Apollo Fourth-Quarter Profit Falls 69% as Asset Sales Dropby and
Firm plans to buy back as much as $250 million of stock
Credit business boosted by two acquisitions in the quarter
Apollo Global Management LLC said fourth-quarter profit fell 69 percent as asset sales slid and energy declines drove depreciation in its private equity portfolio. The company also announced its first share buyback program.
Economic net income, a measure of earnings reflecting both realized and unrealized investment gains, decreased to $32.9 million, or 8 cents a share, from $106.1 million, or 26 cents a share, a year earlier, New York-based Apollo said in a statement Wednesday. Analysts expected earnings of 26 cents a share, according to the average of 17 estimates in a Bloomberg survey.
Earnings were reduced by a $45 million legal reserve related to discussions with U.S. regulators regarding Apollo’s fee collection practices. Excluding the reserve, the firm said economic net income would have been 19 cents a share.
Apollo, which aggressively sold private equity holdings from 2011 to 2014 as market prices surged, now has fewer stakes to sell than peers such as Blackstone Group LP and Carlyle Group LP. The exit spree produced big profits for the firm and investors in its funds, while lessening its exposure to subsequent stock-market swoons in August and last month.
“Over the last three years we’ve realized about $50 billion, so we’re largely sold down in our private equity portfolio,” Josh Harris, Apollo’s co-founder, said on a conference call Wednesday with investors and analysts. “There’s very little left. Now that the markets are low we’re slowing down our selling and doing a lot of buying.”
Shares of Apollo fell 1.6 percent to $12.73 at the close of trading in New York, extending the stock’s decline this year to 16 percent. The firm said it will buy back as much as $250 million of its shares, its first such repurchase plan since its 2011 initial public offering.
“At the current price levels for Apollo shares, we see a significantly undervalued company,” Chief Executive Officer Leon Black said on the call. “The current share price does not in any way capture the inherent strength of Apollo’s business model, growth prospects and long-term strategy.”
Shares of publicly traded alternative-asset managers have slumped since mid-2015. KKR & Co. in October became the first to unveil a buyback plan, saying it would repurchase as much as $500 million of its stock.
The value of Apollo’s private equity investments declined 2 percent in the quarter, compared with a 2.8 percent gain in Blackstone’s portfolio and a 6.5 percent advance in the Standard & Poor’s 500 Index of large U.S. companies. Apollo’s stake in oil producer EP Energy Corp. fell by $48 million, or 15 percent, after plummeting 60 percent in the third quarter. The firm’s credit holdings fell 1.4 percent amid a “challenging market backdrop,” according to the statement.
“Given the volatility we’re seeing in oil prices and the other markets, it’s not surprising that a common thread between the marks we saw in private equity and credit in the fourth quarter was primarily driven by our funds’ energy investments,” Harris said on the call.
Apollo reaped gains in the quarter by unloading shares in Australian broadcaster Nine Entertainment Co. and Norwegian Cruise Line Holdings Ltd. in secondary stock offerings. Distributable earnings, which reflect cash gains on sales, were $131 million, down from $371 million a year earlier. Apollo plans to pay stockholders a dividend of 28 cents a share on Feb. 29.
Blackstone, the biggest manager of alternative assets such as private equity holdings, real estate and credit assets, last week posted a 70 percent drop in fourth-quarter economic net income as asset sales slowed and stakes in some companies it’s taken public declined. Carlyle and KKR are scheduled to report next week.
Apollo, which oversees $170 billion in private equity and credit funds, bolstered its credit unit with acquisitions during the quarter. MidCap Financial, the firm’s middle-market lending unit, more than doubled in size by purchasing $3.6 billion in corporate and real estate loans from Abu Dhabi’s Mubadala Development Co. Apollo’s annuity seller, Athene Holding Ltd., entered the German market and boosted assets to more than $86 billion by buying Delta Lloyd Deutschland AG.
Athene, which contributed $139 million to Apollo’s pretax earnings last year, plans to go public this year.
Apollo remained busy investing during the quarter, completing mid-sized buyouts of chemicals maker OM Group Inc., glass packager Verallia SA and RegionalCare Hospital Partners. Then the debt markets tightened.
“We had a huge pipeline going into the holiday period,” Harris said last week at a conference in Philadelphia. “The market shut down. Our entire private equity pipeline dried up.”
Apollo is increasing its deployment activity in distressed assets, which Black said on the call have generated higher returns for the firm than traditional buyouts. Among investments made so far by its $18.4 billion private equity fund, exposure to distressed holdings almost doubled in the fourth quarter from the previous three-month period, said Harris.
“With $26 billion of dry powder across the Apollo platform, we are more in a deployment mode,” Harris said Wednesday.