When Apollo Global Management approached the Investment Management Corp. of Ontario about a credit fund it was raising in the market tumult caused by the coronavirus, the Canadian pension manger was ready to be nimble — even with its staff dispersed and working from home since mid-March.My advice to the folks at IMCO is to get used to the new normal and think about the repercussions on your portfolio, especially real estate where there is a paradigm shift taking place.
“It was clearly in the maelstrom, in the midst of the market chaos,” Christian Hensley, IMCO’s senior managing director of equities and credit, said Thursday in an interview. “Apollo reached out as we had been in close contact with them about a number of opportunities.”
Demand from institutional investors drove the speedy fundraising of Apollo Accord Fund III B, a credit fund that closed on $1.75 billion in commitments within about eight weeks, according to a statement from the alternative asset manager Thursday. IMCO said it committed $250 million to the fund, moving “very quickly” to benefit from “dislocated opportunities as they arise.”
Apollo, a New York-based private equity firm known for distressed investing, said it saw significant opportunity during the first quarter as the novel virus wreaked havoc on markets. The Accord fund focuses on “mispriced credit risk,” John Zito, Apollo’s deputy chief investment officer of credit and co-head of global corporate credit, said in the firm’s statement.
IMCO said the new fund will seek to buy debt that has dropped in price for “non-economic reasons” as investors feel pressure to sell due to liquidity concerns when markets are dislocated. Apollo Accord Fund III B may invest in the debt of companies that are fundamentally sound, but whose credit prices have been dragged down by broad market selloffs during the crisis, Hensley explained.
“This is about liquidity-driven dislocations,” James Zelter, Apollo’s co-president and CIO for credit, said in an interview. “If you go back to the dark days of March, we quickly drew down all the remaining capital in Accord III and executed on our mandate. It became very apparent that there was appetite for III B.”
IMCO, which managed CAD$70.3 billion (about $50 billion) of assets at the end of December, plans to expand its credit investing. The Toronto-based pension manager expects to increase its credit assets to CAD$8 billion in the next five years, from CAD$3 billion currently, said Hensley.
His group was well-positioned to quickly commit to Apollo, he said, because it had the liquidity it needed as well as the technology to conduct meetings online. At times, Hensley said he felt like he belonged to a call center when working from home in the early days of pandemic.
“You get out of bed, you get ready in the morning, you turn on your screen, you hit a button, and you’re in a meeting,” he said. As the crisis was unfolding, Hensley said he hit that button repeatedly until suddenly it was past dinner time. “We were cranking away to react to — and be productive in — the market that we saw.”
IMCO relied on Zoom during the fundraising process for Apollo Accord Fund III B, according to Hensley. “It’s been a different experience,” he said. “We were fortunate for having had the opportunity previously to have met with the portfolio managers.”
In some ways, he found the online technology helped make the investment analysis more efficient when considering a commitment to the fund.
“We could accelerate the process because we could invite our risk teams, our legal teams, our accounting teams, our performance measurement and attribution teams to the same calls all at the same time,” Hensley said. “We could run in parallel because we knew this was an important inflection point in the market.”
While online meetings have proved productive, IMCO has been considering what working in the office might safely look like as economies begin to reopen during the pandemic.
“Our senior management team has been meeting regularly thinking about ways to transition back to a new normal,” Hensley said. “We want to make sure we’re respectful of people’s individual wishes, but also the constraints of government and the virus itself.”
Truth is you can do due diligence on any fund working remotely. Yes, it's not perfect but you can certainly do it and on a fund like Apollo, it's even easier because they're a brand name with a stellar track record.
IMCO put out a press release on this investment:
The Investment Management Corporation of Ontario (IMCO) has committed US$250 million to Apollo Global Management, Inc.’s new Accord Fund III Series B (“The Fund”), in a Fund designed to enter the market during periods of dislocation and illiquidity. The Fund will focus on credits that have traded down due to liquidity-driven selling and non-economic reasons. IMCO’s Global Credit team closed the commitment on April 23, 2020, making it IMCO’s first investment with an Apollo-managed fund, one of the world’s largest alternative investment managers.Let me be straight up, Apollo is one of the best credit funds in the world. IMCO jumped on the opportunity and took a significant stake in this new fund it's raising, and I would have done the exact same thing.
