Apollo VII Lands Safely In Top Quartile

When Apollo Investment Fund VII LP closed—in December 2008—it had gathered up $14.7 billion in commitments, the most ever for an Apollo fund.  Many of the firm’s investors were no doubt alarmed by the economy’s convulsions—and some may have felt like the terrified figure in the “The Scream,” the famous Edvard Munch painting that Leon Black, Apollo’s chief executive, purchased a version of in 2012 for $120 million.

But Apollo Global’s investors need not have worried. Fund VII has so far delivered a net IRR of 28 percent and a net return multiple of 1.8x as of June 30, according to the firm’s second-quarter financial statements. Returns reported by the fund’s pension investors—from Dec. 31, 2012—show IRRs of between 22 and 23 percent, and an investment multiple of 1.5x to 1.7x. So far, $14.9 billion of investments have been realized, and the fund has $3.7 billion in dry powder, according to the second-quarter statement.

These robust returns helped Fund VII rank ninth out of 69 vintage-2008 domestic buyout, growth equity and turnaround funds that Buyouts tracks. And Fund VII is no ‘one hit wonder.’ Apollo Global’s previous flagship fund, the 2006-vintage Fund VI, returned a net IRR of 8 percent and a return multiple of 1.4x, according to Dec. 31, 2012 data from the California Public Employees’ Retirement System. Meantime, the 2001-vintage Fund V has returned a 38 percent net IRR and a 2.7x return multiple, according to CalPERS.

For Apollo Global the solid performance of Fund VII sets the stage for a strong start to raising the fund’s successor, Apollo Investment Fund VIII LP, which has a $12 billion target; and with the success of Fund VII, the firm has done its part to convince some investors that the age of mega-funds is not over.

“Fund VII had the capital. They put a lot of it to work at distressed prices, and they reaped the benefits,” said Robert Lee, an analyst who covers Apollo Global for Keefe, Bruyette & Woods, an investment bank. Lee, who calls Apollo Global a “distress-oriented firm,” gives Apollo Global’s public shares an ‘outperform’ rating. Apollo Global went public in March 2011, and the company trades at $26 a share, 35 percent above its IPO price.

Apollo Global “spends a lot of time thinking about the market, and what spaces they want to play in,” according to Erik Hirsch, the chief investment officer of Hamilton Lane, the nation’s largest private equity advisory firm, which was an early backer of Apollo funds. “They’ve made really good calls, and there is a clear sector weighting, not a random hodge-podge of companies in a variety of industries.”

One of the industries Apollo likes is basic materials. LyondellBasell, the world’s third-largest independent chemicals company (and the biggest maker of polypropylene), went bankrupt at the height of the economic crisis. As the firm restructured, Apollo’s Fund VII invested between $1.5 billion and $2 billion in the firm. Later, when LyondellBasell went public again, in 2010, Apollo Global’s stake in the company grew to be worth between $6.5 billion and $7 billion, for a 3x to 4x gain, according to news reports.  

Other companies in Fund VII have included CKE Restaurants, the owners of Carl’s Jr. and Hardee’s; Hostess Brands, the famous maker of Twinkies and Ding-Dongs; an interest in Norwegian Cruise Lines, and the textbook division of McGraw-Hill.

Apollo Global, which manages $113 billion in assets overall, is renowned for bargaining hard to purchase companies at steeply discounted prices, and for seizing opportunities when others flee. “We like to buy very good companies, but pay very little for them,” said Black at a Goldman Sachs conference last December. “The single most important factor to a positive outcome is price.”

Hard Bargaining

One possible bargain from Fund VII: amassing a stake in Charter Communications. Apollo just sold its remaining stake in the company to Liberty Media for $1.7 billion earlier this year. At one point, Apollo Global had assembled a 33-percent stake in Charter Communications after buying up the cable company’s debt as the firm slipped into bankruptcy in 2009, according to news reports. After converting that debt into equity, Apollo Global gradually sold off its stake, beginning with Charter Communications’s post-bankruptcy IPO in late 2010. It wasn’t clear how much the firm had initially paid for its investment.

The purchase of McGraw-Hill’s textbook unit in a $2.5 billion deal was another kind of transaction Apollo Global does a lot of: carve-outs. “These are orphans of large…public companies that are selling off divisions that are non-core,” said Black at the Goldman conference. These are “very good companies, but usually under-managed and capital starved. What we like about (carve-outs) is we generally are able to get exclusives…(and) the beauty of having an exclusive is you often end up with a very good price.”

By 2013, as market confidence returned and interest rates remained low, Fund VII was also able to harvest investments at an opportune time. Josh Harris, Apollo Global’s chief investment officer, told the audience of a Deutsche Bank conference in June, “There are three ways to make money in private equity: You can buy right, you can build value while you own it, and you can sell right. We’re selling at about nine times (EBITDA)…and (in Fund VII) we’re buying at around six times. And we’re improving EBITDA. When you do all that, you generate a 26 percent return.”

Already in 2013, the fund has distributed $3.9 billion back to investors. Those distributions come at a good time for Apollo Global. The firm has just begun raising money for Fund VIII, and so far the investor response has been strong—$8.4 billion in commitments. And with a target of $12 billion, Fund VIII is one of the largest funds currently in the marketplace.

Investments likely to be sold soon include CKE Restaurants, which is exploring a possible sale after it had initially postponed its IPO in 2012, according to a report by sister news service Reuters. The company could fetch $1.7 billion, the report said. Apollo Global took CKE private in 2010 as part of a $700 million deal. Apollo Global spokesman Charles Zehran declined to comment for this article.

Fund VII investors that stand to benefit from coming sales include CalPERS, which committed $800 million, the Canadian Pension Plan Investment Board, which pledged $600 million, the Oregon Investment Council, which committed $400 million, the California State Teachers Retirement System and the New York State Common Retirement Fund, each of which pledged $350 Million, the New York City Retirement Systems, which committed a combined $225 Million, and the Colorado Public Employees’ Retirement Association, which committed $100 Million.

Backer Hirsch of Hamilton Lane points one of the less-heralded reasons Fund VII has performed better than many other funds. The firm avoided the TXU-type disasters that befell some big competitors. “Certainly, avoiding losses is good for any fund, and in Fund VII, there are fewer holes,” said Hirsch.

“Many people forget that big firms like Apollo got big for a reason,” added Hirsch. “They got big because they were pretty good.”