The recent earnings call from Apollo Global Management (APO) was almost a field guide to making money in the markets for 2014. Co-founders Leon Black and Joshua Harris were relatively open about where they see opportunities to put money to work at very high rates of return this year.
Black opened the call by telling investors, “The first opportunity is the massive capital investment needed in the energy sector and the second opportunity is the shifting financial services landscape, not only in Europe [but also] in the US.”
Black also addressed the fact that generous asset valuations are continuing to drive profit taking across much of the portfolio. He told shareholders, “The last area I would like to highlight today relates to realizations. At a conference in the spring of last year, I was somewhat infamously quoted as saying that we were selling everything that was not nailed down. Here at Apollo since then it’s no secret we have been very active in monetizing the existing investments of the funds we manage, but even I didn't foresee the remarkable pace of the activity to come.”
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The firm remains active in the real estate market, as well. Gary Stein, the head of corporate communications, said “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.
"Approximately 70% of our US private equity real estate funds base capital is now committed, and in Europe our joint venture with Ivanhoe Cambridge in prime residential has grown to more than $500 million of invested capital with the recent purchase of two multifamily assets. Additionally, our commercial mortgage REIT, ARI, just raised approximately $150 million of additional equity last week."
Black also talked about the company's focus on the credit markets as they moved away from liquid credit products to less liquid investments.
“Likewise, that's our approach in credit. When you look at the yields today for investment grade and how much there has been a flight to safety and you look at where senior loan market has been and you look at where the high-yield market has been, they are really at historic lows.
"What we have tried to do in building our credit business, which is now over $100 billion, is to create, if you will, a Chinese menu of different products across the yield and liquidity spectrum. We don't want to give up safety, but by going more complex, by being more illiquid in a lot of different types of products, we think that we can generate a real premium to the investment grade, more liquid cycle.“
Later in the call, Black added “Credit, credit, credit. I mean, I think the big opportunity we have is that our institutional clients really are starting to recognize that the investment-grade markets, the high-yield markets, the tradable markets, the government markets, the mortgage markets are basically overvalued. And that the illiquid, more idiosyncratic, non-rated, directly-originated markets that we are playing in area providing the best risk return.
"The equity markets are aggressively priced, the private equity markets are very aggressively priced, and the credit markets are very aggressively priced, the trading credit markets. So if you are a pension fund, if you are a sovereign wealth fund, if you are a high net worth individual, you are looking for a place to hide in what is otherwise an overvalued environment and sort of illiquid, opportunistic credit is really, in my opinion, the best opportunity in the world right now. And so that there is a lot of money.”
Harris addressed the huge opportunity the firm sees in the energy markets. He told investors, “In terms of the energy sector, particularly here in the US, the US shale renaissance has created literally over a $2 trillion capital need here in the US where there are very high IRR, return on assets, ability and there's not enough capital and expertise to be able to exploit it in the short term. If you think about the S&P energy sector, it's less than $2 trillion. It's higher market cap of that sector.
"And so even for companies that are as large as the integrated oil companies, they have to not pursue IRR opportunities as great as 25% or 30%, because they just got too much other capital need at higher return. And so the crumbs that are falling off that table in the upstream energy sector here in North America as the US goes -- as the US and Canada go from being higher-cost producers of gas to the lowest cost in the world, where literally you are competing with people like Qatar and Saudi Arabia and in oil you're going through very, very high costs to the middle, that's creating an enormous opportunity.”
What The Investor Can Do
Investors should consider taking advantage of this advice by focusing on the transformation of the banking industry, and investing in small banks that will be part of the M&A wave that is transforming the banking landscape and shares of energy companies with operations in the North American shale fields.
The illiquid direct lending credit markets can be accessed by investing directly in Apollo Investment Management (ASDAQ: AINV), a business development company that makes exactly those types of loans.
The shares trade at just 92 percent of net asset value right now and yield 10.11 percent. Investors can also get their money into the real estate markets alongside Apollo by buying shares of Apollo Residential Mortgage (AMTG) and Apollo Commercial Real Estate (ARI). Both yield more than nine percent and trade at a discount to their net asset value.
The industry continues to present opportunities for value-investors who can weed through the daily noise of the market. A perfect example is the3 Low Risk, High Yield Stocks that Tim Melvin identifies as the trades of the decade.
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