Buyout Firms Get Boost From Credit Units as Deal Exits Dry Up

  • Credit operations ease blow from sharp slowdown in asset sales
  • Apollo CEO Rowan says it’s ‘an amazing time’ for alts, credit

ByAllison McNeely and Dawn Lim

Credit businesses at private equity giants including Apollo Global Management Inc. and Blackstone Inc. helped ease some of the pain from a sharp drop in investment exits during the third quarter.

With markets roiled by Federal Reserve rate hikes and the threat of a recession, many dealmakers are sitting tight rather than selling trophy assets at depressed prices. The challenges underscore how having a variety of strategies can help buyout firms weather the upheaval.

“Your mix in this environment plays a big role,” Jefferies Financial Group Inc. analyst Jerry O’Hara said in an interview. “How you’re diversified across platforms; how buyout dependent you are versus credit.”

Even though Apollo’s income from asset sales plunged 91% in the quarter, the firm still posted a 6.4% increase in adjusted net income from a year earlier. Those gains were driven by a credit operation that has grown to quadruple the size of the private equity arm after Apollo completed a merger with its Athene insurance unit in January.

It’s “an amazing time” for alternative assets, and credit in particular, Apollo Chief Executive Officer Marc Rowan said on a Nov. 2 call with analysts. “Investors have now discovered that everything is correlated to the Fed.”

It has still been a rocky ride for the industry. Blackstone, Carlyle Group Inc. and KKR & Co. all reported declines of more than 10% in distributable earnings.

Deal Slump
Private equity firms made less money from asset sales in the third quarter

But credit cushioned some of the blow. At Blackstone and Carlyle, fee-related earnings at the credit arms rose 179% and 120%, respectively, from a year earlier, while credit-management fees climbed 22.5% at Apollo and 13.5% at KKR.

Private equity firms are becoming more like financial supermarkets as they evolve from their corporate-raider roots, and their credit operations are a prominent part of that transformation, providing an array of financing as well as buying bonds and loans issued by other companies. They’re stepping in as Wall Street banks retrench amid mounting loan losses.

Many private equity firms are buying stakes in insurance companies, bolstering their coffers to make additional credit investments.

Carlyle’s assets under management in credit almost doubled this year to $141 billion, fueled in part by a deal with reinsurer Fortitude Re.

“We are seeing significant demand for private credit,” Chief Financial Officer Curtis Buser said on the firm’s earnings call.

The largest portion of third-quarter fundraising at Blackstone, Carlyle and KKR was earmarked for credit wagers.

As the credit units help fill the void left by Wall Street, they’re also giving private equity dealmakers a boost. In recent weeks, direct lenders provided some financing for Blackstone to strike a deal for a majority of Emerson Electric Co.’s climate-technology business.

Goldman, Sixth Street Lead $2.6 Billion Loan for Emerson Deal

When UK pension funds turned to fire sales to meet an onslaught of margin calls from banks last month, Apollo and Blackstone swooped in to invest in bundles of loans. Apollo’s trading desk purchased $1.1 billion of highly rated collateralized loan obligations, according to Apollo Co-President Scott Kleinman.

Shares of Apollo have fallen 15% this year, outperforming the 17% decline for the S&P 500. Blackstone and KKR both dropped 30%, while Carlyle tumbled 48%.

Source: Bloomberg