Apollo seeks more customised accounts

After building a historic $3bn customised relationship with the Texas Teachers’ Retirement System, the firm is talking to institutions around the world about similar opportunities.

Apollo Global Management wants to form more special relationships with big LPs.

Last year, the Texas Teachers’ Retirement System revealed that it had formed customised relationships with Apollo and Kohlberg Kravis Roberts in which it committed to allocate $3 billion to each of the firms for investments across various strategies.

Apollo has continued to talk to potential LPs around the world about building customised relationships, Marc Spilker, the listed firm’s president, revealed during a year-end 2011 earnings call Friday.

“There’s a handful of others we’re going after,” Spilker said.

The institutions that might be interested in such relationships “have to have large pools of capital, they have to be sophisticated and a relationship needs to exist,” Spilker said. “It’s not just pension plans, it’s also sovereign wealth funds and we’ve done this with both. Large pensions and sovereign wealth funds [are] where the majority of the activity is.”

Apollo is no stranger to customised relationships. The firm runs numerous separate accounts with other LPs, including South Carolina’s public pension system. The system formed a $759 million partnership with Apollo in 2008 called the Apollo Palmetto Strategic Partnership. The relationship gives South Carolina access to Apollo’s private equity funds as well as its capital markets operations, including in European non-performing loans.

It's not just pension plans, it's also sovereign wealth funds and we've done this with both. Large pensions and sovereign wealth funds [are] where the majority of the activity is.

Marc Spilker

“We’ve done a small amount of these with [Texas Teachers’ being] the largest,” Spilker said.

Customised relationships between big LPs and managers has become more popular over the past year. Last year, New Jersey’s public pension system formed a partnership with The Blackstone Group in which it pledged to allocate $1.5 billion to flexible accounts that could focus on investments across the firm’s products, including credit and energy investments.

The California State Teachers’ Retirement System, the US’ second largest pension, has discussed changing its private equity investment policy to allow for investments in separate accounts, though the pension has not announced any imminent action along these lines. California’s public employees’ pension, the biggest in the US, has also expressed interest in the partnerships.

Apollo, like its publicly listed mega-fund peers KKR and Blackstone, reported a drop in earnings over the full year and the fourth quarter due to lower unrealised mark-to-market valuations. The firm’s reporting was tied into the volatility and uncertainty of the markets in the latter half of last year as they are forced to report mark-to-market and have to reflect “a moment in time”, the firm said.

Examining performance quarter to quarter can be misleading for a private equity firm that looks to profit from long-term investments that may not be realised for five to 10 years.

“During the third and fourth quarter, sentiment was at a low, and that is reflected in the valuation process,” Spilker said. “The market today feels a bit better, but sentiment is shifting very quickly”, so it’s hard to determine how performance will look by the next quarter.

“We feel good about the portfolio … those markets don’t really reflect where we’ll be able to monetise over time,” the firm said.

Fee-based income is a measurement publicly listed firms like to tout, and in Apollo’s case, fee-generating assets under

We feel good about the portfolio … those markets don't really reflect where we'll be able to monetise over time.

Apollo Global Management

management increased $11 billion to $58 billion as of 31 December, compared to $47 billion as of a year earlier. The increase in fee income came from the growth of the firm’s capital markets and real estate businesses.

Apollo reported that its total assets under management increased to $75 billion as of 31 December, compared to $65 billion on 30 September. Total realised gains from carried interest income was significantly up – by 229 percent – to $645 million for the full-year, compared to $196 million for 2010.

The firm also has been busy raising capital, launching its second European non-performing loan vehicle, which has held a first close on $200 million, and a natural resources-related fund.

“Our LPs are comfortable looking for things on the illiquid side,” Spilker said. “When markets go up, they’re expecting we’re focusing on realisations, and when markets are down, they’re expecting us to put capital to work. We see the desire to put capital to work particularly in our areas of focus which are Europe and natural resources.”