Apollo Joins the IPO Fray

By Emma Trincal, Senior Financial Correspondent

Thursday, April 10, 2008

NEW YORK (HedgeWorld.com)—Apollo Global Management LLC, the $40.3 billion private equity firm, has announced its plan to become publicly listed on the New York Stock Exchange. But the offering is more of a legal twist than a real market event, as the filing appears to belong to a category experts call a "shelf registration."

Last August, Apollo used Goldman Sachs Group Inc.'s private market GSTrUE platform to quietly raise money on the private markets. When using the so-called 144-A market, issuers can issue shares that do not require registration with regulators. There was no need apparently to conduct an initial public offering today. It seems even more bizarre for a manager to go public today, as the credit crunch poses unprecedented challenges. But Apollo outlines a reason in the fine print. "They had to. They are contractually required to register the stock," said Francis Gaskins, president of IPODesktop.com, a Los Angeles-based independent research firm specializing in IPOs.

The New York firm, founded by Leon Black, the former mergers and acquisitions and corporate finance wizard at Drexel Burnham Lambert Inc., on Tuesday [April 8] filed with the Securities and Exchange Commission for an IPO.

In this document, Apollo indicates that it will register 30 million shares previously sold to two investors who bought them privately: The California Public Employees' Retirement System, Sacramento, and the Abu Dhabi Investment Authority.

"Those investors bought the shares on the 144-A market on the condition that Apollo registers them at a later stage. They wanted to be able to resell the stock," explained Mr. Gaskins.

That makes this offering almost a non-event. Apollo going public looks more like a firm fulfilling its contractual obligations. Yet there might be some lessons for other managers waiting in line to go public. "If it doesn't mean anything, it will be interesting to see if any of those shares are sold and at which price. This offering could be an acid test for the IPO market for other alternative investment managers." A success, even relative, could trigger others, such as Kohlberg Kravis Roberts & Co., that have stayed on the sidelines so far, to follow suit. "It would indicate whether the window is open or not," said Mr. Gaskins.

With this offering, Apollo is doing on paper what rival firms that have conducted IPOs have done since last year, including Fortress Investment Group LLC Previous HedgeWorld Story, The Blackstone Group LP Previous HedgeWorld Story and Och-Ziff Capital Management LP Previous HedgeWorld Story.

A spokesman for Apollo declined to comment on the registration and IPO filing.

To be sure, Apollo has the right profile for a full-blown IPO, should it decide at a later stage to move more aggressively toward a public listing. While private equity is the cornerstone of the firm, it has made a push into hedge funds, becoming more of an all-in-one alternative investment management platform, a prerequisite for any manager to go public. Firms such as Fortress and Blackstone are large and diversified across multiple product lines.

Apollo, founded in 1990, has seen its assets under management grow by 53% annually from December 2004 to December 2007, according to the filing. Private equity represents $30 billion of the firm's assets, with the remainder in credit and distressed hedge funds.

The effort to strengthen the hedge fund business and diversify away from pure leveraged buyout plays is clearly stated in the filing. Apollo's partners said they're trying to raise $15 billion in distressed, a move destined to expand into credit-oriented strategies.

"The business model of raising money to take advantage of distressed opportunities makes sense," said Mr. Gaskins.

Apollo, as any other hedge fund and private equity player, seeks to access permanent capital, and going public is one way to achieve that goal. Another approach has been to focus on long-term capital commitment mandates. According to Apollo's S1 filing, approximately 71% of Apollo's assets were in funds that have a duration of 10 years or more from inception. Some of the funds are subject to a three-year lock-up period.

A sign that Apollo is not putting a real serious deal into the market is the fact that there are no underwriters for the issuance. Other aspects of the offering issues are not shareholder-friendly. For instance, the filing stipulates that, "We expect to qualify for and intend to rely on exceptions from certain corporate governance and other requirements under the rules of the NYSE."

Those exceptions are significant: Apollo will not have a majority of independent voters on the board, it will not be required to nominate a compensation committee composed entirely of independent directors and it will not be required to hold annual meetings of the shareholders. "Accordingly, you will not have the same protections afforded to equityholders of entities that are subject to all of the corporate governance requirements of the NYSE," the authors of the filing wrote.

"This entire thing means that they don't want to be accountable to their shareholders," said Mr. Gaskins. "They want to run their firm like a private club, not like a public company. Several years ago, before Enron, it would have been OK. But now, people want accountable governance and they want transparency."

So either the deal is just a formality accomplished to satisfy existing shareholders that have bought shares privately or it's the prelude to a more substantial deal with limited chances of success, as it was not written for the benefit of public shareholders.