Over the past few years, companies once known mainly as private equity asset managers, such as Blackstone (NYSE:BX), KKR (NYSE:KKR), Carlyle (NASDAQ:CG), and Apollo Global Management LLC (NYSE:APO), have diversified their business mix to include real estate, hedge funds, and credit funds. While Blackstone, KKR, Carlyle, and Apollo all have developed large credit fund businesses, Apollo is the leader in this space. Apollo's credit business currently oversees more than $105 billion, an increase of $87 billion since 2009. Apollo's total AUM is just over $167 billion. Comparably, Blackstone's credit business, GSO, has $69.5 billion under management. Blackstone has a total AUM of $279 billion. KKR's credit business has just over $38 billion in AUM. KKR has a total of AUM of $98 billion. Carlyle manages $38 billion in its credit funds, and has a total AUM of $203 billion. Clearly, as a percentage of AUM, Apollo's credit business is by far the largest, and the company is the leader in the space. Due to this, Apollo's earnings are most leveraged to its credit business.
Apollo Positioned For Rising Rates
During the second-quarter conference call, Apollo co-founder and director, Josh Harris talked about how the company's credit funds are positioned for a rising rate environment:
Out of more than $100 billion of credit AUM, our funds meant very little in the way of rate-sensitive assets, that is to say treasuries, munis and investment-grade bonds with longer duration. In fact, we have an intentionally large exposure to floating rate assets. And so we welcome a rising interest rate environment and believe would be beneficial to our investment performance. Moreover, if rates were to rise at a quicker pace than expected, we believe any resulting dislocation would further benefit our returns as we've historically outperformed in those scenarios. Any dislocation would also likely result in more rapid deployment of our drawdown credit and private equity fund, which tend to generate higher management and incentive fees. Given these points, we believe that any concerns about rising rates with respect to our business are misplaced.
Based on Harris's comments, Apollo appears to be positioned for rising rates. In particular, Apollo's focus on floating rate assets mean rising rates could lead to better returns for Apollo's funds, and ultimately, higher earnings for Apollo itself.
Apollo Starts New Fund To Short Junk Bonds
In early August, Apollo announced that it is starting a new hedge fund, Apollo Short Credit Opportunities Funds, to bet against junk bonds. Apollo is currently in the process of raising outside money for the fund, and the intended size of the fund is unknown. While Apollo's new fund will focus on event-driven situations such as leveraged buyout debt, the fund will be positioned to benefit from rising rates. In addition to being a bet against rates, Apollo's new fund, depending on its size, could help further reduce Apollo's exposure to the "risk-on" macro environment.
Rising Rates As A Negative For Apollo's Peers
Rising rates could be problematic for traditional private equity funds, because the cost of junk debt, sometimes used to finance buyouts, could increase significantly. While Apollo has some exposure to private equity funds, the company is more leveraged to its credit business. It should also be noted, higher rates would have a negative impact on another alternative asset manager space: real estate. Apollo has nearly $9 billion in real estate funds. Comparably, Blackstone and Carlyle have significantly greater exposure to real estate.
I have already expressed my bullish views on both Blackstone and KKR. I am now adding Apollo to this group. While I am bullish on Blackstone and KKR over the long term, I believe a rising interest rate environment could prove somewhat challenging for both Blackstone and KKR. Contrastingly, I believe Apollo is well-positioned to benefit from rising rates, due to its significant exposure to floating rate securities and newly launched Apollo Short Credit Fund. Investors could benefit from owning Apollo, in addition to another alternative asset manager as a way to increase diversification and reduce risk.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in APO over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.