Apollo-Athene: the new Berkshire Hathaway?

When Expedia boss Peter Kern dialled into an earnings name final May, resorts had been closed, flights had been grounded and the new chief govt of the world’s largest journey company had simply requested Wall Street for $4bn in emergency financing. “I’m really excited about the opportunities ahead of us,” Kern mentioned, earlier than including: “I’m not crazy.”

Bereft of income, Expedia urgently wanted money to deal with the financial influence of coronavirus. Yet most sources of liquidity had been dry. Banks had been in no place to lend rapidly. Bond buyers had been in retreat. Even Warren Buffett, who had thrown multibillion-dollar lifelines to corporations as mighty as Goldman Sachs and General Electric throughout the monetary disaster a decade earlier, was licking his wounds from an infinite funding in US airways whose collapsing shares he was now selling.

If Buffett’s Berkshire Hathaway in 2008 offered refuge to corporations whose crisis-inflicted accidents didn’t fairly condemn them to bailout or failure, then in 2020 that position most frequently fell to Apollo Global Management, the $455bn funding group.

An Athene banner hangs on the facade of the New York Stock Exchange. ‘Athene has replaced Berkshire Hathaway as the buyer of last resort of insurance assets,’ says one among its former executives © Brendan McDermid/Reuters

Founded in 1990 as a buyout agency, Apollo introduced two weeks in the past that it’s to merge with its insurance affiliate, Athene Holding, a transfer which will lastly heal the working sore surrounding the relationship between the two corporations. After a Financial Times investigation in 2018 two buyers in Athene sued Apollo, claiming that the funding group had taken unfair benefit of its affect over the insurer, and the controversy has been a extreme drag on the insurance coverage group’s shares ever since.

The enlarged Apollo will be a monetary powerhouse that bears comparability with Buffett’s twin insurance-investing empire. It follows an $88bn dealmaking spree in 2020 that had earned Apollo the repute as Wall Street’s responder of final resort, serving to maintain the Hertz automotive rental chain working, United Airlines flying and Expedia’s recovery plan on track.

“No one has done what we are doing,” says Marc Rowan, who will quickly take over as chief govt of the enlarged Apollo. “Yes, there are elements of Berkshire Hathaway . . . but we are doing something in our own way with our own strategy and with our own rationale.”

Treemap showing Athene investment portfolio

Athene’s explosive growth in recent years already makes it the principal supply of funding for a sprawling funding empire. The insurance coverage enterprise, which Rowan created barely a decade in the past, injects money into Apollo’s huge lending enterprise, which capabilities much less like a Wall Street funding partnership than a diversified nationwide financial institution.

Now Athene will turn into by far the largest a part of Apollo itself, underscoring how the agency Rowan co-founded with Leon Black and Joshua Harris has reworked itself from a scrappy buyout store into a linchpin of the US financial system — one that’s supplanting banks as a supplier of financing for companies and households throughout the US.

Yet the deal, which values the mixed group at just below $30bn, is a dangerous transfer. Overnight Apollo will swap from a nimble asset supervisor to a lumbering insurance coverage firm, with greater than $200bn in belongings, on which it bears the losses if bets bitter.

While that happy some buyers in Athene, who had been sad about the relationship between the two corporations, others had been left puzzled about why Apollo’s billionaire founders had determined to place a lot extra of their very own wealth on the line.

Market cap to 2020 distributable earnings

“The merger is proof that for Apollo this [Athene] was never just a fee business,” Rowan advised the Financial Times. “We were focused on the assets.”

Insuring the future

Rowan’s early publicity to funding and insurance coverage was at Drexel Burnham Lambert in the 1980s. His title was affiliate, one among the lowest ranks in banking, however his colleagues gave him the unofficial standing of “managing associate”, one former banker recollects, after noticing that he usually offered solutions when managing administrators with many years of expertise couldn’t.

During stints at Drexel’s workplace in Beverly Hills, Rowan labored on high-octane financing offers, whereas throughout city in the Brentwood neighbourhood of Los Angeles, a much less glamorous empire was taking form. There an entrepreneur named Eli Broad was taking his quieter monetary revolution to the suburbs. In time, it will turn into Rowan’s mannequin.

Broad had gone into enterprise as a builder in the 1950s, throwing up no-frills homes for younger households looking for their first suburban foothold. Three many years on, he noticed that child boomers had been coming into a new life stage. Broad’s firm spun off its housebuilding unit, renamed itself SolarAmerica and targeted on promoting retirement annuities.

