Leon Black, who made billions by buying up debt of companies in the U.S. and Europe that others deemed worthless, is turning to emerging markets as the next source of growth for his $161 billion money management firm.
Apollo Global Management LLC, the private equity and distressed debt specialist co-founded by Black, is starting a unit to primarily buy investment-grade and high-yield corporate debt from Latin America and Asia, according to Tolga Uzuner, the 41-year-old heading the group. The New York-based firm will also invest in infrastructure, project financing and special situations, said Uzuner, a former managing director in the London branch of JPMorgan Chase & Co.’s chief investment office.
Apollo and firms such as Oaktree Capital Group LLC that have largely focused on developed-market credit, are turning to emerging markets, where the amount of corporate debt outstanding tripled to $1.1 trillion over the past five years, according to data from Bank of America Merrill Lynch. For Apollo, which increased its credit business to more than $100 billion in assets from $4 billion seven years ago by scooping up everything from distressed assets to leveraged loans, this is one of the largest untapped frontiers.
“There was a strategic decision that this was an asset class that has the potential to move the needle at Apollo,” said Uzuner. “A lot of the credit-underwriting skills and requirements for emerging markets are similar to those in the firm’s other areas of focus.”
This will be the first time Apollo has created funds dedicated to developing countries, though some investments were previously made from buyout and credit funds, said Uzuner, who Apollo recruited in October as he was looking to raise money for his own hedge-fund firm, Brocade Capital Management.
Uzuner left JPMorgan last year, where his duties included investing the bank’s excess cash in high-quality emerging market corporate debt. The investment office was at the center of the London Whale trading strategy that caused a $6.2 billion trading loss for the New York-based bank. JPMorgan has said it will fold the operation into its Treasury unit, according to an internal memo obtained yesterday by Bloomberg. Uzuner, who also worked at Bankers Trust and Credit Suisse Group AG, wasn’t involved in the trades.
The U.S. Federal Reserve triggered a pullback from emerging-markets in June, when the central bank signaled it would reduce stimulus prompting international investors to pull money out of assets considered more risky. The shift accelerated as slowing economic growth in Brazil and China led to ratings cuts and an increase in non-performing loans, with money only recently returning.
Apollo also hired Stuart Firth, who worked at Brocade and previously ran European distressed-debt trading at Credit Suisse, and Richard Martin, founding partner of Longwood Credit Partners LP. The firm plans to start multiple funds during the next several years, said Uzuner, declining to comment on the potential size of Apollo Emerging Markets LLC.
Apollo is expanding as some of the largest emerging economies -- including Brazil -- decelerate, geopolitical tensions escalate and corporate defaults increase, often in countries where legal frameworks can heighten investment risk.
“Even places like Chile and Brazil, which are very highly rated countries, have encountered a lot of defaults for a variety of reasons, mainly failed government policies,” said David Hinman, the chief investment officer of SW Asset Management LLC, a Newport Beach, California, firm that invests in emerging-market corporate debt.
The challenges in those markets were highlighted by one of Carlyle Group LP’s first investments in Brazil. Real-estate developer Urbplan Desenvolvimento Urbano SA, has been hit with hundreds of lawsuits, in part for failing to complete home sites across Brazil, according to court and regulatory filings. Partners at the private equity firm have reached into their own pockets to help rescue the investment.
The dollar-based default rate on Latin American corporate debt soared to 7.6 percent last year from 2.5 percent in 2012 and 0.8 percent in 2011, according to data from JPMorgan. Hinman estimates there is about $50 billion of distressed debt now available in the region, including some $3.6 billion of dollar-denominated debt issued by Eike Batista’s Oleo & Gas Participacoes SA, the Rio de Janeiro-based energy company that filed for bankruptcy protection in October. The average yield on a JPMorgan index of emerging market corporate bonds rose to 6.1 percent in September from a low of 4.4 percent in January 2013. The yield has since dropped to 5.4 percent.
“There are a lot of unknowns and a lot of headline risk,” said Ted Neild, chief investment officer of Gresham Partners LLC, which manages almost $5 billion for some 80 family offices and set up Gresham Emerging Markets Strategies LP to increase its allocation to the sector. “But if we can get the right companies at the right prices, we think there is a good long-term opportunity.” The Chicago-based firm will primarily invest in stocks instead of bonds.
Guggenheim Partners LLC, a New York and Chicago-based manager that oversees more than $1 billion of emerging-market debt in separate accounts, anticipates continued pressure on the sector. Still, it plans to increase the number of debt and equity funds it devotes to developing economies. The firm is adding capabilities as most other firms don’t commit new resources, Scott Minerd, global chief investment officer for Guggenheim Partners LLC, said in a telephone interview.
A small number of distressed debt specialists are joining that bet. Oaktree has raised $842 million for emerging market corporate debt and has about $1 billion under management in emerging-market equities, the Los Angeles-based firm said in February. Cerberus Capital Management LP, the New York-based firm run by Stephen Feinberg, incorporated Cerberus South American Investments LLC this year to make potential investments in the region, according to a regulatory filing.
“Our emerging market debt strategy may well become one of the most substantial parts of our business,” John Frank, Oaktree’s managing principal, said on an earnings call in February. The firm had $83.6 billion in assets under management as of Dec. 31, a figure that has more than doubled since 2006.
Apollo prides itself on being a contrarian. It got its start from one of the best-known distressed debt opportunities of the early 1990s, when the firm received financial backing from the French bank Credit Lyonnais to bid on a portfolio of junk bonds held by the insolvent Executive Life Insurance Co. Black, a former Drexel Burnham Lambert Inc. banker, won the auction with a bid of $3.25 billion, or about 50 cents on the dollar, and ultimately reaped fees totaling as much as $350 million from the deal.
Last year the firm exited its investment from LyondellBasell Industries NV, capping a gain of more than $10 billion, the largest ever for a private-equity deal, after buying debt in the chemicals maker at the height of the financial crisis.
Apollo now oversees $161 billion, as of Dec. 31 and Black has an estimated net worth of $6.2 billion, according to the Bloomberg Billionaires Index. Apollo shares fell 2.5 percent to $31 at the close in New York, paring the gain to 29 percent in the past year.
“It’s clearly a large market opportunity,” Uzuner said. “Emerging markets is deemed an asset class that has size, depth and breadth.”