Apollo sees its ‘time to shine’

Photographs by Adam Lerner

Uncertain times that include the looming prospect of a recession are enough to give even the best GPs pause.

Not Apollo Global Management. The firm, which is presently seeking $25 billion for a 10th flagship buyout fund, is instead feeling bullish about today’s volatility. “The worse things are in the market, the more opportunities we see,” Matt Nord, co-head of private equity, says.

“We’re in many ways in uncharted territory. It feels similar to 2000-01, with extreme levels of overvaluation and speculation coming to an end”

David Sambur, Apollo

This owes to a strategy that is purpose-built for complexity and dislocation, especially at the large end of the deal spectrum. Refined over cycles stretching back before the financial crisis, it is now enabling Apollo’s “time to shine,” as David Sambur, co-head of private equity, puts it.

In an interview with Buyouts, Nord and Sambur discuss their take on the market in 2023, how they are managing financing challenges, and the opportunities they see in Apollo’s areas of specialization, among them corporate carve-outs, distressed investing and public-to-privates.

How does Apollo view the current market?

David Sambur: We’re in many ways in uncharted territory. It feels similar to 2000-01, with extreme levels of overvaluation and speculation coming to an end. How we wound up here was different, given covid and excesses that built up in the system before, during and after that.

If you look at it as transitioning from a world of rampant speculation – which is a lot of what people were passing off as investing in 2020, 2021 and 2022 – to where we are now, this is a logical counterpoint to some of the activity around that time.

Clearly, the cost of financing has gone up. That’s one of the drivers of slower corporate and private equity deal activity, because both are correlated to the ability to finance and the cost of finance. We view that as healthy. The cost of money had gotten too low and the availability to finance deals had gotten too easy.

We welcome the injection of discipline back into the market. We finance our deals at lower multiples than peers, so the additional financing cost impacts us less. If you look at two deals we’ve recently done – Atlas Air and Univar Solutions – our ability to source financing at all, let alone at rates we think are attractive, is a real differentiator in this environment.

Matt Nord: Finding deals where you’re getting compensated with an attractive risk-reward to the equity in such a high-rate environment is the thing that we spend a lot of time thinking through.

Being able to do deals with lower leverage levels is helpful because we’re less exposed to higher interest rates. We’re doing deals where you don’t need financing, or companies already have financing in place. The creativity and the flexibility of our model is how we’ve been able to be so active so far, notwithstanding the challenges of the overall market.

 

“Now is the right time to pursue go-privates, given the amount of uncertainty out there and given our ability to acquire these businesses”

Matt Nord, Apollo

It’s in large part a function of buying well. Buying assets at around 6x or 7x multiple of cashflow, we’re usually only leveraging these companies around 3x or 4x. And that’s very different from where the market has been. The market on average has been paying 12x heavily adjusted numbers and leveraging businesses at 6x, 7x, 8x.

How are you dividing your time between the portfolio and new deals?

Nord: Our team has seen multiple cycles. We’ve always benefited from the lessons of history and of our experience. We’ve brought that to underwriting and even in the excesses of the last couple of years we’ve maintained our discipline.

It wasn’t always fun being patient and looking at other firms chasing trends, and paying high valuations, and generating good returns by flipping assets at even more extreme valuations. That worked for a while. But we’re trying to generate strong absolute returns and strong risk-adjusted returns through the cycle.

And now we’re seeing the benefit of that. I often talk about this in terms of offense and defense, and I think many other GPs right now are playing defense. They have a lot of over-levered companies in their portfolios. They’re turning inward.

We’re really the inverse of that. Yes, we’re focused on making sure that our companies can navigate some of the risks that we see in the economy. But, generally speaking, our companies are so well capitalized that we can focus on offense and think about new capital deployment.

Are you investing more capital now relative to 2022 or 2021?

Nord: We’re not market timers, so it’s not like we’re trying to wait for a particular market. We have an ability to deploy capital across all environments. But I do believe there is a counter­cyclical aspect to our business, which is that the worse things are in the market, the more opportunities we see, the more capital deployment we’re able to achieve.

Sambur: Historically, volatile periods like this make great vintages for us, they’re really our time to shine. It’s when we deploy more capital and when we produce the best returns.

In what other ways is Apollo’s strategy suited to today’s market?

Sambur: It’s a flexible investment mandate. We do buyout transactions, complicated corporate carve-outs and deleveraging buyouts – buyouts where instead of levering up the company, we’ll often buy-in through the debt and help the company deleverage. That’s another way to get a good business at a good price.

The common element in all three strategies is purchase price matters – buying a good company at a reasonable price and using creative sourcing in our flexible mandate to get at value.

That’s a very different approach from that of a lot of our peers. The lesson many people took from the financial crisis was buy quality. Firms that have said “let’s just buy a good company” almost ignore the other side of the equation, which is what price are you paying, let alone what’s the investment thesis and how are you going to execute it.

Nord: I think the notion of creativity at scale, or complexity at scale, is what separates us.

We look for situations where a business is either misunderstood or out-of-favor or there’s something to it that discourages others from looking at it. That’s another reason why we can capture value across all market cycles. And then it’s helping these companies to achieve their potential once we acquire them.

