Apollo Global Management (APO) released earnings yesterday, and its report and conference call offered lots of great free market advice to those willing to listen.
Now, Apollo's conference call is one of my favorite ones to review. After all, CEO Leon Black and Senior Managing Director Joshua Harris are not only very successful investors, but they're also very quotable guys who offer valuable insights into the market's current condition and direction.
Both men trace their private-equity and credit-business roots all the way back to the 1980s and the days of Michael Milken and Drexel Burnham Lambert, and they've been very successful since founding Apollo back in 1990.
Here are some things that they had to say:
Apollo Is Buying
The most notable thing about Apollo's latest results is that the firm is doing more buying than most other private-equity firms are right now. Black and Harris deployed or committed more than $7.5 billion across their platform during the latest quarter while realizing just $1.3 billion of capital.
Of course, that's not really surprising given that Black said in 2013 that Apollo was in a multiyear process of selling everything that wasn't nailed down. So, the cupboard must be pretty bare by now.
Black said four large private-equity deals announced during the latest quarter had been in the works for a while. The fact that they all got close to the finish line at the same time was mostly a coincidence rather than a broad call on the markets or economy, he said.
But the CEO noted that Apollo used market volatility to get the deals down to very low valuations.
"That's how we have always operated -- by dealing with complexity, by dealing with distress, [by] going down roads others don't," Black said. "And that's why not only have we put a lot of capital to work, but we've put it to work at four multiples lower than what the average of our peers are doing."
They've Still Got Dry Powder
Apollo has plenty of cash -- more than $24 billion of dry powder across the firm.
For example, Apollo Investment Fund VIII (the company's main private-equity fund) is currently just 56% committed. In fact, it'll have only 60% of capital deployed even after closing a recently announced mega-deal to buy OuterWall (OUTR) , which owns RedBox, CoinStar and other kiosk-based businesses.
The Credit Business Looks Good
Black was very upbeat about APO's credit business, saying: "As one of the world's leading alternative-investment managers, we are poised to benefit from a number of secular tailwinds, including the deleveraging of the banks and re-regulation of financial institutions, coupled with persistently low rates that are forcing institutional and retail investors alike to scour the globe for yield."
That bodes well for Apollo's public credit-investing platforms like Apollo Investment (AINV) and Apollo Commercial Real Estate Finance (ARI) . Both still trade at attractive valuations while offering double-digit dividend yields.
Joshua Harris told investors on the conference call that while he thinks markets will remain tough, APO's value-oriented approach should continue to bear fruit -- especially in credit.
"When are the central banks going to raise rates?" he asked. "We don't really have a crystal ball here, but I would say I don't really see that happening. As much as I don't like the levels of credit spreads, I think we all need to just be accustomed to the fact that we could be in a zero-rate environment for a prolonged period of time."
As such, Harris thinks credit will be very attractive to both institutional and individual investors. He said financial firms should do well "if you can go to someone and say, 'OK, instead of four, I'll give you six to eight. I'll pull in duration so [that] in case the central banks do decide to raise rates -- which we all inevitably worry about and have to think about -- you're protected because you're floating rate.'"
I think he's spot-on correct about this. To me, floating-rate funds and business-development companies with strong relationships to private-equity firms are two of the most attractive alternatives for income investors right now.
How to Really Make Money
Lastly, Black was asked a question about his funds' returns -- and I believe his answer spelled out a fantastic reason why no one should be a short-term trader, but should instead adopt a long-term, value-oriented, private-equity mindset.
As Black put it: "If you look at all of our historic returns, we've crushed the [main market indices]. It's not even close. ... Look at our historic returns in PE and they are in that mid-20%s net and in the mid- to high-30%s gross."
While it's unlikely that you and I can ever get close to generating such returns ourselves, I believe that combining a private-equity mindset with a focus on valuation should beat the market's main indices over time. And that's true even in the low-return world that we live in today.