Josh Harris From Delivering Alpha Conference: SPACs Are Here To Stay
CNBC Exclusive: CNBC’s Leslie Picker Interviews Josh Harris From CNBC Institutional Investor Delivering Alpha Conference
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Q2 2020 hedge fund letters, conferences and more
WHEN: Today, Wednesday, September 30th
The following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht’s interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More
Interview With Apollo Global Management Co-Founder Josh Harris
LESLIE PICKER: Josh Harris, Co-Founder of Apollo, I am so glad you’re here today because you have been one of the most prolific deal makers of 2020. Obviously, you’re marred by so much uncertainty out there. I want to read you a recent Reuters headline that says, “investors see ‘king of distress’ Apollo having its best ever crisis.” When you see or hear that, what does it mean to you.
JOSH HARRIS: Well, I think that, look, I’ve been through five crises since I’ve been doing this for 30 years now, I hate to admit it. You know, there was ‘87, there was ’90, you know, when we started Apollo, 90 – ’01, ’08, you know, the financial crisis, and now this. And this was by far the most difficult one that I’ve been through in terms of both the health crisis aspect of it where there was enormous suffering. And we jumped in and, you know, we have 1,500 people at the firm and 300,000 through portfolio and we jumped in and made sure that our employees were taken care of and we had our 300,000 portfolio company employees were healthy and everyone had technology, there was a hotline set up. And then we have an incredibly agile culture that immediately moved online and started to secondly help the environments where we were working in and the firm delivered everything from hospital supplies to food to laptops, all over the country. We invested or spent about $50 million helping people. Once we had all that squared away, obviously, the culture that we’ve created and the leadership team we had jumped into both providing capital for great American companies, companies like Expedia, Airbnb Cimpress, United Airlines, and making sure that they could weather the crisis. And at the same time, you know, our clients are pension funds.
They are first responders, they are firemen, policemen, teachers and we were able to generate some very attractive risk return opportunities for them. So, you know, Apollo, I’m proud of what we’ve done so far in what is a very difficult time period, but we’re not the kings of distressed anymore. When you look at our platform about 90% of it now is with large private credit business. About 90% of that business is non-distressed. It’s yield. It’s, you know, creating attractive opportunities for pension funds and our insurance company clients. And 90% of private equity right now is more traditional private equity. The distressed world – we did do some so-called good companies with bad balance sheets, we invested in a company called Swissport that ultimately, you know, we’re creating a significant equity stake in. But most of what we’re doing is non-distressed it’s just generating very attractive return opportunities and providing capital to great American businesses.
LESLIE PICKER: Prior to your point to the recent crisis, Apollo did not have much exposure to many of the so-called COVID sensitive sectors like hospitality retail and so forth. You are sitting on, though, about $50 billion in dry powder. I read that you’re looking to raise another $20 billion more focused on credit, to your point from earlier that you’re not, you know, really the distressed kings of yesteryear that you were before. But I’m curious how much of an opportunity set is there right now given the fear that in some industries, they may be changed for good and others seem to have already rebounded.
JOSH HARRIS: Yeah so, the economy lost 22 million jobs and 11 million of them are back. But certainly, it’s going to be pretty slow going from here and the COVID-affected industries. Hospitality, aircraft – anything related to travel – events, sporting events in particular, concerts. I mean, all these things are going to be – it’s going to be a while and even though we have a lot of work being done with vaccines and testing, we’re not far enough along. And so, you are going to see some restructuring and changes that need to occur. Everything from commercial real estate to venues to aircraft or aircraft for travel related services but, and certainly we’re going to participate in that, as both a lender to help some of those businesses, but we may end up owning some of those businesses. But by and large – so there is an opportunity in those sectors and we’re digging in and very well positioned for it. But most of what we’re doing now is helping companies avert, going through the restructuring process or providing capital grow. I mean, we just raised – Apollo Strategic Partners. That’s for companies of around 50 to 150 EBITDA that a lot of the Fed action where they, you know, I think wisely pumped $3 trillion into the economy. That left much of the private lending sector behind. And so, private companies need capital also and so we’re able to – whether it be structured credit or restaurant financing or aircraft leasing – of our platform of 420 billion, 300 billion relates to these private credit opportunities and as I said, 90% of that is literally just capital, where we’re able to generate excess risk. Risk return over the public markets. In fact, today we closed a transaction with ADNOC. That’s a AA company. It had a lot of real estate holdings that it wanted to monetize. The public markets weren’t equipped for the complexity. And we have a ton, over 250 billion of long dated insurance company capital, and we were able to structure a $5 billion deal where we got a great risk return opportunity for our clients. We made 4.5% on a AA company. So 300 basis points of extra return, and at the same time they were able to take real estate and their corporate headquarters and monetize it and invest in technology and other things that they were trying to do in and around their core business, which is the energy business. And so that’s the type of thing that we’re doing over and over and over again.
