Apollo holds $2.2bn first close on hybrid debt-equity fund

Apollo Global Management has held a first close on its debut hybrid debt-equity fund on $2.2 billion, according to the investment firm’s second-quarter earnings results.

On an investor earnings call on Thursday, chairman and chief executive Leon Black said Apollo believed the fund “provides a highly differentiated solution to investors’ portfolios”. The firm expects to hold the final close on the vehicle by year-end.

Apollo Hybrid Value Fund, which has a $3 billion target, is a long-term vehicle which will combine credit and equity, focusing on capital solutions, structured equity, and non-control stressed and distressed investments. The fund will target net returns in the low- to mid-teens with downside protections.

“We’ve been very pleased with the amount of investor interest in that product,” co-president Scott Kleinman said on the call.

“We’re targeting $3 billion – I think we have investor demand in excess of that, but I think rightly with our fund here we wanted to grow this business sensibly.”

Kleinman said the pipeline for the fund is “fantastic”; it has already made its first investment and Apollo expects to announce a few more “in the coming weeks”.

“We see the medium-term growth here [as] pretty extraordinary, and so would expect in coming quarters and years to continue to grow this platform pretty meaningfully.”

Apollo has also begun fundraising for its third natural resources fund and expects to hold a first close on that vehicle around year-end.

The firm’s assets under management reached $269.5 billion at the end of the quarter, up from $247.4 billion in Q1. This was driven by capital inflows of $27.5 billion, around $23 billion of which was for its credit business.

In private equity, the firm has almost fully deployed Apollo Investment Fund VIII and commenced the investment period for the $25 billion Fund IX, the largest private equity fund ever raised which closed last year.

Black said that despite a high-priced environment, Apollo had created Fund VIII at an average EV/adjusted EBITDA of less than 6x, compared with a market average multiple of more than 10x. The fund is generating gross and net internal rates of return of 25 percent and 17 percent, respectively.

When it comes to seeking opportunities for Fund IX, Black said the firm will continue to follow a value-oriented approach, playing to its competitive advantages, which he said include: a willingness to embrace complexity; an ability to creatively finance transactions in a variety of market environments; the significant scale of Fund IX, which allows it to commit to larger investments; and its expertise in distressed investing, which will be advantageous in the event of market turbulence.

Performance across the firm’s private equity funds as a whole was fairly muted, with appreciation of 1.7 percent during the quarter and -1.1 percent year-to-date. This was partly driven by the depreciation of annuity company Athene.

“There are always idiosyncratic marks in any one quarter, but we feel highly, highly confident that Fund VIII is continuing to build value and going to deliver,” co-founder Josh Harris said.

“We had a couple of things related to retail and Canadian natural gas that we had to mark down, but relative to the overall portfolio we’re very positive and excited about where it is.”

Apollo deployed $1.6 billion and committed to invest a further $200 million during the quarter; realisations were at $883 million.