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APO > SEC Filings for APO > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for APOLLO GLOBAL MANAGEMENT LLC

Form 10-Q for APOLLO GLOBAL MANAGEMENT LLC


9-May-2014

Quarterly Report


ITEM 2. 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 condensed consolidated financial statements and the related notes included within this Quarterly Report on Form 10-Q. 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 entitled "Risk Factors" in our Form 10-K for the year ended December 31, 2013 filed with the SEC on March 3, 2014. The highlights listed below have had significant effects on many items within our condensed 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 24 years and lead a team of 761 employees, including 302 investment professionals, as of March 31, 2014.
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.

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 March 31, 2014, 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 March 31, 2014, we had total AUM of $159.3 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 remaining. Additionally, Apollo Investment Fund VII, L.P. ("Fund VII") held a final closing in December 2008, raising a total of $14.7 billion, and as of March 31, 2014, Fund VII had $3.3 billion of uncalled commitments remaining. We have consistently produced attractive long-term investment returns in our traditional private equity funds, generating a 39% gross IRR and a 26% net IRR on a compound annual basis from inception through March 31, 2014. For

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further detail related to fund performance metrics across all of our businesses, see "-The Historical Investment Performance of Our Funds." 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 Quarterly Report on Form 10-Q.
(1) The Strategic Investors hold 30.18% of the Class A shares outstanding and 11.90% of the economic interests in the Apollo Operating Group. The Class A shares held by investors other than the Strategic Investors represent 31.26% of the total voting power of our shares entitled to vote and 27.54% 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 68.74% 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 53.40% 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 60.56% of the limited partner interests in each Apollo Operating Group entity ("AOG Units"). The AOG Units held by Holdings are exchangeable for Class A shares. Our Managing Partners, through their interests in BRH and Holdings, beneficially own 53.40% 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 39.44% 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 1.3% in the first quarter of 2014, following a 9.9% rise in the fourth quarter of 2013. Outside the U.S., world equity markets were weaker in first quarter of 2014. The MSCI All Country World ex USA Index was down 0.1% in the first quarter of 2014 following a 4.4% rise in the fourth quarter of 2013. Importantly, we believe that the generally positive momentum in the equity markets overall has been accommodative for continued equity capital markets activity, including IPOs and secondary offerings of the portfolio companies within our funds.
Conditions in the credit markets also have a significant impact on our business. Credit indices continued to rise in the first quarter of 2014, with the BofAML HY Master II Index up 3.0% and the S&P/LSTA Leveraged Loan Index up 1.2%. Benchmark interest rates declined during the first quarter of 2014 with the U.S. 10-year Treasury down approximately 30 basis points to 2.7%, largely due to concerns around the economic health of some emerging markets as well as tensions in Ukraine.
In terms of economic conditions in the U.S., the Bureau of Economic Analysis reported that real GDP increased at an annual rate of 0.1% in the first quarter of 2014, lower than the 2.6% in the fourth quarter of 2013, likely due to lower levels of activity resulting from the country's unusually harsh winter weather. As of April 2014, The International Monetary Fund estimated that the U.S. economy will expand by 2.8% in 2014, higher than the 1.9% in 2013. Additionally, the U.S. unemployment rate continued to decline and stood at 6.7% as of March 31, 2014, though the decline versus the prior quarter end was largely attributable to a further drop in the labor force participation rate. Amid the generally favorable backdrop of elevated asset prices and positive equity market momentum, Apollo continued to generate significant realizations for fund investors. Apollo returned $4.4 billion and $23.6 billion of capital and realized gains to the limited partners of the funds it manages during the first quarter of 2014 and for the past 12 months ended March 31, 2014, respectively. Apollo's fundraising activities moderated in the first quarter from recent highs driven by the final closing of Fund VIII in the fourth quarter of 2013. Apollo reported $1.5 billion and $22.5 billion of new capital raised during the first quarter of 2014 and over past 12 months, respectively. In general, institutional investors continue 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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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 reorganization of the Company's predecessor businesses on July 13, 2007 (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 condensed 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 the capital and surplus of Athene Holding Ltd. ("Athene Holding") and its subsidiaries (together with Athene Holding, "Athene") 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 13 to the condensed 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 three months ended March 31, 2013:

                                                 Impact of Reclassification on
                                                   Economic Net (Loss) Income
                                               Private Equity          Credit
                                                  Segment             Segment
                                                         (in thousands)
For the three months ended March 31, 2013        $(19,711)            $19,711

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 three months ended March 31, 2013.

                                             Impact of Reclassification on Management
                                                Business Economic Net Income (Loss)
                                             Private
                                             Equity           Credit         Real Estate
                                             Segment          Segment          Segment
                                                          (in thousands)
For the three months ended March 31, 2013    $5,037          $(4,518)          $(519)


                                     Impact of Reclassification on Incentive
                                       Business Economic Net (Loss) Income
                                     Private
                                      Equity          Credit       Real Estate
                                     Segment         Segment         Segment
                                                  (in thousands)
For the three months ended March
31, 2013                             $(3,564)         $3,220           $344

As it relates to the reclassifications described above, the impact to the combined segments' ENI for all periods presented was zero.

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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 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.

