Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018 OR
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¨ | 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)
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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.
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Large accelerated filer | | x | | Accelerated filer | | ¨ |
Non-accelerated filer | | o | | Smaller reporting company | | ¨ |
| | | | Emerging growth company | | ¨ |
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. | | |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 2, 2018 there were 201,427,878 Class A shares and 1 Class B share outstanding.
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| TABLE OF CONTENTS | |
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PART I | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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ITEM 5. | | |
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ITEM 6. | | |
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Forward-Looking Statements
This quarterly report may contain forward-looking statements that are within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, discussions related to Apollo’s expectations regarding the performance of its business, 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 February 12, 2018 (the “2017 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 through which our Managing Partners currently operate our businesses and (ii) one or more limited partnerships formed for the purpose of, among other activities, holding certain of our gains or losses on our principal investments in the funds, which we refer to as our “principal investments”;
“Assets Under Management”, or “AUM”, refers to the 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:
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(i) | the fair value of the investments of the private equity 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; |
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(ii) | the net asset value, or “NAV,” of the credit funds, partnerships and accounts for which we provide investment management or advisory services, other than certain collateralized loan obligations (“CLOs”) and collateralized debt obligations (“CDOs”), which have a fee-generating basis other than the mark-to-market value of the underlying assets, plus used or available leverage and/or capital commitments; |
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(iii) | the gross asset value or net asset value of the real assets funds, partnerships and accounts we manage, and the structured portfolio company investments of the funds, partnerships and accounts we manage or advise, which includes the leverage used by such structured portfolio company investments; |
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(iv) | the incremental value associated with the reinsurance investments of the portfolio company assets we manage or advise; and |
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(v) | 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 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:
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(i) | fair value above invested capital for those funds that earn management fees based on invested capital; |
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(ii) | net asset values related to general partner and co-investment interests; |
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(iii) | unused credit facilities; |
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(iv) | available commitments on those funds that generate management fees on invested capital; |
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(v) | structured portfolio company investments that do not generate monitoring fees; and |
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(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:
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(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; |
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(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 |
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(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;
“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 drawdown funds, (ii) SIAs that have a defined maturity date and (iii) funds and SIAs in our real estate debt strategy;
“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;
“drawdown” refers to commitment-based funds and certain SIAs in which investors make a commitment to provide capital at the formation of such funds and SIAs and deliver capital when called as investment opportunities become available. It includes assets of Athene Holding Ltd. (“Athene Holding”) and its subsidiaries (collectively “Athene”) managed by Athene Asset Management LLC (“Athene Asset Management” or “AAM”) that are invested in commitment-based funds;
“gross IRR” of a credit fund 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 September 30, 2018 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 September 30, 2018 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;
“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 of Athene sub-advised portfolios and CLOs represent the gross returns on invested assets, which exclude cash. 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;
“liquid/performing” includes CLOs and other performing credit vehicles, hedge fund style credit funds, structured credit funds and SIAs, as well as sub-advised managed accounts owned by or related to Athene. Certain commitment-based SIAs are included as the underlying assets are liquid;
“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 September 30, 2018 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, incentive fees allocated to the general partner, or other fees and expenses. Returns of Athene sub-advised portfolios and CLOs represent the gross or net returns on invested assets, which exclude cash. 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” and “incentive fees” 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 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. and AION Capital Partners Limited (“AION”) 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;
“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 pay 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 pursuant to its governing agreements.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AS OF SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
(dollars in thousands, except share data) |
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| As of
September 30, 2018 | | As of
December 31, 2017 |
Assets: | | | |
Cash and cash equivalents | $ | 854,574 |
| | $ | 751,273 |
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Restricted cash | 3,460 |
| | 3,875 |
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U.S. Treasury securities, at fair value | 390,448 |
| | 364,649 |
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Investments (includes performance allocations of $1,435,233 and $1,828,930 as of September 30, 2018 and December 31, 2017, respectively) | 3,415,165 |
| | 3,559,834 |
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Assets of consolidated variable interest entities: | | | |
Cash and cash equivalents | 53,295 |
| | 92,912 |
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Investments, at fair value | 1,202,185 |
| | 1,196,190 |
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Other assets | 45,749 |
| | 39,484 |
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Incentive fees receivable | 7,710 |
