Permanent capital: the pathway to new investors

Apollo is in the vanguard of the trend as managers seek to lessen their reliance on drawdown vehicles.

When Apollo Global Management reported its earnings last week it announced almost half ($136.0 billion) of its $280.3 billion in assets under management is in permanent capital vehicles.

This is significant because permanent capital has the potential to attract new investors beyond the institutional investors typically committing to drawdown funds.

The bulk of Apollo’s permanent capital assets ($108.8 billion) come from Athene Holding, the insurance behemoth it built that may have played a role in inspiring competitors to do something similar. Blackstone and The Carlyle Group have both launched insurance products in recent years with the implication of managing long-term capital, also opening new channels of business for the firms.

“A lot of people are probably jealous of what Apollo was able to create,” says Meghan Neenan, a senior director at Fitch Ratings and head of its North American non-bank financial institutions coverage. “The sell [from alternative asset managers to insurers] is, ‘We can get you higher yields for less risk’, in [the asset manager’s] view.”

Business development companies, as many credit managers know, offer a channel for retail investors to access illiquid debt securities and a new client base for the general partner. For instance, Oaktree Capital Management purchased two BDCs from Fifth Street Asset Management to become an integral part of its retail platform.

“It’s a way for managers to get their name out there and get more familiarity with retail investors,” Neenan notes. “I think the holy grail is to get access to 401(k) plans, but that has a lot of hurdles.”

Permanent capital is a boon for fee streams. The capital is a virtually guaranteed source of income for the firm, making them less reliant on drawdown funds that, even with the best performance track records, can have trouble fundraising in testing market conditions. Apollo’s permanent capital vehicles combined brought in 42 percent of fee-related revenue.

Credit makes a unique home for permanent capital as well. Apollo’s credit business is home to $131 billion of that permanent capital. In addition to Athene, Apollo’s debt investing operation oversees six other permanent capital vehicles, including mid-market senior debt lender MidCap Financial and the Apollo Investment Corporation BDC.

In its investor day presentation, KKR emphasised its dedication to permanent capital, noting that over time it wants to increase its AUM from these vehicles and its core and strategic investor partnerships, including its $5.5 billion account with the Teacher Retirement System of Texas that invests across the asset manager’s platform. It also added a significant amount of permanent capital by joining forces with FS Investments last year.

In private credit, and alternative assets broadly, innovation in fund structures has become a hallmark of the industry. While drawdown funds aren’t likely to go away anytime soon, the chase for permanent capital is unlikely to abate.

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