Apollo downplays Linens ‘n Things loss(4)

A letter sent to Apollo limited partners explains the fund’s IRR will drop only minimally if an investment in the now-bankrupt housewares giant is marked down to zero.

Apollo Management has reassured investors that the highly publicised bankruptcy of portfolio company Linens ‘n Things will have a relatively minimal effect on investor returns.

The Leon Black-led private equity group has estimated that if the value of Apollo’s investment in the housewares giant were marked down to zero, the gross internal rate of return for investors in Apollo Investment Fund V would drop by only one percent, to 70 percent overall, according to an investor letter obtained by PERE's sister publication, PEO.

The memo, sent to limited partners last week in conjunction with Linens ‘n Things’ announcement that it was filing for Chapter 11 bankruptcy protection and closing 120 stores, revealed that Apollo’s $201 million (€129 million) stake in the troubled retailer represented less than two percent of the fund’s $13.43 billion in total value.

In a rare window into the performance of the New York-based buyout firm’s fifth fund, the letter details that the fund has already returned approximately $10 billion in realised proceeds to investors to date, generating a 3.6x multiple of committed capital. Apollo estimated that in the worst case scenario of a zero markdown, that multiple would “only decline 0.1x to 3.5x”.

Linens ‘n Things is one of 20 portfolio companies in Apollo’s fifth fund, according to the memo. Other portfolio companies include nutritional retailer General Nutrition Centers and telecom giant Intelsat, both investments Apollo has recently exited.

A spokesman for Apollo declined to comment. Linens ‘n Things’ bankruptcy represents one of Apollo’s highest profile failures in recent memory.

Just two years after an Apollo-led consortium, including Silverpoint Capital and NRDC Real Estate Advisors, took the New Jersey-based retailer private for $1.3 billion, Linens ‘n Things said last Friday that it was seeking protection from its creditors in Delaware bankruptcy court. Equity from Apollo accounted for $260 million of the $1.3 billion.

Linens ‘n Things, hurt by declining consumer spending in the wake of the housing and credit crises, has secured a $700 million debtor-in-possession loan from leading lender General Electric Capital to keep retail outlets afloat ahead of the back to school and holiday shopping seasons.

Despite the emergency loan, Linens ‘n Things said it will be shutting down 120 stores throughout the US, with closings highly concentrated in California, Texas, and Michigan.

Linens ‘n Things board of directors has named Michael Gries, a financial reorganisation specialist and co-founder of Conway Del Genio Gries, as its chief restructuring officer and interim chief executive as the company’s bankruptcy proceedings progress.

Gries will replace Apollo-installed chief executive Robert DiNicola, who will become the board’s executive chairman.

In its investor letter, Apollo defended DiNicola’s stewardship of Linens ‘n Things.
“Bob [DiNicola] has been a very successful CEO with whom we have had a very long and profitable relationship. Unfortunately, the progress that was made in connection with LNT [Linens ‘n Things] was overwhelmed by the headwinds created by the downturn in consumer spending,” the memo stated.

DiNicola had helped lead Apollo’s successful turnarounds of jewellery retailer Zales and General Nutrition Centers.