For investors seeking more yield than one can earn in public investment-grade bonds, the Apollo Diversified Credit Fund is a compelling choice. Apollo’s strategy offers exposure beyond traditional private credit with a disciplined underwriting process proven over many cycles.

ADCF’s advantages include Apollo’s proprietary origination platform and credit underwriting capabilities. That has enabled the fund to generate strong yields while investing in assets with low historical loss rates. Apollo’s access to low-cost capital has allowed the fund to enhance returns through leverage.

In this article, we will discuss the advantages of the Apollo Diversified Credit fund relative to other offerings, including a superior return history, lower volatility, and a strong 11.71% return in 2024. We also explore how investors can access the share classes that align with their liquidity needs and time horizon.

ADCF Portfolio Overview

As of December 2024, ADCF manages $1.3 billion in assets with a leverage ratio of 12.9%. The portfolio has both a weighted average yield and a 12-month distribution rate of 9.1% (for Class I shares). Overall, the fund’s portfolio is characterized by a conservative leverage ratio and significant private credit exposure.

As of month-end, 78% of the portfolio is allocated to private credit assets, with 68% of the fund’s assets allocated to corporate direct lending. This is a private credit strategy in which Apollo works directly with companies to issue loans, bypassing banks and public markets. The fund’s other private credit strategy is in asset-backed lending, which accounts for 10% of the portfolio. The assets underlying these loans include student loans, commercial real estate, and hard assets.

21% of the portfolio is invested in performing public credit, which are liquid senior loans with alpha generation potential. A small amount of the portfolio is also allocated to structured credit and dislocated credit opportunities. Historically, these strategies have been a larger component of the portfolio and may become more important as the credit environment shifts.

Key Advantage: Asset Quality

Setting ADCF apart is the quality of the fund’s assets. ADCF’s portfolio is largely composed of unrated or sub-investment-grade assets. Apollo’s alpha, however, lies in selecting and managing these assets such that their loss rates are competitive with (and in many cases below) investment-grade credit.

The quality of the fund’s assets is particularly apparent in ADCF’s corporate direct lending allocation. Historically, direct lending strategies have focused on middle-market companies, with average EBITDA levels ranging from $25 million to $75 million. Apollo targets larger borrowers, however, with an average portfolio company EBITDA of $259 million. Larger companies tend to be more stable, less risky, and with more valuable assets to serve as collateral.

ADCF’s direct loans are entirely senior secured with a conservative average loan-to-value ratio of just 41%. Between 2009 and October 2024, Apollo’s corporate credit business had a loss rate of 3 basis points, benefiting from fewer defaults and higher recoveries compared to the broader market. In comparison, the expected annual loss rate on BBB corporate bonds averages about 10 basis points.

The portfolio’s interest coverage ratio of 2.14x is lower than the high-yield median. Despite this, the portfolio has maintained strong credit performance. Since Apollo began managing the fund in Q2 2022, ADCF has had only one position default for a relatively small loss of 4 basis points. 

Within asset-backed lending, Apollo has a low historical annualized loss rate of approximately 1.3 basis points. Some assets, like residential mortgages, have loss rates as low as half a basis point. These figures demonstrate that the portfolio does not earn higher yields by taking on higher credit risk, as these loss rates are in the proximity of investment-grade debt.

The fund’s public bond strategy benefits from Apollo’s ability to deploy capital when markets sell off for non-fundamental reasons. This allows the fund to acquire competitive assets for attractive prices. The performing credit allocation is 96% senior secured.

Finally, ADCF does not generate higher yields by taking on excessive interest rate risk. Across the fund, asset weighted average life ranges between 3 to 5 years. Due to the portfolio’s significant floating-rate exposure, however, the fund has a relatively short duration of 1.2 years. Risk is further reduced through strong diversification. Software company debt makes up 13.4% of the portfolio and no other industry exceeds 10%.

Understanding Apollo’s Origination Platform

Apollo has been able to assemble this credit portfolio due to their origination platform. The firm has a proven track record of originating direct loans for over 20 years. The company’s ability to source and close off-market credit opportunities is amongst the best in the industry.

Apollo operates 16 proprietary credit platforms across verticals like real estate, consumer finance, and equipment finance. In the last 12 months to Q3 2024, Apollo originated $194 billion in volume, largely in direct lending. By 2029, Apollo expects this figure to grow to over $275 billion.

Due to their origination platform, Apollo can deploy capital faster and at a lower cost than competitors relying on middlemen. Across the entire portfolio, ADCF aims to deliver returns of 100 to 300 basis points above a comparable-risk index of high-yield bonds and leveraged loans. Apollo’s origination expertise contributes to this additional spread.

These benefits are enhanced by Apollo’s access to long-term capital, facilitating fewer liquidity pressures than other managers relying on short-term funding markets. The company’s Athene retirement services platform provides a stable source of capital to Apollo’s funds. This allows Apollo to hold fundamentally sound positions until maturity with less sensitivity to technical factors.

ADCF Historical Performance & Correlation

All performance figures cited in this section are net of fees. Return data reported as of January 16, 2025.

These advantages have resulted in historical outperformance for Apollo’s Diversified Credit Fund. Between 2020 and 2025, the fund earned annualized returns of 5.42% for Class I shares. LQD, an ETF that tracks an index of investment-grade corporate bonds, has returned -0.49% over that same period. HYG, which tracks lower-quality high-yield bonds, has returned 3.02%.

