What’s the first thing that comes to mind when you hear “Apollo”? If an algorithm of a social media platform led your here, it’s likely that Apollo primarily means Apollo Global Management for you.

Today, the Asset Manager represents ~$600bn AUM, but it all started with one deal.

As you would expect, Apollo’s first deal came out of a crisis : the collapse of Executive Life, an Insurance company in California, and the subsequent takeover of its “junk” bonds portfolio. Apollo built its reputation on this deal, but few people know about the geopolitical tensions that it generated more than a decade later. All because of one party : Apollo's initial anchor investor.

The French bank

Apollo's debut fund was effectively a mandate for Crédit Lyonnais, an ambitious French bank, owned by the state. At the end of the 1980’s and early 90’s it was growing very fast, in all directions.

In 1990, Crédit Lyonnais acquired Altus Finance, the subsidiary that would do everything Crédit Lyonnais “couldn’t do, either because they didn’t have the know-how, or because they didn’t want to, or just because they were not allowed to”. We'll probably cover one day the background of the acquisition of Altus Finance in this blog, as one of many wild stories involving Crédit Lyonnais from that time. But let’s not get distracted for now.

Investing in “junk” bonds was very much in Altus’ remit. And by the end of 1992, Altus would be the global leader in the space.

“Junk” bonds was the term used until the 2000’s for what is now called High-Yield bonds. Back in the 1980’s, junk bonds were still an exotic asset class. And its champion was Michael Milken from Drexel. Milken certainly deserves a separate story but we’ll stick to the TL;DR today : at the end the 1980’s Milken is at the center of several financial scandals and, in early 1990, he accepts a lifetime ban from the securities industry as part of a plea deal.

Not all Milken’s protégés are equally affected by his demise. Leon Black - sometimes called his right-hand - is notably left unharmed, but Milken's issues coincided with major difficulties for Drexel amid turmoil on junk bonds markets. So Black is open to opportunities at the exact time when Credit Lyonnais, in the process of acquiring Altus, is on the lookout for expertise in the US. Naturally Black and the French got close. And when they do, Executive Life is already on everyone’s mind. The opportunity is huge : the portfolio has a face value exceeding $6bn but is marketed around $3bn.

Black has serious angles through his network, but converting a $3bn-opportunity is no easy feat, and authorities in California run a competitive process. Winning would take 18 months.

Apollo I

In the meantime, and irrespectively of the outcome of the Executive life process, Black and Altus focus on structuring a partnership for the long term. The initial plan was to set-up a new partnership, 51%-owned by Altus and 49% by Black and his partners. The partnership would manage Altus’ own junk bond portfolio and create and manage a new $400m-fund named Apollo I.

Pursuant to the plan, Lion Advisors, the partnership, is set-up. It is fully-owned by the Apollo team at first until Altus is cleared by the authorities to own 51%. Apollo I is also set-up and Altus contributed to the vast majority of commitments.

Yet Altus has to overcome a key hurdle : the Bank Holding Company Act barred Altus from owning more than 24.5% of Apollo I. A quick fix was to “hide” behind two shell companies incorporated in Guernsey and to bring in unaffiliated investors.

Altus would still own more than 25% of Apollo I in transparency (more than 50% in fact) but noone seemed to care at that moment. It’s going to be important later but let’s park this for now. In 1991, everything is in place to scoop a once-in-a-lifetime opportunity.

Black has everything lined-up to clinch the deal. But the Californian authorities insist that the buyer of the junk bonds also acquires Executive Life, the Insurance Company, itself. Altus is willing to do so, but the Bank Holding Company Act prevents it. In addition, state-owned companies are not allowed to own insurance companies in California.

Conveniently, a consortium of French and Swiss investors, which are neither banks nor state-owned nor affiliated with Altus, show up to take that piece. The group is led by French insurance group MAAF, already in the structure via Apollo I. Californian authorities squeeze in Sun America, a local Insurer, at the last minute.

After months of negotiations, the deal closes in February 1992. Executive Life, renamed Aurora, is acquired by the consortium for $300m, of which $200m are borrowed from Altus. A new company named New California Life Holding (NCLH) is set-up for the occasion.

The junk bonds go to Apollo 1, Altus provide substantially all the financing. The actual amount varies across sources (between $2.9bn and $3.2bn) but it almost doesn’t matter : the deal is an absolute home-run for everyone.

Incredible returns

Altus quickly flips a large part of the portfolio, selling ~50% for $2bn to French businessman and long-term partner François Pinault early 1993. Pinault is still one of the wealthiest man in France today, as the owner of luxury empire Kering (Gucci, St Laurent, Balenciaga, famous vineyards…). At this stage, Altus also drops the plan to acquire 51% of Lion Advisors, which had been pending clearance since 1990.

It is impossible to know how much Credit Lyonnais made in total from Executive Life. But they often boasted about the amazing performance and used it to defend Altus’ methods after the bank collapsed in 1993 on the back of the real estate crisis and, more generally, too many risky bets. During the inquiry of the French parliament following the bailout of the bank - and in the many books written on the topic in the following years, including by direct stakeholders - the unanimous feedback was that Executive Life had been one of Altus’ best deals.

US sources tend to exaggerate the Credit Lyonnais’ overall return - for obvious reasons that we’ll cover later - and talk about a profit $2.5bn (this certainly includes Pinault's profit later on) whilst French sources probably underestimate it (below $1bn). In any case, Executive Life has been a very profitable deal, especially for a wrecked ship.

