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AP Alternative Assets (AAA.AS)

June 26, 2012
AlphaVulture

AlphaVulture

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AP Alternative Assets is a closed-end limited partnership that was established by Apollo Global Management in 2006. Apollo describes itself as contrarian value-oriented investors and a leading global alternative asset manager. The company has 75 billion of assets under management. AP Alternative Assets invests in and alongside various Apollo funds and is relative small with a NAV of 1.6 billion at March 31. What attracted my attention is that the fund was trading at a 46% discount to NAV at the end of April.

Fund holdings

AP Alternative Assets provides a nice overview of it’s holdings in the latest quarterly report and has a good presentation online as well that includes the diagram below.

nav.png

The fund has 90% exposure to North America, and 9% exposure to Europe and is diversified across various sectors. The private equity portfolio is quite mature and 50% of fair value is publicly traded and other 28% has filed S-1 registration statements with the SEC making it likely that those companies will go public soon as well. The table below gives an overview of the companies in the private equity portfolio:

companies.png

Current net asset value

Unfortunately the disclosure on the details of the portfolio is poor. AAA does not disclose how much shares it owns, and in it’s quarterly report it only provides a fair value estimation for positions bigger than 5%. In the publicly traded part of the portfolio the only company that meets that criteria is Rexnord with a fair value of $164 million at 31 March 2012, but since that date the share price has dropped 38%.

Four out of the five other public companies also have seen their share prices drop with an average of 14.4 percent. Since we don’t know how big the public debt part of the portfolio is or how the other positions are exactly sized it’s hard to calculate what the current NAV is. We also have to worry that the private part of the portfolio has seen similair declines in asset value. The S&P 500 is down 7 percent since 31 March, and given the leverage that the companies employ it’s probably reasonable to assume that this part of the portfolio could also be down 15 percent since March.

If we would use these assumptions we would get the following asset value:

NAV/share @ March 31: $18.55

Effect of latest tender offer: +$0.53

Total: $19.08

Loss in value: -15% (?)

Result: $16.22

While I think that the asset value has gone down since the latest quarterly report the share price has gone up a bit and is now at $10.33, resulting in a 36% discount if the quick and dirty math above is correct. I’m afraid though that this could be a bit on the positive side since it’s ignoring the leverage that the fund itself has, although on the other hand it’s also ignoring that the fund not only has positions in equity but also in bonds (21% is in debt investments, and those should have a lower volatility).

Conclusion

Because I’m worried that the discount to NAV might have been getting significantly smaller the past months I’m at the moment keeping AAA on my watch list. The average discount for the past 3 years has been 48%, so I might be wrong about what happened to the portfolio value, or I might get an opportunity soon enough again.

At an almost 50% discount I think the fund would be a compelling investment. Just the discount alone would be pretty good, but there are some more interesting things that I have skipped in this write-up since I’m not going to buy at the moment. But if the tender offer line in the valuation above wasn’t a hint enough: the fund is aggressively buying back it’s own shares and reducing debt. Because the private equity portfolio is quite mature there should be a lot of cash flows in the next few years to reduce debt and either close the discount or create a lot of value by buying back shares.

Disclosure

No position, might initiate one in the future


Rating: 2.8/5 (4 votes)

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