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A lucrative age for private equity buyouts has ended, prompting an abrupt shift in the $4tn industry where returns will no longer be fuelled by rising valuations, the chief executive of Apollo Global Management warned on Thursday.
“In the [private] equity business, this year has really marked the end of an era,” said Marc Rowan, whose Apollo is one of the world’s biggest private equity groups with $617bn in assets. A decade of “money printing”, fiscal stimulus and low interest rates that had pulled forward economic demand “is in retreat”, he added.
His warning comes as investors face a period of lower growth and higher interest rates, which have raised the buyout industry’s cost of borrowing to take companies private. Private equity groups enjoyed an extraordinary run of profitability in the past decade as low financing costs and buoyant financial markets made it easy to sell investments for a gain.
Private equity firms would be forced “to go back to investing in the old-fashioned way. They’ll actually have to be very good investors,” Rowan said.
Similar warnings have come from other top executives in private capital. Chip Kaye, chief executive of Warburg Pincus, told the Financial Times last year that an era of geopolitical calm that had provided a tailwind to asset prices was reversing, complicating the investment outlook.
Jeffrey Jaensubhakij, chief investment officer of Singaporean sovereign wealth fund GIC, said last month: “Many of the things that were tailwinds for the private equity industry have come to an end . . . and I don’t think they are coming back any time soon,” referring to the impact of rising interest rates on corporate valuations.
Rowan made his comments as Apollo reported second-quarter results. He said the New York-based group had closed its newest flagship corporate buyout fund with about $20bn in commitments, short of the more than $24bn a predecessor buyout fund raised in 2018.
Apollo earned an adjusted profit of $1.1bn during the quarter, slightly beating consensus estimates and nearly 60 per cent higher than the same quarter a year before. Its finances were buoyed by $35bn of new investor cash that poured into the group and the impact of higher interest rates, which increased yields in its $450bn portfolio of debt investments.
Growth at Apollo has mostly come from its credit investing operations, which include ownership of the insurance company Athene and more than a dozen platforms Apollo has built or acquired over the past decade to originate loans.
These non-buyout businesses constituted more than two-thirds of Apollo’s overall assets and had positioned it to be a beneficiary of the higher interest rate environment, Rowan said.
Quarterly earnings the group generated from base management fees on the assets it manages and the spread it earns from investing insurance policies increased 55 per cent to $1.2bn from this time a year ago.
Apollo continues to expand its debt origination businesses after it bought the securitised products business of Credit Suisse, a large originator of asset-backed securities worldwide. In the second quarter, Apollo’s private credit business originated $23bn in loans. It has targeted making about $100bn of such loans this year.
Its loans range from large deals to finance the growth of a semi-conductor company Wolfspeed and financing for companies such as AT&T and Air France.
“We are in the beginning of a secular shift in how credit is provided to businesses and a shift that I believe will continue to gather speed,” Rowan said.
He characterised the lending as “highly complementary” to the banking system because it is coming from sources of long-term capital, versus a more leveraged bank balance sheet.
Rowan, however, warned against overconfidence in what many have dubbed a “golden age” for private debts, saying that “financial literacy . . . has actually gotten quite sloppy”.
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