“What’s the purpose of investing in private equity if it’s just levered beta on steroids?” wonders Apollo PE exec
Private equity giant Apollo Global Management held its annual investor day, and the most entertaining slide — pictured above — and commentary comes to us courtesy of David Sambur, senior partner and co-head of private equity at Apollo.
It’s a sharp condemnation of his competitors’ track record and a slap on the back for himself and his colleagues.
First, he discusses how the private equity industry has basically relied on a relatively uninterrupted period of economic growth plus low interest rates in order to generate strong returns, drawing on a report from Bain & Co. He then contrasts this with Apollo, where (according to the calculations of Apollo analysts), returns are largely the product of tactical tweaks to portfolio companies that bore fruit.
Sambur (emphasis added):
And even though from 2013 to 2022, the industry had very strong returns, I would argue the quality of those returns was very poor. The mission of our business, I think, we think, is supposed to be superior risk-adjusted returns, excess returns per unit of risk. You have to be able to do that in all market environments. If you look at the industry, 50% of returns over the decade we just experienced were driven by multiple expansion, tremendous, historical amounts of multiple expansion. And the other 50% was driven by top-line growth. Almost no return was generated by operational improvement, or alpha. That is not a high quality return; that’s not a sustainable, repeatable investment model.
You look at our business, to the right of that, 85% of our returns were driven by repeatable building blocks that we can access in any market environment. Indeed, we actually produce better returns when the market is poor. This is the bedrock, this is this investing culture that I’m talking about. I think the industry has to look itself in the mirror and really ask itself, and indeed, our clients are asking us, ‘What’s the purpose of investing in private equity if it’s just levered beta on steroids?’ We don’t want to be levered beta on steroids. If you look at our returns, if you look at all of our investing products, it’s all about simple, repeatable processes that will allow us to generate superior risk-adjusted returns in any market environment.
I guess a r̶e̶a̶l̶i̶s̶t̶ cynic would answer the question “What’s the purpose of investing in private equity if it’s just levered beta on steroids?” with “It’s levered, illiquid beta on steroids, so we don’t have to mark down the value of those holdings as much as our publicly traded stocks and bonds during market downturns. That’s worth something!”
