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Apollo Clients Await Inquiry’s Findings on Chief and Jeffrey Epstein

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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.”

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.”

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.”

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The Trump campaign celebrated a growth record that Democrats downplayed.

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The White House celebrated economic growth numbers for the third quarter released on Thursday, even as Joseph R. Biden Jr.’s presidential campaign sought to throw cold water on the report — the last major data release leading up to the Nov. 3 election — and warned that the economic recovery was losing steam.

The economy grew at a record pace last quarter, but the upswing was a partial bounce-back after an enormous decline and left the economy smaller than it was before the pandemic. The White House took no notice of those glum caveats.

“This record economic growth is absolute validation of President Trump’s policies, which create jobs and opportunities for Americans in every corner of the country,” Mr. Trump’s re-election campaign said in a statement, highlighting a rebound of 33.1 percent at an annualized rate. Mr. Trump heralded the data on Twitter, posting that he was “so glad” that the number had come out before Election Day.

The annualized rate that the White House emphasized extrapolates growth numbers as if the current pace held up for a year, and risks overstating big swings. Because the economy’s growth has been so volatile amid the pandemic, economists have urged focusing on quarterly numbers.

Those showed a 7.4 percent gain in the third quarter. That rebound, by far the biggest since reliable statistics began after World War II, still leaves the economy short of its pre-pandemic levels. The pace of recovery has also slowed, and now coronavirus cases are rising again across much of the United States, raising the prospect of further pullback.

“The recovery is stalling out, thanks to Trump’s refusal to have a serious plan to deal with Covid or to pass a new economic relief plan for workers, small businesses and communities,” Mr. Biden’s campaign said in a release ahead of Thursday’s report. The rebound was widely expected, and the campaign characterized it as “a partial return from a catastrophic hit.”

Economists have warned that the recovery could face serious roadblocks ahead. Temporary measures meant to shore up households and businesses — including unemployment insurance supplements and forgivable loans — have run dry. Swaths of the service sector remain shut down as the virus continues to spread, and job losses that were temporary are increasingly turning permanent.

“With coronavirus infections hitting a record high in recent days and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be much slower,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note following the report.

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Black and Hispanic workers, especially women, lag in the U.S. economic recovery.

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The surge in economic output in the third quarter set a record, but the recovery isn’t reaching everyone.

Economists have long warned that aggregate statistics like gross domestic product can obscure important differences beneath the surface. In the aftermath of the last recession, for example, G.D.P. returned to its previous level in early 2011, even as poverty rates remained high and the unemployment rate for Black Americans was above 15 percent.

Aggregate statistics could be even more misleading during the current crisis. The job losses in the initial months of the pandemic disproportionately struck low-wage service workers, many of them Black and Hispanic women. Service-sector jobs have been slow to return, while school closings are keeping many parents, especially mothers, from returning to work. Nearly half a million Hispanic women have left the labor force over the last three months.

“If we’re thinking that the economy is recovering completely and uniformly, that is simply not the case,” said Michelle Holder, an economist at John Jay College in New York. “This rebound is unevenly distributed along racial and gender lines.”

The G.D.P. report released Thursday doesn’t break down the data by race, sex or income. But other sources make the disparities clear. A pair of studies by researchers at the Urban Institute released this week found that Black and Hispanic adults were more likely to have lost jobs or income since March, and were twice as likely as white adults to experience food insecurity in September.

The financial impact of the pandemic hit many of the families that were least able to afford it, even as white-collar workers were largely spared, said Michael Karpman, an Urban Institute researcher and one of the studies’ authors.

“A lot of people who were already in a precarious position before the pandemic are now in worse shape, whereas people who were better off have generally been faring better financially,” he said.

Federal relief programs, such as expanded unemployment benefits, helped offset the damage for many families in the first months of the pandemic. But those programs have mostly ended, and talks to revive them have stalled in Washington. With virus cases surging in much of the country, Mr. Karpman warned, the economic toll could increase.

“There could be a lot more hardship coming up this winter if there’s not more relief from Congress, with the impact falling disproportionately on Black and Hispanic workers and their families,” he said.

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Ant Challenged Beijing and Prospered. Now It Toes the Line.

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As Jack Ma of Alibaba helped turn China into the world’s biggest e-commerce market over the past two decades, he was also vowing to pull off a more audacious transformation.

“If the banks don’t change, we’ll change the banks,” he said in 2008, decrying how hard it was for small businesses in China to borrow from government-run lenders.

“The financial industry needs disrupters,” he told People’s Daily, the official Communist Party newspaper, a few years later. His goal, he said, was to make banks and other state-owned enterprises “feel unwell.”

The scope of Mr. Ma’s success is becoming clearer. The vehicle for his financial-technology ambitions, an Alibaba spinoff called Ant Group, is preparing for the largest initial public offering on record. Ant is set to raise $34 billion by selling its shares to the public in Hong Kong and Shanghai, according to stock exchange documents released on Monday. After the listing, Ant would be worth around $310 billion, much more than many global banks.

The company is going public not as a scrappy upstart, but as a leviathan deeply dependent on the good will of the government Mr. Ma once relished prodding.