| | 43,176 |
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Due from related parties | 335,778 |
| | 262,588 |
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Deferred tax assets, net | 348,588 |
| | 337,638 |
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Other assets | 207,477 |
| | 231,757 |
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Goodwill | 88,852 |
| | 88,852 |
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Intangible assets, net | 18,877 |
| | 18,842 |
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Total Assets | $ | 6,972,158 |
| | $ | 6,991,070 |
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Liabilities and Shareholders’ Equity | | | |
Liabilities: | | | |
Accounts payable and accrued expenses | $ | 82,008 |
| | $ | 68,873 |
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Accrued compensation and benefits | 159,516 |
| | 62,474 |
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Deferred revenue | 182,045 |
| | 128,146 |
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Due to related parties | 412,862 |
| | 428,013 |
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Profit sharing payable | 684,594 |
| | 752,276 |
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Debt | 1,361,024 |
| | 1,362,402 |
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Liabilities of consolidated variable interest entities: | | | |
Debt, at fair value | 880,570 |
| | 1,002,063 |
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Other liabilities | 73,689 |
| | 115,658 |
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Other liabilities | 142,021 |
| | 173,369 |
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Total Liabilities | 3,978,329 |
| | 4,093,274 |
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Commitments and Contingencies (see note 14) |
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Shareholders’ Equity: | | | |
Apollo Global Management, LLC shareholders’ equity: | | | |
Series A Preferred shares, 11,000,000 shares issued and outstanding as of September 30, 2018 and December 31, 2017 | 264,398 |
| | 264,398 |
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Series B Preferred shares, 12,000,000 and 0 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | 289,815 |
| | — |
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Class A shares, no par value, unlimited shares authorized, 201,089,465 and 195,267,669 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | — |
| | — |
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Class B shares, no par value, unlimited shares authorized, 1 share issued and outstanding as of September 30, 2018 and December 31, 2017 | — |
| | — |
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Additional paid in capital | 1,350,331 |
| | 1,579,797 |
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Accumulated deficit | (273,535 | ) | | (379,460 | ) |
Accumulated other comprehensive loss | (3,600 | ) | | (1,809 | ) |
Total Apollo Global Management, LLC shareholders’ equity | 1,627,409 |
| | 1,462,926 |
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Non-Controlling Interests in consolidated entities | 271,379 |
| | 140,086 |
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Non-Controlling Interests in Apollo Operating Group | 1,095,041 |
| | 1,294,784 |
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Total Shareholders’ Equity | 2,993,829 |
| | 2,897,796 |
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Total Liabilities and Shareholders’ Equity | $ | 6,972,158 |
| | $ | 6,991,070 |
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See accompanying notes to condensed consolidated financial statements.
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(dollars in thousands, except share data)
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| For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | |
Management fees | $ | 358,750 |
| | $ | 301,443 |
| | $ | 987,102 |
| | $ | 852,291 |
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Advisory and transaction fees, net | 13,154 |
| | 16,209 |
| | 42,145 |
| | 54,905 |
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Investment income: | | | | | | | |
Performance allocations | 124,856 |
| | 336,910 |
| | 129,776 |
| | 809,896 |
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Principal investment income | 16,153 |
| | 47,488 |
| | 25,334 |
| | 102,877 |
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Total investment income | 141,009 |
| | 384,398 |
| | 155,110 |
| | 912,773 |
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Incentive fees | 4,818 |
| | 9,670 |
| | 23,593 |
| | 23,563 |
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Total Revenues | 517,731 |
| | 711,720 |
| | 1,207,950 |
| | 1,843,532 |
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Expenses: | | | | | | | |
Compensation and benefits: | | | | | | | |
Salary, bonus and benefits | 112,722 |
| | 108,853 |
| | 343,623 |
| | 316,011 |
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Equity-based compensation | 50,334 |
| | 24,485 |
| | 123,643 |
| | 70,332 |
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Profit sharing expense | 63,059 |
| | 137,296 |
| | 121,327 |
| | 339,679 |
|
Total compensation and benefits | 226,115 |
| | 270,634 |
| | 588,593 |
| | 726,022 |
|
Interest expense | 15,209 |
| | 13,303 |
| | 44,168 |
| | 39,497 |
|
General, administrative and other | 70,657 |
| | 68,149 |
| | 194,851 |
| | 189,918 |
|
Placement fees | 746 |
| | 5,397 |
| | 1,384 |
| | 12,560 |
|
Total Expenses | 312,727 |
| | 357,483 |
| | 828,996 |
| | 967,997 |
|
Other Income: | | | | | | | |
Net gains from investment activities | 155,283 |
| | 68,932 |
| | 20,645 |
| | 102,936 |
|
Net gains from investment activities of consolidated variable interest entities | 13,001 |
| | 845 |
| | 28,746 |
| | 11,085 |
|
Interest income | 5,411 |
| | 1,504 |
| | 13,517 |
| | 2,929 |
|
Other income, net | 3,085 |
| | 25,387 |
| | 1,888 |
| | 44,776 |
|
Total Other Income | 176,780 |
| | 96,668 |
| | 64,796 |
| | 161,726 |
|
Income before income tax provision | 381,784 |
| | 450,905 |
| | 443,750 |
| | 1,037,261 |
|
Income tax provision | (19,092 | ) | | (16,542 | ) | | (46,596 | ) | | (54,926 | ) |
Net Income | 362,692 |
| | 434,363 |
| | 397,154 |
| | 982,335 |
|
Net income attributable to Non-Controlling Interests | (191,171 | ) | | (231,411 | ) | | (220,285 | ) | | (542,507 | ) |
Net Income Attributable to Apollo Global Management, LLC | 171,521 |
| | 202,952 |
| | 176,869 |
| | 439,828 |
|
Net income attributable to Series A Preferred Shareholders | (4,383 | ) | | (4,383 | ) | | (13,149 | ) | | (9,155 | ) |
Net income attributable to Series B Preferred Shareholders | (4,781 | ) | | — |
| | (9,350 | ) | | — |
|
Net Income Attributable to Apollo Global Management, LLC Class A Shareholders | $ | 162,357 |
| | $ | 198,569 |
| | $ | 154,370 |
| | $ | 430,673 |
|
Distributions Declared per Class A Share | $ | 0.43 |
| | $ | 0.52 |
| | $ | 1.47 |
| | $ | 1.46 |
|
Net Income Per Class A Share: | | | | | | | |
Net Income Available to Class A Share – Basic | $ | 0.77 |
| | $ | 1.00 |
| | $ | 0.70 |
| | $ | 2.19 |
|
Net Income Available to Class A Share – Diluted | $ | 0.77 |
| | $ | 1.00 |
| | $ | 0.70 |
| | $ | 2.19 |
|
Weighted Average Number of Class A Shares Outstanding – Basic | 200,347,996 |
| | 192,882,082 |
| | 199,837,707 |
| | 190,014,240 |
|
Weighted Average Number of Class A Shares Outstanding – Diluted | 200,347,996 |
| | 192,882,082 |
| | 199,837,707 |
| | 190,014,240 |
|
See accompanying notes to condensed consolidated financial statements.
