Apollo Aligned Alternatives

Apollo Global Management is one of the best-known names in private markets. In addition to building the world’s largest alternative credit business, Apollo has an enviable private equity track record. Since 1990, its flagship equity funds have generated an average 24% net IRR (December 2023). Past performance is no guide to the future.

The Apollo Aligned Alternatives (“AAA”) fund invests in a unique portfolio of direct private equity investments, mostly specialist lenders, alongside Apollo private equity funds, private credit, infrastructure, and real estate assets.

Apollo has a $10 billion commitment to the strategy, which it has been managing for a decade on its own behalf although the specific fund launched in April 2022.

The fund seeks to produce equity-like returns with a focus on capital preservation. It targets a net return of 12–15% per annum, not guaranteed, and since inception it has achieved a cumulative net return of 14.5% (February 2024). 

The share class available via Wealth Club is AAA (E-1) GBP Class I3, a Sterling hedged share class of the European feeder fund. The main Apollo Aligned Alternatives LP fund is denominated in US Dollars.

This is a semi-liquid fund: when you invest, you get exposure to the whole existing portfolio; you can also request redemptions once a quarter – although a long-term investment horizon is still encouraged.

• Monthly opportunities for subscriptions and quarterly redemptions
• Minimum investment: £26,000 – you can apply online
• Next subscription deadline: 21 August 2024 (5pm, cleared funds)

The manager

Apollo is one of the world’s largest private market asset managers. It manages $671 billion across its private credit, private equity and real assets strategies and has nearly 3,000 employees located in 30 offices across the globe (March 2024).

In 2022, Apollo merged with Athene, the retirement solutions business it co-founded in 2009. Athene is one of the leading providers of annuities in the US and has assets under management of $300 billion. Of this, Athene has committed $10 billion to the AAA strategy and expects to commit around 5% of Athene’s assets to the AAA strategy on an ongoing basis, not guaranteed.

Apollo has a high degree of alignment with its investors. 44% of its total assets under management have come from Apollo and its affiliates (December 2023).

The asset management business is split into three divisions:

1. Credit, the firm’s private credit business, accounts for ~$480 billion of assets under management. It spans traditional corporate credit to consumer lending. The division has a network of specialist lending subsidiaries with capacity to lend billions every year.
2. Equity, the firm’s private equity business, manages ~$107 billion, across private equity, real estate and impact investing.
3. Real Asset, the firm’s real asset business manages ~$85 billion. This division also handles Apollo’s real estate, European principal finance, infrastructure and sustainable investments.

The Apollo Aligned Alternatives strategy draws on expertise and deal flow from all three core business lines. It is overseen by Partners Matt O’Mara and Eric Hanno. Mr O’Mara joined Apollo in 2012 and was previously a credit analyst at OneWest Bank and at Four Corners Capital / Macquarie Funds Group. Mr Hanno joined in 2023 and previously was a partner at Carlyle where he was co-head of AlpInvest’s Primary Investment Team.

O’Mara and Hanno sit on the fund’s investment committee alongside six others, including senior staff and Athene CEO Jim Belardi. 

Investment strategy

AAA seeks equity like returns but with a focus on value and preservation of capital, targeting a net return of 12-15% per annum – not guaranteed.

It invests in a blend of strategic core private equity alongside Apollo, as well as in a diversified mix of leading fund investment strategies.

AAA was seeded with a $10 billion portfolio of existing Apollo assets built over a decade. Apollo intends to continue committing approximately 5% of its balance sheet to the strategy, so this $10 billion investment may increase over time. It is anticipated that most investments will be directly managed by Apollo, although in asset classes where Apollo does not have existing expertise, the fund may also select third-party funds.

AAA expects to invest at least 90% of its assets in alternative investments, with the remainder used to provide liquidity and pay expenses. The fund will not invest more than 20% in a single issuer or borrower.

Direct Investments

Direct Investments are strategic private market investments and are expected to account for around half of the fund over time.

These are direct equity investments into private businesses, predominantly specialist lending, leasing or asset finance businesses that Apollo has helped build. Apollo usually takes a large or controlling stake – owning 25-100% of the equity.

These are sizeable businesses with their own management teams. They originate loans across a wide variety of sectors – from aircraft leasing to mortgages. Some of these loans are then syndicated off to institutional buyers (including Apollo’s pensions business). As an equity holder in the lending company, AAA generates returns through fees and funding spreads on syndicated loans, as well maintaining exposure to the underlying assets through loans held on the companies’ balance sheets.

