveraged Loan Index and the Bank of America Merrill Lynch High Yield Index by roughly 2%. Our credit strategies fund is also up by 68% year-to-date.
In real assets, our overall return for the quarter was positive 1.4%. Energy continued to have a de minimis impact on our portfolio performance in both, private equity and credit this quarter.
Our net economic balance sheet value at the end of the second quarter after debt, preferred equity financing obligations was approximately $2 per share, growing meaningfully from the prior quarter. Our net performance fee receivable increased by approximately $0.40 per share, reflecting in part the full reversal of holdback in Fund VIII.
Apollo remains in a very strong liquidity position with approximately $1.75 billion of liquidity available on our balance sheet. In June, we raised $500 million through a debt offering to further bolster our capital position in light of accommodating in attractively priced markets. Our dry powder for investments across our fund complex was $47 billion at the end of the quarter, an increase of $6 billion driven by fundraising during the quarter.
And with that, we'll now turn the call back to the operator and open the line for any of your questions.
[Operator Instructions] And Josh Harris has returned to the conference. Our first question will come from the line of Alex Blostein with Goldman Sachs.
Thank you. Good morning, everybody. So first, maybe just to touch on Marc's decision to step away from the business on a sabbatical, Leon, I guess, as you described. Is this a bigger picture succession plan effort, or is this more of a temporary change and Marc will be looking to reengage? And are there any implications on the pace of deal making within insurance space we should anticipate on the back of that?
I think it's really that we've been in COVID lockdown now for five months. Marc has just quarter back, two transactions in the quarter, the second quarter, which we've talked to you a bunch about, which you're aware of. And you want to take a little time off from day-to-day operations, especially with the confidence that there is a team there now of over 100 who are totally focused on insurance, and Scott Kleinman been on the Board of Athene and he’s been very involved more increasingly on day-to-day.
And as we've mentioned, and the reason we call it a semi sabbatical is Marc is still very, very engaged in the firm and on the strategic planning with Josh and myself. He remains on the Executive Committee; he remains on the Apollo Board as well as the Athene Board and Executive Committee and on Athora. So, I would really just take it at face of what we've said and not read more into it. I think, he has a well-deserved desire to not be involved in so much day-to-day, given the great team that's been built up and how much that's already been accomplished. But, I think he would tell you that he thinks we're still in early innings in terms of what he has really masterminded over the last 12 years in building the insurance operations to over $200 billion and I think believes that there's no reason that can't double over the next three, four years, and I think he plans to be a major part of that.
Our next question will come from the line of Craig Siegenthaler with Credit Suisse.
Good morning, everyone and congratulations on completing two very sizable transactions this quarter. Just on the two transactions, as we look forward, can you remind us on the level of deal capacity at both Athene in the U.S. and Athora Europe? And also, can you update us on the current M&A and reinsurance backdrop in both markets as we try to estimate the potential for future transactions?
Gary, do you want to take that?
Yes, I'd be happy to. And, I need to address the second one first. And that is just the activity level that could be available. There's several ways to look at it. One is the market opportunity, and the second is how Apollo is positioned to address the issue. The market opportunity today is as robust as it has been over the last four years. The low interest rates continue to put a lot of pressure on traditional companies. Notably, the tight spreads on public securities make it very difficult in the spread business for other companies. We of course, invest so much in originating good investments and creating extra spread. The others, their capital rules continue to create pressure. Particularly in Europe Solvency II is problematic for some back books, the old books of companies. And lastly, a lot of companies continue try to focus more on lines where they can win business or just be winners. And that means they're exiting lines of business or entire geographies, and we're seeing that level of flow.
So, I'd say, sitting today, comparing to any point in time in last four years, we are in is many substantive conversations, we have no idea exactly what the timing of transactions will be. But, as an overall backdrop, it's everybody as attractive today, is it spending at any point in time in the last four years? And in that four years, we've announced five material transactions, three in the U.S., two in Europe.
