As Apollo's cash cow plans IPO, questions linger on ties

Leon Black

Leon Black's golden goose is going public.

Athene Holding Ltd., the insurer that accounts for about one-fourth of the asset management fees earned by Mr. Black's Apollo Global Management, filed for an initial public offering in which some investors plan to sell 23.8 million shares for $38 to $42 apiece. At the high end of that range, an IPO would raise $997.5 million and value the Bermuda-based company at about $7.8 billion, with more than 185 million shares outstanding, according to a regulatory filing Monday.

Buyers will get a stake in a company that expanded into one of the top fixed-annuity providers in the U.S. in less than a decade, generating $437 million of net income in the first nine months of 2016, up 37% from the year-earlier period. Profits have been fueled by returns from a $72 billion investment portfolio that includes an unusual amount of junk-rated debt and structured securities for an insurer. Apollo helps oversee one-fifth of Athene's investments, including a slug in Apollo-related funds and businesses — casino companies, a cruise line and real estate.

Apollo counts Athene as one of its top holdings, with a stake that's expected to be more than 10% after the IPO, and reaps hundreds of millions of dollars in annual fees for helping to manage the insurer's investments. That makes the relationship between the two firms close enough to have been questioned by regulators, investors, bankers and lawyers who've worked with Athene who asked not to be identified discussing clients.

“This is characteristic of many private equity firms pushing limits, here into incestuous financial relationships, with the general goal of increasing aggregate fees to the firm,” said Lawrence Cunningham, a professor at George Washington University who specializes in corporate governance.

Spokesmen for both Apollo and Athene declined to comment. Athene's bylaws require the insurer to have a conflicts committee to review transactions between the two firms. The panel includes Hope Taitz and Marc Beilinson, who have served on the boards of other Apollo-related entities. The relationships between Apollo and Athene have benefited shareholders and policyholders, according to people with knowledge of the firms' thinking.

Mr. Black, Apollo's chairman and chief executive officer, told investors at a 2012 conference that Athene is among Apollo's “hidden assets.” Apollo co-founder Mark Rowan said a year later that Athene “is the perfect vehicle, in many ways, to handle illiquidity.”

Compared with other sources of funds for private equity firms, Athene can be a durable source of income. Rivals including Blackstone Group LP have watched Apollo's success with Athene and have considered creating their own insurance firms, according to people familiar with their planning.

“Athene has really come out of nowhere,” said Dan Jones, a managing director at FTI Consulting who focuses on the insurance industry. “Their growth has been remarkable.”

At the upper end of the price range, Athene would be valued at about 10% above the book value, a measure of assets minus liabilities, as of Sept. 30. It would be more than 40% higher than the metric at the end of 2015. Older and larger annuity sellers, such as Lincoln National Corp. and American Equity Investment Life Holding Co., trade below book value, as does MetLife.

Athene and Apollo will stay connected after an IPO. Athene has said in regulatory filings that Apollo and related entities will keep 45% of shareholders' voting rights. Athene will not receive proceeds from the sale, according to the filing. Selling shareholders include a unit of the C$154.4 billion ($114.1 billion) Ontario Teachers' Pension Plan, Toronto, and the $128.2 billion Texas Teacher Retirement System, Austin, both of which will retain part of their holdings.

In a filing, Athene said that Apollo's interests “may conflict with those of other shareholders and could make it more difficult for you and other shareholders to influence significant corporate decisions.”

The ties between the companies have already drawn the anger of investors in an Apollo entity. Athene this year loaned $175 million to help Apollo combine two of its mortgage ventures. At the same time, the insurer took on $1.1 billion worth of residential mortgage-backed securities, a bundle of which were below investment grade, as part of that deal. A group of shareholders of an Apollo entity sued, alleging Athene was among companies that “aided and abetted” a breach of fiduciary duty, according to court documents.

The loan was repaid. The lawsuit is ongoing. The Apollo entity said it will vigorously defend itself.

Apollo doesn't usually disclose Athene's contribution to its bottom line. But in the first nine months of 2014, Athene generated $408 million, or 32%, of Apollo's revenue, according to an investor presentation. Last year, as the owner of Athene's investment management arm, Apollo collected fees of more than $225 million, according to Athene's IPO filing. That's compared with Apollo management fees of $912 million last year.