APO-9.30.2013-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
 
Form 10-Q  
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013 OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
Commission File Number: 001-35107
 
APOLLO GLOBAL MANAGEMENT, LLC
(Exact name of Registrant as specified in its charter) 
 
Delaware
 
20-8880053
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
9 West 57th Street, 43rd Floor
New York, New York 10019
(Address of principal executive offices) (Zip Code)
(212) 515-3200
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
T
  
Accelerated filer
  
¨
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
  
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  T
As of November 8, 2013 there were 143,707,112 Class A shares and 1 Class B share outstanding.


Table of Contents

 
TABLE OF CONTENTS
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 

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Forward-Looking Statements
This quarterly report may contain forward looking statements that are within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, discussions related to Apollo’s expectations regarding the performance of its business, its liquidity and capital resources and the other non-historical statements in the discussion and analysis. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this quarterly report, the words “believe,” “anticipate,” “estimate,” “expect,” “intend” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to certain risks, uncertainties and assumptions, including risks relating to our dependence on certain key personnel, our ability to raise new private equity, credit or real estate funds, market conditions generally, our ability to manage our growth, fund performance, changes in our regulatory environment and tax status, the variability of our revenues, net income and cash flow, our use of leverage to finance our businesses and investments by our funds and litigation risks, among others. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 1, 2013, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this quarterly report and in other filings. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law.
Terms Used in This Report
In this quarterly report, references to “Apollo,” “we,” “us,” “our” and the “Company” refer collectively to Apollo Global Management, LLC, a Delaware limited liability company, and its subsidiaries, including the Apollo Operating Group and all of its subsidiaries;
“AMH” refers to Apollo Management Holdings, L.P., a Delaware limited partnership owned by APO Corp. and Holdings;
“Apollo funds” and “our funds” refer to the funds, alternative asset companies and other entities that are managed by the Apollo Operating Group;
“Apollo Operating Group” refers to (i) the limited partnerships through which our Managing Partners currently operate our businesses and (ii) one or more limited partnerships formed for the purpose of, among other activities, holding certain of our gains or losses on our principal investments in the funds, which we refer to as our “principal investments”;
“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 to the extent a fund is within the commitment period in which management fees are calculated based on total commitments to the fund;
(ii)
the net asset value, or “NAV,” of our credit funds, other than certain collateralized loan obligations (“CLOs”), which we measure by using the mark-to-market value of the aggregate principal amount of the underlying CLO and collateralized debt obligation (“CDO”) credit funds that have a fee generating basis other than mark-to-market assets or liabilities, 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 that we manage; and
(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

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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 fund management agreements. We consider multiple factors for determining what should be included in our definition of AUM. Such factors include but are not limited to (1) our ability to influence the investment decisions for existing and available assets; (2) our ability to generate income from the underlying assets in our funds; and (3) the AUM measures that we use internally or believe are used by other investment managers. Given the differences in the investment strategies and structures among other alternative investment managers, our calculation of AUM may differ from the calculations employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers;
Fee-generating AUM consists of assets that we manage and on which we earn management fees or monitoring fees pursuant to management agreements on a basis that varies among the Apollo funds. Management fees are normally based on “net asset value,” “gross assets,” “adjusted par asset value,” “adjusted cost of all unrealized portfolio investments,” “capital commitments,” “adjusted assets,” “stockholders’ equity,” “invested capital” or “capital contributions,” each as defined in the applicable management agreement. Monitoring fees, also referred to as advisory fees, generally are based on the total value of certain structured portfolio company investments, which normally includes leverage, less any portion of such total value that is already considered in fee-generating AUM;
Non-fee generating AUM consists of assets that do not produce management fees or monitoring fees. These assets generally consist of the following:
(i)
fair value above invested capital for those funds that earn management fees based on invested capital;
(ii)
net asset values related to general partner and co-investment ownership;
(iii)
unused credit facilities;
(iv)
available commitments on those funds that generate management fees on invested capital;
(v)
structured portfolio company investments that do not generate monitoring fees; and
(vi)
the difference between gross asset and net asset value for those funds that earn management fees based on net asset value.
We use non-fee generating AUM combined with fee-generating AUM as a performance measurement of our investment activities, as well as to monitor fund size in relation to professional resource and infrastructure needs. Non-fee generating AUM includes assets on which we could earn carried interest income;
“carried interest,” “carried interest income,” and “incentive income” refer to interests granted to Apollo by an Apollo fund that entitle Apollo to receive allocations, distributions or fees which are based on the performance of such fund or its underlying investments;
“Contributing Partners” refer to those of our partners and their related parties (other than our Managing Partners) who indirectly own (through Holdings) Apollo Operating Group units;
“feeder funds” refer to funds that operate by placing substantially all of their assets in, and conducting substantially all of their investment and trading activities through, a master fund, which is designed to facilitate collective investment by the participating feeder funds. With respect to certain of our funds that are organized in a master-feeder structure, the feeder funds are permitted to make investments outside the master fund when deemed appropriate by the fund’s investment manager;
“gross IRR” of a fund represents the cumulative investment-related cash flows for all of the investors in the fund on the basis of the actual timing of investment inflows and outflows (for unrealized investments assuming disposition on September 30, 2013 or other date specified) aggregated on a gross basis quarterly, and the return is annualized and compounded before management fees, carried interest and certain other fund expenses (including interest incurred by the fund itself) and measures the returns on the fund’s investments as a whole without regard to whether all of the returns would, if distributed, be payable to the fund’s investors;
“Holdings” means AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership through which our Managing Partners and Contributing Partners hold their interests in the Apollo Operating Group units;

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“Managing Partners” refer to Messrs. Leon Black, Joshua Harris and Marc Rowan collectively and, when used in reference to holdings of interests in Apollo or Holdings, includes certain related parties of such individuals;
“net IRR” of a private equity fund means the gross IRR applicable to all investors, including related parties which may not pay fees, net of management fees, organizational expenses, transaction costs, and certain other fund expenses (including interest incurred by the fund itself). The realized and the estimated unrealized value is adjusted such that up to 20.0% of the unrealized gain is allocated to the general partner, thereby reducing the balance attributable to fund investors’ carried interest all offset to the extent of interest income, and measures returns based on amounts that, if distributed, would be paid to investors of the fund, to the extent that a fund exceeds all requirements detailed within the applicable fund agreement;
“net return” represents the calculated return that is based on month-to-month changes in net assets and is calculated using the returns that have been geometrically linked based on capital contributions, distributions and dividend reinvestments, as applicable;
“our manager” means AGM Management, LLC, a Delaware limited liability company that is controlled by our Managing Partners;
“permanent capital” means capital of publicly traded vehicles that do not have redemption provisions or a requirement to return capital to investors upon exiting the investments made with such capital, except as required by applicable law, such as AP Alternative Assets, L.P. ("AAA"), Apollo Investment Corporation, Apollo Commercial Real Estate Finance, Inc., Apollo Residential Mortgage, Inc., Apollo Tactical Income Fund Inc., and Apollo Senior Floating Rate Fund Inc.; such publicly traded vehicles may be required, or elect, to return all or a portion of capital gains and investment income;
“private equity investments” refer to (i) direct or indirect investments in existing and future private equity funds managed or sponsored by Apollo, (ii) direct or indirect co-investments with existing and future private equity funds managed or sponsored by Apollo, (iii) direct or indirect investments in securities which are not immediately capable of resale in a public market that Apollo identifies but does not pursue through its private equity funds, and (iv) investments of the type described in (i) through (iii) above made by Apollo funds; and
“Strategic Investors” refer to the California Public Employees’ Retirement System, or “CalPERS,” and an affiliate of the Abu Dhabi Investment Authority, or “ADIA.”

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APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION (UNAUDITED)
(dollars in thousands, except share data)
 
September 30,
2013
 
December 31, 2012
Assets:
 
 
 
Cash and cash equivalents
$
1,136,913

 
$
946,225

Cash and cash equivalents held at consolidated funds
1,909

 
1,226

Restricted cash
9,093

 
8,359

Investments
2,190,241

 
2,138,096

Assets of consolidated variable interest entities:
 
 
 
Cash and cash equivalents
1,023,520

 
1,682,696

Investments, at fair value
13,751,844

 
12,689,535

Other assets
596,995

 
299,978

Carried interest receivable
2,332,061

 
1,878,256

Due from affiliates
238,521

 
173,312

Fixed assets, net
49,510

 
53,452

Deferred tax assets
615,440

 
542,208

Other assets
48,771

 
36,765

Goodwill
48,894

 
48,894

Intangible assets, net
104,662

 
137,856

Total Assets
$
22,148,374

 
$
20,636,858

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued expenses
$
49,799

 
$
38,337

Accrued compensation and benefits
119,990

 
56,125

Deferred revenue
267,078

 
252,157

Due to affiliates
528,401

 
477,451

Profit sharing payable
1,078,000

 
857,724

Debt
728,273

 
737,818

Liabilities of consolidated variable interest entities:
 
 
 
Debt, at fair value
12,114,495

 
11,834,955

Other liabilities
802,109

 
634,053

Other liabilities
74,727

 
44,855

Total Liabilities
15,762,872

 
14,933,475

Commitments and Contingencies (see note 12)


 


Shareholders’ Equity:
 
 
 
Apollo Global Management, LLC shareholders’ equity:
 
 
 
Class A shares, no par value, unlimited shares authorized, 143,700,234 shares and 130,053,993 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

 

Class B shares, no par value, unlimited shares authorized, 1 share issued and outstanding at September 30, 2013 and December 31, 2012

 

Additional paid in capital
2,741,531

 
3,043,334

Accumulated deficit
(1,722,459
)
 
(2,142,020
)
Appropriated partners’ capital
1,693,116

 
1,765,360

Accumulated other comprehensive income
94

 
144

Total Apollo Global Management, LLC shareholders’ equity
2,712,282

 
2,666,818

Non-Controlling Interests in consolidated entities
2,333,213

 
1,893,212

Non-Controlling Interests in Apollo Operating Group
1,340,007

 
1,143,353

Total Shareholders’ Equity
6,385,502

 
5,703,383

Total Liabilities and Shareholders’ Equity
$
22,148,374

 
$
20,636,858

See accompanying notes to condensed consolidated financial statements.

