apo initiation

RBC Capital Markets, LLCBulent Ozcan, CFA (AssociateAnalyst)(212) [email protected]

Eric N. Berg, CPA (Analyst)(212) [email protected]

Sector PerformNYSE: APO; USD 33.99

Price Target USD 35.00Scenario Analysis*

DownsideScenario

23.0021%

CurrentPrice

33.99

PriceTarget

35.0015%

UpsideScenario

43.0038%

*Implied Total Returns

Key StatisticsShares O/S (MM): 141.8Dividend: 3.94

Market Cap (MM): 4,820Yield: 11.6%

Priced as of market close, October 23, 2013 ET.

RBC EstimatesFY Dec 2012A 2013E 2014EDistributableEarnings

2.18 4.33 4.29

ENI 3.82 3.89 3.06FEAUM (MM) 81,934 125,557 130,199DPS 1.94 3.87 3.86Div Yield 5.7% 11.4% 11.4%

DistributableEarnings

Q1 Q2 Q3 Q4

2012 0.35A 0.29A 0.48A 1.05A2013 0.71A 1.51A 1.00E 1.08E2014 1.10E 1.09E 1.06E 1.03EAll values in USD unless otherwise noted.

October 23, 2013

Apollo Global Management, LLCTop Operator, But Can Vigorous Pace ofRealizations Persist?Our View: We are initiating coverage of Apollo Global Management with aSector Perform rating and a $35 price target. While we expect the firm toaggressively monetize its investments, we are concerned that the currentpace of realizations may not be sustainable. Taking a long-term view, weprefer peers that are not as deep into the realization cycle or are broadlydiversified with multiple levers to generate promote

Key Points:One of the strongest private equity franchises: With an total net IRRof 26% since inception, Apollo’s private equity funds are one of the topperforming funds in the industry. Success in PE has translated into AUMgrowth, specifically in Credit. Total fee earning assets under management(FEAUM) expanded at a CAGR of 25.7% since 2007, outpacing its peers.The addition of Aviva's assets should boost AUM once more.

Apollo is spearheading the realization cycle: With about 60% of its privateequity assets valued using public market quotes, Apollo's funds are ripefor harvesting in the near term. Apollo's ratio of cash distributions to AUMis at an all time high and could grow further from here.

Apollo's shares could outperform its peers in the near term dueto strong realizations. However, taking a longer-term view, wecannot get more constructive on the name for the followingreasons:Realizations could peak over the next 12 months: We are concerned thatgiven significant monetization activity, Apollo could be entering a periodof drought sooner than its peers. While its largest private equity fund,Fund VII, generated a net IRR of 28%, its second largest fund, Fund VI,has produced a net IRR of only 10%. We would expect realizations to slowdown meaningfully after Apollo sells down more assets over the next 12months. It appears that Apollo shares are trading at a premium to peersas investors are expecting strong realizations. We could see a reversion tothe mean as the rate of realizations declines after peaking in 2014.

Growth in the firm's core franchise, PE, has been slow. While Apollo isnow actively raising capital, we believe that deploying this new capitalcould be difficult: Given current market conditions, we believe thatdeploying capital the firm is currently raising for Fund VIII, its new flagshipprivate equity fund, could be difficult. While APO is ahead of its peers interms of "harvesting", it might be raising PE capital post "growing season,"when PE opportunities are few and far between. This leaves Apollo withtwo options: Either deploying the new capital at lower returns or doingfewer deals.

At current levels, we believe that a lot of the positive developments arepriced into Apollo's shares.

Priced as of prior trading day's market close, EST (unless otherwise noted).For Required Conflicts Disclosures, see Page 64.

Target/Upside/Downside Scenarios

Exhibit 1: Apollo Global Management, LLC

50.00

40.00

30.00

20.00

10.00

0.00Current Share Price

33.99

Price Target

35.00

Upside Scenario

43.00

Downside Scenario

23.00

Shar

e Pr

ice

(USD

/sh)

Source: RBC Capital Markets estimates

Target Price/ Base CaseOur price target for Apollo Global Management LLC class Ashares is $35. We arrive at our price target using a price-to-earnings multiple of 18.0x on 2014 estimated fee-basedearnings of $0.85 per share. Moreover, we value incentiveincome based on a price-to-earnings multiple of 9.0x and 2014estimated incentive income EPS of $2.20.

These are our 2014 assumptions: weighted average portfolioreturns of 12.0% in Private Equity; weighted average portfolioreturns of 11.0% in Credit; weighted average portfolio returnsof 10.0% in Real Estate.

Upside ScenarioOur upside scenario leads to a valuation of $43. We areincreasing our price-to-earnings multiple to 19.0x on 2014estimated fee-based earnings of $0.85 per share. Moreover,we are raising our 2014 estimated incentive income EPSto $2.87. We value incentive income based on a price-to-earnings multiple of 9.5x. These are our upside scenario returnassumptions for 2014: Weighted average portfolio returns of15.7% in Private Equity; weighted average portfolio returns of13.2% in Credit; weighted average portfolio returns of 13.0%in Real Estate.

Downside ScenarioOur downside scenario leads to a valuation of $23. We arelowering our price-to-earnings multiple to 14.0x on 2014estimated fee-based earnings of $0.85 per share. Moreover,we are reducing our estimated incentive income EPS to $1.62.We value incentive income based on a price-to-earningsmultiple of 7.0x. These are our downside scenario returnassumptions for 2014: Weighted average portfolio returns of8.4% in Private Equity; weighted average portfolio returns of9.9% in Credit; weighted average portfolio returns of 5.0% inReal Estate.

Investment SummaryWe think of Apollo Global Management LLC as one of the mostsuccessful private equity investors in the industry. A value-oriented, contrarian investor, Apollo has produced some ofthe strongest returns in the industry. The firm is in the midstof a very strong realization cycle. However, we believe thatrealizations could drop over the next 12 months. The firmis currently trading at a premium to other alternative assetmanagers.

Key Positives:• One of the strongest private equity franchises: Apollo’s

private equity funds have generated net IRRs of 26% sinceinception of funds. This puts the firm ahead of other publiclytraded competitors.

• A very successful asset gatherer: Apollo's fee earning assetsunder management grew at a CAGR of 25.7% since 2007.This puts Apollo at the top of its peer group.

• We expect strong realization activity in the near term:We believe that Apollo is ahead of its competitors. Apollodisclosed that about 60% of its private equity assetsare valued using exchange or broker quotes. We expectaggressive selling.

Key Risks:• Realizations could peak in 2013 and 2014: We are

concerned that the current phase of accelerated realizationactivity could be followed by a period of drought. We viewApollo as one of the most expensive exposures to the sector.Using consensus estimates, we estimate that investors arepaying 9x P/E for incentive income. This premium to peerscould decline as realizations decelerate.

• Growth in private equity AUM has been slow and whileApollo is now raising capital, we believe that deployingthis capital will be difficult: Apollo's private equity business,its most successful franchise, has not experienced anysignificant growth since 2009. While Apollo is currentlyraising capital, we believe that deploying that capital andgenerating strong returns will be difficult given currentvaluations.

• Limited global footprint: We believe that with its narrowfootprint, Apollo might not be able to enjoy the samebenefits as its larger peers do. This includes findingattractive deals in an increasingly competitive marketwith high entry multiples. Furthermore, we would expectmarkets outside of the US to allocate more fundsto alternative asset managers. Raising capital could befacilitated by having a local presence.

October 23, 2013 Bulent Ozcan (212) 863-4818; [email protected] 2

Apollo Global Management, LLC

Key Questions

Our View

1. Has Apollo reached a peak in the realization cycle?

We believe that 2013 and 2014 are peak cycles. Indeed, we are modeling slightly declining distributable earnings post 2013 and a significant decline in distributable earnings after 2014. As Leon Black, CEO of Apollo, pointed out, Apollo is selling “everything that’s not nailed down”. We could be in the midst of an accelerated realization cycle, which could be followed by a period of drought.

2. Why aren’t we more enthusiastic about Apollo given our view on realizations over the near term?

We are taking a long-term view, which we think is prudent given a lack of liquidity in Apollo’s shares. Similar to Apollo’s investment teams, we prefer shares that are undervalued and provide the largest upside. We believe that while Apollo’s management team has done a remarkable job running the company – and the valuation of its shares reflects this – we see more upside in other names that are not as deep into the realization cycle as Apollo.

3. Shouldn’t Apollo trade at a premium to peers given it has generated superior results in private equity?

We agree that Apollo has the best performing private equity franchise among its publicly traded peers. It has produced exceptional results and generated a total net internal rate of return of 26% since inception of its funds. Limited partners recognize this, which is why the firm was able to raise over $8 billion for its new flagship private equity fund – Fund VIII. We have no doubt that Apollo can achieve and exceed its target of $13 billion in commitments. However, we are concerned about the firm’s ability to deploy this capital over the coming years. Apollo is a contrarian, value-oriented investor. Given current valuations, we believe that it will be difficult to deploy this new capital unless Apollo is willing to accept lower returns. Median entry multiples are the highest in a decade. Thus, we believe that it will be increasingly difficult to deploy capital at attractive returns and replicate the success of Fund VII.

4. What should investors think about strategic investors selling their shares?

We think that strategic investors could continue to dispose of their Apollo shares, putting pressure on the shares over the coming three years. The fact that CalPERS and ADIA sold the maximum number of shares allowed under the lock up provisions, making just about 1.25x their original investment over a six-year period, does not bode well. With the shares trading now around $30, we would expect further dispositions. Potential investors could question motives for the disposition.

5. Could Apollo’s shares become less attractive if Congress changes tax treatment of carried interest?

While carried interest has been an issue since 2007, it seems more likely that Congress could move forward and change the tax treatment of carried interest. The Senate Finance Committee released its 8

th tax reform discussion paper on June 6,

2013, focusing on tax treatment of carried interest. The Committee stated that tax code reforms are needed to reduce or eliminate differences in overall tax burdens across different types of entities, owners and income. However, any change in the tax law would come with a multi-year transition period that would allow the firm to optimize its corporate structure. Changing the corporate structure and reorganizing as a corporation could increase institutional demand for Apollo’s shares, potentially offsetting the negative impact associated with higher taxes.

6. A number of institutional clients cannot own limited partnerships. What are the alternatives to investing directly in Apollo?

We agree that the limited partnership structure makes investing in alternative asset managers difficult, if not impossible. However, investors interested in alternative asset managers can gain synthetic exposure to the securities by entering total return swaps or buying notes that provide synthetic ownership.



Table of Contents

Key Questions ...................................................................................................................... 3

Table of Contents ................................................................................................................. 4

Quick Background on Apollo Global Management LLC ......................................................... 5

Investment Thesis – Key Positives ........................................................................................ 6

One of the best performing private equity franchises ............................................................... 6

Apollo is one of the strongest asset gatherers ........................................................................... 9

We expect strong realization activity in the near term ............................................................ 12

Investment Thesis – Key Risks ............................................................................................ 15

Realizations could peak in 2013 and 2014 ............................................................................... 15

Apollo is one of the more expensive exposures to alternative asset managers ...................... 17

Growth in private equity, Apollo’s most successful franchise, has been slow ......................... 18

Capital deployment could slow down, especially in private equity ......................................... 20

Insiders selling could put pressure on shares .......................................................................... 22

Liquidity and float are low; hard to build a position ................................................................ 24

Limited global footprint ........................................................................................................... 25

Potential changes to the tax treatment of carried interest could lower distributable earnings .................................................................................................................................... 26

K-1 filing requirement is holding back investors ...................................................................... 28

Analyzing companies within the sector is difficult given inconsistent accounting & utilization of non-GAAP measures across the sector and the difficulty of projecting realizations ............................................................................................................................... 29

Company Description ......................................................................................................... 31

Milestones ......................................................................................................................... 33

Business segments ................................................................................................................... 34

Management Team ............................................................................................................ 55

Valuation Framework ......................................................................................................... 57

Risks and Price Target Impediments ................................................................................... 59

Appendix 1: Portfolio companies as of December 31, 2012 ................................................ 60

Appendix 2: Largest investments across Private Equity (2Q13) ........................................... 61

Appendix 3: Our understanding of the Athene Relationship .............................................. 62



Quick Background on Apollo Global Management LLC Founded in the year 1990, Apollo Global Management LLC (NYSE: APO) is a global alternative investment manager. Headquartered in New York, Apollo also has offices located in Houston, Los Angeles, London, Luxembourg, Frankfurt, Hong Kong, Singapore, and Mumbai. As of June 30, 2013, its managing partners, Leon Black, Marc Rowan and Joshua Harris are leading 660 employees, including 253 investment professionals. The company primarily manages private equity, capital markets and real estate funds along with strategic investment accounts on behalf of its clients. The private equity business is a key component of Apollo’s investment activities. The firm uses a contrarian, value-oriented investment approach and focuses on nine core industries. Its customers primarily include institutional and high net worth individual investors and pension and endowment funds. For all the investment management services provided, Apollo receives:

Management fees, which are based on amount of assets managed

Transaction and advisory fees for investments made and

Carried interest income, which is based on the performance of the respective funds managed by the company.

Formed as a Delaware limited liability company on July 3, 2007, the company is operated and managed by its manager AGM Management LLC. AGM Management is wholly owned and controlled indirectly by its Managing Partners. As of June 30, 2013, Apollo had US$113.1 billion assets under management (AUM). Apollo has three primary business segments:

Exhibit 2: Overview of Apollo Global Management LLC

Private Equity Credit Real Estate

FEAUM ($B) $26.0 $47.5 $5.8

Strategy Pursuing opportunities throughout the world using a "value-oriented"

approach: Opportunistic buyouts, distressed buyouts and debt

investments, corporate carve-outs. Focused on nine core industries

Debt investment funds utilize the same value-oriented approach as Private

Equity funds. Activities span a broad range of the credit spectrum, from yield to opportunistic funds: US Performing credit, structured credit, opportunistic

credit, non-performing loans, European credit. Apollo affiliates provide

investment management services to Athene, an insurance company focused

on fixed annuities

Apollo's debt and equity platform is focused on residential and commercial real estate, with a presence in North

America, Europe and Asia. This segment targets the acquisition and

recapitalization of real estate portfolios, platforms and operating companies.

Apollo originates and acquires commercial real estate debt investments

throughout the capital structure and across property types.

Permanent Capital Vehicle

AP Alternative Assets (Amsterdam: AAA)

Athene Apollo Investment Corporation

(Nasdaq: AINV) Apollo Residential Mortgage

(NYSE: AMTG) Apollo Funds (NYSE: AFT & AIF)

Apollo Commercial Real Estate Finance (NYSE: ARI)

Life of Funds PE Investment funds: 10 years Credit Investment funds: Generally 3 years to 10 years

RE Investment funds: Credit Real Estate about 3 years to 7 years; PE Real Estate

about 7 years to 10 years

Source: Company reports; RBC Capital Markets



Investment Thesis – Key Positives

One of the best performing private equity franchises We consider Apollo’s private equity franchise to be best in class among the publicly traded alternative asset managers. The firm has its roots in distressed-to-control takeovers. Its first private equity investment fund, the Apollo Investment Fund L.P., was formed to make investments in distressed companies. And while the firm is increasingly utilizing traditional buyout and corporate carve-out approaches, its investment philosophy has changed little. Apollo remains a value-oriented, contrarian investor.

The below chart shows this clearly. Apollo’s private equity funds have generated total net IRRs of 26% on a compounded annual basis since inception. This puts the firm’s investment record of accomplishment ahead of its publicly traded competitors.

Exhibit 3: Net IRRs since inception

26%

15%

19%

3%

15%

18%

12% 12%

22%

14% 15%

9%

18%

n/an/a0%

5%

10%

15%

20%

25%

30%

Apollo Global

Management

Blackstone Group Carlyle Group KKR & Co Fortress

Investment Group



Apollo’s performance seems even more impressive when comparing its private equity returns against the general private equity industry. We estimate that the average vintage of Apollo’s private equity funds is 2003. As such, we would compare Apollo’s net IRRs to the average net IRR of US private equity funds over a 10-year period. The chart below shows the end-to-end mean net returns to limited partners, that is, returns net of fees, expenses and carried interest. We consider an outperformance of 10 percentage points very significant, which could facilitate future capital raising efforts.

With a net IRR of 25% since inception, Apollo’s private equity funds are generating performance that exceeds that of its peers by a large margin



Exhibit 4: Net IRRs generated by Apollo PE are ahead of its competitors by a wide margin

5.5% 5.8%

2.3%

8.0%

5.1%

8.5% 8.5%

14.6%

26.0%

6.2%

8.5% 8.9%

13.5%

0%

5%

10%

15%

20%

25%

30%

Barclays Aggregate

Fixed Incoem

S&P 500 Index NCREIG All Private Equity Apollo Private

Equity

5 Year 10 Year 20 Year


What is driving these strong returns? Apollo’s value orientation and disciplined investment process sets the company apart from other alternative asset managers. Put it differently, it prefers to buy assets at distressed valuations and is willing to walk away from deals that do not meet its return objectives. The firm usually pays about six times EBITDA when it acquires a company and avoids investments where the internal rate of return (IRR) is expected to be below 20%. As a comparison, other private equity firms are happy with IRRs of 15%. The chart below depicts the average entry multiple for three of Apollo’s more recent funds.

