Operator: The next question is coming from Patrick Davitt of Autonomous Research.
Michael Davitt: My question is on the retirement services growth guide run rating at $80 billion in 4Q but guiding to $70 billion for 2024. So does that disconnect some restriction from available capital? Or are you just being conservative and the growth could actually continue to track from that higher 4Q run rate?
Marc Rowan: I think you’re hearing from us. In a week or 2, on the fixed income call, you’ll hear from Jim Belardi. And if you look back in history, the team sitting in New York is a little more conservative than the team sitting out in , but I want to caution this is not just about volume. We can generate all the volume that we want. And I’m going to encourage you to really look into how people are generating volume. When you buy a secondary block of business, you’re buying something that’s degraded from a surrender charge point of view. I’m not sure that’s good business. I’m not sure I can invest against that. I’m not sure I like the potential risk of that business. So we can do a victory lap by growing, but that’s not the growth I want.
We can also do a victory lap by growing 3-year [indiscernible]. That’s going to feel great this year and next year and the following year, but all I’m doing is setting up a cliff that is ultimately going to fall off. And I may not like the 3-year [indiscernible] years from now. We are focused on high-grading the business that we do. I would rather do $70 billion of business that $80 billion or $85 billion of business. And I think, while it is — while many of you are learning this business, we’ve been living in this business for 15 years and the headlines are just not — are not what they seem. And this gets also into the guidance on SRE. We had an unbelievable 2023. Jim Belardi and team, Grant Kvalheim and team, I hope they’re listening. They should be doing victory laps.
We actually did what we say we do. We were not a current-period profit maximizer. We ended the year north of $12 billion of cash. We ended the year with a sizable treasury portfolio, which we almost never have. And we essentially high-graded the portfolio and built liquidity because we had already grown 25%. We have the opportunity, should Apollo, now the pressure is on Apollo, continue at the $30 billion-plus run rate of origination, to actually do what we want to do, which is deploy into investment-grade and yield-y private credit that locks in on a matched basis high spread. That will cushion a big chunk of what people would normally expect to fall off from rates. The other thing that happens rates up, rates down. In a rates up, we tend to go — we tend to get a full benefit of it, but recall that, when rates are up, everything that we own is worth less.
We lose flexibility in the portfolio. In a rates down, everything that we own is in gain position. We have massive flexibility in the portfolio. We have the ability to rotate out of investment-grade corporates and into originated private investment grade. The pressure is not on Jim Belardi and Grant. The pressure is on us. We have to originate more of what they need. And recall that they don’t want 100% of what we originate. They want 25% of everything, so for us to really scale their business and scale our third-party business comes back to origination. We need to originate more.
Operator: The next question is coming from Michael Brown of KBW.
Michael Brown: So the mantra for 2024, no new toys. How can we expect the capital allocation to progress over the next 2 or 3 years? And then specifically in 2024, any way to maybe put some guide rails around how the share buybacks could be utilized this year?
Martin Kelly: Michael, it’s Martin. I’ll — so I addressed some of this in the — in my comments. I think the priorities in terms of allocation, for us, are to grow Athene. And the benefit of growing Athene, including with the , are numerous. And the earnings leverage from that is really beneficial; and some of which, we outlined at the Origination Day last October. It also grows AAA, all right, so that has a compounding impact on earnings. We want to — we are — as I mentioned, we don’t see a lot of scope to invest in growing the business inorganically. And so that should be modest and very sort of targeted. We want to make sure that we’re at least immunizing employee stock issuance, and so that’s built into the plans. And then the ability to immunize and reduce the share count on a real basis is on realizations really.
That’s the delta. And so as realizations pick up, we’ll have more flexibility to do that. And that really depends on what the markets — what receptivity there is in the markets for exits, particularly in our private equity business. So that’s how we sort of connect it all together. Whichever way you look at it, the returns — the marginal return on a dollar of capital — whether you’re buying back stock or whether you’re investing in Athene are both attractive, so they’re both good choices, but that’s how we try to balance it. But I would think, in terms of time frame, think of it as a 3-year plan, but we need more sort of near-term realizations to be leaning into that, so more back ended than front ended.