“Our participation in this fund demonstrates how nimble our team can be in seeking valuable opportunities for our clients,” said Jennifer Hartviksen, Managing Director, Global Credit. Hartviksen noted that the process, from analysis to fund close, took approximately one month, indicating how well-matched IMCO’s capabilities are with Apollo’s proven ability to take advantage of market dislocations. “This is an example of IMCO adapting to market conditions and exploiting our liquidity very quickly so that clients have access to dislocated opportunities as they arise,” she said.
IMCO recently launched its Global Credit program as a separate asset class to provide higher risk-adjusted returns than traditional fixed income, and to contribute additional diversification benefits to a total portfolio for clients. “As our program scales, we are initially relying on experienced strategic partners,” said Christian Hensley, Senior Managing Director, Private Equities and Credit. “The investment in this Fund is an example of the types of opportunities we’re pursuing — investments with sponsors that we believe have deep expertise, delivering diversifying and differentiating exposures, who are transparent, opportunistic, and value-oriented.”
Apollo’s fundamentals-approach and sector-specific expertise allows for selective deployment during periods of both market stability and volatility, in line with IMCO’s Global Credit strategy. The Fund’s judicious use of hedges, designed to address fundamental risks, is well suited for IMCO’s long investment horizon.
Why? There will be no V-shaped economic recovery. The Fed is only addressing liquidity concerns and fueling another tech bubble in the Nasdaq but when solvency issues arise, and they will, then Apollo and other top distressed debt funds (Avenue Capital, Bain Credit, Blackstone, Oaktree, Lone Star, etc) will be very busy buying distressed debt for pennies on the dollar.
The bankruptcy could come as soon as Friday night. It would make Hertz one of the highest-profile corporate defaults yet stemming from the coronavirus pandemic’s impact on American travelers. https://t.co/kmUFxJRn4Y— Edward Harrison (@edwardnh) May 22, 2020
My former BCA Research and Caisse colleague, Brian Romanchuk, wrote an excellent blog comment on the incoherence of yield curve control. Take the time to read it here but this is his conclusion:
Barring a miracle cure for COVID-19, the United States is drifting into a multi-year period of extremely depressed activity. There does not appear to be capacity to eradicate the virus, nor are older consumers or office workers willing to take meaningful health risks to benefit capitalism. Unless there is a magical transformation in the attitudes of the ruling elites, the fiscal policy response will remain reactive, and ineffectual. The Fed is the only entity in the United States that takes any responsibility for the effectiveness of policy, and so we should expect to see greater leaps in its policy framework.Brian gets it, this coronavirus isn't going away, too many investors are smoking vaccine pipe dreams and the credit funds are sitting on a lot of dry powder, patiently waiting to scoop in when the solvency crisis hits.
Although yield curve control is the most likely next step, negative interest rates cannot be ruled out. Health worries might strengthen the hand of those advocating the abolishing of paper money, removing one institutional barrier to negative interest rates.
More than a third of people who contract the coronavirus are likely asymptomatic and don’t report symptoms, according to the CDC. The agency issued new guidance this week: https://t.co/TJrUI1h5wgpic.twitter.com/c5bZ2XQBot— WebMD (@WebMD) May 22, 2020
Interestingly, earlier this month, Apollo pivoted its buyout fund almost entirely into distressed mode as its co-founder Leon Black doesn’t anticipate that companies controlled by the firm will use the Fed’s main street lending program during the coronavirus pandemic:
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.I wouldn't bet against Leon Black. Two years ago, in a highly publicized article, Bloomberg depicted him as the "most feared man in private equity", a ruthless leader who made a fortune by buying struggling businesses with huge piles of debt at bargain-basement prices, imposing austerity measures on the staff, and extracting hue dividend payments and management fees.
