We said it didn't look like 2007 a couple of months ago (see April issue, p. 18), but in one respect, we appear to be wrong. The era of the mega-fund is back. CVC Capital Partners closed Fund VII on €16 billion in May and KKR raised $9.3 for Asian Fund III. But Apollo Global Management has its eyes on a bigger prize.
The firm will raise as much as $23.5 billion for its ninth flagship fund, which would make it the largest private equity fund ever raised. Here is what we have learned so far.
The fund was launched without a target or hard-cap. This was a point of contention for some limited partners; a memo prepared for the State of Connecticut Retirement Plans and Trust Funds by investment consultant StepStone raised the issue as a risk.
It was mitigated, however, by the fact that – according to StepStone – Apollo had “verbally communicated” to them that the fund would “not exceed $20 billion”. The firm could not provide any comment on the fundraising for regulatory reasons, but a source with knowledge of the process said the fund now has a hard-cap, but could not confirm the amount. The State of Connecticut approved a $150 million commitment in May.
Apollo's creed is to buy low, and it sticks to it. Fund VIII has been deployed at an average entry valuation of 5.7x EBITDA, comparing well with the average among large buyouts, which has ranged from 9x to 10.5x over the last four years.
StepStone ranks Apollo's performance as being “slightly above the median” among its global buyout peers. Apollo reported its since-inception net IRR as 25 percent in its latest form 10-K filing. Its 2013 and 2008 flagship funds reported net IRRs of 13 percent and 26 percent respectively at the start of 2017.
Apollo is preparing for a downturn . The firm is known for its flexible approach, investing across the capital structure of target companies in buyouts, carve-outs and distressed opportunities. While Fund VIII has been invested almost entirely in “opportunistic” buyouts and corporate carve-outs, the new fund is expected to channel up to a quarter of its capital into distressed investments.
South Korea and Chile are two budding sources of capital. While not using a placement agent to raise capital in its home territory, Apollo has hired fundraisers in these two countries, according to a filing with the US Securities and Exchange Comission. South Korea in particular is becoming an increasingly important stop on the fundraising map, with appetite for private equity “set to grow significantly” among its institutions, according to placement agent First Avenue.
If it hits the $23.5 billion figure noted in its 26 May SEC filing, Apollo Fund IX will be the largest private equity fund ever raised, topping 2007's $21.7 billion Blackstone Capital Partners V. The record-breaking fund will add to a mountain of private equity dry powder awaiting deployment: nearly $1.5 trillion at the start of 2017. Apollo will have its work cut out to maintain its low purchase price average and lifetime IRR. Past performance suggests it is up to the task.