Finance

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.

For Apollo Global Management, it was only a matter of time before a buying opportunity directly under its own nose became too good to pass up: Its own shares.

Shopping at Home
Apollo plans to buy back some of its slumping stock, describing it as "significantly undervalued".
Source: Bloomberg

The firm said Wednesday it would -- for the first time -- buy back up to $250 million of its shares, describing them as "significantly undervalued." The stock fell as much as 3.6 percent to $12.47, its lowest level since July 2012, in part because quarterly profit came in below Wall Street's expectations. 

Apollo is well known for being a cautious buyer -- the firm would rather lose to rivals when bidding on takeover targets than triumph at a price it believes is excessive. "We don’t pay up, it’s just who we are," said Josh Harris, one of the firm's co-founders, on Wednesday's earnings call.  

The company, which counts Chuck E. Cheese and Hostess Brands among its investments, is honing in on its own shares some three months after KKR announced its first buyback. Sadly for the New York firm, KKR's stock has shed roughly 24 percent since that $500 million repurchase program was announced. 

Still Slipping
KKR's stock price has continued to slide despite a $500 million buyback program.
Source: Bloomberg

Since buybacks don't seem to be bolstering the stock prices of their rivals, Carlyle Group and Blackstone Group are unlikely to join the party anytime soon. Plus, Blackstone's founder Steve Schwarzman said he'd rather use cash to make acquisitions and back its various funds, an action that gives pension funds and its other investors more confidence to write checks of their own. 

Apollo co-founder and CEO Leon Black described the firm's valuation on Wednesday as "an absurdity but an opportunity, clearly, in terms of repurchasing shares".

Analysts, to an extent, agree. On average, they expect the stock to rally some 60 percent in the next 12 months to reach a consensus price target of $20.43, according to data compiled by Bloomberg. 

That would certainly be a boon for Apollo's shareholders, led by Black and Harris, who have seen the value of their shares decline by 50 percent in the past 12 months. (It should be noted that early shareholders who subscribed to Apollo's 2011 IPO at $19 apiece are still in the black, only because the firm has paid more than $11 in dividends.)

Still, when it comes to these stocks, there are other forces are at play.

"To say that sentiment swings on these stocks would be an understatement," Oppenheimer analysts said last month, describing private-equity focused asset managers like Apollo and Blackstone.

Highs and Lows
Private equity firms' total returns to public shareholders has been negative in recent years.
Source: Bloomberg
*Total return calculation assumes dividends are reinvested.

Right now, the sentiment is negative, in part because investors expect volatile equity markets, oil's decline and other macroeconomic variables to weigh on the quarterly profits of such firms. Big spenders during a crisis, they'll spend the next downturn snapping up companies that they can sell when the cycle turns -- a payoff that may be some years away. 

Until that sentiment turns, the impact of any buybacks will be muted. 

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

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net