Historically these businesses have generated free cash flow yields of 11-13% per annum. Past performance is not indicative nor a guarantee of future returns.

Other Investments 

Private/Structured Equity

The fund expects to invest in most of Apollo’s flagship private equity and structured equity strategies, and a selection of other Apollo-managed funds.

In its private equity funds Apollo adopts a contrarian, value-oriented approach, focused on opportunistic buyouts, corporate carve-outs, and distressed opportunities. It is an approach that has served Apollo well; between 1990-2023 Apollo’s flagship Funds have averaged a net IRR of 24% per annum.

Apollo’s hybrid value strategies invest in a mixture of debt and equity. They aim to achieve equity-like returns, but with the downside protections more common in credit investments – not guaranteed.

Real Assets

AAA’s real asset investments are expected to be split between Infrastructure and Real Estate.

The infrastructure allocation is into flexible, value-oriented strategies focusing on lower middle-market infrastructure opportunities which Apollo believes are underserved. Target sectors include power and renewables, midstream energy, communications, and transportation.

Apollo's European credit and real assets special situations strategy focuses on acquiring non- performing, non-core, and capital inefficient whole loans, real estate debt and asset-backed credit instruments. It seeks mispriced risk arising from changes to financial service models, regulatory pressures and asset management complexity.

In real estate, strategies aim to find mispriced assets regardless of broader market trends, making the most of Apollo’s experience in sectors like manufactured housing, food-related real estate and hospitality.

Private Credit

AAA expects to make private credit investments into direct lending, opportunistic credit and principal structured credit.

In direct lending, Apollo focuses on 1st lien and unitranche lending to large corporate borrowers with EBITDA typically over $100 million. As one of the largest global alternative asset managers, Apollo believes its ability to act with size, speed and certainty provides it with a competitive advantage over its peers.

In opportunistic credit Apollo pursues dislocated or event-driven opportunities. The approach aims to construct a portfolio of highly defensible, top of the capital structure investments with strong cash flows and significant asset coverage.

Apollo's Principal Structured Finance product uses Apollo's life insurance expertise to deliver low-correlated, attractive risk-adjusted returns by investing in life settlements, life contingent liabilities and insurance-linked securities.

Portfolio

The strategy size is $15.5 billion (February 2024). 43% of the investment portfolio is in core private equity, 29% in real assets, 15% in traditional private equity, 9% in private credit and 4% in structured equity.

The top 10 investments account for 49% of fund assets, with the fund’s largest investment, Wheels (detailed below), accounting for 9%.

The fund typically holds a small portion (3-5%) in cash. The cash-generative nature of its private direct investments and credit investments help meet any additional liquidity demands – not guaranteed. There can be no assurance that Apollo will be successful in implementing its investment strategy. 

The charts below show the portfolio diversification across asset classes and sector as at 29 February 2024:

Examples of portfolio holdings by asset type

Direct investment – Wheels

Wheels is a fleet finance and management company operating in the US and Canada. It acquires, leases and manages commercial vehicles – from sedans to HGVs – on behalf of corporate customers. The company employs 1,900 staff and leases 450,000 vehicles to clients across the public and private sectors, including over 100 Fortune 500 companies. 

Apollo became directly involved in the business when it merged with Athene in 2022. Athene acquired Wheels in 2021, subsequently merging the business with two others – Donlen and LeasePlan USA – to form an “industry-leading fleet management company”.

The resulting business serves as a platform to generate asset-backed securities based on client fleets – offering attractive risk adjusted returns – while also aiming to deliver profits from fleet management activity. The assets have historically been high quality, with peak losses of 0.06%, and priced at a premium to market rates.

The business has over $5 billion of vehicle assets, generates a free cash flow yield of around 12% and is expected to deliver equity-like returns over the long term, not guaranteed.

Wheels is the largest holding within AAA, accounting for 9% of assets.

Direct investment – MidCap Financial

Apollo-managed funds bought MidCap in late 2013. At the time, the firm specialised in lending to mid-sized healthcare companies and had built up assets of nearly $2 billion.

MidCap has continued to grow under Apollo’s ownership, and today has over $40 billion of committed capital and over 150 loan professionals. While it retains expertise in healthcare and life sciences, which accounts for 28% of the loan book, it has broadened its scope substantially to over 35 industries.

