A recording breaking $23.5 billion of buyout fund was raised by Leon Black’s Apollo Global Management (APO) last week on June 27, 2017. To get a sense of the enormity of this size, this smashed the $21.7 billion raised by Blackstone (BX) back in 2007 at the height of the buyout craze. For a decade after the global financial crisis, this $21.7 record stayed untouched.
Even marquee private equities funds such as CVC Partners and KKR (KKR) raised $18.1 billion and $13.9 billion respectively for a distant second and third. So how did Apollo broke the glass ceiling for buyout funds. The answer is a combination of their stellar performance and the effects of the current macro-economic condition.
Global Search For Yield
In the post global financial crisis era, the enormous liquidity that was pumped into the market had greatly reduced the yield. For instance, a CNBC contributor had noted that the Fed had pumped in $267 billion in the first 3 months of the year even as they raised rates. In total, the Fed had pumped $3.9 trillion into the market as seen in their balance sheet size.
Source: State Street Investors
As seen in the chart above, both the yields of high yield and corporate bonds have been trending downwards over the past decade after the financial crisis. The low yield had forced institutional investors to move from safer fixed income instruments such as mortgages, credit to established companies all the way to private debt funds. Private debt funds lend to the riskier small and medium businesses.
Origination Strength Matches Yield Search
It is increasingly challenging to discover good projects to invest in this crowded market and yet Apollo was able to provide decent returns. In the latest reported quarter, Apollo had outperformed even the top private equity funds and not to mentioned the safer instruments which investors are skipping due to their low yield.
One of the key factors for Apollo success is their ability to find qualified assets to invest in despite the tough competition. They had deployed $16 billion in year 2016 with a notable $800 million financing for the bankrupt Westinghouse. As the debtor in possession lender, Apollo would be repaid first before other borrowers as the distressed firm reorganized. Apollo beat a consortium which consisted of Goldman Sachs (GS) and single-handedly won the entire $800 million deal. Other notable deals include the acquisition of Apollo Education Group and Chisholm Oil and Gas.
The Apollo Education Group acquisition at $1.14 billion was considered a good deal because it is only at half of the revenue generated in the past financial year. Apollo bought it at $10 per share despite its valuation at $29 per share by First Pacific Advisors. Apollo roped in the former deputy education secretary, Tom Miller, as Chairman in an attempt to improve the image after it was investigated for fraud by the Federal Trade Commission.
Origination is an important strength in the private equity business. It is the ability to discover good business ideas which requires good interpersonal and technical skills. To put it down to the layman terms, if you are able to find affordable and suitable office spaces, your business is off to a great start. It applies to the art scene where it is important to discover suitable studios space to practice it before the big performance day. Origination is the hidden and often under-appreciated function of private equity.
Strong Performance
Performance is the other key factor that anchored their record breaking fund raising of $23.5 billion. In the past quarter, their private equity funds had risen by 8% while their public portfolio companies had risen by 10%. As a gauge of the effectiveness of this performance, there are only five UK fund managers who managed to return more than 10% consistently over the past 10 years.
Source: Apollo Global Management Investor Relations
The above gross return of 39% is taken from the past 27 years of Apollo’s operating period which is impressive in this context. Apollo had easily beat the returns of top private equity funds around the world which made it easier for them to convince large institutional investors to invest in them. There are a number of ways to obtain business financing but the most difficult method is to obtain them from institutional investors who have rigorous screening and high expectations.
Past Performance
As it is frequently mentioned, past performance is not indicative of future performance. For the past 27 years, Apollo had managed to gather over $200 billion of asset under the management of 371 investment professionals around the world. It is an open question if these professionals can stay on the ball in this changing environment and they might have to buy modafinil to stay sharp.
Apollo would have to continue its track record of above average return to retain the trust of investors and this will be increasingly difficult. We will just have to observe their performance in the near future.
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