Apollo becomes a mini-Berkshire … without Buffett

The purchase of Athene clarifies its relationship with the insurance company, but obscures the value of the rest of its assets

Marc Rowan may regret imitating Warren Buffett. Apollo Global Management’s new CEO announced Monday that the private equity group was buying the two-thirds of the insurer Athene that it did not yet own. It makes sense to have a permanent capital vehicle in-house, as the Sage of Omaha knows. But Apollo runs the risk of being valued as a heavy heavy financial conglomerate, rather than an energetic buying fund.

The deal simplifies an uneasy relationship between Athene and Rowan’s $ 21 billion group, which created the insurer in 2009. Apollo receives payments for investing Athene’s asset base. That gives Apollo an incentive to push Athene to use the excess capital for investment rather than for share buybacks. It also makes Apollo overly dependent on an outside company. Approximately 40% of its assets under management come from Athene.

After the agreement, all in shares, they will be on the same team. Apollo shareholders will own roughly three-quarters of the expanded $ 30 billion company, with Athene shareholders having the rest. In addition, Rowan stays with the company at a low price. His offering values ​​Athene at nearly $ 11 billion, or 7.1 times 2021 earnings according to Refinitiv’s median estimate. Other life insurance companies trade at 8.8 times on average.

The problem is that the in-house incorporation of Athene clouds Apollo’s investment case. As a result of the deal, Rowan will have to consolidate earnings from the annuity provider. Based on 2020 figures, they could account for more than half of the combined total. The new group will look more like one of those other life insurance companies than a focused buyout fund, and Apollo is trading at 18 times future earnings. The risk of a conglomerate discount may explain the 5% decline in Apollo’s share price following the announcement of the deal on Monday.

Buffett, whose Berkshire Hathaway owns insurance company Geico, is a difficult example for anyone to emulate. Though Rowan helped shape Apollo, he was just given the authority to take over after Chief Leon Black resigned when the company unveiled an investigation into his relationship with convicted sex offender Jeffrey Epstein.

Buying Athene can help Apollo shift gears and move on to the next chapter. But it will also dull the company’s valuation. For Rowan, clarifying the relationship with Athene has a price.

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