Former CEO, Apollo Global Management
David Rubenstein in conversation with Leon Black at SuperReturn International 2019
Don't miss the conversation between the two giants of the private equity industry on the growth and development of Apollo and where they see the drivers of growth and opportunity are across market cycles.
Interviewer: David Rubenstein, Co-Founder & Co-Executive Chairman at The Carlyle Group
Interviewee: Leon Black, Chairman and Chief Executive Officer at Apollo Global Management.
Find more interviews and thought-leadership content on SuperReturn365: https://goo.gl/AYarjE
About Leon Black
Leon Black, the chairman and CEO of Apollo Global Management, has discussed the firm’s investment strategy and market outlook in several public appearances. Black described Apollo’s approach as value-oriented, stating that the firm aims to buy good companies at low multiples and goes to “extraordinary extent not to lose money.” He noted that about 80% of Apollo’s capital is permanent or long-duration, which he said removes pressure to sell. Black also commented on the economic cycle, saying in 2019 that the U.S. was “10 years into an upcycle” and that “at some point, the music’s going to stop,” adding that a downturn might not occur until after the next election. He credited the Trump administration with extending economic growth and keeping inflation down. Black has also spoken about his philanthropic activities, which he said were inspired by his father, a former clergyman, and his mother, an artist. He said he supports cancer research, the arts, and a series of biographies on Jewish lives published with Yale University Press. Black described philanthropy as “very much here to stay” and said that a more robust economy would help it grow. He added that his training in private equity, which he described as a “portfolio approach,” influences his giving.
Transcript (35 segments)
I
Interviewer0:11
Everybody here is probably fairly familiar with Leon. Thanks for doing this. Now Leon, a few years ago at a conference you famously said you were going to sell everything that wasn't nailed down. Now as it turns out, the market still went up. So was it premature to say it was a good idea to sell, and did you sell everything that wasn't nailed down?
L
Leon Black0:36
That sounds like a trick question to me. First of all, it's great to be back at SuperReturn. This is year number 11 for me, the first one with actually good weather in Berlin. And it's great to be up here with... We could counter that. You know, if you've ever been to a psychiatrist and you ask them a question, 'What do they think about something?' they always come back and say, 'Well, what do you think about it?' So I thought maybe I could do the same. Nothing wrong with psychiatry. Or we could go the route of you asking about The Scream and I ask you about the Magna Carta. But The Scream costs a lot more than Magna Carta. But I thought since the chips fell this way, I would go with the setup that has been arranged with you asking all the questions. But I do reserve the right to switch over to the... nailed down. You have to agree that was a catchy phrase. So we got a lot of attention for that. I think with 20/20 hindsight, my guess is we could have gotten more by waiting. I'm reminded of the famous phrase by one of the Rothschilds, I forgot which one, who said, 'How did you amass this fortune?' and he said, 'Actually, I amassed the fortune by selling early.' And our view has always been to take chips off the table, de-risk our portfolios. You know, we make money in private equity on the buy side, on building value, and then finally...
I
Interviewer3:10
Are you most pleased to look at... Are there certain sectors or certain parts of the economy, and is it mostly in Europe and the United States you're investing this money?
L
Leon Black3:23
Okay, again multiple questions. Pick and choose. Look, our whole strategy has been, throughout our 29-year history, to put money to work no matter what the environment is, into good companies on an attractive risk-adjusted return basis. And what we've tried to do is develop multiple pathways to be able to... 5% to stress. You know, we go into complex deals, carve-outs, buildups. We go into idiosyncratic buyouts in about nine different industry areas. Most of our investing, probably 80%, has been US-directed, about 15 to 20% has been in Western Europe, and about 5% other. And that's pretty much constant. As two areas of specific attraction today, I think financial services has been something we've done a lot. But having said that, we're...
I
Interviewer5:11
Good investors like you, was probably higher than today. Would you agree that it's harder to get the returns that you got 10, 15, 20 years ago? And what kind of returns are you trying to get in your main fund for your investors today?
L
Leon Black5:23
Well, I think we're maybe a little bit an outlier in two respects. One, our whole DNA has been focused on value investing. So through those different pathways I described, we try to buy good companies at low multiples. And that is what we've done. Our last two funds were invested at about... Over the last 29 years, our feeling has been if an investor is locking up their money for 10 years, and so they have a basically illiquid investment that's levered, that they deserve a return with a 2 in front of it. So we still underwrite to low 20s return. Over the last 29 years, we've been fortunate in being able to generate a 39% gross, 26% net. Now we don't do that every single fund; that's an average over 29 years.
