One more PE firm gets into broker-dealer biz

Leon Black’s Apollo Global Management LLC is joining private-equity firms that have their own broker-dealers, relying in part on an investment bank built by his former boss at Drexel Burnham Lambert Inc.

Apollo, which is based in New York, invested an undisclosed amount in preferred stock of Morgan Joseph TriArtisan LLC, a securities firm co-founded by the late Drexel Chief Executive Officer Fred Joseph, according to a March 31 regulatory filing. The firm also registered its own brokerage, AP CM LLC, to find clients and negotiate deals for its buyout and hedge funds, according to the same filing.

Apollo, which gained a listing on the New York Stock Exchange in March through a $565 million share sale, follows publicly traded rivals Blackstone Group LP and KKR & Co. in setting up its own broker-dealer. The firm is seeking a bigger share of fees paid by its portfolio companies to sell securities or restructure debt, said James Hill, who runs the private- equity practice of law firm Benesch LLP in Cleveland.

Apollo’s principals “are probably sitting around their boardroom saying ‘Last year, we paid tens of millions of dollars in investment-banking fees,’” Hill said in a telephone interview. “‘Maybe we should be doing this ourselves.’”

Apollo, with $67.6 billion in assets as of Dec. 31, said in the offering documents for last month’s stock sale that it may pursue growth by acquiring other investment managers and entering the insurance, broker-dealer or financial-advisory industries. Charles Zehren, a spokesman for Apollo, declined to comment on either the broker-dealer start-up or the Morgan Joseph investment.

Drexel Connections

The investment in Morgan Joseph TriArtisan, formed through the December merger of Morgan Joseph LLC and merchant bank Tri- Artisan Partners LLC, entitles Apollo to “a percentage of dividends declared on Morgan Joseph’s revenues from its underwriting activities,” according to the filing.

Morgan Joseph TriArtisan, also based in New York, will help underwrite bond sales for companies controlled by Black’s funds, the filing said. Apollo may provide additional financing to the securities firm to help it underwrite these offerings, according to the SEC filing.

The investment allows Black, 59, to strengthen his longtime connection to former colleagues at Drexel, where Michael Milken pioneered the use of high-yield, high-risk bonds to finance a surge in takeovers during the 1980s. Drexel filed for bankruptcy protection in 1990 after Milken was indicted for securities violations as part of the biggest insider trading scandal at the time. Black, once the firm’s head of mergers and acquisitions, started Apollo that year.

Milken’s Son

John Sorte, 63, who was CEO at both Drexel and Morgan Joseph, now holds that title at Morgan Joseph TriArtisan. Mary Lou Malanoski, former chairwoman of Drexel’s credit committee, heads investment banking at the combined firm. Milken’s son Lance is a partner in Apollo’s private equity group, having worked for Black for about 13 years.

Milken pleaded guilty to six felony securities laws violations in 1990 and served 22 months in prison. The SEC barred Joseph, Drexel’s CEO during the 1980s, from holding a top management position at a securities firm after he settled allegations of failing to supervise Milken. The SEC readmitted Joseph as managing director of a Morgan Joseph affiliate in May 2002.

Joseph, who died in 2009 at age 72, co-founded Morgan Joseph LLC in 2001 when he was part of a group that bought a retail brokerage established by John Adams Morgan, the great- grandson of financier J. Pierpont Morgan. Joseph sought to create a high-yield business for mid-size companies and hired investment bankers laid off by larger securities firms after the technology-stock bubble burst in 2000, said Hill.

‘New Models’

“Morgan Joseph was formed during the recession before the Great Recession” of 2008, Hill said in a phone interview. “Investment banks were dumping lots of really good investment bankers.”

Realogy Corp., the Parsippany, New Jersey, residential real estate brokerage that Apollo acquired in April 2007 in a $9 billion transaction, hired Morgan Joseph along with Goldman Sachs Group Inc., JPMorgan Chase & Co. and others to underwrite a $700 million lien note sale in February, according to a company filing. NCL Corp., the Apollo-controlled parent of the Norwegian Cruise Line, listed Morgan Joseph as an underwriter in a November filing for a $250 million high-yield bond sale.

“The conventional wisdom is that the U.S. is turning into Canada, where large institutions are going to dominate everything,” Brad Hintz, a securities-industry analyst at Sanford C. Bernstein & Co. in New York, said in a phone interview. “And yet we are seeing a bunch of new models popping up.”

Blackstone, KKR

Blackstone has at least two registered broker-dealers, including one that conducts the firm’s financial advisory business and a second, Park Hill Group LLC, that finds institutional investors for the parent company’s buyout and hedge funds.

KKR Capital Markets LLC, a KKR subsidiary that is registered as a broker-dealer, arranges debt and equity financing for transactions, structures investment products and underwrites securities offerings. TPG Capital LP, the private equity firm founded by David Bonderman, also has a registered broker-dealer that markets the company’s funds to investors.

While Apollo plans to use Morgan Joseph to underwrite securities offerings, AP CM will line up investors for Apollo private-equity and hedge funds, a task the parent company had delegated to firms including J.P. Morgan Securities and Park Hill Group LLC, a unit of rival Blackstone, filings show.

Finding Investors

AP CM’s broker-dealer registration, submitted to the SEC in September, was approved April 1, according to documents on the Financial Industry Regulatory Authority’s website. The broker- dealer’s president is Barry J. Cohen, who joined Apollo in July 2008 after 21 years at Bear Stearns Cos. with stints as head of risk arbitrage and senior managing director of alternative investments, the documents show.

Apollo will also use the broker-dealer for some tasks traditionally handled by investment bankers, such as negotiating buyouts and debt restructuring efforts on behalf of its portfolio companies, according to its March 31 SEC filing. Under U.S. financial regulations, companies must register with the SEC as a broker-dealer to receive transaction fees in return for marketing securities to investors.

The firm’s sixth buyout fund and the companies it controlled sought to free up cash in 2009 by repurchasing bonds at a discount or refinancing borrowings so they matured later. The restructuring efforts cut the amount of debt due at these companies through 2016 by 36 percent to $33.6 billion, while maturities scheduled for 2017 through 2019 tripled to $16.7 billion, according to a client presentation in November.

–Bloomberg News–