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APO > SEC Filings for APO > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for APOLLO GLOBAL MANAGEMENT LLC

Form 10-K for APOLLO GLOBAL MANAGEMENT LLC


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Apollo Global Management, LLC's consolidated financial statements and the related notes as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012, and 2011. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in the section of this report entitled "Item 1A. Risk Factors." The highlights listed below have had significant effects on many items within our consolidated financial statements and affect the comparison of the current period's activity with those of prior periods.

General
Our Businesses
Founded in 1990, Apollo is a leading global alternative investment manager. We are contrarian, value-oriented investors in private equity, credit and real estate with significant distressed expertise and a flexible mandate in the majority of our funds that enables our funds to invest opportunistically across a company's capital structure. We raise, invest and manage funds on behalf of some of the world's most prominent pension, endowment and sovereign wealth funds as well as other institutional and individual investors. Apollo is led by our Managing Partners, Leon Black, Joshua Harris and Marc Rowan, who have worked together for more than 23 years and lead a team of 710 employees, including 277 investment professionals, as of December 31, 2013.
Apollo conducts its management and incentive businesses primarily in the United States and substantially all of its revenues are generated domestically. These businesses are conducted through the following three reportable segments:
(i) Private equity-primarily invests in control equity and related debt instruments, convertible securities and distressed debt instruments;

(ii) Credit-primarily invests in non-control corporate and structured debt instruments; and

(iii) Real estate-primarily invests in real estate equity for the acquisition and recapitalization of real estate assets, portfolios, platforms and operating companies, and real estate debt including first mortgage and mezzanine loans, preferred equity and commercial mortgage backed securities.

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These business segments are differentiated based on the varying investment strategies. The performance is measured by management on an unconsolidated basis because management makes operating decisions and assesses the performance of each of Apollo's business segments based on financial and operating metrics and data that exclude the effects of consolidation of any of the affiliated funds. Our financial results vary since carried interest, which generally constitutes a large portion of the income we receive from the funds that we manage, as well as the transaction and advisory fees that we receive, can vary significantly from quarter to quarter and year to year. As a result, we emphasize long-term financial growth and profitability to manage our business.
In addition, the growth in our fee-generating AUM during the last year has primarily been in our credit segment. The average management fee rate for these new credit products is at market rates for such products and in certain cases is below our historical rates. Also, due to the complexity of these new product offerings, the Company has incurred and will continue to incur additional costs associated with managing these products. To date, these additional costs have been offset by realized economies of scale and ongoing cost management. As of December 31, 2013, approximately 96% of our total AUM was in funds with a contractual life at inception of seven years or more, and 7% of our total AUM was in permanent capital vehicles with unlimited duration.
As of December 31, 2013, we had total AUM of $161.2 billion across all of our businesses. On December 31, 2013, Apollo Investment Fund VIII, L.P. ("Fund VIII") held a final closing raising a total of $17.5 billion in third-party capital and approximately $880 million of additional capital from Apollo and affiliated investors, and as of December 31, 2013, Fund VIII had $18.2 billion of uncalled commitments, or "dry powder," remaining. Additionally, Fund VII held a final closing in December 2008, raising a total of $14.7 billion, and as of December 31, 2013, Fund VII had $3.4 billion of uncalled commitments remaining. We have consistently produced attractive long-term investment returns in our private equity funds, generating a 39% gross IRR and a 26% net IRR on a compound annual basis from inception through December 31, 2013. For further detail related to fund performance metrics across all of our businesses, see "-The Historical Investment Performance of Our Funds."

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Holding Company Structure
The diagram below depicts our current organizational structure:

[[Image Removed]]
Note: The organizational structure chart above depicts a simplified version of the Apollo structure. It does not include all legal entities in the structure. Ownership percentages are as of the date of the filing of this Annual Report on Form 10-K.
(1) The Strategic Investors hold 30.21% of the Class A shares outstanding and 11.91% of the economic interests in the Apollo Operating Group. The Class A shares held by investors other than the Strategic Investors represent 31.23% of the total voting power of our shares entitled to vote and 27.51% of the economic interests in the Apollo Operating Group. Class A shares held by the Strategic Investors do not have voting rights. However, such Class A shares will become entitled to vote upon transfers by a Strategic Investor in accordance with the agreements entered into in connection with the investments made by the Strategic Investors.

(2) Our Managing Partners own BRH Holdings GP, Ltd., which in turn holds our only outstanding Class B share. The Class B share represents 68.77% of the total voting power of our shares entitled to vote but no economic interest in Apollo Global Management, LLC. Our Managing Partners' economic interests are instead represented by their indirect beneficial ownership, through Holdings, of 53.42% of the limited partner interests in the Apollo Operating Group.

