(Bloomberg) -- The deal had all the hallmarks of Wall Street's inevitable power shift: Apollo Global Management Inc., king of the rising non-bank lenders, seizing on weakness at Credit Suisse Group AG to snatch up one of the Swiss firm's most lucrative businesses.
But Atlas SP Partners — the structured finance business that's key to Apollo Chief Executive Officer Marc Rowan's plan to become a lending machine — has struggled under its new owner since last year's acquisition, according to interviews with almost a dozen people with knowledge of the unit. Cultures have clashed, business has slowed and a raft of senior departures culminated in the abrupt exit of Atlas SP's longtime head, Jay Kim, in August.
The unit also came up against higher interest rates that curtailed mortgage originations. Other aspects of the business proved harder outside of a bank. Atlas no longer had a major trading desk making markets in the securities it structured, and it didn't benefit from banks' low funding costs to compete in the most vanilla assets.
Apollo, Blackstone Inc., KKR & Co. and other private equity powerhouses have been ramping up their private lending businesses in recent years, riding the $1.7 trillion boom as banks have pulled back. Rowan aims to increase annual origination volume by almost 70% over the next five years, and the firm already earned more management fees from credit last year than KKR, Blackstone and Carlyle Group Inc.
But the past 18 months have shown that Apollo's march deeper into banks' traditional territory won't be as simple as it appears on paper. Crucially, Atlas needs a new leader to move past a tumultuous year-and-a-half and reach Rowan's goal of $275 billion of annual originations by 2029.
Rowan isn't backing away from Atlas, one of the biggest of Apollo's 16 origination platforms. The unit has lined up fresh firepower in the form of $5 billion of financing from BNP Paribas SA and $5 billion of equity from investors including Massachusetts Mutual Life Insurance Co. and Abu Dhabi Investment Authority.
The firm finally secured a broker-dealer license and has begun plans to build a trading operation, with the hope that more deals will come its way if it can show there's a market for investors to sell the assets if needed.
The unit started out with about $40 billion of assets under management when Apollo acquired it. After assets fell, Atlas moved into new areas to get back to roughly $40 billion again, some of the people said.
"With $50 billion of originations, $5 billion of long-term equity and a team that's nearly doubled in size since inception, Atlas has quickly become one of our most important platform businesses," Apollo said in an emailed statement. "We are proud to support the team's success and continuity since its carveout from Credit Suisse."
Kim declined to comment.
'High-Growth Franchise'
In February 2023, Apollo completed the deal with Credit Suisse to add Atlas as one of its platforms that make the loans that Apollo bundles into securities and sells to other investors, its own client funds and its Athene insurance arm. Apollo touted its new unit as a "high-growth franchise" that originates assets coveted by "a broad range of investors."
A month later, UBS Group AG agreed to take over the troubled bank as part of a rescue brokered by the Swiss government. While Credit Suisse had agreed to let Apollo manage $20 billion of securitized assets in exchange for fees, the deal was terminated after UBS bought its rival.
Meanwhile, Atlas was operating without a broker-dealer license for well over a year. Without it, Atlas has struggled to generate business because — unlike competitors such as big banks — it couldn't easily syndicate deals for clients. Its residential mortgage business was hit hardest by difficulty originating new deals, largely because of the firm's lack of trading capabilities, some of the people said.
The firm also shifted away from some of Credit Suisse's existing structured finance business, including government-backed mortgages. It's typically harder for non-banks to compete against Wall Street banks and their ultra-low cost of funding in the market for agency mortgages.
Atlas moved toward non-qualified mortgages for borrowers who don't meet traditional underwriting requirements, which it viewed as more attractive than the government-backed market. Despite the pivot, Atlas has also had to deal with a broader slowdown in mortgage originations as elevated interest rates kept homebuyers from refinancing.
As a result, the firm has pursued business outside of mortgages, including providing financing to regional banks after last year's crisis toppled several mid-size lenders. Meanwhile, Atlas managed to persuade the vast majority of Credit Suisse clients to stay, allaying concerns some had about working with a non-bank.
Staff Tension
While transferring Credit Suisse's clients, Atlas also transitioned about 180 of the bank's employees to work for the alternative asset manager.
The melding of teams caused friction, particularly in the early days of the deal. When Apollo executives tried to dig into the granular details of the portfolio they'd bought as the deal was closing, they struggled to get timely information out of Credit Suisse, some of the people said. Meanwhile, Apollo's hard-driving culture — with its late-night phone calls — spurred disagreements with the ex-Credit Suisse staff over expectations that some people perceived as unreasonable.
Some disgruntled junior employees at Atlas began shopping their resumes to competitors, while several senior staff members took their skills elsewhere.
Pacific Investment Management Co. is bringing on Jason O'Brien, who was head of Europe at Atlas. Ryan Bernholz, who oversaw investment and securitization of loans, also recently departed.
Ares Management Corp. hired Lekith Lokesh, who was a managing director in structuring, and sales managing director Michael Santulli will work for Nomura Holdings Inc. Margaret Dellafera, a residential mortgage team member, is going to Canadian Imperial Bank of Commerce. Trader David Garner was hired by Barclays earlier this year.
The employees either declined to comment or didn't respond to requests for comment. Pimco confirmed that it hired O'Brien, and the other firms declined to comment.
Kim's Exit
While some have left of their own accord, Apollo dismissed others as part of team reorganizations. Kim's departure in August was a mutual decision, and he's still looking into his options, some of the people said. He had led the structured products group under Credit Suisse since 2016.
Atlas' headcount has grown to about 350 people from roughly 180 when Apollo bought it. As the team expands, Rowan has mandated that its members home in on burgeoning areas of lending such as net-asset-value loans for private equity firms. NAV loans — debt backed by an investment fund's assets — have exploded in popularity as buyout firms look for ways to generate cash for their investors amid a prolonged deal slowdown.
There are signs the deal market could be thawing, though, meaning Atlas will have to keep evolving if it wants to meet Rowan's high expectations. The Apollo CEO has pegged Atlas as one of the businesses with the capacity to double its business, and he continues to project optimism that private markets will ultimately win more business than public markets and banks.
"At the end of the day," Rowan said at the firm's investor day last week, "private will win over public."
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