The net IRR for its prior fund — Apollo Investment Fund V, which invested its capital during the economic downturn of 2001 through late 2003 when a number of buyout funds did well — dipped slightly to 52 per cent from 54 per cent during the same time period. However, in a Securities and Exchange Commission document filed in preparation for going public, Apollo officials wrote investors should not expect similar returns from future funds. “We do not believe our future IRRs will be similar to the IRRs for Fund V,” the firm states.

Bad news for two big investors

This is particularly bad news for two large investors. In July 2007, the $900 billion Abu Dhabi Investment Authority and the US$227.7 billion California Public Employees’ Retirement System each bought a 10 per cent stake in Apollo Global Management, the manager’s parent, for a combined US$1.2 billion. As part of the deal, they agreed not to sell the stakes for two years. In addition, CalPERS committed US$1 billion to Apollo’s seventh buyout fund as well as capital to the two other funds.

Apollo Global reported a US$96.4 million net loss in the quarter ended March 31, down from a US$144 million profit in the same quarter last year, according to the SEC filing. Kohlberg Kravis Roberts & Co. also suffered return declines, even in the Millennium Fund, a 2002 vintage fund. From inception in December 2002 through March 31, 2007, the Millennium Fund’s IRR was 40.6 per cent. Also, last quarter KKR suffered net unrealised losses of US$2.2 billion from changes in the market values of the portfolio companies in its private equity business.

Not only was there a boom in fundraising between 2005 and 2007, but the megafunds went to the marketplace a couple of times during the time period. “People invested very quickly. Some 2006 funds were invested by 2007,” said David Fann, boss of PCG Asset Management, a private equity consulting and fund-of-funds management firm.

A number of pension funds invested in multiple funds. For example, in 2006 and 2007, CalPERs committed capital to KKR European Fund II and KKR 2006 Fund. But CalPERS officials say it is too early to be concerned about the 2006 and 2007 buyout funds. “These funds are too young for any meaningful assessment of performance,” said spokesman Clark McKinley. “You may have noticed that the youngest funds have often negative returns for the early years of what’s typically a 10-year fund lifetime (or longer) before we cash out. It may take three to five years for funds to draw down CalPERS’ committed capital. It’s just too early to tell how this might pan out.”