Apollo Global Management, Inc. (NYSE:APO) Q4 2022 Earnings Call Transcript

Apollo Global Management, Inc. (NYSE:APO) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good morning and welcome to Apollo Global Management's Fourth Quarter and Full Year 2022 Earnings Conference Call. During today's discussion, all callers will be placed in listen-only mode. And following management's prepared remarks, the conference call will open for questions. Please limit yourself to one question and then rejoin the queue. This conference call is being recorded. This call may include forward-looking statements and projections, which does not guarantee future events or performance. Please refer to Apollo's most recent SEC filings for risk factors related to these statements. Apollo will be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business.

These non-GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the company's Web site. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Apollo fund. I would now like to turn the call over to Noah Gunn, Global Head of Investor Relations. Please go ahead.

Noah Gunn: Thanks, Donna, and a special thanks to a couple of members of the research community who selected two of the three songs for our hold music jukebox that was playing before we got on the line today. Earlier this morning, we published our earnings release and financial supplement on the Investor Relations portion of our Web site. In short, we're very pleased to deliver a strong set of results for 2022 that featured record fee-related earnings of $1.4 billion or $2.36 per share and record normalized spread-related earnings of $2.3 billion or $3.88 per share. This strong combination of fee and spread-related earnings alongside principal investing income drove total adjusted net income of $3.1 billion or $5.21 per share for the full year. Joining me this morning to discuss these results and our positive outlook on the business in further detail are Marc Rowan, CEO; Jim Zelter, Co-President; and Martin Kelly, CFO. With that, I'll turn the call over to Marc.

Marc Rowan: Thank you, Noah, and good morning to all. 2022 was a transformational year for the firm. At the end of 2021, we held our first Investor Day and we set out our five-year targets and laid out what we needed to accomplish internally to achieve those targets. End of 2021 seems like a lifetime ago or at least a Fed regime or two ago. However, in 2022, we met or exceeded those targets. Record FRE of 1.4 billion was in line with our target and record normalized SRE of 2.3 billion was meaningfully ahead of target. As important and as we suggested, we restarted the growth engine. Inflows in 2021 were 75 billion. Inflows this year, 128 billion. Inflows for '23 will be higher. We expect a record year of capital raising in 2023.

As I've often cautioned, capital raising is the reward for good performance. It is not actually the goal that we set out. AUM ended the year at 548 billion, or X rates, and FX would have been about 565 billion, all in meaningful progress against our five-year targets. Recall that in Investor Day, we laid out three key objectives or three key pillars that we had to focus on to achieve our plan; global wealth, origination and capital solutions. Global wealth had a really strong 2022. We ended the year with approximately 30 billion of AUM in our global wealth segment, including 6 billion of capital raised in 2022, accounting for and implementing successfully the Griffin acquisition during the mid part of the year. We are on track to meet or exceed our $50 billion target at the end of 2026.

When we laid out these targets, we had zero perpetual products in the marketplace. By year end, we expect nine perpetual products in the marketplace. In short, we've had tremendous receptivity to our product and to our franchise in the global wealth community. Our goal here, like the goal elsewhere in our organization, is not to be the biggest. We will not necessarily be the fastest growing. We will be seen and are seen as the innovator in this marketplace, showing the global wealth community the kinds of products that they have never seen before and addressing the unique needs of this interesting constituency. Origination volume totaled north of 100 billion on a 12-month basis. We now have 15 platforms, including seven platforms, which were new additions during 2022.

You will hear later in the call the most recent edition, Atlas, formerly known as the Credit Suisse securitized products group. We are definitely on track here to meet or exceed our $150 billion annual target at the end of 2026. Having a steady source of unique credit production every year really enables us to power our business to make the kind of projections and predictability and the client commitments that are necessary for us to grow. This is good for our FRE business, in that it powers our third parties, particularly in private credit and it is especially good for our SRE business, in that we produce reliable amounts of excess spread, particularly in investment grade private credit. I'm going to spend a second just on that term. We hear the term private credit a lot.

