Josh Harris says its All About a Company's Value
Harris recently appeared at a Delivering Alpha conference and said much of Apollo's success can be attributed to errors common investors make because they depress the value of companies that are appealing, or aren't far away from success. That gives Apollo a chance to buy those companies at very appealing prices.
Harris said that publicly traded stocks usually trade at double-digit multiples compared to their respective EBITDA. Taking this into consideration Apollo's last fund searched for diamonds in the rough and acquired companies for just six times their EBITDA.
"We've been able to buy great companies really well, really cheaply because they've been misvalued by the public markets because they don't fit in a box," he said. "If you don't fit the box in the public markets, you can't raise money." As an example he mentioned Smart and Final, a company Apollo bought in June for $1.1 billion. He argued that investors weren't sure how to evaluate the company, which included both a warehouse-style grocery store and a food-service business.
"More and more, the public markets are suited for simple companies' growth, things that are easy to understand," he said. "We were able to buy it at six times cash flow."
Harris said Apollo will probably break Smart and Final into two companies, and has high expectations for both divisions separately.
"What we're finding is that if anything has a hint of internet disintermediation, if it's complicated, we can buy it," Harris said.
Harris noted that average investor aim at short-termism, "If you have a long-run strategy, you need to invest, you need to build a plant, you need to grow, and you might have to your earnings might have to go down first," he said. "We own companies for five to seven years or even longer, typically and so you can take that longer-term point of view."
Harris also encouraged the average investor not to be too scared of debt. He added, Properly deployed, leverage can enhance a company's growth and get it a tax break, but companies that borrow or need to borrow can get punished. "There are many, many companies that make sense for private equity where private equity will afford them the opportunity to grow," he said.