Breakingviews: Rubber meets road for divergent buyout-shop models

Buyout barons have been plowing disparate furrows, and the harvest is upon them. Third-quarter results from Apollo Global Management, Blackstone, Carlyle and KKR reveal their approaches are paying off in different ways. A presidential victory for business-friendly Donald Trump adds to the exuberance. For those who sowed with insurance, however, there are reaping challenges.

Trump’s return to the White House, with his predilection for demanding lower interest rates, augurs an end to a long slowdown in transactions. The share prices for the private equity and credit foursome, with nearly $3 trillion of combined assets under management, jumped immediately following the election.

The reaction compounds the benefits from stabilizing markets. Profit exceeded what analysts were expecting from 4% to 15%, according to estimates gathered by Visible Alpha. Deal-making also is on the rise, with Blackstone and KKR deploying more than twice as much as a year earlier and Carlyle generating an additional 24% in proceeds from exits. The shop led by Harvey Schwartz even broke the public-markets logjam with the initial public offering of $10 billion airplane-engine repairer StandardAero.

Apollo has understandably thrived in a higher-rate environment. Run by Marc Rowan, the firm owns annuity writer Athene, which can turbocharge growth by offering better-paying policies when its investments command higher yields. Blackstone, meanwhile, sidestepped the underwriting business. President Jonathan Gray pointedly boasts that his investment empire is not “selling annuities,” even as it oversees more than $200 billion of money from such policy writers. Blackstone is also more leveraged to falling interest rates with its massive real estate portfolio, helping explain why analysts expect its earnings growth will outpace rivals next year.

The risks for Apollo are greater in two ways. First, owning Athene may spook insurers from working with it, given they compete, a fear somewhat diluted by the $100 billion of third-party business it handles. Second, if the volume of policies written during high-rate periods persists when rates are lower, investments are bound to yield less.

There are ways for Apollo to navigate the challenges. It owns a stable of companies that issue debt which can be carved up and stuffed onto insurer balance sheets. By owning the pipeline, the idea goes, it will squeeze out extra profit and carefully match up Athene’s book of liabilities, regardless of what the Fed does.

Competition is also intensifying, however. Many of Apollo’s peers are pushing into the area, threatening to erode the bottom line. For now, Athene is managing to widen the gap between its returns and obligations to policyholders. Chasing these gargantuan markets amid slower growth endangers the bounty.