Apollo Global Management Inc

NYSE:APO

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to Apollo Global Management’s First 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 will now turn the call over to you Gary Stein, Head of Corporate Communications.

[Gary Stein, Head, Corporate Communications]

Great. Thanks operator. Welcome to our first quarter 2018 earnings call and thanks for joining us. As usual joining me this morning are Josh Harris, Co-Founder and Senior Managing Director; and Martin Kelly, our Chief Financial Officer. In addition, I’d like to introduce a few other members of our team that are here in the room including our Co-President, Jim Zelter; and Scott Kleinman as well as Gary Parr, Senior Managing Director.

Jim, Scott and Gary will be available to provide insight during the Q&A portion of today’s call. As a reminder, this call may include forward-looking statements and projections which do not guarantee future events and 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 to assess 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 solicitations of an offer to purchase an interest in any Apollo Fund. Earlier this morning, we reported distributable earnings to common and equivalent holders of $0.46 per share, which drove the cash distribution of $0.38 per share for the first quarter. This quarter’s distributable earnings were primarily driven by fee related earnings or FRE of $0.32 per share.

Lastly, we reported an economic debt loss of $0.30 per share for the first quarter of 2018 principally driven by unrealized mark-to-market depreciation within our private equity business. Lastly, you may have notice the earnings presentation we issued this morning has a new look and feel. This is part of our broader brand refresh recently launched by Apollo to be turned a new visualized entity including a streamline logo and re-launch of our corporate website. We believe this new approach reinforces our strong brand equity and position us as a leading investment management franchise.

With that, I’d like to turn the call over Josh Harris.

[Josh Harris, Co-Founder, Senior Managing Director]

Thanks, Gary, and thanks all of you for joining us this morning. As we reflect on the momentum of our business, we wanted to share our perspectives on a few important multiyear trends some of which were matched in the first quarter results principally due to the lower transaction fees and volatility environment.

First, we continue to drive strong growth and fee-generating assets under management, which is being fueled by strategic capital initiatives and traditional fund raising. Second, we believe the growth trend in fee-generating AUM is underpinning strong growth in management fee revenues and scalability of our business model is driving expanding margin and fee-related earnings. These metrics have been on a positive trajectory for several years and we believe this will continue. And finally, we believe we continue to build long-term value in the portfolios we manage and we will opportunistically monetize investments as appropriate.

Now, I’d like to cover each of these topics in more detail. At the end of the first quarter, our fee-generating assets under management stood at $182 billion, capping a seven year run of 21% compound annual growth since our IPO. We believe this result is powerful evidence of Apollo’s model of work where we are pursuing strategic capital initiatives and driving growth while also raising larger opportunistic funds by continuing to deliver excellent investment performance to the investors and our funds.

Over the last 12 months, our strategic capital initiatives and organic fund raising activity have collectively generated $30 billion of fee-generating net inflows across the platform. And we have conviction that strong growth is sustainable since there are several non-catalysts already in view and others are on the horizon. This year, transactions that have already been announced by Athene and Athora are expected to generate at least $25 billion of future inflows. Both companies are continuing to execute their strategies of pursuing accretive acquisitions to grow their businesses, which has the added benefit of growing a positive business since we are their strategic asset management partner.

Looking forward, these balance sheets will approach the 100 billion mark following the closing of the announced Voya transaction. Athora's balance sheet will be approximately 15 billion following recently announced deal activity that will expand their European footprints to include Belgium in addition to Germany and Ireland. These transactions are expected to close later this year, subject to regulatory approvals. In addition to Athene and Athora, we continue to explore opportunities to establish new strategic capital initiatives, several of which are a direct result of our deep expertise in insurance, where we are broadening our dialogues across the sector.

In terms of traditional fundraising activities, we have numerous initiatives in the market today and others are expected to launch in the coming months. As we mentioned on the prior call, we've launched a new strategy called hybrid value, which 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.

The current size for the inaugural Vintage of this strategy is $3 billion, the current target size, and we expect a first close during the second quarter. Next are natural resources franchise is continuing to perform well with ANRP2 experiencing very strong returns to-date. Since the $3.5 billion fund is currently 75% committed or invested. We expect to launch fundraising for a successor fund Vintage shortly and would anticipate at first closing around yearend. We are also seeing heightened interest for customized managed accounts across our credit business as well as the broader platform. These dialogues are with a mix of new investors as well as with current investors that are seeking to expand their existing managed accounts.