Today MidCap manages around $26 billion of assets, including $13 billion of loans held on its own balance sheet. Over the years it’s shown a track record of low loss rates, covering multiple market cycles – past performance is not a guide to the future.

As well as capital from AAA, Apollo has raised equity capital from third parties, and debt providers to support the growth of the loan book. The firm now pays a regular dividend to AAA. 

MidCap Financial accounts for 7% of fund assets.

Private Equity – Apollo Flagship Funds

The fund expects to invest in Apollo’s flagship private equity funds, the most recent of which, Apollo Fund X, closed a $20+ billion fundraise in 2023. From inception (1990) to 2023, Funds I–X have delivered an internal rate of return (IRR) of 24% after fees. Past performance is not a guide to the future.

The funds target opportunistic buyouts, corporate carve-outs and distressed investments. Examples include McGraw-Hill Education. 

McGraw-Hill Education is a global provider of education content and learning solutions for students, instructors, and institutions. It serves the 2- and 4-year college and university, professional, international, and school markets, with digital, print, and hybrid solutions.

Apollo-managed funds acquired MHE as a carve-out from McGraw-Hill Companies in 2013. Since then, the company has been transformed – with more investment in digital products, six digital-focused acquisitions, cost savings, and a turnaround in the company’s school and international businesses. Apollo sold the company in June 2021.

Apollo Flagship funds currently account for 5% of fund assets.

Hybrid Value Funds – DCLI

Direct ChassisLink (DCLI) operates a network of over 270,000 skeletal trailers across 500 locations. The trailers are used to transport marine and domestic shipping containers on the road between ports, railroads, and container yards. DCLI is a leader in the U.S. marine and domestic chassis markets. 

In April 2019, HVF and other Apollo-managed funds acquired a 78% structured equity stake in DCLI and its wholly owned software subsidiary, Blume Global, from EQT Partners for a purchase price of $2.4 billion. Blume was separated from DCLI to become a standalone entity upon transaction close.

Prior to the DCLI transaction, Apollo had been following the company for many years. In fact, Apollo submitted the cover bid for DCLI when the business was sold to EQT in early 2016. In late 2018, EQT’s financial advisors ran a sale process for DCLI. When the financing market experienced volatility, HVF was uniquely positioned to negotiate a bespoke transaction structure to bridge the valuation gap and ensure downside protection for Apollo’s investment.

Apollo Hybrid Value funds currently account for 4% of fund assets.

Examples of previous exits and failures

AAA has yet to report any complete exits, a reflection of the long investment periods associated with private market assets. There have been no failures within the portfolio to date, although these are to be expected.

Performance

The fund launched to US investors in April 2022 and European investors in July 2023.

This chart below shows a blended track record of the AAA LP fund (available to US investors), and the AAA (E-1) fund (available to European investors). Performance is shown in USD and is net of AAA (E-1) management fees.

Since launch, the fund has cumulatively returned 14.5% in USD (February 2024).

Apollo Aligned Alternatives

Apollo Aligned Alternatives – balance sheet track record

Prior to launching the AAA fund, Apollo managed the AAA strategy on its own balance sheet.

It has prepared what it believes to be an illustrative track record of the strategy’s performance based on investments that would have been included in the AAA strategy had the fund been in place for the period 01/01/2015 to 31/03/2022. Please note, no actual investor has received these returns, as the fund did not exist during this period. Past performance is no guide to the future.

Tax treatment

There are no tax reliefs associated with this investment.

For UK taxpayers, any income generated by the fund (whether distributed or not) will be subject to income tax. Any realised gains from the fund should be subject to Capital Gains Tax. Apollo aims to publish the amount of income earned within the fund within six months of its annual reporting period. This should then be reported on your self-assessment return.

Remember, tax rules can change and tax benefits depend on your circumstances.

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice.

Private equity investments are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose.

Investments in private equity are sensitive to changes in the global economic outlook. An economic slowdown or drop in investor confidence is likely to have an impact on the value of private market investments.

Private equity investments are long-term and should not be considered as readily realisable. The fund invests in companies or instruments which are denominated in currencies other than the fund’s respective currency – such investments are exposed to currency fluctuations.

Unlisted investments can be difficult to price and value. Certain investments are valued based on estimated prices and therefore subject to potentially greater pricing uncertainties than listed securities.

