If it weren’t for mistakes that investors made and continue to make, Apollo’s co-founder Josh Harris admits that his firm wouldn’t be where it is today.
As he revealed during CNBC’s Delivering Alpha, he is an expert at exploiting these mistakes, and Apollo has enjoyed massive returns on this basis.
By massive returns, Harris isn’t exaggerating in any way. Currently, the firm holds assets worth over $300 billion, and $77 billion of this amount is in private equity. Not bad at all, right?
Sweeping in Unnoticed
Thanks to these mistakes that Harris is talking about, investors unknowingly reduce the strength of appealing companies — or at least those that are just on the brink of massive success. Like a hungry owl to a mouse, this is where Harris sweeps in unnoticed, buying these companies at appealing prices.
Once they are under the Apollo wing, the rest is history. Harris and co. restore them to their former glory, reaping all the benefits while at it. Who then can dare say that the man isn’t a master of his craft?
All this while, you must be wondering what exactly the entrepreneur means when he refers to mistakes. Thankfully, he was kind enough to spell them out for us.
He started off by saying that your average investor hardly ever backs a complicated company. They see such companies as complex businesses, and because of this, they end up under-valuing them.
According to Harris, the public has this idea of what an ideal business should be, and if yours doesn’t fit into their box, raising money becomes a headache. One such company is Smart & Final, a company that Apollo recently acquired for $1.1 billion.
As Harris argued, investors weren’t quite on top of their game in terms of company evaluation. If it were him on the other side, his valuation would have had the company selling for six times more. Do you now see how much of a bargain $1.1 billion was?
Now, Apollo plans to split Smart & Final into two distinctly separate companies, and you bet that they have big plans in store for either. Watch this space!
Mistake number two that your average investor makes is that they are too afraid of a potential disruption in the market. Still singling out Smart & Final, Harris recalls that in the build-up to its acquisition, folks at Wall Street were all about how Amazon was coming for its business.
For Apollo, this fear is one of the ingredients to a perfect acquisition, and that’s exactly what they did. Harris admitted that his firm has noticed a pattern with such fear – whenever investors think that the issue is complicated, Apollo finds it easier to buy the company.
The third mistake is one that everyone knows, and it is that the average investor goes into business for short-term benefits. Apollo buys out companies whose previous owners have given up on them after one or two years, and after owning them for at least five years, they are able to completely turn things around.
What do you think of debt? Harris says that an average investor is scared of borrowing, but that’s because they don’t know the power of debt. When these funds are properly utilized, they can bring you heaven on earth.