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APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(dollars in thousands, except share data)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Advisory and transaction fees from affiliates
$
28,961

 
$
15,149

 
$
141,465

 
$
112,162

Management fees from affiliates
151,127

 
147,611

 
456,644

 
418,115

Carried interest income from affiliates
952,001

 
549,613

 
2,340,314

 
1,170,467

Total Revenues
1,132,089

 
712,373

 
2,938,423

 
1,700,744

Expenses:
 
 
 
 
 
 
 
Compensation and benefits:
 
 
 
 
 
 
 
Equity-based compensation
20,832

 
144,407

 
109,619

 
435,387

Salary, bonus and benefits
81,266

 
64,647

 
223,944

 
204,666

Profit sharing expense
424,542

 
237,797

 
975,406

 
506,680

Total Compensation and Benefits
526,640

 
446,851

 
1,308,969

 
1,146,733

Interest expense
7,179

 
7,136

 
22,291

 
29,083

Professional fees
18,752

 
11,490

 
56,477

 
39,849

General, administrative and other
21,720

 
24,028

 
70,698

 
66,810

Placement fees
3,185

 
4,292

 
15,663

 
13,344

Occupancy
9,849

 
9,644

 
29,803

 
27,360

Depreciation and amortization
12,790

 
16,567

 
41,603

 
37,021

Total Expenses
600,115

 
520,008

 
1,545,504

 
1,360,200

Other Income:
 
 
 
 
 
 
 
Net gains from investment activities
74,045

 
20,463

 
127,294

 
149,957

Net gains (losses) from investment activities of consolidated variable interest entities
78,601

 
(45,475
)
 
91,264

 
(29,913
)
Income from equity method investments
32,236

 
40,779

 
80,116

 
83,191

Interest income
3,304

 
3,277

 
9,444

 
7,093

Other income, net
22,634

 
8,304

 
26,710

 
1,959,669

Total Other Income
210,820

 
27,348

 
334,828

 
2,169,997

Income before income tax provision
742,794

 
219,713

 
1,727,747

 
2,510,541

Income tax provision
(47,204
)
 
(21,917
)
 
(83,922
)
 
(47,127
)
Net Income
695,590

 
197,796

 
1,643,825

 
2,463,414

Net income attributable to Non-controlling Interests
(503,074
)
 
(115,005
)
 
(1,143,594
)
 
(2,323,966
)
Net Income Attributable to Apollo Global Management, LLC
$
192,516

 
$
82,791

 
$
500,231

 
$
139,448

Distributions Declared per Class A Share
$
1.32

 
$
0.24

 
$
2.94

 
$
0.95

Net Income Per Class A Share:
 
 
 
 
 
 
 
Net Income Available to Class A Share – Basic
$
1.13

 
$
0.55

 
$
3.11

 
$
0.93

Net Income Available to Class A Share –Diluted
$
1.13

 
$
0.55

 
$
3.08

 
$
0.93

Weighted Average Number of Class A Shares – Basic
142,829,913

 
128,980,438

 
137,165,119

 
126,909,962

Weighted Average Number of Class A Shares – Diluted
146,212,984

 
131,635,202

 
140,423,929

 
129,309,716

See accompanying notes to condensed consolidated financial statements.

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APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands, except share data)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Net Income
$
695,590

 
$
197,796

 
$
1,643,825

 
$
2,463,414

Other Comprehensive Income, net of tax:
 
 
 
 
 
 
 
Net unrealized (loss) gain on interest rate swaps (net of taxes of $0 and $172 for Apollo Global Management, LLC for the three months ended September 30, 2013 and 2012, respectively, and $0 and $410 for Apollo Global Management, LLC for the nine months ended September 30, 2013 and 2012, respectively, and $0 for Non-Controlling Interests in Apollo Operating Group for both the three and nine months ended September 30, 2013 and 2012)

 
(172
)
 

 
2,653

Net (loss) income on available-for-sale securities (from equity method investment)
(4
)
 
16

 
(9
)
 
13

Total Other Comprehensive (Loss) Income, net of tax
(4
)
 
(156
)
 
(9
)
 
2,666

Comprehensive Income
695,586

 
197,640

 
1,643,816

 
2,466,080

Comprehensive Income attributable to Non-Controlling Interests
(434,303
)
 
(174,245
)
 
(1,076,823
)
 
(452,563
)
Comprehensive Income Attributable to Apollo Global Management, LLC
$
261,283

 
$
23,395

 
$
566,993

 
$
2,013,517

See accompanying notes to condensed consolidated financial statements.

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APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(dollars in thousands, except share data)
 
Apollo Global Management, LLC Shareholders
 
 
 
 
 
 
 
 
 
Class A
Shares
 
Class B
Shares
 
Additional
Paid  in
Capital
 
Accumulated
Deficit
 
Appropriated
Partners’
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total Apollo
Global
Management,
LLC Total
Shareholders’
Equity
 
Non-
Controlling
Interests in
Consolidated
Entities
 
Non-
Controlling
Interests in
Apollo
Operating
Group
 
Total
Shareholders’
Equity
Balance at January 1, 2012
123,923,042

 
1

 
$
2,939,492

 
$
(2,426,197
)
 
$
213,594

 
$
(488
)
 
$
726,401

 
$
1,444,767

 
$
477,153

 
$
2,648,321

Capital increase related to equity-based compensation

 

 
205,370

 

 

 

 
205,370

 
 
 
227,973

 
433,343

Capital contributions

 

 

 

 

 

 

 
267,642

 

 
267,642

Cash distributions

 

 

 

 

 

 

 
(394,954
)
 

 
(394,954
)
Distributions

 

 
(142,616
)
 

 
(192,561
)
 

 
(335,177
)
 

 
(239,022
)
 
(574,199
)
Distributions related to deliveries of Class A shares for RSUs
5,951,244

 

 
(83
)
 
(25,852
)
 

 

 
(25,935
)
 

 

 
(25,935
)
Purchase of AAA shares

 

 

 

 

 

 

 
(100,046
)
 

 
(100,046
)
Non-cash distributions

 

 

 
(780
)
 

 

 
(780
)
 
(2,728
)
 

 
(3,508
)
Non-cash contribution to Non-Controlling Interests

 



 

 

 

 

 
1,247

 

 
1,247

Capital increase related to business acquisition

 


14,001

 

 

 

 
14,001

 

 

 
14,001

Non-Controlling Interests in consolidated entities at acquisition date

 



 

 

 

 

 
306,351

 

 
306,351

Deconsolidation

 

 

 

 

 

 

 
(46,148
)
 

 
(46,148
)
Net transfers of AAA ownership interest to (from) Non-Controlling Interests in consolidated entities

 

 
(1,098
)
 

 

 

 
(1,098
)
 
1,098

 

 

Satisfaction of liability related to AAA RDUs

 

 
174

 

 

 

 
174

 

 

 
174

Net income

 

 

 
139,448

 
1,873,413

 

 
2,012,861

 
114,717

 
335,836

 
2,463,414

Net gain on available-for-sale securities (from equity method investment)

 

 

 

 

 
13

 
13

 

 

 
13

Net unrealized gain on interest rate swaps (net of taxes of $410 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively)

 

 

 

 

 
643

 
643

 

 
2,010

 
2,653

Balance at September 30, 2012
129,874,286

 
1

 
$
3,015,240

 
$
(2,313,381
)
 
$
1,894,446

 
$
168

 
$
2,596,473

 
$
1,591,946

 
$
803,950

 
$
4,992,369

Balance at January 1, 2013
130,053,993

 
1

 
$
3,043,334

 
$
(2,142,020
)
 
$
1,765,360

 
$
144

 
$
2,666,818

 
$
1,893,212

 
$
1,143,353

 
$
5,703,383

Dilution impact of issuance of Class A shares

 

 
(766
)
 

 

 

 
(766
)
 

 

 
(766
)
Capital increase related to equity-based compensation

 

 
88,394

 

 

 

 
88,394

 

 
19,163

 
107,557

Capital contributions

 

 

 

 

 

 

 
489,636

 

 
489,636

Distributions

 

 
(479,330
)
 

 
(139,056
)
 

 
(618,386
)
 
(93,501
)
 
(744,242
)
 