Operator: The next question is coming from Brennan Hawken of UBS.
Brennan Hawken: Martin, I’d like to maybe try and square your comments around the cost of funds in the fourth quarter and some of the adjustments you flagged to Slide 12. Is the one piece that’s not one of the notable items the impact of the new performance fee? And given that performance fees are something I’d think you guys would be collecting on a regular basis, why is it that we should be adjusting that out? Can you please just maybe help us understand that impact a little bit more?
Marc Rowan: So this is Marc. I’m going to give a conceptual and then Martin will address the specifics. If you look at history in our portfolio — and this is not history of 1 year, but you look over 15 years. Then you say, where have the vast majority of losses come from in the investment portfolio? They’ve come from the corporate IG book, the thing that everyone thinks is safe. And if we’re — if you think of that as like most investors, a lot of that is based on rating and diversification and industry classifications. That no longer suffices. Athene has decided that it makes more sense to bonus the people who are managing portfolios for them, net of specific losses and net of specific impairments, which now include the corporate IG bond book.
What we saw was it — 100% of the charge for the change took place in 1 quarter, as opposed to spread over 4 quarters. Ultimately the belief is and the reason this was done is that this on a net basis should be a positive for Athene, but in the quarter it was taken, we’re just calling it out so you know exactly why it was taken.
Martin Kelly: I think my…
Marc Rowan: Sorry…
Martin Kelly: I would also connect it back to originations, all right? So it’s a tool to incentivize appropriate originations on a risk-adjusted basis. And the math is pretty simple. The full charge of 7 bps was taken in 1 quarter, but think of it as an equivalent dollar amount performance-dependent taken over the course of the year. And if you adjust for that and the notables from Q3, you — and look at the change in sort of top line fixed-income income and cost of funds, they’re right on top of each other on a quarter-over-quarter basis.
Operator: The next question is coming from Ben Budish of Barclays.
Benjamin Budish: I was wondering if you can give an update on ADIP specifically and then maybe speak a little bit more generally about sidecars. You identified it, I think, last year as one of your kind of strategic priorities going forward, so maybe a little more color on how you expect that opportunity to evolve and what we should see this year.
Scott Kleinman: Sure. So fundraising, going quite well. We expect to wrap it up this summer in the $4 billion to $5 billion range, so providing Athene the sidecar capital necessary for the next probably 2 years. So feeling really good about that. Part of what we’re doing is just a big education campaign, right? This is not necessarily an intuitive product to investors, but once folks start to understand it, it’s a pretty exciting product.
Marc Rowan: Yes. The color I would give in this — and this is as you evaluate entering into this business. The reason we are successful raising sidecars — and people buy into the business pro rata with Athene and actually pay both Athene and Apollo fees for the privilege of doing retirement services business. The reason this works is they, the investors, have seen us over a very long period of time stick to a mantra of high cash-on-cash returns. The ability to produce north of 15% cash-on-cash returns growth in book value over that period of time; and to step away from the market; and to step away from kinds of transactions that, while would give us growth, but — are not fundamentally good transactions is why we’re trusted with this capital.
People will discover very quickly that this business done poorly is very capital intensive. This business done well is a great business, so I just step back to the big economics. It costs roughly $0.08 of capital for every dollar of growth. If you fund all $0.08 yourself — you can do the math as to how big you get and how much capital you need. Roughly 2/3 of that $0.08 is funded by third parties who for — pay us a fee for the privilege of funding because it offers excess return per unit of risk and they are aligned with us. And they know that we will be good stewards of their capital. If firms do not produce high rates of return and do not make fundamentally good strategic choices, they will not be trusted with sidecars; and that will be the difference between success and failure.
Operator: The next question is coming from Michael Cyprys of Morgan Stanley.
Michael Cyprys: I wanted to ask more broadly on the retail annuities market with aging demographics and the need for income. I was hoping you could speak to the market growth that you expect from annuities over the next 5 to 10 years. And what sort of enhancements might you be able to make to the product set and overall customer experience to perhaps unlock some additional growth and expand the?
