The deluge will inevitably weigh on returns. Apollo’s 2013 fund, which has acquired home security operator ADT and cloud-computing company Rackspace, has generated a net internal rate of return of 16 percent as of March 31. There’s still plenty of time, but that’s less than the 26 percent rate of its 2008 mega-fund and far below the 44 percent IRR generated on a $3.7 billion buyout fund of 2001.
Apollo co-founder Leon Black is like the proverbial hiker who encounters a bear in the woods. He only needs to outrun his peers, not the bear. Slow economic growth, historically low interest rates and massive bond buying by central banks have depressed returns across all asset classes. Hedge funds, one of the closest comparisons, have generated annual gains of just 4.9 percent over the past five years, according to Hedge Fund Research’s Fund Weighted Composite Index.
Even shrunken returns appeal on a relative basis. According to Greenwich Associates, a net 12 percent of big fund managers plan to significantly increase their private-equity allocations over the next three years, more than any other investment except direct real estate. That suggests Black and his fellow buyout barons have considerable room for error built into their mega-funds.
(This item has been updated in the third and fourth paragraphs to show the percentage of the 2013 fund that’s been invested and the fund’s IRR as of late April and March 31, respectively, from Dec. 31 previously.)
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