Investing Lessons From Apollo (AINV)

Apollo Investment Corp. (AINV) is a closed-end investment company whose goal is to create income and capital appreciation through debt and equity investments. AINV focuses on mezzanine and senior secured loans as well as direct equity investments in middle-market companies.

The point of this post is not so much to discuss Apollo Investment Corp. as a potential investment (although it does have a 9.5% yield) but to share some of the investing philosophy AINV discusses in its recent 10K.

Although AINV is relatively new to the public market, it is associated with the legendary private equity firm Apollo (to avoid confusion, we’ll be referring to the publicly traded firm as “AINV” and to the private equity firm as “Apollo”). Apollo was founded in 1990 by Leon Black, Michael Gross, John Hannan, and three others. Since then Apollo has invested over $12 billion in more than 150 companies. The firm is known for favoring undervalued companies with solid business models and strong cashflow.

AINV wrote that they “intend to utilize the same, value oriented philosophy used by the investment professionals of Apollo in Apollo’s private investment funds and will commit resources to managing downside exposure.”

In their annual report AINV identified features it looks for when evaluating potential investments, based on Apollo model. We admire the approach and view it as a sound framework for thinking about investing. Here’s an excerpt:

Value orientation/positive cash flow. Our investment philosophy places a premium on fundamental analysis from an investor’s perspective and has a distinct value orientation. We focus on companies in which we can invest at relatively low multiples of operating cash flow and that are profitable at the time of investment on an operating cash flow basis. Typically, we do not expect to invest in start-up companies or companies having speculative business plans.

Experienced management. We generally require that our portfolio companies have an experienced management team. We also require the portfolio companies to have in place proper incentives to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests.

Strong competitive position in industry. We seek to invest in target companies that have developed leading market positions within their respective markets and are well positioned to capitalize on growth opportunities. We seek companies that demonstrate significant competitive advantages versus their competitors, which should help to protect their market position and profitability.

Exit strategy. We seek to invest in companies that we believe will provide a steady stream of cash flow to repay our loans. We expect that such internally generated cash flow, leading to the payment of interest on, and the repayment of the principal of, our investments in portfolio companies to be a key means by which we exit from our investments over time. In addition, we seek to invest in companies whose business models and expected future cash flows offer attractive exit possibilities. These companies include candidates for strategic acquisition by other industry participants and companies that may repay our investments through an initial public offering of common stock or another capital market transaction.

Liquidation value of assets. The prospective liquidation value of the assets, if any, collateralizing loans in which we invest is an important factor in our credit analysis. We emphasize both tangible assets, such as accounts receivable, inventory, equipment and real estate, and intangible assets, such as intellectual property, customer lists, networks and databases.

For more thoughts on investing, see this post on James Tisch.