Apollo Asset Management, Inc. - Quarter Report: 2019 March (Form 10-Q)
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 MARCH 31, 2019 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 every Interactive Data File required to be submitted 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 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 | x | Accelerated filer | o | |||
Non-accelerated filer | o | Smaller reporting company | o | |||
Emerging growth company | o | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ||||||
o | ||||||
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A shares representing limited liability company interests | APO | New York Stock Exchange | ||
6.375% Series A Preferred shares | APO.PR A | New York Stock Exchange | ||
6.375% Series B Preferred shares | APO.PR B | New York Stock Exchange | ||
Securities registered pursuant to Section 12(g) of the Act: None
As of May 3, 2019 there were 200,525,287 Class A shares and 1 Class B share outstanding.
TABLE OF CONTENTS | ||
Page | ||
PART I | ||
ITEM 1. | ||
ITEM 1A. | ||
ITEM 2. | ||
ITEM 3. | ||
ITEM 4. | ||
PART II | ||
ITEM 1. | ||
ITEM 1A. | ||
ITEM 2. | ||
ITEM 3. | ||
ITEM 4. | ||
ITEM 5. | ||
ITEM 6. | ||
- 2-
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, 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 credit, private equity, or real assets 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 (the “SEC”) on March 1, 2019 (the “2018 Annual Report”); 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 report and in our 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, or as the context may otherwise require;
“AMH” refers to Apollo Management Holdings, L.P., a Delaware limited partnership, that is an indirect subsidiary of Apollo Global Management, LLC;
“Apollo funds”, “our funds” and references to the “funds” we manage, refer to the funds (including the parallel funds and alternative investment vehicles of such funds), partnerships, accounts, including strategic investment accounts or “SIAs,” alternative asset companies and other entities for which subsidiaries of the Apollo Operating Group provide investment management or advisory services;
“Apollo Operating Group” refers to (i) the limited partnerships and limited liability companies through which our Managing Partners currently operate our businesses and (ii) one or more limited partnerships or limited liability companies 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 assets of the funds, partnerships and accounts to which we provide investment management, advisory, or certain other investment-related services, including, without limitation, capital that such funds, partnerships and accounts have the right to call from investors pursuant to capital commitments. Our AUM equals the sum of:
(i) | the net asset value, or “NAV,” plus used or available leverage and/or capital commitments, or gross assets plus capital commitments, of the credit funds, partnerships and accounts for which we provide investment management or advisory services, other than certain collateralized loan obligations (“CLOs”), collateralized debt obligations (“CDOs”), and certain permanent capital vehicles, which have a fee-generating basis other than the mark-to-market value of the underlying assets; |
(ii) | the fair value of the investments of the private equity and real assets funds, partnerships and accounts we manage or advise plus the capital that such funds, partnerships and accounts are entitled to call from investors pursuant to capital commitments, plus portfolio level financings; for certain permanent capital vehicles in real assets, gross asset value plus available financing capacity; |
(iii) | the gross asset value associated with the reinsurance investments of the portfolio company assets we manage or advise; and |
(iv) | the fair value of any other assets that we manage or advise for the funds, partnerships and accounts to which we provide investment management, advisory, or certain other |
- 3-
investment-related services, plus unused credit facilities, including capital commitments to such funds, partnerships and accounts for investments that may require pre-qualification or other conditions before investment plus any other capital commitments to such funds, partnerships and accounts available for investment that are not otherwise included in the clauses above.
Our AUM measure includes Assets Under Management for which we charge either nominal or zero fees. Our AUM measure also includes assets for which we do not have investment discretion, including certain assets for which we earn only investment-related service fees, rather than management or advisory 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. Our calculation also differs from the manner in which our affiliates registered with the SEC report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways;
“Fee-Generating AUM” consists of assets of the funds, partnerships and accounts to which we provide investment management, advisory, or certain other investment-related services and on which we earn management fees, monitoring fees or other investment-related fees pursuant to management or other fee agreements on a basis that varies among the Apollo funds, partnerships and accounts. 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, with respect to the structured portfolio company investments of the funds, partnerships and accounts we manage or advise, are generally based on the total value of such 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” refers to AUM that does not produce management fees or monitoring fees. This measure generally includes 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 interests; |
(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. |
“Performance Fee-Eligible AUM” refers to the AUM that may eventually produce performance fees. All funds for which we are entitled to receive a performance fee allocation or incentive fee are included in Performance Fee-Eligible AUM, which consists of the following:
(i) | “Performance Fee-Generating AUM”, which refers to invested capital of the funds, partnerships and accounts we manage, advise, or to which we provide certain other investment-related services, that is currently above its hurdle rate or preferred return, and profit of such funds, partnerships and accounts is being allocated to, or earned by, the general partner in accordance with the applicable limited partnership agreements or other governing agreements; |
(ii) | “AUM Not Currently Generating Performance Fees”, which refers to invested capital of the funds, partnerships and accounts we manage, advise, or to which we provide certain other investment-related services, that is currently below its hurdle rate or preferred return; and |
- 4-
(iii) | “Uninvested Performance Fee-Eligible AUM”, which refers to capital of the funds, partnerships and accounts we manage, advise, or to which we provide certain other investment-related services, that is available for investment or reinvestment subject to the provisions of applicable limited partnership agreements or other governing agreements, which capital is not currently part of the NAV or fair value of investments that may eventually produce performance fees allocable to, or earned by, the general partner. |
“AUM with Future Management Fee Potential” refers to the committed uninvested capital portion of total AUM not
currently earning management fees. The amount depends on the specific terms and conditions of each fund;
We use AUM as a performance measure of our funds’ 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 performance fees;
“Advisory” refers to certain assets advised by Apollo Asset Management Europe PC LLP, a wholly-owned subsidiary of Apollo Asset Management Europe LLP (collectively, “AAME”). The AAME entities are subsidiaries of Apollo;
“Athene Holding” refers to Athene Holding Ltd. (together with its subsidiaries, “Athene”), a leading retirement services company that issues, reinsures and acquires retirement savings products designed for the increasing number of individuals and institutions seeking to fund retirement needs, and to which Apollo, through its consolidated subsidiary Athene Asset Management LLC (“Athene Asset Management” or “AAM’), provides asset management and advisory services;
“Athora” refers to a strategic platform established to acquire or reinsure blocks of insurance business in the German and broader European life insurance market (collectively, the “Athora Accounts”). The Company, through its consolidated subsidiary, AAME, provides investment advisory services to Athora. Athora Non-Sub-Advised Assets includes the Athora assets which are managed by Apollo but not sub-advised by Apollo nor invested in Apollo funds or investment vehicles. Athora Sub-Advised includes assets which the Company explicitly sub-advises as well as those assets in the Athora Accounts which are invested directly in funds and investment vehicles Apollo manages;
“capital deployed” or “deployment” is the aggregate amount of capital that has been invested during a given period (which may, in certain cases, include leverage) by (i) our commitment based funds and (ii) SIAs that have a defined maturity date;
“Contributing Partners” refer to those of our partners and their related parties (other than our Managing Partners) who indirectly beneficially own (through Holdings) Apollo Operating Group units;
“gross IRR” of a credit fund and the principal finance funds within the real assets segment represents the annualized return of a fund based on the actual timing of all cumulative fund cash flows before management fees, performance fees allocated to the general partner and certain other expenses. Calculations may include certain investors that do not pay fees. The terminal value is the net asset value as of the reporting date. Non-U.S. dollar denominated (“USD”) fund cash flows and residual values are converted to USD using the spot rate as of the reporting date. In addition, gross IRRs at the fund level will differ from those at the individual investor level as a result of, among other factors, timing of investor-level inflows and outflows. Gross IRR does not represent the return to any fund investor;
“gross IRR” of a private equity fund represents the cumulative investment-related cash flows (i) for a given investment for the fund or funds which made such investment, and (ii) for a given fund, in the relevant fund itself (and not any one investor in the fund), in each case, on the basis of the actual timing of investment inflows and outflows (for unrealized investments assuming disposition on March 31, 2019 or other date specified) aggregated on a gross basis quarterly, and the return is annualized and compounded before management fees, performance fees and certain other 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. In addition, gross IRRs at the fund level will differ from those at the individual investor level as a result of, among other factors, timing of investor-level inflows and outflows. Gross IRR does not represent the return to any fund investor;
“gross IRR” of a real assets fund represents the cumulative investment-related cash flows in the fund itself (and not any one investor in the fund), on the basis of the actual timing of cash inflows and outflows (for unrealized investments assuming disposition on March 31, 2019 or other date specified) starting on the date that each investment closes, and the return is annualized and compounded before management fees, performance fees, and certain other 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. Non-USD fund cash flows and residual values are converted to USD using the spot rate as of the reporting date. In addition, gross IRRs at the fund level will differ from those at the individual investor level as a result of, among other factors, timing of investor-level inflows and outflows. Gross IRR does not represent the return to any fund investor;
- 5-
“gross return” of a credit or real assets fund is the monthly or quarterly time-weighted return that is equal to the percentage change in the value of a fund’s portfolio, adjusted for all contributions and withdrawals (cash flows) before the effects of management fees, incentive fees allocated to the general partner, or other fees and expenses. Returns for credit funds are calculated for all funds and accounts in the respective strategies excluding assets for Athene, Athora and certain other entities where we manage or may manage a significant portion of the total company assets. Returns of CLOs represent the gross returns on assets. Returns over multiple periods are calculated by geometrically linking each period’s return over time;
“Holdings” means AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership through which our Managing Partners and Contributing Partners indirectly beneficially own their interests in the Apollo Operating Group units;
“inflows” represents (i) at the individual segment level, subscriptions, commitments, and other increases in available capital, such as acquisitions or leverage, net of inter-segment transfers, and (ii) on an aggregate basis, the sum of inflows across the credit, private equity and real assets segments;
“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 credit fund represents the annualized return of a fund after management fees, performance fees allocated to the general partner and certain other expenses, calculated on investors that pay such fees. The terminal value is the net asset value as of the reporting date. Non-USD fund cash flows and residual values are converted to USD using the spot rate as of the reporting date. In addition, net IRR at the fund level will differ from that at the individual investor level as a result of, among other factors, timing of investor-level inflows and outflows. Net IRR does not represent the return to any fund investor;
“net IRR” of a private equity fund means the gross IRR applicable to a fund, including returns for related parties which may not pay fees or performance fees, net of management fees, certain expenses (including interest incurred or earned by the fund itself) and realized performance fees all offset to the extent of interest income, and measures returns at the fund level on amounts that, if distributed, would be paid to investors of the fund. The timing of cash flows applicable to investments, management fees and certain expenses, may be adjusted for the usage of a fund’s subscription facility. To the extent that a fund exceeds all requirements detailed within the applicable fund agreement, the estimated unrealized value is adjusted such that a percentage of up to 20.0% of the unrealized gain is allocated to the general partner of such fund, thereby reducing the balance attributable to fund investors. In addition, net IRR at the fund level will differ from that at the individual investor level as a result of, among other factors, timing of investor-level inflows and outflows. Net IRR does not represent the return to any fund investor;
“net IRR” of a real assets fund represents the cumulative cash flows in the fund (and not any one investor in the fund), on the basis of the actual timing of cash inflows received from and outflows paid to investors of the fund (assuming the ending net asset value as of March 31, 2019 or other date specified is paid to investors), excluding certain non-fee and non-performance fee bearing parties, and the return is annualized and compounded after management fees, performance fees, and certain other expenses (including interest incurred by the fund itself) and measures the returns to investors of the fund as a whole. Non-USD fund cash flows and residual values are converted to USD using the spot rate as of the reporting date. In addition, net IRR at the fund level will differ from that at the individual investor level as a result of, among other factors, timing of investor-level inflows and outflows. Net IRR does not represent the return to any fund investor;
“net return” of a credit or real assets fund represents the gross return after management fees, performance fees allocated to the general partner, or other fees and expenses. Returns over multiple periods are calculated by geometrically linking each period’s return over time;
“our manager” means AGM Management, LLC, a Delaware limited liability company that is controlled by our Managing Partners;
“performance allocations”, “performance fees”, “performance revenues”, “incentive fees” 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;
“permanent capital vehicles” refers to (a) assets that are owned by or related to Athene or Athora Holding Ltd. (“Athora Holding” and together with its subsidiaries, “Athora”), (b) assets that are owned by or related to MidCap FinCo Designated Activity Company (“MidCap”) and managed by Apollo, (c) assets of publicly traded vehicles managed by Apollo such as Apollo Investment Corporation (“AINV”), Apollo Commercial Real Estate Finance, Inc. (“ARI”), Apollo Tactical Income Fund Inc. (“AIF”), and Apollo Senior Floating Rate Fund Inc. (“AFT”), in each case 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 and (d) a non-traded business development company from which Apollo earns certain investment-related service fees. The investment management agreements of AINV, AIF and AFT have one year terms, are reviewed annually and remain in effect only if approved by the boards of directors of such companies or by the affirmative vote of the holders of a majority of the outstanding voting shares of such
- 6-
companies, including in either case, approval by a majority of the directors who are not “interested persons” as defined in the Investment Company Act of 1940. In addition, the investment management agreements of AINV, AIF and AFT may be terminated in certain circumstances upon 60 days’ written notice. The investment management agreement of ARI has a one year term and is reviewed annually by ARI’s board of directors and may be terminated under certain circumstances by an affirmative vote of at least two-thirds of ARI’s independent directors. The investment management or advisory arrangements between MidCap and Apollo, as well as between Athene and Apollo, may also be terminated under certain circumstances. The agreement pursuant to which Apollo earns certain investment-related service fees from a non-traded business development company may be terminated under certain limited circumstances;
“private equity fund appreciation (depreciation)” refers to gain (loss) and income for the traditional private equity funds (as defined below), Apollo Natural Resources Partners, L.P. (“ANRP I”), Apollo Natural Resources Partners II, L.P. (“ANRP II”), Apollo Special Situations Fund, L.P., AION Capital Partners Limited (“AION”) and Apollo Hybrid Value Fund, L.P. (together with its parallel funds and alternative investment vehicles, “Hybrid Value Fund”) for the periods presented on a total return basis before giving effect to fees and expenses. The performance percentage is determined by dividing (a) the change in the fair value of investments over the period presented, minus the change in invested capital over the period presented, plus the realized value for the period presented, by (b) the beginning unrealized value for the period presented plus the change in invested capital for the period presented. Returns over multiple periods are calculated by geometrically linking each period’s return over time;
“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;
“Realized Value” refers to all cash investment proceeds received by the relevant Apollo fund, including interest and dividends, but does not give effect to management fees, expenses, incentive compensation or performance fees to be paid by such Apollo fund;
“Redding Ridge” refers to Redding Ridge Asset Management, LLC and its subsidiaries, which is a standalone, self-managed asset management business established in connection with risk retention rules that manages CLOs and retains the required risk retention interests;
“Remaining Cost” represents the initial investment of the fund in a portfolio investment, reduced for any return of capital distributed to date on such portfolio investment;
“Strategic Investor” refers to the California Public Employees’ Retirement System, or “CalPERS”
“Total Invested Capital” refers to the aggregate cash invested by the relevant Apollo fund and includes capitalized costs relating to investment activities, if any, but does not give effect to cash pending investment or available for reserves;
“Total Value” represents the sum of the total Realized Value and Unrealized Value of investments;
“traditional private equity funds” refers to Apollo Investment Fund I, L.P. (“Fund I”), AIF II, L.P. (“Fund II”), a mirrored investment account established to mirror Fund I and Fund II for investments in debt securities (“MIA”), Apollo Investment Fund III, L.P. (together with its parallel funds, “Fund III”), Apollo Investment Fund IV, L.P. (together with its parallel fund, “Fund IV”), Apollo Investment Fund V, L.P. (together with its parallel funds and alternative investment vehicles, “Fund V”), Apollo Investment Fund VI, L.P. (together with its parallel funds and alternative investment vehicles, “Fund VI”), Apollo Investment Fund VII, L.P. (together with its parallel funds and alternative investment vehicles, “Fund VII”), Apollo Investment Fund VIII, L.P. (together with its parallel funds and alternative investment vehicles, “Fund VIII”) and Apollo Investment Fund IX, L.P. (together with its parallel funds and alternative investment vehicles, “Fund IX”);
“Unrealized Value” refers to the fair value consistent with valuations determined in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), for investments not yet realized and may include payments in kind, accrued interest and dividends receivable, if any, and before the effect of certain taxes. In addition, amounts include committed and funded amounts for certain investments; and
“Vintage Year” refers to the year in which a fund’s final capital raise occurred, or, for certain funds, the year in which a fund’s investment period commences as per its governing agreements.
- 7-
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AS OF MARCH 31, 2019 AND DECEMBER 31, 2018
(dollars in thousands, except share data)
As of March 31, 2019 | As of December 31, 2018 | ||||||
Assets: | |||||||
Cash and cash equivalents | $ | 720,253 | $ | 609,747 | |||
Restricted cash | 3,450 | 3,457 | |||||
U.S. Treasury securities, at fair value | 707,316 | 392,932 | |||||
Investments (includes performance allocations of $1,049,297 and $912,182 as of March 31, 2019 and December 31, 2018, respectively) | 2,946,087 | 2,722,612 | |||||
Assets of consolidated variable interest entities: | |||||||
Cash and cash equivalents | 47,641 | 49,671 | |||||
Investments, at fair value | 1,171,460 | 1,175,677 | |||||
Other assets | 54,796 | 65,543 | |||||
Incentive fees receivable | — | 6,792 | |||||
Due from related parties | 380,952 | 378,108 | |||||
Deferred tax assets, net | 291,607 | 306,094 | |||||
Other assets | 206,241 | 192,169 | |||||
Lease assets | 102,845 | — | |||||
Goodwill | 88,852 | 88,852 | |||||
Total Assets | $ | 6,721,500 | $ | 5,991,654 | |||
Liabilities and Shareholders’ Equity | |||||||
Liabilities: | |||||||
Accounts payable and accrued expenses | $ | 83,766 | $ | 70,878 | |||
Accrued compensation and benefits | 60,553 | 73,583 | |||||
Deferred revenue | 183,458 | 111,097 | |||||
Due to related parties | 391,711 | 425,435 | |||||
Profit sharing payable | 520,864 | 452,141 | |||||
Debt | 1,903,862 | 1,360,448 | |||||
Liabilities of consolidated variable interest entities: | |||||||
Debt, at fair value | 845,866 | 855,461 | |||||
Other liabilities | 71,076 | 78,977 | |||||
Other liabilities | 108,920 | 111,794 | |||||
Lease liabilities | 109,184 | — | |||||
Total Liabilities | 4,279,260 | 3,539,814 | |||||
Commitments and Contingencies (see note 15) | |||||||
Shareholders’ Equity: | |||||||
Apollo Global Management, LLC shareholders’ equity: | |||||||
Series A Preferred shares, 11,000,000 shares issued and outstanding as of March 31, 2019 and December 31, 2018 | 264,398 | 264,398 | |||||
Series B Preferred shares, 12,000,000 shares issued and outstanding as of March 31, 2019 and December 31, 2018 | 289,815 | 289,815 | |||||
Class A shares, no par value, unlimited shares authorized, 201,375,418 and 201,400,500 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | — | — | |||||
Class B shares, no par value, unlimited shares authorized, 1 share issued and outstanding as of March 31, 2019 and December 31, 2018 | — | — | |||||
Additional paid in capital | 1,144,664 | 1,299,418 | |||||
Accumulated deficit | (372,576 | ) | (473,276 | ) | |||
Accumulated other comprehensive loss | (4,810 | ) | (4,159 | ) | |||
Total Apollo Global Management, LLC shareholders’ equity | 1,321,491 | 1,376,196 | |||||
Non-Controlling Interests in consolidated entities | 273,145 | 271,522 | |||||
Non-Controlling Interests in Apollo Operating Group | 847,604 | 804,122 | |||||
Total Shareholders’ Equity | 2,442,240 | 2,451,840 | |||||
Total Liabilities and Shareholders’ Equity | $ | 6,721,500 | $ | 5,991,654 | |||
See accompanying notes to condensed consolidated financial statements.
- 8-
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands, except share data)
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Revenues: | |||||||
Management fees | $ | 380,026 | $ | 286,726 | |||
Advisory and transaction fees, net | 19,569 | 13,551 | |||||
Investment income (loss): | |||||||
Performance allocations | 251,497 | (124,165 | ) | ||||
Principal investment income (loss) | 26,025 | (12,994 | ) | ||||
Total investment income (loss) | 277,522 | (137,159 | ) | ||||
Incentive fees | 660 | 3,785 | |||||
Total Revenues | 677,777 | 166,903 | |||||
Expenses: | |||||||
Compensation and benefits: | |||||||
Salary, bonus and benefits | 119,163 | 115,826 | |||||
Equity-based compensation | 45,077 | 35,525 | |||||
Profit sharing expense | 123,447 | (12,277 | ) | ||||
Total compensation and benefits | 287,687 | 139,074 | |||||
Interest expense | 19,108 | 13,797 | |||||
General, administrative and other | 71,662 | 61,677 | |||||
Placement fees | (440 | ) | 327 | ||||
Total Expenses | 378,017 | 214,875 | |||||
Other Income (Loss): | |||||||
Net gains (losses) from investment activities | 18,829 | (67,133 | ) | ||||
Net gains from investment activities of consolidated variable interest entities | 9,466 | 6,532 | |||||
Interest income | 7,076 | 3,559 | |||||
Other income, net | 90 | 4,246 | |||||
Total Other Income (Loss) | 35,461 | (52,796 | ) | ||||
Income (loss) before income tax provision | 335,221 | (100,768 | ) | ||||
Income tax provision | (19,654 | ) | (8,580 | ) | |||
Net Income (Loss) | 315,567 | (109,348 | ) | ||||
Net (income) loss attributable to Non-Controlling Interests | (166,510 | ) | 51,086 | ||||
Net Income (Loss) Attributable to Apollo Global Management, LLC | 149,057 | (58,262 | ) | ||||
Net income attributable to Series A Preferred Shareholders | (4,383 | ) | (4,383 | ) | |||
Net income attributable to Series B Preferred Shareholders | (4,781 | ) | — | ||||
Net Income (Loss) Attributable to Apollo Global Management, LLC Class A Shareholders | $ | 139,893 | $ | (62,645 | ) | ||
Distributions Declared per Class A Share | $ | 0.56 | $ | 0.66 | |||
Net Income (Loss) Per Class A Share: | |||||||
Net Income (Loss) Available to Class A Share – Basic | $ | 0.67 | $ | (0.34 | ) | ||
Net Income (Loss) Available to Class A Share – Diluted | $ | 0.67 | $ | (0.34 | ) | ||
Weighted Average Number of Class A Shares Outstanding – Basic | 200,832,323 | 198,432,603 | |||||
Weighted Average Number of Class A Shares Outstanding – Diluted | 200,832,323 | 198,432,603 | |||||
See accompanying notes to condensed consolidated financial statements.
- 9-
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands, except share data)
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net Income (Loss) | $ | 315,567 | $ | (109,348 | ) | ||
Other Comprehensive Income (Loss), net of tax: | |||||||
Currency translation adjustments, net of tax | (7,001 | ) | 5,020 | ||||
Net gain from change in fair value of cash flow hedge instruments | 26 | 27 | |||||
Net loss on available-for-sale securities | (82 | ) | (41 | ) | |||
Total Other Comprehensive Income (Loss), net of tax | (7,057 | ) | 5,006 | ||||
Comprehensive Income (Loss) | 308,510 | (104,342 | ) | ||||
Comprehensive (Income) Loss attributable to Non-Controlling Interests | (160,104 | ) | 47,074 | ||||
Comprehensive Income (Loss) Attributable to Apollo Global Management, LLC | $ | 148,406 | $ | (57,268 | ) | ||
See accompanying notes to condensed consolidated financial statements.
- 10-
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands, except share data)
Apollo Global Management, LLC Shareholders | |||||||||||||||||||||||||||||||||||||||||
Class A Shares | Class B Shares | Series A Preferred Shares | Series B Preferred Shares | Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Apollo Global Management, LLC Shareholders’ Equity | Non- Controlling Interests in Consolidated Entities | Non- Controlling Interests in Apollo Operating Group | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
Balance at January 1, 2018 | 195,267,669 | 1 | $ | 264,398 | $ | — | $ | 1,579,797 | $ | (379,460 | ) | $ | (1,809 | ) | $ | 1,462,926 | $ | 140,086 | $ | 1,294,784 | $ | 2,897,796 | |||||||||||||||||||
Adoption of new accounting guidance | — | — | — | — | — | (8,149 | ) | — | (8,149 | ) | — | (11,210 | ) | (19,359 | ) | ||||||||||||||||||||||||||
Dilution impact of issuance of Class A shares | — | — | — | — | 104 | — | — | 104 | — | — | 104 | ||||||||||||||||||||||||||||||
Equity issued in connection with Preferred shares offering | — | — | — | 289,815 | — | — | — | 289,815 | — | — | 289,815 | ||||||||||||||||||||||||||||||
Capital increase related to equity-based compensation | — | — | — | — | 28,312 | — | — | 28,312 | — | — | 28,312 | ||||||||||||||||||||||||||||||
Capital contributions | — | — | — | — | — | — | — | — | 143,928 | — | 143,928 | ||||||||||||||||||||||||||||||
Distributions | — | — | (4,383 | ) | — | (138,407 | ) | — | — | (142,790 | ) | (2,111 | ) | (133,689 | ) | (278,590 | ) | ||||||||||||||||||||||||
Payments related to issuances of Class A shares for equity-based awards | 1,879,695 | — | — | — | — | (31,518 | ) | — | (31,518 | ) | — | — | (31,518 | ) | |||||||||||||||||||||||||||
Repurchase of Class A shares | (777,310 | ) | — | — | — | (26,444 | ) | — | — | (26,444 | ) | — | — | (26,444 | ) | ||||||||||||||||||||||||||
Exchange of AOG Units for Class A shares | 5,180,600 | — | — | — | 39,882 | — | — | 39,882 | — | (32,828 | ) | 7,054 | |||||||||||||||||||||||||||||
Net income (loss) | — | — | 4,383 | — | — | (62,645 | ) | — | (58,262 | ) | 5,979 | (57,065 | ) | (109,348 | ) | ||||||||||||||||||||||||||
Currency translation adjustments, net of tax | — | — | — | — | — | — | 1,001 | 1,001 | 2,975 | 1,044 | 5,020 | ||||||||||||||||||||||||||||||
Net gain from change in fair value of cash flow hedge instruments | — | — | — | — | — | — | 13 | 13 | — | 14 | 27 | ||||||||||||||||||||||||||||||
Net loss on available-for-sale securities | — | — | — | — | — | — | (20 | ) | (20 | ) | — | (21 | ) | (41 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2018 | 201,550,654 | 1 | $ | 264,398 | $ | 289,815 | $ | 1,483,244 | $ | (481,772 | ) | $ | (815 | ) | $ | 1,554,870 | $ | 290,857 | $ | 1,061,029 | $ | 2,906,756 | |||||||||||||||||||
Balance at January 1, 2019 | 201,400,500 | 1 | $ | 264,398 | $ | 289,815 | $ | 1,299,418 | $ | (473,276 | ) | $ | (4,159 | ) | $ | 1,376,196 | $ | 271,522 | $ | 804,122 | $ | 2,451,840 | |||||||||||||||||||
Capital increase related to equity-based compensation | — | — | — | — | 34,024 | — | — | 34,024 | — | — | 34,024 | ||||||||||||||||||||||||||||||
Distributions | — | — | (4,383 | ) | (4,781 | ) | (118,304 | ) | — | — | (127,468 | ) | (1,373 | ) | (113,258 | ) | (242,099 | ) | |||||||||||||||||||||||
Payments related to issuances of Class A shares for equity-based awards | 2,202,200 | — | — | — | 1,392 | (39,193 | ) | — | (37,801 | ) | — | — | (37,801 | ) | |||||||||||||||||||||||||||
Repurchase of Class A shares | (2,327,282 | ) | — | — | — | (72,316 | ) | — | — | (72,316 | ) | — | — | (72,316 | ) | ||||||||||||||||||||||||||
Exchange of AOG Units for Class A shares | 100,000 | — | — | — | 450 | — | — | 450 | — | (368 | ) | 82 | |||||||||||||||||||||||||||||
Net income | — | — | 4,383 | 4,781 | — | 139,893 | — | 149,057 | 8,662 | 157,848 | 315,567 | ||||||||||||||||||||||||||||||
Currency translation adjustments, net of tax | — | — | — | — | — | — | (623 | ) | (623 | ) | (5,666 | ) | (712 | ) | (7,001 | ) | |||||||||||||||||||||||||
Net gain from change in fair value of cash flow hedge instruments | — | — | — | — | — | — | 13 | 13 | — | 13 | 26 | ||||||||||||||||||||||||||||||
Net loss on available-for-sale securities | — | — | — | — | — | — | (41 | ) | (41 | ) | — | (41 | ) | (82 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2019 | 201,375,418 | 1 | $ | 264,398 | $ | 289,815 | $ | 1,144,664 | $ | (372,576 | ) | $ | (4,810 | ) | $ | 1,321,491 | $ | 273,145 | $ | 847,604 | $ | 2,442,240 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
- 11-
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands, except share data)
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Cash Flows from Operating Activities: | |||||||
Net income (loss) | $ | 315,567 | $ | (109,348 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Equity-based compensation | 45,077 | 35,525 | |||||
Depreciation and amortization | 3,644 | 3,877 | |||||
Unrealized (gains) losses from investment activities | (16,917 | ) | 69,018 | ||||
Principal investment (income) loss | (26,025 | ) | 12,994 | ||||
Performance allocations | (251,497 | ) | 124,165 | ||||
Change in fair value of contingent obligations | 3,328 | 466 | |||||
Deferred taxes, net | 15,032 | 6,958 | |||||
Non-cash lease expense | 6,666 | — | |||||
Other non-cash amounts included in net income, net | (6,427 | ) | (7,540 | ) | |||
Cash flows due to changes in operating assets and liabilities: | |||||||
Incentive fees receivable | 6,792 | 576 | |||||
Due from related parties | (4,527 | ) | (63,841 | ) | |||
Accounts payable and accrued expenses | 12,888 | 12,675 | |||||
Accrued compensation and benefits | (13,030 | ) | (1,985 | ) | |||
Deferred revenue | 73,203 | 17,978 | |||||
Due to related parties | (1,285 | ) | 3,668 | ||||
Profit sharing payable | 66,710 | (48,068 | ) | ||||
Other assets and other liabilities, net | (13,153 | ) | (9,037 | ) | |||
Lease liability | (7,056 | ) | — | ||||
Cash distributions of earnings from principal investments | 12,956 | 22,299 | |||||
Cash distributions of earnings from performance allocations | 81,482 | 148,658 | |||||
Satisfaction of contingent obligations | (1,315 | ) | (2,564 | ) | |||
Apollo Fund and VIE related: | |||||||
Net realized and unrealized gains from investing activities and debt | (8,994 | ) | (6,668 | ) | |||
Purchases of investments | (80,004 | ) | (228,807 | ) | |||
Proceeds from sale of investments | 77,099 | 72,229 | |||||
Changes in other assets and other liabilities, net | 1,887 | (11,701 | ) | ||||
Net Cash Provided by Operating Activities | $ | 292,101 | $ | 41,527 | |||
Cash Flows from Investing Activities: | |||||||
Purchases of fixed assets | $ | (4,898 | ) | $ | (2,174 | ) | |
Proceeds from sale of investments | 1,059 | 28,315 | |||||
Purchase of investments | (15,048 | ) | (57,903 | ) | |||
Purchase of U.S. Treasury securities | (541,530 | ) | (59,529 | ) | |||
Proceeds from maturities of U.S. Treasury securities | 229,322 | 200,000 | |||||
Cash contributions to principal investments | (62,727 | ) | (36,455 | ) | |||
Cash distributions from principal investments | 19,556 | 24,916 | |||||
Issuance of related party loans | (450 | ) | — | ||||
Other investing activities | 108 | 45 | |||||
Net Cash (Used in) Provided by Investing Activities | $ | (374,608 | ) | $ | 97,215 | ||
Cash Flows from Financing Activities: | |||||||
Principal repayments of debt | $ | (29 | ) | $ | (300,000 | ) | |
Issuance of Preferred shares, net of issuance costs | — | 289,815 | |||||
Distributions to Preferred Shareholders | (9,164 | ) | (4,383 | ) | |||
Issuance of debt | 550,000 | 299,676 | |||||
Purchase of Class A shares | (72,316 | ) | (40,823 | ) | |||
Payments related to deliveries of Class A shares for RSUs | (39,193 | ) | (31,518 | ) | |||
Distributions paid | (118,304 | ) | (138,407 | ) | |||
Distributions paid to Non-Controlling Interests in Apollo Operating Group | (113,258 | ) | (133,689 | ) | |||
Other financing activities | (6,760 | ) | (3,352 | ) | |||
Apollo Fund and VIE related: | |||||||
Principal repayment of debt | — | (1,073 | ) | ||||
Distributions paid to Non-Controlling Interests in consolidated entities | — | (671 | ) | ||||
Contributions from Non-Controlling Interests in consolidated entities | — | 144,610 | |||||
Net Cash Provided by Financing Activities | $ | 190,976 | $ | 80,185 | |||
Net Increase in Cash and Cash Equivalents, Restricted Cash and Cash Held at Consolidated Variable Interest Entities | 108,469 | 218,927 | |||||
Cash and Cash Equivalents, Restricted Cash and Cash Held at Consolidated Variable Interest Entities, Beginning of Period | 662,875 | 848,060 | |||||
Cash and Cash Equivalents, Restricted Cash and Cash Held at Consolidated Variable Interest Entities, End of Period | $ | 771,344 | $ | 1,066,987 | |||
Supplemental Disclosure of Cash Flow Information: | |||||||
Interest paid | $ | 7,991 | $ | 4,234 | |||
Interest paid by consolidated variable interest entities | 3,599 | 4,457 | |||||
Income taxes paid | 2,639 | 3,750 | |||||
Supplemental Disclosure of Non-Cash Investing Activities: | |||||||
Non-cash distributions from principal investments | $ | — | $ | (24,185 | ) | ||
Non-cash purchases of other investments, at fair value | — | 194,003 | |||||
Non-cash sales of other investments, at fair value | — | (46,623 | ) | ||||
Supplemental Disclosure of Non-Cash Financing Activities: | |||||||
Capital increases related to equity-based compensation | $ | 34,024 | $ | 28,312 | |||
Issuance of restricted shares | 1,392 | — | |||||
Other non-cash financing activities | — | 104 | |||||
Adjustments related to exchange of Apollo Operating Group units: | |||||||
Deferred tax assets | $ | 546 | $ | 47,009 | |||
Due to related parties | (464 | ) | (39,955 | ) | |||
Additional paid in capital | (82 | ) | (7,054 | ) | |||
Non-Controlling Interest in Apollo Operating Group | 368 | 32,828 | |||||
Reconciliation of Cash and Cash Equivalents, Restricted Cash and Cash Held at Consolidated Variable Interest Entities to the Condensed Consolidated Statements of Financial Condition: | |||||||
Cash and cash equivalents | $ | 720,253 | $ | 988,287 | |||
Restricted cash | 3,450 | 3,902 | |||||
Cash held at consolidated variable interest entities | 47,641 | 74,798 | |||||
Total Cash and Cash Equivalents, Restricted Cash and Cash and Cash Equivalents Held at Consolidated Variable Interest Entities | $ | 771,344 | $ | 1,066,987 | |||
See accompanying notes to condensed consolidated financial statements.
- 12-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
1. ORGANIZATION
Apollo Global Management, LLC (“AGM”, 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 credit, private equity and real assets funds as well as strategic investment accounts, 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, incentive fees and performance allocations related to the performance of the respective funds that it manages. Apollo has three primary business segments:
• | Credit—primarily invests in non-control corporate and structured debt instruments including performing, stressed and distressed investments across the capital structure; |
• | Private equity—primarily invests in control equity and related debt instruments, convertible securities and distressed debt investments; and |
• | Real assets—primarily invests in (i) real estate equity and infrastructure equity for the acquisition and recapitalization of real estate and infrastructure assets, portfolios, platforms and operating companies, (ii) real estate and infrastructure debt including first mortgage and mezzanine loans, preferred equity and commercial mortgage backed securities and (iii) European performing and non-performing loans, and unsecured consumer loans. |
Organization 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 Leon Black, Joshua Harris and Marc Rowan, its Managing Partners.
As of March 31, 2019, the Company owned, through six intermediate holding companies, 49.9% 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.
AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership (“Holdings”), is the entity through which the Managing Partners and certain of the Company’s other partners (the “Contributing Partners”) indirectly beneficially own interests in each of the entities that comprise the Apollo Operating Group (“AOG Units”). As of March 31, 2019, Holdings owned the remaining 50.1% of the economic interests in the Apollo Operating Group. The Company consolidates the financial results of 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with 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. These condensed consolidated financial statements should be read in conjunction with the annual financial statements included in the 2018 Annual Report.
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 VIEs but which the Company controls through a majority voting interest. Intercompany accounts and transactions, if any, have been eliminated upon consolidation.
- 13-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Certain reclassifications, when applicable, have been made to the prior periods’ condensed consolidated financial statements and notes to conform to the current period’s presentation and are disclosed accordingly.
Consolidation
The types of entities with which Apollo is involved generally include subsidiaries (e.g., general partners and management companies related to the funds the Company manages), entities that have all the attributes of an investment company (e.g., funds) and securitization vehicles (e.g., CLOs). Each of these entities is assessed for consolidation on a case by case basis depending on the specific facts and circumstances surrounding that entity.
Pursuant to the consolidation guidance, the Company first evaluates whether it holds a variable interest in an entity. Fees that are customary and commensurate with the level of services provided, and where the Company does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, would not be considered a variable interest. Apollo factors in all economic interests including proportionate interests through related parties, to determine if such interests are considered a variable interest. As Apollo’s interests in many of these entities are solely through market rate fees and/or insignificant indirect interests through related parties, Apollo is not considered to have a variable interest in many of these entities and no further consolidation analysis is performed. For entities where the Company has determined that it does hold a variable interest, the Company performs an assessment to determine whether each of those entities qualify as a VIE.
The determination as to whether an entity qualifies as a VIE depends on the facts and circumstances surrounding each entity and therefore certain of Apollo’s funds may qualify as VIEs under the variable interest model whereas others may qualify as voting interest entities (“VOEs”) under the voting interest model. The granting of substantive kick-out rights is a key consideration in determining whether a limited partnership or similar entity is a VIE and whether or not that entity should be consolidated.
Under the variable interest model, Apollo consolidates those entities where it is determined that the Company is the primary beneficiary of the entity. The Company is determined to be the primary beneficiary when it has a controlling financial interest in the VIE, which is defined as possessing both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. When Apollo alone is not considered to have a controlling financial interest in the VIE but Apollo and its related parties under common control in the aggregate have a controlling financial interest in the VIE, Apollo will be deemed the primary beneficiary if it is the party that is most closely associated with the VIE. When Apollo and its related parties not under common control in the aggregate have a controlling financial interest in the VIE, Apollo would be deemed to be the primary beneficiary if substantially all the activities of the entity are performed on behalf of Apollo.
Apollo determines whether it is the primary beneficiary of a VIE at the time it becomes initially involved with the VIE and reconsiders that conclusion continuously. Investments and redemptions (either by Apollo, related parties of Apollo or third parties) or amendments to the governing documents of the respective entity may affect an entity’s status as a VIE or the determination of the primary beneficiary.
Assets and liabilities of the consolidated VIEs are primarily shown in separate sections within the condensed consolidated statements of financial condition. Changes in the fair value of the consolidated VIEs’ assets and liabilities and related interest, dividend and other income and expenses are presented within net gains from investment activities of consolidated variable interest entities in the condensed consolidated statements of operations. The portion attributable to Non-Controlling Interests is reported within net income attributable to Non-Controlling Interests in the condensed consolidated statements of operations. For additional disclosures regarding VIEs, see note 5.
Under the voting interest model, Apollo consolidates those entities it controls through a majority voting interest. Apollo does not consolidate those VOEs in which substantive kick-out rights have been granted to the unrelated investors to either dissolve the fund or remove the general partner.
Cash and Cash Equivalents
Apollo considers all highly liquid short-term investments with original maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include money market funds and U.S. Treasury securities with original maturities of three months or less when purchased. Interest income from cash and cash equivalents is recorded in interest income in the condensed consolidated statements of operations. The carrying values of the money market funds and U.S. Treasury securities were $215.3 million and $231.8 million as of March 31, 2019 and December 31, 2018, respectively, which approximate their fair
- 14-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
values due to their short-term nature and are categorized as Level I within the fair value hierarchy. Substantially all of the Company’s cash on deposit is in interest bearing accounts with major financial institutions and exceed insured limits.
Restricted Cash
Restricted Cash represents cash deposited at a bank, which is pledged as collateral in connection with leased premises.
U.S. Treasury securities, at fair value
U.S. Treasury securities, at fair value includes U.S. Treasury bills with original maturities greater than three months when purchased. These securities are recorded at fair value. Interest income on such securities is separately presented from the overall change in fair value and is recognized in interest income in the condensed consolidated statements of operations. Any remaining change in fair value of such securities, that is not recognized as interest income, is recognized in net gains (losses) from investment activities in the condensed consolidated statements of operations.
Fair Value of Financial Instruments
Apollo has elected the fair value option for the Company’s investment in Athene Holding, the assets and liabilities of certain of its consolidated VIEs (including CLOs), the Company’s U.S. Treasury securities with original maturities greater than three months when purchased, and certain of the Company’s other investments. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition.
The fair value of a financial instrument is 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 under current market conditions.
Except for the Company’s debt obligations, financial instruments are generally recorded at fair value or at amounts whose carrying values approximate fair value. 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.
Fair Value Hierarchy
U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:
Level I - Quoted prices are available in active markets for identical financial instruments as of the reporting date. The types of financial instruments included in Level I include listed equities and debt. The Company does not adjust the quoted price for these financial instruments, 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. Financial instruments 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 financial instruments exhibit higher levels of liquid market observability as compared to Level III financial instruments.
Level III - Pricing inputs are unobservable for the financial instrument and includes situations where there is little observable market activity for the financial instrument. The inputs into the determination of fair value may require significant management judgment or estimation. Financial instruments that are included in this category generally include general and limited partner interests in corporate private equity and real assets funds, opportunistic credit funds, distressed
- 15-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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 financial instrument would qualify for classification as Level II or Level III. These criteria include, but are not limited to, the number and quality of the broker quotes, the standard deviations of the observed broker quotes, and the percentage deviation from 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, a financial instrument’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 financial instrument when the fair value is based on unobservable inputs.
Equity Method Investments
For investments in entities over which the Company exercises significant influence but which do not meet the requirements for consolidation and for which the Company has not elected the fair value option, the Company uses the equity method of accounting, whereby the Company records its share of the underlying income or loss of such entities. The Company’s share of the underlying net income or loss of such entities is recorded in principal investment income in the condensed consolidated statements of operations.
The carrying amounts of equity method investments are recorded 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 approximates fair value.
Financial Instruments held by Consolidated VIEs
The Company measures both the financial assets and financial liabilities of the consolidated CLOs in its condensed consolidated financial statements using the fair value of the financial assets of the consolidated CLOs, which are more observable than the fair value of the financial liabilities of the consolidated CLOs. As a result, the financial assets of the consolidated CLOs are measured at fair value and the financial liabilities are measured in consolidation as: (i) the sum of the fair value of the financial assets and the carrying value of any non-financial assets that are incidental to the operations of the CLOs less (ii) the sum of the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services) and the Company’s carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interest retained by the Company) using a reasonable and consistent methodology. Under the measurement alternative, net income attributable to Apollo Global Management, LLC reflects the Company’s own economic interests in the consolidated CLOs including (i) changes in the fair value of the beneficial interests retained by the Company and (ii) beneficial interests that represent compensation for collateral management services.
