Apollo explores new private equity products

The firm is looking for ways to ‘supplement the growth’ of its private equity business, which reached $72bn in AUM last year.

Apollo Global Management is exploring potential new product lines to build out its private equity business, according to co-founder Leon Black.

On the firm’s fourth quarter earnings conference call on Thursday, Black said the firm “intend[s] to supplement the growth of our private equity business by seeking ways to leverage our existing expertise and capabilities”.

“We expect this effort could manifest itself in a variety of ways, leading to the potential launch of complementary new products,” he said.

One such product is 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. The vehicle, which Black first mentioned at the Goldman Sachs US Financial Services Conference in New York in December, will target returns in the low- to mid-teens.

Apollo is also intending to launch its latest natural resources fund later this year. Apollo Natural Resources Partners II held a final close on $3.5 billion two years ago.

“We believe we have navigated the energy market well and have been actively deploying capital in a number of interesting opportunities amidst a dislocated market from our second fund,” Black said.

Apollo’s latest flagship private equity fund, Apollo Investment Fund IX, contributed just under $25 billion to the firm’s roughly $60 billion growth in assets under management last year. Its predecessor hit 90 percent invested at the end of January, and the investment period for Fund IX is expected to begin by the end of the first quarter, said Apollo co-founder Josh Harris.

Apollo predicts the launch of Fund IX will add around $200 million of annualised management fees.

Meanwhile, the $18.4 billion Fund VIII is entering a harvesting phase. As of 31 December that fund had generated gross and net internal rates of return of 33 percent and 23 percent respectively, with a portfolio company average hold period of two years.

“We believe Fund VIII’s performance to date showcases Apollo’s investment acumen since it demonstrates that even in a relatively high-valuation environment, we can create meaningful value for our fund investors,” Black said.

The average entry multiple of Fund VIII portfolio companies is around six times EBITDA.

“It’s no secret we’re operating in a higher-priced environment and so finding what we believe are attractive investment opportunities at discounted valuations is a formidable task,” Black said. “However, we strive to meet this challenge by remaining committed to our value orientation and adhering to a consistent willingness to embrace complexity.”

Last year Apollo deployed $5 billion in private equity capital and committed a further $2.6 billion. Of its $72 billion in private equity assets under management, $34 billion, or almost 50 percent, is dry powder. The firm’s total AUM reached $249 billion, with fee-generating AUM at $169 billion.