LESLIE PICKER: I want to go back to something you just said, which is that the Fed, you know, wasn’t able to essentially provide lending opportunities for the entirety of the market. Why do you think there was a shortfall there? What types of companies kind of fell under the program that the Fed put forward? And how is it that, you know, what’s known as private equity – we can talk about the definition of private equity in a little bit – but how is it that, you know, what’s known as kind of the alternative assets universe has been able to come in and provide lending for these companies that have kind of fallen under the other relief that’s been coming out of Washington?
JOSH HARRIS: Yeah, so the Fed did a great job at expanding its balance sheet over $3 trillion in a situation where there was about 10 years around the financial crisis where it did that much lending and investing in the economy or monetizing the economy. But much of that went to the public markets. The investment grade fixed income markets, rates are near zero, the government markets. The special lending facilities that the Fed created haven’t been used that much. And part of it is that the distribution mechanism, the banks, they don’t really lend as much to private companies to CLOs to structured credit to real estate backed credit to restaurant financing data. That comes from insurance companies, pension funds, alternatives companies. And so, those are just a little harder to reach. They’re not a big part of the market, but it’s still trillions of dollars. And so, we stepped in and provided the financing to those markets and they’re much more complicated. They don’t have a CUSIP, it’s harder for public, you know, that sort of faster money that moves around the bond markets to reach. And so, you get an arbitrage. You get one to 300 basis points of extra return for being able to underwrite those and have clients understand, you know that the risk return is good. And the ADNOC transaction is a great example of it but there’s many, many other transactions in the CLO market or otherwise that we could talk about. And so that’s what we’ve been doing and so, it’s not a negative reflection on the Fed, it’s just much harder to reach. But these are the job creators in the economy.
LESLIE PICKER: And other areas that you’ve been involved in that kind of speak to the evolution of, you know, the LBO shop that you were known for back in 2008, you’ve lately been heavily involved in these PIPEs or private investment in public equity. You’ve got 1.2 billion worth of a PIPE going into Expedia. As you mentioned earlier, Cimpress, about $300 million. You’ve been doing pre-IPO funding of Airbnb and Albertsons. During this period of such distress, how come you have sought PIPEs as the mechanism by which to make some of your investments?
