Apollo Global Management Inc. is finding that its business buying leveraged loans and bundling them into bonds has grown so big, it’s getting harder to grow much larger.
Instead it’s seeding new, smaller players that put together the securities known as collateralized loan obligations, according to people with knowledge of the matter. Along with an affiliate, it has helped start Gulf Stream Asset Management and another yet-to-be disclosed new CLO firm.
Apollo is talking to portfolio managers looking to launch their own firms, and has already given term sheets to five potential startups that may turn into investments, the people said, asking not to be named discussing private transactions. The firm is looking to get around a problem for the biggest asset managers: the Wall Street dealers that sell loans to CLOs are reluctant to offload too many loans to one firm. Apollo also views seeding new managers as an attractive business, the people said.
The great CLO gold rush has been on since the middle of this decade, as the size of the market has more than doubled since 2010 to around $670 billion. Established portfolio managers are quitting their big firms to set up their own shops. Hedge funds are acquiring startups to get into the business. Investors that stayed out of the business for years are starting to jump in.
They’re after the stable fee income they can get from buying loans made to junk-rated companies and packaging them into bonds that, through the alchemy of securitization, can carry ratings as high as AAA. Fees can equal around 0.35% of a fund’s assets, plus bonuses for performance, and investors often consent to keep their money tied up in CLOs for six or seven years.
Meanwhile firms like Apollo that have been in the CLO business for years are running into size limitations: Wall Street dealers often prefer to spread the debt among multiple fund managers. That helps ensure there are enough parties that can later trade the loans among themselves, a step that two CLOs at the same firm often won’t do. A CLO management firm that’s too big might have trouble getting enough loans to build its products.
Apollo’s credit business has mushroomed, to $208 billion of assets under management as of the end of September, up from $28 billion in 2011 and dwarfing its $78 billion of private equity funds. It has multiple credit funds that buy CLO securities themselves, and seeding managers makes it easier for those funds to find bonds to buy, the people said.
When an established asset manager invests in a startup, it could get somewhere between about 5% to 20% of the new firm’s fee revenue, according to one of the people.
To get Gulf Stream up and running, Apollo is working with Redding Ridge Asset Management, an independent firm created by Apollo that is closely affiliated. Redding Ridge is providing Gulf Stream with a multi-million dollar credit line for daily business, and is offering processing and risk management services, the people said. For Gulf Stream’s first few deals, Apollo is investing in a sort of credit line, known as a warehouse, that CLOs use to finance loans they buy before bundling them into bonds, the people said. It is also buying bonds and equity in those initial CLOs.
An earlier incarnation of Gulf Stream has worked with Apollo before. In 2011, the private equity firm bought the CLO manager, an established player in the industry, and absorbed it. The founder of that firm, Mark Mahoney, joined Apollo, and then retired. He has now started up a new CLO firm with the same name as his prior company, with Apollo’s assistance.