We actually have no idea what the words private credit mean. They're just two words that will follow each other. What we have focused on in our platform and what we have done uniquely is to create a source of private investment grade credit. Very few people, very few organizations have that capability. This is in addition to the strength that the franchise has always had in more generic private credit. Jim will spend a lot of time on this in his remarks and it is a very important part of our franchise going forward and a huge differentiator. The third pillar that we set out was our capital solutions business. Capital solutions in 2021 was approximately 250 million of annual revenue. And we suggested that at the end of 2026, we wanted that to be north of 500 million of annual revenue.

In 2022, we exceeded 400 million of annual revenue. It gives me great confidence that we are on track to meet or exceed the five-year projections that we laid out at the beginning of 2021. The team has been fully built out globally. We have a massive pipeline that we executed on partially in 2022, and will carry over into the first quarter of 2023, which Martin will touch on. And most important is to help understand and help explain the ecosystem that we are creating. 15 platforms, 15 companies whose only job is to produce credit wake up every day and do what they do, they produce credit. We, as a diversified buyer of credit for our own balance sheet in SRE we want 25% of everything and 100% of nothing. And so what that means, we are creating every day credit that needs to be syndicated into the marketplace.

Some of that goes into funds or to SMAs of clients who have previously come to the Apollo platform. The rest of it goes into our capital solutions business. This is a strategic imperative for us, and does two very interesting things. One, as we place credit with third parties, we earn fees. Earning fees is a fundamental part of our business model. But as important, they are expanding our ecosystem. We have done business in the alternative community with investors with circa 3,500 counterparties for a long period of time. This is an opportunity with unique product with side-by-side with align product, with recurring product for our capital solutions group to go out and build new relationships. Sometimes those new relationships will result in one-off transactions, which is just fine.

But oftentimes those new relationships will open up client's eyes as to what we can do, and we will turn those into SMAs and recurring revenues. This is an ecosystem that is picking up tremendous traction and the team here is doing an unbelievable job. As excited as I am about the '22 performance against the three initiatives, I now want to turn to Athene who had just an awesome year. Inflows at Athene on an organic basis were some 48 billion. Athene was the number one purveyor of annuities in the United States, despite not being represented in a lot of annuity markets. New business was put on the books in the fourth quarter at about 145 basis points of spread versus about 120 basis points of spread for the full year. Both of those targets are meaningfully ahead of what we would consider normal levels of business.

2023 I believe will also continue to be very strong. I doubt it will continue at the same levels that we saw in the fourth quarter. But new business is being put on the books very profitably. Athene's alt portfolio, which as many of you also understand forms the foundation for AAA, our retail product, our equity replacement product was up 10% during the year versus the S&P benchmark, which was down almost 20%, very strong performance and an indication that Athene and AAA are doing something other than buying and providing clients with market beta. As we step back and we think about our positioning in this marketplace, one of the questions we ask the team who is the fortress balance sheet in our industry? And the answer is we are the fortress balance sheet in our industry.

We are A plus across all three agencies. We ended the year 2 billion of excess capital and more than 1 billion ahead of S&P AA. Some years ago we introduced was the first sizable reinsurance sidecar for our industry, affectionately known as ADIP1, with 3.25 billion of capital. That sidecar has now been nearly fully deployed. And yesterday or earlier this morning, we announced the first closing for ADIP2 of some $2 billion and we expect that ADIP2 will be larger than ADIP1. And further that ADIP2 will take an increased share of the new business that Athene puts on the books. This is good all around. This is good for Athene from a capital generation point of view and a capital efficiency point of view, even though it will mean that some of their assets are now essentially belong to investors and they will realize the benefits of SRE growth.

It is good for FRE and it is good for our origination franchises creating additional capacity that needs to be filled which will further spur the flywheel of our capital solutions and other businesses. In short, an amazing year for Athene. Our success in this business of retirement solutions has not gone unnoticed. By some measure, there are now north of 100 asset management entities or insurance entities who have become asset managers pursuing a strategy similar to that which Athene started on 13 years ago. To be successful in this business and to understand where we sit relative to the rest of the business, I believe there are four things that contribute to success. First is capital. Massive amounts of capital in an industry that has not been able to raise capital.

