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Notes on a $23bn mega-fund

Apollo’s ability to buy cheaply and adapt its investment strategy will count in its favour as it tries to raise the largest PE fund ever.

In a week of fundraising highs – notably from CVC Capital Partners in Europe and KKR in Asia – another manager, Apollo Global Management, has its eyes on a bigger prize.

The firm will raise as much as $23.5 billion for its ninth flagship fund, potentially making it the largest private equity fund ever raised. Here is what we have learned so far:

The fund was launched without a target or hard-cap. This was a point of contention among certain limited partners; a memo prepared for the State of Connecticut Retirement Plans and Trust Funds by investment consultant StepStone raised the issue as a risk; it was mitigated, however, by the fact that – according to StepStone – Apollo had “verbally communicated” to them that the fund would “not exceed $20 billion”. The firm could not provide any comment on the fundraising for regulatory reasons, but a source with knowledge of the process said the fund now has a hard-cap, but could not confirm the amount. The State of Connecticut approved a $150 million commitment earlier this month.

Apollo's creed is to buy low, and it sticks to it. Fund VIII has been deployed at an average entry valuation of 5.7x EBITDA, which compares favourably with the average among large buyouts, which has ranged from 9x to 10.5x over the last four years.

StepStone ranks Apollo's performance as being “slightly above the median” among its global buyout peers (with top performers being CD&R, Advent International, Hellman & Friedman and CVC Capital Partners). Apollo reported its since inception net IRR as being 25 percent in its latest form 10k filing. Its 2013 and 2008 flagship funds were reporting net IRRs of 13 percent and 26 percent respectively as of the start of 2017.

Apollo is preparing for a downturn. The firm is known for its flexible approach – being able to invest across the capital structure of target companies in buyouts, carve-outs and distressed opportunities. While Fund VIII has been invested almost entirely in “opportunistic” buyouts and corporate carve-outs, the new fund is expected to channel up to a quarter of its capital into distressed investments.

Eight partners or senior partners have left the firm since 2013, a rate of turnover that StepStone describes as “relatively high”. The consultant qualified this observation with an overall assessment of the Apollo platform as “stable”, and it has 34 executives at partner level and above.

The firm has no in house operating partners, opting instead for a network of 22 external operating executives.

South Korea and Chile are two budding sources of capital for the firm. While Apollo is not using a placement agent to raise capital in its home territory, it has hired fundraisers in Chile and South Korea, according to a filing with the SEC. South Korea in particular is becoming an increasingly important stop on the global fundraising map, with appetite for private equity “set to grow significantly” among Korean institutions, according to placement agent First Avenue. Apollo was one of the seven global firms to recently win commitments from South Korean pension fund manager the Public Officials Benefit Association (POBA).

Despite our earlier analysis, it's beginning to look a lot like 2007. If it hits the $23.5 billion figure noted in this SEC filing, Apollo Fund IX will become the largest private equity fund ever raised, topping that year's $21.7 billion Blackstone Capital Partners V. The record-breaking fund will add to an already mountainous pile of private equity dry powder awaiting deployment: nearly $1.5 trillion as of the start of 2017. Apollo, like its peers, will have its work cut out to maintain its low purchase price average and lifetime IRR.