Private Equity, Public Embarrasment

Apollo: decidedly un-marquee performance in '08

Apollo Management sure has made some awful deals recently…

From Bloomberg:
Apollo founder Leon Black, 57, is trying to salvage some of the $60 billion worth of companies he has acquired since 2006. Retailer Linens ‘n Things Inc. filed for bankruptcy last year. Casino operator Harrah’s Entertainment Inc. is restructuring debt to stave off default. At least $2 billion of loans Apollo bought last year have lost half their value…

There is no denying that Apollo and its head chef Leon Black have posted astounding returns over a long period of time, roughly 25% a year over the last 20 years.  But Linens n’ Things?  Really?  What could Monsieur Black have seen in that pile of s%$@?  Had he ever been to one of the stores?

The rest of the portfolio isn’t so hot either:

The firm has also announced distressed-debt buybacks for Claire’s Stores, Harrah’s and Realogy Corp., the Parsippany, New Jersey-based owner of residential brokerage agencies Century 21 and Coldwell Banker…The three companies, which had combined losses of more than $7 billion in 2008, all appear on a list of businesses at highest risk of default released by Moody’s Investors Service last month.

There was also the failed acquisition of Huntsman Chemical, which was a $6.5 billion deal when announced, but ended with a “my bad” termination payment of a measly $1 billion.  As Senator Everett Dirksen once said, “A billion here, a billion there, pretty soon it adds up to real money.”

So how did such an incredible track record like Apollo’s go bad so fast?

“When Apollo made its money in the 1990s, they were the only game in town,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “There’s a ton of money going after distressed, and that’s going to make it a lot tougher.”

Kaplan’s got it half-right…yes, of course with success like Black’s, other money and competition had come in, bid up the good deals and screwed up the game.  That said, let us also not forget the fact that for two decades, except for a blip in 2001-2002, the overall business climate and m&a environment were extremely healthy, historically speaking.  Black’s portfolio companies and investments benefited from the fact that just about anyone who wanted to could find a merger partner or do an IPO.  There were exit strategies and liquidity events at every turn.  The test for Apollo, Blackstone, KKR, Texas Pacific et al is running a private equity/ buyout firm in a period of poor liquidity and almost no shot at going public (unless you’re Visa).

I hope for the sake of the teachers’ pension funds that are doubling and tripling down on their Apollo investments that these guys can do better this year than last.  If not, their investors may as well buy index funds.

Full Story:  CALPERS Apollo Bet Sours (Bloomberg)

Read Also:  Johnny Upside – “I’m All About Distressed Assets, Yo!”

Full Disclosure:  I currently have client accounts that are long Blackstone (BX).