Apollo CEO Marc Rowan Defends Athene, Says Its Insurance Business Is ‘Poorly Understood’

Apollo (ticker: APO) entered the retirement services sector in 2008 and has since grown it into a $330 billion business, including its 2022 merger with Athene Holdings, an insurer that provides annuity products to retirees. 

Rowan sat down with Barron’s Andy Serwer at the Milken Institute Global Conference in Los Angeles to talk about how people misunderstand Apollo’s business, the role of alternative investments, and the questions some have raised about the future of Athene. 

 Below, edited excerpts from that conversation 

Barron’s: Tell us a little bit about the various lines of business that Apollo is in, and what your priorities are.

Marc Rowan: We’re in two lines of business. One is the asset management business, which is what people assume we do. Apollo Asset Management ended the year [with] roughly $550 billion [assets under management]: $400 billion of private credit—mostly investment-grade—$75 billion of hybrid equity, $75 billion of private equity. 

The other business is a business people don’t know as well, and that’s the retirement services business which we do through Athene. In 2008, we started with a $16 million dollar equity investment, we ended the year at $330 billion, and have become the largest provider of retirement products in the U.S… an awesome business.

You guys are known as a private equity shop—how big a part of the business is that at this point?

The core private equity business is about $75 billion today. It’s an incredibly important business, it’s one we do very well, but it is not a growth business. Done well, it’s actually a farming business. We plant, we harvest, we plant, we harvest. If we do a good job for investors, we will grow a little. If we don’t do a good job for investors, we will shrink a little. But we don’t run that business for growth. We run that business for rate of return.

I take it you see the retirement business as a growth business then. Why is that?

In the retirement services business, you have aging of the population, a need for retirement income, a lack of reliance on public pension, social security and the like—all of the trends speak to growth in the business. The reality is people need to save for retirement. We are in a massive deficit in this country in terms of providing for retirement income and this is one of many solutions. 

We are in the market for providing guaranteed retirement income [through annuities]. We make money by investing our assets at a greater rate of return than we pay out on our liabilities. And because we are both large and highly rated, we are 95% of fixed income, of which 95% is investment grade and 5% equity. As a result of being a good investor, we have been able to offer very competitive and very attractive rates of return. 

Why is it that you think alternative investments, such as private credit, have a significant place in retirement? They are illiquid—isn’t that dangerous for retirees? 

We thought of the word alternative, if I go back 35 years, as being something high-octane: private equity, venture capital, a hedge fund. Now, I look at the definition of the word alternative, I think of an alternative as nothing other than an alternative to publicly traded stocks and bonds. 

We also used to think private was risky and public was safe. 2022 was a good opportunity for us to realize that public can be both safe and risky and private can be both safe and risky. The only difference is a degree of liquidity. So, How many retirees, people saving for their retirement in their 20s, need all of their money [by] Tuesday? Very few. How many institutions need all of their money Tuesday? Very few. If you are the kind of entity that can tolerate illiquidity and you can get paid for that, it seems very straightforward that investors should harvest illiquidity premiums to add to their rates of return. 

Some see private credit as increasing risks in their portfolios. Can you explain?

If we think back in history, banks were the primary source of credit. Banks today are less than 20% of all the credit in the U.S. marketplace. So who are the new banks? All the investors are now the new banks: the investment marketplace now supplies 80% plus of capital to U.S. consumers and U.S. businesses.

Then you look at the word private credit. Private credit has historically meant levered lending or less than investment-grade. Things that do have risk. Sometimes they’re attractive, sometimes not. Right now they happen to be very attractive. But we’ve never thought of private credit as being investment-grade, just because it hasn’t been offered before. The bet we made back in 2008 was that the private investment grade market was going to be an amazing business and I believe we’re right. Much of the world needs safe yield: retirement services companies need safe yield, institutions need safe yield, consumers need safe yield—and if they can get paid for illiquidity and can bear it? I think that’s an amazing risk for investors to take.

So aren’t we talking about a shadow banking system? Is there a lack of regulatory oversight here?

There’s plenty of regulation. Following the financial crisis, officials made a choice. Did we want the supply of credit to U.S. markets to come from government-backed, guaranteed banking institutions, or did we want it to come from investors? The decision was clear. We wanted it to come from investors. Dodd-Frank actually was designed to restrain the growth or the percentage of the economy that was dependent on four large banks—and it worked. Investors are in many cases ideally situated to be able to supply credit and take risks. Investors are used to things going up and down and socializing losses. So now you come to the notion of private credit and regulation, I think there will be more regulation. There’s no doubt the world we’re living in today is interconnected. This causes people to be curious about how credit is created, but that does not mean unregulated. 

Some people have raised questions about Athene and the risk associated with the business given that investors could cash in their annuities early. Your stock has been a little bit under pressure versus your competitors year-to-date. What do you say to investors to assure them that this is not a big risk?

Fundamentally people use annuities and pension for retirement, they are in tax-deferred accounts. People don’t trade them, they don’t withdraw them. And if they do redeem them, they do it after surrender charge periods and after market value adjustments. When they redeem, they go into another new annuity product. This is how we run our business, and it’s actually very poorly understood. We have nine-year assets and nine-year liabilities. We’re hedged from an interest rate point of view and a protection point of view. But at the end of life for an annuity or end of life for a pension, we want people to surrender. We don’t want to build up a book of business that is unprotected by surrender charges, because it’s very hard to invest against as the current environment is showing us. So as these policies mature and as they come out of the surrender charge period, they retire which is perfectly fine. And then people buy new policies. We are the largest beneficiary of that. 

Four years ago we were $20 billion of new sales. This year will do north of $60 billion dollars of new sales. It continues to be, from a planned point of view, surrenders are of course alive—from an unplanned point of view, crickets. No increase in phone calls. No increase in surrenders, no increase in activity. By the way, we’ve seen this before; we saw it with AIG, we saw it with Genworth, the industry just operates in a fundamentally different dynamic than a bank, which borrows short and lends long. 

So the market is misunderstanding your business to a degree?

The word insurance is enough for some people to cause their brain to fog up and not to focus over time. When I look at what we’ve done, we have actually grown book value at about 17% for the last 12 years. We’ve outperformed our industry, in terms of new sales, we’ve outperformed our industry in capital generation, we’ve had fewer credit losses. 

What the investors say to us is, well, we need to see you go through a credit cycle. And I keep saying we’ve been trying! The Fed keeps saving us, unfortunately. Maybe we’ll have an opportunity to go through an honest-to-goodness credit cycle and that will give investors the understanding that the risk we’re taking is not credit risk. The risk we’re taking is liquidity risk. And by the way, this is the risk we want to take. We get paid for illiquidity and we’re able to absorb it.

Thanks, Marc.