During the quarter, we took a mandate totaling $1.4 billion and the pipeline of dialogue is quite active. We anticipate that a few of these conversations will likely turn into mandate during 2018. Lastly, one of our newer innovative credit products worth highlighting is called Apollo Capital Efficient or ACE, which has been designed to solve the specific yield requirements of European insurance. We believe the ACE serve as a great example of how we are leveraging our deep expertise in credit and insurance to create compelling investment solutions for European insurance companies.

Given the overall momentum and needs to strategic capital initiatives and our various fund raising efforts across the Apollo platform, we believe we are well positioned to continue to grow our management fee revenues and fee-related earnings. As you know, we believe FRE as one of our most important financial metrics. Since it is the foundational component of our quarterly and annual cash distribution and is largely based on recurring management fees generated from long-dated and permanent assets we manage.

Management fees are comprised approximately 90% of our fee-related revenues historically and have been growing at a compound annual rate of 8% over the last five years. This growth in management fees has been augmented by an ongoing focus on efficiency, cost discipline and operating leverage, which is driven margin expansion across the platform and led to a 14% compound annual growth and fee-related earnings over the same timeframe. We believe there is a high degree of visibility supporting a continuation of these trends that will lead to a sustainably higher level of FRE, as we progress through 2018 and beyond. This visibility is driven by recent impending catalysts including the commencement of Fund IX and the aforementioned Voya transaction.

Collectively, the net addition of more than $35 billion of fee generating AUM from these items alone will add approximately $270 million of net annualized management fee revenues. We believe additional upside will be provided overtime from other growth opportunities across the platform. My comments this morning have largely covered the growth of our fee-generating assets and the positive impact of this growth, but this growth has on fee-related revenues margins and earnings. However, it is also important to emphasize the long-term value we believe our investment teams are creating in the funds we manage.

In private equity for example from 2015 through 2017, the funds we managed deployed nearly $20 billion largely from funding. The fund is off to a great start and despite the decline in March in the first quarter Fund VIII has depreciated 25% over the past 12 months. It is worth noting that this is still a relatively young fund with an average life of an investment at just over two years versus our historical averagable period of approximately four years. As this fund matures, we believe it is building value in its portfolio that we expect will be monetized overtime and deliver cash distribution.

Our long run track record in traditional private equity is strong with 39% growth and 25% net IRR since inception. We will value one and can train investment philosophy that dictates we are determined buyers and opportunistic sellers. Because of our historic ability to drive strong returns over a long period of time, today’s economic cycles, we believe Fund VIII will ultimately follow the same pattern of differentiated performance. Finally, we continue to analyze the merits and the market valuation of a C-Corp conversion. As we discussed on our last call, there is a tax cost involved as our current structure is tax efficient.

It’s worth noting that each alternative asset manager has a different mix of earnings and strategy, so the analysis around conversion varies by company. As these announcements by our peers are absorbed by the market, it's possible that the positive attributes of converting to a C-Corp will materialize in the form of greater shareholder value such as an expansion in valuation multiples and broader investment ownership or investor ownership. One of the items we were continuing to monitor very closely is the sustainability of a value creation. Since converting to C-Corp, a C-Corp is essentially a one-time decision and permanent decision. We do not have a specific time table for making a determination, 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.

[Martin Kelly, CFO]

Thanks, Josh, and good morning again everyone. Staring with our cash distribution, the $0 38 we declared today was driven by the relative cash flow stability of our fee-related earnings and was complemented by realized performance fees principally generated from Fund VIII monetization activity. Focusing on the economic financial performance of the first quarter, we generated fee-related earnings of $133 million or $0.32 per share, which was offset by two factors, including the reversal of net performance fees and associated investment losses of 136 million dollars or $0.33 per share primarily due to unrealized mark-to-market depreciation in Fund VIII. And the Athene related depreciation during the quarter drove $74 million or $0.18 per share of unrealized losses between our balance sheet investment and carry arrangements.