The consolidated VIEs hold investments that could be 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.
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating leases are included in lease assets and lease liabilities in the condensed consolidated statements of financial condition. The Company does not have any finance leases.
- 16-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease assets and lease liabilities are recognized at the date of commencement of the lease (the “commencement date”) based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its derived incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. The determination of an appropriate incremental borrowing rate requires judgment. The Company determined its incremental borrowing rate based on consideration of market conditions, the Company’s overall creditworthiness, and recent debt and preferred equity issuances. The Company adjusts its rate accordingly based on the term of the leases.
Lease assets also include any lease payments made (e.g. pre-paid rent) and are reduced by any deferred rent liabilities arising from lease escalation provisions and lease incentives within the Company’s lease agreements. Accordingly, as of March 31, 2019, the difference between lease assets and lease liabilities represents the Company’s deferred rent liabilities that are netted against the lease asset amount. Certain lease agreements contain lease escalation or lease incentive provisions based on the terms of the arrangement with the landlord. Lease escalations and lease incentives, if any, are recognized on a straight-line basis over the lease term. The Company’s lease agreements may also include options to extend or terminate the lease. Options to extend would not be included in the lease term until it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term and is recorded within general, administrative and other in the condensed consolidated statements of operations. The Company has lease agreements with non-lease components (e.g. estimated operating expenses associated with the lease), which are accounted for separately.
Other Assets
Other assets primarily includes fixed assets, net, deferred equity-based compensation and prepaid expenses. As of March 31, 2019, presentation of intangible assets, net was combined with other assets on the condensed consolidated statements of financial condition and the prior period was recast to conform to the current presentation.
Deferred Revenue
Apollo records deferred revenue, which is a type of contract liability, when consideration is received in advance of management services provided.
Apollo also earns management fees subject to the Management Fee Offset (described below). When advisory and transaction fees are earned by the management company, the Management Fee Offset reduces the management fee obligation of the fund. When the Company receives cash for advisory and transaction fees, a certain percentage of such advisory and/or transaction fees, as applicable, is allocated as a credit to reduce future management fees, otherwise payable by such fund. Such credit is recorded as deferred revenue in the condensed consolidated statements of financial condition. A portion of any excess advisory and transaction fees may be required to be returned to the limited partners of certain funds upon such fund’s liquidation. As the management fees earned by the Company are presented on a gross basis, any Management Fee Offsets calculated are presented as a reduction to advisory and transaction fees in the condensed consolidated statements of operations.
Additionally, Apollo earns advisory fees pursuant to the terms of the advisory agreements with certain of the portfolio companies that are owned by the funds Apollo manages. When Apollo receives a payment from a portfolio company that exceeds the advisory fees earned at that point in time, the excess payment is recorded as deferred revenue in the condensed consolidated statements of financial condition. The advisory agreements with the portfolio companies vary in duration and the associated fees are received monthly, quarterly or annually. Deferred revenue is reversed and recognized as revenue over the period that the agreed upon services are performed. There was $38.2 million of revenue recognized during the three months ended March 31, 2019 that was previously deferred as of January 1, 2019.
Under the terms of the funds’ partnership agreements, Apollo is normally required to bear organizational expenses over a set dollar amount and placement fees or costs in connection with the offering and sale of interests in the funds it manages to investors. The placement fees are payable to placement agents, who are independent third parties that assist in identifying potential investors, securing commitments to invest from such potential investors, preparing or revising offering and marketing materials, developing strategies for attempting to secure investments by potential investors and/or providing feedback and insight regarding issues and concerns of potential investors, when a limited partner either commits or funds a commitment to a fund. In certain instances the placement fees are paid over a period of time. Based on the management agreements with the funds, Apollo considers placement fees and organizational costs paid in determining if cash has been received in excess of the management fees earned. Placement fees and organizational costs are normally the obligation of Apollo but can be paid for by the funds. When these
- 17-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
costs are paid by the fund, the resulting obligations are included within deferred revenue. The deferred revenue balance will also be reduced during future periods when management fees are earned but not paid.
Revenues
The Company’s revenues are reported in four separate categories that include (i) management fees; (ii) advisory and transaction fees, net; (iii) investment income, which is comprised of performance allocations and principal investment income; and (iv) incentive fees.
On January 1, 2018, the Company adopted new revenue guidance issued by the FASB for recognizing revenue from contracts with customers. The new revenue guidance requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services (i.e., the transaction price). When determining the transaction price under the new revenue guidance, an entity may recognize variable consideration only to the extent that it is probable to not be significantly reversed. The new revenue guidance also requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.
The Company has concluded that its management fees, advisory and transaction fees, and incentive fees are within the scope of the new revenue guidance. For incentive fees, the new revenue guidance delays the timing of certain revenues compared to the prior accounting treatment. These amounts were previously recognized in carried interest income in the condensed consolidated statements of operations and are now recognized within a separate line, incentive fees.
Effective January 1, 2018, the Company implemented a change in accounting principle for performance allocations to be accounted for under guidance applicable to equity method investments, and therefore not within the scope of the new revenue guidance. The accounting change does not change the timing or amount of revenue recognized related to performance allocation arrangements. These amounts were previously recognized within carried interest income in the condensed consolidated statements of operations and carried interest receivable within the condensed consolidated statements of financial condition. As a result of the change in accounting principle, the Company recognizes performance allocations within investment income along with the related principal investment income (as further described below) in the condensed consolidated statements of operations and within the investments line in the condensed consolidated statements of financial condition. The Company applied this change in accounting principle on a full retrospective basis.
The new revenue guidance was adopted on a modified retrospective basis. The adoption of the new revenue guidance did not have a material impact on the Company. In connection with the adoption of the new revenue guidance, the Company recorded a cumulative effect adjustment to total shareholders’ equity as of January 1, 2018 in the amount of $19.4 million net of taxes. Prior periods have not been recast to reflect the new revenue guidance. Accordingly, prior periods reflect recognition under the previous guidance whereby incentive fees were recorded on an assumed liquidation basis at each reporting date. Refer to disclosures below for additional information on each of the Company’s revenue streams.
Management Fees
Management fees are recognized over time during the periods in which the related services are performed in accordance with the contractual terms of the related agreement. Management fees are generally based on (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. Included in management fees are certain expense reimbursements where the Company is considered the principal under the agreements and is required to record the expense and related reimbursement revenue on a gross basis.
Advisory and Transaction Fees, Net
Advisory fees, including management consulting fees and directors’ fees, are generally recognized over time as the underlying services are provided in accordance with the contractual terms of the related agreement. The Company receives such fees in exchange for ongoing management consulting services provided to portfolio companies of funds it manages. Transaction fees, including structuring fees and arranging fees are generally recognized at a point in time when the underlying services rendered are complete.
The amounts due from fund portfolio companies are recorded in due from related parties, which is discussed further in note 14. Under the terms of the limited partnership agreements for certain funds, the management fee payable by the funds may
- 18-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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”). Advisory and transaction fees are presented net of the Management Fee Offset in the condensed consolidated statements of operations.
Underwriting fees, which are also included within advisory and transaction fees, net, include gains, losses and fees, arising from securities offerings in which one of the Company’s subsidiaries participates in the underwriter syndicate. Underwriting fees are recognized at a point in time when the underwriting is completed. Underwriting fees recognized but not received are recorded in other assets on the condensed consolidated statements of financial condition.
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 as a component of the calculation of the Management Fee Offset. If a deal is successfully completed, Apollo is reimbursed by the fund or fund’s portfolio company for all costs incurred and no offset is generated. As the Company acts as an agent for the funds it manages, any transaction costs incurred and paid by the Company on behalf of the respective funds relating to successful or broken deals are recorded net on the Company’s condensed consolidated statements of operations, and any receivable from the respective funds is recorded in due from related parties on the condensed consolidated statements of financial condition.
Investment Income
Investment income is comprised of performance allocations and principal investment income.
Performance Allocations
Performance allocations are a type of performance revenue (i.e., income earned based on the extent to which an entity’s performance exceeds predetermined thresholds). Performance allocations are generally structured from a legal standpoint as an allocation of capital in which the Company’s capital account receives allocations of the returns of an entity when those returns exceed predetermined thresholds. The determination of which performance revenues are considered performance allocations is primarily based on the terms of an agreement with the entity.
As noted above, as a result of a change in accounting principle, the Company recognizes performance allocations within investment income along with the related principal investment income (as described further below) in the condensed consolidated statements of operations and within the investments line in the condensed consolidated statements of financial condition.
Principal Investment Income
Principal investment income includes the Company’s income or loss from equity method investments and certain other investments in entities in which the Company is generally eligible to receive performance allocations. Income from equity method investments includes the Company’s share of net income or loss generated from its investments, which are not consolidated, but in which the Company exerts significant influence. Prior to the change in accounting principle noted above, income from equity method investments was included within other income (loss) in the condensed consolidated statements of operations. All prior periods have been conformed to reflect this change in presentation.
Incentive Fees
Incentive fees are a type of performance revenue. Incentive fees differ from performance allocations in that incentive fees do not represent an allocation of capital but rather a contractual fee arrangement with the entity.
Incentive fees are considered a form of variable consideration under the new revenue recognition guidance as they are subject to clawback or reversal and therefore must be deferred until the fees are probable to not be significantly reversed. Accrued but unpaid incentive fees are reported within incentive fees receivable in the Company’s condensed consolidated statements of financial condition. As noted earlier, prior to the adoption of the new revenue recognition guidance, incentive fees were recognized on an assumed liquidation basis. The Company’s incentive fees primarily relate to the credit segment and are generally received from CLOs, managed accounts and AINV.
- 19-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Compensation and Benefits
Equity-Based Compensation
Equity-based awards granted to employees and non-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. In addition, certain restricted share units (“RSUs”) granted by the Company vest based on both continued service and the Company’s receipt of performance revenues, within prescribed periods, sufficient to cover the associated equity-based compensation expense. In accordance with U.S. GAAP, equity-based compensation expense for such awards, if and when granted, will be recognized on an accelerated recognition method over the requisite service period to the extent the performance revenue metrics are met or deemed probable. The Company accounts for forfeitures of equity-based awards when they occur.
Profit Sharing
Profit sharing expense and profit sharing payable primarily consist of a portion of performance revenues earned from certain funds that are allocated to employees, former employees and Contributing Partners. Profit sharing amounts are recognized as the related performance revenues are earned. Accordingly, profit sharing amounts can be reversed during periods when there is a decline in performance revenues that were previously recognized.
Profit sharing amounts are generally not paid until the related performance revenue is distributed to the general partner upon realization of the fund’s investments. Under certain profit sharing arrangements, the Company requires that a portion of certain of the performance revenues distributed to its employees be used to purchase Class A restricted shares issued under the Company’s 2007 Omnibus Equity Incentive Plan (the “2007 Equity Plan”). Prior to distribution of the performance revenue, the Company records the value of the equity-based awards expected to be granted in other assets and other liabilities within the condensed consolidated statements of financial condition. Such equity-based awards are recorded as equity-based compensation expense over the relevant service period once granted.
Additionally, profit sharing amounts previously distributed may be subject to clawback from employees, former employees and Contributing Partners. When applicable, the accrual for potential clawback of previously distributed profit sharing amounts, which is a component of due from related parties on the condensed consolidated statements of financial condition, represents all amounts previously distributed to employees, former employees and Contributing Partners that would need to be returned to the general partner if the Apollo funds were to be liquidated based on the fair value of the underlying funds’ investments as of the reporting date. The actual general partner receivable, however, would not become realized until the end of a fund’s life.
Profit sharing payable also includes contingent consideration obligations that were recognized in connection with certain Apollo acquisitions. Changes in the fair value of the contingent consideration obligations 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 performance revenue earned by the Company in a given year, which amounts are reflected in profit sharing expense in the accompanying condensed consolidated financial statements.
401(k) Savings Plan
The Company sponsors a 401(k) savings plan (the “401(k) Plan”) whereby U.S.-based employees are entitled to participate in the 401(k) Plan based upon satisfying certain eligibility requirements. The Company matches 50% of eligible annual employee contributions up to 3% of the eligible employees’ annual compensation. Matching contributions vest after three years of service.
General, Administrative and Other
General, administrative and other primarily includes professional fees, occupancy, depreciation and amortization, travel, information technology and administration expenses.
- 20-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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, performance allocations, incentive fees, contingent consideration obligation related to an acquisition, non-cash compensation, and fair value of investments and debt. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements
Recently Issued Accounting Standards Effective on January 1, 2019
In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use lease assets and lease liabilities on the statements of financial condition. The most significant among the changes in the standard is the recognition of right-of-use lease assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objectives of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the standard effective January 1, 2019 under the simplified transition method. The simplified transition method allows companies to forgo the comparative reporting requirements initially required under the modified retrospective transition approach and apply the new guidance prospectively. The Company also elected to use the practical expedients available under the standard whereby the Company would not need to reassess whether an arrangement is or contains a lease, lease classification, and the accounting for initial direct costs.
The adoption of the standard had an impact on the Company’s condensed consolidated statements of financial condition but did not have an impact on the Company’s condensed consolidated statements of operations, condensed consolidated statements of cash flows or beginning accumulated deficit. The most significant impact was the recognition of right-of-use lease assets and lease liabilities for operating leases. Refer to the condensed consolidated statements of financial condition and note 8 for further information on the impact of the adoption of the standard on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Standards Effective on January 1, 2020
In January 2017, the FASB issued guidance to simplify the test for goodwill impairment. The new guidance removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment (Step 2). Under the new guidance, a goodwill impairment is calculated as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in the reporting unit. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be performed prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The guidance is not expected to have a material impact on the condensed consolidated financial statements of the Company.
3. INVESTMENTS
The following table presents Apollo’s investments:
As of March 31, 2019 | As of December 31, 2018 | ||||||
Investments, at fair value | $ | 933,275 | $ | 900,959 | |||
Equity method investments | 963,515 | 909,471 | |||||
Performance allocations | 1,049,297 | 912,182 | |||||
Total Investments | $ | 2,946,087 | $ | 2,722,612 | |||
Investments, at Fair Value
Investments, at fair value, consist of investments for which the fair value option has been elected and primarily include the Company’s investment in Athene Holding and investments in debt of unconsolidated CLOs. Changes in the fair value related to these investments are presented in net gains (losses) from investment activities except for certain investments for which the
- 21-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Company is entitled to receive performance allocations. For those investments, changes in fair value are presented in principal investment income.
As of March 31, 2019 and for the three months ended March 31, 2019, no equity method investment held by Apollo met the significance criteria as defined by the SEC. Although the following disclosure is not required by the significance criteria for the three months ended March 31, 2019, the Company chose to continue to include this information as it was disclosed in its 2018 Annual Report. The following table presents summarized financial information of Athene Holding:
For the Three Months Ended March 31, | |||||||
2019(1) | 2018 | ||||||
Statements of Operations | |||||||
Revenues | $ | 1,154 | $ | 1,011 | |||
Expenses | 1,301 | 689 | |||||
Income (loss) before income tax provision (benefit) | (147 | ) | 322 | ||||
Income tax provision (benefit) | (43 | ) | 45 | ||||
Net income (loss) | $ | (104 | ) | $ | 277 | ||
(1) | The financial information for the three months ended March 31, 2019 is presented a quarter in arrears and reflects the financial information for the three months ended December 31, 2018, which represents the latest available financial information as of the date of this report. |
Net Gains (Losses) from Investment Activities
The following table presents the realized and net change in unrealized gains (losses) reported in net gains (losses) from investment activities:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Realized gains (losses) on sales of investments, net | $ | (137 | ) | $ | 66 | ||
Net change in unrealized gains (losses) due to changes in fair value | 18,966 | (67,199 | ) | ||||
Net gains (losses) from investment activities | $ | 18,829 | $ | (67,133 | ) | ||
Equity Method Investments
Apollo’s equity method investments include its investments in the credit, private equity and real assets funds it manages, which are not consolidated, but in which the Company exerts significant influence. Apollo’s share of net income generated by these investments is recorded in principal investment income (loss) in the condensed consolidated statements of operations.
Equity method investments consisted of the following:
Equity Held as of | ||||||||
March 31, 2019 | (4) | December 31, 2018 | (4) | |||||
Credit(2) | $ | 289,341 | $ | 279,888 | ||||
Private Equity(1) | 584,387 | 534,818 | ||||||
Real Assets | 89,787 | 94,765 | ||||||
Total equity method investments(3) | $ | 963,515 | $ | 909,471 | ||||
(1) | The equity method investment in Fund VIII was $362.0 million and $356.6 million as of March 31, 2019 and December 31, 2018, respectively, representing an ownership percentage of 2.2% and 2.2% as of March 31, 2019 and December 31, 2018, respectively. |
(2) | The equity method investment in AINV was $52.6 million and $53.9 million as of March 31, 2019 and December 31, 2018, respectively. The value of the Company’s investment in AINV was $44.8 million and $36.7 million based on the quoted market price of AINV as of March 31, 2019 and December 31, 2018, respectively. |
(3) | Certain funds invest across multiple segments. The presentation in the table above is based on the classification of the majority of such funds’ investments. |
(4) | Some amounts included are a quarter in arrears. |
- 22-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Performance Allocations
Performance allocations from credit, private equity and real assets funds consisted of the following:
As of March 31, 2019 | As of December 31, 2018 | ||||||
Credit | $ | 286,343 | $ | 241,896 | |||
Private Equity | 617,138 | 520,892 | |||||
Real Assets | 145,816 | 149,394 | |||||
Total performance allocations | $ | 1,049,297 | $ | 912,182 | |||
The table below provides a roll forward of the performance allocations balance:
Credit | Private Equity | Real Assets | Total | ||||||||||||
Performance allocations, January 1, 2019 | $ | 241,896 | $ | 520,892 | $ | 149,394 | $ | 912,182 | |||||||
Change in fair value of funds | 66,834 | 155,618 | (3,855 | ) | 218,597 | ||||||||||
Fund distributions to the Company | (22,387 | ) | (59,372 | ) | 277 | (81,482 | ) | ||||||||
Performance allocations, March 31, 2019 | $ | 286,343 | $ | 617,138 | $ | 145,816 | $ | 1,049,297 | |||||||
The change in fair value of funds excludes the reversal of previously realized performance allocations due to the general partner obligation to return previously distributed performance allocations, which is recorded in due to related parties in the consolidated statements of financial condition. See note 14 for further disclosure regarding the general partner obligation.
The timing of the payment of performance allocations due to the general partner or investment manager varies depending on the terms of the applicable fund agreements. Generally, performance allocations with respect to the private equity funds and certain credit and real assets funds are payable and are distributed to the fund’s general partner upon realization of an investment if the fund’s cumulative returns are in excess of the preferred return.
4. PROFIT SHARING PAYABLE
Profit sharing payable consisted of the following:
As of March 31, 2019 | As of December 31, 2018 | ||||||
Credit | $ | 199,478 | $ | 178,093 | |||
Private Equity | 255,953 | 205,617 | |||||
Real Assets | 65,433 | 68,431 | |||||
Total profit sharing payable | $ | 520,864 | $ | 452,141 | |||
The table below provides a roll forward of the profit sharing payable balance:
Credit | Private Equity | Real Assets | Total | ||||||||||||
Profit sharing payable, January 1, 2019 | $ | 178,093 | $ | 205,617 | $ | 68,431 | $ | 452,141 | |||||||
Profit sharing expense | 36,019 | 74,585 | (2,137 | ) | 108,467 | ||||||||||
Payments/other | (14,634 | ) | (24,249 | ) | (861 | ) | (39,744 | ) | |||||||
Profit sharing payable, March 31, 2019 | $ | 199,478 | $ | 255,953 | $ | 65,433 | $ | 520,864 | |||||||
Profit sharing expense includes (i) changes in amounts payable to employees and former employees entitled to a share of performance revenues in Apollo’s funds and (ii) changes to the fair value of the contingent consideration obligations recognized in connection with certain Apollo acquisitions. Profit sharing expense excludes the potential return of profit sharing distributions that would be due if certain funds were liquidated, which is recorded in due from related parties in the consolidated statements of financial condition. See note 14 for further disclosure regarding the potential return of profit sharing distributions.
As discussed in note 2, under certain profit sharing arrangements, the Company requires that a portion of certain of the performance revenues distributed to its employees be used to purchase Class A restricted shares issued under its 2007 Equity
- 23-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Plan. Prior to distribution of the performance revenues, the Company records the value of the equity-based awards expected to be granted in other assets and other liabilities within the condensed consolidated statements of financial condition. See note 7 for further disclosure regarding deferred equity-based compensation.
5. VARIABLE INTEREST ENTITIES
As described in note 2, the Company consolidates entities that are VIEs for which the Company has been designated as the primary beneficiary. There is no recourse to the Company for the consolidated VIEs’ liabilities.
Consolidated Variable Interest Entities
Apollo has consolidated VIEs in accordance with the policy described in note 2. Through its role as investment manager of these VIEs, the Company determined that Apollo has the power to direct the activities that most significantly impact the economic performance of these VIEs. Additionally, Apollo determined that its interests, both directly and indirectly from these VIEs, represent rights to returns that could potentially be significant to such VIEs. As a result, Apollo determined that it is the primary beneficiary and therefore should consolidate the VIEs.
Certain CLOs are consolidated by Apollo as the Company is considered to hold a controlling financial interest through direct and indirect interests in these CLOs exclusive of management and performance-based fees received. Through its role as collateral manager of these VIEs, the Company determined that Apollo has the power to direct the activities that most significantly impact the economic performance of these VIEs. These CLOs were formed for the sole purpose of issuing collateralized notes to investors. The assets of these VIEs are primarily comprised of senior secured loans and the liabilities are primarily comprised of debt.
The assets of consolidated CLOs are not available to creditors of the Company. In addition, the investors in these consolidated CLOs have no recourse against the assets of the Company. The Company measures both the financial assets and the financial liabilities of the CLOs using the fair value of the financial assets as further described in note 2. The Company has elected the fair value option for financial instruments held by its consolidated CLOs, which includes investments in loans and corporate bonds, as well as debt obligations and contingent obligations held by such consolidated CLOs. Other assets include amounts due from brokers and interest receivables. Other liabilities include payables for securities purchased, which represent open trades within the consolidated CLOs and primarily relate to corporate loans that are expected to settle within 60 days. As of March 31, 2019 and December 31, 2018, the Company held investments of $43.2 million and $44.2 million, respectively, in consolidated foreign currency denominated CLOs, which eliminate in consolidation.
Net Gains from Investment Activities of Consolidated Variable Interest Entities
The following table presents net gains from investment activities of the consolidated VIEs:
For the Three Months Ended March 31, | ||||||||
2019 | (1) | 2018 | (1) | |||||
Net gains from investment activities | $ | 17,982 | $ | 5,322 | ||||
Net gains (losses) from debt | (8,936 | ) | 1,350 | |||||
Interest and other income | 4,961 | 9,579 | ||||||
Interest and other expenses | (4,541 | ) | (9,719 | ) | ||||
Net gains from investment activities of consolidated variable interest entities | $ | 9,466 | $ | 6,532 | ||||
(1) | Amounts reflect consolidation eliminations. |
- 24-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Senior Secured Notes, Subordinated Notes and Secured Borrowings
Included within debt are amounts due to third-party institutions by the consolidated VIEs. The following table summarizes the principal provisions of the debt of the consolidated VIEs:
As of March 31, 2019 | As of December 31, 2018 | ||||||||||||||||
Principal Outstanding | Weighted Average Interest Rate | Weighted Average Remaining Maturity in Years | Principal Outstanding | Weighted Average Interest Rate | Weighted Average Remaining Maturity in Years | ||||||||||||
Senior Secured Notes(2) | $ | 752,300 | 1.67 | % | 10.9 | $ | 768,860 | 1.67 | % | 11.2 | |||||||
Subordinated Notes(2) | 93,625 | N/A | (1) | 21.2 | 95,686 | N/A | (1) | 21.4 | |||||||||
Secured Borrowings(2)(3) | 18,976 | 3.96 | % | 8.6 | 18,976 | 3.42 | % | 8.8 | |||||||||
Total | $ | 864,901 | $ | 883,522 | |||||||||||||
(1) | The subordinated notes do not have contractual interest rates but instead receive distributions from the excess cash flows of the VIEs. |
(2) | The debt of the consolidated VIEs is collateralized by assets of the consolidated VIEs and assets of one vehicle may not be used to satisfy the liabilities of another vehicle. The fair value of the debt and collateralized assets of the Senior Secured Notes, Subordinated Notes and Secured Borrowings are presented below: |
As of March 31, 2019 | As of December 31, 2018 | ||||||
Debt, at fair value | $ | 845,866 | $ | 855,461 | |||
Collateralized assets | $ | 1,273,897 | $ | 1,290,891 | |||
(3) | Secured borrowings consist of a consolidated VIE’s obligation through a repurchase agreement redeemable at maturity with a third party lender. The fair value of the secured borrowings as of March 31, 2019 and December 31, 2018 was $19.0 million and $19.0 million, respectively. |
The consolidated VIEs’ debt obligations contain various customary loan covenants. As of March 31, 2019, the Company was not aware of any instances of non-compliance with any of these covenants.
As of March 31, 2019, the contractual maturities for debt of the consolidated VIEs is greater than 5 years.
Variable Interest Entities Which are Not Consolidated
The Company holds variable interests in certain VIEs which are not consolidated, as it has been determined that Apollo is not the primary beneficiary.
- 25-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
The following table presents the carrying amounts of the assets and liabilities of the VIEs for which Apollo has concluded that it holds a significant variable interest, but that it is not the primary beneficiary. In addition, the table presents the maximum exposure to losses relating to these VIEs.
As of March 31, 2019 | As of December 31, 2018 | ||||||
Assets: | |||||||
Cash | $ | 295,700 | $ | 404,660 | |||
Investments | 5,092,299 | 4,919,118 | |||||
Receivables | 93,195 | 126,873 | |||||
Total Assets | $ | 5,481,194 | $ | 5,450,651 | |||
Liabilities: | |||||||
Debt and other payables | $ | 3,230,343 | $ | 3,673,219 | |||
Total Liabilities | $ | 3,230,343 | $ | 3,673,219 | |||
Apollo Exposure(1) | $ | 248,731 | $ | 244,894 | |||
(1) | Represents Apollo’s direct investment in those entities in which Apollo holds a significant variable interest and certain other investments. Additionally, cumulative performance allocations are subject to reversal in the event of future losses, as discussed in note 15. |
6. FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
The following tables summarize the Company’s financial assets and financial liabilities recorded at fair value by fair value hierarchy level:
As of March 31, 2019 | |||||||||||||||||||
Level I | Level II | Level III | Total | Cost | |||||||||||||||
Assets | |||||||||||||||||||
U.S. Treasury securities, at fair value | $ | 707,316 | $ | — | $ | — | $ | 707,316 | $ | 697,589 | |||||||||
Investments, at fair value: | |||||||||||||||||||
Investment in Athene Holding | 780,360 | — | — | 780,360 | 592,561 | ||||||||||||||
Other investments | — | 43,564 | 109,351 | (1) | 152,915 | 138,368 | |||||||||||||
Total investments, at fair value | 780,360 | 43,564 | 109,351 | 933,275 | 730,929 | ||||||||||||||
Investments of VIEs, at fair value | — | 875,636 | 293,448 | 1,169,084 | |||||||||||||||
Investments of VIEs, valued using NAV | — | — | — | 2,376 | |||||||||||||||
Total investments of VIEs, at fair value | — | 875,636 | 293,448 | 1,171,460 | |||||||||||||||
Derivative assets(2) | — | 373 | — | 373 | |||||||||||||||
Total Assets | $ | 1,487,676 | $ | 919,573 | $ | 402,799 | $ | 2,812,424 | |||||||||||
Liabilities | |||||||||||||||||||
Liabilities of VIEs, at fair value | $ | — | $ | 845,866 | $ | — | $ | 845,866 | |||||||||||
Contingent consideration obligations(3) | — | — | 76,500 | 76,500 | |||||||||||||||
Derivative liabilities(2) | — | 320 | — | 320 | |||||||||||||||
Total Liabilities | $ | — | $ | 846,186 | $ | 76,500 | $ | 922,686 | |||||||||||
- 26-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
As of December 31, 2018 | |||||||||||||||||||
Level I | Level II | Level III | Total | Cost | |||||||||||||||
Assets | |||||||||||||||||||
U.S. Treasury securities, at fair value | $ | 392,932 | $ | — | $ | — | $ | 392,932 | $ | 390,336 | |||||||||
Investments, at fair value: | |||||||||||||||||||
Investment in Athene Holding | 761,807 | — | — | 761,807 | 592,572 | ||||||||||||||
Other investments | — | 42,782 | 96,370 | (1) | 139,152 | 124,379 | |||||||||||||
Total investments, at fair value | 761,807 | 42,782 | 96,370 | 900,959 | 716,951 | ||||||||||||||
Investments of VIEs, at fair value | — | 877,427 | 295,987 | 1,173,414 | |||||||||||||||
Investments of VIEs, valued using NAV | — | — | — | 2,263 | |||||||||||||||
Total investments of VIEs, at fair value | — | 877,427 | 295,987 | 1,175,677 | |||||||||||||||
Derivative assets(2) | — | 388 | — | 388 | |||||||||||||||
Total Assets | $ | 1,154,739 | $ | 920,597 | $ | 392,357 | $ | 2,469,956 | |||||||||||
Liabilities | |||||||||||||||||||
Liabilities of VIEs, at fair value | $ | — | $ | 855,461 | $ | — | $ | 855,461 | |||||||||||
Contingent consideration obligations(3) | — | — | 74,487 | 74,487 | |||||||||||||||
Derivative liabilities(2) | — | 681 | — | 681 | |||||||||||||||
Total Liabilities | $ | — | $ | 856,142 | $ | 74,487 | $ | 930,629 | |||||||||||
(1) | Other investments as of March 31, 2019 and December 31, 2018 excludes $17.8 million and $17.0 million, respectively, of performance allocations classified as Level III related to certain investments for which the Company has elected the fair value option. The Company’s policy is to account for performance allocations as investments. |
(2) | Derivative assets and derivative liabilities are presented as a component of Other assets and Other liabilities, respectively, in the condensed consolidated statements of financial condition. |
(3) | Profit sharing payable includes contingent obligations classified as Level III. |
The following tables summarize the changes in financial assets measured at fair value for which Level III inputs have been used to determine fair value:
For the Three Months Ended March 31, 2019 | |||||||||||
Other Investments | Investments of Consolidated VIEs | Total | |||||||||
Balance, Beginning of Period | $ | 96,370 | $ | 295,987 | $ | 392,357 | |||||
Purchases | 15,048 | — | 15,048 | ||||||||
Sale of investments/distributions | (1,059 | ) | — | (1,059 | ) | ||||||
Changes in net unrealized gains | 1,818 | 7,920 | 9,738 | ||||||||
Cumulative translation adjustment | (2,044 | ) | (6,343 | ) | (8,387 | ) | |||||
Transfer out of Level III(1) | (782 | ) | (4,116 | ) | (4,898 | ) | |||||
Balance, End of Period | $ | 109,351 | $ | 293,448 | $ | 402,799 | |||||
Change in net unrealized gains included in principal investment income related to investments still held at reporting date | $ | 1,818 | $ | — | $ | 1,818 | |||||
Change in net unrealized gains included in net gains from investment activities of consolidated VIEs related to investments still held at reporting date | — | 7,920 | 7,920 | ||||||||
- 27-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
For the Three Months Ended March 31, 2018 | |||||||||||
Other Investments | Investments of Consolidated VIEs | Total | |||||||||
Balance, Beginning of Period | $ | 35,701 | $ | 132,348 | $ | 168,049 | |||||
Purchases | 65,762 | 142,487 | 208,249 | ||||||||
Sale of investments/distributions | (28,315 | ) | (11,661 | ) | (39,976 | ) | |||||
Net realized gains (losses) | 413 | (1,160 | ) | (747 | ) | ||||||
Changes in net unrealized gains (losses) | (215 | ) | 8,909 | 8,694 | |||||||
Cumulative translation adjustment | 1,686 | 3,554 | 5,240 | ||||||||
Transfer into Level III(1) | — | 18,783 | 18,783 | ||||||||
Transfer out of Level III(1) | (17,740 | ) | — | (17,740 | ) | ||||||
Balance, End of Period | $ | 57,292 | $ | 293,260 | $ | 350,552 | |||||
Change in net unrealized losses included in principal investment income related to investments still held at reporting date | $ | (217 | ) | $ | — | $ | (217 | ) | |||
Change in net unrealized gains included in net gains from investment activities of consolidated VIEs related to investments still held at reporting date | — | 6,950 | 6,950 | ||||||||
(1) | Transfers between Level II and III were a result of subjecting the broker quotes on these financial assets to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes and the percentage deviation from independent pricing services. |
The following table summarizes the changes in fair value in financial liabilities measured at fair value for which Level III inputs have been used to determine fair value:
For the Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | ||||||||||||||
Contingent Consideration Obligations | Liabilities of Consolidated VIEs & Apollo Funds | Contingent Consideration Obligations | Total | ||||||||||||
Balance, Beginning of Period | $ | 74,487 | $ | 12,620 | $ | 92,600 | $ | 105,220 | |||||||
Payments | (1,315 | ) | (12,620 | ) | (2,564 | ) | (15,184 | ) | |||||||
Changes in net unrealized (gains) losses(1) | 3,328 | — | 464 | 464 | |||||||||||
Balance, End of Period | $ | 76,500 | $ | — | $ | 90,500 | $ | 90,500 | |||||||
(1) | Changes in fair value of contingent consideration obligations are recorded in profit sharing expense in the condensed consolidated statements of operations. |
The following tables summarize the quantitative inputs and assumptions used for financial assets and liabilities categorized as Level III under the fair value hierarchy:
As of March 31, 2019 | |||||||||||
Fair Value | Valuation Techniques | Unobservable Inputs | Ranges | Weighted Average | |||||||
Financial Assets | |||||||||||
Other investments | $ | 4,723 | Third Party Pricing | N/A | N/A | N/A | |||||
104,628 | Discounted cash flow | Discount rate | 15.0% - 16.0% | 15.6% | |||||||
Investments of consolidated VIEs: | |||||||||||
Equity securities | 293,448 | Book value multiple | Book value multiple | 0.64x | 0.64x | ||||||
Discounted cash flow | Discount rate | 13.8% | 13.8% | ||||||||
Total Financial Assets | $ | 402,799 | |||||||||
Financial Liabilities | |||||||||||
Contingent consideration obligation | $ | 76,500 | Discounted cash flow | Discount rate | 16.8% | 16.8% | |||||
Total Financial Liabilities | $ | 76,500 | |||||||||
- 28-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
As of December 31, 2018 | |||||||||||
Fair Value | Valuation Techniques | Unobservable Inputs | Ranges | Weighted Average | |||||||
Financial Assets | |||||||||||
Other investments | $ | 6,901 | Third Party Pricing | N/A | N/A | N/A | |||||
89,469 | Discounted cash flow | Discount Rate | 15.0% - 16.0% | 15.5% | |||||||
Investments of consolidated VIEs: | |||||||||||
Corporate loans/bonds/CLO notes | 4,116 | Third party pricing | N/A | N/A | N/A | ||||||
Equity securities | 291,871 | Book value multiple | Book value multiple | 0.65x | 0.65x | ||||||
Discounted cash flow | Discount rate | 15.2% | 15.2% | ||||||||
Total investments of consolidated VIEs | 295,987 | ||||||||||
Total Financial Assets | $ | 392,357 | |||||||||
Financial Liabilities | |||||||||||
Contingent consideration obligation | $ | 74,487 | Discounted cash flow | Discount rate | 17.0% | 17.0% | |||||
Total Financial Liabilities | $ | 74,487 | |||||||||
Fair Value Measurement of Investment in Athene Holding
As of March 31, 2019 and December 31, 2018, the fair value of Apollo’s Level I investment in Athene Holding was calculated using the closing market price of Athene Holding shares of $40.80 and $39.83, respectively.
Discounted Cash Flow Model
When a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of an investment and the contingent consideration obligations; conversely decreases in the discount rate can significantly increase the fair value of an investment and the contingent consideration obligations.
Consolidated VIEs
Investments
As of March 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurement of the equity securities include the discount rate applied and the book value multiples applied in the valuation models. These unobservable inputs in isolation can cause significant increases or decreases in fair value. The discount rate is determined based on the market rates an investor would expect for a similar investment with similar risks. When a comparable multiple model is used to determine fair value, the comparable multiples are generally multiplied by the underlying companies’ earnings before interest, taxes, depreciation and amortization (“EBITDA”) to establish the total enterprise value of the company. The comparable multiple is determined based on the implied trading multiple of public industry peers.
Liabilities
As of March 31, 2019 and December 31, 2018, the debt obligations of the consolidated CLOs were measured on the basis of the fair value of the financial assets of the CLOs as the financial assets were determined to be more observable and, as a result, categorized as Level II in the fair value hierarchy.
Contingent Consideration Obligations
The significant unobservable input used in the fair value measurement of the contingent consideration obligations is the discount rate applied in the valuation models. This input in isolation can cause significant increases or decreases in fair value. The discount rate was based on the hypothetical cost of equity in connection with the acquisition of Stone Tower. See note 15 for further discussion of the contingent consideration obligations.
Valuation of Underlying Investments of Equity Method Investees
As discussed previously, the underlying entities that the Company manages and invests in are primarily investment companies which account for their investments at estimated fair value.
- 29-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
On a quarterly basis, Apollo utilizes valuation committees consisting of members from senior management, to review and approve the valuation results related to the investments of the funds it manages. For certain publicly traded vehicles managed by the Company, a review is performed by an independent board of directors. 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 investments in Apollo’s credit funds are valued based on quoted market prices and valuation models. Quoted market prices are valued based on the average of the “bid” and the “ask” quotes provided by multiple brokers wherever possible without any adjustments. Apollo will designate certain brokers to use to value specific securities. In order to determine the designated brokers, Apollo considers the following: (i) brokers with which Apollo has previously transacted, (ii) the underwriter of the security and (iii) active brokers indicating executable quotes. In addition, when valuing a security based on broker quotes wherever possible Apollo tests the standard deviation amongst the quotes received and the variance between the concluded fair value and the value provided by a pricing service. When broker quotes are not available Apollo considers the use of pricing service quotes or other sources to mark a position. When relying on a pricing service as a primary source, Apollo (i) analyzes how the price has moved over the measurement period, (ii) reviews the number of brokers included in the pricing service’s population and (iii) validates the valuation levels with Apollo’s pricing team and traders.
Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value utilizing a model based approach to determine fair value. Valuation approaches used to estimate the fair value of illiquid credit investments also may include the market approach and the income approach, as previously described above. The valuation approaches used consider, as applicable, market risks, credit risks, counterparty risks and foreign currency risks.
Private Equity Investments
The majority of the illiquid investments within our private equity funds are valued using the market approach, which provides an indication of fair value based on a comparison of the subject company to comparable publicly traded companies and transactions in the industry.
Market Approach
The market approach is driven by 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 any of the following factors: (1) the subject company’s historical and projected financial data; (2) valuations given to comparable companies; (3) the size and scope of the subject company’s operations; (4) the subject company’s individual strengths and weaknesses; (5) expectations relating to the market’s receptivity to an offering of the subject company’s securities; (6) applicable restrictions on transfer; (7) industry and market information; (8) general economic and market conditions; and (9) other factors deemed relevant. Market approach valuation models typically employ a multiple that is based on one or more of the factors described above. Enterprise value as a multiple of EBITDA is common and relevant for most companies and industries, however, other industry specific multiples are employed where available and appropriate. Sources for gaining additional knowledge related to comparable companies include public filings, annual reports, analyst research reports, and press releases. Once a comparable company set is determined, Apollo reviews certain aspects of the subject company’s performance and determines how its performance compares to the group and to certain individuals in the group. Apollo compares certain measurements such as EBITDA margins, revenue growth over certain time periods, leverage ratios and growth opportunities. In addition, Apollo compares our entry multiple and its relation to the comparable set at the time of acquisition to understand its relation to the comparable set on each measurement date.
Income Approach
For investments where the market approach does not provide adequate fair value information, Apollo relies on the income approach. The income approach is also used to validate the market approach within our private equity funds. 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 for the income approach is a discounted cash flow method. Inherent in
- 30-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
the discounted cash flow method are significant assumptions related to the subject company’s expected results, the determination of a terminal value and a calculated discount rate, which is normally based on the subject company’s weighted average cost of capital, or “WACC.” The WACC represents the required rate of return on total capitalization, which is comprised of a required rate of return on equity, plus the current tax-effected rate of return on debt, weighted by the relative percentages of equity and debt that are typical in the industry. The most critical step in determining the appropriate WACC for each subject company is to select companies that are comparable in nature to the subject company and the credit quality of the subject company. Sources for gaining additional knowledge about the comparable companies include public filings, annual reports, analyst research reports, and press releases. The general formula then used for calculating the WACC considers the after-tax rate of return on debt capital and the rate of return on common equity capital, which further considers the risk-free rate of return, market beta, market risk premium and small stock premium, if applicable. The variables used in the WACC formula are inferred from the comparable market data obtained. The Company evaluates the comparable companies selected and concludes on WACC inputs based on the most comparable company or analyzes the range of data for the investment.
Debt securities that are not publicly traded or whose market prices are not readily available are valued at fair value utilizing a model based approach to determine fair value. Valuation approaches used to estimate the fair value of hybrid capital investments also may include the market approach and the income approach, as previously described above. The valuation approaches used consider, as applicable, market risks, credit risks, counterparty risks and foreign currency risks.
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.
Real Assets Investments
The estimated fair value of commercial mortgage-backed securities (“CMBS”) in Apollo’s real assets 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 and costs for certain investments. The loans in Apollo’s real assets funds are evaluated for possible impairment on a quarterly basis. For Apollo’s real assets 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.
Certain of the credit, private equity, and real assets funds may 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 the period, the changes in value are recorded in income as unrealized. Realized gains or losses are recognized when contracts are settled. Total return swap 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.
- 31-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
7. OTHER ASSETS
Other assets consisted of the following:
As of March 31, 2019 | As of December 31, 2018 | ||||||
Fixed assets | $ | 111,977 | $ | 109,039 | |||
Less: Accumulated depreciation and amortization | (91,207 | ) | (89,049 | ) | |||
Fixed assets, net | 20,770 | 19,990 | |||||
Deferred equity-based compensation(1) | 87,328 | 80,443 | |||||
Prepaid expenses | 55,664 | 49,648 | |||||
Intangible assets, net | 19,373 | 18,899 | |||||
Tax receivables | 10,199 | 10,464 | |||||
Other | 12,907 | 12,725 | |||||
Total Other Assets | $ | 206,241 | $ | 192,169 | |||
(1) | Deferred equity-based compensation relates to the value of equity-based awards that have been or are expected to be granted in connection with the settlement of certain profit sharing arrangements. A corresponding amount for awards expected to be granted of $64.2 million and $54.5 million, as of March 31, 2019 and December 31, 2018, respectively, is included in other liabilities on the condensed consolidated statements of financial condition. |
Depreciation expense was $2.3 million and $2.1 million for the three months ended March 31, 2019 and 2018, respectively, and is presented as a component of general, administrative and other expense in the condensed consolidated statements of operations.
8. LEASES
Apollo has operating leases for office space, data centers, and certain equipment under various lease agreements.
