Have Apollo, TPG already recouped their investment in Caesars Entertainment? Report by UNITE HERE asks

Transaction, monitoring fees raise questions about GP-LP interest alignment

LAS VEGAS--(BUSINESS WIRE)--A new report by UNITE HERE looks at fees that Apollo Global Management (NYSE: APO) and TPG Capital have collected on their investment in Caesars Entertainment (NASDAQ: CZR) (previously Harrah’s Entertainment), which they took private in 2008. The report is available at www.PEcloserlook.org.

Apollo Global Management’s and TPG Capital’s Caesars Entertainment investment has fallen far short of expectations. TPG Partners V and Apollo Investment Fund VI, along with a number of co-investors, acquired Caesars in 2008 at a price of $90 per shareⁱ or $6 billion in equity.ⁱⁱ As of April 29, 2013 Caesars had a total market capitalization of $2 billion.ⁱⁱⁱ

Based on their commitments to Apollo Investment Fund VI and TPG Partners V, Apollo Global Management and TPG Capital would have invested a total of around $61 million of their own capital when the private equity firms took over Harrah’s Entertainment in 2008 ($25.8 million for TPG^iv and $35.3 million^v for Apollo).^vi

At the same time, TPG and Apollo stand to collect nearly $500 million in transaction and monitoring fees from Caesars regardless of how the investment performs, raising questions about how well the private equity sponsors’ interests are aligned with those of limited partners.

Unlike limited partners, Apollo and TPG would have eliminated their downside risk in the Caesars Entertainment investment, generating 1.71x and 1.34x returns respectively on their General Partner investments in Caesars from transaction and monitoring fees as of the end of 2012.

While annual fees incentivize TPG and Apollo to hold on to Caesars as long as possible, it is unclear that they will act in the best interests of limited partners during that period.

The report is available at www.PEcloserlook.org.

UNITE HERE is the union of workers in the hotel, gaming, and food service industries. Our 250,000 members are beneficiaries of pension funds with over $60 billion in assets. The UNITE HERE Research Department regularly distributes information about investment managers in our members’ industries.

ⁱ “Stockholders like Harrah's buyout for $90 per share,” Las Vegas Review Journal, Apr. 6, 2007.
ⁱⁱ NJ Division of Gaming Enforcement report re TPG, May 28, 2008, p. 29.
ⁱⁱⁱ NASDAQ.com, accessed Apr. 29, 2013.
^iv Based on $300 million GP commitment to Fund V, Apr. 25, 2006 report by TPG Partners V limited partner.
^v Based of $270 million GP commitment to Fund VI, Apollo Global Management Form 10Q, Nov. 14, 2012.
^vi NJ Division of Gaming Enforcement report re Apollo and TPG, May 28, 2008