Marc Rowan, centre, who will soon take over as chief executive of the enlarged Apollo, hopes he can deliver extra profits from 'alternative' investments, which represent 4.5% of Athene’s total assets
Marc Rowan, centre, who will quickly take over as chief govt of the enlarged Apollo, hopes he can ship additional income from ‘different’ investments, which characterize 4.5% of Athene’s complete belongings © Kevork Djansezian/Reuters

The company raiders backed by Drexel had been all-or-nothing operators, making an attempt to rake in staggering sums from large, high-stakes bets. By distinction, SolarAmerica earned pennies on the greenback from what individuals in finance name “spread” — the consequence, in impact, of borrowing cash at a decrease rate of interest than they’ll earn. Insurers usually plough the premiums they obtain from clients into the credit score markets, in impact lending out the cash to corporations and different debtors. Over time, as the money owed are repaid, the insurer sends policyholders their promised annuity funds. Typically, the margins are slender and since funds to policyholders are mounted upfront, any shortfall could be catastrophic for the insurer.

But for a resourceful insurer — and one with a excessive sufficient earnings a number of — incomes extra unfold on a big e book of insurance policies could be profitable. 

SolarAmerica was extraordinarily resourceful, ploughing a few of its money into junk bonds, automotive loans and different unconventional belongings. One govt boasted that the firm was incomes practically three share factors extra in curiosity than it was paying out to policyholders.

In 1990, Drexel collapsed, and junk bond costs plummeted. That spelt catastrophe for Executive Life, a Drexel consumer and SolarAmerica rival that had been amongst the largest consumers of junk bonds. As insurance coverage regulators organised a hearth sale of Executive Life’s portfolio, savvy buyers noticed a possibility to make monumental income by shopping for bonds that had been nonetheless being paid off.

SolarAmerica put in a bid, solely to lose out to a Wall Street upstart named Apollo. It was a deal that will make the fortunes of Rowan and his co-founders, who raked in respectable income from debtors that stored up on their funds, whereas taking up corporations that went into default. The deal helped persuade buyers to again Apollo’s core funding funds, whereas the hardball techniques the firm employed in its dealings with delinquent debtors made it one among the most feared distressed debt investors in America.

Column line chart showing Adjusted book value per share (bar) Price/adjusted book value (line)

For Broad, the decade ended so nicely that the missed alternative hardly mattered. Insurance group AIG purchased his firm for $18bn in inventory in 1998, an astounding valuation that was equal to 5 instances e book worth.

The start of Athene

When Rowan noticed his subsequent large alternative in insurance coverage, he would surpass even Broad’s ingenuity. In 2009, an Iowa-based insurer known as American Equity Investment Life (AEL) was trying to hive off a few of its annuity insurance policies. Apollo purchased them cheaply, and ploughed the corresponding belongings into business mortgages that had collapsed in worth throughout the monetary disaster, however had been nonetheless being paid off. Rowan had expanded the unfold from each side.

Warren Buffett of Berkshire Hathaway, which provided multibillion-dollar lifelines to companies as big as Goldman Sachs and General Electric during the financial crisis
Warren Buffett of Berkshire Hathaway, which offered multibillion-dollar lifelines to corporations as large as Goldman Sachs and General Electric throughout the monetary disaster © Andrew Harrer/Bloomberg

Like a wildcat driller who had struck oil, he raced to construct construction round his new enterprise mannequin. Athene was its central help. Incorporated in Bermuda, suggested by Apollo and initially owned by the agency’s purchasers, the insurance coverage firm made a everlasting enterprise out of what Rowan had initially conceived as a one-off commerce in AEL.

Apollo and Athene employed a small military of trade veterans to scour insurance coverage firm stability sheets for extra retirement annuities to purchase on the low-cost. Everywhere they regarded, insurers had been making an attempt to rid themselves of annuity enterprise that was dragging down their monetary outcomes. A decade on, Aviva, Voya and Prudential have all offered blocks of insurance policies to Rowan’s workforce. “Athene has replaced Berkshire Hathaway as the buyer of last resort of insurance assets,” says one among its former executives.

By 2011 and with the financial system in restoration, there have been not any bargains in mortgage-backed securities. And with its largest consumer being an insurance coverage firm, Apollo — which had specialised in leveraged buyouts, that carried large dangers however might generate billions of {dollars} in revenue for the agency — wanted to turn into a spread-generating machine.

Only a sliver of Athene’s stability sheet is uncommon. About 95 per cent of the insurer’s belongings are invested in company debt, mortgage-backed securities and money. The insurance coverage firm carries little debt, and a variety of extra capital. But Rowan hopes he can ship additional income from “alternative” investments, which characterize 4.5 per cent of Athene’s complete belongings, and are invested in Apollo’s “origination platforms”, basically a set of mini-banks.

In Maryland, there may be MidCap, which specialises in secured lending to medium-sized companies, lots of them in the healthcare sector. In Ireland, there may be Merx Aviation, which offers finance leases for plane. In New York, a workforce of Apollo executives works on its Buffett-style company rescues, which use Athene capital alongside cash from different purchasers. Last 12 months, the insurer paid no less than $875m to purchase a part of Hertz, the bankrupt car rental company.

