Showing posts with label junk bonds. Show all posts
Showing posts with label junk bonds. Show all posts

Thursday, October 1, 2026

My Review of William D. Cohan's "Money to Burn: The Unvarnished Truth about Leon Black........"

 

The Rise and Fall of Leon Black


       “Behind every great fortune there is a great crime.”

                                             HonorĂ© de Balzac


Financial journalist and former investment banker William Cohan brings together the intertwined history of financier Leon Black and Apollo Global Management, the private equity firm he founded. The most formative event in Leon Black’s life was the suicide of his father Eli in 1975. The senior Black founded the 1960’s conglomerate United Brands which fell to hard times in the early 1970’s. It was Eli who convinced him to give up on his love of art history, which came from his mother and aunt, to go to Harvard Business School. Nevertheless, his knowledge of art and the big bucks he made enabled him to accumulate one of the largest private collections in the world whose value exceeds one billion dollars.

 

Black gets his start as a young associate at Michael Milken’s Drexel Burnham’s junk bond empire. By the mid-1980’s Milken became the “King of Wall Street” by first using high yield bonds to finance hitherto noncredit worthy smaller companies, especially in cable television (See: https://shulmaven.blogspot.com/2025/09/my-review-of-john-malones-born-to-be.html ) Black expanded the use of junk bonds to acquire established companies through the use of “highly confident letters” that sent shivers down the corporate establishment. It was that innovation that made Black’s reputation at Drexel.

 

However, Drexel and Milken were soon charged with securities law violations that brought down the firm and sent Milken to jail in 1990. Out of the wreckage Black formed Apollo. It was here where the great crime took place. Apollo received funding from France’s Credit Lyonnaise to acquire the junk bond portfolio of Executive Life Insurance that was in receivership in California. Executive Life was one of Drexel’s biggest clients and Black had intimate knowledge of its portfolio. As the junk market recovered Apollo made a fortune and its reputation. Although Apollo was never charged, Credit Lyonnaise was charged with violating state and Federal banking laws and ended up paying a $770 million fine.

 

Working hand and glove with Black in the early 1990’s Marc Rowan, now head of Apollo, and Josh Harris became key members of the firm. Although they were not exactly cofounders, Black gave them the title in the early 2000’s and made them billionaires. One of the keys to Cohan’s book is that Black, Rowan, and Harris talked freely to him. Thus, we get here inside views as to how Apollo grew from being primarily a private equity company to a leader in private credit. It was Rowan’s idea to establish a captive annuity company that would buy Apollo’s debt products. That company, Athene, has become a leader in the sale of annuities.

 

The advantage of having an insurance company to hold private debt is that it is not subject to the vagaries of short-term finance. It also has the benefit of being regulated by the generally understaffed state insurance departments. The risk here is that should private debt experience a wave of defaults the annuitants and the backup state insurance funds would be at risk.

 

After riding high for years, Leon Black got caught up in the Jeffrey Epstein sexual predator scandal. It was discovered that he paid Epstein a staggering $158 million fee for tax advice on his estate plan. To be sure Epstein found a way to correct a major mistake that Black’s white shoe law firm made, it hardly justifies the $158 million. Cohan goes into unsubstantiated reports of Black’s sexual proclivities, too much for my taste, but I guess it sells books and might explain the $158 million.

 

Then there is Black’s long time Russian paramour who claimed that Black sexually abused her. Black paid her off for years, but then she broke her nondisclosure agreement and the whole sordid mess became public. With that the Museum of Modern Art removed Black as its chairman but left him on the board. Why? Cohan suggests they want his art collection.

 

One of the great attributes of Cohan’s book is that he goes into great detail about the successful and failed deals that Apollo was involved in. Here his investment banking knowledge is crucial. Of particular note is the dispute with the Huntsman family of Utah and their eponymous chemical company. It was a knock down drag out fight that Huntsman won, but afterwards the relationship remained cordial.

 

Cohan makes all his leading players come alive. It becomes very clear that Black, Rowan, and Harris continue to have money to burn and they all show it. As a postscript Leon Black continues to ignore a congressional subpoena to discuss his involvement with Epstein.

Friday, July 20, 2018

My Amazon Review of Seth Klarman's "Margin of Safety: Risk -Averse Value Investing"


A Primer on Value Investing

Seth Klarman through his Baupost Fund is one of the greatest investors of the current generation, perhaps of all-time. This 1991 book is an investing classic, so much so that it sells for $780 on the secondary market. The key insight for most value investors is the all investments must have an inherent margin of safety. That means looking at the downside before looking at the upside. The notion of risk is asymmetric, not the standard deviation of returns as modern portfolio theory suggests. For example for any given stock under modern portfolio risk is independent of price; for a value investor risk is extraordinarily dependent upon price.

Klarman is focused on absolute performance, not relative performance. Thus unlike the bubbleheads on CNBC he doesn’t have to be invested all of the time. He is rightly skeptical of Wall Street research and the exotic products their investment bankers come up with.

The key earnings metric for Klarman is rightly free cash flow. It is not earnings per share and it is not EBITDA. Depreciation is real and so too are capital expenditures which do not enter the income statement.

The reader has to remember that this book was written in 1991 against the backdrop of the 1987 crash, the junk bond collapse and the 1990 bear market. He is critical of newly issued junk bonds (high yield in today’s terminology). Little did he realize that 27 years later high yield would dominate the new issues. He is also critical of the index funds that now dominate today’s stock market. For the average investor index funds make a great deal of sense.

Why? Simply put the average investor doesn’t have the talent or the time to be a value investor like Klarman. To be another Seth Klarman takes more than a few brains and much hard work.

“Margin of Safety” is written in clear and concise language. My two criticisms are that there are far too few examples of value investing in action and it is obviously dated. Nevertheless the lessons to be learned from reading the book are timeless.