(1,456,129
)
Distributions related to deliveries of Class A shares for RSUs
4,876,877

 

 
26,162

 
(80,670
)
 

 

 
(54,508
)
 

 

 
(54,508
)
Purchase of AAA shares

 

 

 

 

 

 

 
(62,326
)
 

 
(62,326
)
Net transfers of AAA ownership interest to (from) Non-Controlling Interests in consolidated entities

 

 
(1,921
)
 

 

 

 
(1,921
)
 
1,921

 

 

Satisfaction of liability related to AAA RDUs

 

 
1,027

 

 

 

 
1,027

 

 

 
1,027

Exchange of AOG Units for Class A Shares
8,769,364

 

 
64,631

 

 

 

 
64,631

 

 
(50,819
)
 
13,812

Net income

 

 

 
500,231

 
66,812

 

 
567,043

 
104,271

 
972,511

 
1,643,825

Net (loss) gain on available-for-sale securities (from equity method investment)

 

 

 

 

 
(50
)
 
(50
)
 

 
41

 
(9
)
Balance at September 30, 2013
143,700,234

 
1

 
$
2,741,531

 
$
(1,722,459
)
 
$
1,693,116

 
$
94

 
$
2,712,282

 
$
2,333,213

 
$
1,340,007

 
$
6,385,502

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(dollars in thousands, except share data)

 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
Net income
$
1,643,825

 
$
2,463,414

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Equity-based compensation
109,619

 
435,387

Depreciation and amortization
8,409

 
7,582

Amortization of intangible assets
33,194

 
29,439

Amortization of debt issuance costs
448

 
383

Unrealized losses from investment in HFA and other investments
9,206

 
7,774

Non-cash interest income
(2,526
)
 
(2,370
)
Income from equity awards received for directors’ fees
(1,239
)
 
(2,469
)
Income from equity method investment
(80,116
)
 
(83,191
)
Unrealized gain on derivatives
(3,202
)
 

Waived management fees

 
(18,460
)
Non-cash compensation expense related to waived management fees

 
18,460

Change in fair value of contingent obligations
47,523

 
16,880

Deferred taxes, net
76,764

 
38,029

Loss on disposal of assets
26

 
911

Gain on business acquisitions

 
(1,951,133
)
Changes in assets and liabilities:
 
 
 
Carried interest receivable
(453,805
)
 
(723,258
)
Due from affiliates
(58,934
)
 
(95,741
)
Other assets
(12,449
)
 
(1,001
)
Accounts payable and accrued expenses
11,462

 
8,168

Accrued compensation and benefits
61,729

 
45,605

Deferred revenue
14,921

 
35,352

Due to affiliates
(79,074
)
 
63,332

Profit sharing payable
172,753

 
338,107

Other liabilities
(2,646
)
 
(2,002
)
Apollo Funds related:
 
 
 
Net realized gains from investment activities
(68,878
)
 
(23,144
)
Net unrealized gains from investment activities
(59,809
)
 
(340,463
)
Net realized gains on debt
(139,619
)
 

Net unrealized losses on debt
203,353

 
356,890

Distributions from investment activities
66,796

 
99,675

Change in cash held at consolidated variable interest entities
659,176

 
(249,585
)
Purchases of investments
(7,968,793
)
 
(4,658,417
)
Proceeds from sale of investments and liquidating distributions
6,867,820

 
4,650,584

Change in other assets
(297,017
)
 
78,435

Change in other liabilities
168,112

 
(82,740
)
Net Cash Provided by Operating Activities
927,029

 
460,433

Cash Flows from Investing Activities:
 
 
 
Purchases of fixed assets
(6,775
)
 
(8,101
)
Acquisition of Stone Tower (net of cash assumed)

 
(99,190
)
Proceeds from disposals of fixed assets
2,282

 

Cash contributions to equity method investments
(64,217
)
 
(109,076
)
Cash distributions from equity method investments
156,740

 
82,027

Change in restricted cash
(734
)
 
(642
)
Net Cash Provided by (Used In) Investing Activities
$
87,296

 
$
(134,982
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Principal repayments on debt and repurchase of debt
$
(9,545
)
 
$
(530
)
Distributions related to deliveries of Class A shares for RSUs
(80,670
)
 
(25,852
)
Distributions to Non-Controlling Interests in consolidated entities
(9,625
)
 
(6,595
)
Contributions from Non-Controlling Interests in consolidated entities
289

 
2,535

Distributions paid
(428,554
)
 
(127,614
)
Distributions paid to Non-Controlling Interests in Apollo Operating Group
(744,242
)
 
(239,022
)
Apollo Funds related:
 
 
 
Issuance of debt
2,095,707

 
929,532

Principal repayment of debt
(1,850,403
)
 
(433,587
)
Purchase of AAA shares
(62,326
)
 
(100,046
)
Distributions paid
(139,056
)
 
(192,561
)
Distributions paid to Non-Controlling Interests in consolidated variable interest entities
(83,876
)
 
(388,359
)
Contributions from Non-Controlling Interests in consolidated variable interest entities
489,347

 
265,107

Net Cash Used in Financing Activities
(822,954
)
 
(316,992
)
Net Increase in Cash and Cash Equivalents
191,371

 
8,459

Cash and Cash Equivalents, Beginning of Period
947,451

 
744,731

Cash and Cash Equivalents, End of Period
$
1,138,822

 
$
753,190

Supplemental Disclosure of Cash Flow Information:
 
 
 
Interest paid
$
30,484

 
$
39,138

Interest paid by consolidated variable interest entities
92,389

 
79,371

Income taxes paid
6,343

 
4,225

Supplemental Disclosure of Non-Cash Investing Activities:
 
 
 
Non-cash contributions on equity method investments
$
935

 
$
3,478

Non-cash distributions from equity method investments
(1,975
)
 
(468
)
Non-cash contributions from investing activities

 
2,170

Change in accrual for purchase of fixed assets

 
(1,624
)
Supplemental Disclosure of Non-Cash Financing Activities:
 
 
 
Declared and unpaid distributions
(50,776
)
 
(15,782
)
Non-cash distributions to Non-Controlling Interests in consolidated entities

 
(2,728
)
Unrealized gain on interest rate swaps to Non-Controlling Interests in Apollo Operating Group, net of taxes

 
2,010

Satisfaction of liability related to AAA RDUs
1,027

 
174

Net transfers of AAA ownership interest to Non-Controlling Interests in consolidated entities
1,921

 
1,098

Net transfer of AAA ownership interest from Apollo Global Management, LLC
(1,921
)
 
(1,098
)
Non-cash contributions from Non-Controlling Interests in Apollo Operating Group related to equity-based compensation
19,163

 
227,973

Unrealized (loss) gain on available for sale securities (from equity method investment)
(50
)
 
13

Capital increases related to equity-based compensation
88,394

 
205,370

Non-cash contributions from Non-Controlling Interests in consolidated entities

 
1,247

Dilution impact of issuance of Class A shares
(766
)
 

Deferred tax asset related to interest rate swaps

 
(410
)
Tax benefits related to deliveries of Class A shares for RSUs
(26,162
)
 
83

Non-Controlling Interest in consolidated entities related to acquisition

 
260,203

Capital increase related to business acquisition

 
14,001

Net Assets Transferred from Consolidated Variable Interest Entity:
 
 
 
Cash and cash equivalents

 
1,161,016

Investments, at fair value

 
8,581,827

Other assets

 
394,026

Debt, at fair value

 
(7,255,172
)
Other liabilities

 
(560,262
)
Adjustments related to exchange of Apollo Operating Group units:
 
 
 
Deferred tax assets
$
92,080

 
$

Due to affiliates
(78,268
)
 

Additional paid in capital
(13,812
)
 

Non-controlling Interest in Apollo Operating Group
$
50,819

 
$

See accompanying notes to condensed consolidated financial statements.

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Table of Contents
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)




1. ORGANIZATION AND BASIS OF PRESENTATION
Apollo Global Management, LLC (together with its consolidated subsidiaries, the “Company” or “Apollo”) is a global alternative investment manager whose predecessor was founded in 1990. Its primary business is to raise, invest and manage private equity, credit and real estate funds as well as strategic investment accounts ("SIAs"), on behalf of pension, endowment and sovereign wealth funds, as well as other institutional and individual investors. For these investment management services, Apollo receives management fees generally related to the amount of assets managed, transaction and advisory fees for the investments made and carried interest income related to the performance of the respective funds that it manages. Apollo has three primary business segments:
Private equity—primarily invests in control equity and related debt instruments, convertible securities and distressed debt investments;
Credit—primarily invests in non-control corporate and structured debt instruments; and
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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and instructions to the Quarterly Report on Form 10-Q. The condensed consolidated financial statements and these notes are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting only of normal recurring items) so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The condensed consolidated financial statements include the accounts of the Company, its wholly-owned or majority-owned subsidiaries, the consolidated entities which are considered to be variable interest entities (“VIEs”) and for which the Company is considered the primary beneficiary, and certain entities which are not considered variable interest entities but which the Company controls through a majority voting interest. Intercompany accounts and transactions have been eliminated upon consolidation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the SEC.
Certain reclassifications, when applicable, have been made to the prior period's condensed consolidated financial statements and notes to conform to the current period's presentation and are disclosed accordingly.
Reorganization of the Company
The Company was formed as a Delaware limited liability company on July 3, 2007 and completed a reorganization of its predecessor businesses on July 13, 2007 (the “2007 Reorganization”). The Company is managed and operated by its manager, AGM Management, LLC, which in turn is indirectly wholly-owned and controlled by the Managing Partners.
As of September 30, 2013, the Company owned, through three intermediate holding companies that include APO Corp., a Delaware corporation that is a domestic corporation for U.S. Federal income tax purposes, APO Asset Co., LLC, a Delaware limited liability company that is a disregarded entity for U.S. Federal income tax purposes, and APO (FC), LLC, an Anguilla limited liability company that is treated as a corporation for U.S Federal income tax purposes (collectively, the “Intermediate Holding Companies”), 38.3% of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group through its wholly-owned subsidiaries.
Holdings is the entity through which the Managing Partners and Contributing Partners indirectly beneficially own interests in each of the partnerships that comprise the Apollo Operating Group (“AOG Units”) that represented 61.7% of the economic interests in the Apollo Operating Group as of September 30, 2013. The Company consolidates the financial results of

