Talking Deal Prices: Apollo averages 6x EBITDA on Fund VIII deals

  • Firm invests nearly 20 pct of Fund VIII at low prices
  • Leon Black: Market is “generally overvalued”
  • Blackstone touts leverage levels at 5x to 6x EBITDA or less

Apollo’s CEO Leon Black recently emphasized that the firm holds fast to its value orientation even during the current time of lofty purchase price multiples. (See Chart of the Week.)

And Tony James, president of Blackstone, often devotes his energy explaining why the firm avoids excessive leverage on deals.

Both seem to be signalling that despite the amply dry powder and rising interest in private equity, their firms remain firmly planted on the ground, even with sky-high prices looming above.

Black said Apollo has managed to stick to its principles for its vintage 2013 flagship fund, Apollo Investment Fund VIII, which raised $18.4 billion. By the end of 2014, the fund was 20 percent deployed — at bargain prices, no less.

With average buyout multiples moving up above 9x EBITDA and often well into the double-digits, Apollo’s average purchase price multiple remains at about 6x EBITDA for Fund VIII, he said.

“In a generally overvalued market, we continue to find what we believe are attractive opportunities in a number of regions and industries,” Black said.

One example of a rock-bottom priced deal: Apollo paid about 1.5 times cash flow for Caelus Energy Alaska, the firm said during its annual investor day in December. Dallas-based Caelus, led by James Musselman, the former leader of Kosmos Energy, teamed up with Apollo in April to buy Alaskan assets from Pioneer Natural Resources for $300 million in cash.

Black said that despite the pricey environment, Fund VIII remains on track to deploy its capital within its investment period.

Blackstone takes less leverage than offered

Blackstone’s James said recently the firm doesn’t rely too heavily on leverage to generate a healthy return.

“All of our investment strategies, particularly in real estate and private equity, are heavily driven by intervention into the fortunes of the company and creating our own value,” he said. “We cannot make a return simply by buying a company, levering it and selling it… We can’t make the returns that our investors expect.”

Blackstone’s key metric remains unlevered returns.

“Leverage is an amplifier,” James said. “If you don’t earn good, basic, solid unlevered returns, it will amplify the upside but it will also amplify the downside – and leverage always adds a risk.” 

The firm looks to deliver unlevered returns above what the public stock market offers. Blackstone does this through “buying right” and generally using leverage of 5x to 6x EBITDA, and often less, James said.

“Many times we don’t actually take all the leverage that the market offers us,” he said.

The comments from Black and James came during their fourth-quarter conference calls with Wall Street investors in recent weeks, but they’ve been on the same page for quite some time now.

Their remarks show how buyout shops continue to work to distance themselves from the bubble years, when excessive leverage and purchase price multiples led to bad deals such as TXU. Despite some rotten bets by the industry, both firms have maintained the performance and diversity of funds necessary to draw billions in 2014 for new funds.

Looking ahead, it’ll take a few years to see if their latest efforts to pay cheap prices or use less leverage bear fruit. The report card for the big buyout funds from the past couple of years will come after exits and the first IRR figures in the next 24 to 48 months, roughly. Paying a low multiple for buyouts and holding the lid on borrrowing may help deliver top-quartile returns.