Apollo to up distressed investing for Fund IX – exclusive

The firm, which also invests in corporate carve-outs and buyouts, has allocated about a third of its capital to distressed investing since inception.

Apollo Global Management is anticipating an increase in distressed debt opportunities in the next few years as the economic cycle turns, but foresees the opportunity as less attractive than during the global financial crisis.

The New York-based firm, currently raising its ninth flagship fund – Apollo Investment Fund IX, for which it is seeking $23.5 billion – expects to invest a much larger portion of the fund’s capital toward distressed debt than with its previous fund, Apollo Investment Fund VIII, according to a recommendation document prepared by StepStone Group for the State of Connecticut Retirement Plans and Trust Funds. 

Apollo, which managed $189 billion in assets as of 30 September, focuses on three strategies for its funds: distressed debt, corporate carveouts and opportunistic buyouts.

The document indicates Apollo plans to invest 20-25 percent of Fund IX in distressed debt opportunities, up significantly from the 1 percent allocated to this strategy in Fund VIII’s current portfolio. This increase in the distressed portion comes at an expense of buyouts, which made up 67 percent of Fund VIII, a 2013-vintage fund, but are expected to account for about 40-50 percent of Fund IX.

Corporate carveouts, which accounted for 32 percent of Fund VIII, will remain relatively consistent, at between 30-35 percent of Fund IX, according to the document prepared for Connecticut’s April meeting and recently obtained by Private Equity International.

The report said: “During expansionary markets, Apollo tends to invest exclusively in opportunistic buyouts and corporate carve-outs, as is the case for Fund VIII. During recessionary markets, when most private equity investors typically pull back on investment activity, Apollo has remained active, executing on investments in opportunities that seek to capitalize on market dislocation mostly through distressed investments.”

However, Apollo anticipates fewer distressed opportunities than during the last down cycle.

The last time Apollo invested a big chunk of its fund to the distressed strategy was between 2008 and 2013, during which it deployed its 2008-vintage Apollo Investment Fund VII. Fund VII poured 41 percent of its capital into distressed debt investments, the document showed.

Apollo’s distressed strategy is described as taking debt-to-equity positions to eventually own control of “good companies with bad balance sheets” in market dislocation and volatility, according to the document. If the firm cannot eventually gain control, it will sell the securities over time, the document said.

On average, the firm has deployed about a third of its capital in the distressed strategy in its history, according to a separate Connecticut document prepared by interim chief investment officer Laurie Martin on 31 March.

Fund IX will mainly seek investments in the US, but could deploy up to 35 percent of its capital in non-US opportunities, largely in Europe. It expects to make 25 to 35 investments valued at between $300 million and $1.5 billion per transaction, the document showed.

Apollo is offering a 1.5 percent management fee to limited partners that commit less than $250 million until – depending on which is earliest – the sixth anniversary of the fund’s effective date, the end of the fundraising period, or the date when a successor fund starts collecting management fees. After one of those events is triggered, Apollo will charge 1.25 percent until the second anniversary of the date the successor fund starts collecting management fees and 1 percent until the fourth anniversary. For the remainder of the fund life, Apollo will charge 0.75 percent in management fees, the document showed.

Fund IX also has a standard 20 percent carried interest and 8 percent hurdle rate, the StepStone document indicated.

As PEI previously reported, if Apollo raises as much as $23.5 billion for its latest fund, it will become the firm’s largest vehicle ever.

An Apollo spokesman did not comment at press time.