Apollo eyes credit growth after profit falls

  • First-quarter after-tax ENI per share of 55 cts vs Street view 56 cts
  • First-quarter distribution of 84 cents/share, up from 57 cts year ago
  • Assets of $159.3 bln as of end March vs $161.2 bln end of December

Apollo raised an $18.4 billion private equity fund last year on strong investor demand as its portfolio appreciated by 49 percent in 2013, sister news service Reuters reported. But its first-quarter earnings showed its private equity funds appreciating just 2 percent in the quarter, leading to a 71 percent drop in profit.

“Credit, credit, credit,” said Josh Harris, Apollo co-founder and senior managing director, on the earnings call in response to an analyst’s question on what will drive growth in Apollo’s fee-paying assets over the next 12 to 24 months.

“The private equity markets and the trading credit markets are very aggressively priced,” Harris said. “If you are a pension fund, a sovereign wealth fund or a high net-worth individual looking for a place to hide, illiquid opportunistic credit is in my opinion the best opportunity in the world right now.”

Apollo had $159.3 billion in assets as of the end of March, $48.1 billion of which was in private equity and $101.2 billion in credit, ranging from high-yield bonds and nonperforming loans to residential mortgage-backed securities and collateralized loan obligations.

As regulators on both sides of the Atlantic restrict the origination, holding and trading of debt by banks, alternative credit fund managers such as Apollo are eying more opportunities to provide capital to companies themselves—a practice often referred to as shadow banking. For example, Apollo sees an opportunity to provide mezzanine financing to oil companies whose reserves are too complex for them to tap high-yield bond markets, Harris said.

Apollo is also eying assets that banks are looking to shed, such as Banco Santander SA’s real estate management business, which was sold to an Apollo credit fund in January for 664 million euros ($920 million).

“We are best in class in private equity … but I don’t think that’s terribly scalable. We don’t see any reason (credit assets) can’t be a large multiple, frankly, of where we are today at $100 billion,” Leon Black, Apollo co-founder and chief executive, told analysts on the same conference call.

Apollo has taken advantage of robust capital markets in the least two years to cash out of investments. The cash generated from performance fees, or so-called carried interest, increased in the first quarter, allowing it to pay out a higher dividend. But its buyout funds appreciated just 2 percent in the quarter, slightly higher than the wider stock market but less than its 14 percent appreciation in the first quarter of 2013.

Apollo reported total economic net income after taxes of $219 million versus $764 million in the first quarter of 2013. ENI is an earnings metric that takes into account the market value of a company’s portfolio. This translated into ENI of 55 cents per share after taxes, less than the average analyst estimate of 56 cents in a survey by Thomson Reuters I/B/E/S.

“The decline was widely expected as Apollo could not replace the profits generated from LyondellBasell Industries NV, which was one of the best private equity investments ever,” Morningstar analyst Stephen Ellis wrote in a note.

The resignation of Marc Spilker as president in March cost Apollo $45.6 million, or 8 cents in post-tax ENI per share, due to a noncash expense associated with equity-based compensation.

Greg Roumeliotis is a correspondent for Reuters in New York.