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Table of Contents
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

the Apollo Operating Group and its consolidated subsidiaries. Holdings’ ownership interest in the Apollo Operating Group is reflected as a Non-Controlling Interest in the accompanying condensed consolidated financial statements.
Apollo also entered into an exchange agreement with Holdings (as amended, the “Exchange Agreement”) that allows the holders of the AOG Units (and certain permitted transferees thereof), subject to the applicable vesting and minimum retained ownership requirements and transfer restrictions to exchange, upon notice (subject to the terms of the Exchange Agreement), their AOG Units for the Company’s Class A shares on a one-for-one basis up to four times each year, subject to customary conversion rate adjustments for splits, distributions and reclassifications. Under the Exchange Agreement, a holder of AOG Units must simultaneously exchange one partnership unit in each of the Apollo Operating Group partnerships to effectuate an exchange for one Class A share. As a holder exchanges its AOG Units, the Company’s indirect interest in the Apollo Operating Group will be correspondingly increased.
On May 15, 2013, the Company completed its public offering for resale of approximately 24.3 million Class A shares owned by its Strategic Investors and certain of its Managing Partners, Contributing Partners and employees (collectively, the “Selling Shareholders”) at a price to the public of $25.00 per Class A share, which included approximately 3.2 million Class A shares sold by the Selling Shareholders upon the exercise in full of the underwriters' option to purchase additional shares (the “Secondary Offering”). In connection with the Secondary Offering, certain holders of AOG Units exchanged their AOG Units for Class A shares and approximately 8.8 million Class A shares were issued by the Company in the exchange. No proceeds were received by the Company from the sale of Class A shares by the Selling Shareholders in the Secondary Offering. All underwriting costs were borne by the Selling Shareholders. The Company incurred approximately $3.0 million of fees for the nine months ended September 30, 2013, consisting of legal and professional fees and filing costs, as a result of the Secondary Offering.
As a result of the exchange of AOG Units into Class A shares, the Company's economic interests in the Apollo Operating Group increased from 35.6% to 38.0% and Holdings' economic interests in the Apollo Operating Group decreased from 64.4% to 62.0%. The dilution of Holdings' economic interests in the Apollo Operating Group is reflected in the condensed consolidated statements of changes in shareholders' equity in the line titled Exchange of AOG Units for Class A shares, where $50.8 million was transferred to Apollo Global Management, LLC's shareholders' equity from Non-Controlling Interests in the Apollo Operating Group. Additionally, as a result of the exchange of AOG Units into Class A shares, the Company recognized a step-up in tax basis of certain assets and liabilities. Similar to its 2007 Reorganization, the Company recognized an increase in its deferred tax asset, tax receivable agreement liability and shareholders' equity as a result of the exchange of AOG Units into Class A shares. Refer to note 7 and note 11 for a discussion of the increase in deferred taxes, tax receivable agreement liability and additional paid in capital as a result of the exchange of AOG Units into Class A shares.




2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation—Apollo consolidates those entities it controls through a majority voting interest or through other means, including those funds in which the general partner is presumed to have control (e.g., AP Alternative Assets, L.P., (“AAA”) and the Apollo Credit Senior Loan Fund, L.P. (“Apollo Senior Loan Fund”)). Apollo also consolidates entities that are VIEs for which Apollo is the primary beneficiary. Under the amended consolidation rules, an enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE.
Certain of the Company’s subsidiaries hold equity interests in and/or receive fees qualifying as variable interests from the entities that the Company manages. The amended consolidation rules require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would give it a controlling financial interest. When the VIE has qualified for the deferral of the amended consolidation rules in accordance with U.S. GAAP, the analysis is based on previous consolidation rules, which require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would be expected to absorb a majority of the variability of the entity.

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Table of Contents
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

Under both the previous and amended consolidation rules, the determination of whether an entity in which Apollo holds a variable interest is a VIE requires judgments which include determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the success of the entity, determining whether two or more parties’ equity interests should be aggregated, and determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity. Under both the previous and amended consolidation rules, Apollo determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion continuously. The consolidation analysis can generally be performed qualitatively. However, if it is not readily apparent whether Apollo is the primary beneficiary, a quantitative expected losses and expected residual returns calculation will be performed. Investments and redemptions (either by Apollo, affiliates of Apollo or third parties) or amendments to the governing documents of the respective Apollo fund may affect an entity’s status as a VIE or the determination of the primary beneficiary.
Apollo assesses whether it is the primary beneficiary and will consolidate or deconsolidate the entity accordingly. Performance of that assessment requires the exercise of judgment. Where the variable interests have qualified for the deferral, judgments are made in estimating cash flows in evaluating which member within the equity group absorbs a majority of the expected profits or losses of the VIE. Where the variable interests have not qualified for the deferral, judgments are made in determining whether a member in the equity group has a controlling financial interest, including power to direct activities that most significantly impact the VIE’s economic performance and rights to receive benefits or obligations to absorb losses that are potentially significant to the VIE. Under both guidelines, judgment is made in evaluating the nature of the relationships and activities of the parties involved in determining if there is a related-party group, and if so, which party within the related-party group is most closely associated with the VIE. The use of these judgments has a material impact to certain components of Apollo’s condensed consolidated financial statements.
Certain of the consolidated VIEs were formed to issue collateralized notes in the legal form of debt backed by financial assets. The difference between the fair value of the assets and liabilities of these VIEs is presented within appropriated partners’ capital in the condensed consolidated statements of financial condition as these VIEs are funded solely with debt. Changes in the fair value of the assets and liabilities of these VIEs and the related interest and other income is presented within net gains from investment activities of consolidated variable interest entities and net (income) loss attributable to Non-Controlling Interests in the condensed consolidated statements of operations. Such amounts are recorded within appropriated partners’ capital as, in each case, the VIE’s note holders, not Apollo, will ultimately receive the benefits or absorb the losses associated with the VIE’s assets and liabilities.
Assets and liability amounts of the consolidated VIEs are shown in separate sections within the condensed consolidated statements of financial condition as of September 30, 2013 and December 31, 2012.
Refer to additional disclosures regarding VIEs in note 4. Intercompany transactions and balances, if any, have been eliminated in the consolidation.
Equity Method Investments—For investments in entities over which the Company exercises significant influence but which do not meet the requirements for consolidation, the Company uses the equity method of accounting, whereby the Company records its share of the underlying income or loss of such entities. Income (loss) from equity method investments is recognized as part of other income (loss) in the condensed consolidated statements of operations. The carrying amounts of equity method investments are reflected in investments in the condensed consolidated statements of financial condition. As the underlying entities that the Company manages and invests in are, for U.S. GAAP purposes, primarily investment companies which reflect their investments at estimated fair value, the carrying value of the Company’s equity method investments in such entities are at fair value.
Non-Controlling Interests—For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than Apollo. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in Non-Controlling Interests in the condensed consolidated financial statements. As of September 30, 2013, the Non-Controlling Interests relating to Apollo Global Management, LLC primarily includes the 61.7% ownership interest in the Apollo Operating Group held by the Managing Partners and Contributing Partners through their limited partner interests in Holdings and other ownership interests in consolidated entities, which primarily consist of the approximately 97% ownership interest held by limited partners in AAA as of September 30, 2013. Non-Controlling Interests also include limited partner interests of Apollo managed funds in certain consolidated VIEs.

