My favorite private equity firm to steal ideas from is Apollo Global Management (APO) . The firm has a definite value tilt to its approach to private equity investing. As CEO Leon Black said on a recent conference call, "Consistent with our value orientation, the average creation multiple on investments made by Fund VIII during the year was approximately five turns, meaningfully below the industry average of some 10.5x, so not one or two multiples slower, but actually half of what the industry average was doing." Historically, the firm has put a maximum multiple of a 6 EV/EBITDA ratio on buyouts. Co-founder Josh Harris was quoted in the Financial Times last year as saying, "If you propose a deal that is expensive, you do not belong at Apollo."
I also like the fact that the co-founders of the firm trace their roots all the way back to Drexel Burnham Lambert during the Milken heydays of the 1980s. They learned a thing or two about getting leveraged buyouts done and debt financing and investing that has paid off big for their investors.
When I looked at its 13F portfolio this week, the first thing I noticed is that while it was finding some things to buy, it is clearly skeptical about market valuation and price levels. Apollo has a pretty large hedge position, with puts on ETFs that track the S&P 500 (SPDR S&P 500 ETF (SPY) ), the Russell 2000 (iShares Russell 2000 (IWM) ), high-yield bonds (iShares iBoxx $ High Yield Corporate Bd (HYG) ), tech stocks (Technology Select Sector SPDR ETF (XLK) ) and energy stocks (SPDR S&P Oil & Gas Explor & Prodtn ETF (XOP) ).
It was a buyer of some discounted closed-end funds in the quarter. Purchases included BlackRock Credit Allocation Income Trust (BTZ) , Invesco Senior Income Trust (VVR) and Prudential Global Short Duration High Yield Fund (GHY) . Apollo owns a lot of closed-end funds -- including some in-house funds, like Apollo Senior Floating Rate Fund (AFT) and Apollo Tactical Income Fund (AIF) that I have owned in the past with good results. The floating rate fund discount is too narrow for me, but the tactical income fund is trading at a discount of almost 10% to its net asset value and yielding 8.4% right now. The fund is currently 71% in floating rate loans, so should do well even if rates rise this year.
Advanced Emissions Solutions (ADES) was one of their more-interesting purchases in the quarter. This company provides clean coal technology and chemicals used in the cleaning process. It has customers in the coal-fired power generation, industrial boiler and cement industries. The company has finished the restatement of its past financials, paid down all debt and made some changes to the management team. The stock has more than doubled, but it is still pretty cheap, with an EV/EBITDA multiple of 8 right now. That's obviously above Apollo's limit of 6, but the private equity firm appears to have been buyers at much lower levels in the fourth quarter. This is a fascinating company that should do very well in the future. Coal is not going away, and this stock should be near the top of your watch list, in my opinion.
They were also a buyer of Radio One (ROIAK) during the final quarter of the year. The company owns radio and media assets serving African American and urban customers across the United States. In addition to its 56 radio stations in 16 markets, and radio programming assets, it also owns TV One -- a cable TV and satellite network that reaches 57 million homes. Radio is a tough business, but the company has been focusing on cost controls and has been using some of its cash flow to buy back stock. In the first nine months of last year, the company bought back a total 1,255,592 share.
The private equity firm also increased its stake in its commercial real estate finance REIT by about 24% in the quarter. I am a big fan of Apollo Commercial Real Estate Finance (ARI) as I think that while CRE appreciation may not be as robust as it has been the last few years, I don't see pricing declining anytime soon either. It's a pretty good time to be a CRE lender. Plus, you can buy the REIT at 83% of book value and the yield is currently over 10%. I have owned it for a long time and hope to continue to own it all the way through the current CRE cycle.
I read and steal from the filings of all the big private equity firms. I confess that I steal more from Apollo than the others, as they are more value oriented, and approach the markets in a similar fashion to mine.