Markets ‘have become more punitive’ for firms that miss earnings targets

Apollo Global Management has spent about $18bn in recent years on 14 public-to-private deals

Leon Black's Apollo Global Management has $331 billion worth of assets under management, $77bn of which is in private equity. Image courtesy of Milken Institute
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Stock markets “have become more punitive” for firms that miss earnings targets, the founder of one of the world’s biggest alternative asset managers said.

Leon Black of Apollo Global Management, which has $331 billion (Dh1.2 trillion) of assets under management, said this has led to a “bifurcation” between highly-valued technology stocks and solid, but unloved companies.

“You miss your quarter [earnings target] by a few pennies and you get slaughtered,” Mr Black said at the Milken Institute Middle East and Africa event in Abu Dhabi last week.

“It’s tough for managements to do any type of long-term planning. Long-term planning and strategic planning ought to be pretty important.”

Apollo Global Management started as a private equity firm in 1990 and has since broadened into an alternative assets manager investing in private credit, real estate and infrastructure.

“Clearly, there’s been huge growth in companies going private,” he said, adding that the number of public companies has declined by about 40 per cent over the past decade.

Of the private equity investments made by Apollo over the past three years, 80 per cent, or about $18bn, has been used to take 14 public companies private.

He said that when he founded Apollo in 1990, private equity was a $250bn industry with about 300 firms. Today, there are about 4,500 firms and the industry is worth $5tn.

He attributed the growth of the industry to its returns, arguing that it has achieved a higher return to investors than any other asset class — “better than credit, real estate, even better than venture".

“That is why investors have poured a lot of money into the industry,” he added.

Private equity firms raised $595bn in 2019, the third year in a row the sector has attracted funds of more than $500bn, according to Preqin, a company that provides data on alternative assets. It said firms in the sector were currently sitting on a cash pile, known in the industry as “dry powder”, of $1.43tn, This is partly due to concerns about the high valuations being attached to companies.

Mr Black said the average price paid by private equity firms in deals worth more than $500 million is now 11-times earnings.

“This is an all-time high in my 40 years in the business," he said. “We have put our portfolio together for most of the last 10 years at a six-times multiple. So not one or two multiples but almost half what our peers are doing.”

The intense competition for deals “has pushed the average buyout investment to a size not seen since the global financial crisis, and future returns may suffer as a result", Preqin’s head of private equity, Christopher Elvin said last month.

“But overall, private equity remains sought-after by investors, and we are likely to see capital continue to flow into the asset class in 2020.”

Private equity currently accounts for about $77bn of Apollo’s assets under management, or 23 per cent of the total. In the decade since the financial crisis, private credit has grown to become the largest part of its business, with $216bn under management.