JOSH HARRIS: We have a very broad platform and certainly we still are in the private equity business. We have amongst the largest fund at 25 billion. That fund has been doing quite well. It’s about 40% invested and certainly it is very focused on – of the last $18 billion we’ve invested across that and the previous fund, about two-thirds of it has been into public companies that are going private. So, the public markets today are, you know, not as hospitable. Used to be that there were 8,000-plus public companies, now there’s 4,000. There are over 32,000 private companies and even within the context of the public markets, the bottom part of the public markets, which is cash flow – not as growth oriented, maybe has a couple different divisions a little harder to understand – those traded at a 10 P/E. Even though the public markets themselves trade at a 22 P/E and you know the five biggest companies, the FAANGs, are over 40, and most of the market in that top quartile are over 40. And so, they’re very bifurcated. And so, owning great American companies – we bought Tech Data. Great American company, global supply chain for technology, lots of cash flow but wasn’t growing very fast and we were able to buy it at a very attractive price and provide sponsorship and capital grow. And so, that’s been our private equity business because we pay lower multiples. We pay about six times EBITDA versus our competitors that pay over ten. We started off the crisis with very low leverage, about three and a half times. And so, only 3% of our portfolios on watch list where our portfolio’s chugging along quite nicely and we’re seeing a lot of opportunities in the public markets still, even though the public markets themselves are, you know, on the frothy side. And a little ahead of the fundamentals that bottom quartile of the public markets just the private markets have better a better home for it. In terms of the lending stuff that you’re talking about, increasingly, we have 250 billion of permanent capital, insurance company capital, we have another 100 billion or so of client assets and a lot of those assets are looking for yield, with the public markets at zero to 2%, they’re interested in the safe five, the safe seven, the safe eight. Or some of the deals that you’re mentioning might be a safe eight or safe nine with some upside to 15 and those are different pockets of capital. And increasingly larger pockets of capital where we are more active today, private equity is about 70 billion of 420 billion of assets. So, most of what we do is in these other pockets. And so, we’re active though across all of these things. We have about 550 investors looking across, you know, the world and across the credit spectrum and into equity for opportunities. And so, whatever the market brings us, we’re going to take advantage of and continue to increase the size and the breadth of our platform and the agility of our integrated model. We’re integrated across all of our businesses and so there are no so-called information walls that restrict us. When we look at something in private, we restrict the firm, but we’re set up to move very quickly to take advantage or to facilitate opportunities for our clients.
LESLIE PICKER: Now, you’ve also – speaking of kind of opportunities and the public markets – you’ve participated in what we’ve called on our air, this SPAC frenzy. These are special purpose acquisition companies. Essentially blank check vehicles, where they raise money from the public markets in order to make a future acquisition. You know, Apollo is sitting on upwards of what? $50 billion in dry powder, why raise a SPAC to go make a deal?
JOSH HARRIS: Well, again, I think, can’t talk about our specific SPAC, some of which are in registration right now. But speaking generally, the SPAC part of the IPO market is a part of the market that’s here to stay. If you go back a number of years, it was about 3% of the market now it’s about 20% of the market. And there’s a real need for quick, confidential capital price certainty and for sponsorship in the markets. And most of the SPACs that have been done have been more emerging growth SPACs, less cash flow, more growth. And what we see is the opportunity for sponsorship. We have an incredibly broad platform where we see a ton of opportunities of companies that are IPO ready. Ready for the equity markets but don’t want to go through the time or the hassle of rent or registration or where the markets can’t understand them, or where our unique skills can help them grow, either through acquisition or otherwise or through our capital. And so, we don’t have a pocket for that right now. That just goes nowhere and so SPACs provide a real pocket for pre-IPO into IPO capital that we don’t have otherwise, and we think we also could add value to the market. We have hundreds of companies that have gone into the public markets. They’ve done well in the public markets and so these are no different. It’s just a unique strategy that I believe is here to stay and will be a big part of the market.
LESLIE PICKER: So that’s notable coming from you because as a large private equity firm, you’ve obviously gone through the traditional IPO process. Most recently Rackspace over the summer, to find an exit for some of your portfolio companies. So, would you say that you as Apollo would even consider selling some of your portfolio companies to a SPAC as a potential exit opportunity for you? Is that a possibility?
JOSH HARRIS: We can and we have. It is how we exited Hostess. I think that certainly they’re definitely going to be those companies where, you know, the institutions need more information. The sale itself requires sponsorship and more knowledge and so yeah, there will definitely be – we will look at exiting to SPACs where it makes sense, where there’s more of a cash exit. A lot of times the IPO market doesn’t want any monetization, so there’ll be plenty of opportunities for us to access the SPAC market, both in terms of exit but also in terms of providing opportunities to companies that might be public or IPO ready that don’t necessarily want to go through the traditional registration process and take the time to do that.