(3) Through BRH Holdings, L.P., our Managing Partners indirectly beneficially own through estate planning vehicles, limited partner interests in Holdings.

(4) Holdings owns 60.58% of the limited partner interests in each Apollo Operating Group entity. The AOG Units held by Holdings are exchangeable for Class A shares. Our Managing Partners, through their interests in BRH and Holdings, beneficially own 53.42% of the AOG Units. Our Contributing Partners, through their ownership interests in Holdings, beneficially own 7.16% of the AOG Units.

(5) BRH Holdings GP, Ltd is the sole member of AGM Management, LLC, our manager. The management of Apollo Global Management, LLC is vested in our manager as provided in our operating agreement.

(6) Represents 39.42% of the limited partner interests in each Apollo Operating Group entity, held through intermediate holding companies. Apollo Global Management, LLC, also indirectly owns 100% of the general partner interests in each Apollo Operating Group entity.

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Each of the Apollo Operating Group partnerships holds interests in different businesses or entities organized in different jurisdictions. Our structure is designed to accomplish a number of objectives, the most important of which are as follows:

                           We are a holding company that is qualified as a
                            partnership for U.S. Federal income tax purposes. Our
                            intermediate holding companies enable us to maintain
                            our partnership status and to meet the qualifying
                            income exception.


                           We have historically used multiple management
                            companies to segregate operations for business,
                            financial and other reasons. Going forward, we may
                            increase or decrease the number of our management
                            companies or partnerships within the Apollo Operating
                            Group based on our views regarding the appropriate
                            balance between (a) administrative convenience and
                            (b) continued business, financial, tax and other
                            optimization.

Business Environment
As a global investment manager, we are affected by numerous factors, including the condition of financial markets and the economy. Fluctuations in equity prices, which may be volatile, can significantly impact the valuation of our funds' portfolio companies and related income we may recognize. In the U.S., the S&P 500 Index rose 9.9% in the fourth quarter of 2013, bringing the full year appreciation to 29.6% and closed at a new record high at the end of the fourth quarter of 2013. Outside the U.S., world equity markets also continued to rise in the fourth quarter of 2013, completing a strong year. The MSCI All Country World ex USA Index was up 4.4% in the fourth quarter of 2013 and 12.3% for the year ended December 31, 2013. Importantly, we believe that the continued strength in the equity markets has been accommodative for continued equity capital markets activity, including IPOs and secondary offerings of the portfolio companies within our funds.
Conditions in the global credit markets also have a significant impact on our business. Credit indices rose in the fourth quarter of 2013, completing a positive year, with the BoAML HY Master II Index up 3.5% in the fourth quarter of 2013 and 7.4% for the year ended December 31, 2013, while the S&P/LSTA Leveraged Loan Index was up 1.7% during the fourth quarter of 2013 and 5.3% for the year ended December 31, 2013. Benchmark interest rates increased sharply during the fourth quarter of 2013 with the U.S. 10-year Treasury up approximately 40 basis points to 3.0%, following the Federal Reserve's commencement of tapering its quantitative easing policy.
In terms of economic conditions, the Bureau of Economic Analysis reported that real GDP in the U.S. increased at an annual rate of 3.2% in the fourth quarter of 2013 and 1.9% for the full year ended December 31, 2013. As of January 2014, The International Monetary Fund estimates that the U.S. economy will expand by 2.8% in 2014. Additionally, the U.S. unemployment rate remained elevated at 7.0% as of December 31, 2013, despite recent signs of improvement.
Amid the generally favorable backdrop of elevated asset prices, Apollo continued to generate significant realizations for fund investors. Apollo returned $5.8 billion and $22.6 billion of capital and realized gains to the limited partners of the funds it manages during the fourth quarter of 2013 and the full year ended December 31, 2013, respectively. Apollo's fundraising activities also continued at a strong pace, with $10.0 billion and $22.1 billion of new capital raised during the fourth quarter and full year 2013, respectively, as institutional investors continued to allocate capital towards alternative investment managers for more attractive risk-adjusted returns in a low rate environment.
Regardless of the market or economic environment at any given time, Apollo relies on its contrarian, value-oriented approach to consistently invest capital on behalf of its investors by focusing on opportunities that management believes are often overlooked by other investors. We believe Apollo's expertise in credit and its focus on nine core industry sectors, combined with more than 20 years of investment experience, has allowed Apollo to respond quickly to changing environments. Apollo's core industry sectors cover chemicals, natural resources, consumer and retail, distribution and transportation, financial and business services, manufacturing and industrial, media and cable and leisure, packaging and materials and the satellite and wireless industries. Apollo believes that these attributes have contributed to the success of its private equity funds investing in buyouts and credit opportunities during both expansionary and recessionary economic periods.

