An Easy Way To Invest In Private Equity
Contents
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INTRO
Let's explore a solid way to potentially get a 100x return - by investing in private equity. Companies that have not yet gone public are a goldmine. And at the same time, they also yield significant risk of default.
So, how do you navigate those troubled waters? How do you invest in private equity without too much risk?
That’s what we'll touch upon in this brief write-up. Let’s start with the basics.
What Is Private Equity Investing
Private equity investing is basically putting money into companies that aren't listed on any stock exchange. They're privately held companies, owned by individuals or other companies. Gaining an ownership stake in privately held companies typically requires direct talks and negotiations with the owners of such entities. But in ultimately gaining an equity stake in such companies, you’re giving them cash in exchange for a piece of ownership in the privately held companies.
Take SpaceX, for example, Elon Musk's space company. It's a big name, but you can't just buy their shares like you would with, say, Apple. These private companies stay off the stock market to keep control over what they do.
Sure, they might go public one day, but until then, they're hidden from the public. Their financial statements are confidential, and there is no way for the average investor to invest in them.
Or is there?
Private Equity Companies
Private equity firms like KKR, the Carlyle Group, and Apollo specialize in investing in private companies. Sometimes they'll swoop in and buy out struggling companies, using borrowed money to seal the deal. Note that using borrowed money increases their leverage and magnifies their returns. On the other hand, it also increases the risk to some extent.
Ultimately, their goal is to turn a tidy profit, either by selling their stake in these companies later on or by taking them public after restructuring them, shaking up the management, and/or making improvements to the company's operations in some way. I don’t want to go into these details too much. But let’s just say they buy low and sell high.
But, why should you care? Because these companies - KKR, the Carlyle Group, and Apollo - are actually publicly traded companies that invest in other privately held companies. As such, they are therefore an indirect way to profit from private equity markets.
Here is a list of the top players in private equity.
"Dry powder" refers to funds that have been committed by investors but not yet invested in any companies.
Now, let me introduce my favorite.
Enter Apollo Global ($APO)
Money makes the world go around. So let me start by showing how much money they manage.
ResearchAndMarkets.com reports that the Global Private Equity Market was worth $645.2 billion in 2022. Refer to this article by Yahoo Finance. It's projected to continue growing steadily until 2028, boasting a Compound Annual Growth Rate (CAGR) of 13.45%.
Now that we got that out of the way, let me tell you more about Apollo.
Apollo Asset Management ($APO) is a New York City-based multinational private equity firm with a focus on private credit and ancillary verticals across the financial services industry, including alternative assets, insurance, annuities, asset management, etc.
As reflected in the pie chart above, Apollo has a solid stake within the private equity markets. It also has a sizeable stake in the private credit industry as well. Apollo is the leader in the private credit industry, which is expected to grow at a CAGR of 15% and be worth $40T.
To provide clarity with further explanation on the 3 business segments highlighted above.
Credit: Apollo's Credit business focuses on lending money to different types of companies, helping them grow. They offer flexible solutions with competitive costs, which companies like because they're tailored to their needs and come with certainty and speed.
Equity: In their Equity business, they work with companies they invest in to help them grow. They're flexible and hands-on, aiming for good results for everyone involved, including local communities and investors who get bigger returns.
Real Assets: Apollo's Real Assets business invests in things like real estate and infrastructure projects around the world. They look for good opportunities to invest in these areas, using their expertise to make sure they do well even when markets change.
Apollo has grown beyond the confines of traditional private equity. It's developed a solid origination and distribution infrastructure to become and remain the leader in the ever-growing private credit market, which complements its existing private equity segment. Its insurance arm, Athene, provides retirement services. Future retirees regularly pay money to Athene in exchange for future annuity payments. Athene takes the proceeds and invests them in investment grade loans, a process that is run through the asset management arm.
The company's combination of both asset management and its private credit arm effectively allows it to charge higher fees and be resilient to high interest rates. It relies heavily on annuities, which are positively correlated with interest rates. This model also enables Apollo to charge a lot in fees. Learn more in this very informative and insightful Seeking Alpha article: Apollo is the Definition of Growth at a Reasonable Price.
As a whole, Apollo's business model takes full advantage of Athene's rapid growth in assets (retirement services) and allows Apollo to charge higher fees than most peers. Expecting to double assets under management (AUM) and net income over the next 3 years, Apollo also pays out a 1.85% dividend. It's deploying capital quite well with a ROIC of 19.2% and an ROE of 50.1%. It's also poised for continued growth in terms of revenue, earnings, and equity.
Conclusion
“We have created a differentiated model and built a strong team to lead within an evolving, high-growth alternative asset management industry.”
- Marc Rowat (Chief Executive Officer)
I believe the above quote by Apollo's CEO says it all. Apollo Global Management is an under-covered and under-appreciated alternative asset manager with high growth prospects. They invest in both private and public markets, covering credit, equity, and real assets, aiming to generate extra returns.
And their plans are big.
It is difficult not to be excited about Apollo. Its organic growth is driven by two fundamental facts - population aging and relatively high interest rates that make annuities attractive. There are also going to be plenty of inorganic opportunities to drive growth. Backed by tailwinds such as indexation & the difficulty of active investing, they believe more and more people will want to invest in private equity and alternative investments. And if that’s really the case, Apollo ($APO) stock will likely go higher.
Apollo Global stock has delivered a 28% annual IRR and almost doubled since June 2021. While Apollo is perhaps fairly valued now, its strong organic growth should deliver stock appreciation of close to 20% based on management's guidance.
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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.
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