I previously wrote about Challenger Ltd., an Australian annuities / lifeco that Apollo bought ~20% of last year. At that point in time the shares were trading for $5.72AUD with Apollo’s blended purchase price coming in at ~$6.00AUD.
It has a decently managed franchise in place with a credible plan to boost return on equity to the ~mid-teens level and pays out a nice share of earnings to shareholders. But as I wrote before, it’s more interesting when the company’s valuation is underpinned by a potential Apollo bid at or slightly above book value ($5.70AUD at prior update).
Yesterday Challenger reported a Q3-22 (Aussie fiscal year) update (they only do 2 real updates annually outside the US), and the stock shot up ~10% before settling down a bit lower. The major update was guidance that indicated profit will land at the high end of its prior guidance range.
While it’s price is out of range for my tastes at present, it’s always good hygiene to keep companies on a list that one may buy if the opportunity presents itself, and Challenger is on that list to dig deeper on if pricing changes.
Disclosure: We do not own shares in CGF.AX, this is not investment advice. Do your own work.
Blackstone reported earnings this morning. They continue to print amazing growth in earnings. Here’s a quick summary:
2014 Inv. Day
2018 Inv. Day
Q1-22 LTM
Fee Earnings
$0.86
$1.14
$3.70
Fee +Carry Earnings (Distributable Earnings)
$1.60
$2.49
$5.36
Stock Price
$34
$37
$119
2018 BX Investor Day, 2022 BX Q1 Earnings
This has been one of our better investments and as with all good ones, one only wishes they owned more than they did initially. But where from here?
Blackstone changed the trajectory of its growth by, in my opinion, doing two things:
It pivoted from classic go-anywhere opportunistic investing to thematic investing. I believe what it effectively means is they pay less attention to “deep value” purchase prices and shifted downside protection to secular growth trends. An example is their industrial real estate bet, to which they have tens if not greater than $100B invested in the sector. They believe the continued share growth of e-commerce vs brick and mortar provides the downside protection previously provided by a value price. Overall, thematic investing gave Blackstone the license to deploy gargantuan amounts of capital as the price setter in the market, and thereby grow AUM dramatically on the back of investor demand for bond allocation replacements.
It expanded from opportunistic (e.g., ~20% expected net returns) investing to core / core+ investing (e.g., from ~5-15% expected net returns). The available investments that have lower expected core/core+ returns dwarfs the opportunistic market. It plays right into the hand of thematic investing, allowing Blackstone to, for example, invest in industrial real estate debt, preferred equity, and vanilla equity. The lower, although still highly respectable, return profile also allowed for products that are more appropriate for retail investors (a topic for another day).
Going forward, my largest worry with respect to Blackstone and its now Big Reputation is that those that are price setters (read: paying up) for growth investments may be the recipient of lower returns going forward. Trees don’t often grow to the sky. If this was a large holding for us, I would be reducing it.
That said given its modest size in the portfolio, I’m willing to give the Blackstone team the benefit of the doubt. They have been a highly innovative team (relatively speaking) over the past 10 years, and I presume they will continue shifting their product set by taking risks that others aren’t taking. Given the now near perpetual nature of their capital base, at worst, we are clipping a roughly 15% dividend yield based on the cost of our investment on a highly durable business model.
Disclosure: We own shares of Blackstone, this is not investment advice. Do your own work.
What does one do once they make a billion, let alone a few billion dollars? David Rubenstein founded The Carlyle Group and has stepped back from the majority of his corporate duties over the past 5 years as he hit his 70s. However he appears busier than ever via his near constant interview cadence of interesting leaders on Bloomberg (and other forums).
Yesterday, his interview with Apollo’s Marc Rowan aired.
As a CEO, Rowan clearly outlines that his job is to set culture, oversee communications (internal and external), set strategy, and solve problems. He has elevated himself from the details of running the business to his two Co-Presidents (with Jim Zelter overseeing Yield and Scott Kleinman overseeing Hybrid and Equity).
