Apollo picks up Credit Suisse SPG; Goldman Sachs’ Greg Olafson appreciates PE’s control and influence

Good morning, Hubsters. MK Flynn here with today’s Wire.

Over the last few months, I’ve spoken with a lot of dealmakers about how the private equity model will fare as the economy enters a more challenging period. I’ve got some interesting insights to share on that topic, below. But first, let’s take a quick look a deal in the financial services sector.

Profitable but expensive

Credit Suisse confirmed today that it is moving forward with a deal to sell much of its securitized products group to Apollo.

The New York-based group is profitable but also capital intensive. The move comes as the Swiss bank undergoes a major restructuring.

Credit Suisse announced last month that it had entered into a framework agreement to transfer a significant portion of its securitized products group and other related financing businesses to Apollo and PIMCO.

“This transaction with Credit Suisse demonstrates Apollo’s differentiation as a partner to leading financial institutions and, together with our clients, creating a home for some of the highest quality credit origination platforms and professionals,” said James Zelter, co-president of Apollo Asset Management, in the October 27 statement.

Proactive capital

Yesterday, I heard some interesting insights on the advantages of private equity as an asset class when I attended a virtual media roundtable hosted by Goldman Sachs Asset Management.

Among the speakers was Greg Olafson, who co-heads the firm’s direct alternatives business, which he said has $220 billion of assets under supervision. The Goldman alternatives platform includes six direct strategies – private equity, growth equity, private credit, infrastructure, real estate and sustainability – and is complemented by secondaries and GP stakes. The breadth of activities gives Goldman a great perspective in these uncertain times, Olafson said.

“Without question, we’re operating in a more complicated environment,” he said. “This is characterized by … rising interest rates, uncertain economic conditions, heightened geopolitical risk and earnings and valuation volatility that is higher than we’ve seen for a long time. While this is quite a change from a year ago and much more challenging than any time we’ve seen since the [global financial crisis] – and we think this will persist through next year – we think that this offers a great opportunity to continue to find investments across that alternatives platform. Really, we think it plays to the strengths of alternatives by calling upon the advantages of control and influence that are central to direct investing. That’s contrasted with the more indirect approach inherent in public markets. Basically, it’s a hands-on approach that allows for proactive value creation, transaction terms negotiation – everything is a transaction – and very proactive risk management.”

Olafson discussed how private equity can steer portfolio companies adeptly through the currents.

“This control, which is central to alts investing, we think is very important,” he said. “We act as patient capital and proactive capital, supporting these companies as they navigate times of uncertainty. We influence outcomes by bringing resources to bear, and I think that is one of the key factors of this asset class, if you like, that allows it to achieve excess returns through all market conditions. In this environment of rising input prices, slowing growth and declining valuations, the key to successful private equity investing is how GPs and management teams work together to formulate strategies that focus on old-school – this is a back-to to basics environment – how you innovate, how you drive productivity, how you extract operational efficiencies.”

On valuations, Olafson said, “There probably is room for these to reflect the broader economic environment. The alts are a bit of a slow-moving part of the market. As the cost of capital has increased, undoubtedly valuations will adjust. We’re starting to see that. But private investors should exhibit patience, which allows for that value creation I talked about to take hold.”

I’d love to hear your insights on the private equity model and how you think it will, or won’t, hold up in uncertain economic times. Send me email at mk.flynn@peimedia.com.

PDI awards deadline

The entry process is well under way in the Private Debt Investor Awards, which are decided solely by those in the industry, who vote in their thousands. You can vote today but don’t wait too long. The deadline is Friday, November 18.

Find out more and cast your submission.

That’s all for today.

Buyouts’ Chris Witkowsky is back from vacation and will be back on the Wednesday Wire. Then PE Hub’s Aaron Weitzman will be on duty Thursday and Friday, and I’ll be back with more on Monday.

Until then, happy dealmaking,

MK