Such offers are advanced, however doubtlessly extremely worthwhile. One journey trade deal final 12 months concerned parachuting in a workforce of Apollo executives to determine whether or not the contemplated rescue financing would allow the stricken firm to outlive with out income for 2 to 3 years. “The answer was ‘yes’,” in response to an Apollo govt who was intently concerned. “But you couldn’t tell that from the outside, if you didn’t work with management and consultants.”

Those capabilities exist largely inside banks, which have lengthy offered such rescue financing, and funding corporations reminiscent of Apollo, which till lately didn’t. “I am excited about that,” Rowan mentioned lately, “because there is excess spread.”

Line chart of Share prices, rebased showing Apollo slips behind its peers

Investor scepticism

Yet the inventory market has by no means displayed a lot pleasure over Athene. Some of Apollo’s most loyal purchasers earned as a lot as 4 instances their funding earlier than the insurance coverage group’s 2016 preliminary public providing, and Apollo itself did even higher, having put up nearly no money of its personal for its double-digit stake in Athene which had elevated to round 35 per cent by the time the merger was introduced. But 4 years later, the share worth is barely any greater.

The entrepreneur Eli Broad, whose focus on selling retirement annuities with SunAmerica became Marc Rowan's model
The entrepreneur Eli Broad, whose give attention to promoting retirement annuities with SolarAmerica grew to become Marc Rowan’s mannequin © John Rizzo/Bloomberg News

While few anticipate an insurer to match the heady valuation that SolarAmerica attained 20 years in the past, Athene’s share worth efficiency has been noticeably dismal whilst earnings per share have doubled since the IPO.

The downside stems partially from some buyers’ perceptions of Apollo. Athene’s board is filled with Apollo loyalists, in response to a shareholder lawsuit filed in 2019. The relationship has delivered a whole lot of thousands and thousands of {dollars} in asset administration charges to Apollo, an quantity the lawsuit known as “exorbitant”, citing an FT investigation that reported Apollo’s personal executives believed an unbiased asset supervisor would cost much less. Apollo mentioned the lawsuits had been with out benefit and though the litigation subsequently stalled, it magnified unease over Apollo’s outsized affect over the insurer.

The worth of that unease might run into billions of {dollars}. One trade govt estimates that, given its double-digit return on fairness and matching earnings progress, Athene ought to commerce at two instances e book worth. Lately, it has traded under one. Apollo has suffered a double blow. Its senior executives personal a big chunk of Athene’s underperforming shares, as does Apollo itself. But, due to an accounting quirk, the funding group’s accounts don’t replicate its one-third share of Athene’s income. 

With Athene now accounting for roughly one-third of Apollo’s asset base, a divorce was inconceivable. In 2019, Apollo ploughed an extra $1.6bn into the insurer whereas slicing its voting stake from 45 per cent — an effort, one insider says, to appease Athene shareholders who had been spooked by the concept that Apollo may be utilizing its affect to additional its personal pursuits relatively than theirs. Ultimately, the inventory worth barely budged.

Apollo's $88bn dealmaking spree in 2020 helped keep the Hertz car rental chain running, United Airlines flying and Expedia’s recovery plan on track
Apollo’s $88bn dealmaking spree in 2020 helped maintain the Hertz automotive rental chain working, United Airlines flying and Expedia’s restoration plan on monitor © Chris Helgren/Reuters

Rowan way back concluded that the two corporations ought to merge, in response to individuals acquainted with his pondering. And when he was chosen to interchange Leon Black as chief executive in January, he acted swiftly.

Not everyone seems to be satisfied by the logic, and Apollo’s personal shares have fallen barely since the deal was introduced. “I get why it is good for Athene but [am] not totally clear on why it is good for Apollo,” says a former govt in the agency’s credit score enterprise. As a non-public fairness agency, Apollo earned monumental charges whereas tying up little capital of its personal. Now the agency will probably be a capital-intensive insurance coverage firm, overseen by regulators looking ahead to dangers that might impair its a whole lot of billions of {dollars} in belongings.

“Owning more insurance on [the] balance sheet does bring a lower multiple,” wrote Glenn Schorr, an fairness analysis analyst, in a be aware after the deal. “Apollo [is] being Apollo and embracing complexity to create value — it’s how they roll.”

As it strives to maneuver previous the controversy surrounding its founder Leon Black — and his hyperlinks to the late paedophile Jeffrey Epstein — Apollo not conceives of itself as a buyout agency however as an important a part of America’s monetary system.

Yet there’s a rigidity in Rowan’s pitch. He is taking credit score for making a new sort of monetary establishment, whereas making an attempt to influence cautious buyers that it’s one they’ll perceive and finally embrace. “I assure you that this merger is not an investment in the insurance business,” he mentioned when saying the merger. “Nor is it an attempt to build a conglomerate. We are building an asset manager.”

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