The net result of these items drove a pre-tax economic loss of 105 million dollars or $0.26 per share or an economic net loss of $121 million or $0.30 per share post-tax. Starting with FRE, the first quarter result was roughly flat year-over-year but down quarter-over-quarter, primarily due to the moderation of transaction and advisory fees. Transaction fees typically correlate with the level of capital deployment activity in a given period, and while the funds we manage to deploy capital into new investments during the quarter, these particular investments were not large enough to warrant the need for equity co-investment or meaningful financial syndication, activities which usually generate fees.

Management fees were also sequentially lowered due to the cessation of management fees from Fund VI as well as the absence of some catch-up fees in credit. We believe this decrease in management fees will be short-lived as the quarterly run rate is expected to increase by approximately $50 to $55 million from Fund IX alone with modest incremental expense, beginning in the second quarter.

For added perspective on Page 7 of our earnings expectation, you'll see that we've laid out the trajectory of our historical fee-related earnings growth including a bridge to our first quarter results and an illustration of the expected impacts around this near term [indiscernible]. Next, I'd like to provide some context behind the quarter's investments performance which was principally responsible for the reversal performance fees and associated equity method or GP investment losses. While the credit and real assets businesses produced positive returns in the first quarter or plus 1% to 2%, the private equity portfolio was down 3% overall.

The blended private equity marked for the quarter represents significantly diverging outcomes in the portfolio, as publicly traded investments were down 16%, while private investments were up 4%. The primary source of volatility on the public side was ADT, which had its initial public offering in January and subsequently traded down during the quarter. Excluding the mark on ADT, the blended return on the portfolio would have been approximately 500 basis points higher and plus 2%.

We believe the quarter's performance is quite idiosyncratic given the outsized of 38% quarter-over-quarter swing in ADT's valuation. Despite the decline, Fund VIII inception to-date gross net IRRs of 26% and 18% respectively, continue to be strong and the team is optimistic regarding the long-term value proposition offered by ADT and the other 30 plus investments in the fund.

As it relates to the quarterly mark on the Athene, the fair value decreased by approximately 8% quarter-over-quarter due to the lower trading price of its 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, it was an unrealized loss of $0.18 per share for the quarter. Despite the depreciation in the quarter, we believe strategic investments like Athene serves to make our balance sheet stronger.

During the quarter, we received additional shares of Athene to satisfy performance fee receivable from AAA. We have the option to monetize these shares, but we elected to increase our ownership position in the Company, as we believe it is a compelling investment and to further align our sales with a strategic corner. As a result, we now hold 19.2 million shares of Athene in aggregate, which translates into nearly a 10% economic state.

To provide further context on the topics of unrealized marks and a growing Athene investment, we included Page 16 in today's earnings presentation. This page illustrates the recent growth where we stressed in our net performance fee receivable balance resulting from strong investment performance in 2017 and the components of the decline in the first quarter, which included the additional investment in Athene. Looking a bit more broadly at our balance sheet, we now hold $1.2 billion of cash and treasury and an additional $500 million undrawn revolver against $1.4 billion of debt, providing us with a conservatively capitalized financial position with ample liquidity.

Now cash balance reflects the issuance of our second perpetual preferred stock security during the quarter. The transaction was well received with gross proceeds of $300 million or 6.38%. We replaced by the outcome as it allowed us to diversify our capital structure even further by additional permanent financing at an attractive rate. With this enhanced flexibility, we continue to pursue strategic capital initiatives evaluate potential M&A transactions, fund other growth initiatives and immunize share dilution of employee provided compensation.

Our debt structure now includes 30 year senior notes which raised gross proceeds of an additional $300 million at 5% during the quarter, which was used to refinance outstanding term loans. We are again pleased with the outcome of the transaction as it enabled us to access new institutional systemic income investors and diversify our maturity profile.

Approximately two years ago, we launched a share repurchase program that authorized up to $259 of aggregate repurchases. Through the end of March, we've cumulatively spent $159 of capital on this initiative by repurchasing roughly 5 million of shares immunized employee related share dilution as well as an additional 2 million shares in open market transactions. We intend to continue to the net share settlement programs to mitigate dilution resulting from employee stock trends.

With that, we’ll now turn the call back to the operator and open up the line for any of your questions.