David led the Yahoo carve-out from Verizon [2021]. That’s the quintessential Apollo deal. It was built upon a relationship with Verizon. It was years in the making. It’s a true world-class franchise – still one of the most popular sites on the internet. We financed the business to give it flexibility to invest in growth and unlock potential using all the tools in our toolkit.

$68bn

Size of Apollo’s flagship private equity business

We have a go-anywhere approach. It’s bottoms-up, focused on the best risk-reward and pivoting between ­geography, industry and deal structure. We want to have the broadest possible funnel so we can be as selective as ­possible.

Sambur: It’s going to be in our zone of competence. Along with our deal focus, it’s primarily in the developed world, in North America and Western Europe. And if you look at the industries we’ve invested in, there are about nine or 10 that we think we’re experts in. Within those areas, there’s plenty of room to be opportunistic.

I want to mention size as well. Our strategy is designed around finding opportunities where we get paid for our capital and creativity. These larger deals, these larger check sizes, are a great way for us to differentiate ourselves because they’re fundamentally less competitive. There are only so many firms that can write a $2 billion, $3 billion, $4 billion or $5 billion equity check.

“Many other GPs right now are playing defense”

Matt Nord

In these larger transactions, we’ve also found more operational value-creation opportunities. These deals at scale are a critical component of our strategy and something that we’re intentionally leaning into.

For Apollo, where are the best opportunities? Do they include bargains?

Sambur: There are certainly more things that scream cheap in the current market than there were a year ago. It’s a more target-rich environment. But you have to generate these opportunities, they don’t just fall into your lap. Just because something is trading at a lower price doesn’t mean that it’s a good value per se.

Our pipeline is substantially larger than it was a year ago. I think that’s a function of the market’s trading down in all of this volatility that’s occurred because of the dramatic increase in rates.

Nord: When we talk about purchase prices or value orientation, that is not a commentary on the quality of the businesses that we buy or what we’re doing with those businesses once we own them.

“What we realized a long time ago is companies that have the best values, the best ethics, the best practices actually generate the most value”

Matt Nord

I would describe our approach as polishing a lot of gems. These are really good companies that for whatever reason are not being appropriately rewarded for the quality of their franchise, the quality of their business. Ours is really more of a “good-to-great” strategy.

Are reluctant sellers a barrier to getting deals done?

Sambur: A lot of private equity GPs are focused on auctions or buying assets that are being sold. And when markets are down, fewer people are willing or excited about selling assets. You see fewer processes and therefore you see less dealflow being generated.

If you look at the deals we’ve done, nearly all of them have been outbound sourcing – deals where we’ve created the opportunity. We’re not sitting around waiting for the phone to ring. We’re not waiting for bankers to give us a call.

“We’ve been in a world where real rates have been zero or negative for much of the last 15 years and that has inflated an ‘everything’ bubble”

David Sambur

How do you approach distressed investing? Are you seeing more opportunities?

Nord: We don’t view deleveraging transactions as a different type of deal. It’s really a different starting point. In a traditional buyout you lever up to effectuate your purchase of the business. In a distressed or deleveraging transaction, the debt is already there. We’re buying the debt and turning it into equity.

The reason why it’s so powerful is that if you’re buying first-lien debt at a discount – you have all the downside protection of being top of the capital structure and then you have a “heads-I-win, tails-I-win” dynamic. If the company refinances you, you generate a good return, and if not, you’re happy to own the business at that creation value.

$548bn

Apollo’s total assets under management

So, I don’t view us as a distressed firm. I view us as a flexible private equity firm where this is an incredibly valuable tool to have when you experience downturns. We’ll take the tool out like we did in the financial crisis. We’ll take it out like we did in 2020, when we put about $4 billion of capital to work in a couple of weeks.

Sambur: The market backdrop is extraordinarily important. We’ve been in a world where real rates have been zero or negative for much of the last 15 years and that has inflated an ‘everything’ bubble. It has also encouraged companies to borrow. There’s more than $3 trillion of sub-investment grade debt on the ­balance sheets of corporations in America today. That’s more than 3x as much as existed at the dawn of the financial crisis.

Now that interest rates have gone up, many capital structures are mis-sized for the realities of the market and debt needs to be converted into equity. That’s a healthy thing. There needs to be deleveraging in corporate America. I think we could provide a valuable service to these companies in helping them better align their capital structures to the current market.

Does Apollo perceive a rich environment for carve-outs?

Sambur: Large, complicated carve-outs is a space where we’ve carved out a competitive advantage. These deals are not simple deals. Not only by virtue of the fact that sometimes you’re carving-out businesses and standing up functions on their own, but also the size of the deals.

$25bn

Amount Apollo is seeking for its 10th flagship buyout fund

It often takes many months to negotiate these transactions. That’s a big investment for corporations to make. It’s a big risk on their part. I think given our track record the word has gotten out in Fortune 500 circles that we’re good at this and a trusted partner. That’s why, for example, CenturyLink, now Lumen, was willing to spend almost two years talking to us about buying its local exchange carrier in 20 states [2022].

