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Apollo May Raise $499 Million Selling at Discount to Peers

Apollo Global Management Chairman and CEO Leon Black
Apollo, the New York-based private equity firm led by Leon Black, seen here, is scheduled to offer 26.3 million shares for $17 to $19 each today, according to a regulatory filing. Photographer: Jonathan Alcorn/Bloomberg

Apollo Global Management LLC plans to raise as much as $499 million in its share sale this week, betting a recovery of capital markets will spur investors to buy the stock at a discount to Blackstone Group LP and KKR & Co.

Apollo, the New York-based private equity firm led by Leon Black, is scheduled to offer 26.3 million shares for $17 to $19 each today, according to a regulatory filing. Goldman Sachs Group Inc. is among the investors that will sell a partial stake. The midpoint price would value Apollo at 5.4 times adjusted earnings of $1.18 billion last year, compared with 14 times for Blackstone and 5.7 times for KKR, Bloomberg data show.

The revival of capital markets that began in 2010 has boosted valuations on Apollo’s holdings and enabled dealmaking after the worst financial crisis since the Great Depression. KKR, which listed its shares on the New York Stock Exchange after combining with its publicly traded European fund in July, gained 73 percent through yesterday. Blackstone closed at its highest level in almost three years, paring declines since its 2007 initial public offering.

“They see the valuations of their peers improving tremendously over a relatively short amount of time, and the cynic in me says they want to get while the getting is good,” said Tom Jalics, a senior investment analyst at the private-banking unit of KeyCorp in Cleveland, which oversees $25 billion. “The fact that their assets are linked to the equity markets in general obviously has been a boon to them.”

The share sale from Apollo has received more orders than the amount of stock being offered, two people with knowledge of the situation said today. It may price at the top or above the high end of the proposed range, said one of the people, who declined to be identified because the information isn’t public.

GNC, Qihoo

Apollo, GNC Holdings Inc., Qihoo 360 Technology Co. and Preferred Apartment Communities Inc. are attempting to raise as much as $1.08 billion in offerings this week, marking the biggest weekly number of deals in more than a month after the March 11 earthquake in Japan caused global markets to slump and at least 10 share sales worldwide to be shelved or scrapped.

Private equity firms, which are required to mark the value of their holdings to market quarterly, wrote down stakes during the stock market decline and later benefited in the recovery. That has left Apollo’s early backers without a return on their investment. California Public Employees’ Retirement System bought a stake for about $580 million in 2007, which had dropped in value to $240 million as of June 30. The share sale may value Calpers’ stake closer to the original price.

Asset Volatility

The volatility in asset values has led investors to place a higher value on more traditional asset managers such as Legg Mason Inc., which is trading at a multiple of 20 times adjusted earnings in the past 12 months. Analysts tend to discount private equity incentive fees, which are dependent on the performance of buyout funds, because the profits vary widely and are difficult to predict.

“Investors have a better understanding of private equity companies now that Blackstone has been public for over three years,” said Michael Kim, an analyst at Sandler O’Neill & Partners in New York. “Despite that, public investors will still discount the incentive fee the firms generate because it’s more volatile.”

Blackstone sold shares for $31 in June 2007, two months before the start of the credit market freeze, and closed at $18.93 yesterday. The firm, as well as Apollo and KKR, is working to diversify revenue beyond fees tied to buyouts.

New, Existing Investors

The offering by Apollo, which Black founded in 1990 as an investor in distressed companies, aims to raise as much as $342 million for the firm and $157 million for existing shareholders, according to its filing with the U.S. Securities and Exchange Commission. Goldman Sachs, JPMorgan Chase & Co. and Bank of America Corp. are leading the sale, according to the filing. Underwriters may buy 3.94 million additional shares from Apollo by exercising an overallotment option, the prospectus showed.

The earnings multiples for buyout firms are based on a measure called economic net income, which doesn’t conform to generally accepted accounting principles, or GAAP. Analysts use that measure because it doesn’t include some costs such as equity-based compensation and expenses associated with moving to a publicly traded company from a private partnership.

Apollo may have a market capitalization of $6.43 billion after the offering, assuming the $18 midpoint price. The firm had adjusted ENI of $1.18 billion for 2010, according to its prospectus. KKR, with a market value of $12.2 billion, had ENI of $2.14 billion last year, according to a filing with the SEC. Blackstone, with a market value of $22.5 billion, reported ENI of $1.58 billion for the period.


U.S. initial share sales have raised $11.8 billion so far this year, more than triple the $3.8 billion raised in the first quarter of 2010, data compiled by Bloomberg show. That compares with 2008 and 2009, the worst two years for new stock sales since 2003.

GNC, the Pittsburgh-based retailer of vitamins and sports nutrition products owned by Ares Management LLC and the Ontario Teachers’ Pension Plan, is attempting to raise as much as $382.5 million. The company is offering 22.5 million shares at $15 to $17 each, according to an SEC filing and Bloomberg data. Goldman Sachs and JPMorgan are leading the deal.

Proceeds of the offering will be used to redeem preferred stock, reduce debt and pay management fees to Ares, the prospectus showed. GNC’s shares will trade on the NYSE under the symbol GNC.

Qihoo, the Beijing-based provider of computer anti-virus products and Web browsers, is seeking to raise $151.4 million selling 12.11 million American depositary receipts at $10.50 to $12.50 each, its filing with the SEC showed.

Product Development

The midpoint price of $11.50 values Qihoo 360 at about 25 times 2010 sales, more than five times the average of 4.7 among 26 U.S.-traded Chinese Internet companies, data compiled by Bloomberg show.

Investors in Qihoo 360 include venture capital firms Highland Capital of Lexington, Massachusetts, and Menlo Park, California-based Sequoia Capital, according to the share-sale prospectus. UBS AG and Citigroup Inc. are leading the offering.

Qihoo 360 will use the proceeds for product development and acquisitions, the filing said. The ADRs will trade on the NYSE under the symbol QIHU.

Preferred Apartment Communities, the Atlanta-based real-estate investment company set up to buy multifamily properties in the U.S., will attempt to raise $45 million in an offering led by Wunderlich Securities Inc. The shares will trade on the NYSE Amex under the symbol APTS.

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