Exhibit 5: Apollo’s entry multiples are below industry average

6.6x

7.7x

6.2x

7.7x

9.6x8.9x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

Fund V (2001) Fund VI (2006) Fund VII (2008)

Apollo Entry Multiple Industry Entry Multiple


Value creation at Apollo starts with buying the assets at a deep discount. The investment philosophy is simple: The returns don’t necessarily depend on what you sell the assets for, but on what you paid for them. This makes sense. While the market will dictate exit multiples in most cases, Apollo has full control over the entry price. As Marc Spilker, President at Apollo, pointed out during a non-deal road show we hosted in early 2013, it is hard to

Fund performance at Apollo is driven by entry multiples. Funds with a large holding of distressed assets perform the best



generate an IRR of over 15% once you pay a multiple of over 8x EV to EBITDA. When calculating the IRR, Apollo does not assume a multiple expansion on exits. It views multiple expansions as an added benefit that should not influence the purchase price.

Furthermore, Apollo likes to invest in complicated situations that might not appeal to other private equity investors. It regards its credit expertise as a strength that allows the firm to buy companies and restructure the balance sheet such that it can transform a 15% IRR deal into a 25% IRR opportunity. Apollo uses an integrated approach, utilizing all available resources within the firm. As Marc Spilker pointed out, Apollo has a Chinese Wall around the firm instead of within departments. It fosters the exchange of ideas and measures performance at the firm level instead of the deal level.

While Apollo emphasizes that its private equity funds are invested in more than just distressed assets, i.e., buyouts and carve-outs, we believe that Apollo generates the best results investing in classic distressed situations. The chart below compares the difference between industry entry EV/EBITDA multiples and Apollo’s entry multiples. Note that entry multiples tend to be the lowest when the fund invests heavily in distressed assets. Consequently, the net IRRs tend to be superior, as well.

Exhibit 6: Apollo’s entry multiples are the lowest versus the industry when they buy distressed assets

-1.1x

-1.9x

-2.7x-3.0x

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

De

lta

to I

nd

ust

ry E

ntr

y M

ult

iple

s (E

V/E

BIT

DA

)

Fund V (2001) - 27% Distressed Assets

Fund VI (2006) - 23% Distressed Assets

Fund VII (2008) - 57% Distressed Assets


As noted earlier, Fund VII had an entry multiple of 6.2x versus the industry’s 8.9x. It is worthwhile to point out that distressed assets in Fund VII represent 57% of total invested capital versus the 27% and 23% for Fund V and Fund VI, respectively. Our point is simply that fund performance tends to be better when Apollo acquires distressed assets as the firm can negotiate a very attractive entry multiple and use its expertise in restructuring the balance sheet. This, in part, explains the strong performance that we are seeing at the company’s private equity funds. We view Apollo as one of the more successful distressed asset investors.

Another factor contributing to strong PE results is that Apollo avoids club deals as much as possible and prefers sourcing deals independently. Apollo reports that 80% of its private equity investments made since inception have been proprietary in nature. This, in our view, leads to attractive entry multiples as the firm avoids competitive situations with financial investors trying to outbid each other for the assets. Likewise, avoiding club deals allows the firm to take full charge of the restructuring process.

Apollo likes to invest in complicated situations that require a great deal of restructuring. This leads to strong IRRs



Apollo is one of the strongest asset gatherers Since 2007, Apollo has been able to grow its fee-earning assets under management (FEAUM) at a faster pace than any of its publicly traded competitors. We estimate that the firm was able to grow FEAUM at a 25.7% compounded annual growth rate (CAGR) since 2007.

If we were to adjust the assets under management for the $21 billion of assets that Apollo added as part of the Stone Tower Capital LLC and Gulf Stream Asset Management acquisition, we would still arrive at a CAGR of 19.7%. This demonstrates the firm’s ability to grow fee- earning assets under management, which impact the valuation of the company’s shares as analysts apply a larger valuation multiple to earnings derived from management fees as opposed to incentive income.

Exhibit 7: Apollo’s FEAUM has been growing at a 25.7% compounded annual growth rate since 2007

25.7%

14.6%13.8%

10.2% 9.5%

0%

5%

10%

15%

20%

25%

30%

Apollo Global

Management


Investment Group

CA

GR


Despite the fact that Apollo had its roots in private equity, it has been extremely successful in building out its credit franchise and is currently in the process of re-establishing its real estate platform.

Apollo had founded Apollo Real Estate Advisers in 1993 to invest in the US property markets. However, the firm exited this business in 2000 and did not have major exposure to real estate until 2010. While we believe that it is going to be difficult to gather significant amount of assets in real estate, we are optimistic that the firm can continue to grow its credit franchise.

The exhibit below shows that total AUM in the Credit segment has grown from about $500 million in 2003 to $62.2 billion as of 2Q13.

AUM growth since 2007 at Apollo has exceeded that of its peers. The Credit segment has been a big contributor to this growth



Exhibit 8: Apollo’s total AUM growth was driven mainly by growth of its Credit platform

$8.2 $9.2 $9.8$18.7 $20.2

$30.2 $29.1 $34.0 $38.8 $35.4 $40.2

$10.5 $15.1$19.1

$22.3 $31.9

$62.2$6.5

$8.0

$0.5 $1.6$2.5

$4.4

$9.5

$1.2

$-

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2Q13

Tota

l A

UM

($

b)

Private Equity Credit Real Estate Unallocated Strategic Account


With the recent acquisition of Aviva’s US life and annuities business, which closed October 2, 2013, Apollo’s total AUM continues to grow and stands today at a pro-forma $158 billion – up from $113 billion as of 2Q13.

Exhibit 9: Aviva’s US annuity assets to add $45 billion to total AUM

$8.2 $9.2 $9.8 $18.7 $20.2 $30.2 $29.1 $34.0 $38.8 $35.4 $40.2

$10.5 $15.1$19.1

$22.3 $31.9

$107.2

$6.5$8.0

$4.4$2.5$1.6$0.5

$9.5$1.2

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2Q13

Pro

Forma

Tota

l A

UM

($

b)

Private Equity Credit Real Estate Unallocated Strategic Account


Apollo will manage the acquired Aviva assets through Athene Asset Management LLC, which was established as an investment manager to provide asset management services to Athene Holding Ltd. and its operating subsidiaries.

Athene Holding Ltd. is the parent of the following subsidiaries:

Athene Life Re Ltd. – a reinsurance company focused on the fixed annuity sector

Athene Annuity & Life Assurance Company – a stock life insurance company focused on retail sales and reinsurance in the retirement services market

With the Aviva transaction closing, Apollo will add another $45 billion to its assets under management



Athene Life Insurance Company – a stock life insurance company focused on the institutional funding agreement backed note and funding agreement markets

Presidential Life – focused on selling fixed annuity products principally in New York through its subsidiary Presidential Life Insurance Company

Athene USA Corporation – the parent of Aviva Life and Annuity Company and Aviva Life & Annuity Company of New York

Apollo, through Athene Asset Management LLC, provides asset allocation and related services to Athene and its subsidiaries. In addition, Apollo sub-advises or directly manages about $6.6 billion in assets through its funds and investment vehicles. Going forward, Apollo will provide similar asset allocation and investment management services to Athene USA Corporation (formerly Aviva USA Corporation). We would expect Apollo to allocate more capital to its own credit funds after the close of the Aviva transaction.

As a reminder, Apollo gets compensated for its services in four different ways:

It earned gross management fees of 40 basis points (bps) on the Athene assets it manages. This impacts cash earnings as it flows through the management fee line in the Credit segment. While Apollo has not disclosed the new fee structure post the Aviva transaction, we would expect the 40bps to decline as Athene’s assets are growing from $15.7 billion to $60 bilion.

Prior to the Aviva acquisition, Apollo managed 42% of the $15.7 billion of Athene assets directly, i.e., about $6.6 billion of assets were invested directly in Apollo funds. Apollo earns management fees on the portion that it manages directly within its funds and, in addition, earns a performance fees (carry) depending on the fund returns. The fees and the realized carry also impact cash earnings. The vast majority of these assets are invested in Credit strategies, with only about $800 million being invested in private equity funds.

Furthermore, Apollo receives 20% of the change in AP Alternative Assets’ book value as incentive income. Apollo has about $108m of carried interest receivable accumulated from AP Alternative Assets (Euronext Amsterdam: AAA). This carry will be paid to Apollo in Athene equity in the future when Athene goes public - by November 2015 at the latest. This component has no cash earnings impact.

Finally, under an amended services contract with Athene, Apollo earns monitoring fees on Athene’s capital and surplus. The monitoring fees will accrue quarterly until December 2014. To give an indication of the magnitude of this compensation to Apollo, the firm accrued monitoring fees of about $19.5 million in 1Q13 and about $21.2 million in 2Q13. This compensation has no cash earnings impact and is recorded in the “advisory and transaction fees from affiliates” line. As of 2Q13, Apollo had $40.9 million receivables, which are accounted for as a derivative.

Athene’s assets under management now stand at over $60 billion post the Aviva acquisition. This provides Apollo an opportunity to earn additional management fees and performance fees on the assets it manages in its own funds. Furthermore, Apollo should be able to monetize its holding in Athene when the reinsurer goes public – which we believe will be a 2015 event.

Apollo could remain involved in Athene and postpone selling its shares even after the reinsurer has gone public. We believe that the management contract is valuable to Apollo and will become even more so once Athene starts growing its assets organically. And while there are more retirement assets available for purchase, we believe that Athene will now focus on integrating Aviva and pursuing an organic growth strategy. Despite the fact that



Reuters reported (October 9, 2013) Apollo could be bidding for Hartford’s Japanese variable annuity business, we would view the addition of variable annuities to Athene’s book of business as very unlikely. Jim Belardi, Chairman and CEO of Athene Holding Ltd, likes the spread business – fixed annuities and institutional funding agreements. As he pointed out, Mr. Belardi expects Athene to be the best fixed annuity company in the world. With the upcoming IPO of Athene, we would consider adding potentially toxic variable annuity assets as an unlikely scenario. We would even suggest that some investors might not like the fact that Athene has exposure to indexed annuities. Our view is that Athene will avoid equity market exposure and will not purchase variable annuity assets.

We expect strong realization activity in the near term Leon Black, Chairman & CEO of Apollo, put it succinctly in May 2013 when he said “We are selling everything that’s not nailed down”. There is no doubt that Apollo is in a considerable harvesting cycle.

Exhibit 10: Realized gains from carried interest have been increasing steadily ($ in mm)

$292.0 $292.4$365.3

$71.0$196.2

$644.6

$997.2

$1,192.6

$1,977.1

$-

$500

$1,000

$1,500

$2,000

$2,500

2006 2007 2008 2009 2010 2011 2012 1Q13

(LTM)

2H13

(LTM)


The exhibit above shows this. Over the last 12 months (LTM), Apollo’s realized gains from carried interest income increased significantly.

This trend is important as an increase in realizations should drive distributable earnings and dividends higher over the coming quarters. While about 40% of realized carried interest income is distributed to the investment teams, 60% of the income flows through to investors in Class A shares.

We believe that Apollo is ahead of its competitors in terms of the realization cycle. Apollo disclosed that about 60% of its private equity assets are valued using exchange or broker quotes.

We expect strong realization activity over the coming quarters. Apollo will likely continue to monetize its investments in the near term



Exhibit 11: About 60% of Apollo’s PE portfolio is valued using exchange or broker quotes

88%

50%

72%

20%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Private Equity Credit Real Estate Total


The 60% ratio encompasses valuations for debt and equity holdings. Focusing on equity holdings solely, we estimate that one could derive about 40% of PE marks using exchange quotes. Put it differently, Apollo could sell down 40% of its equity holdings on exchanges as these are publicly traded companies.

Having a significant holding of publicly traded portfolio companies, Apollo can dispose of assets opportunistically. The exhibit below shows that Apollo is much further into the realization cycle than Blackstone, which we regard as the one firm setting the benchmark for the industry. Below, we analyzed the ratio of distributable earnings to total assets to show that Apollo generates twice as much cash earnings from its assets under management as Blackstone does. While Apollo continues to grow its asset base, it has started to sell down its holdings aggressively, driving cash earnings and distributions higher.

Exhibit 12: Apollo’s cash earnings have increased significantly since 2011, boosting the cash earnings to total AUM ratio

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2008 2009 2010 2011 2012 1H13 (LTM)

APO BX


With about 60% of its private equity investments valued using exchange or broker quotes, Apollo is in a unique situation in that it can opportunistically exit its holdings at will

The high ratio of cash earnings to total AUM indicates that Apollo is indeed selling “everything that’s not nailed down”



We believe that Apollo will continue to generate significant incentive income in the near term.

As we had illustrated in Exhibit 3, total net internal rate of returns (IRRs) have been 26% since inception for Apollo’s private equity funds. The private equity franchise is its strongest business and thus carries the largest amount of unrealized incentive income. However, there is embedded value in other segments, as well. This is why we expect further realizations. We estimate that Apollo could generate performance fees of $2.77 per share if it sold its portfolio holdings today.

Exhibit 13: Apollo has about $2.77 of net carried interest receivable on its balance sheet

($ in mm) 2Q13

Private Equity Funds $1,601.3Credit Funds 408.8 Real Estate Funds 4.6

Total Carried Interest Receivable $2,014.7

Less: Profit Sharing Payable $908.2

Net Carried Interest Receivable $1,106.5

Sharecount incl. Unvested RSUs (mm) 399.8

Net Carried Interest Receivable per Share $2.77


Given strong cash distributions and a strong pipeline of realization opportunities, Apollo provides a very attractive dividend yield over the near term, which we view as a great downside protection. Apollo and Och-Ziff Capital Management stand out as providing the highest dividend yield in our coverage universe.



Investment Thesis – Key Risks Given strong AUM growth, a very attractive private equity franchise and a strong pipeline of harvesting opportunities, why are we not more positive on the name? After all, the average rating for Apollo’s shares is a strong buy, with all 15 analysts covering the company having an Outperform rating. While we acknowledge that there a many reasons to like the company and be positive on the name – with expected strong realizations as the main one – we believe that these positive developments are largely priced into the company’s shares.

Realizations could peak in 2013 and 2014 Wayne Gretzky, considered the greatest hockey player of all times, once said “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be”. Thus, given where Apollo is in terms of the harvesting cycle, we are concerned that realizations could peak in 2013 and 2014 and this could be followed by a period of drought, i.e., low realization activity. In fact, we are modeling declining distributable earnings beyond 2013.

Leon Black stated that the firm is very aggressively selling assets and returning capital to its investors (limited partners). To quote Leon Black: “It’s almost biblical. There is a time to reap and there’s a time to sow. We are harvesting.” As we pointed out earlier, Apollo is ahead of its peers in the harvesting cycle, with about 60% of the private equity valuation being derived using exchange or broker quotes.

The chart below shows realization activity for the private equity segment only. It is noteworthy that realizations have almost doubled from 2011 to 2012 and could double once again in 2013 considering that realizations year to date exceeded the total amount booked for fiscal year 2012.

Exhibit 14: Private equity realizations for 1H13 exceed full year 2012 ($ in billion)

$3.5

$6.5$7.6 $7.6

$7.6

$-

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

2011 2012 1H2013 2013 Annualized


The question then becomes, can Apollo continue to sell down assets at this pace, for an extended period of time?

While realizations should drive Apollo’s share prices higher in the near term, we are concerned about a decline in realization activity that could follow



The company disclosed that the fair value of Apollo’s private equity portfolios is about $24 billion as of June 30, 2013. About 90% of this value is embedded in Fund VI and Fund VII. The latest private equity fund, Fund VII, was established in 2008. The fair market value of this portfolio is $12.1 billion as of June 30, 2013, with the fund generating a net IRR of 28%. On the other hand, Fund VI, which was established in 2006, has a fair market value of $9.2 billion. However, net IRRs for this fund generated since inception have been only 10%.

Our conclusion is this: while we would expect Apollo to dispose its holdings in Fund VII at an accelerated rate as it is raising capital for its new flagship fund, Fund VIII, we would expect Apollo to hold on to a majority of its investments in Fund VI for an extended period of time until performance improves.

Exhibit 15: The time is ripe to harvest Fund VII – but not all funds are created equally

Value ($ in mm)

Fund Vintage Realized Unrealized Net IRR

Fund VI 2006 $9,564 $9,232 10%

Fund VII 2008 $14,909 $12,107 28%


Thus, we are concerned that we could see a period of drought after witnessing accelerated sell-downs over the coming few quarter.

We believe that there are numerous positions that can be monetized in Fund VII and even some in Fund VI, such as LyondellBasell and Norwegian Cruise Lines. However, we believe that monetization could take a barbell shape, with big realizations in the near term being followed by a period of reduced selling activity.

Consequently, we cannot get more excited about strong realizations at this point as we think that the market has already priced in strong near term realizations. As noted earlier, Apollo’s shares are trading at a premium to a number of its peers. Taking a longer-term view, we are concerned that valuation of Apollo’s shares could come under pressure as realizations start to slow down following a few quarters of strong monetization activity.

While Fund VII has produced strong returns, the predecessor fund, Fund VI, has not had the same degree of success



Apollo is one of the more expensive exposures to alternative asset managers Since its public offering in March 2011, Apollo’s shares have appreciated about 70%. Investors who bought the shares at the time of the IPO would have owned the best performing stock in the alternative asset management sector. The chart below shows indexed performance for Apollo and its peers since Apollo has been public.

