After exit binge, Apollo’s Leon Black sees opportunities to buy

Speaking February 28 at Columbia University’s annual private equity and venture capital conference in New York City, Black confirmed that the firm, which manages some $161 billion in private equity, credit investments and real estate, has indeed been more seller than buyer over the last 18 to 24 months. During that time, he said, the firm has sold “something like” $24 billion in assets, while investing $5.5 billion in new opportunities. 

Black, interviewed on stage by Bloomberg reporter David Carey, suggested that his “now infamous” quote had a fuller context than has been appreciated. He had meant to convey that Apollo Global planned to sell “mature companies” that the firm had been holding during the industry’s “four-year journey in the wilderness”—a difficult time for realizations following the financial crisis. It was also refinancing “everything that was nailed down”—companies the firm preferred to hang on to. 

His remark also “wasn’t meant to say there was nothing to buy,” said Black. Indeed, a follow-up interview with Black after his keynote revealed that the firm had so far invested about $500 million in two deals from its freshly raised $18.4 billion Apollo Fund VIII. This includes its recent agreement to purchase the parent company of kid’s restaurant chain Chuck E. Cheese for $1.3 billion. The firm also recently agreed to acquire American Gaming Systems, maker of slot machines, in a deal valued at $240 million, according to The Wall Street Journal.

In discussing fresh opportunities Black said that his firm has historically been a value investor with an emphasis on improving the operations of portfolio companies. Some 35 percent to 40 percent of the investments the firm has made since its founding in 1991 came during economic downturns, Black said, and in each of those downturns the firm acquired something like five to seven companies. Among its biggest hits from the last downturn: a $2 billion distressed debt investment around 2008 in struggling chemicals company LyondellBasell Industries, which produced a paper profit of some $9.6 billion, according to Bloomberg. 

Black described distressed debt investments that often lead to controlling equity stakes and largely uncontested “complex corporate carveouts” as central to Apollo Global’s strategy. The firm tends to average entry EBITDA multiples of 5x on distressed debt deals and 6x on the more than 50 corporate carveouts the firm has done, he said. “We often like to deal with aggravation if it will get us a better price.” He added: ”You don’t need a global recession to find good distressed opportunities.” Indeed, the firm hasn’t had a private equity fund in its history that didn’t consist of at least 25 percent distressed investments, Black said, adding that the firm is working on two to three corporate carveouts. Below are highlights of other opportunities Black sees for Apollo Global:

* Black spoke enthusiastically about last year’s $410 million purchase, along with Metropoulos & Company, of Hostess Brands, which had filed for bankruptcy protection after failing to reach a deal with its unions. The firms acquired “great brands” such as Twinkies, he said, and they were able to melt out costs by cherry picking five to six plants that focus on non-perishable products that are cheaper to transport than perishables. The company got products back on the shelves about four months after the court blessed the deal, he said.

* The firm sees opportunities in natural resources, and in particular Black pointed to opportunities in upstream and downstream oil and gas assets. 

* Non-performing loans remain a focus in Spain, Ireland, the United Kingdom and Germany, as do banks in Spain and Germany. He said the supply and demand dynamics in financial services in Europe favor a handful of players who “know what they’re doing,” such as The Blackstone Group, Cerberus Capital Management, Lone Star Funds and Apollo Global.

* On the credit side the firm has been active investing in corporate debt in emerging markets. “It’s a business you can scale if you have a good team. It’s why we went into it,” said Black. The firm hasn’t been as active in emerging markets on the private equity side, since it prefers to avoid the minority investments that are the hallmark of foreign-investor deals there. The exception, he said, is in India, where the firm has formed a joint venture and equity fund with ICICI Venture to invest in the restructuring of overleveraged, family-run businesses.