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(dollars in thousands, except share data)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net Income | $ | 362,692 |
| | $ | 434,363 |
| | $ | 397,154 |
| | $ | 982,335 |
|
Other Comprehensive Income (Loss), net of tax: | | | | | | | |
Currency translation adjustments, net of tax | (2,318 | ) | | 5,643 |
| | (15,183 | ) | | 14,583 |
|
Net gain from change in fair value of cash flow hedge instruments | 27 |
| | 27 |
| | 79 |
| | 78 |
|
Net gain (loss) on available-for-sale securities | (309 | ) | | 290 |
| | (546 | ) | | 189 |
|
Total Other Comprehensive Income (Loss), net of tax | (2,600 | ) | | 5,960 |
| | (15,650 | ) | | 14,850 |
|
Comprehensive Income | 360,092 |
| | 440,323 |
| | 381,504 |
| | 997,185 |
|
Comprehensive Income attributable to Non-Controlling Interests | (189,041 | ) | | (236,410 | ) | | (206,426 | ) | | (550,695 | ) |
Comprehensive Income Attributable to Apollo Global Management, LLC | $ | 171,051 |
| | $ | 203,913 |
| | $ | 175,078 |
| | $ | 446,490 |
|
See accompanying notes to condensed consolidated financial statements.
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(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, 2017 | 185,460,294 |
| | 1 |
| | $ | — |
| | $ | — |
| | $ | 1,830,025 |
| | $ | (986,186 | ) | | $ | (8,723 | ) | | $ | 835,116 |
| | $ | 90,063 |
| | $ | 942,349 |
| | $ | 1,867,528 |
|
Adoption of new accounting guidance | — |
| | — |
| | — |
| | — |
| | — |
| | 22,901 |
| | — |
| | 22,901 |
| | — |
| | — |
| | 22,901 |
|
Dilution impact of issuance of Class A shares | — |
| | — |
| | — |
| | — |
| | (295 | ) | | — |
| | — |
| | (295 | ) | | — |
| | — |
| | (295 | ) |
Equity issued in connection with Preferred shares offering | — |
| | — |
| | 264,398 |
| | — |
| | — |
| | — |
| | — |
| | 264,398 |
| | — |
| | — |
| | 264,398 |
|
Capital increase related to equity-based compensation | — |
| | — |
| | — |
| | — |
| | 52,442 |
| | — |
| | — |
| | 52,442 |
| | — |
| | — |
| | 52,442 |
|
Capital contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 43,758 |
| | — |
| | 43,758 |
|
Distributions | — |
| | — |
| | (9,155 | ) | | — |
| | (288,726 | ) | | — |
| | — |
| | (297,881 | ) | | (4,570 | ) | | (329,172 | ) | | (631,623 | ) |
Payments related to issuances of Class A shares for equity-based awards | 2,096,389 |
| | — |
| | — |
| | — |
| | — |
| | (28,001 | ) | | — |
| | (28,001 | ) | | — |
| | — |
| | (28,001 | ) |
Repurchase of Class A shares | (233,248 | ) | | — |
| | — |
| | — |
| | (6,903 | ) | | — |
| | — |
| | (6,903 | ) | | — |
| | — |
| | (6,903 | ) |
Exchange of AOG Units for Class A shares | 6,217,418 |
| | — |
| | — |
| | — |
| | 41,224 |
| | — |
| | — |
| | 41,224 |
| | — |
| | (30,631 | ) | | 10,593 |
|
Net income | — |
| | — |
| | 9,155 |
| | — |
| | — |
| | 430,673 |
| | — |
| | 439,828 |
| | 8,967 |
| | 533,540 |
| | 982,335 |
|
Currency translation adjustments, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,436 |
| | 6,436 |
| | 11,518 |
| | (3,371 | ) | | 14,583 |
|
Net gain from change in fair value of cash flow hedge instruments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37 |
| | 37 |
| | — |
| | 41 |
| | 78 |
|
Net income on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 189 |
| | 189 |
| | — |
| | — |
| | 189 |
|
Balance at September 30, 2017 | 193,540,853 |
| | 1 |
| | $ | 264,398 |
| | $ | — |
| | $ | 1,627,767 |
| | $ | (560,613 | ) | | $ | (2,061 | ) | | $ | 1,329,491 |
| | $ | 149,736 |
| | $ | 1,112,756 |
| | $ | 2,591,983 |
|
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 | — |
| | — |
| | — |
| | — |
| | (34 | ) | | (8,116 | ) | | — |
| | (8,150 | ) | | — |
| | (11,210 | ) | | (19,360 | ) |
Dilution impact of issuance of Class A shares | — |
| | — |
| | — |
| | — |
| | 90 |
| | — |
| | — |
| | 90 |
| | — |
| | — |
| | 90 |
|
Equity issued in connection with Preferred shares offering | — |
| | — |
| | — |
| | 289,815 |
| | — |
| | — |
| | — |
| | 289,815 |
| | — |
| | — |
| | 289,815 |
|
Capital increase related to equity-based compensation | — |
| | — |
| | — |
| | — |
| | 94,238 |
| | — |
| | — |
| | 94,238 |
| | — |
| | — |
| | 94,238 |
|
Capital contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 146,518 |
| | — |
| | 146,518 |
|
Distributions | — |
| | — |
| | (13,149 | ) | | (9,350 | ) | | (309,780 | ) | | — |
| | — |