The table below presents operating lease expenses:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Operating lease cost | $ | 8,993 | $ | 9,185 | |||
The following table presents supplemental cash flow information related to operating leases:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Operating cash flows for operating leases | $ | 9,384 | $ | 9,269 | |||
- 32-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
As of March 31, 2019, the Company’s total lease payments by maturity are presented in the following table:
Operating Leases | |||
Remaining 2019 | $ | 26,335 | |
2020 | 19,105 | ||
2021 | 14,384 | ||
2022 | 11,690 | ||
2023 | 10,587 | ||
Thereafter | 41,326 | ||
Total lease payments | $ | 123,427 | |
Less imputed interest | (14,243 | ) | |
Present value of lease payments | $ | 109,184 | |
The Company has undiscounted future operating lease payments of $418.2 million related to leases that have not commenced that were entered into as of and subsequent to March 31, 2019. Such lease payments are not yet included in the table above or the Company’s condensed consolidated statements of financial condition as lease assets and lease liabilities. These operating leases are anticipated to commence between fiscal years 2019 and 2021 with lease terms of approximately 15 years.
Supplemental information related to leases is as follows:
As of March 31, 2019 | ||
Weighted average remaining lease term (in years) | 7.3 | |
Weighted average discount rate | 3.3 | % |
As of December 31, 2018, the approximate aggregate minimum future payments required for operating leases under U.S. GAAP applicable to that period were as follows:
2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | |||||||||||||||||||||
Aggregate minimum future payments | $ | 39,970 | $ | 25,923 | $ | 33,022 | $ | 36,243 | $ | 35,231 | $ | 400,889 | $ | 571,278 | |||||||||||||
9. INCOME TAXES
The Company’s income tax provision totaled $19.7 million and $8.6 million for the three months ended March 31, 2019 and 2018, respectively. The Company’s effective income tax rate was 5.9% and (8.5)% for the three months ended March 31, 2019 and 2018, respectively.
Under U.S. GAAP, a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Based upon the Company’s review of its federal, state, local and foreign income tax returns and tax filing positions, the Company determined that no unrecognized tax benefits for uncertain tax positions were required to be recorded. In addition, the Company does not believe that it has any tax positions for which it is reasonably possible that it will be required to record significant amounts of unrecognized tax benefits within the next twelve months.
The primary jurisdictions in which the Company operates are the United States, New York State, New York City, California and the United Kingdom. There are no unremitted earnings with respect to the United Kingdom and other foreign entities due to the flow-through nature of these entities.
In the normal course of business, the Company is subject to examination by federal and certain state, local and foreign tax authorities. With a few exceptions, as of March 31, 2019, the Company’s U.S. federal, state, local and foreign income tax returns for the years 2015 through 2017 are open under the general statute of limitations provisions and therefore subject to examination. Currently, the Internal Revenue Service is examining the tax return of a subsidiary for the 2011 tax year. The State and City of New York are examining certain subsidiaries’ tax returns for tax years 2011 to 2017.
- 33-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
The Company has recorded a deferred tax asset for the future amortization of tax basis intangibles resulting from the 2007 Reorganization. The Company recorded additional deferred tax assets as a result of the step-up in tax basis of intangibles from subsequent exchanges of AOG Units for Class A shares. A related tax receivable agreement liability is recorded in due to related parties in the condensed consolidated statements of financial condition for the expected payments under the tax receivable agreement entered into by and among APO Corp., the Managing Partners, the Contributing Partners, and other parties thereto (as amended, the “tax receivable agreement”) (see note 14). The benefit the Company obtains from the difference in the tax asset recognized and the related liability results in an increase to additional paid in capital. The amortization period for these tax basis intangibles is 15 years and the deferred tax assets will reverse over the same period.
The table below presents the impact to the deferred tax asset, tax receivable agreement liability and additional paid in capital related to the exchange of AOG Units for Class A shares.
Exchange of AOG Units for Class A shares | Increase in Deferred Tax Asset | Increase in Tax Receivable Agreement Liability | Increase to Additional Paid In Capital | |||||||||
For the Three Months Ended March 31, 2019 | $ | 546 | $ | 464 | $ | 82 | ||||||
For the Three Months Ended March 31, 2018 | $ | 47,009 | $ | 39,955 | $ | 7,054 | ||||||
10. DEBT
Debt consisted of the following:
As of March 31, 2019 | As of December 31, 2018 | ||||||||||||||||||||
Outstanding Balance | Fair Value | Annualized Weighted Average Interest Rate | Outstanding Balance | Fair Value | Annualized Weighted Average Interest Rate | ||||||||||||||||
2024 Senior Notes(1) | $ | 496,675 | $ | 502,336 | (4) | 4.00 | % | $ | 496,512 | $ | 498,736 | (4) | 4.00 | % | |||||||
2026 Senior Notes(1) | 496,319 | 504,888 | (4) | 4.40 | 496,191 | 502,107 | (4) | 4.40 | |||||||||||||
2029 Senior Notes(1) | 544,658 | 567,160 | (4) | 4.87 | — | — | — | ||||||||||||||
2048 Senior Notes(1) | 296,417 | 298,130 | (4) | 5.00 | 296,386 | 290,714 | 5.00 | ||||||||||||||
2014 AMI Term Facility I(2) | 15,297 | 15,297 | (3) | 2.00 | 15,633 | 15,633 | (3) | 2.00 | |||||||||||||
2014 AMI Term Facility II(2) | 17,276 | 17,276 | (3) | 1.75 | 17,657 | 17,657 | (3) | 1.75 | |||||||||||||
2016 AMI Term Facility I(2) | 18,925 | 18,925 | (3) | 1.30 | 19,371 | 19,371 | (3) | 1.32 | |||||||||||||
2016 AMI Term Facility II(2) | 18,295 | 18,295 | (3) | 1.40 | 18,698 | 18,698 | (3) | 1.70 | |||||||||||||
Total Debt | $ | 1,903,862 | $ | 1,942,307 | $ | 1,360,448 | $ | 1,362,916 | |||||||||||||
(1) | Includes amortization of note discount, as applicable. Outstanding balance is presented net of unamortized debt issuance costs: |
As of March 31, 2019 | As of December 31, 2018 | ||||||
2024 Senior Notes | $ | 2,808 | $ | 2,946 | |||
2026 Senior Notes | 3,365 | 3,483 | |||||
2029 Senior Notes | 5,343 | — | |||||
2048 Senior Notes | 3,270 | 3,298 | |||||
(2) | Apollo Management International LLP (“AMI”), a subsidiary of the Company, entered into several five year credit facilities (collectively referred to as the “AMI Facilities”) to fund the Company’s investment in certain European CLOs it manages. |
Facility | Date | Loan Amount | ||||
2014 AMI Term Facility I | July 3, 2014 | € | 13,636 | |||
2014 AMI Term Facility II | December 9, 2014 | € | 15,400 | |||
2016 AMI Term Facility I | January 18, 2016 | € | 16,870 | |||
2016 AMI Term Facility II | June 22, 2016 | € | 16,308 | |||
(3) | Fair value is based on obtained broker quotes. These notes are classified as a Level III liability within the fair value hierarchy based on the number and quality of broker quotes obtained, the standard deviations of the observed broker quotes and the percentage deviation from |
- 34-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
independent pricing services. For instances where broker quotes are not available, a discounted cash flow method is used to obtain a fair value.
(4) | Fair value is based on obtained broker quotes. These notes are classified as a Level II liability within the fair value hierarchy based on the number and quality of broker quotes obtained, the standard deviations of the observed broker quotes and the percentage deviation from independent pricing services. |
2013 AMH Credit Facilities—On December 18, 2013, AMH and its subsidiaries and certain other subsidiaries of the Company entered into credit facilities (the “2013 AMH Credit Facilities”) with the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent for the lenders. The 2013 AMH Credit Facilities provided for (i) a term loan facility to AMH (the “Term Facility”) that included $750 million of term loan from third-party lenders and $271.7 million of term loan held by a subsidiary of the Company and (ii) a $500 million revolving credit facility (the “Revolver Facility”), in each case, with an original maturity date of January 18, 2019. On March 11, 2016, the maturity date of both the Term Facility and the Revolver Facility was extended by two years to January 18, 2021. The extension was determined to be a modification of the 2013 AMH Credit Facilities in accordance with U.S. GAAP.
In connection with the issuance of the 2024 Senior Notes, the 2026 Senior Notes and the 2048 Senior Notes (as described below), $250 million, $200 million and $300 million of the proceeds, respectively, were used to repay the entire remaining amount of both the term loan from third-party lenders and the term loan held by a subsidiary of the Company as of March 15, 2018. The Revolver Facility was replaced as of July 11, 2018 by the 2018 AMH Credit Facility, as described below. The 2013 AMH Credit Facilities and all related loan documents were terminated as of July 11, 2018.
2018 AMH Credit Facility—On July 11, 2018, AMH as borrower (the “Borrower”) entered into a new credit agreement (the “2018 AMH Credit Facility”) with the lenders and issuing banks party thereto and Citibank, N.A., as administrative agent for the lenders. The 2018 AMH Credit Facility provides for a $750 million revolving credit facility to the Borrower with a final maturity date of July 11, 2023. The 2018 AMH Credit Facility is to remain available until its maturity, and any undrawn revolving commitments bear a commitment fee. The interest rate on the 2018 AMH Credit Facility is based on adjusted LIBOR and the applicable margin as of March 31, 2019 was 1.00%. The commitment fee on the $750 million undrawn 2018 AMH Credit Facility as of March 31, 2019 was 0.09%.
Borrowings under the 2018 AMH Credit Facility may be used for working capital and general corporate purposes, including, without limitation, permitted acquisitions. The Borrower may incur incremental facilities in respect of the 2018 AMH Credit Facility in an aggregate amount not to exceed $250 million plus additional amounts so long as the Borrower is in compliance with a net leverage ratio not to exceed 4.00 to 1.00. As of March 31, 2019, the 2018 AMH Credit Facility was undrawn.
2024 Senior Notes—On May 30, 2014, AMH issued $500 million in aggregate principal amount of its 4.000% Senior Notes due 2024 (the “2024 Senior Notes”), at an issue price of 99.722% of par. Interest on the 2024 Senior Notes is payable semi-annually in arrears on May 30 and November 30 of each year. The 2024 Senior Notes will mature on May 30, 2024. The discount is amortized into interest expense on the condensed consolidated statements of operations over the term of the 2024 Senior Notes. The face amount of $500 million related to the 2024 Senior Notes is the amount for which the Company is obligated to settle the 2024 Senior Notes.
2026 Senior Notes—On May 27, 2016, AMH issued $500 million in aggregate principal amount of its 4.400% Senior Notes due 2026 (the “2026 Senior Notes”), at an issue price of 99.912% of par. Interest on the 2026 Senior Notes is payable semi-annually in arrears on May 27 and November 27 of each year. The 2026 Senior Notes will mature on May 27, 2026. The discount is amortized into interest expense on the condensed consolidated statements of operations over the term of the 2026 Senior Notes. The face amount of $500 million related to the 2026 Senior Notes is the amount for which the Company is obligated to settle the 2026 Senior Notes.
2029 Senior Notes—On February 7, 2019, AMH issued $550 million in aggregate principal amount of its 4.872% Senior Notes due 2029 (the “2029 Senior Notes”), at an issue price of 99.999% of par. Interest on the 2029 Senior Notes is payable semi-annually in arrears on February 15 and August 15 of each year. The 2029 Senior Notes will mature on February 15, 2029. The discount is amortized into interest expense on the condensed consolidated statements of operations over the term of the 2029 Senior Notes. The face amount of $550 million related to the 2029 Senior Notes is the amount for which the Company is obligated to settle the 2029 Senior Notes.
2048 Senior Notes—On March 15, 2018, AMH issued $300 million in aggregate principal amount of its 5.000% Senior Notes due 2048 (the “2048 Senior Notes”), at an issue price of 99.892% of par. Interest on the 2048 Senior Notes is payable
- 35-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
semi-annually in arrears on March 15 and September 15 of each year. The 2048 Senior Notes will mature on March 15, 2048. The discount is amortized into interest expense on the condensed consolidated statements of operations over the term of the 2048 Senior Notes. The face amount of $300 million related to the 2048 Senior Notes is the amount for which the Company is obligated to settle the 2048 Senior Notes.
As of March 31, 2019, the indentures governing the 2024 Senior Notes, the 2026 Senior Notes, the 2029 Senior Notes and the 2048 Senior Notes (the “Indentures”) include covenants that restrict the ability of AMH and, as applicable, the guarantors of the notes under the Indentures to incur indebtedness secured by liens on voting stock or profit participating equity interests of their respective subsidiaries, or merge, consolidate or sell, transfer or lease assets. The Indentures also provide for customary events of default.
The following table presents the interest expense incurred related to the Company’s debt:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Interest Expense:(1) | |||||||
2013 AMH Credit Facilities | $ | — | $ | 1,964 | |||
2018 AMH Credit Facility | 312 | — | |||||
2024 Senior Notes | 5,163 | 5,163 | |||||
2026 Senior Notes | 5,628 | 5,628 | |||||
2029 Senior Notes | 3,915 | — | |||||
2048 Senior Notes | 3,781 | 667 | |||||
AMI Term Facilities | 309 | 375 | |||||
Total Interest Expense | $ | 19,108 | $ | 13,797 | |||
(1) | Debt issuance costs incurred in connection with the 2013 AMH Credit Facilities, the 2018 AMH Credit Facility, the 2024 Senior Notes, the 2026 Senior Notes, the 2029 Senior Notes and the 2048 Senior Notes are amortized into interest expense over the term of the debt arrangement. |
11. NET INCOME (LOSS) PER CLASS A SHARE
The table below presents basic and diluted net income per Class A share using the two-class method:
Basic and Diluted | ||||||||
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net Income (Loss) Attributable to Apollo Global Management, LLC Class A Shareholders | $ | 139,893 | $ | (62,645 | ) | |||
Distributions declared on Class A shares(1) | (113,345 | ) | (133,023 | ) | ||||
Distributions on participating securities(2) | (4,959 | ) | (5,384 | ) | ||||
Earnings allocable to participating securities | (1,114 | ) | — | (3) | ||||
Undistributed income (loss) attributable to Class A shareholders: Basic and Diluted | $ | 20,475 | $ | (201,052 | ) | |||
Denominator: | ||||||||
Weighted average number of Class A shares outstanding: Basic and Diluted | 200,832,323 | 198,432,603 | ||||||
Net Income (Loss) per Class A Share: Basic and Diluted | ||||||||
Distributed Income | $ | 0.56 | $ | 0.66 | ||||
Undistributed Income (Loss) | 0.11 | (1.00 | ) | |||||
Net Income (Loss) per Class A Share: Basic and Diluted(4) | $ | 0.67 | $ | (0.34 | ) | |||
(1) | See note 13 for information regarding the quarterly distributions declared and paid during 2019 and 2018. |
(2) | Participating securities consist of vested and unvested RSUs that have rights to distributions and unvested restricted shares. |
- 36-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
(3) | No allocation of undistributed losses was made to the participating securities as the holders do not have a contractual obligation to share in the losses of the Company with Class A shareholders. |
(4) | For the three months ended March 31, 2019 and 2018, all of the classes of securities were determined to be anti-dilutive. |
The Company has granted RSUs that provide the right to receive, subject to vesting during continued employment, Class A shares pursuant to the 2007 Equity Plan. The Company has three types of RSU grants, which we refer to as Plan Grants, Bonus Grants and Performance Grants. “Plan Grants” vest over time (generally one to six years) and may or may not provide the right to receive distribution equivalents on vested RSUs on an equal basis with the Class A shareholders any time a distribution is declared. “Bonus Grants” vest over time (generally three years) and generally provide the right to receive distribution equivalents on both vested and unvested RSUs on an equal basis with the Class A shareholders any time a distribution is declared. “Performance Grants” generally vest over time (three to five years), subject to the Company’s receipt of performance revenues, within prescribed periods, sufficient to cover the associated equity-based compensation expense. Performance Grants provide the right to receive distribution equivalents on vested RSUs and may also provide the right to receive distribution equivalents on unvested RSUs.
Any distribution equivalent paid to an employee will not be returned to the Company upon forfeiture of the award by the employee. Vested and unvested RSUs that are entitled to non-forfeitable distribution equivalents qualify as participating securities and are included in the Company’s basic and diluted earnings per share computations using the two-class method. The holder of an RSU participating security would have a contractual obligation to share in the losses of the entity if the holder is obligated to fund the losses of the issuing entity or if the contractual principal or mandatory redemption amount of the participating security is reduced as a result of losses incurred by the issuing entity. The RSU participating securities do not have a mandatory redemption amount and the holders of the participating securities are not obligated to fund losses, therefore, neither the vested RSUs nor the unvested RSUs are subject to any contractual obligation to share in losses of the Company.
Holders of AOG Units are subject to the transfer restrictions set forth in the agreements with the respective holders and may, a limited number of times each year, upon notice (subject to the terms of an exchange agreement), exchange their AOG Units for Class A shares on a one-for-one basis. An AOG Unit holder must exchange one unit in each of the Apollo Operating Group partnerships to effectuate an exchange for one Class A share.
Apollo Global Management, LLC has one Class B share outstanding, which is held by BRH Holdings GP, Ltd. (“BRH”). The voting power of the Class B share is reduced on a one vote per one AOG Unit basis in the event of an exchange of AOG Units for Class A shares, as discussed above. The Class B share has no net income (loss) per share as it does not participate in Apollo’s earnings (losses) or distributions. The Class B share has no distribution or liquidation rights. The Class B share has voting rights on a pari passu basis with the Class A shares. The Class B share represented 52.4% and 52.4% of the total voting power of the Company’s shares entitled to vote as of March 31, 2019 and 2018, respectively.
The following table summarizes the anti-dilutive securities.
For the Three Months Ended March 31, | |||||
2019 | 2018 | ||||
Weighted average vested RSUs | 1,349,163 | 1,176,450 | |||
Weighted average unvested RSUs | 8,547,527 | 7,817,506 | |||
Weighted average unexercised options | 204,167 | 204,167 | |||
Weighted average AOG Units outstanding | 202,287,439 | 204,576,722 | |||
Weighted average unvested restricted shares | 1,030,796 | 668,672 | |||
12. EQUITY-BASED COMPENSATION
Equity-based awards granted to employees and non-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. Equity-based awards that require performance metrics to be met are expensed only when the performance metric is met or deemed probable.
- 37-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
RSUs
The Company grants RSUs under the 2007 Equity Plan. The fair value of all grants is based on the grant date fair value, which considers the public share price of the Company’s Class A shares subject to certain discounts, as applicable. The following table summarizes the weighted average discounts for Plan Grants, Bonus Grants and Performance Grants.
For the Three Months Ended March 31, | |||||
2019 | 2018 | ||||
Plan Grants: | |||||
Discount for the lack of distributions until vested(1) | 19.8 | % | 10.5 | % | |
Marketability discount for transfer restrictions(2) | 4.3 | % | 3.4 | % | |
Bonus Grants: | |||||
Marketability discount for transfer restrictions(2) | 4.3 | % | 2.3 | % | |
Performance Grants: | |||||
Discount for the lack of distributions until vested(1) | 16.7 | % | N/A | ||
Marketability discount for transfer restrictions(2) | 7.0 | % | N/A | ||
(1) | Based on the present value of a growing annuity calculation. |
(2) | Based on the Finnerty Model calculation. |
The estimated total grant date fair value for Plan Grants and Bonus Grants is charged to compensation expense on a straight-line basis over the vesting period, which for Plan Grants is generally one to six years, with the first installment vesting one year after grant and quarterly vesting thereafter, and for Bonus Grants is generally annual vesting over three years.
During the three months ended March 31, 2019, the Company awarded Performance Grants of 1.2 million RSUs to certain employees with a grant date fair value of $25.0 million, which vest over time (generally 3 to 5 years) subject to the receipt of performance revenues, within prescribed periods, sufficient to cover the associated equity-based compensation expense. In accordance with U.S. GAAP, equity-based compensation expense for these and other Performance Grants will be recognized on an accelerated recognition method over the requisite service period to the extent the performance revenue metrics are met or deemed probable. Accordingly, for the three months ended March 31, 2019 and March 31, 2018, equity-based compensation expense of $14.6 million and $12.4 million, respectively, was recognized relating to Performance Grants.
Additionally, the Company entered into an agreement in 2018 with several employees under which it expects to grant them RSUs beginning in 2020 if year-over-year growth in certain discretionary earnings metrics is attained prior to grant and they remain employed at the grant date. Once granted, these RSUs will vest based on both continued service and the Company’s receipt of performance revenues, within prescribed periods, sufficient to cover the associated equity-based compensation expense. In accordance with U.S. GAAP, equity-based compensation expense for such awards, if and when granted, will be recognized on an accelerated recognition method over the requisite service period to the extent the performance revenue metrics are met or deemed probable. No equity-based compensation expense was recognized related to these RSUs for the three months ended March 31, 2019.
The fair value of all RSU grants made during the three months ended March 31, 2019 and 2018 was $85.0 million and $160.8 million, respectively.
The following table presents the actual forfeiture rates and equity-based compensation expense recognized:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Actual forfeiture rate | 0.6 | % | 5.9 | % | |||
Equity-based compensation | $ | 33,753 | $ | 30,747 | |||
- 38-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
The following table summarizes RSU activity:
Unvested | Weighted Average Grant Date Fair Value | Vested | Total Number of RSUs Outstanding | ||||||||||
Balance at January 1, 2019 | 9,839,968 | $ | 26.52 | 2,380,783 | 12,220,751 | (1) | |||||||
Granted | 3,540,951 | 24.00 | — | 3,540,951 | |||||||||
Forfeited | (62,201 | ) | 20.11 | (18,524 | ) | (80,725 | ) | ||||||
Vested | (1,416,248 | ) | 29.38 | 1,416,248 | — | ||||||||
Issued | — | 23.73 | (3,449,719 | ) | (3,449,719 | ) | |||||||
Balance at March 31, 2019 | 11,902,470 | (2) | $ | 25.46 | 328,788 | 12,231,258 | (1) | ||||||
(1) | Amount excludes RSUs which have vested and have been issued in the form of Class A shares. |
(2) | RSUs were expected to vest over the weighted average period of 3.4 years. |
Restricted Share Awards—Athene Holding
The Company has granted Athene Holding restricted share awards to certain employees of the Company. Separately, Athene Holding has also granted restricted share awards to certain employees of the Company. Both awards are collectively referred to as the “AHL Awards.” Certain of the AHL Awards function similarly to options as they are exchangeable for Class A shares of Athene Holding upon payment of a conversion price and the satisfaction of certain other conditions. The awards granted are either subject to time-based vesting conditions that generally vest over three to five years or vest upon achieving certain metrics, such as attainment of certain rates of return and realized cash received by certain investors in Athene Holding upon sale of their shares.
The Company records the AHL Awards in other assets and other liabilities in the condensed consolidated statements of financial condition. The fair value of the asset is amortized through equity-based compensation over the vesting period. The fair value of the liability is remeasured each period, with any changes in fair value recorded in compensation expense in the condensed consolidated statements of operations. For AHL Awards granted by Athene Holding, compensation expense related to amortization of the asset is offset, with certain exceptions, by related management fees earned by the Company from Athene.
The grant date fair value of the AHL Awards is based on the share price of Athene Holding, less discounts for transfer restrictions, and has been categorized as Level II within the fair value hierarchy as a result. The AHL Awards that function similarly to options were valued using a multiple-scenario model, which considers the price volatility of the underlying share price of Athene Holding, time to expiration and the risk-free rate, while the other awards were valued using the share price of Athene Holding less any discounts for transfer restrictions.
The following table summarizes the management fees, equity-based compensation expense and actual forfeiture rates for the AHL Awards:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Management fees | $ | 189 | $ | (878 | ) | ||
Equity-based compensation | 755 | (920 | ) | ||||
Actual forfeiture rate | — | % | — | % | |||
Equity-Based Compensation Allocation
Equity-based compensation is allocated based on ownership interests. Therefore, the amortization of equity-based compensation is allocated to shareholders’ equity attributable to AGM and the Non-Controlling Interests, which results in a difference in the amounts charged to equity-based compensation expense and the amounts credited to shareholders’ equity attributable to AGM in the Company’s condensed consolidated financial statements.
- 39-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Below is a reconciliation of the equity-based compensation allocated to Apollo Global Management, LLC:
For the Three Months Ended March 31, 2019 | ||||||||||||||
Total Amount | Non-Controlling Interest % in Apollo Operating Group | Allocated to Non-Controlling Interest in Apollo Operating Group(1) | Allocated to Apollo Global Management, LLC | |||||||||||
RSUs, share options and restricted share awards | $ | 37,943 | — | % | $ | — | $ | 37,943 | ||||||
AHL Awards | 755 | 50.1 | 378 | 377 | ||||||||||
Other equity-based compensation awards | 6,379 | 50.1 | 3,196 | 3,183 | ||||||||||
Total equity-based compensation | $ | 45,077 | 3,574 | 41,503 | ||||||||||
Less other equity-based compensation awards(2) | (3,574 | ) | (7,479 | ) | ||||||||||
Capital increase related to equity-based compensation | $ | — | $ | 34,024 | ||||||||||
For the Three Months Ended March 31, 2018 | ||||||||||||||
Total Amount | Non-Controlling Interest % in Apollo Operating Group | Allocated to Non-Controlling Interest in Apollo Operating Group(1) | Allocated to Apollo Global Management, LLC | |||||||||||
RSUs, share options and restricted share awards | $ | 32,759 | — | % | $ | — | $ | 32,759 | ||||||
AHL Awards | (920 | ) | 50.1 | (461 | ) | (459 | ) | |||||||
Other equity-based compensation awards | 3,686 | 50.1 | 1,848 | 1,838 | ||||||||||
Total equity-based compensation | $ | 35,525 | 1,387 | 34,138 | ||||||||||
Less other equity-based compensation awards(2) | (1,387 | ) | (5,826 | ) | ||||||||||
Capital increase related to equity-based compensation | $ | — | $ | 28,312 | ||||||||||
(1) | Calculated based on average ownership percentage for the period considering Class A share issuances during the period. |
(2) | Includes equity-based compensation reimbursable by certain funds. |
13. EQUITY
Class A Shares
Class A shares represent limited liability company interests in the Company. Holders of Class A shares are entitled to participate in distributions from the Company on a pro rata basis. Class A shareholders do not elect the Company’s manager or the manager’s executive committee and have limited voting rights.
During the three months ended March 31, 2019 and 2018, the Company issued Class A shares in settlement of vested RSUs. The Company has generally allowed holders of vested RSUs and exercised share options to settle their tax liabilities by reducing the number of Class A shares issued to them, which the Company refers to as “net share settlement.” Additionally, the Company has generally allowed holders of share options to settle their exercise price by reducing the number of Class A shares issued to them at the time of exercise by an amount sufficient to cover the exercise price. The net share settlement results in a liability for the Company and a corresponding accumulated deficit adjustment.
In February 2016, Apollo announced its adoption of a program to repurchase up to $250 million in the aggregate of its Class A shares, including up to $150 million in the aggregate of its outstanding Class A shares through a share repurchase program and up to $100 million through net share settlement of equity-based awards granted under the 2007 Equity Plan. In January 2019, Apollo increased its authorized share repurchase amount by $250 million bringing the total authorized repurchase amount to $500 million, which may be used to repurchase outstanding Class A shares as well as to reduce Class A shares to be issued to employees to satisfy associated tax obligations in connection withe the settlement of equity-based awards granted under the the 2007 Equity Plan (or any successor equity plan thereto). Class A shares may be repurchased from time to time in open market transactions, in privately negotiated transactions, pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Exchange Act, or otherwise, with the size and timing of these repurchases depending on legal requirements, price, market and economic conditions and other factors. Apollo is not obligated under the terms of the program to repurchase any of its Class A shares. The
- 40-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
repurchase program has no expiration date and may be suspended or terminated by the Company at any time without prior notice. Class A shares repurchased as part of this program will be canceled by the Company.
The table below summarizes the issuance of Class A shares for equity-based awards:
For the Three Months Ended March 31, | |||||
2019 | 2018 | ||||
Class A shares issued in settlement of vested RSUs and share options exercised(1) | 3,449,719 | 2,911,640 | |||
Reduction of Class A shares issued(2) | (1,291,150 | ) | (940,168 | ) | |
Class A shares purchased related to share issuances and forfeitures(3) | (65,183 | ) | (91,777 | ) | |
Issuance of Class A shares for equity-based awards | 2,093,386 | 1,879,695 | |||
(1) | The gross value of shares issued was $104.7 million and $97.8 million for the three months ended March 31, 2019 and 2018, respectively, based on the closing price of a Class A share at the time of issuance. |
(2) | Cash paid for tax liabilities associated with net share settlement was $39.2 million and $31.5 million for the three months ended March 31, 2019 and 2018, respectively. |
(3) | Certain Apollo employees receive a portion of the profit sharing proceeds of certain funds in the form of (a) restricted Class A shares of AGM that they are required to purchase with such proceeds or (b) RSUs, in each case which equity-based awards generally vest over three years. These equity-based awards are granted under the Company's 2007 Equity Plan. To prevent dilution on account of these awards, Apollo may, in its discretion, repurchase Class A shares on the open market and retire them. During the three months ended March 31, 2019 and 2018, we issued 31,235 and 341,214 of such restricted shares and 63,835 and zero of such RSUs under the 2007 Equity Plan, respectively, and repurchased 95,070 and 422,690 Class A shares in open-market transactions not pursuant to a publicly-announced repurchase plan or program, respectively. In addition, there were 1,348 and 10,301 restricted shares forfeited during the three months ended March 31, 2019 and 2018, respectively. |
Additionally, during the three months ended March 31, 2019 and 2018, 2,354,001 and 777,310 Class A shares were repurchased in open market transactions as part of the publicly announced share repurchase program adopted in February 2016, respectively, and such shares were subsequently canceled by the Company. The Company paid $69.4 million and $26.4 million for these open market share repurchases during the three months ended March 31, 2019 and 2018, respectively.
Preferred Share Issuance
On March 7, 2017, Apollo issued 11,000,000 6.375% Series A Preferred shares (the “Series A Preferred shares”) for gross proceeds of $275.0 million, or $264.4 million net of issuance costs and on March 19, 2018, Apollo issued 12,000,000 6.375% Series B Preferred shares (the “Series B Preferred shares” and collectively with the Series A Preferred shares, the “Preferred shares”) for gross proceeds of $300.0 million, or $289.8 million net of issuance costs. When, as and if declared by the manager of Apollo, distributions on the Preferred shares will be payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on June 15, 2018 for the Series B Preferred shares, at a rate per annum equal to 6.375%. Distributions on the Preferred shares are discretionary and non-cumulative.
Subject to certain exceptions, unless distributions have been declared and paid or declared and set apart for payment on the Preferred shares for a quarterly distribution period, during the remainder of that distribution period Apollo may not declare or pay or set apart payment for distributions on any Class A shares or any other equity securities that the Company may issue in the future ranking as to the payment of distributions, junior to the Preferred shares (“Junior Shares”) and Apollo may not repurchase any Junior Shares. These restrictions were not applicable during the initial distribution period, which was the period from March 19, 2018 to but excluding June 15, 2018 for the Series B Preferred shares.
The Series A Preferred shares and the Series B Preferred shares may be redeemed at Apollo’s option, in whole or in part, at any time on or after March 15, 2022 and March 15, 2023, respectively, at a price of $25.00 per Preferred share, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of the Preferred shares will have no right to require the redemption of the Preferred shares and there is no maturity date.
If a certain change of control event or a certain tax redemption event occurs prior to March 15, 2022 and March 15, 2023 for the Series A Preferred shares and the Series B Preferred shares, respectively, the Preferred shares may be redeemed at Apollo’s option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such change of control event or such tax redemption event, as applicable, at a price of $25.25 per Preferred share, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. If a certain rating agency event occurs
- 41-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
prior to March 15, 2023, the Series B Preferred shares may be redeemed at Apollo’s option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such rating agency event, at a price of $25.50 per Series B Preferred share, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. If (i) a change of control event occurs (whether before, on or after March 15, 2022 and March 15, 2023 for the Series A Preferred shares and the Series B Preferred shares, respectively) and (ii) Apollo does not give notice prior to the 31st day following the change of control event to redeem all the outstanding Preferred shares, the distribution rate per annum on the Preferred shares will increase by 5.00%, beginning on the 31st day following such change of control event.
The Preferred shares are not convertible into Class A shares and have no voting rights, except in limited circumstances as provided in the Company’s limited liability company agreement. In connection with the issuance of the Preferred shares, certain Apollo Operating Group entities issued for the benefit of Apollo a series of preferred units with economic terms that mirror those of the Preferred shares.
The table below summarizes the distributions on the Preferred shares:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Series A Preferred Shares total distribution | $ | 4,383 | $ | 4,383 | |||
Series B Preferred Shares total distribution | 4,781 | — | |||||
Distributions
The table below presents information regarding the quarterly distributions which were made at the sole discretion of the manager of the Company (in millions, except per share data). Certain subsidiaries of AGM may be subject to U.S. federal, state, local and non-U.S. income taxes at the entity level and may pay taxes and/or make payments under the tax receivable agreement in a given fiscal year; therefore, the net amounts ultimately distributed by AGM to its Class A shareholders in respect of each fiscal year are generally expected to be less than the net amounts distributed to AOG Unitholders.
Distribution Declaration Date | Distribution per Class A Share | Distribution Payment Date | Distribution to Class A Shareholders | Distribution to Non-Controlling Interest Holders in the Apollo Operating Group | Total Distributions from Apollo Operating Group | Distribution Equivalents on Participating Securities | ||||||||||||||||
February 1, 2018 | $ | 0.66 | February 28, 2018 | $ | 133.0 | $ | 133.7 | $ | 266.7 | $ | 5.4 | |||||||||||
April 12, 2018 | — | April 12, 2018 | — | 50.5 | (1) | 50.5 | — | |||||||||||||||
May 03, 2018 | 0.38 | May 31, 2018 | 76.6 | 77.0 | 153.6 | 4.1 | ||||||||||||||||
August 2, 2018 | 0.43 | August 31, 2018 | 86.5 | 87.1 | 173.6 | 4.2 | ||||||||||||||||
November 1, 2018 | 0.46 | November 30, 2018 | 92.6 | 93.0 | 185.6 | 4.4 | ||||||||||||||||
For the year ended December 31, 2018 | $ | 1.93 | $ | 388.7 | $ | 441.3 | $ | 830.0 | $ | 18.1 | ||||||||||||
January 31, 2019 | $ | 0.56 | February 28, 2018 | $ | 113.3 | $ | 113.3 | $ | 226.6 | $ | 5.0 | |||||||||||
For the three months ended March 31, 2019 | $ | 0.56 | $ | 113.3 | $ | 113.3 | $ | 226.6 | $ | 5.0 | ||||||||||||
(1) | On April 12, 2018, the Company made a $0.25 per AOG Unit pro rata distribution to the Non-Controlling Interest holders in the Apollo Operating Group, in connection with taxes and payments made under the tax receivable agreement. See note 14 for more information regarding the tax receivable agreement. |
- 42-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Non-Controlling Interests
The table below presents equity interests in Apollo’s consolidated, but not wholly-owned, subsidiaries and funds. Net income and comprehensive income attributable to Non-Controlling Interests consisted of the following:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net income attributable to Non-Controlling Interests in consolidated entities: | |||||||
Interest in management companies and a co-investment vehicle(1) | $ | 1,161 | $ | 1,395 | |||
Other consolidated entities | 7,501 | 4,584 | |||||
Net income attributable to Non-Controlling Interests in consolidated entities | $ | 8,662 | $ | 5,979 | |||
Net income attributable to Non-Controlling Interests in the Apollo Operating Group: | |||||||
Net income (loss) | $ | 315,567 | $ | (109,348 | ) | ||
Net income attributable to Non-Controlling Interests in consolidated entities | (8,662 | ) | (5,979 | ) | |||
Net income (loss) after Non-Controlling Interests in consolidated entities | 306,905 | (115,327 | ) | ||||
Adjustments: | |||||||
Income tax provision(2) | 19,654 | 8,580 | |||||
NYC UBT and foreign tax benefit(3) | (2,048 | ) | (1,556 | ) | |||
Net loss in non-Apollo Operating Group entities | 15 | 86 | |||||
Net income attributable to Series A Preferred Shareholders | (4,383 | ) | (4,383 | ) | |||
Net income attributable to Series B Preferred Shareholders | (4,781 | ) | — | ||||
Total adjustments | 8,457 | 2,727 | |||||
Net income (loss) after adjustments | 315,362 | (112,600 | ) | ||||
Weighted average ownership percentage of Apollo Operating Group | 50.1 | % | 50.7 | % | |||
Net income (loss) attributable to Non-Controlling Interests in Apollo Operating Group | $ | 157,848 | $ | (57,065 | ) | ||
Net income (loss) attributable to Non-Controlling Interests | $ | 166,510 | $ | (51,086 | ) | ||
Other comprehensive income (loss) attributable to Non-Controlling Interests | (6,406 | ) | 4,012 | ||||
Comprehensive Income (Loss) Attributable to Non-Controlling Interests | $ | 160,104 | $ | (47,074 | ) | ||
(1) | Reflects the remaining interest held by certain individuals who receive an allocation of income from certain of the credit funds managed by Apollo. |
(2) | Reflects all taxes recorded in our condensed consolidated statements of operations. Of this amount, U.S. federal, state, and local corporate income taxes attributable to APO Corp. are added back to income of the Apollo Operating Group before calculating Non-Controlling Interests as the income allocable to the Apollo Operating Group is not subject to such taxes. |
(3) | Reflects New York City Unincorporated Business Tax (“NYC UBT”) and foreign taxes that are attributable to the Apollo Operating Group and its subsidiaries related to its operations in the U.S. as partnerships and in non-U.S. jurisdictions as corporations. As such, these amounts are considered in the income attributable to the Apollo Operating Group. |
14. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED ENTITIES
Management fees, transaction and advisory fees and reimbursable expenses from the funds the Company manages and their portfolio companies are included in due from related parties in the condensed consolidated statements of financial condition. The Company also typically facilitates the payment of certain operating costs incurred by the funds that it manages as well as their related parties. These costs are normally reimbursed by such funds and are included in due from related parties. Other related party transactions include loans to employees and periodic sales of ownership interests in Apollo funds to employees. Due from related parties and due to related parties are comprised of the following:
- 43-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
As of March 31, 2019 | As of December 31, 2018 | ||||||
Due from Related Parties: | |||||||
Due from credit funds | $ | 173,352 | $ | 153,687 | |||
Due from private equity funds | 27,348 | 19,993 | |||||
Due from real assets funds | 36,669 | 42,471 | |||||
Due from portfolio companies | 62,762 | 67,740 | |||||
Due from Contributing Partners, employees and former employees | 80,821 | 94,217 | |||||
Total Due from Related Parties | $ | 380,952 | $ | 378,108 | |||
Due to Related Parties: | |||||||
Due to Managing Partners and Contributing Partners | $ | 286,061 | $ | 285,598 | |||
Due to credit funds | 1,938 | 3,444 | |||||
Due to private equity funds | 103,349 | 136,078 | |||||
Due to real assets funds | 363 | 315 | |||||
Total Due to Related Parties | $ | 391,711 | $ | 425,435 | |||
Tax Receivable Agreement and Other
Subject to certain restrictions, each of the Managing Partners and Contributing Partners has the right to exchange his vested AOG Units for the Company’s Class A shares. Certain Apollo Operating Group entities have made an election under Section 754 of the U.S. Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), which will result in an adjustment to the tax basis of the assets owned by the Apollo Operating Group at the time of the exchange. These exchanges will result in increases in tax deductions that will reduce the amount of tax that APO Corp. will otherwise be required to pay in the future.
The tax receivable agreement provides for the payment to the Managing Partners and Contributing Partners of 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income taxes that APO Corp. would realize as a result of the increases in tax basis of assets that resulted from the 2007 Reorganization and exchanges of AOG Units for Class A shares. APO Corp. retains the benefit from the remaining 15% of actual cash tax savings. If the Company does not make the required annual payment on a timely basis as outlined in the tax receivable agreement, interest is accrued on the balance until the payment date.
As a result of the exchanges of AOG Units for Class A shares during the three months ended March 31, 2019 and 2018, a $0.5 million and $40.0 million liability was recorded, respectively, to estimate the amount of the future expected payments to be made by APO Corp. to the Managing Partners and Contributing Partners pursuant to the tax receivable agreement.
Due from Contributing Partners, Employees and Former Employees
As of March 31, 2019 and December 31, 2018, due from Contributing Partners, Employees and Former Employees includes various amounts due to the Company including employee loans and return of profit sharing distributions. As of March 31, 2019 and December 31, 2018, the balance included interest-bearing employee loans receivable of $16.8 million. The outstanding principal amount of the loans as well as all accrued and unpaid interest is required to be repaid at the earlier of the eighth anniversary of the date of the relevant loan or at the date of the relevant employee’s resignation from the Company.
The Company recorded a receivable from the Contributing Partners and certain employees and former employees for the potential return of profit sharing distributions that would be due if certain funds were liquidated as of March 31, 2019 and December 31, 2018 of $51.3 million and $66.3 million, respectively.
Indemnity
Performance revenues from certain funds can be distributed to the Company on a current basis, but is subject to repayment by the subsidiaries of the Apollo Operating Group that act as general partners of the funds in the event that certain specified return thresholds are not ultimately achieved. The Managing Partners, Contributing Partners and certain other investment professionals have personally guaranteed, subject to certain limitations, the obligations of these subsidiaries in respect of this
- 44-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
general partner obligation. Such guarantees are several and not joint and are limited to a particular Managing Partner’s or Contributing Partner’s distributions. Pursuant to an existing shareholders agreement, the Company has agreed to indemnify each of the Company’s Managing Partners and certain Contributing Partners against all amounts that they pay pursuant to any of these personal guarantees in favor of certain funds that the Company manages (including costs and expenses related to investigating the basis for or objecting to any claims made in respect of the guarantees) for all interests that the Company’s Managing Partners and Contributing Partners have contributed or sold to the Apollo Operating Group.
Accordingly, in the event that the Company’s Managing Partners, Contributing Partners and certain investment professionals are required to pay amounts in connection with a general partner obligation for the return of previously made distributions with respect to Fund IV, Fund V and Fund VI, the Company will be obligated to reimburse the Company’s Managing Partners and certain Contributing Partners for the indemnifiable percentage of amounts that they are required to pay even though the Company did not receive the certain distribution to which that general partner obligation related. The Company recorded an indemnification liability of $12.5 million and $12.2 million as of March 31, 2019 and December 31, 2018, respectively.
Due to Credit and Private Equity Funds
Based upon an assumed liquidation of certain of the credit and private equity funds the Company manages, the Company has recorded a general partner obligation to return previously distributed performance allocations, which represents amounts due to these funds. The general partner obligation is recognized based upon an assumed liquidation of a fund’s net assets as of the reporting date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund or as otherwise set forth in the respective limited partnership agreement or other governing document of the fund.
There was a general partner obligation to return previously distributed performance allocations related to certain credit funds of $0.3 million and $1.4 million accrued as of March 31, 2019 and December 31, 2018, respectively. There was a general partner obligation to return previously distributed performance allocations related to certain private equity funds of $102.6 million and $135.7 million accrued as of March 31, 2019 and December 31, 2018, respectively.
Athene
Athene Holding was founded in 2009 to capitalize on favorable market conditions in the dislocated life insurance sector. Athene Holding, through its subsidiaries, is a leading retirement services company that issues, reinsures and acquires retirement savings products designed for the increasing number of individuals and institutions seeking to fund retirement needs. The products and services offered by Athene include fixed and fixed indexed annuity products, reinsurance services offered to third-party annuity providers; and institutional products, such as funding agreements. Athene Holding became an effective registrant under the Exchange Act on December 9, 2016. Athene Holding is currently listed on the New York Stock Exchange under the symbol “ATH”.
