Anyone looking at Apollo ($APO) down here at 15x earnings? This private credit divergence is wild.

I have been looking into the asset management industry for quite some time now, and the primary focus has been to answer the question: Why is Apollo Global Management ($APO) down 22% year-to-date despite posting record metrics? While doing research, I found an article on a Substack called Waver that describes a large gap in private credit currently  occurring between firms like Apollo, Blackstone, and BlackRock.

So one of these valuation figures is incorrect; I do not believe the problem will be in the earnings of Apollo.

The traditional alternative model has an inherent flaw in the business model because of their reliance upon episodic fundraising. Most fund managers travel across the globe for an 18 month period raising capital from pension funds and will deploy it over a 5 year time horizon before hoping to receive investor capital again in the next fundraising cycle; thus making the entire business model reliant upon external goodwill.

Interestingly, Apollo circumvented this dilemma by merging fully with Athene, which is their insurance company. Whenever a retiree purchases an annuity, those funds turn into insurance float which would be considered sticky. Once those funds become sticky, either during a really bad quarter and/or concerning news articles released; the retiree would never want to redeem those funds. Apollo utilizes this sticky float to fund their private credit investments, allowing them to profit from the 130 bps spread that is almost guaranteed. In FY25 alone, this business generated over $3.4 billion of Spread Related Earnings. Therefore, when measured to what Berkshire Hathaway is doing, Apollo is essentially applying the same model (acquiring permanent insurance float) to private credit, albeit with a different asset class.

Another point I would like to discuss relates to technology credits. Over the past few years, there has been tremendous interest from multiple sources of private credit investment capital targeted towards lending to SaaS software companies due to the strong margins associated with SaaS software and the recurring revenues provided by the same. For example, Blackstone's BCRED has accumulated an enormous 26% of its loan portfolio to SaaS software companies. However, with the technology upgrades being pushed onto various SaaS companies as a result of AI and other technologies, there are beginning to be fewer equity cushions available on those same loans. The cracks in those loans will soon begin to occur. Just a few days ago, Blackstone's BCRED experienced a rarity and reported a negative monthly performance and is now approaching their redemption limitations. Blue Owl was forced to move to periodic distributions for its OBDC II fund, which will also reduce their ability to make large cash distributions from that fund. More recently, BlackRock's HPS fund (HLEND) gated their capital due to a similar reason.

Apollo elected against searching for yield in the cloud software space (their $749 billion credit book has a disproportionate amount of real-world infrastructure, energy transition financing, data center power grids, aircraft leasing and Logistics) all of which are tangible assets with contracted cash flow. Furthermore, while most were pursuing yield, Apollo held a defensive cash buffer of $24 billion inside Athene. Apollo's annualized default rate since 2009 has only been 0.1%. Not just "point one" percent.

At ~$130/share, Apollo is now being priced at approximately 15 times Adjusted Net Income ($8.50/share in FY25). Management is projecting $15 ANI by 2029 through 15% organic compound growth. The S&P 500 trades at a multiple of 21-22 times on single-digit growth.

That in itself is a great data point; there appears to be substantial risk/reward against this stock, but we still need to discuss the Epstein overhang.

I believe that this is one of the biggest risks to me and therefore it requires appropriate attention. The two main teachers' unions (with nearly $27 Billion in commitments between both unions) have called on the SEC to investigate Apollo’s prior disclosures regarding his current executives’ ties to Jeffrey Epstein. Because of this as well Marc Rowan also took a major pay reduction as a result of this increasing scrutiny.

This is not a legal risk but a relationship risk LP's decision-making processes take place over weeks or months behind closed doors, therefore you may not see the adverse effects reflected in the reported Assets Under Management (AUM) for 12 to 18 months at the same time you will not see how the relationships have eroded concurrently with how long it takes the market to evaluate the AUM numbers. If corporations and/or public defined benefit pension funds commence quietly withdrawing their allocations from Apollo's new flagship funds you will completely eliminate any opportunity to generate a sizable fee base from these transactions. While that is difficult to measure definitively from a value perspective, the capital markets do not appreciate risks that cannot be defined or quantified via an Excel model.

Retail fund gating limits have become a focus for the media. However, this dilemma is not unique to Apollo, but rather a structural issue affecting all institutional investors – and is being felt more acutely by Blackrock than by Apollo. That said, gated products account for a very small percentage of Apollo's overall revenue. The remaining 80% of revenue generated from institutional sources is producing record results.

If we assume no multiple expansion over the next five years (the conservative assumption), combined with a 15% organic growth rate, plus a 2% shareholder yield, we would arrive at a ~17% total return on our investment.

Consequently, I believe Apollo has a very attractive value proposition at current levels. The retail fund drama is nothing but noise; the Athene IPO is an indicator of value; and the stock of Apollo is undervalued because of the media's fixation with the retail fund flap but has no real impact on the company's underlying fundamentals.

The original article includes a comprehensive breakdown of Apollo's 16 loan platforms, including spreadsheet models that will allow you to do your own analysis; please visit this page for additional details: https://www.waver.one/p/the-boring-billionaire-factory-why

What do you guys think? Is the pension relationship risk a permanent impairment to their fundraising, or is this a clear entry point?