Apollo Global Management
Annual Report 2013

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K (Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012 OR (cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number: 001-35107 APOLLO GLOBAL MANAGEMENT, LLC (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 20-8880053 (I.R.S. Employer Identification No.) 9 West 57th Street, 43rd Floor New York, New York 10019 (Address of principal executive offices) (Zip Code) (212) 515-3200 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Class A shares representing limited liability company interests Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities. Yes  No (cid:3) Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:3) No  Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No (cid:3) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No (cid:3) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer  (cid:3) (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company (cid:3) (cid:3) Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:3) No  As of June 30, 2012, the aggregate market value of 43,086,687 Class A shares held by non-affiliates was approximately $741 million. As of March 1, 2013, there were 132,139,856 Class A shares and 1 Class B share outstanding. DOCUMENTS INCORPORATED BY REFERENCE None Table of Contents TABLE OF CONTENTS PART I ITEM 1. BUSINESS ITEM 1A. RISK FACTORS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. MINE SAFETY DISCLOSURES PART II ITEM 5. EQUITY SECURITIES MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES ITEM 9B. OTHER INFORMATION PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES SIGNATURES -2- Page 7 26 64 64 64 66 67 70 73 149 154 240 240 241 242 248 261 263 273 274 278 Table of Contents Forward-Looking Statements This report may contain forward looking statements that are within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, discussions related to Apollo’s expectations regarding the performance of its business, its liquidity and capital resources and the other non-historical statements in the discussion and analysis. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this report, the words “believe,” “anticipate,” “estimate,” “expect,” “intend” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to certain risks, uncertainties and assumptions, including risks relating to our dependence on certain key personnel, our ability to raise new private equity, credit or real estate funds, market conditions generally, our ability to manage our growth, fund performance, changes in our regulatory environment and tax status, the variability of our revenues, net income and cash flow, our use of leverage to finance our businesses and investments by our funds and litigation risks, among others. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in this report; as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this release and in other filings. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law. Terms Used in This Report In this report, references to “Apollo,” “we,” “us,” “our” and the “Company” refer collectively to Apollo Global Management, LLC, a Delaware limited liability company, and its subsidiaries, including the Apollo Operating Group and all of its subsidiaries. “AMH” refers to Apollo Management Holdings, L.P., a Delaware limited partnership owned by APO Corp. and Holdings; “Apollo funds” and “our funds” refer to the funds, alternative asset companies and other entities that are managed by the Apollo Operating Group; “Apollo Operating Group” refers to (i) the limited partnerships through which our Managing Partners currently operate our businesses and (ii) one or more limited partnerships formed for the purpose of, among other activities, holding certain of our gains or losses on our principal investments in the funds, which we refer to as our “principal investments”; “Assets Under Management,” or “AUM,” refers to the investments we manage or with respect to which we have control, including capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of: (i) (ii) the fair value of our private equity investments plus the capital that we are entitled to call from our investors pursuant to the terms of their capital commitments plus non-recallable capital to the extent a fund is within the commitment period in which management fees are calculated based on total commitments to the fund; the net asset value, or “NAV,” of our credit funds, other than certain collateralized loan obligations (“CLOs”) (such as Apollo Artus Investors 2007-I, L.P.), which we measure by using the mark-to-market value of the aggregate principal amount of the underlying CLO and collateralized debt obligation (“CDO”) credit funds that have a -3- Table of Contents fee generating basis other than mark-to-market asset, plus used or available leverage and/or capital commitments; (iii) the gross asset value or net asset value of our real estate entities and the structured portfolio company investments included within the funds we manage, which includes the leverage used by such structured portfolio companies; (iv) the incremental value associated with the reinsurance investments of the portfolio company assets that we manage; and (v) the fair value of any other investments that we manage plus unused credit facilities, including capital commitments for investments that may require pre-qualification before investment plus any other capital commitments available for investment that are not otherwise included in the clauses above. Our AUM measure includes Assets Under Management for which we charge either no or nominal fees. Our definition of AUM is not based on any definition of Assets Under Management contained in our operating agreement or in any of our Apollo fund management agreements. We consider multiple factors for determining what should be included in our definition of AUM. Such factors include but are not limited to (1) our ability to influence the investment decisions for existing and available assets; (2) our ability to generate income from the underlying assets in our funds; and (3) the AUM measures that we use internally or believe are used by other investment managers. Given the differences in the investment strategies and structures among other alternative investment managers, our calculation of AUM may differ from the calculations employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. Fee-generating AUM consists of assets that we manage and on which we earn management fees or monitoring fees pursuant to management agreements on a basis that varies among the Apollo funds. Management fees are normally based on “net asset value,” “gross assets,” “adjusted par asset value,” “adjusted cost of all unrealized portfolio investments,” “capital commitments,” “adjusted assets,” “stockholders’ equity,” “invested capital” or “capital contributions,” each as defined in the applicable management agreement. Monitoring fees, also referred to as advisory fees, generally are based on the total value of certain structured portfolio company investments, which normally includes leverage, less any portion of such total value that is already considered in fee-generating AUM. Non-fee generating AUM consists of assets that do not produce management fees or monitoring fees. These assets generally consist of the following: (i) fair value above invested capital for those funds that earn management fees based on invested capital; (ii) net asset values related to general partner and co-investment ownership; (iii) unused credit facilities; (iv) available commitments on those funds that generate management fees on invested capital; (v) structured portfolio company investments that do not generate monitoring fees; and (vi) the difference between gross assets and net asset value for those funds that earn management fees based on net asset value. We use non-fee generating AUM combined with fee-generating AUM as a performance measurement of our investment activities, as well as to monitor fund size in relation to professional resource and -4- Table of Contents infrastructure needs. Non-fee generating AUM includes assets on which we could earn carried interest income; “carried interest,” “carried interest income,” and “incentive income” refer to interests granted to Apollo by an Apollo fund that entitle Apollo to receive allocations, distributions or fees which are based on the performance of such fund or its underlying investments; “co-founded” means the individual joined Apollo in 1990, the year in which the Company commenced business operations; “Contributing Partners” refer to those of our partners (and their related parties) who indirectly own (through Holdings) Apollo Operating Group units; “feeder funds” refer to funds that operate by placing substantially all of their assets in, and conducting substantially all of their investment and trading activities through, a master fund, which is designed to facilitate collective investment by the participating feeder funds. With respect to certain of our funds that are organized in a master-feeder structure, the feeder funds are permitted to make investments outside the master fund when deemed appropriate by the fund’s investment manager; “gross IRR” of a fund represents the cumulative investment-related cash flows for all of the investors in the fund on the basis of the actual timing of investment inflows and outflows (for unrealized investments assuming disposition on December 31, 2012 or other date specified) aggregated on a gross basis quarterly, and the return is annualized and compounded before management fees, carried interest and certain other fund expenses (including interest incurred by the fund itself) and measures the returns on the fund’s investments as a whole without regard to whether all of the returns would, if distributed, be payable to the fund’s investors; “Holdings” means AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership through which our Managing Partners and Contributing Partners hold their Apollo Operating Group units; “IRS” refers to the Internal Revenue Service; “Managing Partners” refer to Messrs. Leon Black, Joshua Harris and Marc Rowan collectively and, when used in reference to holdings of interests in Apollo or Holdings, includes certain related parties of such individuals; “net IRR” of a fund means the gross IRR applicable to all investors, including related parties which may not pay fees, net of management fees, organizational expenses, transaction costs, and certain other fund expenses (including interest incurred by the fund itself) and realized and the estimated unrealized value is adjusted such that a percentage of up to 20.0% of the unrealized gain is allocated to the general partner, thereby reducing the balance attributable to fund investors carried interest all offset to the extent of interest income, and measures returns based on amounts that, if distributed, would be paid to investors of the fund; to the extent that an Apollo private equity fund exceeds all requirements detailed within the applicable fund agreement; “net return” represents the calculated return that is based on month-to-month changes in net assets and is calculated using the returns that have been geometrically linked based on capital contributions, distributions and dividend reinvestments, as applicable; “our manager” means AGM Management, LLC, a Delaware limited liability company that is controlled by our Managing Partners; “permanent capital” means capital of funds that do not have redemption provisions or a requirement to return capital to investors upon exiting the investments made with such capital, except as required by applicable law, such as AP Alternative Assets, L.P., Apollo Investment Corporation, Apollo Commercial -5- Table of Contents Real Estate Finance, Inc., Apollo Residential Mortgage, Inc. and Apollo Senior Floating Rate Fund Inc.; such funds may be required, or elect, to return all or a portion of capital gains and investment income; “private equity investments” refers to (i) direct or indirect investments in existing and future private equity funds managed or sponsored by Apollo, (ii) direct or indirect co-investments with existing and future private equity funds managed or sponsored by Apollo, (iii) direct or indirect investments in securities which are not immediately capable of resale in a public market that Apollo identifies but does not pursue through its private equity funds, and (iv) investments of the type described in (i) through (iii) above made by Apollo funds; and “Strategic Investors” refers to the California Public Employees’ Retirement System, or “CalPERS,” and an affiliate of the Abu Dhabi Investment Authority, or “ADIA.” -6- Table of Contents PART I. ITEM 1. BUSINESS Overview Founded in 1990, Apollo is a leading global alternative investment manager. We are contrarian, value-oriented investors in private equity, credit and real estate, with significant distressed investment expertise. We have a flexible mandate in the majority of the funds we manage that enables the funds to invest opportunistically across a company’s capital structure. We raise, invest and manage funds on behalf of some of the world’s most prominent pension, endowment and sovereign wealth funds, as well as other institutional and individual investors. As of December 31, 2012, we had total AUM of $113 billion, including approximately $38 billion in private equity, $64 billion in credit and $9 billion in real estate. We have consistently produced attractive long-term investment returns in our private equity funds, generating a 39% gross IRR and a 25% net IRR on a compound annual basis from inception through December 31, 2012. Apollo is led by our Managing Partners, Leon Black, Joshua Harris and Marc Rowan, who have worked together for more than 22 years and lead a team of 634 employees, including 253 investment professionals, as of December 31, 2012. This team possesses a broad range of transaction, financial, managerial and investment skills. We have offices in New York, Los Angeles, Houston, London, Frankfurt, Luxembourg, Singapore, Hong Kong, and Mumbai. We operate our private equity, credit and real estate businesses in a highly integrated manner, which we believe distinguishes us from other alternative investment managers. Our investment professionals frequently collaborate across disciplines. We believe that this collaboration, including market insight, management, banking and consultant contacts, and investment opportunities, enables the funds we manage to more successfully invest across a company’s capital structure. This platform and the depth and experience of our investment team have enabled us to deliver strong long- term investment performance for our funds throughout a range of economic cycles. Our objective is to achieve superior long-term risk-adjusted returns for our fund investors. The majority of our investment funds are designed to invest capital over periods of seven or more years from inception, thereby allowing us to generate attractive long-term returns throughout economic cycles. Our investment approach is value-oriented, focusing on nine core industries in which we have considerable knowledge and experience, and emphasizing downside protection and the preservation of capital. Our core industry sectors cover chemicals, commodities, consumer and retail, distribution and transportation, financial and business services, manufacturing and industrial, media and cable and leisure, packaging and materials and the satellite and wireless industries. We are frequently contrarian in our investment approach, which is reflected in a number of ways, including: • • • • • our willingness to invest in industries that our competitors typically avoid; the often complex structures we employ in some of our investments, including our willingness to pursue difficult corporate carve-out transactions; our experience investing during periods of uncertainty or distress in the economy or financial markets when many of our competitors simply reduce their investment activity; our orientation towards sole sponsored transactions when other firms have opted to partner with others; and our willingness to undertake transactions that have substantial business, regulatory or legal complexity. We have applied this investment philosophy to identify what we believe are attractive investment opportunities, deploy capital across the balance sheet of industry leading, or “franchise,” businesses and create value throughout economic cycles. -7- Table of Contents We rely on our deep industry, credit and financial structuring experience, coupled with our strengths as value-oriented, distressed investors, to deploy significant amounts of new capital within challenging economic environments. As in prior market downturns and periods of significant volatility, in the recent environment our funds have purchased distressed securities and continue to opportunistically build positions in high quality companies with stressed balance sheets in industries where we have deep expertise. Our approach towards investing in distressed situations often requires our funds to purchase particular debt securities as prices are declining, since this allows us both to reduce our funds’ average cost and accumulate sizable positions which may enhance our ability to influence any restructuring plans and maximize the value of our funds’ distressed investments. As a result, our investment approach may produce negative short-term unrealized returns in certain of the funds we manage. However, we concentrate on generating attractive, long-term, risk-adjusted realized returns for our fund investors, and we therefore do not overly depend on short-term results and quarterly fluctuations in the unrealized fair value of the holdings in our funds. In addition to deploying capital in new investments, we seek to enhance value in the investment portfolios of the funds we manage. We have relied on our transaction, restructuring and credit experience to work proactively with our private equity funds’ portfolio company management teams to identify and execute strategic acquisitions, joint ventures, and other transactions, generate cost and working capital savings, reduce capital expenditures, and optimize capital structures through several means such as debt exchange offers and the purchase of portfolio company debt at discounts to par value. We had total AUM of $113.4 billion as of December 31, 2012, consisting of $37.8 billion in our private equity business, $64.4 billion in our credit business and $8.8 billion in our real estate business. We have grown our total AUM at a 39% compound annual growth rate from December 31, 2004 to December 31, 2012. In addition, we benefit from mandates with long-term capital commitments in our private equity, credit and real estate businesses. Our long-lived capital base allows us to invest assets with a long-term focus, which is an important component in generating attractive returns for our investors. We believe our long-term capital also leaves us well-positioned during economic downturns, when the fundraising environment for alternative assets has historically been more challenging than during periods of economic expansion. As of December 31, 2012, approximately 93% of our AUM was in funds with a contractual life at inception of seven years or more, and 10% of our AUM was in permanent capital vehicles with unlimited duration. We expect our growth in AUM to continue over time by seeking to create value in our funds’ existing private equity, credit and real estate investments, continuing to deploy our funds’ available capital in what we believe are attractive investment opportunities, and raising new funds and investment vehicles as market opportunities present themselves. See “Item 1A. Risk Factors—Risks Related to Our Businesses—We may not be successful in raising new funds or in raising more capital for certain of our funds and may face pressure on fee arrangements of our future funds.” Our financial results are highly variable, since carried interest (which generally constitutes a large portion of the income that we receive from the funds we manage), and the transaction and advisory fees that we receive, can vary significantly from quarter to quarter and year to year. We manage our business and monitor our performance with a focus on long-term performance, an approach that is generally consistent with the investment horizons of the funds we manage and is driven by the investment returns of our funds. Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act are made available free of charge on or through our website at www.agm.com as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. The information on our website is not, and shall not be deemed to be, part of this report or incorporated into any other filings we make with the SEC. -8- Table of Contents Our Businesses We have three business segments: private equity, credit and real estate. As part of our private equity segment, we also manage AP Alternative Assets, L.P. (“AAA”), a publicly listed permanent capital vehicle. The sole investment held by AAA is its interest in AAA Investments, L.P. (“AAA Investments”), which currently has substantially all of its capital invested through various subsidiaries in Athene Holding Ltd., a Bermuda holding company that was founded in 2009 to capitalize on favorable market conditions in the dislocated life insurance sector. In addition to AAA, we manage several strategic investment accounts (“SIAs”) established to facilitate investments by third-party investors directly in Apollo-sponsored funds and other transactions. We have also raised a dedicated natural resources fund, which we include within our private equity segment that targets global private equity opportunities in energy, metals and mining and select other natural resources sub-sectors. The diagram below summarizes our current businesses: (1) All data is as of December 31, 2012, except for certain publicly traded vehicles managed by Apollo for which data is presented as of September 30, 2012. Includes funds that are denominated in Euros and translated into U.S. dollars at an exchange rate of € 1.00 to $1.32 as of December 31, 2012. (2) Private Equity As a result of our long history of private equity investing across market cycles, we believe we have developed a unique set of skills which we rely on to make new investments and to maximize the value of our existing investments. As an example, through our experience with traditional private equity buyouts, which we refer to herein also as buyout equity, we apply a highly disciplined approach towards structuring and executing transactions, the key tenets of which include acquiring companies at below industry average purchase price multiples, and establishing flexible capital structures with long- term debt maturities and few, if any, financial maintenance covenants. We believe we have a demonstrated ability to adapt quickly to changing market environments and capitalize on market dislocations through our traditional, distressed and corporate buyout approach. In prior periods of strained financial liquidity and economic recession, our private equity funds have made -9- Table of Contents attractive investments by buying the debt of quality businesses (which we refer to as “classic” distressed debt), converting that debt to equity, seeking to create value through active participation with management and ultimately monetizing the investment. This combination of traditional and corporate buyout investing with a “distressed option” has been deployed through prior economic cycles and has allowed our funds to achieve attractive long-term rates of return in different economic and market environments. In addition, during prior economic downturns we have relied on our restructuring experience and worked closely with our funds’ portfolio companies to maximize the value of our funds’ investments. We seek to focus on investment opportunities where competition is limited or non-existent. We believe we are often sought out early in the investment process because of our industry expertise, willingness to pursue investments in complicated situations and ability to provide value-added advice to portfolio companies regarding operational improvements, acquisitions and strategic direction. We generally prefer sole sponsored transactions and since inception approximately 80% of the investments made by our private equity funds have been proprietary in nature. We believe that by emphasizing our proprietary sources of deal flow, our private equity funds will be able to acquire businesses at more compelling valuations which will ultimately create a more attractive risk/reward proposition. Distressed Buyouts and Debt Investments During periods of market dislocation and volatility, we rely on our credit and capital markets expertise to build positions in distressed debt. We target assets with high-quality operating businesses but low-quality balance sheets, consistent with our traditional buyout strategies. The distressed securities our funds purchase include bank debt, public high-yield debt and privately held instruments, often with significant downside protection in the form of a senior position in the capital structure, and in certain situations our funds also provide debtor-in-possession financing to companies in bankruptcy. Our investment professionals generate these distressed buyout and debt investment opportunities based on their many years of experience in the debt markets, and as such they are generally proprietary in nature. We believe distressed buyouts and debt investments represent a highly attractive risk/reward profile. Our funds’ investments in debt securities have generally resulted in two outcomes. The first and preferred potential outcome, which we refer to as a distressed for control investment, is when our funds are successful in taking control of a company through its investment in the distressed debt. By working proactively through the restructuring process, we are often able to equitize the debt position of our funds to create a well-financed buyout which would then typically be held for a three-to-five year period, similar to other traditional leveraged buyout transactions. The second potential outcome, which we refer to as a non-control distressed investment is when our funds do not gain control of the company. This typically occurs as a result of an increase in the price of the debt investments to levels which are higher than what we consider to be an attractive acquisition valuation. In these instances, we may forgo seeking control, and instead our funds may seek to sell the debt investments over time, typically generating a higher short-term IRR with a lower multiple of invested capital than in the case of a typical distressed for control transaction. We believe that we are a market leader in distressed investing and that this is one of the key areas that differentiates us from our peers. During the depths of the most recent financial crisis, we believe we were one of the most active market participants, with our funds acquiring over $39 billion of face value of debt investments from inception through December 31, 2012 in an array of distressed strategies whereby our funds purchased levered senior loans, effectuated distressed for control investments and bought back debt of the funds’ portfolio companies at significant discounts to par. Corporate Carve-outs Corporate partner buyouts or carve-out situations offer another way to capitalize on investment opportunities during environments in which purchase prices for control of companies are at high multiplies of earnings, making them less attractive for traditional buyout investors. Corporate partner buyouts focus on companies in need of a financial partner in order to consummate acquisitions, expand product lines, buy back stock or pay down debt. In these investments, our funds do not seek control but instead make significant investments that typically allow our funds to demand control rights similar to those that would be required in a traditional buyout, such as control over the direction of the business and ultimate exit. -10- Table of Contents Although corporate partner buyouts historically have not represented a large portion of our overall investment activity, we do engage in them selectively when we believe circumstances make them an attractive strategy. Corporate partner buyouts typically have lower purchase multiples and a significant amount of downside protection, when compared with traditional buyouts. Downside protection can come in the form of seniority in the capital structure, a guaranteed minimum return from a creditworthy partner, or extensive governance provisions. We have often been able to use our position as a preferred security holder in several buyouts to weather difficult times in a portfolio company’s lifecycle and to create significant value in investments that otherwise would have been impaired. Opportunistic Buyouts We have extensive experience completing leveraged buyouts across various market cycles. We take an opportunistic and disciplined approach to these transactions, generally avoiding highly competitive situations in favor of proprietary transactions where there may be opportunities to purchase a company at a discount to prevailing market averages. Oftentimes, we will focus 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. To further alter the risk/reward profile in our funds’ favor, we often focus 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. In the case of physical asset acquisitions, our private equity funds seek to acquire physical assets at discounts to where those assets trade in the financial markets, and to lock in that value arbitrage through comprehensive hedging and structural enhancements. We believe buyouts of non-correlated assets or businesses also represent attractive investments since they are generally less correlated to the broader economy and provide an element of diversification to our overall portfolio of private equity investments. In the case of more conventional buyouts, we seek investment opportunities where we believe our focus on complexity and sector expertise will provide us with a significant competitive advantage, whereby we can leverage our knowledge and experience from the nine core industries in which our investment professionals have historically invested private equity capital. We believe such knowledge and experience can result in our ability to find attractive opportunities for our funds to acquire portfolio company investments at lower purchase price multiples. Other Investments In addition to our opportunistic, distressed and corporate partner buyout activities, we also maintain the flexibility to deploy capital of our private equity funds in other types of investments such as the creation of new companies, which allows us to leverage our deep industry and distressed expertise and collaborate with experienced management teams to seek to capitalize on market opportunities that we have identified, particularly in asset- intensive industries that are in distress. In these types of situations, we have the ability to establish new entities that can acquire distressed assets at what we believe are attractive valuations without the burden of managing an existing portfolio of legacy assets. Similar to our corporate partner buyout activities, other investments, such as the creation of new companies, historically have not represented a large portion of our overall investment activities, although we do make these types of investments selectively. Natural Resources In 2011, Apollo established Apollo Natural Resources Partners, L.P. (together with its parallel funds and alternative investment vehicles, “ANRP”), and has assembled 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 -11- Table of Contents fundraising period during the fourth quarter of 2012, and had over $1.3 billion of committed capital as of December 31, 2012. AP Alternative Assets, L.P. AAA is a Guernsey limited partnership whose partners are comprised of (i) AAA Guernsey Limited (“AAA Guernsey” or “Managing General Partner”), which holds 100% of the general partner interests in AAA, and (ii) the holders of common units representing limited partner interests in AAA. The common units are non-voting and are listed on NYSE Euronext in Amsterdam under the symbol “AAA”. AAA Guernsey is a Guernsey limited company and is owned 55% by an individual who is not an affiliate of Apollo and 45% by Apollo Principal Holdings III, L.P., an indirect subsidiary of Apollo. AAA Guernsey is responsible for managing the business and affairs of AAA. AAA generally makes all of these investments through AAA Investments, of which AAA is the sole limited partner. AAA issued approximately $1.9 billion of equity capital in its initial public offering (“IPO”) in June 2006. AAA was originally designed to give investors in its common units exposure as a limited partner to certain of the strategies that we employ and allowed us to manage the asset allocations to those strategies by investing alongside our private equity funds and directly in our credit funds and certain other opportunistic investments that we sponsor and manage. On October 31, 2012, AAA and AAA Investments consummated a transaction whereby a wholly-owned subsidiary of AAA Investments contributed substantially all of its investments to Athene Holding Ltd. (together with its subsidiaries, “Athene”) in exchange for common shares of Athene Holding Ltd., cash and a short term promissory note (the “AAA Transaction”) payable at the option of AAA Investments in cash or common shares of Athene Holding Ltd. After the AAA Transaction, Athene was AAA’s only material investment and as of December 31, 2012, AAA, through its investment in AAA Investments, was the largest shareholder of Athene Holding Ltd. with an approximate 77% ownership stake (without giving effect to restricted common shares issued under Athene’s management equity plan). Subsequent to December 31, 2012, Athene called additional capital from other investors, and as a result AAA’s ownership of Athene Holding Ltd. was reduced to approximately 72% (without giving effect to restricted common shares issued under Athene’s management equity plan). Additional information related to AAA can be found on its website at www.apolloalternativeassets.com. The information contained in AAA’s website is not part of this report. In connection with the consummation of the AAA Transaction, on October 31, 2012, AAA and Apollo Alternative Assets, L.P. (“Apollo Alternative Assets”), a subsidiary of Apollo, entered into an amendment to the services agreement pursuant to which Apollo Alternative Assets manages AAA’s assets in exchange for a quarterly management fee. Pursuant to the amendment, the parties agreed that there will be no management fees payable by AAA with respect to the shares of Athene Holding Ltd. that were newly acquired by AAA in the AAA Transaction (the “Excluded Athene Shares”). Likewise, affiliates of Apollo Alternative Assets will not be entitled to receive any carried interest in respect of the Excluded Athene Shares. AAA will continue to pay Apollo Alternative Assets the same management fee on AAA’s investment in Athene (other than the Excluded Athene Shares), except that Apollo Alternative Assets agreed that AAA’s obligation to pay the existing management fee shall terminate on December 31, 2014. The amendment provides for Apollo Alternative Assets to receive a formulaic unwind of its management fee in the event that AAA makes a tender offer for all or substantially all of its outstanding units where the consideration is to be paid in shares of Athene Holding Ltd (or if AAA accomplishes a similar transaction using an alternative structure): up to a cap of $30.0 million if the realization event commences in 2013, $25.0 million if the realization event commences in 2014, $20.0 million if the realization event commences in 2015 and zero if the realization event commences in 2016 or thereafter. Apollo Alternative Assets has further agreed that AAA has the option to settle all such management fees payable either in cash or shares of Athene Holding Ltd. valued at the then fair market value (or an equivalent derivative). Carried interest payable to an affiliate of Apollo Alternative Assets will be paid in shares of Athene Holding Ltd. (valued at the then fair market value) if there is a distribution in kind or paid in cash if AAA sells the shares of Athene Holding Ltd. Building Value in Portfolio Companies We are a “hands-on” investor organized around nine core industries where we believe we have significant knowledge and expertise, and we remain actively engaged with the management teams of the portfolio companies of our private equity funds. We have established relationships with operating executives that assist in the diligence review of new opportunities and provide strategic and operational -12- Table of Contents oversight for portfolio investments. We actively work with the management of each of the portfolio companies of the funds we manage to maximize the underlying value of the business. To achieve this, we take a holistic approach to value-creation, concentrating on both the asset side and liability side of the balance sheet of a company. On the asset side of the balance sheet, Apollo works with management of the portfolio companies to enhance the operations of such companies. Our investment professionals assist portfolio companies in rationalizing non-core and underperforming assets, generating cost and working capital savings, and maximizing liquidity. On the liability side of the balance sheet, Apollo relies on its deep credit structuring experience and works with management of the portfolio companies to help optimize the capital structure of such companies through proactive restructuring of the balance sheet to address near-term debt maturities. We also seek to capture discounts on publicly traded debt securities through exchange offers and potential debt buybacks. In addition, we have established a group purchasing program to help portfolio companies to leverage the combined corporate spending among Apollo and portfolio companies of the funds it manages in order to seek to reduce costs, optimize payment terms and improve service levels for all program participants. Exiting Investments The value of the investments that have been made by our funds are typically realized through either an IPO of common stock on a nationally recognized exchange or through the private sale of the companies in which our funds have invested. We believe the advantage of having long-lived funds and investment discretion is that we are able to time our funds’ exit to maximize value. Portfolio Company Holdings The following table presents the current list of portfolio companies of our private equity funds as of December 31, 2012. Company EP Energy LLC Great Wolf Resorts Year of Initial Investment 2012 Fund(s) Buyout Type Industry Region Sole Financial Sponsor at Time of Initial Investment 2012 2012 2012 2012 2011 2011 2011 2011 2011 2010 2010 2010 2010 2010 2010 2010 2010 2010 Fund VII & ANRP Corporate Carve-outs Oil & Gas Media, Entertainment & Cable Opportunistic Buyouts Fund VII Fund VII Fund VII Fund VII Fund VI Opportunistic Buyouts Fund VII & ANRP Opportunistic Buyouts Agriculture Fund VII & ANRP Opportunistic Buyouts Oil & Gas Opportunistic Buyouts Chemicals Fund VII & ANRP Corporate Carve-outs Materials Insurance Media, Entertainment & Cable Opportunistic Buyouts Corporate Carve-outs Food Retail Fund VII & ANRP Opportunistic Buyouts Materials Building Products Distressed Buyouts Opportunistic Buyouts Oil & Gas Opportunistic Buyouts Food Retail Corporate Carve-outs Materials Financial Services Gaming & Leisure Fund VII & VI Fund VII Fund VII Fund VII Corporate Carve-outs Fund VII Fund VII & VI Fund VII & VI Fund VII Fund VII 2009 Fund VII & VI 2009 2008 2008 2007 2007 2007 2007 Fund VII Fund VI Fund VI Fund VI Fund VI Fund VI Fund VI Distressed Buyouts Distressed Buyouts Distressed Buyouts Opportunistic Buyouts Distressed Buyouts Opportunistic Buyouts Chemicals Building Products Shipping Media, Entertainment & Cable Media, Entertainment & Cable Gaming & Leisure Cruise Specialty Retail Real Estate Services Building Opportunistic Buyouts Products Corporate Carve-outs Materials Opportunistic Buyouts Opportunistic Buyouts Opportunistic Buyouts Opportunistic Buyouts North America No North America Yes North America Yes North America No Western Europe No Western Europe Yes Western Europe No North America Yes North America Yes No India Global No North America Yes North America Yes Western Europe No Puerto Rico No Western Europe No No Global Western Europe No North America Yes North America No India No North America No North America Yes Global Yes Western Europe Yes Global Yes North America Yes Pinnacle - Jimmy Sanders Talos Taminco Ascometal Brit Insurance CORE Media Group (formerly CKx) Sprouts Farmers Markets Welspun Aleris International Athlon CKE Restaurants Inc. Constellium (formerly Alcan) EVERTEC Gala Coral Group LyondellBasell Monier Veritable Maritime Charter Communications Dish TV Caesars Entertainment Norwegian Cruise Line Claire’s Countrywide Jacuzzi Brands Noranda Aluminum Prestige Cruise Holdings Realogy Vantium Berry Plastics (1) CEVA Logistics Rexnord (3) (2) SourceHOV (4) Verso Paper Affinion Group Metals USA PLASE Capital Momentive Performance Materials Quality Distribution 2007 2007 2007 2006 2006 2006 2006 2006 2005 2005 Fund VII & VI Opportunistic Buyouts Fund VI Opportunistic Buyouts Fund VII Other Investments Fund VI & V Fund VI Corporate Carve-outs Corporate Carve-outs Fund VI Opportunistic Buyouts Fund V Opportunistic Buyouts Fund VI Corporate Carve-outs Fund V Corporate Carve-outs Fund V Opportunistic Buyouts North America Yes North America Yes North America Yes North America Yes Western Europe Yes Cruise Real Estate Services Business Services Packaging & Materials Logistics Diversified Industrial Financial Services Paper Products Financial Services Distribution & Transportation North America Yes North America Yes North America Yes North America Yes North America Yes Financial Services 2000/2004/2006 Fund IV, V & VI Corporate Carve-outs Chemicals Opportunistic Buyouts Fund V 2003 North America Yes North America Yes Debt Investment Vehicles - Fund VII Debt Investment Vehicles - Fund VI Debt Investment Vehicles - Fund V 1998 Various Various Various Fund III Fund VII Fund VI Fund V Opportunistic Buyouts Debt Investments Debt Investments Debt Investments (1) Prior to merger with Covalence Specialty Material Holdings Corp. (2) Includes add-on investment in EGL, Inc. -13- Distribution & Transportation North America Yes Various Various Various Various Various Various Various Various Various Table of Contents Includes add-on investment in Zurn Industries Inc. (3) (4) Subsequent to merger with SOURCECORP. Credit Since Apollo’s founding in 1990, we believe our expertise in credit has served as an integral component of our company’s growth and success. Our credit-oriented approach to investing commenced in 1990 with the management of a $3.5 billion high-yield bond and leveraged loan portfolio. Since that time, our credit activities have grown significantly, through both organic growth and strategic acquisitions. As of December 31, 2012, Apollo’s credit segment had total AUM and fee-generating AUM of $64.4 billion and $49.5 billion, respectively, across a diverse range of credit-oriented investments that utilize the same disciplined, value-oriented investment philosophy that we employ with respect to our private equity funds. Apollo’s broad credit platform, which we believe is adaptable to evolving market conditions and different risk tolerances, has been organized by the following six functional groups: Credit AUM (in billions) U.S. Performing Credit The U.S. performing credit group provides investment management services to funds, including SIAs, that primarily focus on income- oriented, senior loan and bond investment strategies. The U.S. performing credit group also includes CLOs that we raise and manage internally. As of December 31, 2012, our U.S. performing credit group had total AUM and fee-generating AUM of $27.5 billion and $20.6 billion, respectively. Structured Credit The structured credit group provides investment management services to funds, including SIAs, that primarily focus on structured credit investment strategies that target multiple tranches of structured securities with favorable and protective lending terms, predictable payment schedules, strong financials, and low historical levels of default by underlying borrowers, among other characteristics. These strategies include investments in externally managed CLOs, residential mortgage-backed securities, asset-backed securities and other structured instruments, including insurance-linked securities and longevity-based products. The structured credit group also serves as substitute investment manager for a number of asset- -14- Table of Contents backed CDOs and other structured vehicles. As of December 31, 2012, our structured credit group had total AUM and fee-generating AUM of $11.4 billion and $7.6 billion, respectively. Opportunistic Credit The opportunistic credit group provides investment management services to funds, including SIAs, that primarily focus on credit investment strategies that are often less liquid in nature and that utilize a similar value-oriented investment philosophy as our private equity business. The opportunistic credit funds and SIAs invest in a broad array of primary and secondary opportunities encompassing performing, stressed and distressed public and private securities primarily within corporate credit, including senior loans, high yield, mezzanine, debtor in possession financings, rescue or bridge financings, and other debt investments. Additionally, certain opportunistic credit funds will selectively invest in aircraft, energy and structured credit investment opportunities. In certain cases, leverage can be employed in connection with these strategies by having fund subsidiaries or special- purpose vehicles incur debt or by entering into credit facilities or other debt transactions to finance the acquisition of various credit investments. As of December 31, 2012, our opportunistic credit group had total AUM and fee-generating AUM of $6.2 billion and $4.7 billion, respectively. Non-performing Loans The non-performing loan group provides investment management services to funds, including SIAs, that primarily invest in European commercial and residential real estate performing and non-performing loans (“NPLs”) and unsecured consumer loans. The non-performing loan group also controls captive pan-European loan servicing and property management platforms within certain of the NPL investment vehicles that we manage. These loan servicing and property management platforms currently operate in six European countries and directly service approximately 56,000 loans secured by approximately 19,000 commercial and residential properties. The post-investment loan servicing and real estate asset management requirements, combined with the illiquid nature of NPLs, limit participation by traditional long only investors, hedge funds, and private equity funds, resulting in what we believe to be a unique opportunity for our credit business. As of December 31, 2012, our non-performing loans group had total AUM and fee-generating AUM of $6.4 billion and $4.5 billion, respectively. European Credit The European credit group provides investment management services to funds, including