Apollo Management, which last year looked likely to be one of the victims of the global financial crisis, has staged a strong recovery, in large part due to the way it has taken advantage of the rally in debt markets and its strength in investing in distressed companies. Thanks to its ability to both restructure the finances of the portfolio of companies that it controls and buy up their debt at bargain prices after the financial crisis, Apollo has restored value to many of the businesses it bought at high prices at the peak of the market. ‘The largescale, distressed for control opportunities have largely played out’ Moreover, it has acquired companies from rivals at a fraction of the price these competitors paid.
Apollo’s own turnround underscores just how flexible private equity firms can be. It comes as the group, with $55bn under management, turns its attention to new initiatives, including a foray into lending with a new bank to be called Aris, and as it prepares to list on the New York Stock Exchange, following the path Blackstone laid out three years ago.In light of the upcoming listing, Leon Black, Apollo’s founder, and his spokesman declined to comment.Apollo is one of a group of funds, including Blackstone’s GSO unit, Centerbridge Partners and Oaktree Capital, that have been able to use their knowledge of distressed debt investing to make profits in the downturn – sometimes at the expense of their competitors.With a shortage of lending for buy-outs, some private equity firms have languished and, with those debt markets continuing to falter, many of Apollo’s competitors will have a hard time catching up in the immediate future.
Mr Black has told investors that three things make private equity interesting: low prices, great financing and a change in the macroeconomic climate– and he believes none of the three conditions holds today. “We believe the large-scale, distressed for control opportunities have largely played out,” Mr Black wrote to his investors in a recent letter obtained by the Financial Times. At the end of March, the $10.8bn Apollo Investment Fund VI stood at $12.3bn.“We are no doubt in much better shape today than we were at this time last year,” the firm told its investors last month, adding that the companies it owns saw earnings swell 26 per cent over the year-ago period.
Most of that performance came not from Apollo’s private equity but from its debt investing. Apollo put $3.3bn into debt, which it now values at $5.5bn, or 167 per cent of cost.
That includes buying loans at sharp discounts from lenders to companies Apollo owns, such as Harrah’s Entertainment, or those controlled by rivals, such as First Data and NXP Semiconductor, which are both owned by Kohlberg Kravis & Roberts.Apollo has made mistakes. It has written down its $900m investment in Realogy, a property company, to $76m.But it has also been the beneficiary of others’ mistakes, such as when companies others control have filed for Chapter 11 bankruptcy protection.
When Aleris, an aluminium maker for which TPG paid about $4bn filed for Chapter 11, Apollo and Oaktree emerged as the most significant creditors and wrestled control of the business – for nearly half the price TPG paid, investors say.In another example,
Apollo is likely to make at least four times its money on LyondellBasell, into which it put $1.5bn, one of its largest investments.The chemical company was created with more than $20bn of debt and very little equity by Russian-born oligarch Len Blavatnik. When the recession hit and Lyondell’s earnings dropped from $4.5bn in 2007 to $3bn in 2008, it became clear that it had more debt than it could support.As the company’s troubles grew, Apollo started buying its debt, the price of which was tumbling, falling to a low of 15 cents on the dollar. Today, Apollo is the lead creditor and largest shareholder with a 27 per cent stake for a fraction of what Mr Blavatnik paid at the top of the cycle when the company was valued at $27bn.