Keep Apollo in Your Sights

 | Jul 06, 2012 | 9:30 AM EDT  | Comments
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Several of the most clubby private equity partnerships have gone public in the past few years, and none have done very well. But if there is one that has a shot at breaking through as a public entity, it is Apollo Global Management (APO), a global investment management firm focused not just on private equity but also on capital markets, real estate and natural resources sectors.

The $1.6 billion firm is headquartered in New York, but has offices in just about every significant financial capital around the world, including in London, Hong Kong, Singapore and Mumbai.

The company raises, invests and manages funds for a lot of the world's largest pensions, endowment funds and institutional and private investors. Apollo's investment philosophy is to focus on undervalued assets in industries in which it feels it has considerable knowledge, focusing on mitigating risk and preserving capital.

The company prides itself on its contrarian approach, willing to go into sectors and industries that are largely viewed as out of favor by the rest of the investment community. As a result, the firm holds a significant amount of credit from distressed companies, and has stated it is poised to ramp up those purchases should credit conditions continue to deteriorate globally.

The firm was founded in 1990 by the legendary Leon Black, and has grown to become one of the world's largest alternative investment managers, with more than $100 billion in assets under management. Black was the former head of mergers and acquisitions for the celebrated, notorious investment firm Drexel Burnham Lambert. He left to start Apollo when Drexel was forced into bankruptcy, and brought along a number of colleagues to help get the new firm off and running, including co-founders John Hannan, Craig Cogut, Arthur Bilger and Tony Ressler.

The firm utilizes an integrated operational process. All its various business units collaborating and share information, such as specific market insight, investment opportunities, banking and consulting contacts and management relationships.

The private equity segment is the largest, with a number of funds totaling more than $30 billion in assets under management. The segment consists of traditional and partnered buyouts, debt investments and distressed buyouts. The capital markets division is nearly as big, with investments focusing on insurance company assets, senior credit funds, mezzanine funds and event-driven hedge funds.

Meanwhile, the real estate segment, with about $8 billion in assets under management, utilizes private equity investments in distressed debt, equity recapitalizations and mortgage-backed securities. Rounding out the business operating segments is the natural resources unit, which launched only last year. At the end of 2011, the segment had $560 million in commitments dedicated to global private equity in metals, mining, energy and several other natural resources subsectors.

Within the four operating segments exist nine sector-specific teams, all cross-collaborating. That is, every potential investment must pass through the investment committee in which business, financial, tax, accounting, environmental and legal issues are all evaluated.

Apollo has a number of targeted funds within these segments, as well. These include the India Distressed Fund, which focuses solely on distressed and specialized credit situations in India, and the European Credit Fund, which purchased credit assets at extreme discounts in major Western European countries.

Researchers at Deutsche Bank point to Apollo as a clear leader in the private equity industry as a result of its proven experience, industry-leading investment performance and access to capital. The firm has grown assets in this sector by 25% annually since 2004. Apollo largely generates its revenue from management fees, transaction and advisory fees, interest income and investment income.

Shares went public in the spring of 2011 at $19, valuing the firm at nearly $7 billion, but have since slumped by 29%. Most of Apollo's peers that have gone public in the past few years, among them Fortress Investment Group (FIG) and Carlyle Group (CG), have declined since their initial offering. Perhaps Apollo will be the exception.

While Apollo has grown revenue in the past three years, profits are down from a year ago -- yet Apollo remains extremely optimistic, giving its penchant for thriving in distressed economic periods. Keep it on your radar for the day when the company's shares themselves become distressed.  Turnabout would be fair play, and potentially very profitable.

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