Exhibit 16: Apollo has outperformed its peers since the company went public in 2011

40%

80%

120%

160%

200%

03

/31

/20

11

06

/27

/20

11

09

/21

/20

11

12

/15

/20

11

03

/14

/20

12

06

/08

/20

12

09

/04

/20

12

11

/30

/20

12

02

/28

/20

13

05

/24

/20

13

08

/20

/20

13

APO (+86%) FIG (+50%) BX (+55%)

OZM (-26%) KKR (+39%) CG (38%)

Source: Company reports; RBC Capital Markets; priced as of October 21, 2013

This outperformance comes as no surprise as we believe that alternative asset managers trade based on the markets expectation of realizations and where they are deemed to be in the harvesting cycle. We think investors have been bidding up the shares in anticipation of outsized distributions.

The reason we cannot be more positive about the name is because we believe that given current valuations, some of Apollo’s peers might offer a more compelling risk-reward opportunity for long-term focused investors who wish to gain exposure to alternative asset managers. Similar to Apollo’s own investment philosophy, we too believe that money is made when assets are bought, but not necessarily when sold.

In essence, investors ought to be indifferent as to which alternative asset manager pays their dividends. We believe that there are less expensive names that can provide exposure to alternative asset managers and the opportunity to benefit from the current realization cycle.

The table below demonstrates our valuation argument. We calculated projected management fees each of Apollo’s peers, i.e., management fees they could earn over the next 12 months. We assumed that management fees will continue to grow at rates shown in Exhibit 7. As a reminder, we had calculated various AUM CAGRs starting with the year 2007, that is, over a five-and-a-half year period. The resulting management fee earnings are shown in the column titled “B”. We applied a 17x P/E multiple to these earnings. This resulted in a valuation based on management fees only, which is shown in the column titled “D”. We then

Investors buying APO are paying more for one dollar of performance fees than they would owning some of its peers

Using consensus estimates and backing into incentive income, we estimate that investors buying the shares as of today are paying about 9x for a dollar of incentive income at current levels



added net cash and investments on a per share basis to this valuation to arrive at a valuation excluding incentive income. In column H, we calculated an incentive income figure using consensus EPS estimates. For simplicity, we deducted the management fees from mean analyst estimates for all companies under analysis. The resulting table is depicted below and shows Apollo’s valuation relative to its peers.

Exhibit 17: Relative to peers, investors seem to be paying more for Apollo’s incentive income

A B C D E F G H I

Ticker

NTM Mgmt Fee

Earnings Multiple Assigned Value

Cash &

Investments

Valuation ex.

Incentive Income Current Price

NTM Incentive

Income

Multiple assigned to

NTM Inc. Income

FIG $0.26 17.0x $4.35 $2.88 $7.23 $8.60 $0.51 2.7xKKR $0.48 17.0x $8.15 $7.83 $15.98 $22.84 $1.83 3.8xBX $0.70 17.0x $11.97 $2.62 $14.59 $27.82 $1.83 7.2xAPO $0.81 17.0x $13.79 $2.31 $16.09 $33.81 $1.97 9.0xCG $0.73 17.0x $12.48 ($0.28) $12.20 $31.57 $2.07 9.3x

Source: Company reports; FactSet; RBC Capital Markets (Priced as of market close ET, October 18, 2013)

Certainly, there are shortcomings to this simple approach as consensus estimates could be based on economic net income. We made the assumption that distributable earnings are the same as economic income, which tends to be true over the long run. In this case, we have applied this approach uniformly to come up with our relative valuation.

One could also argue that Apollo’s management fees will grow at a faster rate than the 25.7% we have used given that the Aviva assets will add $45 billion to total AUM. However, with the uncertainty around the effective fee rate on the combined assets, we chose to use the long-term growth rate, excluding the impact of the Aviva assets.

Our point is this: we believe there are less expensive ways to buy a dollar of incentive income than owning Apollo’s shares.

Growth in private equity, Apollo’s most successful franchise, has been slow Apollo has the best performing private equity franchise in the industry, in our view. It has been generating one of the finest returns in the space, outpacing its peers. With total net IRRs of 26% since inception, it is ahead of its closest competitor to the tune of 700 basis points, as depicted in Exhibit 3.

However, it is reasonable to assume that the strong performance in private equity comes at a cost. Apollo walks away from deals more often than its competitors do, as it has ambitious return objectives. If it cannot generate adequate returns, i.e., internal rate of returns north of 20%, it will not invest. This has implications for growth. As the exhibit below shows, assets under management in Private Equity have not grown meaningfully since 2010.

Apollo has not raised a major private equity fund since 2008. While it is currently in the market raising capital for a new private equity fund, we would argue that current entry multiples will make it difficult to deploy this capital



Exhibit 18: Private equity AUM has been steady since 2010

$40.2$37.8

$35.4

$38.8

$34.0

$29.1$30.2

$20.2$18.7

$9.8$9.2$8.2

$-

$5

$10

$15

$20

$25

$30

$35

$40

$45

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2Q13

Tota

l A

UM

($

b)


We believe that this slow growth in assets under management is driven by a lack of investment opportunities and consequently, restrained capital-raising effort. Analyzing organic growth from 2010 to 2Q13 for Apollo’s peers, we see that Apollo has posted the lowest AUM growth rate in private equity.

Exhibit 19: Organic growth rate for Apollo’s private equity franchise is the lowest among its peers (2010 to 2Q13)

17.8%

82.9%

25.6%

37.5% 38.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Apollo Global

Management


Investment Group


While Apollo is currently in the market raising capital for its next private equity fund, Fund VIII, we would not consider this segment to be a growth opportunity. Apollo will sell down assets in other funds and return capital to its limited partners, offsetting some of the AUM growth attributable to the new fund. The firm’s investors base (LPs) is used to strong returns, which brings us to our next worry: Apollo might have difficulty deploying the capital it is currently raising if it continues to follow its rigorous investment guidelines. We believe it is going to be difficult to generate strong returns while deploying large amounts of capital, especially in the current environment.



Capital deployment could slow down, especially in private equity This is because we believe that Apollo will remain disciplined as it is searching for new investment opportunities to deploy the capital it is currently raising. The firm disclosed that it had received $8.4 billion of capital commitments during its June earnings call for its new flagship fund, Fund VIII. Bloomberg reported in October that Apollo was seeking approval by the LPs to raise the limit on this fund from $15 billion to $20 billion. If approved by LPs, this could be the largest buyout fund since Blackstone raised $21.7 billion in 2007.

The magnitude of the capital commitment makes us ponder. Apollo had set an initial limit of around $12 billion for the fund. Now, if the news reported by Bloomberg is true and Apollo succeeds in raising the limit to $20 billion, will it be able to deploy the capital at returns that exceed its minimum IRR target of 20 percent?

We are surprised about the size of Fund VIII as Fund VII, which held a final closing in December 2008, raised $14.7 billion during a time when investment opportunities were abundant. The general opinion in the industry seems to be that this is a realization cycle and that investment opportunities are rare since entry multiples are unattractive. Certainly, private equity still offers opportunities to deploy capital, but these investments seem to be more idiosyncratic in nature. As Blackstone pointed out during its 2Q13 earnings call, competition remains high for new investments and the firm has been relying increasingly on its global network to source exclusive and proprietary deals. It just opened an office in Singapore, its eighth in Asia, in order to seek out investment opportunities.

Exhibit 20: US PE Deal volume has declined steadily

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Cap

ital

In

vest

ed

($

b)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

# o

f De

als Clo

sed

# of Deals Closed Capital Invested ($B)

* 2Q13 Source: PitchBook; RBC Capital Markets

The exhibit above shows the decline in the number of deals and deal volume so far in 2013. While strong equity markets lead to more exits, as valuations improve, finding attractive opportunities to deploy capital is becoming progressively more difficult.

With entry multiples the highest in a decade, we don’t see a lot of investment opportunities – unless Apollo reduces its target return expectation



The data below demonstrates that the current environment is more suitable for exits rather than investing and shows that entry multiples have exceeded levels last seen in 2008.

Exhibit 21: US PE – Median EBITDA multiples are the highest in a decade

5.9x

6.9x7.6x

8.2x

9.0x 8.8x9.5x

7.7x8.1x

8.5x 8.5x

10.7x

0x

2x

4x

6x

8x

10x

12x

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 3Q13

De

al S

ize

/EB

ITD

A

Source: PitchBook; RBC Capital Markets

This recent increase in deal multiples can be attributed to low-cost and readily available financing, aging dry powder that needs to be put to work and the continued shortage of attractive investment opportunities.

However, not all is bleak. There are still industries and regions that continue to be attractive for private equity investors. For instance, the energy sector continues to be appealing from a strategic investment perspective. However, Apollo already has a dedicated fund called Apollo Natural Resources Partner (ANRP) that buys mature oil & gas fields. Energy companies continue to sell assets to finance new explorations. The ANRP fund was raised in 2012 to take advantage of these opportunities. It has invested about $338 million since then and has an estimated $1 billion of dry powder as of June 2013. There is no need to invest in these opportunities using capital raised for the new flagship fund, Fund VIII.

Likewise, Europe continues to offer investment opportunities. European banks are continuing to hold on to assets that are deemed non-core or have punitive capital charges associated with holding them. As Bloomberg reported, deal volumes are picking up in Europe as lenders dispose of soured real estate, corporate and consumer loans. Deals are indeed shifting to Europe. However, here too, Apollo has a dedicated credit fund that invests in non-performing loans. The Apollo European Principal Finance Fund II L.P. (EPF II) was raised in 2012 and has invested about $480 million as of 2Q13. We estimate that the fund has about $3 billion of dry powder left to invest. We believe that the European opportunity is more suited for the firm’s credit funds, with portfolio managers acquiring assets such as loan or real estate portfolios. We believe that Apollo’s new private equity fund, Fund VIII, would not be able to take full advantage of these opportunities. Instead of buying assets such as non-performing loans or mortgage servicing rights, private equity funds take a strategic position in a company, i.e., own the equity at some point – most likely converting debt to equity or buying the common shares of the target outright – in order to add value through a restructuring. This value creation cycle is an important step in private equity investments that ultimately drives valuation upon exit. Strategic investment opportunities in Europe are constrained and competition is intense. For instance, Hypo Real Estate Holding received a

Europe continues to offer opportunities to invest. However, Apollo already has a dedicated fund that can take advantage of banks selling non-core assets



number of interests for its DEPFA Bank Plc, which it needs to sell as part of its bailout condition. The list of interested alternative asset managers is long, including Long Star Funds, J.C. Flowers & Co., Cerberus Capital Management, KKR, and Blackstone in addition to Apollo.

Currently, credit and real estate remain attractive asset classes for capital deployment. These are investment opportunities in asset classes where Apollo does not enjoy the same competitive advantage as in private equity. Remember that it was only in 2010 that Apollo was involved in real estate investing in a meaningful way. And even in credit, opportunities are becoming less attractive. Investors are becoming less excited about the market with spreads having come down dramatically from levels seen with the onset of the financial crisis in 2008.

Our conclusion is as follows: while we think there is no doubt that Apollo will hit its original target of raising $12 billion for its Fund VIII and could likely exceed this amount, it is going to be difficult to deploy the capital while maintaining its investing discipline.

Certainly, analysts will like the fact that Apollo can raise what could be its largest fund ever. However, it could take a long time to invest the capital absent any major economic disruptions as a healthy economy leads to high entry multiples.

Current market conditions could impact returns on new investments as entry multiples are elevated. Fund VI, which is a 2006 vintage fund, has an average entry multiple of 7.7x. According to the PitchBook data shown in Exhibit 21, median EBITDA multiples were around 9.0x in 2006. Today, net IRRs for Fund VI are 10%, well below the 28% generated with Fund VII, which is a 2008 vintage. As a reminder, the creation multiple for Fund VII was 6.2x – well below that of Fund VI.

Insiders selling could put pressure on shares We believe that strategic investors and insiders disposing of their holdings could lead to pressure on the share price over the next three years and could raise questions as to why insiders are selling.

The California Public Employees’ Retirement System (CalPERS) and the Abu Dhabi Investment Authority (ADIA) each bought 30 million non-voting shares in Apollo in June 2007, paying $600 million or $20 per shares. With the end of the lock-up period, which was on March 29

th,

ADIA and CalPERS disposed of the maximum number of shares allowed. They each sold 7.5 million shares in a secondary offering, at an offering price of $25 per share. This is striking as the strategic investors made merely 1.25x times their original investment over a 6-year period – excluding any dividends they would have received since 2007, of course.

We would expect these insiders to continue to sell shares as they might be motivated by the current valuation of Apollo’s shares. Furthermore, there are more reasons for CalPERS to sell its shares in Apollo, which is not its only stake in a private equity manager. It also held equity in Carlyle Group LP (NASDAQ:CG) and still owns shares of Silver Lake Partners. As for the CG position, it monetized its holdings in September, 2013, generating about 3.5x its investment over a 12 year period. Currently, CalPERS does not own any CG shares. We believe that CalPERS could continue to sell down its direct investments in other private equity managers and in Apollo Global Management.

To understand why Caplers could sell all its shares in Apollo, one needs to understand the recent history: recently, the former head of CalPERS, Federico Buenrostro, was charged with concocting fraudulent documents to help an acquaintance, Alfred Villalobos, collect millions of dollars in fees from Apollo Global Management. Villalobos acted as a placement agent,

Insiders selling shares could lead to questions around valuation and growth opportunities



helping Apollo secure investments by CalPERS in 2007 and 2008. Apollo required Villalobos to obtain an investor disclosure letter from CalPERS before paying any fees for securing investments. After CalPERS’ legal and investment office refused to sign the letter, Mr. Villalobos and Mr. Buenrostro created fraudulent letters that were sent to Apollo. Consequently, Apollo paid Mr. Villalobos about $14 million in fees.

We need to emphasize that Apollo was not aware that the disclosure letters were forged and that Apollo was in full compliance with securities laws. Yet, we would think that CalPERS will continue to sell down its holdings in Apollo to put these events behind it. Here is why: Christopher Bower, founder of a private equity advisory firm PCG Asset Management, had relations with Mr. Villalobos firm, Arvco Capital Research. According to Sacramento Bee, a daily newspaper published in Sacramento, California, Mr. Bower encouraged CalPERS to invest $600 million in an equity stake in Apollo. Mr. Bower’s firm lost CalPERS as a client due his firm’s association with Mr. Villalobos. Thus, we would expect CalPERS to further reduce its equity ownership in Apollo Global Management to put this issue behind it.

However, strategic investors are not the only ones selling their shares. Marc Rowan and Joshua Harris, co-founders, sold their shares after the expiration of the lock-up period. Mr. Rowan sold 7.5% of stake in Apollo while Mr. Harris disposed of 3.7% of his stake. In addition, 10 other employees of the firm sold about 2.6 million shares.

While the sale of shares by insiders helps in generating float, which stands at 89 million shares as of today, it also raises some concerns. Current and potential investors may ponder why insiders are selling their shares. The additional shares offered could also lead to a decline in the company’s share price around the next lock-up period. We estimate that another 28 million shares could be sold in the market if managing and contributing partners sold the maximum amount of shares allowed. More importantly, however, it could lead leave the impression that insiders think that the shares are fully valued.



Liquidity and float are low; hard to build a position Another argument for not owning shares of Apollo Global Management is the lack of liquidity. While there are 141.8 million Class A shares outstanding, we estimate free float to be about 89 million shares. Two strategic investors, ADIA and CalPERS, own 22.5 million shares each as of 2Q13. In addition, employees own about 8 million Class A shares. Thus, just about 89 million shares can currently be traded on the open market.

Exhibit 22: 90-day average volume (shares in million)

4.69

1.67

0.92 0.910.69

0.370.21

0.00

1.00

2.00

3.00

4.00

5.00

6.00

BX KKR FIG APO OZM CG OAK


Some investors could be concerned about their ability to build and exit a meaningful position in Apollo due to a lack of liquidity in the shares. This is true not only for Apollo, but for most alternative asset managers – with Blackstone being the exception. Assuming that an investor wanted to own 5% of Apollo’s outstanding shares, the investor would have to buy 8% of the free float. This could be accomplished in about eight trading days given the daily average trading volume. Thus, liquidity could be an issue for some investors. While liquidity should improve as strategic investors and insiders sell their shares, it will take at least 3 years for them to dispose of their holdings – and could lead to the aforementioned questions around the motive of insider selling.

Quickly building and exiting a position could be an issue given limited public float



Limited global footprint We believe that having a global footprint provides distinct advantages. Having presence in multiple countries could provide an edge in raising capital. After all, investors prefer relationships with general partners that have a permanent presence in their market. Furthermore, while alternative assets make an increasing percentage of asset allocation in US portfolios, there is a large growth opportunity outside of the US.

The exhibit below shows the expected allocation to various alternative asset classes and is based on a survey conducted by McKinsey titled “The Mainstreaming of Alternative Investments”. As the authors point out, growth in alternative asset classes is expected to be broad and strong. However, there are three items we would like to point to. First, allocations to alternative asset classes are higher in North America, and we would expect European investors to increase their allocation to alternative asset managers. Second, allocation in real estate is expected to increase the most in Europe. Third, this survey does not include Asia, a rapidly growing market. A report published by Julius Baer, a wealth manager, predicted that the high-net-worth population (cash and assets over $1 million) will more than double in Asia, up from 1.16 million in 2010 to 2.67 million by 2015.

Exhibit 23: If the US is an indication, European investors could increase allocation to alternative asset classes

Real EstateHedge FundsPrivate Equity

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2009 2010 2013E 2009 2010 2013E 2009 2010 2013E

North America European Union

Source: McKinsey&Company; RBC Capital Markets

Having a broad global presence allows the firm to identify attractive investment opportunities by utilizing expertise about the local market. One could raise the question of whether this is indeed true, given Apollo’s success despite the lack of a global footprint. We would argue that while Apollo has generated excellent returns investing mostly in the US, we believe that this was due to being at the right spot at the right time. It had raised $14 billion of funds in 2008 and was ready to invest in mostly domestic opportunities.

