Apollo to keep Fund X in market longer, citing denominator effect

Apollo Global Management will keep its latest flagship fund open well into next year as potential investors grapple with allocation constraints.

Speaking on the firm’s third-quarter earnings call on Wednesday, co-president Scott Kleinman said Fund X had collected about $14.5 billion as of late-October against a $25 billion target. This represents a modest increase from the $13 billion it had gathered as of August.

By comparison, Apollo’s 2017-vintage Fund IX held a final close on $24.7 billion after less than half a year on the fundraising trail, according to Private Equity International data.

“In regard to the ongoing Fund X capital raise, our conversations and diligence efforts with limited partners remain very constructive,” Kleinman said.

“Due to the impacts of the denominator effect and the sheer number of GPs in the market this year, we’ve agreed to keep the fund open until the first half of ’23 to accommodate our investors’ annual allocation budgets.”

Fund X began pre-marketing in January and has received commitments from the likes of California State Teachers’ Retirement System, Virginia Retirement System and Teachers’ Retirement System of the State of Illinois, according to PEI data.

“We remain confident in reaching our $25 billion target fund size and, importantly, all capital closed in the remainder of ’22 or the first part of ’23 will accrue fees back to the fund’s fee commencement date, which we activated on 1 October,” Kleinman said.

Private equity’s stellar performance last year and resilience relative to public market comparables this year has left some investors overallocated to the asset class. This denominator effect, as it is known, has prompted some to reduce their ticket sizes or commit to fewer vehicles.

As a result, some LPs have asked GPs to keep their fundraising processes open until 2023, when they will have a new annual allocation from which to commit, as PEI reported in July.

“A lot of GPs came out thinking, ‘We’ll do a one-and-done-close in 2022. We’ll be done by summer’, and then all of a sudden the LPs said, ‘No, stop, we can’t keep up with that’,” Rhonda Ryan, a partner in Mercer’s alternative assets business, told PEI at the time. “So even some very, very good names are pushing out their fundraising timetable.”

The denominator effect can be particularly problematic for US public pensions due to their strict allocation limits. State of Wisconsin Investment Board, for example, this year had to raise its allocation range for private debt and private equity from 3 percent to 5 percent in either direction to prevent it from needing to offload assets. The move followed a 47.5 percent rise in its private equity assets under management over the course of last year.

KKR, for its part, is seeking to build relationships with new sets of investors, including insurers, sovereign wealth funds, family offices and high-net-worth individuals, as traditional capital sources find themselves at or above allocation limits.

“There’s no doubt some US pension plans are getting their bearings right now and are trying to figure out where the market is going to go,” co-chief executive Scott Nuttall told analysts on a 1 November earnings call. “We’re spending a lot of time with institutions we’ve never spent time with before.”

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