Apollo reveals $2.3bn loss as coronavirus takes toll
Private equity firm says staff would have had to hand back $390m in performance-related pay if portfolio had been liquidated in March
Apollo Global Management has calculated that its partners and employees would have been on the hook to hand back $390m in performance-related pay if its portfolio had been liquidated in late March, as financial markets reeled from the coronavirus pandemic.
The calculation, unveiled as Apollo disclosed a $2.3bn net loss for the first quarter, underscores the huge financial burden that a sustained market downturn could inflict on senior Apollo executives.
It comes a month after the firm’s billionaire founder, Marc Rowan, emailed senior White House adviser Jared Kushner to urge an expansion of the US Federal Reserve’s purchases of securitised debt in order to unfreeze the capital markets, according to people familiar with the matter.
While the Fed has launched unprecedented interventions in credit markets since then, Apollo has said the central bank’s actions did match those it suggested, and that it received “minimal — if any — benefit from any of the announced Fed programmes”.
Apollo manages $316bn of assets for institutional investors, including a large credit portfolio that has made it a vital source of funding for businesses that range from local hospitals and dental practices to multinational corporations including United Airlines.
The firm has a long record of spotting attractive investments in moments of financial turmoil, and recorded gross asset purchases of $41bn in the first three months of the year.
But many of Apollo’s holdings lost value in March, forcing the firm into writedowns that ranged from 22 per cent in private equity to 15 per cent in structured credit and 5 per cent in its heartland “direct lending business”.
Like other private capital firms, Apollo receives a management fee representing a fixed percentage of the funds it manages, as well as a share of the proceeds when investments are sold at a profit.
These profit shares are typically paid out soon after the underlying assets are sold, but if subsequent investment losses impair the performance of a fund or push it into loss, executives — even those who have subsequently left the firm — can be forced to pay them back.
Any “clawbacks” that Apollo may eventually face as a result of the market turmoil would probably be shared between hundreds of partners and employees. They will not have to hand over any cash unless the paper losses crystallise into asset sales — something that is not likely to happen for at least many months.
The liability will disappear altogether if investment values recover sufficiently, and the picture is already likely to have improved since March 31. Markets rebounded in April in response to a $2tn stimulus, and a dramatically expanded programme of bond-buying by the US Federal Reserve.
Executives assessing the impact on a $16bn private equity fund that Apollo raised in 2013 have calculated that a modest appreciation from the March 31 valuation would suffice to eliminate the clawback obligation for that fund, according to a person familiar with the calculations.
The S&P 500 index has posted gains of 13 per cent since the end of March.