You asked about the capacity. We said that -- as we said, it’s over $85 billion of buying power. And that basically relates to the excess capital at Athene, plus borrowing capacity. ADIP of course still has quite a lot of capacity and Athora also has about a 0.5 billion of capacity of equity. And I think the last point on this growth potential, that's our existing capacity to do transactions, so over 85 billion. But, as a reminder, as we said in Investor Day, we're very appreciative our investors believe in us. We've raised over $12 billion in the last three and a half years of equity capital to do transactions. And we continue to see that as our ability to raise capital. When we see opportunities, we think we have the credibility, at least up to this point and we've proven it and we think we will continue to.
Just to add to that, it's very simply a low interest rate environment, but much of the industry is going to be challenged and will revert to shedding assets. We not only have the reference capital to do sizeable transactions, but we've also shown with both VOYA and with the recent Jackson, that we can do highly complex deals that provide holistic solutions to sellers. So, I think one, it’s in our favor that there should be real supply as long as there are going to be low interest rates, which I think we all agree and certainly in the near to medium term outlook; and two, that there's really nobody out there that has both, the combination of capital and ability to deal with complexity and come up with holistic solutions and the 100 to 150 people that we have incredible depth of management in this specific area. So, I think, this all augers very positively for us in the years to come.
Our next question will come from the line of Bill Katz with Citigroup.
Okay. Thank you very much for taking the questions. And Marc, best of luck in your short stay over. Question for maybe Martin just on the $1 billion. I wonder if you could just maybe fill that back a little bit and help us understand, which portfolios are affected by that. And then, just relatively, and I apologize for igniting this question. In your supplements you mentioned that only 18 of the $47 billion of dry powder has a potential or management fees. I wondered if you could just expand on that a little bit. Thank you.
Yes. Sure, Bill. So, the $1 billion is specific to Fund VIII and it's also contained to the -- we provided a statistic last call, last quarter that approximately 5% of Fund VIII was on a watch list. These impairments relate exclusively to that. And it also includes an impairment that we referenced two quarters ago on our Q4 call. So, combined, the impact of all the impairments or a delay in carry distributions of about $0.25 a share. And as I said in my comments, it's partly energy, and it's partly one or two other names that have just been severely affected by the pandemic.
And then, as far as your second question, when we raise capital, we either -- manage fees as it's committed, which is typical for most drawdown funds, including Fund VIII, Fund IX, or we earn management fees as we deploy the capital. And so, the $18 billion that you reference is capital that’s been committed to us but the one that management fees until it’s invested and that's more specific to the credit business. The remainder of the dry powder has been committed and is earning management fees and is typically in drawdown funds, fund line being the most prominent example of it.
The next question will come from the line of Glenn Schorr with Evercore.
Hi. Thanks very much. One quickie follow-up after all your comments on fee and insurances. Just curious, in your view, rates have been low for a while, spreads have been tight for a while. What is it that gets insurance company to pull the trigger? I know there's a lot of conversations out there. And then, how important are your proprietary origination platforms for them to choose Apollo over the others in the space?
Well, ultimately they're -- I think, ultimately, it's idiosyncratic in each insurance company, transaction is highly customized. And so, there's not really a one size fits all answer to that, relative to kind of what -- the factors that have been laid out previously or what's sort of driving, the insurance company decision. I think, our ability to invest the -- our ability, both to create this customized bespoke deal situations and transactions that are highly engineered as well as our asset management capability, our ability to earn extra yield, I mean, we continue to earn -- and we continue to target and earn 50 basis points extra, and that extra juice on the asset management side also provides unique secret sauce that allows us to advise. So, it’s both, our ability to originate very idiosyncratic deals and it's the asset management capability that we have.
The next question will come from the line of Ken Worthington with JPMorgan.
