So What Kind of Investor Is Apollo Management?

Today the New York Times ran a story on Apollo not unlike the one I wrote last week. The main difference (aside from this ridiculous photo illustration) is the fact that Leon Black actually spoke with the Times.

In the story, he offers a few vague answers to accusations made by both the peHUB article and the Times reporter. Linens N Things wasn’t that big of an investment. Dividend recaps “are what’s best for our investors.” The firm “underestimated” the housing market downturn. Et cetera. No mention of the firm’s IPO. No mention of the performance of Apollo’s debt investments.

However, Black does offer the sound byte, “Private equity is dead,” perhaps to explain away his firm’s return-killing performance of late. The best line in the 3000 word story is Apollo’s response to this stated death of private equity:

“We’ve totally turned into a bond house,” he declares.

Reminds me of what Josh Harris said at a conference back in February. At the time, I wrote:

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. The remaining 25 percent of deals relied on “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.

And we got what we expected. The firm has poured lots of money into distressed debt, only to see the prices of its purchases trade dramatically lower since the firm began investing, and apparently received margin calls on that debt. Yet Apollo keeps buying, perhaps with less leverage. That’s fine, but is that what investors were buying into when they committed to Apollo’s latest, $15 billion buyout fund? Isn’t there a fear of the dreaded D-word: drift? I went to the firm’s S-1.

As it turns out, Apollo makes the clear distinction in its filing that its private equity funds have a flexible focus on “Global private equity and distressed buyouts/debt.” In fact, the filing even says, “At the present time, as a result of the current supply and demand imbalance in the global credit markets, we are investing primarily in senior and subordinated debt securities.”

So Apollo’s transformation into a bond house isn’t necessarily an about-face to investors. They know what they’re getting. A flexible firm that can convert itself from a mega-buyout shop into a bond house at the drop of a hat (or market). For better or for worse.

Earlier: How Has Apollo Disappointed Investors? Let Us Count The Ways