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Table of Contents
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

Non-Controlling Interests are presented as a separate component of shareholders’ equity on the Company’s condensed consolidated statements of financial condition. The primary components of Non-Controlling Interests are separately presented in the Company’s condensed consolidated statements of changes in shareholders’ equity to clearly distinguish the interest in the Apollo Operating Group and other ownership interests in the consolidated entities. Net income (loss) includes the net income (loss) attributable to the holders of Non-Controlling Interests on the Company’s condensed consolidated statements of operations. Profits and losses are allocated to Non-Controlling Interests in proportion to their relative ownership interests regardless of their basis.
Revenues—Revenues are reported in three separate categories that include (i) advisory and transaction fees from affiliates, which relate to the investments of the funds and may include individual monitoring agreements the Company has with the portfolio companies and debt investment vehicles of the private equity funds and credit funds; (ii) management fees from affiliates, which are based on committed capital, invested capital, net asset value, gross assets or as otherwise defined in the respective agreements; and (iii) carried interest income (loss) from affiliates, which is normally based on the performance of the funds subject to preferred return.
Advisory and Transaction Fees from Affiliates—Advisory and transaction fees, including directors’ fees, are recognized when the underlying services rendered are substantially completed in accordance with the terms of the transaction and advisory agreements. Additionally, during the normal course of business, the Company incurs certain costs related to certain transactions that are not consummated (“broken deal costs”). These costs (e.g. research costs, due diligence costs, professional fees, legal fees and other related items) are determined to be broken deal costs upon management’s decision to no longer pursue the transaction. In accordance with the related fund agreement, in the event the deal is deemed broken, all of the costs are reimbursed by the funds and then included in the calculation of the Management Fee Offset described below. If a deal is successfully completed, Apollo is reimbursed by the fund or fund’s portfolio company of all costs incurred and no offset is generated.
Advisory and transaction fees from affiliates also include underwriting fees. Underwriting fees include gains, losses and fees, net of syndicate expenses, arising from securities offerings in which one of the Company’s subsidiaries participates in the underwriter syndicate. Underwriting fees are recognized at the time the underwriting is completed and the income is reasonably assured and are included in the condensed consolidated statements of operations. Underwriting fees recognized but not received are included in other assets on the condensed consolidated statements of financial condition.
As a result of providing advisory services to certain private equity and credit portfolio companies, Apollo is generally entitled to receive fees for transactions related to the acquisition, in certain cases, and disposition of portfolio companies as well as ongoing monitoring of portfolio company operations and directors’ fees. The amounts due from portfolio companies are included in “—Due from Affiliates,” which is discussed further in note 11. Under the terms of the limited partnership agreements for certain funds, the management fee payable by the funds may be subject to a reduction based on a certain percentage of such advisory and transaction fees, net of applicable broken deal costs (“Management Fee Offset”). Such amounts are presented as a reduction to advisory and transaction fees from affiliates in the condensed consolidated statements of operations.
Management Fees from Affiliates—Management fees for private equity, real estate and credit funds are recognized in the period during which the related services are performed in accordance with the contractual terms of the related agreement, and are generally based upon (1) a percentage of the capital committed during the commitment period, and thereafter based on the remaining invested capital of unrealized investments, or (2) net asset value, gross assets or as otherwise defined in the respective agreements.
Carried Interest Income from Affiliates—Apollo is entitled to an incentive return that can normally amount to as much as 20% of the total returns on funds’ capital, depending upon performance. Performance-based fees are assessed as a percentage of the investment performance of the funds. The carried interest income from affiliates for any period is based upon an assumed liquidation of the fund’s net assets on the reporting date, and distribution of the net proceeds in accordance with the fund’s income allocation provisions. Carried interest receivable is presented separately in the condensed consolidated statements of financial condition. The carried interest income from affiliates may be subject to reversal to the extent that the carried interest income recorded exceeds the amount due to the general partner based on a fund’s cumulative investment returns. When applicable, the accrual for potential repayment of previously received carried interest income, which is a component of due to affiliates, represents all amounts previously distributed to the general partner that would need to be repaid to the Apollo funds if these funds were to be liquidated based on the current fair value of the underlying funds’ investments as

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APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

of the reporting date. The actual general partner obligation, however, would not become payable or realized until the end of a fund’s life.
Investments, at Fair Value—The Company follows U.S. GAAP attributable to fair value measurements which, among other things, requires enhanced disclosures about investments that are measured and reported at fair value. Investments, at fair value, represent investments of the consolidated funds, investments of the consolidated VIEs and certain financial instruments for which the fair value option was elected. The unrealized gains and losses resulting from changes in the fair value are reflected as net gains (losses) from investment activities and net gains (losses) from investment activities of the consolidated variable interest entities, respectively, in the condensed consolidated statements of operations. In accordance with U.S. GAAP, investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level I—Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed derivatives. As required by U.S. GAAP, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and the sale of such position would likely deviate from the quoted price.
Level II—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives where the fair value is based on observable inputs. These investments exhibit higher levels of liquid market observability as compared to Level III investments. The Company subjects broker quotes to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level II investment. These criteria include, but are not limited to, the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services.
Level III—Pricing inputs are unobservable for the investment and includes situations where there is little observable market activity for the investment. The inputs into the determination of fair value may require significant management judgment or estimation. Investments that are included in this category generally include general and limited partnership interests in corporate private equity and real estate funds, opportunistic credit funds, distressed debt and non-investment grade residual interests in securitizations and CDOs and CLOs where the fair value is based on observable inputs as well as unobservable inputs. When a security is valued based on broker quotes, the Company subjects those quotes to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level II or Level III investment. Some of the factors we consider include the number of broker quotes we obtain, the quality of the broker quotes, the standard deviations of the observed broker quotes and the corroboration of the broker quotes to independent pricing services.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment when the fair value is based on unobservable inputs.
In cases where an investment or financial instrument that is measured and reported at fair value is transferred into or out of Level III of the fair value hierarchy, the Company accounts for the transfer as of the end of the reporting period.
Private Equity Investments
The value of liquid investments, where the primary market is an exchange (whether foreign or domestic) is determined using period end market prices. Such prices are generally based on the close price on the date of determination.
Valuation approaches used to estimate the fair value of investments that are less liquid include the market approach and the income approach. The market approach provides an indication of fair value based on a comparison of the subject company to comparable publicly traded companies and transactions in the industry. The market approach is driven more by

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Table of Contents
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

current market conditions, including actual trading levels of similar companies and, to the extent available, actual transaction data of similar companies. Judgment is required by management when assessing which companies are similar to the subject company being valued. Consideration may also be given to such factors as the Company’s historical and projected financial data, valuations given to comparable companies, the size and scope of the Company’s operations, the Company’s strengths, weaknesses, expectations relating to the market’s receptivity to an offering of the Company’s securities, applicable restrictions on transfer, industry and market information and assumptions, general economic and market conditions and other factors deemed relevant. The income approach provides an indication of fair value based on the present value of cash flows that a business or security is expected to generate in the future. The most widely used methodology used in the income approach is a discounted cash flow method. Inherent in the discounted cash flow method are assumptions of expected results and a calculated discount rate.
On a quarterly basis, Apollo utilizes a valuation committee, consisting of members from senior management, to review and approve the valuation results related to its funds' private equity investments. The Company also retains independent valuation firms to provide third-party valuation consulting services to Apollo, which consist of certain limited procedures that management identifies and requests them to perform. The limited procedures provided by the independent valuation firms assist management with validating their valuation results or determining fair value. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analyses. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.
 
Credit Investments
The majority of the investments in Apollo’s credit funds are valued based on quoted market prices and valuation models. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value utilizing recognized pricing services, market participants or other sources. When market quotations are not available, a model based approach is used to determine fair value. The credit funds also enter into foreign currency exchange contracts, total return swap contracts, credit default swap contracts, and other derivative contracts, which may include options, caps, collars and floors. Foreign currency exchange contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. If securities are held at the end of this period, the changes in value are recorded in income as unrealized. Realized gains or losses are recognized when contracts are settled. Total return swap contracts and credit default swap contracts are recorded at fair value as an asset or liability with changes in fair value recorded as unrealized appreciation or depreciation. Realized gains or losses are recognized at the termination of the contract based on the difference between the close-out price of the total return or credit default swap contract and the original contract price.
Forward contracts are valued based on market rates obtained from counterparties or prices obtained from recognized financial data service providers. When determining fair value pricing when no market value exists, the value attributed to an investment is based on the enterprise value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation approaches used to estimate the fair value of illiquid investments included in Apollo’s credit funds also may use the income approach or market approach. The valuation approaches used consider, as applicable, market risks, credit risks, counterparty risks and foreign currency risks.
On a quarterly basis, Apollo utilizes a valuation committee consisting of members from senior management, to review and approve the valuation results related to its funds' credit investments. The Company also retains independent valuation firms to provide third-party valuation consulting services to Apollo, which consist of certain limited procedures that management identifies and requests them to perform. The limited procedures provided by the independent valuation firms assist management with validating their valuation results or determining fair value. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analyses.
Real Estate Investments
The estimated fair value of commercial mortgage-backed securities (“CMBS”) in Apollo’s funds is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. Broker quotes are only indicative of fair value and may not necessarily represent what the funds would receive in an actual trade for the applicable instrument. Additionally, the loans held-for-investment are stated at the principal amount outstanding, net of deferred loan fees

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APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

and costs for certain investments. For Apollo’s opportunistic and value added real estate funds, valuations of non-marketable underlying investments are determined using methods that include, but are not limited to (i) discounted cash flow estimates or comparable analysis prepared internally, (ii) third party appraisals or valuations by qualified real estate appraisers, and (iii) contractual sales value of investments/properties subject to bona fide purchase contracts. Methods (i) and (ii) also incorporate consideration of the use of the income, cost, or sales comparison approaches of estimating property values.
On a quarterly basis, Apollo utilizes a valuation committee, consisting of members from senior management, to review and approve the valuation results related to its funds' real estate investments. The Company also retains independent valuation firms to provide third-party valuation consulting services to Apollo, which consist of certain limited procedures that management identifies and requests them to perform. The limited procedures provided by the independent valuation firms assist management with validating their valuation results or determining fair value. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analyses.

Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Except for the Company’s debt obligation related to the AMH Credit Agreement (as defined in note 8), Apollo’s financial instruments are recorded at fair value or at amounts whose carrying value approximates fair value. See “Investments, at Fair Value” above. While Apollo’s valuations of portfolio investments are based on assumptions that Apollo believes are reasonable under the circumstances, the actual realized gains or losses will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may ultimately differ significantly from the assumptions on which the valuations were based. Other financial instruments’ carrying values generally approximate fair value because of the short-term nature of those instruments or variable interest rates related to the borrowings. As disclosed in note 8, the Company’s long term debt obligation related to the AMH Credit Agreement is believed to have an estimated fair value of approximately $770.9 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities as of September 30, 2013. However, the carrying value that is recorded on the condensed consolidated statements of financial condition is the amount for which we expect to settle the long term debt obligation. The Company has determined that the long term debt obligation related to the AMH Credit Agreement would be categorized as a Level III liability in the fair-value hierarchy.
Fair Value Option—Apollo has elected the fair value option for the convertible notes issued by HFA Holdings Limited (“HFA”) and for the assets and liabilities of the consolidated VIEs. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. Apollo has applied the fair value option for certain corporate loans, other investments and debt obligations held by the consolidated VIEs that otherwise would not have been carried at fair value. For the convertible notes issued by HFA, Apollo has elected to separately present interest income from other changes in the fair value of the convertible notes in the condensed consolidated statements of operations. Refer to notes 3 and 4 for further disclosure on the investment in HFA and financial instruments of the consolidated VIEs for which the fair value option has been elected.
Financial Instruments held by Consolidated VIEs
The consolidated VIEs hold investments that are traded over-the-counter. Investments in securities that are traded on a securities exchange or comparable over-the-counter quotation systems are valued based on the last reported sale price at that date. If no sales of such investments are reported on such date, and in the case of over-the-counter securities or other investments for which the last sale date is not available, valuations are based on independent market quotations obtained from market participants, recognized pricing services or other sources deemed relevant, and the prices are based on the average of the “bid” and “ask” prices, or at ascertainable prices at the close of business on such day. Market quotations are generally based on valuation pricing models or market transactions of similar securities adjusted for security-specific factors such as relative capital structure priority and interest and yield risks, among other factors. When market quotations are not available, a model based approach is used to determine fair value.
The consolidated VIEs also have debt obligations that are recorded at fair value. The primary valuation methodology used to determine fair value for debt obligation is market quotation. Prices are based on the average of the “bid” and “ask” prices. In the event that market quotations are not available, a model based approach is used. The valuation approach used to

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APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

estimate the fair values of debt obligations for which market quotations are not available is the discounted cash flow method, which includes consideration of the cash flows of the debt obligation based on projected quarterly interest payments and quarterly amortization. Debt obligations are discounted based on the appropriate yield curve given the loan’s respective maturity and credit rating. Management uses its discretion and judgment in considering and appraising relevant factors for determining the valuations of its debt obligations.
Goodwill and Intangible AssetsGoodwill and indefinite-life intangible assets must be reviewed annually for impairment or more frequently if circumstances indicate impairment may have occurred. Identifiable finite-life intangible assets, by contrast, are amortized over their estimated useful lives, which are periodically re-evaluated for impairment or when circumstances indicate an impairment may have occurred. Apollo amortizes its identifiable finite-life intangible assets using a method of amortization reflecting the pattern in which the economic benefits of the finite-life intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, Apollo uses the straight-line method of amortization. At June 30, 2013, the Company performed its annual impairment testing. As the fair value of the Company’s reporting units was well in excess of the carrying value as of June 30, 2013, there was no impairment of goodwill or indefinite life intangible assets at such time.
 
Compensation and Benefits
Equity-Based Compensation—Equity-based awards granted to employees as compensation are measured based on the grant date fair value of the award. Equity-based awards that do not require future service (i.e., vested awards) are expensed immediately. Equity-based employee awards that require future service are expensed over the relevant service period. The Company estimates forfeitures for equity-based awards that are not expected to vest. Equity-based awards granted to non-employees for services provided to affiliates are remeasured to fair value at the end of each reporting period and expensed over the relevant service period.
Salaries, Bonus and Benefits—Salaries, bonus and benefits include base salaries, discretionary and non-discretionary bonuses, severance and employee benefits. Bonuses are generally accrued over the related service period.
Also included within salaries, bonus and benefits is the expense related to profits interests issued to certain employees whereby they are entitled to a share in earnings and any appreciation in the value of a subsidiary of the Company during their term of employment. The expense related to these profits interests is recognized ratably over the requisite service period and thereafter will be recognized at the time the distributions are determined.
From time to time, the Company may assign profits interests received in lieu of management fees to certain investment professionals. Such assignments of profits interests are treated as compensation and benefits when assigned.
The Company sponsors a 401(k) Savings Plan whereby U.S. based employees are entitled to participate in the plan based upon satisfying certain eligibility requirements. The Company may provide discretionary contributions from time to time. No contributions relating to this plan were made by the Company for the three and nine months ended September 30, 2013 and 2012.
Profit Sharing Expense—Profit sharing expense primarily consists of a portion of carried interest recognized in one or more funds allocated to employees and former employees. Profit sharing expense is recognized on an accrued basis as the related carried interest income is earned. Profit sharing expense can be reversed during periods when there is a decline in carried interest income that was previously recognized. Additionally, profit sharing expenses previously distributed may be subject to clawback from employees, former employees and Contributing Partners.
Changes in the fair value of the contingent obligations that were recognized in connection with certain Apollo acquisitions are reflected in the Company’s condensed consolidated statements of operations as profit sharing expense.
The Company has a performance based incentive arrangement for certain Apollo partners and employees designed to more closely align compensation on an annual basis with the overall realized performance of the Company. This arrangement enables certain partners and employees to earn discretionary compensation based on carried interest realizations earned by the Company in a given year, which amounts are reflected in profit sharing expense in the accompanying condensed consolidated financial statements.
Other Income (Loss)

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APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

Net Gains (Losses) from Investment Activities—Net gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in the Company’s investment portfolio between the opening balance sheet date and the closing balance sheet date. The condensed consolidated financial statements include the net realized and unrealized gains (losses) of investments, at fair value.
Net Gains (Losses) from Investment Activities of Consolidated Variable Interest Entities—Changes in the fair value of the consolidated VIEs’ assets and liabilities and related interest, dividend and other income and expenses subsequent to consolidation are presented within net gains (losses) from investment activities of consolidated variable interest entities and are attributable to Non-Controlling Interests in the condensed consolidated statements of operations.
Other Income (Loss), Net—Other income (loss), net includes the recognition of bargain purchase gains as a result of Apollo acquisitions, gains (losses) arising from the remeasurement of foreign currency denominated assets and liabilities of foreign subsidiaries, reversal of a portion of the tax receivable agreement liability (see note 11), gains (losses) arising from the remeasurement of derivative instruments associated with fees from certain of the Company’s affiliates and other miscellaneous non-operating income and expenses.
Net Income (Loss) Per Class A Share—U.S. GAAP requires use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for distributions declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for distributions declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
The remaining earnings are allocated to Class A shares and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding common shares and all potential common shares assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from a hypothetical conversion of these potential common shares.
Use of Estimates—The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Apollo’s most significant estimates include goodwill, intangible assets, income taxes, carried interest income from affiliates, contingent consideration obligations related to acquisitions, non-cash compensation and fair value of investments and debt in the consolidated and unconsolidated funds and VIEs. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance to enhance disclosures about financial instruments and derivative instruments that are either (1) offset or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. Under the guidance, an entity is required to disclose quantitative information relating to recognized assets and liabilities that are offset or subject to an enforceable master netting arrangement or similar agreement, including the gross amounts of those recognized assets and liabilities, the amounts offset to determine the net amount presented in the statement of financial position, and the net amount presented in the statement of financial position. With respect to amounts subject to an enforceable master netting arrangement or similar agreement which are not offset, disclosure is required of the amounts related to recognized financial instruments and other derivative instruments, the amount related to financial collateral (including cash collateral), and the overall net amount after considering amounts that have not been offset. The guidance is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods and retrospective application is required. As the amendments are limited to disclosure only, the adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.
In January 2013, the FASB issued guidance to clarify the scope of disclosures about offsetting assets and liabilities. The amendments clarify that the scope of guidance issued in December 2011 to enhance disclosures around financial instruments and derivative instruments that are either (1) offset, or (2) subject to a master netting arrangement or similar agreement, irrespective of whether they are offset, applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either

