- Apollo pays 6x for assets on average, says Harris
- Market yet to recognize depth of energy recession
- “Mismatch” between public market expectations and private hold periods
Apollo Global Management co-founder Leon Black famously claimed his firm was “selling everything that’s not nailed down” in 2013. Three years and one economic slowdown later, the $170 billion asset management firm now considers itself a buyer.
“With the market coming down, for the first time in a long time, we’ve become more of a buyer than a seller,” said Apollo co-founder Joshua Harris, speaking at Harvard Business School’s 22nd Annual VCPE Conference. “In the last four weeks we announced two very large transactions, ADT and Apollo Education Group.”
In February, Apollo agreed to pay $7 billion for electronic security services business ADT. The firm also recently participated in a consortium that agreed to pay $1.1 billion to take private Apollo Education Group, which owns University of Phoenix.
Apollo was also among those bidding in an auction for Fresh Market Inc, a U.S. specialty grocery retailer, Reuters reported in February.
Apollo invested approximately $5 billion through its private equity funds in 2015, considerably more than the $3 billion to $4 billion it typically deploys annually, Black said in a recent earnings call. In his remarks at Harvard Business School, Harris said the firm has invested “about half” of the $18.4 billion it raised for its 2014 mega fund.
In recent months, Apollo found the most value in “things that banks are selling,” Harris said.
Speaking earlier this year at an event hosted by the Wharton School of the University of Pennsylvania, Harris said Apollo’s pipeline of completed distressed deals doubled in the fourth quarter.
Uncertain growth prospects in China and declining energy prices have swelled volumes of distressed debt. Harris expanded on those themes in his Harvard remarks, noting, “energy has just been decimated. I think even today, the market has not even recognized how deep the recession is going to be in the energy market.” he said. “Companies are just getting stressed. And they need to sell assets that are very
He added: “Companies are just getting stressed. And they need to sell assets that are very high-quality assets, and they need to de-lever their balance sheets.”
Apollo was hit by the sharp decline in energy prices in its third Credit Opportunity fund, Buyouts reported. Apollo Credit Opportunity Fund III produced a -18 percent net internal rate of return as of the fourth quarter, according to Apollo’s year-end earnings report.
The firm told LPs earlier this year it lowered its gross return expectations on the fund from 15 percent to as low as 8 percent. Fund III invested in energy through 2015, when oil prices fell from $50 to about $30 per barrel.
The firm’s focus on undervalued assets helped keep its purchase price multiples below what other private equity firms pay, Harris said. On average, Apollo invests in companies at around 6x their cash flows, well short of the double-digit multiples many firms paid for assets in recent years.
While the focus on distressed assets helps the firm maintain pricing discipline, it can also hurt the price of Apollo shares on the New York Stock Exchange. As a publicly traded company, Apollo values its fund assets at market prices each quarter. In down cycles, lower asset valuations lead to weaker share prices.
“Our ultimate rocket fuel is making money for our LPs, so we’re just telling our public investors buy our stock and hold it for a very long time,” Harris said. He added that publicly traded alternative asset firms have been “unsuccessful” in convincing public market investors to hold onto their stocks. “In my opinion, the industry is undervalued because the shareholders are not as long term as our investors.”
As of mid-day on March 7, Apollo’s shares were trading for $16.90 apiece, down from their 2011 IPO price of $19.
Action Item: To learn more about Apollo Global Management, visit www.agm.com
Photo: Apollo co-founder Joshua Harris speaks to the media on August 15, 2013. REUTERS/Eduardo Munoz