Apollo Third-Quarter Profit Rises 39% as Holdings Advance

Apollo Global Management LLC, the private-equity firm run by Leon Black, said third-quarter profit rose 39 percent as it sold assets and fund holdings climbed. The shares fell the most in more than two months as executives addressed analysts’ questions regarding deal activity.

Economic net income after taxes, a measure of earnings excluding some compensation costs tied to Apollo’s 2011 initial public offering, increased to $528.6 million, or $1.34 a share, from $379 million, or 98 cents, a year earlier, New York-based Apollo said today in a statement. Analysts had expected profit of 93 cents a share, according to the average of 15 estimates in a Bloomberg survey.

Apollo, among the most active buyout firms in exiting investments as markets have risen, sold at least eight blocks of shares in companies during the quarter, reaping more than $4 billion in proceeds, regulatory filings show. Its buyout portfolio appreciated 18 percent in the quarter, fueling paper profits. Earnings from the firm’s credit business declined 60 percent, and its real estate unit had a loss as expenses rose.

“It’s clearly a less good deployment environment,” Marc Spilker, Apollo’s president, said on a conference call today with analysts and investors in response to questions about whether the firm is doing deals as often as it’s exiting stakes. “Having said that, things are going to change in the world. The deployment cycle has always been very lumpy quarter to quarter, year to year.”

Shares Decline

Apollo fell 4.5 percent, the most since Aug. 22, to close at $32 in New York. The stock has gained 84 percent this year, outpacing the 23 percent advance in the Standard & Poor’s 500 Index of large U.S. companies.

The 18 percent appreciation in Apollo’s buyout portfolio compares with 10 percent at Fortress Investment Group LLC, 5.9 percent at KKR & Co., 5 percent at Carlyle Group LP and 4.2 percent at Blackstone Group LP. Carlyle is based in Washington, while the others are headquartered in New York.

Apollo’s economic net income differs from U.S. generally accepted accounting principles. Net income under those standards, known as GAAP, increased to $192.5 million, or $1.13 a share, from $82.8 million, or 55 cents, a year earlier.

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 as a carried interest.

Beyond Buyouts

Apollo, like competitors Blackstone and Carlyle, has sought investment opportunities outside of traditional leveraged buyouts to attract more capital and reduce reliance on volatile private-equity earnings. Carlyle yesterday said third-quarter profit fell 21 percent as it sold fewer assets than a year earlier. Blackstone said last month that its profit for the quarter rose 3 percent as real estate gains offset a decline in its buyouts business. Both firms, like their peers, report non-GAAP profit that excludes some costs.

Apollo, which is raising its eighth buyout fund, is seeking permission from investors to increase the limit on the pool to $17.5 billion in order to meet client demand, three people familiar with the matter said this week. Apollo initially planned to limit Apollo Investment Fund VIII, which follows a $14.7 billion pool raised in 2008, at $15 billion.

The firm raised $3.3 billion for the fund in the third quarter and has $12 billion in commitments, it said in the statement.

Lyondell Offerings

Among the firm’s dispositions in the third quarter were two secondary offerings of LyondellBasell Industries NV, the chemical maker whose debt Apollo started accumulating in 2008. Apollo swapped the debt for equity following the company’s 2009 bankruptcy and, through sales and dividends, has reaped more than $7 billion on a $2 billion investment.

When fully exited, the deal is expected to have handed Apollo more than five times its money and will be its most profitable investment to date, Spilker said on today’s call.

Apollo’s Athene Holding Ltd. unit last month completed its acquisition of Aviva Plc’s U.S. insurance business after a 10-month approval process, adding to expected cash flow next year, according to Credit Suisse Group AG. The deal became the subject of a hearing overseen by Iowa’s insurance commissioner, and New York’s insurance regulator called for extra scrutiny of the risks created when investment firms buy insurers.

The Aviva acquisition was completed Oct. 2, after the end of the third quarter. Apollo’s assets under management would be $157 billion if the transaction were recorded in third-quarter results, the company said.

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