Apollo (and other MF) Performance?

Really confused abt Apollo's and MF performance in general. I always hear about how Apollo is the leader in the industry in terms of performance/returns. I remember watching a bloomberg interview with Josh Harris like a few months ago, where he said that their PE funds are clocking in 25-30% returns. Let's break down the math real quick...

So let's assume these funds are for 8 years. What MOIC implies a 25% IRR over 8 years? The answer is 6x...What MOIC implies a 30% IRR over 8 years? The answer is 8x...

HOW IS IT POSSIBLE that Apollo is doing 6-8x in their funds?? Yeah I get VII but what about the other, more recent ones, because Josh Harris said it himself "yeah around mid to high 20s in terms of IRRs in our private equity funds".

I thought that the megafund standard was like 1.5x-2x, and that anything above 3x was hard even for MM funds-- how is it possible that the second biggest PE player is putting up 6-8x? Someone please explain this to me because it makes no sense. And the other thing is if we say "2x MOIC over 8 years" is standard, that implies a 9% return. NINE PERCENT. What is the point of MF PE if LPs are basically expecting 9%; what is the point for GPs when there is an 8% hurdle rate?? Answers folks, answers!!

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Comments (16)

Apr 2, 2021 - 3:24pm

Eight years isn't really the right reference point, at least in the way that you're framing it. They're not buying all of the companies in the fund at t=0 and selling them eight years later. Each year, they'll make a handful of investments and may also experience some liquidity events (partial / full sales, dividend recap, etc.).

Array

Apr 2, 2021 - 3:44pm

Let's hypothetically say you have a fund with $10 billion. Let's assume your fund isn't a buy and build type of shop so you don't need to reserve a crazy amount for follow-on capital and expenses. You might try to deploy $8 billion of equity (80%) in platform acquisition equity checks.

Let's assume the 8 year cycle that you mentioned refers to the assumed time it takes to deploy your capital and then cash out your investments (maybe not fully realistic since it's likely you won't be able to exit every investment over that time frame). If you're aiming for ~15-20 investments per fund, you would target an average equity check of ~$400 to $500 million per deal. If you fully deploy this capital over three years, you'd have to do 5-7 deals per year. You won't make all of these investments on day 1 and you won't sell all of those companies at the end of 8 years. You may buy a company two years in and then sell for 3x after five years (seven years in). You might buy a company one year in and then sell for 4x after six years (also seven years in). Both outcomes result in a ~25% IRR for those investments.

Most of the numbers above actually don't matter.

Array

Apr 2, 2021 - 3:52pm

There's a great relevant article on this called "you can't eat IRR" which is linked below, and another article addressing this specific fact about Apollo. My general take on the issue is below.

Capital doesn't start ticking against your IRR until you call the capital, so while the fund IRR over 8 years may be 30%, the think you'll need to look at in determining the multiple for the capital is the average outstanding capital over the life of the fund. They may only have 50% of the fund outstanding on average, which will reduce the multiple required to get to your 25% to 30%. How much exactly depends on the actual contribution schedule, but you could say in rough terms that reduces the 6x to a 3x and the 8x to a 4x, which is still a great multiple. You can also use fund level debt etc. to juice it further.

https://www.oaktreecapital.com/docs/default-source/memos/2006-07-12-you…

https://www.starmagnoliacapital.com/post/you-can-t-eat-irr

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Apr 2, 2021 - 7:49pm

Okay couple comments because think you're confused here. Fund lives on average = 5 years on a time weighted basis. Apollo yeah does like 25% irr (but that's gross not net so take off call it 7.5% in fees. Apollo is a different animal and most mega funds have shitty returns. Apollo can make those returns because they work people to the bone and have an insanely cutthroat culture of doing stuff people don't want to do (like hig on steroids). Considering top private credit funds return (again for like the really big, not just distressed) on a gross percentage something like 10% IRR, 25% for equity isn't insane. Yeah it's probably marketing bs for 20% isn't crazy 

  • Associate 2 in PE - LBOs
Apr 3, 2021 - 4:47am

Apollo's performance isn't very good especially the latest fund (8.5% IRR / 1.3x net). The market currently values growth and high quality businesses and it shows in the returns... 

  • Associate 1 in IB - Ind
Apr 3, 2021 - 4:52am

Average fund life is more like 10-12 years - def not 5.

Top private credit gross returns are more like 12-15% - 8-10% net.

I get that you're trying to help but a couple of your statements are outright false.

Someone already said this but the mid-20s IRR for Apollo is gross returns and is only their best funds.  

source: former LP that's seen hundreds of these funds and was an investor in Apollo 

Apr 3, 2021 - 11:46pm

According to what I'm reading now, this guy is probably right about the general returns.

Why Apollo has 25% net IRR lifetime is that they assume that the investors from the early funds reinvested their money at the same rate. So their early funds returned like 40 gross, and now the IRR calculation assumes those 1990 funds are still earning 40 today.

Its basically a lie. If you take every dollar invested at apollo, the total returns and the number of years those dollars were invested, the irr calculation would not be 39. It might be like 20ish.

Basically if your early funds did well, you can make it look like your funds lifetime performance is incredible because it assumes say $100m at 40% becomes $2t over 30 years, and so it doesn't matter how many $20b funds you have that return 6%, that "$2t" return sets the number. Very misleading.

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