On the demand-side for carve-outs, we’re seeing our pipeline grow. Because of uncertainty around the economy, corporations and CEOs want to simplify their businesses and put cash on their balance sheets and really build fortress balance sheets for whatever volatility is to come.

Nord: Corporate carve-outs are not zero-sum. In a take-private transaction, it’s price. In a carve-out transaction, the most effective approach in our view is meeting with the company and asking them, “What are your objectives?” And then saying, “We can be a solutions provider.”

We’ve done carve-outs where the company is focused on day-one proceeds. There are other deals where the corporate will say, “This business is non-core, but we know it has tremendous upside and we would love to keep a portion of the equity.” And there are others where there continues to be an on-going commercial relationship between the business we’re acquiring and the seller.

When we do carve-outs, price is a consideration. But sellers really want to know that we’re going to be good stewards of these assets, that we’re going to put these businesses in a position to be successful.

Are public-to privates another expanding opportunity set?

Nord: What CEOs have come to appreciate is their flexibility and access to capital is actually greater in a private context than in a public context. That’s been an education over time. For most CEOs, if we’re heading into a recession – which we believe we are – your ability to invest in your business and take a longer-term perspective will be enhanced as a private company.

Many of these take-private transactions were situations where we spent years getting to know the management teams, getting to know the companies. And now is the right time to pursue go-privates, given the amount of uncertainty out there and given our ability to acquire these businesses, capitalize them well and provide an opportunity to invest heading into a dislocation.

$3trn

Sub-investment-grade debt on balance sheets of US corporations, according to David Sambur

The most compelling value, the best times to invest and grow, are in downturns. If you’re public, it’s a lot harder to capture that upside.

How do you incorporate ESG and responsible ownership in your investing?

Sambur: One of the benefits of our model is our ability to infuse best-in-class practices, whether it’s running companies efficiently or whether it’s responsible stewardship and governance.

The overall umbrella of responsible ownership is a big part of what we do. For example, we made recent investments to take our approach to ESG and sustainability to the next level.

We announced $1 billion of annual spend across our portfolio to diverse suppliers and we’ve already well exceeded that. We announced an across-the-board 15 percent reduction in carbon for all of our investments. We announced that more than a third of our directors of portfolio companies be diverse and we’re close to 40 percent.

This is something LPs want, this is something portfolio companies and their employees want and this is something our employees want.

Nord: What we realized a long time ago is companies that have the best values, the best ethics, the best practices actually generate the most value.

If you’re protecting and investing in your employees, if you’re keeping them healthy and safe, if you’re allowing them to participate in the value creation, they’re going to be happy.

And if they’re happier, they’re going to stay and they’re going to be more productive. And, ultimately, the communities that they operate in are going to be supportive.

Separated at birth – and by the Long Island Expressway

If you didn’t know better, you might think Matt Nord and David Sambur were siblings, given their similar backgrounds.

Close in age, both were born into middle-class families on Long Island (Sambur on the North Shore, Nord on the South Shore). Both were raised by parents who were educators. Both began their careers at Salomon Smith Barney (Nord in sponsor coverage, Sambur in leveraged finance). And both next went to Apollo Global Management, within a year of one another.

But there are differences, including the teams they boost. Sambur is a fan of the New York Yankees, making him one of the Bleacher Creatures. Nord, in contrast, as a fan of the New York Mets, is part of the 7 Line Army (named after the 7 train, which ferries Mets fans to the ballpark).

The deep-seated rivalry between New York City’s baseball teams and their fan bases comes up at the office “less often than you’d think,” Nord and Sambur tell Buyouts.

Interestingly, Nord and Sambur did not actually meet before Apollo, where they began working together in the bullpen on the 43rd floor of the firm’s 9 West 57th Street headquarters. That encounter started up a nearly 20-year partnership, culminating in Nord and Sambur being named co-heads of the flagship private equity business in 2019.

Since then, the pair have come to appreciate each other, recognizing “similar value systems,” Nord says, and much else besides. “It’s a strange thing because you need to squint to see the differences between us,” Sambur says. “But I think the additive nature of having the two of us together creates real synergy.”

That synergy has contributed to multiple Apollo deals. One of Nord’s favorites is the take-private buyout of Tech Data, closed in 2020 at $6 billion after Apollo thwarted a rival bid by Warren Buffett. For Sambur, a favorite is the $5 billion carve-out of Yahoo from Verizon, wrapped up in 2021. “It’s contrarian,” he says, “It exhibits a lot of what makes Apollo special.”

The good times have been accompanied by the bad. One of the toughest moments was covid, which arrived six months after Nord and Sambur were appointed to their current roles.

“You had a global pandemic,” Sambur says. “You had a health emergency, a business emergency, an economic emergency, a psychological and wellbeing emergency. It put us to the test.”

But the challenges of the health crisis also brought out the best in the pair and created important opportunities for Apollo. For that reason, covid’s end was one of most the rewarding moments, Nord says. “It was coming back to the office and just feeling the energy across the team, because we did well.”

Nord and Sambur today oversee a roughly $68 billion private equity platform and a global team of more than 100 professionals.