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Apollo Latest Fund Offers Clients Bigger Share of Fees

Apollo’s Next Fund Offers Clients Bigger Share of Company Fees
Leon Black, chairman and chief executive officer of Apollo Management LP, speaks at the 2010 Milken Institute Global Conference in Los Angeles. Photographer: Jonathan Alcorn/Bloomberg

Apollo Global Management LLC, the private-equity firm run by Leon Black, will give investors a larger share of fees levied on companies held in its next flagship fund, according to a marketing document obtained by Bloomberg News.

Apollo Investment Fund VIII LP, which is seeking $12 billion, will direct 80 percent of fees it charges portfolio companies to clients, the document shows. The prior fund, which raised $14.7 billion in 2008, offered 68 percent, according to the limited-partnership agreement for that fund. The share credited to investors is used to pay down the management fee owed to New York-based Apollo.

Charles Zehren, a spokesman for Apollo at Rubenstein Associates, declined to comment on the fund terms.

Private-equity firms charge the companies they own fees for services including consulting, investment banking and advice. Some clients have protested the fees, saying they reduce the value of holdings and provide a source of revenue for firms that isn’t linked to investment performance.

In response, buyout firms have increased the portion of the fees going to investors to as much as 100 percent as they compete for money in a crowded fundraising environment. Firms have been less willing to make broad concessions on management fees, which are based on fund assets, even as they offer discounts to win large commitments and to encourage investors to join initial closes.

Large Commitments

Apollo is keeping its management fee consistent with the prior fund, charging 1.5 percent on the first $7 billion in commitments and 1 percent on total pledges that surpass $7 billion. It will give fee breaks for larger commitments, reducing the management fee by 10 basis points a year for checks of $250 million and by 20 basis points for $500 million.A basis point is one hundredth of a percent.

Under the fund terms, the firm can decide to add other thresholds for other investors.

The fund will take 20 percent of investment profit, the same as its predecessor, after an 8 percent preferred return is met.

The new fund will invest in distressed assets, corporate carve-outs and opportunistic buyouts. Apollo believes it can find value in distressed debt as the economic environment remains uncertain. It’s also focusing more on specialized buyouts such as carve-outs of company units and “investments that are less correlated to broader economic trends,” the firm said in a cover letter accompanying the documents. It likes natural resources, saying it can purchase physical assets at discounts to where they trade in the financial markets.

Investment Returns

Founded in 1990, Apollo managed $110 billion of assets as of Sept. 30. The firm’s private-equity funds have generated a 25 percent net internal rate of return since inception, according to the sales documents.

Fund VII was generating a 26 percent return rate as of Sept. 30, after taking advantage of distressed opportunities that arose from the 2008 financial crisis. The firm’s $10.1 billion Fund VI, which invested during the buyout boom from 2006 to 2008, was producing an 8 percent internal return.

The firm realized $27 billion of proceeds and had an additional $11 billion of value in publicly trade investments as of Nov. 1 across its last three funds, according to the cover letter. Over the last 18 months, those funds have realized about $8 billion of proceeds as of the same date.

The firm recently realized $664 million of proceeds through a block trade of a portion of its position in chemical company LyondellBasell Industries NV, according to the marketing document. Portfolio companies that have held initial public offerings this year include Realogy Holdings Corp., a provider of real estate and relocation services; Rexnord Corp., an industrial company; and Berry Plastics Group Inc., a packaging company. Another holding, Smart & Final Inc., signed an agreement this month to be sold to Ares Management LLC.

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