Apollo Acknowledges Alternative-Asset Underperformance as It Weighs Uncertain AI Returns

Apollo Global Management (NYSE:APO) acknowledged continued underperformance in parts of its alternative investment portfolio while outlining a cautious approach to the artificial intelligence boom, warning that investors still face significant uncertainty over which companies will ultimately profit from the technology.

During its third-quarter earnings call Tuesday, CEO Marc Rowan acknowledged that alternative investments have underperformed expectations over the past several years, with a small number of investments at its insurance subsidiary Athene and challenges at European insurer Athora weighing on results.

The comments came as Apollo reported $1.3 billion in combined adjusted net income for the quarter, alongside record fee-related earnings of $802 million, up 23% year over year.

Alternative Investments Struggle to Meet Return Expectations

Responding to questions about Athene’s alternative investment returns, Rowan acknowledged that performance has fallen short of the company’s long-term expectations.

Apollo continues to use an 11% normalized return assumption for its alternatives portfolio, even as actual performance has remained below that level for nearly five years.

“We do have to acknowledge the underperformance and what we’ve seen over the past few years,” Rowan said.

He attributed much of the weakness to one or two investments specific to Athene and a drag from Athora, which struggled to expand across Europe before ultimately deploying capital in the U.K. through its acquisition of Pension Insurance Corporation.

Rowan said Athora’s contribution could help narrow the performance gap as the business develops.

Apollo Warns About Unknown Returns

Apollo’s comments on alternative investment performance come as the firm positions itself to finance the massive capital spending cycle surrounding AI infrastructure.

President Jim Zelter said the company sees substantial opportunities in financing power generation and semiconductor supply chains, two areas where it believes capital shortages could persist.

However, Apollo acknowledged that the economics of the AI boom remain uncertain.

“What we don’t know is how pricing and economics will evolve, or which parts of the ecosystem will earn an attractive return on the capital being committed to,” Zelter said.

He also pointed to uncertainty surrounding the broader societal and regulatory implications of AI.

Apollo is focusing primarily on financing power and chips, where management believes the risk-reward profile is more attractive.

Zelter said Apollo and Athene currently have approximately 2.5% to 3% exposure to AI-related investments in aggregate, while Athene’s exposure is around 3%. He indicated the firm would remain more conservative than the broader investment-grade market if AI-related companies eventually account for 12% to 15% of the index.

$350 Million Technology Investment

Beyond financing the AI infrastructure buildout, Apollo is also looking to use artificial intelligence internally.

Rowan said the company expects to invest approximately $350 million over the next 24 months to modernize its technology systems, improve data capabilities and build new businesses around private-market infrastructure.

The investment will include writing off existing software and replacing legacy systems with newer technologies.

Rowan pointed to Apollo’s Mumbai office, where employees estimated AI could increase capacity by 50% without adding staff.

He said the company is already delivering on those productivity improvements, creating opportunities to expand operations without increasing headcount at the same pace.

Despite the investment and uncertainty surrounding AI returns, Apollo remains optimistic about the opportunity, particularly in areas where financing can be structured to limit downside risk.

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