The second is an ability everyday to create investment grade spread. This is something in a skill set that is not traditionally resonant within the alternatives industry, or quite frankly within traditional asset management. It is a skill that we have built up. The third is a really attractive cost structure. You need scale, because ultimately spread is a function of your net interest margin, but it's also a function of a very efficient cost base. And finally, you need a very attractive cost of funds. If your cost of funds is low, because you're efficient and because your products are well designed, you do not need to take investment risk to earn good returns. And if you're a good investor, returns can actually be quite high. Everything goes in reverse if your cost of funds is very high.

What we are watching in our industry is the haves, like Athene, where we have some 48 billion of organic origination versus the have-nots, the market entrants, who in fact are paying up for inorganic blocks at very high cost of funds, which also are very expensive to administer on a hope that they will get to scale. I believe that the vast majority of new entrants, although not all, will not be successful and will learn a very expensive lesson along the way. We are also in a period of time where the increased activity by asset managers has resulted in increased regulatory interest in what we are doing. We have spent 13 years creating the kinds of regulatory dialogues and transparency and putting out a best-in-class set of standards. We are, to my knowledge, not just a fortress balance sheet, but the most transparent of the companies.

We regularly publish stress tests, although we are not required. We regularly publish details of assets that we are not required. We regularly go back and forth with respect to our reinsurance so that people understand there is no €œarbitrage€ between the U.S. regulatory standard and the Bermuda regulatory standard. All of the things I've just mentioned are not generally followed by many, although some are good actors of the new entrants. What you will see in 2023 on our part is an increased foot forward to help lead this regulatory dialogue to make sure that we get to the right place with appropriate transparency and appropriate oversight. This is an amazing business that is driven by powerful trends, but it is also a business of promises to retirees.

We expect that we will be included among a group of companies as internationally active insurance groups at some point in 2023, giving us an opportunity and a seat at the table to participate in shaping the regulatory future for our industry, which is changing very fast. FRE for us is the flipside of FRE. The ability to generate safe yield is something that very few people have. Who need safe yield? Retirees need safe yield, pension funds, replacing a portion of their fixed income need safe yield, banks need safe yield, Japanese insurance companies and international investors need safe yield. The world is short safe yield. And we are very good at producing it. So when we produce it in an asset that is short, we want to maximize the profitability of our capability.

And then why I say that SRE is the flipside of that. We are FRE for the safe field we produce for third parties and for Athene. But then on top of that, we are an SRE or spread-related earnings by matching the safe yield with long-term sticky liabilities. In 2022, a number of other forms of so called permanent capital went in reverse. 2022 was an awesome year for Athene. Let me step back and now return to a higher level view of our business. Our business, as I've suggested previously, exists and our industry exists to provide investors excess return per unit of risk. It does not exist for us to grow or for us to pursue that which we want. We are fundamentally responding to investor needs. Fortunately, we have very strong tailwinds as a firm and as an industry for the need for income, excess return per unit of risk.

Our business strategy is being driven and growth is being driven in areas where we believe we can continue to produce excess return per unit of risk. Our business is guided not just by excess return by unit of risk, but by an aligned investing philosophy. The combination of Athene and Athora in our balance sheet side by side with investors ensures investors at all points in time that we are fully aligned with them. Finally, as I'm sure Jim will pivot on to, purchase price matters. The purchase price matters strategy is very hard to pursue in a risk-on everything rally . Nonetheless, we did that and the reward for doing that was certainly available and shown in 2022. But I believe the positioning we've taken out and our industry tailwinds really bode well for us going forward.

2023 will be a very good year for Apollo. We are on offense. We have 50 billion of dry powder across the platform. We deployed 160 billion in 2022. Fundamentally, we do better when markets are uncertain and when there is uncertainty in the economy. We expect FRE and SRE in 2023 to be up more than 20% over 2022, as I'm sure Martin will detail in his remarks. But we also have an amazing opportunity in our business to really focus on operating leverage. We have enough in front of us with the initiatives that are currently on our plate to not just meet our 2023 goals but to meet our five-year targets. Alongside the three pillars of global wealth, origination and capital solutions, we have added a number of growth initiatives and I will not steal Jim Zelter's thunder as he lays out the things that are in front of us to focus on.

