By Greg Roumeliotis
(Reuters) - Apollo Global Management LLC
Apollo has taken advantage of red-hot capital markets to cash out on investments throughout the year, an approach epitomized by co-founder and chief executive Leon Black in April with the phrase: "We are selling everything that is not nailed down."
While the fair value of its portfolio, $24 billion in private equity and $15.9 billion in credit, means Apollo has assets to sell for years to come, some investors and analysts have raised questions about the timing of sales.
"Realizations could peak over the next 12 months. We are concerned that given significant monetization activity, Apollo could be entering a period of drought sooner than its peers," RBC Capital Markets analysts wrote in a note last month.
On an earnings call with analysts on Thursday, Apollo President Marc Spilker suggested the pipeline for asset sales was still robust, but cautioned that at least one revenue stream of its dividend was going to change.
"Due to our significant realization activity over the past few quarters, we have exited many of the investments that have generated the bulk of our quarterly interest and dividend income, and we do not currently anticipate this component of our quarterly distribution to be as significant going forward," Spilker said.
Income from interest and dividends paid out by Apollo's portfolio companies usually translates into five to 10 cents per share in Apollo's distribution, but in the third quarter of 2013 it was only two cents per share, Spilker said.
Apollo's growing breadth and scale has allowed it to increase the fixed component of its quarterly dividend, Spilker said. He noted that from the fourth quarter of 2013, the regular component of its quarterly dividend will be 15 cents per share, up from 7 cents per share.
The bulk of Apollo's third-quarter dividend of $1.01 cents per share came from performance fees generated from asset sales, 84 cents per share, while balance sheet investments contributed 8 cents per share, Spilker said. These can vary significantly every quarter and it is at Apollo's discretion whether it pays any dividend at all.
Apollo's portfolio does favor more asset sales in the short term. The big appreciation of its portfolio makes it more likely it can fetch a good price for its assets.
Moreover, 62 percent of its private equity assets are already publicly listed, making asset sales easier by simply selling shares in the stock market.
"Apollo announced a third-quarter distribution of $1.01 (per share), which is in line with the Street consensus, but below the $1.20 we had anticipated, reflecting lower realized performance fees as well as lower fee-related earnings," Sterne Agee analyst Jason Weyeneth wrote in a note.
Apollo shares have doubled since the start of the year, strongly outperforming the peer group, but dropped following the earnings. They were down 4 percent at $32.19 in New York in early afternoon trading.
SPROUT AND ATHLON IPOS
Apollo's economic net income after taxes totaled $1.34 per share, compared with 98 cents a year earlier. Analysts on average had forecast 94 cents, according to Thomson Reuters I/B/E/S.
The New York-based firm benefited from private equity portfolio appreciation of 18 percent in the third quarter, much stronger than its peers. Blackstone Group LP
Total realized gains from carried interest, Apollo's cut of investment profits, were $639 million, compared with $230 million a year ago.
During the quarter, Apollo completed the initial public offerings of Sprouts Farmers Market Inc
Sales of shares in companies already listed in the stock market included LyondellBasell Industries Inc
Assets under management totaled $112.7 billion at the end of September, up from $109.7 billion at the end of June. This excludes the assets of Aviva USA, acquired by Apollo's insurance arm Athene Holding Ltd in a deal that had not yet closed by September 30. Including Aviva would have brought Apollo's total assets to about $157 billion.
Apollo said it raised about $3.3 billion from investors during the third quarter for its latest flagship private equity fund, Apollo Investment Fund VIII, bringing total commitments to $12 billion. Apollo launched the fund last November with a $12 billion target, but strong investor demand has led it to explore increasing its size.
Despite private equity's dominance over Apollo's earnings, that asset class accounts for 38 percent of its assets. The majority of its portfolio is comprised of credit investments, where pre-tax ENI plunged to $79.2 million from $198.7 million a year ago as carried interest income fell by more than half. Private equity contributed pre-tax ENI of $538.8 million.
(Reporting by Greg Roumeliotis in New York; Editing by Lisa Von Ahn, John Wallace and Andre Grenon)