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Apollo moves past CalPERS woes

The private equity firm portrays itself as a victim in the public pension fund scandal.

March 26, 2011|By Stuart Pfeifer and Nathaniel Popper, Los Angeles Times

Reporting from Los Angeles and New York — It's the name behind some of the most recognized brands around, including Carl's Jr. restaurants, Norwegian Cruise Lines and Smart & Final warehouse stores.

It's also the name that came up, again and again, in a recent independent report about corruption inside the nation's largest public pension system.

Apollo Global Management, a New York private equity investment firm, was not accused of wrongdoing in its dealings with the California Public Employees' Retirement System. But the report detailed how Apollo had paid tens of millions of dollars to a former CalPERS board member who helped it land billions of dollars of investments from the massive pension fund.

The former board member, Alfred J.R. Villalobos, plied CalPERS staff with gifts, luxury travel, a job offer and a Lake Tahoe condominium to persuade them to invest in firms he represented, including Apollo, the report said.

In July 2007, CalPERS put up $600 million to buy about 9% of the non-voting shares of Apollo, which operates a West Coast office in Los Angeles. Afterward, Apollo paid Villalobos $13 million in fees for helping secure the deal, according to the report commissioned by CalPERS.

The fact that Apollo had so much money to spend on a placement agent is a testament to its vast resources. The company, which is preparing an initial public stock offering, reported that it had $67.6 billion in assets under management last year and $2.1 billion in revenue, according to a prospectus it filed with federal securities regulators.

The firm is one of the giants in the private equity industry, and like its peers — the Carlyle Group and TPG Capital, among others — its operations had been a closely guarded secret until it opened up recently in preparation for the stock offering, which is expected in the next few months.

The core of Apollo's business is raising money to buy companies that have hit on hard times, including, more recently, Caesar's Entertainment and Coldwell Banker. The firm then makes changes at the companies and sells them once they are worth more.

"We are contrarian, value-oriented investors in private equity," the company said in the prospectus filed with the Securities and Exchange Commission. It searches for "high-quality companies with stressed balance sheets."

Apollo also has branched out into the hedge fund and real estate businesses.

The firm is led by Leon Black, a former protégé of Michael Milken at high-risk securities operation Drexel Burnham Lambert Group Inc. When Drexel went under in 1990, Black and a few colleagues founded Apollo.

Black, the son of a rabbi-turned-food-industry tycoon, is an avid art collector and sits on the boards of the Metropolitan Museum of Art and the Museum of Modern Art. His net worth was recently estimated at $3.5 billion by Forbes magazine.

Over the years Black and his team have developed a reputation for their willingness to fight it out over deals.

"They stick up for the investors," said Paul Schaye, the founder of Chestnut Hill Partners, a private equity advisory firm. "They want to get transactions done, and sometimes that involves sharp elbows."

The financial crisis hit the firm hard, causing it to delay earlier efforts at a public offering of stock. But last year Apollo's portfolio grew 26% and generated a profit of $94.6 million.

The upcoming public offering could raise as much as $417 million, which the firm wants to use to expand its operations. The deal is structured to keep decision making power firmly in the hands of Black and his partners.

Apollo does not appear to have been particularly fazed by the CalPERS investigation. In its regulatory filings, the company said it expects that the probe "will not have a material adverse effect on its financial statements."

"Apollo believes that it has handled its use of placement agents in an appropriate manner," the filing said.

The CalPERS report, the culmination of a 17-month investigation by a Washington law firm, focused blame on Villalobos, former CalPERS Chief Executive Federico Buenrostro Jr. and others at the pension fund.

Last week's report said Villalobos had turned Buenrostro into "a puppet," promising him a lucrative job, lavishing him with gifts and securing a valuable advocate for Apollo and other Villalobos clients inside CalPERS.

Apollo portrayed itself as a victim in a court filing in Nevada, where Villalobos has filed for bankruptcy. The company submitted a claim against Villalobos, saying he violated state and federal law by lavishing CalPERS staff with gifts, causing Apollo "reputational harm."

Apollo spokesman Charles Zehren declined to comment.

The conduct described in the report comes amid national criticism of public pensions in Wisconsin, Iowa and California. Orange County Supervisor John M.W. Moorlach, a longtime critic of what he described as overly generous pensions for public employees, said he hoped CalPERS divested from Apollo as a result of the accusations.

"If there's an ethical issue, you get out," Moorlach said. "If it hasn't happened already, it's because Apollo has ingratiated itself too far with the board of CalPERS."

The relationship between Apollo and CalPERS remains strong. Last year, Apollo said it no longer would pay placement agents such as Villalobos to help it land business with CalPERS.

"We believe that in proactively addressing these issues with our partner and affirming its priorities and objectives, we have established a foundation to enhance and grow our long-term partnership," Black said in a statement released at the time.

Joseph Dear, CalPERS chief investment officer, said the pension system is pleased with its relationship with Apollo.

"If you look at the record, the Apollo investments, with one exception, have been outstanding in their returns."

stuart.pfeifer@latimes.com

nathaniel.popper@latimes.com

Times staff writer Marc Lifsher contributed to this report.

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