And it’s obvious that he has made a dramatic shift in all aspects of his role versus the prior guard. Three examples on culture is everyone is now on at least a 4/1 schedule (in office / work from home) with many on 3/2, Miami and West Palm Beach offices have opened with more to come based on where people want to live, and compensation has been reset to give greater share of carry to employees and higher share of fee earnings to shareholders (acknowledging public markets don’t value carry highly versus fee earnings).
Check out the interview for more on all aspects of the wholesale change occurring at Apollo, including the acquisition of Athene, FinTech participation, and growth prioritization.
Disclosure: We own shares of Apollo, this is not investment advice. Do your own work.
Generally speaking as I’ve noted in the past, when the next downturn happens there will be a slew of people who said they called it. In reality few accurately predict, let alone prepare for, the specific downturn that happens next.
As of now, fear seems high. Lots of uncertainty about war. People doubling down on commodities after they have had a huge run. Inflation shocking multiple generations from old to young. Deep social and political division. Etc. Few people are bullish:
But certain barometers of economic health are telling a different story. One recession indicator is going the other direction, the 10Year – 3Month US government yield spread (red line):
Federal Reserve
High yield spreads are low and steady:
Federal Reserve
And the consumer is in good shape:
Bank of America
The divergence from what people’s expectations are for the future (mayhem!) versus what certain core indicators have been registering in, may mean one thing, volatility. And generally speaking volatility along with apprehension is not a poor time for investors or companies to be taking advantage of select investment opportunities.
Bill Brewster is a private investor who runs a podcast, The Business Brew, of which I’ve found a number of episodes to be interesting (principally his first two, Mike Mitchell and Dan McMurtrie). I feel some level of kinship with Bill, as he is investing for his own account in support of his lifestyle. But more specifically, he isn’t a traditionally trained financial analyst, more a person who has stumbled through the knowledge curve via self-education and “own-goals” (mistakes). In that, I’m much the same.
However at this point, it seems that Bill is experiencing a period of self-doubt:
This is where I believe that my own thought process has diverged from Bill. And I think it’s because we have different goals. His, without asking him directly, appears to be to beat the market. Mine, is to generate consistent and growing investment income from a diversified pool of investments.
I’m not looking to regularly check the chart of my performance versus the S&P500. I regularly research existing and new investments across debt / real estate / public stocks, tally up investment income as it comes in, and evaluate earnings of our portfolio companies and watchlist companies quarterly. The output of this is a clear budget of what we can spend for the year without excessive stress of whether the market will go up, down, or sideways.
Perhaps more importantly, my focus on investment income is a strong eliminator of FOMO. I’m not going to chase investments others make, simply because most businesses today don’t pay out their earnings to shareholders. Furthermore, I’m honest with myself that as a solo analyst, the limits of my analytical ability are are very real. I just won’t have a differential view on the valuation and business model of Peloton, Twitter, etc – especially when there are absolute pros on the other side of the fence (see above podcast episodes). I’m shameless about letting others be the investing experts and act more as a capital allocator (like a pension fund manager) versus investment underwriter. In fact, most of my public stock investments are just that, effectively publicly traded private investment funds that are generally somewhat diversified.
To conclude, as I’m running out of steam, I hope that Bill finds an equilibrium between being able to engage his deep interest in finance, his talent for building his network and podcast, and the realities of the investment goal(s) he has set for himself. Life is too short not to have a lot of fun when you’ve got the gift of financial independence.
Earnings season has kicked off with banks churning through Q1-2022 reports and conference calls. D-Sol had some notable commentary which I’ve excerpted below.
David Solomon (DJ D-Sol), EDM DJ by night and CEO Goldman Sachs by day
De-globalization in motion:
In recent decades, we’ve grown used to low inflation, low interest rates and the free flow of people and goods across national borders. I believe we’re in through a period that won’t be — that won’t be the case and the consequences for financial markets will be meaningful.
Stagflation possible:
Beyond geopolitics, I’m keeping a close eye on several other trends. While U.S. unemployment levels are low and wages are increasing, inflation is the highest it’s been in decades. We’re seeing new stress on supply chain and commodity prices and U.S. households are facing rising gas prices as well as higher prices for food and housing. We’ve also seen an increased risk of stagflation and mixed signals on consumer confidence.