Hi. Good morning. First, I'm pretty impressed. You guys know each other so well that Martin can finish Josh's sentences and presentations without even pausing.
Technology doesn't always work. I apologize.
So, maybe just on the outlook for the pace of deployment. First, maybe what kind of economic recovery do you see? Are we in a U or an L or maybe pick the letter that best describes what you think. And then, on the last call, you guys described three phases of deployment with bespoke capital solutions being sort of in the second phase. Do you see it being sort of early days or later days with regard to bespoke solution opportunities? And ultimately, do you see the -- or what do you see as the outlook for deployment as we look forward relative to 2Q levels? Is it going to pick up, does it slow down or does it generally stay the same?
Well, let's the break the business into private equity and opportunistic and credit. I think, on an overall basis, the economy is behind -- the fundamentals of the economy are behind the technicals of the economy. The big run up in the market is driven by a very significant fiscal and monetary stimulus. And the S&P 500 earnings outlook continues to be surprisingly that ‘21 earnings are going to be ahead of ‘19 earnings. Like, we don't -- when we look at the underlying economy and try to compare that to the forecast of the S&P earnings, like, we don't see it. And therefore, we think there's just going to be volatility as the market absorbs earnings that are coming in a little softer than maybe they would have expected as well as obviously you have significant volatility around COVID, around the political environment here in the U.S. and so, and then the U.S.-China relationship. Those four factors are going to lead to just volatility. And so, we expect that we're going to have opportunities across our platform.
As it relates to discreet pipeline, private equity pipeline is actually picking up. And so, even though the markets are -- look to be priced at a premium, when you bifurcate the markets, the bottom 25% of the S&P trades as 10, the top 25% trades above 30. And so, there continues to be value-oriented opportunities and sweet spot. And so, private equity, for the first time, we are looking at -- other than Tech Data, which we announced, most of what we've done -- all of what we've done has been in debt in our private equity businesses. And I think, we're seeing that change a bit as our pipeline is building and more traditional private equity.
On the credit side, we're seeing a very robust flow of opportunities in terms of both, bespoke capital solutions that you mentioned where companies are uniquely impacted by COVID and need capital, either to overcome leverage issues or to grow as well -- both in the investment grade space and in the non-investment grade space. And so, private capital, the public markets continue to be hospitable for some of the larger companies. But, in many cases the sort of private capital sector that we operate in and is continuing to step in and be able to do transactions. And so, we see our pipeline across everything really being very robust.
The next question will come from the line of Patrick Davitt with Autonomous Research.
Hey. Good morning. Thanks. Quick follow-up on Bill's question, just to make sure we've got the understanding right. So, the $0.25 needed to still I guess the netting holding, that would just be realized cash carry, $0.25 of really cash carry than anything beyond that would flow through DE?
Yes. That's right, Patrick. It's a timing in fact. So, the next set of realizations that are required to fill or cover that impairment are devoted exclusively to the LPs and thereafter it would then flow back into DE and the distribution. And so, everything else being unchanged, it pays down LP capital more quickly and then creates more carry after that to the fund.
The next question will come from the line of Robert Lee with KBW.
Hey. Good morning. Thanks for taking my questions. I guess, maybe sticking with the insurance theme, just curious with Athora specifically. So, what is the opportunity there for redeployment of VIVAT assets? If I think historically, Leon has represented this way with Athene on a new block business and [indiscernible] roughly about 20% of the investments were made their way to various Apollo managed funds and what not. Is the same opportunity there for Athora, over given the different regulatory rules there, not as much potential to shift the portfolio around?
Gary, why don’t you take this one?
I can do a part of it and then hand off to Martin. A few things. As you know, our arrangement with Athora is that we have a standard fee, our base fee, where we provide a variety of services to Athora and all the parts of Athora authority for asset liability management, risk management, mergers and acquisitions and so on. So, that base fee is in place. As it relates to the rest of Athora and the various parts of Athora, we sub-advise on various asset classes where we have expertise. And a big headline, of course, is that in Europe, roughly 50% of an insurer’s balance sheet is going to be sovereign’s, government’s. And that's just a part of managing asset liability and Solvency II. So that's not something that we do or apply.
