In an upbeat call with investors, Apollo Global Management Inc.’s co-heads of private equity investing said they are tracking more than 250 potential opportunities to scoop up distressed assets, and pursuing chances to enhance returns by snapping up its own portfolio companies’ discounted debt.
In a private briefing of limited partners Tuesday, Matt Nord and David Sambur said the firm has spent more than $1 billion pouncing on opportunities linked to 10 distressed companies, and that they’re drawing on additional funds from investors to pursue more, according to a person with knowledge of the call. The market turmoil caused by the Covid-19 pandemic has presented a “time to shine,” the duo said repeatedly, even if it’s inflicting pain on some of Apollo’s holdings.
It’s a snapshot of the mood at one of the world’s largest and most aggressive investors in the midst of corporate carnage around the world. The firm, known for making lucrative bets on companies that rivals wouldn’t go near, acknowledged it will mark down the value of certain holdings and that some portfolio companies are racing to shore up their access to cash. But mostly, the briefing emphasized that chances to profit are multiplying after years in which buoyant markets elevated many asset prices.
One other piece of their pitch: Apollo’s private equity team is in close contact with the firm’s credit arm, sharing information and giving dealmakers an edge.
A spokeswoman for New York-based Apollo declined to comment. The firm, led by Chief Executive Officer Leon Black, said at an investor day in November that it was tracking potential opportunities tied to about 120 distressed names.
To help it buy the discounted debt of portfolio companies, the firm called on about $500 million of commitments from investors in its eighth flagship private equity fund last week. The executives said they expect to use some of the roughly $2 billion in available dry powder there to “build value” in the current market environment.
The investment committee also has approved another $1 billion of distressed investments from the roughly $18 billion of dry powder in Apollo’s ninth flagship fund, which oversees a total of $24.7 billion.
Apollo has so far plowed 14% of its ninth fund into distressed opportunities and expects the figure to rise given the current environment, they said. That compares with a 3% composition of distressed bets in the prior fund. Its previous crisis-era fund saw bets on distressed and other credit swell to 59%. The executives anticipate that some distressed opportunities will arise from companies that had too much debt ladened on them by other private equity firms.
Broadly, Apollo expects to mark down its private equity portfolio by 15% to a “low 20%” figure in the first quarter, the executives said. They predicted most markdowns may be temporary. The S&P 500 has tumbled about 24% so far this year.
Leisure companies, a sector hit particularly hard as the deadly virus brought global travel to a standstill, account for about 9% of Apollo’s total private equity portfolio. But some of those holdings, such as golf club owner ClubCorp and timeshare operator Diamond Resorts International, are somewhat insulated because between 50% to 70% of their operating income is derived from membership fees, the executives said. They also assured investors about the franchise value of another holding, low-cost carrier Sun Country Airlines, which has no corporate debt.
The dislocation of valuations in the leisure and travel sector has presented an opportunity that arises only once every 12 or even 50 years, Sambur said, noting “we’re very excited about it.”
Apollo, out of all the firms on Wall Street, is uniquely able to provide structured financing to gaming ventures, cruise operators, airlines and other companies, which may need billions of capital to weather the pending recession, they said.
The investment firm is tracking more than $125 billion of debt opportunities across 45 companies in the travel and leisure sector and already buying the debt of six, the executives said, without specifying names. The firm’s credit fund already purchased a portion of a United Airlines Holdings Inc. loan.
The executitves described the energy sector as having been hit by a perfect storm of declining demand and an outsize increase in supply, adding their belief that it may take 12 to 24 months for the market to reach an equilibrium where prices stabilize enough to stimulate new projects. About 9% of Apollo’s private equity portfolio is exposed to natural resources including energy.
Apollo told investors that it can use money from its private equity funds to provide bridge financing in sectors where banks are reluctant to lend, ensuring that it can lock in deals at discounts. “Financing is temporary but valuation is permanent,” the executives said.
Looking ahead at the economy, the executives said they are modeling various scenarios. While the situation is fluid, they are currently ascribing a 60% probability to a so-called U-shaped recovery, in which commerce rebounds around the first quarter of 2021. They assigned 20% probabilities each to V-shaped and L-shaped recoveries, which imply the beginning of a recovery later this year or in the second half of 2021, respectively.
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