Flows to alternative investments to continue:
I would say that there are a variety of secular tailwinds that are still driving lots of institutional capital on a global basis towards broad alternatives platforms.
I think despite the volatility that exists in markets, those trends continue to be in place. And I think you’ll continue to see secular growth in the amount of capital, institutional capital that’s allocated to alternatives platforms for quite some time.
Financial transactions peaked:
Well, there’s no question that — and I’ve tried to say it in different ways, and there’s no science to this. And no one knows obviously, where the macro environment goes as we go forward. But when you look at the volumes and the levels of 2020 and 2021, we’ve said repeatedly that those volumes were at levels that were not sustainable and are a reflection of some of that monetary fiscal policy.
Source: Goldman Sachs Q1-2022 Earnings Transcript
Disclosure: We don’t own shares of GS, this is not investment advice. Do your own work.
I’ve written about my aversion to allocating more to “housing” in the past here and here. Housing, whether single family homes or apartment complexes, has had an incredible 10 year run to the point that the rental yields at today’s prices are incredibly low. Bulls point to the shortage of housing at the moment, which is correct. However, when multiples are high / yields are low, a lot more has to go right than in the past. I like the opposite, when not much has to go right to make a decent return.
The only real estate I’ve been buying since late 2019 has been open-air shopping centers. Contrary to apartments, they have traded at much higher yields, due to the fear of retail bankruptcies. They went through a deep economic bomb with respect to Covid as they all were forced to close their doors, and performed very well due to the strong spread between debt financing and property yield. Retail bankruptcies have been manageable due to attractive property locations.
One of our past fund investments in apartments within the South-East US has started selling off buildings, which I am thrilled about. To that end, I’m considering redeploying apartment sale proceeds into a bit more shopping center real estate as their value proposition feels stronger based on the way I choose to invest.
I don’t have anything particularly insightful to say on this drama, I just *have* to record this for myself to look back on in the future, as I believe it may be a historic moment if he succeeds in this shocking foray.
Elon Musk continued his trolling of Twitter today in a way no normal person can fathom doing. Prior (meaning only last week…), he bought 9.9% of the company for $3B and immediately started trolling the management team by polling Twitter whether the HQ should be turned into a homeless shelter (because nobody shows up). Someone posted a video of Carl Icahn telling a story of how he bought a company, couldn’t figure out what 12 floors of execs in New York did, and ended up firing them all, to which Elon replied, “exactly.”
It seems like at Twitter HQ, the <woke> employee base lost their shit at Elon assuming the role of Chief Product Officer (despite no official role at the company) by polling Twitter users about feature changes and announcing that ad-funded corporations can never be trusted to protect free speech. The board went on to retract an offer for Elon to join as a board member as a result. Elon, being the enigma he is, responded by announcing this morning that he has made a cash offer to take the company private for ~$43 billion in *cash*. Of course his offer deadline is 4/20.
In this moment, I believe this is a good thing. The platform can’t say in any way that it’s a protector of free speech, as it is generally a left-leaning platform that censors people at will. One can correctly argue that a private company can do whatever it wants with censorship, which is true. Elon’s hypothesis is that the company will be much valuable if its product supports free speech and isn’t ad supported (perhaps user supported). I think if one of these many social media platforms de-emphasized amplifying clickbait (which drives disinformation and ad revenue) and focused on the product vs all consuming efforts on “platform safety”, that would be a good thing for the world.
As far as immediate knock-on effects of a successful bid and closing of the deal, the obvious elephant in the room is Trump. One can presume with near 100% certainty that his lifetime suspension will be lifted, and that the course of future history will likely be far different than it would have been had Elon not made a play for the business.
Below are the simple filings Elon made for the takeover:
Oppenheimer is out with a new note on the alternative asset managers this morning. I’ve discussed Oppenheimer’s views in the past, arguing that I believe that they are conservative.
Here’s the summary of today’s note:
The effect of rates on Apollo specifically is something that I’ve thought a lot about, and believe that my view differs than the majority of people that discuss the business. However in this case, Oppenheimer aligns with my view. The consensus is that alts have been the beneficiary of low rates as institutional LPs are forced to grab more “alpha” via opportunistic equity vehicles and more yield via private credit vehicles. That is not wrong.
