Apollo unveils growing ‘separate account’ business

South Carolina Retirement System has committed $750m in a ‘strategic partnership’ that will invest alongside and through Apollo funds - a new trend, according to the firm.

Apollo Management expects more partnerships involving what it calls “separately managed accounts” as limited partners look for more transparency and control over investments than traditional commitments to external funds.

Apollo included a note in a recent filing with the US Securities and Exchange Commission that “institutional investors are expressing increasing levels of interest in SMAs, since these accounts can provide investors with greater levels of transparency, liquidity and control over their investments as compared to more traditional investment funds.

“Consequently, we expect our [assets under management] through SMAs to continue to grow over time,” the firm said in the filing.

In the filing, the firm provided updated information on a separately managed account in called Palmetto, which it set up with a “large state pension”. The filing does not name the pension, but Apollo created a $750 million separately managed account called the Apollo Palmetto Strategic Partnership over the past year with the South Carolina Retirement System.

The partnership was set for $700 million but the pension decided to reduce the amount to $200 million after the financial meltdown in the fall of 2008. The $750 million amount was reinstated earlier this year.

As of 30 September, 2009, Palmetto contained $759 million, including $750 million from the state pension and $9 million from the firm, according to the filing. The account had committed more than $250 million to investments “primarily in our European non-performing loan and private equity funds”, the firm said.

“Palmetto was established to facilitate investments by such third-party investor directly in our private equity and capital markets funds and certain other transactions that we sponsor and manage,” Apollo said.

The partnership gives South Carolina the option to either invest directly alongside Apollo in investments, or commit capital to Apollo funds.

The firm, which is reportedly preparing to file on the New York Stock Exchange in the next few weeks, also set up a separate account with the $200 billion California Public Employees’ Retirement System last year. CalPERS committed $1 billion to the Apollo Credit Opportunities Fund for investments in senior bank debt and hung leveraged buyout loans.

Apollo said in the three months to September 2009 the net income attributable to Apollo Global Management was a loss of $46 million. The firm had total revenues of $213 million in the third quarter, compared to total expense of $404.5 million, $348 million of which was compensation and benefits.

Apollo also revealed its sixth buyout fund, Fund VI, which raised $10.1 billion in 2006, had a net IRR of zero percent to the end of September, having realised $2.4 billion from investments. The firm said the fund’s multiple was currently 1.1x. The fund has investments in casino company Harrah’s Entertainment and real estate broker Realogy.

The firm said it was too early to provide returns for its 2008 $14.7 billion Fund VII, which has realised $1.5 billion to date against $3.9 billion of invested capital. Apollo’s $3.7 billion Fund V had a net IRR of 46 percent; the $3.6 billion Fund IV had a net IRR of 8 percent; Apollo’s $1.5 billion Fund III had a net IRR of 11 percent to the end of the third quarter. The firm added the overall net IRR of its funds was 26 percent with a 2.6x multiple.

Zoe Hughes contributed to this article.