Apollo PE co-head sees the end of ‘low-quality’ returns

Private equity is entering a phase that’s exposing which firms “truly delivered” and which simply benefited from a long period of ultra-low interest rates, according to Apollo Global Management Inc.’s David Sambur.

For a decade and a half, historically low or near-zero interest rates spurred firms to chase any deal with growth potential, Apollo’s co-head of private equity said in an interview at the firm’s New York headquarters.

“It was easy to put money to work — you just had to ride the wave,” Sambur said, referring to the years when cash was cheap. “Almost all returns came from multiple expansion and revenue growth — that’s low quality.”

That wave crashed when the Federal Reserve began raising interest rates in 2022, crimping deals and choking off cash distributions to investors. Many private equity firms have been clinging to assets for which they overpaid, hoping valuations will recover, according to Sambur. 

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There’s been a surge of activity in the secondaries market for private holdings, including continuation funds, which allow firms to hold onto prized or tough-to-sell assets longer.

But Sambur suggested that can’t last forever, contending that unhappy investors are “voting with their feet” and no longer backing certain funds.

“You’ll start to see more sales and marketed assets as time runs out,” he said. “Funds with middling performance that haven’t returned capital aren’t raising, and that’s well deserved.”

Apollo’s private equity business has deployed about $7.5 billion annually on average over the past five years. Meanwhile, private equity firms are sitting on $1.2 trillion of dry powder, or unspent capital, and nearly a quarter of that cash pile is more than four years old, according to data from Bain & Co. That suggests many firms are finding it difficult to identify desirable targets within their price range. 

This year is set to be among the highest in Apollo’s history for realizations in its private equity strategy, according to a person familiar with the matter, who asked not to be named discussing private details.

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Apollo is looking to gather $25 billion of capital for its next private equity fund, which launched this year. If achieved, the firm’s 11th vehicle would be the largest yet.

Earlier this month, Apollo-owned Mexican airline Grupo Aeromexico SAB and some of its shareholders raised about $300 million from an initial public offering and private placement. 

And in October, Apollo and Vistria Group took the owner of the University of Phoenix public, in one of the last IPOs to receive US Securities and Exchange Commission approval ahead of the government shutdown.