The executives of Apollo Global Management Inc. sought to assuage investor concerns about the performance of alternative investments held in its Athene annuities business as that unit weighed on second-quarter earnings.

Athene's profit fell 11% to $710 million, driven by a decline in alts revenue. That resulted from the poor performance of several equity investments in other insurance companies held by Athene, including Catalina, a property and casualty insurer that will be spun off because the business is less attractive, Chief Executive Marc Rowan said Thursday in a conference call with analysts.

“The vast majority of portfolio alts are doing exactly what they're supposed to do, and you're looking at irregularities in some of the strategic stocks,” he said, noting that Catalina is the only such company that's underperforming. “It's a relatively small stock and it's in the process of transitioning its business.”

Apollo shares fell 7.5% to close at $115.97, the biggest drop since March last year.

Interest rate hedging costs and unwinding of higher annuity contracts issued in recent years also weighed on Athene during the three months ended June 30, and that trend is expected to continue in the current quarter, Rowan said. The firm expects mid-single-digit earnings growth for Athene this year and a return to double-digit growth next year, he said.

Adjusted net income was $1.01 billion, little changed from a year ago, Apollo said in a statement STATEMENT. That equates to $1.64 per share, falling short of the $1.75 average estimate of analysts polled by Bloomberg.

Optimistic tone

Apollo executives struck an upbeat tone for private equity, noting the firm announced multiple acquisitions in the past 30 days — including Travel Corp., parcel delivery company Evri and a concurrent deal for IGT Gaming and Everi Holdings Inc. The firm expects to fully deploy its 10th major private equity fund by the end of next year and begin fundraising for its 11th, Apollo co-president Scott Kleinman said on the conference call.

AAA, the firm's equity product for individual investors, has a net asset value of $17 billion and has returned about 10% over the past 12 months, Rowan said. Apollo expects AAA to eventually become its largest fund.

Apollo's fee-related earnings rose 17% to $516 million, driven by higher management fees and record revenues in its capital solutions business. The firm invested $70 billion during the quarter, more than double a year earlier, joining rivals Blackstone Inc. and KKR & Co. to capitalize on an improved deal environment.

Assets under management rose 13% to $696 billion, with $39 billion inflows during the second quarter. Loan assets increased by 16% to 521 billion dollars. Apollo raised $6 billion for the second iteration of a co-investing strategy with Athene.

Income from the sale of private equity assets improved, with Apollo reporting $33 million in principal investment income for the period, a 65% increase from a year earlier.

Other highlights of the second quarter:

• Equity AUM was flat at $105 billion, while hybrid AUM grew 13% to $70 billion
• Direct originations rose 3.8%, while major European financials fell 1.6%
• The hybrid value portfolio rose 4.8% and private equity core gained 1.6%
• Dry powder was $68 billion at mid-year