                      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.


                      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 such funds and those of the Company's shareholders by providing such individuals a profit sharing interest in the carried interest income earned in relation to the funds. To achieve that objective, a certain amount of compensation is based on the Company's performance and growth for the year.

ENI does not take into account certain items included when calculating net income under U.S. GAAP and as such, we do not rely solely on ENI as a performance measure and also consider our U.S. GAAP results. The following items, which are significant to our business, are excluded when calculating ENI:
(i) non-cash charges related to RSUs granted in connection with the 2007 private placement and amortization of AOG Units (the costs associated with the 2007 private placement are expected to be recurring components of our costs but at a diminishing rate, we may be able to incur lower cash compensation costs with the granting of equity-based compensation). The AOG Units were fully vested and amortized as of June 30, 2013;

(ii) income tax, which represents a necessary and recurring element of our operating costs and our ability to generate revenue because ongoing revenue generation is expected to result in future income tax expense;

(iii) amortization of intangible assets associated with the 2007 Reorganization and acquisitions, which is a recurring item until all intangibles have been fully amortized; and

(iv) Non-Controlling Interests, excluding the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies, which is expected to be a recurring item and represents the aggregate of the income or loss that is not owned by the Company.

We believe that ENI is helpful for an understanding of our business and that investors should review the same supplemental financial measure that management uses to analyze our segment performance. This measure supplements and should be considered in addition to and not in lieu of the results of operations discussed below in "-Overview of Results of Operations" that have been prepared in accordance with U.S. GAAP.
The following summarizes the adjustments to ENI that reconcile ENI to the net income (loss) attributable to Apollo Global Management, LLC determined in accordance with U.S. GAAP:

                           Inclusion of the impact of RSUs granted in connection
                            with the 2007 private placement and non-cash
                            equity-based compensation expense comprising
                            amortization of AOG Units. Management assesses our
                            performance based on management fees, advisory and
                            transaction fees, and carried interest income
                            generated by the business and excludes the

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impact of non-cash charges related to RSUs granted in connection with the 2007 private placement and amortization of AOG Units because these non-cash charges are not viewed as part of our core operations. The AOG Units were fully vested and amortized as of June, 2013.
Inclusion of the impact of income taxes as we do not take income taxes into consideration when evaluating the performance of our segments or when determining compensation for our employees. Additionally, income taxes at the segment level (which exclude APO Corp.'s corporate taxes) are not meaningful, as the majority of the entities included in our segments operate as partnerships and therefore are only subject to New York City unincorporated business taxes ("NYC UBT") and foreign taxes when applicable.

Inclusion of amortization of intangible assets associated with the 2007 Reorganization and subsequent acquisitions as these non-cash charges are not viewed as part of our core operations.

Carried interest income, management fees and other revenues from Apollo funds are reflected on an unconsolidated basis. As such, ENI excludes the Non-Controlling Interests in consolidated funds, which remain consolidated in our condensed consolidated financial statements. Management views the business as an alternative investment management firm and therefore assesses performance using the combined total of carried interest income and management fees from each of our funds. One exception is the Non-Controlling Interest related to certain individuals who receive an allocation of income from certain of our credit management companies, which is deducted from ENI to better reflect the performance attributable to shareholders.

ENI may not be comparable to similarly titled measures used by other companies and is not a measure of performance calculated in accordance with U.S. GAAP. We use ENI as a measure of operating performance, not as a measure of liquidity. ENI should not be considered in isolation or as a substitute for operating income, net income, operating cash flows, investing and financing activities, or other income or cash flow statement data prepared in accordance with U.S. GAAP. The use of ENI without consideration of related U.S. GAAP measures is not adequate due to the adjustments described above. Management compensates for these limitations by using ENI as a supplemental measure to U.S. GAAP results, to provide a more complete understanding of our performance as management measures it. A reconciliation of ENI to our U.S. GAAP net income (loss) attributable to Apollo Global Management, LLC can be found in the notes to our condensed consolidated financial statements.

Operating Metrics
We monitor certain operating metrics that are common to the alternative investment management industry. These operating metrics include Assets Under Management, private equity dollars invested and uncalled private equity commitments.
Assets Under Management
Assets Under Management, or AUM, refers to the investments we manage or with respect to which we have control, including capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of:
(i) the fair value of our private equity investments plus the capital that we are entitled to call from our investors pursuant to the terms of their capital commitments;

(ii) the NAV, of our credit funds, other than certain CLOs and CDOs, which have a fee generating basis other than the mark-to-market value of the underlying assets, plus used or available leverage and/or capital commitments;

(iii) the gross asset value or net asset value of our real estate entities and the structured portfolio company investments included within the funds we manage, which includes the leverage used by such structured portfolio companies;

(iv) the incremental value associated with the reinsurance investments of the portfolio company assets we manage; and

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(v) the fair value of any other investments that we manage plus unused credit facilities, including capital commitments for investments that may require pre-qualification before investment plus any other capital commitments available for investment that are not otherwise included in the clauses above.

Our AUM measure includes Assets Under Management for which we charge either no or nominal fees. Our definition of AUM is not based on any definition of Assets Under Management contained in our operating agreement or in any of our Apollo . . .

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