Apollo seeks deals amid market distress

Leon Black-led Apollo -- which has approximately $10bn in dry powder -- believes the volatile markets could be rife with opportunities.

Apollo Global Management is prepared to deploy capital into the turbulent markets and far from panicking, the firm’s limited partners expect the firm to get busy finding deals.

The firm had $9.9 billion in dry powder as of 30 June, 2011 in its private equity funds.

Apollo's second quarter earnings call Tuesday was punctuated by repeated questions about the extreme volatility in the stock markets this week. The Dow Jones industrial average plunged more than 600 points Monday, the first trading session after Standard & Poor’s downgraded US credit rating for the first time ever. Other markets around the world also felt the shock Monday, including Britain's FTSE 100 index, which was down 1.7 percent to 5,160 and Germany's DAX dropped 2.3 percent to 6,096.

“When markets are going up, we’re looking to do realisations; when markets are going down, we’re looking to deploy capital,” firm president Marc Spilker said during the call. “Our LPs look to us to deploy in this environment, and there’s a lot of work and dialogue going on.”

Apollo is seeing “big opportunities” in its capital markets and credit business and has been building out its capabilities in those areas, Spilker said.

However, opportunities could evaporate depending on how long markets remain depressed. The market needs to stay down long enough for capital to be deployed, Spilker said. Similarly, in good times, the markets need to stay up long enough to make realisations.

“If this is a blip, if it stays down for a short period of time, it’s harder to get capital to work,” he said.

The environment so far is different than 2008, mostly because there has not been big strains on liquidity, he said.

“We see anxiety about sovereign debt in Europe, anxiety about growth, re-pricing of markets, that’s different from what we were seeing in 2008, which was a credit crisis,” Spilker said. “I’m not saying one couldn’t lead to the other, but we are seeing opportunities to put capital to work.”

Private equity soars

Meanwhile, the firm is attributing a huge boost in its economic net income – a way of measuring earnings that includes unrealised gains and losses – to improved performance of its private equity funds. The firm reported economic net income of $140 million, up 510 percent from the $23 million reported in the second quarter of 2010.

“The increase was primarily driven by Apollo’s incentive business, which reported $94.8 million of ENI for the second quarter of 2011, an increase of $133.4 million compared to the second quarter of 2010, which was largely the result of higher carried interest income in Apollo’s private equity segment,” the firm said in the earnings statement.

ENI in the private equity segment was $117.5 million, compared to $42.2 million for the same time period last year. The improvement was driven by a $178.6 million increase in carried interest income, which was offset by certain expenses. Carried interest income was boosted by gains mostly driven by the firm’s exit of Hughes Communications, a portfolio company in Fund IV.

Fledgling real estate

Apollo’s fledgling real estate business climbed back into earnings in the second quarter with ENI of $4.3 million compared to a loss of $6.1 million in the same time period last year. Total revenues jumped to $9.7 million in the second quarter, compared to $1.6 million last year. The revenue increase was mostly driven by increased management fees following Apollo’s acquisition of Citi Property Investors last November.

Also during the second quarter, Apollo’s AGRE US Real Estate Fund held a second closing and also announced a joint venture with Driftwood Hospitality Management to buy and renovate full-service hotels in the US.