Marc Rowan: Patrick, it’s Marc. I want to give you a way of thinking about this. And again, we always have to execute before. But what do we see here? This is a business that has not heretofore existed outside of the banking system. And each of the banks who own one of these businesses is competitive with the other banks. We are not a competitor to the banking system. We actually don’t want what the banking system wants. We don’t want the client. And I’m saying it in a confusing way. But we can’t sell the client equity, advice, M&A, treasury, payments, FX, and derivatives. And the banking system wants to sell all those things. And what they don’t want for the most part is the asset. So we are actually an incredible partner to the banking system.
But if you’re in a competitive bank or a boutique, you historically have not wanted to bring your client to this business, because you’re bringing it to a competitor who’s interested in the same thing that you are. Our job here is to represent a capital box, which will serve as an investment grade capital box, as Jim suggested. We will build and have a massive warehouse business. The warehouse business is a really good business. The stat I have in my mind is more than 350 billion of origination over the last seven, eight years with de minimis losses. At spreads, we believe single A credit spreads, but at very wide spreads, which then the warehouses are cleaned out through securitization, which is broadly available to a variety of investors.
Our job is to scale that, but also to become the financing partner to lots of boutiques who have clients where they’re nervous about bringing them to banks who are their full fledged competitors. Also, we’re a great partner to existing banking system on hold positions. People who have securitizing businesses where they just don’t want the hold, or they don’t want the capital, bringing us in to be a side by side with them, they are bringing in someone who is not a competitor for their client. That’s our job. And we have a lot of work in front of us. But Jay Kim has built an amazing team, and we’re very excited about what can be done here. We expect, as I suggested previously, this will be accretive financially in 2023. But it’s up to us to make it in 2023 strategically accretive to our platform.
Operator: Thank you. The next question is coming from Craig Siegenthaler of Bank of America. Please go ahead.
Craig Siegenthaler: Thank you. Good morning, everyone.
Marc Rowan: Good morning.
Craig Siegenthaler: Just a follow up to Glenn’s question on retirement and OTTIs. Your historical loss rate has been very low, 7 basis points annualized. But what was the loss rate in 4Q? And do you have any view on how this should trend this year, especially in light of the prospects for an economic recession?
Martin Kelly: Yes. So Craig, it’s Martin. The loss rate was right on top of that in Q4. As we go through every asset class and go through a pretty rigorous process, we’re just not seeing — we’re not seeing any uptick. If you look at the headline, there was some peak-up CECL adjustments, which were just sort of accounting required, but don’t reflect actual credit losses. But the actual changes in the reserves, incidence of any stress and actual realized losses coming through, we’re just not seeing it across resi loans, commercial loans, asset backs, any other asset class.
Jim Zelter: And if I can just highlight, Craig, I know there’s lots of questions about credit cycle and a concern from our perspective, and we’re not the economist. We will let Torsten do that. And we’re just following our discipline of purchase price matters. The reality is there are certain sectors that are doing very well post COVID. There are certain that are having a bit of a challenge. Hotels, entertainment, lodging, airlines doing very well; hard industrials or the auto sector is having a tough time. Our IG book, a lot of financials have the big banks. Big IG book, CLO book really strong, AA, AAA book. So we really feel like we have a very well thought out strategic asset allocation and how we put it together is showing the robust nature of the portfolio.
Marc Rowan: I’ll just finish it, Craig. You’re going to see a tremendous amount of additional activity from Athene this year in communicating its portfolio what’s going on? We have a tremendously good story to tell and the team is anxious to tell it, and they’re going to be very visible and very transparent in how that gets sold. But I’ll just echo where Martin and Jim started. We’re just not seeing it in the portfolio. Absolute normalcy in terms of credit and we’re getting paid for structure and for illiquidity and for origination. We’re not getting paid for credit.
Operator: Thank you. The next question is coming from Michael Cyprys of Morgan Stanley. Please go ahead.
