Apollo: Connoisseurs of Complexity - [Business Breakdowns, REPLAY]

· 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?

· Hunter Hopcroft

[00:00:00] S1: Sure. Well, in the spirit of these repeating cycles, 2008, 2009 is another one of those situations where the fallout creates a huge opportunity, not just for Apollo, but for all the alternative asset managers. And again, there was already a strong tailwind behind alternatives. And 2008, 2009 just adds fuel to the fire of people looking for what look like uncorrelated returns in private markets. These firms at this point have gotten really large, both in terms of assets, but in terms of people. And they have these founders who have a lot of their wealth tied up in these general partnerships. The GP business at scale starts to become a bit of a liability, and it's really talent-heavy. So it's driven by people, and you want to keep those people, and you need to find a way to compensate them and have them participate in the upside. It's also really hard in general – at least it used to be. Now things are changing a little bit. It's hard to raise money just for platform expansion. You're getting your fees and carry, but a lot of that is going out the door in compensation, and it's hard to reinvest in the business. So they all went public in 2010 and 2011. They originally, most of them including Apollo, went public as limited partnerships. But in 2019, they converted to a C Corp. This helps the founders monetize. And, drawn to complexity, the founders set up all sorts of elaborate tax structures to go public and protect their wealth in this windfall of monetization from taking the names public. But I think it also shows that these are becoming, especially post-2008 and post-Dodd Frank (circa 2009), full-fledged financial services companies. In some ways, they operate differently than banks; they make money differently than banks, but they are a key part of the financial system we have today.

· Matt Reustle, Hunter Hopcroft

[00:00:00] S0: And when you think about the IPO, but then also strategically having a publicly traded equity, I think you mentioned some of the different dynamics and reasons why you would take the business public. But if we were to just isolate on an ongoing basis, you have equity, which could be used as a form of primary capital. If you wanted to raise additional equity to use those proceeds within the business, you could do so for secondary purposes—which I'm sure played a major role in the IPO—and then you can use it as a currency for acquisitions or other things along those lines. Would you say that there's one of those buckets that really stands out in terms of what it allows these alternative asset managers to do? Maybe focusing on post-initial monetization for some of the founders and partners within the business? [00:00:00] S1: Yeah. So they all want to grow. And again, it's hard for private general partners to necessarily raise money for platform expansion. So, to your point, access to equity and debt capital markets allows them to go out and spin up new platforms, spin up new strategies, and I think that's a big part of what you see as the growth following the GFC. But I do also think that, as a currency for talent, this is a key element in why it makes sense for these companies to be public.