Apollo IPO: Redemption For CalPERS

Breakeven on Investment

Stake Tarred by Scandal

Lock-Up After IPO

Redemption, of a sort, is close at hand for the California Public Employees’ Retirement System following Apollo’s initial public offering on March 30.

In June 2007, CalPERS and the Abu Dhabi Investment Authority each bought 30 million non-voting shares in Apollo Global Management, for which each fund paid $600 million, or $20 per share. Those shares together represented an 18 percent stake in the company.

The following year, the financial crisis pummeled these stakes. In 2009, according to Pensions & Investments, these shares fell on private exchanges to just $6 a share, a drop of nearly 70 percent from their purchase price. Fast forward two years, and it seems that CalPERS and ADIA have been redeemed, at least as far as the value of their Apollo stakes are concerned. Right before Apollo’s IPO, its shares were priced at $19, and as of April 5, those shares were trading at $17.85.

When dividends are taken into account, the initial deal can break even at $19 a share, based on the $29.7 million that CalPERS and ADIA have each received since 2007, according to a March 21 offering prospectus. So, after the harrowing roller-coaster ride of the financial crisis, CalPERS and ADIA arrived at a point very close to where they started.

“We have great confidence in Apollo, which is a major player in our $32 billion private equity portfolio,” said CalPERS spokesman Clark McKinley. Besides investing in private equity funds, CalPERS also looks “to obtain equity stakes in carefully considered partners,” he said.

But if CalPERS has managed to extricate itself from a dark financial hole, it is still dealing with the stain to its reputation, due to the circumstances surrounding its original investment. CalPERS was sold on the Apollo deal in the first place by Alfred Villalobos, a placement agent now being investigated by federal authorities for bribing CalPERS officials, including former chief executive Federico Buenrostro, with lavish travel and gifts to secure investments for firms he represented, including Apollo.

A recent report on the ensuing scandal detailed Villalobos’s role in securing the Apollo deal as well as the $13 million that Apollo paid him. Altogether, over a six-year period, Villalobos’s firm, Arvco Capital Research, was paid $60 million by Apollo for securing investments from CalPERS.

Another tainted affiliation involved CalPERS’s private equity adviser, Pacific Corporate Group. After PCG blessed the Apollo deal in 2007, it was revealed that the firm’s former co-president was named in a pay-to-play lawsuit involving the New York State Common Retirement Fund.

These ethical issues did much to sully the reputation of CalPERS, which has seen itself as a leader not just by virtue of its status as the nation’s largest pension fund, but by using its substantial influence to push companies in which it has invested to improve their standing among shareholders on issues such as corporate governance and executive pay. CalPERS, for instance, has been a staunch advocate for “Say-on-Pay” provisions that allow shareholders to cast yearly votes on companies’ executive compensation policies.

To be sure, it is increasingly common for large investors like CalPERS to take direct stakes in private equity firms. CalPERS also owns a 5.5 percent stake in The Carlyle Group, which it bought in 2001 for $175 million. In its 2010 investment report, CalPERS estimated that stake to be worth $334 million. Carlyle is still a private firm, but it is commonly believed that it will seek to go public in the next year.

CalPERS also owns a 9.9 percent stake in Silver Lake Partners, a technology focused buyout firm. CalPERS bought its Silver Lake stake in 2008, paying $270 million. In 2010, CalPERS estimated the stake to be worth $198 million. In total, CalPERS manages about $230 billion in assets.

While the value of its Apollo stake has certainly bounced back, CalPERS is not yet completely redeemed. Actual redemption, in the form of being able to sell its shares, won’t be possible for two years because of a lock-up provision.