The Company provides asset management and advisory services to Athene, including asset allocation services, direct asset management services, asset and liability matching management, mergers and acquisitions, asset diligence hedging and other asset management services. On September 20, 2018, Athene and Apollo agreed to revise the existing fee arrangements between Athene and Apollo (the “proposed amended fee agreement”). The proposed amended fee agreement remains subject to approval by Athene’s shareholders in 2019 of a bye-law amendment providing that Athene will not elect to terminate the investment management arrangement between Athene and Apollo, except for cause, for a period of four years from the date of the bye-law amendment and thereafter only on each successive two-year anniversary of the expiration of the initial four-year period. Following the approval by Athene’s shareholders, the proposed amended fee agreement would have retroactive effect to the month beginning January 1, 2019. The Company began recording fees under the proposed amended fee agreement on January 1, 2019. The proposed amended fee agreement amends the existing agreement and provides for sub-allocation fees which vary based on portfolio allocation differentiation, as described below.
The proposed amended fee agreement provides for a monthly fee to be payable by Athene to the Company in arrears, with retroactive effect to the month beginning on January 1, 2019, in an amount equal to the following, to the extent not otherwise payable to the Company pursuant to any one or more investment management or sub-advisory agreements or arrangements:
(i) | The Company, through its consolidated subsidiary Athene Asset Management, or AAM, earns a base management fee of 0.225% per year on the aggregate market value of substantially all of the assets in substantially all of the investment accounts of or relating to Athene (collectively, the “Athene Accounts”) up to $108.790 billion (the level of assets in the |
- 45-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Athene Accounts as of January 1, 2019, the “Backbook Value”) and 0.150% per year on all assets in excess of $108.790 billion (the “Incremental Value”), respectively; plus
(ii) | with respect to each asset in an Account, subject to certain exceptions, that is managed by the Company and that belongs to a specified asset class tier (“core,” “core plus,” “yield,” and “high alpha”), a sub-allocation fee as follows, which will, in the case of assets acquired after January 1, 2019, be subject to a cap of 10% of the applicable asset’s gross book yield: |
As of March 31, 2019 | ||
Sub-Allocation Fees: | ||
Core Assets(1) | 0.065 | % |
Core Plus Assets(2) | 0.130 | % |
Yield Assets(3) | 0.375 | % |
High Alpha Assets(4) | 0.700 | % |
Cash, Treasuries, Equities and Alternatives(5) | — | % |
(1) | Core assets include public investment grade corporate bonds, municipal securities, and agency residential mortgage backed securities (“RMBS”). |
(2) | Core plus assets include private investment grade corporate bonds, first lien commercial mortgage loans (“CML”), and long-term fixed rate mortgages. |
(3) | Yield assets include non-agency RMBS, investment grade collateralized loan obligations (“CLO”), commercial mortgage backed securities and other asset-backed securities (other than RMBS), emerging market investments, below investment grade corporate bonds, residential mortgage loans, triple net leases, bank loans, investment grade infrastructure debt, and lower yielding floating rate mortgages. |
(4) | High alpha assets include mezzanine CMLs, below investment grade CLOs, preferred equity, assets originated by MidCap, higher yielding mortgages and below investment grade infrastructure debt. |
(5) | With respect to Equities and Alternatives, Apollo earns performance revenues of 0% to 20%. |
Athora
The Company, through its consolidated subsidiary, AAME, provides investment advisory services to certain portfolio companies of Apollo funds and Athora, a strategic platform established to acquire or reinsure blocks of insurance business in the German and broader European life insurance market (collectively, the “Athora Accounts”).
Athora Sub-Advised
The Company, through AAME, provides sub-advisory services with respect to a portion of the assets in certain portfolio companies of Apollo funds and the Athora Accounts. The Company broadly refers to “Athora Sub-Advised” assets as those assets in the Athora Accounts which the Company explicitly sub-advises as well as those assets in the Athora Accounts which are invested directly in funds and investment vehicles Apollo manages. With limited exceptions, the sub-advisory fee earned by the Company on the Athora Sub-Advised assets is 0.35%.
AAA Investments
Apollo, as general partner of AAA Investments, is generally entitled to performance allocations equal to 20% of the realized returns (net of related expenses, including borrowing costs) on AAA Investments’ investment in Athene Holding, except that Apollo is not entitled to receive any performance allocations with respect to the shares of Athene Holding that were acquired (and not in satisfaction of prior commitments to buy such shares) by AAA Investments in the contribution of certain assets by AAA to Athene in October 2012.
The following table presents the performance allocations earned from AAA Investments:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Performance Allocations from AAA Investments, net(1) | $ | 39 | $ | (4,841 | ) | ||
(1) | Net of related profit sharing expense. |
- 46-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
The following table presents the revenues earned in aggregate from Athene, Athora and AAA Investments:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Revenues earned in aggregate from Athene, Athora and AAA Investments, net(1)(2) | $ | 160,348 | $ | 38,143 | |||
(1) | Consisting of management fees, sub-advisory fees, performance revenues from Athene, Athora and AAA Investments, as applicable (net of related profit sharing expense) and changes in the market value of the Athene Holding shares owned directly by Apollo. These amounts exclude the deferred revenue recognized as management fees associated with the vesting of AHL Awards granted to employees of Apollo as further described in note 12. |
(2) | Gains (losses) on the market value of the shares of Athene Holding owned directly by Apollo were $18.6 million and $(67.5) million for the three months ended March 31, 2019 and 2018, respectively. |
The following table presents performance allocations and profit sharing payable from AAA Investments:
As of March 31, 2019 | As of December 31, 2018 | ||||||
Performance allocations | $ | 1,664 | $ | 1,611 | |||
Profit sharing payable | 457 | 442 | |||||
As of March 31, 2019 and December 31, 2018, the Company held a 10.2% economic ownership interest in Athene Holding.
AAA Investments Credit Agreement
On April 30, 2015, Apollo entered into a revolving credit agreement with AAA Investments (the “AAA Investments Credit Agreement”). Under the terms of the AAA Investments Credit Agreement, the Company shall make available to AAA Investments one or more advances at the discretion of AAA Investments in the aggregate amount not to exceed a balance of $10.0 million at an applicable rate of LIBOR plus 1.5%. The Company receives an annual commitment fee of 0.125% on the unused portion of the loan. As of March 31, 2019 and December 31, 2018, $7.2 million and $6.7 million, respectively, had been advanced by the Company and remained outstanding on the AAA Investments Credit Agreement. AAA Investments was obligated to pay the aggregate borrowings plus accrued interest at the earlier of (a) the third anniversary of the closing date, or (b) the date that was fifteen months following the initial public offering of shares of Athene Holding Ltd. (the “Maturity Date”). On January 30, 2019, the Company and AAA agreed to extend the maturity date of the AAA Investments Credit Agreement to April 30, 2020.
AINV Amended and Restated Investment Advisory Management Agreement
On May 17, 2018, the board of directors of AINV approved an amended and restated investment advisory management agreement with Apollo Investment Management, L.P., the Company’s consolidated subsidiary, which reduced the base management fee and revised the incentive fee on income to include a total return requirement. Effective April 1, 2018, the base management fee was reduced from 2.0% to 1.5% of the average value of AINV’s gross assets (excluding cash or cash equivalents but including other assets purchased with borrowed amounts) at the end of each of the two most recently completed calendar quarters; provided, however, the base management fee would be 1.0% of the average value of AINV’s gross assets (excluding cash or cash equivalents but including other assets purchased with borrowed amounts) that exceeds the product of (i) 200% and (ii) the value of AINV’s net asset value at the end of the most recently completed calendar quarter. In addition, beginning January 1, 2019, the incentive fee on income calculation included a total return requirement with a rolling twelve quarter look-back starting from April 1, 2018. The incentive fee rate remained 20% and the performance threshold remained 1.75% per quarter (7% annualized).
Regulated Entities
Apollo Global Securities, LLC (“AGS”) is a registered broker dealer with the SEC and is a member of the Financial Industry Regulatory Authority, subject to the minimum net capital requirements of the SEC. AGS was in compliance with these requirements at March 31, 2019. From time to time, this entity is involved in transactions with related parties of Apollo, including portfolio companies of the funds Apollo manages, whereby AGS earns underwriting and transaction fees for its services.
- 47-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
15. COMMITMENTS AND CONTINGENCIES
Investment Commitments—As a limited partner, general partner and manager of the Apollo funds, Apollo had unfunded capital commitments as of March 31, 2019 and December 31, 2018 of $1.1 billion and $1.2 billion, respectively, of which $434 million and $469 million related to Fund IX as of March 31, 2019 and December 31, 2018, respectively.
Debt Covenants—Apollo’s debt obligations contain various customary loan covenants. As of March 31, 2019, the Company was not aware of any instances of non-compliance with the financial covenants contained in the documents governing the Company’s debt obligations.
Litigation and Contingencies—Apollo is, from time to time, party to various legal actions arising in the ordinary course of business including claims and lawsuits, reviews, investigations or proceedings by governmental and self-regulatory agencies regarding its business.
On March 4, 2016, the Public Employees Retirement System of Mississippi filed a putative securities class action against Sprouts Farmers Market, Inc. (“SFM”), several SFM directors (including Andrew Jhawar, an Apollo partner), AP Sprouts Holdings, LLC and AP Sprouts Holdings (Overseas), L.P. (the “AP Entities”), which are controlled by entities managed by Apollo affiliates, and two underwriters of a March 2015 secondary offering of SFM common stock. The AP Entities sold SFM common stock in the March 2015 secondary offering. The complaint, filed in Arizona Superior Court and captioned Public Employees Retirement System of Mississippi v. Sprouts Farmers Market, Inc. (CV2016-050480), alleges that SFM filed a materially misleading registration statement for the secondary offering that incorporated alleged misrepresentations in SFM’s 2014 annual report regarding SFM’s business prospects, and failed to disclose alleged accelerating produce deflation. Plaintiff alleged causes of action against the AP Entities for violations of Sections 11 and 15 of the Securities Act of 1933, seeking compensatory damages for alleged losses sustained from a decline in SFM’s stock price. Defendants moved to dismiss the action, and the court dismissed the Section 11 claim against the AP Entities but not the Section 15 claim. On December 27, 2018, the parties executed a settlement agreement, and on December 28, 2018, the parties filed a motion for preliminary approval of the settlement. On January 31, 2019, the Court preliminarily approved the settlement and set a hearing on final approval of the settlement for May 31, 2019. Although the case appears to be in its final stages, no reasonable estimate of possible loss, if any, can be made at this time.
On June 20, 2016 Banca Carige S.p.A. (“Carige”) commenced a lawsuit in the Court of Genoa (Italy) (No. 8965/2016), against its former Chairman, its former Chief Executive Officer, AGM and certain entities (the “Apollo Entities”) organized and owned by investment funds managed by affiliates of AGM. The complaint alleged that AGM and the Apollo Entities (i) aided and abetted breaches of fiduciary duty to Carige allegedly committed by Carige’s former Chairman and former CEO in connection with the sale to the Apollo Entities of Carige subsidiaries engaged in the insurance business; and (ii) took wrongful actions aimed at weakening Banca Carige’s financial condition supposedly to facilitate an eventual acquisition of Carige. The causes of action were based in tort under Italian law. Carige purportedly seeks damages of €450 million in connection with the sale of the insurance businesses and €800 million for other losses. With judgment no. 3118/2018 published on December 6, 2018, the Court of Genoa fully rejected all the claims raised by Carige against AGM and the Apollo Entities, also awarding attorneys' fees in their favor for an amount of €428,996.10. Carige filed an appeal on January 3, 2019. A hearing before the Court of Appeals of Genoa is scheduled for May 8, 2019. Although the case appears to be in its final stages, no reasonable estimate of possible loss, if any, can be made at this time.
On December 12, 2016, the CORE Litigation Trust (the “Trust”), which was created under the Chapter 11 reorganization plan for CORE Media and other affiliated entities, including CORE Entertainment, Inc. (“CORE”), commenced an action in California Superior Court for Los Angeles County, captioned Core Litigation Trust v. Apollo Global Management, LLC, et al., Case No. BC 643732, that was stayed on October 3, 2017, in favor of litigating in New York state court. On November 9, 2017, the Trust commenced an action in the Supreme Court of the State of New York, captioned Core Litigation Trust v. Apollo Global Management, LLC, et al., Index No. 656856/2017. The complaint names as defendants: (i) AGM and certain AGM affiliates including the Apollo-managed funds that were CORE’s beneficial owners (the “CORE Funds”), (ii) Twenty-First Century Fox, Inc. (“Fox”) and certain Fox affiliates, (iii) Endemol USA Holding, Inc. (“Endemol”) and certain Endemol-affiliated entities, and (iv) the joint venture through which the CORE Funds and Fox beneficially owned CORE Media and Endemol Shine (the “JV”). The Trust asserts claims against (i) all defendants for tortiously interfering with $360 million in loans under the 2011 loan agreements entered into between CORE and certain Lenders, and (ii) certain defendants for alter-ego and de-facto merger. The Trust seeks $240 million in compensatory, unspecified punitive damages, pre-judgment interests, and costs and expenses. The Court has scheduled further oral argument on Defendants’ motions to dismiss the complaint for May 6, 2019. Apollo believes that there is no merit to the claims. Additionally, as the case is in its early stages, no reasonable estimate of possible loss, if any, can be made
- 48-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
at this time. On April 27, 2018, the Trust filed an adversary complaint in the Southern District of New York Bankruptcy Court captioned Core Litigation Trust v. Apollo Global Management, LLC, et al., Adv. Pro. No. 18-01539. The complaint names as defendants (i) AGM and certain AGM affiliates including the CORE Funds, (iii) certain former CORE directors who are current or former employees of AGM subsidiaries (the “Directors”), (iv) CORE Entertainment Holdings (CORE’s direct parent), and (v) the JV (which the Trust voluntarily dismissed on August 24, 2018). The Trust asserts (i) fiduciary-duty breach claims against the Directors and an aiding-and-abetting claim against AGM for allegedly preventing CORE Media from investing in the JV, and (ii) fiduciary-duty breach claims against the Directors and Apollo CORE Holdings, aiding-and-abetting claims against all defendants, and a fraudulent conveyance claim against AGM related to CORE Media paying $93 million to satisfy a legal judgment in March 2015. The Trust seeks unspecified compensatory damages, to avoid and recover the $93 million judgment payment, pre-judgment interest, and costs and fees. In an opinion filed on March 5, 2019, and order filed on March 8, 2019, the bankruptcy court granted Defendants’ motion to dismiss the complaint on abstention grounds. The Trust did not appeal the bankruptcy court’s ruling.
On August 3, 2017, a complaint was filed in the United States District Court for the Middle District of Florida against AGM, a senior partner of Apollo and a former principal of Apollo by Michael McEvoy on behalf of a purported class of employees of subsidiaries of CEVA Group, LLC (“CEVA Group”) who purchased shares in CEVA Investment Limited (“CIL”), the former parent company of CEVA Group. The complaint alleged that the defendants breached fiduciary duties to and defrauded the plaintiffs by inducing them to purchase shares in CIL and subsequently participating in a debt restructuring of CEVA Group in which shareholders of CIL did not receive a recovery. On February 9, 2018, the Bankruptcy Court for the Southern District of New York held that the claims asserted in the complaint were assets of CIL, which is a chapter 7 debtor, and that the complaint was null and void as a violation of the automatic stay. McEvoy subsequently revised his complaint to attempt to assert claims that do not belong to CIL. The amended complaint no longer names any individual defendants, but Apollo Management VI, L.P. and CEVA Group have been added as defendants. The amended complaint purports to seek damages of approximately €30 million and asserts, among other things, claims for violations of the Investment Advisers Act of 1940, breach of fiduciary duties, and breach of contract. On December 7, 2018, after receiving permission from the Bankruptcy Court, McEvoy filed his amended complaint in the District Court in Florida. Apollo is currently seeking dismissal of this action and believes that there is no merit to the claims. Additionally, as the case is in its early stages, no reasonable estimate of possible loss, if any, can be made at this time.
On December 21, 2017, Harbinger Capital Partners II, LP, Harbinger Capital Partners Master Fund I, Ltd., Harbinger Capital Partners Special Situations Fund, L.P., Harbinger Capital Partners Special Situations GP, LLC, Harbinger Capital Partners Offshore Manager, L.L.C., Global Opportunities Breakaway Ltd. (in voluntary liquidation), and Credit Distressed Blue Line Master Fund, Ltd. (collectively, “Harbinger”) commenced an action in New York Supreme Court captioned Harbinger Capital Partners II LP et al. v. Apollo Global Management LLC, et al. (No. 657515/2017). The complaint names as defendants (i) AGM, (ii) the funds managed by Apollo that invested in SkyTerra Communications, Inc. (“SkyTerra”) equity before selling their interests to Harbinger under an April 2008 agreement that closed in 2010, and (iii) six former SkyTerra directors, five of whom are current or former Apollo employees. The complaint alleges that during the period of Harbinger’s various equity and debt investments in SkyTerra, from 2004 to 2010, Defendants concealed from Harbinger material defects in SkyTerra technology that was to be used to create a new mobile wi-fi network. The complaint alleges that Harbinger would not have made investments in SkyTerra totaling approximately $1.9 billion had it known of the defects, and that the public disclosure of these defects ultimately led to SkyTerra filing for bankruptcy in 2012 (after it had been renamed LightSquared). The complaint asserts claims against (i) all defendants for fraud, civil conspiracy, and negligent misrepresentation, (ii) AGM and the Apollo-managed funds only for breach of fiduciary duty, breach of contract, and unjust enrichment, and (iii) the SkyTerra director defendants only for aiding and abetting breach of fiduciary duty. The complaint seeks $1.9 billion in damages, as well as punitive damages, interest, costs, and fees. On February 14, 2018, the parties filed a stipulation in the state court to stay the state court action until December 31, 2018. The Court entered the stay on February 21, 2018. On February 14, 2018, Defendants moved the United States Bankruptcy Court for the Southern District of New York to reopen the LightSquared bankruptcy proceeding for the limited purpose of enforcing Harbinger’s assignment and release in that bankruptcy of the claims that it asserts in the New York state court action. On February 23, 2018, Apollo filed a Notice of Adjournment on behalf of all parties that adjourned without date the hearing on the motion to reopen, to be rescheduled to a new date and time following the expiration of the state-court stay. On January 4, 2019, the state court entered a stipulation submitted by the parties extending the stay until April 3, 2019. On January 11, 2019, Apollo filed a Notice of Adjournment in the Bankruptcy Court on behalf of all parties that adjourned the hearing on the motion to reopen to May 29, 2019. Apollo believes these claims are without merit. Because this action is in its early stages, no reasonable estimate of possible loss, if any, can be made at this time.
On February 9, 2018, plaintiffs Joseph M. Dropp, Mary E. Dropp, Robert Levine, Susan Levine, and Kaarina Pakka filed a complaint in the United States District Court for the District of Nevada (the “Nevada Court”) against Apollo Management
- 49-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
VIII, L.P. (“Management VIII”), AGM and Diamond Resorts International, Inc. (“Diamond”) and several of its affiliates and executives. Plaintiffs, who allege that they bought vacation interest points from Diamond, allege that the points are securities and that defendants violated federal securities laws by selling the points without registering them as securities. Plaintiffs also assert a “control person” claim against Management VIII and AGM. Plaintiffs assert their claims on their own behalf and on behalf of a purported class of Diamond customers who bought vacation interest points over a certain period of time. They seek injunctive relief prohibiting defendants from continuing to market and sell unregistered securities, the right to rescind their purchases, and unspecified compensatory damages. On April 11, 2018, Defendants filed motions to sever Ms. Pakka's claims from the claims of the other plaintiffs and to transfer those claims to the United States District Court for the District of Hawaii. On January 25, 2019, the Nevada Court entered an order granting defendants’ motion to compel the Dropps and Levines to arbitrate their claims individually and dismissing their claims without prejudice to pursue them in arbitration. The Nevada Court also severed Ms. Pakka’s claims and transferred the complaint as to Ms. Pakka only to the United States District Court for the District of Hawaii (the “Hawaii Court”). On January 28, 2019, the Hawaii Court entered an order directing Ms. Pakka to file an amended complaint to reflect only the claims that were transferred to that Court, after she obtains Hawaii counsel. Ms. Pakka has not yet filed an amended complaint. Apollo believes the claims in this action are without merit. Because this action is in the early stages, no reasonable estimate of possible loss, if any, can be made at this time.
Five shareholders filed substantially similar putative class action lawsuits in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida in March, April, and May 2018, alleging violations of the Securities Act in connection with the January 19, 2018 IPO of ADT Inc. common stock. The actions were consolidated on July 10, 2018, and the case was re-captioned In re ADT Inc. Shareholder Litigation. On August 24, 2018, the state-court plaintiffs filed a consolidated complaint naming as defendants ADT Inc., several ADT officers and directors, the IPO underwriters (including Apollo Global Securities, LLC), AGM and certain other Apollo affiliates. Plaintiffs generally allege that the registration statement and prospectus for the IPO contained false and misleading statements and failed to disclose material information about certain litigation in which ADT was involved, ADT’s efforts to protect its intellectual property, and competitive pressures ADT faced. Defendants filed motions to dismiss the consolidated complaint on October 23, 2018, and those motions are fully briefed. On May 21, 2018, a similar shareholder class action lawsuit was filed in the United States District Court for the Southern District of Florida, naming as defendants ADT, several officers and directors, and AGM. The federal action, captioned Perdomo v. ADT Inc., generally alleges that the registration statement was materially misleading because it failed to disclose ongoing deterioration in ADT’s financial results, along with certain customer and business metrics. On July 20, 2018, several alleged ADT shareholders filed competing motions to be named lead plaintiff in the federal action. On November 20, 2018, the court appointed a lead plaintiff, and on January 15, 2019, the lead plaintiff filed an amended complaint. The amended complaint names the same Apollo-affiliated defendants as the state-court action, along with three new Apollo entities. Defendants filed motions to dismiss on March 25, 2019, and those motions are fully briefed. Based on the allegations in the complaints, Apollo believes that there is no merit to any of the claims against AGM or the other Apollo defendants. Thus, no reasonable estimate of possible loss, if any, can be made at this time.
On May 3, 2018, Caldera Holdings Ltd, Caldera Life Reinsurance Company, and Caldera Shareholder, L.P. (collectively, “Caldera”) filed a summons with notice in the Supreme Court of the State of New York, New York County, naming as defendants AGM, Apollo Management, L.P., Apollo Advisors VIII, L.P., Apollo Capital Management VIII, LLC, Athene Asset Management, L.P., Athene Holding, Ltd., and Leon Black (collectively, “Defendants” and all but Athene Holding, Ltd., the “Apollo Defendants”). On July 12, 2018, Caldera filed a complaint, Index No. 652175/2018 (the “Complaint”), alleging three causes of action: (1) tortious interference with prospective business relations/prospective economic advantage; (2) defamation/trade disparagement/injurious falsehood; and (3) unfair competition. The Complaint seeks damages of no less than $1.5 billion, as well as exemplary and punitive damages, attorneys’ fees, interest, and an injunction. Defendants moved to dismiss the Complaint on September 21, 2018 and Caldera filed an amended complaint on January 21, 2019 (the “Amended Complaint”). Defendants have moved to dismiss the Amended Complaint, and the Apollo Defendants have submitted to the Court a Final Arbitration Award issued on April 26, 2019 in a JAMS arbitration, finding Caldera, Imran Siddiqui, and Ming Dang liable for various causes of action, including breaches of fiduciary duty and/or aiding and abetting thereof. Oral argument on the motions to dismiss has been scheduled for May 31, 2019. The Apollo Defendants believe that the claims contained in the Complaint lack merit and intend to defend the case vigorously. Because this action is in the early stages, no reasonable estimate of possible loss, if any, can be made at this time.
On March 7, 2019, plaintiff Elizabeth Morrison filed an amended complaint in an action captioned Morrison v. Ray Berry, et. al., Case No. 12808-VCG (the “Morrison Action”), pending in the Chancery Court for the State of Delaware, adding as defendants AGM and certain AGM affiliates. The original complaint had only named as defendants certain officers and directors (the “TFM defendants”) of The Fresh Market, Inc. (“TFM”), claiming that those defendants breached their fiduciary duties to the TFM shareholders in connection with their consideration and approval of a merger agreement between TFM and certain entities
- 50-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
affiliated with Apollo, including by engaging in a sale process that improperly favored AGM, and/or Apollo Management VIII, L.P., by agreeing to an inadequate price and by filing materially deficient disclosures regarding the transaction. In addition to AGM, the amended complaint added as defendants Apollo Overseas Partners (Delaware 892) VIII, L.P., Apollo Overseas Partners (Delaware) VIII, L.P., Apollo Overseas Partners VIII, L.P., Apollo Management VIII, L.P., AIF VIII Management, LLC, Apollo Management, L.P., Apollo Management GP, LLC, Apollo Management Holdings, L.P., Apollo Management Holdings GP, LLC, APO Corp., AP Professional Holdings, L.P., Apollo Advisors VIII, L.P., Apollo Investment Fund VIII, L.P., and Pomegranate Holdings, Inc., and other defendants. The amended complaint alleges that the Apollo defendants aided and abetted the breaches of fiduciary duties by the TFM defendants. The defendants moved to dismiss the complaint on May 1, 2019. Those motions will be fully briefed on June 12th, with a hearing scheduled for June 18, 2019. Apollo believes the claims in this action are without merit. Because this action is in the early stages, no reasonable estimate of possible loss, if any, can be made at this time.
Commitments and Contingencies—Other long-term obligations relate to payments with respect to certain consulting agreements entered into by Apollo Investment Consulting LLC, a subsidiary of Apollo, as well as long-term service contracts. A significant portion of these costs are reimbursable by funds or portfolio companies. As of March 31, 2019, fixed and determinable payments due in connection with these obligations were as follows:
Remaining 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | |||||||||||||||||||||
Other long-term obligations | $ | 16,431 | $ | 3,547 | $ | 2,722 | $ | 907 | $ | 673 | $ | 673 | $ | 24,953 | |||||||||||||
Contingent Obligations—Performance allocations with respect to certain funds are subject to reversal in the event of future losses to the extent of the cumulative revenues recognized in income to date. If all of the existing investments became worthless, the amount of cumulative revenues that have been recognized by Apollo through March 31, 2019 and that would be reversed approximates $2.2 billion. Management views the possibility of all of the investments becoming worthless as remote. Performance allocations are affected by changes in the fair values of the underlying investments in the funds that Apollo manages. Valuations, on an unrealized basis, can be significantly affected by a variety of external factors including, but not limited to, bond yields and industry trading multiples. Movements in these items can affect valuations quarter to quarter even if the underlying business fundamentals remain stable.
Additionally, at the end of the life of certain funds that the Company manages, there could be a payment due to a fund by the Company if the Company, as general partner, has received more performance allocations than was ultimately earned. The general partner obligation amount, if any, will depend on final realized values of investments at the end of the life of each fund or as otherwise set forth in the respective limited partnership agreement of the fund. See note 14 to our condensed consolidated financial statements for further details regarding the general partner obligation.
Certain funds may not generate performance allocations as a result of unrealized and realized losses that are recognized in the current and prior reporting period. In certain cases, performance allocations will not be generated until additional unrealized and realized gains occur. Any appreciation would first cover the deductions for invested capital, unreturned organizational expenses, operating expenses, management fees and priority returns based on the terms of the respective fund agreements.
One of the Company’s subsidiaries, AGS, provides underwriting commitments in connection with securities offerings to the portfolio companies of the funds Apollo manages. As of March 31, 2019, AGS had an unfunded contingent commitment of $150.0 million outstanding related to such offerings. The commitment expired on April 4, 2019 with no funding on the part of the Company.
Contingent Consideration—In connection with the acquisition of Stone Tower in April 2012, the Company agreed to pay the former owners of Stone Tower a specified percentage of any future performance revenues earned from certain of the Stone Tower funds, CLOs, and strategic investment accounts. This contingent consideration liability was determined based on the present value of estimated future performance revenue payments, and is recorded in profit sharing payable in the condensed consolidated statements of financial condition. The fair value of the remaining contingent obligation was $76.5 million and $74.5 million as of March 31, 2019 and December 31, 2018, respectively.
The contingent consideration obligations will be remeasured to fair value at each reporting period until the obligations are satisfied and are characterized as Level III liabilities. The changes in the fair value of the contingent consideration obligations is reflected in profit sharing expense in the condensed consolidated statements of operations. See note 6 for further information regarding fair value measurements.
- 51-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
16. SEGMENT REPORTING
Apollo conducts its business primarily in the United States and substantially all of its revenues are generated domestically. Apollo’s business is conducted through three reportable segments: credit, private equity and real assets. Segment information is utilized by our Managing Partners, who operate collectively as our chief operating decision maker, to assess performance and to allocate resources. These segments were established based on the nature of investment activities in each underlying fund, including the specific type of investment made and the level of control over the investment.
The performance is measured by the Company’s chief operating decision maker on an unconsolidated basis because management makes operating decisions and assesses the performance of each of Apollo’s business segments based on financial and operating metrics and data that exclude the effects of consolidation of any of the affiliated funds.
Segment Reporting Changes
During the first quarter of 2019, Apollo’s chief operating decision makers determined that Segment Distributable Earnings, together with its main components including Fee Related Earnings, is the key performance measure used by management in evaluating the performance of Apollo’s credit, private equity and real assets segments. Accordingly, Apollo will no longer report Economic Income. Apollo believes these changes better reflect the manner in which it makes key operating decisions pertaining to resource allocation, capital deployment, budgeting and forecasting, and are consistent with what shareholders consider to be most important in evaluating its performance.
Apollo determined to change the business segment in which it reports certain funds and accounts to align its segment reporting with the manner in which such funds and accounts were managed. Effective January 1, 2019, the European Principal Finance Fund series, which has been historically reported in the credit segment, moved to the real assets segment. Several funds and accounts that generally invest in illiquid opportunistic investments and the latest fund in the Credit Opportunity Fund series, which have been historically reported in the credit segment, moved to the private equity segment. Certain commercial real estate mortgage loan assets, previously reported in the credit segment, moved to the real assets segment. These changes affected the composition, but not the determination, of Apollo’s reporting segments.
Apollo changed its definition of “Distributable Earnings” to include depreciation and amortization expenses and renamed it “Segment Distributable Earnings.” Historically, depreciation and amortization expenses were not reflected in Apollo’s calculation of Segment Distributable Earnings. Apollo also renamed “Distributable Earnings after Taxes and Related Payables” to “Distributable Earnings.”
In connection with these changes, all prior periods have been recast to conform to the new presentation. Consequently, this information will be different from the historical segment financial results previously reported by Apollo in its reports filed with the SEC.
Segment Distributable Earnings
Segment Distributable Earnings, or “Segment DE”, is the key performance measure used by management in evaluating the performance of Apollo’s credit, private equity and real assets segments. Management believes the components of Segment DE, such as the amount of management fees, advisory and transaction fees and realized performance fees, are indicative of the Company’s performance. Management uses Segment DE in making key operating decisions such as the following:
• | Decisions related to the allocation of resources such as staffing decisions including hiring and locations for deployment of the new hires; |
• | Decisions related to capital deployment such as providing capital to facilitate growth for the business and/or to facilitate expansion into new businesses; |
• | Decisions related to expenses, such as determining annual discretionary bonuses and equity-based compensation awards to its employees. With respect to compensation, management seeks to align the interests of certain professionals and selected other individuals with those of the investors in the funds and those of Apollo’s shareholders by providing such individuals a profit sharing interest in the performance fees earned in relation to the funds. To achieve that objective, a certain amount of compensation is based on Apollo’s performance and growth for the year; and |
- 52-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
• | Decisions related to the amount of earnings available for distribution to Class A shareholders, holders of RSUs that participate in distributions and holders of AOG Units. |
Segment DE is a measure of profitability and has certain limitations in that it does not take into account certain items included under U.S. GAAP. Segment DE represents the amount of Apollo’s net realized earnings, excluding the effects of the consolidation of any of the related funds, Taxes and Related Payables, transaction-related charges and any acquisitions. Transaction-related charges includes equity-based compensation charges, the amortization of intangible assets, contingent consideration and certain other charges associated with acquisitions. In addition, Segment DE excludes non-cash revenue and expense related to equity awards granted by unconsolidated related parties to employees of the Company, compensation and administrative related expense reimbursements, as well as the assets, liabilities and operating results of the funds and variable interest entities that are included in the condensed consolidated financial statements. We believe the exclusion of the non-cash charges related to the 2007 Reorganization for equity-based compensation provides investors with a meaningful indication of our performance because these charges relate to the equity portion of our capital structure and not our core operating performance. Segment DE also excludes impacts of the remeasurement of the tax receivable agreement recorded in other income, which arises from changes in the associated deferred tax balance.
Segment DE may not be comparable to similarly titled measures used by other companies and is not a measure of performance calculated in accordance with U.S. GAAP. We use Segment DE as a measure of operating performance, not as a measure of liquidity. Segment DE should not be considered in isolation or as a substitute for net income or other income data prepared in accordance with U.S. GAAP. The use of Segment DE without consideration of related U.S. GAAP measures is not adequate due to the adjustments described above. Management compensates for these limitations by using Segment DE as a supplemental measure to U.S. GAAP results, to provide a more complete understanding of our performance as management measures it. A reconciliation of Segment DE to its most directly comparable U.S. GAAP measure of income (loss) before income tax provision can be found in this footnote.
Fee Related Earnings
Fee Related Earnings (“FRE”) is derived from our segment reported results and refers to a component of Segment DE that is used as a supplemental performance measure to assess whether revenues that we believe are generally more stable and predictable in nature, primarily consisting of management fees, are sufficient to cover associated operating expenses and generate profits. FRE is the sum across all segments of (i) management fees, (ii) advisory and transaction fees, (iii) performance fees earned from business development companies and Redding Ridge Holdings and (iv) other income, net, less (x) salary, bonus and benefits, excluding equity-based compensation, (y) other associated operating expenses and (z) non-controlling interests in the management companies of certain funds the Company manages.
- 53-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
The following tables present financial data for Apollo’s reportable segments.
As of and for the Three Months Ended March 31, 2019 | |||||||||||||||
Credit Segment | Private Equity Segment | Real Assets Segment | Total Reportable Segments | ||||||||||||
Management fees | $ | 182,742 | $ | 130,496 | $ | 45,385 | $ | 358,623 | |||||||
Advisory and transaction fees, net | 2,848 | 16,136 | 76 | 19,060 | |||||||||||
Performance fees(1) | 661 | — | — | 661 | |||||||||||
Fee Related Revenues | 186,251 | 146,632 | 45,461 | 378,344 | |||||||||||
Salary, bonus and benefits | (44,304 | ) | (43,233 | ) | (18,188 | ) | (105,725 | ) | |||||||
General, administrative and other | (27,496 | ) | (25,862 | ) | (9,675 | ) | (63,033 | ) | |||||||
Placement fees | 305 | 135 | — | 440 | |||||||||||
Fee Related Expenses | (71,495 | ) | (68,960 | ) | (27,863 | ) | (168,318 | ) | |||||||
Other income (loss), net of Non-Controlling Interest | (404 | ) | 196 | (62 | ) | (270 | ) | ||||||||
Fee Related Earnings | 114,352 | 77,868 | 17,536 | 209,756 | |||||||||||
Realized performance fees | 3,327 | 60,456 | 6 | 63,789 | |||||||||||
Realized profit sharing expense | (3,518 | ) | (37,727 | ) | 106 | (41,139 | ) | ||||||||
Net Realized Performance Fees | (191 | ) | 22,729 | 112 | 22,650 | ||||||||||
Realized principal investment income | 3,049 | 8,088 | 299 | 11,436 | |||||||||||
Net interest loss and other | (4,386 | ) | (6,133 | ) | (2,173 | ) | (12,692 | ) | |||||||
Segment Distributable Earnings(2) | $ | 112,824 | $ | 102,552 | $ | 15,774 | $ | 231,150 | |||||||
Total Assets(2) | $ | 2,414,986 | $ | 2,508,047 | $ | 614,143 | $ | 5,537,176 | |||||||
(1) | Represents certain performance fees from business development companies and Redding Ridge Holdings LP (“Redding Ridge Holdings”), an affiliate of Redding Ridge. |
(2) | Refer below for a reconciliation of total revenues, total expenses, other loss and total assets for Apollo’s total reportable segments to total consolidated revenues, total consolidated expenses, total consolidated other income (loss) and total assets. |
- 54-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
For the Three Months Ended March 31, 2018 | |||||||||||||||
Credit Segment | Private Equity Segment | Real Assets Segment | Total Reportable Segments | ||||||||||||
Management fees | $ | 149,715 | $ | 82,280 | $ | 40,208 | $ | 272,203 | |||||||
Advisory and transaction fees, net | 2,195 | 10,655 | 144 | 12,994 | |||||||||||
Performance fees(1) | 5,275 | — | — | 5,275 | |||||||||||
Fee Related Revenues | 157,185 | 92,935 | 40,352 | 290,472 | |||||||||||
Salary, bonus and benefits | (46,821 | ) | (40,725 | ) | (18,985 | ) | (106,531 | ) | |||||||
General, administrative and other | (26,368 | ) | (17,983 | ) | (10,024 | ) | (54,375 | ) | |||||||
Placement fees | (276 | ) | (51 | ) | — | (327 | ) | ||||||||
Fee Related Expenses | (73,465 | ) | (58,759 | ) | (29,009 | ) | (161,233 | ) | |||||||
Other income (loss), net of Non-Controlling Interest | 3,183 | 309 | 168 | 3,660 | |||||||||||
Fee Related Earnings | 86,903 | 34,485 | 11,511 | 132,899 | |||||||||||
Realized performance fees(2) | 3,114 | 112,772 | 6,416 | 122,302 | |||||||||||
Realized profit sharing expense(2) | (2,834 | ) | (57,748 | ) | (3,065 | ) | (63,647 | ) | |||||||
Net Realized Performance Fees | 280 | 55,024 | 3,351 | 58,655 | |||||||||||
Realized principal investment income | 4,280 | 18,330 | 783 | 23,393 | |||||||||||
Net interest loss and other | (3,518 | ) | (5,356 | ) | (1,909 | ) | (10,783 | ) | |||||||
Segment Distributable Earnings(3) | $ | 87,945 | $ | 102,483 | $ | 13,736 | $ | 204,164 | |||||||
(1) | Represents certain performance fees from business development companies and Redding Ridge Holdings. |
(2) | Excludes realized performance fees and realized profit sharing expense settled in the form of shares of Athene Holding during the three months ended March 31, 2018. |
(3) | Refer below for a reconciliation of total revenues, total expenses and other income (loss) for Apollo’s total reportable segments to total consolidated revenues, total consolidated expenses and total consolidated other income (loss) and total assets |
The following table reconciles total consolidated revenues to total revenues for Apollo’s reportable segments:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Total Consolidated Revenues | $ | 677,777 | $ | 166,903 | |||
Equity awards granted by unconsolidated related parties, reimbursable expenses and other(1) | (29,129 | ) | (18,913 | ) | |||
Adjustments related to consolidated funds and VIEs(1) | 1,632 | 1,639 | |||||
Performance fees(2) | (248,172 | ) | 128,239 | ||||
Principal investment (income) loss | (23,764 | ) | 12,604 | ||||
Total Fee Related Revenues | 378,344 | 290,472 | |||||
Realized performance fees(3) | 63,789 | 122,302 | |||||
Realized principal investment income and other | 10,594 | 22,551 | |||||
Total Segment Revenues | $ | 452,727 | $ | 435,325 | |||
(1) | Represents advisory fees, management fees and performance fees earned from consolidated VIEs which are eliminated in consolidation. Includes non-cash revenues related to equity awards granted by unconsolidated related parties to employees of the Company and certain compensation and administrative related expense reimbursements. |
(2) | Excludes certain performance fees from business development companies and Redding Ridge Holdings. |
(3) | Excludes realized performance fees settled in the form of shares of Athene Holding during the three months ended March 31, 2018. |
- 55-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
The following table reconciles total consolidated expenses to total expenses for Apollo’s reportable segments:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Total Consolidated Expenses | $ | 378,017 | $ | 214,875 | |||
Equity awards granted by unconsolidated related parties, reimbursable expenses and other(1) | (28,842 | ) | (18,735 | ) | |||
Reclassification of interest expenses | (19,108 | ) | (13,797 | ) | |||
Transaction-related compensation charges, net(1) | (5,463 | ) | (1,852 | ) | |||
Equity-based compensation | (18,423 | ) | (17,435 | ) | |||
Total profit sharing expense(2) | (137,863 | ) | (1,823 | ) | |||
Total Fee Related Expenses | 168,318 | 161,233 | |||||
Realized profit sharing expense(3) | 41,139 | 63,647 | |||||
Total Segment Expenses | $ | 209,457 | $ | 224,880 | |||
(1) | Represents the addition of expenses of consolidated funds and VIEs, transaction-related charges, non-cash expenses related to equity awards granted by unconsolidated related parties to employees of the Company and certain compensation and administrative expenses. Transaction-related charges include equity-based compensation charges, the amortization of intangible assets, contingent consideration and certain other charges associated with acquisitions. |
(2) | Includes unrealized profit sharing expense, realized profit sharing expense and equity based profit sharing expense and other. |
(3) | Excludes realized profit sharing expense settled in the form of shares of Athene Holding during the three months ended March 31, 2018. |
The following table reconciles total consolidated other income (loss) to total other income (loss) for Apollo’s reportable segments:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Total Consolidated Other Income (Loss) | $ | 35,461 | $ | (52,796 | ) | ||
Adjustments related to consolidated funds and VIEs(1) | (9,134 | ) | (6,225 | ) | |||
Net (gains) losses from investment activities | (18,825 | ) | 67,137 | ||||
Interest income and other, net of Non-Controlling Interest | (7,772 | ) | (4,456 | ) | |||
Other Income (Loss), net of Non-Controlling Interest | (270 | ) | 3,660 | ||||
Net interest loss and other | (11,850 | ) | (9,941 | ) | |||
Total Segment Other Loss | $ | (12,120 | ) | $ | (6,281 | ) | |
(1) | Represents the addition of other income of consolidated funds and VIEs. |
- 56-
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
The following table presents the reconciliation of income (loss) before income tax provision reported in the condensed consolidated statements of operations to Segment Distributable Earnings:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Income (loss) before income tax provision | $ | 335,221 | $ | (100,768 | ) | ||
Transaction-related charges(1) | 5,463 | 1,852 | |||||
Net income attributable to Non-Controlling Interests in consolidated entities and appropriated partners’ capital | (8,662 | ) | (5,979 | ) | |||
Unrealized performance fees(2) | (184,383 | ) | 250,541 | ||||
Unrealized profit sharing expense(2) | 75,762 | (76,388 | ) | ||||
Equity-based profit sharing expense and other(3) | 20,962 | 14,564 | |||||
Equity-based compensation | 18,423 | 17,435 | |||||
Unrealized principal investment (income) loss | (12,328 | ) | 35,997 | ||||
Unrealized net (gains) losses from investment activities and other | (19,308 | ) | 66,910 | ||||
Segment Distributable Earnings | $ | 231,150 | $ | 204,164 | |||
(1) | Transaction-related charges include equity-based compensation charges, the amortization of intangible assets, contingent consideration and certain other charges associated with acquisitions. |
(2) | Includes realized performance fees and realized profit sharing expense settled in the form of shares of Athene Holding during the three months ended March 31, 2018. |
(3) | Equity-based profit sharing expense and other includes certain profit sharing arrangements in which a portion of performance fees distributed to the general partner are allocated by issuance of equity-based awards, rather than cash, to employees of Apollo. Equity-based profit sharing expense and other also includes non-cash expenses related to equity awards granted by unconsolidated related parties to employees of Apollo. |
The following table presents the reconciliation of Apollo’s total reportable segment assets to total assets:
As of March 31, 2019 | As of December 31, 2018 | ||||||
Total reportable segment assets | $ | 5,537,176 | $ | 4,791,646 | |||
Adjustments(1) | 1,184,324 | 1,200,008 | |||||
Total assets | $ | 6,721,500 | $ | 5,991,654 | |||
(1) | Represents the addition of assets of consolidated funds and VIEs and consolidation elimination adjustments. |
17. SUBSEQUENT EVENTS
On April 16, 2019, the Company entered into an agreement to lease additional office space at 9 West 57th Street, New York, New York. The term of the lease extends through 2036. See note 8 for information regarding aggregate minimum future payments.