| | (332,279 | ) | | (29,028 | ) | | (348,276 | ) | | (709,583 | ) |
Payments related to issuances of Class A shares for equity-based awards | 2,202,634 |
| | — |
| | — |
| | — |
| | — |
| | (40,329 | ) | | — |
| | (40,329 | ) | | — |
| | — |
| | (40,329 | ) |
Repurchase of Class A shares | (1,571,438 | ) | | — |
| | — |
| | — |
| | (54,266 | ) | | — |
| | — |
| | (54,266 | ) | | — |
| | — |
| | (54,266 | ) |
Exchange of AOG Units for Class A shares | 5,190,600 |
| | — |
| | — |
| | — |
| | 40,286 |
| | — |
| | — |
| | 40,286 |
| | — |
| | (32,880 | ) | | 7,406 |
|
Net income | — |
| | — |
| | 13,149 |
| | 9,350 |
| | — |
| | 154,370 |
| | — |
| | 176,869 |
| | 26,035 |
| | 194,250 |
| | 397,154 |
|
Currency translation adjustments, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,558 | ) | | (1,558 | ) | | (12,232 | ) | | (1,393 | ) | | (15,183 | ) |
Net gain from change in fair value of cash flow hedge instruments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 39 |
| | 39 |
| | — |
| | 40 |
| | 79 |
|
Net loss on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (272 | ) | | (272 | ) | | — |
| | (274 | ) | | (546 | ) |
Balance at September 30, 2018 | 201,089,465 |
| | 1 |
| | $ | 264,398 |
| | $ | 289,815 |
| | $ | 1,350,331 |
| | $ | (273,535 | ) | | $ | (3,600 | ) | | $ | 1,627,409 |
| | $ | 271,379 |
| | $ | 1,095,041 |
| | $ | 2,993,829 |
|
See accompanying notes to condensed consolidated financial statements.
APOLLO GLOBAL MANAGEMENT, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(dollars in thousands, except share data)
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2018 | | 2017 |
Cash Flows from Operating Activities: | | | |
Net income | $ | 397,154 |
| | $ | 982,335 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Equity-based compensation | 123,643 |
| | 70,332 |
|
Depreciation and amortization | 11,215 |
| | 15,241 |
|
Unrealized gains from investment activities | (14,555 | ) | | (107,803 | ) |
Principal investment income | (25,334 | ) | | (102,877 | ) |
Performance allocations | (129,776 | ) | | (809,896 | ) |
Change in fair value of contingent obligations | (7,953 | ) | | 4,619 |
|
Deferred taxes, net | 38,682 |
| | 49,817 |
|
Other non-cash amounts included in net income, net | (18,768 | ) | | 1,310 |
|
Cash flows due to changes in operating assets and liabilities: | | | |
Incentive fees receivable | (258 | ) | | 8,419 |
|
Due from related parties | (65,697 | ) | | (47,536 | ) |
Accounts payable and accrued expenses | 13,135 |
| | 21,597 |
|
Accrued compensation and benefits | 97,042 |
| | 91,910 |
|
Deferred revenue | 56,426 |
| | (17,285 | ) |
Due to related parties | (912 | ) | | (7,928 | ) |
Profit sharing payable | 4,457 |
| | 179,703 |
|
Other assets and other liabilities, net | (7,075 | ) | | (14,409 | ) |
Cash distributions of earnings from principal investments | 55,913 |
| | 41,335 |
|
Cash distributions of earnings from performance allocations | 350,012 |
| | 470,843 |
|
Satisfaction of contingent obligations | (6,947 | ) | | (23,597 | ) |
Apollo Fund and VIE related: | | | |
Net realized and unrealized gains from investing activities and debt | (33,341 | ) | | (10,111 | ) |
Purchases of investments | (359,847 | ) | | (517,652 | ) |
Proceeds from sale of investments | 341,745 |
| | 385,035 |
|
Changes in other assets and other liabilities, net | (48,071 | ) | | 6,990 |
|
Net Cash Provided by Operating Activities | $ | 770,890 |
| | $ | 670,392 |
|
Cash Flows from Investing Activities: | | | |
Purchases of fixed assets | $ | (10,010 | ) | | $ | (5,929 | ) |
Proceeds from sale of investments | 49,239 |
| | — |
|
Purchase of investments | (80,677 | ) | | (14,774 | ) |
Purchase of U.S. Treasury securities | (449,865 | ) | | (198,868 | ) |
Proceeds from maturities of U.S. Treasury securities | 425,830 |
| | — |
|
Cash contributions to equity method investments | (185,372 | ) | | (116,233 | ) |
Cash distributions from equity method investments | 84,036 |
| | 80,360 |
|
Issuance of related party loans | (2,995 | ) | | (5,834 | ) |
Repayment of related party loans | — |
| | 17,700 |
|
Other investing activities | 210 |
| | (1,141 | ) |
Net Cash Used in Investing Activities | $ | (169,604 | ) | | $ | (244,719 | ) |
Cash Flows from Financing Activities: | | | |
Principal repayments of debt | $ | (300,000 | ) | | $ | (30 | ) |
Issuance of Preferred shares, net of issuance costs | 289,815 |
