Reports of the death of LBOs appear to have been exaggerated

By Paul Mackintosh - 18/11/13

Leon Black's Apollo Global Management, one of the truly iconic private equity Barbarians at the Gates, with a pedigree reaching back to the RJR Nabisco deal in 1988, appears to be writing itself a new page in the history books with its latest Apollo Investment Fund VIII LP buyout vehicle, originally targeted to close with a hard cap of US$15 billion, but now seeking to raise that to $17.5 billion, against investor interest reported by Bloomberg and others to be closer to $20 billion. At anywhere near either of those figures, this already makes it the largest buyout fund to close since 2008, when TPG Capital closed its biggest vehicle on $18.9 billion, and at least 20% higher than Apollo's own 2008 fund, which closed on $14.7 billion. 

With these kinds of figures, the Lehman collapse and the GFC might never have happened. All those doubts and misgivings about the continuing viability of the buyout model, let alone about the availability of leverage in the financial marketplace to support the volume of leveraged buyouts (LBOs) that $17.5 billion could enable, appear to have simply faded away. And presumably talk about limited partners (LPs) continuing to exert pressure on private equity firms for better terms and even a potential reset of the well-worn 2-and-20 compensation structure is now similarly vaporous. Even if private equity's institutional client base has become more discriminating and selective in the vehicles it backs, Apollo's latest target figures speak volumes about the appetite in a yield-starved world for the kind of performance the top decile firms can generate. Apollo first launched the fund with a $12 billion soft target last year, but has since been able to ramp up and up.

Apollo's listed status, which it now shares with many of its US buyout peers, also allows better insight than before 2008 into just what kind of performance is fostering that appetite. According to Preqin, quoted by Bloomberg, the 2008 fund recorded a 28% net IRR as of mid-year, and its third-quarter profits were up 39%. Despite that, some analysts downgraded Apollo's stock after the third quarter results, citing over-bullish sentiment around some of its entities and performance scraping its growth ceiling. Apollo's stock was still up 82% in 2013 as of early November. LP investors obviously share the same opinion as the broad public markets. Reports of the death of LBOs appear to have been exaggerated. One hopes that expectations of Apollo's performance after the latest fund closes haven't been equally exaggerated.