On May 2, 2019, the Company declared a cash distribution of $0.46 per Class A share, which will be paid on May 31, 2019 to holders of record on May 21, 2019.
On May 2, 2019, the Company declared a cash distribution of $0.398438 per Series A Preferred share and Series B Preferred share, which will be paid on June 17, 2019 to holders of record on May 31, 2019.
On May 2, 2019, the Company announced plans to convert from a publicly traded partnership to a C corporation. The conversion is expected to be effective during the third quarter of 2019. The details of the conversion remain subject to the approval of the conflicts committee of Apollo Global Management, LLC’s board of directors and any required regulatory approvals.
- 57-
ITEM 1A. UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS
OF FINANCIAL CONDITION
APOLLO GLOBAL MANAGEMENT, LLC
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(dollars in thousands, except share data)
As of March 31, 2019 | |||||||||||||||
Apollo Global Management, LLC and Consolidated Subsidiaries | Consolidated Funds and VIEs | Eliminations | Consolidated | ||||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | $ | 720,249 | $ | 4 | $ | — | $ | 720,253 | |||||||
Restricted cash | 3,450 | — | — | 3,450 | |||||||||||
U.S. Treasury securities, at fair value | 707,316 | — | — | 707,316 | |||||||||||
Investments | 3,033,638 | 562 | (88,113 | ) | 2,946,087 | ||||||||||
Assets of consolidated variable interest entities: | |||||||||||||||
Cash and cash equivalents | — | 47,641 | — | 47,641 | |||||||||||
Investments, at fair value | — | 1,171,761 | (301 | ) | 1,171,460 | ||||||||||
Other assets | — | 54,796 | — | 54,796 | |||||||||||
Incentive fees receivable | — | — | — | — | |||||||||||
Due from related parties | 382,308 | (1 | ) | (1,355 | ) | 380,952 | |||||||||
Deferred tax assets, net | 291,607 | — | — | 291,607 | |||||||||||
Other assets | 206,911 | — | (670 | ) | 206,241 | ||||||||||
Lease assets | 102,845 | — | — | 102,845 | |||||||||||
Goodwill | 88,852 | — | — | 88,852 | |||||||||||
Total Assets | $ | 5,537,176 | $ | 1,274,763 | $ | (90,439 | ) | $ | 6,721,500 | ||||||
Liabilities and Shareholders’ Equity | |||||||||||||||
Liabilities: | |||||||||||||||
Accounts payable and accrued expenses | $ | 83,766 | $ | — | $ | — | $ | 83,766 | |||||||
Accrued compensation and benefits | 60,553 | — | — | 60,553 | |||||||||||
Deferred revenue | 183,458 | — | — | 183,458 | |||||||||||
Due to related parties | 391,711 | — | — | 391,711 | |||||||||||
Profit sharing payable | 520,864 | — | — | 520,864 | |||||||||||
Debt | 1,903,862 | — | — | 1,903,862 | |||||||||||
Liabilities of consolidated variable interest entities: | |||||||||||||||
Debt, at fair value | — | 889,024 | (43,158 | ) | 845,866 | ||||||||||
Other liabilities | — | 71,376 | (300 | ) | 71,076 | ||||||||||
Due to related parties | — | 1,725 | (1,725 | ) | — | ||||||||||
Other liabilities | 108,920 | — | — | 108,920 | |||||||||||
Lease liabilities | 109,184 | — | — | 109,184 | |||||||||||
Total Liabilities | 3,362,318 | 962,125 | (45,183 | ) | 4,279,260 | ||||||||||
Shareholders’ Equity: | |||||||||||||||
Apollo Global Management, LLC shareholders’ equity: | |||||||||||||||
Series A Preferred shares | 264,398 | — | — | 264,398 | |||||||||||
Series B Preferred shares | 289,815 | — | — | 289,815 | |||||||||||
Additional paid in capital | 1,144,664 | — | — | 1,144,664 | |||||||||||
Accumulated deficit | (372,575 | ) | 18,359 | (18,360 | ) | (372,576 | ) | ||||||||
Accumulated other comprehensive loss | (4,554 | ) | (3,441 | ) | 3,185 | (4,810 | ) | ||||||||
Total Apollo Global Management, LLC shareholders’ equity | 1,321,748 | 14,918 | (15,175 | ) | 1,321,491 | ||||||||||
Non-Controlling Interests in consolidated entities | 5,506 | 297,720 | (30,081 | ) | 273,145 | ||||||||||
Non-Controlling Interests in Apollo Operating Group | 847,604 | — | — | 847,604 | |||||||||||
Total Shareholders’ Equity | 2,174,858 | 312,638 | (45,256 | ) | 2,442,240 | ||||||||||
Total Liabilities and Shareholders’ Equity | $ | 5,537,176 | $ | 1,274,763 | $ | (90,439 | ) | $ | 6,721,500 | ||||||
- 58-
APOLLO GLOBAL MANAGEMENT, LLC
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(dollars in thousands, except share data)
As of December 31, 2018 | |||||||||||||||
Apollo Global Management, LLC and Consolidated Subsidiaries | Consolidated Funds and VIEs | Eliminations | Consolidated | ||||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | $ | 609,743 | $ | 4 | $ | — | $ | 609,747 | |||||||
Restricted cash | 3,457 | — | — | 3,457 | |||||||||||
U.S. Treasury securities, at fair value | 392,932 | — | — | 392,932 | |||||||||||
Investments | 2,811,445 | 558 | (89,391 | ) | 2,722,612 | ||||||||||
Assets of consolidated variable interest entities: | |||||||||||||||
Cash and cash equivalents | — | 49,671 | — | 49,671 | |||||||||||
Investments, at fair value | — | 1,175,985 | (308 | ) | 1,175,677 | ||||||||||
Other assets | — | 65,543 | — | 65,543 | |||||||||||
Incentive fees receivable | 6,792 | — | — | 6,792 | |||||||||||
Due from related parties | 379,525 | — | (1,417 | ) | 378,108 | ||||||||||
Deferred tax assets | 306,094 | — | — | 306,094 | |||||||||||
Other assets | 192,806 | — | (637 | ) | 192,169 | ||||||||||
Goodwill | 88,852 | — | — | 88,852 | |||||||||||
Total Assets | $ | 4,791,646 | $ | 1,291,761 | $ | (91,753 | ) | $ | 5,991,654 | ||||||
Liabilities and Shareholders’ Equity | |||||||||||||||
Liabilities: | |||||||||||||||
Accounts payable and accrued expenses | $ | 70,878 | $ | — | $ | — | $ | 70,878 | |||||||
Accrued compensation and benefits | 73,583 | — | — | 73,583 | |||||||||||
Deferred revenue | 111,097 | — | — | 111,097 | |||||||||||
Due to related parties | 425,435 | — | — | 425,435 | |||||||||||
Profit sharing payable | 452,141 | — | — | 452,141 | |||||||||||
Debt | 1,360,448 | — | — | 1,360,448 | |||||||||||
Liabilities of consolidated variable interest entities: | |||||||||||||||
Debt, at fair value | — | 899,651 | (44,190 | ) | 855,461 | ||||||||||
Other liabilities | — | 79,244 | (267 | ) | 78,977 | ||||||||||
Due to related parties | — | 1,787 | (1,787 | ) | — | ||||||||||
Other liabilities | 111,794 | — | — | 111,794 | |||||||||||
Total Liabilities | 2,605,376 | 980,682 | (46,244 | ) | 3,539,814 | ||||||||||
Shareholders’ Equity: | |||||||||||||||
Apollo Global Management, LLC shareholders’ equity: | |||||||||||||||
Series A Preferred shares | 264,398 | — | — | 264,398 | |||||||||||
Series B Preferred shares | 289,815 | — | — | 289,815 | |||||||||||
Additional paid in capital | 1,299,418 | — | — | 1,299,418 | |||||||||||
Accumulated deficit | (473,275 | ) | 17,673 | (17,674 | ) | (473,276 | ) | ||||||||
Accumulated other comprehensive loss | (3,925 | ) | (2,479 | ) | 2,245 | (4,159 | ) | ||||||||
Total Apollo Global Management, LLC shareholders’ equity | 1,376,431 | 15,194 | (15,429 | ) | 1,376,196 | ||||||||||
Non-Controlling Interests in consolidated entities | 5,717 | 295,885 | (30,080 | ) | 271,522 | ||||||||||
Non-Controlling Interests in Apollo Operating Group | 804,122 | — | — | 804,122 | |||||||||||
Total Shareholders’ Equity | 2,186,270 | 311,079 | (45,509 | ) | 2,451,840 | ||||||||||
Total Liabilities and Shareholders’ Equity | $ | 4,791,646 | $ | 1,291,761 | $ | (91,753 | ) | $ | 5,991,654 | ||||||
- 59-
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with Apollo Global Management, LLC’s condensed consolidated financial statements and the related notes included within this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in the section entitled “Risk Factors” in the 2018 Annual Report. The highlights listed below have had significant effects on many items within our condensed consolidated financial statements and affect the comparison of the current period’s activity with those of prior periods.
General
Our Businesses
Founded in 1990, Apollo is a leading global alternative investment manager. We are a contrarian, value-oriented investment manager in credit, private equity and real assets with significant distressed expertise and a flexible mandate in the majority of our funds which enables our funds to invest opportunistically across a company’s capital structure. We raise, invest and manage funds on behalf of some of the world’s most prominent pension, endowment and sovereign wealth funds as well as other institutional and individual investors. Apollo is led by our Managing Partners, Leon Black, Joshua Harris and Marc Rowan, who have worked together for more than 33 years and lead a team of 1,212 employees, including 408 investment professionals, as of March 31, 2019.
Apollo conducts its business primarily in the United States and substantially all of its revenues are generated domestically. These businesses are conducted through the following three reportable segments:
(i) | Credit—primarily invests in non-control corporate and structured debt instruments including performing, stressed and distressed instruments across the capital structure; |
(ii) | Private equity—primarily invests in control equity and related debt instruments, convertible securities and distressed debt instruments; and |
(iii) | Real assets—primarily invests in (i) real estate equity and infrastructure equity for the acquisition and recapitalization of real estate and infrastructure assets, portfolios, platforms and operating companies, (ii) real estate and infrastructure debt including first mortgage and mezzanine loans, preferred equity and commercial mortgage backed securities and (iii) European performing and non-performing loans, and unsecured consumer loans. |
These business segments are differentiated based on the varying investment strategies. The performance is measured by management on an unconsolidated basis because management makes operating decisions and assesses the performance of each of Apollo’s business segments based on financial and operating metrics and data that exclude the effects of consolidation of any of the managed funds.
Our financial results vary since performance fees, which generally constitute a large portion of the income we receive from the funds that we manage, as well as the transaction and advisory fees that we receive, can vary significantly from quarter to quarter and year to year. As a result, we emphasize long-term financial growth and profitability to manage our business.
In addition, the growth in our Fee-Generating AUM during the last year has primarily been in our credit segment. The average management fee rate for these new credit products is at market rates for such products and in certain cases is below our historical rates. Also, due to the complexity of these new product offerings, the Company has incurred and will continue to incur additional costs associated with managing these products. To date, these additional costs have been offset by realized economies of scale and ongoing cost management.
As of March 31, 2019, we had total AUM of $303.0 billion across all of our businesses. More than 90% of our total AUM was in funds with a contractual life at inception of seven years or more, and 49% of such AUM was in permanent capital vehicles.
As of December 31, 2017, Fund IX held its final closing, raising a total of $23.5 billion in third-party capital and approximately $1.2 billion of additional capital from Apollo and affiliated investors for total commitments of $24.7 billion. On December 31, 2013, Fund VIII held a final closing raising a total of $17.5 billion in third-party capital and approximately $880 million of additional capital from Apollo and affiliated investors, and as of March 31, 2019, Fund VIII had $3.4 billion of uncalled commitments remaining. Additionally, Fund VII held a final closing in December 2008, raising a total of $14.7 billion, and as of
- 60-
March 31, 2019, Fund VII had $2.0 billion of uncalled commitments remaining. We have consistently produced attractive long-term investment returns in our traditional private equity funds, generating a 39% gross IRR and a 25% net IRR on a compound annual basis from inception through March 31, 2019. Apollo’s private equity fund appreciation was 4.6% for the three months ended March 31, 2019.
For our real assets segment, total gross return was 4.0% for the three months ended March 31, 2019. The gross return represents gross return for U.S. Real Estate Fund I and U.S. Real Estate Fund II including co-investment capital, Asia Real Estate Fund including co-investment capital, the European Principal Finance funds, and Infrastructure Equity.
For further detail related to fund performance metrics across all of our businesses, see “—The Historical Investment Performance of Our Funds.”
Subsequent to December 31, 2018, the Company determined to change the business segment in which it reports certain funds and accounts to align its segment reporting with the manner in which such funds and accounts were managed. Effective January 1, 2019, the European Principal Finance Fund series, which has been historically reported in the credit segment, moved to the real assets segment. Several funds and accounts that generally invest in illiquid opportunistic investments and the latest fund in the Credit Opportunity Fund series, which have been historically reported in the credit segment, moved to the private equity segment. Certain commercial real estate mortgage loan assets, previously reported in the credit segment, moved to the real assets segment. These changes affected the composition, but not the determination, of Apollo’s reporting segments.
Holding Company Structure
The diagram below depicts our current organizational structure:
Note: The organizational structure chart above depicts a simplified version of the Apollo structure. It does not include all legal entities in the structure. Ownership percentages are as of May 3, 2019.
(1) | Based on a Form 13F for the quarter ended March 31, 2019 filed with the SEC on May 3, 2019 by the Strategic Investor, the Strategic Investor holds 7.7% of the Class A shares outstanding and 3.9% of the economic interests in the Apollo Operating Group. The Class A shares held by investors other than the Strategic Investor represent 47.8% of the total voting power of our shares entitled to vote and 45.9% of the economic interests in the Apollo Operating Group. Class A shares held by the Strategic Investor do not have voting rights. However, such Class A shares will become entitled to vote upon transfers by the Strategic Investor in accordance with the agreements entered into in connection with the investments made by the Strategic Investor. |
- 61-
(2) | Our Managing Partners own BRH Holdings GP, Ltd., which in turn holds our only outstanding Class B share. The Class B share represents 52.2% of the total voting power of our shares entitled to vote but no economic interest in Apollo Global Management, LLC. Our Managing Partners’ economic interests are instead represented by their indirect beneficial ownership, through Holdings, of 45.6% of the limited partner interests in the Apollo Operating Group. |
(3) | Through BRH Holdings, L.P., our Managing Partners indirectly beneficially own through estate planning vehicles, limited partner interests in Holdings. |
(4) | Holdings owns 50.2% of the limited partner interests in each Apollo Operating Group entity. The AOG Units held by Holdings are exchangeable for Class A shares. Our Managing Partners, through their interests in BRH and Holdings, beneficially own 45.6% of the AOG Units. Our Contributing Partners, through their ownership interests in Holdings, beneficially own 4.6% of the AOG Units. |
(5) | BRH Holdings GP, Ltd. is the sole member of AGM Management, LLC, our manager. The management of Apollo Global Management, LLC is vested in our manager as provided in our operating agreement. |
(6) | Represents 49.8% of the limited partner interests in each Apollo Operating Group entity, held through the intermediate holding companies. Apollo Global Management, LLC, also indirectly owns 100% of the general partner interests in each Apollo Operating Group entity. |
Each of the Apollo Operating Group entities holds interests in different businesses or entities organized in different jurisdictions.
Our structure is designed to accomplish a number of objectives, the most important of which are as follows:
• | We are a holding company that is qualified as a partnership for U.S. federal income tax purposes. Our intermediate holding companies enable us to maintain our partnership status and to meet the qualifying income exception. |
• | We have historically used multiple management companies to segregate operations for business, financial and other reasons. Going forward, we may increase or decrease the number of our management companies, partnerships or other entities within the Apollo Operating Group based on our views regarding the appropriate balance between (a) administrative convenience and (b) continued business, financial, tax and other optimization. |
Business Environment
As a global investment manager, we are affected by numerous factors, including the condition of financial markets and the economy. Price fluctuations within equity, credit, commodity, foreign exchange markets, as well as interest rates, which may be volatile and mixed across geographies, can significantly impact the valuation of our funds’ portfolio companies and related income we may recognize.
In the U.S., the S&P 500 Index increased by 13.1% in the first quarter of 2019, following a decrease of 14.0% in the fourth quarter of 2018. Outside the U.S., global equity markets appreciated during the quarter, with the MSCI All Country World ex USA Index increasing 10.6% following a decrease of 14.4% in the fourth quarter of 2018.
Conditions in the credit markets also have a significant impact on our business. Credit markets were positive in the first quarter of 2019, with the BofAML HY Master II Index increasing 7.4%, while the S&P/LSTA Leveraged Loan Index increased 4.0%. The U.S. 10-year Treasury yield fell slightly in the quarter to 2.4%. Federal Reserve officials kept the benchmark rate steady and indicated that they will maintain a patient stance on rates for the remainder of the year, as they recognized solid fundamentals across the U.S. economy and slight easing of risks abroad in Europe and China.
Foreign exchange rates can materially impact the valuations of our investments and those of our funds that are denominated in currencies other than the U.S. dollar. Relative to the U.S. dollar, the Euro depreciated 2.2% in the first quarter of 2019, after depreciating by 1.2% in the fourth quarter of 2018, while the British pound appreciated 2.2% in the first quarter of 2019, after depreciating 2.1% in the fourth quarter of 2018. Commodities generally decreased in the first quarter of 2019, with gold, copper, natural gas, and sugar all depreciating. The price of crude oil appreciated by 32.4% during the first quarter of 2019.
In terms of economic conditions in the U.S., the Bureau of Economic Analysis reported real GDP increased at an annual rate of 3.2% in the first quarter of 2019, higher than the 2.2% growth experienced in the fourth quarter of 2018. As of April 2019, the International Monetary Fund estimated that the U.S. economy will expand by 2.3% in 2019 and 1.9% in 2020. Additionally, the U.S. unemployment rate stood at 3.8% as of March 31, 2019, slightly lower than in the previous quarter.
Regardless of the market or economic environment at any given time, Apollo relies on its contrarian, value-oriented approach to consistently invest capital on behalf of its fund investors by focusing on opportunities that management believes are often overlooked by other investors. As such, Apollo’s global integrated investment platform deployed $4.3 billion and $13.4 billion of capital through the funds it manages during the three and twelve months ended March 31, 2019, respectively. We believe Apollo’s expertise in credit and its focus on nine core industry sectors, combined with more than 29 years of investment experience,
- 62-
has allowed Apollo to respond quickly to changing environments. Apollo’s core industry sectors include chemicals, manufacturing and industrial, natural resources, consumer and retail, consumer services, business services, financial services, leisure, and media/telecom/technology. Apollo believes that these attributes have contributed to the success of its private equity funds investing in buyouts and credit opportunities during both expansionary and recessionary economic periods.
In general, institutional investors continue to allocate capital towards alternative investment managers for more attractive risk-adjusted returns in a low interest rate environment, and we believe the business environment remains generally accommodative to raise larger successor funds, launch new products, and pursue attractive strategic growth opportunities, such as continuing to grow the assets of our permanent capital vehicles. As such, Apollo had $24.9 billion and $82.8 billion of capital inflows during the three and twelve months ended March 31, 2019, respectively. While Apollo continues to attract capital inflows, it also continues to generate realizations for fund investors. Apollo returned $1.7 billion and $8.7 billion of capital and realized gains to the investors in the funds it manages during the three and twelve months ended March 31, 2019, respectively.
Managing Business Performance
We believe that the presentation of Segment Distributable Earnings, or “Segment DE”, supplements a reader’s understanding of the economic operating performance of each of our segments.
Segment Distributable Earnings and Distributable Earnings
Segment Distributable Earnings is the key performance measure used by management in evaluating the performance of Apollo’s credit, private equity and real assets segments. See note 16 to the condensed consolidated financial statements for more details regarding the components of Segment DE. Distributable Earnings (“DE”) represents Segment DE less estimated current corporate, local and non-U.S. taxes as well as the current payable under Apollo’s tax receivable agreement. DE is net of preferred distributions, if any, to the Series A and Series B Preferred shareholders. DE excludes the impacts of the remeasurement of deferred tax assets and liabilities which arises from changes in estimated future tax rates. The economic assumptions and methodologies that impact the implied income tax provision are similar to those methodologies and certain assumptions used in calculating the income tax provision for Apollo’s condensed consolidated statements of operations under U.S. GAAP. Management believes that excluding the remeasurement of the tax receivable agreement and deferred taxes from Segment DE and DE, respectively, is meaningful as it increases comparability between periods. Remeasurement of the tax receivable agreement and deferred taxes are estimates that may change due to changes in the interpretation of tax law.
We believe that Segment DE is helpful for an understanding of our business and that investors should review the same supplemental financial measure that management uses to analyze our segment performance. This measure supplements and should be considered in addition to and not in lieu of the results of operations discussed below in “—Overview of Results of Operations” that have been prepared in accordance with U.S. GAAP. See note 16 to the condensed consolidated financial statements for more details regarding management’s consideration of Segment DE.
Fee Related Earnings and Fee Related EBITDA
Fee Related Earnings is derived from our segment reported results and refers to a component of Segment DE that is used as a supplemental performance measure. See note 16 to the condensed consolidated financial statements for more details regarding the components of FRE.
Fee related EBITDA is a non-U.S. GAAP measure derived from our segment reported results and is used to assess the performance of our operations as well as our ability to service current and future borrowings. Fee related EBITDA represents FRE plus amounts for depreciation and amortization. “Fee related EBITDA +100% of net realized performance fees” represents Fee related EBITDA plus realized performance fees less realized profit sharing expense.
We use Segment DE, DE, FRE and Fee related EBITDA as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation or as a substitute for net income or other income data prepared in accordance with U.S. GAAP. The use of these measures without consideration of their related U.S. GAAP measures is not adequate due to the adjustments described above.
Segment Strategies
Apollo determined to change the business segment in which it reports certain funds and accounts to align its segment reporting with the manner in which such funds and accounts were managed. Effective January 1, 2019, the European Principal Finance Fund series, which has been historically reported in the credit segment, moved to the real assets segment. Several funds and accounts that generally invest in illiquid opportunistic investments and the latest fund in the Credit Opportunity Fund series, which have been historically reported in the credit segment, moved to the private equity segment. Certain commercial real estate
- 63-
mortgage loan assets, previously reported in the credit segment, moved to the real assets segment. These changes affected the composition, but not the determination, of Apollo’s reporting segments.
In order to better reflect the grouping of synergistic credit strategies across the funds, accounts and permanent capital vehicles managed within our credit segment, Apollo has re-aligned its credit segment around four main strategies: corporate credit, structured credit, direct origination and advisory and other. The underlying assets managed within, and strategies employed by, Apollo’s credit segment have not changed as a result of this re-alignment.
Apollo has re-aligned its private equity segment around three strategies: traditional private equity, hybrid capital and natural resources. Hybrid capital includes our recently launched hybrid value strategy, other funds and accounts that generally invest in illiquid opportunistic investments and the latest fund in the Credit Opportunity Fund series.
Apollo has re-aligned its real assets segment around three strategies: real estate, principal finance and infrastructure. Real estate includes the commercial real estate mortgage loan assets discussed above, among other types of real estate assets. Principal finance includes our European Principal Finance Fund series.
Operating Metrics
We monitor certain operating metrics that are common to the alternative investment management industry. These operating metrics include Assets Under Management, capital deployed and uncalled commitments.
Assets Under Management
The tables below present Fee-Generating and Non-Fee-Generating AUM by segment:
As of March 31, 2019 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Fee-Generating | $ | 156,860 | $ | 46,372 | $ | 25,033 | $ | 228,265 | |||||||
Non-Fee-Generating | 36,809 | 30,953 | 6,967 | 74,729 | |||||||||||
Total Assets Under Management | $ | 193,669 | $ | 77,325 | $ | 32,000 | $ | 302,994 | |||||||
As of March 31, 2018 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Fee-Generating | $ | 116,722 | $ | 47,519 | $ | 18,226 | $ | 182,467 | |||||||
Non-Fee-Generating | 29,914 | 29,333 | 5,702 | 64,949 | |||||||||||
Total Assets Under Management | $ | 146,636 | $ | 76,852 | $ | 23,928 | $ | 247,416 | |||||||
As of December 31, 2018 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Fee-Generating | $ | 144,071 | $ | 46,633 | $ | 23,663 | $ | 214,367 | |||||||
Non-Fee-Generating | 30,307 | 28,453 | 7,132 | 65,892 | |||||||||||
Total Assets Under Management | $ | 174,378 | $ | 75,086 | $ | 30,795 | $ | 280,259 | |||||||
- 64-
The table below presents AUM with Future Management Fee Potential, which is a component of Non-Fee-Generating AUM, for each of Apollo’s three segments.
As of March 31, 2019 | As of March 31, 2018 | As of December 31, 2018 | |||||||||
(in millions) | |||||||||||
Credit | $ | 7,202 | $ | 7,570 | $ | 8,725 | |||||
Private Equity | 10,729 | 8,863 | 10,555 | ||||||||
Real Assets | 2,175 | 1,273 | 2,097 | ||||||||
Total AUM with Future Management Fee Potential | $ | 20,106 | $ | 17,706 | $ | 21,377 | |||||
The following tables present the components of Performance Fee-Eligible AUM for each of Apollo’s three segments:
As of March 31, 2019 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Performance Fee-Generating AUM(1) | $ | 35,018 | $ | 23,225 | $ | 2,553 | $ | 60,796 | |||||||
AUM Not Currently Generating Performance Fees | 14,318 | 6,157 | 2,189 | 22,664 | |||||||||||
Uninvested Performance Fee-Eligible AUM | 7,649 | 33,488 | 4,643 | 45,780 | |||||||||||
Total Performance Fee-Eligible AUM | $ | 56,985 | $ | 62,870 | $ | 9,385 | $ | 129,240 | |||||||
As of March 31, 2018 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Performance Fee-Generating AUM(1) | $ | 27,776 | $ | 25,985 | $ | 2,828 | $ | 56,589 | |||||||
AUM Not Currently Generating Performance Fees | 10,295 | 4,171 | 688 | 15,154 | |||||||||||
Uninvested Performance Fee-Eligible AUM | 6,969 | 33,834 | 5,839 | 46,642 | |||||||||||
Total Performance Fee-Eligible AUM | $ | 45,040 | $ | 63,990 | $ | 9,355 | $ | 118,385 | |||||||
As of December 31, 2018 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Performance Fee-Generating AUM(1) | $ | 23,574 | $ | 22,974 | $ | 2,019 | $ | 48,567 | |||||||
AUM Not Currently Generating Performance Fees | 17,857 | 3,850 | 2,662 | 24,369 | |||||||||||
Uninvested Performance Fee-Eligible AUM | 8,483 | 35,749 | 4,659 | 48,891 | |||||||||||
Total Performance Fee-Eligible AUM | $ | 49,914 | $ | 62,573 | $ | 9,340 | $ | 121,827 | |||||||
(1) | Performance Fee-Generating AUM of $1.3 billion, $7.7 billion and $0.2 billion as of March 31, 2019, March 31, 2018 and December 31, 2018, respectively, are above its hurdle rate or preferred return, but in accordance with the adoption of the revenue recognition standard effective January 1, 2018, recognition of performance fees associated with such Performance Fee-Generating AUM have been deferred to future periods when the fees are probable to not be significantly reversed. |
- 65-
The following table presents AUM Not Currently Generating Performance Fees for funds that have commenced investing capital for more than 24 months as of March 31, 2019 and the corresponding appreciation required to reach the preferred return or high watermark in order to generate performance fees:
Strategy / Fund | Invested AUM Not Currently Generating Performance Fees | Investment Period Active > 24 Months | Appreciation Required to Achieve Performance Fees(1) | |||||||
(in millions) | ||||||||||
Credit: | ||||||||||
Corporate Credit | $ | 6,045 | $ | 6,045 | 3% | |||||
Structured Credit | 1,421 | 755 | 14% | |||||||
Direct Origination | 145 | — | N/A | |||||||
Advisory and Other | 6,707 | — | N/A | |||||||
Total Credit | 14,318 | 6,800 | 4% | |||||||
Private Equity: | ||||||||||
ANRP I | 430 | 430 | 48% | |||||||
Hybrid Capital | 2,558 | 2,178 | 69% | |||||||
Other PE | 3,169 | 191 | 81% | |||||||
Total Private Equity | 6,157 | 2,799 | 67% | |||||||
Real Assets: | ||||||||||
Total Real Assets | 2,189 | 435 | > 250bps | |||||||
Total | $ | 22,664 | $ | 10,034 | ||||||
(1) | All investors in a given fund are considered in aggregate when calculating the appreciation required to achieve performance fees presented above. Appreciation required to achieve performance fees may vary by individual investor. Funds with an investment period less than 24 months are “N/A”. |
The components of Fee-Generating AUM by segment are presented below:
As of March 31, 2019 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Fee-Generating AUM based on capital commitments | $ | 3,403 | $ | 26,849 | $ | 5,382 | $ | 35,634 | |||||||
Fee-Generating AUM based on invested capital | 1,152 | 18,438 | 2,212 | 21,802 | |||||||||||
Fee-Generating AUM based on gross/adjusted assets | 131,031 | 698 | 16,532 | 148,261 | |||||||||||
Fee-Generating AUM based on NAV | 21,274 | 387 | 907 | 22,568 | |||||||||||
Total Fee-Generating AUM | $ | 156,860 | $ | 46,372 | (1) | $ | 25,033 | $ | 228,265 | ||||||
(1) | The weighted average remaining life of the traditional private equity funds as of March 31, 2019 was 86 months. |
As of March 31, 2018 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Fee-Generating AUM based on capital commitments | $ | 3,403 | $ | 27,897 | $ | 5,546 | $ | 36,846 | |||||||
Fee-Generating AUM based on invested capital | 1,033 | 18,234 | 6,315 | 25,582 | |||||||||||
Fee-Generating AUM based on gross/adjusted assets | 95,042 | 742 | 6,301 | 102,085 | |||||||||||
Fee-Generating AUM based on NAV | 17,244 | 646 | 64 | 17,954 | |||||||||||
Total Fee-Generating AUM | $ | 116,722 | $ | 47,519 | (1) | $ | 18,226 | $ | 182,467 | ||||||
(1) | The weighted average remaining life of the traditional private equity funds as of March 31, 2018 was 96 months. |
- 66-
As of December 31, 2018 | |||||||||||||||
Credit | Private Equity | Real Assets | Total | ||||||||||||
(in millions) | |||||||||||||||
Fee-Generating AUM based on capital commitments | $ | 3,403 | $ | 26,849 | $ | 5,419 | $ | 35,671 | |||||||
Fee-Generating AUM based on invested capital | 1,020 | 18,601 | 6,659 | 26,280 | |||||||||||
Fee-Generating AUM based on gross/adjusted assets | 119,525 | 776 | 11,435 | 131,736 | |||||||||||
Fee-Generating AUM based on NAV | 20,123 | 407 | 150 | 20,680 | |||||||||||
Total Fee-Generating AUM | $ | 144,071 | $ | 46,633 | (1) | $ | 23,663 | $ | 214,367 | ||||||
(1) | The weighted average remaining life of the traditional private equity funds as of December 31, 2018 was 89 months. |
The following table presents total AUM and Fee-Generating AUM amounts for our credit segment by category type:
Total AUM | Fee-Generating AUM | ||||||||||||||||||||||
As of March 31, | As of December 31, | As of March 31, | As of December 31, | ||||||||||||||||||||
2019 | 2018 | 2018 | 2019 | 2018 | 2018 | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Corporate Credit | $ | 103,268 | $ | 75,768 | $ | 98,188 | $ | 87,723 | $ | 66,155 | $ | 82,812 | |||||||||||
Structured Credit | 45,243 | 36,889 | 42,693 | 40,514 | 31,854 | 37,932 | |||||||||||||||||
Direct Origination | 17,421 | 13,639 | 16,715 | 15,358 | 12,511 | 14,395 | |||||||||||||||||
Advisory & Other | 27,737 | 20,340 | 16,782 | 13,265 | 6,202 | 8,932 | |||||||||||||||||
Total | $ | 193,669 | $ | 146,636 | $ | 174,378 | $ | 156,860 | $ | 116,722 | $ | 144,071 | |||||||||||
Investment Management Agreement - AAM
Apollo, through its consolidated subsidiary, AAM, provides asset management services to Athene with respect to assets in the Athene Accounts, including asset allocation services, direct asset management services, asset and liability matching management, mergers and acquisitions, asset diligence, hedging and other asset management services and receives management fees for providing these services. The Company, through AAM, also provides sub-allocation services with respect to a portion of the assets in the Athene Accounts. See note 14 to the condensed consolidated financial statements for more details regarding the fee rates of the investment management and sub-allocation fee arrangements with respect to the assets in the Athene Accounts.
The following table presents the aggregate Athene Sub-Allocated Total AUM by asset class tier:
As of March 31, 2019 | |||
(in millions) | |||
Core Assets | $ | 31,928 | |
Core Plus Assets | 29,596 | ||
Yield Assets | 40,771 | ||
High Alpha | 4,751 | ||
Cash, Treasuries, Equity and Alternatives | 7,156 | ||
Total | $ | 114,202 | |
Investment Advisory and Sub-Advisory Agreements - AAME
Apollo, through AAME, sub-advises the Athora Accounts and broadly refers to “Athora Sub-Advised” assets as those assets in the Athora Accounts which the Company explicitly sub-advises as well as those assets in the Athora Accounts which are invested directly in funds and investment vehicles Apollo manages. The Company refers to the portion of the Athora AUM that is not Athora Sub-Advised AUM as “Athora Non-Sub Advised” AUM. See note 14 to the condensed consolidated financial statements for more details regarding the fee arrangements with respect to the assets in the Athora Accounts.
- 67-
The following table presents Athora Sub-Advised and Athora Non-Sub-Advised AUM:
As of March 31, | As of December 31, | ||||||||||
2019 | 2018 | 2018 | |||||||||
(in millions) | |||||||||||
Sub-Advised AUM | $ | 3,187 | $ | 1,449 | $ | 3,032 | |||||
Non-Sub-Advised AUM | 10,732 | 6,799 | 4,952 | ||||||||
Total AUM | $ | 13,919 | $ | 8,248 | $ | 7,984 | |||||
The following table presents total AUM and Fee-Generating AUM amounts for our private equity segment:
Total AUM | Fee-Generating AUM | ||||||||||||||||||||||
As of March 31, | As of December 31, | As of March 31, | As of December 31, | ||||||||||||||||||||
2019 | 2018 | 2018 | 2019 | 2018 | 2018 | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Traditional Private Equity Funds | $ | 62,134 | $ | 64,310 | $ | 60,680 | $ | 39,374 | $ | 39,319 | $ | 39,519 | |||||||||||
Hybrid Capital | 9,128 | 7,557 | 8,886 | 2,908 | 4,033 | 3,025 | |||||||||||||||||
Natural Resources | 6,063 | 4,985 | 5,520 | 4,090 | 4,167 | 4,089 | |||||||||||||||||
Total | $ | 77,325 | $ | 76,852 | $ | 75,086 | $ | 46,372 | $ | 47,519 | $ | 46,633 | |||||||||||
The following table presents total AUM and Fee-Generating AUM amounts for our real assets segment:
Total AUM | Fee-Generating AUM | ||||||||||||||||||||||
As of March 31, | As of December 31, | As of March 31, | As of December 31, | ||||||||||||||||||||
2019 | 2018 | 2018 | 2019 | 2018 | 2018 | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Real Estate | $ | 22,940 | $ | 15,388 | $ | 21,971 | $ | 17,978 | $ | 11,412 | $ | 16,873 | |||||||||||
Principal Finance | 6,921 | 8,078 | 7,050 | 5,368 | 6,352 | 5,468 | |||||||||||||||||
Infrastructure | 2,139 | 462 | 1,774 | 1,687 | 462 | 1,322 | |||||||||||||||||
Total | $ | 32,000 | $ | 23,928 | $ | 30,795 | $ | 25,033 | $ | 18,226 | $ | 23,663 | |||||||||||
The following tables summarize changes in total AUM for each of Apollo’s three segments:
For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||||||||||||
Credit | Private Equity | Real Assets | Total | Credit | Private Equity | Real Assets | Total | ||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||
Change in Total AUM(1): | |||||||||||||||||||||||||||||||
Beginning of Period | $ | 174,378 | $ | 75,086 | $ | 30,795 | $ | 280,259 | $ | 144,807 | $ | 80,694 | $ | 23,427 | $ | 248,928 | |||||||||||||||
Inflows | 21,237 | 2,094 | 1,606 | 24,937 | 3,289 | 495 | 879 | 4,663 | |||||||||||||||||||||||
Outflows(2) | (2,362 | ) | (39 | ) | (226 | ) | (2,627 | ) | (1,396 | ) | (143 | ) | — | (1,539 | ) | ||||||||||||||||
Net Flows | 18,875 | 2,055 | 1,380 | 22,310 | 1,893 | 352 | 879 | 3,124 | |||||||||||||||||||||||
Realizations | (234 | ) | (1,171 | ) | (336 | ) | (1,741 | ) | (1,419 | ) | (2,029 | ) | (621 | ) | (4,069 | ) | |||||||||||||||
Market Activity(3) | 650 | 1,355 | 161 | 2,166 | 1,355 | (2,165 | ) | 243 | (567 | ) | |||||||||||||||||||||
End of Period | $ | 193,669 | $ | 77,325 | $ | 32,000 | $ | 302,994 | $ | 146,636 | $ | 76,852 | $ | 23,928 | $ | 247,416 | |||||||||||||||
(1) | At the individual segment level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income. |
- 68-
(2) | Outflows for Total AUM include redemptions of $445.2 million and $184.2 million during the three months ended March 31, 2019 and 2018, respectively. |
(3) | Includes foreign exchange impacts of $(370.1) million, $(43.2) million and $(40.4) million for credit, private equity and real assets, respectively, during the three months ended March 31, 2019, and foreign exchange impacts of $780.7 million, $61.0 million and $88.5 million for credit, private equity and real assets, respectively, during the three months ended March 31, 2018. |
Total AUM was $303.0 billion at March 31, 2019, an increase of $22.7 billion, or 8.1%, compared to $280.3 billion at December 31, 2018. The net increase was primarily due to:
Net flows of $22.3 billion primarily related to:
• | a $18.9 billion increase related to funds we manage in the credit segment primarily consisting of an increase in AUM in the advisory and other category as a result of the acquisition of Aspen Insurance Holdings Limited and Athora’s acquisition of Generali Belgium, which added approximately $7.5 billion and $6.5 billion of AUM, respectively, an increase in AUM relating to Athene of $3.9 billion as a result of portfolio company activity and subscriptions of $1.1 billion across our corporate credit funds. These increases were offset by net segment transfers of $1.5 billion; |
• | a $2.1 billion increase related to funds we manage in the private equity segment consisting of subscriptions of $2.1 billion primarily related to certain traditional private equity fund co-investments and Hybrid Value Fund of $1.2 billion and $0.4 billion, respectively; and |
• | a $1.4 billion increase related to funds we manage in the real assets segment primarily consisting of net segment transfers of $1.5 billion. |
Market activity of $2.2 billion primarily related to:
• | a $1.4 billion increase related to funds we manage in the private equity segment as a result of appreciation in Fund VIII and co-investment vehicles. |
Offsetting these increases were:
Realizations of $1.7 billion primarily related to:
• | $1.2 billion related to funds we manage in the private equity segment primarily consisting of distributions of $0.5 billion, $0.4 billion and $0.2 billion from Fund VIII, Fund VI and certain hybrid capital funds, respectively; |
• | $0.3 billion related to funds we manage in the real assets segment primarily consisting of distributions from our principal finance funds; and |
• | $0.2 billion related to funds we manage in the credit segment primarily consisting of distributions from our direct origination funds. |
The following tables summarize changes in Fee-Generating AUM for each of Apollo’s three segments:
For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||||||||||||
Credit | Private Equity | Real Assets | Total | Credit | Private Equity | Real Assets | Total | ||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||
Change in Fee-Generating AUM(1): | |||||||||||||||||||||||||||||||
Beginning of Period | $ | 144,071 | $ | 46,633 | $ | 23,663 | $ | 214,367 | $ | 116,352 | $ | 34,063 | $ | 18,550 | $ | 168,965 | |||||||||||||||
Inflows | 14,345 | 134 | 1,480 | 15,959 | 3,017 | 23,529 | 1 | 26,547 | |||||||||||||||||||||||
Outflows(2) | (2,204 | ) | (227 | ) | (9 | ) | (2,440 | ) | (2,341 | ) | (10,081 | ) | — | (12,422 | ) | ||||||||||||||||
Net Flows | 12,141 | (93 | ) | 1,471 | 13,519 | 676 | 13,448 | 1 | 14,125 | ||||||||||||||||||||||
Realizations | (102 | ) | (194 | ) | (121 | ) | (417 | ) | (888 | ) | (17 | ) | (445 | ) | (1,350 | ) | |||||||||||||||
Market Activity(3) | 750 | 26 | 20 | 796 | 582 | 25 | 120 | 727 | |||||||||||||||||||||||
End of Period | $ | 156,860 | $ | 46,372 | $ | 25,033 | $ | 228,265 | $ | 116,722 | $ | 47,519 | $ | 18,226 | $ | 182,467 | |||||||||||||||
(1) | At the individual segment level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income. |
(2) | Outflows for Fee-Generating AUM include redemptions of $442.2 million and $172.1 million during the three months ended March 31, 2019 and 2018, respectively. |
- 69-
(3) | Includes foreign exchange impacts of $(142.8) million and $(32.6) million for credit and real assets, respectively, during the three months ended March 31, 2019, and foreign exchange impacts of $356.4 million, $11.4 million and $85.7 million for credit, private equity and real assets, respectively, during the three months ended March 31, 2018. |
Total Fee-Generating AUM was $228.3 billion at March 31, 2019, an increase of $13.9 billion or 6.5%, compared to $214.4 billion at December 31, 2018. The net increase was primarily due to:
Net flows of $13.5 billion primarily related to:
• | a $12.1 billion increase related to funds we manage in the credit segment primarily consisting of an increase in AUM in advisory and other as a result of Athora’s acquisition of Generali Belgium, which added approximately $6.5 billion of AUM, an increase in AUM relating to Athene of $3.9 billion as a result of portfolio company activity and subscriptions throughout our corporate credit funds of $1.0 billion; and |
• | a $1.5 billion increase related to funds we manage in the real assets segment primarily consisting of net segment transfers of $1.2 billion and $0.3 billion of fee-generating deployment related to certain infrastructure funds. |
Market activity of $0.8 billion primarily related to:
• | a $0.8 billion increase related to funds we manage in the credit segment as a result of appreciation across our corporate credit funds. |
Capital Deployed and Uncalled Commitments
Capital deployed is the aggregate amount of capital that has been invested during a given period by our commitment-based funds, SIAs that have a defined maturity date and funds and SIAs in our real estate debt strategy. Uncalled commitments, by contrast, represents unfunded capital commitments that certain of Apollo’s funds and SIAs have received from fund investors to fund future or current fund investments and expenses.