However, we believe that having a broad network to source deals across multiple regions will become more important as entry multiples start increasing in the US. We can see this with the firm’s Fund VI, which has produced a net IRR of 10% when entry multiples were below levels seen in today’s market. The exhibit below shows that Apollo has the least number of international offices.

Having a global footprint could turn out to be more important as investment opportunities in the US become less attractive



Exhibit 24: Apollo has only 6 offices outside of the US

Apollo Global

Management

Blackstone

Group

Carlyle

Group

KKR & Co Fortress

Investment

Group

a a a a a

x x a a x

x x a x x

x x a x x

a a a a a

x a a a x

x x a x x

x a x x x

a a x x a

x x a x x

x a x a x

a x a x x

x x x x a

x x a x x

x a a x x

x a a a x

a a a a x

a a a a a

a a a a a

x a a a x

x x a x x

x a a x a

x a a a x

x a a a a

x a a x a

x x a x x

x x a x x

253 638 650 245 240

x No

a Yes

Legend

Sydney, AU

Johannesburg, ZA

Lagos, NG

Investment Professionals

Chengdu, CN

Shanghai, CN

Seoul, KR

Tokyo, JP

Mumbai, IN

Singapore, SG

Hong Kong, HK

Beijing, CN

Rome, IT

Milan, IT

Istanbul, TR

Dubai, AE

Frankfurt, DE

Munich, DE

Dublin, IE

Luxembourg, LU

London, UK

Paris, France

Amsterdam,NL

Dusseldorf, DE

Various cities, USA

Sao Paulo, BR

Lima, PE

Barcelona, ES


Potential changes to the tax treatment of carried interest could lower distributable earnings The tax treatment of carried interest has been in the spotlight for some time now. With the need to raise tax revenues and reduce the budget deficit, we would expect this debate to continue for some time. As we had mentioned in previous initiation reports, this is despite the fact that as the Private Equity Growth Capital Council pointed out, changing the tax treatment of carried interest would only pay for 3.1 hours a year in federal government operations.

Investors could remain on the sidelines until there is more clarity about tax treatment of carried interest. However, any change in tax treatment would require up to a 10-year transition period



Private equity firms generate income in two ways. They receive a management fee, which is taxed as ordinary income, and carried interest. Private equity funds receive 20% of partnerships profit when the return exceeds a certain hurdle rate, i.e., carried interest. Currently, carried interest qualifies for long-term capital gains tax treatment.

In 2007, Congress held hearings on this topic. The Obama Administration’s 2008 Budget Blueprint included a sentence that carried interest should be taxed as ordinary income. In 2010, the US House of Representatives passed HR 4213, the American Jobs and Closing Tax Loopholes Act.

While it is difficult to predict whether the tax treatment of carried interest will change and be a part of a tax reform bill, if passed, taxing carried interest as ordinary income could have an adverse impact on capital distributions and dividend yields as it would significantly raise the amount of taxes owed. HR 4213 could prevent Apollo Global Management from completing certain types of internal reorganization transactions or converting to a corporation on a tax-free basis. The proposed legislation could also increase the ordinary income portion of any gain realized from the sale of Class A shares.

In February, 2012, Representative Levin introduced the “2012 Levin Bill”, which would tax carried interest at ordinary income rates.

However, if any new legislation were to pass the US Congress, there could be a multi-year transition period (up to 10 years) before capital gains can be taxed as ordinary income. Thus, the impact of any tax reform would not be immediate and there could be sufficient time to revise any tax law changes under a new administration. Furthermore, it is difficult to predict how the Apollo’s shares would react to any changes in the tax law. Currently, there is a reluctance to own shares of alternative asset managers as institutional investors don’t want to be burdened with filing K-1s, or cannot own them due to fund mandates or due to the float not being sufficient. This is why a large number of institutional investors are not investing in alternative asset managers.

Alternative asset managers could reconsider their corporate structure and reorganize as a corporation if carried interest is taxed as ordinary income. This, in turn, could increase demand for their shares and liquidity, helping offset some of the negative effect of having to pay ordinary income taxes.

Even with changes to the treatment of carried interest, private equity firms could likely determine alternative ways to reduce the amount of taxes they would have to pay. As CNBC has outlined, one way of doing this would be through a non-recourse loan. The general partner could borrow money from the limited partners and invest this amount in the new fund. Thus, any return to the general partner could be considered a return of capital and qualify for capital gains tax treatment. We would expect the industry to come up with creative solutions to reduce the impact of taxes on distributable earnings. Nevertheless, some investors could decide to wait until there is more visibility around taxes.



K-1 filing requirement is holding back investors As mentioned above, certain institutional investors do not want to invest in alternative asset managers due to the K-1 filing requirement. Limited partnerships are required to issue a Schedule K-1 to unitholders. This would require institutional investors to build out their back office operations.

Furthermore, each unitholder has to report the partnership’s taxable income on a K-1. Certain portion of the income from owning the A shares could have tax consequences for tax-exempt entities if it was deemed “Unrelated Business Taxable Income” (UBTI).

The bottom line is this: Owning shares of any alternative asset manager structured as a limited partnership can lead to incremental administrative burdens. Institutional investors are often not willing to commit to these incremental costs.

However, institutional investors can avoid this by entering into a total return swap (TRS)/buying a note that provides a synthetic exposure to returns. Our understanding of a TRS/note is that brokers would structure this such that the counterparty would receive the cash flow associated with the underlying assets – for a fee. The broker would take care of any filing requirements/back-office duties. This would allow institutional investors to own the economic benefits in companies such as Apollo Global Management without having to own the shares outright. This, of course, is a very high-level description of the structure and the details would be beyond the scope of this note. Some institutional clients are prohibited from owning a limited partnership due to fund mandates. Owning a TRS/note would alleviate increased administrative costs associated with owning the underlying securities outright.

Exhibit 25: About 9% of Apollo’s shares are owned by brokers providing synthetic exposure to underlying securities

11.6%

8.4%

11.5%

8.6%

11.6% 11.1%

5.5%

0%

5%

10%

15%

20%

BX KKR FIG APO OZM CG OAK


As for Apollo Global Management, about 8.6% of total shares outstanding are owned by brokers, with Credit Suisse Securities owning 3.8% of shares outstanding. This shows that there is demand for the security and investors willing to own the shares can do so by entering into a TRS or buying a note that provides them synthetic exposure to Apollo.

Were alternative asset managers to change their corporate structure due to a loss of tax advantages associated with being a limited partnership, we believe that more institutional

Incremental administrative burdens make investing in limited partnerships less attractive – but there are options to avoiding these



investors could be enticed to own their shares. As mentioned previously, some institutional investors cannot own limited partnerships due to fund mandates. Owning the shares directly would add to liquidity. After all, there is likely a high probability that brokers providing exposure to limited partnerships may match buy and sell orders internally before routing any trades to the exchanges.

Analyzing companies within the sector is difficult given inconsistent accounting & utilization of non-GAAP measures across the sector and the difficulty of projecting realizations We believe that the reason alternative asset managers trade at a discount to traditional asset managers can be explained by the complexity of the industry, lack of visibility into earnings (realization) and the difficulty of comparing companies within the sector.

For instance, while some alternative asset managers disclose the value of accrued performance fees on their balance sheet, others do not. Furthermore, while most companies disclose economic net income (a non-GAAP measure of earnings power), others do not. Fortress Investment Group (FIG), for instance, reasons that economic net income (ENI) adds volatility to earnings. ENI shows marks on portfolios, unrealized incentive fees and carried interest as earnings, which can fluctuate from quarter to quarter. This peer argues that over time, ENI and distributable earnings will converge and that investors are better served focusing on a metric that is more predictable. There are other examples of non-GAAP measures being used to demonstrate value creation. Simple exercises such as comparing capital raising activity and capital deployment are inherently difficult because not all companies disclose these measures for all of their business units. Moreover, it is extremely difficult to project earnings as there is very little visibility into realizations. This leads to many surprises and misses when the companies report earnings. The chart below depicts this and shows the average deviation of reported earnings versus the mean analyst expectation over time. The data goes back to 1Q08 or latest quarter data was available. As for Apollo, there was only one quarter with a large “surprise” when the company missed consensus earnings estimates in 3Q11.

Exhibit 26: Earnings surprises – actual reported earnings versus estimated earnings (1Q08 to 2Q13)

-31.0%

(239.9%)

44.0%

(25.2%)

(543.8%)(600%)

(500%)

(400%)

(300%)

(200%)

(100%)

0%

100%

200%

APO FIG BX KKR CG

Source: FactSet; RBC Capital Markets

Investing in alternative asset managers has its challenges, but can be rewarding as there are fewer resources allocated to the space



Yet, we believe that a lack of transparency could lead to opportunities. We would not expect the accounting to change, nor would we expect the alternative asset managers to agree to use common non-GAAP measures to make their performance more comparable. Consequently, the sector as a whole trades at a discount given the issues described above. We could see a multiple expansion as the industry matures, investors become more comfortable with the accounting, and alternative asset managers provide additional information that will allow an easier comparison across the sector.



Company Description Founded in the year 1990, Apollo Global Management LLC (NYSE: APO) is a global alternative investment manager. Headquartered in New York, Apollo also has offices in Houston, Los Angeles, London, Luxembourg, Frankfurt, Hong Kong, Singapore, and Mumbai. As of June 30, 2013, its managing partners, Leon Black, Marc Rowan and Joshua Harris are leading 660 employees, including 253 investment professionals. The company primarily manages private equity, capital markets and real estate funds along with managed accounts on behalf of its clients. Its customers primarily include institutional and high net worth individual investors, and pension and endowment funds. For all the investment management services provided, Apollo receives:

Management fees: which is based on amount of assets managed

Transaction and advisory fees for investments made and

Carried interest income, which is based on the performance of the respective funds managed by the company.

Formed as a Delaware limited liability company on July 3, 2007, the company is operated and managed by its manager AGM Management LLC. AGM Management is wholly-owned and controlled indirectly by its Managing Partners. As of June 30, 2013, Apollo had US$113.1 billion assets under management (AUM). Apollo has three primary business segments:

Exhibit 27: Business segments

Apollo Global Management LLC

Private Equity• Distressed Buyout and Debt Investments

• Corporate partner buyouts

• Opprtunistic buyouts

•Natural resources

Credit• U.S. Performing Credit

• Strutured Credit

• Opportunistic Credit

• Non-performing loan

• European Credit

Real Estate• Global opportunity investments in distressed debt and equity recapitalization transcations

• Senior and subordinated debt

• Commercial mortgage backed securities.

AAA/Strategic Investment Accounts

Source: Company reports

Private Equity: Apollo’s private equity segment consists of various strategies such as Distressed Buyout and Debt Investments, Corporate partner buyouts, and Opportunistic buyouts.

Credit: It primarily invests in U.S. Performing Credit, Structured Credit, Opportunistic Credit, Non-performing loan and European Credit. During third quarter 2012, this segment was renamed from Capital Markets segment to Credit segment.

Real Estate: Company’s Apollo Global Real Estate (AGRE) invests in commercial and residential first mortgage loans, CMBS, mezzanine investments and other real estate-related investments. The company also invests in real estate funds that focus on opportunistic investments in distressed debt and equity recapitalization transactions.

Strategic Investment Vehicles: The company also manages other investment vehicles such as AAA and Apollo Palmetto Strategic Partnership LP (Palmetto). These vehicles have been established in order to invest in or alongside certain Apollo funds and other Apollo-sponsored transactions, either directly or indirectly.



Exhibit 28: Apollo snapshot

Apollo Snapshot

Founded 1990

Headquarters New York, USA

Managing Partners Leon Black, Joshua Harris and Marc Rowan

Employees 660 (as of June 30, 2013)

Business Segments Private Equity Funds, Credit Funds, and Real Estate Funds

Total Revenue US$497.3 Million (as of June 30, 2013)

Total AUM US$113.1 Billion (as of June 30, 2013)




Milestones Exhibit 29: Milestones

Year Highlights

1990 Founded by Leon Black along with John Hannan, Craig Cogut, and Arthur Bilger. Other founding partners

include Marc Rowan, Josh Harris, Michael Gross and Tony Ressler.

1993 Formation of Apollo Real Estate Advisors

2005 Acquired Hexion Specialty Chemicals

2006 Acquired TNT Logistics

Apollo along with Graham Partners acquired Berry Plastics Corporation

2007 Formed as a Delaware limited liability company and completed the reorganization of predecessor businesses

Acquired Noranda Aluminum Holding Corporation

Acquired Countrywide plc

Acquired Claire's Stores for approximately US$3.1 billion

2008 Acquired Carlson's Regent Seven Seas Cruises operations

Completed a US$1 billion investment in the cruise line operator Norwegian Cruise Line

2010 Completed the acquisition of Citi Property Investors

Entered into a strategic alliance with Lighthouse Investment Partners

2011 Completed its IPO listing on the NYSE

Completed the acquisition of Gulf Stream Asset Management

Formed Apollo Natural Resources Partners, L.P.

2012 Partnered with Chartres Lodging Group for the purchase of Novotel New York Times Square

Completed the acquisition of Taminco Group Holdings

Along with Riverstone Holdings LLC and Access Industries, Inc. signed a definitive agreement to acquire all of the oil and gas exploration and production assets of El Paso Corporation for US$7.2 billion

Announced a definitive agreement to acquire the Irish consumer credit card unit of Bank of America Europe Card Services

Completed the acquisition of Stone Tower Capital LLC

Completed the acquisition of Great Wolf, a North America-based family of indoor waterpark resorts

Acquired EP Energy from El Paso Corporation for approximately US$7.15 billion

Signed a definitive agreement to acquire McGraw-Hill Education business for a purchase price of US$2.5 billion

Acquired portfolio of Irish commercial real estate loans from Lloyds Banking Group plc for £150 million

Affiliates of Apollo Global Management signed a definitive agreement to acquire AURUM Holdings Limited

Along with Ivanhoe Cambridge and Residential Land Limited acquired Peony Court in South Kensington

Joint venture between Driftwood Hospitality Management and Apollo Global Real Estate Management acquired DoubleTree Suites by Hilton Columbus Downtown

2013 Apollo Global Management and NRI Management Group LLC announced strategic partnership to invest in

mining assets equity.

Apollo Global Management and Metropoulos & Co. signed agreement to acquire certain Hostess Snack Brands and Bakeries for US$410 million in cash

Apollo European Principal Finance Fund II announced a definitive agreement to acquire FinanMadrid, the auto and consumer loan unit of Bankia

Apollo Global Management and Double Eagle Energy announced strategic partnership to invest in oil & gas assets

Apollo Global Management and Apex Energy announced strategic partnership to invest in oil & gas assets




Business segments Apollo conducts its Management and Incentive businesses primarily in United States and generates most of its revenues domestically. The Management and Incentive businesses are conducted through three segments, Private Equity, Credit (earlier referred as Capital Markets), and Real Estate. Apollo measures performance of these segments on ‘Unconsolidated’ basis because management makes operating decisions and assesses the performance of each of Apollo’s business segments based on financial and operating metrics and data that exclude the effects of consolidation of any of the affiliated funds.

Private equity Apollo’s private equity funds make investments in nine core industries including Media, Cable & Leisure, Consumer & Retail, Manufacturing & Industrial, Chemicals, Satellite & Wireless, Commodities, Packaging & Materials, Distribution & Transportation and Financial & Business Services. As of June 30, 2013, this segment had approximately US$40.2 billion assets under management representing 36% of total assets management of Apollo. Investment activities under private equity are conducted through several strategies including Distressed Buyouts and Debt Investments, Corporate Carve-outs, Opportunistic Buyouts, Other Investments and Natural Resources.

Distressed Buyouts and Debt Investments: Approximately 40% of Apollo’s private equity investments involve debt investments and distressed buyouts. The distressed securities purchased by the company include public high-yield debt, bank debt and privately held instruments. These securities are often come with significant downside protection in the form of a senior position in the capital structure. Some of Apollo’s recent distressed investments include Charter Communications in 2009, Gala Coral in 2010 and LyondellBasell in 2010. The company also targets assets that have high quality operating businesses but low-quality balance sheets. The company’s funds acquired over $39 billion face value of debt investments from inception through December 31, 2012 in an array of distressed strategies.

Corporate Carve-outs: Corporate partner buyouts or carve-out have not represented a large portion of APO’s investment activity, however the company engages them in selective environments in which purchase prices for control of companies are at high multiplies of earnings, making them less attractive for traditional buyout investors. In these investments, Apollo does not seek control but instead makes significant investments that typically allow it to obtain control rights similar to those that it would require in a traditional buyout, such as control over the direction of the business and its ultimate exit. Some of Apollo’s Corporate Carve-outs include Sirius Satellite Radio in 1998, Educate in 2000, AMC Entertainment in 2001 and Oceania Cruises (now Prestige Cruise Holdings) in 2007. Corporate Carve-outs focus on companies in need of a financial partner in order to consummate acquisitions, expand product lines, buy back stock or pay down debt.

Opportunistic Buyouts: In Opportunistic Buyouts, it purchases a company at a discount to prevailing market averages. It also focuses on complex situations such as out-of-favor industries or broken (or discontinued) sales processes where the inherent value may be less obvious to potential acquirers. The company also focuses on certain types of buyouts such as physical asset acquisitions and investments in non-correlated assets where underlying values tend to change in a manner that is independent of broader market movements.

