Caesars Entertainment: The house doesn't always win

Apollo Global Management and TPG have not hit the jackpot with their investment in Caesars Entertainment.

Apollo's co-founder Joshua Harris said it himself when he spoke at the Harvard Business School's Venture Capital and Private Equity Conference earlier this year.

“We manage to mess up one or two companies a fund,” he said, adding that “one of the problems we have right now is Caesars. We bought the largest gaming company in the world in early 2008 just before the financial crisis and we paid a big price for it. We've done our best since then to make it better, but the reality is we probably paid too much”.

Apollo invested $2.9 billion and TPG put in at least $1.32 billion in the $30 billion deal for the business, then known as Harrah's, in 2008. A restructuring agreement reached at the end of September means the two firms, along with co-investors, retain just a 16 percent stake in the businesses having had to contribute $950 million-worth of their equity to the reorganisation.

The Caesars deal has hit the performance of Apollo Investment Fund VI, which posted a net internal rate of return of 8.8 percent and a 1.4x investment multiple, as of 31 March, according to data from the California Public Employees' Retirement System, an investor in the fund.

A source familiar with the vehicle indicates that by the end of June, its performance had improved to an IRR of 9 percent, with a 2.05x multiple. 

TPG Partners V, which also invested in the transaction, posted a 3.8 percent net IRR and a 1.2x investment multiple, according to CalPERS' March numbers. Limited partners in the funds include major pension plans in the US and Canada, university endowments, foundations and funds of funds.

But it's not just returns that Apollo and TPG had to take into consideration, according to Nathan Flanders, managing director at Fitch Ratings. “They do have a fiduciary responsibility to try to maximise the return on the investment they made,” he says. “But there are other elements they're trying to satisfy here beyond absolute return.”

Apollo and TPG have to be mindful of mounting legal costs related to both bankruptcy proceedings and to a lawsuit brought against them by disgruntled creditors. 

By contributing $950 million-worth of equity, the two firms will be released from all pending and potential litigation, including the one brought by creditors. They will also avoid having to release personal financial records for TPG's chairman and founding partner David Bonderman and Apollo's co-founder and senior managing director Marc Rowan, as a judge had previously ordered.

Apollo and TPG declined to comment for this article.