Global Management is the most misunderstood of the publicly traded alternative asset managers. But the stock could represent significant upside for those who wish to take a look, according to Rufus Hone, an analyst with BMO Capital Markets.
Founded in 1990, Apollo (ticker: APO) is an alternative asset manager known for its private-equity investments, including
(RXT), Yahoo, and Hostess Brands, owner of Twinkies.
Apollo, however, also has one of the biggest credit platforms with $373 billion in assets under management, according to a May management presentation. It has provided loans to Hertz Global Holdings (HTZ), Bombardier, and
New Fortress Energy
according to its website.
Apollo, which had $513 billion in AUM, also has real estate and infrastructure funds.
It is one of several publicly traded alternative asset managers that include the
(CG), Blackstone (BX), TPG (TPG),
Apollo’s stock has dropped about 35% since hitting a high of $79.96 in October. The group was down 30% as of Thursday’s close.
In January, Apollo closed its merger with Athene Holdings, a retirement services company that offers annuities. Athene has $246.1 billion of total assets and $232.4 billion in total liabilities, according to the company’s website.
Some expected the deal to transform Apollo into an insurance company from an asset manager. Investors also worried that the Athene merger would cause its price-to-earnings multiple to drop. A few years ago, Apollo’s PE multiple traded in the high teens but now it’s roughly at about 7 times price to earnings, Hone said.
“It’s come down too far,” he said.
Still, Hone thinks the Athene deal will provide significant upside for the alternative asset manager.
One big rollout will be Athene’s launch of a variable annuity, expected later this year, that will be its first product to let high-net worth investors access Apollo funds, an Athene spokeswoman said.
Athene has historically experienced minimal credit losses and outperformed during periods when the credit markets have experienced meaningful stress, Hone said. This means that it has a more predictable, lower risk liability profile compared with its peers.
Athene’s core product, annuities, “is in greater demand when rates rise,” Hone told Barron’s.
Apollo last week guided, during an investor update, for Athene to provide about $5 a share in spread-related earnings, or SRE, by 2026, but Hone thinks this will happen by 2023. (SRE represents the spread between what Athene earns on assets minus what it pays to policyholders and pays in operating costs.)
Hone said the earnings power of Athene is under appreciated by investors. About 60% of Apollo’s earnings come from Athene.
“The concerns investors have around the resiliency of Athene’s credit book are overblown and I see Athene as well capitalized to withstand a recession,” Hone said in emailed response to questions.
After the Athene merger, Apollo earnings visibility has improved; about 90% of Apollo’s earnings come from fee-related earnings, or FRE, as well as SRE, the note said.
FRE includes all management fee-based revenue (and some transaction fees) minus operating expenses. FRE is considered more resilient to market fluctuations and more stable than carried interest.
Apollo is the best positioned of the alternative asset managers.
After stripping out the value of SRE, the net balance sheet and net accrued carry, Apollo is trading at just 4 times posttax FRE (net of stock-based compensation), Hone said in the note.
The market is valuing Apollo’s FRE at $7.80, which is lower than its peers. By comparison, KKR’s FRE valuation is nearly double that at $15.50, while Carlyle is at $23.30, TPG is at $19.80, Ares is $53.20, and Blackstone is $81.70.
Hone thinks Athene is worth $40 a share but Apollo’s stock closed Friday at $52. This means the market is valuing all of Apollo’s other businesses, such as its credit arm, as well as its private equity and real estate funds, at $12 a share, Hone said.
Apollo’s asset-management unit is “worth meaningfully more than the insurance company and yet the market is saying that there’s not much value there,” he said.
This represents the potential for upside, said Hone, who has an “Outperform” and an $86 price target for Apollo.
Write to Luisa Beltran at firstname.lastname@example.org