| | 264,398 |
|
Distributions to Preferred Shareholders | (22,499 | ) | | (9,155 | ) |
Satisfaction of tax receivable agreement | (50,267 | ) | | (17,895 | ) |
Issuance of debt | 303,267 |
| | — |
|
Purchase of Class A shares | (81,858 | ) | | (18,463 | ) |
Payments related to deliveries of Class A shares for RSUs | (40,329 | ) | | (28,001 | ) |
Distributions paid | (309,780 | ) | | (288,726 | ) |
Distributions paid to Non-Controlling Interests in Apollo Operating Group | (348,276 | ) | | (329,172 | ) |
Other financing activities | (8,138 | ) | | (2,949 | ) |
Apollo Fund and VIE related: | | | |
Issuance of debt | — |
| | 534,595 |
|
Principal repayment of debt | (92,153 | ) | | (442,640 | ) |
Distributions paid to Non-Controlling Interests in consolidated entities | (24,988 | ) | | (347 | ) |
Contributions from Non-Controlling Interests in consolidated entities | 147,189 |
| | 42,484 |
|
Net Cash Used in Financing Activities | $ | (538,017 | ) | | $ | (295,901 | ) |
Net Increase in Cash and Cash Equivalents, Restricted Cash and Cash Held at Consolidated Variable Interest Entities | 63,269 |
| | 129,772 |
|
Cash and Cash Equivalents, Restricted Cash and Cash Held at Consolidated Variable Interest Entities, Beginning of Period | 848,060 |
| | 859,662 |
|
Cash and Cash Equivalents, Restricted Cash and Cash Held at Consolidated Variable Interest Entities, End of Period | $ | 911,329 |
| | $ | 989,434 |
|
Supplemental Disclosure of Cash Flow Information: | | | |
Interest paid | $ | 33,692 |
| | $ | 32,207 |
|
Interest paid by consolidated variable interest entities | 12,979 |
| | 9,026 |
|
Income taxes paid | 8,036 |
| | 8,070 |
|
Supplemental Disclosure of Non-Cash Investing Activities: | | | |
Non-cash distributions from equity method investments | $ | (26,817 | ) | | $ | (26,167 | ) |
Non-cash contributions of other investments, at fair value | 194,003 |
| | 25,091 |
|
Non-cash distributions of other investments, at fair value | (46,623 | ) | | — |
|
Supplemental Disclosure of Non-Cash Financing Activities: | | | |
Capital increases related to equity-based compensation | $ | 94,238 |
| | $ | 52,442 |
|
Other non-cash financing activities | 90 |
| | (296 | ) |
Adjustments related to exchange of Apollo Operating Group units: | | | |
Deferred tax assets | $ | 47,011 |
| | $ | 46,539 |
|
Due to related parties | (39,605 | ) | | (35,946 | ) |
Additional paid in capital | (7,406 | ) | | (10,593 | ) |
Non-Controlling Interest in Apollo Operating Group | 32,880 |
| | 30,631 |
|
| | | |
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 | $ | 854,574 |
| | $ | 941,043 |
|
Restricted cash | 3,460 |
| | 4,165 |
|
Cash held at consolidated variable interest entities | 53,295 |
| | 44,226 |
|
Total Cash and Cash Equivalents, Restricted Cash and Cash and Cash Equivalents Held at Consolidated Variable Interest Entities | $ | 911,329 |
| | $ | 989,434 |
|
See accompanying notes to condensed consolidated financial statements.
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 real estate equity for the acquisition and recapitalization of real estate assets, portfolios, platforms and operating companies, and real estate debt including first mortgage and mezzanine loans, preferred equity and commercial mortgage backed securities. |
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 September 30, 2018, the Company owned, through six intermediate holding companies, 49.8% 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 partnerships that comprise the Apollo Operating Group (“AOG Units”). As of September 30, 2018, Holdings owned the remaining 50.2% 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 2017 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.
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.
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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 was $340.8 million and $404.7 million as of September 30, 2018 and December 31, 2017, respectively, which approximate their fair 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.
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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 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 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
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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.