Capital deployed and uncalled commitments are indicative of the pace and magnitude of fund capital that is deployed or will be deployed, and which therefore could result in future revenues that include management fees, transaction fees and performance fees to the extent they are fee-generating. Capital deployed and uncalled commitments can also give rise to future costs that are related to the hiring of additional resources to manage and account for the additional capital that is deployed or will be deployed. Management uses capital deployed and uncalled commitments as key operating metrics since we believe the results measure our fund’s investment activities.
Capital Deployed
The following table summarizes the capital deployed for funds and SIAs with a defined maturity date by segment:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(in millions) | |||||||
Credit | $ | 908 | $ | 603 | |||
Private Equity | 3,116 | 1,422 | |||||
Real Assets | 255 | 191 | |||||
Total capital deployed | $ | 4,279 | $ | 2,216 | |||
Uncalled Commitments
The following table summarizes the uncalled commitments by segment:
As of March 31, 2019 | As of December 31, 2018 | ||||||
(in millions) | |||||||
Credit | $ | 7,015 | $ | 8,066 | |||
Private Equity | 39,918 | 41,585 | |||||
Real Assets | 6,003 | 5,980 | |||||
Total uncalled commitments(1) | $ | 52,936 | $ | 55,631 | |||
(1) | As of March 31, 2019 and December 31, 2018, $45.8 billion and $48.5 billion, respectively, represented the amount of capital available for investment or reinvestment subject to the provisions of the applicable limited partnership agreements or other governing agreements |
- 70-
of the funds, partnerships and accounts we manage. These amounts exclude uncalled commitments which can only be called for fund fees and expenses.
The Historical Investment Performance of Our Funds
Below we present information relating to the historical performance of our funds, including certain legacy Apollo funds that do not have a meaningful amount of unrealized investments, and in respect of which the general partner interest has not been contributed to us.
When considering the data presented below, you should note that the historical results of our funds are not indicative of the future results that you should expect from such funds, from any future funds we may raise or from your investment in our Class A shares.
An investment in our Class A shares is not an investment in any of the Apollo funds, and the assets and revenues of our funds are not directly available to us. The historical and potential future returns of the funds we manage are not directly linked to returns on our Class A shares. Therefore, you should not conclude that continued positive performance of the funds we manage will necessarily result in positive returns on an investment in our Class A shares. However, poor performance of the funds that we manage would cause a decline in our revenue from such funds, and would therefore have a negative effect on our performance and in all likelihood the value of our Class A shares.
Moreover, the historical returns of our funds should not be considered indicative of the future results you should expect from such funds or from any future funds we may raise. There can be no assurance that any Apollo fund will continue to achieve the same results in the future.
Finally, our private equity IRRs have historically varied greatly from fund to fund. For example, Fund IV generated a 12% gross IRR and a 9% net IRR since its inception through March 31, 2019, while Fund V generated a 61% gross IRR and a 44% net IRR since its inception through March 31, 2019. Accordingly, the IRR going forward for any current or future fund may vary considerably from the historical IRR generated by any particular fund, or for our private equity funds as a whole. Future returns will also be affected by the applicable risks, including risks of the industries and businesses in which a particular fund invests. See “Item 1A. Risk Factors—Risks Related to Our Businesses—The historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our Class A shares and our Preferred shares” in the 2018 Annual Report.
- 71-
Investment Record
The following table summarizes the investment record by segment of Apollo’s significant commitment-based funds that have a defined maturity date in which investors make a commitment to provide capital at the formation of such funds and deliver capital when called as investment opportunities become available. The funds included in the investment record table below have greater than $500 million of AUM and/or form part of a flagship series of funds.
All amounts are as of March 31, 2019, unless otherwise noted:
($ in millions) | Vintage Year | Total AUM | Committed Capital | Total Invested Capital | Realized Value | Remaining Cost | Unrealized Value | Total Value | Gross IRR | Net IRR | ||||||||||||||||||||||||||
Private Equity: | ||||||||||||||||||||||||||||||||||||
Fund IX | 2018 | $ | 24,704 | $ | 24,729 | $ | 1,636 | $ | — | $ | 1,636 | $ | 1,696 | $ | 1,696 | NM | (1) | NM | (1) | |||||||||||||||||
Fund VIII | 2013 | 19,709 | 18,377 | 15,475 | 5,714 | 12,626 | 16,190 | 21,904 | 17 | % | 11 | % | ||||||||||||||||||||||||
Fund VII | 2008 | 4,577 | 14,677 | 16,315 | 30,931 | 2,959 | 2,389 | 33,320 | 34 | 25 | ||||||||||||||||||||||||||
Fund VI | 2006 | 1,346 | 10,136 | 12,457 | 20,357 | 1,149 | 734 | 21,091 | 12 | 9 | ||||||||||||||||||||||||||
Fund V | 2001 | 264 | 3,742 | 5,192 | 12,715 | 120 | 9 | 12,724 | 61 | 44 | ||||||||||||||||||||||||||
Fund I, II, III, IV & MIA(2) | Various | 13 | 7,320 | 8,753 | 17,400 | — | — | 17,400 | 39 | 26 | ||||||||||||||||||||||||||
Traditional Private Equity Funds(3) | $ | 50,613 | $ | 78,981 | $ | 59,828 | $ | 87,117 | $ | 18,490 | $ | 21,018 | $ | 108,135 | 39 | % | 25 | % | ||||||||||||||||||
ANRP II | 2016 | 3,413 | 3,454 | 2,006 | 827 | 1,642 | 1,928 | 2,755 | 30 | 17 | ||||||||||||||||||||||||||
ANRP I | 2012 | 710 | 1,323 | 1,127 | 938 | 657 | 467 | 1,405 | 7 | 3 | ||||||||||||||||||||||||||
AION | 2013 | 763 | 826 | 621 | 279 | 427 | 566 | 845 | 18 | 9 | ||||||||||||||||||||||||||
Hybrid Value Fund | 2019 | 3,234 | 3,238 | 114 | 5 | 114 | 116 | 121 | NM | (1) | NM | (1) | ||||||||||||||||||||||||
Total Private Equity | $ | 58,733 | $ | 87,822 | $ | 63,696 | $ | 89,166 | $ | 21,330 | $ | 24,095 | $ | 113,261 | ||||||||||||||||||||||
Credit: | ||||||||||||||||||||||||||||||||||||
Structured Credit Funds | ||||||||||||||||||||||||||||||||||||
FCI III | 2017 | $ | 2,747 | $ | 1,906 | $ | 1,800 | $ | 694 | $ | 1,460 | $ | 1,601 | $ | 2,295 | NM | (1) | NM | (1) | |||||||||||||||||
FCI II | 2013 | 2,236 | 1,555 | 2,577 | 1,527 | 1,675 | 1,594 | 3,121 | 9 | % | 5 | % | ||||||||||||||||||||||||
FCI I | 2012 | 683 | 559 | 1,535 | 1,410 | 654 | 551 | 1,961 | 11 | 8 | ||||||||||||||||||||||||||
SCRF IV (6) | 2017 | 2,826 | 2,502 | 2,160 | 582 | 1,755 | 1,764 | 2,346 | NM | (1) | NM | (1) | ||||||||||||||||||||||||
SCRF III | 2015 | — | 1,238 | 2,110 | 2,428 | — | — | 2,428 | 18 | 14 | ||||||||||||||||||||||||||
SCRF II | 2012 | — | 104 | 467 | 528 | — | — | 528 | 15 | 12 | ||||||||||||||||||||||||||
SCRF I | 2008 | — | 118 | 240 | 357 | — | — | 357 | 33 | 26 | ||||||||||||||||||||||||||
Total Credit | $ | 8,492 | $ | 7,982 | $ | 10,889 | $ | 7,526 | $ | 5,544 | $ | 5,510 | $ | 13,036 | ||||||||||||||||||||||
Real Assets: | ||||||||||||||||||||||||||||||||||||
European Principal Finance Funds | ||||||||||||||||||||||||||||||||||||
EPF III(4) | 2017 | $ | 4,569 | $ | 4,511 | $ | 1,640 | $ | 12 | $ | 1,628 | $ | 1,831 | $ | 1,843 | NM | (1) | NM | (1) | |||||||||||||||||
EPF II(4) | 2012 | 1,928 | 3,440 | 3,442 | 3,980 | 847 | 1,110 | 5,090 | 16 | % | 10 | % | ||||||||||||||||||||||||
EPF I(4) | 2007 | 246 | 1,453 | 1,909 | 3,197 | — | 9 | 3,206 | 23 | 17 | ||||||||||||||||||||||||||
U.S. RE Fund II(5) | 2016 | 1,328 | 1,233 | 739 | 368 | 520 | 640 | 1,008 | 18 | 15 | ||||||||||||||||||||||||||
U.S. RE Fund I(5) | 2012 | 363 | 652 | 635 | 670 | 239 | 274 | 944 | 14 | 11 | ||||||||||||||||||||||||||
Asia RE Fund(5) | 2017 | 629 | 709 | 325 | 198 | 171 | 209 | 407 | 19 | 13 | ||||||||||||||||||||||||||
Infrastructure Equity Fund | 2018 | 922 | 897 | 634 | 69 | 579 | 599 | 668 | NM | (1) | NM | (1) | ||||||||||||||||||||||||
Total Real Assets | $ | 9,985 | $ | 12,895 | $ | 9,324 | $ | 8,494 | $ | 3,984 | $ | 4,672 | $ | 13,166 | ||||||||||||||||||||||
(1) | Data has not been presented as the fund commenced investing capital less than 24 months prior to the period indicated and such information was deemed not meaningful. |
(2) | The general partners and managers of Funds I, II and MIA, as well as the general partner of Fund III, were excluded assets in connection with the 2007 Reorganization. As a result, Apollo did not receive the economics associated with these entities. The investment performance of these funds, combined with Fund IV, is presented to illustrate fund performance associated with Apollo’s Managing Partners and other investment professionals. |
(3) | Total IRR is calculated based on total cash flows for all funds presented. |
(4) | Funds are denominated in Euros and historical figures are translated into U.S. dollars at an exchange rate of €1.00 to $1.12 as of March 31, 2019. |
(5) | U.S. RE Fund I, U.S. RE Fund II and Asia RE Fund had $156 million, $761 million and $366 million of co-investment commitments as of March 31, 2019, respectively, which are included in the figures in the table. A co-invest entity within U.S. RE Fund I is denominated in pound sterling and translated into U.S. dollars at an exchange rate of £1.00 to $1.30 as of March 31, 2019. |
(6) | Remaining cost for certain of our credit funds may include physical cash called, invested or reserved for certain levered investments. |
- 72-
Private Equity
The following table summarizes the investment record for distressed investments made in our traditional private equity fund portfolios, since the Company’s inception. All amounts are as of March 31, 2019:
Total Invested Capital | Total Value | Gross IRR | ||||||||
(in millions) | ||||||||||
Distressed for Control | $ | 7,890 | $ | 19,118 | 29 | % | ||||
Non-Control Distressed | 5,416 | 8,467 | 71 | |||||||
Total | 13,306 | 27,585 | 49 | |||||||
Corporate Carve-outs, Opportunistic Buyouts and Other Credit(1) | 46,522 | 80,550 | 21 | |||||||
Total | $ | 59,828 | $ | 108,135 | 39 | % | ||||
(1) | Other Credit is defined as investments in debt securities of issuers other than portfolio companies that are not considered to be distressed. |
The following tables provide additional detail on the composition of the Fund VIII, Fund VII and Fund VI private equity portfolios based on investment strategy. Amounts for Fund I, II, III, IV, V and IX are included in the table above but not presented below as their remaining value is less than $100 million, the fund has been liquidated or the fund commenced investing capital less than 24 months prior to March 31, 2019 and such information was deemed not meaningful. All amounts are as of March 31, 2019:
Fund VIII(1)
Total Invested Capital | Total Value | ||||||
(in millions) | |||||||
Corporate Carve-outs | $ | 2,673 | $ | 5,071 | |||
Opportunistic Buyouts | 12,282 | 15,997 | |||||
Distressed | 520 | 836 | |||||
Total | $ | 15,475 | $ | 21,904 | |||
Fund VII(1)
Total Invested Capital | Total Value | ||||||
(in millions) | |||||||
Corporate Carve-outs | $ | 2,394 | $ | 4,024 | |||
Opportunistic Buyouts | 4,338 | 10,552 | |||||
Distressed/Other Credit(2) | 9,583 | 18,744 | |||||
Total | $ | 16,315 | $ | 33,320 | |||
Fund VI
Total Invested Capital | Total Value | ||||||
(in millions) | |||||||
Corporate Carve-outs | $ | 3,397 | $ | 5,860 | |||
Opportunistic Buyouts | 6,374 | 10,254 | |||||
Distressed/Other Credit(2) | 2,686 | 4,977 | |||||
Total | $ | 12,457 | $ | 21,091 | |||
(1) | Committed capital less unfunded capital commitments for Fund VIII and Fund VII $15.0 billion and $14.2 billion, respectively, which represents capital commitments from limited partners to invest in such funds less capital that is available for investment or reinvestment subject to the provisions of the applicable limited partnership agreement or other governing agreements. |
(2) | The distressed investment strategy includes distressed for control, non-control distressed and other credit. |
During the recovery and expansionary periods of 1994 through 2000 and late 2003 through the first half of 2007, our private equity funds invested or committed to invest approximately $13.7 billion primarily in traditional and corporate partner
- 73-
buyouts. During the recessionary periods of 1990 through 1993, 2001 through late 2003 and the recessionary and post recessionary periods (beginning the second half of 2007 through March 31, 2019), our private equity funds have invested $51.9 billion, of which $19.2 billion was in distressed buyouts and debt investments when the debt securities of quality companies traded at deep discounts to par value. Our average entry multiple for Fund VIII, VII and VI was 5.7x, 6.1x and 7.7x, respectively, as of March 31, 2019. Our average entry multiple for a private equity fund is the average of the total enterprise value over an applicable adjusted earnings before interest, taxes, depreciation and amortization which may incorporate certain adjustments based on the investment team’s estimate and we believe captures the true economics of our funds’ investments in portfolio companies. The average entry multiple of actively investing funds may include committed investments not yet closed.
Credit
The following table presents the gross and net returns for Apollo’s credit segment by category type:
Gross Returns | Net Returns | ||||
Category | For the Three Months Ended March 31, 2019 | For the Three Months Ended March 31, 2019 | |||
Corporate Credit | 3.9 | % | 3.6 | % | |
Structured Credit | 4.0 | 3.3 | |||
Direct Origination | 2.8 | 2.1 | |||
Permanent Capital
The following table summarizes the investment record for our permanent capital vehicles by segment, excluding Athene-related and Athora-related assets managed or advised by Athene Asset Management and AAME:
Total AUM | Total Returns(1) | ||||||||||
IPO Year(2) | As of March 31, 2019 | For the Three Months Ended March 31, 2019 | For the Three Months Ended March 31, 2018 | ||||||||
Credit: | (in millions) | ||||||||||
MidCap(3) | N/A | $ | 8,740 | 3 | % | 4 | % | ||||
AIF | 2013 | 373 | 9 | 2 | |||||||
AFT | 2011 | 404 | 5 | 6 | |||||||
AINV/Other(4) | 2004 | 5,290 | 26 | (5 | ) | ||||||
Real Assets: | |||||||||||
ARI(5) | 2009 | 5,342 | 12 | % | — | ||||||
Total | $ | 20,149 | |||||||||
(1) | Total returns are based on the change in closing trading prices during the respective periods presented taking into account dividends and distributions, if any, as if they were reinvested without regard to commission. |
(2) | An IPO year represents the year in which the vehicle commenced trading on a national securities exchange. |
(3) | MidCap is not a publicly traded vehicle and therefore IPO year is not applicable. The returns presented are a gross return based on NAV. The net returns based on NAV were 2% and 3% for the three months ended March 31, 2019 and March 31, 2018, respectively. |
(4) | Included within Total AUM of AINV/Other is $1.9 billion of AUM related to a non-traded business development company from which Apollo earns investment-related service fees, but for which Apollo does not provide management or advisory services. Net returns exclude performance related to this AUM. |
(5) | Amounts are as of December 31, 2018. Refer to www.apolloreit.com for the most recent financial information on ARI. The information contained on ARI’s website is not part of this presentation. |
SIAs
As of March 31, 2019, Apollo managed approximately $25 billion of total AUM in SIAs, which include capital deployed from certain SIAs across Apollo’s credit, private equity and real assets funds.
- 74-
Overview of Results of Operations
Revenues
Advisory and Transaction Fees, Net. As a result of providing advisory services with respect to actual and potential credit, private equity, and real assets investments, we are entitled to receive fees for transactions related to the acquisition and, in certain instances, disposition of portfolio companies as well as fees for ongoing monitoring of portfolio company operations and directors’ fees. We also receive advisory fees for advisory services provided to certain credit funds. In addition, monitoring fees are generated on certain structured portfolio company investments. 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, net, in the condensed consolidated statements of operations (see note 2 to our condensed consolidated financial statements for more detail on advisory and transaction fees, net).
The Management Fee Offsets are calculated for each fund as follows:
• | 65%-100% for certain credit funds, gross advisory, transaction and other special fees; |
• | 65%-100% for private equity funds, gross advisory, transaction and other special fees; and |
• | 65%-100% for certain real assets funds, gross advisory, transaction and other special fees. |
Management Fees. The significant growth of the assets we manage has had a positive effect on our revenues. Management fees are typically calculated based upon any of “net asset value,” “gross assets,” “adjusted par asset value,” “adjusted costs of all unrealized portfolio investments,” “capital commitments,” “invested capital,” “adjusted assets,” “capital contributions,” or “stockholders’ equity,” each as defined in the applicable limited partnership agreement and/or management agreement of the unconsolidated funds.
Performance Fees. The general partners of our funds are entitled to an incentive return of normally up to 20% of the total returns of a fund’s capital, depending upon performance of the underlying funds and subject to preferred returns and high water marks, as applicable. Performance fees, categorized as performance allocations, are accounted for as an equity method investment, and effectively, the performance fees for any period are based upon an assumed liquidation of the funds’ assets at the reporting date, and distribution of the net proceeds in accordance with the funds’ allocation provisions. Performance fees categorized as incentive fees, which are not accounted as an equity method investment, are deferred until fees are probable to not be significantly reversed. Prior to the adoption of the new revenue recognition guidance, incentive fees were recognized on an assumed liquidation basis.The majority of performance fees are comprised of performance allocations.
As of March 31, 2019, approximately 54% of the value of our funds’ investments on a gross basis was determined using market-based valuation methods (i.e., reliance on broker or listed exchange quotes) and the remaining 46% was determined primarily by comparable company and industry multiples or discounted cash flow models. For our credit, private equity and real assets segments, the percentage determined using market-based valuation methods as of March 31, 2019 was 76%, 19% and 19%, respectively. See “Item 1A. Risk Factors—Risks Related to Our Businesses—Our funds’ performance, and our performance, may be adversely affected by the financial performance of our funds’ portfolio companies and the industries in which our funds invest” for a discussion regarding certain industry-specific risks that could affect the fair value of our private equity funds’ portfolio company investments.
In our private equity funds, the Company does not earn performance fees until the investors in the fund have achieved cumulative investment returns on invested capital (including management fees and expenses) in excess of an 8% hurdle rate. Additionally, certain of our credit and real assets funds have various performance fee rates and hurdle rates. Certain of our credit and real assets funds allocate performance fees to the general partner in a similar manner as the private equity funds. In our private equity, certain credit and real assets funds, so long as the investors achieve their priority returns, there is a catch-up formula whereby the Company earns a priority return for a portion of the return until the Company’s performance fees equate to its incentive fee rate for that fund; thereafter, the Company participates in returns from the fund at the performance fee rate. Performance fees, categorized as performance allocations, are subject to reversal to the extent that the performance fees distributed exceed the amount due to the general partner based on a fund’s cumulative investment returns. The Company recognizes potential repayment of previously received performance fees as a general partner obligation representing 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 of the reporting date. The actual general partner obligation, however, would not become payable or realized until the end of a fund’s life or as otherwise set forth in the respective limited partnership agreement of the fund.
- 75-
The table below presents an analysis of Apollo’s (i) performance fees receivable on an unconsolidated basis and (ii) realized and unrealized performance fees for Apollo’s combined segments:
As of March 31, 2019 | |||||||||||||||
For the Three Months Ended March 31, 2019 | |||||||||||||||
Performance Fees Receivable on an Unconsolidated Basis | Unrealized Performance Fees | Realized Performance Fees | Total Performance Fees | ||||||||||||
(in thousands) | |||||||||||||||
Credit: | |||||||||||||||
Corporate Credit(1) | $ | 38,999 | $ | 30,256 | $ | 3,327 | $ | 33,583 | |||||||
Structured Credit | 156,681 | 22,542 | (346 | ) | 22,196 | ||||||||||
Direct Origination | 86,940 | 6,881 | 1,007 | 7,888 | |||||||||||
Total Credit | $ | 282,620 | $ | 59,679 | $ | 3,988 | $ | 63,667 | |||||||
Total Credit, net of profit sharing expense | 83,141 | 33,004 | 470 | 33,474 | |||||||||||
Private Equity: | |||||||||||||||
Fund VIII(2) | $ | 509,541 | $ | 68,346 | $ | 57,479 | $ | 125,825 | |||||||
Fund VII(1)(2) | 231 | 20,416 | 734 | 21,150 | |||||||||||
Fund VI(2) | 8,239 | 20,065 | 954 | 21,019 | |||||||||||
Fund IV and V(1) | — | (598 | ) | — | (598 | ) | |||||||||
ANRP I and II(1)(2) | 40,947 | 6,818 | 325 | 7,143 | |||||||||||
Other(1)(3) | 66,373 | 13,502 | 964 | 14,466 | |||||||||||
Total Private Equity | $ | 625,331 | $ | 128,549 | $ | 60,456 | $ | 189,005 | |||||||
Total Private Equity, net of profit sharing expense | 369,379 | 77,192 | 22,729 | 99,921 | |||||||||||
Real Assets: | |||||||||||||||
Principal Finance | $ | 116,043 | $ | (6,116 | ) | $ | 18 | $ | (6,098 | ) | |||||
U.S. RE Fund I & II | 14,546 | (1,612 | ) | 199 | (1,413 | ) | |||||||||
Other(3) | 15,227 | 3,883 | (211 | ) | 3,672 | ||||||||||
Total Real Assets | $ | 145,816 | $ | (3,845 | ) | $ | 6 | $ | (3,839 | ) | |||||
Total Real Assets, net of profit sharing expense | 80,383 | (1,574 | ) | 112 | (1,462 | ) | |||||||||
Total | $ | 1,053,767 | $ | 184,383 | $ | 64,450 | $ | 248,833 | |||||||
Total, net of profit sharing expense(4) | $ | 532,903 | $ | 108,622 | $ | 23,311 | $ | 131,933 | |||||||
(1) | As of March 31, 2019, certain credit funds and certain private equity funds had $0.3 million and $102.6 million, respectively, in general partner obligations to return previously distributed performance fees. The fair value gain on investments and income at the fund level needed to reverse the general partner obligations for certain credit funds and certain private equity funds was $1.5 million and $879 million, respectively, as of March 31, 2019. |
(2) | As of March 31, 2019, the remaining investments and escrow cash of Fund VIII were valued at 121% of the fund’s unreturned capital, which was above the required escrow ratio of 115%. As of March 31, 2019, the remaining investments and escrow cash of Fund VII, Fund VI, ANRP I and ANRP II were valued at 80%, 71%, 69% and 109% of the fund’s unreturned capital, respectively, which were below the required escrow ratio of 115%. As a result, these funds are required to place in escrow current and future performance fee distributions to the general partner until the specified return ratio of 115% is met (at the time of a future distribution) or upon liquidation. As of March 31, 2019, Fund VII had $128.5 million of gross performance fees, or $73.1 million net of profit sharing, in escrow. As of March 31, 2019, Fund VI had $167.6 million of gross performance fees, or $112.4 million net of profit sharing, in escrow. As of March 31, 2019, ANRP I had $38.7 million of gross performance fees, or $24.3 million net of profit sharing, in escrow. As of March 31, 2019, ANRP II had $18.4 million of gross performance fees, or $12.5 million net of profit sharing, in escrow. With respect to Fund VII, Fund VI, ANRP II and ANRP I, realized performance fees currently distributed to the general partner are limited to potential tax distributions and interest on escrow balances per the funds’ partnership agreements. Performance fees receivable as of March 31, 2019 include interest earned on escrow balances that is not subject to contingent repayment. |
(3) | Other includes certain SIAs. |
(4) | There was a corresponding profit sharing payable of $520.9 million as of March 31, 2019, including profit sharing payable related to amounts in escrow and contingent consideration obligations of $76.5 million. |
The general partners of certain of our credit funds accrue performance fees, categorized as performance allocations, when the fair value of investments exceeds the cost basis of the individual investors’ investments in the fund, including any allocable share of expenses incurred in connection with such investments, which we refer to as “high water marks.” These high water marks are applied on an individual investor basis. Certain of our credit funds have investors with various high water marks, the achievement of which is subject to market conditions and investment performance.
- 76-
Performance fees from our private equity funds and certain credit and real assets funds are subject to contingent repayment by the general partner in the event of future losses to the extent that the cumulative performance fees distributed from inception to date exceeds the amount computed as due to the general partner at the final distribution. These general partner obligations, if applicable, are included in due to related parties on the condensed consolidated statements of financial condition.
The following table summarizes our performance fees since inception for our combined segments through March 31, 2019:
Performance Fees Since Inception(1) | |||||||||||||||||||
Undistributed by Fund and Recognized | Distributed by Fund and Recognized(2) | Total Undistributed and Distributed by Fund and Recognized(3) | General Partner Obligation(3) | Maximum Performance Fees Subject to Potential Reversal(4) | |||||||||||||||
(in millions) | |||||||||||||||||||
Credit(5): | |||||||||||||||||||
Corporate Credit | $ | 39.0 | $ | 1,062.5 | $ | 1,101.5 | $ | 0.3 | $ | 55.0 | |||||||||
Structured Credit | 156.7 | 128.1 | 284.8 | — | 156.7 | ||||||||||||||
Direct Origination | 86.9 | — | 86.9 | — | 86.9 | ||||||||||||||
Total Credit | 282.6 | 1,190.6 | 1,473.2 | 0.3 | 298.6 | ||||||||||||||
Private Equity: | |||||||||||||||||||
Fund VIII | 509.6 | 488.1 | 997.7 | — | 794.3 | ||||||||||||||
Fund VII | 0.2 | 3,129.5 | 3,129.7 | 18.2 | 466.0 | ||||||||||||||
Fund VI | 8.2 | 1,662.0 | 1,670.2 | — | 203.9 | ||||||||||||||
Fund IV and V | — | 2,053.1 | 2,053.1 | 29.9 | 1.9 | ||||||||||||||
ANRP I and II | 40.9 | 90.8 | 131.7 | 12.0 | 60.0 | ||||||||||||||
Other | 66.4 | 704.5 | 770.9 | 42.5 | 111.0 | ||||||||||||||
Total Private Equity | 625.3 | 8,128.0 | 8,753.3 | 102.6 | 1,637.1 | ||||||||||||||
Real Assets: | |||||||||||||||||||
Principal Finance | 116.0 | 369.8 | 485.8 | — | 243.7 | ||||||||||||||
U.S. RE Fund I and II | 14.6 | 26.4 | 41.0 | — | 34.8 | ||||||||||||||
Other(6) | 15.2 | 32.3 | 47.5 | — | 30.2 | ||||||||||||||
Total Real Assets | 145.8 | 428.5 | 574.3 | — | 308.7 | ||||||||||||||
Total | $ | 1,053.7 | $ | 9,747.1 | $ | 10,800.8 | $ | 102.9 | $ | 2,244.4 | |||||||||
(1) | Certain funds are denominated in Euros and historical figures are translated into U.S. dollars at an exchange rate of €1.00 to $1.12 as of March 31, 2019. Certain funds are denominated in pound sterling and translated into U.S. dollars at an exchange rate of £1.00 to $1.30 as of March 31, 2019. |
(2) | Amounts in “Distributed by Fund and Recognized” for the CPI, Gulf Stream Asset Management, LLC (“Gulf Stream”) and Stone Tower funds and SIAs are presented for activity subsequent to the respective acquisition dates. |
(3) | Amounts were computed based on the fair value of fund investments on March 31, 2019. Performance fees have been allocated to and recognized by the general partner. Based on the amount allocated, a portion is subject to potential reversal or, to the extent applicable, has been reduced by the general partner obligation to return previously distributed performance fees at March 31, 2019. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of the fund’s investments based on contractual termination of the fund. |
(4) | Represents the amount of performance fees that would be reversed if remaining fund investments became worthless on March 31, 2019. Amounts subject to potential reversal of performance fees include amounts undistributed by a fund (i.e., the performance fees receivable), as well as a portion of the amounts that have been distributed by a fund, net of taxes not subject to a general partner obligation to return previously distributed performance fees, except for those funds that are gross of taxes as defined in the respective funds’ governing documents. |
(5) | Amounts exclude certain performance fees from business development companies and Redding Ridge Holdings. |
(6) | Other includes certain SIAs. |
Expenses
Compensation and Benefits. Our most significant expense is compensation and benefits expense. This consists of fixed salary, discretionary and non-discretionary bonuses, profit sharing expense associated with the performance fees earned from credit, private equity, and real assets funds and compensation expense associated with the vesting of non-cash equity-based awards.
- 77-
Our compensation arrangements with certain partners and employees contain a significant performance-based incentive component. Therefore, as our net revenues increase, our compensation costs rise. Our compensation costs also reflect the increased investment in people as we expand geographically and create new funds.
In addition, certain professionals and selected other individuals have a profit sharing interest in the performance fees earned in relation to our private equity, certain credit and real assets funds in order to better align their interests with our own and with those of the investors in these funds. Profit sharing expense is part of our compensation and benefits expense and is generally based upon a fixed percentage of credit, private equity and real assets performance fees. Profit sharing expense can reverse during periods when there is a decline in performance fees that were previously recognized. Profit sharing amounts are normally distributed to employees after the corresponding investment gains have been realized and generally before preferred returns are achieved for the investors. Therefore, changes in our unrealized performance fees have the same effect on our profit sharing expense. Profit sharing expense increases when unrealized performance fees increases. Realizations only impact profit sharing expense to the extent that the effects on investments have not been recognized previously. If losses on other investments within a fund are subsequently realized, the profit sharing amounts previously distributed are normally subject to a general partner obligation to return performance fees previously distributed back to the funds. This general partner obligation due to the funds would be realized only when the fund is liquidated, which generally occurs at the end of the fund’s term. However, indemnification obligations also exist for realized gains with respect to Fund IV, Fund V and Fund VI, which, although our Managing Partners and Contributing Partners would remain personally liable, may indemnify our Managing Partners and Contributing Partners for 17.5% to 100% of the previously distributed profits regardless of the fund’s future performance. See note 14 to our condensed consolidated financial statements for further information regarding the Company’s indemnification liability.
Each Managing Partner receives $100,000 per year in base salary for services rendered to us. Additionally, our Managing Partners can receive other forms of compensation. In addition, AHL Awards (as defined in note 12 to our condensed consolidated financial statements) and other equity-based compensation awards have been granted to the Company and certain employees, which amortize over the respective vesting periods. The Company grants equity awards to certain employees, including RSUs, restricted Class A shares and options, that generally vest and become exercisable in quarterly installments or annual installments depending on the contract terms over a period of three to six years. In some instances, vesting of an RSU is also subject to the Company’s receipt of performance fees, within prescribed periods, sufficient to cover the associated equity-based compensation expense. See note 12 to our condensed consolidated financial statements for further discussion of equity-based compensation.
Other Expenses. The balance of our other expenses includes interest, placement fees, and general, administrative and other operating expenses. Interest expense consists primarily of interest related to the 2013 AMH Credit Facilities, the 2018 AMH Credit Facility, the 2024 Senior Notes, the 2026 Senior Notes, the 2029 Senior Notes and the 2048 Senior Notes as discussed in note 10 to our condensed consolidated financial statements. Placement fees are incurred in connection with our capital raising activities. General, administrative and other expenses includes occupancy expense, depreciation and amortization, professional fees and costs related to travel, information technology and administration. Occupancy expense represents charges related to office leases and associated expenses, such as utilities and maintenance fees. Depreciation and amortization of fixed assets is normally calculated using the straight-line method over their estimated useful lives, ranging from two to sixteen years, taking into consideration any residual value. Leasehold improvements are amortized over the shorter of the useful life of the asset or the expected term of the lease. Intangible assets are amortized based on the future cash flows over the expected useful lives of the assets.
Other Income (Loss)
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 our investment portfolio between the opening reporting date and the closing reporting date. Net unrealized gains (losses) are a result of changes in the fair value of unrealized investments and reversal of unrealized gains (losses) due to dispositions of investments during the reporting period. Significant judgment and estimation goes into the assumptions that drive these models and the actual values realized with respect to investments could be materially different from values obtained based on the use of those models. The valuation methodologies applied impact the reported value of investment company holdings and their underlying portfolios in our condensed consolidated financial statements.
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.
- 78-
Other Income (Losses), Net. Other income (losses), net includes gains (losses) arising from the remeasurement of foreign currency denominated assets and liabilities, remeasurement of the tax receivable agreement liability and other miscellaneous non-operating income and expenses.
Income Taxes. The Apollo Operating Group and its subsidiaries generally operate as partnerships for U.S. federal income tax purposes. As a result, except as described below, the Apollo Operating Group has not been subject to U.S. income taxes. However, the U.S. entities, in some cases, are subject to New York City unincorporated business tax (“NYC UBT”), and non-U.S. entities, in some cases, are subject to non-U.S. corporate income taxes. In addition, certain consolidated entities are, or are treated as, corporations for U.S. and non-U.S. tax purposes and therefore subject to federal, state, local and foreign corporate income tax. The Company's provision for income taxes is accounted for in accordance with U.S. GAAP.
Significant judgment is required in determining the provision for income taxes and in evaluating income tax positions, including evaluating uncertainties. We recognize the income tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained upon examination, including resolutions of any related appeals or litigation, based on the technical merits of the positions. The tax benefit is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If a tax position is not considered more likely than not to be sustained, then no benefits of the position are recognized. The Company’s income tax positions are reviewed and evaluated quarterly to determine whether or not we have uncertain tax positions that require financial statement recognition or de-recognition.
Deferred tax assets and liabilities are recognized for the expected future tax consequences, using currently enacted tax rates, of differences between the carrying amount of assets and liabilities and their respective tax basis. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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. The Non-Controlling Interests relating to Apollo Global Management, LLC primarily include the 50.1% and 50.1% ownership interest in the Apollo Operating Group held by the Managing Partners and Contributing Partners through their limited partner interests in Holdings as of March 31, 2019 and 2018, respectively. Non-Controlling Interests also include limited partner interests in certain consolidated funds and VIEs.
The authoritative guidance for Non-Controlling Interests in the condensed consolidated financial statements requires reporting entities to present Non-Controlling Interest as equity and provides guidance on the accounting for transactions between an entity and Non-Controlling Interests. According to the guidance, (1) Non-Controlling Interests are presented as a separate component of shareholders’ equity on the Company’s condensed consolidated statements of financial condition, (2) net income (loss) includes the net income (loss) attributable to the Non-Controlling Interest holders on the Company’s condensed consolidated statements of operations, (3) the primary components of Non-Controlling Interest are separately presented in the Company’s condensed consolidated statements of changes in shareholders’ equity to clearly distinguish the interests in the Apollo Operating Group and other ownership interests in the consolidated entities and (4) profits and losses are allocated to Non-Controlling Interests in proportion to their ownership interests regardless of their basis.
- 79-
Results of Operations
Below is a discussion of our condensed consolidated results of operations for the three months ended March 31, 2019 and 2018. For additional analysis of the factors that affected our results at the segment level, see “—Segment Analysis” below:
For the Three Months Ended March 31, | Amount Change | Percentage Change | ||||||||||||
2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||
Revenues: | ||||||||||||||
Management fees | $ | 380,026 | $ | 286,726 | $ | 93,300 | 32.5 | % | ||||||
Advisory and transaction fees, net | 19,569 | 13,551 | 6,018 | 44.4 | ||||||||||
Investment income (loss): | ||||||||||||||
Performance allocations | 251,497 | (124,165 | ) | 375,662 | NM | |||||||||
Principal investment income (loss) | 26,025 | (12,994 | ) | 39,019 | NM | |||||||||
Total investment income (loss) | 277,522 | (137,159 | ) | 414,681 | NM | |||||||||
Incentive fees | 660 | 3,785 | (3,125 | ) | (82.6 | ) | ||||||||
Total Revenues | 677,777 | 166,903 | 510,874 | 306.1 | ||||||||||
Expenses: | ||||||||||||||
Compensation and benefits: | ||||||||||||||
Salary, bonus and benefits | 119,163 | 115,826 | 3,337 | 2.9 | ||||||||||
Equity-based compensation | 45,077 | 35,525 | 9,552 | 26.9 | ||||||||||
Profit sharing expense | 123,447 | (12,277 | ) | 135,724 | NM | |||||||||
Total compensation and benefits | 287,687 | 139,074 | 148,613 | 106.9 | ||||||||||
Interest expense | 19,108 | 13,797 | 5,311 | 38.5 | ||||||||||
General, administrative and other | 71,662 | 61,677 | 9,985 | 16.2 | ||||||||||
Placement fees | (440 | ) | 327 | (767 | ) | NM | ||||||||
Total Expenses | 378,017 | 214,875 | 163,142 | 75.9 | ||||||||||
Other Income (Loss): | ||||||||||||||
Net gains (losses) from investment activities | 18,829 | (67,133 | ) | 85,962 | NM | |||||||||
Net gains from investment activities of consolidated variable interest entities | 9,466 | 6,532 | 2,934 | 44.9 | ||||||||||
Interest income | 7,076 | 3,559 | 3,517 | 98.8 | ||||||||||
Other income, net | 90 | 4,246 | (4,156 | ) | (97.9 | ) | ||||||||
Total Other Income (Loss) | 35,461 | (52,796 | ) | 88,257 | NM | |||||||||
Income (loss) before income tax provision | 335,221 | (100,768 | ) | 435,989 | NM | |||||||||
Income tax provision | (19,654 | ) | (8,580 | ) | (11,074 | ) | 129.1 | |||||||
Net Income (Loss) | 315,567 | (109,348 | ) | 424,915 | NM | |||||||||
Net (income) loss attributable to Non-Controlling Interests | (166,510 | ) | 51,086 | (217,596 | ) | NM | ||||||||
Net Income (Loss) Attributable to Apollo Global Management, LLC | 149,057 | (58,262 | ) | 207,319 | NM | |||||||||
Net income attributable to Series A Preferred Shareholders | (4,383 | ) | (4,383 | ) | — | — | ||||||||
Net income attributable to Series B Preferred Shareholders | (4,781 | ) | — | (4,781 | ) | NM | ||||||||
Net Income (Loss) Attributable to Apollo Global Management, LLC Class A Shareholders | $ | 139,893 | $ | (62,645 | ) | $ | 202,538 | NM | ||||||
Note: | “NM” denotes not meaningful. Changes from negative to positive amounts and positive to negative amounts are not considered meaningful. Increases or decreases from zero and changes greater than 500% are also not considered meaningful. |
Revenues
Our revenues and other income include fixed components that result from measures of capital and asset valuations and variable components that result from realized and unrealized investment performance, as well as the value of successfully completed transactions.
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Management fees increased by $93.3 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. This change was primarily attributable to the commencement of Fund IX’s investment period in April 2018, resulting in $80.0 million in management fees during the three months ended March 31, 2019, and an increase in management fees earned from Athene of $33.2 million primarily due to its completion of the reinsurance transaction relating to the fixed annuity business of VA Capital Company, L.P. (“VA Capital”) subsequent to March 31, 2018. The increase in management fees was partially offset by decreased management fees earned from Fund VIII of $25.2 million during the three months ended
- 80-
March 31, 2019 as compared to the three months ended March 31, 2018. The decrease in management fees earned from Fund VIII was the result of a change in the basis upon which management fees are earned from capital commitments to invested capital.
Advisory and transaction fees, net, increased by $6.0 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. This change was primarily attributable to an increase in net advisory and transaction fees earned with respect to Fund IX’s portfolio companies of $10.8 million, partially offset by decreases in net advisory and transaction fees earned with respect to portfolio companies of Fund VIII and ANRP II of $2.8 million and $1.3 million, respectively, during the three months ended March 31, 2019, as compared to the same period during 2018.
Performance allocations were $251.5 million for the three months ended March 31, 2019 as compared to performance allocations of $(124.2) million for the three months ended March 31, 2018. The increase in performance allocations was primarily attributable to increased performance allocations earned from Fund VIII, Fund VI, SCRF VI and Apollo Credit Master Fund Ltd. (“Credit Fund”) of $294.4 million, $25.0 million, $21.3 million and $13.4 million, respectively, partially offset by a decrease in performance allocations earned from EPF II of $19.2 million.
The increase in performance allocations from Fund VIII was primarily driven by greater appreciation of the fund’s public portfolio companies primarily in the consumer services, business services and financial services sectors during the three months ended March 31, 2019 as compared to the same period during 2018. The increase in performance fees from Fund VI was primarily driven by appreciation of the fund’s public portfolio companies primarily in the leisure sector, during the three months ended March 31, 2019 as compared to the same period during 2018. The increase in performance allocations from SCRF IV was primarily driven by appreciation from investments in derivatives and CLOs during the three months ended March 31, 2019 as compared to the same period during 2018. The increase in performance allocations from Credit Fund was primarily attributable to higher appreciation on investments in bank loans during the three months ended March 31, 2019 as compared to the same period during 2018. The decrease in performance allocations from EPF II was primarily attributable to decreased appreciation of UK commercial real estate investments and non-performing loans in Ireland during the three months ended March 31, 2019 as compared to the same period during 2018.
Incentive fees decreased by $3.1 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. This change was primarily attributable to a decrease in incentive fees earned from AINV of $3.8 million as a result of the amended and restated investment management agreement, as described in note 14 to our condensed consolidated financial statements. The fee arrangement was revised to be on a total return measure and the total return hurdle rate was not achieved as of March 31, 2019.
Principal investment income was $26.0 million for the three months ended March 31, 2019 as compared to principal investment loss of $13.0 million for the three months ended March 31, 2018. This change was primarily driven by an increase in the value of investments held by certain Apollo funds and other entities in which the Company has a direct interest, mainly with respect to Fund VIII of $34.6 million during the three months ended March 31, 2019, as compared to the same period in 2018.
Expenses
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Compensation and benefits increased by $148.6 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to an increase in profit sharing expense of $135.7 million due to a corresponding increase in performance allocations during the three months ended March 31, 2019, as compared to the same period in 2018. In any period the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance allocations in the period. In addition, equity-based compensation increased by $9.6 million primarily attributable to increased amortization expense relating to grants of RSUs to certain employees under the 2007 Equity Plan subsequent to March 31, 2018.
Included in profit sharing expense is $17.0 million and $15.5 million for the three months ended March 31, 2019 and 2018, respectively, related to 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 (referred to herein as the “Incentive Pool”). Allocations to participants in the Incentive Pool contain both a mandatory component and a discretionary component, each of which may vary year to year. The Incentive Pool is separate from the fund related profit sharing expense and may result in greater variability in compensation and have a variable impact on the blended profit sharing percentage during a particular period. See “—Profit Sharing Expense” in the Critical Accounting Policies section for an overview of the Incentive Pool.
