CPP Investments Reviewing Apollo Global Management?

 Benjamin Robertson of Bloomberg reports Apollo faces Canada pension review as stain outlasts Black:

One of the world’s largest private equity backers may be pulling back from Apollo Global Management Inc. as the buyout giant struggles to move past the taint of a co-founder’s ties to convicted sex offender Jeffrey Epstein.

The Canada Pension Plan Investment Board, which manages $500 billion, is weighing whether to keep investing with Apollo, according to a person with knowledge of the Toronto-based fund’s deliberations. The CPPIB is disappointed with Apollo’s fund performance and the firm’s handling of former Chief Executive Officer Leon Black’s relationship with Epstein, the person said.

The Epstein scandal precipitated a leadership shakeup this year that put co-founder Marc Rowan at the helm of Apollo. Black stepped down in March, several months earlier than expected in an attempt to quell the attention. Co-founder Josh Harris, who advocated for Black’s exit, has relinquished his day-to-day role at Apollo.

Losing the CPPIB would mark a major setback in a tumultuous year for Apollo marked by mounting scrutiny over Black’s business dealings with Epstein. Some investors, including the Pennsylvania Public School Employees’ Retirement System, decided to pause investments with the firm and analysts openly questioned Apollo’s corporate governance.

Asked about the CPPIB, an Apollo spokesperson said: “There have been no concerns expressed on these topics recently. We have longstanding relationships with approximately 1,700 limited partners, our fundraising activity has been strong and our corporate governance structure is industry-leading.”

The CPPIB has almost $3 billion of capital committed to Apollo’s private equity funds, and is one of the biggest investors in the firm’s most recent flagship buyout vehicles, according to data from the pension fund and Bloomberg.

The firm’s 31-year private equity returns are 24%, when taking into account fees, the Apollo spokesperson said. Apollo’s latest flagship fund, Fund IX, had a net internal rate of return of 26% as of the first quarter.

Representatives for the CPPIB declined to comment.

The Canada fund has had ongoing conversations with Apollo about corporate governance issues and remains concerned, said the person, without elaborating. The outcome may impact CPPIB’s willingness to invest in Apollo’s next flagship fund, which will likely begin fundraising in late 2022, the person said.

The organization’s review of Apollo is part of a broader assessment of outside managers, said the person. The CPPIB is considering cutting the number of core private equity fund managers to between 35 and 40 from the 50 it currently has.

It’s also seeking to back 10 to 15 up-and-coming managers as part of a new strategy. That would initially involve around $1 billion of commitments, the person said. Any changes would take several years and be made in line with new fundraising opportunities and redemptions from existing holdings.

Apollo has been doing damage control for more than a year, as one revelation after another about Black’s business ties to Epstein spilled into public view, unsettling clients and shareholders. Black paid Epstein at least $158 million for personal tax advice. An independent review found no evidence of wrongdoing by Black. Epstein was found dead in his jail cell in 2019 while awaiting trial.

Even as Apollo tries to turn the page, Black was back in the headlines last week, accused of defamation and gender-motivated violence in a lawsuit filed by a woman with whom he claims he had a consensual affair. Black called the claims in the suit “categorically untrue.”

Like many of you, I read this article and I can't say I was terribly impressed.

Whenever you read these articles, you should immediately stop and reflect:

  • Was this information purposely "leaked" to Bloomberg? (I doubt it but it's possible)
  • Does someone have an axe to grind and reached out to Bloomberg to discuss this supposed review? (more likely)

Whatever the case, nobody working at CPP Investments should be making comments to any reporter on a review of any manager, especially a high profile one like Apollo.

Apollo Global Management is a premiere alternatives fund which is part of an elite handful of funds which every pension, endowment, and sovereign wealth fund invests in. It is best known for its credit funds but it invests across the alternatives spectrum.

When they say they have relationships with "approximately 1,700 limited partners," they mean it.

And these aren't just any limited partners, they are the cream of the crop, led by organizations like CPP Investments which has almost $3 billion of capital committed to Apollo’s private equity funds, and is one of the biggest investors in the firm’s most recent flagship buyout vehicles.

There's a reason why CPP Investments and other large Canadian pensions invest in Apollo, the firm prints money. Apollo’s latest flagship fund, Fund IX, had a net internal rate of return of 26% as of the first quarter and the firm's net IRR going back 31 years is 24% (again, that's net of all fees).

 Leon Black's downfall

What about Leon Black and his alleged relationship with Jeffrey Epstein?

Bob Ivry of Town & Country wrote a comment recently, Leon Black in Winter, where he goes over the financier's alleged relationship with Jeffrey Epstein and a lot more.

I'm not going to lie, there are a lot of things that don't look good in all these allegations and I'm pretty sure Leon Black (and Apollo's investors) wish he never met Epstein (I'm sure Bill Gates wishes the same).

The alleged relationship with Epstein left a mark and Black was forced to step away from the firm he co-founded. It's not the way he wanted to end an incredible career but with or without Black, Apollo remains a powerhouse.

CPP Investments and its PE portfolio

I wouldn't be surprised if some of the things in the Bloomberg article are right.

Like the fact that CPP Investments is looking to limit its PE partners.

The CPP Fund invests in the best private equity funds all over the world, but it might be time to conduct a full review and see whether they can cut their core managers down to 35-40 from the current 50.

I'm speculating, have no idea if this is necessary but sometimes it makes sense to have fewer core managers where you write bigger tickets for co-investments where you pay no fees.

Will CPP Investments cut Apollo? I doubt it, Apollo is in a league of its own when it comes to credit investments and replacing a fund like that is next to impossible. 

But no fund is indispensable and if there are reputational issues at stake, even an Apollo can get cut. 

If that happens, it will send shock waves across the pension industry, especially here in Canada where all the big pensions are invested in Apollo.

All this to say, we can speculate but until I hear it from John Graham's mouth, I don't believe anything I read.

What else? Apparently CPP Investments wants to invest $1 billion in 10 to 15 emerging managers.

Seeding any manager is tricky but I think CPP Investments is in an excellent position to do so and build great long-term relationships with new managers which can go on to become leaders in their industry.

Having a seeder like CPP Investments is like having the gold standard of seeders, patient, long-term capital with an extensive network and long investment horizon. 

Below, Josh Harris, co-founder of Apollo Global Management, will step down from his day-to-day role after being passed up for the CEO position. Bloomberg’s Sonali Basak reports.

Update: On June 18, Bloomberg reports a brawl between billionaire co-founders sidelines one of its own:

Three months after Josh Harris made his failed pitch to take Leon Black’s crown atop a $455 billion investing juggernaut, Black’s chosen heir is in charge -- and Harris is on the outs.

The behind-the-scenes drama between Apollo Global Management Inc.’s billionaire co-founders keeps brewing, with ramifications for investors as the company reconfigures its governance this year. Publicly, Harris has endorsed the decision to elevate co-founder Marc Rowan to chief executive officer. Privately, he’s being sidelined, even as he remains a “key man” in Apollo’s flagship fund -- meaning investments could stall without him.

People close to the company, speaking on the condition they not be identified, said Harris has relinquished day-to-day handling of operations. He’s less involved in dealmaking than before, with underlings generally seeking his sign-off for only the largest transactions. Outside Apollo, he’s been shopping for a house in Florida to potentially serve as his primary residence, which would lower his tax bill if he starts to draw down the wealth he’s amassed at the company.

Read the entire article here. Clearly if Josh Harris steps away, it could trigger a key man clause, giving him a lot of leverage. I also embedded another Bloomberg clip below looking at the behind the scenes drama.