Rowan the boat
Marc Rowan may regret imitating Warren Buffett. The incoming Apollo Global Management chief executive on Monday announced that the private-equity group was buying the roughly two-thirds of insurer Athene that it doesn’t already own. There’s logic to having a permanent capital vehicle in-house, as the Sage of Omaha knows. But Apollo risks being valued like a stodgy financial conglomerate rather than a racy buyout shop.
The deal simplifies an awkward relationship between Athene and Rowan’s $21 billion group, which created the insurer in 2009. Apollo is paid to invest Athene’s asset base. That gives Apollo an incentive to push Athene to use excess capital for investment rather than share buybacks. It also makes Apollo overly dependent on an external company. Roughly 40% of assets under management come from Athene.
After the all-stock deal, they’ll be on the same team. Apollo shareholders will own roughly three-quarters of the enlarged $30 billion company, while Athene’s will have the rest. Rowan is securing the company at a low price, too. His offer values Athene at almost $11 billion, or just 7.1 times 2021 earnings using Refinitiv’s median estimate. Life insurance peers trade at 8.8 times on average.
The problem is that bringing Athene in-house muddies Apollo’s investment case. As a result of the deal, Rowan will have to consolidate the annuity provider’s earnings. Based on 2020 figures, they could account for more than half of the combined total. The new group will look more like one of those life insurance peers rather than a focused buyout shop, and Apollo currently trades at 18 times forward earnings. The risk of a conglomerate discount may explain the 5% decline in Apollo’s share price after the deal was announced on Monday.
Buffett, whose Berkshire Hathaway owns insurer GEICO, is a hard act for anyone to mimic. Though Rowan helped shape Apollo, he’s only just been given authority to take the reins after figurehead Leon Black stepped down as the company unveiled an investigation into his relationship with convicted sex offender Jeffrey Epstein. Buying Athene may help Apollo shift gears and move on to the next chapter. But it will also take the shine off the company’s punchy valuation. For Rowan, cleaning up the relationship with Athene comes with a price.