By Greg Roumeliotis
NEW YORK (Reuters) - Apollo Global Management LLC APO.N plans to start raising between $2 billion and $3 billion for a second natural resources private equity fund, sources familiar with the situation said, in the latest sign that the firm is doubling down on the U.S. shale boom.
Apollo's plans for a new fund come amid a steep fall in oil prices, with Brent crude oil plunging 15 percent since the end of September to a four-year low of under $83 per barrel. The fall in oil prices could generate new opportunities for the fund to buy assets at cheaper prices, but could also eat into cushions that Apollo built into its earlier deals in the sector.
The timing of the fundraising is not driven by the oil price decline, the sources said, noting that it is part of a longer-term strategy. The firm's first resources fund, the Apollo Natural Resources Partners, has now almost fully invested the $1.3 billion it raised in 2012.
More than two-thirds of the money that's already been spent from its global, multi-sector fund, the $18.4 billion Apollo Fund VIII, has also gone into natural resources deals, the sources said. That fund, which finished fundraising in January, has invested about 15 percent of its capital.
A spokesman for Apollo declined to comment.
Apollo's interest in natural resources puts a spotlight on how private equity firms, with tens of billions of dollars of capital to invest, have been quietly funding America's shale boom and investing aggressively in energy plays around the world. Others such as Blackstone Group LP BX.N and Warburg Pincus LLC have also been pouring funds into the sector through dedicated investment vehicles and general private equity funds.
Their interest comes as private equity firms find fewer opportunities for their traditional business of debt-fuelled acquisitions of companies. Soaring stock markets and renewed hunger for mergers and acquisitions among corporations over the past couple of years have made leveraged buyouts more expensive and crowded out private equity.
As a result, these firms have been struggling to put money to work and maintain the kind of returns that pension funds and other institutional investors in their funds got used to over the past decade.
The energy sector is offering alternative investment opportunities and deal structures.
Apollo's natural resources investment strategy typically involves backing seasoned management teams to acquire and develop oil and gas assets, including unloved reserves being sold by energy companies.
These deals tend to be cheaper than leveraged buyouts. They are, though, often more complicated, which reduces competition and allows the firm to build in cushions against oil price declines.
Over the past three years, even when oil was trading above $100 per barrel, Apollo did deals assuming much lower oil prices, the sources said. It has also hedged its exposure to lower oil prices in much of its existing portfolio, the sources added.
In August, Apollo's co-founder and Chief Executive Leon Black told investors that energy deals are helping Apollo invest its Fund VIII at an average of 6 times a company's annual earnings before interest, tax, depreciation and amortization, versus a private equity industry average of 9.5 times for all deals.
HIGH RETURNS
Apollo Natural Resources Partners is still a young fund by private equity standards. But it reported a gross internal rate of return of 20 percent as of the end of June, beating a three-year average annual return of 16.6 percent for the S&P 500 Index. The fund's returns since then have not yet been disclosed, and may have been hurt by the decline in energy prices and energy company stock prices in recent weeks.
Last month, Athlon Energy Inc ATHL.N, an oil and gas exploration and production company, became one of Apollo's most profitable investments, as Canada's Encana Corp ECA.TO agreed to acquire it for $5.9 billion, equivalent to 7.3 times Apollo's investment.
Apollo helped put Athlon together from scratch in 2010 to acquire and develop long-lived oil and natural gas properties in the United States.
Not all energy deals have been a home run for Apollo.
Shares in EP Energy Corp EPE.N, which an Apollo-led consortium acquired for $7.15 billion in 2012, trade at 25 percent below the price of their initial public offering in January.
Apollo has not yet sold any of its shares in EP Energy. The deal was a big leveraged buyout, and sources said the company's high borrowings have contributed to the shares' underperformance.
There are also limits to how much Apollo can do in energy. Investors expect generalist private equity funds to have exposure across a range of sectors. Apollo itself sees energy deals accounting for less than a third of the capital that Fund VIII will eventually deploy, one of the sources said.
Fund VIII has a six-year investment period, and has been seeking cheap deals in other sectors, too, such as financial services.
Earlier this month, for example, Apollo agreed to acquire Portuguese insurance company Tranquilidade, part of the troubled web of businesses of the Espirito Santo family.
(Reporting by Greg Roumeliotis in New York; Editing by Paritosh Bansal and Martin Howell)