Suffice it to say, 2023 will be a year of execution. We will return the business to operating leverage in 2023 and again in 2024. The team here feels great. There's tremendous momentum. We are incredibly engaged and energized. And at the end of the day, what makes this a great place is the people. This is a group of hardworking charitable people where the vast majority of the team, 93% are involved in our giving programs. And our job is to be the single best place to be a partner in the financial services industry. And with that, I want to thank the employees for an amazing year and the investors and analysts for all the time you've given us to understand what we're trying to do. And with that, let me turn it over to Jim.

Jim Zelter: Thanks, Marc. As you've heard us say before, one of our core tenants is excess return per unit of risk. After 12-plus years of low rates and relatively free money, the best investors will begin to reveal themselves. And strong investment performance is the foundation of our business and we take our responsibility to provide differentiating returns to our clients quite seriously. As we look out to 2023, we believe this is a particularly good time for Apollo to generate excess return. While other managers may be in a defensive position, we have been patiently waiting for this type of environment and we're confident there will be meaningful opportunities to deploy capital amid a heightened period of volatility and candidly a foggy capital markets backdrop.

Marc provided a high level update on our three key growth pillars, and I'd like to deep dive for a moment into origination. As we addressed at that Investor Day a short 16 months ago, a large portion of what we do is this high grade, fixed income replacement end of the market. Central to our strategy is the ability to originate a recurring supply of these durable assets. And one of the primary ways we do though is through these platforms, real operating businesses within a variety of industries. Platform origination is clearly a differentiated way to originate these investment grades assets at scale, which is needed to grow our retirement services business profitably and increasingly to third party accounts that want the same alpha in their portfolio.

Importantly, however, rather than expand HoldCo balance sheet resources, the capital used to purchase these origination platforms can be sourced via the normal course purchasing power of Athene's alt portfolio as well as AAA. At year end, our platform ecosystem was producing approximately 35 billion of annual volume and generating about 425 basis points of excess spread versus equivalent IG benchmarks. We've assembled this portfolio of 16 platforms across asset classes in sectors which had been acquired through a variety of funds we manage and also built organically, and we're now focused on scale and execution of those. Metaphorically speaking, we pay the tuition to develop this important capability of scale, which we think is a great competitive advantage or MO .

This advantage will expand following this week's or yesterday's announcement of the CS securitized products group platform, which has been renamed Atlas SP. This platform is a best-in-class asset-backed warehousing business, really a finance company of finance companies, with an extensive network of clients, an amazing 20-year track record of negligible losses. The industry-leading team at Atlas is excited to be working with Apollo. And through the closing process, it's become clear that the variety of counterparties also want to work with the Apollo ecosystem. Many investors are reaching out to us as they expand their private credit exposure from direct lending into a broad base of asset-based finance capabilities. We think this is the largely untapped part of the 40 trillion IG fixed income replacement market.

And simply put, we believe the opportunity to source resilient yield in asset-based finance is where sponsor finance was and private credit was 10 years ago. In addition to the three growth pillars, we began to execute on six additional strategic initiatives that we've mentioned past. We've organized our efforts and resources around these initiatives, and now '23 is focused on execution. In this competitive fundraising landscape, our innovative and differentiated product offerings we believe will stand out. And we're seeing early indications of those facts. And I'll mention a few here. We continue to be very optimistic on the growth of AAA or Apollo Aligned Alternatives. We're broadening the distribution system domestically through additional bank platform and a variety of other independent channels as well as globally to Asia and Europe.

To note, we're launching our European product platform in the coming months, designed to offer a full suite of options to individuals in Europe, and AAA will be the first product available on that platform. We've also begun marketing Athene Altitude . This is a product designed to offer a range of Apollo managed funds across this risk-reward spectrum, but to do so in a tax efficient vehicle. While still early, we raised 300 million in the fourth quarter from our first client, a third party insurance firm, to invest in AAA through Athene Altitude. Additionally, a couple of key organic initiatives in nascent asset classes are building scale. Our sponsor and secondary solutions platform, named S3, has gained momentum following a cornerstone investment from last year.