An investor who allocated $1 million to ADCF five years ago would end up with an additional $318,770 in wealth compared with an investor in LQD, reflecting a 32% higher final investment value. Even compared to HYG, which takes on more credit risk, an ADCF investor would have ended up with an additional $143,325 (or 12%) in final wealth. These results are summarized in the chart below.

This outperformance has been particularly notable in recent years. In 2024, ADCF returned 11.71%, compared with just 0.86% and 7.97% for LQD and HYG, respectively. ADCF has benefited from rising rates due to the portfolio’s majority floating-rate exposure. Interest income, not capital gains, remains the core driver of these returns.

In a given year, Apollo expects interest income to account for 75-80% of the fund’s returns. This target aligns with ADCF’s focus on income generation rather than speculative growth. Moreover, this income is overwhelmingly in paid cash, with just 1.5% of portfolio income attributable to payment-in-kind in 2024. 

As of December 2024, the fund’s trailing twelve months’ distribution rate was 9.1%. That is 482 basis points above the current market yield on a 5-year US Treasury. Investment-grade corporate bonds, which have comparably credit quality, currently have a spread of 84 basis points above Treasuries. The high-yield corporate spread, which has a lower credit quality than ADCF, is 267 basis points.

This means that investors earn approximately 4% more than the current investment grade corporate aggregate index yield by investing in Apollo’s portfolio. Investors also earn about 2% more than investing in an index of high-yield bonds, despite their lower credit quality. The Apollo fund has also exceeded some notable alternative credit peers and with a longer track record of performance. The KKR Credit Opportunities fund, for instance, has a 4.56% three-year annualized return and a 9.51% return in 2024, both of which are below ADCF.

The fund has managed to achieve these returns while also offering diversification from traditional credit indexes. From inception to December 2024, the fund’s correlation to the Bloomberg US Aggregate Bond Index was just 0.42. The fund had a higher, but still imperfect, correlation of 0.84 to the ICE BofA US High Yield Index.

ADCF: Risks & Fees

The Apollo Diversified Credit Fund offers compelling historical returns, strong credit quality, and lower volatility than peers. Investors should be aware of several considerations before investing, however.

As an interval fund, ADCF faces unique liquidity limitations compared to mutual funds and ETFs. While investors can purchase shares daily, they can only redeem shares on a quarterly basis. The fund is also limited to redeeming 5% of total shares outstanding each quarter. If the total amount of withdrawal requests exceeds this amount, shares will be redeemed on a pro rata basis.

In terms of investment risk, the fund’s portfolio is almost 90% composed of floating-rate debt. Global interest rates are expected to fall in 2025, with markets currently anticipating two Fed rate cuts this year. This could have a multifaceted impact on fund returns. While falling rates will likely reduce portfolio yield, they could also make it easier for portfolio companies to service their debt, contributing positively to performance.

Floating-rate exposure should also be viewed in the context of an investor’s portfolio. Because public bonds are generally fixed rate, many investors are underallocated to floating-rate assets. Given ADCF’s short duration and majority floating-rate portfolio, the fund has significant diversification benefits within an investor’s income-generating allocation.

Some investors may also consider the fund’s fees high. Annual expenses amount to 4.37% of net assets on Class I shares. 236 basis points of these fees, however, are attributable to interest expenses on borrowed funds. Because Apollo can earn a higher yield on these funds than they pay, such expenses result in a positive spread.

The remaining amount is almost entirely attributable to management fees and fund operating expenses, which are 200 basis points after accounting for waived expenses. The fund has an agreement in place with Apollo to cap management and operating expenses at 2% of net assets for Class I shares. Certain classes of shares may also be subject to sales load fees upon initial investment and additional ongoing fees.

Because Apollo internalizes so much of the credit process, from origination to funding to management, the fund naturally incurs more expenses. Overall, however, we believe these expenses to be return-enhancing in the context of Apollo’s investment platform. Reported performance figures are net of fees, so these expenses do not impact our preceding analysis.

Conclusion

ADCF is a strong choice to generate high current income while diversifying an investor’s credit allocation. Due to the fund’s existing asset base and Apollo’s origination capabilities, we expect it to continue outperforming peers over the next several years. Although the fund is not without risks, we believe these risks are adequately compensated for due to higher spreads than public market investments.

Each of the fund’s four share classes has different expense levels and minimum investment requirements: Class I (CRDIX), Class A (CRDTX), Class C (CGCCX), and Class L (CRDLX). Class I shares require a $1 million minimum initial investment but have the lowest fees. Class A, C, and L shares have a $2,500 minimum for regular accounts and a $1,000 minimum for retirement accounts. These three share classes have varying levels of upfront and ongoing expense levels to best fit investor preferences.

If you’re interested in investing in the Apollo Diversified Credit Fund or need help determining which share class best suits your goals, we invite you to contact us for a consultation. At Sandro Wealth Management, we specialize in helping clients identify and benefit from private market opportunities.

Disclaimer

Sandro Wealth Management, LLC (“Sandro Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Sandro Wealth and its representatives are properly licensed or exempt from licensure.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Targets are estimates based on certain assumptions and analysis made by the Advisor. There is no guarantee that the estimates will be achieved.

Although bonds generally present less short-term risk and volatility risk than stocks, bonds contain interest rate risks; the risk of issuer default; issuer credit risk; liquidity risk; and inflation risk.

Diversification does not ensure a profit or guarantee against loss. Past performance shown is not indicative of future results, which could differ substantially.