NEW YORK (Reuters) - Private equity and credit investment firm Apollo Global Management LLC (APO.N) announced bold plans this week to expand its lending to companies, seizing on the shadow banking opportunity created by regulatory curbs on junk-rated loans.
Apollo has traditionally lent to companies through so-called mezzanine funds and other vehicles that accept securities which promise higher returns, but are more risky than the senior secured loans usually provided by banks.
The New York-based firm said it now plans to grow its permanent capital base to invest in such senior secured loans, emulating the practice of banks on which it relies to fund its private equity deals.
"Think of this as the levered lending business within one of the large financial institutions... except the desire here is not to originate to distribute, but to originate to hold, and distribute little pieces, when, as and if necessary," Apollo co-founder and senior managing director Marc Rowan told investors at an event hosted by the firm on Thursday.
Apollo wants to work with banks, rather than compete against them, Rowan said. Apollo would not be seeking clients like banks do, but work with them to originate and then hold on to loans, rather than mostly syndicate like banks do.
Banks regulated by U.S. agencies have been struggling to meet the demands of private equity clients for loans after regulatory guidance issued last year imposed restrictions on the amount of debt lent to companies.
"That's probably the way regulators want the market. People who are originating and holding credit, having so-called skin in the game, and doing it on a permanent capital basis, rather than on a hot potato of let's distribute to the market and let's underwrite and see if the market will take it," Rowan said.
While Apollo has historically helped finance small buyouts of companies, it has been gradually expanding into larger deals. Last month, it helped finance private equity firm Vista Equity Partners' $1.5 billion acquisition of TransFirst Inc.
Apollo manages around $164 billion in assets. Rowan said $71 billion of that was permanent capital, mostly coming from insurer Athene Holding Ltd, one of the largest U.S. fixed annuity providers, established by Apollo five years ago.
Dubbed 'NewCo', Apollo now has a permanent capital pool of between $1.5 billion and $2 billion dedicated to senior secured loans, Rowan said, adding this could become an "incredibly important" part of its business.
Reporting by Greg Roumeliotis in New York; Editing by Grant McCool