To Apollo, AR Global Deal is a Way In

NEW YORK CITY—For Apollo Global Management, the acquisition of AR Capital's business will expand its real estate footprint, but in a different way than, say, the Blackstone Group's entity-level deals for Hilton Worldwide Holdings in 2007 and, most recently, Excel Trust. In this case, the emphasis is not on amassing a huge pool of rental income but rather, tapping into a huge pool of retail investors, in the form of a newly launched business, AR Global, that will pick up where AR Capital left off.

“We believe AR Global will be well-positioned to benefit from the growing trend among retail investors to seek yield-oriented investment solutions and at the same time drive meaningful growth for Apollo,” Marc Rowan, co-founder and senior managing director of Apollo, said Thursday when the acquisition was announced. AR Capital, established in 2006, has an enviable track record in this space: an Apollo investor presentation on the AR Global deal notes that “in recent years, AR Capital has been the leading asset gatherer in the non-listed product market”—currently estimated at $100 billion-plus—“capturing 20-35% of annual industry capital raised.”

In 2014, for example, AR Capital raised $5.9 billion of equity in the non-listed REIT space. Citing data from the Investment Program Association, Apollo's presentation notes that more than 30,000 financial advisors use non-listed REITs or business development corporations in their practices, and more than 1.2 million investors include these vehicles in their portfolios.

The AR Global deal will help position Apollo as a leader in this arena, as the industry evolves “to offer more institutional quality products and services to retail investors,” according to the investor presentation. It will also enable the company to broaden its positioning as a full-service solution provider for the institutional, high net worth and retail markets.

Apollo's deal for a 60% stake in AR Global also brings it into the retail investment market at a time that this market is undergoing secular changes. The regulatory regime continues to grow, and new disclosure rules mean new business models, along with changing fee structures.

Also changing, according to Apollo, are retail investor requirements. Investors are looking for current income, a criterion that meshes well with income-producing properties. Furthermore, the company sees “growth in permanent capital vehicles that match investor capital with new investment opportunities.”

In a separate but related deal, Apollo said Thursday that it had agreed to acquire RCS Capital's wholesale distribution business for $25 million in cash, and that it had also entered into a strategic partnership with RCS's retail advice business, Cetera Financial Group. Additionally, Apollo will be purchasing $25 million in newly issued preferred stock in RCS.

The wholesale business and partnership with Cetera are "complementary to Apollo's existing relationships and long-term commitment to the retail channel,” the company says. “The transaction will substantially expand Apollo's wholesale distribution network, adding scale and an increased ability to service the needs of its strategic distribution partners as appropriate.”

Last but certainly not least, there is the strictly real estate-oriented aspect of the deal for AR Capital's business. After the transaction closes, Apollo's real estate assets under management will more than double from $11 billion to $27 billion.

The Wall Street Journal on Thursday called Apollo's deal "a risky bet," and Fitch Ratings would be inclined to agree. While affirming Apollo's A- ratings, Fitch on Thursday cited "execution risk" associated with achieving the synergies and scale envisioned for the new platform, and pointed to the increased regulatory scrutiny non-listed REITs have gotten lately.