Apollo anticipates 2020 realisation pick-up

Apollo Global Management is expecting an increase in realisations in its private equity portfolio over the next 12 months as its holdings mature.

Speaking on the firm’s third-quarter earnings call on Thursday, co-founder Josh Harris said the firm feels “pretty good” about the portfolio companies held in the $18.4 billion Fund VIII, which were acquired at an average entry multiple of 6.5x. That fund was generating a net internal rate of return of 13 percent at the end of Q3. Investments in that fund have been held for an average of three-and-a-half years, according to Harris.

“That portfolio was acquired at about a five multiple point discount to the average multiple paid for larger transactions,” Harris said, adding that the market has seen “a dispersion between growth and value”.

“Presuming that the markets hold out over the next 12 months, you’re going to start seeing the pickup in realisations there as that portfolio matures.”

Apollo’s private equity programme saw fund appreciation of 3.6 percent in the quarter, primarily driven by private portfolio companies held in Fund VIII, and depreciation of 1 percent over the last 12 months. The firm deployed $1 billion and committed an additional $900 million in the quarter. Private equity AUM stood at $78 billion at quarter end, $32.7 billion of which is dry powder.

Apollo completed its conversion to a C-corporation on 5 September and “the positive effects are already becoming evident”, Harris said.

Average daily volume has more than doubled from pre-conversion levels to 2.6 million shares, and Apollo has recently been added to the CRSP indices, which resulted in Vanguard purchasing almost 13 million shares at the end of September.

Harris said the firm believes the growth in long-only and passive ownership of Apollo stock – from 35 percent of its float to more than 50 percent – has “only just begun”.

“We think we’re only in the middle innings in terms of realising the benefits of our C-corporation conversion and believe we will continue to see a transition of our shareholder base going forward,” Harris said, adding that the firm expects to be added to additional indices including MSCI in the coming months.

“Ultimately, based on what we have seen from some of our peers that converted before Apollo, we believe that more than 70 percent of our public float could be owned by long-only and passive investors, which would be more than twice our level prior to conversion.”

Apollo’s AUM is up 19 percent year-over-year to $323 billion, half of which is held in the firm’s two permanent capital vehicles, Athene and Athora. Inflows of $15.9 billion in Q3 were primarily driven by growth in Athene and across the credit platform, as well as inflows from real estate funds, according to the firm’s Q3 presentation.

Earlier this week Apollo announced it was doubling its stake in insurance company Athene in a $1.55 billion deal. Apollo is acquiring a further 18 percent stake in Athene for a combination of $350 million in cash and a 7 percent stake in Apollo, giving the insurer “a direct economic interest in Apollo’s financial success for the first time”, co-founder Leon Black said on a call with analysts Monday. After the deal, Apollo will hold approximately 35 percent of Athene.

The transaction will eliminate Apollo’s supervoting rights in Athene, as the insurer will scrap its multi-class shares and move to a one-share, one-vote structure, thus making it eligible for inclusion in various indices.

“We’re doing this because many investors were telling us that the structure of Athene’s supervoting shares held by Apollo was a negative on the valuation of Athene and Apollo shares,” Harris said on Thursday’s call.

Athene had an “unfounded concern” that Apollo might take too much risk or cause Athene to grow unprofitably because Apollo did not have enough capital at risk while managing Athene’s assets, Harris said. For its part, Apollo was concerned Athene may want to change the asset management contract.

“Although we thought the concerns were unfounded, we listened. We believe we now have stronger alignment to ensure the durability of the relationship.”