Business Breakdowns
· Hunter Hopcroft
[00:00:00] S1: Okay, Apollo was founded in 1990, and canonically, the folks that came to be thought of as the founders of Apollo are Leon Black, Joshua Harris, and Marc Rowan. But there's a lot of Drexel and Burnham Lambert alumni who were in this group that founded Apollo. Tony Ressler, who would go on to establish Ares, was in this initial group. All of them were Drexel and Burnham Lambert alumni who came up under Michael Milken. I really can't overstate how this background is foundational to the firm. To do a quick history lesson, Milken established the junk bond market. Prior to Milken, bonds were for blue-chip, safe companies. Milken realized that there was a market for lower-rated, higher-yielding debt. And it was this innovation that sparked the private equity LBO boom. To begin with, high-yield bonds were such a boon for Drexel that the firm's success became closely tied with Milken and high-yield bonds in general. So when Milken goes down, down goes Drexel and down goes the high-yield market. If you think of some of the other alternative asset managers, like Blackstone or KKR, they were very entrepreneurial—they wanted to go out on their own. Apollo, obviously, was entrepreneurial, but it's a little bit different. Apollo was formed opportunistically. There was this vacuum left by the collapse of Drexel Burnham Lambert after the high-yield bond market collapse. And Leon Black specifically saw an opportunity to step into a lot of interesting situations. Black was the most senior of the Apollo founders at Drexel. He was head of M&A and worked closely with Milken. Marc Rowan, who's now the CEO, was actually just an associate at Drexel, but he was in the corporate finance department focusing on bankruptcies and restructuring. Josh Harris is the youngest of the three, but he was also in M&A. This has been described as a dysfunctional family, for all that means. Leon Black is known as an incredibly tough negotiator. Marc Rowan is much more professorial and even-keeled, and then Josh Harris is a deal maker. That is where Apollo comes from. And that's how they got their start—by stepping into the opportunistic opportunity left after Drexel Burnham Lambert collapsed.
· Matt Reustle
[00:00:00] S0: Yeah, it's a really interesting contrast. Think of Blackstone, which went out on its own in the mid-'80s. And you don't have this vacuum necessarily in the market. You have Peter Peterson and Steve Schwarzman going out and raising, I think, $400,000 initially to get their fund off the ground. And here, I think you had something like a $400 million initial fundraise for Apollo. Is that the right number?
· Hunter Hopcroft
[00:00:00] S1: Right. Here's where we have to caveat this entire discussion. Again, Apollo is drawn to complexity, but the Drexel Burnham Lambert background obviously gives them a fantastic network. What really gets Apollo off the ground is basically a mandate from the largest French bank at the time, Credit Lyonnais, to manage through some of the distressed debt situations that arose after the collapse of Drexel. And what sets Apollo on its course to being one of the largest alternative asset managers is this keystone deal. Executive Life is a California life insurance company that faced insolvency in 1991 due to its own junk bond portfolio. Credit Lyonnais wanted to get its hands on some of the assets in that portfolio, but there was a law prohibiting foreign banks from owning U.S. insurers. What Credit Lyonnais did was set up a shell insurance company called Aurora and a U.S. subsidiary called Altus. Altus provided the financing for Aurora to win the bid to buy Executive Life. And then, through a series of transactions, this distressed debt portfolio that was hidden in Executive Life slowly got transferred to Apollo's management to fill the mandate from Credit Lyonnais. This again speaks to a recurring theme in Apollo's life cycle. This deal is considered highly controversial. In fact, there's decades-long legal fallout when it becomes apparent that Credit Lyonnais was effectively secretly controlling Aurora. Apollo was never found to have committed any wrongdoing. Ultimately, Credit Lyonnais pled guilty to fraud and paid over $771 million in settlements. But the deal was a blockbuster for Apollo and really set them on their course.
· Matt Reustle, Hunter Hopcroft
[00:00:00] S0: Just thinking about that, what it entailed—the distressed debt, again, you mentioned it's very credit-driven in nature. In terms of what was going on there, would you say that is the real debt DNA? Here is the junk bond backstory and everything that was going on with Milken. Where would you say the private equity piece comes into play with that credit background? Was it always hybrid? Just a little bit more about that evolution and when that came into play? [00:00:00] S1: Well, I think it goes back to that original quote. If you think about traditional private equity, it's very income statement driven—can you increase EBITDA, and can you bootstrap a higher multiple somehow? Apollo has always been balance-sheet focused. And when they looked at these distressed situations, they saw a way to get at assets that had value. A good example of that is that it is through the Executive Life deal that Apollo ultimately came to control a brand like Samsonite. Part of this giant Executive Life distressed debt portfolio were EII bonds, which were Samsonite's parent company's bonds. Samsonite itself was formerly a KKR portfolio company. EII fell into bankruptcy and Apollo's bond ownership gave them significant control over the restructuring. EII ultimately emerged from bankruptcy as Astrum and refocused on Samsonite, which spun out as an independent brand. And it's another huge win for Apollo. But again, it's getting at this ownership—getting at these assets through the debt side of the balance sheet.
· Matt Reustle, Hunter Hopcroft
[00:00:00] S0: Yeah, owning through restructuring is an alternative private equity strategy, but one that I think, especially in this era, was ripe for opportunity and Apollo certainly played into that. One of the things that's notable from their history—and you tapped on it a little bit—is what they've spawned in terms of talent that's gone elsewhere, but also businesses that were part of Apollo, like Ares, which is another private credit giant today. Can you just get into that? I was always curious about why that was spun out of Apollo, what the backstory is there, because it feels like it would have been a core piece of what they were doing to begin with. [00:00:00] S1: Sure. And actually, the founding of Ares speaks to this Credit Lyonnais portfolio. Again, Executive Life was a California life insurer. Tony Ressler set up Ares at that time, with Lion Advisors on the West Coast. It's closely affiliated, though not directly related to Apollo, and it became this West Coast satellite for Apollo's credit operations. Ultimately, now we're talking about 2002—so this is almost 12 years after the initial Executive Life deal. One of the things that led to Ares officially separating from the relationship with Apollo was just the ongoing legal troubles with the Executive Life deal. And we'll see echoes of that as we get into Caesars Palace and even some of the more recent deals.
· Hunter Hopcroft, Matt Reustle
[00:00:00] S1: Sure. And actually, the founding of Ares speaks to this Credit Lyonnais portfolio. Again, Executive Life was a California life insurer. Tony Ressler set up Ares at that time, with Lion Advisors on the West Coast. It's closely affiliated, though not directly related to Apollo, and it became this West Coast satellite for Apollo's credit operations. Ultimately, now we're talking about 2002—so this is almost 12 years after the initial Executive Life deal. One of the things that led to Ares officially separating from the relationship with Apollo was just the ongoing legal troubles with the Executive Life deal. And we'll see echoes of that as we get into Caesars Palace and even some of the more recent deals. [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?