SIAs, that focus on investment strategies in a variety of credit opportunities in Europe across a company’s capital structure. The European credit group invests in senior secured loans and notes, mezzanine loans, subordinated notes, distressed and stressed credit and other idiosyncratic credit investments of companies established or operating in Europe, with a focus on Western Europe. As of December 31, 2012, our European credit group had total AUM and fee-generating AUM of $1.9 billion and $1.3 billion, respectively. Athene During 2009, Athene Holding Ltd. was founded to capitalize on favorable market conditions in the dislocated life insurance sector. Athene Holding Ltd. is the direct or indirect parent of the following principal operating subsidiaries: Athene Life Re Ltd., a Bermuda-based reinsurance company formed in 2009 that is focused on the fixed annuity reinsurance sector; Athene Annuity & Life Assurance Company (formerly known as Liberty Life Insurance Company), a Delaware-domiciled (formerly South Carolina domiciled) stock life insurance company acquired by Athene Holding Ltd. in 2011 that is focused on retail sales and reinsurance in the retirement services market; Athene Life Insurance Company, a Delaware-domiciled (formerly Indiana domiciled) stock life insurance company formed in 2010 that is focused on the institutional funding agreement backed note and funding agreement markets; and Presidential Life Corporation, a Delaware corporation headquartered in Nyack, New York, which markets and sells a variety of fixed annuity products principally in New York through its wholly owned subsidiary, Presidential Life Insurance Company, a New York-domiciled stock life insurance company. On December 28, 2012, Athene Annuity & Life Assurance Company completed the acquisition of Presidential Life Corporation. -15- Table of Contents On December 21, 2012, Athene Holding Ltd. entered into an agreement with Aviva plc to acquire Aviva USA Corporation, an Iowa corporation, which markets and sells a variety of fixed annuity and life insurance products in the U.S. through its wholly owned subsidiaries Aviva Life and Annuity Company, an Iowa-domiciled stock life insurance company, and Aviva Life & Annuity Company of New York, a New York-domiciled stock life insurance company. The acquisition is subject to customary closing conditions, including the approval of the acquisition of control of Aviva Life and Annuity Company by the Iowa Insurance Division and the approval of the acquisition of control of Aviva Life & Annuity Company of New York by the New York State Department of Financial Services. Apollo also formed Athene Asset Management LLC (“Athene Asset Management”) during 2009, an investment manager that receives fees for asset management services provided to Athene and other insurance clients, including asset allocation and portfolio management strategies. As of December 31, 2012, Athene Asset Management had $15.8 billion of total AUM, of which approximately $5 billion was either sub-advised by Apollo or invested in Apollo funds and investment vehicles. Real Estate We have assembled a dedicated global investment management team to pursue real estate investment opportunities which we believe benefits from Apollo’s long-standing history of investing in both credit and real estate-related sectors such as hotels and lodging, leisure, and logistics. We believe our dedicated real estate platform benefits from, and contributes to, Apollo’s integrated platform, and further expands Apollo’s deep real estate industry knowledge and relationships. As of December 31, 2012, our real estate business had total and fee-generating AUM of approximately $8.8 billion and $4.5 billion, respectively. Citi Property Investors (“CPI”) Business On November 12, 2010, Apollo completed the acquisition of the CPI business, which was the real estate investment management business of Citigroup Inc. The CPI business had total AUM of approximately $2.9 billion as of December 31, 2012. CPI is an integrated real estate investment platform with investment professionals located in Asia, Europe and North America. As part of the acquisition, Apollo acquired general partner interests in, and advisory agreements with, various real estate investment funds and co-invest vehicles and added to its team of real estate professionals. Apollo Commercial Real Estate Finance, Inc. In September 2009, we launched Apollo Commercial Real Estate Finance, Inc. (“ARI”), a publicly traded real estate investment trust managed by Apollo that acquires, originates, invests in and manages performing commercial first mortgage loans, commercial mortgage backed securities (“CMBS”), mezzanine investments and other commercial real estate-related investments in the United States. The company trades on the New York Stock Exchange (the “NYSE”) under the symbol “ARI.” As of September 30, 2012, ARI had total and fee-generating AUM of approximately $0.8 billion and $0.4 billion, respectively. CMBS Funds Since December 2009, we have launched four real estate accounts formed to invest principally in CMBS. We collectively refer to these four accounts (AGRE CMBS Fund, L.P., 2011 A4 Fund, L.P., 2012 CMBS-I Fund, L.P., and the 2012 CMBS-II Fund, L.P.) as the “CMBS Funds”. As of December 31, 2012, -16- Table of Contents the CMBS Funds had total and fee-generating AUM of approximately $2.4 billion and $0.3 billion, respectively. AGRE U.S. Real Estate Fund, L.P. Apollo Global Real Estate Management, L.P. (“AGRE”), an indirect subsidiary of Apollo, is the sponsor of the AGRE U.S. Real Estate Fund, L.P. (“AGRE U.S. Real Estate Fund”), which pursues investment opportunities to recapitalize, restructure and acquire real estate assets, portfolios and companies primarily in the United States. As of December 31, 2012, the AGRE U.S. Real Estate Fund had $785.2 million of committed capital, including committed capital from co-investors. Strategic Investment Accounts Institutional investors are expressing increasing levels of interest in SIAs since these accounts can provide investors with greater levels of transparency, liquidity and control over their investments as compared to more traditional investment funds. Based on the trends we are currently witnessing among a select group of large institutional investors, we expect our AUM that is managed through SIAs to continue to grow over time. As of December 31, 2012, approximately $2.4 billion of our total AUM was managed through one of our SIAs. Fundraising and Investor Relations We believe our performance track record across our funds has resulted in strong relationships with our fund investors. Our fund investors include many of the world’s most prominent pension and sovereign wealth funds, university endowments and financial institutions, as well as individuals. We maintain an internal team dedicated to investor relations across our private equity, credit and real estate businesses. In our private equity business, fundraising activities for new funds begin once the investor capital commitments for the current fund are largely invested or committed to be invested. The investor base of our private equity funds includes both investors from prior funds and new investors. In many instances, investors in our private equity funds have increased their commitments to subsequent funds as our private equity funds have increased in size. During our Fund VI fundraising effort, investors representing over 88% of Fund V’s capital committed to the new fund. During our Fund VII fundraising effort, investors representing over 84% of Fund VI’s capital committed to Fund VII. The single largest unaffiliated investor represents 6% of Fund VI’s commitments and 7% of Fund VII’s commitments. In addition, many of our investment professionals commit their own capital to each private equity fund. During the management of a private equity fund, we maintain an active dialogue with our limited partner investors. We host quarterly webcasts that are led by members of our senior management team and we provide quarterly reports to the limited partner investors detailing recent performance by investment. We also organize an annual meeting for our private equity investors that consists of detailed presentations by the senior management teams of many of our current investments. From time to time, we also hold meetings for the advisory board members of our private equity funds. In our credit business, we have raised private capital from prominent institutional investors and have also raised capital from public market investors, as in the case of Apollo Investment Corporation (“AINV”), Apollo Senior Floating Rate Fund Inc. (“AFT”) and Apollo Residential Mortgage Inc. (“AMTG”). AINV is listed on the NASDAQ Global Select Market and complies with the reporting requirements of that exchange. AFT and AMTG are listed on the NYSE and comply with the reporting requirements of that exchange. In our real estate business, we have raised capital from prominent institutional investors and we have also raised capital from public market investors, as in the case of ARI. ARI is listed on the NYSE and complies with the reporting requirements of that exchange. -17- Table of Contents Investment Process We maintain a rigorous investment process and a comprehensive due diligence approach across all of our funds. We have developed policies and procedures, the adequacy of which are reviewed annually, that govern the investment practices of our funds. Moreover, each fund is subject to certain investment criteria set forth in its governing documents that generally contain requirements and limitations for investments, such as limitations relating to the amount that will be invested in any one company and the geographic regions in which the fund will invest. Our investment professionals are familiar with our investment policies and procedures and the investment criteria applicable to the funds that they manage. Our investment professionals interact frequently across our businesses on a formal and informal basis. We have in place certain procedures to allocate investment opportunities among our funds. These procedures are meant to ensure that each fund is treated fairly and that transactions are allocated in a way that is equitable, fair and in the best interests of each fund, subject to the terms of the governing agreements of such funds. Private Equity Investment Process Our private equity investment professionals are responsible for selecting, evaluating, structuring, diligence, negotiating, executing, monitoring and exiting investments for our traditional private equity funds, as well as pursuing operational improvements in our funds’ portfolio companies. These investment professionals perform significant research into each prospective investment, including a review of the company’s financial statements, comparisons with other public and private companies and relevant industry data. The due diligence effort will also typically include: • • • • on-site visits; interviews with management, employees, customers and vendors of the potential portfolio company; research relating to the company’s management, industry, markets, products and services, and competitors; and background checks. After an initial selection, evaluation and diligence process, the relevant team of investment professionals will prepare a detailed analysis of the investment opportunity for our private equity investment committee. Our private equity investment committee generally meets weekly to review the investment activity and performance of our private equity funds. After discussing the proposed transaction with the deal team, the investment committee will decide whether to give its preliminary approval to the deal team to continue the selection, evaluation, diligence and negotiation process. The investment committee will typically conduct several lengthy meetings to consider a particular investment before finally approving that investment and its terms. Both at such meetings and in other discussions with the deal team, our Managing Partners and partners will provide guidance to the deal team on strategy, process and other pertinent considerations. Every private equity investment requires the approval of our Managing Partners. Our private equity investment professionals are responsible for monitoring an investment once it is made and for making recommendations with respect to exiting an investment. Disposition decisions made on behalf of our private equity funds are subject to careful review and approval by the private equity investment committee, including our Managing Partners. -18- Table of Contents Credit and Real Estate Investment Process Our credit and real estate investment professionals are responsible for selecting, evaluating, structuring, diligence, negotiating, executing, monitoring and exiting investments for our credit funds and real estate funds, respectively. The investment professionals perform significant research into and due diligence of each prospective investment, and prepare analyses of recommended investments for the investment committee of the relevant fund. Investment decisions are scrutinized by the investment committees where applicable, who review potential transactions, provide input regarding the scope of due diligence and approve recommended investments and dispositions. Close attention is given to how well a proposed investment is aligned with the distinct investment objectives of the fund in question, which in many cases have specific geographic or other focuses. The investment committee of each of our credit funds and real estate funds generally is provided with a summary of the investment activity and performance of the relevant funds on at least a monthly basis. Overview of Fund Operations Investors in our private equity funds and our real estate equity funds make commitments to provide capital at the outset of a fund and deliver capital when called by us as investment opportunities become available. We determine the amount of initial capital commitments for any given private equity fund by taking into account current market opportunities and conditions, as well as investor expectations. The general partner’s capital commitment is determined through negotiation with the fund’s investor base. The commitments are generally available for six years during what we call the investment period. We have typically invested the capital committed to our funds over a three to four year period. Generally, as each investment is realized, our private equity funds first return the capital and expenses related to that investment and any previously realized investments to fund investors and then distribute any profits. These profits are typically shared 80% to the investors in our private equity funds and 20% to us so long as the investors receive at least an 8% compounded annual return on their investment, which we refer to as a “preferred return” or “hurdle.” Our private equity funds typically terminate ten years after the final closing, subject to the potential for two one-year extensions. Dissolution of those funds can be accelerated upon a majority vote of investors not affiliated with us and, in any case, all of our funds also may be terminated upon the occurrence of certain other events. Ownership interests in our private equity funds and certain of our credit and real estate funds are not, however, subject to redemption prior to termination of the funds. The processes by which our credit and real estate funds receive and invest capital vary by type of fund. AINV, AMTG, AFT and ARI, for instance, raise capital by selling shares in the public markets and these vehicles can also issue debt. Many of our opportunistic credit funds sell shares or limited partner interests, subscriptions which are payable in full upon a fund’s acceptance of an investor’s subscription, via private placements. Other funds have drawdown structures, such as Apollo European Principal Finance Fund, L.P. (“EPF I”), Apollo European Principal Finance Fund II, L.P. (“EPF II”), Apollo Investment Europe II, L.P. (“AIE II”), Apollo Credit Opportunity Fund I, L.P (“COF I”), and Apollo Credit Opportunity Fund II, L.P. (“COF II”), where investors made a commitment to provide capital at the formation of such funds and deliver capital when called by us as investment opportunities become available. As with our private equity funds, the amount of initial capital commitments for our credit funds is determined by taking into account current market opportunities and conditions, as well as investor expectations. The general partner commitments for our credit funds that are structured as limited partnerships are determined through negotiation with the funds’ investor base. The fees and incentive income we earn for management of our credit funds and the performance of these funds and the terms of such funds governing withdrawal of capital and fund termination vary across our credit funds and are described in detail below. We conduct the management of our private equity, credit and real estate funds primarily through a partnership structure, in which limited partnerships organized by us accept commitments and/or funds for investment from investors. Funds are generally organized as limited partnerships with respect to private equity funds and other U.S. domiciled vehicles and limited partnership and limited liability (and other similar) companies with respect to non-U.S. domiciled vehicles. Typically, each fund has an investment advisor registered under the Investment Advisers Act of 1940, as amended (the “Investment Advisers -19- Table of Contents Act”). Responsibility for the day-to-day operations of the funds is typically delegated to the funds’ respective investment advisors pursuant to an investment advisory (or similar) agreement. Generally, the material terms of our investment advisory agreements relate to the scope of services to be rendered by the investment advisor to the applicable funds, certain rights of termination in respect of our investment advisory agreements and, generally, with respect to our credit funds (as these matters are covered in the limited partnership agreements of the private equity funds), the calculation of management fees to be borne by investors in such funds, as well as the calculation of the manner and extent to which other fees received by the investment advisor from fund portfolio companies serve to offset or reduce the management fees payable by investors in our funds. The funds themselves generally do not register as investment companies under the Investment Company Act of 1940, as amended (the “Investment Company Act”), in reliance on Section 3(c)(7) or Section 7(d) thereof or, typically in the case of funds formed prior to 1997, Section 3(c)(1) thereof. Section 3(c)(7) of the Investment Company Act excepts from its registration requirements funds privately placed in the United States whose securities are owned exclusively by persons who, at the time of acquisition of such securities, are “qualified purchasers” or “knowledgeable employees” for purposes of the Investment Company Act. Section 3(c)(1) of the Investment Company Act exempts from its registration requirements privately placed funds whose securities are beneficially owned by not more than 100 persons. In addition, under current interpretations of the SEC, Section 7(d) of the Investment Company Act exempts from registration any non-U.S. fund all of whose outstanding securities are beneficially owned either by non-U.S. residents or by U.S. residents that are qualified purchasers. In addition to having an investment advisor, each fund that is a limited partnership, or “partnership” fund, also has a general partner that makes all policy and investment decisions relating to the conduct of the fund’s business. The general partner is responsible for all decisions concerning the making, monitoring and disposing of investments, but such responsibilities are typically delegated to the fund’s investment advisor pursuant to an investment advisory (or similar) agreement. The limited partners of the funds take no part in the conduct or control of the business of the funds, have no right or authority to act for or bind the funds and have no influence over the voting or disposition of the securities or other assets held by the funds. These decisions are made by the fund’s general partner in its sole discretion, subject to the investment limitations set forth in the agreements governing each fund. The limited partners often have the right to remove the general partner or investment advisor for cause or cause an early dissolution by a simple majority vote. In connection with the private offering transactions that occurred in 2007 pursuant to which we sold shares of Apollo Global Management, LLC to certain initial purchasers and accredited investors in transactions exempt from the registration requirements of the Securities Act (“Private Offering Transactions”) and the reorganization of the Company’s predecessor business (the “2007 Reorganization”), we deconsolidated certain of our private equity and credit funds that have historically been consolidated in our financial statements and amended the governing agreements of those funds to provide that a simple majority of a fund’s investors have the right to accelerate the dissolution date of the fund. In addition, the governing agreements of our private equity funds and certain of our credit and real estate funds enable the limited partners holding a specified percentage of the interests entitled to vote not to elect to continue the limited partners’ capital commitments for new portfolio investments in the event certain of our Managing Partners do not devote the requisite time to managing the fund or in connection with certain triggering events (as defined in the applicable governing agreements). In addition to having a significant, immeasurable negative impact on our revenue, net income and cash flow, the occurrence of such an event with respect to any of our funds would likely result in significant reputational damage to us. Further, the loss of one or more of our Managing Partners may result in the acceleration of our debt. The loss of the services of any of our Managing Partners would have a material adverse effect on us, including our ability to retain and attract investors and raise new funds, and the performance of our funds. We do not carry any “key man” insurance that would provide us with proceeds in the event of the death or disability of any of our Managing Partners. General Partner and Professionals Investments and Co-Investments General Partner Investments Certain of our management companies and general partners are committed to contribute to our funds and affiliates. As a limited partner, general partner and manager of the Apollo funds, Apollo had -20- Table of Contents unfunded capital commitments of $258.3 million and $137.9 million at December 31, 2012 and 2011, respectively. Apollo has an ongoing obligation to acquire additional common units of AAA in an amount equal to 25% of the aggregate after-tax cash distributions, if any, that are made to its affiliates pursuant to the carried interest distribution rights that are applicable to investments made through AAA Investments. As the general partner of Apollo/Artus Investor 2007-I, L.P. (“Artus”), Apollo may be obligated for certain losses in excess of those allocable to the limited partners to the extent that there is negative equity in that fund. As of December 31, 2012, Apollo had no current obligations to Artus. On December 21, 2012, Apollo agreed to provide up to $100 million of capital support to Athene to the extent such support is necessary in connection with Athene’s pending acquisition of Aviva plc’s annuity and life insurance operations in the United States. Managing Partners and Other Professionals Investments To further align our interests with those of investors in our funds, our Managing Partners and other professionals have invested their own capital in our funds. Our Managing Partners and other professionals will either re-invest their carried interest to fund these investments or use cash on hand or funds borrowed from third parties. We generally have not historically charged management fees or carried interest on capital invested by our Managing Partners and other professionals directly in our private equity and credit funds. Co-Investments Investors in many of our funds, as well as other investors, may have the opportunity to make co-investments with the funds. Co-investments are investments in portfolio companies or other assets generally on the same terms and conditions as those to which the applicable fund is subject. Regulatory and Compliance Matters Our businesses, as well as the financial services industry generally, are subject to extensive regulation in the United States and elsewhere. All of the investment advisors of our funds are registered as investment advisors with the SEC. Registered investment advisors are subject to the requirements and regulations of the Investment Advisers Act. Such requirements relate to, among other things, fiduciary duties to clients, maintaining an effective compliance program, managing conflicts of interest and general anti-fraud prohibitions. Each of AFT and Apollo Tactical Income Fund Inc. (“AIF”) is a registered investment company under the Investment Company Act. AINV is a registered investment company that has elected to be treated as a business development company under the Investment Company Act. Each of AFT and AINV has elected, and AIF intends to elect, for U.S. Federal tax purposes to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As such, each of AFT, AIF and AINV is required to distribute at least 90% of its ordinary income and realized, net short-term capital gains in excess of realized net long-term capital losses, if any, to its shareholders. In addition, in order to avoid excise tax, it needs to distribute at least 98% of its income (such income to include both ordinary income and net capital gains), which would take into account short-term and long-term capital gains and losses. Each of AFT, AIF and AINV, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay an excise tax on this income. In addition, as a business development company, AINV must not acquire any assets other than “qualifying assets” specified in the Investment Company Act unless, at the time the acquisition is made, at least 70% of AINV’s total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” In late 2006, the SEC adopted rules under the Investment Company Act to expand the definition of “eligible portfolio company” to include all private companies and companies whose securities are not listed on a national securities exchange. The rules also permit AINV to -21- Table of Contents include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition. ARI elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code commencing with its taxable year ended December 31, 2009. AMTG also elected to be taxed as a REIT under the Internal Revenue Code, commencing with its fiscal year ending December 31, 2011. To maintain their qualification as REITs, ARI and AMTG must distribute at least 90% of their taxable income to their shareholders and meet, on a continuing basis, certain other complex requirements under the Internal Revenue Code. During 2011, we formed Apollo Global Securities, LLC (“AGS”), which is a registered broker dealer with the SEC and is a member of the Financial Industry Regulatory Authority, Inc. From time to time, this entity is involved in transactions with affiliates of Apollo, including portfolio companies of the funds we manage, whereby AGS will earn underwriting and transaction fees for its services. Broker-dealers are subject to regulations that cover all aspects of the securities business. In particular, as a registered broker-dealer and member of a self regulatory organization, we are subject to the SEC’s uniform net capital rule, Rule 15c3-1. Rule 15c3-1 specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant part of a broker-dealer’s assets be kept in relatively liquid form. The SEC and various self-regulatory organizations impose rules that require notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the SEC’s uniform net capital rule imposes certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital. In December 2012, the Delaware Department of Insurance approved our application to acquire control (as the ultimate parent of the general partner or manager of certain shareholders of Athene) of the U.S. insurance company subsidiaries of Athene Holding Ltd. in connection with the restructuring of Athene and the New York State Department of Financial Services approved our application to acquire control (as the ultimate parent of the general partner or manager of certain shareholders of Athene) of Presidential Life Insurance Company. As a result, we became subject to insurance holding company system laws and regulations in Delaware and New York, which are the states in which the current insurance company subsidiaries of Athene Holding Ltd. are domiciled. In addition, following the completion of Athene’s acquisition of Aviva USA Corporation, we will become subject to insurance holding company system laws and regulations in Iowa. These regulations generally require each of such insurance company subsidiaries to register with the insurance department in its state of domicile and to furnish financial and other information about the operations of companies within its holding company system. These regulations also impose restrictions and limitations on the ability of such insurance company subsidiaries to pay dividends and make other distributions to their parent companies. In addition, transactions between an insurance company and other companies within its holding company system, including sales, loans, reinsurance agreements, management agreements and service agreements, must be on terms that are fair and reasonable and, if material or of a specified category, require prior notice and approval or non-disapproval by the applicable domiciliary insurance department. The insurance laws of Delaware prohibit any person from acquiring control of an insurance company or its parent company unless that person has filed a notification with specified information with the Delaware Commissioner of Insurance (the “Commissioner”) and has obtained the Commissioner’s prior approval. The insurance laws of New York prohibit any person from acquiring control of an insurance company or its parent company unless that person has filed a notification with specified information with the New York Superintendent of Financial Services (the “Superintendent”) and has obtained the Superintendent’s prior approval. Under both Delaware and New York statutes, acquiring 10% or more of the voting securities of an insurance company or its parent company is presumptively considered an acquisition of control of the insurance company, although such presumption may be rebutted. Accordingly, any person or entity that acquires, directly or indirectly, 10% or more of the voting securities of Apollo without the requisite prior approvals will be in violation of these laws and may be subject to injunctive action requiring the disposition or seizure of those securities or prohibiting the voting of those securities, or to other actions that may be taken by the applicable state insurance regulators. -22- Table of Contents In addition, many U.S. state insurance laws require prior notification to state insurance departments of an acquisition of control of a non- domiciliary insurance company doing business in that state if the acquisition would result in specified levels of market concentration. While these pre- notification statutes do not authorize the state insurance departments to disapprove the acquisition of control, they authorize regulatory action in the affected state, including requiring the insurance company to cease and desist from doing certain types of business in the affected state or denying a license to do business in the affected state, if particular conditions exist, such as substantially lessening competition in any line of business in such state. Any transactions that would constitute an acquisition of control of Apollo may require prior notification in those states that have adopted pre-acquisition notification laws. These laws may discourage potential acquisition proposals and may delay, deter or prevent an acquisition of control of Apollo (in particular through an unsolicited transaction), even if Apollo might consider such transaction to be desirable for its shareholders. Currently, there are proposals to increase the scope of regulation of insurance holding companies in both the United States and internationally. In the United States, the National Association of Insurance Commissioners has promulgated a model law for consideration by the various states that would provide for more extensive informational reporting by parents and affiliates of insurance companies. Internationally, the International Association of Insurance Supervisors is in the process of adopting a framework for the “group wide” supervision of internationally active insurance groups. Changes to existing laws or regulations must be adopted by individual states or foreign jurisdictions before they will become effective. We cannot predict with any degree of certainty the additional capital requirements, compliance costs or other burdens these requirements may impose on us and our subsidiaries. In addition, state insurance departments also have broad administrative powers over the insurance business of our insurance company affiliates, including insurance company licensing and examination, agent licensing, establishment of reserve requirements and solvency standards, premium rate regulation, admissibility of assets, policy form approval, unfair trade and claims practices and other matters. Apollo Management International LLP is authorized and regulated by the U.K. Financial Services Authority. As of April 11, 2013, the Financial Services Authority will be replaced by the Financial Conduct Authority. AAA is regulated under the Authorized Closed-ended Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission (“GFSC”) with effect from December 15, 2008 under The Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended (the “New Rules”). AAA is deemed to be an authorized closed-ended investment scheme under the New Rules. Apollo Advisors (Mauritius) Ltd (“Apollo Mauritius”), one of our subsidiaries, and AION Capital Management Limited (“AION Manager”), one of our joint venture investments, are licensed providers of investment management services in the Republic of Mauritius and are subject to applicable Mauritian securities laws and the oversight of the Financial Services Commission (Mauritius) (the “FSC”). Each of Apollo Mauritius and AION Manager is subject to limited regulatory requirements under the Mauritian Securities Act 2005, Mauritian Financial Services Act 2007 and relevant ancillary regulations, including, ongoing reporting and record keeping requirements, anti-money laundering obligations, obligations to ensure that it and its directors, key officers and representatives are fit and proper and requirements to maintain positive shareholders’ equity. The FSC is responsible for administering these requirements and ensuring the compliance of Apollo Mauritius and AION Manager with them. If Apollo Mauritius or AION Manager contravenes any such requirements, such entities and/or their officers or representatives may be subject to a fine, reprimand, prohibition order or other regulatory sanctions. AGM India Advisors Private Limited is regulated by the Company Law Board (also known as the Ministry of Company Affairs) through the Companies Act of 1956 in India. Additionally since there are foreign investments in the company, AGM India Advisors Private Limited is also subject to the rules and regulations applicable under the Foreign Exchange Management Act of 1999 which falls within the purview of Reserve Bank of India. The SEC and various self-regulatory organizations have in recent years increased their regulatory activities in respect of investment management firms. -23- Table of Contents Certain of our businesses are subject to compliance with laws and regulations of U.S. Federal and state governments, non-U.S. governments, their respective agencies and/or various self-regulatory organizations or exchanges relating to, among other things, the privacy of client information, and any failure to comply with these regulations could expose us to liability and/or reputational damage. Our businesses have operated for many years within a legal framework that requires our being able to monitor and comply with a broad range of legal and regulatory developments that affect our activities. However, additional legislation, changes in rules promulgated by self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect our mode of operation and profitability. Rigorous legal and compliance analysis of our businesses and investments is important to our culture. We strive to maintain a culture of compliance through the use of policies and procedures such as oversight compliance, codes of ethics, compliance systems, communication of compliance guidance and employee education and training. We have a compliance group that monitors our compliance with the regulatory requirements to which we are subject and manages our compliance policies and procedures. Our Chief Legal Officer serves as the Chief Compliance Officer and supervises our compliance group, which is responsible for addressing all regulatory and compliance matters that affect our activities. Our compliance policies and procedures address a variety of regulatory and compliance risks such as the handling of material non-public information, personal securities trading, valuation of investments on a fund-specific basis, document retention, potential conflicts of interest and the allocation of investment opportunities. We generally operate without information barriers between our businesses. In an effort to manage possible risks resulting from our decision not to implement these barriers, our compliance personnel maintain a list of issuers for which we have access to material, non-public information and for whose securities our funds and investment professionals are not permitted to trade. We could in the future decide that it is advisable to establish information barriers, particularly as our business expands and diversifies. In such event our ability to operate as an integrated platform will be restricted. Competition The investment management industry is intensely competitive, and we expect it to remain so. We compete both globally and on a regional, industry and niche basis. We face competition both in the pursuit of outside investors for our funds and in acquiring investments in attractive portfolio companies and making other investments. We compete for outside investors based on a variety of factors, including: • • • • • investment performance; investor perception of investment managers’ drive, focus and alignment of interest; quality of service provided to and duration of relationship with investors; business reputation; and the level of fees and expenses charged for services. Depending on the investment, we expect to face competition in acquisitions primarily from other private equity, credit and real estate funds, specialized funds, hedge fund sponsors, other financial institutions, corporate buyers and other parties. Many of these competitors in some of our businesses are substantially larger and have considerably greater financial, technical and marketing resources than are available to us. Many of these competitors have similar investment objectives to us, which may create additional competition for investment opportunities. Some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we -24- Table of Contents want to make. Corporate buyers may be able to achieve synergistic cost savings with regard to an investment that may provide them with a competitive advantage in bidding for an investment. Lastly, the allocation of increasing amounts of capital to alternative investment strategies by institutional and individual investors could well lead to a reduction in the size and duration of pricing inefficiencies that many of our funds seek to exploit. Competition is also intense for the attraction and retention of qualified employees. Our ability to continue to compete effectively in our businesses will depend upon our ability to attract new employees and retain and motivate our existing employees. For additional information concerning the competitive risks that we face, see “Item 1A. Risk Factors—Risks Related to Our Businesses—The investment management business is intensely competitive, which could materially adversely impact us.” -25- Table of Contents ITEM 1A. RISK FACTORS Risks Related to Our Businesses Poor performance of our funds would cause a decline in our revenue and results of operations, may obligate us to repay incentive income previously paid to us and would adversely affect our ability to raise capital for future funds. We derive revenues in part from: • • • • management fees, which are based generally on the amount of capital invested in our funds; transaction and advisory fees relating to the investments our funds make; incentive income, based on the performance of our funds; and investment income from our investments as general partner. If a fund performs poorly, we will receive little or no incentive income with regard to the fund and little income or possibly losses from any principal investment in the fund. Furthermore, if, as a result of poor performance of later investments in a fund’s life, the fund does not achieve total investment returns that exceed a specified investment return threshold for the life of the fund, we may be obligated to repay the amount by which incentive income that was previously distributed to us exceeds amounts to which we are ultimately entitled. Our fund investors and potential fund investors continually assess our funds’ performance and our ability to raise capital. Accordingly, poor fund performance may deter future investment in our funds and thereby decrease the capital invested in our funds and ultimately, our management fee income. We depend on Leon Black, Joshua Harris and Marc Rowan, and the loss of any of their services would have a material adverse effect on us. The success of our businesses depends on the efforts, judgment and personal reputations of our Managing Partners, Leon Black, Joshua Harris and Marc Rowan. Their reputations, expertise in investing, relationships with our fund investors and relationships with members of the business community on whom our funds depend for investment opportunities and financing are each critical elements in operating and expanding our businesses. We believe our performance is strongly correlated to the performance of these individuals. Accordingly, our retention of our Managing Partners is crucial to our success. Subject to the terms of their employment, non-competition and non-solicitation agreements, our Managing Partners may resign, join our competitors or form a competing firm at any time. If any of our Managing Partners were to join or form a competitor, some of our investors could choose to invest with that competitor rather than in our funds. The loss of the services of any of our Managing Partners may have a material adverse effect on us, including our ability to retain and attract investors and raise new funds, and the performance of our funds. We do not carry any “key man” insurance that would provide us with proceeds in the event of the death or disability of any of our Managing Partners. In addition, the loss of one or more of our Managing Partners may result in the termination of our role as general partner of one or more of our funds and the acceleration of our debt. Although our Managing Partners have entered into employment, non-competition and non-solicitation agreements, which impose certain restrictions on competition and solicitation of our employees by our Managing Partners if they terminate their employment, a court may not enforce these provisions. See “Item 11. Executive Compensation—Narrative Disclosure to the Summary Compensation Table and Grants of Plan-Based Awards Table—Employment, Non- Competition and Non-Solicitation Agreement with Chairman and Chief Executive Officer” for a more detailed description of the terms of the agreement for one of our Managing Partners. Changes in the debt financing markets may negatively impact the ability of our funds and their portfolio companies to obtain attractive financing for their investments and may increase the cost of such financing if it is obtained, which could lead to lower-yielding investments and potentially decreasing our net income. -26- Table of Contents In the event that our funds are unable to obtain committed debt financing for potential acquisitions or can only obtain debt at an increased interest rate or on unfavorable terms, our funds may have difficulty completing otherwise profitable acquisitions or may generate profits that are lower than would otherwise be the case, either of which could lead to a decrease in the investment income earned by us. Any failure by lenders to provide previously committed financing can also expose us to potential claims by sellers of businesses which we may have contracted to purchase. Similarly, the portfolio companies owned by our private equity funds regularly utilize the corporate debt markets in order to obtain financing for their operations. To the extent that the current credit markets have rendered such financing difficult to obtain or more expensive, this may negatively impact the operating performance of those portfolio companies and, therefore, the investment returns on our funds. In addition, to the extent that the current markets make it difficult or impossible to refinance debt that is maturing in the near term, the relevant portfolio company may face substantial doubt as to its status as a going concern (which may result in an event of default under various agreements) or be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection. Difficult market conditions may adversely affect our businesses in many ways, including by reducing the value or hampering the performance of the investments made by our funds or reducing the ability of our funds to raise or deploy capital, each of which could materially reduce our revenue, net income and cash flow and adversely affect our financial prospects and condition. Our businesses are materially affected by conditions in the global financial markets and economic conditions throughout the world, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts or security operations). These factors are outside our control and may affect the level and volatility of securities prices and the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure to these conditions. Global financial markets have experienced considerable volatility in the valuations of equity and debt securities, a contraction in the availability of credit and an increase in the cost of financing. Volatility in the financial markets can materially hinder the initiation of new, large-sized transactions for our private equity segment and, together with volatility in valuations of equity and debt securities, may adversely impact our operating results. If market conditions deteriorate, our business could be affected in different ways. In addition, these events and general economic trends are likely to impact the performance of portfolio companies in many industries, particularly industries that are more impacted by changes in consumer demand, such as travel and leisure, gaming and real estate. The performance of our funds and our performance may be adversely affected to the extent our fund portfolio companies in these industries experience adverse performance or additional pressure due to downward trends. Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs, within a time frame sufficient to match any further decreases in net income or increases in net losses relating to changes in market and economic conditions. The financial downturn that began in 2007 adversely affected our operating results in a number of ways, and if the economy were to re-enter a period of recession, it may cause our revenue and results of operations to decline by causing: • • • • • our AUM to decrease, lowering management fees from our funds; increases in costs of financial instruments; adverse conditions for our portfolio companies (e.g., decreased revenues, liquidity pressures, increased difficulty in obtaining access to financing and complying with the terms of existing financings as well as increased financing costs); lower investment returns, reducing incentive income; higher interest rates, which could increase the cost of the debt capital we use to acquire companies in our private equity business; and -27- Table of Contents • material reductions in the value of our fund investments, affecting our ability to realize carried interest from these investments. Lower investment returns and such material reductions in value may result, among other reasons, because during periods of difficult market conditions or slowdowns (which may be across one or more industries, sectors or geographies), companies in which we invest may experience decreased revenues, financial losses, difficulty in obtaining access to financing and increased funding costs. During such periods, these companies may also have difficulty in expanding their businesses and operations and be unable to meet their debt service obligations or other expenses as they become due, including expenses payable to us. In addition, during periods of adverse economic conditions, we may have difficulty accessing financial markets, which could make it more difficult or impossible for us to obtain funding for additional investments and harm our AUM and operating results. Furthermore, such conditions would also increase the risk of default with respect to investments held by our funds that have significant debt investments, such as our opportunistic and European credit funds and our U.S. performing credit funds. Our funds may be affected by reduced opportunities to exit and realize value from their investments, by lower than expected returns on investments made prior to the deterioration of the credit markets, and by the fact that we may not be able to find suitable investments for the funds to effectively deploy capital, which could adversely affect our ability to raise new funds and thus adversely impact our prospects for future growth. A decline in the pace of investment in our funds would result in our receiving less revenue from transaction and advisory fees. The transaction and advisory fees that we earn are driven in part by the pace at which our funds make investments. Many factors could cause a decline in the pace of investment, including the inability of our investment professionals to identify attractive investment opportunities, competition for such opportunities among other potential acquirers, decreased availability of capital on attractive terms and our failure to consummate identified investment opportunities because of business, regulatory or legal complexities and adverse developments in the U.S. or global economy or financial markets. Any decline in the pace at which our funds make investments would reduce our transaction and advisory fees and could make it more difficult for us to raise capital. If one or more of our Managing Partners or other investment professionals leave our company, the commitment periods of certain of our funds may be terminated, and we may be in default under our credit agreement. The governing agreements of certain of our funds provide that in the event certain “key persons” (such as one or more of Messrs. Black, Harris and Rowan and/or certain other of our investment professionals) fail to devote the requisite time to our business, the commitment period will terminate if a certain percentage in interest of the investors do not vote to continue the commitment period. This is true of Fund VI and Fund VII, on which our near- to medium-term performance will heavily depend. EPF I and II have a similar provision. In addition to having a significant negative impact on our revenue, net income and cash flow, the occurrence of such an event with respect to any of our funds would likely result in significant reputational damage to us. In addition, it will be an event of default under the April 20, 2007 credit agreement that AMH, one of the entities in the Apollo Operating Group, entered into (the “AMH Credit Agreement”), under which AMH borrowed a $1.0 billion variable-rate term loan (of which approximately $728.3 million was outstanding as of December 31, 2012) if either (i) Mr. Black, together with related persons or trusts, shall cease as a group to participate to a material extent in the beneficial ownership of AMH or (ii) two of the group constituting Messrs. Black, Harris and Rowan shall cease to be actively engaged in the management of the AMH loan parties. If such an event of default occurs and the lenders exercise their right to accelerate repayment of the loan, we are unlikely to have the funds to make such repayment and the lenders may take control of us, which is likely to materially adversely impact our results of operations. Even if we were able to refinance our debt, our financial condition and results of operations would be materially adversely affected. Messrs. Black, Harris and Rowan may terminate their employment with us at any time. -28- Table of Contents We may not be successful in raising new funds or in raising more capital for certain of our funds and may face pressure on fee arrangements of our future funds. Our funds may not be successful in consummating their current capital-raising efforts or others that they may undertake, or they may consummate them at investment levels far lower than those currently anticipated. Any capital raising that our funds do consummate may be on terms that are unfavorable to us or that are otherwise different from the terms that we have been able to obtain in the past. These risks could occur for reasons beyond our control, including general economic or market conditions, regulatory changes or increased competition. Over the last few years, a large number of institutional investors that invest in alternative assets and have historically invested in our funds experienced negative pressure across their investment portfolios, which may affect our ability to raise capital from them. As a result of the global economic downturn during 2008 and 2009, these institutional investors experienced, among other things, a significant decline in the value of their public equity and debt holdings and a lack of realizations from their existing private equity portfolios. Consequently, many of these investors were left with disproportionately outsized remaining commitments to a number of private equity funds, and were restricted from making new commitments to third- party managed private equity funds such as those managed by us. To the extent economic conditions remain volatile and these issues persist, we may be unable to raise sufficient amounts of capital to support the investment activities of our future funds. In addition, certain institutional investors have publicly criticized certain fund fee and expense structures, including management fees and transaction and advisory fees. In September 2009, the Institutional Limited Partners Association, or “ILPA,” published a set of Private Equity Principles, or the “Principles,” which were revised in January 2011. The Principles were developed in order to encourage discussion between limited partners and general partners regarding private equity fund partnership terms. Certain of the Principles call for enhanced “alignment of interests” between general partners and limited partners through modifications of some of the terms of fund arrangements, including proposed guidelines for fees and carried interest structures. We provided ILPA our endorsement of the Principles, representing an indication of our general support for the efforts of ILPA. Although we have no obligation to modify any of our fees with respect to our existing funds, we may experience pressure to do so. The failure of our funds to raise capital in sufficient amounts and on satisfactory terms could result in a decrease in AUM and management fee and transaction fee revenue or us being unable to achieve an increase in AUM and management fee and transaction fee revenue, and could have a material adverse effect on our financial condition and results of operations. Similarly, any modification of our existing fee arrangements or the fee structures for new funds could adversely affect our results of operations. Third-party investors in our funds with commitment-based structures may not satisfy their contractual obligation to fund capital calls when requested by us, which could adversely affect a fund’s operations and performance. Investors in all of our private equity and certain of our credit and real estate funds make capital commitments to those funds that we are entitled to call from those investors at any time during prescribed periods. We depend on investors fulfilling their commitments when we call capital from them in order for those funds to consummate investments and otherwise pay their obligations when due. Any investor that did not fund a capital call would be subject to several possible penalties, including having a significant amount of its existing investment forfeited in that fund. However, the impact of the penalty is directly correlated to the amount of capital previously invested by the investor in the fund and if an investor has invested little or no capital, for instance early in the life of the fund, then the forfeiture penalty may not be as meaningful. If investors were to fail to satisfy a significant amount of capital calls for any particular fund or funds, the operation and performance of those funds could be materially and adversely affected. The historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our Class A shares. -29- Table of Contents We have presented in this report the returns relating to the historical performance of our private equity, credit and real estate funds. The returns are relevant to us primarily insofar as they are indicative of incentive income we have earned in the past and may earn in the future, our reputation and our ability to raise new funds. The returns of the funds we manage are not, however, directly linked to returns on our Class A shares. Therefore, you should not conclude that continued positive performance of the funds we manage will necessarily result in positive returns on an investment in Class A shares. However, poor performance of the funds we manage will cause a decline in our revenue from such funds, and would therefore have a negative effect on our performance and the value of our Class A shares. An investment in our Class A shares is not an investment in any of the Apollo funds. Moreover, most of our funds have not been consolidated in our financial statements for periods since either August 1, 2007 or November 30, 2007 as a result of the deconsolidation of most of our funds as of August 1, 2007 and November 30, 2007. Moreover, the historical returns of our funds should not be considered indicative of the future returns of these or from any future funds we may raise, in part because: • • • • • • • • • • market conditions during previous periods may have been significantly more favorable for generating positive performance, particularly in our private equity business, than the market conditions we may experience in the future; our funds’ returns have benefited from investment opportunities and general market conditions that may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities; our private equity funds’ rates of returns, which are calculated on the basis of net asset value of the funds’ investments, reflect unrealized gains, which may never be realized; our funds’ returns have benefited from investment opportunities and general market conditions that may not repeat themselves, including the availability of debt capital on attractive terms and the availability of distressed debt opportunities, and we may not be able to achieve the same returns or profitable investment opportunities or deploy capital as quickly; the historical returns that we present in this report derive largely from the performance of our current private equity funds, whereas future fund returns will depend increasingly on the performance of our newer funds or funds not yet formed, which may have little or no realized investment track record; Fund VI and Fund VII are several times larger than our previous private equity funds, and this additional capital may not be deployed as profitably as our prior funds; the attractive returns of certain of our funds have been driven by the rapid return of invested capital, which has not occurred with respect to all of our funds and we believe is less likely to occur in the future; our track record with respect to our credit funds and real estate funds is relatively short as compared to our private equity funds; in recent years, there has been increased competition for private equity investment opportunities resulting from the increased amount of capital invested in private equity funds and high liquidity in debt markets; and our newly established funds may generate lower returns during the period that they take to deploy their capital. -30- Table of Contents Finally, our private equity IRRs have historically varied greatly from fund to fund. Accordingly, you should realize that the IRR going forward for any current or future fund may vary considerably from the historical IRR generated by any particular fund, or for our private equity funds as a whole. Future returns will also be affected by the risks described elsewhere in this report, including risks of the industries and businesses in which a particular fund invests. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Historical Investment Performance of Our Funds.” Our reported net asset values, rates of return and incentive income from affiliates are based in large part upon estimates of the fair value of our investments, which are based on subjective standards and may prove to be incorrect. A large number of investments in our funds are illiquid and thus have no readily ascertainable market prices. We value these investments based on our estimate of their fair value as of the date of determination. We estimate the fair value of our investments based on third-party models, or models developed by us, which include discounted cash flow analyses and other techniques and may be based, at least in part, on independently sourced market parameters. The material estimates and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates used, and, in some cases, the ability to execute, the timing of and the estimated proceeds from expected financings. The actual results related to any particular investment often vary materially as a result of the inaccuracy of these estimates and assumptions. In addition, because many of the illiquid investments held by our funds are in industries or sectors which are unstable, in distress, or undergoing some uncertainty, such investments are subject to rapid changes in value caused by sudden company-specific or industry-wide developments. We include the fair value of illiquid assets in the calculations of net asset values, returns of our funds and our AUM. Furthermore, we recognize incentive income from affiliates based in part on these estimated fair values. Because these valuations are inherently uncertain, they may fluctuate greatly from period to period. Also, they may vary greatly from the prices that would be obtained if the assets were to be liquidated on the date of the valuation and often do vary greatly from the prices we eventually realize. In addition, the values of our investments in publicly traded assets are subject to significant volatility, including due to a number of factors beyond our control. These include actual or anticipated fluctuations in the quarterly and annual results of these companies or other companies in their industries, market perceptions concerning the availability of additional securities for sale, general economic, social or political developments, changes in industry conditions or government regulations, changes in management or capital structure and significant acquisitions and dispositions. Because the market prices of these securities can be volatile, the valuation of these assets will change from period to period, and the valuation for any particular period may not be realized at the time of disposition. In addition, because our private equity funds often hold very large amounts of the securities of their portfolio companies, the disposition of these securities often takes place over a long period of time, which can further expose us to volatility risk. Even if we hold a quantity of public securities that may be difficult to sell in a single transaction, we do not discount the market price of the security for purposes of our valuations. If we realize value on an investment that is significantly lower than the value at which it was reflected in a fund’s net asset values, we would suffer losses in the applicable fund. This could in turn lead to a decline in asset management fees and a loss equal to the portion of the incentive income from affiliates reported in prior periods that was not realized upon disposition. These effects could become applicable to a large number of our investments if our estimates and assumptions used in estimating their fair values differ from future valuations due to market developments. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Analysis” for information related to fund activity that is no longer consolidated. If asset values turn out to be materially different than values reflected in fund net asset values, fund investors could lose confidence which could, in turn, result in redemptions from our funds that permit redemptions or difficulties in raising additional investments. We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our administrative, operational and financial resources. -31- Table of Contents Our AUM has grown significantly in the past and we are pursuing further growth in the near future. Our rapid growth has caused, and planned growth, if successful, will continue to cause, significant demands on our legal, accounting and operational infrastructure, and increased expenses. The complexity of these demands, and the expense required to address them, is a function not simply of the amount by which our AUM has grown, but of the growth in the variety, including the differences in strategy between, and complexity of, our different funds. In addition, we are required to continuously develop our systems and infrastructure in response to the increasing sophistication of the investment management market and legal, accounting, regulatory and tax developments. Our future growth will depend in part, on our ability to maintain an operating platform and management system sufficient to address our growth and will require us to incur significant additional expenses and to commit additional senior management and operational resources. As a result, we face significant challenges: • • • in maintaining adequate financial, regulatory and business controls; implementing new or updated information and financial systems and procedures; and in training, managing and appropriately sizing our work force and other components of our businesses on a timely and cost-effective basis. We may not be able to manage our expanding operations effectively or be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses. Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on our businesses. Changes in tax or law and other legislative or regulatory changes could adversely affect us. Overview of Our Regulatory Environment. We are subject to extensive regulation, including periodic examinations, by governmental and self-regulatory organizations in the jurisdictions in which we operate around the world. Many of these regulators, including U.S. and foreign government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct investigations and administrative proceedings that can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders or the suspension or expulsion of an investment advisor from registration or memberships. Even if an investigation or proceeding did not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing investors or fail to gain new investors. The requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our funds and are not designed to protect our shareholders. Consequently, these regulations often serve to limit our activities. As a result of highly publicized financial scandals, investors have exhibited concerns over the integrity of the U.S. financial markets and the regulatory environment in which we operate both in the United States and outside the United States is particularly likely to be subject to further regulation. There has been an active debate both nationally and internationally over the appropriate extent of regulation and oversight of private investment funds and their managers. Any changes in the regulatory framework applicable to our businesses may impose additional expenses on us, require the attention of senior management or result in limitations in the manner in which our business is conducted. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the “Dodd-Frank Act,” which imposes significant new regulations on almost every aspect of the U.S. financial services industry, including aspects of our business and the markets in which we operate. Among other things, the Dodd-Frank Act requires private equity and hedge fund advisers to register with the SEC, under the Investment Advisers Act, to maintain extensive records and to file reports if deemed necessary for purposes of systemic risk assessment by certain governmental bodies. Importantly, many of the provisions of the Dodd- -32- Table of Contents Frank Act are subject to further rulemaking and to the discretion of regulatory bodies, such as the Financial Stability Oversight Council. As a result, we do not know exactly what the final regulations under the Dodd-Frank Act will require or how significantly the Dodd-Frank Act will affect us. Exemptions from Certain Laws. We regularly rely on exemptions from various requirements of the Securities Act, the Exchange Act, the Investment Company Act, the Commodity Futures Trading Commission, the Commodity Exchange Act of 1936, as amended, and the Employment Retirement Income Security Act of 1974, as amended, in conducting our activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our businesses could be materially and adversely affected. See, for example, “—Risks Related to Our Organization and Structure—If we were deemed an investment company under the Investment Company Act, applicable restrictions could make it impractical for us to continue our businesses as contemplated and could have a material adverse effect on our businesses and the price of our Class A shares.” Fund Regulatory Environment. The regulatory environment in which our funds operate may affect our businesses. For example, changes in antitrust laws or the enforcement of antitrust laws could affect the level of mergers and acquisitions activity, and changes in state laws may limit investment activities of state pension plans. See “Item 1. Business—Regulatory and Compliance Matters” for a further discussion of the regulatory environment in which we conduct our businesses. Future Regulation. We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. As calls for additional regulation have increased, there may be a related increase in regulatory investigations of the trading and other investment activities of alternative asset management funds, including our funds. Such investigations may impose additional expenses on us, may require the attention of senior management and may result in fines if any of our funds are deemed to have violated any regulations. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. New laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business. Apollo provides investment management services through registered investment advisors. Investment advisors are subject to extensive regulation in the United States and in the other countries in which our investment activities occur. The SEC oversees our activities as a registered investment advisor under the Investment Advisers Act. In the United Kingdom, we are subject to regulation by the U.K. Financial Services Authority, which will be replaced by the Financial Conduct Authority as of April 11, 2013. Our other European operations, and our investment activities around the globe, are subject to a variety of regulatory regimes that vary country by country. A failure to comply with the obligations imposed by regulatory regimes to which we are subject, including the Investment Advisers Act could result in investigations, sanctions and reputational damage. In June 2010, the SEC adopted a new “pay-to-play” rule that restricts politically active investment advisors from managing state pension funds. The rule prohibits, among other things, a covered investment advisor from receiving compensation for advisory services provided to a government entity (such as a state pension fund) for a two-year period after the advisor, certain covered employees of the advisor or any covered political action committee controlled by the advisor or its employees makes a political contribution to certain government officials. In addition, a covered investment advisor is prohibited from engaging in political fundraising activities for certain elected officials or candidates in jurisdictions where such advisor is providing or seeking governmental business. This new rule complicates and increases the compliance burden for our investment advisors. It will be imperative for a covered investment advisor to adopt an effective compliance program in light of the substantial penalties associated with the rule. In November 2010, the European Parliament adopted the Directive on Alternative Investment Fund Managers, or the “AIFM,” which is required to be implemented in the national laws of the European -33- Table of Contents Union (“EU”) member states by July 22, 2013. The AIFM imposes significant new regulatory requirements on investment managers operating within the EU, including with respect to conduct of business, regulatory capital, valuations, disclosures and marketing. Alternative investment funds organized outside of the EU in which interests are marketed within the EU would be subject to significant conditions on their operations, including, restrictions on marketing interests in relevant funds to EU and European Economic Area investors; satisfying the competent authority of the robustness of internal arrangements with respect to risk management, in particular liquidity risks and additional operational and counterparty risks associated with short selling; the management and disclosure of conflicts of interest; the fair valuation of assets; and the security of depository/custodial arrangements. Additional requirements and restrictions apply where such funds invest in an EU portfolio company, including restrictions that may impose limits on certain investment and realization strategies, such as dividend recapitalizations and reorganizations. Such rules could potentially impose significant additional costs on the operation of our business in the EU and could limit our operating flexibility within the relevant jurisdictions. In Denmark and Germany, legislative amendments have been adopted which may limit deductibility of interest and other financing expenses in companies in which our funds have invested or may invest in the future. In brief, the Danish legislative amendments generally entail that annual net financing expenses in excess of a certain threshold amount (approximately €2.9 million in 2012) will b e limited on the basis of earnings before interest and taxes and/or asset tax values. According to the German interest barrier rule, the tax deduction available to a company in respect of a net interest expense (interest expense less interest income) is limited to 30% of its tax earnings before interest, taxes, depreciation and amortization (“EBITDA”). Interest expense that does not exceed the threshold of €3m can be deducted without any limitations for income tax purposes. Interest expense in excess of the interest deduction limitation may be carried forward indefinitely (subject to change in ownership restrictions) and used in future periods against all profits and gains. In respect of a tax group, interest paid by the German tax group entities to non-tax group parties (e.g. interest on bank debt, capex facility and working capital facility debt) will be restricted to 30% of the tax group’s tax EBITDA. However, the interest barrier rule may not apply where German company’s gearing under International Financial Reporting Standards (“IFRS”) accounting principles is at maximum of 2% higher than the overall group’s leverage ratio at the level of the very top level entity which would be subject to IFRS consolidation (the “escape clause test”). This test is failed where any worldwide company of the entire group pays more than 10% of its net interest expense on debt to substantial (i.e. greater than 25%) shareholders, related parties of such shareholders (that are not members of the group) or secured third parties (although security granted by group members should not be harmful). If the group does not apply IFRS accounting principles, EU member countries’ generally accepted accounting principles or generally accepted accounting principles in the United States of America (“U.S. GAAP”) may also be accepted for the purpose of the escape clause test. It should be noted that for trade tax purposes, there is principally a 25% add back on all deductible interest paid or accrued by any German entity after the consideration of a tax exempt amount kEUR 100 which is applied to the sum of all add back amounts. For trade tax purposes interest payments within a German tax group will not be considered. Our businesses are subject to the risk that similar measures might be introduced in other countries in which they currently have investments or plan to invest in the future, or that other legislative or regulatory measures might be promulgated in any of the countries in which we operate that adversely affect our businesses. In particular, the U.S. Federal income tax law that determines the tax consequences of an investment in Class A shares is under review and is potentially subject to adverse legislative, judicial or administrative change, possibly on a retroactive basis, including possible changes that would result in the treatment of a portion of our carried interest income as ordinary income, that would cause us to become taxable as a corporation and/or would have other adverse effects. See “—Risks Related to Our Organization and Structure—Although not enacted, the U.S. Congress has considered legislation that would have: (i) in some cases after a ten-year transition period, precluded us from qualifying as a partnership or required us to hold carried interest through taxable corporations; and (ii) taxed certain income and gains at increased rates. If similar legislation were to be enacted and apply to us, the value of the Class A Shares could be adversely affected.” In addition, U.S. and foreign labor unions have recently been agitating for greater legislative and regulatory oversight of private equity firms and transactions. Labor unions have also threatened to use their influence to prevent pension funds from investing in private equity funds. -34- Table of Contents Insurance Regulation. State insurance departments have broad administrative powers over the insurance business of our insurance company affiliates, including insurance company licensing and examination, agent licensing, establishment of reserve requirements and solvency standards, premium rate regulation, admissibility of assets, policy form approval, unfair trade and claims practices and other matters. State regulators regularly review and update these and other requirements. The National Association of Insurance Commissioners (“NAIC”) continues to move forward with its implementation of principles-based reserving for life insurers, which may change the methodology used by our insurance company affiliates to calculate their reserves. Currently, there are proposals to increase the scope of regulation of insurance holding companies in both the United States and internationally. In the United States, the NAIC has promulgated a model law for consideration by the various states that would provide for more extensive informational reporting by parents and affiliates of insurance companies. Internationally, the International Association of Insurance Supervisors is in the process of adopting a framework for the “group wide” supervision of internationally active insurance groups. Changes to existing laws or regulations must be adopted by individual states or foreign jurisdictions before they will become effective. We cannot predict with any degree of certainty the additional capital requirements, compliance costs or other burdens these requirements may impose on us and our insurance company affiliates. The Dodd-Frank Act created the Federal Insurance Office (the “FIO”) within the Department of Treasury headed by a Director appointed by the Treasury Secretary. The FIO is designed principally to exercise a monitoring and information gathering role, rather than a regulatory role. In that capacity, the FIO has been charged with providing reports to the U.S. Congress on (i) modernization of U.S. insurance regulation and (ii) the U.S. and global reinsurance market. Neither report has been issued to date. Such reports could lead to changes in the regulation of insurers and reinsurers in the U.S. Additionally, certain state regulations impose restrictions and limitations on the ability of our insurance company affiliates to pay dividends and make other distributions to their parent companies. To the extent we depend on dividends from our insurance company affiliates, these regulations could have an adverse impact on our financial condition and results of operations. Our revenue, net income and cash flow are all highly variable, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause the price of our Class A shares to decline. Our revenue, net income and cash flow are all highly variable, primarily due to the fact that carried interest from our private equity funds and certain of our credit and real estate funds, which constitutes the largest portion of income from our combined businesses, and the transaction and advisory fees that we receive can vary significantly from quarter to quarter and year to year. In addition, the investment returns of most of our funds are volatile. We may also experience fluctuations in our results from quarter to quarter and year to year due to a number of other factors, including changes in the values of our funds’ investments, changes in the amount of distributions, dividends or interest paid in respect of investments, changes in our operating expenses, the degree to which we encounter competition and general economic and market conditions. In addition, carried interest income from our private equity funds and certain of our credit and real estate funds is subject to contingent repayment by the general partner if, upon the final distribution, the relevant fund’s general partner has received cumulative carried interest on individual portfolio investments in excess of the amount of carried interest it would be entitled to from the profits calculated for all portfolio investments in the aggregate. Such variability may lead to volatility in the trading price of our Class A shares and cause our results for a particular period not to be indicative of our performance in a future period. It may be difficult for us to achieve steady growth in net income and cash flow on a quarterly basis, which could in turn lead to large adverse movements in the price of our Class A shares or increased volatility in our Class A share price generally. The timing of carried interest generated by our funds is uncertain and will contribute to the volatility of our results. Carried interest depends on our funds’ performance. It takes a substantial period of time to identify attractive investment opportunities, to raise all the funds needed to make an investment and then to realize the cash value or other proceeds of an investment through a sale, public offering, recapitalization or other exit. Even if an investment proves to be profitable, it may be several years before -35- Table of Contents any profits can be realized in cash or other proceeds. We cannot predict when, or if, any realization of investments will occur. Generally, with respect to our private equity funds, although we recognize carried interest income on an accrual basis, we receive private equity carried interest payments only upon disposition of an investment by the relevant fund, which contributes to the volatility of our cash flow. If we were to have a realization event in a particular quarter or year, it may have a significant impact on our results for that particular quarter or year that may not be replicated in subsequent periods. We recognize revenue on investments in our funds based on our allocable share of realized and unrealized gains (or losses) reported by such funds, and a decline in realized or unrealized gains, or an increase in realized or unrealized losses, would adversely affect our revenue, which could further increase the volatility of our results. With respect to a number of our credit funds, our incentive income is generally paid annually, semi-annually or quarterly, and the varying frequency of these payments will contribute to the volatility of our revenues and cash flow. Furthermore, we earn this incentive income only if the net asset value of a fund has increased or, in the case of certain funds, increased beyond a particular threshold. Certain of our credit funds also have “high water marks” with respect to the investors in these funds. If the high water mark for a particular investor is not surpassed, we would not earn incentive income with respect to such investor during a particular period even though such investor had positive returns in such period as a result of losses in prior periods. If such an investor experiences losses, we will not be able to earn incentive income from such investor until it surpasses the previous high water mark. The incentive income we earn is therefore dependent on the net asset value of investors’ investments in the fund, which could lead to significant volatility in our results. Because our revenue, net income and cash flow can be highly variable from quarter to quarter and year to year, we plan not to provide any guidance regarding our expected quarterly and annual operating results. The lack of guidance may affect the expectations of public market analysts and could cause increased volatility in our Class A share price. The investment management business is intensely competitive, which could materially adversely impact us. The investment management business is intensely competitive. We face competition both in the pursuit of outside investors for our funds and in acquiring investments in attractive portfolio companies and making other investments. It is possible that it will become increasingly difficult for our funds to raise capital as funds compete for investments from a limited number of qualified investors. Due to the global economic downturn and generally poor returns in alternative asset investment businesses during the crisis, institutional investors have suffered from decreasing returns, liquidity pressure, increased volatility and difficulty maintaining targeted asset allocations, and a significant number of investors have materially decreased or temporarily stopped making new fund investments during this period. As the economy begins to recover, such investors may elect to reduce their overall portfolio allocations to alternative investments such as private equity and hedge funds, resulting in a smaller overall pool of available capital in our industry. Even if such investors continue to invest at historic levels, they may seek to negotiate reduced fee structures or other modifications to fund structures as a condition to investing. In the event all or part of this analysis proves true, when trying to raise new capital we will be competing for fewer total available assets in an increasingly competitive environment which could lead to fee reductions and redemptions as well as difficulty in raising new capital. Such changes would adversely affect our revenues and profitability. Competition among funds is based on a variety of factors, including: • • • • investment performance; investor liquidity and willingness to invest; investor perception of investment managers’ drive, focus and alignment of interest; quality of service provided to and duration of relationship with investors; -36- Table of Contents • • business reputation; and the level of fees and expenses charged for services. We compete in all aspects of our businesses with a large number of investment management firms, private equity, credit and real estate fund sponsors and other financial institutions. A number of factors serve to increase our competitive risks: • • • • • • • • • • • fund investors may develop concerns that we will allow a business to grow to the detriment of its performance; investors may reduce their investments in our funds or not make additional investments in our funds based upon current market conditions, their available capital or their perception of the health of our businesses; some of our competitors have greater capital, lower targeted returns or greater sector or investment strategy- specific expertise than we do, which creates competitive disadvantages with respect to investment opportunities; some of our competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities; some of our competitors may perceive risk differently than we do, which could allow them either to outbid us for investments in particular sectors or, generally, to consider a wider variety of investments; some of our funds may not perform as well as competitors’ funds or other available investment products; our competitors that are corporate buyers may be able to achieve synergistic cost savings in respect of an investment, which may provide them with a competitive advantage in bidding for an investment; some fund investors may prefer to invest with an investment manager that is not publicly traded; there are relatively few barriers to entry impeding new private equity and capital markets fund management firms, and the successful efforts of new entrants into our various businesses, including former “star” portfolio managers at large diversified financial institutions as well as such institutions themselves, will continue to result in increased competition; there are no barriers to entry to our businesses, implementing an integrated platform similar to ours or the strategies that we deploy at our funds, such as distressed investing, which we believe are our competitive strengths, except that our competitors would need to hire professionals with the investment expertise or grow it internally; and other industry participants continuously seek to recruit our investment professionals away from us. These and other factors could reduce our earnings and revenues and materially adversely affect our businesses. In addition, if we are forced to compete with other alternative investment managers on the basis of price, we may not be able to maintain our current management fee and incentive income structures. We have historically competed primarily on the performance of our funds, and not on the level of our fees or incentive income relative to those of our competitors. However, there is a risk that fees and incentive -37- Table of Contents income in the alternative investment management industry will decline, without regard to the historical performance of a manager. Fee or incentive income reductions on existing or future funds, without corresponding decreases in our cost structure, would adversely affect our revenues and profitability. Our ability to retain our investment professionals is critical to our success and our ability to grow depends on our ability to attract additional key personnel. Our success depends on our ability to retain our investment professionals and recruit additional qualified personnel. We anticipate that it will be necessary for us to add investment professionals as we pursue our growth strategy. However, we may not succeed in recruiting additional personnel or retaining current personnel, as the market for qualified investment professionals is extremely competitive. Our investment professionals possess substantial experience and expertise in investing, are responsible for locating and executing our funds’ investments, have significant relationships with the institutions that are the source of many of our funds’ investment opportunities, and in certain cases have key relationships with our fund investors. Therefore, if our investment professionals join competitors or form competing companies it could result in the loss of significant investment opportunities and certain existing fund investors. Legislation has been proposed in the U.S. Congress to treat portions of carried interest as ordinary income rather than as capital gain for U.S. Federal income tax purposes. Because we compensate our investment professionals in large part by giving them an equity interest in our business or a right to receive carried interest, such legislation could adversely affect our ability to recruit, retain and motivate our current and future investment professionals. See “—Risks Related to Taxation—Our structure involves complex provisions of U.S. Federal income tax law for which no clear precedent or authority may be available. Our structure is also subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.” The loss of even a small number of our investment professionals could jeopardize the performance of our funds, which would have a material adverse effect on our results of operations. Efforts to retain or attract investment professionals may result in significant additional expenses, which could adversely affect our profitability. We may not be successful in expanding into new investment strategies, markets and businesses. We actively consider the opportunistic expansion of our businesses, both geographically and into complementary new investment strategies. We may not be successful in any such attempted expansion. Attempts to expand our businesses involve a number of special risks, including some or all of the following: • • • • • • the diversion