June 26, 2020 / 9:08 AM / 10 days ago

Investors see 'king of distress' Apollo having its best ever crisis

NEW YORK (Reuters) - A credit crunch is hitting many indebted companies, and Apollo Global Management Inc (APO.N) never had it so good.

The private equity firm’s shares hit an all-time high earlier this month, outperforming its peers, as investors bet it can invest its $40 billion of unspent capital in cash-strapped companies that are struggling in the aftermath of the COVID-19 pandemic.

Central banks and governments around the world have unveiled a raft of credit support and economic programs to help businesses. However, aid is often limited for companies with weak credit ratings, driving many of them into the arms of Apollo and other private equity firms.

Since the onset of the crisis, Apollo has invested $1.2 billion alongside Silver Lake Partners in Expedia Group Inc (EXPE.O), whose online booking business was hit hard by the coronavirus-induced stay-at-home orders and travel bans. Apollo also provided $250 million to U.S. pipeline operator NGL Energy Partners LP (NGL.N) to refinance existing loan facilities.

While other private equity firms, such as Blackstone Group Inc (BX.N) and Ares Management Corp (ARES.N), are also very active in this space and have seen their shares rally, Apollo’s stock has outperformed because of the New York-based firm’s record of capitalizing on such opportunities, analysts and investors have said.

“The market has a fair amount of confidence in Apollo’s ability to invest in credit,” said Jefferies analyst Gerald O’Hara, who has a “buy” rating on Apollo’s stock.

Inspiring this confidence are some of Apollo’s returns. Apollo Fund VII, a private equity fund launched during the 2008 financial crisis, generated a net internal rate of return (IRR) of 24% as of March this year.

By comparison, an index measuring the net IRR of U.S. private equity funds gained 14.4% over the most recent 10-year period, according to data compiled by investment adviser Cambridge Associates LLC.

Unlike many of its peers, Apollo has the ability to carry out leveraged buyouts and credit investments from its flagship private equity funds. It also had dedicated credit funds managing $210 billion in assets as of the end of March, $105.6 billion of which is devoted to corporate credit.

By comparison, peers Blackstone, KKR & Co Inc (KKR.N) and Carlyle Group Inc (CG.O) had credit fund assets of $129 billion, $68 billion and $49 billion, respectively, as of the end of March.

Apollo also generates a higher fee-related earnings margin than its peers, because half its assets under management are in permanent capital vehicles as opposed to funds it has to replenish. It manages the investment portfolios of insurance companies such as reinsurer Athene Holding Ltd (ATH.N). “Their fee-related earnings have held up well,” O’Hara said.

Mitch Rubin, chief investment officer at RiverPark Funds, said the reliability of Apollo’s fees revenue was a key consideration in his decision to acquire shares of the private equity firm following the coronavirus outbreak.

“When the market saw that Apollo’s investment in Athene wasn’t going to be a drag, the stock rebounded strongly,” said Rubin. RiverPark Funds is also an investor in Blackstone and KKR.

CLAWBACKS

Apollo’s shares dropped more than its peers in the market downturn before outperforming them in the rally. This is because the stock market bounceback boosted the value of Apollo’s assets and eliminated any need for the firm to return some of the performance fees it was paid by its fund investors, according to Citigroup analyst Bill Katz.

The fact that these fees can no longer be clawed back has made Apollo’s shares more attractive to investors.

“The clawback risk has been erased because of the market coming back,” said Katz, who recently downgraded Apollo’s stock from “buy” to “neutral.”

Analysts cautioned that there is no certainty that Apollo shares will sustain their rally given that a resurgence of coronavirus infections and a new slump in global markets could cause the threat of clawbacks to resurface or derail its fundraising.

“Even though its shares have rebounded, Apollo has had severe pressure on its investment performance and its stock touched lows when the market was at its lowest point,” said JMP analyst Devin Ryan.

Reporting by Chibuike Oguh in New York; Editing by Greg Roumeliotis and Daniel Wallis

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