Apollo Global Management is launching a major new credit operation as the buyout giant dives deeper into the rapidly expanding direct lending pool.
The New York-based company is building a $12 billion platform focused on providing business loans of about $1 billion, Apollo officials said. Abu Dhabi’s state-owned fund Mubadala Investment is the main backer of the venture, whose firepower Apollo plans to increase with additional capital from other investors.
In direct lending, an alternative credit provider makes a loan and keeps it on its books rather than syndicating it to investors. Direct lending has grown significantly since the financial crisis as new regulations and a desire to avoid past mistakes lead banks to avoid riskier activities. This has left a void for private capital to fill, creating a market that Apollo and others estimate at around $800 billion, up from around $100 billion a decade ago.
The continued search for yield by repo, sovereign wealth funds and other institutions during a period of historically low interest rates has resulted in a flood of money into direct lending. With rates even lower following the Federal Reserve’s response to the coronavirus crisis, there is no sign that the torrent will subside.
Apollo, which already had $24.5 billion dedicated to direct lending in March, took full advantage of this. But so far, its direct lending business has mainly focused on making small loans to medium-sized businesses.
Indeed, most direct lenders target these companies, most of them backed by private equity, with loans of around $100-300 million.
Apollo is also a big investor in corporate bonds and loans, with aggregate credit activity totaling $210 billion.
“It’s the big white space between our large corporate credit business and our mid-market sponsor business,” said Apollo co-chairman James Zelter, who leads the company’s credit business, about the new lending platform.
Many of the biggest borrowers still turn to banks, which spread the loans and sell the coins to investors.
But a small group of direct lenders, including Ares Management, Golub Capital and Antares Capital, have moved into making larger loans, usually spreading them among a limited number of peers.
Apollo, which has also made larger loans to companies such as energy infrastructure provider New Fortress Energy and trucking company YRC Worldwide, believes the less congested upper end of the market will continue to grow. By launching a dedicated business that will be able to hold most of the loans it makes, Apollo hopes to more aggressively target large borrowers – both backed by private equity and those who aren’t – who can’t. get the financing they need from a bank. .
For example, a fast-growing company’s current cash flow might make it look too leveraged for a bank to extend credit, but a private lender might feel comfortable with its trajectory. .
With New Fortress Energy, banks would lend no more than $500 million based on their current cash flows, according to John Zito, deputy chief investment officer of Apollo’s credit business. But the company, which builds natural gas infrastructure in the Caribbean and Latin America in return for long-term contracts to transport natural gas to those markets from the United States, needed more capital to expand.
In January, in an example of the type of deal its new platform will strike, Apollo gave the company an $800 million three-year loan. Apollo expects it to eventually be refinanced through a syndicated deal from a bank, Zito said.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
Excerpt from the Wall Street Journal