sssdsThe barbarians are crying foul. For decades, private equity firms have been seen as the aggressive interlopers, using sharp practices to prevail in brutal corporate contests.
Now that is being turned on its head. In a wave of company restructurings following the coronavirus crisis, Apollo Global Management and other traditional private equity groups have appealed to the courts to complain about the behaviour of rival creditors.
It has not gone unnoticed that the legally aggressive tactics they are challenging are those they may themselves have deployed in the past.
Reaching for new funds to see it through the pandemic, mattress company Serta Simmons Bedding took $200m in new loans from a slim majority of creditors who, in addition to putting in the fresh money, saw their existing loans move up in seniority in the capital structure. Holders of the other 49 per cent of Serta’s loans, including Apollo, effectively had their claim on the company’s assets become subordinated to the favoured debtholders.
Apollo sued, alongside other disgruntled creditors including Angelo Gordon and Gamut Capital. In a tart response, Serta, owned by private equity group Advent International, noted that the claimants had “sponsored and participated in numerous transactions structured similarly to this transaction”.
A New York judge denied Apollo’s attempt to halt the deal.
The flashpoints are coming thick and fast, as the pandemic pushes more highly-leveraged companies to the brink. Earlier this month, AMC Theatres, the troubled cinema chain, announced a rescue financing led by Silver Lake Partners, the private equity firm that already owns $600m of AMC convertible bonds. A group of senior lenders, including Apollo, have objected to the new financing and made their own competing proposal, believing the Silver Lake package was inferior for AMC as well as undercutting their own claims on the chain.
Apollo has also been a part of a creditor group calling for an independent “examiner” to probe corporate governance at the private equity-backed energy company Sable Permian Resources.
The scrambling of traditional roles has led to private equity groups taking a different position in such battles. Since Leon Black co-founded the group in 1990 from the ashes of junk bond house Drexel Burnham, Apollo has consistently taken opportunistic positions in distressed debt, trying to profit by trading in loans and bonds of struggling companies.
But today, a majority of Apollo’s assets under management come from a $216bn debt arm, which lends to companies and buys ordinary corporate debt. Blackstone’s debt unit, GSO Capital, itself now exceeds $130bn in assets.
Steven Kaplan, a private equity expert at the University of Chicago, said this creates contradictions that are increasingly apparent among large, diversified alternative investment firms.
“It is a very natural development given the increased amount of funding to alternatives and the overlap of buyout, credit and hedge funds in the distress space,” he said.
Apollo’s rivals are enjoying a moment of schadenfreude. At one point, the private equity group had such a reputation for playing rough with creditors of its portfolio companies, that it began to worry that traditional debt buyers would be wary of financing its future buyouts and in 2015 Apollo embarked on what investors dubbed an “apology tour”.
Even as private equity pioneers have drilled deeper into credit, some large hedge funds are expanding in the opposite direction. Elliott Management, founded by ex-lawyer Paul Singer, is best-known as a ferocious distressed debt investor, unafraid to take on big companies or even the country of Argentina. In the Caesars case, for example, where it owned $1bn worth of debt, it had filed a lawsuit accusing the Caesars’ co-owner, Apollo, of “unimaginably brazen corporate looting” for selling casinos that creditors including Elliott believed had belonged to them. (Elliott eventually settled with Caesars and Apollo).
Since then, Elliott has become a primary lender into technology buyouts. It has even established its own private equity unit, Evergreen Coast Capital, that specialises in tech LBOs — and now finds itself in the crosshairs of credit hedge funds that bought one of its portfolio company’s debt.
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