Insurance is hot for Apollo’s new CEO – classy takeovers, not so much

Apollo Global Management Inc.

APO -0.29%

Made its name, generating double-digit returns on debt-laden buyouts. Under the new Chief Executive Officer Marc Rowan, the company’s future will increasingly be about finding ways to get a few percentage points more than corporate and government bonds pay.

The shift reflects Apollo’s evolution from a leveraged buyout shop to a credit-investing powerhouse, primarily aimed at insurance companies looking to park tons of cash from the sale of retirement products called fixed annuities.

For Apollo, this has meant building platforms that will spawn a growing number of investment products that are designed for relatively low risk. These products include loans to large and medium-sized companies, asset-backed securities, aircraft finance, and residential mortgages, which yield only marginally more than what insurance companies pay out to policyholders.

Apollo’s ability to develop alternatives to the simple vanilla bonds that insurance companies traditionally rely on in times of extremely low interest rates has helped the assets in its lending business more than triple in the past five years, to over 320 billion US dollar has risen. The company now accounts for more than 70% of the company’s total assets of approximately $ 455 billion.

The company redoubled its efforts with a deal in March to buy the 65% stake in insurer Athene Holding GmbH.

that it doesn’t own yet. The move that will turn Apollo’s largest source of wealth into a wholly owned division came immediately after Mr. Rowan’s appointment as chief executive. As a co-founder of the company, he was the insurance strategy architect and helped build Athene after the financial crisis.

(His appointment came as a surprise to people close to the company who expected co-founder Josh Harris, who oversaw Apollo’s day-to-day operations, to become CEO.)

Leon Black stepped down as CEO of Apollo after revealing his connections to the late Jeffrey Epstein, despite a review showing no involvement in the shamed financier’s criminal activities.


Photo:

Patrick T. Fallon / Bloomberg News

For 58-year-old Mr. Rowan, who took over as long-time CEO Leon Black after revelations of Mr. Black’s connections to the late disgraced financier Jeffrey Epstein, the combination with Athene fulfills his vision for Apollo. According to Forbes, Mr. Rowan owns several restaurants in the Hamptons, who is generally holding back, and is valued at over $ 4 billion.

“It’s the ideal structure,” he said in an interview, the first time since he formally assumed the CEO role. “When we started Athene in 2009, the size of the capital to build the business precluded that, but if I could have done it I would have owned 100%.” The merger will give the company a fully aligned structure and pave the way for a doubling of Apollo’s lending business, he said.

Apollo’s strategy is not without risk. Investments for insurers tend to be less liquid than standard issue bonds and may be more difficult to discharge in a market downturn. And Apollo’s fortune is now more tied to Athene’s annuity business, which could hit the company if its growth slows.

This weighed on Apollo’s shares after the deal was announced, although they recently rose to all-time highs as investors became more familiar with the company’s new structure. Investors will be on the lookout for clues on Tuesday as to where stock will go from here when Apollo releases its first quarter results.

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The deal with Athene is the culmination of something Mr. Rowan and Apollo realized years ago: pursuing growth in Apollo’s private equity business by expanding too quickly into new strategies could force the company to pursue substandard investment opportunities. With credit, especially the lower-return strategies, the options are almost limitless.

All of Apollo’s publicly traded rivals have tried to imitate the move in some way. For example, in February KKR & Co. acquired a 60% stake in Global Atlantic Financial Group Ltd. acquired and developed new platforms for managing its insurance assets.

Unlike many of his peers, Apollo designed its loan offerings with insurance companies in mind, Rowan said.

There are far fewer investment options with an 8% to 12% return – which many peers have sought in their lending business – than those with a 4% return that would be suitable for insurers. “I want to play the big pile, not the small pile,” said Mr. Rowan.

Offers alert

Important news in the world of deals and deal makers.

A number of business models have emerged among the large public buyout firms aiming for the next growth. All have recognized the need to generate stable and predictable wealth management fees, but their strategies for achieving this vary.

Blackstone Group Inc.,

For example, the company is focused on raising heaps of external cash for numerous new investment firms in pursuit of its $ 1 trillion net worth goal. Some of this is known as perpetual capital because it generates a steady stream of fees over a longer period of time.

“We all started out as private equity firms,” ​​said Rowan. “Each of us has diversified in our own way and we are now incredibly different.”

With all of the money coming in through the lending business, Apollo is now a big lender – often in areas where banks can no longer operate due to regulatory hurdles. According to Co-President James Zelter, the company now has 3,500 credit relationships.

“Since 2008, traditional Wall Street has undergone tremendous changes that have only accelerated our growth, and this has transformed the opportunities for companies like us,” he said.

Apollo’s leaders say the segments that include private equity and real estate, which combined assets of $ 127 billion at the end of 2020, can grow more than 50% over the next five years If the company finances greater profits and continues to move into areas such as infrastructure and impact investing.

The company, which invests from a $ 24.7 billion buyout fund, was one of the most active investors during the coronavirus pandemic. In addition, the company has built its Hybrid Value business, which is structured debt and equity investments and offers more modest returns than full buyouts with lower risk.

“We believe there is a place for a more value-minded investor,” said Scott Kleinman, the company’s other co-president. “That doesn’t mean we’re ignoring growth. We just don’t like paying top dollar for it. “

Write to Miriam Gottfried at [email protected]

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