Interest expense increased by $5.3 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018 primarily due to additional interest expense incurred during the three months ended March 31, 2019 as a
- 81-
result of the issuance of the 2029 Senior Notes in February 2019, partially offset by a decrease in interest expense as a result of the repayment of the remaining amount of the 2013 AMH Credit Facilities, as described in note 10 to our condensed consolidated financial statements.
General, administrative and other expenses increased by $10.0 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily driven by an increase in professional fees and technology expenses during the three months ended March 31, 2019 as compared to the same period in 2018.
Other Income (Loss)
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Net gains from investment activities were $18.8 million for the three months ended March 31, 2019, as compared to net losses from investment activities of $67.1 million for the three months ended March 31, 2018. This change was primarily attributable to a gain on the Company’s investment in Athene Holding during the three months ended March 31, 2019 as compared to a loss on the Company’s investment in Athene Holding during the three months ended March 31, 2018. See note 6 to the condensed consolidated financial statements for further information regarding the Company’s investment in Athene Holding.
Net gains from investment activities of consolidated VIEs increased by $2.9 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, primarily driven by increases in net gains from Champ, L.P. during the three months ended March 31, 2019, as compared to the same period in 2018. See note 5 to the condensed consolidated financial statements for details regarding net gains from investment activities of consolidated VIEs.
Interest income increased by $3.5 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018 primarily due to additional interest income earned from money market funds and U.S. Treasury securities held during the three months ended March 31, 2019.
Other income, net decreased by $4.2 million during the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to income of $3.8 million recognized in connection with the assignment of a CLO collateral management agreement during the three months ended March 31, 2018 which did not recur in 2019.
Net Income Attributable to Non-Controlling Interests and Series A and Series B Preferred Shareholders
For information related to net income attributable to Non-Controlling Interests and net income attributable to Series A and Series B Preferred shareholders, see note 13 to the condensed consolidated financial statements.
Income Tax Provision
The Apollo Operating Group and its subsidiaries generally operate as partnerships for U.S. federal income tax purposes. As a result, only a portion of the income we earn is subject to corporate-level tax in the United States and foreign jurisdictions. The provision for income taxes includes federal, state and local income taxes in the United States and foreign income taxes.
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
The income tax provision increased by $11.1 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The increase was due to an increase in pre-tax GAAP net income during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 and an overall change in the mix of earnings when comparing the amount of earnings that are subject to corporate-level tax to those earnings that are not subject to corporate-level tax as these earnings are passed through to Non-Controlling Interests and Class A shareholders. The provision for income taxes includes federal, state, local and foreign income taxes resulting in an effective income tax rate of 5.9% and (8.5)% for the three months ended March 31, 2019 and 2018, respectively. The most significant reconciling items between our U.S. federal statutory income tax rate and our effective income tax rate were due to the following: (i) income passed through to Non-Controlling Interests; (ii) income passed through to Class A shareholders and (iii) state and local income taxes including NYC UBT (see note 9 to the condensed consolidated financial statements for further details regarding the Company’s income tax provision).
Segment Analysis
Discussed below are our results of operations for each of our reportable segments. They represent the segment information available and utilized by our executive management, which consists of our Managing Partners, who operate collectively as our chief operating decision maker, to assess performance and to allocate resources. See note 16 to our condensed consolidated financial statements for more information regarding our segment reporting.
- 82-
Our financial results vary, since performance fees, which generally constitute a large portion of the income from the funds that we manage, as well as the transaction and advisory fees that we receive, can vary significantly from quarter to quarter and year to year. As a result, we emphasize long-term financial growth and profitability to manage our business.
Credit
The following table sets forth our segment statement of operations information and our supplemental performance measure, Segment Distributable Earnings, within our credit segment.
For the Three Months Ended March 31, | Total Change | Percentage Change | ||||||||||||
2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||
Credit: | ||||||||||||||
Management fees | $ | 182,742 | $ | 149,715 | $ | 33,027 | 22.1 | % | ||||||
Advisory and transaction fees, net | 2,848 | 2,195 | 653 | 29.7 | ||||||||||
Performance fees(1) | 661 | 5,275 | (4,614 | ) | (87.5 | ) | ||||||||
Fee Related Revenues | 186,251 | 157,185 | 29,066 | 18.5 | ||||||||||
Salary, bonus and benefits | (44,304 | ) | (46,821 | ) | 2,517 | (5.4 | ) | |||||||
General, administrative and other | (27,496 | ) | (26,368 | ) | (1,128 | ) | 4.3 | |||||||
Placement fees | 305 | (276 | ) | 581 | NM | |||||||||
Fee Related Expenses | (71,495 | ) | (73,465 | ) | 1,970 | (2.7 | ) | |||||||
Other income (loss), net of Non-Controlling Interest | (404 | ) | 3,183 | (3,587 | ) | NM | ||||||||
Fee Related Earnings | 114,352 | 86,903 | 27,449 | 31.6 | ||||||||||
Realized performance fees | 3,327 | 3,114 | 213 | 6.8 | ||||||||||
Realized profit sharing expense | (3,518 | ) | (2,834 | ) | (684 | ) | 24.1 | |||||||
Net Realized Performance Fees | (191 | ) | 280 | (471 | ) | NM | ||||||||
Realized principal investment income | 3,049 | 4,280 | (1,231 | ) | (28.8 | ) | ||||||||
Net interest loss and other | (4,386 | ) | (3,518 | ) | (868 | ) | 24.7 | |||||||
Segment Distributable Earnings | $ | 112,824 | $ | 87,945 | $ | 24,879 | 28.3 | % | ||||||
(1) | Represents certain performance fees from business development companies and Redding Ridge Holdings. |
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Management fees increased by $33.0 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to an increase in management fees earned from Athene of $27.7 million during the three months ended March 31, 2019, as compared to the same period during 2018. The increase in management fees earned from Athene was primarily attributable to its completion of the reinsurance transaction relating to the fixed annuity business of VA Capital subsequent to March 31, 2018.
Performance fees decreased by $4.6 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to a decrease in performance fees earned from AINV of $3.8 million during the three months ended March 31, 2019, as compared to the same period during 2018, as a result of the amended and restated investment management agreement, as described in note 14 to our condensed consolidated financial statements. The fee arrangement was revised to be on a total return measure and the total return hurdle rate was not achieved as of March 31, 2019.
Salary, bonus and benefits expense decreased by $2.5 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018 primarily due to changes in bonus accrual estimates.
General, administrative and other increased by $1.1 million during the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The change was primarily driven by an increase in technology and other expenses during the three months ended March 31, 2019, as compared to the same period in 2018.
Other loss, net of Non-Controlling Interest was $0.4 million for the three months ended March 31, 2019, as compared to other income, net of Non-Controlling Interest of $3.2 million the three months ended March 31, 2018. This change was primarily attributable to income of $3.8 million recognized in connection with the assignment of a CLO collateral management agreement during the three months ended March 31, 2018 that did not recur during the three months ended March 31, 2019.
Realized performance fees increased by $0.2 million during the three months ended March 31, 2019, as compared to the same period in 2018. Realized performance fees of $3.3 million during the three months ended March 31, 2019 were primarily
- 83-
driven by fees generated from the Credit Fund and a strategic investment account of $2.5 million and $0.4 million, respectively. The realized performance fees from the Credit Fund were primarily driven by the appreciation of its bank loan investments during the three months ended March 31, 2019. The realized performance fees from the strategic investment account were primarily driven by the closing of bridge loans and the sale of an equity investment during the three months ended March 31, 2019. Realized performance fees of $3.1 million during the three months ended March 31, 2018 was primarily driven by fees generated from SCRF III and COF II of $1.5 million and $1.1 million, respectively. The realized performance fees from SCRF III were driven by the realization of the fund’s remaining residual investments in CLOs and derivatives, as the fund unwound its portfolio during the three months ended March 31, 2018. The realized performance fees from COF II were driven by the realization of the fund’s remaining assets, as the fund unwound its portfolio during the three months ended March 31, 2018.
Realized profit sharing expense increased by $0.7 million during the three months ended March 31, 2019, as compared to the same period in 2018, as a result of a corresponding increase in performance fees as described above. In any period the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance fees in the period. Included in realized profit sharing expense is $0.1 million and $0.1 million related to the Incentive Pool for the three months ended March 31, 2019 and 2018, respectively. The Incentive Pool is separate from the fund related profit sharing expense and may result in greater variability in compensation and have a variable impact on the blended profit sharing percentage during a particular period.
Realized principal investment income decreased by $1.2 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to a decrease in realizations from Apollo’s equity ownership interest in AINV of $0.9 million during the three months ended March 31, 2019, as compared to the same period in 2018.
Net interest loss and other increased by $0.9 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, primarily due to additional interest expense incurred during the three months ended March 31, 2019 as a result of the issuance of the 2029 Senior Notes in February 2019, as described in note 10 to our condensed consolidated financial statements.
Private Equity
The following table sets forth our segment statement of operations information and our supplemental performance measure, Segment Distributable Earnings, within our private equity segment.
For the Three Months Ended March 31, | Total Change | Percentage Change | ||||||||||||
2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||
Private Equity: | ||||||||||||||
Management fees | $ | 130,496 | $ | 82,280 | $ | 48,216 | 58.6 | % | ||||||
Advisory and transaction fees, net | 16,136 | 10,655 | 5,481 | 51.4 | ||||||||||
Fee Related Revenues | 146,632 | 92,935 | 53,697 | 57.8 | ||||||||||
Salary, bonus and benefits | (43,233 | ) | (40,725 | ) | (2,508 | ) | 6.2 | |||||||
General, administrative and other | (25,862 | ) | (17,983 | ) | (7,879 | ) | 43.8 | |||||||
Placement fees | 135 | (51 | ) | 186 | NM | |||||||||
Fee Related Expenses | (68,960 | ) | (58,759 | ) | (10,201 | ) | 17.4 | |||||||
Other income, net | 196 | 309 | (113 | ) | (36.6 | ) | ||||||||
Fee Related Earnings | 77,868 | 34,485 | 43,383 | 125.8 | ||||||||||
Realized performance fees | 60,456 | 112,772 | (52,316 | ) | (46.4 | ) | ||||||||
Realized profit sharing expense | (37,727 | ) | (57,748 | ) | 20,021 | (34.7 | ) | |||||||
Net Realized Performance Fees | 22,729 | 55,024 | (32,295 | ) | (58.7 | ) | ||||||||
Realized principal investment income | 8,088 | 18,330 | (10,242 | ) | (55.9 | ) | ||||||||
Net interest loss and other | (6,133 | ) | (5,356 | ) | (777 | ) | 14.5 | |||||||
Segment Distributable Earnings | $ | 102,552 | $ | 102,483 | $ | 69 | 0.1 | % | ||||||
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Management fees increased by $48.2 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to the commencement of Fund IX’s investment period in April 2018, resulting in $80.0 million in management fees during the three months ended March 31, 2019. The increase in management fees was partially offset by decreased management fees earned from Fund VIII of $25.2 million during the three
- 84-
months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decrease in management fees earned from Fund VIII was the result of a change in the basis upon which management fees are earned from capital commitments to invested capital.
Advisory and transaction fees, net increased by $5.5 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to an increase in net advisory and transaction fees earned with respect to Fund IX’s portfolio companies of $10.8 million, partially offset by decreases in net advisory and transaction fees earned with respect to portfolio companies of Fund VIII and ANRP II of $2.8 million and $1.3 million, respectively, during the three months ended March 31, 2019, as compared to the same period during 2018.
Salary, bonus and benefits expense increased by $2.5 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 primarily due to increased headcount.
General, administrative and other increased by $7.9 million during the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The change was primarily driven by increased professional fees and fund organizational expenses related to Apollo Natural Resources Partners III, L.P. during the three months ended March 31, 2019, as compared to the same period in 2018.
Realized performance fees decreased by $52.3 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to decreases in realized performance fees generated from Fund VIII of $41.7 million during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decrease in realized performance fees from Fund VIII was primarily driven by a decrease in profits realized from investment sales and income from the fund’s investments. The realized performance fees from Fund VIII during the three months ended March 31, 2019 were the result of sales and income generated from investments primarily in the business services, manufacturing and industrial, financial services and leisure sectors, and the realized performance fees during the same period in 2018 were the result of sales and income generated from investments primarily in the chemicals, consumer services and leisure sectors.
Realized profit sharing expense decreased by $20.0 million during the three months ended March 31, 2019, as compared to the same period in 2018, as a result of a corresponding decrease in realized performance fees as described above. In any period the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance fees in the period. Included in realized profit sharing expense is $16.9 million and $14.9 million related to the Incentive Pool for the three months ended March 31, 2019 and 2018, respectively. The Incentive Pool is separate from the fund related profit sharing expense and may result in greater variability in compensation and have a variable impact on the blended profit sharing percentage during a particular period.
Realized principal investment income decreased by $10.2 million for the three months ended March 31, 2019, as compared to the same period in 2018. This change was primarily attributable to a decrease in realizations from Apollo’s equity ownership interest in Fund VIII of $5.1 million as well as modest decreases in realizations across most of our other private equity funds during the three months ended March 31, 2019, as compared to the same period in 2018.
Net interest loss and other increased by $0.8 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, primarily due to additional interest expense incurred during the three months ended March 31, 2019 as a result of the issuance of the 2029 Senior Notes in February 2019, as described in note 10 to our condensed consolidated financial statements.
- 85-
Real Assets
The following table sets forth our segment statement of operations information and our supplemental performance measure, Segment Distributable Earnings, within our real assets segment.
For the Three Months Ended March 31, | Total Change | Percentage Change | ||||||||||||
2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||
Real Assets: | ||||||||||||||
Management fees | $ | 45,385 | $ | 40,208 | $ | 5,177 | 12.9 | % | ||||||
Advisory and transaction fees, net | 76 | 144 | (68 | ) | (47.2 | ) | ||||||||
Fee Related Revenues | 45,461 | 40,352 | 5,109 | 12.7 | ||||||||||
Salary, bonus and benefits | (18,188 | ) | (18,985 | ) | 797 | (4.2 | ) | |||||||
General, administrative and other | (9,675 | ) | (10,024 | ) | 349 | (3.5 | ) | |||||||
Fee Related Expenses | (27,863 | ) | (29,009 | ) | 1,146 | (4.0 | ) | |||||||
Other income (loss), net of Non-Controlling Interest | (62 | ) | 168 | (230 | ) | NM | ||||||||
Fee Related Earnings | 17,536 | 11,511 | 6,025 | 52.3 | ||||||||||
Realized performance fees | 6 | 6,416 | (6,410 | ) | (99.9 | ) | ||||||||
Realized profit sharing expense | 106 | (3,065 | ) | 3,171 | NM | |||||||||
Net Realized Performance Fees | 112 | 3,351 | (3,239 | ) | (96.7 | ) | ||||||||
Realized principal investment income | 299 | 783 | (484 | ) | (61.8 | ) | ||||||||
Net interest loss and other | (2,173 | ) | (1,909 | ) | (264 | ) | 13.8 | |||||||
Segment Distributable Earnings | $ | 15,774 | $ | 13,736 | $ | 2,038 | 14.8 | % | ||||||
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Management fees increased by $5.2 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This change was primarily attributable to an increase in management fees earned from Athene of $4.8 million, during the three months ended March 31, 2019, as compared to the same period during 2018.
Realized performance fees decreased by $6.4 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. Realized performance fees generated from certain funds, including U.S. RE Fund I, U.S. RE Fund II, Apollo Asia Real Estate Fund, L.P. (“Asia RE Fund”) and EPF II, includes an allocation of realized performance fees from strategic investment accounts that invest in the funds. The decrease in realized performance fees was primarily attributable to decreases in realized performance fees generated from strategic investment accounts and EPF II of $3.6 million and $1.8 million, respectively, during the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The decrease in realized performance fees from strategic investment accounts is primarily due to allocations of realizations relating to underlying investments in U.S. RE Fund I, U.S. RE Fund II and EPF II for the three months ended March 31, 2018 and allocations relating to limited realizations from the underlying fund investments for the same period during 2019. Realized performance fees from EPF II decreased primarily due to the realizations of distressed real estate investments in Italy and Europe during the three months ended March 31, 2018, as compared to no realizations during the three months ended March 31, 2019.
Realized profit sharing expense decreased by $3.2 million during the three months ended March 31, 2019, as compared to the same period in 2018, as a result of a corresponding decrease in realized performance fees as described above. In any period the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance fees in the period. Included in realized profit sharing expense is $0.6 million related to the Incentive Pool for the three months ended March 31, 2018. There was no realized profit sharing expense related to the Incentive Pool for the three months ended March 31, 2019. The Incentive Pool is separate from the fund related profit sharing expense and may result in greater variability in compensation and have a variable impact on the blended profit sharing percentage during a particular period.
- 86-
Summary of Distributable Earnings
The following table is a reconciliation of Distributable Earnings per share of common and equivalent to net distribution per share of common and equivalent.
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(in thousands, except per share data) | |||||||
Segment Distributable Earnings | $ | 231,150 | $ | 204,164 | |||
Taxes and related payables | (14,636 | ) | (11,198 | ) | |||
Preferred distributions | (9,164 | ) | (4,383 | ) | |||
Distributable Earnings | 207,350 | 188,583 | |||||
Add back: Tax and related payables attributable to common and equivalents | 12,475 | 9,167 | |||||
Distributable Earnings before certain payables(1) | 219,825 | 197,750 | |||||
Percent to common and equivalents | 51 | % | 51 | % | |||
Distributable Earnings before other payables attributable to common and equivalents | 112,111 | 100,853 | |||||
Less: Taxes and related payables attributable to common and equivalents | (12,475 | ) | (9,167 | ) | |||
Distributable Earnings attributable to common and equivalents | $ | 99,636 | $ | 91,686 | |||
Distributable Earnings per share of common and equivalent(2) | $ | 0.50 | $ | 0.46 | |||
Retained capital per share of common and equivalent(2)(3) | (0.04 | ) | (0.08 | ) | |||
Net distribution per share of common and equivalent(2) | $ | 0.46 | $ | 0.38 | |||
(1) | Distributable Earnings before certain payables represents Distributable Earnings before the deduction for the estimated current corporate taxes and the amounts payable under Apollo’s tax receivable agreement. |
(2) | Per share calculations are based on end of period Distributable Earnings Shares Outstanding, which consists of total Class A shares outstanding, AOG Units and RSUs that participate in distributions (collectively referred to as “common and equivalents”). |
(3) | Retained capital is withheld pro-rata from common and equivalent holders. |
- 87-
Summary of Non-U.S. GAAP Measures
The table below sets forth a reconciliation of net income attributable Apollo Global Management, LLC Class A Shareholders to our non-U.S. GAAP performance measures:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(in thousands) | |||||||
Net Income (Loss) Attributable to Apollo Global Management, LLC Class A Shareholders | $ | 139,893 | $ | (62,645 | ) | ||
Preferred distributions | 9,164 | 4,383 | |||||
Net income attributable to Non-Controlling Interests in consolidated entities | 8,662 | 5,979 | |||||
Net income (loss) attributable to Non-Controlling Interests in the Apollo Operating Group | 157,848 | (57,065 | ) | ||||
Net Income (Loss) | $ | 315,567 | $ | (109,348 | ) | ||
Income tax provision | 19,654 | 8,580 | |||||
Income (Loss) Before Income Tax Provision | $ | 335,221 | $ | (100,768 | ) | ||
Transaction-related charges(1) | 5,463 | 1,852 | |||||
Net income attributable to Non-Controlling Interests in consolidated entities | (8,662 | ) | (5,979 | ) | |||
Unrealized performance fees(2) | (184,383 | ) | 250,541 | ||||
Unrealized profit sharing expense(2) | 75,762 | (76,388 | ) | ||||
Equity-based profit sharing expense and other(3) | 20,962 | 14,564 | |||||
Equity-based compensation | 18,423 | 17,435 | |||||
Unrealized principal investment (income) loss | (12,328 | ) | 35,997 | ||||
Unrealized net (gains) losses from investment activities and other | (19,308 | ) | 66,910 | ||||
Segment Distributable Earnings(4) | $ | 231,150 | $ | 204,164 | |||
Taxes and related payables | (14,636 | ) | (11,198 | ) | |||
Preferred distributions | (9,164 | ) | (4,383 | ) | |||
Distributable Earnings | $ | 207,350 | $ | 188,583 | |||
Preferred distributions | 9,164 | 4,383 | |||||
Taxes and related payables | 14,636 | 11,198 | |||||
Realized performance fees | (63,789 | ) | (122,302 | ) | |||
Realized profit sharing expense | 41,139 | 63,647 | |||||
Realized principal investment income | (11,436 | ) | (23,393 | ) | |||
Net interest loss and other | 12,692 | 10,783 | |||||
Fee Related Earnings | $ | 209,756 | $ | 132,899 | |||
Depreciation, amortization and other, net | 2,578 | 2,589 | |||||
Fee Related EBITDA | $ | 212,334 | $ | 135,488 | |||
Realized performance fees(5) | 63,789 | 122,302 | |||||
Realized profit sharing expense(5) | (41,139 | ) | (63,647 | ) | |||
Fee Related EBITDA + 100% of Net Realized Performance Fees | $ | 234,984 | $ | 194,143 | |||
(1) | Transaction-related charges include contingent consideration, equity-based compensation charges and the amortization of intangible assets and certain other charges associated with acquisitions. |
(2) | Includes realized performance fees and realized profit sharing expense settled in the form of shares of Athene Holding during the three months ended March 31, 2018. |
(3) | Equity-based profit sharing expense and other includes certain profit sharing arrangements in which a portion of performance fees distributed to the general partner are allocated by issuance of equity-based awards, rather than cash, to employees of Apollo. Equity-based profit sharing expense and other also includes non-cash expenses related to equity awards in unconsolidated related parties granted to employees of Apollo. |
(4) | See note 16 for more details regarding Segment Distributable Earnings for the combined segments. |
(5) | Excludes realized performance fees and realized profit sharing expense settled in the form of shares of Athene Holding during the three months ended March 31, 2018. |
- 88-
Liquidity and Capital Resources
Overview
Apollo’s business model primarily derives revenues and cash flows from the assets it manages. Apollo targets operating expense levels such that fee income exceeds total operating expenses each period. The company intends to distribute to its shareholders on a quarterly basis substantially all of its distributable earnings after taxes and related payables in excess of amounts determined to be necessary or appropriate to provide for the conduct of the business. As a result, the Company requires limited capital resources to support the working capital or operating needs of the business. While primarily met by cash flows generated through fee income received, liquidity needs are also met (to a limited extent) through proceeds from borrowings and equity issuances as described in notes 10 and 13 to the condensed consolidated financial statements, respectively. The Company had cash and cash equivalents of $720.3 million at March 31, 2019.
Primary Sources and Uses of Cash
The Company has multiple sources of short-term liquidity to meet its capital needs, including cash on hand, annual cash flows from its activities, and available funds from the Company’s $750 million revolving credit facility as of March 31, 2019. The Company believes these sources will be sufficient to fund our capital needs for at least the next twelve months. If the Company determines that market conditions are favorable after taking into account our liquidity requirements, we may seek to issue additional senior notes, preferred equity, or other financing instruments.
The section below discusses in more detail the Company’s primary sources and uses of cash and the primary drivers of cash flows within the Company’s condensed consolidated statements of cash flows:
For the Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(in thousands) | |||||||
Operating Activities | $ | 292,101 | $ | 41,527 | |||
Investing Activities | (374,608 | ) | 97,215 | ||||
Financing Activities | 190,976 | 80,185 | |||||
Net Increase in Cash and Cash Equivalents, Restricted Cash and Cash Held at Consolidated Variable Interest Entities | $ | 108,469 | $ | 218,927 | |||
Operating Activities
The Company’s operating activities support its investment management activities. The primary sources of cash within the operating activities section include: (a) management fees, (b) advisory and transaction fees, (c) realized performance revenues, and (d) realized principal investment income. The primary uses of cash within the operating activities section include: (a) compensation and non-compensation related expenses, (b) placement fees, and (c) interest and taxes.
• | During the three months ended March 31, 2019 and 2018, cash provided by operating activities primarily includes cash inflows from the receipt of management fees, advisory and transaction fees, realized performance revenues, and realized principal investment income, offset by cash outflows for compensation, general, administrative, and other expenses. Net cash provided by operating activities also reflects the operating activity of our consolidated funds and VIEs, which primarily include cash inflows from the sale of investments offset by cash outflows for purchases of investments. |
Investing Activities
The Company’s investing activities support growth of its business. The primary sources of cash within the investing activities section include distributions from investments. The primary uses of cash within the investing activities section include: (a) capital expenditures, (b) investment purchases, including purchases of U.S. Treasury securities, and (c) equity method investments in the funds we manage.
• | During the three months ended March 31, 2019 and 2018 , cash used by investing activities primarily reflects purchases of U.S. Treasury securities and other investments and net contributions to equity method investments, offset by proceeds from maturities of U.S. Treasury securities. |
Financing Activities
The Company’s financing activities reflect its capital market transactions and transactions with owners. The primary sources of cash within the financing activities section includes proceeds from debt and preferred equity issuances. The primary
- 89-
uses of cash within the financing activities section include: (a) distributions, (b) payments under the tax receivable agreement, (c) share repurchases, (d) cash paid to settle tax withholding obligations in connection with net share settlements of equity-based awards, and (e) repayments of debt.
• | During the three months ended March 31, 2019, cash provided by financing activities primarily reflects proceeds from the issuance of the 2029 Senior Notes, partially offset by distributions to Class A shareholders and Non-Controlling interest holders. |
• | During the three months ended March 31, 2018, cash provided by financing activities primarily reflects proceeds from the issuance of Series B Preferred shares and the issuance of the 2048 Senior Notes, partially offset by repayments on the term loan facility to AMH and distributions to Class A shareholders and Non-Controlling interests. |
Future Debt Obligations
The Company had long-term debt of $1.9 billion at March 31, 2019, which includes $1.8 billion of senior notes with maturities in 2024, 2026, 2029 and 2048. See note 10 to the condensed consolidated financial statements for further information regarding the Company’s debt arrangements.
Contractual Obligations, Commitments and Contingencies
The Company had unfunded general partner commitments of $1.1 billion at March 31, 2019, of which $434 million related to Fund IX. For a summary and a description of the nature of the Company’s commitments, contingencies and contractual obligations, see note 15 to the condensed consolidated financial statements and “—Contractual Obligations, Commitments and Contingencies”. The Company’s commitments are primarily fulfilled through cash flows from operations and (to a limited extent) through borrowings and equity issuances as described in notes 10 and 13 to the condensed consolidated financial statements, respectively.
Consolidated Funds and VIEs
The Company manages its liquidity needs by evaluating unconsolidated cash flows; however, the Company’s financial statements reflect the financial position of Apollo as well as Apollo’s consolidated funds and VIEs. The primary sources and uses of cash at Apollo’s consolidated funds and VIEs include: (a) raising capital from their investors, which have been reflected historically as Non-Controlling Interests of the consolidated subsidiaries in our financial statements, (b) using capital to make investments, (c) generating cash flows from operations through distributions, interest and the realization of investments, (d) distributing cash flow to investors, and (e) issuing debt to finance investments (CLOs).
Other Liquidity and Capital Resource Considerations
Future Cash Flows
Our ability to execute our business strategy, particularly our ability to increase our AUM, depends on our ability to establish new funds and to raise additional investor capital within such funds. Our liquidity will depend on a number of factors, such as our ability to project our financial performance, which is highly dependent on our funds and our ability to manage our projected costs, fund performance, access to credit facilities, compliance with existing credit agreements, as well as industry and market trends. Also during economic downturns the funds we manage might experience cash flow issues or liquidate entirely. In these situations we might be asked to reduce or eliminate the management fee and performance fees we charge, which could adversely impact our cash flow in the future.
An increase in the fair value of our funds’ investments, by contrast, could favorably impact our liquidity through higher management fees where the management fees are calculated based on the net asset value, gross assets or adjusted assets. Additionally, higher performance fees not yet realized would generally result when investments appreciate over their cost basis which would not have an impact on the Company’s cash flow until realized.
Consideration of Financing Arrangements
As noted above, in limited circumstances, the Company may issue debt or equity to supplement its liquidity. The decision to enter into a particular financing arrangement is made after careful consideration of various factors including the Company’s cash flows from operations, future cash needs, current sources of liquidity, demand for the Company’s debt or equity, and prevailing interest rates.
- 90-
Revolver Facility
As further described in note 10 to the condensed consolidated financial statements, the 2013 AMH Credit Facilities and all related loan documents were terminated as of July 11, 2018. Under the Company’s 2018 AMH Credit Facility, the Company may borrow in an aggregate amount not to exceed $750 million and may incur incremental facilities in an aggregate amount not to exceed $250 million plus additional amounts so long as the Borrower is in compliance with a net leverage ratio not to exceed 4.00 to 1.00. Borrowings under the 2018 AMH Credit Facility may be used for working capital and general corporate purposes, including without limitation, permitted acquisitions. As of March 31, 2019, the 2018 AMH Credit Facility was undrawn.
Distributions
For information regarding the quarterly distributions which were made at the sole discretion of the Company’s manager during 2019 and 2018 to Class A shareholders, Non-Controlling Interest holders in the Apollo Operating Group and participating securities, see note 13 to the condensed consolidated financial statements.
Although the Company expects to pay distributions according to our distribution policy, we may not pay distributions according to our policy, or at all, if, among other things, we do not have the cash necessary to pay the intended distributions. To the extent we do not have cash on hand sufficient to pay distributions, we may have to borrow funds to pay distributions, or we may determine not to pay distributions. The declaration, payment and determination of the amount of our quarterly distributions are at the sole discretion of our manager.
On May 2, 2019, the Company declared a cash distribution of $0.46 per Class A share, which will be paid on May 31, 2019 to holders of record on May 21, 2019. Also, the Company declared a cash distribution of $0.398438 per Series A Preferred share and Series B Preferred share which will be paid on June 17, 2019 to holders of record on May 31, 2019.
Tax Receivable Agreement
The tax receivable agreement provides for the payment to the Managing Partners and Contributing Partners of 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income taxes that APO Corp. realizes subject to the agreement. For more information regarding the tax receivable agreement, see note 14 to the condensed consolidated financial statements.
AGM Share Repurchases
For information regarding the Company’s share repurchase program, see note 13 to the condensed consolidated financial statements.
AINV Share Purchases
On March 11, 2016, it was announced that Apollo intended to embark on a program to purchase $50 million of AINV’s common stock, subject to certain regulatory approvals. Under the program, shares may be purchased from time to time in open market transactions and in accordance with applicable law. As of March 31, 2019, Apollo had purchased approximately 871 thousand shares, or approximately $4.9 million of AINV’s common stock.
Athora
On April 14, 2017, Apollo made an unfunded commitment of €125 million to purchase new Class B-1 equity interests in Athora, a strategic platform established to acquire traditional closed life insurance policies and provide capital and reinsurance solutions to insurers in Europe. In January 2018, Apollo purchased Class C-1 equity interests in Athora that represent a profits interest in Athora which, upon meeting certain vesting triggers, will be convertible by Apollo into additional Class B-1 equity interests in Athora. Apollo and Athene are minority investors in Athora and long term strategic partners with aggregate voting power of 35% and 10%, respectively. For more information regarding unfunded general partner commitments, see “—Contractual Obligations, Commitments and Contingencies”.
Fund VIII, Fund VII, Fund VI, ANRP I and ANRP II Escrow
As of March 31, 2019, the remaining investments and escrow cash of Fund VIII were valued at 121% of the fund’s unreturned capital, which was above the required escrow ratio of 115%. As of March 31, 2019, the remaining investments and escrow cash of Fund VII, Fund VI, ANRP I and ANRP II were valued at 80%, 71%, 69% and 109% of the fund’s unreturned capital, respectively, which were below the required escrow ratio of 115%. As a result, these funds are required to place in escrow
- 91-
current and future performance fee distributions to the general partner until the specified return ratio of 115% is met (at the time of a future distribution) or upon liquidation.
Clawback
Performance fees from our private equity funds and certain credit and real assets funds are subject to contingent repayment by the general partner in the event of future losses to the extent that the cumulative performance fees distributed from inception to date exceeds the amount computed as due to the general partner at the final distribution. See “—Overview of Results of Operations—Performance Fees” for the maximum performance fees subject to potential reversal by each fund.
Indemnification Liability
The Company recorded an indemnification liability in the event that our Managing Partners, Contributing Partners and certain investment professionals are required to pay amounts in connection with a general partner obligation to return previously distributed performance fees. See note 14 to the condensed consolidated financial statements for further information regarding the Company’s indemnification liability.
Investment Management Agreements - Athene Asset Management
The Company provides asset management and advisory services to Athene as described in note 14 to the condensed consolidated financial statements. On September 20, 2018, Athene and Apollo agreed to revise the existing fee arrangements between Athene and Apollo (the “proposed amended fee agreement”). The proposed amended fee agreement amends the existing agreement, provides for sub-allocation fees which vary based on portfolio allocation differentiation and is intended to provide for further alignment of interests between Athene and the Company.
The base management fee covers a range of investment services that Athene receives from the Company, including investment management, asset allocation, mergers and acquisition asset diligence and certain operational support services such as investment compliance, tax, legal and risk management support, among others. Additionally, the Proposed Amended Fee Agreement provides for a possible payment by the Company to Athene, or a possible payment by Athene to the Company, equal to 0.025% of the Incremental Value as of the end of each year, beginning on December 31, 2019, depending upon the percentage of Athene’s investments that consist of core assets and core plus assets. In furtherance of yield support for Athene, if more than 60% of Athene’s invested assets which are subject to the sub-allocation fees are invested in core and core plus assets, Athene will receive a 0.025% fee reduction on the Incremental Value. As an incentive for differentiated asset management, if less than 50% of Athene’s invested assets which are subject to the sub-allocation fee are invested in core and core plus assets, thereby reflecting a higher allocation toward assets with the highest alpha-generating abilities, Athene will pay an additional fee of 0.025% on Incremental Value.
The Proposed Amended Fee Agreement is intended to provide for further alignment of interests between Athene and the Company. On the Backbook Value, assuming constant portfolio allocations, the near-term impact of the Proposed Amended Fee Agreement is anticipated to be immaterial. On the Incremental Value, assuming the same allocations as the Backbook Value, total fees paid by Athene to the Company are expected to be marginally lower than fees paid by Athene to the Company would be under the Existing Fee Agreement. If invested asset allocations are more heavily weighted to assets with lower alpha-generating abilities than Athene’s current investment portfolio, the fees that Athene pays to the Company under the Proposed Amended Fee Agreement would be expected to decline relative to the Existing Fee Agreement. Conversely, if a greater proportion of Athene’s investment portfolio is allocated to differentiated assets with higher alpha-generating abilities, Athene’s net investment earned rates would be expected to increase, and so would the fees Athene pays to the Company relative to the Existing Fee Agreement.
To incentivize the Company to make long-term investments that enhances its ability to continue to provide Athene with differentiated asset management, Athene has proposed changes to its existing Bye-Laws (the “Existing Bye-Laws”) set forth in an amendment and restatement of the Existing Bye-Laws in substantially the form attached as an exhibit to the Letter Agreement (the “Proposed Bye-Laws”). Specifically, the Proposed Bye-Laws, if adopted as the Bye-Laws of Athene, will (1) provide for the IMA and each New IMA (each such term as defined in the Existing Bye-Laws) to have initial terms of four years, beginning on the date on which the Proposed Bye-Laws are adopted as the Bye-Laws of Athene (the “Adoption Date”), that extend automatically for successive two-year periods unless otherwise terminated (with any such termination being effective no earlier than two years after the end of the then existing term), and (2) reflect conforming amendments, including by amending the IMA Termination Election Date (as defined in the Existing Bye-Laws) to be the fourth anniversary of the Adoption Date and each two-year anniversary of the Adoption Date. The Proposed Bye-Laws, if adopted as the Bye-Laws of Athene, will continue to permit Athene to terminate the IMA, or any New IMA, for cause. In the Letter Agreement, Athene (1) confirmed that its board of directors approved, and recommended that its shareholders approve, the Proposed Bye-Laws and (2) agreed that it will seek the approval of its shareholders of the Proposed Bye-Laws at the next annual general meeting of its shareholders.
- 92-
Equity-Based Profit Sharing Expense
Profit sharing amounts are generally not paid until the related performance fees are distributed to the general partner upon realization of the fund’s investments. Under certain profit sharing arrangements, a portion of the performance fees distributed to the general partner is allocated by issuance of equity-based awards, rather than cash, to employees. See note 2 to the condensed consolidated financial statements for further information regarding the accounting for the Company’s profit sharing arrangements.
Strategic Relationship Agreement with CalPERS
On April 20, 2010, the Company announced that it entered into a strategic relationship agreement with CalPERS. The strategic relationship agreement provides that Apollo will reduce fees charged to CalPERS on funds it manages, or in the future will manage, solely for CalPERS by $125 million over a five-year period or as close a period as required to provide CalPERS with that benefit. The agreement further provides that Apollo will not use a placement agent in connection with securing any future capital commitments from CalPERS. As of March 31, 2019, the Company had reduced fees charged to CalPERS on the funds it manages by approximately $108.0 million.
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates. A summary of our significant accounting policies is presented in note 2 to our condensed consolidated financial statements. The following is a summary of our accounting policies that are affected most by judgments, estimates and assumptions.
Consolidation
The Company assesses all entities with which it is involved for consolidation on a case by case basis depending on the specific facts and circumstances surrounding each entity. Pursuant to the consolidation guidance, the Company first evaluates whether it holds a variable interest in an entity. Apollo factors in all economic interests including proportionate interests through related parties, to determine if such interests are to be considered a variable interest. As Apollo’s interest in many of these entities is solely through market rate fees and/or insignificant indirect interests through related parties, Apollo is generally not considered to have a variable interest in many of these entities under the guidance and no further consolidation analysis is performed. For entities where the Company has determined that it does hold a variable interest, the Company performs an assessment to determine whether each of those entities qualify as a VIE.
The determination as to whether an entity qualifies as a VIE depends on the facts and circumstances surrounding each entity and therefore certain of Apollo’s funds may qualify as VIEs under the variable interest model whereas others may qualify as voting interest entities (“VOEs”) under the voting interest model. The granting of substantive kick-out rights is a key consideration in determining whether a limited partnership or similar entity is a VIE and whether or not that entity should be consolidated.
Under the voting interest model, Apollo consolidates those entities it controls through a majority voting interest. Apollo does not consolidate those VOEs in which substantive kick-out rights have been granted to the unaffiliated investors to either dissolve the fund or remove the general partner.
Under the variable interest model, Apollo consolidates those entities where it is determined that the Company is the primary beneficiary of the entity. The Company is determined to be the primary beneficiary if it holds a controlling financial interest in the VIE defined as possessing both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If Apollo alone is not considered to have a controlling financial interest in the VIE but Apollo and its related parties under common control in the aggregate have a controlling financial interest in the VIE, Apollo will still be deemed to be the primary beneficiary if it is the party within the related party group that is most closely associated with the VIE. If Apollo and its related parties not under common control in the aggregate have a controlling financial interest in a VIE, then Apollo is deemed to be the primary beneficiary if substantially all the activities of the entity are performed on behalf of Apollo. Apollo determines whether it is the primary beneficiary of a VIE at the time it becomes initially involved with the VIE and reconsiders that conclusion continuously. Investments and redemptions (either by Apollo, related parties of Apollo or third parties) or amendments to the governing documents of the respective entity may affect an entity’s status as a VIE or the determination of the primary beneficiary.
- 93-
The assessment of whether an entity is a VIE and the determination of whether Apollo should consolidate such VIE requires judgment by our management. Those judgments include, but are not limited to: (i) determining whether the total equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, (ii) evaluating whether the holders of equity investment at risk, as a group, can make decisions that have a significant effect on the success of the entity, (iii) determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive the expected residual returns from an entity and (iv) evaluating the nature of the relationship and activities of those related parties with shared power or under common control for purposes of determining which party within the related-party group is most closely associated with the VIE. Judgments are also 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 could be potentially significant to the VIE. This analysis considers all relevant economic interests including proportionate interests held through related parties.
Revenue Recognition
Performance Fees. We earn performance fees from our funds as a result of such funds achieving specified performance criteria. Such performance fees generally are earned based upon a fixed percentage of realized and unrealized gains of various funds after meeting any applicable hurdle rate or threshold minimum.
Performance allocations are performance fees that are generally structured from a legal standpoint as an allocation of capital to the Company. Performance allocations from certain of the funds that we manage are subject to contingent repayment and are generally paid to us as particular investments made by the funds are realized. If, however, upon liquidation of a fund, the aggregate amount paid to us as performance fees exceeds the amount actually due to us based upon the aggregate performance of the fund, the excess (in certain cases net of taxes) is required to be returned by us to that fund. We account for performance allocations as an equity method investment, and accordingly, we accrue performance allocations quarterly based on fair value of the underlying investments and separately assess if contingent repayment is necessary. The determination of performance allocations and contingent repayment considers both the terms of the respective partnership agreements and the current fair value of the underlying investments within the funds. Estimates and assumptions are made when determining the fair value of the underlying investments within the funds and could vary depending on the valuation methodology that is used. See “Investments, at Fair Value” below for further discussion related to significant estimates and assumptions used for determining fair value of the underlying investments in our credit, private equity and real assets funds.
Incentive fees are performance fees structured as a contractual fee arrangement rather than a capital allocation. Incentive fees are generally received from the management of CLOs, managed accounts and AINV. For a majority of our incentive fees, once the quarterly or annual incentive fees have been determined, there is no look-back to prior periods for a potential contingent repayment, however, certain other incentive fees can be subject to contingent repayment at the end of the life of the entity. In accordance with the new revenue recognition standard, certain incentive fees are considered a form of variable consideration and therefore are deferred until fees are probable to not be significantly reversed. There is significant judgment involved in determining if the incentive fees are probable to not be significantly reversed, but generally the Company will defer the revenue until the fees are crystallized or are no longer subject to clawback or reversal. Prior to the adoption of the new revenue recognition guidance, incentive fees were recognized on an assumed liquidation basis.
Management Fees. Management fees related to our credit funds, can be based on net asset value, gross assets, adjusted cost of all unrealized portfolio investments, capital commitments, adjusted assets, capital contributions, or stockholders’ equity all as defined in the respective partnership agreements. The credit management fee calculations that consider net asset value, gross assets, adjusted cost of all unrealized portfolio investments and adjusted assets are normally based on the terms of the respective partnership agreements and the current fair value of the underlying investments within the funds. Estimates and assumptions are made when determining the fair value of the underlying investments within the funds and could vary depending on the valuation methodology that is used. The management fees related to our private equity funds, by contrast, are generally based on a fixed percentage of the committed capital or invested capital. The corresponding fee calculations that consider committed capital or invested capital are both objective in nature and therefore do not require the use of significant estimates or assumptions. The management fees related to our real assets funds are generally based on a specific percentage of the funds’ stockholders’ equity or committed or net invested capital or the capital accounts of the limited partners. See “Investments, at Fair Value” below for further discussion related to significant estimates and assumptions used for determining fair value of the underlying investments in our credit, private equity and real assets funds.
Investments, at Fair Value
On a quarterly basis, Apollo utilizes valuation committees consisting of members from senior management, to review and approve the valuation results related to the investments of the funds it manages. For certain publicly traded vehicles managed by Apollo, a review is performed by an independent board of directors. The Company also retains independent valuation firms to
- 94-
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, the 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.
The fair values of the investments in our funds can be impacted by changes to the assumptions used in the underlying valuation models. For further discussion on the impact of changes to valuation assumptions see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk—Sensitivity” in our 2018 Annual Report. There have been no material changes to the valuation approaches utilized during the periods that our financial results are presented in this report.
Fair Value of Financial Instruments
Except for the Company’s debt obligations (each as defined in note 10 to our condensed consolidated financial statements), Apollo’s financial instruments are recorded at fair value or at amounts whose carrying values approximate 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. 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.