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
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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 $120.6 million of revenue recognized during the nine months ended September 30, 2018 that was previously deferred as of January 1, 2018.
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 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 two subcomponents: (1) performance allocations and (2) 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 separately within its own 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 described further 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
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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 for funds 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 monitoring 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, monitoring, and oversight of portfolio company operations. 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 portfolio companies are recorded in due from related parties, which is discussed further in note 13. 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”). 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 two subcomponents: (1) performance allocations and (2) 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 asset manager’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.
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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 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 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 the management of CLOs, managed accounts and AINV.
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, the Company provides for the vesting of certain restricted share units (“RSUs”) subject to continued employment and certain performance metrics being achieved. In accordance with U.S. GAAP, equity-based compensation expense for such awards is recognized on an accelerated recognition method over the requisite service period to the extent the performance 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 allocations and incentive fees (collectively, “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 our employees be used to purchase Class A restricted shares issued under our 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.
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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.
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 Adopted in 2018
In November 2016, the FASB issued guidance to reduce diversity in practice in the classification and presentation of changes in restricted cash on the statements of cash flows. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash. Entities are also required to reconcile such total to amounts on the Company’s condensed consolidated statements of financial condition and disclose the nature of the restrictions. The Company adopted the standard beginning January 1, 2018 using a retrospective transition method to each period presented. Upon adoption of this standard restricted cash and cash and cash equivalents held at consolidated variable interest entities are included within the beginning of period and end of period balances in the Company’s condensed consolidated statements of cash flows. Refer to the Company’s condensed consolidated statements of cash flows for the impact of this standard.
In January 2017, the FASB issued guidance that changes the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the standard beginning January 1, 2018. The adoption of this standard did not have an impact on the condensed consolidated financial statements of the Company.
In June 2018, the FASB issued guidance which generally aligns the measurement and classification for share-based payments to non-employees with the accounting guidance for share-based payments to employees. Among other requirements, the new guidance requires equity-classified non-employee share-based payment awards to be measured at the grate date, rather than remeasured to fair value at the end of each reporting period. The guidance is effective for public business entities on January 1, 2019, however early adoption is permitted. The Company early adopted this standard retroactive to January 1, 2018 and the impact of this guidance was not material to the condensed consolidated financial statements.
In August 2018, the FASB issued guidance which changes the fair value disclosure requirements. The guidance includes new fair value disclosure requirements and eliminates and modifies certain other fair value disclosure requirements. Among other requirements, the guidance requires the following new disclosures: (i) disclosure of changes in unrealized gains or losses included in other comprehensive income for recurring Level III fair value measurements held at the end of the reporting period and (ii) a description of how the weighted average used to develop significant unobservable inputs for Level III fair value measurements
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
was calculated. The guidance eliminates the following disclosure requirements: (i) disclosure of the amount and reason for transfers between Level I and Level II and (ii) disclosure of the policy for timing of transfers between levels of the fair value hierarchy. The guidance is effective for all entities for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for any eliminated or modified disclosure requirements upon issuance of the guidance. The Company early adopted the eliminated and modified disclosure requirements upon issuance of the guidance during the three month period ended September 30, 2018 and will adopt the new disclosure requirements upon their effective date. Eliminated disclosures have been applied retroactively to all periods presented.
Recently Issued Accounting Standards Effective on January 1, 2019
In February 2016, the FASB issued guidance that amends the accounting for leases. The amended guidance requires recognition of a lease asset and a lease liability by lessees for leases classified as operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from existing guidance. The amended guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. Early adoption is permitted for all entities. The Company expects its total assets and total liabilities on its condensed consolidated statements of financial condition to increase upon adoption of this guidance as a result of recording a lease asset and lease liability related to its operating leases. The Company is continuing to evaluate the impact that this guidance will have on its condensed consolidated financial statements. However, the Company expects to elect to use the practical expedients under which 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 Company will adopt the new leasing guidance on January 1, 2019.
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 an impact on the condensed consolidated financial statements of the Company.
3. INVESTMENTS
The following table represents Apollo’s investments:
|
| | | | | | | |
| As of
September 30, 2018 | | As of
December 31, 2017 |
Investments, at fair value | $ | 1,076,095 |
| | $ | 866,998 |
|
Equity method investments | 903,837 |
| | 863,906 |
|
Performance allocations | 1,435,233 |
| | 1,828,930 |
|
Total Investments | $ | 3,415,165 |
| | $ | 3,559,834 |
|
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 from investment activities except for certain investments for which the Company is entitled to receive performance allocations. For those investments, changes in fair value are presented in principal investment income.