This overall business has committed or deployed over 13 billion of capital since 2020, mainly in fund finance but has been committed over 1 billion into equity and credit secondaries over the past six months. And we expect formally to launch fundraising for an equity secondaries fund in the second quarter and opportunistically raise capital for our credit secondaries fund ahead of a dedicated fundraise in 2024. We're seeing a similar story in our clean transition franchise. Since launching our sustainable investing platform about a year ago, we've committed or deployed over 6 billion of capital into these investments. And later this month, we will be adding a dedicated team for climate and infrastructure yield to further boost our origination capabilities across the board.

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And we anticipate launching fundraising for clean transition finance and opportunistic vehicles in the latter half of this year. Next, we're bringing in the investment toolkit that has made Athene and Athora successful to others in the retirement services industry. Our proprietary origination volume has grown, as Marc said, in consistency and diversity. And now we're reaching a point where we can distribute more of these assets to third parties who have the same fundamental needs. We are building on a strong foundation of existing relationships in that area. And over the next year, we aim to raise over $10 billion of capital from others in the retirement services space. And finally, we're replicating the successful sidecar structure we've had with MidCap and ADIP in a variety of other areas in our business and to do so in a simplified, cost effective manner to really scale and partner with the investors, as Marc mentioned, in the Apollo ecosystem.

Turning to our broader fundraising activities apart from these new six initiatives, our momentum on a variety of fronts is strong. In asset management, we had strong inflows and included 46 billion of third party fundraising, which doubled 2021 levels. In the fourth quarter specifically, total fundraising of 9 billion was driven by new capital for Athora income and incremental capital for a variety of drawdown fundraisers, co-investment capital, and in our global wealth, including 800 million for AAA. Looking to '23, we expect a record amount of capital from third party investors exceeding the strong levels achieved last year. And we're already in the market with a range of drawdown funds, including our fourth vintage European principal finance, our third infrastructure fund, as Marc mentioned, ADIP2 and certainly our 10th vintage of our flagship private equity fund.

Additionally, a variety of funds and manager accounts across the yield strategies that are currently raising capital, or will be later in the year similar to our Accord series as well as a variety of perpetual products, as Marc mentioned, in the global wealth channel, including the non-traded BDC, non-traded REIT and two interval funds. Regarding Fund X fundraising, I'm pleased to report that we are experiencing broad support from the existing shareholder investor base and gaining traction with new investors, especially from non-U.S. regions and the global wealth channel. Through January, we've received commitments approximately 15 billion. And with congestion dynamics in the market, it's difficult to predict the ultimate size of the fund and exact timing.

However, we expect to close on the majority of incremental commitments in the back half of the second quarter, and we believe the fund will land within striking distance of our target. Coming into the new year, we believe investors are focusing on managers with healthy portfolios who had less exposure to growth-oriented sectors, which certainly bodes well for our long tenured strategy. It's worth noting that our private equity fund portfolios outperformed the S&P by over 25% in 2022 and our flagship PE Fund IX appreciated 22% during the year. Revenue and EBITDA trends remain strong in those portfolios, up mid-teens percent year-over-year across the broader fund portfolios. Historically, and as you've heard, we've generated some of our best returns for investors and midmarket downturns and we're one of the few funds with a complete product toolbox.

Our proprietary financing capabilities have allowed us to execute transactions when the traditional markets are more restricted as they are now. And our flexible mandate across corporate carve-outs, public to privates in distressed allows us to pivot to more attractive opportunities. For example, Fund X began its investment period in October. We've already deployed 1 billion of capital into nine distressed positions through year end, as well as another 2 billion in a take private along other variety of funds, and a sizable chunk of capital to a structured financing. Moving to retirement services. As Marc mentioned, Athene had a spectacular year of organic inflows totaling 48 billion, including 11 billion in the fourth quarter. The most significant contributor to the fourth quarter was the retail channel, which was 7.5 billion, a new quarterly record.

And retail annuities are certainly in high demand industry-wide as principal protected products with attractive guaranteed yield are compelling in today's environment. Zooming in though, it's clear that Athene success is driven more than just the industry tied expanding distribution, differentiated asset origination and ample capital resources to support that robust growth, which has allowed us to generate record flows while writing business at compelling spreads. For '23, we expect another robust year of organic growth from Athene across all channels, with gross inflows exceeding 2022 levels and reaching new highs. Retail and flow insurance should remain the strongest but also benefit from a solid pipeline of new distribution relationships in both the U.S. and Asia.

