Apollo Pivots Buyout Fund ‘Almost Entirely’ Into Distressed Mode

Apollo Global Management’s massive buyout fund has shifted its strategy to gain ownership of companies in distress during the coronavirus crisis, according to co-founder Josh Harris.

Apollo’s $25 billion private equity fund has shifted “almost entirely” to a distressed strategy under which it aims to gain control of companies buy investing in their debt, Harris said during the firm’s first-quarter earnings call Friday. “We’ve seen the pace of that fund go up significantly in the last month and a half.” 

The destruction caused by the coronavirus pandemic is likely to lead to an economic cycle that looks more like an “L” than a “V,” according to Harris. While the Federal Reserve’s emergency intervention has helped markets function during the crisis, he said the economy is “really hurting” and could see gross domestic product drop 30 percent in the second quarter.

“There’s a lot of companies that have no revenues,” said Harris. “Ultimately, a lot of the leverage that existed in the system is too high for cash flows that don’t exist over a medium term.” 

Apollo’s own portfolio has been hurt in the pandemic. The value of its private equity funds dropped 21.6 percent during the first quarter, according to the firm’s earnings report.

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None of the companies controlled by Apollo or its funds will be using the federal government’s Payment Protection Program as aid during the coronavirus crisis, Leon Black, the firm’s co-founder and chief executive officer, said during the earnings call.

“Similarly, although we are still reviewing the guidance recently announced by the Federal Reserve, we do not anticipate that the main street lending program will provide any relief or financial assistance to companies controlled by us or our funds,” he said.  

Meanwhile, Apollo’s $25 billion buyout fund is only about a third invested, according to Black. He said “even with outsized opportunities, it’s probably going to be at least 18 to 24 months before we’re out fundraising again.”

Black expects to see “a lot more distressed opportunities” over the next two years, drawing a comparison to the period surrounding the great financial crisis.

Right after the “market dislocation” thirteen years ago, Apollo’s private equity fund VII was two-thirds invested in distressed, he said, compared with less than five percent for its next fund. “That is the bandwidth vis-à-vis distressed-for-control that can come out of the private equity funds.”