As of September 30, 2018 and for the three and nine months ended September 30, 2018, 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 and nine months ended September 30, 2018, the Company chose to continue to include this information as it was disclosed in its 2017 Annual Report. The following table presents summarized financial information of Athene Holding:
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2018(1) | | 2017 | | 2018(1) | | 2017 |
| (in millions) |
Statements of Operations | | | | | | | |
Revenues | $ | 1,797 |
| | $ | 1,473 |
| | $ | 6,680 |
| | $ | 4,855 |
|
Expenses | 1,467 |
| | 1,179 |
| | 5,525 |
| | 3,818 |
|
Income before income tax provision | 330 |
| | 294 |
| | 1,155 |
| | 1,037 |
|
Income tax provision | 66 |
| | 20 |
| | 159 |
| | 53 |
|
Net income | $ | 264 |
| | $ | 274 |
| | $ | 996 |
| | $ | 984 |
|
| |
(1) | The financial information for the three and nine months ended September 30, 2018 is presented a quarter in arrears and reflects the financial information for the three and nine months ended June 30, 2018, which represents the latest available financial information as of the date of this report. |
Net Gains from Investment Activities
The following table presents the realized and net change in unrealized gains reported in net gains from investment activities:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Realized gains on sales of investments, net | $ | 1 |
| | $ | 162 |
| | $ | 67 |
| | $ | 14 |
|
Net change in unrealized gains due to changes in fair value | 155,282 |
| | 68,770 |
| | 20,578 |
| | 102,922 |
|
Net gains from investment activities | $ | 155,283 |
| | $ | 68,932 |
| | $ | 20,645 |
| | $ | 102,936 |
|
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 in the condensed consolidated statements of operations.
Equity method investments consisted of the following:
|
| | | | | | | | |
| Equity Held as of |
| September 30, 2018 | (4) | December 31, 2017 | (4) |
Credit(2) | $ | 392,235 |
| | $ | 325,267 |
| |
Private Equity(1) | 483,665 |
| | 509,707 |
| |
Real Assets | 27,937 |
| | 28,932 |
| |
Total equity method investments(3) | $ | 903,837 |
| | $ | 863,906 |
| |
| |
(1) | The equity method investment in Fund VIII was $384.4 million and $385.7 million as of September 30, 2018 and December 31, 2017, respectively, representing an ownership percentage of 2.2% and 2.2% as of September 30, 2018 and December 31, 2017, respectively. |
| |
(2) | The equity method investment in AINV was $54.1 million and $56.5 million as of September 30, 2018 and December 31, 2017, respectively. The value of the Company’s investment in AINV was $48.3 million and $50.2 million based on the quoted market price as of September 30, 2018 and December 31, 2017, 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. |
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
Performance Allocations
Performance allocations from private equity, credit and real assets funds consisted of the following:
|
| | | | | | | |
| As of September 30, 2018 | | As of December 31, 2017 |
Private Equity | $ | 1,011,770 |
| | $ | 1,404,777 |
|
Credit | 396,316 |
| | 395,340 |
|
Real Assets | 27,147 |
| | 28,813 |
|
Total performance allocations | $ | 1,435,233 |
| | $ | 1,828,930 |
|
The table below provides a roll forward of the performance allocations balance:
|
| | | | | | | | | | | | | | | |
| Private Equity | | Credit | | Real Assets | | Total |
Performance allocations, January 1, 2018 | $ | 1,404,777 |
| | $ | 395,340 |
| | $ | 28,813 |
| | $ | 1,828,930 |
|
Change in fair value of funds | 18,313 |
| | 102,702 |
| | 5,181 |
| | 126,196 |
|
Fund distributions to the Company | (411,320 | ) | (1) | (101,726 | ) | | (6,847 | ) | | (519,893 | ) |
Performance allocations, September 30, 2018 | $ | 1,011,770 |
| | $ | 396,316 |
| | $ | 27,147 |
| | $ | 1,435,233 |
|
| |
(1) | Includes realized performance allocations of $169.9 million from AP Alternative Assets, L.P. (“AAA”), settled in the form of shares of Athene Holding. |
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 13 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 is payable and is 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 September 30, 2018 | | As of December 31, 2017 |
Credit | $ | 270,077 |
| | $ | 265,791 |
|
Private Equity | 401,226 |
| | 475,556 |
|
Real Assets | 13,291 |
| | 10,929 |
|
Total profit sharing payable | $ | 684,594 |
| | $ | 752,276 |
|
The table below provides a roll forward of the profit sharing payable balance:
|
| | | | | | | | | | | | | | | |
| Private Equity | | Credit | | Real Assets | | Total |
Profit sharing payable, January 1, 2018 | $ | 475,556 |
| | $ | 265,791 |
| | $ | 10,929 |
| | $ | 752,276 |
|
Profit sharing expense | 57,287 |
| | 61,843 |
| | 3,570 |
| | 122,700 |
|
Payments/other(1) | (131,617 | ) | (2) | (57,557 | ) | | (1,208 | ) | | (190,382 | ) |
Profit sharing payable, September 30, 2018 | $ | 401,226 |
| | $ | 270,077 |
| | $ | 13,291 |
| | $ | 684,594 |
|
| |
(1) | Includes $10.6 million associated with the adoption of new revenue recognition accounting guidance, as discussed in note 2. |
| |
(2) | Includes $46.6 million associated with profit sharing expense related to AAA that was settled in the form of shares of Athene Holding. |
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
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 13 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 our 2007 Equity 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.
