Capital markets around the world are on fire. And Apollo Global Management could not be happier. During its earnings call on Wednesday, the US investment manager revealed it had bought a third of the collateralised loan obligations that UK pensions had to dump during the liability-driven investment mess of early October.
Top investment performance often begins with a low entry price. Apollo’s biggest wins in its 40-year history have come in the midst of market unrest.
Last month it bought more than a billion dollars worth of the highest tranches of the CLOs, generating a staggering yield of 8 per cent. Rapidly rising interest rates have caught investors off guard creating opportunities for nimble investors such as Apollo.
But today it has left behind its historic focus on taking over entire distressed companies. It prefers to grow, with more than $500bn of assets under management, by becoming a lender and purchaser of credit. It has usurped the role of banks and insurers, hobbled by the 2008 financial crisis and constrained by the regulations that followed.
Apollo’s other recent big deal underscores this. It confirmed on Wednesday that it would soon complete a purchase of Credit Suisse’s securitisation products business. With the CS unit, Apollo will have its 14th different vehicle originating some form of corporate loans.
Much of the group’s asset base depends upon annuities that its Athene unit has sold. Apollo has “spread-related” earnings, between the 4 or 5 per cent it aims to earn on investments, less the 2 or 3 per cent promised to annuity holders. Perhaps it lacks the glamour of its LBO business, but Apollo still clocked nearly $600mn of “spread” profits in the third quarter.
Apollo shares are down 15 per cent for the year. Markets may wonder how the existing portfolio will withstand current stresses. Even as the group has shifted away from lumpy buyout profits, those can be massive. Meanwhile, realised performance fees from its principal investing business fell from $600mn to $100mn, year-over-year.
Still, Apollo believes that even as volatile markets favour its skills, traditional institutions will not be rendered completely obsolete, if only as sources for more easy wins.
Our popular newsletter for premium subscribers is published twice weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here.