So, by definition, there's a smaller pool of the total of assets, but that's exactly then what we can provide our expertise. And over time, assets -- in those segments of expertise we have, touch wood, VIVAT will be and Athora generally, will be looking to us to provide. Maybe Martin, I know you, as to how we communicated certain numbers...
Yes. I mean, next 12 to 24 months, we would expect that the -- to be redeploying Athora’s assets into higher yielding assets and Apollo will be sub-advising more of those assets. We haven't really set specifically or put a target our there specifically, but what we've ultimately said is that the economics, there are lots of nuances and differences between Athene and Athora. And what we've ultimately said is that the economics on the AUM of Athora to Apollo should be similar to Athene. And we’ve left ourselves 24 months or so to get there.
The next question will come from the line of Devin Ryan with JMP Securities.
Good morning. Just a question here on the outlook for realizations, and appreciating the capital markets have reopened, I think, which has been a positive. But really trying to get a sense of whether you feel like there's going to be an ability to sell assets through M&A. I guess, I'm curious if virtual processes are starting, an ability to do that. And whether there's any kind of efficiencies that are being learned today that may last beyond the pandemic? Obviously, everyone's using technology quite a bit more. So, I'm curious, kind of how that connects as well. And then, just anything more you can say about kind of the realization outlook would be appreciated.
Yes. I mean, the realization outlook is just difficult to predict. And I think that we hesitate, given all the volatility to predict, how that's going to go right now. I would say that it's more difficult. But, things are changing on a daily basis. And, I do -- I think that certainly in terms of transactions, people are getting used to doing diligence by Zoom, virtual data rooms, virtual management meetings. I actually experienced one myself. And then, ultimately, the face to face interaction that you need when you're partnering with the team, that gets more limited, but it has to be done carefully.
So, the M&A markets, we'll work around the pandemic. But, I think that it's not -- I would say it's not -- it's certainly -- it makes it a little bit more cumbersome, but it's manageable. So, I think we continue to focus on -- so, we’ll hesitate from predicting realizations. I think that we continue to look for opportunities and we do have some public companies that are enabled to kind of take advantage of the public markets. But by and large, we're focused right now on growing and continue to deliver very significant and durable FRE, and high margins, and continue to grow FRE stream, which is much more predictable. And I think, when you think of cycle, our realizations would be there. We're building value on our portfolio.
The next question will come from the line of Gerry O'Hara with Jefferies.
Great. Thanks for taking my question this morning, perhaps one on the strategic origination business. And if you could maybe add a little context or color on the opportunity set, what Apollo’s competitive advantage is there and perhaps even how you see that platform scaling going forward? Thank you.
Yes. So, our Company’s advantage has been, obviously we have the largest alternative credit business in the world. And, we have hundreds of investors and originators and originators, and we have a really significant capital base. And so, what that allows us to do is commit $1 billion to upto $2 billion of capital to sort of larger companies, in the $1 billion to $5 billion TV that need capital solutions very quickly, very bespoke way. And I think that we -- because of our -- the size of our platform and the size of our capital base really puts us in a very unique position in today's markets where the need for capital is quite large. And so, I don't think, there's very many people that can -- that have those advantages. And so, we're in a very small group. And so, it's going to be a really interesting capability that not a lot of other people have.
Our next question will come from the line of Chris Harris with Wells Fargo.
Great. Can you guys maybe give us an update on trends you're seeing in your underlying portfolio? I know, in the past, I think you talked about 5% of the portfolio on watch. Has that changed at all since last quarter?