And we also expect pension group annuity is likely to remain heightened as the funded status of many corporate pension plans continues to exceed 100%. And while the public FABN market remains less attractive, we're seeing more opportunities in private transactions that require our overall flexibility. Reflecting on the past year, we've certainly re-instilled a growth through all assets of our facets of our business and put the building blocks to execute our five-year plan in place. As we said, 2023 will be a pivotal year of execution and optimization. And we're seeing great momentum already. With that, let me hand it over to Martin.

Martin Kelly: Great. Thanks, Jim, and good morning, everyone. As Marc and Jim have highlighted, 2022 was a very successful year of growth and execution for Apollo. Amid a backdrop of significant market choppiness, our financial results demonstrate the strength and resiliency of our earnings streams. In our first full year post merger, the combination of our asset management and retirement services businesses proved increasingly valuable. FRE and SRE comprised 93% of total pre-tax earnings in 2022. And on average, we expect 90% or more of our earnings to be driven by stable recurring predictable earnings streams over the long term. This translates to a meaningfully less potential for volatility versus other businesses that may be more reliant on incentive and investment-based income streams.

Our business model is fully aligned with the growth of FRE and SRE inextricably linked and highly correlated. We intend to drive consistent and attractive earnings growth, regardless of the macro backdrop, in line with our stated goal from Investor Day of doubling earnings by 2026. 2022 was a solid proof point of our progress towards this goal, as we met or exceeded nearly all of our key financial and business targets, which we outlined on Page 4 of our earnings release. FRE of $1.4 billion in '22 grew 11% year-over-year, in line with our expectations, while we absorbed costs associated with significant investments in our next chapter of growth. Management fees increased 14% year-over-year, supported by strong fundraising from both our asset management and retirement services clients, as well as a solid pace of capital deployment.

As Marc mentioned, capital solutions fees reached a record quarterly $142 million in the fourth quarter, bringing full year revenue to $414 million, up approximately 40% year-over-year, an incredible result amid a turbulent capital markets backdrop, highlighting the quality of our team and the capabilities we've built. Finally, full year FRE margin of 54% was in line with our previously communicated guidance. In retirement services, normalized net spread reached 140 basis points and 123 basis points in the fourth quarter and for the full year '22, respectively, well above our initial 110 to 115 basis point guidance as the higher interest rate backdrop, more interesting investing climate, and robust organic growth trends drove upside to our expectations.

Athene's alternative investment portfolio returned 10.4% in 2022, very close to our 11% normalized assumption, driven by a broad-based strength across strategic retirement services platforms, origination platforms and fund investment returns. Entering 2023, we expect another year of strength across the businesses. I'll walk through some of the key building blocks. As previously communicated, we expect fee-related revenue growth of more than 20% in 2023. The bulk of this growth should be driven by management fees, resulting from a variety of new strategic growth initiatives that Marc and Jim walked through, robust organic inflows from Athene, strong capital deployment in yield and hybrid strategies, and additional capital raised for Fund X. Turning to capital solutions.

Fee revenue from this business far exceeded our expectations in 2022, growing approximately twice as fast as we originally expected. Given the strong outperformance, we currently see last year's level providing a good baseline for 2023, which is tracking very nicely versus our $500 million target by 2026. We see a healthy pipeline of transactions to support this revenue. Moving to expenses. We expect our rate of growth in total fee-related expenses to moderate as we progress through 2023 driving positive operating leverage versus our full year 2022 margin. We added almost 400 Apollo employees to our total headcount in 2022 following several previous years of significant headcount expansion. We've been very fortunate to attract top talent in the industry across investing, fundraising, product development, capital markets and enterprise solutions.

This has helped drive strong 2022 financial results and solid progress as we look forward on our growth initiatives. We expect that the bulk of our senior hiring is now behind us. Relatedly, we've seen a meaningful increase in our non-comp expenses to support this higher run rate level of employees as well as our strategic initiatives, which has materialized principally through growing occupancy and technology costs. Additionally, our travel and entertainment expenses have normalized back to pre-COVID levels. We're prudently managing discretionary expenses as we enter the new year, which should help drive a lower growth rate year-over-year in 2023. However, you should expect the fourth quarter of 2022 non-comp to be a good jumping off point for 2023.

