Trends of the Year: Apollo’s mega-raise

The global investment firm raised the largest private equity fund of the industry in 2017. Here’s a look back at an unorthodox fundraise.

In many ways, Apollo Investment Fund IX, Apollo Global Management’s ninth vehicle, and its 2017 fundraising, nicely sum up the state of the current private equity market.

The fund was largely oversubscribed in a matter of months, illustrating the robust fundraising environment. It plans to invest more heavily in distressed debt opportunities than predecessors  up to a quarter of total capital  reminding us that the current economic cycle has reached a high and will be turning a corner in the next couple of years.

The process also encapsulates how large listed alternative asset managers have created internal fundraising machines, which has allowed them to lower placement fees. For Fund IX, Apollo has been drastically cutting down on placement fees paid to third-party placement agents, spending $3.5 million on it. This is down from $15.4 million for Fund VIII, which closed on $18.4 billion only four years ago; and more than $20 million for Fund VII.

At the same time, the way Apollo raised its latest flagship fund was quite unusual.

Fund IX had no specific initial target or hard-cap on paper, which some limited partners saw as a risk. Apollo initially said in its 2016 third-quarter earnings conference call that the size of Fund IX would be similar to Fund VIII. At launch, it verbally communicated to LPs that the fund would not exceed $20 billion  although it did, ultimately closing at nearly $25 billion.

Regardless of such unorthodoxies, Apollo’s fundraising process was quick and successful.

Co-founder Leon Black indicated in early December at a conference in New York that it received $30 billion in demand in only six months. “We cut people back to about $25 billion because we thought that’s what we could handle responsibly,” he said.

US LPs include Connecticut Office of the Treasurer, Louisiana State Employees Retirement System, New Hampshire Retirement System, Ohio Police & Fire Pension Fund, Teachers’ Retirement System of Louisiana and the State Teachers Retirement System of Ohio, according to PEI data.

LPs were attracted by the robust performance of Apollo’s recent flagship funds – Fund VIII had an unrealised net internal rate of return of 19 percent while Fund VII while Fund VII had a 26 percent net IRR as of 30 September – and by a mix of equity and distressed debt strategies in the vehicle, which ideally allows investors to cash in on both sides of the cycle.

Apollo co-founder and senior managing director Josh Harris said during the first-quarter earnings conference call with analysts in April that the firm is seeing the globalisation of its LP base, particularly in Asia, the Middle East and Europe, with North America representing a little less than half of investors.

Apollo, which had $241.6 billion in total assets under management as of the end of the third quarter, will start deploying the fund in the first quarter of 2018.