Apollo shifts Fund IX focus to distressed-for-control as PE portfolio plunges

Apollo Global Management’s $24.7 billion Fund IX has shifted its focus almost entirely to distressed-for-control transactions as the firm seeks to deploy capital into a vastly different market environment to the one in which the fund was raised.

“Fund IX has obviously shifted almost entirely into credit, distressed-for-control, stressed investing and we’ve seen the pace of that fund go up significantly in the last month-and-a half,” said co-founder Josh Harris, speaking on the firm’s first-quarter earnings call Friday.

Co-founder Leon Black added that the firm’s $14.68 billion Fund VII, a 2008-vintage, was two-thirds invested in distressed opportunities, while the subsequent $18.38 billion Fund VIII, a 2013-vintage, was less than 5 percent invested in distressed.

“That is the bandwidth vis-à-vis distressed-for-control that can come out of the private equity funds,” Black said. “Our expectation is that over the next two years, there are going to be a lot more distressed opportunities.”

On 31 March, 36 percent of Fund IX was committed or deployed. During the quarter, Apollo deployed $1.7 billion through its private equity funds and committed to invest an additional $1.3 billion.

Apollo’s private equity arm took a significant hit during the quarter, depreciating 21.6 percent driven by markdowns across public and private portfolio company holdings. Private equity AUM decreased 12 percent quarter-over-quarter to $68 billion.

The firm is facing $965.4 million in clawback obligations across several funds, including Fund VIII, which was generating a net internal rate of return of 7 percent at quarter-end. The fund is marked at 1.3x, Harris said.

Chief financial officer Martin Kelly said the firm believes “this obligation is temporary and will not be realized.”

“Fund VIII would require an approximate 11 percent appreciation in value from 31 March to remove this obligation, approximately equal to the changes in the broad equity markets in April.”

“We invested with an emphasis on durable business models with strong free cashflow and despite the challenging economic environment, we remain confident Fund VIII will perform well over time,” Harris said, adding that the firm recently created a “watch list” of companies in stressed situations.

“As of 31 March, these companies represented less than 5 percent of the current value of Fund VIII.”

Harris said that during the global financial crisis, Apollo’s $10.14 billion Fund VI and its Fund VII were marked down to 0.6x and 0.5x, respectively, at their lowest points as a multiple of net committed capital. Both achieved multiples of more than 2x as of the end of Q1 2020.

This year the firm’s $3.25 billion hybrid value fund has invested $600 million of preferred equity in online travel platform Expedia and provided a $300 million secured note to Cimpress, an e-commerce provider of customized print, signage and marketing materials.

Harris said Apollo intends to launch fundraising for a successor vehicle later this year. The firm is seeking to raise $20 billion across several strategies in the next year, and LP interest has been high, he added.

“We’re seeing people actually calling us up and saying, ‘What new funds are you thinking about? Do you have any co-invest opportunities?’” Harris said.

Black added that the firm is not expecting any challenges to fundraising as a result of travel restrictions and social distancing rules.

“[Institutions] give us money, one, for performance, and two, they give us money because we’ve created a chemistry of trust and a relationship over time,” he said, adding that in the last few years the private equity industry has split into “the haves and have-nots” as investors place increasingly large sums with large firms.

“If anything, this will continue to play to our benefit, as long as we perform, because we already do have 30-year relationships with the large pools of capital that exist.”

He added that the firm does not anticipate returning to market with its next flagship private equity fund for “at least 18 to 24 months.”

Firm-wide, Apollo’s assets under management fell almost 5 percent to $315.5 billion. The firm posted a net loss of $2.3 billion for the quarter, and distributable earnings of $0.37 per share, down from $1.10 per share in the fourth quarter of 2019.