Business Breakdowns
· Matt Reustle, Hunter Hopcroft
[00:00:00] S0: Yes, very interesting. And the legal complexity, I can speak to it. And having some dealings with Apollo at all different seats of the table alongside them, on the other side of them, they are not shy of complexity on the deal side. Would you point to anything else in the early days that stands out from a deal perspective that maybe was defining or a good microcosm of who Apollo is? [00:00:00] S1: Yeah, the Vail Resorts deal is another one that certainly a lot of people will be familiar with. That was not part of the Executive Life portfolio, but it was another situation where Vail's owners, Gillett Holdings, filed for bankruptcy. Apollo gets control of the company again through the debt, ultimately brings Vail public in 1997. So between Executive Life, these first two fund vintages out of the gate absolutely crush it. They return 3.6x on the invested capital and it works out to an internal rate of return of 47% before fees, 37% after fees. In the vacuum left by Drexel Burnham, Apollo is just awash in opportunities to pursue private equity through these distressed debt deals, which they do to great success and set them on the course to be one of these top three alt managers as private equity gains adoption from institutional investors through the '90s up to the new millennium.
· Matt Reustle
[00:00:00] S0: It's certainly interesting just in terms of the origins. You can think of KKR as having their large buyouts. Some of those deals, I think particularly early on in the '70s, were much more friendly. It was actually buying out the equity. With Apollo, it's owning something through restructuring, getting into the weeds of the debt. And while they all have merged to look a little bit more similar or have strategies that all overlap, it's always interesting to know the origins of these. Let's get into the 2000s again. This is when I came to know Apollo at a particular point early in my career when they were in the headlines. They have this prestige associated with them. What went into that evolution for alt managers for Apollo and talk about that environment and what it was like.
· Hunter Hopcroft
[00:00:00] S1: Yeah. Through the 2000s, and especially leading up to and right around the great financial crisis, institutional investors really embraced the asset class. The numbers are getting really big in terms of what capital has to be deployed. And so the deals are getting really big. I think obviously one of these formative deals for Apollo's, both in terms of their evolution—although the deal itself was not a success, but certainly in terms of their reputation—has to be Caesars Palace, which, obviously, there's an entire book on. The complexity of these deals is almost endless. We're going to try to keep this high level. Apollo and TPG Capital try to do a $31 billion leveraged buyout of Harrah's, which later becomes Caesars. This starts in December 2006, and it's one of the largest leveraged buyouts in gaming history. Rowan has this grand strategy of reward points. He's thinking of this like a traditional LBO. They're going to come in, they're going to improve operations, and they're going to make a return by improving Caesars operating. But the deal closes in 2008 with $24 billion of debt and runs right into the jaws of the great financial crisis. By 2009, Caesars has a debt to EBITDA ratio of like 14x. Apollo immediately sees the writing on the wall and starts trying to protect its equity value by moving assets off Caesars balance sheet. They're bullying junior creditors into swapping for equity and doing all sorts of aggressive, esoteric strategies to try to preserve their investment. And just like Executive Life, this leads to an incredibly long, protracted legal battle. By 2019, Apollo is out of Caesars. But this is what really makes Apollo. Apollo 2002. Just four years after the Caesars fiasco finally winds down, Apollo partner David Sambur, who is really central to the Caesars process, is back in Las Vegas speaking with the Nevada Gaming Control Board about Apollo's bid to acquire Las Vegas Sands and a portfolio of casinos in the Las Vegas Convention Center. And the best part about this is that a giant part of the financing for that deal is effectively a sale leaseback with VICI, which was a spin-off of Caesars real estate assets during that whole process. Apollo's in the echelon with KKR and Blackstone, but it's their appetite and willingness for this complexity—even when it goes poorly—that sets them apart.
· Hunter Hopcroft, Matt Reustle
But we learned, and we're going back in with those learnings that I think really sets them apart from somebody who would say, "We got burned on that before." It's too much reputational risk. Apollo seems to have a really high appetite for taking on this reputational risk in the spirit of generating returns for their investors. [00:00:00] S0: It's interesting here because oftentimes when you hear a scenario like that, it is someone who is a specialist in an industry and it's something where they can move in and out of names along with how the market moves. But let's just take a private equity fund that is purely focused on insurance and they can understand cycles, they can understand moving into different subsegments of the asset class. With Apollo, it feels so much more tied to understanding the ways of de-risking your financial investment and then, therefore, increasing return. Is that selling them too short just in terms of their specialty in operations, do you think it's fair to say that is where they are experts or masters of the craft? How would you split up the difference between their financial prowess and their operational execution?
· Hunter Hopcroft
[00:00:00] S1: Well, there are two things that stand out to me. One is this focus on understanding that they can create a lot of value through the balance sheet, not necessarily just the income statement. How a company is capitalized, what the sources of the capital are, can really drive returns. The second is Apollo sees a hairy, complex, or dirty situation and it doesn't go to their "too-hard" pile. They want to dig in. I think Apollo is very open about it. They use a lot of consultants; they parachute people in to understand what's going on. And I think whereas other asset managers, because they have a lot of capital to deploy and because they're pulled in a lot of directions, some of those more difficult situations end up being passed on. And it leaves this great white space for Apollo to come into these really complex situations that they're willing to do—even sometimes if there's some reputational risk attached to it.
· Matt Reustle
[00:00:00] S0: Yeah, I think Apollo might actually operate with a "too-easy" pile. Or whenever they get involved, they make sure that it is not simple. We worked our way up towards the 2000s. You talked about the financial crisis and some of the fallout, obviously as it relates to the operations and some of the deals in the portfolio. But coming out of the financial crisis, you also had the big move to IPO the business. So can you talk about what that means? I think the idea of having an alternative manager with a publicly traded stock is just an interesting dynamic that we've all come to accept and appreciate. But can you get into what that moment defined for Apollo and what it ultimately meant for them, and maybe the industry as well?