[Operator]

Thank you. The floor is now open for your questions. [Operator Instructions] Our first question comes from line of Glenn Schorr of Evercore.

[Glenn Schorr, Evercore]

Wonder if you could just help us outline the fee structure for some of these new products hybrid value, pace and maybe the new assets taken on for the deals in both of the Athene and Athora?

[Martin Kelly, CFO]

Sure. So, we haven't been public with any of this. I would expect hybrid value to be in line with traditional draw down to VIII funds. And on Athora, we similarly don't plan to make a fee rate public yet. I would say it's -- the platform is formative and the fee rates are similar in context to seeing asset management, but also different in the sense of there is a base fee rate which we expect to be lower, driven by the fact that these platforms need to have treasury securities as a duration. But we will have the opportunity to earn some investments or some advisory fees overtime, which we expect will be meaningfully accretive of the time.

[Operator]

Our next question comes from the line of Michael Carrier of Bank of America.

[Michael Carrier, Bank of America]

Josh, maybe one for you, just on Fund VIII, anyone ever -- any of the big funds have a sizable investment, it tends to be the spotlight with ADT. So just wanted to get your sense when you look at Fund VIII across the 30 portfolio companies or so, what's going on in terms of like the revenue and the EBITDA trends, the performance overall still looks very good when we look at it relative to like history and it's like you mentioned a young fund. So just trying to gauge sort of like the one investment that kind of in the spotlight versus everything else that's going on and what that means for you the future like kind of realization potential as a fund?

[Josh Harris, Co-Founder, Senior Managing Director]

So, I think first of all we just had a big portfolio review we do at once or twice a year, couple of times a year, and to what every company and it's pretty much the fund is in great shape as evidenced by the 25% return -- unrealized return that we reflected in the comments. And I'd say, it's pretty broad based across the portfolio, there are very few issues. And I would say that the revenues and EBITDA are growing in line with GDP about plus low single digits. But as we reflected to you all very consistent with our strategy of buying stuff that under six times EBITDA even when the market is paying over 10 times to EBITDA, even and but like -- even with ATD, while we -- while market has obviously move the stock of ADT relative to its IPO, that's still a great investment for us and marked up.

I want to say 1.4 times or something which you can read in our financial statement so. I think it's a good situation and look at the end of the day, the ebb and flow of market value when you have more than 50 companies across multiple portfolios, it certainly does create some quarterly volatility. But long run, we think that the fundamentals of ADT in that portfolio are good and we're actually quite positive. I would say that when we look at the multiple on that fund relative to fair value today, it's about 7.4. And when we started, it was 5.7. So what we think we’re building value in the portfolio, it's still like wells out, anything -- any of the S&P 500 or any of the kind of industry comps.

[Operator]

Our next question comes from the line of Devin Ryan of JMP Securities.

[Devin Ryan, JMP Securities]

Maybe just a follow-up on ADT, I know it’s been a big win for Apollo here, but more recently just on the public market its’ been a tougher run. And so, if you trying to think about -- I know every investment kind of has its unique characteristics, but this was the fast turnaround for being public company into the private market back out to the public market. So, I’m just curious if there is any kind of lesson to be learned from that? Or does that change the trajectory for any other investments for Fund VIII? And I've seen some reports of some other that's when maybe public not too longer ago that could come back to the public. So, I’m just curious about that?

[Josh Harris, Co-Founder, Senior Managing Director]

I mean look, I'll sort of illustrate of how [indiscernible] yesterday what add-on -- I mean I think that ADT, we’ve grown ADT, we’ve changed the trajectory of the earnings and the cost structure and the capital intensity of the business. And so, we wanted -- we went public and obviously the public markets were quite a more convincing, and I think something you don’t always get it right exactly. You rely on underwriters and you use your best judgment.

We believe in the long-term fundamental value of ADT, and certainly, we have other companies that we’ve taken out the public market and we’re certainly going to do our best to when we exit to whether it’s -- if it ends up being to the public market, but certainly there are other exits alternatives. To do that at the right time, after the appropriate seasoning and value creation, which we think we did in ADT, but obviously the market hasn’t fully -- doesn’t fully agree with that. So, I think that, that sort of I would set on if you have anything to do add.