However, in the case of Apollo, the current business makeup is distinct from its past. The funding base has shifted largely to its captive insurance balance sheets versus institutional LPs. In the future, I expect its insurers to continue to take higher share of the funding base, further reducing the role of institutional LPs as a funding source. But specifically on interest rate exposure, a couple notes:
Apollo’s insurer balance sheets hold about 20% of their portfolio in floating rate senior debt. Most are tied to 3mo LIBOR (the rest 6-12 month LIBOR), which has widened by ~100bps already since the prior earnings call, in which they indicated every 25bps wider is ~$25m in income to the bottom line.
As rates rise, legacy annuity blocks that were deep in loss, underwritten by multi-line insurance giants start to reverse in total projected loss. Like a stock that has been a deep loss for a long time and gets close to even – it’s more palatable for that investor to part with it. Same goes for insurers. Thus there’s a higher likelihood that these blocks will trade and Apollo will be the buyer (especially in Europe / Asia as in the US, competition has become fierce).
Annuities become more attractive to retirees as rates go up. Who wanted to lock in guaranteed income at the lowest rates ever? Some, but more will as rates rise. One can simply expect greater amounts of demand for Apollo’s annuity products (via Athene), and Athene being the low cost provider of this commodity product allows them to underwrite more volume at high rates of return.
Last, the note indicated that when markets are volatile / down, is when these sorts of companies do their best work. Apollo cleared $12B on a $2B investment in LyondellBasell and seeded Athene in the great financial crisis (GFC). Their 2008 vintage PE vehicle did 33% gross / 25% net (2.1x MOIC), and their 2001 vintage did 61% gross / 44% net (2.5x MOIC).
Overall, I’m excited to see how this year plays out, and while others bemoan short term movements in its share price, I believe that the business will do some its best work in the coming years.
Disclosure: We own shares of Apollo Global, this is not investment advice. Do your own work.
Two things on my mind today, Kohl’s and Sri Lanka.
Franchise Group, a portfolio company of ours, is submitting a bid for Kohl’s this morning at $69 / share. Franchise Group joins a crowded bidding war consisting of:
Hudson’s Bay, the department store at $70 / share
Leonard Green and Authentic Brands Group (another portfolio company via Simon Property Group’s ownership of ABG)
The retail vampire Sycamore Partners along with Starboard Value
Kohl’s feels a bit different than the prior string of retail M&A. Authentic Brands / Simon Property were feasting out of a back alley dumpster on brands since Covid (and before) including purchases of Brooks Brothers, JC Penny, Eddie Bauer, Reebok, Forever 21, Barney’s, and more. Mostly they were bought at deeply distressed prices, with many purchased for something like 1x EBITDA or the value of the inventory on hand. Franchise Group was part of a deal that bought Justice and repositioned it to gush cash.
Sycamore has a long history of retail including Express, Hot Topic, J Jill, Staples, etc (including deals at their prior home at Golden Gate Capital) – but tend to slap max leverage on them, get their cash out, and have a free option on whether it survives.
It seems sentiment is a bit different this time around as the interest is before Kohl’s is on the doorstep of death. Furthermore a bidding war of material value has been rare of late. While I’m not close to Kohl’s business health, it is notable of where we are in the consumer apparel cycle.
Sri Lanka defaulted on its government debt. Here’s the statement from the Ministry of Finance:
As a place that we have visited, and loved, it’s sad to hear as undoubtedly things are far worse for the locals now than when we were there. A default will further drive capital from the private sector and result in more civil unrest along with greater hunger, disease, and unhappiness.
Globally, I believe that this is the first of multiple nations that are going to have difficulty in part from the war in Ukraine. Sky-high prices of basic needs for nations that must import those products is a disaster in slow motion as inventories run out and the next crop either doesn’t make it into the ground (Ukraine) or can’t leave the country (Russia).
Uncertainty breeds opportunity but it’s always prudent to wait for opportunity to hit one in the face versus be a “smart guy” and invest in a complex, multi-variable situation.
Disclosure: We own shares of Franchise Group, this is not investment advice. Do your own work.