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APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

offset or subject to an enforceable master netting arrangement or similar agreement. The amendments are effective for interim and annual periods beginning on or after January 1, 2013. As the amendments are limited to disclosure only, the adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.
In July 2012, the FASB issued amended guidance related to testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the revised guidance, entities have the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not to be less than the carrying amount, then the entity must perform the quantitative impairment test; otherwise, further testing would not be required. The amendments are effective for all entities for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. In conjunction with the annual goodwill impairment test as of June 30, 2013, utilizing the two step method described above, the Company concluded these amendments did not have an impact on the Company's condensed consolidated financial statements.
In February 2013, the FASB issued guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. The guidance does not change the requirement for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The guidance is effective prospectively for periods beginning after December 15, 2012. As the amendments are limited to presentation and disclosure only, the adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.
In April 2013, the FASB issued guidance that requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The financial statements prepared using the liquidation basis of accounting should present relevant information about the expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The entity should include in its presentation of assets any items it had not previously recognized under U.S. GAAP but that it expects to either sell in liquidation or use in settling liabilities. Liabilities should be recognized and measured in accordance with U.S. GAAP that otherwise applies to those liabilities. The guidance requires an entity to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with the sale or settlement of those assets and liabilities. Additionally, the amended guidance requires disclosures about an entity's plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. The guidance is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's condensed consolidated financial statements.
In June 2013, the FASB issued guidance to change the assessment of whether an entity is an investment company by developing a new two-tiered approach that requires an entity to possess certain fundamental characteristics while allowing judgment in assessing certain typical characteristics. The fundamental characteristics that an investment company must have include the following: (1) it obtains funds from one or more investors and provides the investor(s) with investment management services; (2) it commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income or both; and (3) it does not obtain returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests. The typical characteristics of an investment company that an entity should consider before concluding whether it is an investment company include the following: (1) it has more than one investment; (2) it has more than one investor; (3) it has investors that are not related parties of the parent or the investment manager; (4) it has ownership interests in the form of equity or partnership interests; and (5) it manages substantially all of its investments on a fair value basis. The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and design to determine whether it is an investment company. The guidance includes disclosure requirements about an entity's status as an investment company and financial support provided or contractually required to be provided by an investment company to its investees. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December

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APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

15, 2013. Earlier application is prohibited. The Company is in the process of evaluating the impact that this guidance will have on its condensed consolidated financial statements.
In July 2013, the FASB issued guidance to eliminate the diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under the new guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carry forward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statement as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date (e.g. an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled). The guidance does not require new recurring disclosures. The guidance applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists at the reporting date. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The guidance should be applied prospectively to all unrecognized tax benefits that exist at the effective date, although retrospective application is permitted. The Company is in the process of evaluating the impact that this guidance will have on its condensed consolidated financial statements.


3. INVESTMENTS
The following table represents Apollo’s investments:
 
 
September 30,
2013
 
December 31,
2012
Investments, at fair value
$
1,810,017

 
$
1,744,412

Other investments
380,224

 
393,684

Total Investments
$
2,190,241

 
$
2,138,096

 
Investments, at Fair Value
Investments, at fair value, consist of financial instruments held by AAA, investments held by the Apollo Senior Loan Fund, the Company’s investment in HFA and other investments held by the Company at fair value. As of September 30, 2013 and December 31, 2012, the net assets of the consolidated funds (excluding VIEs) were $1,764.2 million and $1,691.3 million, respectively. The following investments, except the investment in HFA and Other Investments, are presented as a percentage of net assets of the consolidated funds:
 

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APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

  
September 30, 2013
 
December 31, 2012
 
Fair Value
 
 
 
% of Net
Assets of
Consolidated
Funds
 
Fair Value
 
 
 
% of Net
Assets of
Consolidated
Funds
Investments, at
Fair Value –
Affiliates
Private
Equity
 
Credit
 
Total
 
Cost
 
 
Private Equity
 
Credit
 
Total
 
Cost
 
Investments held by:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AAA
$
1,735,525

 
$

 
$
1,735,525

 
$
1,494,358

 
98.4
%
 
$
1,666,448

 
$

 
$
1,666,448

 
$
1,561,154

 
98.5
%
Apollo Senior Loan Fund

 
29,622

 
29,622

 
29,357

 
1.7

 

 
27,653

 
27,653

 
27,296

 
1.5

HFA

 
42,413

 
42,413

 
60,341

 
N/A

 

 
48,723

 
48,723

 
57,815

 
N/A

Other Investments
2,457

 

 
2,457

 
4,089

 
N/A

 
1,588

 

 
1,588

 
3,563

 
N/A

Total
$
1,737,982

 
$
72,035

 
$
1,810,017

 
$
1,588,145

 
100.1
%
 
$
1,668,036

 
$
76,376

 
$
1,744,412

 
$
1,649,828

 
100.0
%
Securities
At September 30, 2013 and December 31, 2012, the sole investment held by AAA was its investment in AAA Investments, L.P. (“AAA Investments”), which is measured based on AAA’s share of net asset value of AAA Investments. The following tables represent each investment of AAA Investments constituting more than five percent of the net assets of the funds that the Company consolidates (excluding VIEs) as of the aforementioned dates:
 
 
September 30, 2013
 
December 31, 2012
 
Instrument
Type
 
Fair Value
 
Cost
 
% of Net
Assets of
Consolidated
Funds
 
Instrument
Type
 
Fair Value
 
Cost
 
% of Net
Assets of
Consolidated
Funds
Athene Holding Ltd.
Equity
 
$
1,728,986

 
$
1,331,942

 
98.0
%
 
Equity
 
$
1,578,954

 
$
1,276,366

 
93.4
%
 
AAA Investments owns through its subsidiaries the majority of the economic equity of Athene Holding Ltd. (together with its subsidiaries, “Athene”). Athene Holding Ltd. is the ultimate parent of various insurance company operating subsidiaries. Through its subsidiaries, Athene Holding Ltd. provides insurance products focused primarily on the retirement market and its business centers primarily on issuing or reinsuring fixed and equity indexed annuities. See note 15 for further information regarding Athene and its recently completed acquisition of the U.S. annuity operations of Aviva plc ("Aviva USA").
During the fourth quarter of 2012, AAA and AAA Investments consummated a transaction whereby a wholly-owned subsidiary of AAA Investments contributed substantially all of its investments to Athene Holding Ltd. in exchange for common shares of Athene Holding Ltd., cash and a short term promissory note (the “AAA Transaction”). Following receipt of required regulatory consents, AAA Investments, through a subsidiary, transferred its remaining investments to Athene Holding Ltd. on July 29, 2013. After the AAA Transaction, Athene Holding Ltd. was AAA’s only material investment and as of September 30, 2013 and December 31, 2012, AAA, through its investment in AAA Investments was the largest shareholder of Athene Holding Ltd. with an economic ownership stake of approximately 72.5% and 77.2%, respectively (without giving effect to restricted common shares issued under Athene's management equity plan and conversion of AAA Investments' note receivable), and as of September 30, 2013 and December 31, 2012, effectively held 45% of the voting power of Athene.
 
Apollo Senior Loan Fund
On December 31, 2011, the Company invested $26.0 million in the Apollo Senior Loan Fund. As a result, the Company became the sole investor in the fund and therefore consolidated the assets and liabilities of the fund. The fund invests in U.S. denominated senior secured loans, senior secured bonds and other income generating fixed-income investments. At least 90% of the Apollo Senior Loan Fund’s portfolio of investments must consist of senior secured, floating rate loans or cash or cash equivalents. Up to 10% of the Apollo Senior Loan Fund’s portfolio may consist of non-first lien fixed income investments and other income generating fixed income investments, including but not limited to senior secured bonds. The Apollo Senior Loan Fund may not

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APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

purchase assets rated (tranche rating) at B3 or lower by Moody’s, or equivalent rating by another nationally recognized rating agency.
The Company has classified the instruments associated with the Apollo Senior Loan Fund investment as Level II and Level III investments. All Level II and Level III investments of the Apollo Senior Loan Fund were valued using broker quotes.
HFA
On March 7, 2011, the Company invested $52.1 million (including expenses related to the purchase) in a convertible note with an aggregate principal amount of $50.0 million and received 20,833,333 stock options issued by HFA, an Australian based specialist global funds management company.
The terms of the convertible note allow the Company to convert the note, in whole or in part, into common shares of HFA at an exchange rate equal to the principal plus accrued payment-in-kind interest (or “PIK” interest) divided by US$0.98 at any time, and convey participation rights, on an as-converted basis, in any dividends declared in excess of $6.0 million per annum, as well as seniority rights over HFA common equity holders. Unless previously converted, repurchased or canceled, the note will be converted on the eighth anniversary of its issuance on March 11, 2019. Additionally, the note has a percentage coupon interest of 6% per annum, paid via principal capitalization (PIK interest) for the first four years, and thereafter either in cash or via principal capitalization at HFA’s discretion. The PIK interest provides for the Company to receive additional common shares of HFA if the note is converted. The Company has elected the fair value option for the convertible note. The convertible note is valued using an “if-converted basis,” which is based on a hypothetical exit through conversion to common equity (for which a quoted price exists) as of the valuation date. The Company separately presents interest income in the condensed consolidated statements of operations from other changes in the fair value of the convertible note. For the three and nine months ended September 30, 2013, the Company recorded $0.9 million and $2.5 million, respectively, in PIK interest income included in interest income in the condensed consolidated statements of operations. For the three and nine months ended September 30, 2012, the Company recorded $0.8 million and $2.4 million, respectively, in PIK interest income included in interest income in the condensed consolidated statements of operations. The terms of the stock options allow for the Company to acquire 20,833,333 fully paid ordinary shares of HFA at an exercise price in Australian Dollars (“A$”) of A$8.00 (exchange rate of A$1.00 to $0.93 as of September 30, 2013) per stock option. The stock options became exercisable upon issuance and expire on the eighth anniversary of the issuance date. The stock options are accounted for as a derivative and are valued at their fair value under U.S. GAAP at each balance sheet date. As a result, for the nine months ended September 30, 2013 and 2012, the Company recorded an unrealized loss of approximately $8.8 million and $7.6 million, respectively, related to the convertible note and stock options within net gains from investment activities in the condensed consolidated statements of operations. For the three months ended September 30, 2013 and 2012, the Company recorded an unrealized loss of $7.1 million and an unrealized gain of $2.1 million, respectively, related to the convertible note and stock options within net gains (losses) from investment activities in the condensed consolidated statements of operations.
The Company has classified the instruments associated with the HFA investment as Level III investments.
Net Gains (Losses) from Investment Activities
Net gains (losses) from investment activities in the condensed consolidated statements of operations include net realized gains from sales of investments, and the change in net unrealized gains (losses) resulting from changes in fair value of the consolidated funds’ investments and realization of previously unrealized gains (losses). Additionally, net gains (losses) from investment activities include changes in the fair value of the investment in HFA and other investments held at fair value. The following tables present Apollo’s net gains (losses) from investment activities for the three and nine months ended September 30, 2013 and 2012: 
 
