In many ways, 2004 was a worldwide festival for the LBO market, energized by record deal volume, a healthy fundraising environment and plenty of lucrative exits. And while certain macroeconomic factors helped set the stage for those successes, there’s no question that in most cases, buyout pros earned their spot at the party.
Two buyout pros whose presence loomed especially large in 2004 are Apollo co-founders and managing directors Marc Rowan and Joshua Harris. They bought low, sold high, fixed what needed fixing, and helped set trends that only a firm like Apollo could pull off.
For the uninitiated, Apollo is quite simply a money machine. In the 15 years since its founding, the firm has furnished compound annual returns of roughly 40% from roughly $12 billion invested. Its most recent buyout fund, the 2001-vintage, $3.8 billion Apollo Investment Fund V, LP, has so far delivered an IRR of 23.4%, which clearly puts it among the top performers from that vintage.
Like some of their contemporaries in the LBO world, Harris and Rowan emerged from the ashes at Drexel Burnham Lambert. After the firm’s infamous collapse 15 years ago this month the pair teamed up with Leon Black to start Apollo.
Who’s Your Daddy?
While Rowan and Harris may have picked up some swagger from their high-flying days at Drexel, the culture at Apollo is more reserved today. When it comes to investing, Apollo has developed a paternal instinct for the companies in its portfolio. Sure, few if any pros at the firm would evoke images of television’s Ward Cleaver, but a look at the Apollo’s work in 2004 points to a group of investors that will work tirelessly to keep a company moving in the right direction.
Take the firm’s investment in Sirius Satellite Radio. Apollo first invested in the company in 1998 with a $200 million capital infusion. Sirius was late off the starting blocks in launching its service, and its rival, XM Radio, capitalized on that delay with an early and wide lead in subscriptions. This second fiddle, beta-max’ status plagued Sirius throughout its early years. And during the first four years of the investment, Apollo had to sink an additional $50 million more into the business to help stave off bankruptcy.
But Apollo has been anything but a passive investor, and to ensure the follow-up investments weren’t just a case of good money chasing bad, the firm started swinging its weight around. Rowan was instrumental in bringing in Joe Clayton and Mel Karmazin, and with those hirings, subsequent deals with the NFL and Howard Stern soon followed. The subscriber base has grown from 261,000 to 1.25 million over the past year alone, while the stock has jumped as high as 198% during that time. Apollo, on the edge of seeing its investment wiped out two years ago, now sits with a stake in Sirius valued at between four and five times its equity investment.
WMC Mortgage was another company that Apollo brought back from the brink of collapse last year. The firm had originally acquired the business in 1997, and at first enjoyed spectacular success, but after the financial markets reversed and the subprime mortgage industry torpedoed, WMC’s fortunes quickly changed. Rowan describes, “We were fortunate to have done some things that enabled us to even stay afloat. At the time, Apollo was sending WMC $2.5 million to $5 million a month so the company could meet payroll… Eventually, a group of us had to literally move out to California for a couple months and we worked with the management team to completely rewrite the business model.”
WMC became exclusively an Internet-focused company, and saw its monthly volume surge from around $16 million a month following the conversion to almost $2 billion a month just prior to the company’s sale to GE Consumer Finance this past June. Again, Apollo went from nearly losing its shirt on the investment to ringing up a win. The investment returned more than four times Apollo’s invested capital.
But the firm isn’t necessarily a thrill seeker. Last year, Apollo unloaded a number of investments that were never in peril. Harris, for one, proved especially adept at using the public market as an exit. He oversaw the floatation of fertilizer distributor UAP, which resulted in a six times return on paper; the dividend recap and IPO of waste-water treatment company Nalco, which recouped almost 90% of the 2003 investment; and the secondary sales of Pacer International and Compass Minerals, yielding a 240% IRR and a more than 100% IRR, respectively. Meanwhile, in addition to the turnaround at Sirius and the sale of WMC, Rowan also completed the exit of Vail Resorts through a secondary sale of the company’s stock.
While 2004 provided a wide window for Apollo to find realizations, the firm was just as adroit in finding deals. In 2004, Harris led the acquisitions of Borden Chemicals, certain Eastman Chemical Co. assets, and Bakelite GmbH (as an add-on to Borden). Rowan, meanwhile, orchestrated a recap in AMC Theatres. In that transaction, Apollo took the company private along with JPMorgan Partners, but at the same time realized a return of three to four times its equity from an earlier investment in the movie chain.
With all of the activity at the firm, Harris remarks proudly that Apollo’s golf handicap may be the highest on Wall Street. In one nine-month period, Harris cites, he was involved in the secondary sales of Compass and Pacer, taking Nalco public, buying and taking UAP public, and then buying the Borden and the Eastman businesses. This kind of schedule, he says, “requires that we consistently give up our weekends or work well into the morning.”
Creativity & Diversification
Beyond the dealmaking, Apollo also finds time to flex its creative muscle. It was Winston Churchill who said, “Without tradition, art is a flock of sheep without a shepherd. Without innovation, it is a corpse.” Apollo has brought this sentiment into the buyouts space. The firm’s dual focus on distressed debt and private equity has become a preferred model these days, and many of the larger buyout firms and hedge funds alike are racing to emulate the design.
Additionally, last year Apollo reintroduced the buyout world to the business development company, or BDC, which is a publicly held, closed-end investment vehicle that invests in equity and senior secured and mezzanine loans. While the structure has been around since the 1950s, it was the floatation of Apollo’s BDC that sparked a mad rush from the firm’s peers to come out with their own versions. However, of the 15 or so private equity firms that filed to float business development companies, only a few were able to follow in Apollo’s footprints.
Going into this year and beyond, Apollo’s plate will only get more full. The firm is expected to launch a $5 billion fund in the coming months, and as far as deal activity is concerned, Apollo anticipates there will be more selling opportunities in 2005 than buying. However, that does not mean the firm won’t pounce when opportunities arise.
“We’ve found that valuations have started to increase and we’re seeing an incredible amount of corporate M&A activity… In 2005, on balance, we’ll probably be a net seller in a fairly big way, but that doesn’t mean we won’t continue to buy if we can find an angle,” Rowan says.
And even if valuations do creep up, Apollo benefits from the fact that it can just as easily put on its distressed debt hat to pursue opportunities that arise there. “When buyouts get too high and that market starts to crack, that opens the window for the distressed market,” Harris notes. “Our model allows us to put a lot of capital to work in different environments, and we see this as the beginning of the next distressed market.”
Regardless of what kind of market develops, Apollo can be counted on to stay on its toes. “We really are a pretty small firm,” Rowan says, “But I like to think we’re one of the hardest working, if not the hardest working firm, in the business.”
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