[Scott Kleinman, Co-President]

Yes. I would just echo Josh’s comments. We feel really good about ADT specifically. I don’t think you can extrapolate from that the broader portfolio. We look at every company and think long and hard about, the timing of exit and the right path for exit. And I don’t think you wanted to take too much from the current trading performance. Ultimately, ADT's performance is quite strong and we would expect the market to eventually get up to that.

[Josh Harris, Co-Founder, Senior Managing Director]

ADT was two year's old we took a public relative to our investment rise. It wasn’t headwind. We want any rush. So, we’re also happy to the market doesn’t look like hold on.

[Operator]

Our next question comes from the line of Alex Blostein from Goldman Sachs.

[Alex Blostein, Goldman Sachs]

Just a follow-up question around Voya and Athora. So, heard you on the fee obviously, but I was wondering if you guys talk to the incremental FRE margins you expect to see from both of these transactions? And I guess broader, as you think about the opportunities set for Athene and Athora, how does that compare versus let's say a year ago, as we're thinking about potential and more activity here on the forward?

[Josh Harris, Co-Founder, Senior Managing Director]

Yes, so I'll start with the first part and then I'll pass to Gary for the second part. Both of them are very, very high margin. We don’t actually disclose the specific margins, but once you built the cost structure you're adding revenues and you're not adding a lot of cost. So, there overtime, I mean obviously Athora, it's just beginning and so I don’t want to overplay too much the effect on this year's earnings, but it will be marginally accretive and overtime significant when you're building the platform clearly their cost associated with it.

In Athene's case, obviously, you've got fully above that platform. Voya is going to add 19 billion of AUM and that's at 30 bps, which we've announced, and plus you've got whatever we can sub-advise which today -- which was about 20% through pre-Voya. And then you get the underlying economics of those funds, so and then obviously as the asset of Voya -- the variable annuities becomes fix annuities, Athene also gets those and then we manage the assets that Athene gets. And so, those are -- that will be accretive overtime and growing from Apollo's point of view and from Athene's point of view. In terms of the more strategic aspects of your transaction, I'd like to have Gary Parr who is on the call answer that.

[Gary Parr, Senior Managing Director]

Yes, at a high level, we continue to look for creative ways to expand our permanent capital. So Voya is a particularly good example where we saw a dilemma in the insurance industry and that is the old runoff blocks of variable business. They shouldn’t -- those blocks shouldn’t be in a public company, really we think they should be in a private arena. So, we also saw that they were attached to fixed annuities which were attractive to Athene. So, we bundled a transaction that was good for Voya, obviously good for Athene and good for Apollo.

Now that we have the platform of a variable capability and venerable once we close, which as we intend would be midyear. And when we have that capability, it just adds to the array of things we can look at and consider, and it is the case that there are other companies that have variable of blocks that they need to address. There are some other aspects of just the life and annuity industry that are feeling continuing to feel margin pressure that placed to some of our advantages. So, we will continue to look for creative ways to do material transactions, such as Voya.

[Josh Harris, Co-Founder, Senior Managing Director]

Yes, and there is other types of insurance that we're looking at where we feel like similar strategy to be effective.

[Operator]

Our next question comes from the line of Bill Katz of Citigroup.

[Brian Whalen, Citigroup]

This is Brian Whalen for Bill Katz. We noticed the pace of dry powder deployment explode quarter-over-quarter. Could you guys provide some details on what's driving that? And maybe what the challenges or opportunities are for deployment in the current market backdrop? Thanks.

[Josh Harris, Co-Founder, Senior Managing Director]

Yes, so Scott why don’t you just -- PE.

[Scott Kleinman, Co-President]

Yes, I would say PE deployment was a little bit slower in the first quarter, a little bit off our normal pacing. I don’t see that having any longer term repercussions. We are looking at Q2 back more on normal fund, normal tracks, so…

[Josh Harris, Co-Founder, Senior Managing Director]

Yes, I mean look Athene today, there is the ebb and the flow of the deployment cycle of the realization cycle, sometime you have a stock where you believe in it and it doesn’t perform in the stock market. And so, the reality is there can be these quarterly fluctuations. But from Scott says like our -- from a fundamental long-term point of view, we feel like we’re going to be back on the pace.

