Apollo Global Management (APO) is one of the world’s largest alternative asset managers with a sizeable $160 billion of assets under management AUM. The current distribution yield is 9.9%.
However, it is not without controversy.
APO specializes in managing funds in the credit, private equity, and real estate strategies. One of its biggest relationships is fixed-annuity issuer Athene with about $60 billion in AUM, or 37% of its AUM.
Morningstar’s description of APO’s attributes:
Apollo Global Management's specialization in illiquid credit instruments offers substantial potential in the coming years. Banks of all sizes, under tough regulatory scrutiny following the Great Recession, are shedding risky and complex credit assets to shore up their capital ratios. We see this as a secular trend, particularly as Basel III rules force banks to shed risk, and Apollo's relationships and deep expertise in the market position the firm to earn lucrative returns.
APO’s niche is in illiquid asset management. Of its AUM, $41 billion is in private equity, $108 billion in credit instruments, and $10 billion in real estate holdings.
The type of assets held in each investment category is:
Private Equity: Opportunistic buyouts; Distressed buyouts and debt investments; Corporate carve-outs
Credit: U.S. Performing Credit; Opportunistic Credit; European Credit; Non-Performing Loans; Structure Credit
Real Estate: Residential and commercial
Global private equity and distressed debt investments:
Performing fixed income.
The relationship with Athene is interesting, profitable and unique. Several years ago, APO purchased the portfolio and developed the relationship to manage their assets. Athene is one of the larger issuers/underwriters of annuities. Unlike other types of customers who are looking for a return of their original capital contribution, the fixed-annuity profile of Athene is seeking return ON capital rather than return OF capital. This allows APO to utilize its expertise – illiquid assets that provide better than market returns. Most hedge funds and private equity firms have a 10 year life cycle for their customer’s assets, the Apollo – Athene relationship has no such constraints. This gives APO a leg up to other alternative asset managers as a large portion of its AUM has a very long life cycle.
Like most alternative asset managers, APO generates income from asset management fees and performance fees. These vary based on asset categories:
Private Equity: 98pbs + 20% performance
Credit, ex Athene: 75 bps + 15% to 20% perform.
Athene: 40 bps + 0% performance
Real Estate: 77 bps + 10% to 15% performance
APO is expected to earn $2.01 in 2015 and $2.25 in 2016. Long-term earnings growth is pegged at 10% a year. As a LLP and similar to a MLP, APO pays out a large percentage of reported income as distributions. This year, APO is expected to distribute $2.08 a share and $2.15 next.
In 2013, APO raised one of the largest private equity funds, Apollo Fund VIII, at $17 billion. This capital is being put to work in the depressed oil and gas sector, which should provide a high return as energy returns to more “normal” valuations over the next few years. The normalization of the energy sector could drive higher performance fees for private equity, and to a lesser degree credit assets.
Several of APO’s funds are traded on exchanges and are open for individual investors. Below is a list of these funds and the current yield:
AINV – Business Development Corp (11.0%)
AMTG – Residential Mortgage REIT (12.2%)
ARI – Commercial Mortgage REIT (10.3%)
AFT – Senior Floating Rate Fund (6.9%)
AIF – Tactical Income Fund (10.1%)
Apollo is not without controversy. Earnings declined 58% in 2014, mainly from a large reduction in investments and their income. Revenue declined from $3.7 billion in 2013 to $1.6 billion in 2014. Since peaking in early 2014, APO share price has dropped 23% over the past 52-weeks while the S&P 500 is up 12% and a peer return of 7%.
Brokerage firms either love’em or hate’em. Morningstar has APO rated as 5-Star with a Fair Valuation target of $44 versus S&P Capital IQ rating at 1-Star and a price target of $19.
According to benzinga.com, in March, JP Morgan reiterated its Overweight and a target of $25. In Feb, JPM Securities maintained an Outperform with a target of $32; also in Feb, Keefer downgraded APO to Market Perform (neutral) with a target of $27. In Dec’14 and Jan ’15, Citigroup upgraded its recommendation to Buy and Credit Suisse maintained its neutral rating
For a speculative, alternative asset selection in the diverse financial industry, APO could provide interesting total returns, supported by its high current income. APO is well worth additional research.
This article first appeared in the April 2015 issue of Guiding Mast Investments newsletter. Thanks for reading, George Fisher