It’s finally IPO showtime for Leon Black’s Apollo

January 18, 2011

By Lisa Lee and Jeffrey Goldfarb
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Apollo’s IPO plans have aged well. Last week Leon Black’s buyout shop filed the sixth iteration of its prospectus, the first of which was submitted to securities regulators three years ago. The latest version contains some signs buried deep within its 1,000-plus pages that should encourage prospective investors. Apollo looks ready to move from the dark corners of a private Goldman Sachs exchange, where it trades at a steep discount, to the public market’s bright lights.

Apollo’s economic net income, private equity’s preferred measure of profitability, swung from a loss in 2008 to $581 million in 2009. And the first nine months of 2010 were better still. The results in some ways also showcase Apollo’s model of pursuing distressed as well as traditional LBOs. Since the onset of the credit crisis, Apollo’s private equity arm bought or retired at least $19 billion of portfolio company debt at a discount of about 50 percent.

This should all contribute to a higher valuation than Black and his other partners Joshua Harris and Marc Rowan could have hoped for over the past couple of years. Certainly they should garner Apollo more respect than it currently receives on the illiquid GSTrUE marketplace, where recent trades gave Apollo a $3 billion market value.

Apollo has two basic streams of income. First, there were about $170 million of management fees in the 12 months to Sept. 30. At a multiple of 18 times, roughly in line with those of other traditional asset managers to reflect their relative stability, these are worth some $3 billion on their own.

Then there are the lumpier profits from the firm’s share of investment gains. Because these performance-based fees are less predictable, they aren’t worth as much. And they should be discounted even against KKR’s and Blackstone’s since Apollo depends more heavily on them. At eight times they would be worth around $4 billion — giving the whole of Apollo a valuation around $7 billion.

That’s smaller than either Blackstone or KKR. But Apollo could wind up helping all three improve their fortunes. Though the financial community fixates on the rivalry, however real or imagined, between Stephen Schwarzman and Henry Kravis, investors will now have another publicly listed rival for comparison.

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