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Apollo Global’s Profit Falls 84% on Decline in Holdings

Apollo Global Management LLC (APO), the private-equity firm run by Leon Black, said second-quarter profit fell 84 percent as global market declines hurt its share of profits from investments.

Economic net income after taxes, a measure of earnings excluding some compensation costs tied to Apollo’s IPO last year, fell to $18.7 million, or 5 cents a share, from $118 million, or 31 cents, a year earlier, New York-based Apollo said today in a statement. Analysts had expected a loss of 17 cents a share, according to the average of 10 estimates in a Bloomberg survey.

Apollo follows Blackstone Group LP (BX) in reporting lower profit for the quarter as market swings hurt the value of some holdings and slowed deals. Black, the chief executive officer, is seeking investment opportunities outside of the traditional leveraged-buyout business to reduce reliance on volatile private-equity earnings.

Lower valuations in the firm’s sixth private-equity fund, which began investing in 2006 with more than $10 billion, “should preclude Apollo from distributing its share of interest and dividends until valuations rebound,” Howard Chen, an analyst at Credit Suisse Group AG, said in a note to clients before earnings were released.

Apollo fell 1.6 percent to $13.77 at 9:32 a.m. in New York. Before today, the shares advanced 13 percent this year through yesterday. They’ve fallen 26 percent from their March 2011 initial offering price of $19.

Carried Interest

Apollo’s economic net income doesn’t comply with U.S. generally accepted accounting principles. The net loss under those standards, known as GAAP, narrowed to $41 million, or a loss of 38 cents a share, from a loss of $51 million, or 46 cents, a year earlier.

Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about six years, overhaul and then sell them and return the funds with a profit after about a decade. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments, known as carried interest.

Apollo’s carried interest income from private equity dropped to $5.7 million from $139 million amid global declines in the stock market.

Deals Decline

Assets under management rose 46 percent to $105 billion from $71.7 billion a year earlier, driven by increases in Apollo’s capital-market unit.

Worldwide, the value of private-equity deals announced in the second quarter fell 36 percent to about $101.5 billion from a year earlier, with leveraged buyouts declining 39 percent to about $21.7 billion, according to data compiled by Bloomberg.

“We live in a very uncertain and unstable world,” Black said in May during a panel discussion at the Milken Institute Global Conference. “The U.S. has a very tepid recovery going, at best.”

The value of a private-equity firm’s buyout holdings affects economic net income, or ENI, because the metric relies on a quarterly “mark-to-market” valuations of those investments. Accounting rules require the firms to value their portfolio holdings each quarter.

Apollo won a month-long bidding war during the quarter for Great Wolf Resorts Inc., the Madison, Wisconsin-based operator of water parks across North America. The deal was completed in May at a value of about $740 million, 57 percent more than Apollo’s initial offer on a per-share basis.

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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