FundFire: Apollo Gears Up for New Credit Push By Tom Stabile

Tom Stabile Feb 8, 2017
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Featuring Peter Martenson

Apollo Global Management won’t be letting up on its lead as the largest private alts fund manager in the credit market, with plans for more initiatives even as it saw the sector contribute most of its new capital last quarter and throughout last year.

Apollo added $26.2 billion in its credit segment for 2016, the lion’s share of its $34.8 billion in capital inflows last year, including $5.1 billion of the $6.6 billion it brought in during the fourth quarter. The quarter’s tally relied on a wide mix of strategies, including $2.2 billion from the first closing of its third fund that acquires assets from European banks, and additional inflows from its total return credit hedge fund, various collateralized loan obligation funds, and other strategies.

Apollo is well ahead of its peers in the overall credit segment, which makes up $136.6 billion of its $191.7 billion in assets. Blackstone Group is its closest private equity peer with $93.3 billion in credit strategies out of its $366.6 billion in assets.

Much of Apollo’s credit market lead is through what CEO Leon Black called the firm’s "nontraditional asset management" strategies, such as most of the $92 billion in assets it manages through its Athene, MidCap, and AAME platforms, which don’t involve the standard fare of funds that raise capital from limited partners. These instead manage money from other pockets, such as assets of Apollo portfolio companies or through permanent capital vehicles.

A new product in the wings is its Apollo Multi Sector Income Fund, a registered closed end credit vehicle it has not yet switched on that it plans to deploy into loans, high-yield bonds, distressed credit, rescue financing, mezzanine debt, residential and commercial mortgage-backed securities, municipal credit, and other investments.

And credit will be a main focus for Gary Parr, who recently joined the firm from Lazard to help it acquire new capabilities, said Josh Harris, senior managing director at Apollo, during its earnings call last week.

"Clearly, we are constantly looking at how to grow our platform in a way that is accretive to our value and our long-run growth and prospects, and so Gary will help with that," Harris said. "[F]rom a credit point of view, there are a whole bunch of different things where there are growth opportunities for us."

It’s not surprising to see Apollo looking to credit for even more growth, given that many of its peers are making the same bet, says Elvire Perrin, managing director at Pavilion Alternatives Group, an investment consultant.

"It’s not just growth for the next year," she says. "Several organizations, such as CVC [Capital Partners], KKR, [BNY Mellon’s] Alcentra, Ares [Management], EQT [Partners] – all pretty big names – have been growing very, very fast on the credit side, and clearly they’ve got a strong rationale to do so. This new asset class clearly is becoming more and more important and they’re growing the platforms accordingly."

Investor and consultant appetite for private debt strategies is strong, and they’re often looking for "steady hands" of large, experienced managers to handle their assets, says Peter Martenson, partner at Eaton Partners, a placement agent.

"They want a stronger return than fixed income but still lower volatility," he says. "They often want a big, well-known platform that will be able to deal with something if the credit goes sideways – everything from having an influence on the outcome to being on the creditors’ committee. And they want a firm that can take on large dollar amounts, where you can deploy $1 billion."

That greater focus on credit has also played out in Pavilion’s global client base, where investors are looking at a range of private debt options, Perrin says.

"There has been an increase in requests for help to select credit managers and do due diligence on credit funds, and I presume that will keep on being the case in the next year," she says. "Even if interest rates are expected to grow in the U.S. it doesn’t mean that private credit will not be as attractive. We might see investors bringing some diversity and downside protection to the portfolio."

For instance, Perrin says she has seen new interest in private credit from institutional investors in Germany, a market long dominated by standard fixed income strategies. Lower yields in recent years have led some of these longstanding conservative investors to move some of their fixed income assets into private credit in search of better risk-adjusted returns, primarily in areas such as direct lending, she says.

That trend is likely global, with 62% of private equity limited partner respondents to a recent Preqin survey saying they plan to boost their private debt allocations over the long term.

Apollo also may be well-positioned to benefit from another strain of the private credit market’s growth, with stronger investor interest in separate account formats. Apollo reported having $19 billion in separate account relationships with large investors, and has counted it as a growing area for new capital flows.

"A lot of the capital coming in from the fixed income side is from investors used to fees that are pretty low," Perrin says. "Clients trying to find ways to limit the fees as much as possible will be interested in separate accounts."

Limited partners are increasingly asking for separate accounts and co-investments as a way to "order off menu" for some of the same deals they might have previously expected to get through funds, Martenson says. Credit is better suited to such separate bites because it often is easier to tailor such investments into stand-alone mandates with their own terms than it is to take a slice out of an equity deal, he adds.

"LPs are demanding it and [managers] realize that if they bend to it, it could be large dollars in inflows," he says. "And that’s to get capital that is sticky."

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