Other Investments: Apollo is also engaged in other type of investments such as creation of new companies, particularly in asset-intensive industries that are in distress. Apollo has the ability to establish new entities that can acquire distressed assets at attractive valuations without the burden of managing an existing portfolio of legacy assets.



Creation of new companies has historically not represented a large portion of the company’s overall investment activities. Apollo made such an investment in Vantium in 2007, Athlon Energy LP in 2010 and Veritable Maritime in 2010.

Natural Resourses: In 2011, Apollo established Apollo Natural Resources Partners, L.P. (ANRP), and developed a team of dedicated investment professionals to capitalize on private equity investment opportunities in the natural resources industry, principally in the metals and mining, energy and select other natural resources sectors. ANRP completed its fundraising period during Q4 2012, and had over US$1.3 billion of committed capital as of December 31, 2012.

The following table summarizes the investment record of Private Equity fund portfolios as of June 30, 2013, unless otherwise noted (amounts in $ millions):

Exhibit 30: Private equity fund performance

Fund Vintage Year

Committed

Capital

Invested

Capital Realized Unrealized Total Value Gross IRR Net IRR Gross IRR Net IRR

Fund VIII 2013 6,641 ― ― ― NM NM NM NM

AION 2013 277 ― 12 327 NM NM NM NM

ANRP 2012 1,323 338 ― ― 339 NM NM NM NM

Fund VII 2008 14,676 14,686 14,909 12,107 27,016 37% 28% 35% 26%

Fund VI 2006 10,136 11,819 9,564 9,232 18,796 12% 10% 11% 9%

Fund V 2001 3,742 5,192 12,230 642 12,872 61% 44% 61% 44%

Fund IV 1998 3,600 3,481 6,757 52 6,819 12% 9% 12% 9%

Fund III 1995 1,500 1,499 2,654 41 2,695 18% 11% 18% 11%

Fund I, II &

MIA1990/92 2,220 3,773 7,924 0 7,924 47% 37% 47% 37%

Total 44,115 40,788 54,050 22,401 76,461 39% 26% 39% 25%

As of June 30, 2013 As of Dec 31, 2012


Private Equity AUM: For the six months ending June 30, 2013, Private Equity total asset

under management increased by 6.3% to US$40.2 billion compared to US$37.8 billion, for the period ended December 31, 2012. The segment’s fee-generating AUM decreased to US$26.0 billion from US$27.9 billion as of December 31, 2012 and non fee-generating assets increased by US$4.3 billion to US$14.2 billion as of June 30, 2013 from US$9.9 billion as of December 31, 2012. The increase in total AUM is due to improved unrealized gains of US$4.5 billion, including US$2.7 billion from Fund VII, $1.7 billon from Fund VI along with $1.1 billion of transfer-in. This increase was offset by distributions of US$7.6 billion.

For the three months ending June 30, 2013, total AUM increased by 2.6% or US$1.0 billion from the previous quarter. The increase is primarily due to a subscription of $5.8 billion in Fund VIII, and US$1.2 of income mainly from Fund VII. These gains were offset by distribution worth US$2.5 billion each in Fund VI and VII.



Exhibit 31: Private Equity AUM ($ in billion)

28.2 27.5 27.7 27.9 27.8 27.7 27.8 28.0 27.7 27.8 28.1 27.9 27.9 26.0

6.2 6.0 7.610.9 11.8 12.7

7.0 7.4 10.7 10.5 10.8 9.9 11.3 14.2

33.535.3

38.8 39.6 40.4

34.8 35.438.4 38.2 39.0 37.8 39.2 40.2

0

5

10

15

20

25

30

35

40

45

50

Mar

-10

Jun

-10

Sep

-10

De

c-1

0

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Fee-Generating AUM Non Fee-Generating AUM

34.4

Source: Company Reports

New Capital and Distributions: A total of over US$19 billion has been distributed under

the segment starting from 2010, in the same duration, total of approximately US$7 billion new capital/subscriptions (excluding acquisitions) has been raised. In 2012, Apollo distributed over US$6.5 billion, including $3.7 billion from Fund VII and $2.1 billion from Fund VI, and raised US$664 million new capital under the segment.

Exhibit 32: Capital raised and distributions/AUM share by strategy

Private Equity - Capital Raised and Distributions ($ in mm)

20 3

87

4

91

2

41

7

21

8

20

1,2

12

99

8

1,0

52

60

3,5

21

1,9

02

5,8

34

15

7

25

9

10 2

47

20

2

1,5

18

1,4

38

5,6

69

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Mar

-10

Jun

-10

Sep

-10

De

c-1

0

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Capital Raised Distributions

Private Equity AUM Share by Strategy

Traditional

Private Equity

Funds, 95%

ANRP, 3%

AAA, 2%


Private Equity Revenues: Apollo’s revenues include advisory and transaction fees from

affiliates, management fees from affiliates (together referred as Management Business revenue including carried interest income from certain mezzanine funds) and Carried Interest Income (loss) from affiliates referred as Incentive Business income.

Advisory and Transaction fees from affiliates decreased by 32% or US$20 million to reach US$42 million for the three months ending June 30, 2013 as compared to US$61 million for



the three months ending June 30, 2012. The decrease is primarily due to a $20.3 million decrease in transaction and termination fees earned by ANRP and Fund VII during the period. During second quarter, transaction fees that came from EP Energy LLC and Great Wolf Resorts were offset by termination fees from EVERTEC, Constellium and Taminco. During the same period, Management fees also declined by 5% to US$66 million from US$69 million in the same quarter a year ago. The company’s management fees earned from Fund VI by $1.3 million and AAA Investments declined by $1.8 million as compared to same period in 2012 due to lower invested capital and lower adjusted assets. Carried interest income from affiliates increased by US$223 million to reach US$229 million for the quarter ending June 30, 2013 compared to carried interest income of US$6 million for the quarter ending June 30, 2012. The increase was backed by rise in the fair value of Fund VI by $99.5 million and Fund VII by $181.8 million. The company’s management fees earned from Fund VI declined by $1.3 million and AAA Investments declined by $1.8 million. Realized carried interest income also improved to stand at $694.9 million due to rise in dispositions of portfolio investments held by Fund VII, Fund VI and Fund V of $334.3 million, $281.9 million and $79.5 million, respectively, for quarter ended June 30, 2013 as compared to the same period in 2012.

Exhibit 33: Private equity revenue and economic net income

Private Equity Revenue Break Up ($ in mm)

(1279)

522

226411

538

136

419

973 1082

336

(1,350)

(850)

(350)

150

650

1,150

1,650

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Advisory and transaction fees Management feesCarried interest income (loss)

Private Equity Economic Net Income ($ in mm)

282

112

(887)

232309

52

237

602 659

177

-1000.0

-800.0

-600.0

-400.0

-200.0

0.0

200.0

400.0

600.0

800.0M

ar-1

1

Jun

e-1

1

Sep

-11

De

c-1

1

Mar

-12

Jun

e-1

2

Sep

-12

De

c-1

2

Mar

-13

Jun

e-1

3

Management Business Incentive Business


Private Equity Economic Net Income (ENI): For the quarter ending June 30, 2013, Private Equity segment’s ENI was US$177 million compared to economic net income of US$52 million in the same quarter of 2012. The improvement is primarily due to an increase in carried interest income (incentive business), ENI, which increased to US$133 million in the quarter ending June 30, 2013 from economic net loss of US$6.3 million in the quarter ending June 30, 2012. The increase in the incentive business ENI in the quarter is primarily due to the rise in its income resulting from an increase in realized gains of portfolio investments. Management business ENI declined to US$43.5 million during the quarter from US$58.4 million in the quarter ending June 30, 2012. The decline was primarily due to a decrease in advisory and transaction fees.

Credit Credit and capital markets expertise has been as an integral component of Apollo’s growth and success. Apollo’s Credit Markets (previously known as Capital Markets) operations commenced in 1990, with the management of a US$3.5 billion high-yield bond and leveraged loan portfolio. The credit segment’s operations are led by James Zelter, who has served as



managing director of the capital markets business since April 2006. Credit market activities span a broad range of the credit spectrum, including U.S. Performing Credit, Structured Credit, Opportunistic Credit, Non-performing loan and European Credit . The value-oriented fixed income segment of the credit market spectrum is the most recent investment area for Apollo, and it is characterized by its ability to generate attractive risk-adjusted returns relative to traditional fixed income investments. As of June 30, 2013 credit segment had total assets under management of approximately US$62 billion (US$48 billion of fee-generating AUM).

The credit segment has been categorized under six functional groups, which are shown in the following chart.

Exhibit 34: Credit segment AUM by functional groups (2012)

Athene, $11 bn

European Credit, $1.9 bn

Non Performing Loans, $6.4 bn

Opportunistic Credit, $6.2 bn

Structured Credit, $11.4 bn

US Performing Credit, $27.5 bn

Credit Segment AUM by Functional Groups (2012)


US Performing Credit: This group provides investment management services to funds that focus on income-oriented, senior loan and bond investment strategies. The group also includes CLOs, which Apollo manages internally. As of December 2012, the group’s fee-generating AUM stood at $20.6 billion.

Structured Credit: This group focuses on structured credit investment strategy oriented funds. These strategies include investment in residential mortgage-backed securities, asset-backed securities, insurance-linked securities and longevity-based products among others. As of December 2012, the group had fee-generating AUM of US$7.6 billion.

Opportunistic Credit: The group targets funds primarily focused on credit investment strategies. These funds invest in primary and secondary opportunities, including performing, stressed and distressed public and private securities. As of December 2012, the group’s fee-generating AUM was $4.7 billion.

Non Performing Loan Funds: The group provides investment management services to the funds, which primarily invest in European commercial and residential real estate performing and non-performing loans (NPLs) and unsecured consumer loans. Apollo started Apollo European Principal Finance Fund (EPF) in May 2007 to invest principally in NPLs in Europe. The fund is structured with many characteristics typically associated with private equity funds, including multi-year capital commitments from the fund’s investors. EPF seeks to capitalize on the inefficiencies of financial institutions in managing and restructuring their NPLs. Apollo estimates the size of European NPL and non-core asset market to be approximately €1.7 trillion. Apollo manages EPF with its 17



professionals based in London, Frankfurt and Dublin, as well as its captive pan-European loan servicing and property management platform, The Lapithus Group. Lapithus operates in six European countries and directly services approximately 54,000 loans secured by more than 19,000 commercial and residential properties. As of December 2012, the group’s fee-generating AUM stood at $4.5 billion.

European Credit: This group provides investment management services to funds that invest primarily in credit opportunities in Europe, with a focus on Western Europe. The group invests in senior secured loans and notes, mezzanine loans, subordinated notes, distressed and stressed credit and other such credit investments of the companies. As of December 2012, fee-generating AUM for the group stood at US$1.3 billion.

Athene: During 2009, Apollo formed Athene Asset Management LLC, an investment manager that provides asset management services to Athene Holding Ltd, a holding company founded in 2009 to capitalize on favorable market conditions in the dislocated life insurance sector, among others. In addition, certain Apollo affiliates manage assets for Athene Asset Management and earn sub-advisory fees for these services. As of December 31, 2012, Athene Asset Management AUM was US$15.8 billion, of which US$5 billion was managed by other Apollo funds and investment vehicles.

Exhibit 35: Credit fund performance ($ in millions)

Funds Strategy

Vintage

Year

Committed

Capital

Invested


ACRF II Structured Credit 2012 104 104 2 114 116 NM NM NM NM

EPF II Non-Performing 2012 3,599 483 61 451 513 NM NM NM NM

FCI Structured Credit 2012 559 443 15 564 579 NM NM NM NM

AESI European Credit 2011 463 577 368 266 634 NM NM NM NM

AEC European Credit 2011 293 345 208 150 358 NM NM NM NM

AIE II European Credit 2008 269 848 1,070 244 1,315 19% 16% 19% 16%

COF I US Performing Credit 2008 1,485 1,611 2,682 1,574 4,257 31% 28% 31% 28%

COF II US Performing Credit 2008 1,583 2,176 2,370 724 3,094 14% 11% 14% 12%

EPF I Non-Performing 2007 1,685 2,132 1,718 1,238 2,956 19% 13% 19% 12%

ACLF US Performing Credit 2007 984 1,449 2,168 209 2,377 13% 11% 13% 11%

Artus US Performing Credit 2007 107 190 226 - 226 7% 7% 7% 7%

Totals 11,129 10,358 10,888 5,534 16,422



Credit Segment AUM: the credit segment’s total assets under management decreased by

3.4% to US$62 billion as of June 30, 2013, compared to US$64 billion at the beginning of the year. The segment’s fee-generating AUM decreased to US$48 billion from US$50 billion as of December 31, 2012 and non fee-generating assets were flat at US$15 billion as of June 30, 2013, the same as in December 31, 2012. The decrease in total AUM is primarily due to distributions worth $2.6 billion, a $1.5 billion fall in leverage, $0.7 billion in redemptions and $0.5 billion of net transfers out. An increase in income and subscriptions by $1.9 billion and $1.3 billion, respectively, helped offset the decline.

For the three months ending June 30, 2013, total AUM decreased by 2.1% compared to the previous quarter. The decline was due to distributions worth $1.3 billion, a decrease of $1.2 billion in leverage, redemptions worth $0.4 billion and net segment transfers out of $0.3 billion. This decline in AUM was offset by $1.2 billion of income, mainly due to improved unrealized gains across its credit funds and additional subscriptions of $0.6 billion from its AINV and ACF funds.



Exhibit 36: Credit AUM ($ in billions)

15.1 15.4 15.9 16.5 17.7 18.1 18.526.6 28.2

45.5 45.349.5 48.5 47.5

4.1 3.6 4.0 5.8 6.2 5.6 3.9

5.38.3

10.6 14.814.9 15.0 14.7

19.3 19.0 19.9 22.3 23.8 23.7 22.4

31.936.5

56.160.1

64.4 63.5 62.2

0

10

20

30

40

50

60

70

Mar

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Jun

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Sep

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De

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0

Mar

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Mar

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Jun

-13



New capital and distributions: A total of approximately US$8.2 billion has been

distributed and another US$2.2 billion has been redeemed under the segment starting in 2010. Over the same period, a total of approximately US$10.4 billion in new capital/subscriptions (excluding acquisitions) was raised. In 2012, Apollo has distributed US$3.2 billion and over US$949 million was redeemed under the segment. Over US$5.5 billion in new capital was raised under the segment in 2012.

Exhibit 37: Capital raised and distributions

80

5 1,0

00

74

1

54

7

1,0

27

1,2

07

1,1

69

67

3

62

7

42

7

18

3 33

0

23

9

15

04 17

09

16

41

2,1

01

24

5

15

0

38 80

48

4

27

6 50

0

50

8

18

2

15

43

91

6

0

500

1000

1500

2000

2500

Mar

-10

Jun

-10

Sep

-10

De

c-1

0

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Capital Raised Distributions/Redemtpions


Revenues: Segment Advisory and transaction fees from affiliates increased substantially – by US$16 million during the quarter ended June 30, 2013 compared to same quarter last year. Management fees from affiliates increased by 21% to US$90 million during the quarter, compared to US$74 million for the quarter ended June 30, 2012. During this period, the company saw increases in management fees earned from EPF II (up $7.1 million), AAM (up $6.4 million), CLOs (up $3.6 million), and ACF (up $1.2 million) as compared to same period



last year. The increases in management fees were partially offset by decreases in fees generated from SVF (down $2.0 million) and COF II (down $1.6 million).

Carried interest income from affiliates increased by US$50.8 million under the segment during the quarter ending June 30, 2013 compared to same quarter last year. The increase is primarily due to a rise in net asset values related to SOMA ($24 million) and COF I ($17.9 million) along with $11.4 million worth of income related to certain sub-advisory arrangements.

Exhibit 38: Credit segment revenue and economic net income

Credit Segment Revenue Break Up ($ in mm)

152

62

-223

217 241

85

325

196240

166

(400.0)

(300.0)

(200.0)

(100.0)

0.0

100.0

200.0

300.0

400.0

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Advisory and transaction fees Management fees

Carried interest income (loss)

Economic Net Income ($ in mm)

102

11

-267

140 158

-11

199

97134

66

-300.0

-200.0

-100.0

0.0

100.0

200.0

300.0

Mar

-11

Jun

e-1

1

Sep

-11

De

c-1

1

Mar

-12

Jun

e-1

2

Sep

-12

De

c-1

2

Mar

-13

Jun

-13



ENI: Credit segment ENI increased by US$77 million during the quarter ended June 30, 2013 to reach US$66 million from a US$11 million net loss in the quarter ending June 30, 2012. The increase is primarily due to a rise in total revenues for the factors mentioned above. However, the gain was offset by a rise in total expenses to $101 million during the quarter ended June 30, 2013 compared to $79 million in the same period last year.

Real Estate Apollo established Apollo Global Real Estate (AGRE), a dedicated business to pursue real estate investment opportunities, in 2012. AGRE invests in legacy commercial mortgage-backed securities, commercial first mortgage loans, mezzanine investments and other commercial real estate-related debt investments. Additionally, Apollo sponsors real estate funds that focus on opportunistic investments in distressed debt and equity recapitalization transactions. As of June 30, 2013, this segment had US$9.5 billion assets under management.

CPI Capital Partners: An affiliate of AGRE acquired the Citi Property Investors (CPI) business from Citigroup Inc. on November 12, 2010. CPI is the real estate investment management firm and has offices in Asia, Europe, and North America. As of June 30, 2013, CPI had four funds with approximately US$6.4 billion committed capital.

