Oppenheimer Ups Apollo Global To Outperform, And It's Not Because Of The Q2 Beat

Oppenheimer has upgraded Apollo Global Management LLC (NYSE: APO) to Outperform from Perform with a $19 price target on potential returns from its new fund.

Apollo's new flagship Fund VIII is now 60 percent committed and has for the first time crossed into carry. The brokerage noted that significant cash realizations are probably still 12–18 months in the future, as the fund realized only $0.3 billion on $7.1 billion of invested capital. Fund VIII is now carried at a 25 percent gross and 10 percent net IRR.

"While this carrying value is thus far mainly non-cash 'mark to market' gains, APO has an outstanding history of turning these marks into cash," analyst Chris Kotowski wrote in a note.

Related Link: Why Is Apollo Global Going On A 2016 Shopping Spree?

"We estimate that Fund VIII appreciated by $500 million–600 million, driving a $135 million increase in gross unrealized carry," the analyst continued.

Further, Kotowski noted that the Fund VIII is in its "catch-up" phase; as of June 30, only $30 million remained to be caught up.

"[W]e expect the carried interest receivable to build rapidly from here as the first 2 percent of appreciation in any quarter goes to the 'catch up,'" the analyst added.

On the financial front, Apollo had a solid beat in the second-quarter gross cash distributable earnings of $0.37 versus Oppenheimer's $0.29 estimate.

At time of writing, shares of Apollo were up 4.15 percent on the day at $18.34.

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