Apollo Diversified Credit Fund
The Apollo Diversified Credit Fund (ticker: “CGCCX”) is a continuously offered, diversified, closed-end management investment company that is operated as an interval fund. The Fund’s investment objective is to generate a return consisting of both current income and capital appreciation with an emphasis on current income with low volatility and low correlation to broader markets. The fund's investments are typically rated below investment grade. This means that the securities have a higher risk of default than investment-grade securities.
The fund applies a “multi-asset” approach in both private and public credit with a strategy that centers around five key strategy pillars: large scale origination, private credit strategies, levered performing credit, dislocated credit, and structured credit. Under normal market conditions, the Fund will invest at least 80% of its assets in debt securities, including investment-grade and high-yield debt, floating rate securities, derivatives, and non-US securities.
As of December 31, 2023, CGCCX’s portfolio aggregated to $392 billion compromised of 152 companies spanning the following top 5 sectors:
Software (9.8%)
Health Care Providers & Services (8.0%)
Financial Services: 6.2%
Media (5.3%)
Commercial Services & Supplies (5.1%)
Apollo applies a differentiated approach to credit investing that aims to deliver attractive returns in both expansionary and recessionary environments. Given Apollo’s size and expertise, the manager is well-suited to invest in “complex transactions” that other investors avoid or lack the skill set to implement. Apollo’s diversified credit offering has a number of strengths, such as a well-diversified portfolio spread across a variety of sectors and credit ratings which helps to reduce the fund's overall risk. The fund pursues a credit strategy focusing on high conviction opportunities and investment themes, such as high-yield bonds, senior loans, structured credit, emerging markets debt, and convertibles.
Overall, the Apollo Diversified Credit Fund is a well-managed fund with a diversified portfolio and modest fee structure. However, investors should be aware of the limited liquidity and credit risks associated with the fund. As a firm, Apollo is one of the world’s largest and most successful credit and alternative investment firms, supported by an experienced team of credit professionals.
Assets
Geography
End Market
Size and scale: Apollo’s track record and expertise in credit and alternative investments serve as a positive factor. Apollo is experienced in analyzing credit opportunities and challenging market conditions.
Mixture of public and private credit: The ability to move between private credit and public credit markets in certain market regimes can benefit risk-adjusted performance and may continue to support returns going forward.
Diversification across sectors: Apollo’s diversified approach provides exposure to a broad range of instruments, potentially reducing the impact of weaker segments in favor of those deemed more attractive.
Market volatility: The fund has experienced elevated volatility as exposure to riskier segments of the credit market has weighed on returns, including emerging market debt, below investment grade debt, and credit-oriented derivatives.
Lack of transparency: Despite its background in the private market space, Apollo lacks easy accessibility and direct communication with investor relations.
Underperformance: The fund has underperformed given broad-based headwinds that weighed on both public and private asset classes.
To help you compare the cost of investing in this offering with other offerings, Apollo has provided an example of the projected dollar amount of total expenses that would be incurred over various periods with respect to a hypothetical investment for each class of common stock.
The fund does not charge a performance fee, which is often used to improve alignment of interest between the fund and underlying investors. It is unclear if the portfolio management team have invested their own capital in the fund so their interests may not be aligned with their investors. Conflicts of interest may arise when Apollo employees serve as directors, board observers, or management committee in the operating entities in which the Fund invests.
For Class C shares, the Fund has delivered a strong recent 10.85% 1-year performance as of January 31, 2024. Its inception-to-date returns are not as attractive as they have returned only a 4.68% annualized rate of return. The current distribution rate for this share class stands at an attractive 9.34%.
Looking at other time periods, the Apollo Diversified Credit Fund has delivered low to mid-single digit returns over the three-year and five-year annualized returns. Compared to peers, the Fund has delivered mixed results, despite its ability to take advantage of different opportunities across both public and private sectors. However, the chart below depicts the unique return profile the Fund has delivered in 2023 compared to its peers.
The portfolio is constructed to benefit from a diversified source of returns, including relative value opportunities between fixed- vs. floating-rate debt, public vs. private market debt, high yield vs. investment grade debt, and US debt vs. non-US debt. As of July 31, 2023, the Fund’s portfolio is comprised of 47% of levered performing credit, 7% dislocated credit, 38% large scale origination, 3% other private credit strategies, and 5% cash.
From 2022 – 2023, rising interest rates put downward pressure on credit valuations and falling rising default rates served as a risk for the fund to underperform due to the rising credit spreads. Now at the beginning of 2024, investors are looking for a “Fed pivot” with short-term interest rates to actually be cut by the Fed. This should help free up liquidity in the economy as investors will move out of cash positions and money markets into other riskier opportunities. This will also help increase the valuation of credit assets and may help boost the fund’s performance. On the other hand, Apollo has the ability to take advantage of opportunities across both public and private markets and its diversified allocation could potentially reduce risks of major losses.
There are still upside risks to inflation in 2024 and investors may not receive the interest rate cuts that they are looking for as soon as they expect. The globe is still exposed to higher amounts of geopolitical risks and investors may want to position themselves into credit assets that are more senior and higher in the capital structure.
Investors should keep an eye out for the low amount of performing credit in the fund. Only 24% of the Fund is considered performing credit. This is below The Fund’s long-term allocation target for Performing Credit is 25-35%.
Apollo Global Management is a well-known, worldwide, and a large private equity firm. The fund managed by Apollo has a competitive position as a top-tier global investment manager which helps mitigate business risk. Apollo also has a diverse base of operations and expertise. Its strong investment record, its ability to navigate challenges, as well as changes overall reduces business risk. While Apollo is a large and experienced firm, there are new key leaders on the Fund’s investment team, having recently joined in late 2021 and early 2022.
The Fund has a leverage ratio of 18.3%, with floating rate debt of 79.2% of the portfolio, and fixed rate debt of 13% with an average duration of 1-2 years. Investors should be aware that the use of leverage exposes the Fund to a higher degree of risks that have not been included.
Early on in 2023, the US economy experienced tightening credit conditions and stalling loan growth for U.S. banks. If this continues, this should be beneficial for credit lenders such as this Fund.
Liquidity for the fund’s shares will be provided only through quarterly repurchases for no less than 5% of the fund’s shares at NAV and there is no guarantee that an investor will be able to sell all the shares that the investors desire to sell in the repurchase offer.
During the year ended December 31, 2022, the fund completed four quarterly repurchase offers in which the fund offered to repurchase up to 5% of its outstanding shares as of each respective request deadline.
February 8, 2022 (56% of the total number of shares for repurchase)
May 10, 2022 (65% of total number of shares for repurchase)
August 9, 2022 (56% of total number of shares for repurchase)
November 8, 2022 (47% of total number of shares for repurchase)
* There was a subsequent event on February 7, 2023 that the fund repurchase request received by the fund exceeded the number of shares subject to the repurchase offers.
Apollo offers a diversified amount of information on its website ranging from prospectus, fact sheets, annual and monthly reports, as well as performances. Additionally, Apollo provides an extensive library of literature, news, and SEC filings allowing current investors and potential investors to browse through. The strategy of daily NAV disclosures also allows the investors to be noted about daily fluctuation and adds transparency to its investors. Despite its background in the market space, it is difficult to reach out to the investor relations team which reduces its transparency. Furthermore, contact information is not provided on the website and lacks accessibility for investors to reach out regarding further questions and gain more information about the fund.