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Apollo PE portfolio down 21.6%, clawback obligations ‘temporary’

On the firm’s Q1 earnings call Friday, executives stressed it is looking to capitalize on distressed opportunities, and the March 31 marks are only a snapshot in time.

Apollo’s private equity assets under management took a 12 percent hit from markdowns to $68 billion. The firm is also facing $965.4 million in clawback obligations across several funds, with $937.6 million stemming from PE funds, and the remainder from credit and real estate funds.

The firm’s PE arm saw a 21.6 percent depreciation due to private and public equity investments. CFO Martin Kelly stressed that, given its outlook, Apollo believes the clawback obligation is “temporary and will not be realized.”

“Our short-term marks are a function, to a large extent, driven by market volatility,” said co-founder Josh Harris on the firm’s earnings call. “We have many, many different ways of valuing companies, but certainly, we’re a prisoner to how the market looks at things on a very short-term basis.”

“I believe our portfolio is in very, very good shape,” he noted.

The firm’s optimism stems in part from the $1.5 billion in liquidity on its balance sheet, and $41 billion in dry powder at quarter end. “We are playing offense, utilizing our decades of experience in times of dislocation,” said co-founder Leon Black.

“What we’re now spending a lot of time on, enormous time on, is how do we spend the excess liquidity in Fund VIII on offense,” added Harris. Fund VIII, which is marked at 1.3x and was generating a net IRR of 7 percent at the marking period, was one of the funds that faces clawback obligations.

Kelly said: “Fund VIII would require an approximate 11 percent appreciation in value from March 31 to remove this obligation, approximately equal to the changes in the broad equity markets in April.”

“We invested with an emphasis on durable business models with strong free cashflow and despite the challenging economic environment, we remain confident Fund VIII will perform well over time,” Harris said. The firm recently created a “watch list” of companies to monitor in stressed situations. “As of March 31, these companies represented less than 5 percent of the current value of Fund VIII,” he added.

Sister publication Private Equity International highlighted the shift in strategy of Apollo’s $24.7 billion Fund IX to distressed-for-control transactions, as the firm seeks to deploy capital in a new market environment to the one in which the fund was raised. Roughly a third of the fund is already committed or deployed.

“Our expectation is that over the next two years, there are going to be a lot more distressed opportunities,” said Black.

“You can shut the economy down in a few days, it takes weeks, months, and quarters to restart it, and it’s that type of environment that we will be active in in the breadth of our business,” said Harris.

Firm-wide, Apollo’s assets under management fell almost 5 percent to $315.5 billion. It reported a net loss of $2.3 billion for the quarter, and distributable earnings of $0.37 per share, down from $1.10 per share in the fourth quarter of 2019.