More than 730 million people use Ant’s Alipay app every month to pay for lunch, invest their savings and shop on credit. Yet Alipay’s size and importance have made it an inevitable target for China’s regulators, which have already brought its business to heel in certain areas.

These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.

The question now is how much higher Ant can fly without provoking the Chinese authorities into clipping its wings further.

Excitable investors see Ant as a buzzy internet innovator. The risk is that it becomes more like a heavily regulated “financial digital utility,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“Utility stocks, as far as I remember, were not the ones to be seen as the most exciting,” Mr. Howie said.

Ant declined to comment, citing the quiet period demanded by regulators before its share sale.

The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.

After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.

China’s Supreme Court this summer capped interest rates for consumer loans, though it was unclear how the ceiling would apply to Ant. The central bank is preparing a new virtual currency that could compete against Alipay and another digital wallet, the messaging app WeChat, as an everyday payment tool.

Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably.

“That’s how the state gets its payoff,” Mr. Howie said. With Ant, he said, “the line between state-owned enterprise and private enterprise is highly, highly blurred.”

China, in less than two generations, went from having a state-planned financial system to being at the global vanguard of internet finance, with trillions of dollars in transactions being made on mobile devices each year. Alipay had a lot to do with it.

Alibaba created the service in the early 2000s to hold payments for online purchases in escrow. Its broader usefulness quickly became clear in a country that mostly missed out on the credit card era. Features were added and users piled in. It became impossible for regulators and banks not to see the app as a threat.

ImageAnt Group’s headquarters in Hangzhou, China.
Credit…Alex Plavevski/EPA, via Shutterstock

A big test came when Ant began making an offer to Alipay users: Park your money in a section of the app called Yu’ebao, which means “leftover treasure,” and we will pay you more than the low rates fixed by the government at banks.

People could invest as much or as little as they wanted, making them feel like they were putting their pocket change to use. Yu’ebao was a hit, becoming one of the world’s largest money market funds.

The banks were terrified. One commentator for a state broadcaster called the fund a “vampire” and a “parasite.”

Still, “all the main regulators remained unanimous in saying that this was a positive thing for the Chinese financial system,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

“If you can’t actually reform the banks,” Mr. Chorzempa said, “you can inject more competition.”

But then came worries about shadowy, unregulated corners of finance and the dangers they posed to the wider economy. Today, Chinese regulators are tightening supervision of financial holding companies, Ant included. Beijing has kept close watch on the financial instruments that small lenders create out of their consumer loans and sell to investors. Such securities help Ant fund some of its lending. But they also amplify the blowup if too many of those loans aren’t repaid.

“Those kinds of derivative products are something the government is really concerned about,” said Tian X. Hou, founder of the research firm TH Data Capital. Given Ant’s size, she said, “the government should be concerned.”

The broader worry for China is about growing levels of household debt. Beijing wants to cultivate a consumer economy, but excessive borrowing could eventually weigh on people’s spending power. The names of two of Alipay’s popular credit functions, Huabei and Jiebei, are jaunty invitations to spend and borrow.

Huang Ling, 22, started using Huabei when she was in high school. At the time, she didn’t qualify for a credit card. With Huabei’s help, she bought a drone, a scooter, a laptop and more.

The credit line made her feel rich. It also made her realize that if she actually wanted to be rich, she had to get busy.

“Living beyond my means forced me to work harder,” Ms. Huang said.

First, she opened a clothing shop in her hometown, Nanchang, in southeastern China. Then she started an advertising company in the inland metropolis of Chongqing. When the business needed cash, she borrowed from Jiebei.

Online shopping became a way to soothe daily anxieties, and Ms. Huang sometimes racked up thousands of dollars in Huabei bills, which only made her even more anxious. When the pandemic slammed her business, she started falling behind on her payments. That cast her into a deep depression.

Finally, early this month, with her parents’ help, she paid off her debts and closed her Huabei and Jiebei accounts. She felt “elated,” she said.

China’s recent troubles with freewheeling online loan platforms have put the government under pressure to protect ordinary borrowers.

Ant is helped by the fact that its business lines up with many of the Chinese leadership’s priorities: encouraging entrepreneurship and financial inclusion, and expanding the middle class. This year, the company helped the eastern city of Hangzhou, where it is based, set up an early version of the government’s app-based system for dictating coronavirus quarantines.

Such coziness is bound to raise hackles overseas. In Washington, Chinese tech companies that are seen as close to the government are radioactive.

In January 2017, Eric Jing, then Ant’s chief executive, said the company aimed to be serving two billion users worldwide within a decade. Shortly after, Ant announced that it was acquiring the money transfer company MoneyGram to increase its U.S. footprint. By the following January, the deal was dead, thwarted by data security concerns.

More recently, top officials in the Trump administration have discussed whether to place Ant Group on the so-called entity list, which prohibits foreign companies from purchasing American products. Officials from the State Department have suggested that an interagency committee, which also includes officials from the departments of defense, commerce and energy, review Ant for the potential entity listing, according to three people familiar with the matter.

Ant does not talk much anymore about expanding in the United States.

Ana Swanson contributed reporting.

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