Apollo Global snapped up $1.1bn of assets from UK pension funds as the US-based private capital group took advantage of a crisis triggered by the UK’s disastrous “mini” Budget.
Scott Kleinman, co-president at Apollo Global, said on an earnings call on Wednesday that Apollo’s Athene unit accounted for about a third of the collateralised loan obligations sold by the pension funds as they desperately raised cash to meet collateral calls in the past few weeks.
“There was nothing inherently wrong with the CLO tranches we were buying,” said Kleinman. “[They] happened to be the most liquid asset that those entities had to liquidate in order to cover their leverage and margin issues.”
Most of the UK’s 5,200 defined benefit schemes, which promise to pay employees’ pensions at a fixed level, use liability-driven investment strategies, which use derivatives to increase exposure to UK government bonds while offering protection against moves in interest rates and inflation.
When gilt prices fell after September’s announcement of unfunded tax cuts, counterparties demanded more cash as collateral to keep the hedging arrangements in place.
Pension funds became forced sellers of assets to meet these collateral calls. They dumped gilts, causing prices to fall further, and also slashed their holdings in the most liquid securities, such as corporate bonds and equities.
As the dust settles on the LDI crisis, many pension funds are now planning to sell more illiquid holdings, including property, private credit and stakes in buyout funds.
Investors including Goldman Sachs Asset Management, Partners Group and Pantheon have said there is an opportunity to capitalise on this repositioning and buy cut-price assets from UK pension funds.
Debt buyers who spoke to the Financial Times in recent weeks said Apollo was able to make these purchases because its Athene unit has lower return targets than traditional private debt funds, making the unit a good home for such distressed sales. Kleinman said Apollo’s purchases were made at an effective 8 per cent yield, a relatively high figure for the safest class of corporate loans.
Apollo also confirmed that it was finalising a purchase of Credit Suisse’s securitised products business, which is being partially sold off by the under-pressure Swiss bank. The unit would become the firm’s 14th different corporate lending platform.
Over the past 12 months, Apollo’s various lending platforms, which range from operations spanning equipment finance, mortgages and mezzanine real estate loans, have originated more than $100bn in debt, including more than $20bn during the third quarter.
Apollo’s chief executive Marc Rowan said the migration of assets from traditional banks was “not fully appreciated”.
“Securitisation is now how America banks,” he said. “We estimate that less than 20 per cent of debt capital to US businesses and consumers is provided directly by the banking system.”
Apollo’s comments came after the group reported third-quarter earnings results that exceeded analysts’ estimates.
The New York-based group reported record quarterly fee-related earnings of $365mn, a proxy for the money it receives from base management fees, and adjusted net income of $801mn, slightly beating the consensus estimates of analysts polled by Bloomberg.
Assets under management at the group reached $523bn as the firm raised $34bn in new investor commitments during the quarter, including $13bn from its Athene annuities unit.
Though Apollo’s annuities, debt origination and credit investing businesses are growing quickly, the firm warned that fundraising for traditional corporate buyouts has slowed.
Kleinman said the firm’s next flagship buyout fund had raised $14.5bn in commitments towards a $25bn target it set a year ago. But Apollo will hold the fundraising through the first half of 2023 as investors slow their commitments to private equity funds due to an overexposure to private assets, pushing the closing into the new year.
Matt Rodda MP, shadow minister for pensions, said: “The scale of the sales that took place is yet more evidence the government’s ‘mini’ Budget has had lasting effects.”