James Zelter, Apollo co-president, heads the firm’s credit business.
Photo: David Paul Morris/Bloomberg NewsApollo Global Management Inc. is launching a big new credit operation as the buyout giant dives deeper into the rapidly expanding pool of direct lending.
The New York firm is creating a $12 billion platform focused on providing companies with loans of around $1 billion, Apollo officials said. Abu Dhabi state fund Mubadala Investment Co. is the lead backer of the venture, whose firepower Apollo plans to augment with additional capital from other investors.
In direct lending, an alternative credit provider makes a loan and keeps it on its books rather than syndicating it out to investors. Direct lending has expanded dramatically since the financial crisis as new regulations and a desire to avoid the mistakes of the past push banks to eschew riskier businesses. That has left a void for private capital to fill, creating a market Apollo and others estimate at roughly $800 billion—up from around $100 billion a decade ago.
The continuing quest for yield by pensions, sovereign-wealth funds and other institutions during a period of historically low interest rates has driven the flood of money into direct lending. With rates falling even further as a result of the Federal Reserve’s response to the coronavirus crisis, there is no sign the torrent will abate.
Apollo, which already had $24.5 billion dedicated to direct lending as of March, has taken full advantage. But so far its direct-lending business has primarily focused on making smaller loans to midsize companies.
Indeed, most direct lenders target such companies—most of them private-equity backed—with loans of around $100 million to $300 million.
Apollo is also a big investor in corporate bonds and loans, with an overall credit business totaling $210 billion.
“This is the great white space between our big corporate-credit business and our middle-market sponsor business,” Apollo Co-President James Zelter, who heads the firm’s credit business, said of the new lending platform.
Many of the biggest borrowers still turn to banks, which divvy up loans and sell the pieces to investors.
But a small group of direct lenders, among them Ares Management Corp., Golub Capital and Antares Capital LP, have branched into making larger loans, typically dividing them among a limited number of peers.
Apollo, which has also made larger loans to companies like energy-infrastructure provider New Fortress Energy LLP and trucking firm YRC Worldwide Inc., believes that the less-crowded upper end of the market will continue to grow. By launching a dedicated business that will be able to hold most of the loans it makes, Apollo hopes to more aggressively target larger borrowers—both private-equity backed and those that aren’t—that can’t get the financing they need from a bank.
For example, a fast-growing company’s current cash flow might make it look too highly indebted for a bank to provide credit, but a private lender could get comfortable with its trajectory.
With New Fortress Energy, banks wouldn’t lend more than $500 million based on its current cash flow, according to John Zito, deputy chief investment officer of Apollo’s credit business. But the company, which builds natural-gas infrastructure in the Caribbean and Latin America in exchange for long-term contracts to transport natural gas to those markets from the U.S., needed more capital to grow.
In January, in an example of the kind of deal its new platform will strike, Apollo gave the company an $800 million, three-year loan. Apollo expects it will ultimately be refinanced with a syndicated deal from a bank, Mr. Zito said.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
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