ADT drags on Apollo performance

Stock market volatility took its toll on Apollo Global Management’s listed holdings in the first quarter.

The firm reported an economic net loss per share of 30 cents, the first time it has reported a loss since the first quarter of 2016.

Apollo said this loss was due to private equity fund depreciation of 2.7 percent in the quarter, primarily driven by the performance of home and business security systems company ADT, a portfolio company in the $18.38 billion Apollo Investment Fund VIII which the firm listed on the New York Stock Exchange in January.

The ADT IPO priced at $14 per share, and was trading at $8.71 per share at 10am Thursday.

“The blended private equity mark for the quarter represents significantly diverging outcomes in the portfolio as publicly traded investments were down 16 percent while private investments were up 4 percent,” chief financial officer Martin Kelly said on the firm’s first-quarter earnings call this morning.

“Excluding the mark on ADT, the blended return on the portfolio would have been approximately 500bps higher at 2 percent. We believe the quarter’s performance is quite idiosyncratic given the outsized 38 percent quarter-over-quarter swing in ADT’s valuation.”

Apollo co-founder Josh Harris said despite the performance of ADT, Fund VIII had appreciated 25 percent over the last 12 months, and Kelly added the vehicle is posting since-inception gross and net internal rates of return of 26 percent and 18 percent, respectively.

Harris said that while the “ebb and flow of market value” of more than 50 companies across multiple portfolios creates some quarterly volatility, in the long-run the fundamentals of both ADT and the overall Fund VIII portfolio are “quite good”.

“We look at every company and think long and hard about the timing and exit and the right path for exit and I don’t think you want to take too much from the current trading performance,” added co-president and lead private equity partner Scott Kleinman.

“Ultimately ADT’s performance is quite strong and we would expect the market to eventually catch up to that.”

Fund VIII posted a loss in unrealized performance fees of $267.77 million, offset by realized performance fees of $99.19 million, for a total performance fee loss of $168.59 million.

Kleinman said private equity deployment had been a little slower in the first quarter, but he doesn’t expect that to have “any longer-term repercussions”.

“We’re looking at Q2 back more on normal track,” he said.

Apollo’s private equity programme deployed $1.3 billion in the first quarter and committed to invest an additional $1.9 billion, and generated $1.5 billion in realisations.

Building on comments from the fourth quarter earnings call, Harris said Hybrid Value, a long-term vehicle which will combine credit and equity, focusing on capital solutions, structured equity, and non-control stressed and distressed investments, had a current target size of $3 billion and the firm expects to hold a first close on the vehicle during the second quarter.

The fund, which will target returns in the low- to mid-teens, will have a fee structure “in line with traditional drawdown PE funds”, according to Kelly.

Harris said the fund will be “on average, less risky and more structured than private equity, and a bit lower return, but still good return”.

With the $3.5 billion Apollo Natural Resources Partners II now 75 percent committed, Harris reiterated plans to launch fundraising for a successor natural resources fund shortly, and said the firm anticipates holding a first close on that vehicle around year-end.