Deals May Strain On Refco News;

Banks left with Apollo Management IPO shrs-sources

Fri Jun 9, 2006 5:39pm ET10

By Michael Flaherty

NEW YORK, June 9 (Reuters) - Private equity fund Apollo Management attracted fewer wealthy individual investors than expected to its $1.5 billion public offering, leaving the investment banks underwriting the deal with a chunk of leftover shares, sources familiar with the deal said on Friday.

The amount of shares still held by the banks was unclear. But their failure to sell them to wealthy retail investors -- known on Wall Street as "high net worth individuals" -- underscores the lower-than-expected demand for the firm's public offering.

Apollo's new public unit, AP Alternative Assets LP, priced 75 million shares at $20 per share on Wednesday night, according to an internal investment bank memo about the deal obtained by Reuters.

AP Alternative Assets is based in Guernsey on the Channel Islands off the coast of France, the same base for KKR Private Equity Investors. Investment banks Citigroup (C.N: Quote, Profile, Research), Goldman Sachs (GS.N: Quote, Profile, Research), J.P. Morgan (JPM.N: Quote, Profile, Research) and Credit Suisse (CSGN.VX: Quote, Profile, Research) were joint bookrunners, according to the memo.

Apollo and the banks declined to comment on Friday.

Some Wall Street sources said the lukewarm reception would deter similar offerings being explored by buyout firms. Other sources said it was the IPO's structure that hurt demand, not its timing, and that more such listings would be coming soon.

Apollo did raise $1.5 billion in the offering, conducted through a special type of private placement allowing the firm to raise the money first and publicly list it later.

The $1.5 billion raised is a tribute to Apollo's reputation, as it came on the heels of another listing by a rival firm and amid a global market pull-back

Apollo, founded by well-known banker Leon Black, is investing a $10 billion fund, with recent deals including the $1.3 billion buyout of home retailer Linens 'n Things and the $975 million purchase of Tyco International's (TYC.N: Quote, Profile, Research) plastics and adhesives unit.

BELOW TARGET

The firm came up $1 billion short of its public offering expectations, having planned to raise up to $2.5 billion in the deal. Rival fund Kohlberg Kravis Roberts & Co. raised $5 billion with KKR Private Equity Investors (KKR.AS: Quote, Profile, Research) last month.

Private equity firms buy companies and sell them later, keeping some of the profit from the sale and giving the rest to their institutional investors.

They raise money privately, asking large institutional investors every few years for a capital commitment -- a process most buyout firms despise due to the time and energy it takes. Public offerings allow them to circumvent that process and keep the proceeds rather than giving them back to investors.

The offering attracted mainly hedge funds and some wealthy individuals -- particularly from the Middle East -- two sources familiar with the matter said on condition of anonymity.

The underwriters promised a certain allocation of shares to the high net worth crowd, but the demand was light, forcing some of the banks to keep the shares, the two sources said.

"They're hoping the market will bail them out. They hope that there's an uptick in the market and demand comes back," said Francis Gaskins, president of research firm IPO Desktop, speaking generally about what happens when banks are left holding IPO shares.

Apollo decided to delay its stock market listing in favor of an immediate private placement to speed up the fund-raising process, a number of sources said.

Demand for publicly traded private equity funds is limited, so those firms wanting to raise money are rushing to tap a limited number of investors first.

KKR raised its initial IPO target to $5 billion from $1.5 billion and took most of the proceeds up front - rather than having the underwriters keep a portion of shares for future buyers, sources say, further limiting marketplace demand.

Apollo expects to list the fund on Amsterdam's Euronext (ENXT.PA: Quote, Profile, Research) in six months, several sources said.

Some of the sources say that the delayed listing is what deterred investors who want shares trading immediately.

These sources said that half of Apollo's fund would invest in private equity and the other half in other opportunities. KKR's new fund is 75 percent private equity, 25 percent other.