[Operator]

Our next question comes from the line of Michael Cyprys of Morgan Stanley.

[Michael Cyprys, Morgan Stanley]

C-Corp conversion, you mentioned that something that you’re thinking about maybe it’s a way to enhance shareholder value. But just curious, are you thinking about any potential change to your capital management policy, maybe as a way to enhance shareholder value, maybe paying a fixed a distribution line with that for re-growth, and using other cash generated for buyback? What sort of the drawback of that sort of the approach? And just general, how are you thinking about any sort of tweaks by requirements to your capital management?

[Josh Harris, Co-Founder, Senior Managing Director]

Yes, I mean I'd say that we have sort of paid out the bulk of our earnings and we continue to do that. What we’ve said is that, if we have -- we have highly cash accretive business, there is not a lot of need for capital other than for GP stakes and acquisitions and investments. And certainly, we’re sitting with an investment grade, capital structure with a $1.2 billion of cash. And selectively, we’re going to pursue investments and acquisition as we’ve done in the past.

If we found something that was and compelling enough, we might and we’ve always said that we look at the dividend as importance. And -- but if we needed to stop the dividend, we would look at the -- we would do that if the ROI on an acquisition that require capital, was in our opinion an attractive enough to merit that. But given the cash accretiveness of our model and our -- the amount of cash on our capital structure, we haven’t had to do that. And so, I we don’t see that happening in the future, but we reserve the right to talk about it. Does it make sense?

And the reality is I mean I’ll just say one more thing, I mean we don’t think our -- I think we’ve said repeatedly, and I’m not -- I mean to come across the great thing about it, but we just think that the ROI of our own stocks and the dividends flow out of our own stocks and the upside of our own stock is incredibly attractive investment. So, we just haven’t seen something that would warrant that.

And then relative to buybacks, I think what we’ve said is that, we don’t want to strike the flow. But what we’ve done is -- what we’re doing strategically is neutralizing the employee dilution with buybacks. And so, we’re going to keep on that path. Clearly, we reserve the right to change all of that, but that’s kind of where we are. And I know right now, we don’t see any reason to change it.

[Operator]

Our next question comes from the line of Brent Dilts of UBS.

[Brent Dilts, UBS]

On the topic of growth, so with the 2014 Investor Day you had said, you didn’t think [CP AUM] would get much larger than where it was at time. Today, it's up 50% bigger. So, could you talk about your outlook for growth in that segment over the next few years, just given where you are with Fund IX starting to turn on fees, but Fund VIII and ANRP2 solidly vary and likely to see an uptick in harvesting here?

[Josh Harris, Co-Founder, Senior Managing Director]

Yes, I mean what we said is, obviously, we were sitting with an $18 billion fund and even though we were performing well and had performed well. We didn’t expect that we would raise a largest fund in history. And so, we didn't want to set that time of expectation. And having said that, so we exceeded expectation, and we now sit with the 25 billion of our fund. We were able to deploy the 18 billion our fund in 3.5 years.

So that merited us taking down a $25 billion fund and so we went forward. But we end -- I think during growth that we also said that, we didn’t expect whispering growth that we felt credit would be our growth engine and that was growing kind of high-single digit or low double-digit sort of the organically, but that given the scale of private equity, we saw the incremental growth. And we did talk about other products such as natural resources.

And as I mentioned in my opening remarks, we've added hybrid value which we think is in the middle of the capital structure and it's sort of not as competitive and really place to the strength of our integrated model between credit and private equity. And so we think we have a competitive advantage. And overtime, we are going to add products where we think we can outperform in the market in terms of returns. But it's not going to be -- it will be -- I think it will be low-to mid-single digit growth, not high single digits because of just to scale of what we're doing already.

[Operator]

Our next question comes from the line of Brian Bedell with Deutsche Bank.

[Brian Bedell, Deutsche Bank]

I appreciate the comments on the C-Corp conversion, maybe just to add a little bit more there, maybe if you can just talk about the complexity for you guys to be this obviously [indiscernible] with the little bit of different situation in every company is unique of course. But as you think about, I think you said 15% to 16% dilution on ENI last quarter would be the pro forma. And as you think about, what kind of valuation improvement you would need? Would you think you would need to see sustained to do this? And then also just on KKR's simplified reporting structure where they're limiting the ENI and focusing more on [indiscernible] and changing the comp a little bit? Just your views on whether you think that makes that type of reporting structure make sense for Apollo in the industry?

