Apollo's private equity business looks exposed. Waking up at 4.30am might help
As we noted earlier this month, Apollo, the private markets investor, does not want its employees to become complacent.
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Speaking at Apollo's investor day, CEO Marc Rowan said the firm has been waking its people up at 4.30am, telling them cautionary tales and bringing in outside speakers to "scare the bejesus" out of them. Rowan wasn't speaking about the private equity business specifically, but he said that Apollo needs to adapt to change: "The tailwinds that got us here are not here anymore. They are going to be new. If we think we're going to succeed by doing more of the same, I think that's a fallacy...", Rowan declared.
A report* on large private equity firms issued by Moody's last week suggests that Apollo's private equity professionals might want to wake up at 4.30am for another reason too. As the charts below show, Moody's thinks Apollo's investments are particularly susceptible to difficult trading conditions.
Moody's says that 22% of the Apollo deals it tracks defaulted in the 20 months to August '24, which is three times more than the proportion of deals that it says defaulted at Blackstone. Moody’s report characterizes things like term loan extensions or opportunistic debt exchanges as defaults, even for companies that are performing and not in distress.
Moody's says that 35% of the companies Apollo has invested in are rated B3N and are distressed, compared to 19% and Blackstone and just 10% at KKR.
And Moody's says that a comparatively high proportion of the companies that Apollo invested in were downgraded between January 2022 and August 2024...
Although interest rates are falling, Moody's also suggests things in private equity may get worse before they get better. All private equity firms have been using debt restructurings and "distressed exchanges" to avoid defaults, but Moody's says these are simply a temporary fix and that bankruptcy tends to become an issue again a few years' later.
The implication is that working for Apollo has the potential to become very stressful in a world of low growth and high geopolitical risk. Although Rowan's comments at investor day preceded the Moody's report and were unrelated to defaults, it could be that dry-runs for difficult situations are being held for a reason.
If Apollo stands to be a stressful employer, what are the alternatives? KKR looks appealing, as does Blackstone. The best placed private equity employer of the lot, however, seems to be Leonard Green, the Los Angeles-based private equity firm which employs several of the Goldman Sachs juniors who complained about their hours. Working for Leonard Green may not be without impunity, though: Moody's notes that it's been one of the biggest users of dividend recapitalizations to juice its returns. FT Alphaville noted recently that dividend recaps themselves massively increase the likelihood of bankruptcy.
*Leveraged Finance – US: Tracking the largest private equity sponsors
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