Apollo Chief warns that private equity is ‘in retreat as rates rise’

The lucrative era of private equity buyouts is over, and the industry’s $4tn worth of returns won’t be fueled by increasing valuations anymore, warned the CEO of Apollo Global Management on Thursday.

Marc Rowan said, “This year marks the end of a era in the [private] Equity business.” His Apollo, one of the largest private equity groups in the world with assets of $617bn, is a testament to this. He added that a decade of fiscal stimulus, low interest rates and “money printing” had pushed forward the economy’s demand.

His warning comes at a time when investors are facing a period with lower growth rates and higher interest rate, which has increased the cost of borrowing for the buyout industry to take companies privately. In the last decade, private equity groups have enjoyed a run of extraordinary profitability as low financing costs combined with booming financial markets allowed them to easily sell their investments at a profit.

Private Equity firms will be forced to “go back to old-fashioned investing”. Rowan added that they’ll have to be excellent investors.

Other top executives from private capital have issued similar warnings. Chip Kaye of Warburg Pincus warned last year about a geopolitical calm era that was providing a tailwind for asset prices .

Jeffrey Jaensubhakij is the chief investment officer at the Singaporean sovereign wealth fund GIC. He said last month that “many of the things which were tailwinds for private equity have ended.” . . “I don’t believe they will be back anytime soon”, referring to the effect of rising interest rates.

Rowan’s comments came as Apollo announced its second-quarter results. He said that the New York-based company had closed its flagship corporate buyout funds with approximately $20bn of commitments. This was less than the more $24bn raised by a predecessor fund in 2018.

Apollo’s adjusted profit for the quarter was $1.1bn, which is nearly 60% higher than it was a year ago. The group’s finances were boosted by the $35bn in new investor money and higher interest rates that increased the yields on its $450bn debt portfolio.

Apollo’s growth has largely come from its credit-investing operations. These include the ownership of Athene, an insurance company, and the more than a dozen platforms Apollo built or acquired in the last decade to originate loan.

Rowan stated that these non-buyout business represented more than two thirds of Apollo’s total assets, and it had been positioned to benefit from the rising interest rates environment.

The group’s quarterly earnings from the base management fees it charges on assets managed and the spreads it earns by investing in insurance policies have increased by 55 percent to $1.2bn compared with the same period last year.

Apollo has continued to grow its debt origination business after it purchased the securitised product business of Credit Suisse. Credit Suisse is a major originator of asset backed securities in the world. Apollo’s private-credit business originated loans worth $23bn during the second quarter. The company aims to make about $100bn in such loans by the end of this year.

The loans it offers range from big deals to fund the growth of Wolfspeed, a semiconductor manufacturer, to financing for AT&T or Air France.

Rowan stated that “we are at the beginning of a secular change in how credit is given to businesses, and I believe this shift will continue to gain speed.”

He described the lending as being “highly complementary” to the banking sector because it comes from sources of capital that are long-term, rather than a bank balance sheet with more leverage.

Rowan warned, however, against overconfidence, stating that “financial education. . . Has actually become quite sloppy”.