Credit Strategies Fire Growth At Public Firms

Apollo Global Management LP added an $18-billion CLO manager to its existing credit operation, while Oaktree Capital Group began raising a new credit opportunity fund. The Carlyle Group added $2.8 billion to its credit portfolio, while Fortress Investment Group had its biggest fundraising quarter since 2008, concentrated in credit funds. Canadian investor Onex Corp. also launched its first collateralized loan obligation fund.

Meantime, most of the firms that reported first quarter earnings during the latest fortnight struggled with generally difficult market conditions in the quarter, as earnings slumped, and two newcomers reported widely divergent results. Executives of the firms pronounced themselves ready to confront economic conditions, come what may.

“If markets behave the way they did in the first quarter it will benefit the realization cycle, and if markets worsen we are well positioned to deploy additional capital. In the current environment we are finding opportunities to do both,” Marc Spilker, Apollo’s president, said on the firm’s earnings call.

Last October, Apollo acquired Gulf Stream Asset Management, a manager of collateralized loan obligations with $3 billion in assets under management, and after the quarter’s end, it added Stone Tower Capital, an alternative credit manager with about $18 billion of assets under management.

Taken together and added to the firm’s existing credit holdings, Apollo said its capital markets unit is now its largest business segment, with more than $55 billion of assets under management. Its credit business is poised grow further, as the New York City Bureau of Asset Management committed $600 million to an “opportunistic fixed income account,” the latest in a series of separate accounts with private equity giants that investors have signed up for.

Apollo reported $462 million of economic net income, a measure of earnings that includes both realized sales and the book value of portfolio holdings, a 23 percent increase from a year earlier. Its assets under management grew 23 percent over the past year, in part due to a pair of significant acquisitions in the credit-market deals.

Analyst Robert Lee of Keefe, Bruyette & Woods called the results “a solid quarter with higher-than-forecast realizations and distribution.” With the surge, Apollo outperformed, for the quarter, rivals The Blackstone Group and Kohlberg Kravis Roberts & Co., both of which, reporting earlier, had said their economic net income fell in the first quarter.

Carlyle also bolstered its CLO operations in the first quarter as it acquired four management contracts on €2.1 billion ($2.8 billion) in European CLO assets from Highland Capital Management. The acquisition, added to the leveraged lender Churchill Financial Group LLC, which the firm acquired last fall, brought Carlyle’s CLO assets under management to $16 billion.

But the market was tough for newcomer Carlyle, which completed its IPO only in May but nevertheless reported that its earnings for the March 31 quarter fell 26 percent as it failed to match a strong 2011 first quarter, sister news service Reuters reported. Carlyle’s decline was mostly due to its corporate private equity segment that contributes two-thirds of its distributable earnings.

Carlyle could not raise as much cash from its investments as it did this time last year, when its Asian buyout funds sold assets, David Rubenstein, the firm’s co-founder and co-chief executive, said on a conference call. Carlyle’s latest flagship $10 billion buyout fund is expected to achieve its first fundraising close, securing commitments from investors, in the second quarter of 2012, Rubenstein said. Carlyle has also started fundraising for its latest Asia buyout fund and expects a first close in the second half of this year, he added.

Oaktree, which went public in April in a $380 million IPO, started fundraising in the first quarter for its new distressed-debt fund, OCM Opportunities Fund IX, a planned $4 billion fund. Howard Marks, Oaktree’s chairman, said the firm has not started investing that fund and is not likely to do so before 2013.

Marks said the firm now has distributed 94 percent of the drawn capital of 2008-vintage OCM Opportunities Fund VIIb LP, its “height of the crisis fund” that only entered its liquidation period a year ago. Oaktree notably began harvesting that vehicle while it was still in its investment period, making a $3 billion distribution from the $10.9 billion Fund VIIb in February 2011.

The firm reported that its first quarter ENI grew 17 percent from the fourth quarter to $278 million. Oaktree, which pursues a niche in distressed asset investing, had received “a tepid response from investors” for its IPO, Reuters said.

The multi-strategy fund manager Fortress said it raised $2.9 billion during the quarter, including $2.4 billion for its FCO III set of credit private equity funds; total third-party commitments to FCO III reached $3.7 billion. Interim Chief Executive Officer Randal Nardone called the quarter “our largest single-quarter capital raise since 2008.”

Fortress reported that its earnings fell 45 percent to $57 million, or 11 cents per share, as incentive fees in some of its hedge and credit private equity funds declined, Reuters reported. That still topped the 10 cent average expectation of analysts surveyed by Thomson Reuters I/B/E/S. Assets under management totaled $46.4 billion as of March 31, an increase of 8 percent from a year earlier, not including dry powder of $6.4 billion, the company reported.

Onex Credit Partners created its first collateralized loan obligation, raising $320 million in March. “As merger and acquisition activity continues to be sporadic, originating new investment opportunities remains our greatest challenge,” said Gerald W. Schwartz, Onex’s chairman and chief executive officer, in a statement.

Onex reported net earnings of $179 million in the first quarter, compared to a net loss of $205 million a year ago. Onex attributed much of the improvement to the IPO of Allison Transmission, which completed a $690 million offering in March. Onex said it and co-investors sold 15 million shares in the IPO, for net proceeds of $326 million, of which Onex’ share was $102 million. That represented a 2.6x return for Onex, and the fund continues to hold 23.4 million shares.

But Onex said it and its management team “elected not to receive the $17 million of carried interest to which they were otherwise entitled,” because the company also is invested in the aircraft maker Hawker Beechcraft, which filed for bankruptcy protection in May, possibly triggering a future claw-back of carry paid. Onex and other LPs own 49 percent of the company.