Friday Letter: Don't cry for Apollo

To the extent that rounding up $1.5 billion can be called “disappointing”, Apollo Management now has tasted this more bitter fruit. The New York firm’s Guernsey partnership, AP Alternative Assets, has only been able to attract the number on the prospectus cover, according to sources close to the firm. Contrary to reports, the vehicle has not yet been listed on the Euronext Amsterdam exchange, and in fact this is part of the problem.  

Unlike Kohlberg Kravis Roberts’ public vehicle, KKR Private Equity Investors, which targeted $1.5 billion but raised $5 billion in its Euronext Amsterdam IPO, Apollo’s offering didn’t reach its full potential in part because of an awkward delay between its private placement and listing.

Not that Apollo can be faulted for rushing its own public vehicle to market. As large private equity firms well remember, Apollo cleaned up the “business development company” (BDC) market in 2004 with its Apollo Investment listing – most of the subsequent clone offerings, including one from KKR, experienced failure to launch.

In seeking to place AP Alternative before the wiring was in place for a Euronext IPO, Apollo captured a certain amount of leftover KKR demand and nicely monetised its own franchise value ahead of other contenders, including Texas Pacific, Blackstone and Carlyle. But many of the potential investors in AP Alternative were less than enthused at the expected 90-day wait before the Apollo units were to become tradable.

Ironically, Apollo structured its Guernsey-Amsterdam vehicle specifically with the issue of “ramping” in mind. KKR, with its $5 billion in cash, is arguably going to take some time putting it all to work. In the meantime, the cash sits in money-market and fixed-income accounts. Apollo promised to immediately place 90 percent of the money raised in its capital markets businesses, including its own Apollo Investment BDC (currently yielding 9.6 percent).

But many public equity investors had a problem with holding an illiquid security in anticipation of an IPO, even thought the IPO is just weeks away.

In addition, some hedge funds, huge buyers of the KKR offering, argued that Apollo’s capital-markets business was something they could do for themselves. AP Alternative is expected to eventually allocate fully 50 percent of its capital to capital markets activity, with the balance going to private equity.

Some may also argue that Apollo’s offering, with Goldman Sachs as its agent, didn’t get the attention it deserved given a competing offering in the market – Texas Pacific Group’s, also being placed by Goldman Sachs (see PEO story).

Don’t cry for Apollo – if they’re lucky, only three or four additional private equity firms will raise more than $1.5 billion in the currently popular Guernsey-Amsterdam format. There is a distinct chance, in fact, that this game is over, and Apollo’s $1.5 billion will be regarded with envy, not pity.