of management’s attention from our core businesses; the disruption of our ongoing businesses; entry into markets or businesses in which we may have limited or no experience; increasing demands on our operational systems; potential increase in investor concentration; and the broadening of our geographic footprint, increasing the risks associated with conducting operations in foreign jurisdictions. Additionally, any expansion of our businesses could result in significant increases in our outstanding indebtedness and debt service requirements, which would increase the risks in investing in our Class A shares and may adversely impact our results of operations and financial condition. We also may not be successful in identifying new investment strategies or geographic markets that increase our profitability, or in identifying and acquiring new businesses that increase our profitability. Because we have not yet identified these potential new investment strategies, geographic markets or businesses, we cannot identify for you all the risks we may face and the potential adverse consequences on us and your investment that may result from our attempted expansion. We also do not know how long it may take for us to expand, if we do so at all. We have total discretion, at the direction of our manager, -38- Table of Contents without needing to seek approval from our board of directors or shareholders, to enter into new investment strategies, geographic markets and businesses, other than expansions involving transactions with affiliates which may require board approval. Many of our funds invest in relatively high-risk, illiquid assets and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of the principal amount we invest in these activities. Many of our funds invest in securities that are not publicly traded. In many cases, our funds may be prohibited by contract or by applicable securities laws from selling such securities for a period of time. Our funds will generally not be able to sell these securities publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration requirements is available. Accordingly, our funds may be forced, under certain conditions, to sell securities at a loss. The ability of many of our funds, particularly our private equity funds, to dispose of investments is heavily dependent on the public equity markets, inasmuch as the ability to realize value from an investment may depend upon the ability to complete an IPO of the portfolio company in which such investment is held. Furthermore, large holdings even of publicly traded equity securities can often be disposed of only over a substantial period of time, exposing the investment returns to risks of downward movement in market prices during the disposition period. Dependence on significant leverage in investments by our funds could adversely affect our ability to achieve attractive rates of return on those investments. Because certain of our funds’ investments rely heavily on the use of leverage, our ability to achieve attractive rates of return on investments will depend on our continued ability to access sufficient sources of indebtedness at attractive rates. For example, in many of our private equity investments, indebtedness may constitute 70% or more of a portfolio company’s total debt and equity capitalization, including debt that may be incurred in connection with the investment, and a portfolio company’s leverage may increase as a result of recapitalization transactions subsequent to the company’s acquisition by a private equity fund. The absence of available sources of senior debt financing for extended periods of time could therefore materially and adversely affect our private equity funds. An increase in either the general levels of interest rates or in the risk spread demanded by sources of indebtedness would make it more expensive to finance those investments. Increases in interest rates could also make it more difficult to locate and consummate private equity investments because other potential buyers, including operating companies acting as strategic buyers, may be able to bid for an asset at a higher price due to a lower overall cost of capital. In addition, a portion of the indebtedness used to finance private equity investments often includes high-yield debt securities issued in credit funds. Availability of capital from the high-yield debt markets is subject to significant volatility, and there may be times when we might not be able to access those markets at attractive rates, or at all. For example, the dislocation in the credit markets which we believe began in July 2007 and the record backlog of supply in the debt markets resulting from such dislocation materially affected the ability and willingness of banks to underwrite new high-yield debt securities until relatively recently. Investments in highly leveraged entities are inherently more sensitive to declines in revenues, increases in expenses and interest rates and adverse economic, market and industry developments. The incurrence of a significant amount of indebtedness by an entity could, among other things: • give rise to an obligation to make mandatory prepayments of debt using excess cash flow, which might limit the entity’s ability to respond to changing industry conditions to the extent additional cash is needed for the response, to make unplanned but necessary capital expenditures or to take advantage of growth opportunities; • allow even moderate reductions in operating cash flow to render it unable to service its indebtedness, leading to a bankruptcy or other reorganization of the entity and a loss of part or all of the equity investment in it; -39- Table of Contents • • • limit the entity’s ability to adjust to changing market conditions, thereby placing it at a competitive disadvantage compared to its competitors who have relatively less debt; limit the entity’s ability to engage in strategic acquisitions that might be necessary to generate attractive returns or further growth; and limit the entity’s ability to obtain additional financing or increase the cost of obtaining such financing, including for capital expenditures, working capital or general corporate purposes. As a result, the risk of loss associated with a leveraged entity is generally greater than for companies with comparatively less debt. For example, many investments consummated by private equity sponsors during the past three years which utilized significant amounts of leverage are experiencing severe economic stress and may default on their debt obligations due to a decrease in revenues and cash flow precipitated by the recent economic downturn. When our private equity funds’ existing portfolio investments reach the point when debt incurred to finance those investments matures in significant amounts and must be either repaid or refinanced, those investments may materially suffer if they have generated insufficient cash flow to repay maturing debt and there is insufficient capacity and availability in the financing markets to permit them to refinance maturing debt on satisfactory terms, or at all. If the current unusually limited availability of financing for such purposes were to persist for several years, when significant amounts of the debt incurred to finance our private equity funds’ existing portfolio investments start to come due, these funds could be materially and adversely affected. Our credit funds may choose to use leverage as part of their respective investment programs and regularly borrow a substantial amount of their capital. The use of leverage poses a significant degree of risk and enhances the possibility of a significant loss in the value of the investment portfolio. The fund may borrow money from time to time to purchase or carry securities. The interest expense and other costs incurred in connection with such borrowing may not be recovered by appreciation in the securities purchased or carried, and will be lost—and the timing and magnitude of such losses may be accelerated or exacerbated—in the event of a decline in the market value of such securities. Gains realized with borrowed funds may cause the fund’s net asset value to increase at a faster rate than would be the case without borrowings. However, if investment results fail to cover the cost of borrowings, the fund’s net asset value could also decrease faster than if there had been no borrowings. In addition, as a business development company under the Investment Company Act, AINV is permitted to issue senior securities in amounts such that its asset coverage ratio equals at least 200% after each issuance of senior securities. AINV’s ability to pay dividends will be restricted if its asset coverage ratio falls below at least 200% and any amounts that it uses to service its indebtedness are not available for dividends to its common stockholders. An increase in interest rates could also decrease the value of fixed-rate debt investments that our funds make. Any of the foregoing circumstances could have a material adverse effect on our financial condition, results of operations and cash flow. The potential requirement to convert our financial statements from being prepared in conformity with accounting principles generally accepted in the United States of America to International Financial Reporting Standards may strain our resources and increase our annual expenses. As a public entity, the SEC may require in the future that we report our financial results under International Financial Reporting Standards, or “IFRS,” instead of under generally accepted accounting principles in the United States of America, or “U.S. GAAP.” IFRS is a set of accounting principles that has been gaining acceptance on a worldwide basis. These standards are published by the London-based International Accounting Standards Board, or “IASB,” and are more focused on objectives and principles and less reliant on detailed rules than U.S. GAAP. Today, there remain significant and material differences in several key areas between U.S. GAAP and IFRS which would affect Apollo. Additionally, U.S. GAAP provides specific guidance in classes of accounting transactions for which equivalent guidance in IFRS does not exist. The adoption of IFRS is highly complex and would have an impact on many aspects and operations of Apollo, including but not limited to financial accounting and reporting systems, internal -40- Table of Contents controls, taxes, borrowing covenants and cash management. It is expected that a significant amount of time, internal and external resources and expenses over a multi-year period would be required for this conversion. We face operational risk from errors made in the execution, confirmation or settlement of transactions and our dependence on our headquarters in New York City and third-party providers may have an adverse impact on our ability to continue to operate our businesses without interruption which could result in losses to us or limit our growth. We face operational risk from errors made in the execution, confirmation or settlement of transactions. We also face operational risk from transactions not being properly recorded, evaluated or accounted for in our funds. In particular, our capital markets oriented credit business is highly dependent on our ability to process and evaluate, on a daily basis, transactions across markets and geographies in a time-sensitive, efficient and accurate manner. Consequently, we rely heavily on our financial, accounting and other data processing systems. New investment products we may introduce could create a significant risk that our existing systems may not be adequate to identify or control the relevant risks in the investment strategies employed by such new investment products. In addition, our information systems and technology might not be able to accommodate our growth, and the cost of maintaining such systems might increase from its current level. These risks could cause us to suffer financial loss, a disruption of our businesses, liability to our funds, regulatory intervention and reputational damage. Furthermore, we depend on our headquarters, which is located in New York City, for the operation of many of our businesses. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, may have an adverse impact on our ability to continue to operate our businesses without interruption which could have a material adverse effect on us. Although we have disaster recovery programs in place, these may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses. Finally, we rely on third-party service providers for certain aspects of our businesses, including for certain information systems, technology and administration of our funds and compliance matters. Any interruption or deterioration in the performance of these third parties could impair the quality of the funds’ operations and could impact our reputation and adversely affect our businesses and limit our ability to grow. We rely on our information systems to conduct our business, and failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed. The efficient operation of our business is dependent on computer hardware and software systems. Information systems are vulnerable to security breaches by computer hackers and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent security breaches. In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased operating costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and results of operations. We derive a substantial portion of our revenues from funds managed pursuant to management agreements that may be terminated or fund partnership agreements that permit fund investors to request liquidation of investments in our funds on short notice. The terms of our funds generally give either the general partner of the fund or the fund’s board of directors the right to terminate our investment management agreement with the fund. However, insofar as we control the general partner of our funds that are limited partnerships, the risk of termination of investment management agreement for such funds is limited, subject to our fiduciary or contractual duties -41- Table of Contents as general partner. This risk is more significant for certain of our funds, which have independent boards of directors. With respect to our funds that are subject to the Investment Company Act, each fund’s investment management agreement must be approved annually by such fund’s board of directors or by the vote of a majority of the shareholders and the majority of the independent members of such fund’s board of directors and, as required by law. The funds’ investment management agreement can also be terminated by the majority of the shareholders. Termination of these agreements would reduce the fees we earn from the relevant funds, which could have a material adverse effect on our results of operations. Currently, AFT and AIF, registered investment companies under the Investment Company Act, and AINV, a registered investment company that has elected to be treated as a business development company under the Investment Company Act, are subject to these provisions of the Investment Company Act. In addition, after undergoing the 2007 Reorganization, we no longer consolidate in our financial statements certain of the funds that have historically been consolidated in our financial statements. In connection with such deconsolidation, we amended the governing documents of those funds to provide that a simple majority of a fund’s unaffiliated investors have the right to liquidate that fund, which would cause management fees and incentive income to terminate. Our ability to realize incentive income from such funds also would be adversely affected if we are required to liquidate fund investments at a time when market conditions result in our obtaining less for investments than could be obtained at later times. We do not know whether, and under what circumstances, the investors in our funds are likely to exercise such right. In addition, the management agreements of our funds would terminate if we were to experience a change of control without obtaining investor consent. Such a change of control could be deemed to occur in the event our Managing Partners exchange enough of their interests in the Apollo Operating Group into our Class A shares such that our Managing Partners no longer own a controlling interest in us. We cannot be certain that consents required for the assignment of our management agreements will be obtained if such a deemed change of control occurs. Termination of these agreements would affect the fees we earn from the relevant funds and the transaction and advisory fees we earn from the underlying portfolio companies, which could have a material adverse effect on our results of operations. Our use of leverage to finance our businesses will expose us to substantial risks, which are exacerbated by our funds’ use of leverage to finance investments. We have loans outstanding under the AMH Credit Agreement and the CIT loan agreements described in note 12 to our consolidated financial statements. We may choose to finance our business operations through further borrowings. Our existing and future indebtedness exposes us to the typical risks associated with the use of leverage, including those discussed above under “—Dependence on significant leverage in investments by our funds could adversely affect our ability to achieve attractive rates of return on those investments.” These risks are exacerbated by certain of our funds’ use of leverage to finance investments and, if they were to occur, could cause us to suffer a decline in the credit ratings assigned to our debt by rating agencies, if any, which might result in an increase in our borrowing costs or result in other material adverse effects on our businesses. Borrowings under the AMH Credit Agreement are scheduled to mature either on April 20, 2014 or January 3, 2017 and borrowings under the CIT loan agreements are scheduled to mature in April 2013. As these borrowings and other indebtedness mature (or are otherwise repaid prior to their scheduled maturities), we may be required to either refinance them by entering into new facilities, which could result in higher borrowing costs, or issuing equity, which would dilute existing shareholders. We could also repay them by using cash on hand or cash from the sale of our assets. We could have difficulty entering into new facilities or issuing equity in the future on attractive terms, or at all. Borrowings under the AMH Credit Agreement are floating-rate obligations based on either the London Interbank Offered Rate (“LIBOR”) or the Alternate Base Rate (“ABR”). As a result, an increase in short-term interest rates will increase our interest costs to the extent such borrowings have not been hedged into fixed rates. -42- Table of Contents We are subject to third-party litigation that could result in significant liabilities and reputational harm, which could materially adversely affect our results of operations, financial condition and liquidity. In general, we will be exposed to risk of litigation by our investors if our management of any fund is alleged to constitute bad faith, gross negligence, willful misconduct, fraud, willful or reckless disregard for our duties to the fund or other forms of misconduct. Investors could sue us to recover amounts lost by our funds due to our alleged misconduct, up to the entire amount of loss. Further, we may be subject to litigation arising from investor dissatisfaction with the performance of our funds or from allegations that we improperly exercised control or influence over companies in which our funds have large investments. By way of example, we, our funds and certain of our employees are each exposed to the risks of litigation relating to investment activities in our funds and actions taken by the officers and directors (some of whom may be Apollo employees) of portfolio companies, such as the risk of shareholder litigation by other shareholders of public companies in which our funds have large investments. We are also exposed to risks of litigation or investigation relating to transactions that presented conflicts of interest that were not properly addressed. In addition, our rights to indemnification by the funds we manage may not be upheld if challenged, and our indemnification rights generally do not cover bad faith, gross negligence, willful misconduct, fraud, willful or reckless disregard for our duties to the fund or other forms of misconduct. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification from our funds, our results of operations, financial condition and liquidity would be materially adversely affected. In addition, with a workforce that includes many very highly paid investment professionals, we face the risk of lawsuits relating to claims for compensation, which may individually or in the aggregate be significant in amount. Such claims are more likely to occur in the current environment where individual employees may experience significant volatility in their year-to-year compensation due to trading performance or other issues and in situations where previously highly compensated employees were terminated for performance or efficiency reasons. The cost of settling such claims could adversely affect our results of operations. If any lawsuits brought against us were to result in a finding of substantial legal liability, the lawsuit could, in addition to any financial damage, cause significant reputational harm to us, which could seriously harm our business. We depend to a large extent on our business relationships and our reputation for integrity and high-caliber professional services to attract and retain investors and to pursue investment opportunities for our funds. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, our investment activities or the private equity industry in general, whether or not valid, may harm our reputation, which may be more damaging to our business than to other types of businesses. See “Item 3. Legal Proceedings.” Our failure to deal appropriately with conflicts of interest could damage our reputation and adversely affect our businesses. As we have expanded and as we continue to expand the number and scope of our businesses, we increasingly confront potential conflicts of interest relating to our funds’ investment activities. Certain of our funds may have overlapping investment objectives, including funds that have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among those funds. For example, a decision to acquire material non-public information about a company while pursuing an investment opportunity for a particular fund gives rise to a potential conflict of interest when it results in our having to restrict the ability of other funds to take any action. In addition, fund investors (or holders of Class A shares) may perceive conflicts of interest regarding investment decisions for funds in which our Managing Partners, who have and may continue to make significant personal investments in a variety of Apollo funds, are personally invested. Similarly, conflicts of interest may exist in the valuation of our investments and regarding decisions about the allocation of specific investment opportunities among us and our funds and the allocation of fees and costs among us, our funds and their portfolio companies. Pursuant to the terms of our operating agreement, whenever a potential conflict of interest exists or arises between any of the Managing Partners, one or more directors or their respective affiliates, on the one -43- Table of Contents hand, and us, any of our subsidiaries or any shareholder other than a Managing Partner, on the other, any resolution or course of action by our board of directors shall be permitted and deemed approved by all shareholders if the resolution or course of action (i) has been specifically approved by a majority of the voting power of our outstanding voting shares (excluding voting shares owned by our manager or its affiliates) or by a conflicts committee of the board of directors composed entirely of one or more independent directors, (ii) is on terms no less favorable to us or our shareholders (other than a Managing Partner) than those generally being provided to or available from unrelated third parties or (iii) it is fair and reasonable to us and our shareholders taking into account the totality of the relationships between the parties involved. All conflicts of interest described in this report will be deemed to have been specifically approved by all shareholders. Notwithstanding the foregoing, it is possible that potential or perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation which would materially adversely affect our businesses in a number of ways, including as a result of redemptions by our investors from our funds, an inability to raise additional funds and a reluctance of counterparties to do business with us. Our organizational documents do not limit our ability to enter into new lines of businesses, and we may expand into new investment strategies, geographic markets and businesses, each of which may result in additional risks and uncertainties in our businesses. We intend, to the extent that market conditions warrant, to grow our businesses by increasing AUM in existing businesses and expanding into new investment strategies, geographic markets and businesses. Our organizational documents, however, do not limit us to the investment management business. Accordingly, we may pursue growth through acquisitions of other investment management companies, acquisitions of critical business partners or other strategic initiatives, which may include entering into new lines of business, such as the insurance, broker-dealer or financial advisory industries. In addition, we expect opportunities will arise to acquire other alternative or traditional asset managers. To the extent we make strategic investments or acquisitions, undertake other strategic initiatives or enter into a new line of business, we will face numerous risks and uncertainties, including risks associated with (i) the required investment of capital and other resources, (ii) the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk, (iii) combining or integrating operational and management systems and controls and (iv) the broadening of our geographic footprint, including the risks associated with conducting operations in foreign jurisdictions. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected. Our strategic initiatives may include joint ventures, in which case we will be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control. Employee misconduct could harm us by impairing our ability to attract and retain investors and by subjecting us to significant legal liability, regulatory scrutiny and reputational harm. Our reputation is critical to maintaining and developing relationships with the investors in our funds, potential fund investors and third parties with whom we do business. In recent years, there have been a number of highly publicized cases involving fraud, conflicts of interest or other misconduct by individuals in the financial services industry. There is a risk that our employees could engage in misconduct that adversely affects our businesses. For example, if an employee were to engage in illegal or suspicious activities, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position, investor relationships and ability to attract future investors. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations, could result in a material adverse effect on our reputation and our businesses. -44- Table of Contents The due diligence process that we undertake in connection with investments by our funds may not reveal all facts that may be relevant in connection with an investment. Before making investments in private equity and other investments, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations. The due diligence investigation that we will carry out with respect to any investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful. Certain of our funds utilize special situation and distressed debt investment strategies that involve significant risks. Our funds often invest in obligors and issuers with weak financial conditions, poor operating results, substantial financial needs, negative net worth and/or special competitive problems. These funds also invest in obligors and issuers that are involved in bankruptcy or reorganization proceedings. In such situations, it may be difficult to obtain full information as to the exact financial and operating conditions of these obligors and issuers. Additionally, the fair values of such investments are subject to abrupt and erratic market movements and significant price volatility if they are publicly traded securities, and are subject to significant uncertainty in general if they are not publicly traded securities. Furthermore, some of our funds’ distressed investments may not be widely traded or may have no recognized market. A fund’s exposure to such investments may be substantial in relation to the market for those investments, and the assets are likely to be illiquid and difficult to sell or transfer. As a result, it may take a number of years for the market value of such investments to ultimately reflect their intrinsic value as perceived by us. A central feature of our distressed investment strategy is our ability to successfully predict the occurrence of certain corporate events, such as debt and/or equity offerings, restructurings, reorganizations, mergers, takeover offers and other transactions, that we believe will improve the condition of the business. If the corporate event we predict is delayed, changed or never completed, the market price and value of the applicable fund’s investment could decline sharply. In addition, these investments could subject us to certain potential additional liabilities that may exceed the value of our original investment. Under certain circumstances, payments or distributions on certain investments may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, a preferential payment or similar transaction under applicable bankruptcy and insolvency laws. In addition, under certain circumstances, a lender that has inappropriately exercised control of the management and policies of a debtor may have its claims subordinated or disallowed, or may be found liable for damages suffered by parties as a result of such actions. In the case where the investment in securities of troubled companies is made in connection with an attempt to influence a restructuring proposal or plan of reorganization in bankruptcy, our funds may become involved in substantial litigation. We often pursue investment opportunities that involve business, regulatory, legal or other complexities. As an element of our investment style, we often pursue unusually complex investment opportunities. This can often take the form of substantial business, regulatory or legal complexity that would deter other investment managers. Our tolerance for complexity presents risks, as such transactions can be more difficult, expensive and time-consuming to finance and execute; it can be more difficult to manage or realize value from the assets acquired in such transactions; and such transactions sometimes entail a higher level of regulatory scrutiny or a greater risk of contingent liabilities. Any of these risks could harm the performance of our funds. Our funds make investments in companies that we do not control. -45- Table of Contents Investments by some of our funds will include debt instruments and equity securities of companies that we do not control. Such instruments and securities may be acquired by our funds through trading activities or through purchases of securities from the issuer. In addition, in the future, our funds may seek to acquire minority equity interests more frequently and may also dispose of a portion of their majority equity investments in portfolio companies over time in a manner that results in the funds retaining a minority investment. Those investments will be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the values of investments by our funds could decrease and our financial condition, results of operations and cash flow could suffer as a result. Our funds may face risks relating to undiversified investments. While diversification is generally an objective of our funds, we cannot give assurance as to the degree of diversification that will actually be achieved in any fund investments. Because a significant portion of a fund’s capital may be invested in a single investment or portfolio company, a loss with respect to such investment or portfolio company could have a significant adverse impact on such fund’s capital. Accordingly, a lack of diversification on the part of a fund could adversely affect a fund’s performance and therefore, our financial condition and results of operations. Some of our funds invest in foreign countries and securities of issuers located outside of the United States, which may involve foreign exchange, political, social and economic uncertainties and risks. Some of our funds invest all or a portion of their assets in the equity, debt, loans or other securities of issuers located outside the United States, including Germany, China and Singapore. In addition to business uncertainties, such investments may be affected by changes in exchange values as well as political, social and economic uncertainty affecting a country or region. Many financial markets are not as developed or as efficient as those in the United States, and as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environment may also be different, particularly with respect to bankruptcy and reorganization. Financial accounting standards and practices may differ, and there may be less publicly available information in respect of such companies. Restrictions imposed or actions taken by foreign governments may adversely impact the value of our fund investments. Such restrictions or actions could include exchange controls, seizure or nationalization of foreign deposits or other assets and adoption of other governmental restrictions that adversely affect the prices of securities or the ability to repatriate profits on investments or the capital invested itself. Income received by our funds from sources in some countries may be reduced by withholding and other taxes. Any such taxes paid by a fund will reduce the net income or return from such investments. While our funds will take these factors into consideration in making investment decisions, including when hedging positions, our funds may not be able to fully avoid these risks or generate sufficient risk-adjusted returns. Third-party investors in our funds will have the right under certain circumstances to terminate commitment periods or to dissolve the funds, and investors in our credit funds may redeem their investments in our credit funds at any time after an initial holding period of 12 to 36 months. These events would lead to a decrease in our revenues, which could be substantial. The governing agreements of certain of our funds allow the limited partners of those funds to (i) terminate the commitment period of the fund in the event that certain “key persons” (for example, one or more of our Managing Partners and/or certain other investment professionals) fail to devote the requisite time to managing the fund, (ii) (depending on the fund) terminate the commitment period, dissolve the fund or remove the general partner if we, as general partner or manager, or certain key persons engage in certain forms of misconduct, or (iii) dissolve the fund or terminate the commitment period upon the affirmative vote of a specified percentage of limited partner interests entitled to vote. Both Fund VI and Fund VII, on which our near- to medium-term performance will heavily depend, include a number of such provisions. Also, after undergoing the 2007 Reorganization, subsequent to which we deconsolidated certain funds that have historically been consolidated in our financial statements, we amended the governing documents of those funds to provide that a simple majority of a fund’s unaffiliated investors have the right to liquidate -46- Table of Contents that fund. In addition to having a significant negative impact on our revenue, net income and cash flow, the occurrence of such an event with respect to any of our funds would likely result in significant reputational damage to us. Investors in our credit funds may also generally redeem their investments on an annual, semiannual or quarterly basis following the expiration of a specified period of time when capital may not be redeemed (typically between one and five years). Fund investors may decide to move their capital away from us to other investments for any number of reasons in addition to poor investment performance. Factors which could result in investors leaving our funds include changes in interest rates that make other investments more attractive, changes in investor perception regarding our focus or alignment of interest, unhappiness with changes in or broadening of a fund’s investment strategy, changes in our reputation and departures or changes in responsibilities of key investment professionals. In a declining market, the pace of redemptions and consequent reduction in our Assets Under Management could accelerate. The decrease in revenues that would result from significant redemptions in these funds could have a material adverse effect on our businesses, revenues, net income and cash flows. In addition, the management agreements of all of our funds would be terminated upon an “assignment,” without the requisite consent, of these agreements, which may be deemed to occur in the event the investment advisors of our funds were to experience a change of control. We cannot be certain that consents required to assign our investment management agreements will be obtained if a change of control occurs. In addition, with respect to our publicly traded closed-end funds, each fund’s investment management agreement must be approved annually by the independent members of such fund’s board of directors and, in certain cases, by its stockholders, as required by law. Termination of these agreements would cause us to lose the fees we earn from such funds. Our financial projections for portfolio companies could prove inaccurate. Our funds generally establish the capital structure of portfolio companies on the basis of financial projections for such portfolio companies. These projected operating results will normally be based primarily on management judgments. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed. General economic conditions, which are not predictable, along with other factors may cause actual performance to fall short of the financial projections we used to establish a given portfolio company’s capital structure. Because of the leverage we typically employ in our investments, this could cause a substantial decrease in the value of our equity holdings in the portfolio company. The inaccuracy of financial projections could thus cause our funds’ performance to fall short of our expectations. Our private equity funds’ performance, and our performance, may be adversely affected by the financial performance of our portfolio companies and the industries in which our funds invest. Our performance and the performance of our private equity funds is significantly impacted by the value of the companies in which our funds have invested. Our funds invest in companies in many different industries, each of which is subject to volatility based upon economic and market factors. Over the last few years, the credit crisis has caused significant fluctuations in the value of securities held by our funds and the global economic recession had a significant impact in overall performance activity and the demands for many of the goods and services provided by portfolio companies of the funds we manage. Although the U.S. economy has improved, there remain many obstacles to continued growth in the economy such as high unemployment, global geopolitical events, risks of inflation and high deficit levels for governmental agencies in the U.S. and abroad. These factors and other general economic trends are likely to impact the performance of portfolio companies in many industries and in particular, industries that are more impacted by changes in consumer demand, such as the packaging, manufacturing, chemical and refining industries, as well as travel and real estate industries. The performance of our private equity funds, and our performance, may be adversely affected to the extent our fund portfolio companies in these industries experience adverse performance or additional pressure due to downward trends. For example, the performance of certain of our portfolio companies in the packaging, manufacturing, chemical and refining industries is subject to the cyclical and volatile nature of the supply-demand balance in these industries. These industries historically have experienced alternating periods of capacity shortages leading to tight supply conditions, causing prices and profit margins to increase, followed by periods when substantial -47- Table of Contents capacity is added, resulting in oversupply, declining capacity utilization rates and declining prices and profit margins. In addition to changes in the supply and demand for products, the volatility these industries experience occurs as a result of changes in energy prices, costs of raw materials and changes in various other economic conditions around the world. The performance of our investments in the commodities markets is also subject to a high degree of business and market risk, as it is substantially dependent upon prevailing prices of oil and natural gas. Prices for oil and natural gas are subject to wide fluctuation in response to relatively minor changes in the supply and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as level of consumer product demand, the refining capacity of oil purchasers, weather conditions, government regulations, the price and availability of alternative fuels, political conditions, foreign supply of such commodities and overall economic conditions. It is common in making investments in the commodities markets to deploy hedging strategies to protect against pricing fluctuations (but that may or may not protect our investments). Similarly, the performance of cruise ship operations is also susceptible to adverse changes in the economic climate, such as higher fuel prices, as increases in the cost of fuel globally would increase the cost of cruise ship operations. Economic and political conditions in certain parts of the world make it difficult to predict the price of fuel in the future. In addition, cruise ship operators could experience increases in other operating costs, such as crew, insurance and security costs, due to market forces and economic or political instability beyond their control. In respect of real estate, even though the U.S. residential real estate market has recently shown some signs of stabilizing from a lengthy and deep downturn, various factors could halt or limit a recovery in the housing market and have an adverse effect on the companies’ performance, including, but not limited to, continued high unemployment, a low level of consumer confidence in the economy and/or the residential real estate market and rising mortgage interest rates. In addition, our funds’ investments in commercial mortgage loans and other commercial real-estate related loans are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with mortgage loans made on the security of residential properties. If the net operating income of the commercial property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of a commercial property can be affected by various factors, such as success of tenant businesses, property management decisions, competition from comparable types of properties and declines in regional or local real estate values and rental or occupancy rates. Fraud and other deceptive practices could harm fund performance. Instances of fraud and other deceptive practices committed by senior management of portfolio companies in which an Apollo fund invests may undermine our due diligence efforts with respect to such companies, and if such fraud is discovered, negatively affect the valuation of a fund’s investments. In addition, when discovered, financial fraud may contribute to overall market volatility that can negatively impact an Apollo fund’s investment program. As a result, instances of fraud could result in fund performance that is poorer than expected. Contingent liabilities could harm fund performance. We may cause our funds to acquire an investment that is subject to contingent liabilities. Such contingent liabilities could be unknown to us at the time of acquisition or, if they are known to us, we may not accurately assess or protect against the risks that they present. Acquired contingent liabilities could thus result in unforeseen losses for our funds. In addition, in connection with the disposition of an investment in a portfolio company, a fund may be required to make representations about the business and financial affairs of such portfolio company typical of those made in connection with the sale of a business. A fund may also be required to indemnify the purchasers of such investment to the extent that any such representations are inaccurate. These arrangements may result in the incurrence of contingent liabilities by a fund, even after the disposition of an investment. Accordingly, the inaccuracy of representations and warranties made by a fund could harm such fund’s performance. -48- Table of Contents Our funds may be forced to dispose of investments at a disadvantageous time. Our funds may make investments that they do not advantageously dispose of prior to the date the applicable fund is dissolved, either by expiration of such fund’s term or otherwise. Although we generally expect that investments will be disposed of prior to dissolution or be suitable for in- kind distribution at dissolution, and the general partners of the funds have a limited ability to extend the term of the fund with the consent of fund investors or the advisory board of the fund, as applicable, our funds may have to sell, distribute or otherwise dispose of investments at a disadvantageous time as a result of dissolution. This would result in a lower than expected return on the investments and, perhaps, on the fund itself. Possession of material, non-public information could prevent Apollo funds from undertaking advantageous transactions; our internal controls could fail; we could determine to establish information barriers. Our Managing Partners, investment professionals or other employees may acquire confidential or material non-public information and, as a result, be restricted from initiating transactions in certain securities. This risk affects us more than it does many other investment managers, as we generally do not use information barriers that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. Our decision not to implement these barriers could prevent our investment professionals from undertaking advantageous investments or dispositions that would be permissible for them otherwise. In order to manage possible risks resulting from our decision not to implement information barriers, our compliance personnel maintain a list of restricted securities as to which we have access to material, non-public information and in which our funds and investment professionals are not permitted to trade. This internal control relating to the management of material non-public information could fail with the result that we, or one of our investment professionals, might trade when at least constructively in possession of material non-public information. Inadvertent trading on material non- public information could have adverse effects on our reputation, result in the imposition of regulatory or financial sanctions and as a consequence, negatively impact our financial condition. In addition, we could in the future decide that it is advisable to establish information barriers, particularly as our business expands and diversifies. In such event, our ability to operate as an integrated platform will be restricted. The establishment of such information barriers may also lead to operational disruptions and result in restructuring costs, including costs related to hiring additional personnel as existing investment professionals are allocated to either side of such barriers, which may adversely affect our business. Regulations governing AINV’s operation as a business development company affect its ability to raise, and the way in which it raises, additional capital. As a business development company under the Investment Company Act, AINV may issue debt securities or preferred stock and borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the Investment Company Act. Under the provisions of the Investment Company Act, AINV is permitted to issue senior securities only in amounts such that its asset coverage, as defined in the Investment Company Act, equals at least 200% after each issuance of senior securities. If the value of its assets declines, it may be unable to satisfy this test. If that happens, it may be required to sell a portion of its investments and, depending on the nature of its leverage, repay a portion of its indebtedness at a time when such sales may be disadvantageous. Business development companies may issue and sell common stock at a price below net asset value per share only in limited circumstances, one of which is during the one-year period after stockholder approval. AINV’s stockholders have, in the past, approved a plan so that during the subsequent 12-month period, AINV may, in one or more public or private offerings of its common stock, sell or otherwise issue shares of its common stock at a price below the then current net asset value per share, subject to certain conditions including parameters on the level of permissible dilution, approval of the sale by a majority of its independent directors and a requirement that the sale price be not less than approximately the market price of the shares of its common stock at specified times, less the expenses of the sale. AINV may ask its stockholders for additional approvals from year to year. There is no assurance such approvals will be obtained. -49- Table of Contents Our credit funds are subject to numerous additional risks. Our credit funds are subject to numerous additional risks, including the risks set forth below. • • • • • • • Generally, there are few limitations on the execution of these funds’ investment strategies, which are subject to the sole discretion of the management company or the general partner of such funds. These funds may engage in short-selling, which is subject to a theoretically unlimited risk of loss. These funds are exposed to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the fund to suffer a loss. Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. The efficacy of investment and trading strategies depend largely on the ability to establish and maintain an overall market position in a combination of financial instruments, which can be difficult to execute. These funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. These funds’ investments are subject to risks relating to investments in commodities, futures, options and other derivatives, the prices of which are highly volatile and may be subject to a theoretically unlimited risk of loss in certain circumstances. Risks Related to Our Class A Shares The market price and trading volume of our Class A shares may be volatile, which could result in rapid and substantial losses for our shareholders. The market price of our Class A shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A shares may fluctuate and cause significant price variations to occur. If the market price of our Class A shares declines significantly, you may be unable to resell your Class A shares at or above your purchase price, if at all. The market price of our Class A shares may fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A shares or result in fluctuations in the price or trading volume of our Class A shares include: • • • • variations in our quarterly operating results or distributions, which variations we expect will be substantial; our policy of taking a long-term perspective on making investment, operational and strategic decisions, which is expected to result in significant and unpredictable variations in our quarterly returns; failure to meet analysts’ earnings estimates; publication of research reports about us or the investment management industry or the failure of securities analysts to cover our Class A shares; -50- Table of Contents • • • • • • • • • additions or departures of our Managing Partners and other key management personnel; adverse market reaction to any indebtedness we may incur or securities we may issue in the future; actions by shareholders; changes in market valuations of similar companies; speculation in the press or investment community; changes or proposed changes in laws or regulations or differing interpretations thereof affecting our businesses or enforcement of these laws and regulations, or announcements relating to these matters; a lack of liquidity in the trading of our Class A shares; adverse publicity about the asset management industry generally or individual scandals, specifically; and general market and economic conditions. In addition, from time to time, management may also declare special quarterly distributions based on investment realizations. Volatility in the market price of our Class A shares may be heightened at or around times of investment realizations as well as following such realization, as a result of speculation as to whether such a distribution may be declared. An investment in Class A shares is not an investment in any of our funds, and the assets and revenues of our funds are not directly available to us. Class A shares are securities of Apollo Global Management, LLC only. While our historical consolidated and combined financial information includes financial information, including assets and revenues of certain Apollo funds on a consolidated basis, and our future financial information will continue to consolidate certain of these funds, such assets and revenues are available to the fund and not to us except through management fees, incentive income, distributions and other proceeds arising from agreements with funds, as discussed in more detail in this report. Our Class A share price may decline due to the large number of shares eligible for future sale and for exchange into Class A shares. The market price of our Class A shares could decline as a result of sales of a large number of our Class A shares or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. As of December 31, 2012, we had 130,053,993 Class A shares outstanding. The Class A shares reserved under our equity incentive plan are increased on the first day of each fiscal year by (i) the amount (if any) by which (a) 15% of the number of outstanding Class A shares and Apollo Operating Group units (“AOG Units”) exchangeable for Class A shares on a fully converted and diluted basis on the last day of the immediately preceding fiscal year exceeds (b) the number of shares then reserved and available for issuance under the Equity Plan, or (ii) such lesser amount by which the administrator may decide to increase the number of Class A shares. Taking into account grants of restricted share units (“RSUs”) and options made through December 31, 2012, 39,558,144 Class A shares remained available for future grant under our equity incentive plan. In addition, Holdings may at any time exchange its AOG Units for up to 240,000,000 Class A shares on behalf of our Managing Partners and Contributing Partners. We may also elect to sell additional Class A shares in one or more future primary offerings. -51- Table of Contents Our Managing Partners and Contributing Partners, through their partnership interests in Holdings, owned an aggregate of 64.9% of the AOG Units as of December 31, 2012. Subject to certain procedures and restrictions (including any transfer restrictions and lock-up agreements applicable to our Managing Partners and Contributing Partners), each Managing Partner and Contributing Partner has the right, upon 60 days’ notice prior to a designated quarterly date, to exchange the AOG Units for Class A shares. These Class A shares are eligible for resale from time to time, subject to certain contractual restrictions and Securities Act limitations. Our Managing Partners and Contributing Partners (through Holdings) have the ability to cause us to register the Class A shares they acquire upon exchange of their AOG Units. Such rights will be exercisable beginning two years after the initial public offering of our Class A shares. See “Item 13. Certain Relationships and Related Party Transactions—Managing Partner Shareholders Agreement—Registration Rights.” The Strategic Investors have the ability to cause us to register any of their non-voting Class A shares beginning two years after the initial public offering of our Class A shares, and, generally, may only transfer their non-voting Class A shares prior to such time to its controlled affiliates. See “Item 13. Certain Relationships and Related Party Transactions—Lenders Rights Agreement.” We have on file with the SEC a registration statement on Form S-8 covering the shares issuable under our equity incentive plan. Subject to vesting and contractual lock-up arrangements, such shares will be freely tradable. We cannot assure you that our intended quarterly distributions will be paid each quarter or at all. Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of our net after-tax cash flow from operations in excess of amounts determined by our manager to be necessary or appropriate to provide for the conduct of our businesses, to make appropriate investments in our businesses and our funds, to comply with applicable laws and regulations, to service our indebtedness or to provide for future distributions to our Class A shareholders for any ensuing quarter. The declaration, payment and determination of the amount of our quarterly dividend, if any, will be at the sole discretion of our manager, who may change our dividend policy at any time. We cannot assure you that any distributions, whether quarterly or otherwise, will or can be paid. In making decisions regarding our quarterly dividend, our manager considers general economic and business conditions, our strategic plans and prospects, our businesses and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, legal, tax, regulatory and other restrictions that may have implications on the payment of distributions by us to our common shareholders or by our subsidiaries to us, and such other factors as our manager may deem relevant. Our Managing Partners’ beneficial ownership of interests in the Class B share that we have issued to BRH Holdings GP, Ltd. (“BRH”), the control exercised by our manager and anti-takeover provisions in our charter documents and Delaware law could delay or prevent a change in control. Our Managing Partners, through their ownership of BRH, beneficially own the Class B share that we have issued to BRH. The Managing Partners interests in such Class B share represented 77.4% of the total combined voting power of our shares entitled to vote as of December 31, 2012. As a result, they are able to exercise control over all matters requiring the approval of shareholders and are able to prevent a change in control of our company. In addition, our operating agreement provides that so long as the Apollo control condition (as described in “Item 10—Directors, Executive Officers and Corporate Governance—Our Manager”) is satisfied, our manager, which is owned and controlled by our Managing Partners, manages all of our operations and activities. The control of our manager will make it more difficult for a potential acquirer to assume control of our Company. Other provisions in our operating agreement may also make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our shareholders. For example, our operating agreement requires advance notice for proposals by shareholders and nominations, places limitations on convening shareholder meetings, and authorizes the issuance of preferred shares that could be issued by our board of directors to -52- Table of Contents thwart a takeover attempt. In addition, certain provisions of Delaware law may delay or prevent a transaction that could cause a change in our control. The market price of our Class A shares could be adversely affected to the extent that our Managing Partners’ control over our Company, the control exercised by our manager as well as provisions of our operating agreement discourage potential takeover attempts that our shareholders may favor. We are a Delaware limited liability company, and there are certain provisions in our operating agreement regarding exculpation and indemnification of our officers and directors that differ from the Delaware General Corporation Law (DGCL) in a manner that may be less protective of the interests of our Class A shareholders. Our operating agreement provides that to the fullest extent permitted by applicable law our directors or officers will not be liable to us. However, under the DGCL, a director or officer would be liable to us for (i) breach of duty of loyalty to us or our shareholders, (ii) intentional misconduct or knowing violations of the law that are not done in good faith, (iii) improper redemption of shares or declaration of dividend, or (iv) a transaction from which the director derived an improper personal benefit. In addition, our operating agreement provides that we indemnify our directors and officers for acts or omissions to the fullest extent provided by law. However, under the DGCL, a corporation can only indemnify directors and officers for acts or omissions if the director or officer acted in good faith, in a manner he reasonably believed to be in the best interests of the corporation, and, in criminal action, if the officer or director had no reasonable cause to believe his conduct was unlawful. Accordingly, our operating agreement may be less protective of the interests of our Class A shareholders, when compared to the DGCL, insofar as it relates to the exculpation and indemnification of our officers and directors. Risks Related to Our Organization and Structure Although not enacted, the U.S. Congress has considered legislation that would have: (i) in some cases after a ten-year transition period, precluded us from qualifying as a partnership or required us to hold carried interest through taxable corporations; and (ii) taxed certain income and gains at increased rates. If similar legislation were to be enacted and apply to us, the value of our Class A shares could be adversely affected. The U.S. Congress, the IRS and the U.S. Treasury Department have recently examined the U.S. Federal income tax treatment of private equity funds, hedge funds and other kinds of investment partnerships. The present U.S. Federal income tax treatment of a holder of Class A shares and/or our own taxation may be adversely affected by any new legislation, new regulations or revised interpretations of existing tax law that arise as a result of such examinations. In May 2010, the U.S. House of Representatives passed legislation (the “May 2010 House Bill”) that would have, in general, treated income and gains, including gain on sale, attributable to an interest in an investment services partnership interest (“ISPI”) as income subject to a new blended tax rate that is higher than under current law, except to the extent such ISPI would have been considered under the legislation to be a qualified capital interest. The interests of Class A shareholders and our interests in the Apollo Operating Group that are entitled to receive carried interest may be classified as ISPIs for purposes of this legislation. The United States Senate considered, but did not pass, similar legislation. On February 14, 2012, Representative Levin introduced similar legislation (the “2012 Levin Bill”) that would tax carried interest at ordinary income rates (which would be higher than the proposed blended rate in the May 2010 House Bill). It is unclear when or whether the U.S. Congress will pass such legislation or what provisions would be included in any legislation, if enacted. Both the May 2010 House Bill and the 2012 Levin Bill provide that, for taxable years beginning ten years after the date of enactment, income derived with respect to an ISPI that is not a qualified capital interest and that is treated as ordinary income under the rules discussed above would not meet the qualifying income requirements under the publicly traded partnership rules. Therefore, if similar legislation were to be enacted, following such ten- year period, we would be precluded from qualifying as a partnership for U.S. Federal income tax purposes or be required to hold all such ISPIs through corporations, possibly U.S. corporations. If we were taxed as a U.S. corporation or required to hold all ISPIs through corporations, our effective tax rate would increase significantly. The federal statutory rate for corporations is currently 35%. In addition, we could be subject to increased state and local taxes. Furthermore, holders of Class A -53- Table of Contents shares could be subject to tax on our conversion into a corporation or any restructuring required in order for us to hold our ISPIs through a corporation. On September 12, 2011, the Obama administration submitted similar legislation to Congress in the American Jobs Act that would tax income and gain, now treated as capital gains, including gain on disposition of interests attributable to an ISPI, at rates higher than the capital gains rate applicable to such income under current law, with an exception for certain qualified capital interests. The proposed legislation would also characterize certain income and gain in respect of ISPIs as non-qualifying income under the publicly traded partnership rules after a ten-year transition period from the effective date, with an exception for certain qualified capital interests. This proposed legislation follows several prior statements by the Obama administration in support of changing the taxation of carried interest. Furthermore, in the proposed American Jobs Act, the Obama administration proposed that current law regarding the treatment of carried interest be changed for taxable years ending after December 31, 2012 to subject such income to ordinary income tax. In its published revenue proposal for 2013, the Obama administration proposed that the current law regarding treatment of carried interest be changed to subject such income to ordinary income tax. The Obama administration’s published revenue proposals for 2010, 2011 and 2012 contained similar proposals. States and other jurisdictions have also considered legislation to increase taxes with respect to carried interest. For example, New York has periodically considered legislation under which you could be subject to New York state income tax on income in respect of our Class A shares as a result of certain activities of our affiliates in New York, although it is unclear when or whether such legislation would be enacted. On February 22, 2012, the Obama administration announced its framework of key elements to change the U.S. Federal income tax rules for businesses. Few specifics were included, and it is unclear what any actual legislation could provide, when it would be proposed, or its prospects for enactment. Several parts of the framework, if enacted, could adversely affect us. First, the framework could reduce the deductibility of interest for corporations in some manner not specified. A reduction in interest deductions could increase our tax rate and thereby reduce cash available for distribution to investors or for other uses by us. Such a reduction could also limit our ability to finance new transactions and increase the effective cost of financing by companies in which we invest, which could reduce the value of our carried interest in respect of such companies. The framework also suggests that some entities currently treated as partnerships for tax purposes could be subject to an entity-level income tax similar to the corporate income tax. If such a proposal caused us to be subject to additional entity-level taxes, it could reduce cash available for distribution to investors or for other uses by us. The framework reiterates the President’s support for treatment of carried interest as ordinary income, as provided in the President’s revenue proposal for 2013 described above. However, whether the President’s framework will actually be enacted by the government is unknown, and the ultimate consequences of tax reform legislation, if any, are also presently not known. Our shareholders do not elect our manager or vote and have limited ability to influence decisions regarding our businesses. So long as the Apollo control condition is satisfied, our manager, AGM Management, LLC, which is owned and controlled by our Managing Partners, will manage all of our operations and activities. AGM Management, LLC is managed by BRH, a Cayman entity owned by our Managing Partners and managed by an executive committee composed of our Managing Partners. Our shareholders do not elect our manager, its manager or its manager’s executive committee and, unlike the holders of common stock in a corporation, have only limited voting rights on matters affecting our businesses and therefore limited ability to influence decisions regarding our businesses. Furthermore, if our shareholders are dissatisfied with the performance of our manager, they will have little ability to remove our manager. As discussed below, the Managing Partners collectively had 77.4% of the voting power of Apollo Global Management, LLC as of December 31, 2012. Therefore, they have the ability to control any shareholder vote that occurs, including any vote regarding the removal of our manager. -54- Table of Contents Control by our Managing Partners of the combined voting power of our shares and holding their economic interests through the Apollo Operating Group may give rise to conflicts of interests. Our Managing Partners controlled 77.4% of the combined voting power of our shares entitled to vote as of December 31, 2012. Accordingly, our Managing Partners have the ability to control our management and affairs to the extent not controlled by our manager. In addition, they are able to determine the outcome of all matters requiring shareholder approval (such as a proposed sale of all or substantially of our assets, the approval of a merger or consolidation involving the company, and an election by our manager to dissolve the company) and are able to cause or prevent a change of control of our company and could preclude any unsolicited acquisition of our company. The control of voting power by our Managing Partners could deprive Class A shareholders of an opportunity to receive a premium for their Class A shares as part of a sale of our company, and might ultimately affect the market price of the Class A shares. In addition, our Managing Partners and Contributing Partners, through their partnership interests in Holdings, are entitled to 64.9% of Apollo Operating Group’s economic returns through the AOG Units owned by Holdings as of December 31, 2012. Because they hold their economic interest in our businesses directly through the Apollo Operating Group, rather than through the issuer of the Class A shares, our Managing Partners and Contributing Partners may have conflicting interests with holders of Class A shares. For example, our Managing Partners and Contributing Partners may have different tax positions from us, which could influence their decisions regarding whether and when to dispose of assets, and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement. For a description of the tax receivable agreement, see “Item 13. Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” In addition, the structuring of future transactions may take into consideration the Managing Partners’ and Contributing Partners’ tax considerations even where no similar benefit would accrue to us. We qualify for, and rely on, exceptions from certain corporate governance and other requirements under the rules of the NYSE. We qualify for exceptions from certain corporate governance and other requirements under the rules of the NYSE. Pursuant to these exceptions, we may elect not to comply with certain corporate governance requirements of the NYSE, including the requirements (i) that a majority of our board of directors consist of independent directors, (ii) that we have a nominating/corporate governance committee that is composed entirely of independent directors and (iii) that we have a compensation committee that is composed entirely of independent directors. In addition, we are not required to hold annual meetings of our shareholders. Although we currently have a board of directors comprised of a majority of independent directors, we plan to continue to avail ourselves of these exceptions. Accordingly, you will not have the same protections afforded to equity holders of entities that are subject to all of the corporate governance requirements of the NYSE. Potential conflicts of interest may arise among our manager, on the one hand, and us and our shareholders on the other hand. Our manager and its affiliates have limited fiduciary duties to us and our shareholders, which may permit them to favor their own interests to the detriment of us and our shareholders. Conflicts of interest may arise among our manager, on the one hand, and us and our shareholders, on the other hand. As a result of these conflicts, our manager may favor its own interests and the interests of its affiliates over the interests of us and our shareholders. These conflicts include, among others, the conflicts described below. • • Our manager determines the amount and timing of our investments and dispositions, indebtedness, issuances of additional stock and amounts of reserves, each of which can affect the amount of cash that is available for distribution to you. Our manager is allowed to take into account the interests of parties other than us in resolving conflicts of interest, which has the effect of limiting its duties (including fiduciary duties) to our shareholders; for example, our affiliates that serve as general partners of our funds have fiduciary and contractual obligations to our fund -55- Table of Contents investors, and such obligations may cause such affiliates to regularly take actions that might adversely affect our near- term results of operations or cash flow; our manager has no obligation to intervene in, or to notify our shareholders of, such actions by such affiliates. Because our Managing Partners and Contributing Partners hold their AOG Units through entities that are not subject to corporate income taxation and Apollo Global Management, LLC holds the AOG Units in part through a wholly-owned subsidiary that is subject to corporate income taxation, conflicts may arise between our Managing Partners and Contributing Partners, on the one hand, and Apollo Global Management, LLC, on the other hand, relating to the selection and structuring of investments. Other than as set forth in the non-competition, non-solicitation and confidentiality agreements to which our Managing Partners and other professionals are subject, which may not be enforceable, affiliates of our manager and existing and former personnel employed by our manager are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. Our manager has limited its liability and reduced or eliminated its duties (including fiduciary duties) under our operating agreement, while also restricting the remedies available to our shareholders for actions that, without these limitations, might constitute breaches of duty (including fiduciary duty). In addition, we have agreed to indemnify our manager and its affiliates to the fullest extent permitted by law, except with respect to conduct involving bad faith, fraud or willful misconduct. By purchasing our Class A shares, you will have agreed and consented to the provisions set forth in our operating agreement, including the provisions regarding conflicts of interest situations that, in the absence of such provisions, might constitute a breach of fiduciary or other duties under applicable state law. Our operating agreement does not restrict our manager from causing us to pay it or its affiliates for any services rendered, or from entering into additional contractual arrangements with any of these entities on our behalf, so long as the terms of any such additional contractual arrangements are fair and reasonable to us as determined under the operating agreement. Our manager determines how much debt we incur and that decision may adversely affect our credit ratings. Our manager determines which costs incurred by it and its affiliates are reimbursable by us. Our manager controls the enforcement of obligations owed to us by it and its affiliates. • • • • • • • Our manager decides whether to retain separate counsel, accountants or others to perform services for us. See “Item 13. Certain Relationships and Related Party Transactions” for a more detailed discussion of these conflicts. Our operating agreement contains provisions that reduce or eliminate duties (including fiduciary duties) of our manager and limit remedies available to shareholders for actions that might otherwise constitute a breach of duty. It will be difficult for a shareholder to challenge a resolution of a conflict of interest by our manager or by its conflicts committee. Our operating agreement contains provisions that waive or consent to conduct by our manager and its affiliates that might otherwise raise issues about compliance with fiduciary duties or applicable law. For example, our operating agreement provides that when our manager is acting in its individual capacity, as opposed to in its capacity as our manager, it may act without any fiduciary obligations to us or our -56- Table of Contents shareholders whatsoever. When our manager, in its capacity as our manager, is permitted to or required to make a decision in its “sole discretion” or “discretion” or that it deems “necessary or appropriate” or “necessary or advisable,” then our manager will be entitled to consider only such interests and factors as it desires, including its own interests, and will have no duty or obligation (fiduciary or otherwise) to give any consideration to any interest of or factors affecting us or any of our shareholders and will not be subject to any different standards imposed by our operating agreement, the Delaware Limited Liability Company Act or under any other law, rule or regulation or in equity. Whenever a potential conflict of interest exists between us and our manager, our manager may resolve such conflict of interest. If our manager determines that its resolution of the conflict of interest is on terms no less favorable to us than those generally being provided to or available from unrelated third parties or is fair and reasonable to us, taking into account the totality of the relationships between us and our manager, then it will be presumed that in making this determination, our manager acted in good faith. A shareholder seeking to challenge this resolution of the conflict of interest would bear the burden of overcoming such presumption. This is different from the situation with Delaware corporations, where a conflict resolution by an interested party would be presumed to be unfair and the interested party would have the burden of demonstrating that the resolution was fair. The above modifications of fiduciary duties are expressly permitted by Delaware law. Hence, we and our shareholders will only have recourse and be able to seek remedies against our manager if our manager breaches its obligations pursuant to our operating agreement. Unless our manager breaches its obligations pursuant to our operating agreement, we and our unitholders will not have any recourse against our manager even if our manager were to act in a manner that was inconsistent with traditional fiduciary duties. Furthermore, even if there has been a breach of the obligations set forth in our operating agreement, our operating agreement provides that our manager and its officers and directors will not be liable to us or our shareholders for errors of judgment or for any acts or omissions unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that the manager or its officers and directors acted in bad faith or engaged in fraud or willful misconduct. These provisions are detrimental to the shareholders because they restrict the remedies available to them for actions that without those limitations might constitute breaches of duty, including fiduciary duties. Also, if our manager obtains the approval of its conflicts committee, the resolution will be conclusively deemed to be fair and reasonable to us and not a breach by our manager of any duties it may owe to us or our shareholders. This is different from the situation with Delaware corporations, where a conflict resolution by a committee consisting solely of independent directors may, in certain circumstances, merely shift the burden of demonstrating unfairness to the plaintiff. If you purchase a Class A share, you will be treated as having consented to the provisions set forth in the operating agreement, including provisions regarding conflicts of interest situations that, in the absence of such provisions, might be considered a breach of fiduciary or other duties under applicable state law. As a result, shareholders will, as a practical matter, not be able to successfully challenge an informed decision by the conflicts committee. The control of our manager may be transferred to a third party without shareholder consent. Our manager may transfer its manager interest to a third party in a merger or consolidation or in a transfer of all or substantially all of its assets without the consent of our shareholders. Furthermore, at any time, the partners of our manager may sell or transfer all or part of their partnership interests in our manager without the approval of the shareholders, subject to certain restrictions as described elsewhere in this report. A new manager may not be willing or able to form new funds and could form funds that have investment objectives and governing terms that differ materially from those of our current funds. A new owner could also have a different investment philosophy, employ investment professionals who are less experienced, be unsuccessful in identifying investment opportunities or have a track record that is not as successful as Apollo’s track record. If any of the foregoing were to occur, we could experience difficulty in making new investments, and the value of our existing investments, our businesses, our results of operations and our financial condition could materially suffer. -57- Table of Contents Our ability to pay regular distributions may be limited by our holding company structure. We are dependent on distributions from the Apollo Operating Group to pay distributions, taxes and other expenses. As a holding company, our ability to pay distributions will be subject to the ability of our subsidiaries to provide cash to us. We intend to distribute quarterly distributions to our Class A shareholders. Accordingly, we expect to cause the Apollo Operating Group to make distributions to its unitholders (in other words, Holdings, which is 100% owned, directly and indirectly, by our Managing Partners and our Contributing Partners, and the three intermediate holding companies, which are 100% owned by us), pro rata in an amount sufficient to enable us to pay such distributions to our Class A shareholders; however, such distributions may not be made. In addition, our manager can reduce or eliminate our dividend at any time, in its discretion. The Apollo Operating Group intends to make periodic distributions to its unitholders in amounts sufficient to cover hypothetical income tax obligations attributable to allocations of taxable income resulting from their ownership interest in the various limited partnerships making up the Apollo Operating Group, subject to compliance with any financial covenants or other obligations. Tax distributions will be calculated assuming each shareholder was subject to the maximum (corporate or individual, whichever is higher) combined U.S. Federal, New York State and New York City tax rates, without regard to whether any shareholder was subject to income tax liability at those rates. If the Apollo Operating Group has insufficient funds, we may have to borrow additional funds or sell assets, which could materially adversely affect our liquidity and financial condition. Furthermore, by paying that cash distribution rather than investing that cash in our business, we might risk slowing the pace of our growth or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise. Because tax distributions to unitholders are made without regard to their particular tax situation, tax distributions to all unitholders, including our intermediate holding companies, were increased to reflect the disproportionate income allocation to our Managing Partners and Contributing Partners with respect to “built-in gain” assets at the time of the Private Offering Transactions. There may be circumstances under which we are restricted from paying distributions under applicable law or regulation (for example, due to Delaware limited partnership or limited liability company act limitations on making distributions if liabilities of the entity after the distribution would exceed the value of the entity’s assets). In addition, under the AMH Credit Agreement, Apollo Management Holdings is restricted in its ability to make cash distributions to us and may be forced to use cash to collateralize the AMH Credit Agreement, which would reduce the cash it has available to make distributions. Tax consequences to our Managing Partners and Contributing Partners may give rise to conflicts of interests. As a result of unrealized built-in gain attributable to the value of our assets held by the Apollo Operating Group entities at the time of the Private Offering Transactions, upon the sale, refinancing or disposition of the assets owned by the Apollo Operating Group entities, our Managing Partners and Contributing Partners will incur different and significantly greater tax liabilities as a result of the disproportionately greater allocations of items of taxable income and gain to the Managing Partners and Contributing Partners upon a realization event. As the Managing Partners and Contributing Partners will not receive a corresponding greater distribution of cash proceeds, they may, subject to applicable fiduciary or contractual duties, have different objectives regarding the appropriate pricing, timing and other material terms of any sale, refinancing, or disposition, or whether to sell such assets at all. Decisions made with respect to an acceleration or deferral of income or the sale or disposition of assets with unrealized built-in gains may also influence the timing and amount of payments that are received by an exchanging or selling founder or partner under the tax receivable agreement. All other factors being equal, earlier disposition of assets with unrealized built-in gains following such exchange will tend to accelerate such payments and increase the present value of the tax receivable agreement, and disposition of assets with unrealized built-in gains before an exchange will increase a Managing Partner’s or Contributing Partner’s tax liability without giving rise to any rights to receive payments under the tax receivable agreement. Decisions made regarding a change of control also could have a material influence on the timing and amount of payments received by our Managing Partners and Contributing Partners pursuant to the tax receivable agreement. -58- Table of Contents We are required to pay Holdings for most of the actual tax benefits we realize as a result of the tax basis step-up we receive in connection with taxable exchanges by our units held in the Apollo Operating Group entities or our acquisitions of units from our Managing Partners and Contributing Partners. Subject to certain restrictions, each Managing Partner and Contributing Partner has the right to exchange the AOG Units that he holds through his partnership interest in Holdings for our Class A shares in a partially taxable transaction. These exchanges, as well as our acquisitions of units from our Managing Partners or Contributing Partners, may result in increases in the tax basis of the intangible assets of the Apollo Operating Group that otherwise would not have been available. Any such increases may reduce the amount of tax that APO Corp., a wholly owned subsidiary of Apollo Global Management, LLC (“APO Corp.”), would otherwise be required to pay in the future. The IRS may challenge all or part of these increased deductions and tax basis increases and a court could sustain such a challenge. We have entered into a tax receivable agreement with Holdings that provides for the payment by APO Corp. to our Managing Partners and Contributing Partners of 85% of the amount of actual tax savings, if any, that APO Corp. realizes (or is deemed to realize in the case of an early termination payment by APO Corp. or a change of control, as discussed below) as a result of these increases in tax deductions and tax basis of the Apollo Operating Group. In April 2012, April 2011 and April 2010, the Apollo Operating Group made a distribution of $5.8 million, $39.8 million and $15.0 million, respectively, to APO Corp., and APO Corp. made payment to satisfy the liability under the tax receivable agreement to the Managing Partners and Contributing Partners from a realized tax benefit for the 2011, 2010 and 2009 tax year. In April 2009, APO Corp. made payment of $9.1 million pursuant to the tax receivable agreement. Prior to 2010, the distribution percentage was governed by a special allocation as discussed in note 15 to our consolidated financial statements. Future payments that APO Corp. may make to our Managing Partners and Contributing Partners could be material in amount. In the event that other of our current or future subsidiaries become taxable as corporations and acquire AOG Units in the future, or if we become taxable as a corporation for U.S. Federal income tax purposes, we expect, and have agreed that, each will become subject to a tax receivable agreement with substantially similar terms. The IRS could challenge our claim to any increase in the tax basis of the assets owned by the Apollo Operating Group that results from the exchanges entered into by the Managing Partners or Contributing Partners. The IRS could also challenge any additional tax depreciation and amortization deductions or other tax benefits (including deductions for imputed interest expense associated with payments made under the tax receivable agreement) we claim as a result of, or in connection with, such increases in the tax basis of such assets. If the IRS were to successfully challenge a tax basis increase or tax benefits we previously claimed from a tax basis increase, Holdings would not be obligated under the tax receivable agreement to reimburse APO Corp. for any payments previously made to them (although any future payments would be adjusted to reflect the result of such challenge). As a result, in certain circumstances, payments could be made to our Managing Partners and Contributing Partners under the tax receivable agreement in excess of 85% of the actual aggregate cash tax savings of APO Corp. APO Corp.’s ability to achieve benefits from any tax basis increase and the payments to be made under this agreement will depend upon a number of factors, including the timing and amount of its future income. In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of business combination or certain other changes of control, APO Corp.’s (or its successor’s) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of control) would be based on certain assumptions, including that APO Corp. would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. See “Item 13. Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” If we were deemed an investment company under the Investment Company Act, applicable restrictions could make it impractical for us to continue our businesses as contemplated and could have a material adverse effect on our businesses and the price of our Class A shares. We do not believe that we are an “investment company” under the Investment Company Act because the nature of our assets and the income derived from those assets allow us to rely on the exception provided by Rule 3a-1 issued under the Investment Company Act. In addition, we believe we are not an investment company under Section 3(b)(1) of the Investment Company Act because we are primarily engaged in non-investment company businesses. We intend to conduct our operations so that we will not be -59- Table of Contents deemed an investment company. However, if we were to be deemed an investment company, we would be taxed as a corporation and other restrictions imposed by the Investment Company Act, including limitations on our capital structure and our ability to transact with affiliates that apply to us, could make it impractical for us to continue our businesses as contemplated and would have a material adverse effect on our businesses and the price of our Class A shares. Risks Related to Taxation You will be subject to U.S. Federal income tax on your share of our taxable income, regardless of whether you receive any cash distributions from us. Under current law, so long as we are not required to register as an investment company under the Investment Company Act and 90% of our gross income for each taxable year constitutes “qualifying income” within the meaning of the Internal Revenue Code on a continuing basis, we will be treated, for U.S. Federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. You will be subject to U.S. Federal, state, local and possibly, in some cases, foreign income taxation on your allocable share of our items of income, gain, loss, deduction and credit for each of our taxable years ending with or within your taxable year, regardless of whether or not you receive cash distributions from us. Accordingly, you may be required to make tax payments in connection with your ownership of Class A shares that significantly exceed your cash distributions in any specific year. If we are treated as a corporation for U.S. Federal income tax purposes, the value of the Class A shares would be adversely affected. The value of your investment will depend in part on our company being treated as a partnership for U.S. Federal income tax purposes, which requires that 90% or more of our gross income for every taxable year consist of qualifying income, as defined in Section 7704 of the Internal Revenue Code, and that we are not required to register as an investment company under the Investment Company Act and related rules. Although we intend to manage our affairs so that our partnership will meet the 90% test described above in each taxable year, we may not meet these requirements or, as discussed below, current law may change so as to cause, in either event, our partnership to be treated as a corporation for U.S. Federal income tax purposes. If we were treated as a corporation for U.S. Federal income tax purposes, (i) we would become subject to corporate income tax and (ii) distributions to shareholders would be taxable as dividends for U.S. Federal income tax purposes to the extent of our earnings and profits. Current law may change, causing us to be treated as a corporation for U.S. Federal or state income tax purposes or otherwise subjecting us to entity level taxation. See “—Risks Related to Our Organization and Structure—Although not enacted, the U.S. Congress has considered legislation that would have: (i) in some cases after a ten-year transition period, precluded us from qualifying as a partnership or required us to hold carried interest through taxable corporations and (ii) taxed certain income and gains at increased rates. If similar legislation were to be enacted and apply to us, the value of our Class A shares could be adversely affected.” Because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us as an entity, our distributions to you would be reduced. Our structure involves complex provisions of U.S. Federal income tax law for which no clear precedent or authority may be available. Our structure is also subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis. The U.S. Federal income tax treatment of holders of Class A shares depends in some instances on determinations of fact and interpretations of complex provisions of U.S. Federal income tax law for which no clear precedent or authority may be available. You should be aware that the U.S. Federal income tax rules are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships and entities taxed as partnerships. The present U.S. Federal income tax treatment of an investment in our Class A shares may be modified by administrative, -60- Table of Contents legislative or judicial interpretation at any time, and any such action may affect investments and commitments previously made. Changes to the U.S. Federal income tax laws and interpretations thereof could make it more difficult or impossible to meet the exception for us to be treated as a partnership for U.S. Federal income tax purposes that is not taxable as a corporation, affect or cause us to change our investments and commitments, affect the tax considerations of an investment in us, change the character or treatment of portions of our income (including, for instance, the treatment of carried interest as ordinary income rather than capital gain) and adversely affect an investment in our Class A shares. For example, as discussed above under “—Risks Related to Our Organization and Structure—Although not enacted, the U.S. Congress has considered legislation that would have: (i) in some cases after a ten-year transition period, precluded us from qualifying as a partnership or required us to hold carried interest through taxable corporations; and (ii) taxed certain income and gains at increased rates. If similar legislation were to be enacted and apply to us, the value of our Class A shares could be adversely affected,” the U.S. Congress has considered various legislative proposals to treat all or part of the capital gain and dividend income that is recognized by an investment partnership and allocable to a partner affiliated with the sponsor of the partnership (i.e., a portion of the carried interest) as ordinary income to such partner for U.S. Federal income tax purposes. Our operating agreement permits our manager to modify our operating agreement from time to time, without the consent of the holders of Class A shares, to address certain changes in U.S. Federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all holders of Class A shares. For instance, our manager could elect at some point to treat us as an association taxable as a corporation for U.S. Federal (and applicable state) income tax purposes. If our manager were to do this, the U.S. Federal income tax consequences of owning our Class A shares would be materially different. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to holders of Class A shares in a manner that reflects such beneficial ownership of items by holders of Class A shares, taking into account variation in ownership interests during each taxable year because of trading activity. However, those assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of the Internal Revenue Code and/or Treasury regulations and could require that items of income, gain, deductions, loss or credit, including interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects holders of Class A shares. Our interests in certain of our businesses are held through entities that are treated as corporations for U.S. Federal income tax purposes; such corporations may be liable for significant taxes and may create other adverse tax consequences, which could potentially, adversely affect the value of your investment. In light of the publicly traded partnership rules under U.S. Federal income tax law and other requirements, we hold our interests in certain of our businesses through entities that are treated as corporations for U.S. Federal income tax purposes. Each such corporation could be liable for significant U.S. Federal income taxes and applicable state, local and other taxes that would not otherwise be incurred, which could adversely affect the value of your investment. Furthermore, it is possible that the IRS could challenge the manner in which such corporation’s taxable income is computed by us. Changes in U.S. tax law could adversely affect our ability to raise funds from certain foreign investors. Under the U.S. Foreign Account Tax Compliance Act, or FATCA, all entities in a broadly defined class of foreign entities including foreign financial institutions, or FFIs, are required to comply with a complicated and expansive reporting regime or, beginning in 2014, be subject to a 30% United States withholding tax on certain U.S. payments (and beginning in 2017, a 30% withholding tax on gross proceeds from the sale of U.S. stocks and securities) and non-U.S. entities which are not FFIs are required to either certify they have no substantial U.S. beneficial ownership or to report certain information with respect to their substantial U.S. beneficial ownership or, beginning in 2014, be subject to a 30% U.S. withholding tax on certain U.S. payments (and beginning in 2017, a 30% withholding tax on gross proceeds from the sale of U.S. stocks and securities). The reporting obligations imposed under FATCA require FFIs to comply with agreements with the IRS to obtain and disclose information about certain investors to the IRS. Accordingly, -61- Table of Contents the administrative and economic costs of compliance with FATCA may discourage some foreign investors from investing in U.S. funds, which could adversely affect our ability to raise funds from these investors. We may hold or acquire certain investments through an entity classified as a PFIC or CFC for U.S. Federal income tax purposes. Certain of our investments may be in foreign corporations or may be acquired through a foreign subsidiary that would be classified as a corporation for U.S. Federal income tax purposes. Such an entity may be a passive foreign investment company, or a “PFIC,” or a controlled foreign corporation, or a “CFC,” for U.S. Federal income tax purposes. For example, APO (FC), LLC is considered to be a CFC for U.S. Federal income tax purposes. Class A shareholders indirectly owning an interest in a PFIC or a CFC may experience adverse U.S. tax consequences, including the recognition of taxable income prior to the receipt of cash relating to such income. In addition, gain on the sale of a PFIC or CFC may be taxable at ordinary income tax rates. Complying with certain tax-related requirements may cause us to forego otherwise attractive business or investment opportunities or enter into acquisitions, borrowings, financings or arrangements we may not have otherwise entered into. In order for us to be treated as a partnership for U.S. Federal income tax purposes, and not as an association or publicly traded partnership taxable as a corporation, we must meet the qualifying income exception discussed above on a continuing basis and we must not be required to register as an investment company under the Investment Company Act. In order to effect such treatment we (or our subsidiaries) may be required to invest through foreign or domestic corporations, forego attractive business or investment opportunities or enter into borrowings or financings we may not have otherwise entered into. This may cause us to incur additional tax liability and/or adversely affect our ability to operate solely to maximize our cash flow. Our structure also may impede our ability to engage in certain corporate acquisitive transactions because we generally intend to hold all of our assets through the Apollo Operating Group. In addition, we may be unable to participate in certain corporate reorganization transactions that would be tax free to our holders if we were a corporation. To the extent we hold assets other than through the Apollo Operating Group, we will make appropriate adjustments to the Apollo Operating Group agreements so that distributions to Holdings and us would be the same as if such assets were held at that level. Moreover, we are precluded by a contract with one of the Strategic Investors from acquiring assets in a manner that would cause that Strategic Investor to be engaged in a commercial activity within the meaning of Section 892 of the Internal Revenue Code. Tax gain or loss on disposition of our Class A shares could be more or less than expected. If you sell your Class A shares, you will recognize a gain or loss equal to the difference between the amount realized and your adjusted tax basis allocated to those Class A shares. Prior distributions to you in excess of the total net taxable income allocated to you will have decreased the tax basis in your Class A shares. Therefore, such excess distributions will increase your taxable gain, or decrease your taxable loss, when the Class A shares are sold and may result in a taxable gain even if the sale price is less than the original cost. A portion of the amount realized, whether or not representing gain, may be ordinary income to you. We cannot match transferors and transferees of Class A shares, and we have therefore adopted certain income tax accounting conventions that may not conform with all aspects of applicable tax requirements. The IRS may challenge this treatment, which could adversely affect the value of our Class A shares. Because we cannot match transferors and transferees of Class A shares, we have adopted depreciation, amortization and other tax accounting positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to holders of Class A shares. It also could affect the timing of these tax benefits or the amount of gain on the sale of Class A shares and could have a negative impact on the value of Class A shares or result in audits of and adjustments to the tax returns of holders of Class A shares. -62- Table of Contents The sale or exchange of 50% or more of our capital and profit interests will result in the termination of our partnership for U.S. Federal income tax purposes. We will be considered to have been terminated for U.S. Federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Our termination would, among other things, result in the closing of our taxable year for all holders of Class A shares and could result in a deferral of depreciation deductions allowable in computing our taxable income. Non-U.S. persons face unique U.S. tax issues from owning Class A shares that may result in adverse tax consequences to them. In light of our investment activities, we may be, or may become, engaged in a U.S. trade or business for U.S. Federal income tax purposes, in which case some portion of our income would be treated as effectively connected income with respect to non-U.S. holders of our Class A shares, or “ECI.” Moreover, dividends paid by an investment that we make in a real estate investment trust, or “REIT,” that are attributable to gains from the sale of U.S. real property interests and sales of certain investments in interests in U.S. real property, including stock of certain U.S. corporations owning significant U.S. real property, may be treated as ECI with respect to non-U.S. holders of our Class A shares. In addition, certain income of non-U.S. holders from U.S. sources not connected to any U.S. trade or business conducted by us could be treated as ECI. To the extent our income is treated as ECI, each non-U.S. holder generally would be subject to withholding tax on its allocable share of such income, would be required to file a U.S. Federal income tax return for such year reporting its allocable share of income effectively connected with such trade or business and any other income treated as ECI, and would be subject to U.S. Federal income tax at regular U.S. tax rates on any such income (state and local income taxes and filings may also apply in that event). Non-U.S. holders that are corporations may also be subject to a 30% branch profits tax on their allocable share of such income. In addition, certain income from U.S. sources that is not ECI allocable to non-U.S. holders may be reduced by withholding taxes imposed at the highest effective applicable tax rate. An investment in Class A shares will give rise to UBTI to certain tax-exempt holders. We will not make investments through taxable U.S. corporations solely for the purpose of limiting UBTI from “debt-financed” property and, thus, an investment in Class A shares will give rise to UBTI to tax-exempt holders of Class A shares. APO Asset Co., LLC may borrow funds from APO Corp. or third parties from time to time to make investments. These investments will give rise to UBTI from “debt-financed” property. Moreover, if the IRS successfully asserts that we are engaged in a trade or business, then additional amounts of income could be treated as UBTI. We do not intend to make, or cause to be made, an election under Section 754 of the Internal Revenue Code to adjust our asset basis or the asset basis of certain of the Apollo Operating Group Partnerships. Thus, a holder of Class A shares could be allocated more taxable income in respect of those Class A shares prior to disposition than if such an election were made. We did not make and currently do not intend to make, or cause to be made, an election to adjust asset basis under Section 754 of the Internal Revenue Code with respect to Apollo Principal Holdings I, L.P., Apollo Principal Holdings II, L.P., Apollo Principal Holdings III, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings VI, L.P., Apollo Principal Holdings VII, L.P., Apollo Principal Holdings VIII, L.P. and Apollo Principal Holdings IX, L.P. If no such election is made, there will generally be no adjustment for a transferee of Class A shares even if the purchase price of those Class A shares is higher than the Class A shares’ share of the aggregate tax basis of our assets immediately prior to the transfer. In that case, on a sale of an asset, gain allocable to a transferee could include built-in gain allocable to the transferor at the time of the transfer, which built-in gain would otherwise generally be eliminated if a Section 754 election had been made. Class A shareholders may be subject to state and local taxes and return filing requirements as a result of investing in our Class A shares. In addition to U.S. Federal income taxes, our Class A shareholders may be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, -63- Table of Contents even if our Class A shareholders do not reside in any of those jurisdictions. Our Class A shareholders may also be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions. Further, Class A shareholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of each Class A shareholder to file all U.S. Federal, state and local tax returns that may be required of such Class A shareholder. We may not be able to furnish to each Class A shareholder specific tax information within 90 days after the close of each calendar year, which means that holders of Class A shares who are U.S. taxpayers should anticipate the need to file annually a request for an extension of the due date of their income tax return. In addition, it is possible that Class A shareholders may be required to file amended income tax returns. As a publicly traded partnership, our operating results, including distributions of income, dividends, gains, losses or deductions and adjustments to carrying basis, will be reported on Schedule K-1 and distributed to each Class A shareholder annually. It may require longer than 90 days after the end of our fiscal year to obtain the requisite information from all lower-tier entities so that K-1s may be prepared for us. For this reason, Class A shareholders who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year. In addition, it is possible that a Class A shareholder will be required to file amended income tax returns as a result of adjustments to items on the corresponding income tax returns of the partnership. Any obligation for a Class A shareholder to file amended income tax returns for that or any other reason, including any costs incurred in the preparation or filing of such returns, are the responsibility of each Class A shareholder. You may be subject to an additional U.S. Federal income tax on net investment income allocated to you by us and on gain on the sale of the Class A shares. As of 2013, individuals, estates and trusts are subject to an additional 3.8% tax on “net investment income” (or undistributed “net investment income,” in the case of estates and trusts) for each taxable year, with such tax applying to the lesser of such income or the excess of such person’s adjusted gross income (with certain adjustments) over a specified amount. Net investment income includes net income from interest, dividends, annuities, royalties and rents and net gain attributable to the disposition of investment property. It is anticipated that net income and gain attributable to an investment in us will be included in a holder of the Class A share’s “net investment income” subject to this additional tax. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our principal executive offices are located in leased office space at 9 West 57th Street, New York, New York 10019. We also lease the space for our offices in Purchase, NY, California, Houston, London, Singapore, Frankfurt, Mumbai, Hong Kong and Luxembourg. We do not own any real property. We consider these facilities to be suitable and adequate for the management and operation of our businesses. ITEM 3. LEGAL PROCEEDINGS We are, from time to time, party to various legal actions arising in the ordinary course of business, including claims and litigation, reviews, investigations and proceedings by governmental and self regulatory agencies regarding our business. On July 16, 2008, Apollo was joined as a defendant in a pre-existing purported class action pending in Massachusetts federal court against, among other defendants, numerous private equity firms. The suit alleges that beginning in mid-2003, Apollo and the other private equity firm defendants violated the U.S. antitrust laws by forming “bidding clubs” or “consortia” that, among other things, rigged the bidding for control of various public corporations, restricted the supply of private equity financing, fixed the prices for target companies at artificially low levels, and allocated amongst themselves an alleged market for private equity services in leveraged buyouts. The suit seeks class action certification, declaratory and injunctive relief, unspecified damages, and attorneys’ fees. On August 27, 2008, Apollo and its co-defendants -64- Table of Contents moved to dismiss plaintiffs’ complaint and on November 20, 2008, the Court granted Apollo’s motion. The court also dismissed two other defendants, Permira and Merrill Lynch. On September 17, 2010, the plaintiffs filed a motion to amend the complaint by adding an additional eight transactions and adding Apollo as a defendant. On October 6, 2010, the court granted plaintiffs’ motion to file that amended complaint. Plaintiffs’ fourth amended complaint, filed on October 7, 2010, adds Apollo as a defendant. Apollo joined in the other defendants’ October 21, 2010 motion to dismiss the third claim for relief and all claims by the PanAmSat Damages Sub-class in the fourth amended complaint, which motion was granted on January 13, 2011. On November 4, 2010, Apollo moved to dismiss, arguing that the claims against Apollo are time-barred and that the allegations against Apollo are insufficient to state an antitrust conspiracy claim. On February 17, 2011, the court denied Apollo’s motion to dismiss, ruling that Apollo should raise the statute of limitations issues on summary judgment after discovery is completed. Apollo filed its answer to the fourth amended complaint on March 21, 2011. On July 11, 2011, the plaintiffs filed a motion for leave to file a fifth amended complaint, adding ten additional transactions and expanding the scope of the class seeking relief. On September 7, 2011, the court denied the motion for leave to amend without prejudice and gave plaintiffs permission to take limited discovery on the ten additional transactions. By court order, the parties concluded discovery on May 21, 2012. The plaintiffs then filed a fifth amended complaint on June 14, 2012. One week later, the defendants filed a motion to dismiss portions of the Fifth Amended Complaint. On July 18, 2012, the court granted the defendants’ motion in part and denied it in part. On July 21, 2012, all defendants filed motions for summary judgment. While those motions were pending, the New York Times moved to intervene and unseal the fifth amended complaint. After a court order, the defendants submitted a version of the complaint containing only four redactions. The court publicly filed this version of the fifth amended complaint on the case docket on October 10, 2012. On December 18 and 19, 2012, the court heard oral argument on the defendants’ motions for summary judgment. Those motions remain pending. Apollo does not believe that a loss from liability in this case is either probable or reasonably estimable. Apollo believes the plaintiffs’ claims lack factual and legal merit and intends to defend itself vigorously. For these reasons, no estimate of possible loss, if any, can be made at this time. In March 2012, plaintiffs filed two putative class actions, captioned Kelm v. Chase Bank (No. 12-cv-332) and Miller v. 1-800-Flowers.com, Inc. (No. 12-cv-396), in the District of Connecticut on behalf of a class of consumers alleging online fraud. The defendants included, among others, Trilegiant Corporation, Inc. (“Trilegiant”), its parent company, Affinion Group, LLC (“Affinion”), and Apollo Global Management, LLC, which is affiliated with funds that are the beneficial owners of 69% of Affinion’s common stock. In both cases, plaintiffs allege that Trilegiant, aided by its business partners, who include e-merchants and credit card companies, developed a set of business practices intended to create consumer confusion and ultimately defraud consumers into unknowingly paying fees to clubs for unwanted services. Plaintiffs allege that Apollo is a proper defendant because of its indirect stock ownership and ability to appoint the majority of Affinion’s board. The complaints assert claims under the Racketeer Influenced Corrupt Organizations Act; the Electronic Communications Privacy Act; the Connecticut Unfair Trade Practices Act; and the California Business and Professional Code, and seek, among other things, restitution or disgorgement, injunctive relief, compensatory, treble and punitive damages, and attorneys’ fees. The allegations in Kelm and Miller are substantially similar to those in Schnabel v. Trilegiant Corp. (No. 3:10-cv-957), a putative class action filed in the District of Connecticut in 2010 that names only Trilegiant and Affinion as defendants. The court has consolidated the Kelm, Miller, and Schnabel cases under the caption In re: Trilegiant Corporation, Inc. and ordered that they proceed on the same schedule. On June 18, 2012, the court appointed lead plaintiffs’ counsel, and on September 7, 2012, plaintiffs filed their consolidated amended complaint (“CAC”), which alleges the same causes of action against Apollo as did the complaints in the Kelm and Miller cases. Defendants filed motions to dismiss on December 7, 2012, and plaintiffs filed opposition papers on February 7, 2013. Defendants’ replies are due on March 11, 2013. On December 5, 2012, plaintiffs filed another putative class action, captioned Frank v. Trilegiant Corp. (No. 12-cv-1721), in the District of Connecticut, naming the same defendants and containing allegations substantially similar to those in the CAC. On January 23, 2013, plaintiffs moved to transfer and consolidate Frank into In re: Trilegiant, and on February 15, 2013, the Frank Court extended all defendants’ deadlines to respond to the Frank complaint until the earlier of (i) April 1, 2013 or (ii) a ruling on the motion to transfer and consolidate. Apollo believes that plaintiffs’ claims against it in these cases are without merit. For this reason, and because the claims against Apollo are in their early stages, no reasonable estimate of possible loss, if any, can be made at this time. -65- Table of Contents On July 9, 2012, Apollo was served with a subpoena by the New York Attorney General’s Office regarding Apollo’s fee waiver program. The subpoena is part of what we understand to be an industry-wide investigation by the New York Attorney General into the tax implications of the fee waiver program implemented by numerous private equity and hedge funds. Under the fee waiver program, individual fund managers for Apollo-managed funds may elect to prospectively waive their management fees. Program participants receive an interest in the future profits, if any, earned on the invested amounts that represent waived fees. They receive such profits from time to time in the ordinary course when distributions are made generally, as provided for in the applicable fund governing documents and waiver agreements. Four Apollo funds have implemented the program. Apollo believes its fee waiver program complies with all applicable laws, and is cooperating with the investigation. Various state attorneys general and federal and state agencies have initiated industry-wide investigations into the use of placement agents in connection with the solicitation of investments, particularly with respect to investments by public pension funds. Certain affiliates of Apollo have received subpoenas and other requests for information from various government regulatory agencies and investors in Apollo’s funds, seeking information regarding the use of placement agents. CalPERS, one of our Strategic Investors, announced on October 14, 2009, that it had initiated a special review of placement agents and related issues. The Report of the CalPERS Special Review was issued on March 14, 2011. That report does not allege any wrongdoing on the part of Apollo or its affiliates. Apollo is continuing to cooperate with all such investigations and other reviews. In addition, on May 6, 2010, the California Attorney General filed a civil complaint against Alfred Villalobos and his company, Arvco Capital Research, LLC (“Arvco”) (a placement agent that Apollo has used) and Federico Buenrostro Jr., the former Chief Executive Officer of CalPERS, alleging conduct in violation of certain California laws in connection with CalPERS’s purchase of securities in various funds managed by Apollo and another asset manager. Apollo is not a party to the civil lawsuit and the lawsuit does not allege any misconduct on the part of Apollo. On December 29, 2011, the United States Bankruptcy Court for the District of Nevada approved an application made by Mr. Villalobos, Arvco and related entities (the “Arvco Debtors”) in their consolidated bankruptcy proceedings to hire special litigation counsel to pursue certain claims on behalf of the bankruptcy estates of the Arvco Debtors, including potential claims against Apollo (a) for fees that Apollo purportedly owes the Arvco Debtors for placement agent services, and (b) for indemnification of legal fees and expenses arising out of the Arvco Debtors’ defense of the California Attorney General action described above. To date, no such claims have been brought. On April 23, 2012, the SEC filed a lawsuit alleging securities fraud on the part of Arvco, as well as Messrs. Buenrostro and Villalobos, in connection with their activities concerning certain CalPERS investments in funds managed by Apollo. This lawsuit also does not allege wrongdoing on the part of Apollo, and in fact alleges that Apollo was defrauded by Arvco, Villalobos, and Buenrostro. Apollo believes that it has handled its use of placement agents in an appropriate manner. Apollo denies the merit of all such claims and will vigorously contest them, if they are brought. Although the ultimate outcome of these matters cannot be ascertained at this time, we are of the opinion, after consultation with counsel, that the resolution of any such matters to which we are a party at this time will not have a material adverse effect on our consolidated financial statements. Legal actions material to us could, however, arise in the future. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. Iran Related Activities Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “ITRA”) added a new subsection (r) to Section 13 of the Exchange Act, requiring a public reporting issuer to disclose in its annual or quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions relating to Iran, including activities not prohibited by U.S. law and conducted outside the U.S. by non-U.S. affiliates in compliance with local law. On February 12, 2013, certain investment funds affiliated with Apollo beneficially owned approximately 19.6% of the ordinary shares of LyondellBasell Industries N.V. (“LyondellBasell”) and have certain director nomination rights. LyondellBasell may be deemed to be under common control with Apollo, but this statement is not meant to be an admission that common control exists. As a result, it appears that we are required to provide disclosures as set forth below pursuant to Section 219 of the ITRA and Section 13(r) of the Exchange Act. The Annual Report on Form 10-K for the year ended December 31, 2012 filed by LyondellBasell with the SEC on February 12, 2013 contained the disclosure set forth below (with all references contained therein to “the Company” being references to LyondellBasell and its consolidated subsidiaries). -66- Table of Contents The disclosure below does not relate to any activities conducted by the Company and does not involve the Company or the Company’s management. The disclosure relates solely to activities conducted by LyondellBasell and its consolidated subsidiaries. “Disclosure pursuant to Section 219 of the Iran Threat Reduction & Syria Human Rights Act • Certain non-U.S. subsidiaries of our predecessor, LyondellBasell AF, licensed processes to construct and operate manufacturing plants in Iran that produce polyolefin plastic material, which is used in the packaging of household and consumer goods. The subsidiaries also provided engineering support and supplied catalyst products to be used in these manufacturing operations. In 2009, the Company made the decision to suspend the pursuit of any new business dealings in Iran. • • • • As previously disclosed by the Company, in 2010, our management made the further decision to terminate all business by the Company and its direct and indirect subsidiaries with the government, entities and individuals in Iran. The termination was made in accordance with all applicable laws and with the knowledge of U.S. Government authorities. As part of the termination, we entered into negotiations with Iranian counterparties in order to exit our contractual obligations. As described below, two transactions occurred under settlement agreements in early 2012, although the agreements to cease our activities with these counterparties were entered into in 2011. In January 2012, one of our non-U.S. subsidiaries received a final payment of approximately € 3.5 million for a shipment of catalyst from an entity that is 50% owned by the National Petrochemical Company of Iran. Our shipment of the catalyst was in February 2012 as part of the agreement related to our termination and cessation of all business under agreements with the counterparty. In 2012, the gross revenue from this limited activity was approximately, € 4.2 million and profit attributable to it was approximately, € 2.4 million. In January and February of 2012, one of the Company’s non-U.S. subsidiaries provided certain engineering documents relating to a polyolefin plastic process to a licensee comprising three Iranian companies, one of which is 20% owned by the National Oil Company of Iran. The provision of documents was the Company’s final act with respect to the termination and cessation of all business under agreements with the counterparties. No gross revenue or profit was attributable to this activity in 2012. The transactions disclosed in this report do not constitute violations of applicable anti- money laundering laws or sanctions laws administered by the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC), and are not the subject of any enforcement actions under the Iran sanction laws. We have not conducted, and do not intend to conduct, any further business activities in Iran or with Iranian counterparties.” PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Class A shares are traded on the NYSE under the symbol “APO.” Our Class A shares began trading on the NYSE on March 30, 2011. The number of holders of record of our Class A shares as of February 26, 2013 was 4. This does not include the number of shareholders that hold shares in “street name” through banks or broker-dealers. As of February 26, 2013, there is 1 holder of our Class B shares. -67- Table of Contents The following table sets forth the high and low intra-day sales prices per unit of our Class A shares, for the periods indicated, as reported by the NYSE: 2012 First Quarter Second Quarter Third Quarter Fourth Quarter 2011 First Quarter Second Quarter Third Quarter Fourth Quarter Sales Price High $ 15.48 14.70 15.06 17.85 Low $ 12.50 10.42 12.00 13.83 Sales Price High $ 19.00 18.91 17.94 14.21 Low $ 17.91 15.27 9.83 8.85 Cash Distribution Policy With respect to fiscal year 2012, we have paid four cash distributions of $0.46, $0.25, $0.24 and $0.40 per Class A share on February 29, May 30, August 31 and November 30, 2012 (aggregating $1.35 per Class A share) to record holders of Class A shares and we have declared an additional cash distribution of $1.05 per Class A shares to shareholders in respect of the fourth quarter of 2012 which was paid on February 28, 2013 to holders of record of Class A shares at the close of business on February 20, 2013. These distributions represented our net after-tax cash flow from operations in excess of amounts determined by our manager to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable law, any of our debt instruments or other agreements, or to provide for future distributions to our shareholders for any ensuing quarter. With respect to fiscal year 2011, we have paid four cash distributions of $0.17, $0.22, $0.24 and $0.20 per Class A share on January 14, June 1, August 29 and December 2, 2011 (aggregating $0.83 per Class A share) to record holders of Class A shares and we have declared an additional cash distribution of $0.46 per Class A shares to shareholders in respect of the fourth quarter of 2011 payable on February 29, 2012 to holders of record of Class A shares at the close of business on February 23, 2012. These distributions represented our net after-tax cash flow from operations in excess of amounts determined by our manager to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable law, any of our debt instruments or other agreements, or to provide for future distributions to our shareholders for any ensuing quarter. Our current intention is to distribute to our Class A shareholders on a quarterly basis substantially all of our net after-tax cash flow from operations in excess of amounts determined by our manager to be necessary or appropriate to provide for the conduct of our businesses, to make appropriate investments in our businesses and our funds, to comply with applicable law, to service our indebtedness or to provide for future distributions to our Class A shareholders for any ensuing quarter. Because we will not know what our actual available cash flow from operations will be for any year until sometime after the end of such year, our fourth quarter distribution may be adjusted to take into account actual net after-tax cash flow from operations for that year. The declaration, payment and determination of the amount of our quarterly distribution will be at the sole discretion of our manager, which may change our cash distribution policy at any time. We cannot assure you that any distributions, whether quarterly or otherwise, will or can be paid. In making decisions regarding our quarterly distribution, our manager will take into account general economic and business conditions, our strategic plans and prospects, our businesses and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, legal, tax and regulatory restrictions, restrictions and other implications on the -68- Table of Contents payment of distributions by us to our common shareholders or by our subsidiaries to us and such other factors as our manager may deem relevant. Because we are a holding company that owns intermediate holding companies, the funding of each distribution, if declared, will occur in three steps, as follows. • • First , we will cause one or more entities in the Apollo Operating Group to make a distribution to all of its partners, including our wholly-owned subsidiaries APO Corp., APO Asset Co., LLC and APO (FC), LLC (as applicable), and Holdings, on a pro rata basis; Second , we will cause our intermediate holding companies, APO Corp., APO Asset Co., LLC and APO (FC), LLC (as applicable), to distribute to us, from their net after-tax proceeds, amounts equal to the aggregate distribution we have declared; and • Third , we will distribute the proceeds received by us to our Class A shareholders on a pro rata basis. Payments that any of our intermediate holding companies make under the tax receivable agreement will reduce amounts that would otherwise be available for distribution by us on our Class A shares. See note 15 to our consolidated financial statements. The Apollo Operating Group intends to make periodic distributions to its partners (that is, Holdings and our intermediate holding companies) in amounts sufficient to cover hypothetical income tax obligations attributable to allocations of taxable income resulting from their ownership interest in the various limited partnerships making up the Apollo Operating Group, subject to compliance with any financial covenants or other obligations. Tax distributions will be calculated assuming each shareholder was subject to the maximum (corporate or individual, whichever is higher) combined U.S. Federal, New York State and New York City tax rates, without regard to whether any shareholder was subject to income tax liability at those rates. Because tax distributions to partners are made without regard to their particular tax situation, tax distributions to all partners, including our intermediate holding companies, will be increased to reflect the disproportionate income allocation to our Managing Partners and Contributing Partners with respect to “built-in gain” assets at the time of the Private Offering Transactions. Tax distributions will be made only to the extent all distributions from the Apollo Operating Group for such year are insufficient to cover such tax liabilities and all such distributions will be made to all partners on a pro rata basis based upon their respective interests in the applicable partnership. There can be no assurance that we will pay cash distributions on the Class A shares in an amount sufficient to cover any tax liability arising from the ownership of Class A shares. Under Delaware law we are prohibited from making a distribution to the extent that our liabilities, after such distribution, exceed the fair value of our assets. Our operating agreement does not contain any restrictions on our ability to make distributions, except that we may only distribute Class A shares to holders of Class A shares. The AMH Credit Agreement, however, restricts the ability of AMH to make cash distributions to us by requiring mandatory collateralization and restricting payments under certain circumstances. AMH will generally be restricted from paying distributions, repurchasing stock and making distributions and similar types of payments if any default or event of default occurs, if it has failed to deposit the requisite cash collateralization or does not expect to be able to maintain the requisite cash collateralization or if, after giving effect to the incurrence of debt to finance such distribution, its debt to EBITDA ratio would exceed specified levels. Instruments governing indebtedness that we or our subsidiaries incur in the future may contain further restrictions on our or our subsidiaries’ ability to pay distributions or make other cash distributions to equity holders. In addition, the Apollo Operating Group’s cash flow from operations may be insufficient to enable it to make required minimum tax distributions to its partners, in which case the Apollo Operating Group may have to borrow funds or sell assets, and thus our liquidity and financial condition could be materially adversely affected. Furthermore, by paying cash distributions rather than investing that cash in our businesses, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise. -69- Table of Contents Our cash distribution policy has certain risks and limitations, particularly with respect to liquidity. Although we expect to pay distributions according to our cash distribution policy, we may not pay distributions according to our policy, or at all, if, among other things, we do not have the cash necessary to pay the intended distributions. As of December 31, 2012, approximately 26.9 million RSUs granted to Apollo employees (net of forfeited awards) were entitled to distribution equivalents, to be paid in the form of cash compensation. Securities Authorized for Issuance Under Equity Compensation Plans See table under “Securities Authorized for Issuance Under Equity Compensation Plans” set forth in “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Class A Shares Repurchases in the Fourth Quarter of 2012 No purchases of our Class A shares were made by us or on our behalf in the fourth quarter of the year ended December 31, 2012. Unregistered Sale of Equity Securities None. ITEM 6. SELECTED FINANCIAL DATA The following selected historical consolidated and combined financial and other data of Apollo Global Management, LLC should be read together with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data.” The selected historical consolidated statements of operations data of Apollo Global Management, LLC for each of the years ended December 31, 2012, 2011 and 2010 and the selected historical consolidated statements of financial condition data as of December 31, 2012 and 2011 have been derived from our consolidated financial statements which are included in “Item 8. Financial Statements and Supplementary Data.” -70- Table of Contents We derived the selected historical consolidated and combined statements of operations data of Apollo Global Management, LLC for the years ended December 31, 2009 and 2008 and the selected consolidated and combined statements of financial condition data as of December 31, 2010, 2009 and 2008 from our audited consolidated and combined financial statements which are not included in this document. Statement of Operations Data Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income (loss) from affiliates Expenses: Total Revenues Compensation and benefits: Equity-based compensation Salary, bonus and benefits Profit sharing expense Incentive fee compensation Total Compensation and Benefits Interest expense Professional fees Litigation settlement General, administrative and other Placement fees Occupancy Depreciation and amortization (1) Total Expenses Other Income (Loss): Net income (loss) from investment activities Net (losses) gains from investment activities of consolidated variable interest entities Income (loss) from equity method investments Interest income Gain from repurchase of debt Other income (loss), net (2) Total Other Income (Loss) Income (Loss) Before Income Tax (Provision) Benefit Income tax (provision) benefit Net Income (Loss) Net (income) loss attributable to Non-Controlling Interests Net Income (Loss) Attributable to Apollo Global (3)(4) Management, LLC Distributions Declared per Class A share Net Income (Loss) Per Class A Share—Basic and Diluted 2012 Year Ended December 31, 2010 (in thousands, except per share amounts) 2011 2009 2008 $ 149,544 580,603 2,129,818 2,859,965 $ 81,953 487,559 (397,880 ) 171,632 $ 79,782 431,096 1,599,020 2,109,898 $ 56,075 406,257 504,396 966,728 $ 145,181 384,247 (796,133 ) (266,705 ) 598,654 274,574 871,394 739 1,745,361 37,116 64,682 — 87,961 22,271 37,218 53,236 2,047,845 1,149,753 251,095 (63,453 ) 3,383 1,340,778 40,850 59,277 — 75,558 3,911 35,816 26,260 1,582,450 1,118,412 249,571 555,225 20,142 1,943,350 35,436 61,919 — 65,107 4,258 23,067 24,249 2,157,386 1,100,106 227,356 161,935 5,613 1,495,010 50,252 33,889 — 61,066 12,364 29,625 24,299 1,706,505 1,125,184 201,098 (482,682 ) — 843,600 62,622 76,450 200,000 71,789 51,379 20,830 22,099 1,348,769 288,244 (129,827 ) 367,871 510,935 (1,269,100 ) (71,704 ) 110,173 9,693 — 1,964,679 2,301,085 3,113,205 (65,410 ) 3,047,795 (2,736,838 ) 24,201 13,923 4,731 — 205,520 118,548 (1,292,270 ) (11,929 ) (1,304,199 ) 835,373 48,206 69,812 1,528 — 195,032 682,449 634,961 (91,737 ) 543,224 (448,607 ) — 83,113 1,450 36,193 41,410 673,101 (66,676 ) (28,714 ) (95,390 ) (59,786 ) — (57,353 ) 19,368 — (4,609 ) (1,311,694 ) (2,927,168 ) 36,995 (2,890,173 ) 1,977,915 $ 310,957 1.35 $ 2.06 $ $ (468,826 ) 0.83 $ (4.18 ) $ $ 94,617 0.21 $ 0.83 $ $ (155,176 ) 0.05 $ (1.62 ) $ $ (912,258 ) 0.56 $ (9.37 ) $ Statement of Financial Condition Data Total assets Debt (excluding obligations of consolidated variable interest entities) Debt obligations of consolidated variable interest entities Total shareholders’ equity Total Non-Controlling Interests 2012 2011 As of December 31, 2010 (in thousands) 2009 2008 $ 20,636,858 $ 7,975,873 $ 6,552,372 $ 3,385,197 $ 2,474,532 1,026,005 — 325,785 822,843 737,818 11,834,955 5,703,383 3,036,565 751,525 1,127,180 3,081,419 2,930,517 933,834 — 1,299,110 1,603,146 738,516 3,189,837 2,648,321 1,921,920 (1) Litigation settlement charge was incurred in connection with an agreement with Huntsman to settle certain claims related to Hexion’s