Apollo takes alternative route

Apollo Management is selling a 10% stake in itself using a proprietary trading system with a commitment to register the stock for resale on a traditional exchange at a later date. The arrangement is designed to expedite the process of raising permanent capital and not to avoid regulatory oversight entirely, as the company intends to list on the NYSE in the medium term.

The buyout firm will sell 35.3m shares on Goldman Sachs’ GS Tradable Unregistered Equity OTC Market, or GSTrUE. The offering will be conducted on a 144a basis, limiting participation to qualified institutional buyers, but carries registration rights, unlike a similar placement from Oaktree Capital Management earlier this year. In addition to Goldman Sachs, Credit Suisse and JPMorgan were mandated as bookrunners.

Apollo intends to list the shares on the NYSE, making them freely tradable, as early as the first quarter of 2008 but must do so within 240 days under any circumstance. The strategy allows Apollo to get in front of investors before a slew of other alternative-asset managers – KKR, Och-Ziff Capital Management, Pzena Investment Management – are able to gain regulatory approval for traditional IPOs.

With an accelerated timetable in mind, the buyout firm launched marketing last week at US$27–$30 with pricing targeted for August 2. Similar to both Fortress and Blackstone, Apollo sold a combined 19% stake to Abu Dhabi Investment Authority and CalPERS to support the valuation. The offering implies a valuation for Apollo of about US$9.6bn, a significant discount to both Fortress and Blackstone, according to sources familiar with the process.

However, that discount is quickly deteriorating as Blackstone and Fortress share prices tumble amid concerns that higher-cost debt could crimp historical returns – 41% over life; 29%, net of fees, in the case of Apollo. Blackstone shares lost 8.4% last week and currently trade 11.8% below their IPO price of less than a month ago. Similarly, Fortress’s valuation is well below what it was earlier in the year.

One of the concerns is that tax reform is almost certainly on the way, raising the carried interest paid by alternative asset managers from the 15% capital-gains rate to 35%. While heading off that reform would seem to be a primary motivation for Apollo to accelerate the offering process, it is not – investment banks are marketing as if results were taxed at the higher rate.

“The general consensus is that capital gains will be taxed at a higher rate within two years,” said one banker close to the Apollo situation.

Nevertheless, key selling points of the GSTrUE platform are speed and the ability to obtain all the benefits of public status (currency for acquisitions, incentivise employees, etc), without the burden.

To retain the private status, issuers must restrict the number of investors to below 500, a trigger that obligates private companies to register with the SEC. The platform has sophisticated software that can track the number of investors, though issuers are able to specify an upper limit to avoid any potential problem.

There are a growing number of options available to alternative asset managers looking to sell equity rapidly. GLG Capital, one of the largest hedge funds in Europe, for example launched marketing last week in support of its US$3.4bn reverse-merger into Freedom Acquisition, a specialty purpose acquisition corporation (SPAC). Triplecrown Acquisition, another SPAC, recently filed to raise US$400m that it will target at the financial services industry.