Apollo Commercial Real Estate Finance, Inc (NYSE:ARI): Apollo launched ARI in 2009. ARI is a real estate investment trust which acquires, originates, invests in and manages performing commercial first mortgage loans, CMBS, mezzanine investments and other commercial real estate-related investments in the United States. ARI had a total raised capital of US$713.9 million as of June 30, 2013.

AGRE CMBS Fund L.P.: Apollo launched AGRE CMBS fund in December 2009 to invest principally in commercial mortgage-backed securities, and leverage those investments



by borrowing from the Federal Reserve Bank of New York's term-asset-backed securities loan facility program. This fund had total raised capital of US$419 million and invested capital of US$1.6 billion as of June 30, 2013. Further, Apollo launched the 2011 A4 Fund, L.P., in November 2010 to invest principally in CMBS and leverage those investments through repurchase facilities. As of June 30, 2013, the 2011 A4 Fund had total raised capital of approximately $235 million and US$931 million invested capital.

AGRE U.S. Real Estate Fund, L.P.: Apollo launched the AGRE U.S. Real Estate Fund in 2011 to make real estate-related investments principally located in the United States. This fund had US$793.4 million raised capital and US$400.9 million invested capital as of June 30, 2013.

Following table summarizes the investment record of Real Estate fund portfolios as of June 30, 2013, unless otherwise noted (US$ in millions):

Exhibit 39: Real Estate performance

Fund Vintage Year

Raised

Capital Current NAV

Invested


AGRE U.S. Real Estate Fund, L.P.(2)(3) 2012 793 407 401 3 405 407 NM NM NM NM

AGRE Debt Fund I, L.P.(2) 2011 716 715 712 38 709 747 NM NM NM NM

2011 A4 Fund, L.P.(2) 2011 235 220 931 — 939 939 16% 14% NM NM

AGRE CMBS Fund, L.P. 2009 419 139 1573 — 531 531 14% 11% 14% 12%

CPI Capita l Partners North America(4) 2006 600 81 453 296 72 369 16% 11% NM NM

CPI Capita l Partners As ia Paci fic(4) 2006 1292 443 1151 1108 452 1560 34% 31% NM NM

CPI Capita l Partners Europe(4)(5) 2006 1512 558 998 153 541 694 3% 1% NM NM

CPI Other Various 2960 946 N/A N/A N/A N/A NM NM NM NM

Total 8,526 3,507 6,218 1,598 3,649 5,247



Real Estate AUM: The segment’s total assets under management increased by 7.6% to US$9.5 billion as of June 30, 2013, up from US$8.8 billion as of December 31, 2012. The segment’s fee-generating AUM increased to US$5.8 billion as of June 30, 2013 from US$4.5 billion as of December 31, 2012. Non fee-generating assets decreased to US$3.7 billion as of June 30, 2013 from US$4.3 billion as of December 31, 2012. During the six months ended June 30, 2013, total AUM increased by US$0.7 billion, or 7.6%, primarily due to US$1.0 billion in additions from new subscriptions and net transfers from other segments amounting to US$0.6 billion. These increases were offset by distributions of US$0.4 billion. For the three months ending June 30, 2013, total AUM increased by 0.6% compared to previous quarter. The increase is primarily due to additional subscriptions of US$0.5 billion and US$0.3 billion in net transfers from other segments. These increases were offset by redemptions of US$0.3 billion and distributions of US$0.2 billion during the quarter.



Exhibit 40: Real Estate AUM ($ in billions)

0.5 0.4 0.6

2.7 2.8 3.1 3.4 3.5 3.7 4.2 4.2 4.55.3 5.8

2.0 1.72.0

3.8 3.74.5 4.5 4.4 4.6 3.7 3.9

4.34.1 3.7

2.52.1

2.6

6.5 6.5

7.67.9 8.0 8.3 7.9 8.1

8.89.4 9.5

0

1

2

3

4

5

6

7

8

9

10

Mar

-10

Jun

-10

Sep

-10

De

c-1

0

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13



New capital and distributions: a total of approximately US$2.2 billion has been distributed and another US$0.6 billion has been redeemed under the segment starting from 2010. In the same period, a total of approximately US$2.2 billion in new capital/subscriptions (excluding acquisitions) was raised. In the three months ended June 30, 2013, Apollo distributed US$232 million, and another US$290 million was redeemed under the segment. New capital of US$465 million was raised under the segment in Q2 2013.

Exhibit 41: Capital raised and distributions

15

6

50

30

5

84

84

2

52

3

46

5

89 94

11 5

7

86

2

69

13

8

52

2

851

05

35

8

29

6

17

1

469

9

30

7

3

0

100

200

300

400

500

600

700

800

900

1000

Mar

-10

Jun

-10

Sep

-10

De

c-1

0

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Capital Raised Distributions/Redemtpions




Exhibit 42: Real Estate AUM by strategy

Fixed Income

61%

Equity39%

Real Estate AUM by Strategy (Jun 30, 2013)

Fixed Income

55%

Equity45%

Real Estate AUM by Strategy (Dec 31, 2012)


Revenues: Due to an increase in transaction and advisory services rendered, the segment’s advisory and transaction fees from affiliates rose by US$0.7 million during the quarter ending June 30, 2013 compared to same quarter last year. Management fees from affiliates increased by US$0.3 million to US$13.2 million during the quarter. The increase in management fees was driven by an increase of US$0.8 million in management fees earned from certain sub-advisory agreements and an increase of US$0.4 million in management fees from the 2012 CMBS I Fund, L.P., and 2012 CMBS II Fund, L.P. Additionally, the ARI and AGRE Debt Fund I, L.P. raised additional fee-generating capital, resulting in higher management fees totaling US$1.6 million. These increases were offset by decreased management fees of US$0.6 million from the CPI Funds, and a decrease of US$1.6 million from AGRE U.S. Real Estate Fund, L.P. during the quarter ended June 30, 2013 compared to the same period in 2012. Carried interest income from affiliates decreased by US$10.5 million under the segment during the quarter ending June 30, 2013 compared to same quarter last year. The decrease was primarily due to a decrease of $8.1 million in unrealized carried interest, driven by a decrease in the fair value of the underlying portfolio investments held during the three months ended June 30, 2013 as compared to the same period in 2012. Additionally, there was a decline in realized gains of $2.4 million during quarter as compared to the same period a year ago.

ENI: The Real Estate segment’s economic net loss was US$1.8 million in the quarter ending June 30, 2013, compared to an economic net income of US$0.7 million for the quarter ending June 30, 2012. The economic net loss in the quarter ending June 30, 2013, was mainly due to a fall in revenues to US$8.2 million as compared to revenues of US$17.7 million in the same quarter a year ago.



Exhibit 43: Real Estate revenue break-up

Real Estate Revenue Break Up ($ in mm)

1617

9 1011 11 12

1816 8

(10)

(5)

0

5

10

15

20

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Advisory and transaction fees Management fees


Real Estate Equity Economic Net Income ($ in mm)

-2.1

-7.6

2.5

-5.4

-15.4

-4.8

0.6-1.7

-0.7-1.6

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

Mar

-11

Jun

e-1

1

Sep

-11

De

c-1

1

Mar

-12

Jun

e-1

2

Sep

-12

De

c-1

2

Mar

-13

Jun

-13



Strategic investment vehicles In addition to Private Equity, Credit and Real Estate investments already discussed, Apollo manages other investment vehicles, including AP Alternative Assets, L.P. (AMS:AAA) and Apollo Palmetto Strategic Partnership, L.P. These have been established to invest either directly in or alongside certain of Apollo’s funds and certain other transactions that company sponsor and manage.

AP Alternative Assets, L.P. (AMS: AAA): Listed on Euronext Amsterdam, AAA issued approximately $1.9 billion of equity capital in its initial global offering in June 2006 to invest alongside Apollo’s private equity funds, directly into Apollo’s capital markets funds and into other transactions that it sponsors and manages. AAA is the sole limited partner in AAA Investments, the vehicle through which AAA’s investments are made, and the Apollo Operating Group holds the economic general partnership interests in AAA Investments. AAA Investments’ current portfolio also includes private equity co-investments in Fund VI and Fund VII portfolio companies, certain opportunistic investments and temporary cash investments. AAA Investments generates management fees through the Apollo funds in which it invests. In addition, AAA Investments generates management fees and incentive income on the portion of its assets that is not invested directly in Apollo funds or temporary investments. AAA Investments pays management fees to Apollo Alternative Assets, L.P., its investment manager, which is 100% owned by the Apollo Operating Group, and pays incentive income to AAA Associates, L.P.

Strategic Investment Accounts (SIAs): SIA’s are gaining more popularity among institutional investors as they provide investors with greater levels of transparency, liquidity and control over their investments compared to more traditional investment funds. As of June 30, 2013, the company had approximately US$15.7 billion of total AUM, of which approximately US$6.6 billion was either sub-advised by Apollo or invested in Apollo funds and investment vehicles.

Segmental reporting on the basis of management and incentive business In addition to evaluating financial results based on the above segments, Apollo also evaluates each of its segments based on management and incentive business. Management business includes management fee revenues, advisory and transaction revenues, and carried interest



income or expenses from certain of Apollo’s mezzanine funds. These revenues are generally stable and predictable in nature. Incentive business includes carried interest income, investment income, incentive fee-based compensation and profit sharing expenses that are associated with its general partner interests in the Apollo funds, which are generally less predictable and more volatile in nature. Financial performance under the incentive business partially depends on the quarterly mark-to-market unrealized valuations in accordance with U.S. GAAP guidance applicable to fair value measurement.

For the quarter ending June 30, 2013 revenue under Management business increased to US$244.5 million, an increase of US$8.9 million or 4% over the same period a year ago. The increase is primarily due to an increase of management fees to US$12.9 million or 4%, driven by growth in fee-generating AUM under the credit segment. Pre-tax ENI increased to US$89.1 million during the quarter ending June 30, 2013, up from US$70.4 million during the same quarter in 2012. The increase in ENI came from US$32.4 million from the credit segment driven by increased revenue and other income, offset by a US$14.9 million ENI decrease from the Private Equity segment, driven by reduced advisory and transaction fees from affiliates, and another US$1.3 million economic net loss improvement under the Real Estate segment.

Exhibit 44: Management business revenue breakup and ENI by segment

Management Business Revenues by Segment ($ in mm)

150 156 152159 167

236

185

223 221

245

0

50

100

150

200

250

300

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13


Management Business ENI by Segment ($ in mm)

3

3115

28 35

70

53

64 66

89

-20

0

20

40

60

80

100

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13



The incentive business had carried interest income of US$265.6 million for the quarter ending June 30, 2013 compared to a carried interest income of US$3.2 million during the quarter ending June 30, 2012. These amounts include US$840.5 million in realized gains from carried interest income, which are largely attributable to dispositions relating to a number of investments held by funds managed by Apollo, including Realogy, Charter Communications, LyondellBasell, Metals USA, Evertec and CKE. ENI in the incentive business increased to US$152.2 million during the quarter ending June 30, 2013 compared to net loss of US$28.4 million during the quarter ending June 30, 2012. The increase in ENI is primarily due to improved unrealized gains of underlying assets under Private Equity and Credit segments. The incentive business revenue refers to Carried Interest Income (loss).



Exhibit 45: Incentive business revenue breakup and ENI by segment

Incentive Business Revenues by Segment ($ in mm)

266

1,117962

574

3

624489

(1,630)

153

546

(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

1,500

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13


Incentive Business ENI by Segment ($ in mm)

152.2

726.4632.5

380

-28

427329

-1162

95

362

-1500

-1000

-500

0

500

1000

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13



Asset Under Management (AUM) Apollo’s total AUM as of June 30, 2013 rose by 7.8% to US$113.1 billion from US$104.9 billion in the same period last year. As of June 30, 2013, the company’s fee-generating AUM was US$79.3 billion as compared to US$77.5 billion for period ended June 30, 2012 as fee-generating assets rose in the company’s Credit and Real Estate segments. Fee-generating assets in credit funds rose primarily due to the acquisition of Stone Tower and a rise in both subscriptions/capital raised and leverage. In the Real Estate segment, fee-generating assets were greatly augmented by additional subscriptions and net segment transfers from other segments, though this was partially offset by distributions.

Exhibit 46: AUM by segment

AUM By Segment ($ in billion)

70 7265

75

86

105113 113 114 113

0

10

20

30

40

50

60

70

80

90

100

110

120

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Private Equity CreditReal Estate Unallocated Strategic Account

AUM ($ in billion)

113114113110105

86

75

657270

0

10

20

30

40

50

60

70

80

90

100

110

120

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13





As of June 30, 2013, AUM in the company’s private equity segment totaled US$40.2 billion (36% of total assets under management) compared to US$38.2 billion in the same period last year. AUM in the credit segment stood at US$62.2 billion (55% of total assets under management) compared to a US$56.1 billion in the same period a year ago. For the same period, AUM in real estate segment was US$9.5 billion (8% of total assets under management). Unallocated strategic accounts had AUM worth US$1.2 billion (1% of total assets under management).

Exhibit 47: AUM by fund

Private Equity, 36%

Capital Market ,

55%

Real Estate , 8%

Unallocated Strategic

Account, 1%

AUM by Fund (As of June 2013)

Private Equity, 36%

Capital Market ,

53%

Real Estate , 7%

Unallocated Strategic

Account, 3%

AUM by Fund (As of June 2012)

Source: Company report

Exhibit 48: Historical total AUM by segment ($ in billion)

8 9 1019 20

30 29 34 39 3538 40

11 1519

22 32

64 626

8

9

2

1 22 4

9

810

1121 25

4144

53

6875

113 113

0

10

20

30

40

50

60

70

80

90

100

110

120

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unallocated Strategic Account Private Equity Credit Real Estate

AUM CAGR: 28.4%


Apollo’s total AUM grew at a CAGR of 28.4% from US$8.2 billion in FY2002 to US$113.1 billion for the period ended June 2013. From its inception in 1990 until the first half of 2003, Apollo had only Private Equity funds. Apollo started funds focusing on credit markets in 2003 and currently these markets hold 55% of the total AUM of the company. Apollo started a dedicated team to explore further into real estate markets in 2010 and these funds hold 8% of total assets under management of the company. The acquisition of Stone Tower contributed US$18.5 billion in AUM to the credit segment in 2012.



Exhibit 49: New capital raised and total distribution and redemption

New Capital Raised ($ in mm)

8051,085 1,054 856

1,342

2,205

1,538 1,5561,200

6,926

0

1000

2000

3000

4000

5000

6000

7000

8000

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13


Total Distribution and Redemptions ($ in mm)

1,6991,581

801

1,606

413

3,923

2,650

5,092

3,749

7,851

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Mar

-11

Jun

-11

Sep

-11

De

c-1

1

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Private Equity Credit/Redemptios Real Estate


In the six months ending June 30, 2013, Apollo raised a total of US$8.1 billion (excluding acquisitions). A majority of the capital came from the Private Equity segment, with US$5.8 billion, accounting for 71.8% of the total capital flow during first six months of 2013. A total of US$1.3 billion new capital was raised under Credit segment and another US$988 million new capital was raised under the Real Estate segment. Apollo distributed and redeemed a total of US$11.6 billion during first six months ending June 30, 2013. Approximately 65.4% or US$7.6 billon distributions were made under Private Equity segment, 28.9% or US$3.3 billion were made under the Credit segment and the remaining 5.7% or US$0.7 billion were made under the Real Estate segment.

Revenues/fee structure Apollo reports revenues in three separate categories, Advisory and Transaction fees from affiliates, Management Fees from affiliates and Carried Interest Income (loss) from affiliates. On a consolidated basis, the company’s total revenue for the second quarter ended June 30, 2013 stood at US$497.3 million, compared to US$211.6 million for second quarter ended June 30, 2012.

Advisory and Transaction fees from affiliates: Apollo is entitled to receive fees for providing advisory services to actual and potential private equity and capital markets investments. Transactions for which company earns fees include acquisition, disposition of portfolio companies and also fees for ongoing monitoring of portfolio company operations and directors’ fees. Apollo also receives advisory fees for delivering certain advisory services to capital markets fund. Advisory and transaction fees from affiliates are realized when underlying services rendered by the company are completed as per the terms of the transaction and advisory agreements. Apollo’s revenue from advisory and transaction fees from affiliates for three months ended June 30, 2013 dropped by US$4.7 million to US$65.1 million compared to the three months ended June 30, 2012. The decrease was due mainly to a decrease in advisory and transaction fees in the private equity segment of US$19.8 million, offset by increases in advisory and transaction fees in the credit and real estate segments of US$14.2 million and US$0.7 million, respectively.

Management fees from affiliates: Management fees from affiliates are based on net asset value, committed capital, gross assets, invested capital or as otherwise defined in the



respective agreement. Management fees for the three segments (Private Equity funds, Real Estate funds and Credit funds) are recognized for the period during which related services are performed as per the contractual terms of the related agreement. For the three months ended June 30, 2013, management fees from affiliates rose by US$11.7 million to US$155.1 million compared to US$143.3 million during three months ended June 30, 2012. The increase in revenue was primarily because of an increase in management fees by US$16.0 million and US$0.3 million earned by the Credit and Real Estate segments, respectively, which was offset by a decrease of US$3.5 million in management fees earned by its private equity segment. The increase in management fees for the Credit and Real Estate segments was mainly due to increase in the net assets managed and fee-generating invested capital with respect to these segments during the period. Part of the increase in management fees earned from the credit segment was due to US$1.1 million in fees earned from consolidated variable interest entities (VIEs).