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.
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.”
No doubt about it, Leon Black isn't someone you want to cross, and he has made his fortune during recessions buying up deals his rivals wouldn't touch.
He has also had his share of controversy. Last year, he got into hot water for his past ties to Jeffrey Epstein, who was charged with sex trafficking and was forced to send a company-wide email to Apollo employees in which he explained that he was unaware of Epstein’s alleged criminal behavior.
But these articles on Black should be taken with a grain of salt. He and his wife, Debra, run a successful foundation and they donate huge sums to charitable causes, donating to arts and most recently $20 million to help employees at hospitals in New York City, which have been hit hard by the coronavirus pandemic.
Unbeknownst to me at the time, my introduction to Leon Black happened over 35 years ago when I was a young teenager asking my father, a psychiatrist, if rich people get depressed.
"Of course they do, depression hits everyone from all socioeconomic backgrounds," my father said. "Did I ever tell you the story of the CEO of United Brands Company who committed suicide in 1975 by jumping out of the 44th floor of the Pan Am Building in New York City? You were just four-years-old when it happened but I remember it well, it was tragic."
Little did I know that CEO was Eli M. Black, Leon Black's father. That's not something easy for anyone to go through and so when people call him ruthless and "the most feared man in private equity," I ignore it.
At the time of his father's death, Black had completed his MBA from Harvard University. Prior to that, he had received a BA in Philosophy and History from Dartmouth College in 1973 and that tells me he's extremely intelligent and well educated (I like people who studied philosophy and history, it shows me they're deep thinkers, like Isaiah Berlin and Charles Taylor).
From 1977 to 1990, Leon Black was employed by investment bank Drexel Burnham Lambert, where he served as managing director, head of the Mergers & Acquisitions Group, and co-head of the Corporate Finance Department. Black was regarded as "junk bond king" Michael Milken's right-hand man at Drexel (a great mentor and friend).
In 1990, he co-founded, on the heels of the collapse of Drexel Burnham Lambert, the private equity firm Apollo Global Management. Apollo is one of the world’s largest alternative investment managers, managing over $300 billion in assets for the world's most sophisticated investors.
Like Blackstone, KKR, Carlyle and others, it has publicly traded shares which have bounced back nicely since March:
Would I buy the shares? I'd much rather invest in its funds. These are the very best credit managers in the world and they deliver solid returns.
Christian Hensley, IMCO’s Senior Managing Director of Equities and Credit, is a very sharp guy. Along with Jennifer Hartviksen, Managing Director of Global Credit, their focus is on finding opportunities and keeping a long-term view (read their insights here).
Partnering up with Apollo is exactly what they should be doing, finding the very best partners to help them carry out their mandate. They need scale and they need the right partners to successfully deploy massive pools of capital fairly quickly when opportunities arise.
Below, Christian Hensley, Senior Managing Director of Equities and Credit, at Investment Management Corp. of Ontario, discusses the Canadian pension fund's investment into a Apollo Global Management Inc. dislocation fund. He speaks with Bloomberg's Amanda Lang and Shery Ahn on "Bloomberg Markets."
Listen carefully to Christian, he states they want to grow the global credit portfolio up to $8 billion and they need the right partners to find the right opportunities all over the world.
And two years ago, Bloomberg's Sonali Basak reported that during the past 10 years, Leon Black has grown assets at Apollo Global Management Inc. sixfold to more than $320 billion, while Black himself has amassed a personal fortune of $9.5 billion. A Bloomberg Businessweek article examined why Black has become the most feared man in private equity.
Last year, Leon Black, chairman and chief executive officer at Apollo Global Management, examined the prospect of a US economic downturn. He spoke with David Rubenstein at the Bloomberg Invest New York conference.
Lastly, CNBC's Scott Wapner talks with Avenue Capital CEO and chairman Marc Lasry about new deals he's working on and what he foresees for the US economy. Lasry says it's going to be a hard couple of years and we will be in a recession for awhile.