Redemptions, which are at the discretion of the Board, are available on a quarterly basis. However, redemptions are generally limited to 5% of share class NAV per quarter, to manage liquidity in the fund. Please refer to the prospectus for more information on redemptions.

Before investing, you must be an elective professional client of Wealth Club. You must be able to understand the fund’s strategy, characteristics, and liquidity profile. You must also be comfortable with the potential for periods of illiquidity.

Before you invest, please carefully read the Risks and Commitments and the offer documents, including the ADV forms and the articles, to ensure you fully understand the risks. 

Charges 

A summary of the main charges for the fund is shown below: please note, any underlying investments may have additional charges. These will not be paid directly by you but will have an impact on returns. Wealth Club investors will invest using a nominee structure. This service is provided by Wealth Club’s subsidiary companies Wealth Club Asset Management Limited (authorised and regulated by the FCA) and Wealth Club Nominees Limited and is governed by the Terms and Conditions of the Wealth Club Services. Please refer to the schedule of Wealth Club charges for more detail on fees paid by investors to Wealth Club, the Investment Documentation for more details on charges.

Deadlines and dealing process 

The fund accepts investor subscriptions on a monthly basis and redemptions once per quarter. 

Subscriptions

The next subscription deadline is 21 August 2024 (5pm, cleared funds).

Dealing dates take place on the first business day of the month. Trade confirmations take place 45 business days after the dealing date.

Redemptions 

Investors can request redemptions once per quarter. The deadline for redemptions is 56 business days before the last day in March, June, September, and December. Settlement occurs 48 business days after quarter end. Redemptions are generally limited to 5% of share class NAV.

Investors will be able to submit redemption instructions using the Wealth Club secure message portal. 

5% of NAV redemption cap 

Redemptions will generally be limited to 5% of the share class Net Asset Value per quarter as at the relevant calculation day at the end of the preceding quarter.

If redemptions are above 5% of the share class NAV per quarter, these will be processed on a pro-rata basis. Investors will be informed of any redemption amount not processed on the relevant settlement date. Any redemption amount not processed on any dealing day will be deferred until the next dealing day unless cancelled by the investor.

Limitations on the number of redemptions in any given quarter as set out in further detail in the Fund's offering documents. In addition, redemption rights might be suspended in exceptional circumstances, as described in the Fund's offering documents.

Our view

Apollo Aligned Alternatives is an opportunity to invest in a unique portfolio of Apollo owned specialist lenders, as well as private market funds. 

The fund was officially launched in April 2022. However, the $10 billion portfolio of Apollo’s own assets which forms the backbone of the strategy has been developed over more than a decade.

This alignment of interest between Apollo and its investors is a key feature of the offer, in our view.

The monthly dealing nature of the fund means investors benefit from full exposure to the portfolio of investments from day one. However, prospective investors should note that redemptions are capped at 5% of the fund’s net asset value per quarter, and investors should be prepared to hold the fund for the long term.

We believe the fund’s exposure to Apollo’s specialist lending businesses, not available elsewhere, together with Apollo’s wider private equity expertise makes this a potentially interesting addition to an established, diversified portfolio – you should form your own view.

Disclaimer:

Target IRR is presented solely for the purpose of providing insight into a strategy’s investment objectives, detailing the strategy’s anticipated risk and reward characteristics in order to facilitate comparisons with other investments and for establishing a benchmark for future evaluation. The target IRR presented is not a prediction, projection or guarantee of future performance. The target IRR is based upon estimates and assumptions that a potential investment will yield a return equal or greater than the target. There can be no assurance that Apollo’s targets will be realised or that Apollo will be successful in finding investment opportunities that meet these anticipated return parameters. Apollo’s target of potential return from a potential investment is not a guarantee as to the quality of the investment or a representation as to the adequacy of Apollo’s methodology for estimating returns. Accordingly, a strategy’s target return should not be used as a primary basis for an investor’s decision to invest.

Certain information set forth in this presentation may be considered to be simulated or hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual investment results. Also, since the performance presented does not represent an actual investment portfolio, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity or market disruptions. Hypothetical or simulated performance results set forth herein are based on a number of assumptions (not all of which are described herein) which may or may not be accurate, and therefore actual returns may be substantially less than those illustrated. No representation is being made by the inclusion of any hypothetical or simulated illustration presented herein that the returns for any Apollo Fund will achieve similar results. Simulated investment programs in general are also subject to the fact that they are designed with the benefit of hindsight.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.