Apollo posts losses while growing credit strategies

The alternative investment firm revealed mostly declining financials in its Q1 earnings report, though Apollo is raising several credit funds, where performance was about flat compared to declines in private equity.  

Apollo Global Management revealed several fund launches and strategy growth in its credit business, which posted a modest profit gain in the first quarter, while the private equity segment and the firm overall saw losses. Overall economic net income (ENI) came in at negative $72.9 million, down from positive $32.8 million in the fourth quarter and $93.5 million in the first quarter last year.

The PE segment’s ENI was at negative $79.6 million in the quarter, down from negative $50.5 million Q4 2015 and positive $53.6 million in the first quarter last year. The declines were attributed to losses in the firm’s management and investment businesses. The management business decrease was driven by lower revenues stemming from transaction fees and higher expenses, namely compensation, management said. The investment business loss was the result of unrealized decreases in the firm’s valuation of Athene, the insurance holding company Apollo owns.

Speaking on the earnings call, co-founder Josh Harris said the firm’s flagship private equity funds posted mixed results. Apollo Investment Fund VI and Fund VII were both down 5, while Fund VIII was up 9 percent. He noted the funds are all in different periods in their investment cycles. “Since Fund VIII is not yet in a carry earning position, the fund’s positive performance in the quarter is not yet being reflected in the income statement. However, the fund’s net IRR is now in positive territory and only needs to appreciate by another 5 percent for the fund to begin accruing carry,” he said.

The credit segment posted a modest ENI gain of $112,000 in the first quarter, compared to $75.8 million in the fourth quarter and $49.6 million in the first quarter last year. The credit’s performance was at 0.9 percent net IRR in the quarter.

Inflows of $3.7 billion in in the first quarter were primarily driven by assets in Athene, customised managed accounts, liquid funds and MidCap Financial’s partial acquisition of the Mubadala GE Capital portfolio. MidCap, a healthcare-focused lender that was acquired by Apollo three years ago, has been expanding into lending to other industries. It now has $6 billion in assets, having added another $600 million in the first quarter. The platform managed $1.2 billion in the beginning of 2014.

Speaking on the earnings call, Harris said the firm has started raising money for its third European Principal Finance Fund, a series that buys non-performing loan portfolios from European banks. The last such fund, a 2012 vintage, raised $3.5 billion. The firm also launched the third fund in the financial credit investment fund series, a credit product that focuses on insurance-linked securities. The predecessor was a 2013 vintage that raised $1.6 billion. The firm is also growing its emerging market corporate debt platform which is nearing $1.5 billion in assets.

Apollo also reported a $250 million first close for its new special situations fund, which targets longer-dated private equity, royalties, infrastructure and minority investments. Management declined to disclose a target for the fund.

Apollo also shared an update on its previously announced share repurchase programme. During the first quarter, the firm bought back 2.6 million shares worth about $35 million.

While many firms have been looking forward to distressed opportunities amid a volatile market backdrop, Apollo’s management said that opportunity may have been short lived. “The distressed market got really interesting for about three days and we were buying almost two handful of distressed names, but the reality is that the markets turned relatively quickly,” said Harris. “Outside the natural resource and energy space, we’ve had something of a V in terms of markets going down and then coming back up.”

“The good times are rolling again at least for this month but you can’t really predict what will happen given the relatively muted financial fundamentals of the economy, but very aggressive minority technical out there,” co-founder Leon Black said on the call. “There is this battle between fundamentals and technicals. One month fundamentals win and the next month technical win and you just have to be on your toes to navigate what is a very challenging environment.”

The firm’s total assets under management were at $172.5 billion at the end of the quarter, up from $170 billion the prior quarter.