May 6 (Bloomberg) -- Apollo Global Management LLC, the private-equity firm run by Leon Black, reported first-quarter profit that beat analysts’ estimates as the value of its fund holdings climbed.
Economic net income after taxes, a measure of earnings excluding some compensation costs tied to Apollo’s 2011 initial public offering, increased 76 percent to $741.3 million, or $1.89 a share, from $422.3 million, or $1.10, a year earlier, New York-based Apollo said today in a statement. Earnings beat the $1.23 average estimate of 11 analysts in a Bloomberg survey.
A 10 percent gain in U.S. stocks during the quarter and a rebounding real estate market helped lift the firm’s fund holdings, boosting fees for managing them. Among Apollo’s biggest holdings, Charter Communications Inc. rose 37 percent in the three months and brokerage owner Realogy Holdings Corp. increased 16 percent. Apollo sold shares in Charter and chemical maker LyondellBasell Industries NV in follow-on deals.
Apollo had a “healthy level of capital raising, deployment and distributions to investors,” said Roger Freeman, an analyst at Barclays Plc in New York.
Apollo rallied before falling 0.3 percent in the final minutes of New York trading to close at $26.50. The shares have gained 53 percent so far this year, outpacing the 21 percent increase in the 20-member Standard & Poor’s index of asset managers and custody banks.
The firm’s economic net income differs from U.S. generally accepted accounting principles. The net gain under those standards, known as GAAP, rose to $249 million, or $1.59 a share, from $98 million, or 66 cents, a year ago.
The value of Apollo’s private-equity holdings increased 14 percent in the quarter, outpacing the 7.9 percent gain at Blackstone Group LP, the largest so-called alternative-asset manager. KKR & Co. said last month its portfolio appreciated 5.9 percent in the first three months of the year, and Fortress Investment Group LLC said last week its buyout holdings gained 5.2 percent.
“We think it’s a fabulous environment to be selling,” Black said during a panel discussion last week at the Milken Institute Global Conference in Beverly Hills, California, adding that Apollo has sold about $13 billion of assets in the past 15 months. “We’re selling everything that’s not nailed down in our portfolio, and if it is nailed down, we’re refinancing it.”
The value of a private-equity firm’s buyout holdings affects economic net income, or ENI, because the metric relies on quarterly “mark-to-market” valuations of those investments. Accounting rules require the firms to value their portfolio holdings each quarter.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit after about 10 years. 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.
Assets under management at Apollo were $114.3 billion as of March 31, a 0.8 percent increase from the end of 2012 as the firm raised $1.2 billion and distributed $3.4 billion.
Apollo, like competitors Blackstone and KKR, has sought investment opportunities outside of traditional leveraged buyouts to attract more capital and reduce reliance on volatile private-equity earnings. Blackstone and KKR, both based in New York, reported first-quarter profits that beat analysts’ estimates as the value of their buyout portfolios rose.
Apollo joins KKR and Carlyle Group LP in raising large buyout funds this year. Apollo is preparing to hold a first close on more than $5 billion by the end of May for Apollo Investment Fund VIII LP, which is seeking $12 billion, according to two people with knowledge of the matter. KKR is targeting $8 billion for a pool focused on North America, and Washington-based Carlyle is planning to raise $10 billion for a U.S. flagship fund.
Apollo’s current flagship pool, Fund VII, was generating a 28 percent net internal rate of return as of March 31, the firm said today. That fund started in 2008 with $14.7 billion. The $10.1 billion Fund VI, which started investing in 2006, was producing a 10 percent return.
The firm said it will pay a distribution of 57 cents a share on May 30.
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