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Market Considerations
Our revenues consist of the following:

                           Management fees, which are calculated based upon any
                            of "net asset value," "gross assets," "adjusted par
                            asset value," "adjusted costs of all unrealized
                            portfolio investments," "capital commitments,"
                            "adjusted assets," "invested capital," "capital
                            contributions," or "stockholders' equity," each as
                            defined in the applicable management agreement of the
                            unconsolidated funds;


                           Advisory and transaction fees relating to the
                            investments our funds make, or individual monitoring
                            agreements with individual portfolio companies of the
                            private equity funds and certain credit funds as well
                            as advisory services provided to certain credit
                            funds; and

Carried interest with respect to our funds.

Our ability to grow our revenues depends in part on our ability to attract new capital and investors, which in turn depends on our ability to appropriately invest our funds' capital, and on the conditions in the financial markets, including the availability and cost of leverage, and economic conditions in the United States, Western Europe, Asia, and to some extent, elsewhere in the world. The market factors that impact this include the following:
The strength of the alternative investment management industry, including the amount of capital invested and withdrawn from alternative investments. Allocations of capital to the alternative investment sector are dependent, in part, on the strength of the economy and the returns available from other investments relative to returns from alternative investments. Our share of this capital is dependent on the strength of our performance relative to the performance of our competitors. The capital we attract and our returns are drivers of our Assets Under Management, which, in turn, drive the fees we earn. In light of the current volatile conditions in the financial markets, our funds' returns may be lower than they have been historically and fundraising efforts may be more challenging.

                           The strength and liquidity of the U.S. and relevant
                            global equity markets generally, and the
                            initial public offering market specifically. The
                            strength of these markets affects the value of, and
                            our ability to successfully exit, our equity
                            positions in our private equity portfolio companies
                            in a timely manner.


                           The strength and liquidity of the U.S. and relevant
                            global debt markets. Our funds and our portfolio
                            companies borrow money to make acquisitions and our
                            funds utilize leverage in order to increase
                            investment returns that ultimately drive the
                            performance of our funds. Furthermore, we utilize
                            debt to finance the principal investments in our
                            funds and for working capital purposes. To the extent
                            our ability to borrow funds becomes more expensive or
                            difficult to obtain, the net returns we can earn on
                            those investments may be reduced.


                           Stability in interest rate and foreign currency
                            exchange rate markets. We generally benefit from
                            stable interest rate and foreign currency exchange
                            rate markets. The direction and impact of changes in
                            interest rates or foreign currency exchange rates on
                            certain of our funds are dependent on the funds'
                            expectations and the related composition of their
                            investments at such time.

For the most part, we believe the trends in these factors have historically created a favorable investment environment for our funds. However, adverse market conditions may affect our businesses in many ways, including reducing the value or hampering the performance of the investments made by our funds, and/or reducing the ability of our funds to raise or deploy capital, each of which could materially reduce our revenue, net income and cash flow, and affect our financial condition and prospects. As a result of our value-oriented, contrarian investment style which is inherently long-term in nature, there may be significant fluctuations in our financial results from quarter to quarter and year to year.
The financial markets encountered a series of negative events in 2007 and 2008 which led to a global liquidity and broad economic crisis and impacted the performance of many of our funds' portfolio companies. The impact of such events on our private equity and credit funds resulted in volatility in our revenue. If the market were to experience similar periods of volatility, we and the funds we manage may experience tightening of liquidity, reduced earnings and cash flow, impairment charges, as well

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as challenges in raising additional capital, obtaining investment financing and making investments on attractive terms. These market conditions can also have an impact on our ability to liquidate positions in a timely and efficient manner. For a more detailed description of how economic and global financial market conditions can materially affect our financial performance and condition, see "Item 1A. Risk Factors-Risks Related to Our Businesses-Difficult market conditions may adversely affect our businesses in many ways, including by reducing the value or hampering the performance of the investments made by our funds or reducing the ability of our funds to raise or deploy capital, each of which could materially reduce our revenue, net income and cash flow and adversely affect our financial prospects and condition." Uncertainty remains regarding Apollo's future taxation levels. On May 28, 2010, the House of Representatives passed legislation that would, if enacted in its present form, preclude us from qualifying for treatment as a partnership for U.S. Federal income tax purposes under the publicly traded partnership rules. See "Item 1A. Risk Factors-Risks Related to Our Organization and Structure-Although not enacted, the U.S. Congress has considered legislation that would have: (i) in some cases after a ten-year transition period, precluded us from qualifying as a partnership or required us to hold carried interest through taxable corporations; and (ii) taxed certain income and gains at increased rates. If similar legislation were to be enacted and apply to us, the value of our Class A shares could be adversely affected" and "Item 1A. Risk Factors-Risks Related to Taxation-Our structure involves complex provisions of U.S. Federal income tax law for which no clear precedent or authority may be available. Our structure is also subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis."

