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(Bloomberg) — In its quest to double its size by 2029, Apollo Global Management Inc. is ramping up its ability to write jumbo checks to high-grade corporations as it delves deeper into what it calls private credit’s next frontier.

The alternative-asset manager is making its high-grade capital-solutions business a key plank in its growth strategy and is beefing up resources for the unit, Apollo Co-President Scott Kleinman said in an interview.

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“Companies that are extremely well-capitalized are calling us to find out more about these types of deals,” Kleinman said. “We think investment-grade capital solutions are the next frontier of private credit.” 

Capital solutions deals provide flexible lending arrangements, and they’ve grown in popularity among alternative-asset managers that are eager to capitalize on banks’ pullback in lending. Borrowers can expect to cough up roughly 2% more than what they would pay to issue a bond, Kleinman said, but they can often get longer duration, as well as some added sweeteners. 

Apollo has underwritten $18 billion worth of such deals over the past year for companies such as Intel Corp., Vonovia SE, Air France-KLM and BP Plc. The firm estimates that high-grade corporations have $75 trillion of capital expenditure and investment needs over next decade across sectors such as energy transition and digital infrastructure, as well as power and utilities.

During its investor day earlier this month, Apollo said it forecasts assets under management to increase to $1.5 trillion over the next five years. Apollo also projects that earnings at its Athene insurance arm, which is integral to its private credit business, will increase 10% annually on average over the next five years.

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Apollo often places investment-grade products from its capital solutions business on the balance sheets of Athene and other third-party insurers that seek high-yielding assets. Since insurers typically purchase assets with investment-grade ratings, Apollo’s capital solutions business hinges on finding that alignment.

European Market

When the European Central Bank began raising interest rates in 2022, it sent property prices tumbling — pushing up landlords’ relative indebtedness and increasing the risk of default. Landlords rushed to sell assets, only to find many buyers wouldn’t pay anything close to the asking price. If they sold properties at a steep discount, landlords risked going even deeper into debt.

“As European businesses face these massive investment needs, private capital can play a really important role, especially if they want something custom that’s secured by assets or cash flows or is longer dated,” Kleinman said.

German real estate — which borrowed heavily during the negative rate-driven property boom — has been a fruitful hunting ground for Apollo’s capital solutions business.

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The firm struck a trio of deals totaling more than €3 billion ($3.3 billion) with Vonovia, the country’s largest residential landlord, giving Apollo minority stakes in vast portfolios of German housing.

In the first deal, Vonovia sold a 30% stake in a portfolio of 21,000 homes in Germany’s Baden-Wuerttemberg, a transaction that provided a blueprint for subsequent trades.

Despite buying a minority stake, Apollo’s investors get about 70% of the dividends generated by the homes. Vonovia manages the properties without charging asset-management fees.

The deal drew close scrutiny from ratings agencies, but once it became clear Vonovia wouldn’t risk a downgrade, the firm sold a minority stake in a northern German portfolio to Apollo on similar terms. And this month the firms announced a third transaction for a stake in a company that will hold 20% of Vonovia’s shares in Deutsche Wohnen, the rival landlord it bought at the top of the market just as inflation began to accelerate. Details of that transaction weren’t disclosed.

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