Black Sees Apollo’s $100 Billion Menu of Credit Growing

Apollo Global Management LLC, the third-biggest U.S. private-equity firm, plans to expand its credit business far faster than its buyout activities, its chief executive officer said.

“We don’t see any reason why that can’t be a large multiple, frankly, of where we are today at $100 billion,” Leon Black said of Apollo’s credit operation, already the firm’s biggest unit, on a conference call today. “What we’ve tried to do in building our credit business is to create, if you will, a Chinese menu of different products across the yield and liquidity spectrum.”

Apollo, whose credit arm oversaw $18 billion in September 2009, has diversified its business beyond leveraged buyouts like larger peers Blackstone Group LP and Carlyle Group LP. LBOs will continue to be a profit center for New York-based Apollo, though as a business it’s not “terribly scalable,” said Black, who co-founded the company in 1990 with Josh Harris and Marc Rowan.

Executive Departure

The firm, which managed assets of $159.3 billion as of March 31, said first-quarter profit fell 71 percent as its buyout holdings appreciated at a slower pace than a year ago and compensation increased to pay for the departure of President Marc Spilker. Economic net income after taxes, a measure of earnings excluding some compensation costs tied to Apollo’s 2011 IPO, decreased to $218.6 million, or 55 cents a share, from $763.6 million, or $1.89, a year earlier.

Analysts had expected per-share earnings of 56 cents, according to the average of 16 estimates in a Bloomberg survey.

Apollo has been one of the most active buyout firms in exiting investments over the past two years, taking advantage of rising markets to sell holdings and take companies public. The firm in the first quarter sold shares of aluminum producer Constellium NV and oil-and-gas producer Athlon Energy Inc., among others, according to Credit Suisse Group AG research. While fees earned for selling investments rose in the quarter, unrealized fees fell, reflecting slower appreciation in the firm’s existing holdings.

Stronger Performance

Apollo had “stronger than expected realized performance fees, primarily in the private-equity segment,” Sterne Agee & Leach Inc. analyst Jason Weyeneth said in an e-mail. “While we would generally expect a rebound from recent weakness off of these results, we believe discussions around the health of equity and credit markets, employee turnover and regulatory oversight will be the more likely driver” of the shares.

Apollo fell 3.2 percent to $25.97 at the close of trading in New York. The shares have dropped 18 percent this year, after gaining 82 percent in 2013.

The firm managed $101.2 billion in credit assets as of March 31, compared with $48.1 billion in private equity and $8.9 billion in real estate. Harris said clients are seeking credit offerings as they search for yielding investments, or assets that pay out income during the holding period, as interest rates remain near zero. Apollo is also increasing its lending to companies in Europe and the U.S., stepping into the void left by banks adapting to heightened capital standards.

‘Best Opportunity’

“If you’re a pension fund, if you’re a sovereign-wealth fund, if you’re a high-net-worth individual, you’re looking for a place to hide in what is otherwise an overly valued environment,” Harris said on the call discussing the firm’s earnings, which traditionally was hosted by Spilker before his departure was announced. “Illiquid, opportunistic credit is really, in my opinion, the best opportunity in the world right now.”

Apollo said the value of its buyout holdings rose 2 percent in the first quarter, compared with 14 percent in the same period last year. Carlyle, the Washington-based alternative-asset manager, said its private-equity portfolio appreciated 8 percent in the quarter, compared with 4.5 percent at KKR & Co. and 7 percent at Blackstone, the largest manager of investment alternatives to stocks and bonds. KKR and Blackstone are based in New York.

GAAP Income

The value of buyout holdings at private-equity firms affects economic net income, or ENI, because the metric in part depends on quarterly mark-to-market valuations of those investments. Accounting rules require the firms to value their portfolio holdings every quarter.

Apollo’s economic net income differs from U.S. generally accepted accounting principles. Net income under those standards, known as GAAP, decreased to $72.2 million, or 32 cents a share, from $249 million, or $1.59, a year earlier.

Pooling Money

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 in a cycle lasting about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.

Apollo has recently lost several executives. Spilker plans to leave later this month three-and-a-half years after joining Apollo from Goldman Sachs Group Inc. A “significant increase” in compensation expenses was driven by a noncash expense of $45.6 million, or approximately 11 cents of pretax ENI per share, related to his departure, according to today’s statement.

Two senior partners in the private-equity group, Stan Parker and Jordan Zaken, also plan to depart, following colleagues Ali Rashid and Andy Africk, who left in the past year, according to a person with knowledge of the moves.

Apollo said it will pay stockholders a dividend of 84 cents a share on May 30.

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