IMCO's Big Stake in Apollo's New Fund

May 23 00:05 2020 Print This Article

Christine Idzelis of Institutional Investor reports that Apollo took just two months to raise a credit fund that seeks to profit from tumultuous markets — and it got a swift and significant contribution from Canadian pension manager IMCO:When Apollo Global Management approached the Investment Management Corp. of Ontario about a credit fund it was raising in the market tumult caused by the coronavirus, the Canadian pension manger was ready to be nimble — even with its staff dispersed and working from home since mid-March.“It was clearly in the maelstrom, in the midst of the market chaos,” Christian Hensley, IMCO’s senior managing director of equities and credit, said Thursday in an interview. “Apollo reached out as we had been in close contact with them about a number of opportunities.” Demand from institutional investors drove the speedy fundraising of Apollo Accord Fund III B, a credit fund that closed on $1.75 billion in commitments within about eight weeks, according to a statement from the alternative asset manager Thursday. IMCO said it committed $250 million to the fund, moving “very quickly” to benefit from “dislocated opportunities as they arise.” Apollo, a New York-based private equity firm known for distressed investing, said it saw significant opportunity during the first quarter as the novel virus wreaked havoc on markets. The Accord fund focuses on “mispriced credit risk,” John Zito, Apollo’s deputy chief investment officer of credit and co-head of global corporate credit, said in the firm’s statement.IMCO said the new fund will seek to buy debt that has dropped in price for “non-economic reasons” as investors feel pressure to sell due to liquidity concerns when markets are dislocated. Apollo Accord Fund III B may invest in the debt of companies that are fundamentally sound, but whose credit prices have been dragged down by broad market selloffs during the crisis, Hensley explained.“This is about liquidity-driven dislocations,” James Zelter, Apollo’s co-president and CIO for credit, said in an interview. “If you go back to the dark days of March, we quickly drew down all the remaining capital in Accord III and executed on our mandate. It became very apparent that there was appetite for III B.”IMCO, which managed CAD$70.3 billion (about $50 billion) of assets at the end of December, plans to expand its credit investing. The Toronto-based pension manager expects to increase its credit assets to CAD$8 billion in the next five years, from CAD$3 billion currently, said Hensley. His group was well-positioned to quickly commit to Apollo, he said, because it had the liquidity it needed as well as the technology to conduct meetings online. At times, Hensley said he felt like he belonged to a call center when working from home in the early days of pandemic. “You get out of bed, you get ready in the morning, you turn on your screen, you hit a button, and you’re in a meeting,” he said. As the crisis was unfolding, Hensley said he hit that button repeatedly until suddenly it was past dinner time. “We were cranking away to react to — and be productive in — the market that we saw.” IMCO relied on Zoom during the fundraising process for Apollo Accord Fund III B, according to Hensley. “It’s been a different experience,” he said. “We were fortunate for having had the opportunity previously to have met with the portfolio managers.” In some ways, he found the online technology helped make the investment analysis more efficient when considering a commitment to the fund.“We could accelerate the process because we could invite our risk teams, our legal teams, our accounting teams, our performance measurement and attribution teams to the same calls all at the same time,” Hensley said. “We could run in parallel because we knew this was an important inflection point in the market.” While online meetings have proved productive, IMCO has been considering what working in the office might safely look like as economies begin to reopen during the pandemic.“Our senior management team has been meeting regularly thinking about ways to transition back to a new normal,” Hensley said. “We want to make sure we’re respectful of people’s individual wishes, but also the constraints of government and the virus itself.”My advice to the folks at IMCO is to get used to the new normal and think about the repercussions on your portfolio, especially real estate where there is a paradigm shift taking place.Truth is you can do due diligence on any fund working remotely. Yes, it's not perfect but you can certainly do it and on a fund like Apollo, it's even easier because they're a brand name with a stellar track record.IMCO put out a press release on this investment:The Investment Management Corporation of Ontario (IMCO) has committed US$250 million to Apollo Global Management, Inc.’s new Accord Fund III Series B (“The Fund”), in a Fund designed to enter the market during periods of dislocation and illiquidity. The Fund will focus on credits that have traded down due to liquidity-driven selling and non-economic reasons. IMCO’s Global Credit team closed the commitment on April 23, 2020, making it IMCO’s first investment with an Apollo-managed fund, one of the world’s largest alternative investment managers.“Our participation in this fund demonstrates how nimble our team can be in seeking valuable opportunities for our clients,” said Jennifer Hartviksen, Managing Director, Global Credit. Hartviksen noted that the process, from analysis to fund close, took approximately one month, indicating how well-matched IMCO’s capabilities are with Apollo’s proven ability to take advantage of market dislocations. “This is an example of IMCO adapting to market conditions and exploiting our liquidity very quickly so that clients have access to dislocated opportunities as they arise,” she said.IMCO recently launched its Global Credit program as a separate asset class to provide higher risk-adjusted returns than traditional fixed income, and to contribute additional diversification benefits to a total portfolio for clients. “As our program scales, we are initially relying on experienced strategic partners,” said Christian Hensley, Senior Managing Director, Private Equities and Credit. “The investment in this Fund is an example of the types of opportunities we’re pursuing — investments with sponsors that we believe have deep expertise, delivering diversifying and differentiating exposures, who are transparent, opportunistic, and value-oriented.”Apollo’s fundamentals-approach and sector-specific expertise allows for selective deployment during periods of both market stability and volatility, in line with IMCO’s Global Credit strategy. The Fund’s judicious use of hedges, designed to address fundamental risks, is well suited for IMCO’s long investment horizon.Let me be straight up, Apollo is one of the best credit funds in the world. IMCO jumped on the opportunity and took a significant stake in this new fund it's raising, and I would have done the exact same thing.Why? There will be no V-shaped economic recovery. The Fed is only addressing liquidity concerns and fueling another tech bubble in the Nasdaq but when solvency issues arise, and they will, then Apollo and other top distressed debt funds (Avenue Capital, Bain Credit, Blackstone, Oaktree, Lone Star, etc) will be very busy buying distressed debt for pennies on the dollar.

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About Article Author

Pension Pulse

Leo Kolivakis is an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. He has researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). He's also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system.

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