Apollo Wants to Be a Bit Like Buffett, But It’s Complicated

(Bloomberg Opinion) -- Everyone wants to mimic Warren Buffett. Apollo Global Management is sort of giving it a shot.

The 91-year-old Sage of Omaha, famous for his astute investing and folksy wisdom, has one thing in his Berkshire Hathaway group that most asset managers don't: a very large pot of money that can't easily walk out the door.

Apollo, a publicly traded alternative-asset manager, will have a similar set-up when it completes its takeover of Athene Holding in January. Apollo established the life insurer in 2009 and then listed in 2016 but kept a large stake in the business. In March, it decided it was time to take the firm back in an all-share deal worth $11 billion. 

Apollo and its shareholders have had other distractions this year: Leon Black, its 70-year-old founder, left just after the Athene deal was struck, following controversy over his personal links to the disgraced financier Jeffrey Epstein. Now the question facing investors is whether its stock should be valued like an insurer with a premium for investment skill, which is one way to view Buffett's Berkshire Hathaway, or with a discount for greater complexity and unfamiliar risks.  

Buffett has funded investments from his insurance pot for decades. Today, the insurance arm has about $360 billion split between shareholder capital and the “float” that is directly linked with live policies. About $191 billion of this is in just four public stocks: American Express, Apple, Bank of America and Coca-Cola.

Athene's insurance assets are about $194 billion. Apollo won't be making concentrated bets like Buffett but will keep investing most of the money in secured investment-grade debt. Much of that is the kind of illiquid or structured lending that banks have largely avoided since the crisis of 2008.

About 5% of Athene's funds will be invested in alternative assets. These include ownership of lending businesses (which create the kind of debt Athene wants to own) as well as continuing to invest in Apollo's private equity and debt funds.

Having Athene put policyholders' cash into fee-paying funds run by Apollo, which was Athene's top shareholder, was never a comfortable fit. Did the arrangement suit Apollo more than Athene? And how did Apollo decide how to split investments between Athene's balance sheet and its own funds? Part of the rationale for the takeover was to at least end questions of fiduciary conflicts between Apollo and Athene shareholders.  

Apollo still has its own investment bank, called Capital Solutions. This unit hunts for deals and structures investments or restructures companies. It can divide investments among Apollo's different pots of money or sell bits on to other large investors, like pension funds or endowments.  

Apollo said it has no conflicts between its funds and won't, for example, have the debt of a portfolio company in one fund and its equity in another. But it does do some pretty complex and serpentine trades. It illustrated one such operation on a snake-shaped timeline in its recent investor day presentation.

The example was Hertz, the car-rental company that filed for bankruptcy in May 2020. One of Apollo's funds first got involved in March 2020 by betting against Hertz's bonds in the derivatives market. By mid-2021, Apollo owned various Hertz loans and bonds, joined a bid to purchase the company out of bankruptcy, acquired Hertz's fleet-finance business for Athene, and bought $1.5 billion of preferred shares in Hertz.

The bigger, more complex and more far reaching that groups like Apollo become, the more likely it is regulators will take more interest in their activities. That doesn't necessarily mean Apollo will get in trouble, but it is likely to spell growing compliance and reporting costs at least. 

Apollo isn't alone in such potential conflicts, nor in trying to use insurance balance sheets. Rivals like KKR & Co. and Blackstone, which have debt and equity funds and act like investment banks, are now also buying or developing insurance arms.

Apollo is more advanced. It is already a bit like Berkshire Hathaway, a bit like Goldman Sachs, a bit like a distressed investor such as Oaktree Capital Management and a bit like a classic private equity fund: but all in one sprawling beast.

For shareholders, Apollo on its own had earnings that were a bit too unpredictable; Athene on its own was undervalued in part for the uncertain influence of Apollo. Both will report third-quarter numbers next week, Apollo on Tuesday and Athene on Wednesday.

Berkshire's shares are more highly valued than Apollo's right now on a forward price-to-earnings multiple. But Buffett has built up a celebrity status over decades and Berkshire shares are also hard to buy: There are few of them so each costs a lot, currently more than $430,000 per A share.

Investors reacted well to the investor day that was meant to better answer these issues and explain the point of the combined group. Before the investor day, it was trading at about 11 times pro forma earnings for 2022, now it is closer to 15 times. That is a premium to life insurers like Prudential Financial or Metlife, but a significant discount to KKR, Blackstone and, yes, Berkshire Hathaway. 

This novel chimera of a finance company is something investors might still take a while to really get their heads around. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.

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