The money that Apollo Management raised last year by selling part of its management company in a private offering will likely be used to finance an expansion in real estate and commodities, possibly through acquisition, according to a source familiar with the situation. Shortly, the firm will also have an additional currency to use for acquisitions—publicly traded shares.
In August, the Purchase, N.Y.-based firm founded floated a $900 million stake in its management company—representing an undisclosed percentage of the general partnership—in a 144A equity offering on a private exchange operated by Goldman Sachs Group. By this spring, the buyout firm must move ahead with plans to shift its shares off the Goldman Sachs market and onto “a normal exchange,” most likely the NYSE, our source said. Shortly before the listing on the Goldman Sachs exchange, Apollo sold a little less than 10% of itself to the Abu Dhabi Investment Authority as well as a second, undisclosed stake to the California Public Employees’ Retirement System, both long-time limited partners.
Just as Blackstone last month used cash and stock from its June 2007 IPO to make its $930 million offer for GSO Capital Partners, Apollo plans to use the proceeds from its stock offering to expand into complementary businesses, our source said. The firm has already begun expanding its global credit and distressed debt team, which buys debt securities on the secondary market and has $13 billion to $14 billion of assets under management.
A real estate play makes particular sense for Apollo since the firm already has expertise in the field. It owns a number of REITs as well as real estate-focused portfolio companies in the retail and leisure industries, our source said. In the last year, the firm’s forays into real estate included the $8.4 billion buyout of Realogy, a New Jersey-based owner of Coldwell Banker and Century 21 real estate agencies, and the $28 billion purchase, along with TPG Capital, of casino operator Harrah’s Entertainment. Apollo can also use its shares as currency, especially enticing when acquiring targets that rely on the performance of a handful of key managers. “When buying a people business, giving out a lot of cash at one time isn’t wise, but using stock allows you to vest the options over time, which locks in the team,” the source said.
In addition to branching into new areas, expect to see Apollo return to its distressed investing roots in the coming months, as traditional LBO opportunities dry up. During its 17-year history, about 75 percent of Apollo’s deals have been conventional LBOs, our source said. The remaining 25 percent of deals relied on what our source called “de-leveraging,” or distressed-for-control investing in which Apollo buys bonds of distressed companies cheaply and swaps them for equity at some point during a restructuring process. That style of deal-making pops up periodically for the firm as market conditions warrant, and 2008 should produce “a big opportunity” in this arena, our source said.
Apollo’s organization along industry verticals aids in this flexibility, our source added.
This story first appeared in Buyouts Magazine, where Erin Griffith is an associate editor.