Apollo Global Management LLC reported a bigger-than-expected 91 percent drop in third-quarter profit on Thursday, as its private equity funds depreciated, in stark contrast to its peers, and the firm generated less cash from selling assets.
A halt to the stock market rally weighed on the earnings of all of Apollo’s publicly listed peers, with KKR & Co LP and Carlyle Group LP also posting lower profits. But Apollo’s profit decline – it reported its lowest quarterly profit in two years – dwarfed those of its peers.
[contextly_sidebar id=”hsGUJYa9upPO1XS74kCK1I79javnCLM1″]Apollo’s private equity funds depreciated by 2 percent in the quarter, versus a 3 percent appreciation at Carlyle’s private equity funds, a 2.2 percent appreciation at KKR and a 3.7 percent appreciation at Blackstone Group LP.
Apollo is particularly exposed to stock market jitters because it likes to take many of its companies public, and historically more than half of its private equity portfolio has included publicly-traded securities.
“As equity markets face pressure, we would anticipate a lighter concentration of share sales as a percentage of overall exit activity,” Josh Harris, Apollo’s senior managing director, told investors on a conference call.
“We believe other channels would continue to be available to drive exit activity. Corporations and financial sponsors are sitting on record levels of cash and we are observing that dialogues are becoming increasingly more active,” Harris added.
Prior to this quarter, Apollo’s recent earnings had been stronger. It manages some of the best-performing funds in its industry – its $14.7 billion Fund VII, for example, reported a 29 percent net internal rate of return (IRR) as of the end of September.
Economic net income after taxes was $48 million versus $550.9 million a year earlier. That translated into ENI per share of 12 cents, compared to the analysts’ average estimate of 38 cents in a poll by Thomson Reuters I/B/E/S and the lowest since the 5 cents reported in the second quarter of 2012.
Apollo shares fell 3.5 percent to $22.58.
Distributable earnings, which show actual cash available to pay dividends, fell to $342.7 million from $455.6 million.
Assets under management were $163.9 billion at the end of September, down from $167.5 billion at the end of June.
Asked about the SEC’s investigation of how private equity firms disclose whether they include their own money in average net IRR calculations, which was first reported by Reuters this week, Apollo Chief Financial Officer Martin Kelly said on the earnings call he was not aware of any IRR-specific investigation and that the New York-based firm was very transparent about its inclusion of its own capital in the calculations.
He added that the increase of the average net IRR by the inclusion of that capital was small. As an example, he cited Fund VII, where Apollo’s capital accounted for 3.4 percent of the fund, and said the inclusion had added two-tenths of a percentage point to the average net IRR figure to date.
(Reporting by Greg Roumeliotis in New York; Editing by Lisa Von Ahn and Paul Simao)