Altogether, we expect FRE growth of 25% in 2023, equating to approximately $1.75 billion or slightly under $3.00 per share. Turning to retirement services, we expect another strong year of growth in spread-related earnings as Athene continues to fire on all cylinders. We generated extraordinary normalized SRE in the fourth quarter, which was driven by another year of record organic inflows, underwritten to spreads above our target returns, as well as historic interest rate tailwinds. These ingredients led to a truly remarkable performance. To an increasing degree now, as we look forward, we have the flexibility to choose how much we want to grow and how we want to fund that growth. Given the rising rate, wider spread and strong demand environment of last year, we leaned in and added tens of billions of dollars of highly profitable business that we believe will drive predictable and durable spread-related earnings for years to come.

We find Athene's growth in a highly capital efficient manner, utilizing its fortress balance sheet resources, which includes third party capital via the ADIP equity sidecars that Marc referenced. For every $100 of inflows sourced, we put up approximately $8 of capital. Last year, Athene contributed approximately 80% of that capital, as ADIP deployed most of its remaining dry powder. And as ADIP2 comes online, we expect greater utilization of third party capital to support incremental growth, likely double 2022's level or approximately 40%, which will make the business even more capital efficient than it already is today. In addition to increasing capital efficiency, ADIP provides external validation by sophisticated third party investors of Athene's core business, risk framework, fee structure and strong returns on capital.

Importantly, Apollo earns management fees on total gross assets within the Athene complex, including those managed on behalf of the third party investors in ADIP. Because of this mechanism, we are agnostic to the method of funding for Athene's growth from an asset management perspective, as fee-related earnings benefit dollar-for-dollar in either scenario. As we have emphasized before, SRE is a highly attractive running stream, and the economics of growing it represent a highly attractive return on group capital as we evaluate the highest and best uses of capital across the complex. The returns on capital are even more attractive with more equity sidecar funding, and that's another reason we intend to utilize it to a greater degree. We expect this effort will result in Athene's net invested assets growing by a mid-single digit rate in 2023.

As you know, we have benefited from higher rates due to an allocation to floating rate assets and the positive impacts on new money yields. With the forward curve signaling a flatter trajectory, we currently expect our normalized net investment spread to remain in the vicinity of the strong fourth quarter level, which we expect will underpin a normalized net spread of 135 to 140 basis points for the full year 2023. Combining our current expectations for organic growth, the use of ADIP equity, the investing environment and the interest rate backdrop, we expect normalized SRE growth of approximately 20% in 2023. And when combining FRE and normalized SRE, we expect year-over-year earnings growth of more than 20% in '23. As it relates to principal investing, we expect continued equity market volatility and relatively muted capital markets activity, at least in the first half of '23.

Although it's difficult to predict market trends with any accuracy, based on the visibility we have into our pipeline through the first half of the year, we currently expect PII to be below our multiyear average target of $1 per share in '23. If markets continue to improve, it's entirely possible we'll move more actively into a monetizing phase in the back half of the year. Now, finally, let me spend a minute on capital. As a reminder, we expect to generate $15 billion of capital to invest over 2022 to '26, including $5 billion to fund the base dividend of $1.60 per share, $5 billion for additional capital returned via opportunistic buybacks and dividend increases and $5 billion for strategic growth investments. In 2022, we spent nearly $1 billion of capital on the base dividend, about $350 million of capital on strategic investments, and over $300 million of capital for opportunistic share repurchases above ongoing stock comp immunization.

Given the line of sight we have into a strong earnings growth year, we intend to raise the annual dividend by 7.5% to $1.72 per share, starting with the first quarter 2023 dividend declaration. We also expect to be a regular buyer of our stock as we believe the intrinsic value remains highly compelling. In conclusion, we ended the year on a very strong note in what was a very difficult market backdrop. We're refreshed and focused on executing the next leg of our strategic five-year plan with great enthusiasm. And with that, I'll turn the call back to the operator for Q&A.

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