Buyout barons enter their spray-and-pray era
Corrects the name of KKR's captive insurer to Global Atlantic from General Atlantic in paragraph 3. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, Aug 2 (Reuters Breakingviews) -Right now, private equity is a game of spending money as much as making it. Quarterly earnings this week showed Apollo Global Management APO.N and KKR KKR.N ramping up investment, an industry-wide turn that’s plumping up the portfolios of companies like Ares Management ARES.N that lend alongside their deals. Some bets, though, seem underwhelming – and shares in big asset managers were tumbling on Friday. That’s fine, as long as buyout bosses’ contrarian view of the future proves correct.
Apollo put a record $70 billion to work during the three months ending June 30. Blackstone BX.N and KKR nearly doubled their capital invested in the first half of the year, compared with a relatively glum 2023. All this activity generates a lot of income, sometimes from multiple angles. Apollo buys, lends, and also arranges and advises on lending by others, which generated $208 million in fees. Credit specialist Ares grew management fees by 17% to $722 million. At its publicly-traded subsidiary, Ares Capital ARCC.O, fewer new loans were twinned with repayments of old ones, a change indicating an influx of fresh deals in contrast from the preceding quarter.
Amid this frenetic activity, there are signs of strain. Apollo and KKR, for example, both own insurance companies, which sometimes invest in their parents’ own deals. KKR’s insurer Global Atlantic just invested in a $2 billion residential real estate transaction that, at first, will return less money than it costs to fund clients’ policies. Apollo’s insurer Athene reported that its “alternative investments” have been earning about half the 11% return it hopes for.
To executives like Apollo boss Marc Rowan, holding on to strategically important investments is a way to grow fees and increase market share. KKR argues that getting in position with tricky deals now sets up better returns later. Buyout firms are, after all, paid to look past quarterly gyrations and take risks that others might not. Moreover, their earnings are still mostly strong, especially KKR’s 49% year-over-year profit bump this quarter.
The “trust me” message is a common theme in private equity now, including at $1 trillion goliath Blackstone. There are as yet few obvious catastrophes - Ares Capital’s borrowers are covering their interest payments as comfortably now as a year ago. At Athene, alternative investments are a tiny part of the overall investment portfolio. At the same time, small pockets of underperformance matter. Buyout firms can’t afford not to sweat the small stuff.
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CONTEXT NEWS
KKR on July 31 reported $972 million in adjusted earnings for the second quarter, a measure that reflects profit from its asset management and insurance operations that is theoretically available to be paid out to shareholders. The result represents an increase of 49% year-over-year. The firm invested $37 billion in the first half of the year, nearly double its rate in the same period of 2023.
Apollo Global Management on Aug. 1 reported adjusted earnings that were flat year-over-year, at a little over $1 billion. The result was affected by declining earnings at its insurance business Athene, which saw both a shortfall in the performance of its equity investments in affiliated companies, and an increase in its cost of funds – broadly meaning its insurance policies. The firm put a record $70 billion into new investments in the quarter.
Ares Management on Aug. 2 said that its comparable income metric, after-tax realized income, grew 14% year-over-year to roughly $332 million. Capital deployed into investments hit its second-highest level ever of $26 billion.
KKR is back to ramping up investments https://reut.rs/3LPU2Pv
Ares Capital's lending is increasingly about new deals https://reut.rs/4cdlO3j
Editing by John Foley, Sharon Lam and Pranav Kiran
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