Business Breakdowns
· 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?
· 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.