Credit businesses at private equity giants including Apollo Global Management Inc. and Blackstone Inc. helped ease some of the pain from a sharp drop in investment exits during the third quarter.
With markets roiled by Federal Reserve rate hikes and the threat of a recession, many dealmakers are sitting tight rather than selling trophy assets at depressed prices. The challenges underscore how having a variety of strategies can help buyout firms weather the upheaval.
“Your mix in this environment plays a big role,” Jefferies Financial Group Inc. analyst Jerry O’Hara said in an interview. “How you’re diversified across platforms; how buyout dependent you are versus credit.”
Even though Apollo’s income from asset sales plunged 91% in the quarter, the firm still posted a 6.4% increase in adjusted net income from a year earlier. Those gains were driven by a credit operation that has grown to quadruple the size of the private equity arm after Apollo completed a merger with its Athene insurance unit in January.
It’s “an amazing time” for alternative assets, and credit in particular, Apollo Chief Executive Officer Marc Rowan said on a Nov. 2 call with analysts. “Investors have now discovered that everything is correlated to the Fed.”
It has still been a rocky ride for the industry. Blackstone, Carlyle Group Inc. and KKR & Co. all reported declines of more than 10% in distributable earnings.
But credit cushioned some of the blow. At Blackstone and Carlyle, fee-related earnings at the credit arms rose 179% and 120%, respectively, from a year earlier, while credit-management fees climbed 22.5% at Apollo and 13.5% at KKR.
Private equity firms are becoming more like financial supermarkets as they evolve from their corporate-raider roots, and their credit operations are a prominent part of that transformation, providing an array of financing as well as buying bonds and loans issued by other companies. They’re stepping in as Wall Street banks retrench amid mounting loan losses.
Many private equity firms are buying stakes in insurance companies, bolstering their coffers to make additional credit investments.
Carlyle’s assets under management in credit almost doubled this year to $141 billion, fueled in part by a deal with reinsurer Fortitude Re.