IPO Watch: Day Two... Apollo Brings Some Concern (APO, KKR, BX, FIG)

Apollo Global Management LLC (NYSE: APO) is looking like a bit of a dud of an IPO.  Some will think that this could temper some of the excitement around private equity and the ambitions of coming public.  What it should actually bring is a lesson to be learned either from greed or miscalculation.

Apollo shares debuted on Wednesday after a $19.00 price for more than 29.7 million shares as the private equity group sold more shares at a higher price than expected.  The IPO for Apollo was 21.5 million shares being sold by the company and more than 8.2 million shares being sold by holders.  We were originally expecting that Apollo would price between $17.00 and $19.00 per share after the price range had been cut from $18.00 to $20.00.  Due to the recent stock market rallies, the reports were out that the deal became oversubscribed with strong demand from retail and institutional investors.

Kohlberg Kravis Roberts & Co. (NYSE: KKR) is now public in the U.S. and its market cap is more than $11 billion.  The Blackstone Group LP (NYSE: BX) is worth some $20 billion in market cap, and Fortress Investment Group LLC (NYSE: FIG) has a market cap of about $2.7 billion.  After the drop seen yesterday and today so far, Apollo’s market cap is about $6.5 billion.

New investors may want to blame the private equity firm itself or  the underwriters.  The shares being sold by the company were about 20% more than what we were expecting.  While the net proceeds of the company’s portion were to fund growth and for general corporate purposes, it is easy to play Monday-morning Quarterback here and say that both the private equity firm and that the underwriters should have known better.  They should have.

How many days of the last two weeks have been up in the markets?  Almost all of them.  Stocks were up more in this first quarter than they have been in years.  That alone doesn’t signal any major top without having a crystal ball.  Still, the markets feel complacent now and stocks are starting to look at least near-term overbought.

Investors need to understand that this IPO had been cut off by market conditions since all the way back to 2008 and maybe even before that.  The market kept telling the company that another public private equity firm was not necessary at the time, and the higher share count eliminated what would have otherwise likely been a better post-IPO debut.  Imagine what happens now if investors decide to start taking broader stock market profits or if the market finally gets spooked near-term by one or more of the myriad of geopolitical news events.

Apollo’s 360.9 million shares outstanding gives the company an ‘at-IPO valuation’ of about $6.85 billion and we know today that this is lower now to about $6.5 billion.  The most recent figure seen is that Apollo’s assets under management were about $67.6 billion.  We would expect that Apollo and its other private equity peers will show higher valuations for the quarter ending today due to the stronger stock market.

What Apollo gets here from this IPO is liquidity for its partners and founders.  It also gets a cheaper currency to use to attract talent as well.  We do not fault the company for coming public.  It was in the best interests of the holders and it allows investors to decide whether they want a piece of the partnership.  We do not even really question the valuation today as it is in-line with or even at a discount to some peer group financial metrics.  Where we have an issue is over the bumped up share count in the initial sale.

Investors have to assume that more shares will be sold in six-months or at some point afterwards as lock-up expirations come into play.  This higher share count was either greed or an extreme miscalculation.  Regardless of which case it is, professionals of this caliber should know better.

Apollo shares were down close to 1% at $18.05 in early afternoon trading and it seems that shares have barely breached the $18.00 level on the downside earlier today.  Had it not been for the higher share count it is our opinion that investors and critics would be talking up the success of this IPO rather than pointing out the problems of this IPO.

JON C. OGG