Shares of private equity giant Apollo Global Management (APO 0.30%) were on the rise Wednesday, rising 8.5% as of 2:10 p.m. ET.
The company reported earnings this morning, and while its headline adjusted non-GAAP (generally accepted accounting principles) earnings fell just short of estimates, there were apparently enough positive data points within the release to give investors reason to cheer.
Of note, Apollo's stock had fallen about 15% since its summer highs on economic fears, rising rates, and a slower merger and acquisitions market. So perhaps its better-than-feared performance was enough to satisfy the bulls.
A record performance in key segments, but lower exits
In the quarter, Apollo recorded $1.71 in adjusted earnings, just below analyst estimates of $1.77.
It appears that while overall headline numbers missed, the important and more "recurring" revenue centers for Apollo's business impressed to the upside.
The third quarter was a paltry quarter for asset sales, which are lumpy and market-dependent. In fact, Apollo only generated $4 million from "principal investing income," or the company's net income it makes from exiting private equity investments. That's down 95% from the year-ago quarter.
However, if market conditions are unfavorable to Apollo to sell, then management is doing the absolute right thing in holding these assets until the market recovers. Certainly, with rising interest rates and fears of a recession still on the minds of many, there are not a lot of asset buyers these days.
So the rock-bottom performance income likely contributed heavily to the miss, but isn't as big of a deal if Apollo can get a better price later on.
Image source: Getty Images.
Meanwhile, Apollo's other sources of revenue appear robust. In fact, over 80% of Apollo's business is now in either credit or hybrid businesses, as opposed to equity.
Given the rise in interest rates, the company is now attracting inflows for its credit-based solutions. Fee-related earnings on assets under management of $472 million grew 6.8% quarter over quarter, and spread-related earnings, which are related to Apollo's insurance unit Athene, grew 9.3% quarter over quarter to $873 million.
So Apollo probably shouldn't be viewed as a straight private equity play, but rather almost half an insurance company. And insurance companies have been fairly resilient over the past two years, as rising rates benefit investment portfolios, and companies can pass on higher rates in the form of higher premiums.
Apollo is a solid financial for your portfolio
Apollo is a very well-run, conservatively managed private equity and insurance hybrid. In fact, a lot of its businesses actually benefit from higher interest rates. Moreover, the low P/E exits last quarter, while weighing on results, could actually be a positive sign of discipline on the part of management.
With a 2.15% dividend, solidly growing inflows, and high demand for Apollo's credit and alternative investment offerings, it's an attractive name in the space.