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
September 30, | | For the Nine Months Ended
September 30, | |
| 2018 | (1) | 2017 | (1) | 2018 | (1) | 2017 | (1) |
Net gains (losses) from investment activities | $ | 17,898 |
| | $ | (272 | ) | | $ | 23,211 |
| | $ | 9,244 |
| |
Net gains (losses) from debt | (6,131 | ) | | 635 |
| | 2,043 |
| | 3,319 |
| |
Interest and other income | 8,391 |
| | 9,977 |
| | 27,118 |
| | 26,420 |
| |
Interest and other expenses | (7,157 | ) | | (9,495 | ) | | (23,626 | ) | | (27,898 | ) | |
Net gains from investment activities of consolidated variable interest entities | $ | 13,001 |
| | $ | 845 |
| | $ | 28,746 |
| | $ | 11,085 |
| |
| |
(1) | Amounts reflect consolidation eliminations. |
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 September 30, 2018 | | As of December 31, 2017 |
| 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) | $ | 778,229 |
| | 1.66 | % | | 11.4 | | $ | 806,603 |
| | 1.68 | % | | 12.2 |
Subordinated Notes(2) | 96,852 |
| | N/A |
| (1) | 21.7 | | 100,188 |
| | N/A |
| (1) | 22.4 |
Secured Borrowings(2)(3) | 18,976 |
| | 3.33 | % | | 9.1 | | 109,438 |
| | 2.70 | % | | 9.3 |
Total | $ | 894,057 |
| | | | | | $ | 1,016,229 |
| | | | |
| |
(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 September 30, 2018 | | As of December 31, 2017 |
Debt, at fair value | $ | 880,570 |
| | $ | 1,002,063 |
|
Collateralized assets | $ | 1,301,229 |
| | $ | 1,328,586 |
|
| |
(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 September 30, 2018 and December 31, 2017 was $19.0 million and $109.4 million, respectively. |
The consolidated VIEs’ debt obligations contain various customary loan covenants. As of September 30, 2018, the Company was not aware of any instances of non-compliance with any of these covenants.
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.
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
September 30, 2018 | | As of
December 31, 2017 |
Assets: | | | |
Cash | $ | 207,410 |
| | $ | 254,791 |
|
Investments | 4,532,562 |
| | 6,230,397 |
|
Receivables | 174,680 |
| | 36,601 |
|
Total Assets | $ | 4,914,652 |
| | $ | 6,521,789 |
|
| | | |
Liabilities: | | | |
Debt and other payables | $ | 3,579,828 |
| | $ | 3,285,263 |
|
Total Liabilities | $ | 3,579,828 |
| | $ | 3,285,263 |
|
| | | |
Apollo Exposure(1) | $ | 223,464 |
| | $ | 252,605 |
|
| |
(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 14. |
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 September 30, 2018 |
| Level I | | Level II | | Level III | | Total | | Cost |
Assets | | | | | | | | | |
U.S. Treasury securities, at fair value | $ | 390,448 |
| | $ | — |
| | $ | — |
| | $ | 390,448 |
| | $ | 387,848 |
|
Investments, at fair value: | | | | | | | | | |
Investment in Athene Holding | 209,800 |
| | 760,702 |
| | — |
| | 970,502 |
| | 510,784 |
|
Other investments | — |
| | 42,905 |
| | 62,688 |
| (1) | 105,593 |
| | 100,269 |
|
Total investments, at fair value | 209,800 |
| | 803,607 |
| | 62,688 |
| | 1,076,095 |
| | 611,053 |
|
Investments of VIEs, at fair value | — |
| | 919,705 |
| | 278,430 |
| | 1,198,135 |
| |
|
|
Investments of VIEs, valued using NAV | — |
| | — |
| | — |
| | 4,050 |
| | |
Total investments of VIEs, at fair value | — |
| | 919,705 |
| | 278,430 |
| | 1,202,185 |
| | |
Derivative assets(2) | — |
| | 320 |
| | — |
| | 320 |
| | |
Total Assets | $ | 600,248 |
| | $ | 1,723,632 |
| | $ | 341,118 |
| | $ | 2,669,048 |
| | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Liabilities of VIEs, at fair value | $ | — |
| | $ | 880,570 |
| | $ | — |
| | $ | 880,570 |
| | |
Contingent consideration obligations(3) | — |
| | — |
| | 77,700 |
| | 77,700 |
| | |
Derivative liabilities(2) | — |
| | 944 |
| | — |
| | 944 |
| | |
Total Liabilities | $ | — |
| | $ | 881,514 |
| | $ | 77,700 |
| | $ | 959,214 |
| | |
APOLLO GLOBAL MANAGEMENT, LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands, except share data, except where noted)
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, 2017 |
| Level I | | Level II | | Level III | | Total | | Cost |
Assets | | | | | | | | | |
U.S. Treasury securities, at fair value | $ | 364,649 |
| | $ | — |
| | $ | — |
| | $ | 364,649 |
| | $ | 363,812 |
|
Investments, at fair value: | | | | | | | | | |
Investment in Athene Holding | — |
| | 802,985 |
| | — |
| | 802,985 |
| | 387,526 |
|
Other investments | 205 |
| | 28,107 |
| | 35,701 |
| | 64,013 |
| | 61,179 |
|
Total investments, at fair value | 205 |
| | 831,092 |
| | 35,701 |
| | 866,998 |
| | 448,705 |
|
Investments of VIEs, at fair value | — |
| | 1,058,999 |
| | 132,348 |
| | 1,191,347 |
|