Black says Apollo will deploy more capital in new down cycle

Apollo Global Management founder and CEO Leon Black famously said in 2014 the firm was selling everything that wasn’t nailed down. Now Apollo has flipped its strategy to invest more than it’s selling, even as credit for deals has tightened.

Apollo said it wrapped up 2015 with about $13 billion deployed into its credit and private equity funds, as well as other vehicles, including $4 billion in the fourth quarter. It generated $8.5 billion in realizations. In past quarters, realizations often outpaced deployment by 3x, Apollo said.

On a call with analysts, Black said the firm will stick to the same strategy it has followed throughout its 25-year history: Buy during tougher times.

“We’ve gone through four market cycles — this one is going to be the fifth,” he said. “We’ve deployed 35 to 40 percent of our private equity capital during down cycles. Frankly, it’s had our best returns.”

Black’s comments came as Apollo unveiled a $250 million share buyback after posting a 69 percent decline in fourth-quarter earnings in the wake of historically low oil prices. The firm’s economic net income (ENI), which accounts for unrealized investment gains or losses, fell to $32.9 million between October and December, or 8 cents per share. That is down from $106.1 million, or 26 cents per share, a year ago.
Analysts had expected Apollo’s ENI to rise around 12 percent to 25.8 cents per share in the fourth quarter, according to Thomson Reuters I/B/E/S.

Choppy market

Echoing comments by Blackstone Group and others in the industry, Black acknowledged that it is more difficult to finance buyout deals because of distress in the junk bond market tied to a lack of liquidity and other factors.

“It’s more of a choppy market,” Black said when asked about leveraged loans. “Our deals aren’t any harder to finance than any others in the industry.”

The big lending banks have “fear and anxiety” right now because they don’t want to be stuck with hung loans — plus regulators are keeping a close watch, Black said.

“Deals will have to have more equity and be slightly less levered,” he said. “Clearly, we’re in a period like that again, but it’s nothing new.”

Black said Apollo continues to hunt for “good companies with bad balance sheets” by investing in debt and then emerging with equity stakes after companies are reorganized. Such was the path the firm took with plastics and chemical company LyondellBasell, which led to a $10 billion profit for the firm.

Josh Harris, managing partner, said Apollo “has more than enough liquidity in our credit business to manage through this situation.”

Harris voiced a similar theme about opportunities and tighter credit markets at the Wharton Private Equity & Venture Capital 2016 Conference on January 29.

PE credit funds dip

Apollo’s private equity funds depreciated by 2 percent during the fourth quarter, as marks in its energy portfolio weighed on performance. The firm’s credit portfolio posted a net loss of 1.4 percent for the quarter.

On the fundraising front during the fourth quarter, Apollo Natural Resources II drew in $400 million, and its managed accounts rang up about $300 million.

All told, Apollo booked $12.3 billion of capital inflows for the quarter and $23.7 billion for all of 2015.

Its private equity arm deployed $1.8 billion via 10 investments.

Total assets under management climbed to $170.1 billion, up from $161.8 billion at the end of the third quarter.

Apollo ended the quarter with $26.1 billion in dry powder, including $13 billion for Apollo Investment Fund VIII.

Reuters contributed to this story.

Action Item: For more on Apollo’s Q4 results, see: http://bit.ly/1nGU7Yz

Photo: Leon Black, Chairman and CEO Apollo Global Management, speaks at the Milken Institute Global Conference in Beverly Hills, California April 29, 2014. REUTERS/Kevork Djansezian