LESLIE PICKER: Another theme that’s been a key focus this year has been that of ESG – environmental, social governance. We talk about it a lot as it pertains to the public markets with regard to divestment, and screening, various metrics, ETFs, index funds and so forth. We don’t talk about it as much as it pertains to the private equity world. How do you see kind of this theme around ESG desires potentially from LPs to be more ESG-compliant impacting your portfolio over the long run?
JOSH HARRIS: Yeah, look, we’re 70% — I don’t think we do a good enough job talking about it – we’re 70% millennial and Gen Z. People today – we’ve always cared about making the world a better place and our clients, our LPs are no different. They want to not only get great returns, but they want to make the world better and so impact investing – we’ve been leaders in ESG. We haven’t talked about it enough for a decade. And so, impact investing allows for us to make a difference in the world, there are real impact goals, and our fees – our incentive fee is dependent on – the level of it is dependent on not only returns but on impact goals. And the management teams that we hire, their compensation is dependent on impact goals. And so, we’re able to not only do well by our investors, but also do good in the world. And everyone wants that to happen right now, our culture and our investors culture we’re motivated by more than just returns. And so, this gives us a vehicle to be able to do that. Gives our investors the vehicle to do that. And so, certainly you can’t let returns slip, but there’s a way to have both. And that is what impact investing allows. And you’ll see a lot more of it. It’s coming not only from the LP community but inside of Apollo, and inside of other alternatives firms. It’s coming from our own employee base and our own desire to help the world in a unique way.
LESLIE PICKER: In addition to your role as Co-Founder of Apollo, you also are the principal owner of the New Jersey Devils, the Philadelphia 76ers, general partner for Crystal Palace, which is on quite frequently in my household. You were most recently, one of the final bidders for the Mets which ultimately went to Steve Cohen. Is it a good time to be investing in sports right now with all the disintermediation that’s going on as a result of the pandemic?
JOSH HARRIS: So, I’m incredibly proud of what all of our teams have done in terms of – you know, when you buy or when you invest in a sports asset or sport team, you adopt a community. And Philly and Camden and Newark and South London, where our teams compete, they’re very hard-hit areas. And led by our players, we’ve done everything from giveaway laptops to food to provide medical equipment to invest in medical research, but in terms of sports, economically – and the NBA has done a great job of continuing and the NHL and the Premier League, all the sports – sports goes forward. And so, in terms of sports as an investment, I’d say short run, 50% or so depending on the sport of revenues is game based and none of those sports right now have fans in the stadiums. That’s going to be dependent on testing and on contact tracing and on vaccines and on people feeling more comfortable. But they’re all on the air and the desire to watch sports – all the ratings are doing great. And importantly the health of the players, and the health of the people in the arena that put on the show that everyone is doing a very good job there. And so short run, I would say that sports, financially, it’s a little bit hard financially to be in sports right now. But long run, America loves sports, the world loves sports and the globalization of media content is still there. The disintermediation you’re talking about is in between the teams and the leagues and the ultimate viewer, right? There’s cable companies, there’s entertainment companies, there are RSNs. And so, certainly as things go online and as direct to consumer businesses grow, all that will have to be sorted out, but I think that the content the teams themselves have something that people really want. They want to watch sports and they’re the ultimate owners of the content. And so, a lot of cross currents and there are a lot of people getting into the business. A lot of the major tech companies, you know, want that content to build other businesses. And so, I think it’s a short run, long run thing and if you have patience and you’re willing to hold for the long run, I think sports is, will and continues to be a great business as content globalizes. And as content is available, people want to watch the best teams in the world on their phone wherever they sit.
LESLIE PICKER: Alright, Josh Harris, Co-Founder of Apollo as well as a variety of sports teams. Thank you for that unparalleled look at how the pandemic has reshaped our lives as well as some of the various deals that you’re doing within your firm. We appreciate you joining us.
JOSH HARRIS: Leslie, it is always a pleasure to be with you. Thanks for having me.