Carried Interest Income (loss) from affiliates: This is income earned based on the performance of underlying funds subject to preferred returns and high water marks, depending on the contractual agreements. It is the incentive return earned by the general partners of funds and can amount to as much as 20% of the total returns on the fund capital depending on the performance of the fund. For the three months ending June 30, 2013, carried interest income from affiliates was US$277.1 million, compared to a loss of US$1.5 million for the three months ending June 30, 2012. The increase is primarily due to increases in the fair value of portfolio investments primarily under Fund VII, Fund VI, SOMA and COF I, which generated higher carried interest income compared to same quarter last year. The increase in carried interest income was partially offset by Fund V and CLOs, which had carried interest income of US$50.1 million and US$14.1 million, respectively, in the three months ended June 30, 2013. This is a decline from the same period a year earlier.

Exhibit 50: Revenue break-up

Revenue Break-Up ($ in mm)

696

309

(1,480)

646777

212

712

1,159 1,309

497

(2,000)

(1,750)

(1,500)

(1,250)

(1,000)

(750)

(500)

(250)

0

250

500

750

1,000

1,250

1,500

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13

Advisory & transaction fees Management fees Carried interest income (loss)

Revenue Break-Up (June 2013)

Advisory &

transaction fees

, 13%

Management

fees , 31%

Carried interest

income (loss),

56%




Exhibit 51: Revenue contribution by segments

Private Equity, 83%

Credit, 16%

Real Estate, 1%

Revenue Contribution by Segment (Dec 2012)

Private Equity, 66%

Credit, 33%

Real Estate, 2%

Revenue Contribution by Segment (June 2013)


Economic Net Income (ENI): ENI is the key performance measure used by Apollo’s management in evaluating the performance of each segment. ENI is a profitability measure that excludes certain items to calculate net income following US GAAP rules. A few items Apollo excludes in calculating ENI are (1) non-cash charges related to RSUs granted in connection with the 2007 private placement and amortization of Apollo Operating Group units; (2) income tax expense; (3) amortization of intangibles associated with the 2007 reorganization as well as acquisitions; (4) Non-Controlling Interests, excluding the remaining interest held by certain individuals who receive an allocation of income from certain of its credit management companies. Further, the ENI of each segment excludes the assets, liabilities and operating results of the funds and VIEs that are included in the condensed consolidated financial statements.

For the three months ending June 30, 2013, total ENI increased to US$241.3 million from ENI of US$42 million during three months ending June 30, 2012. The increase is primarily due to favorable performance in Apollo's management and incentive businesses. The increase in ENI for the incentive business was largely the result of higher carried interest income from Apollo's private equity and credit segments during the second quarter of 2013 compared to the same period in 2012.

On a segment basis, historically the majority of the ENI comes from the Private Equity segment, which accounted 73% of total ENI with US$176.8 million for the quarter ending June 30, 2013. In the same period, Credit segment accounted approximately 27% of Apollo’s total ENI, with US$66.5 million. The Real Estate segment had an economic net loss of US$1.8 million during the quarter.



Exhibit 52: Economic Net Income

Economic Net Income ($ in mm)

241

792697

377

125

(1,159)

357462

42

433

(1500)

(1000)

(500)

0

500

1000

Mar

-11

Jun

e-1

1

Sep

-11

De

c-1

1

Mar

-12

Jun

e-1

2

Sep

-12

De

c-1

2

Mar

-13

Jun

-13


ENI After Tax Per Share

0.99

0.31

-2.89

0.81.1

0.05

0.98

1.691.89

0.50

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0

2.0

3.0

Mar

-11

Jun

e-1

1

Sep

-11

De

c-1

1

Mar

-12

Jun

e-1

2

Sep

-12

De

c-1

2

Mar

-13

Jun

-13


Cash distributions: Since 2011, Apollo has distributed an average quarterly dividend of US$0.49 per Class A share. For the quarter ending June 30, 2013, Apollo made a quarterly cash distribution of US$1.32 per Class A share, which includes a regular distribution of US$0.07 per Class A share and a quarterly distribution of $1.25 per Class A share.

Exhibit 53: Distributions ($ per Class A share)

$0.05 $0.07 $0.07 $0.07

$0.17$0.22 $0.24

$0.20

$0.46

$0.25

$0.40

$1.05

$0.57

$1.32

$0.24

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

De

c-0

9

Mar

-10

Jun

e-1

0

Sep

-10

De

c-1

0

Mar

-11

Jun

e-1

1

Sep

-11

De

c-1

1

Mar

-12

Jun

e-1

2

Sep

-12

De

c-1

2

Mar

-13

Jun

-13


Organization structure Apollo Global Management LLC (Apollo) is a holding company listed on NYSE. The company’s primary assets are 100% of the general partner interests in the Apollo Operating Group. Apollo owns 38% of economic interests in Apollo Operating Group through three intermediate holding companies. The remaining 62% of economic interests in Apollo Operating Group are held by AP Professional Holdings L.P., which is indirectly owned by managing partners and contributing partners. Principal operations are conducted through



Apollo Operating Group. Apollo operates and controls all the businesses and affairs of Apollo Operating Group through its wholly owned general partners.

The following chart depicts simplified organization structure of Apollo and its managing partners.

Exhibit 54: Organization structure

70.49% of Total Voting Power 11.73% of LP

Units

Managing Partners

BRH Holdings

L.P.

AGM Management

LLC (Our

Contributing Partners

Class A Shareholders

(Class A

BRH Holdings GP. Ltd. (Class B

share)

Apollo Global Management, LLC (38.01% of Apollo Operating Group Units)

APO Asset Co., LLC

APO (FC), LLC APO Corp.

AP Professional Holdings

L.P.(61.99% of

Apollo Operating

Apollo Operating Group

38.01% of the LP Units of Certain Apollo Operating Group Entities



GP

GP

88.27% of LP Units

29.51% of Total Voting Power

Source: Company Reports



Share structure Class A shares were issued to the public through an initial public offering (IPO) in April 2011 and are publicly traded on the New York Stock Exchange. These shares provide economic interest, i.e., pay dividends out of the holding company. In addition, Class A shareholders (excluding strategic investors) are entitled to one vote per share. Strategic Investors, who hold 31.73% of the total Class A shares, do not have voting rights. Class B shares issued to BRH Holdings GP Ltd., a general partner holdings owned and controlled by managing partners. They have no economic rights, i.e., holders of Class B shares do not receive dividends and do not have liquidation rights. Class B shares provide the partners with a voting interest in the management company.

Economic interest: Class A shares represent 38.01% of economic interests in Apollo Operating Group. Strategic Investors holding Class A shares represent 16.31% (16.6% at the time of IPO) of economic interests and the remaining 21.69% of economic interests are represented by the Class A shareholders other than Strategic investors. Class A shares are entitled to 100% of any distribution declared by the board of directors for Apollo Global Management LLC.

Voting rights: Holders of Class A shares (other than the strategic investors and their affiliates, who have no voting rights) and holders of Class B shares vote together as a single class on all matters submitted to shareholders for their vote approval. The Class A shares (other than those of the strategic investors) hold 29.51% of combined voting power and Class B shares have 70.49% of combined voting power as of June 30, 2013. Thus, the managing partners are on par with public shareholders as they hold majority voting rights and indirect ownership of 54.72% in Apollo (the remaining 7.27% of beneficial ownership is with the contributing partners).



Management Team Exhibit 55: Management team

Name Age Title Background

Leon Black 61 Chairman, Chief Executive Officer and Director

Mr. Leon Black is Apollo’s Chairman of the Board of Directors and Chief Executive Officer. He is also a Managing Partner of Apollo Management LP. Mr. Black founded Lion Advisors LP and Apollo Management LP in the year 1990. From 1977 to 1990, he held various positions at Drexel Burnham Lambert Incorporated, including Managing Director, head of the Mergers & Acquisitions Group and co-head of the Corporate Finance Department. At present, he is also serving as the general partner of AP Alternative Assets and is on the boards of directors of The New York City Partnership and Sirius XM Radio Inc. He graduated from Dartmouth College majoring in Philosophy and History in 1973. Mr. Black received an MBA from Harvard Business School in 1975.

Joshua Harris 48 Senior Managing Director and Director

Mr. Joshua Harris is serving as a Senior Managing Director and a member of the board of directors of Apollo. He is also the co-founder and Managing Partner of Apollo Management LP. Currently, Mr. Harris serves on the boards of directors of LyondellBasell Industries B.V, Momentive Performance Materials Holdings LLC, the holding company for Alcan Engineered Products, CEVA Group plc and Berry Plastics Group Inc. Before 1990, he was a member of the Mergers and Acquisitions Group of Drexel Burnham Lambert Incorporated. He attained a BS in Economics from the University of Pennsylvania’s Wharton School of Business and received his MBA from Harvard Business School.

Marc Rowan 50 Senior Managing Director and Director

Mr. Marc Rowan serves as a Senior Managing Director and member of the Board of Directors of Apollo. He is the co-founder and Managing Partner of Apollo Management LP. Before 1990, he took care of responsibilities including merger structure negotiation, high yield financing and transaction idea generation as a member of Drexel Burnham Lambert Incorporated’s Mergers & Acquisitions Group. At present, he is serving on the boards of directors for the following portfolio companies: Caesars Entertainment Corporation, Athene Holding Ltd. and Norwegian Cruise Lines. He completed his BS and MBA in Finance from the University of Pennsylvania’s Wharton School of Business. He holds 26 years of experience in financing, analyzing and investing in public and private companies.



Name Age Title Background

Marc Spilker 48 President Mr. Marc Spilker joined Apollo in 2010 as President. He joined Goldman Sachs in 1990 and held various positions, some of which include head of Fixed Income, Currency and Commodities in Japan (1997 to 2000), head of Global Alternative Asset Management (2006) and Chief Operating Officer (2007). After 20 years at Goldman Sachs, he was the co-head of the Investment Management Division and a member of the firm-wide Management Committee. He retired from Goldman Sachs in May 2010. Mr. Spilker graduated from the Wharton School of the University of Pennsylvania with a BS in Economics.

Martin Kelly 45 Chief Financial Officer Mr. Martin Kelly joined Apollo in 2012 as Chief Financial Officer. Prior to Apollo, he was with Barclays and Lehman Brothers (from 2000 to 2012) in various leadership roles, the most recent being Managing Director, Chief Financial Officer of the Americas and Global Head of Financial Control for the Corporate and Investment Bank. Before that, he worked with PricewaterhouseCoopers for 13 years and, from 1994 to 2004, he served in the Financial Services Group of PWC in New York. Mr. Kelly was made a partner of the firm in 1999. He attained a Bachelor of Commerce degree (major in finance and accounting) in 1989 from the University of New South Wales.

Barry Giarraputo 49 Chief Accounting Officer and Controller

Mr. Giarraputo joined Apollo as Chief Accounting Officer and Controller in 2006. Before that, he was serving as Senior Managing Director at Bear Stearns & Co. for over nine years. Prior to that, for over 12 years Mr. Barry Giarraputo was with the accounting and auditing firm of PricewaterhouseCoopers LLP. As a member of its Audit and Business Services Group, he was responsible for various capital markets clients. He graduated with a BBA in Accountancy from Baruch College in 1985.

John Suydam 52 Chief Legal Officer and Chief Compliance Officer

Mr. Suydam joined Apollo as Chief Legal Officer and Chief Compliance Officer in 2006. Prior to that, from 2002 through 2006, he was head of Mergers & Acquisitions and co-head of the Corporate Department at O’Melveny & Myers LLP. Before that, he was with law firm O’Sullivan LLP as chairman and was responsible for representing private equity investors. Currently, he is also serving on the board of the Environmental Solutions Worldwide Inc. and the Big Apple Circus. He completed his JD from New York University and graduated from the State University of New York at Albany with a BA in History.



Valuation Framework We value Apollo Global Management, LLC using a “one plus a half methodology”, which is a deviation from the valuation approach we have used for traditional asset managers. Under this method, earnings derived from fee-based earnings (asset management fees) are valued using a peer traditional asset management multiple, while earnings attributed to incentive income (performance fees) are valued a 50% discount to peer traditional asset management multiples.

Management fees earned by Apollo are higher than those earned by traditional long-only fund managers, justifying a premium to peer P/E multiples. However, we are not applying a premium to the peer multiple to value fee-based earnings. As for incentive income, we apply a 50% discount to earnings related to incentive income. We believe a discount is justified as performance fees are more volatile than fee-based earnings and difficult to project.

Our price target for Apollo Global Management LLC Class A shares is $35. We arrive at our price target using a price-to-earnings multiple of 18.0x on 2014 estimated fee-based earnings of $0.85 per share. We value earnings based on management fees at $15.39.

Moreover, we value incentive income based on a price-to-earnings multiple of 9.0x and 2014 estimated incentive income EPS of $2.20. The multiple of 9.0x represents a 50% discount to the fee-based earnings multiple. We value earnings based on incentive income at $19.84 per share. The sum of the two valuations leads us to our price target of $35 for Apollo Global Management, LLC.

Exhibit 56: Price target based on one-plus-a-half-methodology

Valuation2014 Management Fee EPS $0.85P/E Multiple 18.0xPer Share $15.39

2014 Incentive Income EPS $2.20P/E Multiple 9.0xPer Share $19.84

Price Target $35


Our $35 base case scenario valuation is based on these 2014 assumptions: weighted average portfolio returns of 12% in Private Equity; weighted average portfolio returns of 11.0% in Credit; weighted average portfolio returns of 10.0% in Real Estate.

Our upside scenario results in $0.85 in management fee earnings per share and $2.87 in incentive income earnings per share. We are applying a P/E multiple of 19.0x to management fee earnings and 9.5x to incentive income earnings to arrive at our $43 upside valuation.

The 2014 assumptions for our upside scenario are as follows: weighted average portfolio returns of 15.7% in Private Equity; weighted average portfolio returns of 13.2% in Credit; weighted average portfolio returns of 13.0% in Real Estate.



Exhibit 57: Upside scenario based on one-plus-a-half-methodology



Price Target $43


Our downside scenario results in $0.85 in management fee earnings per share and $1.62 in incentive income earnings per share. We are applying a P/E multiple of 14x to management fee earnings and 7x to incentive income earnings to arrive at our $23 downside valuation. The downside P/E multiple reflects a sell-off in the markets due to concerns about the economy.

The 2014 assumptions for our downside scenario are as follows: Weighted average portfolio returns of 8.4% in Private Equity; weighted average portfolio returns of 9.9% in Credit; weighted average portfolio returns of 5.0% in Real Estate.

Exhibit 58: Downside scenario based on one-plus-a-half-methodology



Price Target $23




Risks and Price Target Impediments Weaker-than-expected realizations could lead to a shortfall in distributable earnings Apollo, like other alternative asset managers, derives a large portion of its earnings from realizations. Investors in the common shares of publicly traded companies prefer to invest in firms that are in the “harvesting” period and can generate strong cash earnings and dividends. Given the significant holding of publicly traded portfolio companies, investor expectations for realizations are high.

Adverse capital market and economic conditions could impact Apollo’s earnings Declining equity markets could lead to lower than expected realization activity as exit opportunities would be subdued. This would lead to a potential shortfall in distributions and lower incentive income. Apollo earns management fees based on fee-based assets under management. A decline in the value of assets under management could lead to lower management fee revenues and earnings. Apollo relies on debt financing for potential acquisitions. An inability to obtain committed debt financing or an increase in interest rates could lead to declining investment returns and earnings. Likewise, portfolio companies’ difficulties in tapping the debt market for financing could lead to subpar operating results. This, in turn, would lead to lower valuations and earnings.

Weak investment performance could impact earnings and result in declining assets under management Weaker than expected fund performance could lead to netting holes, lower incentive fees and potentially, to clawbacks. A majority of the funds have to meet certain investment return thresholds before the company can earn any carry and incentive income. Furthermore, investors could reduce their investments and redeem assets if performance does not meet their return requirement. Lower AUM will lead to lower fee-based earnings. Weak fund performance could also make future fund-raising efforts more difficult.

Changes in the tax code could negatively impact the company’s share Changes to the US federal tax law could have a negative impact on the share price. Currently, carried interest is treated as a capital gain and not ordinary income. If carried interest income were to be treated as ordinary fee income, the company’s share price could be negatively impacted as this would affect dividends.

Key person risk Retention of the company’s founder such as Leon Black, Marc Rowan and Josh Harris, and other key senior managing directors is important to Apollo. A departure of key personnel and loss of their services could have an adverse impact on the company’s ability to raise and retain capital. Departure of the company’s principals could also lead to the departure of highly qualified employees. Several funds have “key person” provisions, which provide investors with the right to redeem their investments should a senior employee (other than the principals) leave the firm. A loss of a key person could negatively affect fund performance.



