Apollo Global Management LLC (APO:US), the private-equity firm run by Leon Black, plans to give fund investors all fees levied on companies in its next flagship pool, according to two people familiar with the situation.
Apollo Investment Fund VIII LP, which is seeking $12 billion, agreed to direct 100 percent of transaction fees to clients, after proposing an 80 percent share when the fund started marketing last year, said the people, who asked not to be identified because the information is private. The prior fund, which raised $14.7 billion in 2008, offered 68 percent, according to a limited-partnership agreement for that fund.
Apollo, one of the most successful firms in navigating the aftermath of the financial crisis, recently came under attack on the issue of transaction fees. Unite Here, a union representing workers in industries including gaming, hotels and food service, in April criticized New York-based Apollo and TPG Capital for the fees they’ve reaped from their investment in Caesars Entertainment Corp. (CZR:US) Last month, the Oregon Investment Council made a $300 million commitment to the new Apollo fund contingent on a 100 percent transaction fee offset, according to two other people familiar with the situation.
Charles Zehren, a spokesman for Apollo at public relations firm Rubenstein Associates, declined to comment.
Private-equity firms charge fees to the companies they buy for services such as consulting and investment banking. Fund investors, known as limited partners, have pushed back, saying the practice reduces the value of their holdings by siphoning cash from the companies. Limited partners also object because the levies reward buyout firms regardless of the performance of the investments.
While the standard fee split had been 80-20 in favor of investors, private-equity firms are moving toward 100 percent as they compete for investor money in a tough fundraising environment. Leonard Green & Partners LP made changes to its 2011 fund that included giving investors 100 percent of transaction fees, up from the originally planned 80 percent. Warburg Pincus LLC has typically allocated all fees to limited partners.
Apollo is expected to hold an initial close on the fund of at least $5 billion by this month. The firm set a $15 billion maximum on the fund, after starting marketing without a limit, according to the people. If that hard cap is met, the fund would be one of the largest raised after the 2008 financial crisis.
Apollo’s private-equity funds have realized about $13 billion in proceeds over the last 16 months, according to board meeting documents from Teacher Retirement System of Texas.
Apollo’s previous flagship fund, Fund VII, was generating a net 28 percent internal rate of return as of March 31, according to the Texas TRS documents, after taking advantage of distressed opportunities that came out of the financial crisis. The firm’s $10.1 billion Fund VI, which invested during the buyout boom of 2006 to 2008, was generating a 10 percent net IRR as of the same date, the data shows.
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