Flying High With Apollo And Affiliates

By: Tim Melvin

The top executives of Apollo Global Management (NYSE:APO) in the most recent earnings call outlined some areas where they see opportunity in the years ahead.

Benzinga covered this last week in an article revealing the company's thoughts on credit, energy and real estate services.

The management team at Apollo can trace their history in the markets all the way back to Michael Milken and Drexel Burnham Lambert, at one time a wildly successful private equity and alternative investment firm.

Apollo Global founder, Leon Black, was the head of Drexel's mergers and acquisitions department and formed Apollo Global following the collapse of Drexel in 1990. Their advice is worth listening to and best of all, Apollo has some publicly traded entities that allow investors to take advantage of their insights and ideas.

Apollo Investment (NASDAQ:AINV) invests primarily in various forms of debt investments, including senior secured loans, subordinated and mezzanine investments and equity in private middle-market companies.

Apollo made the case for investing in illiquid direct loans to middle market companies and this is the perfect vehicle for investors who want to take advantage of the opportunities in this marketplace.

At year's end, the portfolio consisted of loans and investments in 101 companies worth a total $3.1 billion.

Management has been taking steps to prepare its balance sheet for higher interest rates by having a significant portion of its portfolio in floating rate assets and issuing fixed rate debt.

They have also repositioned the portfolio over the past 18 months into more secured debt and think this has made the portfolio better able to withstand market and economic volatility.

Apollo Investment believes, like the management team at the parent company, that there continues to be a significant illiquidity premium for direct lending to middle market companies.

They also share the long-term view of the energy markets, as they recently established a Houston-based energy team to take advantage of the opportunities the firm sees in shale gas-related investments. They will focus on secured lending against North American producing upstream oil and gas reserves, with an emphasis on significant asset coverage using downside case assumptions.

They will downside lend against proven, developed producing reserves rather than proved undeveloped reserves or acreage as part of a focus on what management calls exploitation, not exploration. Apollo Investment told investors they think they can earn mezzanine like returns of 15 to 25 percent on the risk equivalent of senior secured notes in this sector.

Investment Trends

Apollo Investment Management allows investors to participate in what Leon Black and Joshua Harris identified as two key investment trends.

The Business Development Company has significant exposure to the illiquid direct lending to middle market companies and is building a larger portfolio of investments in the shale gas field.

The shares are currently priced at just 90 percent of asset value and are yielding 10 to 11 percent right now, so this could be a very attractive entry point for long-term investors who want to invest like the private equity pros. Insiders think so, as two directors -- as well as the President and the CFO of AINV -- have been buyers of the stock so far this year.

Apollo also remains active in the real estate markets through both debt and equity investments. Black told investors last week that “we remain active in real estate debt and during the first quarter the funds we managed deployed approximately $400 million in first lien mortgage loans, mezzanine loans, and CMBS. On the equity side, we remain opportunistic across property types and geographies."

Apollo once again has a publicly traded vehicle that can allow investors to take advantage of their real estate expertise.

Apollo Commercial Real Estate Finance (NYSE:ARI) is a commercial mortgage real estate investment trust that primarily originates, invests in, acquires and manages senior performing commercial real estate mortgage loans, commercial mortgage-backed securities and other commercial real estate-related debt investments throughout the United States.

The company's relationship with Apollo Global allows them to take advantage of their long-standing and deep relationships with brokers, global investment banks, insurances companies and CRE owners to make loans most other REITs will never even see. The shares are trading at about 90 percent of book value and have a current yield of 9.74 percent.

Apollo Global has a tremendous track record in both private equity,  middle market loans and investments, as well as commercial real estate. These two stocks give outside investors a chance to invest alongside one of the most successful investment firms in the world today. The industry continues to present opportunities for value-investors who can weed through the daily noise of the market. A perfect example is the 3 Low Risk, High Yield Stocks that Tim Melvin identifies as the trades of the decade.

© 2014 Benzinga does not provide investment advice.

One thought on “Flying High With Apollo And Affiliates

  1. Their stock chart tells a different story, it looks like a great short setup actually.

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