Moon Shot

Apollo Has a Blueprint for Liftoff

Shrewd private equity investments and moves to diversify into recurring fee-based businesses have helped its valuation power ahead of rivals.
Photographer: STF/AFP/Getty Images

Apollo Global Management LLC's penchant for contrarian private equity deals has earned it bragging rights.

The firm delivered fourth-quarter earnings on Thursday that crushed analysts' expectations, thanks in part to a 9.1 percent lift in the valuation of its private equity holdings. For context, this figure tops a 6.8 percent climb in the value of comparable holdings at rival Blackstone Group LP as well as a 6.6 percent increase in the S&P 500 Index, assuming the reinvestment of dividends. As for the full year? Apollo's private equity holdings managed to gain 28.9 percent, outpacing the S&P 500's 21.8 percent rally and the Blackstone private equity unit's 17.6 percent.

Flight Path

Apollo's price-to-earnings multiple has improved substantially more than rivals, thanks in part to its shrewd private equity investments

Source: Bloomberg, Company filings, Oppenheimer estimates for KKR & Carlyle which report next week

*Valuation multiple calculated by dividing the firm's stock price at the date of their full year results by cash earnings, which refers to distributable earnings

Such stellar performance validates Apollo's strategy of targeting unloved, inexpensive publicly traded companies like golf club operator ClubCorp Holdings Inc., DVD rental-kiosk operator Outerwall Inc. and cloud-computing provider Rackspace Hosting Inc. It should also cause rivals, almost all of whom are striking pricier deals, to consider taking a page out of Apollo's playbook by doing some bargain-hunting of their own. 1  

Since 2013, the firm's flagship $18.4 billion private equity fund has been sealing deals at an average Ebitda multiple of less than 6, according to Apollo's co-founders, Leon Black and Josh Harris. That's well below the median U.S. buyout multiple of 14, according to data compiled by Bloomberg, and allows their companies to -- for the most part -- avoid taking on large slugs of debt financing. As a result, they're relatively immune to any dent in portfolio company earnings as a result of the new tax law's limit to interest deductibility, which is a thorn in the side of rivals. 2

Apollo also deserves credit for its initiatives outside of private equity, headlined by the growth of annuity provider Athene Holding Ltd. and efforts to replicate that business in Europe. Combined, these units account for some 85 percent of the firm's $102 billion in permanent capital, which have made its fee stream increasingly predictable. Plus, like rivals, a large portion of its business (think private equity, real estate funds) is basically semi-permanent capital. That gives it an advantage over traditional asset managers in a downturn, as such funds aren't subject to outflows or withdrawals. 

Lock it Up

As a percentage of assets under management, Apollo, Ares and Carlyle have the biggest proportion of long-duration assets

Source: Company filings; Morgan Stanley research

Apollo's increasing reliance on recurring fees makes it a little likelier to convert to a corporation from a partnership than rivals such as Carlyle Group LP or Blackstone. That's because the portion of its earnings that would be subject to higher taxes is relatively smaller. But on the flip side, considering that shareholders have become more appreciative of the firm's pivot toward steadier, stable earnings, the potential gains from such a move -- as measured by a lift in its multiple -- may be limited.  

Pick and Mix

U.S. alternative asset managers have vastly different business models. These will ultimately determine whether or not incorporating makes sense for them.

Source: Company filings, Morgan Stanley research estimates

*Projected 2018 figures; reflects contribution to pre-tax earnings

Even without heralding in new shareholders by converting to a corporation, Apollo's valuation has meaningfully improved to a record. If the current structure works and the firm's various strategies are paying off, why mess with a good thing?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Apollo's recent outperformance also explains why the firm was easily able to raise a record $24.7 billion this past summer for its next private equity fund.

  2. Blackstone's Tony James said Thursday that not all the companies overseen by its private equity arm will benefit from tax cuts. Among those that won't are ones that are heavily levered, since they will be able to deduct only a limited portion of their interest expense. 

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

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