Yes. At this point, it’s about 3%. And I think that right now, we've -- obviously, as we mentioned in the last call, we definitely took a hit in energy. And then, we've had one or two other situations that have been -- are in COVID affected industries, certainly restaurants being front and centre. And those have all been marked down and therefore -- or marked to zero. And that's part of what Martin is talking about, or pretty much all of what Martin's talking about on the $0.26. So, going forward, we don't see a lot of issues. I mean, obviously -- and works and sort of -- so we expect the portfolio to improve from here, subject to -- and head in a very positive direction, subject to obviously, kind of an economic downturn that goes the other way, which we don't really forecast right now. So, we think kind of a lot of our issues are behind us, and we're going to build value from here.
Next question comes from the line of Michael Cyprys with Morgan Stanley.
Hey. Good morning, thanks for taking the question. I just wanted to follow up a little bit on the strategic origination platform. I was just hoping maybe you could elaborate a little bit more on your aspirations there longer term, and maybe talk about how you're approaching planning to originate in this larger part of the marketplace. Maybe what are you building out in terms of headcount? And I know a lot of the private credit space has been more sponsor financed. It sounds like this is maybe a little bit less so. Maybe just talk a little bit about the hurdles in terms of moving beyond sponsor finance? How you're approaching that?
Yes. I mean, I think, like basically we're building out -- we have a significant origination at midcap that's in the lower middle market. And then, we're making significant hires in the middle and upper market. And this all relates to the sort of withdraw or sort of the pullback of the banks from being willing to make significant underwriting and capital commitment. And we set up a situation where we have both client balance sheets that are able to hold as well as a vehicle that allows us to underwrite and then sell. And so, we're building up kind of a whole team, to do that. And we've already made a series of hires and expect that team to be in excess of 20 to just be out calling on companies and on sponsors. It's really that simple.
And then, we're building up a capital markets effort. We're adding to our broker dealer and our capital markets effort to be able to kind of syndicate a little bit where we're committing to a little more than we ultimately want to own for our clients.
And so, the ability to underwrite and sort of quickly underwrite up to $2 billion loan is something that is going to be unique or amongst a very small group of people. And so, we expect that to be highly needed in the marketplace. And so, we're hiring on both fronts, capital markets and origination. And ultimately, we expect there to be a lot of action there.
And, I mean, it's no different. I mean, you literally are just calling on companies and calling on sponsors and it's a lot of the same skill sets. We have -- and across our platform because we're integrated, we have hundreds of professionals in private equity and credit that are -- now have just greater tools in their toolkits. So, because of the integration across our firm, private equity credit, real estate, this just -- we now have a lot more capability, private equity, a team member that might be calling on a company now knows, well, maybe you don't want to go private, maybe you don't want to sell your company, but we've got this other opportunity to offer you. And so, increasingly, under the leadership of Scott and Jim, we're seeing the whole firm, all 500 of our investment professionals, taking part in this. And so, we are building up unique people to do this, but it's across our platform. And our integrated platform is very different than how other people run their businesses.
The next question will come from the line of Jeremy Campbell with Barclays.
Just maybe one on the insurance landscape. Obviously, given all your peers have jumped into the market relatively recently, over the past year or so, and your relationship with Athene, the capital [indiscernible] a little bit differentiated. Just kind of wondering, does this competitive market kind of relegate you and the partners to more kind of big game hunting here in insurance world as maybe the smaller deals get a little bit aggressively bid, given the competition? And then, if so, maybe just from the insurance executive side, what are some of the hurdles that you guys see to these executives doing a big deal like that?
So, it's big deals and it's also like our ability to navigate complexity and structure, bespoke solutions to tackle, big insurance portfolios that might not be discreetly fixed annuity or discreetly variable annuity. And so, it's broad set of -- our broad set of capabilities, and then, it's our asset management capability. So it's all three of those things that make us unique. But, Gary, do you want to add to that.
