A Deeply Undervalued Asset Manager
Apollo is one of the best-positioned alternative asset managers in credit today, writes Morningstar’s Stephen Ellis.
After incorporating the impact of the AR Global transaction and our revised forecast for incentive income, we lowered our fair value estimate for Apollo Global Management (APO) to $35 per unit from $42. However, we still see Apollo as deeply undervalued and reiterate our narrow economic moat rating.
We do consider the AR Global transaction a positive, as we estimate it has added $1-$2 to our fair value estimate. We forecast that the deal will take Apollo's real estate fee-earning assets under management to $48 billion in 2019 from $11 billion in our prior forecast, which is made up of the $12 billion in initial AUM acquired plus an incremental $23 billion of inflows over 2017-19. Similarly, segment economic net income increases to $185 million in 2019 versus $53 million in our previous forecast, reflecting an incremental $0.32 per unit in earnings. While the management realization rate for AR Global assets is decent, at 80 basis points by our estimates, AR Global also earns advisory and carried interest from its business development companies. The BDC fees are typically based on asset size, creating stability but also letting Apollo benefit from asset growth over time. We consider the stream of income highly stable, helping offset Apollo's still sizable contributions from its more volatile and mature private equity AUM. We continue to believe Apollo is quite well positioned to drive incremental AUM inflows, given its leading retail platform, especially if it pursues product step-outs under its own brand name rather than the tarnished American Realty brand name.
Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.