Analysis: Athene/Apollo Merger
Earlier this month, Apollo Global Management, Inc announced that it has entered into an agreement to merge with Athene Holding Ltd, its insurance affiliate, in an all-stock transaction. The merger is set to bring together the asset manager and annuity provider, creating a capital-intensive financial powerhouse.
Apollo started as a private equity fund in 1990 to become a global alternative asset management firm with $455bn in assets under management. Apollo created Athene at the height of financial crisis in 2009, seeing insurance business as a perfect opportunity to invest in corporate debts and other credit assets at beaten-down prices. Athene became Apollo’s biggest client, paying hundreds of millions of dollars a year in exchange for managing its asset portfolio.
Athene is a life-insurance company. A life insurance company essentially works in the following way: when people retire, they hand a chunk of their savings to Athene in return for an annual payment, an income for life. In 2009, Apollo bought some cheap annuity policies from an Iowa based insurer, American Equity Investment Life. This was the beginning of a new business model where Apollo-backed Athene would chase more retirement companies for cheap annuities. In other words, Athene was set to capitalize on complications in the pension market after the financial crisis. The financial crisis worked in its favor as many insurance companies at the time were looking to get rid of annuity business that was dragging down their financial performance.
Athene has startled the way annuity business operated in the US. Typically, insurance businesses would invest their clients’ capital in safe bonds and keep a modest portion of the returns on the investment for themselves. Athene has found a way to siphon a portion of retirement savings into complex credit instruments that conventional insurers would not dare to touch. This means policyholders saw their savings being transferred into new, riskier and often untested avenues. This model increased insurance business’s exposure to risk in the markets.
Apollo benefited from Athene’s insurance business in terms of the capital Athene provided to support its corporate lending business. However, Apollo’s relationship with Athene has remained complicated. Shareholders in Athene have pointed out that Athene has paid a high price, higher than one charged by an independent asset manager, for management of its asset portfolio. In 2017, Athene paid more than $400m to Apollo for managing its portfolio which included credit instruments linked to residential mortgages, corporate debt, aircraft leasing.
An argument that runs in favor of this settlement is that Apollo has been generating high returns for Athene, giving it an incredible advantage against the incumbent long-term insurers. An internal investment team at Athene could not generate the same returns as Apollo did. More importantly, since Apollo and its executives hold shares in Athene, the interests of two businesses align. This brings us to a question: were the investors better off with looking at risk-adjusted returns and not the fees?
It turns out that investor sentiment at Athene was a burgeoning problem for Apollo. In 2019, Apollo cut its voting stake in Athene from 45 percent to appease the shareholders. However, the tactic failed after it was reported that investors at Athene sued Apollo for exercising undue influence over the insurance company. On March 8, 2021, Apollo announced that it had entered into a merger agreement with Athene, valuing the combined group at just under $30bn. Although, it is obvious that the merger was to ease tensions between the two companies. The merger was also inevitable because Athene provided Apollo a strong capital source and accounted roughly one-third of Apollo’s asset base. This means that Apollo, known for distressed buyouts without tying up too much capital of its own, was now a capital-intensive business with an insurance wing.
Merging with a capital-intensive insurance business also means extra scrutiny for Apollo. The regulators are more likely to oversee Apollo’s investments and potential risks that can impair hundreds of billions of dollars in assets. It is still to be seen how Apollo’s distressed buyout business will be affected by a stricter regulatory oversight. However, it is clear that any buyout deemed as too risky will suffer from intense scrutiny. This raises a broader question: can a private equity fund be compatible with an insurance business in the long run?
While there is a question about cultural compatibility of two lines of businesses, there is also a concern about assets and liabilities. If Apollo’s non-Athene assets back Athene’s liabilities, pre-deal investors may find themselves in an unanticipated situation. At the same time, Athene’s insurance business will inject cash into Apollo’s lending business, potentially keeping investors optimistic about asset manager’s performance on returns on investment.
There is no doubt that the merger has created a different kind of financial institution. It resembles a bank with its highly capitalized insurance business but providing other services such as asset management and private equity. Persuading investors that this new model will work in favor of the business will be a difficult job. It will require from the executives at Apollo a comprehensive effort at making sure investors understand and embrace this new model. Perhaps, the departure of Leon Black from leadership positions at Apollo can be helpful in this regard. After an outcry over his ties to the late pedophile, Jeffrey Epstein, Leon Black ceded power to Marc Rowan who co-founded Apollo 30 years ago.
The merger deal is expected to close in January 2022. The deal is set to combine two growth businesses providing services high in demand – retirement income and investment returns.