Getting comfortable with Apollo’s massive fundraising

Apollo Global Management’s new private equity fund could be the largest traditional buyout fund of all time. At least that’s what staff for the Oregon Investment Council says, and recent events suggest they’re pretty comfortable with that.

Oregon last week greenlit a $500 million commitment to Apollo Investment Fund IX, its biggest commitment to an Apollo fund to date.

Oregon’s sizable bet on Apollo’s latest megafund is interesting for a couple of reasons. For one, Oregon CIO John Skjervem has made no secret of his concerns with an asset class in which LPs pay sizable fees for high-priced assets.

Second, and to the latter point, firms like Bain & Co, Cambridge Associates and Oregon consultant TorreyCove Capital Partners recently published reports noting possible hazards in today’s market for large buyout firms. All three firms reported elevated dry-powder levels and an overabundance of low-cost credit, which will likely keep prices on new assets high for the next 12 to 18 months, if not longer.

In short, it’s hard to buy low and sell high in today’s PE marketplace. Those dynamics haven’t yielded favorable results for megafunds historically, according to Preqin and public-pension data.

Two funds on Preqin’s list of the 10 largest buyout funds ever raised have yet to generate meaningful returns. Of the remaining eight, all of which were raised between 2006 and 2010, only two were netting internal rates of return in excess of 10 percent as of June 30. Four were netting less than the traditional 8 percent general partners must return before they can collect carried interest.

Just one — Apollo’s $14.7 billion 2008 vintage — was netting top-quartile returns through June 30, 2016, Cambridge Associates and Preqin benchmarks show. California Public Employees’ Retirement System pegged Apollo VII at a 23.5 percent net IRR through June 30.

Apollo’s other entry on Preqin’s top-10 list, the $18.4 billion Apollo Investment Partners VIII, is a 2013 vintage and too early in its life cycle to measure performance, according to Oregon documents. In a memo, Oregon staff wrote that they were “impressed” with Apollo’s ability to invest Fund VIII, which raised a tidy $18.4 billion, without overpaying for new assets.

Apollo Co-Founder and CEO Leon Black said in a recent earnings call that the firm tends to pay around 5x for distressed assets — roughly half the 10x-plus EBITDA multiples reported as market averages by Bain & Co, Cambridge and TorreyCove. Fund IX will likely acquire more distressed assets than its predecessor, Co-Founder Josh Harris said during the same call.

Every firm talks the talk on maintaining price discipline, but Apollo’s track record suggests it’s done more than talk. In short, Apollo’s latest foray into megafund territory seems to carry fewer risks than fund size and market dynamics suggest.

And I’m pretty comfortable with that.

Tully Friedman (left) speaks with Sam Sutton of Buyouts at the LP-GP Summit on Sept. 19, 2014. Photo by Robert Paul.