Profit Sharing Expense. Profit sharing expense is primarily a result of agreements with our Contributing Partners and employees to compensate them based on the ownership interest they have in the general partners of the Apollo funds. Therefore, changes in the fair value of the underlying investments in the funds we manage and advise affect profit sharing expense. The Contributing Partners and employees are allocated approximately 30% to 50%, of the total performance fees which is driven primarily by changes in fair value of the underlying fund’s investments and is treated as compensation expense. Additionally, profit sharing expenses paid may be subject to clawback from employees, former employees and Contributing Partners to the extent not indemnified. When applicable, the accrual for potential clawback of previously distributed profit sharing amounts, which is a component of due from related parties on the condensed consolidated statements of financial condition, represents all amounts previously distributed to employees, former employees and Contributing Partners that would need to be returned to the general partner if the Apollo funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the reporting date. The actual general partner receivable, however, would not become realized until the end of a fund’s life.
Several of the Company’s employee remuneration programs are dependent upon performance fee realizations, including the Incentive Pool, and dedicated performance fee rights. The Company established these programs to attract and retain, and provide incentive to, partners and employees of the Company and to more closely align the overall compensation of partners and employees with the overall realized performance of the Company. Dedicated performance fee rights entitle their holders to payments arising from performance fee realizations. The Incentive Pool enables certain partners and employees to earn discretionary compensation based on realized performance fees in a given year, which amounts are reflected in profit sharing expense in the Company’s condensed consolidated financial statements. Amounts earned by participants as a result of their performance fee rights (whether dedicated or Incentive Pool) will vary year-to-year depending on the overall realized performance of the Company (and, in the case of the Incentive Pool, on their individual performance). There is no assurance that the Company will continue to compensate individuals through the same types of arrangements in the future and there may be periods when the executive committee of the Company’s manager determines that allocations of realized performance fees are not sufficient to compensate individuals, which may result in an increase in salary, bonus and benefits, the modification of existing programs or the use of new remuneration programs. Reductions in performance fee revenues could also make it harder to retain employees and cause employees to seek other employment opportunities.
Fair Value Option. Apollo has elected the fair value option for the Company’s investment in Athene Holding, the assets and liabilities of certain of its consolidated VIEs (including CLOs), the Company’s U.S. Treasury securities with original maturities greater than three months when purchased and certain of the Company’s other investments. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. See notes 3, 5, and 6 to the condensed consolidated financial statements for further disclosure.
Equity-Based Compensation. Equity-based compensation is accounted for in accordance with U.S. GAAP, which requires that the cost of employee services received in exchange for an award is generally 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 recognized over the relevant service period. In addition, certain RSUs granted
- 95-
by the Company vest subject to continued employment and the Company’s receipt of performance fees, within prescribed periods, sufficient to cover the associated equity-based compensation expense. In accordance with U.S. GAAP, equity-based compensation expense for such awards, if and when granted, will be recognized on an accelerated recognition method over the requisite service period to the extent the performance fee metrics are met or deemed probable. The addition of these performance measures helps to promote the interests of our Class A shareholders and fund investors by making RSU vesting contingent on the realization and distribution of profits on our funds. Forfeitures of equity-based awards are accounted for when they occur. Apollo’s equity-based awards consist of, or provide rights with respect to, AOG Units, RSUs, share options, restricted shares, AHL Awards and other equity-based compensation awards. For more information regarding Apollo’s equity-based compensation awards, see note 12 to our condensed consolidated financial statements. The Company’s assumptions made to determine the fair value on grant date are embodied in the calculations of compensation expense.
A significant part of our compensation expense is derived from amortization of RSUs. The fair value of all RSU grants after March 29, 2011 is based on the grant date fair value, which considers the public share price of the Company. The Company has three types of RSU grants, which we refer to as Plan Grants, Bonus Grants, and Performance Grants. Plan Grants may or may not provide the right to receive distribution equivalents until the RSUs vest and, for grants made after 2011, the underlying shares are generally issued by March 15th after the year in which they vest. For Plan Grants, the grant date fair value is based on the public share price of the Company, and is discounted for transfer restrictions and lack of distributions until vested if applicable. Bonus Grants provide the right to receive distribution equivalents on both vested and unvested RSUs and Performance Grants provide the right to receive distribution equivalents on vested RSUs and may also provide the right to receive distribution equivalents on unvested RSUs. Both Bonus Grants and Performance Grants are generally issued by March 15th of the year following the year in which they vest. For Bonus Grants and Performance Grants, the grant date fair value for the periods presented is based on the public share price of the Company, and is discounted for transfer restrictions.
We utilized the present value of a growing annuity formula to calculate a discount for the lack of pre-vesting distributions on certain Plan Grant and Performance Grant RSUs. The weighted average for the inputs utilized for the shares granted are presented in the table below for Plan Grants and Performance Grants:
For the Three Months Ended March 31, | |||
2019 | 2018 | ||
Plan Grants: | |||
Distribution Yield(1) | 7.3% | 5.3% | |
Cost of Equity Capital Rate(2) | 10.3% | 10.5% | |
Performance Grants: | |||
Distribution Yield(1) | 7.3% | N/A | |
Cost of Equity Capital Rate(2) | 10.3% | N/A | |
(1) | Calculated based on the historical distributions paid during the twelve months ended March 31, 2019 and 2018 and the Company’s Class A share price as of the measurement date of the grant on a weighted average basis. |
(2) | Assumes a discount rate that was equivalent to the opportunity cost of foregoing distributions on unvested Plan Grant and Performance Grant RSUs as of the valuation date, based on the Capital Asset Pricing Model (“CAPM”). CAPM is a commonly used mathematical model for developing expected returns. |
The following table summarizes the weighted average discounts for certain Plan Grants and Performance Grants:
For the Three Months Ended March 31, | |||
2019 | 2018 | ||
Plan Grants: | |||
Discount for the lack of distributions until vested(1) | 19.8% | 10.5% | |
Performance Grants: | |||
Discount for the lack of distributions until vested(1) | 16.7% | N/A | |
(1) | Based on the present value of a growing annuity calculation. |
We utilize the Finnerty Model to calculate a marketability discount on the Plan Grant, Bonus Grant and Performance Grant RSUs to account for the lag between vesting and issuance. The Finnerty Model provides for a valuation discount reflecting the holding period restriction embedded in a restricted security preventing its sale over a certain period of time.
- 96-
The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a company’s stock price and the length of restriction. The concept underpinning the Finnerty Model is that a restricted security cannot be sold over a certain period of time. Further simplified, a restricted share of equity in a company can be viewed as having forfeited a put on the average price of the marketable equity over the restriction period (also known as an “Asian Put Option”). If we price an Asian Put Option and compare this value to that of the assumed fully marketable underlying security, we can effectively estimate the marketability discount.
The inputs utilized in the Finnerty Model are (i) length of holding period, (ii) volatility and (iii) distribution yield. The weighted average for the inputs utilized for the shares granted are presented in the table below for Plan Grants, Bonus Grants and Performance Grants:
For the Three Months Ended March 31, | |||
2019 | 2018 | ||
Plan Grants: | |||
Holding Period Restriction (in years) | 0.2 | 0.4 | |
Volatility(1) | 41.8% | 22.9% | |
Distribution Yield(2) | 7.3% | 5.3% | |
Bonus Grants: | |||
Holding Period Restriction (in years) | 0.2 | 0.2 | |
Volatility(1) | 42.0% | 22.5% | |
Distribution Yield(2) | 7.3% | 5.3% | |
Performance Grants: | |||
Holding Period Restriction (in years) | 1.2 | N/A | |
Volatility(1) | 30.5% | N/A | |
Distribution Yield(2) | 7.3% | N/A | |
(1) | The Company determined the expected volatility based on the volatility of the Company’s Class A share price as of the grant date with consideration to comparable companies. |
(2) | Calculated based on the historical distributions paid during the twelve months ended March 31, 2019 and 2018 and the Company’s Class A share price as of the measurement date of the grant on a weighted average basis. |
The following table summarizes the weighted average marketability discounts for Plan Grants, Bonus Grants and Performance Grants:
For the Three Months Ended March 31, | |||
2019 | 2018 | ||
Plan Grants: | |||
Marketability discount for transfer restrictions(1) | 4.3% | 3.4% | |
Bonus Grants: | |||
Marketability discount for transfer restrictions(1) | 4.3% | 2.3% | |
Performance Grants: | |||
Marketability discount for transfer restrictions(1) | 7.0% | N/A | |
(1) | Based on the Finnerty Model calculation. |
Bonus Grants constitute a component of the discretionary annual compensation awarded to certain of our professionals. During 2016, the Company increased the default portion of annual compensation to be awarded as a discretionary Bonus Grant relative to the portion awarded in previous years. The increase in the proportion of discretionary annual compensation awarded as a Bonus Grant has generally been offset by a decrease in discretionary annual cash bonuses. These changes are intended to further align the interests of Apollo’s employees and stakeholders and strengthen the long-term commitment of our partners and employees.
- 97-
Fair Value Measurements
See note 6 to our condensed consolidated financial statements for a discussion of the Company’s fair value measurements.
Recent Accounting Pronouncements
A list of recent accounting pronouncements that are relevant to Apollo and its industry is included in note 2 to our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
In the normal course of business, we engage in off-balance sheet arrangements, including transactions in derivatives, guarantees, commitments, indemnifications and potential contingent repayment obligations. See note 15 to our condensed consolidated financial statements for a discussion of guarantees and contingent obligations.
Contractual Obligations, Commitments and Contingencies
The Company’s material contractual obligations consisted of lease obligations, contractual commitments as part of the ongoing operations of the funds and debt obligations. Fixed and determinable payments due in connection with these obligations are as follows as of March 31, 2019:
Remaining 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | |||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||
Operating lease obligations(7) | $ | 27,820 | $ | 25,847 | $ | 36,012 | $ | 37,383 | $ | 35,430 | $ | 378,388 | $ | 540,880 | |||||||||||||
Other long-term obligations(1) | 16,431 | 3,547 | 2,722 | 907 | 673 | 673 | 24,953 | ||||||||||||||||||||
2018 AMH Credit Facility(2) | 506 | 675 | 675 | 675 | 358 | — | 2,889 | ||||||||||||||||||||
2024 Senior Notes(3) | 15,000 | 20,000 | 20,000 | 20,000 | 20,000 | 508,333 | 603,333 | ||||||||||||||||||||
2026 Senior Notes(4) | 16,500 | 22,000 | 22,000 | 22,000 | 22,000 | 552,983 | 657,483 | ||||||||||||||||||||
2029 Senior Notes(5) | 20,097 | 26,796 | 26,796 | 26,796 | 26,796 | 690,680 | 817,961 | ||||||||||||||||||||
2048 Senior Notes(6) | 11,250 | 15,000 | 15,000 | 15,000 | 15,000 | 663,751 | 735,001 | ||||||||||||||||||||
2014 AMI Term Facility I | 229 | 306 | 15,543 | — | — | — | 16,078 | ||||||||||||||||||||
2014 AMI Term Facility II | 227 | 302 | 302 | 17,355 | — | — | 18,186 | ||||||||||||||||||||
2016 AMI Term Facility I | 185 | 246 | 246 | 246 | 246 | 19,182 | 20,351 | ||||||||||||||||||||
2016 AMI Term Facility II | 192 | 256 | 256 | 256 | 18,439 | — | 19,399 | ||||||||||||||||||||
Obligations | $ | 108,437 | $ | 114,975 | $ | 139,552 | $ | 140,618 | $ | 138,942 | $ | 2,813,990 | $ | 3,456,514 | |||||||||||||
(1) | Includes (i) payments on management service agreements related to certain assets and (ii) payments with respect to certain consulting agreements entered into by the Company. Note that a significant portion of these costs are reimbursable by funds. |
(2) | The commitment fee as of March 31, 2019 on the $750 million undrawn 2018 AMH Credit Facility was 0.09%. See note 10 of the condensed consolidated financial statements for further discussion of the 2018 AMH Credit Facility. |
(3) | $500 million of the 2024 Senior Notes matures in May 2024. The interest rate on the 2024 Senior Notes as of March 31, 2019 was 4.00%. See note 10 of the condensed consolidated financial statements for further discussion of the 2024 Senior Notes. |
(4) | $500 million of the 2026 Senior Notes matures in May 2026. The interest rate on the 2026 Senior Notes as of March 31, 2019 was 4.40%. See note 10 of the condensed consolidated financial statements for further discussion of the 2026 Senior Notes. |
(5) | $550 million of the 2029 Senior Notes matures in February 2029. The interest rate on the 2029 Senior Notes as of March 31, 2019 was 4.87%. See note 10 of the condensed consolidated financial statements for further discussion of the 2029 Senior Notes. |
(6) | $300 million of the 2048 Senior Notes matures in March 2048. The interest rate on the 2048 Senior Notes as of March 31, 2019 was 5.00%. See note 10 of the condensed consolidated financial statements for further discussion of the 2048 Senior Notes. |
(7) | Operating lease obligations excludes $136.8 million of other operating expenses. |
Note: | Due to the fact that the timing of certain amounts to be paid cannot be determined or for other reasons discussed below, the following contractual commitments have not been presented in the table above. |
(i) | As noted previously, we have entered into a tax receivable agreement with our Managing Partners and Contributing Partners which requires us to pay to our Managing Partners and Contributing Partners 85% of any tax savings received by APO Corp. from our step-up in tax basis. The tax savings achieved may not ensure that we have sufficient cash available to pay this liability and we might be required to incur additional debt to satisfy this liability. |
(ii) | Debt amounts related to the consolidated VIEs are not presented in the table above as the Company is not a guarantor of these non-recourse liabilities. |
- 98-
(iii) | In connection with the Stone Tower acquisition, the Company agreed to pay the former owners of Stone Tower a specified percentage of any future performance fees earned from certain of the Stone Tower funds, CLOs and strategic investment accounts. This contingent consideration liability is remeasured to fair value at each reporting period until the obligations are satisfied. See note 15 to the condensed consolidated financial statements for further information regarding the contingent consideration liability. |
(iv) | Commitments from certain of our subsidiaries to contribute to the funds we manage and certain related parties. |
Commitments
Certain of our management companies and general partners are committed to contribute to the funds we manage and certain related parties. While a small percentage of these amounts are funded by us, the majority of these amounts have historically been funded by our related parties, including certain of our employees and certain Apollo funds. The table below presents the commitment and remaining commitment amounts of Apollo and its related parties, the percentage of total fund commitments of Apollo and its related parties, the commitment and remaining commitment amounts of Apollo only (excluding related parties), and the percentage of total fund commitments of Apollo only (excluding related parties) for each credit, private equity and real assets fund as of March 31, 2019 as follows ($ in millions):
- 99-
Fund | Apollo and Related Party Commitments | % of Total Fund Commitments | Apollo Only (Excluding Related Party) Commitments | Apollo Only (Excluding Related Party) % of Total Fund Commitments | Apollo and Related Party Remaining Commitments | Apollo Only (Excluding Related Party) Remaining Commitments | |||||||||||||
Credit: | |||||||||||||||||||
Apollo Credit Opportunity Fund II, L.P. (“COF II”) | 30.5 | 1.93 | 23.4 | 1.48 | 0.8 | 0.6 | |||||||||||||
Apollo Credit Opportunity Fund I, L.P. (“COF I”) | 449.2 | 30.26 | 29.7 | 2.00 | 237.1 | 4.2 | |||||||||||||
Financial Credit Investment III, L.P. (“FCI III”) | 224.3 | 11.76 | 0.1 | 0.01 | 143.5 | 0.1 | |||||||||||||
Financial Credit Investment II, L.P. (“FCI II”) | 244.6 | 15.72 | — | — | 115.9 | — | |||||||||||||
Financial Credit Investment I, L.P. (“FCI I”) | 151.3 | 27.07 | — | — | 76.8 | — | |||||||||||||
Apollo Structured Credit Recovery Master Fund IV, L.P. (“SCRF IV”) | 416.1 | 16.63 | 33.1 | 1.32 | 131.6 | 10.5 | |||||||||||||
MidCap | 1,672.9 | 80.23 | 110.9 | 5.32 | 169.3 | 31.0 | |||||||||||||
Apollo Moultrie Credit Fund, L.P. | 400.0 | 100.00 | — | — | 195.0 | — | |||||||||||||
Apollo/Palmetto Short-Maturity Loan Portfolio, L.P. | 300.0 | 100.00 | — | — | — | — | |||||||||||||
Apollo Accord Master Fund II, L.P. | 274.7 | 35.17 | 11.6 | 1.49 | 178.5 | 7.6 | |||||||||||||
Athora(1) | 664.7 | 27.37 | 140.2 | 5.77 | 461.2 | 97.3 | |||||||||||||
Other Credit | 2,456.5 | Various | 170.6 | Various | 844.9 | 64.6 | |||||||||||||
Private Equity: | |||||||||||||||||||
Fund IX | 1,849.5 | 7.48 | 469.8 | 1.90 | 1,691.9 | 433.6 | |||||||||||||
Fund VIII | 1,543.5 | 8.40 | 396.4 | 2.16 | 289.3 | 75.8 | |||||||||||||
Fund VII | 467.2 | 3.18 | 178.1 | 1.21 | 66.3 | 24.3 | |||||||||||||
Fund VI | 246.3 | 2.43 | 6.1 | 0.06 | 9.7 | 0.2 | |||||||||||||
Fund V | 100.0 | 2.67 | 0.5 | 0.01 | 6.2 | — | |||||||||||||
Fund IV | 100.0 | 2.78 | 0.2 | 0.01 | 0.5 | — | |||||||||||||
AION | 151.5 | 18.34 | 50.0 | 6.05 | 32.7 | 10.5 | |||||||||||||
ANRP I | 426.1 | 32.21 | 10.1 | 0.76 | 64.5 | 1.2 | |||||||||||||
ANRP II | 561.2 | 16.25 | 25.2 | 0.73 | 236.9 | 10.3 | |||||||||||||
ANRP III | 646.3 | 52.58 | 26.3 | 2.14 | 646.3 | 26.3 | |||||||||||||
A.A. Mortgage Opportunities, L.P. | 625.0 | 80.31 | — | — | 261.6 | — | |||||||||||||
Apollo Rose, L.P. | 299.1 | 100.00 | — | — | — | — | |||||||||||||
Apollo Rose II, L.P. | 887.1 | 51.07 | 33.0 | 1.9 | 439.7 | 16.6 | |||||||||||||
Champ, L.P. | 189.0 | 78.25 | 26.1 | 10.8 | 7.0 | 1.1 | |||||||||||||
Apollo Royalties Management, LLC | 108.6 | 100.00 | — | — | — | — | |||||||||||||
Apollo Hybrid Value Fund, L.P. | 834.2 | 25.76 | 89.2 | 2.75 | 724.2 | 77.4 | |||||||||||||
COF III | 358.1 | 10.45 | 83.1 | 2.43 | 78.6 | 19.4 | |||||||||||||
Apollo Asia Private Credit Fund, L.P. | 126.5 | 55.12 | 0.1 | 0.04 | 32.0 | — | |||||||||||||
AEOF | 125.5 | 12.01 | 25.5 | 2.44 | 92.7 | 18.8 | |||||||||||||
Other Private Equity | 585.8 | Various | 104.0 | Various | 188.0 | 53.1 | |||||||||||||
Real Assets: | |||||||||||||||||||
U.S. RE Fund II(2) | 693.8 | 56.26 | 4.7 | 0.39 | 393.0 | 2.4 | |||||||||||||
U.S. RE Fund I(2) | 434.6 | 74.90 | 16.5 | 2.85 | 82.3 | 2.7 | |||||||||||||
CPI Capital Partners Europe, L.P.(1) | 6.1 | 0.47 | — | — | — | — | |||||||||||||
CPI Capital Partners Asia Pacific, L.P. | 6.9 | 0.53 | 0.5 | 0.04 | 0.1 | — | |||||||||||||
Asia RE Fund(2) | 376.9 | 53.12 | 8.4 | 1.18 | 246.9 | 5.9 | |||||||||||||
Apollo Infrastructure Equity Fund(3) | 322.8 | 35.97 | 13.1 | 1.46 | 81.3 | 2.7 | |||||||||||||
Apollo European Principal Finance Fund III, L.P. (“EPF III”)(1) | 609.4 | 13.51 | 76.8 | 1.70 | 407.8 | 54.3 | |||||||||||||
Apollo European Principal Finance Fund II, L.P. (“EPF II”)(1) | 410.9 | 11.94 | 60.2 | 1.75 | 93.3 | 18.1 | |||||||||||||
Apollo European Principal Finance Fund, L.P. (“EPF I”)(1) | 301.4 | 20.74 | 19.9 | 1.37 | 49.0 | 4.6 | |||||||||||||
Other Real Assets | 570.3 | Various | 1.8 | Various | 91.3 | 0.1 | |||||||||||||
Other: | |||||||||||||||||||
Apollo SPN Investments I, L.P. | 13.5 | 0.29 | 13.5 | 0.29 | 8.0 | 8.0 | |||||||||||||
Total | $ | 21,261.9 | $ | 2,258.7 | $ | 8,875.7 | $ | 1,083.3 | |||||||||||
(1) | Apollo’s commitment in these funds is denominated in Euros and translated into U.S. dollars at an exchange rate of €1.00 to $1.12 as of March 31, 2019. |
- 100-
(2) | Figures for U.S. RE Fund I include base, additional, and co-investment commitments. A co-investment vehicle within U.S. RE Fund I is denominated in pound sterling and translated into U.S. dollars at an exchange rate of £1.00 to $1.30 as of March 31, 2019. Figures for U.S. RE Fund II and Asia RE Fund include co-investment commitments. |
(3) | Figures for Apollo Infrastructure Equity Fund include Apollo Infra Equity US Fund, L.P. and Apollo Infra Equity International Fund, L.P. commitments. |
On April 30, 2015, Apollo entered into the AAA Investments Credit Agreement (see note 14 of our condensed consolidated financial statements for further disclosure regarding this facility). The 2018 AMH Credit Facility, 2024 Senior Notes, 2026 Senior Notes, 2048 Senior Notes, and 2029 Senior Notes will have future impacts on our cash uses. See note 10 of our condensed consolidated financial statements for information regarding the Company’s debt arrangements.
Contingent Obligation—Performance fees with respect to certain credit and private equity funds and real assets funds is subject to reversal in the event of future losses to the extent of the cumulative performance fees recognized in income to date. See note 15 of our condensed consolidated financial statements for a description of our contingent obligation.
One of the Company’s subsidiaries, AGS, provides underwriting commitments in connection with securities offerings to the portfolio companies of the funds Apollo manages. As of March 31, 2019, AGS had an unfunded contingent commitment of $150.0 million outstanding related to such offerings. The commitment expired on April 4, 2019 with no funding on the part of the Company.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our predominant exposure to market risk is related to our role as investment manager and general partner for our funds and the sensitivity to movements in the fair value of their investments and resulting impact on performance fees and management fee revenues. Our direct investments in the funds also expose us to market risk whereby movements in the fair values of the underlying investments will increase or decrease both net gains (losses) from investment activities and income (loss) from equity method investments. For a discussion of the impact of market risk factors on our financial instruments see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Investments, at Fair Value.”
The fair value of our financial assets and liabilities of our funds may fluctuate in response to changes in the value of investments, foreign exchange, commodities and interest rates. The net effect of these fair value changes impacts the gains and losses from investments in our condensed consolidated statements of operations. However, the majority of these fair value changes are absorbed by the Non-Controlling Interests.
The Company is subject to a concentration risk related to the investors in its funds. Although there are more than 1,000 investors in Apollo’s active credit, private equity and real assets funds, no individual investor accounts for more than 10% of the total committed capital to Apollo’s active funds.
Risks are analyzed across funds from the “bottom up” and from the “top down” with a particular focus on asymmetric risk. We gather and analyze data, monitor investments and markets in detail, and constantly strive to better quantify, qualify and circumscribe relevant risks.
Each risk management process is subject to our overall risk tolerance and philosophy and our enterprise-wide risk management framework. This framework includes identifying, measuring and managing market, credit and operational risks at each segment, as well as at the fund and Company level.
Each segment runs its own investment and risk management process subject to our overall risk tolerance and philosophy:
• | Our credit and real assets funds continuously monitor a variety of markets for attractive trading opportunities, applying a number of traditional and customized risk management metrics to analyze risk related to specific assets or portfolios, as well as, fund-wide risks. |
• | The investment process of our private equity funds involves a detailed analysis of potential acquisitions, and investment management teams assigned to monitor the strategic development, financing and capital deployment decisions of each portfolio investment. |
At the direction of the Company’s manager, the Company has established a risk committee comprised of various members of senior management including the Company’s Chief Financial Officer, Chief Legal Officer, and the Company’s Chief Risk Officer. The risk committee is tasked with assisting the Company’s manager in monitoring and managing enterprise-wide risk. The risk committee generally meets on a quarterly basis and reports to senior management of the Company’s manager at such times as the committee deems appropriate and at least on an annual basis.
- 101-
On at least a monthly basis, the Company’s risk department provides a summary analysis of fund level market and credit risk to the portfolio managers of the Company’s funds and the heads of the various business segments. On a periodic basis, the Company’s risk department presents a consolidated summary analysis of fund level market and credit risk to the Company’s risk committee. In addition, the Company’s Chief Risk Officer reviews specific investments from the perspective of risk mitigation and discusses such analysis with the Company’s risk committee and/or the executive committee of the Company’s manager at such times as the Company’s Chief Risk Officer determines such discussions are warranted. On an annual basis, the Company’s Chief Risk Officer provides senior management of the Company’s manager with a comprehensive overview of risk management along with an update on current and future risk initiatives.
Impact on Management Fees—Our management fees are based on one of the following:
• | capital commitments to an Apollo fund; |
• | capital invested in an Apollo fund; |
• | the gross, net or adjusted asset value of an Apollo fund, as defined; or |
• | as otherwise defined in the respective agreements. |
Management fees could be impacted by changes in market risk factors and management could consider an investment permanently impaired as a result of (i) such market risk factors causing changes in invested capital or in market values to below cost, in the case of certain credit funds and our private equity funds or (ii) such market risk factors causing changes in gross or net asset value, for the credit funds. The proportion of our management fees that are based on NAV is dependent on the number and types of our funds in existence and the current stage of each fund’s life cycle.
Impact on Advisory and Transaction Fees—We earn transaction fees relating to the negotiation of credit, private equity and real assets transactions and may obtain reimbursement for certain out-of-pocket expenses incurred. Subsequently, on a quarterly or annual basis, ongoing advisory fees, and additional transaction fees in connection with additional purchases, dispositions, or follow-on transactions, may be earned. Management Fee Offsets and any broken deal costs, if applicable, are reflected as a reduction to advisory and transaction fees. Advisory and transaction fees will be impacted by changes in market risk factors to the extent that they limit our opportunities to engage in credit, private equity and real assets transactions or impair our ability to consummate such transactions. The impact of changes in market risk factors on advisory and transaction fees is not readily predicted or estimated.
Impact on Performance Fees—We earn performance fees from our funds as a result of such funds achieving specified performance criteria. Our performance fees will be impacted by changes in market risk factors. However, several major factors will influence the degree of impact:
• | the performance criteria for each individual fund in relation to how that fund’s results of operations are impacted by changes in market risk factors; |
• | whether such performance criteria are annual or over the life of the fund; |
• | to the extent applicable, the previous performance of each fund in relation to its performance criteria; and |
• | whether each funds’ performance fee distributions are subject to contingent repayment. |
As a result, the impact of changes in market risk factors on performance fees will vary widely from fund to fund. The impact is heavily dependent on the prior and future performance of each fund, and therefore is not readily predicted or estimated.
Market Risk—We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues and expenses will be adversely affected by changes in market conditions. Market risk is inherent in each of our investments and activities, including equity investments, loans, short-term borrowings, long-term debt, hedging instruments, credit default swaps and derivatives. Just a few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity prices, changes in the implied volatility of interest rates and price deterioration. Volatility in debt and equity markets can impact our pace of capital deployment, the timing of receipt of transaction fee revenues and the timing of realizations. These market conditions could have an impact on the value of fund investments and rates of return. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse effects on our results from operations and our overall financial condition. We monitor market risk using certain strategies and methodologies which management evaluates periodically for appropriateness. We intend to continue to monitor this risk going forward and continue to monitor our exposure to all market factors.
- 102-
Interest Rate Risk—Interest rate risk represents exposure we and our funds have to instruments whose values vary with the change in interest rates. These instruments include, but are not limited to, loans, borrowings, investments in interest bearing securities and derivative instruments. We may seek to mitigate risks associated with the exposures by having our funds take offsetting positions in derivative contracts. Hedging instruments allow us to seek to mitigate risks by reducing the effect of movements in the level of interest rates, changes in the shape of the yield curve, as well as, changes in interest rate volatility. Hedging instruments used to mitigate these risks may include related derivatives such as options, futures and swaps.
Credit Risk—Certain of our funds are subject to certain inherent risks through their investments.
Certain of our entities invest substantially all of their excess cash in open-end money market funds and money market demand accounts, which are included in cash and cash equivalents. The money market funds invest primarily in government securities and other short-term, highly liquid instruments with a low risk of loss. We continually monitor the funds’ performance in order to manage any risk associated with these investments.
Certain of our funds hold derivative instruments that contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. We seek to minimize our risk exposure by limiting the counterparties with which our funds enter into contracts to banks and investment banks who meet established credit and capital guidelines. As of March 31, 2019, we do not expect any counterparty to default on its obligations and therefore do not expect to incur any loss due to counterparty default.
Foreign Exchange Risk—Foreign exchange risk represents exposures our funds have to changes in the values of current fund holdings and future cash flows denominated in other currencies and investments in non-U.S. companies. The types of investments exposed to this risk include investments in foreign subsidiaries, foreign currency-denominated loans, foreign currency-denominated transactions, and various foreign exchange derivative instruments whose values fluctuate with changes in currency exchange rates or foreign interest rates. Instruments used to mitigate this risk are foreign exchange options, currency swaps, futures and forwards. These instruments may be used to help insulate our funds against losses that may arise due to volatile movements in foreign exchange rates and/or interest rates.
In our capacity as investment manager of the funds we manage, we continuously monitor a variety of markets for attractive opportunities for managing risk. For example, certain of the funds we manage may put in place foreign exchange hedges or borrowings with respect to certain foreign currency denominated investments to provide a hedge against foreign exchange exposure.
Non-U.S. Operations—We conduct business throughout the world and are continuing to expand into foreign markets. We currently have offices outside the U.S. in Toronto, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong, Shanghai and Tokyo and have been strategically growing our international presence. Our fund investments and our revenues are primarily derived from our U.S. operations. With respect to our non-U.S. operations, we are subject to risk of loss from currency fluctuations, social instability, changes in governmental policies or policies of central banks, expropriation, nationalization, unfavorable political and diplomatic developments and changes in legislation relating to non-U.S. ownership. Our funds also invest in the securities of companies which are located in non-U.S. jurisdictions. As we continue to expand globally, we will continue to focus on monitoring and managing these risk factors as they relate to specific non-U.S. investments.
ITEM 4. | CONTROLS AND PROCEDURES |
We maintain “disclosure controls and procedures”, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective at the reasonable assurance level to accomplish their objectives of ensuring that information we are required to disclose
- 103-
in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
No changes in our internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) occurred during our most recent quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
See note 15 to our condensed consolidated financial statements for a summary of the Company’s legal proceedings.
ITEM 1A. RISK FACTORS
For a discussion of our potential risks and uncertainties, see the information under the heading "Risk Factors" in our 2018 Annual Report, which is accessible on the Securities and Exchange Commission's website at www.sec.gov. There have been no material changes to the risk factors for the three months ended March 31, 2019.
The risks described in our 2018 Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/ or operating results.
ITEM 2. | UNREGISTERED SALE OF EQUITY SECURITIES |
On February 5, 2019, February 15, 2019, February 19, 2019 and March 19, 2019, we issued 2,140,408, 1,653, 31,235, and 16,508 Class A shares, respectively, net of taxes to Apollo Management Holdings, L.P., a subsidiary of Apollo Global Management, LLC, in connection with issuances of shares to participants in the 2007 Equity Plan for an aggregate purchase price of $65.0 million, $49.3 thousand, $0.9 million and $0.5 million, respectively. The issuance was exempt from registration under the Securities Act in accordance with Section 4(a)(2) and Rule 506(b) thereof, as transactions by the issuer not involving a public offering. We determined that the purchaser of Class A shares in the transactions, Apollo Management Holdings, L.P., was an accredited investor.
Issuer Purchases of Equity Securities
The following table sets forth purchases of our Class A shares made by us or on our behalf during the fiscal quarter ended March 31, 2019.
Period | Number of Class A Shares Purchased(1) | Average Price Paid per Share | Class A Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Approximate Dollar Value of Class A Shares that May be Purchased Under the Plan or Programs | ||||||||||
January 1, 2019 through January 31, 2019 | — | $ | — | — | $ | 326,007,061 | ||||||||
February 1, 2019 through February 28, 2019 | 1,551,341 | 29.87 | 1,456,271 | 282,508,246 | ||||||||||
March 1, 2019 through March 31, 2019 | 897,730 | 28.93 | 897,730 | 256,536,917 | ||||||||||
Total | 2,449,071 | 2,354,001 | ||||||||||||
(1) | Certain Apollo employees receive a portion of the profit sharing proceeds of certain funds in the form of (a) restricted Class A shares of AGM that they are required to purchase with such proceeds or (b) RSUs, in each case which equity-based awards generally vest over three years. These equity-based awards are granted under the Company's 2007 Equity Plan. To prevent dilution on account of these awards, Apollo may, in its discretion, repurchase Class A shares on the open market and retire them. During the three months ended March 31, 2019, we repurchased 95,070 Class A shares at an average price paid per share of $29.87 in open-market transactions not pursuant to a publicly-announced repurchase plan or program on account of these awards. See note 13 for further information on Class A shares. |
(2) | Pursuant to a publicly announced share repurchase program, the Company is authorized to repurchase up to $500 million in the aggregate of its Class A shares, including through the repurchase of outstanding Class A shares and through a reduction of Class A shares to be issued to employees to satisfy associated tax obligations in connection with the settlement of equity-based awards granted under the 2007 Equity Plan (or any successor equity plan thereto). Class A shares may be repurchased from time to time in open market transactions, in privately negotiated transactions, pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Exchange Act, or otherwise, with the size and timing of these repurchases depending on legal requirements, price, market and economic conditions and other factors. The |
- 104-
Company is not obligated under the terms of the program to repurchase any of its Class A shares. The repurchase program has no expiration date and may be suspended or terminated by the Company at any time without prior notice. Class A shares repurchased as part of this program are canceled by the Company. Reductions of Class A shares issued to employees to satisfy associated tax obligations in connection with the settlement of equity-based awards granted under the 2007 Equity Plan are not included in the table.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
The following tables present financial data for Apollo’s reportable segments for the years ended December 31, 2018, 2017 and 2016, and are provided on a voluntary basis for comparability purposes.
For the Year Ended December 31, 2018 | |||||||||||||||
Credit Segment | Private Equity Segment | Real Assets Segment | Total Reportable Segments | ||||||||||||
Management fees | $ | 642,331 | $ | 477,185 | $ | 163,172 | $ | 1,282,688 | |||||||
Advisory and transaction fees, net | 8,872 | 89,602 | 13,093 | 111,567 | |||||||||||
Performance fees | 28,390 | — | — | 28,390 | |||||||||||
Fee Related Revenues | 679,593 | 566,787 | 176,265 | 1,422,645 | |||||||||||
Salary, bonus and benefits | (180,448 | ) | (160,512 | ) | (74,002 | ) | (414,962 | ) | |||||||
General, administrative and other | (119,450 | ) | (79,450 | ) | (40,391 | ) | (239,291 | ) | |||||||
Placement fees | (1,130 | ) | (585 | ) | (407 | ) | (2,122 | ) | |||||||
Fee Related Expenses | (301,028 | ) | (240,547 | ) | (114,800 | ) | (656,375 | ) | |||||||
Other income, net of Non-Controlling Interest | 1,104 | 1,923 | 1,942 | 4,969 | |||||||||||
Fee Related Earnings | 379,669 | 328,163 | 63,407 | 771,239 | |||||||||||
Realized performance fees | 45,139 | 279,078 | 55,971 | 380,188 | |||||||||||
Realized profit sharing expense | (36,079 | ) | (156,179 | ) | (33,371 | ) | (225,629 | ) | |||||||
Net Realized Performance Fees | 9,060 | 122,899 | 22,600 | 154,559 | |||||||||||
Realized principal investment income | 19,199 | 43,150 | 7,362 | 69,711 | |||||||||||
Net interest loss and other | (13,619 | ) | (20,081 | ) | (8,330 | ) | (42,030 | ) | |||||||
Segment Distributable Earnings | $ | 394,309 | $ | 474,131 | $ | 85,039 | $ | 953,479 | |||||||
- 105-
For the Year Ended December 31, 2017 | |||||||||||||||
Credit Segment | Private Equity Segment | Real Assets Segment | Total Reportable Segments | ||||||||||||
Management fees | $ | 555,586 | $ | 356,208 | $ | 170,521 | $ | 1,082,315 | |||||||
Advisory and transaction fees, net | 30,325 | 84,216 | 3,083 | 117,624 | |||||||||||
Performance fees | 17,666 | — | — | 17,666 | |||||||||||
Fee Related Revenues | 603,577 | 440,424 | 173,604 | 1,217,605 | |||||||||||
Salary, bonus and benefits | (172,152 | ) | (144,391 | ) | (77,612 | ) | (394,155 | ) | |||||||
General, administrative and other | (107,617 | ) | (81,058 | ) | (39,904 | ) | (228,579 | ) | |||||||
Placement fees | (1,073 | ) | (4,238 | ) | (8,602 | ) | (13,913 | ) | |||||||
Fee Related Expenses | (280,842 | ) | (229,687 | ) | (126,118 | ) | (636,647 | ) | |||||||
Other income, net of Non-Controlling Interest | 11,285 | 27,843 | 4,327 | 43,455 | |||||||||||
Fee Related Earnings | 334,020 | 238,580 | 51,813 | 624,413 | |||||||||||
Realized performance fees | 91,982 | 445,923 | 93,454 | 631,359 | |||||||||||
Realized profit sharing expense | (34,409 | ) | (193,489 | ) | (50,940 | ) | (278,838 | ) | |||||||
Net Realized Performance Fees | 57,573 | 252,434 | 42,514 | 352,521 | |||||||||||
Realized principal investment income | 19,249 | 44,087 | 4,906 | 68,242 | |||||||||||
Net interest loss and other | (16,638 | ) | (23,131 | ) | (8,584 | ) | (48,353 | ) | |||||||
Segment Distributable Earnings | $ | 394,204 | $ | 511,970 | $ | 90,649 | $ | 996,823 | |||||||
For the Year Ended December 31, 2016 | |||||||||||||||
Credit Segment | Private Equity Segment | Real Assets Segment | Total Reportable Segments | ||||||||||||
Management fees | $ | 486,388 | $ | 370,698 | $ | 120,563 | $ | 977,649 | |||||||
Advisory and transaction fees, net | 11,602 | 128,893 | 6,620 | 147,115 | |||||||||||
Performance fees | 22,941 | — | — | 22,941 | |||||||||||
Fee Related Revenues | 520,931 | 499,591 | 127,183 | 1,147,705 | |||||||||||
Salary, bonus and benefits | (149,963 | ) | (149,087 | ) | (67,840 | ) | (366,890 | ) | |||||||
General, administrative and other | (100,873 | ) | (84,464 | ) | (33,153 | ) | (218,490 | ) | |||||||
Placement fees | (1,329 | ) | (3,640 | ) | (19,464 | ) | (24,433 | ) | |||||||
Fee Related Expenses | (252,165 | ) | (237,191 | ) | (120,457 | ) | (609,813 | ) | |||||||
Other income (loss), net of Non-Controlling Interest | (9,313 | ) | 767 | 528 | (8,018 | ) | |||||||||
Fee Related Earnings | 259,453 | 263,167 | 7,254 | 529,874 | |||||||||||
Realized performance fees | 101,670 | 88,336 | 61,940 | 251,946 | |||||||||||
Realized profit sharing expense | (51,805 | ) | (39,113 | ) | (45,875 | ) | (136,793 | ) | |||||||
Net Realized Performance Fees | 49,865 | 49,223 | 16,065 | 115,153 | |||||||||||
Realized principal investment income | 17,709 | 13,775 | 5,696 | 37,180 | |||||||||||
Net interest loss and other | (16,861 | ) | (20,533 | ) | (6,809 | ) | (44,203 | ) | |||||||
Segment Distributable Earnings | $ | 310,166 | $ | 305,632 | $ | 22,206 | $ | 638,004 | |||||||
- 106-
The following table presents the reconciliation of income before income tax provision reported in the condensed consolidated statements of operations to Segment Distributable Earnings:
For the Year Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Income before income tax provision | $ | 105,272 | $ | 1,769,584 | $ | 1,061,014 | |||||
Transaction-related charges(1) | (5,631 | ) | 17,496 | 55,302 | |||||||
Gain from remeasurement of tax receivable agreement liability | (35,405 | ) | (200,240 | ) | (3,208 | ) | |||||
Net income attributable to Non-Controlling Interests in consolidated entities and appropriated partners’ capital | (31,648 | ) | (8,891 | ) | (5,789 | ) | |||||
Unrealized performance fees(2) | 782,888 | (688,565 | ) | (510,999 | ) | ||||||
Unrealized profit sharing expense(2) | (274,812 | ) | 226,319 | 179,857 | |||||||
Equity-based profit sharing expense and other(3) | 91,051 | 6,980 | 3,127 | ||||||||
Equity-based compensation | 68,229 | 64,954 | 63,081 | ||||||||
Unrealized principal investment (income) loss | 62,097 | (94,709 | ) | (65,401 | ) | ||||||
Unrealized net (gains) losses from investment activities and other | 191,438 | (96,105 | ) | (138,980 | ) | ||||||
Segment Distributable Earnings | $ | 953,479 | $ | 996,823 | $ | 638,004 | |||||
(1) | Transaction-related charges include equity-based compensation charges, the amortization of intangible assets, contingent consideration and certain other charges associated with acquisitions. |
(2) | Includes realized performance fees and realized profit sharing expense settled in the form of shares of Athene Holding during the year ended December 31, 2018. |
(3) | Equity-based profit sharing expense and other includes certain profit sharing arrangements in which a portion of performance fees distributed to the general partner are allocated by issuance of equity-based awards, rather than cash, to employees of Apollo. Equity-based profit sharing expense and other also includes non-cash expenses related to equity awards granted by unconsolidated related parties to employees of Apollo. |
- 107-
ITEM 6. | EXHIBITS |
Exhibit Number | Exhibit Description | |
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 | ||
4.7 | ||
4.8 | ||
4.9 | ||
- 108-
Exhibit Number | Exhibit Description | |
4.10 | ||
4.11 | ||
4.12 | ||
4.13 | ||
4.14 | ||
4.15 | ||
*31.1 | ||
*31.2 | ||
*32.1 | ||
*32.2 | ||
*101.INS | XBRL Instance Document | |
*101.SCH | XBRL Taxonomy Extension Scheme Document | |
*101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
*101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
*101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
*101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
- 109-
* | Filed herewith. |
+ | Management contract or compensatory plan or arrangement. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
- 110-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Apollo Global Management, LLC | |||
(Registrant) | |||
Date: May 6, 2019 | By: | /s/ Martin Kelly | |
Name: | Martin Kelly | ||
Title: | Chief Financial Officer and Co-Chief Operating Officer (principal financial officer and authorized signatory) | ||
- 111-