Apollo’s S3 launch: Expect the firm to become a meaningful secondaries player

With the launch of S3, Apollo becomes 'much more of a one-stop relationship' for GPs, co-president Scott Kleinman tells Secondaries Investor.

Apollo Global Management has moved into the secondaries market with full force following the launch of its sponsor and secondaries solutions business, S3.

Kleinman: the value we already add to sponsors is well understood and well known

Formally launched on 4 August with a cornerstone commitment from the Abu Dhabi Investment Authority – bringing total new commitments to approximately $4 billion – the alternatives giant has been building out the platform over the past year or so, making high-profile hires from the likes of Goldman Sachs, BlackRock and Tikehau Capital.

At the time of the launch, the firm had already committed or deployed more than $13 billion across secondary and fund finance capital solutions transactions, according to a statement.

Apollo anticipates substantial fundraising dedicated to S3 activities, particularly in equity secondaries, credit secondaries and fund finance.

Scott Kleinman, co-president at the alternatives giant, spoke to Secondaries Investor about the drivers behind Apollo’s entry into the secondaries market.

What were the main reasons behind Apollo’s S3 launch?

Secondaries is a space we’ve been exploring for several years, that has proved to be very interesting and dynamic. The traditional LP secondaries – where an LP is selling older positions – is still a meaningful part of the industry, but it’s become just one piece of a much more diversified and dynamic ecosystem. GP solutions are now a meaningful part of the secondary market, and come in all sorts of permutations – continuation vehicles and other things.

Then you think about credit secondaries: [this] is a newer product [which came] out of the explosion of direct lending products and funds over the last five, six, seven years. CIOs now need to rebalance the debt side of their portfolio as well. With Apollo’s credit background [and] our knowledge of the leveraged loan market, our ability to be a meaningful player there is clear.

Then, lastly, the fund finance business is a less well-known part of the market, but really ties in all of these things we’re talking about – to the GP side as well as the LP side. A lot of times, these secondary trades would be better off being done in a leveraged structure or in some sort of a loan rather than an outright sale.

[With] the scale and explosive growth of private markets over the last decade, it stands to reason the secondary market will continue to grow alongside that.

What drove the decision to grow the business organically?

Over the last couple of years, there have been some very large trades; some big companies have sold. We, as you can imagine, looked at all those. But when we examined what is the definition of success and what’s going to make [us] successful, we felt like we had most of the tools in house and have supplemented [those] with some very attractive hires.

The market certainly is growing fast enough where there’s room for another scale player, so we are very excited about this opportunity. I expect Apollo is going to be a very meaningful player in this in the coming years.

What are the next steps for fundraising? Will capital come from institutional investors, your retirement services business or retail investment channels?

It will be a combination. We expect to raise additional capital in the areas of equity secondaries, credit secondaries and fund finance alongside the seed capital that we and ADIA have put in. That will commence in due course. Then, in addition, other pockets of capital around the Apollo system – where particular situations might be relevant – will participate as well.

With the launch of S3, Apollo has said it had established operational protocols that provide additional information safeguards. Could you elaborate on that?

We spent a lot of time looking at how the industry operates and listening to the needs of GPs and other clients. That’s why we launched S3 as a sub-business to Apollo, to make sure that both internally and externally it is understood that, to a certain degree, this is a segregated business and it has enhanced policies and procedures around information flow. S3 will have access to the knowledge and expertise of Apollo’s broader 2,500-person platform, but that information flows in, not out.

You will now enter into LP relationships under some of S3’s solutions. For managers that may be used to a more traditional LP base, how have you been articulating the strategy?

Apollo has a long history of working with literally hundreds of GPs. Because of our large direct lending platform, we finance hundreds of sponsors. Our relationship, the knowledge of what we can do and the value we already add to sponsors in bringing creative financing solutions to sponsors is well understood and well known.

[We are] now just taking that to the next step and providing more solutions; more opportunities for that GP as they think about not only financing a deal, but now, how they finance their GP growth, how they raise capital, how they deal with LPs who might want to rebalance their portfolios ahead of schedule, how they execute a continuation deal, among other things.

It becomes much more of a one-stop relationship to those GPs. It’s a very powerful tool, we think, to be able to provide the full breadth of services to a GP, and very, very few people actually do that today.

Do you see instances where you’ll take on a more passive, traditional LP relationship in transactions?

Primary fund capital is something we can offer, but you are likely to see it in combination with other investments at the GP level and various strategic support. Primary, passive fund interests alone are not necessarily going to be our highest and best use of capital.

Across all GP solutions, we want to be value-add and to partner in solving problems, and so fund seeding may be accompanied by capital markets support, or a holdco loan, or lending against an earlier vintage fund. These are the value-add opportunities. Just going out and being a $10 million LP in 100 different funds is not the baseline target opportunity.