Apollo Global Management is focusing on take-privates as it searches for value-oriented investment opportunities in a competitive market.
On its third-quarter earnings call Wednesday, co-founder Josh Harris said that the New York-headquartered firm has completed eight take-private transactions in the US over the past three years, and committed to two more during the quarter.
Harris noted that private equity deployment was “somewhat light” in the three months to 30 September and attributed this to the typical lumpy pace of deployment, reassuring analysts that the firm is on track to maintain its average annual deployment pace of $4 billion-$5 billion.
Apollo made $4.3 billion of new private equity commitments Q3, the two largest of which were take-privates: the acquisition of LifePoint Health by a Fund VIII portfolio company and the acquisition of Aspen Insurance.
“Both of these deals require sizeable equity commitments, but we expect to raise equity co-investment for these transactions,” Harris said.
In aggregate, Apollo private equity funds have invested more than $10 billion of equity capital into take-private deals, and the firm’s deal pipeline includes “a number of other potential take-private deals”, according to Harris.
“Although there is a general perception that public market valuations are relatively full, we see a bifurcation among publicly traded stocks, with growth-oriented industry leaders on one hand and companies that have fallen out of favour on the other hand.”
Harris said the distressed-for-control market “hasn’t really been a great market” and that private markets, driven by the availability of leveraged finance and the high levels of dry powder, are “a bit more competitive”. The public markets, however, are driven by “a lot of other factors”.
“There’s a lot of companies that have been left behind and a lot of industries that have been left behind,” he noted. “If you have a complicated story, you’re not really welcomed so much in the public market. That is creating a very fertile hunting ground for private equity and we do see more opportunities there.”
Three-quarters of Apollo’s overall private equity portfolio is in its $18.4 billion Fund VIII, which is delivering a gross and net internal rate of return of 23 percent and 16 percent respectively. The $25 billion Fund IX holds one committed investment.
Harris said 2018 has been a “very low year” for the firm on the realisations front; the average investment in Fund VIII has been held for just over two years.
“We would expect that fund to mature and we would expect our realisations to go up significantly over the next few years,” he explained. “Having said that, obviously it’s market-dependent. We’ve been expecting some volatility, and we’re certainly seeing a little bit of that now. If the environment isn’t conducive to realisations, then we will be more buyers than sellers.”
Harris said Apollo Hybrid Value Fund, which held a first close on $2.2 billion earlier this year, continues to “benefit from strong investor receptivity” and expects to hit its $3 billion target by year-end. The firm is also actively fundraising for its third natural resources fund, and anticipates holding a first close around year-end.
Apollo’s assets under management remained relatively unchanged at $270 billion. The firm reported economic net income per share of $0.83 for the quarter, compared with $1.07 per share for the same quarter last year.