Managing Business Performance
We believe that the presentation of Economic Net Income (Loss) supplements a reader's understanding of the economic operating performance of each of our segments.
Economic Net Income (Loss)
Economic Net Income (Loss) ("ENI") is a measure of profitability and does not take into account certain items included under U.S. GAAP. ENI represents segment income (loss) attributable to Apollo Global Management, LLC, which excludes the impact of non-cash charges related to RSUs granted in connection with the 2007 private placement and amortization of AOG Units, income tax expense, amortization of intangibles associated with the 2007 Reorganization, as well as acquisitions and Non-Controlling Interests (excluding the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies). In addition, segment data excludes the assets, liabilities and operating results of the funds and VIEs that are included in the consolidated financial statements. Adjustments relating to income tax expense, intangible asset amortization and Non-Controlling Interests are common in the calculation of supplemental measures of performance in our industry. We believe the exclusion of the non-cash charges related to the 2007 Reorganization for equity-based compensation provides investors with a meaningful indication of our performance because these charges relate to the equity portion of our capital structure and not our core operating performance.
During the second quarter of 2013, monitoring fees based on Athene's capital and surplus and the change in the market value of the derivative contracts related to Athene's capital and surplus recorded in advisory and transaction fees from affiliates, net, as disclosed in note 17 to the consolidated financial statements, were reclassified from the private equity segment to the credit segment to better evaluate the performance of Apollo's private equity and credit segments in making key operating decisions. Reclassifications have been made to the prior period financial data for Apollo's reportable segments to conform to the current presentation. The impact of this reclassification on the ENI for the private equity and credit segment is reflected in the table below for the years ended December 31, 2012 and 2011:

                                                 Impact of Reclassification on
                                                   Economic Net (Loss) Income
                                               Private Equity          Credit
                                                  Segment             Segment
For the year ended December 31, 2012             $(16,787)            $16,787
For the year ended December 31, 2011              $(8,768)             $8,768

During the fourth quarter of 2013, certain reclassifications were made to prior period financial data within salary, bonus and benefits and profit sharing expense to conform to the current presentation. The impact of these reclassifications on management business ENI and incentive business ENI is reflected in the table below for Apollo's three reportable segments for the years ended December 31, 2012 and 2011.

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                                        Impact of Reclassification on Management
                                          Business Economic Net Income (Loss)
                                       Private
                                        Equity           Credit        Real Estate
                                       Segment          Segment          Segment
For the year ended December 31, 2012   $24,397         $(17,082)         $(7,315)
For the year ended December 31, 2011    3,434           (2,081)          (1,353)


                                       Impact of Reclassification on Incentive
                                         Business Economic Net (Loss) Income
                                       Private
                                        Equity          Credit       Real Estate
                                       Segment         Segment         Segment
For the year ended December 31, 2012  $(24,397)        $17,082          $7,315
For the year ended December 31, 2011   (3,434)          2,081           1,353

As it relates to the reclassifications described above, the impact to the combined segments' ENI for all periods presented was zero.
ENI is a key performance measure used for understanding the performance of our operations from period to period and although not every company in our industry defines these metrics in precisely the same way we do, we believe that this metric, as we use it, facilitates comparisons with other companies in our industry. We use ENI to evaluate the performance of our private equity, credit and real estate segments. Management also believes the components of ENI such as the amount of management fees, advisory and transaction fees, net and carried interest income are indicative of the Company's performance. Management also uses ENI in making key operating decisions such as the following:
Decisions related to the allocation of resources such as staffing decisions including hiring and locations for deployment of the new hires. As the amount of fees, investment income, and ENI is indicative of the performance of the management companies and advisors within each segment, management can assess the need for additional resources and the location for deployment of the new hires based on the results of this measure. For example, a positive ENI could indicate the need for additional staff to manage the respective segment whereas a negative ENI could indicate the need to reduce staff assigned to manage the respective segment.

                      Decisions related to capital deployment such as providing
                       capital to facilitate growth for our business and/or to
                       facilitate expansion into new businesses. As the amount of
                       fees, investment income, and ENI is indicative of the
                       performance of the management companies and advisors
                       within each segment, management can assess the
                       availability and need to provide capital to facilitate
                       growth or expansion into new businesses based on the
                       results of this measure. For example, a negative ENI may
                       indicate the lack of performance of a segment and thus
                       indicate a need for additional capital to be deployed into
                       the respective segment.


                      Decisions related to expenses, such as determining annual
                       discretionary bonuses and equity-based compensation awards
                       to its employees. With respect to compensation, management

seeks to align the interests of certain professionals and selected other individuals with those of the investors in . . .
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