Just briefly to say that we view our breadth of expertise and our size as indeed one of our big competitive advantage. We have six segments of expertise, U.S. spread business, European spread, variable capability, life settlements and structure settlements as in fund FCI and we have property casualty runoff and then P&C flow. With all those skills, we can then go to larger companies and talk about solutions. So, your question somewhat relates to, I think Glenn asked it earlier about comparative advantages in these transactions? Are there common themes? And if you take the three U.S. transactions, [indiscernible] Jackson, a common theme was that these companies were looking for a solution to something. They actually weren't selling something per se, their business wasn't for sale, per se, but they were trying to solve for different strategic directions. And that's where we go in with our expertise and capital, and we work with them. So, the CEO dialogue actually, if you would enjoy being in the room to hear the dialogue, because the CEO is talking about what they're trying to accomplish in their company, Prudential being the most recent in our conversations with Mike Wells, which were delightful and productive, but us trying to figure out win-win-win solutions. And by that we mean that -- in that instance Prudential, Athene, and Apollo stocks all outperformed their respective peers on the announcement of a transaction. The same happened in Voya, one of you all actually wrote about that. So, that's what prompts a CEO to want to engage is -- and now we actually have a track record. So, relative to our competition, we've now established this singular track record of creating value for multiple parties involved in a transaction.
That's a competitive advantage that we will continue to in these substantive conversations we're having today. That's the kind of conversation we have.
We have more permanent capital than anyone other than Berkshire Hathaway. And the truth of the matter is, we're so deep and so well-known in the insurance space, and our regulatory relationships are positive that all of these things create a franchise for us that is unparalleled. And, we're tracking -- the ability to track talent is probably positively impacted by that.
[Technical Difficulty] Kotowski with Oppenheimer & Co.
Yes. Good morning. Thanks. Josh, you were talking about the disconnect between the real economy and the market. I was just looking at the statistics which has the leveraged loans, default rates at around 3.9% in the almost all in energy resources at retail. If you had to guess six to nine months from now, where would that be? And, what is both the risk to existing investments and the opportunities to deploy against that?
Yes. So, I mean, obviously the answer to that's going to depend on ultimately the liquidity that's provided by the Federal Reserve that's indicated that it's all in and the economy, the recovery of the economy. I think, we expect that it'll go up from here. And I think that that well kind of open up a series of opportunities for us. And so, do we get to double digit? We could, for a year, for some period of time. I think that that will open distinctive opportunities for us. As to kind of like our portfolio, we're pretty much all first lien and top of the capital structure. We've been very oriented towards the safest, most high quality secure debt across our platform. And that did not serve us well as well in a risk on environment. But, it serves as a very well in an environment like the one you're describing. And so, we expect that our portfolio would be quite robust in that scenario and that our opportunities, I think, it would open up a lot. And so, certainly we're not -- for the world, obviously, we're not -- we hope that we're wrong and that the economy does as well as the stock market thinks it'll do. But, we're not planning for that in terms of how we invest. And so, therefore, we think we would be pretty robust in that situation. I think, capital would also find us.
The next question comes from the line of Adam Beatty with UBS.
Hi. Good morning. Thanks for taking the question. I just want to follow up on the existing portfolio companies, more so from the deployment angle. How much of the -- I wanted to get a sense of how much of the deployment so far this year has been with companies that you already owned and kind of the outlook on that. And also, if you could, the mix within that deployment of kind of offense versus defense, depending on the specific company circumstances? Thank you.
Yes. So, that's a zero or negligible. So very little, I mean, there may have been something that went into the existing portfolio. So, I want to say very little has gone into the existing portfolio and nearly a 100% has been on offense. So, when we talk about the 3%, we're not -- we haven't had to deploy into existing situations across the company.
With that, I will now hand the conference back over to Gary Stein for closing remarks.
Great. Thanks operator. Thanks everyone for joining us. If you have any questions, please feel free to follow up with us, and the team looks forward to catching up with you again next quarter.
This does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.