Apollo Global Management LLC, the private equity firm that went public last year, said fourth-quarter profit fell 66 percent as market swings hurt its private equity holdings.
Economic net income after taxes, a measure of earnings excluding some compensation costs tied to its initial public offering, declined to $302 million, 80 cents a share, from $881.8 million, or $2.52, a year earlier, New York-based Apollo said today in a statement. The shares fell the most in almost two months.
Apollo joins KKR & Co. and Blackstone Group LP in reporting lower profit as market volatility eroded investment income. Apollo, led by Chief Executive Officer Leon Black, is seeking investment opportunities outside of its traditional leveraged-buyout business to reduce its ties to volatile private equity earnings.
The firm’s economic net income doesn’t comply with U.S. generally accepted accounting principles. The net gain under those standards shrank to $10.9 million, or 5 cents a share, in the quarter from $206.3 million, or $1.77, a year earlier.
Apollo fell 6.1 percent to close at $14.40 in New York trading, the biggest full-day decline since Dec. 16. The shares have fallen 24 percent from their March 29 IPO price of $19. Black said this month his firm had “miserable” timing for its offering as Europe’s sovereign-debt crisis fueled market volatility.
Like their competitors at Blackstone and KKR, Black and co-founders Joshua Harris and Marc Rowan have expanded the firm’s portfolio with credit investments and real estate purchases. Those businesses tend to deliver more predictable profits than private equity.
Earnings from private equity investments, Apollo’s biggest business by assets, fell 70 percent to $232.4 million for the quarter, while profits in its capital markets division rose 8.6 percent to $139.6 million for the three months ended Dec. 31 compared to the same period last year. The economic net loss in the real estate business widened to $15.4 million from $14 million.
While declining values in Apollo’s private equity holdings hurt earnings, the buyout unit drove the company’s 46-cents a share payout to shareholders. Apollo funded the distribution through sales of portfolio companies as well as a dividend from chemical company LyondellBasell Industries NV.
The acquisition of Gulf Stream Asset Management LLC in the fourth quarter and new deposits at the capital markets unit fueled an increase in assets under management. Assets rose 16 percent in the three months to $75.2 billion as of December 31. Apollo raised about $259 million for its private equity unit during the quarter.
Apollo agreed in December to buy Stone Tower Capital LLC, adding $17 billion in credit assets and making capital markets its biggest business unit, with about $39 billion under management. Citigroup Inc. raised a $436.7 million collateralized loan obligation for Apollo, four people with knowledge of the deal said this month.
“We don’t think it’s a particularly good time to do buyouts because putting equity at the bottom of a leveraged capital structure in an uncertain macro environment isn’t an attractive risk-reward,” Sanjay Patel, head of Apollo’s international private equity unit, said in November at the Super Investor conference in Paris.
Private equity firms pool investor money to buy companies, using mostly debt, with the intention of selling them or taking them public later for a profit. They typically charge an annual management fee of 1.5 percent to 2 percent of committed funds and keep 15 to 20 percent of profit from investments.
Founded in 1990, Apollo participated in some of the biggest deals of the leveraged-buyout peak, including the 2007 acquisition of real estate group Realogy Corp. and the 2008 takeover of casino company Caesars Entertainment Corp., then known as Harrah’s.
Caesars raised $16.3 million on Feb. 8, selling less than 2 percent of its shares in an IPO. Apollo and TPG Capital, which led the buyout in 2008, didn’t plan to sell shares in the offering.