Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Apollo Global Management's shareholders have an unusual reason to applaud the firm: It didn't do a deal. 

The asset manager on Monday abandoned plans to acquire the bulk of real estate investor Nicholas Schorsch’s holdings. At just $378 million in cash and stock, it was an inexpensive transaction that would've more than doubled the size of Apollo's real estate arm to $27 billion under management and been modestly accretive to fiscal 2016's economic net income (a profitability measure that includes unrealized gains as well as cash earnings). 

Discerning Dealmakers
The firms' shares could benefit from the right acquisition.
Source: Bloomberg

Pulling the plug appears prudent, though: Apollo was poised to bet on Schorsch even after it was disclosed  a little over a year ago that one of his real estate investment trusts had made accounting errors that were intentionally concealed. “We don’t get to buy something of this size for this price without some hair on it...we’re trading perspiration for purchase price," Apollo co-founder Marc Rowan told The Wall Street Journal when the deal was announced in August. 

Since then, the firm's conviction around the bargain deal has waned, and for good reason: Apollo was set to burden itself with a majority stake in a business whose investment vehicles are raising less than a third of what they were pulling in before the accounting errors, according to Robert A. Stanger & Co., a Shrewsbury, New Jersey-based investment bank that compiles data on nontraded REITs. Even under Apollo's ownership and with the firm's reputation attached to those funds, it's far from certain that the trend would reverse and that investor capital would flood back in. 

Josh Harris, another of Apollo's co-founders, said on an earnings call last month that its contrarian style of investing will drive the firm to "lean into situations from which others may shy away."  But by letting this one go, Apollo has acknowledged there's a limit to how far it will stretch. 

Interestingly, the firm's decision to walk away comes two weeks after Ares Management, which was co-founded by Apollo operatives, scrapped a merger with rival Kayne Anderson. The deal would’ve lifted its assets under management by $26 billion, allowing the combined firm to leapfrog rivals like KKR. Though the pair said the split was due to differing views about how to navigate the battered energy sector, Ares would have been uncomfortable with the earnings decline that it could inherit from Kayne Anderson's exposure to master limited partnerships -- a sector that has found itself out of favor with investors.

Both Apollo and Ares have an incentive to keep an eye out for acquisitions that would allow them to diversify their businesses and grow their fee income: Year to date, they've fallen 23 percent and 3 percent, respectively. But their recent discipline -- including their loss to Canada Pension Plan Investment Board in the hotly contested auction for General Electric's coveted U.S. private-equity lending business, shows the duo have realized that while size does matter, they're better off waiting for deals that are the right fit. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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