[Martin Kelly, CFO]

Sure, Brian, so what we've said last quarter was looking at 2017 full year. Our reported 8% blended ENI tax rate would have been 5% under the new tax code or 23%. And so, that sort of the rough order of magnitude of the leakage at the Company level, it obviously doesn’t consider the shareholder level because that's a further derivation of that. I think it is a very complex topic. I think the complex comes in -- do you convert all or part of the structure is the conversion, a taxable transaction or non-taxable transaction, and then ultimately to Josh's earlier comment, we convinced that we get a sustainable uplift in the multiple of the time. And so, we continue to study it hard and spend time on it, but it's very complicated and a one-time decision. We would expect that the multiple uplift would on the whole earning stream is a couple of times, but if were to isolate that's an FRE, it's still of that. So you need a meaningful uplift to justify that's how we continue to do other work on.

[Josh Harris, Co-Founder, Senior Managing Director]

Yes, I mean obviously the math is relatively straightforward. If you got 15% dilution or whatever, you have to assume -- you have to think that on the overall multiple, you get more than that on sustainable basis overtime. And so, we just have to -- we’re studying it, we’re watching what others are doing. I think others going first, is helpful. We have to see that what happens overtime.

In terms of the focus on DNI, that’s the good focus. Management company DNI, total DNI, cash flow and obviously from an earnings point of view, we are -- we do report earnings and we’re committed for the earnings, and we think it’s a great reflection of our net view. But as you can see with this quarter and something like ADT, obviously, it’s a -- when stock market might take a different view of something that can affect your reported earnings, but it's unrealized, this are unrealized marks.

And from our point of view, volatility and markets right while they may create unrealized mark-to-market loss is generally that’s been very, very positive for us overtime. Because that’s when we get to step in with lots of our locked up capital and by stuff, right. And so, there is a -- so for us ultimately what we’re really looking at is, cash flow, DNI, predictable DNI out of the management company and then total DNI, which is we’re very reflected by FRE.

FRE is very, very close to cash flow out of the management company, and that we’re going to try to continue to emphasize that more, but we'll probably get to keep reporting everything because we want to be very transparent and allow people to look at whatever they want to look at.

[Operator]

Our next question comes from the line of Gerald O'Hara of Jefferies.

[Gerald O'Hara, Jefferies]

Perhaps one more on the permitting capital vehicles, you noted the closing of Aegon trend that the Aegon transaction here in our Q2. So maybe can discuss what our missing growth does provide to the European insurance platform? And I don't know if there is any ability to leverage this platform across multiple regions, but any kind of additional commentary there would be helpful?

[Josh Harris, Co-Founder, Senior Managing Director]

So, a couple of thoughts, as Martin refers to earlier, we’re building out the capability for Athora and building the platform to build it to the multi countries. Specifically, Ireland, it gave us a reinsurance platform through Ireland that is helpful for capital management and efficiency for example. There was some product capabilities embedded in that as well. There was some variable capability in fact for the equivalent of variable to European version. If that’s not the business line we want to keep in, but there were some technical abilities that will help us to do other transactions. So, think about of that is another building block for giving us expertise and capability along with -- now the Generali transaction giving us a base in Belgium where we see Belgium is being just as we see Germany having a number of opportunities and it is particularly helpful to have your first base of the platform from which you then consolidate.

[Operator]

Our next question comes from the line of Chris Harris of Wells Fargo.

[Chris Harris, Wells Fargo]

So as you know short-term interest rates are up a lot. Wondering, if you guys could help us understand your exposure to that like, do you underlying portfolio companies have a lot of floating rate that. And are you guys being any stressors in the portfolio as a result of these losing rates? It seems like no, but just if you can elaborate on that that would be great.

[Josh Harris, Co-Founder, Senior Managing Director]

Yes, and we're not. First of all most of our credit portfolio is floating rate nearly all of it so when short-term rates go up, we actually just make more return from a P point of view, we're generally hedged. And also the leverage in our P portfolio is very, very reasonable. It's under 4 times and so short-term fluctuation and rates generally, isn’t moving the needle between the lower leverage and the hedging that we've done relative to our cash flow.