Michael Cyprys: Good morning. Thanks for taking the question. I wanted to circle back on the normalized SRE spread. If I heard Martin correctly, I think he was suggesting 135 to 140 for ’23. Maybe you can correct me or not. But maybe you could just help unpack some of the moving pieces in your guidance. Clearly, the benefit from higher rates, I think 20% of the book is floating, but also think a portion of the liabilities are also floating. We’re seeing cost of funds ticking up here in the quarter. So I was just hoping you could elaborate on some of the moving pieces, where are cost of funds on new business? And as you look out three to five years, where do you see that net SRE spread settling out to over time? Thank you.
Martin Kelly: Yes. So Mike, that’s the reason we provide a single net number to sort of get through the puts and takes that go into that. The benefit of interest rate increases on the floating rate assets is starting to diminish, as you’d expect, right? A lot of that benefit has come through the numbers. And if we just assume that today’s rate curve at the short end holds for the year, over the next couple of quarters that will flat line out, right? So that’s a temporary benefit for the year. There’s also option costs that are required to hedge rate features and policies, which are part of that. And so we’re seeing some headwinds there. And we’re assuming that fourth quarter was extraordinary in terms of net spreads. We had 145 basis points of fully netted costs, 185 before OpEx and financing costs.
And so we don’t expect in our models that that will continue. And so if you bring that down to a more normalized level and net all of the above, including what we think is an appropriate allocation to alts for the year, you get to that 135 to 140 basis points. And that’s the reason we’re trying to anchor around a single metric, which we believe is the most sort of appropriate view of spread for the year, given the components that go into it.
Marc Rowan: Maybe I’ll take the two pieces of it that Martin didn’t flush out. One is in alts. One has to be stepping back and saying that if I look at the relative attractiveness of asset classes, a credit is simply more attractive than equity. And so you will see that reflected on the margin allocations from Athene. And all of this nets down into credit requires less capital than equity, which allows us to do more business. The other piece, and it’s important that you track this through in the model, is we have a choice. And the choice is keep 100% of the business on the books, realize the growth in SRE and deploy our own capital, as that’s Athene’s balance sheet capital, or allocate a portion of the business to sidecars and essentially receive a fee for fronting that at Athene, receive FRE at Apollo for managing that and allow investors to earn the spread.
Given the attractiveness of credit, this for investors is another opportunity for investors to invest in private investment grade credit with perfectly matched low cost liabilities, which is why we’ve seen such good take up at ADIP2 in addition to the really strong performance of ADIP1. And so as Martin suggested, we expect a very strong origination here, organically. Not even looking at inorganic where the cost of funds is now not sufficiently attractive to justify spending any money. But we will allocate more of that growth to sidecars than we will to the Athene balance sheet. And so it is not just understanding the spread of the business. It’s understanding how much of the business we elect to keep. And so the second number I think you need to anchor on is we’re expecting SRE growth of about 20% year-over-year.
Combination of basis points margin, which in part reflects a decision between debt and equity, and then on the growth side, how much capital we want to deploy as principal versus how much we want to deploy through the sidecars? We’re in a fortunate position where we have that choice.
Operator: Thank you. The next question is coming from Finian O’Shea of Wells Fargo. Please go ahead.
Finian O’Shea: Hi, everyone. Good morning. Another on the Atlas partners origination. Will Athene provide the warehouse financing? And if so, are you offering similar to what banks do on advanced rates or go further? And then relatedly for the equity of those deals, will you mainly sell to something like AAA internal or more so external parties? Thank you.
Jim Zelter: Okay. Let’s take a step back for a second. No, Athene is not offering warehouses. We’re going out. There’s a consortium of global banks that you’re very familiar with that are offering us appropriate financing facilities for the commercial real estate, the resi real estate and the consumer facilities, again, global banks, massive facilities. And what Athene will take as other investors, they’ll take either the mezzanine or the residual of that financing facility. And again, I contrast this to what we were talking earlier. They’re not taking residual securitization risk, which is a higher attachment and lower spread. What Athene and the other investors will have access to is those financing facilities with lower attachment points and higher spreads behind those senior banks.
So think spreads 350, 450 over; think attachment points 55% to 65%, where once those companies go to the securitization market, the attachment point goes to 80%, 85% at dramatically tighter spreads. So what we’re talking about is offering these investors Athene, Athora and many, many others to get earlier in the process, earlier in the manufacturing of these facilities than ever had they’ve been able to participate before.
