Apollo Is 'Deeply Undervalued’, Morningstar Says

Even with extremely conservative projections, the data firm sees Apollo as solid with sticky investors despite its weak stock price.

Apollo Global Management has been shortchanged by equities markets, according to Morningstar’s head of financial stock research. 

The private equity and asset management firm’s stock opened Thursday at $19.43—less than two-thirds of its fair value, as Morningstar’s Stephen Ellis calculated it. 

Much of the negative views on Apollo stem from increasing regulator oversight of—and expected action against—private equity fee practices. Add in concerns about changes to the carried interest tax, Ellis wrote, and Apollo finds itself “mired in a negative new flows cycle.”

“The industry is struggling to put money to work in a high-valuation environment, and mark-to-market losses in the energy and credit portfolios have hurt recent earnings results,” Ellis continued. 

But Apollo has advantages other competitors lack, he argued—advantages that aren’t reflected in its valuation.

Foremost: Its specialization in illiquid credit instruments. 

Banks have been dropping risky and complex credit assets to shore up their capital ratios, Ellis pointed out. “We see this as a secular trend, particularly as regulatory rules force banks to shed risk, and Apollo’s relationships and deep expertise in the market position the firm to earn lucrative returns.” 

He called credit Apollo’s number one opportunity, but also noted several more promising sectors. 

The firm’s acquisition of annuity provider Athene several years ago differentiates it from global alternatives peers. The deal and subsequent growth added $60 billion to global assets under management, or nearly 40% of Apollo capital base. These assets are permanent, unlike private equity funds which eventually have to be returned to limited partners. 

Still, these asset owners can be confident that their investments remain core to Apollo’s future success, according to Ellis. “While we see Apollo’s largest opportunity in credit in the coming years, its highly respected private equity business should still do well.” 

Read Stephen Ellis’ entire analysis

Apollo Global Management (APO): Five-Year Performance APOSource: Yahoo Finance

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