[Operator]

Our next question comes from the line Patrick Davitt of Autonomous Research.

[Patrick Davitt, Autonomous Research]

Couple of questions on ACE. One, is this going to be the only product like it in the market? And two, what asset bucket will it fallen for the insurance companies with the idea of getting to an addressable market for this product?

[Martin Kelly, CFO]

Well, as Gary and others have said this morning, between the a Athene which is U.S. focused and for a European focused, there is just a different regulatory regime in terms of constructing a fixed income and insurance dedicated portfolio. So for us, obviously, we have a lot of experience in the Athene in the U.S. it's more of an NAIC portfolios largely investment grade. You know in Europe, there are different constraints under the regulatory regime, under solvency too that we've really this is really extracted that knowledge and that experienced.

And in addition to using it for our own balance sheets, we're really making that intellectual capital now available to others. So it's really insight on portfolio construction, it's insight on your various asset classes in the manner which those would be treated. So for us, it's just really a logical expansion of our proprietary activities with Athene and Athora and logically expanding those look to a very thoughtful and solid inch client business. So, I think you will see us constantly doing more of that, but -- and I think that we feel like we are the leading -- we have a leading edge and leading insight in that field.

[Patrick Davitt, Autonomous Research]

It sounds like it's more transactional than an eight like a fee on AUM type situation?

[Josh Harris, Co-Founder, Senior Managing Director]

Well, I just think it's a -- we have a variety of products in our credit platform. This would be an additional product that we rolled out and have been rolling out. So, it really just continued logical expansion of our products out.

[Martin Kelly, CFO]

But it's not a permanent capital vehicle, another words, yes, I think you are on to the right structure. It's more of a that this part of it I mean obviously on a traction we would use this expertise, but relative to the products we're offering -- we're going to off our client to generally they are going to be more managed accounts slash possibly fund infrastructures, not a permanent capital vehicle.

[Josh Harris, Co-Founder, Senior Managing Director]

And that's what means product but not a permanent capital per se.

[Operator]

Our next question comes from the line of Allison Taylor Rudary of Oppenheimer.

[Allison Taylor Rudary]

I just wanted to dig in a little bit to the hybrid credit strategy. You mentioned that the economics might look more like a drawdown fund, but is this strategy a permanent capital vehicle? Could it morph into that and can it co-invest alongside your private equity or real asset businesses?

[Martin Kelly, CFO]

Sure and this really is a fund product, so it’s not really a permanent capital type vehicle. And it will be a -- it has a distinct strategy that fits into the Apollo ecosystem of products. So, it’s not really a co-investment vehicle to private equity per se. It’s targeting a specific set of risk in return in corporate and other entities. And so, it will be a very distinct strategy.

[Josh Harris, Co-Founder, Senior Managing Director]

So, less -- probably on average, less risky more structure than private equity and a bit lower return, but still good return.

[Operator]

Our next question comes from the line of Michael Carrier of Bank of America.

[Michael Carrier, Bank of America]

Just quick one Martin on the follow-up. Just in terms of the incentive comp, I don’t know if there is anything unusual this quarter and maybe it was just given the negative realized on the revenue side, but it just seemed a little unusual in terms of how we look at that?

[Martin Kelly, CFO]

Mike that’s said, if we had a realized profit share cost of on the gains that we thought of mid 40s, 43, I think it was 44%. And then on the unrealized losses which exceeded the gains, we had a lower profit share cost which is driven by Fund VIII. And Fund VIII, we accrue -- if you recall Fund VIII has a cash and structural fund to its profit share. We accrue the cash and the stock cost comes later. When you net the two together, it brought down to a negligible net number.

[Operator]

Thank you. That concludes the Q&A portion of today’s call. I will now return the floor to Gary Stein for any additional or closing remarks.

[Gary Stein, Head, Corporate Communications]

Great. Thanks again for joining us today. As I noted earlier if you have any follow-up questions, please feel free to circle back to Noah Gunn or myself. I look forward to talking to you next quarter.

[Operator]

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.