Apollo Pivots Buyout Fund ‘Almost Entirely’ Into Distressed Mode

May 7, 2020 | News | 0 comments

Apollo Global Management’s massive buyout fund has shifted its strategy to gain ownership of companies in distress during the coronavirus crisis, according to co-founder Josh Harris.

Apollo’s $25 billion private equity fund has shifted “almost entirely” to a distressed strategy under which it aims to gain control of companies buy investing in their debt, Harris said during the firm’s first-quarter earnings call Friday. “We’ve seen the pace of that fund go up significantly in the last month and a half.”

The destruction caused by the coronavirus pandemic is likely to lead to an economic cycle that looks more like an “L” than a “V,” according to Harris. While the Federal Reserve’s emergency intervention has helped markets function during the crisis, he said the economy is “really hurting” and could see gross domestic product drop 30 percent in the second quarter.

“There’s a lot of companies that have no revenues,” said Harris. “Ultimately, a lot of the leverage that existed in the system is too high for cash flows that don’t exist over a medium term.”

Apollo’s own portfolio has been hurt in the pandemic. The value of its private equity funds dropped 21.6 percent during the first quarter, according to the firm’s earnings report.

 

None of the companies controlled by Apollo or its funds will be using the federal government’s Payment Protection Program as aid during the coronavirus crisis, Leon Black, the firm’s co-founder and chief executive officer, said during the earnings call.

“Similarly, although we are still reviewing the guidance recently announced by the Federal Reserve, we do not anticipate that the main street lending program will provide any relief or financial assistance to companies controlled by us or our funds,” he said.

Meanwhile, Apollo’s $25 billion buyout fund is only about a third invested, according to Black. He said “even with outsized opportunities, it’s probably going to be at least 18 to 24 months before we’re out fundraising again.”

Black expects to see “a lot more distressed opportunities” over the next two years, drawing a comparison to the period surrounding the great financial crisis.

Right after the “market dislocation” thirteen years ago, Apollo’s private equity fund VII was two-thirds invested in distressed, he said, compared with less than five percent for its next fund. “That is the bandwidth vis-à-vis distressed-for-control that can come out of the private equity funds.”

Source: Insitutional Investor 

 

Private equity firms have gone hat in hand to lawmakers to argue that their portfolio companies should get coronavirus assistance alongside Main Street companies. They’ve come up short in at least one big way, The Times’s Kate Kelly and Peter Eavis found.

A big sticking point is the “affiliation rule” for some lending programs, which essentially treats companies owned by a private equity firm as part of a conglomerate, rather than separately. This excludes them from aid based on company size. The main private equity lobbying group has tried to get an exemption.

Individual firms have also lobbied for help for their holdings. Carlyle, for instance, wants aid for troubled aviation companies — including three it owns that have applied for relief. One of them, PrimeFlight, said it had “not received any funding” yet.

Private equity has had some success. A big breakthrough was when the Fed expanded a $100 billion lending program known as TALF to accept most kinds of corporate debt, including many junk bonds, as collateral. The move came after Apollo presented an elaborate proposal to Jared Kushner, President Trump’s son-in-law and a White House adviser, and lawmakers.

Critics in Washington aren’t inclined to give them a break. Private equity firms “do fabulously well when their risky bets pay off, and they are the people arguably best positioned to absorb losses right now,” Bharat Ramamurti, a member of the congressional committee overseeing federal bailout efforts, told Kate and Peter.

It has been a somber earnings season, to say the least. A majority of big companies have now reported quarterly results and fielded questions from investors about what their future holds.

Profits are down, and worse is to come. S&P 500 earnings are on track to fall by around 14 percent compared with the first quarter of last year, according to FactSet. That would be the worst such decline since 2009, and pandemic shutdowns only began toward the end of the quarter. Analysts expect steeper declines in the second quarter (37 percent) and the third (20 percent).

Executives don’t know what’ll happen. It’s a time-honored tradition on Wall Street for companies to offer guidance on their future earnings. (Usually, these forecasts are just below the earnings the companies end up reporting.) Now, C.E.O.s are throwing their hands up: More than 100 companies in the S&P 500 stock index have scrapped regularly provided forecasts. Analysts are “flying blind,” one lamented to the FT.

So why are stocks up? The S&P 500 has risen nearly 30 percent from its March low all the same. Andrea Cicione of TS Lombard describes this as a “narrow recovery,” driven by the stocks of tech giants like Amazon that benefit from lockdowns. With so many companies withdrawing guidance, he says that bank earnings are the best forward-looking indicator — and that a huge spike in lenders’ provisions against bad loans “was an eye-opener.”

• John Authers of Bloomberg reckons that hopeful investors are “drawing the best possible conclusions” from earnings calls and discounting bad news.

Remember buybacks? Like a dispatch from a bygone era, companies’ first-quarter reports reveal how aggressively executives were buying back shares before the pandemic hit, with repurchases running 13 percent higher than the previous quarter, according to S&P.

• AlphaSense combed through the filings and calculated that 135 big companies (with a market cap of at least $5 billion) spent more than $40 billion on buybacks in March alone.

• Buybacks, dividends, overhead, capex and just about every other cash expense are now being cut, so second-quarter earnings reports will feel much more austere.

Source: The New York Times

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