Leon Black
(Patrick T. Fallon/Bloomberg)
Investors in Apollo Global Management knew that founder Leon Black had a Jeffrey Epstein problem.
This week, it became a problem once again when a New York Times investigation revealed new details about Black’s relationship with the convicted sex offender, the scope of their financial ties, and Black’s backchannels for funneling money to Epstein. These payments aren’t in dispute.
“It is true that I paid Mr. Epstein millions of dollars annually for his work, which he provided from 2012 to 2017,” Black wrote to Apollo clients Monday.
The $414 billion firm is expected escape the scandal with assets and client base intact, industry insiders predict. This is thanks to skillful handling, lucky timing, and institutions’ reluctance to cut ties with or blacklist a powerful partner — however distasteful they find its CEO’s former choice of advisor.
Apollo never did business with Epstein, nor did the now-dead pedophile invest in its funds. “Importantly,” Black stressed to clients, “there has never been an allegation by anyone, including the New York Times, that I engaged in any wrongdoing or inappropriate conduct.”
But that’s where investors and industry insiders might disagree. A half dozen shared their views on the situation this week with Institutional Investor, including senior staff at pension funds and a major foundation, fundraising experts, and money managers. Most spoke on the condition of anonymity in order to be candid on a delicate subject.
Apollo is a titan of global finance, after all, and Black its inscrutable chieftain.
No one interviewed suggested that Black broke the law in his dealings with Epstein.
But to a person, these institutional investors felt that hiring a convicted sex offender is inappropriate for the CEO of a major public company — especially one responsible for billions of dollars of public pensioners’ and charities’ money.
“I would really want to look Leon in the eyes,” said one alternatives investor who has worked at elite institutions, “and ask him, ‘Knowing that this person had been charged with arguably one of the worst crimes you can be charged with, why on earth would you give this guy $50 million bucks?”
“I think there’s an amazing ability to segment values and objectives in this business,” another veteran of the hedge fund world put it — after triple-checking that he wouldn’t be quoted by name. “It’s not my job to be a judge of moral values; it’s my job to optimize returns.”
The sheer number of hyper-successful financiers and business leaders in Epstein’s circle — Black, Highbridge Capital founder Glenn Dubin, Barclays CEO Jes Staley, former lingerie magnate Les Wexner — doesn’t excuse any of them individually, interviewees felt, but implicates the whole industry culture. “There is a tremendous amount of misogyny, of shitbags in this business,” said the hedge fund vet, adding that he gets exposed to unfiltered talk as a straight white man.
Black’s personal spokesperson said the CEO simply didn’t know about Epstein’s sexual criminality, and wasn’t comfortable with it when he found out. “Mr. Black was completely unaware of, and continues to be appalled by, the reprehensible conduct that surfaced at the end of 2018 and led to the federal criminal charges brought against Mr. Epstein and deeply regrets having had any involvement with him.”
The U.S. Virgin Islands attorney general is “seeking information from Mr. Black, several major banks, and others as third-party witnesses in a civil probe of entities set up by Mr. Epstein in the U.S. Virgin Islands,” the spokesperson went on. “Mr. Black intends to cooperate fully with any such inquiry.”
But for all the personal queasiness that Black’s choice of financial advisor and reportedly frequent dinner companion raises, no one foresees allocators doing much about it. Apollo Global Management will be just fine, they felt.
“You might see some very high integrity organizations say, ‘I don’t need this,’” suggested one senior nonprofit investor. “I have looked at Apollo, and that’s what I said. But the big allocators will have a long relationship with them, and a lot of money invested.” She and others predicted that clients would only flee Apollo over Epstein if Black was charged with a crime. (There’s no indication that’s a possibility.)
At that point, she said, allocators “can no longer make an excuse.”
As one hedge fund trader guessed, “Bottom line, not much is likely to happen other than Black not having a public or client-facing profile for some time.”
“We find ourselves in wartime conditions,” said Saunders, president of Castle Hill Capital Partners, in an interview Thursday. “Major brands and established relationships create an enormous moat around your business.”
Institutional investors, as a rule, hate scandal and bad press brought on by their money managers, and filter for it — so-called “headline risk” — when hiring them. But if a prominent manager is going to have a nasty divorce or associations with a sex criminal dredged up in the paper of record, now’s the ideal time.
“If this was happening outside of the political environment and a pandemic, this would perhaps be more significant than it is,” Saunders said, speaking in general terms. “People don’t have a shared sense of reality or a shared sense of facts. Lies and accusations are hurled around with tremendous frequency and speed. The president accused a governor of killing babies the other day, and people just shrugged their shoulders. It’s very difficult to figure out what’s signal and what’s noise.”
The result is desensitization.
“Allocators are inundated,” he explained. Few are willing to invest retiree or endowment money with managers they’ve only met on Zoom, Saunders has found. Even if an endowment took great exception to, for example, Black’s relationship with Epstein, and the firm allowed them to cash out, pulling their money creates another problem. Where would they put it? “If allocators are unable to easily go elsewhere, and performance is quite strong, things can get lost. Just from a self-preservation standpoint, the brain can’t react to every last outrage.”
The Black-Epstein affair has landed in the laps of institutional investors, and they’ve broadly set is aside.
But not all of them are ignoring it.
Ontario’s new C$70 billion ($52 billion) investment arm for provincial pension assets, IMCO, proudly committed a quarter of a billion dollars to Apollo just this past spring, for example. That deal still stands, but IMCO has put its partner on notice.
“IMCO is aware of recent reports regarding Mr. Black’s alleged ties to Jeffrey Epstein,” a spokesperson told II Thursday. “We hold all of our partners and portfolio companies to the highest ethical standards, both in their private and professional conduct; and take reputational, operational, and financial risks very seriously.”
Translation: Smarten up — please.
Being “institutional quality” is part of blue-chip firms’ pitch to clients. Research shows that performance tends to slip as assets balloon, but they don’t tend to embarrass their institutional clients. That’s worth something.
But the Black-Epstein affair suggests the trade may be out-of-whack, even if this episode isn’t a fireable offense under normal circumstances. What would an Apollo, Blackstone, or Bridgewater Associates have to do to get the axe en masse? Crimes, industry experts agreed. Big ones.
At this point, a handful of investment giants have attracted so much institutional capital, wrapped up in such stringent terms, that firing them ceases to be a practical option. Lavish fees are the carrot for good behavior. But what if there’s no more stick?
A veteran from one alternatives investing machine marveled at the dynamic. “It’s the worst form of too big to fail.”
