New Mexico SIC Drops Apollo Credit Fund

Fund Manager: New Mexico State Investment Council

Assets Managed: $15.4 Billion (June 30, 2012)

Private Equity: $1.8 billion (June 30, 2012)

Actual PE Allocation: 11% (June 30, 2012)

Target PE Allocation: 10%

State Investment Officer: Steven Moise

The original, $100 million investment, made in 2007, is now worth about $92 million. The fund manages roughly $4 billion in assets.

The Kuhns report to the council said that “compared to other funds in the market that share similar strategies, this fund was one of the worst performing in 2008 and unfortunately still has not recovered to par.”

The advisory firm suggested that the council terminate its “existing investment in Apollo and consider reallocating to a fund that invests across multiple credit markets.” Kuhns cited one of the reasons for its recommendation as the departure of Joe Zupan, one of two analysts who managed the fund. Zupan, Kuhns said, “played an integral role in the management of the fund,” but at the time of the report, there wasn’t yet anyone to take over his responsibilities, which made Kuhns “nervous.”

New Mexico made the investment in the fund when it was known as the Stone Tower Corporate Credit Fund. During the first year of the financial crisis, 2008, the fund posted a loss of 74 percent, which was worse than many of its peers due to higher-than-average leverage, said Kuhns. While the fund rebounded significantly in 2009, it never entirely recouped its initial losses.

For the first six months of 2012, the fund was up 8.5 percent. A spokesman for Apollo declined to comment.

In late 2011, Apollo announced it was buying Stone Tower Capital to add the firm’s $17 billion in assets under management and to augment Apollo’s expertise in evaluating credit securities. Apollo completed the purchase of Stone Tower in April, and the fund changed its name soon after.

Separately, the council announced several major changes to its asset allocation strategy, according to its spokesman Charles Wollman. The plans included significantly increasing the fund’s allocations to hedge funds and real assets, such as timber, energy and infrastructure.

Notably, the council decided to maintain its current 10 percent target allocation to private equity. The fund’s actual allocation, 11 percent, corresponds to about $1.8 billion in invested private equity capital. The one major change in private equity pool is the council’s decision to significantly reduce the number of its relationships. “We have more than 100 relationships,” said Wollman. “We’re letting managers roll off.”