Fly With Apollo

In their recent earnings call the top executives of Apollo Global Management APO outlined some areas where they see opportunity in the years ahead. Benzinga covered this last week in an article revealing their thoughts on credit, energy and real estate services. The management team at Apollo can trace their history in the markets all the way back to Michael Milken and Drexel Burnham they have built a wildly successful private equity and alternative investments firm. Their advice is worth listening to and best of all, Apollo has some publicly traded entities that allow investors to take advantage of their insights and ideas.

Apollo Investment AINV invests primarily in various forms of debt investments, including senior secured loans, subordinated and mezzanine investments an equity in private middle-market companies. Apollo made the case for investing in illiquid direct loans to middle market companies and this is the perfect vehicle for investors who want to take advantage of the opportunities in this marketplace. At years end, the portfolio consisted of loans and investments in 101 companies worth a total $3.1 billion. Management has been taking steps taken several steps to prepare its balance sheet for higher interest rates by having a significant portion of its portfolio in floating rate assets and issuing fixed rate debt. They have also repositioned the portfolio over the past eighteen months into more secured debt and think this has made the portfolio better able to withstand market and economic volatility.

AINV believes, like the management team at the parent company, that there continues to be a significant illiquidity premium for direct lending to middle market companies. They also share the long term view of the energy markets as they recently established a Houston based energy team to take advantage of the opportunities the firm see in shale gas related investments. They will focus on secured lending against North American producing upstream oil and gas reserves with an emphasis on significant asset coverage using downside case assumptions. They will downside lend against proved developed producing reserves rather than proved un-developed reserves or acreage as part of a focus on what management calls exploitation not exploration. Apollo Investment told investors they think they can earn mezzanine like returns of 15-25 percent on the risk equivalent of senior secured notes in this sector.

Apollo investment management allows investors to participate in what Leon Black and Joshua Harris identified as two key investment trends. The Business Development Company has significant exposure to the illiquid direct lending to middle market companies and is building a larger portfolio of investments in the shale gas field. The shares are currently priced at just 90 percent of asset value and are yielding 10/11 percent right now, so this could be a very attractive entry point for long term investors who want to invest like the private equity pros. Insiders think so as two directors as well as the President and the CFO of AINV have been buyers of the stock so far this year.

Apollo also remains active in the real estate markets through both debt and equity investments. Mr.Black told investors last week that “we remain active in real estate debt and during the first quarter the funds we managed deployed approximately $400 million in first lien mortgage loans, mezzanine loans, and CMBS. On the equity side, we remain opportunistic across property types and geographies." Once again Apollo has a publicly traded vehicle that can allow investors to take advantage of their real estate expertise.

Apollo Commercial Real Estate Finance ARI is a commercial mortgage real estate investment trust that primarily originates, invests in, acquires and manages senior performing commercial real estate mortgage loans, commercial mortgage-backed securities and other commercial real estate-related debt investments throughout the U.S. The company's relationship with Apollo Global allows them take advantage of their long standing and deep relationships with brokers, global investment banks, insurances companies and CRE owners to make loans most other REITs will never even see. The shares are trading at about 90 percent of book value and have a current yield of 9.74 percent.

Apollo Global has a tremendous track record in both private equity middle market loans and investments as well as commercial real estate. These two stocks give outside investors a chance to invest alongside one of the most successful investment firms in the world today.