I
Interviewer7:11
You're famous in your firm for buying a lot of distressed debt. Some of it was your own deals, some of it was other people's deals. Was that an inspiration that you had to go buy the debt at a discount? And were you worried at any time that buying this debt at a discount might lead to not very good returns, or did you have a pretty good sense these were going to be spectacular deals ultimately?
L
Leon Black7:31
Well, you have to remember that I came from, and my founding partners Marc Rowan, Josh Harris, and many other people at Apollo, from Drexel Burnham originally, which was the Mike Milken school of studying capital... clients. So we saw the use of debt on the successful deals, and we saw the restructurings that went on on the unsuccessful deals. You have to also remember that we started Apollo really in the ashes of Drexel's demise, about four months after Drexel went under. We started Apollo with the help of a large French bank, Credit Lyonnais. And we were doing it during a big recession; the global economy was... 50 cents on the dollar. So we were managing a high-yield portfolio. Debt and credit and distressed has kind of always been part of what Apollo's been about. You have to make sure you're disciplined and that you're looking at the debt of good companies with bad balance sheets, and not so much turnarounds, but really companies that are over-levered. Buying distressed debt and going through a restructuring is a buyout in reverse; it's delivering the company to its appropriate capital structure. So that is something we've now been through four recessions over the last 29 years.
I
Interviewer10:11
You have kind of an engineering or math background or science background? At Dartmouth, where you went to college, you majored in history and philosophy, correct? And you graduated summa cum laude. So how come you didn't become a philosopher or historian? Did you ever think of that?
L
Leon Black10:27
What makes you think I'm not a philosopher? Maybe you are the philosopher king. Okay, so...
I
Interviewer10:35
When you graduated from Dartmouth, did you know what you wanted to do? Did you know you wanted to go into the investment world, or you didn't really know that then?
L
Leon Black10:43
I didn't know it. I thought probably I actually would be an academic and teach. My father convinced me to go to business school just to... management consulting and publishing. At one point I thought I'd go into film and acting, producing. I think acting would have been a stretch. But I then met Fred Joseph at Drexel and then met Mike Milken, and was very attracted to what they were doing.
I
Interviewer11:38
You ultimately became the head of M&A at Drexel, and then subsequently Drexel went out of business, imploded. When that happened, did you think your professional career was over? Did you know what you wanted to do? Did you think of starting your own firm? How did it come about that you decided to start Apollo?
L
Leon Black12:11
I was very involved with most of the players in the private equity industry. We were bankers to KKR, to Odyssey, to Tom Lee, a lot of the major players. So it had always been in the back of my mind to try to create something small. Now Drexel was a rocketship; I went up for 12 of the 13 years I was there, and then it crashed and burned. I got a total cold call from somebody at Credit Lyonnais I had never met, we had never dealt with each other. Would I come and run their... a lot of undervalued situations out there, we can make a lot of money together. So I spent most of that spring in shuttle diplomacy to Paris, which wasn't a bad thing, for about three or four months. The upshot of that was in June of 1991, we opened their doors. They invested $800 million: $400 was a managed account for them, and $400 was the first Apollo fund, and they were mirror funds.
I
Interviewer13:38
Where'd you get the name Apollo?
L
Leon Black13:40
I've always loved Greek mythology. Apollo is not only the god of light and reason, but he was the god of healing. And given the Drexel debacle, I thought that was an appropriate name.
I
Interviewer13:55
So today, as you look back on 29 years of investing, what are some of the deals that stand out?
L
Leon Black14:12
An insurance company that had been rehabilitated by the insurance commissioner in California. There was politics involved, the Federal Reserve was involved, the banking committees were involved, there was a foreign bank, Credit Lyonnais, involved. It was a very, very complex portfolio. We were interested in it because it had so many potential restructurings that were large positions in companies of debt which might be converted into ownership. Everything we analyzed didn't work, but it all went up, so that was very good. I'd say LyondellBasell is a deal where we reset that took about a $9 billion profit. Something like that. And that was a classic restructuring. It was a company, one of the largest chemical companies in the world, and it had about a $5 or $6 billion EBITDA in a normal economy, and they had about $25 billion of debt. Then the recession came in '08, it was deep, and all of a sudden their EBITDA went to $1.5 billion. And as I said before, restructuring is about delivering. We and other creditors decided what was the appropriate capital structure, which we decided should be $5 or $6 billion of debt. We just got it through and approved by the judge. Then the economy came into the recovery, and it went back to $6 billion of EBITDA, now with only $5 billion of debt. And we made a lot of money.
I
Interviewer16:39
Some of your peers have built their large businesses in Asia. You have not done that. Is there a reason you haven't done that, or is there something you're going to do in the future?