The Executive Life portfolio also allowed Apollo to change dimension. The most “active” part of the portfolio, i.e the most likely to convert to equity, and representing ~$500m, was transferred to seed Apollo’s second fund, Apollo II (Altus contributing for 80% indirectly). Apollo, as Management company, collected a fee for arranging the Executive Life deal, a decent share of any profit (between 15% to 50% depending on cases), and had an option to buy in when the bonds were converted to equity - either because they were convertible options in the first place or because a restructuring allowed them to swap their debt for equity.

Fundraising materials for Apollo III mentioned a net IRR of 40% (over 50% gross of fees and carried interest) for the Executive Life transaction through Apollo I and II. In practice it constituted not one but several landmark transactions for the firm : if you research Apollo’s track record in the early years, which are pivotal to raise subsequent funds - names like Vail ski resort, Samsonite or Culligan Water Technologies will likely come up. All of them came from the Executive Life junk bonds portfolio.

The story could end here, on the positive note that everyone made a lot of money. But it was just the beginning.

The whistleblower

Do you remember that the ownership structure of the portfolio was not exactly bullet-proof? Well, in reality, it was even worse, and someone blew the whistle in 1998. Everyone probably knew, yet noone officially did. And, in the end, some paid the bill.

Let’s rewind.

Even before the Executive Life deal, in 1990, Altus held in transparency over 50% of Apollo 1, and controlled both Guernesey SPVs. Altus injected about $3bn to acquire the junk bonds, much more than the initial $400m. The portfolio was later split between Apollo I and Apollo II. Altus’ CEO admitted in 2002 that they represented 88% of the first two Apollo funds.

It also appeared that co-investors benefited from a financing from Credit Lyonnais and/or from guarantees against losses. Credit Lyonnais was aware of the risky position, as evidenced by discussions to transfer the active part of the portfolio during the Fall 1992.

The concern was that equity conversions would raise questions about the ultimate beneficiaries of the companies. And reveal that Crédit Lyonnais held more than 24.5% of non-bank companies in the US. Each conversion basically implied lying to the US authorities again.

The transfer to Pinault did not draw particular attention at the time, but investigations in the early 2000’s revealed that the solution he offered had intriguing features (he was advised by Apollo, who was entitled to a share - estimated at $100m - of Altus’ profit in the trade).

First of all, this was largely financed by Credit Lyonnais - but this was not unusual in the bank’s relationship with the businessman. His retail/distribution empire at the time would have looked very different without the support of Credit Lyonnais’ : the bank financed, amongst others, the acquisitions of Printemps, CFAO…

Legally, the bank owned a big share of Pinault’s estate, and economically it potentially owned everything depending on when you take the snapshot. But that’s a story for another day… The financing to buy the bonds was secured by all assets in Pinault’s retail group (PPR). But in turn Pinault benefited from downside protection and call options on certain underlying companies.

One of the most surprising was certainly a call option on Aurora via NCHL. Although the legal language of the option was subject to interpretation, it was an option in practice. And Pinault exercized it: Artemis bought 50% in September 1994 and another 17% in April 1995, buying out all members of the consortium except Sun.

Why is this call option surprising? Because Credit Lyonnais could only grant a call option if it owned NCHL or had a call option on it. But it wasn’t the case… unless there were secret agreements with the legal owners. In other words, it raised questions on whether the original transaction on Executive Life was a sham. And that’s precisely what the whistleblower claimed in 1998 : if Credit Lyonnais effectively controlled the insurance company, it would be a breach of the Bank Holding Company act, and of California law barring state-owned entities to control local insurers.

US authorities took this very seriously, in particular after the Enron and Worldcom scandals in 2001-2002. Or may be it was driven by the attitude of the French towards the war in Irak. Either way, France was not entitled to the National Treatment principle, which usually protects governments / countries from charges in case of a bailout.

The investigation revealed that the French and Swiss investors into NCLH were entirely funded by Crédit Lyonnais and benefited from a guarantee (put option). At least 67% of the deal was just fronted as Altus also had a call option on the NCLH shares.

Was Sun part of the scheme? it’s impossible to know, they don’t seem to have been funded by Credit Lyonnais, and there was no call option. They only benefited from the same downside protection as the others through a guaranteed put.

Then came Pinault, who also had very strong ties with the bank. The bank owned 44% of Financière Pinault which owned 75% of Artemis. Artemis was a “subsidiary” of Crédit Lyonnais as defined by U.S. banking laws; so Crédit Lyonnais was in violation of those laws.

Leaked documents from the French Ministry of Finance revealed that France had known about the fronting arrangements since at least 1997. But never came clean to the US authorities. And this has been pivotal in the decision to treat France as a criminal defendant rather than a sovereign nation.

The last stages of the indictment process involved direct calls between the French Deputy Ministry of Finance and the US Attorney in charge of the case, and later between the French Ministry of Justice and General Attorney. This hardly ever happens.

Ultimately, Credit Lyonnais paid about $700m to settle both criminal and civil cases, the majority of which was borne by the French tax-payers. At the time, it was the highest amount ever paid in such context. MAAF and smaller co-investors also paid about $10m. Artemis paid about $100m to settle the criminal case but did not settle in the civil case, which they would win in 2012, almost 20 years after the investment. Pinault was not personally indicted.

Black and Apollo were never concerned by the indictment either (they were understood to cooperate with the US authorities). Neither were Sun - Sun actually received about $60m from Artemis/Pinault as part of a separate civil case.

Want to form your own opinion on who did what, and who knew but never told? All sources, from both sides of the Atlantic, are listed below.