Headquarters locations are about more than the view out the window...

Companies tend to choose specific locations that are tailored to their businesses.

If you see a business based in Liberia, Greece, or Panama, there's a decent chance it's a shipping company. Panama is located right on the Panama Canal, one of the biggest shipping routes in the world. All three countries offer tax advantages for shippers.

Or maybe you're looking at a company located in the Cayman Islands. Odds are, it's an investment company like a hedge fund... because the Caymans don't collect corporate, capital gains, income, or profit-based taxes.

And if its headquarters is in Bermuda, it's almost certainly an insurance company. Once again, the country doesn't have income taxes. Plus, it's much less strict when it comes to risk management.

That brings us to private-equity ("PE") giant Apollo Global Management (APO) – the new object of investment firm Tiger Global's affections.

In 2022, Apollo merged with its Bermuda-based affiliate Athene Holdings. And it's no coincidence that the combined entity kept Athene's Bermuda address for its headquarters.

Yesterday, we reviewed Tiger Global's $1 billion investment in Apollo... and explained why the market doesn't understand Apollo's profit potential.

Today, we'll examine another piece of the puzzle. The Athene merger has made a new, smart strategy possible for Apollo. And as we'll explain, the benefits are already playing out.

Insurance is one of Warren Buffett's favorite businesses... And it's not because underwriting is so profitable.

It's because of what insurance companies do with the premiums they collect.

You see, insurance companies can invest their premiums in different asset classes. They can't invest in just anything. They typically have to follow risk mandates. That means they can only invest in safe assets like investment-grade bonds.

Reinsurance companies, however, have lower risk requirements. These businesses are essentially insurance for insurance companies. They sign contracts to take some of the risk of insurance policies... and in exchange, the reinsurers actually collect your premiums.

They can also invest in more places... including PE.

Buffett follows this model himself. His holding company, Berkshire Hathaway (BRK-B), has several different insurance businesses. Many folks know that it owns Geico. It also owns Berkshire Hathaway Primary and Berkshire Hathaway Reinsurance.

The "Oracle of Omaha" never has to worry about asking investors for more money when times are bad. He just builds up a treasure trove of cash from his insurance businesses.

Then, when everyone else is scared, he goes shopping.

And that's where Apollo's merger with Athene comes into play. Athene is a reinsurer, which means it has steady cash flows coming in from policy premiums.

Apollo can now follow Buffett's method. When everyone is panicked about the market and the economy, it can deploy capital at cheap valuations. It knows the cash from its insurance arm is coming in to back up its business.

The Apollo-Athene merger is already paying off...

Since 2006, Apollo has never had more than $2.6 billion in cash in a given year. Yet after the merger, its cash position rose to $9.5 billion in 2022... and $12 billion through June 2023.

Regular readers know we've been vocal about volatility in the PE market this year. However, Apollo has yet another trick up its sleeve. We'll delve into the savvy moves that set it apart from other PE-focused firms in tomorrow's edition.

For now, keep in mind that Apollo isn't just cheap relative to history. It's also juicing its business, so it has more cash to deploy when it sees fit.

This should help it strike deals when a lot of its peers are struggling to stay afloat... and keep Apollo out of the trouble that other PE firms will deal with. Apollo stock should remain more resilient than its peers'. No wonder Tiger Global is buying in.


Joel Litman
August 30, 2023