L
Leon Black16:49
Well, your question is half correct. Okay, we have about 25 people in Mumbai, we have offices in Hong Kong, we have offices in Singapore, we have offices now as of last year in Tokyo. But the correct part is that we really haven't done a lot. We've done a little bit in credit, we've done a little bit in real estate, but very little in private equity. And frankly, it's because we haven't figured out a way to be 'smart money.' There's a lot of money over there, prices are extremely high...
I
Interviewer18:11
I think people would say something relating to your permanent capital and a theme now. The theme is an insurance company that you are very involved with, managing money for Athene. It's worked out extremely well. How did that idea come about?
L
Leon Black18:23
It came about through my partner Mark Rowan, who was incredibly capable. About 10 years ago, he felt that there was an opportunity given where spreads were. It's basically a life annuity spread business on the reinsurance side. So we started there, we put a bit of capital in and raised some other capital from third parties. It's now an $11 billion valuation, manages about $115 billion of assets. It's a great platform for having built up our credit business because it has an unending appetite for different credit product, spread products. In life, you can lever 12 or 13 times, as opposed to PE which is more like three times. So if you can build and manage your money and build in a... Europe called Athora, God knows where we get these names, but it is meant to be another Athene. Right now it's about €15 billion. The balance sheet and Athora will allow us to get to about €50 billion given the capital that's in place.
I
Interviewer20:39
You took your company public, as some of your peers did. Any regrets about taking public? And why do you think that the entire world doesn't properly value private equity firms that are publicly traded?
L
Leon Black20:50
That's a softball if I ever saw one. I asked half of my partners, 'What do you think?' Half of them said, 'You've got to be crazy not to go public. This is a way to monetize your ownership, it's a way to build a brand, it's a way to keep your best employees, you'll have consideration to expand from an M&A point of view.' The other half said, 'What are you crazy? You're going to put yourself into a fishbowl, regulation, press, who needs it?' I think we were 60/40 tilted towards doing it, and they were all correct. But the market doesn't get it. I was lucky enough to build personal wealth through the carry before we went public. We went public and the market said, 'We don't value the carry, it's too unpredictable.' Even though we were a firm sitting with 90% permanent capital or 10-year, and we have the track record I mentioned in private equity, we still get almost no valuation. So they said you really need to focus on your FRE, which is the management fee. So in the last five or six years, we have grown our management fee...
I
Interviewer23:14
You've experienced it, I have experienced it, everybody in this industry has. So if somebody said today, 'I want to, despite all these challenges in private equity, build my own Apollo,' what do you think? Is it possible for a young professional who was at the age you were when you started? How old were you when you started? You were in your 30s, 38. So you think today a 38-year-old could build an Apollo or an equivalent today, or is it too hard?
L
Leon Black23:40
I think there are always opportunities. I would never say never. I think especially America is still the land of opportunity, and I truly believe that. And because of the wealth you mentioned...
I
Interviewer24:10
But on The Scream, what is he screaming about?
L
Leon Black24:14
Probably about the carry, priority changing, the carry taxation.
I
Interviewer24:25
Where did your passion for art come from? Did you have it as a youth? And this is something you spend a lot of your time on in your free time?
L
Leon Black24:32
My mother was an artist. I used to go and review all her work and decide what was good, what should get framed, what should be thrown out. My aunt was a very good art dealer, my uncle was an artist. So I had no escape, I grew up with it. It's from the Renaissance to modern times, paintings and sculpture, European mostly 19th and 20th century, and archaic Chinese bronzes too. I'm also involved as the chairman of MoMA, so that gets me involved.
I
Interviewer25:27
Somebody who's here saying, 'I'd like to be like you, building a successful company and be very involved in philanthropy.' What would you say is the key to your success? Is it you've worked harder than other people, you surround yourself with very good people, you just had a better eye for deals? What would you say is the key to building a successful private equity firm and the key to your success?
L
Leon Black25:54
That's a tough question. As I already said, starting Apollo with Credit Lyonnais was pretty lucky. But one of the best things was always mixing with smart people and learning how to direct them into a team effort towards a common goal. We're blessed with having a very deep bench at Apollo. I have great partners. I think we have a defined brand, a defined direction. We've been very fortunate...
I
Interviewer27:13
The question that everybody gets asked in your business, and I get asked, 'If I have some extra money, should I buy the stock or put the money in your funds?' What should I do? This is all on the record. I assume you'll say both.
L
Leon Black27:34
I would say all of the above.
I
Interviewer27:35
Okay, so thank you very much. Thank you.