Appendix 1: Portfolio companies as of December 31, 2012 Company Initial Investment Fund (s) Buyout Type Industry Region

EP Energy LLC 2012 Fund VII & ANRP Corporate Carve-outs Oil & Gas, North America

Great Wolf Resorts 2012 Fund VII Opportunistic Buyouts Media, Entertainment & Cable

North America

Pinnacle - Jimmy Sanders 2012 Fund VII & ANRP Opportunistic Buyouts Agriculture North America

Talos 2012 Fund VII & ANRP Opportunistic Buyouts Oil & Gas North America

Taminco 2012 Fund VII Opportunistic Buyouts Chemicals Western Europe

Ascometal 2011 Fund VII & ANRP Corporate Carve-outs Materials Western Europe

Brit Insurance 2011 Fund VII Opportunistic Buyouts Insurance Western Europe

CORE Media Group (formerly CKx) 2011 Fund VII Opportunistic Buyouts Media, Entertainment & Cable

North America

Sprouts Farmers Markets 2011 Fund VI Corporate Carve-outs Food Retail North America

Welspun 2011 Fund VII & ANRP Opportunistic Buyouts Materials India

Aleris International 2010 Fund VII & VI Distressed Buyouts Building Products Global

Athlon 2010 Fund VII Opportunistic Buyouts Oil & Gas North America

CKE Restaurants Inc. 2010 Fund VII Opportunistic Buyouts Food Retail North America

Constellium (formerly Alcan) 2010 Fund VII Corporate Carve-outs Materials Western Europe

EVERTEC 2010 Fund VII Corporate Carve-outs Financial Services Puerto Rico

Gala Coral Group 2010 Fund VII & VI Distressed Buyouts Gaming & Leisure Western Europe

LyondellBasell 2010 Fund VII & VI Distressed Buyouts Chemicals Global

Monier 2010 Fund VII Distressed Buyouts Building Products Western Europe

Veritable Maritime 2010 Fund VII Opportunistic Buyouts Shipping North America

Charter Communications 2009 Fund VII & VI Distressed Buyouts Media, Entertainment & Cable

North America

Dish TV 2009 Fund VII Opportunistic Buyouts Media, Entertainment & Cable

India

Caesars Entertainment 2008 Fund VI Opportunistic Buyouts Gaming & Leisure North America

Norwegian Cruise Line 2008 Fund VI Opportunistic Buyouts Cruise North America

Claire’s 2007 Fund VI Opportunistic Buyouts Specialty Retail Global

Countrywide 2007 Fund VI Opportunistic Buyouts Real Estate Services Western Europe

Jacuzzi Brands 2007 Fund VI Opportunistic Buyouts Building Products Global

Noranda Aluminum 2007 Fund VI Corporate Carve-outs Materials North America

Prestige Cruise Holdings 2007 Fund VII & VI Opportunistic Buyouts Cruise North America

Realogy 2007 Fund VI Opportunistic Buyouts Real Estate Services North America

Vantium 2007 Fund VII Other Investments Business Services North America

Berry Plastics(1) 2006 Fund VI & V Corporate Carve-outs Packaging & Materials North America

CEVA Logistics(2) 2006 Fund VI Corporate Carve-outs Logistics Western Europe

Rexnord(3) 2006 Fund VI Opportunistic Buyouts Diversified Industrial North America

SourceHOV(4) 2006 Fund V Opportunistic Buyouts Financial Services North America

Verso Paper 2006 Fund VI Corporate Carve-outs Paper Products North America

Affinion Group 2005 Fund V Corporate Carve-outs Financial Services North America

Metals USA 2005 Fund V Opportunistic Buyouts Distribution & Transportation

North America

PLASE Capital 2003 Fund V Opportunistic Buyouts Financial Services North America

Momentive Performance Materials 2000/2004/2006 Fund IV, V & VI Corporate Carve-outs Chemicals North America

Quality Distribution 1998 Fund III Opportunistic Buyouts Distribution & Transportation

North America

Debt Investment Vehicles - Fund VII Various Fund VII Debt Investments Various Various

Debt Investment Vehicles - Fund VI Various Fund VI Debt Investments Various Various

Debt Investment Vehicles - Fund V Various Fund V Debt Investments Various Various




Appendix 2: Largest investments across Private Equity (2Q13) Estimated Portfolio Company Name Capital at Work Remaining Value

Prestige $880 $781

Momentive Performance Materials(2) 808 1,254

EP Energy 808 1,054

Norwegian Cruise Line 731 1,772

LyondellBasell Industries(1) 473 473

Claire’s Stores(2) 436 734

Realogy(3) 410 965

Athlon Energy 330 781

Taminco 301 833

Rexnord 231 812

Berry Plastics Group 190 1,134

Sprouts 137 655

(1) Includes all current investments in LyondellBasell across Fund VI and VII calculated by tracking all related cash flows (2) Investment is comprised of both debt and equity positions (3) Exited investment in July 2013 Source: Company reports; RBC Capital Markets



Appendix 3: Our understanding of the Athene Relationship Unaffiliated General

Partner (55%

ownership)

Apollo Principal

Holdings III (Affiliate

of Apollo - 45%)

Apollo Global

Management

AAA MIP Limited

Holds 100% of

general partners

interest; effectively

managing AAA

Investments

business and affairs

Apollo Principal

Holdings III (Affiliate

of Apollo - 45%)

Unaffiliated General

Partner (55%

ownership)

AAA Associates LP Apollo Alternative

Assets LP

(Implements

investment policies

and procedures) Holds 100% of

general partners

interest

Manages daily affairs AAA Guernsey Limited

(Managing General

Partner

AAA Investments LP AAA holds 100% of

limited partnership

interest

AP Alternative Assets

(NYSE Euronext: AAA)

Holders of Common

Units (Limited

Partners)

Through AAA

Investments LP, AP

Alternative Assets

and AAA Associates

make investment

decision

Capital is deployed

through Apollo Life Re

Ltd. , which owns the

majority of Athene's

equity

Apollo Life Re Ltd (an

Apollo-sponsored

vehicle that owns 73%

of Athene's equity)

An Apollo-sponsored

entity that owns the

majority of equity in

Athene Holding Ltd.

Athene Holding Ltd -

direct or indirect

parent of:

Athene Asset

Management LLC

(investment manager)

Athne Life Re Ltd.

(focused on fixed

annuity reinsurance

sector)

Athene Annuity & Life

Assurance Company

(focused on retail

sales and reinsurance

in the retirement

services market)

Athene Life Insurance

Company (focused on

funding agreement

backed note and

funding agreement

markets)

Presidential Life

Corporation (focused

on selling fixed

annuity products

principally in New

York through

Presidential Life

Insurance Company)

Aviva USA

Corporation (focused

on selling fixed

annuity and life

insurance products

through Aviva Life and

Annuity Company

(Iowa-domiciled) and

Aviva Life & Annuity

Company of New

York)


Apollo Global Management’s subsidiary Apollo Alternative Assets LP manages AP Alternative Assets and AAA Investments LP’s day-to-day operations.

Apollo Global Management also has a 45% ownership in AAA MIP Limited, which is the general partner to AAA Associates LP and effectively manages AAA Investments LP’s business and affairs.

Apollo Global Management also as a 45% ownership in AAA Guernsey Limited, which is the general partner to AP Alternative Assets, and, as such, manages the business and affairs of AP Alternative Assets (“AAA”).

AP Alternative Assets makes investments (puts money to work) through AAA Investments. However, capital is deployed through Apollo Life Re Ltd. This vehicle owns 73% of Athene’s equity.



Source: Company filings; RBC Capital Markets Estimate

($ in millions) 1QA 2QA 3QE 4QE 1QE 2QE 3QE 4QE 2012A 2013E 2014E

Management Business

Advisory and transaction fees from affiliates $47.4 $65.1 $56.8 $59.8 $60.2 $56.9 $57.6 $58.3 $150.0 $229.1 $232.9

Management fees from affiliates 164.3 169.3 167.8 200.5 201.5 202.5 203.6 204.6 623.0 701.9 812.2

Carried interest income from affiliates:

Realized gains 9.0 10.1 10.2 10.2 10.3 10.3 10.4 10.4 37.8 39.5 41.3

Total management business revenues $220.7 $244.5 $234.7 $270.6 $272.0 $269.7 $271.5 $273.3 $810.8 $970.5 $1,086.5

Equity-based compensation $17.4 $16.8 $17.6 $18.5 $19.5 $20.6 $21.8 $23.1 $68.9 $70.4 $85.0

Salary, bonus and benefits 73.4 69.3 70.8 67.8 70.1 67.7 68.3 68.9 274.6 281.3 274.9

Total compensation based expenses $90.8 $86.1 $88.4 $86.4 $89.6 $88.3 $90.1 $92.0 $343.5 $351.7 $360.0

Total non-compensation expenses $67.6 $71.3 $79.1 $82.8 $83.1 $82.9 $83.7 $84.5 256.6 300.5 334.2

Total management business expenses $158.4 $157.4 $167.5 $169.2 $172.7 $171.3 $173.8 $176.5 $600.1 $652.2 $694.2

Other income (loss) 7.2 5.2 5.3 5.3 5.4 5.4 5.5 5.5 21.0 23.0 21.8

Non-controlling interest (3.5) (3.2) (3.2) (3.2) (3.2) (3.2) (3.2) (3.2) (8.7) (13.1) (12.8)

Management Business Economic Net Income $66.0 $89.1 $69.3 $103.4 $101.4 $100.7 $100.0 $99.1 $223.0 $328.1 $401.2

Incentive Business


Unrealized gains (losses) $771.4 ($574.9) ($78.3) ($123.0) ($145.2) ($138.6) ($114.2) ($97.2) $1,166.4 ($4.8) ($495.2)

Realized gains 345.2 840.5 542.8 545.7 575.8 575.4 552.8 539.0 997.2 2,274.2 2,243.0

Total carried interest income (loss) $1,116.6 $265.6 $464.5 $422.7 $430.6 $436.8 $438.6 $441.8 $2,163.6 $2,269.4 $1,747.8

Profit sharing expense

Unrealized profit sharing expense $272.8 ($219.6) ($32.6) ($52.7) ($62.7) ($59.7) ($48.7) ($41.1) $426.1 ($32.1) ($212.2)

Realized profit sharing expense 150.8 343.8 239.2 240.7 254.5 254.6 244.6 238.6 445.4 974.5 992.3

Total profit sharing expense $423.6 $124.2 $206.6 $188.0 $191.8 $194.9 $195.9 $197.6 $871.5 $942.4 $780.1

Incentive fee compensation $0.0 $3.0 $3.0 $3.0 $3.0 $3.0 $3.0 $3.0 $0.7 $9.0 $12.0

Other income, net - 0.2 - - - - - - - 0.2 -

Net gains (losses) from investment activities 4.0 (5.7) (5.9) (6.0) (6.2) (6.4) (6.6) (6.8) (1.1) (13.6) (26.1)

Income (loss) from equity method investments 29.4 19.3 35.4 22.0 24.5 26.2 26.4 28.2 121.2 106.1 105.2

Other income (loss) $33.4 $13.8 $29.6 $15.9 $18.2 $19.8 $19.8 $21.3 $120.1 $92.7 $79.2

Incentive Business Economic Net Income (Loss) $726.4 $152.2 $284.5 $247.6 $254.0 $258.8 $259.5 $262.6 $1,411.5 $1,410.7 $1,034.8

Total Economic Net Income (Loss) $792.4 $241.3 $353.8 $351.0 $355.5 $359.5 $359.5 $361.7 $1,634.5 $1,738.8 $1,436.1

Income tax (provision) benefit on ENI (51.1) (43.5) (53.1) (52.7) (49.8) (50.3) (50.3) (50.6) (158.6) (200.3) (201.1)

Total Economic Net Income (Loss) After Taxes $741.3 $197.8 $300.7 $298.4 $305.7 $309.1 $309.1 $311.1 $1,475.9 $1,538.5 $1,235.0

Non-GAAP Weighted average diluted shares outstanding 392.1 393.8 395.9 398.4 401.0 402.6 404.2 406.9 386.2 395.1 403.7

Non-GAAP diluted shares outstanding (EOP) 393.3 395.5 396.3 400.6 401.4 403.8 404.6 409.1 392.6 396.4 404.7

Total ENI After Taxes per Share $1.89 $0.50 $0.76 $0.75 $0.76 $0.77 $0.76 $0.76 $3.82 $3.89 $3.06

Total fee based earnings $62.7 $81.3 $61.3 $95.5 $87.2 $86.6 $86.0 $85.3 $201.4 $290.3 $345.1

Fee based earnings per share $0.16 $0.21 $0.15 $0.24 $0.22 $0.22 $0.21 $0.21 $0.52 $0.73 $0.85

Incentive income per share $1.73 $0.30 $0.60 $0.51 $0.54 $0.55 $0.55 $0.56 $3.30 $3.16 $2.20

Total distributable earnings $280.7 $605.5 $396.6 $433.0 $445.1 $445.1 $432.9 $425.5 $855.2 $1,715.9 $1,748.6

Distributable earnings per share $0.71 $1.51 $1.00 $1.08 $1.11 $1.10 $1.07 $1.04 $2.18 $4.33 $4.32

Distributions $0.57 $1.32 $0.90 $1.08 $1.00 $0.99 $0.96 $0.94 $1.94 $3.87 $3.89

Income Statement Driver

Income tax provision on ENI - rate 6.4% 18.0% 15.0% 15.0% 14.0% 14.0% 14.0% 14.0% 9.7% 11.5% 14.0%

Asset Rollforward - Fee Earning Assets ($ in mm)

Beginning Balance $81,934 $81,633 $79,290 $79,933 $125,557 $126,724 $127,872 $129,034 $58,121 $81,934 $125,557

Income (Loss) 173 2,917 695 707 1,284 1,305 1,325 1,346 1,392 4,492 5,260

Subscriptions/Capital raised 1,079 1,084 918 915 1,704 1,700 1,696 1,691 5,873 3,996 6,791

Other inflows/Acquisitions - - - 45,000 - - - - 21,276 45,000 -

Distributions (911) (4,298) (1,734) (1,764) (2,685) (2,722) (2,725) (2,741) (3,728) (8,706) (10,873)

Redemptions (370) (340) - - - - - - (908) (710) -

Net segment transfers - - - - - - - - - - -

Net movement between fee gen. to non-fee gen. 165 256 - - - - - - (565) 421 -

Leverage (437) (1,962) 764 766 863 865 867 868 473 (869) 3,464

Ending Balance $81,633 $79,290 $79,933 $125,557 $126,724 $127,872 $129,034 $130,199 $81,934 $125,557 $130,199

Asset Rollforward - Total Assets ($ in mm)

Beginning Balance $113,379 $114,269 $113,116 $113,869 $159,600 $160,840 $162,059 $163,291 $75,222 $113,379 $159,600

Income (Loss) 4,057 2,273 970 984 1,562 1,584 1,606 1,627 12,039 8,284 6,379

Subscriptions/Capital raised 1,200 6,926 947 943 1,752 1,748 1,744 1,739 6,643 10,017 6,983

Other inflows/Acquisitions - - - 45,000 - - - - 23,629 45,000 -

Distributions (3,396) (7,186) (2,164) (2,196) (3,075) (3,113) (3,117) (3,134) (10,858) (14,943) (12,439)

Redemptions (353) (665) - - - - - - (1,222) (1,018) -

Net movement between fee gen. to non-fee gen. - - - - - - - - - - -

Leverage (618) (2,505) 1,000 1,000 1,000 1,000 1,000 1,000 4,880 (1,123) 4,000

Adjustments - 4 - - - - - - 3,046 4 -

Ending Balance $114,269 $113,116 $113,869 $159,600 $160,840 $162,059 $163,291 $164,523 $113,379 $159,600 $164,523

2013 2014



Required DisclosuresConflicts DisclosuresThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generatedby investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza,29th Floor, South Tower, Toronto, Ontario M5J 2W7.

RBC Capital Markets, LLC makes a market in the securities of Apollo Global Management, LLC.

A partner, director or officer of a member company of RBC Capital Markets or one of its affiliates, or an analyst involved in thepreparation of a report on Apollo Global Management, LLC has, during the preceding 12 months, provided services for ApolloGlobal Management, LLC for remuneration other than normal course investment advisory or trade execution services.

The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.

Explanation of RBC Capital Markets Equity Rating SystemAn analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assignedto a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative tothe analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), andUnderperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same becauseour ratings are determined on a relative basis.RatingsTop Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 monthswith a favorable risk-reward ratio.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk RatingAs of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflectsa security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limitedoperating history that result in a higher expectation of financial and/or stock price volatility.

Distribution of RatingsFor the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,the meanings are not the same because our ratings are determined on a relative basis (as described above).

Distribution of Ratings

RBC Capital Markets, Equity Research

As of 30-Sep-2013

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 769 51.00 271 35.24

HOLD [Sector Perform] 656 43.50 179 27.29

SELL [Underperform] 83 5.50 13 15.66



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References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists includea former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap(RL 7), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL 9), the Guided Portfolio: ADR (RL 10),and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus Listand the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on aRecommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List.

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of a subject company that is considered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buyingopportunity as a result of temporary selling pressure in the market; conversely, the security of a subject company that is rateda long-term 'Outperform' could be considered susceptible to a short-term downward price correction. Short-Term Trade Ideasare not ratings, nor are they part of any ratings system, and RBC Capital Markets generally does not intend, nor undertakes anyobligation, to maintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for allinvestors and have not been tailored to individual investor circumstances and objectives, and investors should make their ownindependent decisions regarding any Short-Term Trade Ideas discussed therein.

Analyst CertificationAll of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all ofthe subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial ServicesLLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or impliedwarranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warrantiesof originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing,in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special,punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Disclaimer

RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBCCapital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, SydneyBranch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty,express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. Allopinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice andare provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investmentadvice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives ofpersons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independentinvestment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buyany securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC CapitalMarkets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment bankingrevenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and otherinvestment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not beeligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicableindustry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report isnot, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is notlegally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets norany of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the informationcontained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets.

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