For the Three Months Ended 
 September 30, 2013
 
Private Equity
 
Credit
 
Total
Realized losses on sales of investments
$

 
$
(59
)
 
$
(59
)
Change in net unrealized gains (losses) due to changes in fair values
81,039

 
(6,935
)
 
74,104

Net Gains (Losses) from Investment Activities
$
81,039

 
$
(6,994
)
 
$
74,045

 

- 23-

Table of Contents
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

 
For the Three Months Ended 
 September 30, 2012
 
Private Equity
 
Credit
 
Total
Realized gains on sales of investments
$

 
$
106

 
$
106

Change in net unrealized gains due to changes in fair values
17,951

 
2,406

 
20,357

Net Gains from Investment Activities
$
17,951

 
$
2,512

 
$
20,463

 

 
For the Nine Months Ended 
 September 30, 2013
 
Private Equity
 
Credit
 
Total
Realized gains on sales of investments
$

 
$
349

 
$
349

Change in net unrealized gains (losses) due to changes in fair values
135,872

 
(8,927
)
 
126,945

Net Gains (Losses) from Investment Activities
$
135,872

 
$
(8,578
)
 
$
127,294


 
For the Nine Months Ended 
 September 30, 2012
 
Private Equity
 
Credit
 
Total
Realized gains on sales of investments
$

 
$
242

 
$
242

Change in net unrealized gains (losses) due to changes in fair values
156,494

 
(6,779
)
 
149,715

Net Gains (Losses) from Investment Activities
$
156,494

 
$
(6,537
)
 
$
149,957



Other Investments
Other Investments primarily consist of equity method investments. Apollo’s share of operating income (loss) generated by these investments is recorded within income from equity method investments in the condensed consolidated statements of operations.

- 24-

Table of Contents
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

The following table presents income from equity method investments for the three and nine months ended September 30, 2013 and 2012:
 
For the Three Months Ended 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
 
2013
 
2012
 
2013
 
2012
 
Investments:
 
 
 
 
 
 
 
 
Private Equity Funds:
 
 
 
 
 
 
 
 
AAA Investments
$
44

 
$
14

 
$
77

 
$
97

 
Apollo Investment Fund IV, L.P. ("Fund IV")
(1
)
 

 
(1
)
 
(2
)
 
Apollo Investment Fund V, L.P. (“Fund V”)
(6
)
 
(13
)
 

 
16

 
Apollo Investment Fund VI, L.P. (“Fund VI”)
2,469

 
(63
)
 
3,542

 
2,485

 
Apollo Investment Fund VII, L.P. (“Fund VII”)
21,224

 
24,243

 
52,701

 
47,466

 
Apollo Natural Resources Partners, L.P. (“ANRP”)
367

 
153

 
530

 
327

 
AION Capital Partners Limited (“AION”)
430

 

 
983

 

 
Apollo Asia Private Credit Fund, L.P. (“APC”)

 

 
3

 

 
Credit Funds:
 
 
 
 
 
 
 
 
Apollo Special Opportunities Managed Account, L.P. (“SOMA”)
324

 
233

 
738

 
899

 
Apollo Value Investment Fund, L.P. (“VIF”)
2

 
5

 
8

 
20

 
Apollo Strategic Value Fund, L.P. (“SVF”)
(1
)
 
3

 

 
15

 
Apollo Credit Liquidity Fund, L.P. (“ACLF”)
118

 
1,659

 
786

 
3,625

 
Apollo/Artus Investors 2007-I, L.P. (“Artus”)

 
318

 
(2
)
 
609

 
Apollo Credit Opportunity Fund I, L.P. (“COF I”)
1,467

 
8,633

 
5,604

 
15,801

 
Apollo Credit Opportunity Fund II, L.P. (“COF II”)
257

 
1,455

 
841

 
4,410

 
Apollo Credit Opportunity Fund III, L.P. ("COF III")
90

 

 
79

 

 
Apollo European Principal Finance Fund, L.P. (“EPF I”)
1,739

 
1,795

 
4,487

 
2,589

 
Apollo European Principal Finance Fund II, L.P. (“EPF II”)
453

 
241

 
539

 
557

 
Apollo Investment Europe II, L.P. (“AIE II”)
536

 
804

 
942

 
1,307

 
Apollo Palmetto Strategic Partnership, L.P. (“Palmetto”)
655

 
553

 
1,497

 
1,102

 
Apollo Senior Floating Rate Fund Inc. (“AFT”)
(9
)
 
9

 
(4
)
 
20

 
Apollo Residential Mortgage, Inc. (“AMTG”)
(423
)
(1) 
(103
)
(2) 
85

(1) 
452

(2) 
Apollo European Credit, L.P. (“AEC”)
100

 
90

 
247

 
117

 
Apollo European Strategic Investments, L.P. (“AESI”)
146

 
242

 
404

 
404

 
Apollo Centre Street Partnership, L.P. (“ACSP”)
245

 
386

 
534

 
319

 
Apollo Investment Corporation (“AINV”)
538

(1) 
(336
)
(2) 
1,948

(1) 
(336
)
(2) 
Apollo SK Strategic Investments, L.P. ("SK")
47

 
5

 
96

 
5

 
Apollo SPN Investments I, L.P.
96

 

 
184

 

 
Apollo Tactical Income Fund Inc. (“AIF”)
(7
)
 

 
(12
)
 

 
Apollo Franklin Partnership, L.P. ("Franklin Fund")
117

 

 
110

 

 
Real Estate:
 
 
 
 
 
 
 
 
Apollo Commercial Real Estate Finance, Inc. (“ARI”)
176

(1) 
299

(2) 
492

(1) 
815

(2) 
AGRE U.S. Real Estate Fund, L.P.
556

 
(38
)
 
797

 
(124
)
 
 CPI Capital Partners North America LP
22

 
2

 
96

 
(29
)
 
CPI Capital Partners Asia Pacific, L.P.
2

 
13

 
(2
)
 
50

 
Apollo GSS Holding (Cayman), L.P.
(3
)
 
(36
)
 
(8
)
 
(36
)
 
BEA/AGRE China Real Estate Fund, L.P.

 

 
(8
)
 

 
Other Equity Method Investments:
 
 
 
 
 
 
 
 
VC Holdings, L.P. Series A (“Vantium A/B”)

 

 
13

 
(306
)
 
VC Holdings, L.P. Series C (“Vantium C”)
396

 
270

 
1,721

 
137

 
VC Holdings, L.P. Series D (“Vantium D”)
72

 
(57
)
 
71

 
375

 
Other
(2
)
 

 
(2
)
 
5

 
Total Income from Equity Method Investments
$
32,236

 
$
40,779

 
$
80,116

 
$
83,191

 
 
(1)
Amounts are for the three and nine months ended June 30, 2013, respectively.
(2)
Amounts are for the three and nine months ended June 30, 2012, respectively.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

- 25-

Table of Contents
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands except share data)

 
Other investments as of September 30, 2013 and December 31, 2012 consisted of the following:
 
Equity Held as of
 
 
September 30, 2013
 
% of
Ownership
 
December 31, 2012
 
% of
Ownership
 
Investments:
 
 
 
 
 
 
 
 
Private Equity Funds:
 
 
 
 
 
 
 
 
AAA Investments
$
1,038

 
0.057
%
 
$
998

 
0.057
%
 
Fund IV
9

 
0.018

 
9

 
0.015

 
Fund V
96

 
0.020

 
173

 
0.014

 
Fund VI
9,872

 
0.100

 
9,814

 
0.094

 
Fund VII
152,584

 
1.267

 
164,773

 
1.316

 
ANRP
3,226

 
0.826

 
2,355

 
0.903

 
AION
4,200

 
10.000

 
625

 
10.000

 
APC
22

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