Leon Black helped start Apollo Global Management three decades ago out of the ashes of a junk-bond scandal and built a $400 billion private-equity powerhouse, handling the investments of institutions around the globe, from public pension systems in California to sovereign wealth funds controlled by foreign governments.
But now some of his clients are asking pointed questions about his judgment, as his association with a notorious sex offender threatens to cloud his future.
In the past two weeks — since The New York Times detailed more than $50 million in payments and contributions from Mr. Black to Jeffrey Epstein — Apollo’s clients have begun demanding answers about that relationship. In at least one case, an investor has decided not to hand Apollo any more of its money for the time being.
Apollo will report its quarterly earnings on Thursday, and an analyst note from investment firm Keefe, Bruyette & Woods said the effect of Mr. Black’s dealings with Mr. Epstein on client relations will be a “focal point†of the private equity firm’s earnings call.
“Investors are concerned about reputational risk,†Kenneth Worthington, an analyst at JPMorgan Chase who covers the company’s shares, wrote in a client note.
Mr. Black, 69, is Apollo’s chief executive and chairman. He started the firm with other former employees of Drexel Burnham Lambert, the investment bank that collapsed in 1990 amid a trading investigation that sent the since-pardoned Michael Milken to prison. Mr. Black has long been the face and voice of Apollo: In securities filings, Apollo names five people who are so vital to its business that the loss of their services would have a “material adverse effect†on the firm.
In plainer terms, Apollo’s business suffers without a few key people. And in the list of names, Mr. Black’s comes first.
“Apollo has always been closely associated with its founder and leader,†said Sabrina T. Howell, an assistant professor of finance at New York University’s Stern School of Business who has studied private equity firms. In the short term, she said, “Apollo’s brand will certainly suffer.â€
Mr. Black — who is one of Apollo’s largest shareholders along with his co-founders Josh Harris and Marc Rowan — asked the firm’s independent board members to conduct an investigation into his financial ties with Mr. Epstein, who died in a Manhattan jail cell last year while facing federal sex-trafficking charges.
Mr. Black knew Mr. Epstein for decades and was just one of a long list of high-profile figures to have associated with him, from Prince Andrew to a number of business leaders. After Mr. Epstein’s arrest, Mr. Black told investors in a letter that there had been a “limited relationship†with Mr. Epstein, who gave him advice “from time to time†on personal financial matters, such as estate planning. Mr. Black stressed that he was not aware of the conduct that had led to the sex-trafficking case against Mr. Epstein.
Although Mr. Black’s letter described how Mr. Epstein had stepped down from the board of his family foundation in 2007 — shortly before a conviction in Florida for soliciting prostitution from a teen girl made Mr. Epstein a pariah — it said little about the years since. After the Times report earlier this month, Mr. Black acknowledged that he had paid Mr. Epstein “millions of dollars annually†between 2012 and 2017 and had socialized with him, but said he “never tried to conceal†the work Mr. Epstein had done for him. (Mr. Black and Apollo have said Mr. Epstein did no work for the firm.)
William Katz, an analyst who covers Apollo shares at Citigroup Global Markets, said the issue was so-called headline risk: the chance that Mr. Black shows up again and again in negative news reports.
“It will come down to the nature of those headlines,†Mr. Katz said.
If the headlines bring closure — such as the board investigation finding nothing of concern — the pressure could abate on Apollo’s shares, he said. Apollo’s stock priced dipped about 11 percent in the days after the report was published, but has since regained some ground. Even so, its shares are down more than 6 percent since the article was published on Oct. 12. The S&P 500 is down more than 2 percent over the same period.
The largest institutional investor in Apollo, which was first publicly traded in 2011, is the hedge fund Tiger Global Management. The firm declined to comment on Mr. Black and the investigation.
Apollo said it was communicating with shareholders and investors in its funds, saying in a statement that it was “firmly committed to transparency.†Mr. Black, it said, was responding to clients.
“Leon has communicated directly with our investors on this issue and we remain in regular dialogue with our investors and other stakeholders,†the statement said.
Most clients who have given money to Apollo to invest appear to be taking a wait-and-see attitude. It is difficult for private equity investors to suddenly pull out their money; clients must commit for years at a time, and the cash they invest is tied up in funds that hold ownership stakes in a variety of companies.
But in the world of private equity investing, even that can have an impact if it means a client chooses not to commit any new money.
One pension fund that invests with Apollo, the $63 billion Pennsylvania Public School Employees’ Retirement System, said on Wednesday that it had told Apollo it would not invest additional money with the firm until the review was complete. The retirement system “is closely following the ongoing legal issues and the newly launched internal Apollo investigation,†said Steve Esack, a spokesman for the retirement system.
Other pension funds — in Texas, California, Illinois and Ontario — did not go as far, but acknowledged that they were watching the investigation closely.
Wayne Davis, a spokesman for CalPERS — the California Public Employees’ Retirement System, one of Apollo’s biggest clients — said the fund had called Apollo after the Times report about Mr. Black’s relationship with Mr. Epstein. He said the system expects its outside investment managers “to follow the same core values of integrity and accountability that guide our own investment decision-making.â€
Still more clients could opt to withhold further investment. Aksia, a major pension and endowment advisory firm that helps manage more than $160 billion in assets, told its clients they should freeze their investments with Apollo until the board review is completed, according to Bloomberg.
While Mr. Black is Apollo’s highest profile figure, it takes the departure of at least two of Apollo’s three senior principal partners to cause a “key person event†permitting all investors to pull their money ahead of schedule, according to the limited partnership agreement for an Apollo fund that is still in force. Even then, the agreement gives Apollo a 120-day window to try to persuade two-thirds of the investors to keep their money in place for the rest of the fund’s natural life span.
The inquiry is being conducted by law firm Dechert and led by Andrew Levander, the white collar criminal defense lawyer who a decade ago represented Jon Corzine, the former New Jersey governor and U.S. senator, over the collapse of the trading firm MF Global. Mr. Levander declined to comment.
Mr. Black has said he will cooperate with the investigation and is expected to turn over bank and other records that document the wire transfers to Mr. Epstein’s businesses in the U.S. Virgin Islands.
Apollo would suffer if the inquiry turns up unflattering information about Mr. Black, said John Longo, a professor at Rutgers University Business School and chief investment officer for Beacon Trust, $3 billion investment advisory firm. But even if Mr. Black had to step away from Apollo, the firm would still be able to thrive in the long term, he said.
Mr. Longo said Apollo, which is publicly traded and has more than 1,500 employees, is far less dependent on a single person than, for example, a hedge fund, which is often tied to the fate of its founder and most seasoned trader.
Given Apollo’s size, Mr. Longo said, “they will be able to continue without interruption.â€