now terminated merger agreement with Huntsman. Insurance proceeds of $162.5 million and $37.5 million are included in other income during the years ended December 31, 2010 and 2009, respectively. (2) During April and May 2009, the Company repurchased a combined total of $90.9 million of face value of debt for $54.7 million and recognized a net gain of $36.2 million which is included in other (loss) income in the consolidated and combined statements of operations for the year ended December 31, 2009. (3) Reflects Non-Controlling Interests attributable to AAA, consolidated variable interest entities and the remaining interests held by certain individuals who receive an allocation of income from certain of our credit management companies. (4) Reflects the Non-Controlling Interests in the net (loss) income of the Apollo Operating Group relating to the units held by our Managing Partners and Contributing Partners after the 2007 Reorganization which is calculated by applying the ownership percentage of Holding in the Apollo Operating Group. -71- Table of Contents The ownership interest was impacted by a share repurchase in February 2009, the Company’s IPO in April 2011, and issuances of Class A shares in settlement of vested RSUs in 2010, 2011 and 2012. Refer to “Item 8. Financial Statements and Supplementary Data” for details of the ownership percentage. -72- Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Apollo Global Management, LLC’s consolidated financial statements and the related notes as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in the section of this report entitled “Item 1A. Risk Factors.” The highlights listed below have had significant effects on many items within our consolidated financial statements and affect the comparison of the current period’s activity with those of prior periods. General Our Businesses Founded in 1990, Apollo is a leading global alternative investment manager. We are contrarian, value-oriented investors in private equity, credit and real estate with significant distressed expertise and a flexible mandate in the majority of our funds that enables our funds to invest opportunistically across a company’s capital structure. We raise, invest and manage funds on behalf of some of the world’s most prominent pension, endowment and sovereign wealth funds as well as other institutional and individual investors. Apollo conducts its management and incentive businesses primarily in the United States and substantially all of its revenues are generated domestically. These businesses are conducted through the following three reportable segments: (i) Private equity —primarily invests in control equity and related debt instruments, convertible securities and distressed debt instruments; (ii) Credit —primarily invests in non-control corporate and structured debt instruments; and (iii) Real estate —primarily invests in legacy commercial mortgage-backed securities, commercial first mortgage loans, mezzanine investments and other commercial real estate-related debt investments. Additionally, the Company sponsors real estate funds that focus on opportunistic investments in distressed debt and equity recapitalization transactions. During the third quarter of 2012, the Company changed the name of its capital markets business to the credit segment. The Company believes this new name provides a more accurate description of the types of assets which are managed within this segment. In addition, this segment name change is consistent with the Company’s management reporting and organization structure, as well as the manner in which resource deployment and compensation decisions are made. These business segments are differentiated based on the varying investment strategies. The performance is measured by management on an unconsolidated basis because management makes operating decisions and assesses the performance of each of Apollo’s business segments based on financial and operating metrics and data that exclude the effects of consolidation of any of the affiliated funds. Our financial results vary since carried interest, which generally constitutes a large portion of the income we receive from the funds that we manage, as well as the transaction and advisory fees that we receive, can vary significantly from quarter to quarter and year to year. As a result, we emphasize long-term financial growth and profitability to manage our business. In addition, the growth in our fee-generating AUM during the last year has primarily been in our credit segment. The average management fee rate for these new credit products is at market rates for such -73- Table of Contents products and in certain cases is below our historical rates. Also, due to the complexity of these new product offerings, the Company has incurred and will continue to incur additional costs associated with managing these products. To date, these additional costs have been offset by realized economies of scale and ongoing cost management. As of December 31, 2012, we had total AUM of $113.4 billion across all of our businesses. Our latest private equity buyout fund, Fund VII, completed its closing in December 2008, raising a total of $14.7 billion, and as of December 31, 2012 Fund VII had $4.7 billion of uncalled commitments, or “dry powder”, remaining. We have consistently produced attractive long-term investment returns in our private equity funds, generating a 39% gross IRR and a 25% net IRR on a compound annual basis from inception through December 31, 2012. For further detail related to fund performance metrics across all of our businesses, see “—The Historical Investment Performance of Our Funds.” As of December 31, 2012, approximately 93% of our total AUM was in funds with a contractual life at inception of seven years or more, and 10% of our total AUM was in permanent capital vehicles with unlimited duration. Holding Company Structure The diagram below depicts our current organizational structure: -74- Table of Contents Note: The organizational structure chart above depicts a simplified version of the Apollo structure. It does not include all legal entities in the structure. Ownership percentages are as of the date of the filing of this Annual Report on Form 10-K. (1) The Strategic Investors hold 45.4% of the Class A shares outstanding. The Class A shares held by investors other than the Strategic Investors represent 23.1% of the total voting power of our shares entitled to vote and 19.4% of the economic interests in the Apollo Operating Group. Class A shares held by the Strategic Investors do not have voting rights. However, such Class A shares will become entitled to vote upon transfers by a Strategic Investor in accordance with the agreements entered into in connection with the investments made by the Strategic Investors. (2) Our Managing Partners own BRH, which in turns holds our only outstanding Class B share. The Class B share represents 76.9% of the total voting power of our shares entitled to vote but no economic interest in Apollo Global Management, LLC. Our Managing Partners’ economic interests are instead represented by their indirect beneficial ownership, through Holdings, of 57% of the limited partner interests in the Apollo Operating Group. (3) Through BRH Holdings, L.P., our Managing Partners indirectly beneficially own through estate planning vehicles limited partner interests in Holdings. (4) Holdings owns 64.5% of the limited partner interests in each Apollo Operating Group entity. The AOG Units held by Holdings are exchangeable for Class A shares. Our Managing Partners, through their interests in BRH and Holdings, beneficially own 57% of the AOG Units. Our Contributing Partners, through their ownership interests in Holdings, beneficially own 7.9% of the AOG Units. (5) BRH is the sole member of AGM Management, LLC, our manager. The management of Apollo Global Management, LLC is vested in our manager as provided in our operating agreement. (6) Represents 35.5% of the limited partner interests in each Apollo Operating Group entity, held through intermediate holding companies. Apollo Global Management, LLC, also indirectly owns 100% of the general partner interests in each Apollo Operating Group entity. Each of the Apollo Operating Group partnerships holds interests in different businesses or entities organized in different jurisdictions. Our structure is designed to accomplish a number of objectives, the most important of which are as follows: • • We are a holding company that is qualified as a partnership for U.S. Federal income tax purposes. Our intermediate holding companies enable us to maintain our partnership status and to meet the qualifying income exception. We have historically used multiple management companies to segregate operations for business, financial and other reasons. Going forward, we may increase or decrease the number of our management companies or partnerships within the Apollo Operating Group based on our views regarding the appropriate balance between (a) administrative convenience and (b) continued business, financial, tax and other optimization. Business Environment During the fourth quarter of 2012, global equity and credit markets continued to improve, assisted in part by low interest rate policies and other governmental actions. Against this backdrop, Apollo continued to generate realizations for fund investors, playing to the strengths of its flexible business model. Apollo returned $4.9 billion of capital and realized gains to the limited partners of the funds it manages during the fourth quarter of 2012. Apollo’s fundraising activities also continued at a strong pace, as evidenced by the $1.6 billion of new capital that was raised during the fourth quarter as institutional investors continued to turn to alternative investment managers for more attractive risk-adjusted returns in a low rate environment. Regardless of the market or economic environment at any given time, Apollo relies on its contrarian, value-oriented approach to consistently invest capital on behalf of its investors by focusing on opportunities that management believes are often overlooked by other investors. Apollo’s expertise in credit and its focus on nine core industry sectors combined with more than 20 years of investment experience have allowed Apollo to respond quickly to changing environments. Apollo’s core industry sectors cover chemicals, commodities, consumer and retail, distribution and transportation, financial and business services, manufacturing and industrial, media and cable and leisure, packaging and materials and the satellite and wireless industries. Apollo believes that these attributes have contributed to the success of its private equity funds investing in buyouts and credit opportunities during both expansionary and recessionary economic periods. -75- Table of Contents From the beginning of the third quarter of 2007 through December 31, 2012, we have deployed approximately $35.0 billion of gross invested capital across our private equity and certain credit funds focused on control, distressed and buyout investments, leveraged loan portfolios and mezzanine, non-control distressed and non-performing loans. In addition, from the beginning of the fourth quarter of 2007 through December 31, 2012, the funds managed by Apollo have acquired approximately $17.7 billion in face value of distressed debt at discounts to par value and purchased approximately $47.3 billion in face value of leveraged senior loans at discounts to par value from financial institutions. Since we purchased many of these leveraged loan portfolios from highly motivated sellers, we were able to secure, in certain cases, attractive long-term, low cost financing. Since the financial crisis in 2008, we have relied on our deep industry, credit and financial structuring experience, coupled with our strengths as a value-oriented, distressed investor, to deploy significant amounts of new capital within challenging economic environments. In addition, we actively work with the management of each of the portfolio companies of the funds we manage to maximize the underlying value of the business, including helping the companies to generate cost and working capital savings. We also rely on our deep credit structuring experience and work with management of the portfolio companies to help optimize the capital structure of such companies through proactive restructuring of the balance sheet to address near-term debt maturities or capturing discounts on publicly traded debt securities through exchange offers and potential debt buybacks. For example, as of December 31, 2012, Fund VI and its underlying portfolio companies purchased or retired approximately $19.8 billion in face value of debt and captured approximately $9.7 billion of discount to par value of debt in portfolio companies such as CEVA Logistics, Caesars Entertainment, Realogy and Momentive Performance Materials. Additionally, the portfolio companies of Fund VI have implemented approximately $3.8 billion of cost savings programs on an aggregate basis from the date Fund VI invested in them through December 31, 2012, which we believe will positively impact their operating profitability. In certain situations, funds managed by Apollo are the largest owner of the total outstanding debt of the portfolio company. In addition to the attractive return profile associated with these portfolio company debt purchases, we believe that building positions as senior creditors within the existing portfolio companies is strategic to the existing equity ownership positions. During the recovery and expansionary periods of 1994 through 2000 and late 2003 through the first half of 2007, our private equity funds invested or committed to invest approximately $13.7 billion primarily in traditional and corporate partner buyouts. During the recessionary periods of 1990 through 1993, 2001 through late 2003 and the current recessionary and post recessionary periods (second half of 2007 through the year end of 2012), our private equity funds have invested $27.4 billion, of which $16.2 billion was in distressed buyouts and debt investments when the debt securities of quality companies traded at deep discounts to par value. Our average entry multiple for Fund VII, VI and V was 6.2x, 7.7x and 6.6x, respectively as of December 31, 2012. The average entry multiple for a private equity fund is the average of the total enterprise value over an applicable EBITDA which we believe captures the true economics for our purchases of portfolio companies. Market Considerations Our revenues consist of the following: • Management fees, which are calculated based upon any of “net asset value,” “gross assets,” “adjusted costs of all unrealized portfolio investments,” “capital commitments,” “adjusted assets,” “invested capital” or “stockholders’ equity,” each as defined in the applicable management agreement of the unconsolidated funds; • Advisory and transaction fees relating to the investments our funds make, or individual monitoring agreements with individual portfolio companies of the private equity funds and certain credit funds as well as advisory services provided to certain credit funds; and • Carried interest with respect to our funds. -76- Table of Contents Our ability to grow our revenues depends in part on our ability to attract new capital and investors, which in turn depends on our ability to appropriately invest our funds’ capital, and on the conditions in the financial markets, including the availability and cost of leverage, and economic conditions in the United States, Western Europe, Asia, and to some extent, elsewhere in the world. The market factors that impact this include the following: • The strength of the alternative investment management industry, including the amount of capital invested and withdrawn from alternative investments. Allocations of capital to the alternative investment sector are dependent, in part, on the strength of the economy and the returns available from other investments relative to returns from alternative investments. Our share of this capital is dependent on the strength of our performance relative to the performance of our competitors. The capital we attract and our returns are drivers of our Assets Under Management, which, in turn, drive the fees we earn. In light of the current volatile conditions in the financial markets, our funds’ returns may be lower than they have been historically and fundraising efforts may be more challenging. • The strength and liquidity of the U.S. and relevant global equity markets generally, and the initial public offering market specifically. The strength of these markets affects the value of, and our ability to successfully exit, our equity positions in our private equity portfolio companies in a timely manner. • The strength and liquidity of the U.S. and relevant global debt markets. Our funds and our portfolio companies borrow money to make acquisitions and our funds utilize leverage in order to increase investment returns that ultimately drive the performance of our funds. Furthermore, we utilize debt to finance the principal investments in our funds and for working capital purposes. To the extent our ability to borrow funds becomes more expensive or difficult to obtain, the net returns we can earn on those investments may be reduced. • Stability in interest rate and foreign currency exchange rate markets. We generally benefit from stable interest rate and foreign currency exchange rate markets. The direction and impact of changes in interest rates or foreign currency exchange rates on certain of our funds are dependent on the funds’ expectations and the related composition of their investments at such time. For the most part, we believe the trends in these factors have historically created a favorable investment environment for our funds. However, adverse market conditions may affect our businesses in many ways, including reducing the value or hampering the performance of the investments made by our funds, and/or reducing the ability of our funds to raise or deploy capital, each of which could materially reduce our revenue, net income and cash flow, and affect our financial condition and prospects. As a result of our value-oriented, contrarian investment style which is inherently long-term in nature, there may be significant fluctuations in our financial results from quarter to quarter and year to year. The financial markets encountered a series of negative events in 2007 and 2008 which led to a global liquidity and broad economic crisis and impacted the performance of many of our funds’ portfolio companies. The impact of such events on our private equity and credit funds resulted in volatility in our revenue. If the market were to experience similar periods of volatility, we and the funds we manage may experience tightening of liquidity, reduced earnings and cash flow, impairment charges, as well as challenges in raising additional capital, obtaining investment financing and making investments on attractive terms. These market conditions can also have an impact on our ability to liquidate positions in a timely and efficient manner. For a more detailed description of how economic and global financial market conditions can materially affect our financial performance and condition, see “Item 1A. Risk Factors—Risks Related to Our Businesses—Difficult market conditions may adversely affect our businesses in many ways, including by reducing the value or hampering the performance of the investments made by our funds or reducing the -77- Table of Contents ability of our funds to raise or deploy capital, each of which could materially reduce our revenue, net income and cash flow and adversely affect our financial prospects and condition.” Uncertainty remains regarding Apollo’s future taxation levels. On May 28, 2010, the House of Representatives passed legislation that would, if enacted in its present form, preclude us from qualifying for treatment as a partnership for U.S. Federal income tax purposes under the publicly traded partnership rules. See “Item 1A. Risk Factors—Risks Related to Our Organization and Structure—Although not enacted, the U.S. Congress has considered legislation that would have: (i) in some cases after a ten-year transition period, precluded us from qualifying as a partnership or required us to hold carried interest through taxable corporations; and (ii) taxed certain income and gains at increased rates. If similar legislation were to be enacted and apply to us, the value of our Class A shares could be adversely affected” and “Item 1A. Risk Factors—Risks Related to Taxation—Our structure involves complex provisions of U.S. Federal income tax law for which no clear precedent or authority may be available. Our structure is also subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.” Managing Business Performance We believe that the presentation of Economic Net Income (Loss) supplements a reader’s understanding of the economic operating performance of each of our segments. Economic Net Income (Loss) ENI is a measure of profitability and does not take into account certain items included under U.S. GAAP. ENI represents segment income (loss) attributable to Apollo Global Management, LLC, which excludes the impact of non-cash charges related to RSUs granted in connection with the 2007 private placement and amortization of AOG Units, income tax expense, amortization of intangibles associated with the 2007 Reorganization as well as acquisitions and Non-Controlling Interests excluding the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies. In addition, segment data excludes the assets, liabilities and operating results of the funds and variable interest entities (“VIEs”) that are included in the consolidated financial statements. Adjustments relating to income tax expense, intangible asset amortization and Non-Controlling Interests are common in the calculation of supplemental measures of performance in our industry. We believe the exclusion of the non-cash charges related to the 2007 Reorganization for equity-based compensation provides investors with a meaningful indication of our performance because these charges relate to the equity portion of our capital structure and not our core operating performance. During the fourth quarter of 2011, the Company modified the measurement of ENI to better evaluate the performance of Apollo’s private equity, credit and real estate segments in making key operating decisions. These modifications include a reduction to ENI for equity-based compensation for RSUs (excluding RSUs granted in connection with the 2007 private placement) and share options, reduction for non-controlling interests related to the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies and an add-back for amortization of intangibles associated with the 2007 Reorganization and acquisitions. These modifications to ENI have been reflected in the prior period presentation of our segment results. The impact of this modification on ENI is reflected in the table below for the year ended December 31, 2010. For the year ended December 31, 2010 Impact of Modification on ENI Private Equity Segment $ (6,525 ) Credit Segment $ (23,449 ) Real Estate Segment $ (3,975 ) Total Reportable Segments $ (33,949 ) During the third quarter of 2012, the Company changed the name of its capital markets business to the credit segment. The Company believes this new name provides a more accurate description of the types of assets which are managed within this segment. In addition, this segment name change is consistent with the Company’s management reporting and organizational structure as well as the manner in which resource deployment and compensation decisions are made. -78- Table of Contents ENI is a key performance measure used for understanding the performance of our operations from period to period and although not every company in our industry defines these metrics in precisely the same way we do, we believe that this metric, as we use it, facilitates comparisons with other companies in our industry. We use ENI to evaluate the performance of our private equity, credit and real estate segments. Management also believes the components of ENI such as the amount of management fees, advisory and transaction fees and carried interest income are indicative of the Company’s performance. Management also uses ENI in making key operating decisions such as the following: • • • Decisions related to the allocation of resources such as staffing decisions including hiring and locations for deployment of the new hires. As the amount of fees, investment income, and ENI is indicative of the performance of the management companies and advisors within each segment, management can assess the need for additional resources and the location for deployment of the new hires based on the results of this measure. For example, a positive ENI could indicate the need for additional staff to manage the respective segment whereas a negative ENI could indicate the need to reduce staff assigned to manage the respective segment. Decisions related to capital deployment such as providing capital to facilitate growth for our business and/or to facilitate expansion into new businesses. As the amount of fees, investment income, and ENI is indicative of the performance of the management companies and advisors within each segment, management can assess the availability and need to provide capital to facilitate growth or expansion into new businesses based on the results of this measure. For example, a negative ENI may indicate the lack of performance of a segment and thus indicate a need for additional capital to be deployed into the respective segment. Decisions related to expenses, such as determining annual discretionary bonuses and equity-based compensation awards to its employees. With respect to compensation, management seeks to align the interests of certain professionals and selected other individuals with those of the investors in such funds and those of the Company’s shareholders by providing such individuals a profit sharing interest in the carried interest income earned in relation to the funds. To achieve that objective, a certain amount of compensation is based on the Company’s performance and growth for the year. ENI does not take into account certain items included when calculating net income under U.S. GAAP and as such, we do not rely solely on ENI as a performance measure and also consider our U.S. GAAP results. The following items, which are significant to our business, are excluded when calculating ENI: (i) non-cash charges related to RSUs granted in connection with the 2007 private placement and amortization of AOG Units, although these costs are expected to be recurring components of our costs we may be able to incur lower cash compensation costs with the granting of equity-based compensation; (ii) income tax, which represents a necessary and recurring element of our operating costs and our ability to generate revenue because ongoing revenue generation is expected to result in future income tax expense; (iii) amortization of intangible assets associated with the 2007 Reorganization and acquisitions, which is a recurring item until all intangibles have been fully amortized; and (iv) Non-Controlling Interests excluding the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies, which is expected to be a recurring item and represents the aggregate of the income or loss that is not owned by the Company. -79- Table of Contents We believe that ENI is helpful for an understanding of our business and that investors should review the same supplemental financial measure that management uses to analyze our segment performance. This measure supplements and should be considered in addition to and not in lieu of the results of operations discussed below in “—Overview of Results of Operations” that have been prepared in accordance with U.S. GAAP. The following summarizes the adjustments to ENI that reconcile ENI to the net income (loss) attributable to Apollo determined in accordance with U.S. GAAP: • Inclusion of the impact of RSUs granted in connection with the 2007 private placement and non-cash equity-based compensation expense comprising amortization of AOG Units. Management assesses our performance based on management fees, advisory and transaction fees, and carried interest income generated by the business and excludes the impact of non-cash charges related to RSUs granted in connection with the 2007 private placement and amortization of AOG Units because these non-cash charges are not viewed as part of our core operations. • Inclusion of the impact of income taxes as we do not take income taxes into consideration when evaluating the performance of our segments or when determining compensation for our employees. Additionally, income taxes at the segment level (which exclude APO Corp.’s corporate taxes) are not meaningful, as the majority of the entities included in our segments operate as partnerships and therefore are only subject to New York City unincorporated business taxes (“NYC UBT”) and foreign taxes when applicable. • • Inclusion of amortization of intangible assets associated with the 2007 Reorganization and subsequent acquisitions as these non-cash charges are not viewed as part of our core operations. Carried interest income, management fees and other revenues from Apollo funds are reflected on an unconsolidated basis. As such, ENI excludes the Non-Controlling Interests in consolidated funds, which remain consolidated in our consolidated financial statements. Management views the business as an alternative investment management firm and therefore assesses performance using the combined total of carried interest income and management fees from each of our funds. One exception is the non-controlling interest related to certain individuals who receive an allocation of income from certain of our credit management companies which is deducted from ENI to better reflect the performance attributable to shareholders. ENI may not be comparable to similarly titled measures used by other companies and is not a measure of performance calculated in accordance with U.S. GAAP. We use ENI as a measure of operating performance, not as a measure of liquidity. ENI should not be considered in isolation or as a substitute for operating income, net income, operating cash flows, investing and financing activities, or other income or cash flow statement data prepared in accordance with U.S. GAAP. The use of ENI without consideration of related U.S. GAAP measures is not adequate due to the adjustments described above. Management compensates for these limitations by using ENI as a supplemental measure to U.S. GAAP results, to provide a more complete understanding of our performance as management measures it. A reconciliation of ENI to our U.S. GAAP net income (loss) attributable to Apollo Global Management, LLC can be found in the notes to our consolidated financial statements. Operating Metrics We monitor certain operating metrics that are common to the alternative investment management industry. These operating metrics include Assets Under Management, private equity dollars invested and uncalled private equity commitments. -80- Table of Contents Assets Under Management Assets Under Management, or AUM, refers to the investments we manage or with respect to which we have control, including capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of: (i) (ii) the fair value of our private equity investments plus the capital that we are entitled to call from our investors pursuant to the terms of their capital commitments to the extent a fund is within the commitment period in which management fees are calculated based on total commitments to the fund; the NAV of our credit funds, other than certain CLOs (such as Artus, which we measure by using the mark-to-market value of the aggregate principal amount of the underlying collateralized loan obligations) or certain CLO and CDO credit funds that have a fee generating basis other than mark-to-market asset values, plus used or available leverage and/or capital commitments; (iii) the gross asset value or net asset value of our real estate entities and the structured portfolio company investments included within the funds we manage, which includes the leverage used by such structured portfolio companies; (iv) the incremental value associated with the reinsurance investments of the funds we manage; and (v) the fair value of any other investments that we manage plus unused credit facilities, including capital commitments for investments that may require pre-qualification before investment plus any other capital commitments available for investment that are not otherwise included in the clauses above. Our AUM measure includes Assets Under Management for which we charge either no or nominal fees. Our definition of AUM is not based on any definition of Assets Under Management contained in our operating agreement or in any of our Apollo fund management agreements. We consider multiple factors for determining what should be included in our definition of AUM. Such factors include but are not limited to (1) our ability to influence the investment decisions for existing and available assets; (2) our ability to generate income from the underlying assets in our funds; and (3) the AUM measures that we believe are used by other investment managers. Given the differences in the investment strategies and structures among other alternative investment managers, our calculation of AUM may differ from the calculations employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. We use AUM as a performance measurement of our investment activities, as well as to monitor fund size in relation to professional resource and infrastructure needs. Assets Under Management—Fee-Generating/Non-Fee Generating Fee-generating AUM consists of assets that we manage and on which we earn management fees or monitoring fees pursuant to management agreements on a basis that varies among the Apollo funds. Management fees are normally based on “net asset value,” “gross assets,” “adjusted par asset value,” “adjusted cost of all unrealized portfolio investments,” “capital commitments,” “adjusted assets,” “stockholders’ equity,” “invested capital” or “capital contributions,” each as defined in the applicable management agreement. Monitoring fees, also referred to as advisory fees, generally are based on the total value of certain structured portfolio company investments, which normally includes leverage, less any portion of such total value that is already considered in fee-generating AUM. Non-fee generating AUM consists of assets that do not produce management fees or monitoring fees. These assets generally consist of the following: (a) fair value above invested capital for those funds that earn management fees based on invested capital, (b) net asset values related to general partner interests and co-investments, (c) unused credit facilities, (d) available commitments on those funds that generate -81- Table of Contents management fees on invested capital, (e) structured portfolio company investments that do not generate monitoring fees and (f) the difference between gross assets and net asset value for those funds that earn management fees based on net asset value. We use non-fee generating AUM combined with fee-generating AUM as a performance measurement of our investment activities, as well as to monitor fund size in relation to professional resource and infrastructure needs. Non-fee generating AUM includes assets on which we could earn carried interest income. The table below displays fee-generating and non-fee generating AUM by segment as of December 31, 2012, 2011 and 2010. Changes in market conditions, additional funds raised and acquisitions have had significant impacts to our AUM: Total Assets Under Management Fee-generating Non-fee generating Private Equity Fee-generating Non-fee generating Credit (2) Fee-generating Non-fee generating Real Estate (2) Fee-generating Non-fee generating 2012 As of December 31, 2011 (in millions) (1) $ 113,379 81,934 31,445 (1) 37,832 27,932 9,900 64,406 49,518 14,888 8,800 4,484 4,316 $ 75,222 58,121 17,101 35,384 28,031 7,353 31,867 26,553 5,314 7,971 3,537 4,434 2010 $ 67,551 47,037 20,514 38,799 27,874 10,925 22,283 16,484 5,799 6,469 2,679 3,790 (1) (2) Includes $2.3 billion of commitments that have yet to be deployed to an Apollo fund within our three segments. Includes fee-generating and non-fee generating AUM as of September 30, 2012 for certain publicly traded vehicles managed by Apollo. During the year ended December 31, 2012, our total fee-generating AUM increased primarily due to acquisitions in our credit segment, as well as increases in subscriptions across our three segments. The fee-generating AUM of our credit funds increased primarily due to the acquisition in 2012 of Stone Tower Capital LLC and its related management companies (“Stone Tower”) as well as increased subscriptions, capital raised and leverage. The fee-generating AUM of our real estate segment increased due to net segment transfers from other segments and subscriptions, partially offset by distributions. The fee-generating AUM of our private equity funds decreased due to distributions, partially offset by subscriptions. When the fair value of an investment exceeds invested capital, we are normally entitled to carried interest income on the difference between the fair value once realized and invested capital after also considering certain expenses and preferred return amounts, as specified in the respective partnership agreements; however, we do not earn management fees on such excess. As a result of the growth in both the size and number of funds that we manage, we have experienced an increase in our management fees and advisory and transaction fees. To support this growth, we have also experienced an increase in operating expenses, resulting from hiring additional personnel, opening new offices to expand our geographical reach and incurring additional professional fees. -82- Table of Contents With respect to our private equity funds and certain of our credit and real estate funds, we charge management fees on the amount of committed or invested capital and we generally are entitled to realized carried interest on the realized gains on the disposition of such funds’ investments. Certain funds may have current fair values below invested capital; however, the management fee would still be computed on the invested capital for such funds. With respect to ARI and AMTG, we receive management fees on stockholders equity as defined in the applicable management agreement. In addition, our fee-generating AUM reflects leverage vehicles that generate monitoring fees on value in excess of fund commitments. As of December 31, 2012, our total fee-generating AUM is comprised of approximately 92% of assets that earn management fees and the remaining balance of assets earn monitoring fees. The Company’s entire fee-generating AUM is subject to management or monitoring fees. The components of fee-generating AUM by segment as of December 31, 2012, 2011 and 2010 are presented below: Fee-generating AUM based on capital commitments Fee-generating AUM based on invested capital Fee-generating AUM based on gross/adjusted assets Fee-generating AUM based on leverage Fee-generating AUM based on NAV Total Fee-Generating AUM (1) Private Equity $ 15,854 7,613 855 3,610 — $ 27,932 (2) As of December 31, 2012 Real Estate Credit (in millions) (3) $ 5,156 3,124 31,599 3,101 6,538 $ 49,518 (3) $ 194 1,866 2,134 — 290 $ 4,484 Total $ 21,204 12,603 34,588 6,711 6,828 $ 81,934 (1) Monitoring fees are normally based on the total value of certain structured portfolio company investments, which includes leverage, less any portion of such total value that is already considered for fee-generating AUM. Monitoring fees are typically calculated using a 0.5% annual rate. (2) The weighted average remaining life of the private equity funds excluding permanent capital vehicles at December 31, 2012 is 61 months. (3) The fee-generating AUM for certain of our publicly traded vehicles is based on an adjusted equity amount as specified by the respective management agreements. Fee-generating AUM based on capital commitments Fee-generating AUM based on invested capital Fee-generating AUM based on gross/adjusted assets Fee-generating AUM based on leverage Fee-generating AUM based on NAV Total Fee-Generating AUM (1) Private Equity $ 14,848 8,635 948 3,600 — $ 28,031 (2) As of December 31, 2011 Real Estate Credit (in millions) $ 2,747 2,909 15,862 3,213 1,822 $ 26,553 (3) $ 279 1,820 1,213 — 225 $ 3,537 Total $ 17,874 13,364 18,023 6,813 2,047 $ 58,121 (1) Monitoring fees are normally based on the total value of certain structured portfolio company investments, which includes leverage, less any portion of such total value that is already considered for fee-generating AUM. Monitoring fees are typically calculated using a 0.5% annual rate. (2) The weighted average remaining life of the private equity funds excluding permanent capital vehicles at December 31, 2011 is 65 months. (3) The fee-generating AUM for certain of our publicly traded vehicles is based on an adjusted equity amount as specified by the respective management agreements. -83- Table of Contents Fee-generating AUM based on capital commitments Fee-generating AUM based on invested capital Fee-generating AUM based on gross/adjusted assets Fee-generating AUM based on leverage Fee-generating AUM based on NAV Total Fee-Generating AUM (1) Private Equity $ 14,289 8,742 1,177 3,666 — $ 27,874 (2) As of December 31, 2010 Real Estate Credit (in millions) $ 1,689 3,093 5,556 3,577 2,569 $ 16,484 $ 154 1,750 — — 775 $ 2,679 Total $ 16,132 13,585 6,733 7,243 3,344 $ 47,037 (1) Monitoring fees are normally based on the total value of certain structured portfolio company investments, which includes leverage, less any portion of such total value that is already considered for fee-generating AUM. Monitoring fees are typically calculated using a 0.5% annual rate. (2) The weighted average remaining life of the private equity funds excluding permanent capital vehicles at December 31, 2010 is 76 months. AUM as of December 31, 2012, 2011 and 2010 was as follows: AUM: Private equity Credit Real estate Total Total Assets Under Management As of December 31, 2012 2011 (in millions) 2010 $ 37,832 64,406 8,800 $ 113,379 (1) $ 35,384 31,867 7,971 $ 75,222 $ 38,799 22,283 6,469 $ 67,551 (1) Includes $2.3 billion of commitments that have yet to be deployed to an Apollo fund within our three segments. The following table presents total Assets Under Management and fee generating Assets Under Management amounts for our private equity segment by strategy: Total AUM As of December 31, 2011 2012 Fee Generating AUM As of December 31, 2011 2010 2010 2012 Traditional Private Equity Funds ANRP AAA (1) Total (1) (in millions) $ 35,617 $ 34,232 $ 37,341 $ 25,706 $ 26,984 $ 26,592 — 1,282 $ 37,832 $ 35,384 $ 38,799 $ 27,932 $ 28,031 $ 27,874 — 1,152 1,295 931 — 1,458 — 1,047 1,284 931 Includes co-investments contributed to Athene by AAA, through its investment in AAA Investments, as part of the AAA Transaction. -84- Table of Contents The following table presents total Assets Under Management and fee generating Assets Under Management amounts for our credit segment by strategy: U.S. Performing Credit Structured Credit Athene (2) NPL Opportunistic Credit European Credit Other Total Total AUM As of December 31, 2011 (1) 2012 2010 (1) Fee Generating AUM As of December 31, 2012 2011 (1) 2010 (1) (in millions) $ 27,509 $ 14,719 $ 11,159 $ 20,567 $ 11,377 $ 7,379 246 1,221 1,689 5,362 544 43 $ 64,406 $ 31,867 $ 22,283 $ 49,518 $ 26,553 $ 16,484 2,442 5,974 1,935 5,310 1,434 53 7,589 10,845 4,527 4,722 1,268 — 246 1,473 1,908 6,691 755 51 1,789 5,974 1,636 4,603 1,122 52 11,436 10,970 6,404 6,177 1,910 — (1) Reclassified to conform to current presentation. (2) Excludes AUM that is either sub-advised by Apollo or invested in Apollo funds and investment vehicles across its private equity, credit and real estate funds. The following table presents total Assets Under Management and fee generating Assets Under Management amounts for our real estate segment by strategy: Fixed Income Equity Total -85- Total AUM As of December 31, 2011 2010 2012 Fee Generating AUM As of December 31, 2011 2012 2010 (in millions) $ 4,826 $ 4,042 $ 2,827 $ 2,332 $ 1,411 $ 549 2,130 $ 8,800 $ 7,971 $ 6,469 $ 4,484 $ 3,537 $ 2,679 2,126 3,642 3,974 3,929 2,152 Table of Contents The following tables summarize changes in total AUM and total AUM for each of our segments for the years ended December 31, 2012, 2011 and 2010: Change in Total AUM: Beginning of Period Income (Loss) Subscriptions/capital raised Other inflows/acquisitions Distributions Redemptions Leverage End of Period Change in Private Equity Total AUM: Beginning of Period Income (Loss) Subscriptions/capital raised Distributions Net segment transfers Leverage End of Period Change in Credit Total AUM: Beginning of Period Income (Loss) Subscriptions/capital raised Other inflows/acquisitions Distributions Redemptions Net segment transfers Leverage End of Period Change in Real Estate Total AUM: Beginning of Period Income Subscriptions/capital raised Other inflows/acquisitions Distributions Redemptions Net segment transfers Leverage End of Period (3) For the Year Ended December 31, 2011 (in millions) $ 67,551 (1,477 ) 3,797 9,355 (5,153 ) (532 ) 1,681 $ 75,222 $ 38,799 (1,612 ) 417 (3,464 ) 167 1,077 $ 35,384 $ 22,283 (110 ) 3,094 9,355 (1,237 ) (532 ) (1,353 ) 367 $ 31,867 $ 6,469 245 286 — (452 ) — 1,186 237 $ 7,971 2012 $ 75,222 12,038 9,688 23,629 (10,858 ) (1,221 ) 4,881 (2) $ 113,379 $ 35,384 8,108 662 (6,537 ) 317 (102 ) $ 37,832 $ 31,867 3,274 5,504 23,629 (3,197 ) (948 ) (1,023 ) 5,300 $ 64,406 $ 7,971 656 475 — (1,124 ) (273 ) 1,412 (317 ) $ 8,800 (3) 2010 ( 1) $ 53,609 8,623 617 3,713 (2,518 ) (338 ) 3,845 $ 67,551 $ 34,002 6,387 — (1,568 ) (68 ) 46 $ 38,799 $ 19,112 2,207 512 — (698 ) (338 ) (291 ) 1,779 $ 22,283 $ 495 29 105 3,713 (252 ) — 359 2,020 $ 6,469 (1) Reclassified to conform to current period’s presentation. (2) (3) Includes $2.3 billion of commitments that have yet to be deployed to an Apollo fund within our three segments at the end of 2012. Includes $273 million of released unfunded commitments primarily related to two legacy real estate funds that were past their investment periods. -86- Table of Contents The following tables summarize changes in total fee-generating AUM and fee-generating AUM for each of our segments for the years ended December 31, 2012, 2011 and 2010: Change in Total Fee-Generating AUM: Beginning of Period Income (Loss) Subscriptions/capital raised Other inflows/acquisitions Distributions Redemptions Net movements between Fee Generating/Non Fee Generating Leverage End of Period Change in Private Equity Fee-Generating AUM: Beginning of Period Income (Loss) Subscriptions/capital raised Distributions Net segment transfers Net movements between Fee Generating/Non Fee Generating Leverage End of Period Change in Credit Fee-Generating AUM: Beginning of Period Income Subscriptions/capital raised Other inflows/acquisitions Distributions Redemptions Net segment transfers Net movements between Fee Generating/Non Fee Generating Leverage End of Period Change in Real Estate Fee-Generating AUM: Beginning of Period Income (Loss) Subscriptions/capital raised Other inflows/acquisitions Distributions Net segment transfers Net movements between Fee Generating/Non Fee Generating Leverage End of Period For the Year Ended December 31, 2011 (in millions) 2010 2012 $ 58,121 1,390 5,873 21,277 (3,728 ) (909 ) (564 ) 474 $ 81,934 $ 28,031 285 644 (1,256 ) 50 515 (337 ) $ 27,932 $ 26,553 988 4,953 21,277 (2,029 ) (909 ) (1,096 ) (1,030 ) 811 $ 49,518 $ 3,537 117 276 — (443 ) 1,045 (48 ) — $ 4,484 $ 47,037 (393 ) 2,547 9,355 (734 ) (481 ) 761 29 $ 58,121 $ 27,874 (112 ) 410 (272 ) (88 ) 285 (66 ) $ 28,031 $ 16,484 301 1,795 9,355 (283 ) (481 ) (638 ) 356 (336 ) $ 26,553 $ 2,679 (582 ) 342 — (179 ) 726 120 431 $ 3,537 $ 43,224 1,244 1,234 2,130 (1,327 ) (291 ) (197 ) 1,020 $ 47,037 $ 28,092 391 — (432 ) (59 ) (218 ) 100 $ 27,874 $ 14,854 842 1,234 — (696 ) (291 ) (300 ) 21 820 $ 16,484 $ 278 11 — 2,130 (199 ) 359 — 100 $ 2,679 Private Equity During the year ended December 31, 2012, the total AUM in our private equity segment increased by $2.4 billion, or 6.9%. This increase was primarily a result of income of $8.1 billion attributable to improved unrealized gains in our private equity funds, including $4.5 billion from Fund VII and $3.1 billion from Fund VI. In addition, contributing to this increase was an additional $0.7 billion in subscriptions from AION Capital Partners Limited (“AION”) and ANRP. Offsetting this increase was $6.5 billion in distributions, including $3.7 billion from Fund VII and $2.1 billion from Fund VI. -87- Table of Contents During the year ended December 31, 2011, the total AUM in our private equity segment decreased by $3.4 billion, or 8.8%. This decrease was primarily a result of distributions of $3.5 billion, including $1.5 billion from Fund VII and $0.9 billion from Fund IV and $0.8 billion from Fund VI. In addition, $1.6 billion of unrealized losses were incurred that were primarily attributable to Fund VI. Offsetting these decreases was a $1.1 billion increase in leverage, primarily from Fund VII and capital raised of $0.4 billion, primarily in ANRP. During the year ended December 31, 2010, the total AUM in our private equity segment increased by $4.8 billion, or 14.1%. This increase was primarily impacted by improved investment valuations of $6.4 billion. This increase was partially offset by $1.6 billion of distributions primarily from Fund V. Credit During the year ended December 31, 2012, total AUM in our credit segment increased by $32.5 billion, or 102.1%. This increase was primarily attributable to $18.5 billion in acquisitions related to Stone Tower, $5.1 billion in other inflows related to Athene and $5.3 billion in increased leverage, including $3.4 billion from AMTG. The increase was also a result of $5.5 billion of additional subscriptions, including $3.0 billion by Apollo European Principal Finance Fund II, L.P. (“EPF II”), $0.6 billion by Apollo Centre Street Partnership, L.P. (“ACSP”) and $0.4 billion by AMTG. This increase was partially offset by $3.2 billion of distributions, including $1.5 billion collectively from COF I and COF II and $0.3 billion from Apollo European Principal Finance Fund I, L.P. (“EPF I”). During the year ended December 31, 2011, total AUM in our credit segment increased by $9.6 billion, or 43.0%. This increase was primarily attributable to inflows of $9.4 billion related to $6.4 billion from Athene and $3.0 billion from the acquisition of Gulf Stream Asset Management, LLC (“Gulf Stream”). Also contributing to this increase was $3.1 billion of capital raised driven by $0.8 billion in Apollo Palmetto Strategic Partnership, L.P. (“Palmetto”), $0.4 billion in Financial Credit Investment I, L.P. (“FCI”), $0.3 billion in AFT, $0.5 billion in Apollo European Strategic Investments, L.P. (“AESI”) and $0.2 billion in EPF II. Partially offsetting these increases were distributions of $1.2 billion and redemptions of $0.5 billion, as well as $1.4 billion in net transfers between segments. During the year ended December 31, 2010, total AUM in our credit segment increased by $3.2 billion, or 16.6%. This increase was attributable to $2.2 billion in improved valuations, primarily in Athene of $0.4 billion and COF I and COF II of $0.7 billion and $0.2 billion, respectively, $1.8 billion of increased leverage primarily in COF II and Athene of $1.1 billion and $0.5 billion, respectively, and $0.5 billion of additional subscriptions. These increases were partially offset by $0.7 billion of distributions and $0.3 billion in redemptions. Real Estate During the year ended December 31, 2012, total AUM in our real estate segment increased by $0.8 billion, or 10.4%. This increase was primarily a result of $1.4 billion in net transfers from other segments and additional subscriptions of $0.5 billion, including $0.2 billion from a real estate investment. In addition, also contributing to this increase was income of $0.7 billion attributable to improved unrealized gains in our real estate funds, including $0.4 billion from the CPI funds. Partially offsetting this increase was $1.1 billion in distributions, including $0.8 billion from the CPI funds. During the year ended December 31, 2011, total AUM in our real estate segment increased by $1.5 billion, or 23.2%. This increase was primarily attributable to $1.2 billion from other net segments. Also impacting this change was an increase in leverage of $0.2 billion, primarily from AGRE CMBS Fund, L.P. and 2011 A-4 Fund, L.P. In addition, there was $0.2 billion of income that was primarily attributable to improved unrealized gains in our real estate funds. These increases were offset by $0.5 billion of distributions. During the year ended December 31, 2010, total AUM in our real estate segment increased by approximately $6.0 billion. The overall AUM increase in our real estate segment was primarily driven by -88- Table of Contents the acquisition of CPI during the fourth quarter of 2010, which had approximately $3.6 billion of AUM at December 31, 2010. Additionally, $2.0 billion of incremental leverage was added during the year ended December 31, 2010 to our real estate segment, which was primarily attributable to the AGRE CMBS Accounts and ARI. Private Equity Dollars Invested and Uncalled Private Equity Commitments Private equity dollars invested represents the aggregate amount of capital invested by our private equity funds during a reporting period. Uncalled private equity commitments, by contrast, represent unfunded commitments by investors in our private equity funds to contribute capital to fund future investments or expenses incurred by the funds, fees and applicable expenses as of the reporting date. Private equity dollars invested and uncalled private equity commitments are indicative of the pace and magnitude of fund capital that is deployed or will be deployed, and which therefore could result in future revenues that include transaction fees and incentive income. Private equity dollars invested and uncalled private equity commitments can also give rise to future costs that are related to the hiring of additional resources to manage and account for the additional capital that is deployed or will be deployed. Management uses private equity dollars invested and uncalled private equity commitments as key operating metrics since we believe the results measure our investment activities. The following table summarizes the private equity dollars invested during the specified reporting periods: Private equity dollars invested For the Year Ended December 31, 2011 (in millions) $ 3,350 2012 $ 3,191 2010 $ 3,863 The following table summarizes the uncalled private equity commitments as of December 31, 2012, 2011 and 2010: Uncalled private equity commitments The Historical Investment Performance of Our Funds As of December 31, 2011 (in millions) $ 8,204 2012 $ 7,464 2010 $ 10,345 Below we present information relating to the historical performance of our funds, including certain legacy Apollo funds that do not have a meaningful amount of unrealized investments, and in respect of which the general partner interest has not been contributed to us. When considering the data presented below, you should note that the historical results of our funds are not indicative of the future results that you should expect from such funds, from any future funds we may raise or from your investment in our Class A shares. An investment in our Class A shares is not an investment in any of the Apollo funds, and the assets and revenues of our funds are not directly available to us. As a result of the deconsolidation of most of our funds, we will not be consolidating those funds in our financial statements for periods after either August 1, 2007 or November 30, 2007. The historical and potential future returns of the funds we manage are not directly linked to returns on our Class A shares. Therefore, you should not conclude that continued positive performance of the funds we manage will necessarily result in positive returns on an investment in our Class A shares. However, poor performance of the funds that we manage would cause a decline in our revenue from such funds, and would therefore have a negative effect on our performance and in all likelihood the value in our Class A shares. There can be no assurance that any Apollo fund will continue to achieve the same results in the future. Moreover, the historical returns of our funds should not be considered indicative of the future results you should expect from such funds or from any future funds we may raise, in part because: -89- Table of Contents • market conditions during previous periods were significantly more favorable for generating positive performance, particularly in our private equity business, than the market conditions we have experienced for the last few years and may experience in the future; • our funds’ returns have benefited from investment opportunities and general market conditions that currently do not exist and may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities; • • • • • • • our private equity funds’ rates of return, which are calculated on the basis of net asset value of the funds’ investments, reflect unrealized gains, which may never be realized; our funds’ returns have benefited from investment opportunities and general market conditions that may not repeat themselves, including the availability of debt capital on attractive terms and the availability of distressed debt opportunities, and we may not be able to achieve the same returns or profitable investment opportunities or deploy capital as quickly; the historical returns that we present are derived largely from the performance of our earlier private equity funds, whereas future fund returns will depend increasingly on the performance of our newer funds, which may have little or no realized investment track record; Fund VI and Fund VII are several times larger than our previous private equity funds, and this additional capital may not be deployed as profitably as our prior funds; the attractive returns of certain of our funds have been driven by the rapid return of invested capital, which has not occurred with respect to all of our funds and we believe is less likely to occur in the future; our track record with respect to our credit and real estate funds is relatively short as compared to our private equity funds; in recent years, there has been increased competition for private equity investment opportunities resulting from the increased amount of capital invested in private equity funds and periods of high liquidity in debt markets, which may result in lower returns for the funds; and • our newly established funds may generate lower returns during the period that they take to deploy their capital; consequently, we do not provide return information for any funds which have not been actively investing capital for at least 24 months prior to the valuation date as we believe this information is not meaningful. Finally, our private equity IRRs have historically varied greatly from fund to fund. For example, Fund IV has generated a 12% gross IRR and a 9% net IRR since its inception through December 31, 2012, while Fund V has generated a 61% gross IRR and a 44% net IRR since its inception through December 31, 2012. Accordingly, the IRR going forward for any current or future fund may vary considerably from the historical IRR generated by any particular fund, or for our private equity funds as a whole. Future returns will also be affected by the applicable risks, including risks of the industries and businesses in which a particular fund invests. See “Item 1A. Risk Factors—Risks Related to Our Businesses—The historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our Class A shares.” -90- Table of Contents Investment Record Private Equity The following table summarizes the investment record of certain of our private equity funds portfolios. All amounts are as of December 31, 2012, unless otherwise noted: As of December 31, 2012 As of December 31, 2011 As of December 31, 2010 Committed Vintage Year Capital Total Invested Capital Committed Capital Less Unfunded Capital Commitments (1) Realized Unrealized (2) Total Value Gross IRR 274 $ — $ 2012 $ 2012 1,323 265 2008 14,676 13,585 2006 10,136 11,813 2001 3,742 5,192 1998 3,600 3,481 1995 1,500 1,499 ($ in millions) — $ — $ 11 305 9,998 10,757 9,065 6,657 3,742 11,618 3,600 6,767 1,500 2,654 (3) — $ — NM 250 NM 239 (3) 12,367 23,124 35 % 10,343 17,000 11 1,198 12,816 61 54 6,821 12 28 2,682 18 Net IRR (3) NM NM (3) 26 % 9 44 9 11 Gross IRR N/A NM (3) 31 % 6 61 12 18 Net IRR N/A NM (3) 22 % 5 44 9 12 Gross IRR N/A N/A 46 % 13 62 11 18 Net IRR N/A N/A 32 % 10 45 9 12 1990/92 2,220 3,773 $ 37,471 $ 39,608 $ 2,220 7,924 — 7,924 47 30,430 $ 46,388 $ 24,229 $ 70,617 39 % 37 25 % 47 39 % 37 25 % 47 39 % 37 26 % (5) (5) (5) (5) (5) (5) (3) AION ANRP (3) Fund VII Fund VI Fund V Fund IV Fund III Fund I, II & MIA Totals (4) AAA (6) Vintage Year 2006 Net Asset Value as of December 31, 2012 $ 1,662.9 For the Year Ended Net Return For the Year Ended For the Year Ended December 31, 2012 December 31, 2011 December 31, 2010 20 % (8 )% 28 % (1) “Committed Capital Less Unfunded Capital Commitments” represent capital commitments from limited partners to invest in a particular fund less capital that is available for investment or reinvestment subject to the provisions of the applicable limited partnership agreements. (2) Figures include the market values, estimated fair value of certain unrealized investments and capital committed to investments. (3) AION and ANRP commenced investing capital less than 24 months prior to the period indicated. Given the limited investment period and overall longer investment period for private equity funds, the return information was deemed not meaningful. (4) Fund I and Fund II were structured such that investments were made from either fund depending on which fund had available capital. We do not differentiate between Fund I and Fund II investments for purposes of performance figures because they are not meaningful on a separate basis and do not demonstrate the progression of returns over time. The general partners and managers of Funds I, II and MIA, as well as the general partner of Fund III were excluded assets in connection with the 2007 Reorganization of Apollo Global Management, LLC. As a result, Apollo Global Management, LLC did not receive the economics associated with these entities. The investment performance of these funds is presented to illustrate fund performance associated with our Managing Partners and other investment professionals. (5) Total IRR is calculated based on total cash flows for all funds presented. (6) AAA completed its IPO in June 2006 and is the sole limited partner in AAA Investments. AAA was originally designed to give investors in its common units exposure as a limited partner to certain of the strategies that we employ and allowed us to manage the asset allocations to those strategies by investing alongside our private equity funds and directly in our credit funds and certain other opportunistic investments that we sponsor and manage. On October 31, 2012, AAA and AAA Investments consummated a transaction whereby a wholly-owned subsidiary of AAA Investments contributed substantially all of its investments to Athene in connection with the AAA Transaction. After the AAA Transaction, Athene was AAA’s only material investment and as of December 31, 2012, AAA, through its investment in AAA Investments, was the largest shareholder of Athene Holding Ltd. with an approximate 77% ownership stake (without giving effect to restricted common shares issued under Athene’s management equity plan). Subsequent to December 31, 2012, Athene called additional capital from other investors, and as a result AAA’s ownership of Athene Holding Ltd. was reduced to approximately 72% (without giving effect to restricted common shares issued under Athene’s management equity plan). Additional information related to AAA can be found on its website at www.apolloalternativeassets.com. The information contained in AAA’s website is not part of this report. -91- Table of Contents The following table summarizes the investment record for distressed investments made in our private equity fund portfolios excluding ANRP and AION, since the Company’s inception. All amounts are as of December 31, 2012: Distressed for Control Non-Control Distressed Total Buyout Equity, Portfolio Company Debt and Other Credit (2) Total Total Invested Capital Total Value Gross IRR (1) (in millions) $ $ 5,568 5,961 11,529 27,814 39,343 $ 15,508 8,399 23,907 46,460 $ 70,367 29 % 71 49 21 39 % IRR information is presented gross and does not give effect to management fees, incentive compensation, certain other expenses and taxes. (1) (2) Other Credit means investments in debt securities of issuers other than portfolio companies that are not considered to be distressed. The following tables provide additional detail on the composition of our Fund VII, Fund VI and Fund V private equity portfolios based on investment strategy. All amounts are as of December 31, 2012. Fund VII Fund VI Fund V Buyout Equity and Portfolio Company Debt Other Credit & Classic Distressed Total (1) Buyout Equity and Portfolio Company Debt Other Credit & Classic Distressed Total (1) Buyout Equity Classic Distressed Total (1) Total Invested Capital Total Value (in millions) $ $ 8,558 5,027 13,585 $ 15,539 7,585 $ 23,124 Total Invested Capital Total Value (in millions) $ 9,667 2,146 $ 11,813 $ 13,543 3,457 $ 17,000 Total Invested Capital Total Value (in millions) $ 4,412 780 $ 5,192 $ 11,856 960 $ 12,816 (1) Classic Distressed means investments in debt securities of issuers other than portfolio companies that are considered to be distressed. -92- Table of Contents Credit The following table summarizes the investment record for certain funds and SIAs with a defined maturity date and internal rate of return since inception, which is computed for the purposes of this table based on the actual dates of capital contributions, distributions and ending limited partners’ capital as of the specified date. Apollo also manages CLOs within our credit segment with total AUM of approximately $10.6 billion as of December 31, 2012, which fund performance information is not included in the following credit investment tables. All amounts are as of December 31, 2012, unless otherwise noted: Vintage Strategy Committed Capital Year Total Invested Capital Realized Unrealized (1) (in millions) As of December 31, 2012 As of December 31, 2011 As of December 31, 2010 Gross Gross Gross Total Value IRR Net IRR Net IRR IRR IRR Net IRR 2012 $ 85.2 $ 85.2 $ 2.4 $ 87.6 $ 90.0 NM (4) NM (4) NM (4) NM (4) NM (4) NM (4) ACRF II (2) EPF II (3)(5) FCI (3) AESI (3)(5) AEC (3) AIE II (5) COF I COF II EPF I (5) ACLF Artus Totals Structured Credit Non- Performing Loans Structured Credit European Credit European Credit European Credit U.S. Performing Credit U.S. Performing Credit Non- Performing Loans U.S. Performing Credit U.S. Performing Credit 2012 3,615.2 175.9 19.7 173.0 192.7 NM (4) NM (4) NM (4) NM (4) NM (4) NM (4) 2012 2011 2011 2008 558.8 347.3 15.0 401.2 469.0 371.4 184.1 269.4 292.5 197.1 103.5 125.5 416.2 NM (4) NM (4) NM (4) NM (4) NM (4) NM (4) 453.5 NM (4) NM (4) NM (4) NM (4) NM (4) NM (4) 229.0 NM (4) NM (4) NM (4) NM (4) NM (4) NM (4) 272.4 860.1 994.2 280.3 1,274.5 19.4 % 15.6 % 18.2 % 14.2 % 27.5 % 21.8 % 2008 1,484.9 1,611.3 1,980.4 2,048.6 4,029.0 30.7 27.6 25.0 22.4 32.5 29.0 2008 1,583.0 2,176.4 1,703.7 1,320.2 3,023.9 14.3 11.7 10.3 8.5 17.4 14.9 2007 1,708.5 1,837.6 1,465.3 1,046.4 2,511.7 18.6 11.6 16.6 8.8 14.8 7.9 2007 2007 984.0 1,448.5 2,081.2 258.1 2,339.3 13.0 11.2 10.1 9.2 12.1 11.2 106.6 190.1 225.9 — 225.9 7.0 6.8 3.6 3.4 3.0 2.8 $ 11,160.1 $ 9,300.9 $ 8,775.4 $ 6,010.3 $ 14,785.7 (1) Figures include the market values, estimated fair value of certain unrealized investments and capital committed to investments. (2) As part of the Stone Tower acquisition, Apollo acquired the manager of Apollo Structured Credit Recovery Master Fund II, Ltd. (“ACRF II”). Apollo became the manager of this fund upon completing the acquisition on April 2, 2012. (3) EPF II, AESI and Apollo European Credit Master Fund, L.P. (“AEC”) were launched during 2011 and have not established their vintage year. FCI had its final capital raise in 2012, establishing its vintage year. (4) Returns have not been presented as the fund commenced investing capital less than 24 months prior to the period indicated and therefore such return information was deemed not meaningful. (5) Certain funds are denominated in Euros and translated into U.S. dollars at an exchange rate of € 1.00 to $1.32 as of December 31, 2012. The following table summarizes the investment record for certain funds and SIAs with no maturity date. All amounts are as of December 31, 2012, unless otherwise noted: Strategy Vintage Year Net Asset Value as of December 31, 2012 (in millions) Net Return Since Inception to December 31, For the Year Ended December 31, For the Year Ended December 31, For the Year Ended December 31, 2012 2012 2011 2010 Opportunistic Credit Opportunistic Credit U.S. Performing Credit Structured Credit Opportunistic Credit Opportunistic Credit U.S. Performing Credit Opportunistic Credit Opportunistic Credit 2003/2006 2012 2011 2011 2011 2010 2007 2005 2004 $ $ 216.4 164.5 290.8 691.4 105.3 758.2 1,790.1 1,652.1 713.2 6,382.0 (1) (1) (1) (1) NM NM NM NM NM 44.9 % NM 47.1 66.2 (3) (3) (1) (1) (1) (1) NM NM NM NM NM 15.1 % NM (3) 9.9 10.8 (3) (1) (1) (1) (1) NM NM NM NM NM (10.5 )% NM (3) (5.1 ) (9.6 ) (3) (1) (1) (1) (1) NM NM NM NM NM (3) 16.9 % NM (3) 4.8 12.2 (1)(5)(6) (3) (1)(4) (1)(2) ACSP ACSF AFT AMTG STCS (3) SOMA ACF (3) AINV Value Funds Totals (7) (8) (9) (1) Returns have not been presented as the fund commenced investing capital less than 24 months prior to the period indicated and therefore such return information was deemed not meaningful. (2) ACSP is a strategic investment account with $615.0 million of committed capital. (3) As part of the Stone Tower acquisition, Apollo acquired the manager of Apollo Credit Strategies Master Fund Ltd. (“ACSF”), Stone Tower Credit Solutions Master Fund Ltd. (“STCS”), and Apollo Credit Master Fund Ltd (“ACF”). As of December 31, 2012, the net returns from inception for ACF and STCS were (6.9)% and 28.8%, respectively. These returns were primarily achieved during a period in which Apollo did not make the initial investment decisions. Apollo became the manager of these funds upon completing the acquisition on April 2, 2012. (4) AFT completed its IPO during the first quarter of 2011. Refer to www.agmfunds.com for the most recent financial information on AFT. The information contained in AFT’s website is not part of this report. (5) Refer to www.apolloresidentialmortgage.com for the most recent financial information on AMTG. The information contained in AMTG’s website is not part of this report. (6) All amounts are as of September 30, 2012. (7) NAV and returns are for the primary mandate, which follows similar strategies as the Value Funds and excludes Apollo Special Opportunities Managed Account, L.P.’s (“SOMA”) investments in other Apollo funds. (8) Net return for AINV represents NAV return including reinvested dividends. Refer to www.apolloic.com for the most recent public financial information on AINV. The information contained in AINV’s website is not part of this report. (9) Value Funds consist of Apollo Strategic Value Master Fund, L.P., together with its feeder funds and Apollo Value Investment Master Fund, L.P., together with its feeder funds. -93- Table of Contents Real Estate The following table summarizes the investment record for certain funds and SIAs with a defined maturity date and internal rate of return since inception, which for the purposes of this table is computed based on the actual dates of capital contributions, distributions and ending limited partners’ capital as of the specified date. All amounts are as of December 31, 2012, unless otherwise noted: Committed Current Net Vintage Year Capital Asset Value Total Invested Capital As of December 31, 2012 As of December 31, 2011 As of December 31, 2010 Gross Gross Gross Realized Unrealized (1) Total Value IRR Net IRR Net IRR IRR Net IRR IRR AGRE U.S. Real Estate (in millions) Fund (3) AGRE Debt Fund I, LP 2011 155.5 2011 A4 Fund, L.P. 2011 234.7 AGRE CMBS Fund, 2012 $ 785.2 $ 180.3 $ 202.7 $ — $ 155.8 155.0 18.5 254.9 930.8 — 202.1 $ 202.1 NM 173.5 NM 155.0 974.6 NM 974.6 (2) (2) (2) NM NM NM (2) (2) (2) NM NM NM (2) (2) (2) NM NM NM (2) (2) (2) NM NM NM (2) (2) (2) NM NM NM (2) (2) (2) L.P. CPI Capital Partners North America (4) CPI Capital Partners Asia Pacific CPI Capital Partners (4) (4)(5) Europe CPI Other Totals 2009 418.8 158.9 1,572.9 — 632.3 2006 600.0 110.3 452.6 250.2 99.3 632.3 14.1 % 11.8 % NM (2) NM (2) NM (2) NM (2) 349.5 NM (4) NM (4) NM (4) NM (4) NM (4) NM (4) 2006 1,291.6 479.8 1,126.7 1,082.9 463.5 1,546.4 NM (4) NM (4) NM (4) NM (4) NM (4) NM (4) 2006 1,533.0 Various 2,998.3 1,047.5 N/A 557.4 994.8 151.8 (6) N/A (6) 543.4 N/A (6) 695.2 NM NM (6) N/A (4) (6) NM NM (4) (6) NM NM (4) (6) NM NM (4) (6) NM NM (4) (6) NM NM (4) (6) $ 8,017.1 $ 2,944.9 $ 5,435.5 $ 1,503.4 $ 3,070.2 $ 4,573.6 (1) Figures include estimated fair value of unrealized investments. (2) Returns have not been presented as the fund commenced investing capital less than 24 months prior to the period indicated and therefore such return information was deemed not meaningful. (3) AGRE U.S. Real Estate Fund, a closed-end private investment fund that intends to make real estate-related investments principally located in the United States, held closings in January 2011, June 2011 and April 2012 for a total of $263.2 million in base capital commitments and $450 million in additional capital commitments. Additionally, there was $72.0 million of co-invest commitments raised for an investment in the first quarter of 2012, which is included in the figures in the table above. (4) As part of the CPI acquisition, Apollo acquired general partner interests in fully invested funds. The net IRRs from the inception of the respective fund to December 31, 2012 were (9.6)%, 6.9% and (11.1)% for the CPI Capital Partners North America, Asia Pacific and Europe funds, respectively. These net IRRs were primarily achieved during a period in which Apollo did not make the initial investment decisions and Apollo only became the general partner or manager of these funds upon completing the acquisition on November 12, 2010. (5) CPI Capital Partners Europe is denominated in Euros and translated into U.S. dollars at an exchange rate of €1.00 to $1.32 as of December 31, 2012. (6) CPI Other consists of funds or individual investments of which we are not the general partner or manager and only receive fees pursuant to either a sub-advisory agreement or an investment management and administrative agreement. CPI Other fund performance is a result of invested capital prior to Apollo’s management of these funds. Return and certain other performance data is therefore not considered meaningful as we perform primarily an administrative role. The following table summarizes the investment record for Apollo Commercial Real Estate Finance, Inc. (“ARI”): ARI (1) 2009 $ 440.4 $ 684.2 $ 427.4 Vintage Year Raised Capital Gross Assets Current Net Asset Value (in millions) (1) Refer to www.apolloreit.com for the most recent financial information on ARI. Results are presented as of September 30, 2012. Athene and SIAs As of December 31, 2012, Athene Asset Management had $15.8 billion of total AUM, of which approximately $5 billion was either sub- advised by Apollo or invested in Apollo funds and investment vehicles. In addition to certain funds and SIAs included in the investment record tables and capital deployed from certain SIAs across our private equity, credit and real estate funds, we also managed approximately an additional $7.5 billion of total AUM in SIAs as of December 31, 2012. The above investment record tables exclude certain funds and SIAs with an aggregate -94- Table of Contents AUM of approximately $4 billion as of December 31, 2012, which were excluded because management deemed them to be immaterial. Performance information for our funds is included throughout this discussion and analysis to facilitate an understanding of our results of operations for the periods presented. An investment in our Class A shares is not an investment in any of our funds. The performance information reflected in this discussion and analysis is not indicative of the possible performance of our Class A shares and is also not necessarily indicative of the future results of any particular fund. There can be no assurance that our funds will continue to achieve, or that our future funds will achieve, comparable results. The following table provides a summary of the cost and fair value of our funds’ investments listed by segment: Private Equity: Cost Fair Value Credit: Cost Fair Value Real Estate: Cost Fair Value As of December 31, 2012 (1) As of December 31, As of December 31, 2011 (in millions) 2010 $ 16,927 25,867 $ 15,956 20,700 $ 14,322 22,485 15,097 16,287 (2) (2) 3,848 3,680 (2) (2) 10,917 11,696 4,791 4,344 10,226 11,476 4,028 3,368 (3) (3) (1) Cost and fair value amounts are presented for investments of the funds that are listed in the investment record tables. (2) AMTG and ARI cost and fair value amounts are as of September 30, 2012. (3) All amounts are as of September 30, 2010 and include CPI funds with investment cost of $1.8 billion and fair value of $1.1 billion. Additionally, ARI amounts include loans at amortized cost. Overview of Results of Operations Revenues Advisory and Transaction Fees from Affiliates. As a result of providing advisory services with respect to actual and potential private equity and credit investments, we are entitled to receive fees for transactions related to the acquisition and, in certain instances, disposition of portfolio companies as well as fees for ongoing monitoring of portfolio company operations and directors’ fees. We also receive an advisory fee for advisory services provided to certain credit funds. In addition, monitoring fees are generated on certain structured portfolio company investments. Under the terms of the limited partnership agreements for certain funds, the management fee payable by the funds may be subject to a reduction based on a certain percentage of such advisory and transaction fees, net of applicable broken deal costs (“Management Fee Offset”). Such amounts are presented as a reduction to Advisory and Transaction Fees from Affiliates in the consolidated statements of operations. The Management Fee Offsets are calculated for each fund as follows: • 65%-80% for private equity funds gross advisory, transaction and other special fees; -95- Table of Contents • • 65%-80% for certain credit funds gross advisory, transaction and other special fees; and 100% for certain other credit funds gross advisory, transaction and other special fees. These offsets are reflected as a decrease in advisory and transaction fees from affiliates on our consolidated statements of operations. Additionally, in the normal course of business, the management companies incur certain costs related to private equity funds (and certain credit funds) transactions that are not consummated, or “broken deal costs.” In accordance with the related fund agreements, in the event the deal is broken, all of the costs are generally reimbursed by the funds and considered in the calculation of the Management Fee Offset (except for Fund VII and certain of our credit funds which initially bear all broken deal costs and these costs are factored into the Management Fee Offsets). These offsets are included in Advisory and Transaction Fees from Affiliates in the Company’s consolidated statements of operations. If a deal is successfully completed, Apollo is reimbursed by the fund or a fund’s portfolio company for all costs incurred. Management Fees from Affiliates. The significant growth of the assets we manage has had a positive effect on our revenues. Management fees are typically calculated based upon any of “net asset value,” “gross assets,” “adjusted par asset value,” “adjusted costs of all unrealized portfolio investments,” “capital commitments,” “invested capital,” “adjusted assets,” “capital contributions,” or “stockholders’ equity,” each as defined in the applicable management agreement of the unconsolidated funds. Carried Interest Income from Affiliates. The general partners of our funds, in general, are entitled to an incentive return that can amount to as much as 20% of the total returns on fund capital, depending upon performance of the underlying funds and subject to preferred returns and high water marks, as applicable. The carried interest income from affiliates is recognized in accordance with U.S. GAAP guidance applicable to accounting for arrangement fees based on a formula. In applying the U.S. GAAP guidance, the carried interest from affiliates for any period is based upon an assumed liquidation of the funds’ assets at the reporting date, and distribution of the net proceeds in accordance with the funds’ allocation provisions. At December 31, 2012, approximately 74% of the fair value of our fund investments was determined using market-based valuation methods (i.e., reliance on broker or listed exchange quotes) and the remaining 26% was determined primarily by comparable company and industry multiples or discounted cash flow models. For our private equity, credit and real estate segments, the percentage determined using market-based valuation methods as of December 31, 2012 was 64%, 89% and 47%, respectively. See “Item 1A. Risk Factors—Risks Related to Our Businesses—Our private equity funds’ performance, and our performance, may be adversely affected by the financial performance of our portfolio companies and the industries in which our funds invest” for discussion regarding certain industry-specific risks that could affect the fair value of our private equity funds’ portfolio company investments. Carried interest income fee rates can be as much as 20% for our private equity funds. In our private equity funds, the Company does not earn carried interest income until the investors in the fund have achieved cumulative investment returns on invested capital (including management fees and expenses) in excess of an 8% hurdle rate. Additionally, certain of our credit funds have various carried interest rates and hurdle rates. Certain credit funds allocate carried interest to the general partner in a similar manner as the private equity funds. In our private equity, certain credit and certain real estate funds, so long as the investors achieve their priority returns, there is a catch-up formula whereby the Company earns a priority return for a portion of the return until the Company’s carried interest income equates to its incentive fee rate for that fund; thereafter, the Company participates in returns from the fund at the carried interest income rate. Carried interest income is subject to reversal to the extent that the carried interest income distributed exceeds the amount due to the general partner based on a fund’s cumulative investment returns. The accrual for potential repayment of previously received carried interest income represents all amounts previously distributed to the general partner that would need to be repaid to the Apollo funds if these funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the -96- Table of Contents reporting date. This actual general partner obligation, however, would not become payable or realized until the end of a fund’s life. The table below presents an analysis of our (i) carried interest receivable as of December 31, 2012 and 2011 and (ii) realized and unrealized carried interest (loss) income for our combined segments for the years ended December 31, 2012, 2011 and 2010: As of December 31, 2012 As of December 31, 2011 For the Year Ended December 31, 2012 For the Year Ended December 31, 2011 For the Year Ended December 31, 2010 Carried Interest Receivable Carried Interest Receivable Unrealized Carried Interest Income (Loss) Realized Carried Interest Income Total Carried Interest Income (Loss) (in millions) Unrealized Carried Interest (Loss) Income Realized Carried Interest Income Total Carried Interest Income (Loss) Unrealized Carried Interest Income Realized Carried Interest Income Total Carried Interest Income Private Equity Funds: $ Fund VII Fund VI Fund V Fund IV Other (AAA, 904.3 $ 270.3 134.3 10.9 508.0 $ 435.5 $ 472.1 $ 907.6 $ (135.9 ) (723.6 ) (51.6 ) (118.1 ) — 345.6 294.0 639.6 42.7 (4.1 ) 125.0 17.9 9.3 (7.0 ) 33.4 2.9 (1) $ 260.2 $ 124.3 $ 427.1 $ 38.7 $ 465.8 13.1 660.7 80.7 (642.9 ) 647.6 24.9 (26.7 ) 47.2 — 136.0 204.7 86.6 136.0 29.4 17.8 (2) (2) Stanhope) 93.6 22.1 71.5 10.2 81.7 9.5 — 9.5 11.4 — 11.4 Total Private Equity Funds $ 1,413.4 $ 673.0 $ 854.9 $ 812.6 $ 1,667.5 $ (1,019.7 ) $ 570.5 $ (449.2 ) $ 1,251.5 $ 69.6 $ 1,321.1 Credit Funds U.S. (3) : Performing Credit $ Opportunistic Credit Structured Credit European Credit Non- Performing Loans Total Credit Funds $ Real Estate Funds: CPI Other Total Real Estate Funds Total $ $ $ 273.9 $ 114.5 $ 206.3 $ 154.3 $ 360.6 $ (79.6 ) $ 62.0 $ (17.6 ) $ 85.8 $ 56.7 $ 142.5 36.7 21.6 7.7 (1) 41.5 49.2 (21.8 ) (1) 43.4 21.6 6.4 104.6 111.0 23.0 — 18.5 13.4 31.9 — — — — — — 18.4 8.0 18.0 8.5 26.5 (18.7 ) 13.2 (5.5 ) 11.7 12.7 24.4 102.1 51.5 50.6 — 50.6 53.2 — 53.2 — — — 454.1 $ 195.6 $ 301.1 $ 217.7 $ 518.8 $ (66.9 ) $ 118.6 $ 51.7 $ 103.9 $ 174.0 $ 277.9 10.8 $ — $ 10.4 $ 4.7 $ 15.1 $ — $ — $ — $ — $ — $ — 10.8 $ — $ 10.4 $ 4.7 $ 15.1 $ — $ — $ — $ — $ — $ — 1,878.3 (4) $ 868.6 (4) $ 1,166.4 $ 1,035.0 $ 2,201.4 $ (1,086.6 ) $ 689.1 $ (397.5 ) $ 1,355.4 $ 243.6 $ 1,599.0 (1) See the following table summarizing the fair value gains on investments and income needed to reverse the general partner obligation to return previously distributed carried interest income as of December 31, 2012. Included in unrealized carried interest income (loss) from affiliates for the year ended December 31, 2011 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $75.3 million and $18.1 million for Fund VI and SOMA, respectively. $602.6 million and $136.0 million for Fund VI and IV, respectively, related to the catch-up formula whereby the Company earns a disproportionate return (typically 80%) for a portion of the return until the Company’s carried interest equates to its 20% incentive fee rate. (2) (3) Reclassified to conform to current presentation. (4) There was a corresponding profit sharing payable of $857.7 million and $352.9 million as of December 31, 2012 and 2011, respectively, that results in a net carried interest receivable amount of $1,020.6 million and $515.7 million as of December 31, 2012 and 2011, respectively. Included within profit sharing payable are contingent consideration obligations of $141.0 million as of December 31, 2012. The general partners of the private equity and real estate funds and funds in the credit strategies listed in the table above were accruing carried interest income as of December 31, 2012. As of December 31, 2012, Fund VII, Fund VI, Fund V and Fund IV were each above their hurdle rate of 8% and generating carried interest income. The investment manager of AINV accrues carried interest in the management company business as it is earned. Additionally, certain of our credit funds, including ACSP, AEC, AIE II, COF I, COF II, FCI, Apollo Credit Liquidity Advisors, L.P. (“ACLF”), AESI, EPF I, and ACRF II were each above their hurdle rates or preferred return of 7.0%, 6.0%, 7.5%, 8.0%, 7.5%, 7.0%, 10.0%, 8.0%, 8.0%, and 8.0%, respectively, and generating carried interest income. The general partners of certain of our credit funds accrue carried interest when the fair value of investments exceeds the cost basis of the individual investors’ investments in the fund, including any allocable share of expenses incurred in connection with such investments. These high water marks are applied on an individual investor basis. Certain of our credit funds have investors with various high water marks and are subject to market conditions and investment performance. As of December 31, 2012, approximately 38% of the limited partners’ capital in the Value Funds was generating carried interest income. Carried interest income from our private equity funds and certain credit and real estate funds is subject to contingent repayment by the general partner in the event of future losses to the extent that the cumulative carried interest distributed from inception to date exceeds the amount computed as due to the general partner at the final distribution. These general partner obligations, if applicable, are disclosed by fund in the table below and are included in due to affiliates on the consolidated statements of financial condition. As of December 31, 2012, there were no such general partner obligations related to our private equity funds or our real estate funds. Carried interest receivables are reported on a separate line item within the consolidated statements of financial condition. -97- Table of Contents The following table summarizes our carried interest income since inception through December 31, 2012: Carried Interest Income Since Inception Undistributed by Fund and Recognized Distributed by Fund and Recognized (1) Total Undistributed and Distributed by Fund and (2) Recognized (in millions) $ $ 904.3 270.3 134.3 10.9 93.6 1,413.4 $ 796.2 418.6 1,311.0 595.4 16.4 3,137.6 401.7 27.6 21.2 18.4 102.1 571.0 10.8 10.8 275.7 150.3 33.3 29.0 — 488.3 4.3 4.3 1,700.5 688.9 1,445.3 606.3 110.0 4,551.0 677.4 177.9 54.5 47.4 102.1 1,059.3 15.1 15.1 General Partner Obligation as of December 31, (2) 2012 $ — — — — — — — 19.6 — — — 19.6 — — Maximum Carried Interest Income Subject to Potential (3) Reversal $ 1,441.0 567.1 213.7 19.7 93.6 2,335.1 656.5 27.2 30.9 47.2 102.1 863.9 10.4 10.4 $ 1,995.2 $ 3,630.2 $ 5,625.4 $ 19.6 $ 3,209.4 Private Equity Funds: Fund VII Fund VI Fund V Fund IV Other (AAA, Stanhope) Total Private Equity Funds Credit Funds (4) : U.S. Performing Credit Opportunistic Credit (5) Structured Credit European Credit Non-Performing Loans Total Credit Funds Real Estate Funds: CPI Other Total Real Estate Funds Total (1) Amounts in “Distributed by Fund and Recognized” for the CPI, Gulf Stream and Stone Tower funds and SIAs are presented for activity subsequent to the respective acquisition dates as described in note 3 to our consolidated financial statements. (2) Amounts were computed based on the fair value of fund investments on December 31, 2012. As a result, carried interest income has been allocated to and recognized by the general partner. Based on the amount of carried interest income allocated, a portion is subject to potential reversal or has been reduced by the general partner obligation to return previously distributed carried interest income or fees at December 31, 2012. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of the fund’s investments based on contractual termination of the fund. (3) Represents the amount of carried interest income that would be reversed if remaining fund investments became worthless on December 31, 2012. Amounts subject to potential reversal of carried interest income include amounts undistributed by a fund (i.e., the carried interest receivable), as well as a portion of the amounts that have been distributed by a fund, net of taxes not subject to a general partner obligation to return previously distributed carried interest income, except for Fund IV which is gross of taxes. (4) Reclassified to conform to current presentation. (5) Amounts exclude (i) AINV, as carried interest income from this fund is not subject to contingent repayment by the general partner, and (ii) Apollo Investment Europe I, L.P. as this fund is winding down. The following table summarizes the fair value gains on investments and the income to reverse the general partner obligation to return previously distributed carried interest income based on the current fair value of the underlying funds’ investments as of December 31, 2012: Fund SOMA Asia Private Credit (“APC”) General Partner Obligation (1) $ 19.3 0.3 $ 19.6 Net Asset Value as of December 31, 2012 (in millions) 915.5 28.6 944.1 $ $ Fair Value Gain on Investments and Income to Reverse General (2) Partner Obligation $ $ 20.4 3.4 23.8 (1) Based upon a hypothetical liquidation as of December 31, 2012, Apollo has recorded a general partner obligation to return previously distributed carried interest income, which represents amounts due to this fund. The actual determination and any required payment of a general partner obligation would not take place until the final disposition of the fund’s investments based on contractual termination of the fund. -98- Table of Contents (2) The fair value gain on investments and income to reverse the general partner obligation is based on the life-to-date activity of the entire fund and assumes a hypothetical liquidation of the fund as of December 31, 2012. Expenses Compensation and Benefits. Our most significant expense is compensation and benefits expense. This consists of fixed salary, discretionary and non-discretionary bonuses, incentive fee compensation and profit sharing expense associated with the carried interest income earned from private equity, credit and real estate funds and compensation expense associated with the vesting of non-cash equity-based awards. Our compensation arrangements with certain partners and employees contain a significant performance-based incentive component. Therefore, as our net revenues increase, our compensation costs also rise or can be lower when net revenues decrease. In addition, our compensation costs reflect the increased investment in people as we expand geographically and create new funds. All payments for services rendered by our Managing Partners prior to the 2007 Reorganization have been accounted for as partnership distributions rather than compensation and benefits expense. Refer to note 1 of the consolidated financial statements for further discussion of the 2007 Reorganization. Subsequent to the 2007 Reorganization, our Managing Partners are considered employees of Apollo. As such, payments for services made to these individuals, including the expense associated with the AOG Units described below, have been recorded as compensation expense. The AOG Units were granted to the Managing Partners and Contributing Partners at the time of the 2007 Reorganization, as discussed in note 1 to our consolidated financial statements. In addition, certain professionals and selected other individuals have a profit sharing interest in the carried interest income earned in relation to our private equity, certain credit and real estate funds in order to better align their interests with our own and with those of the investors in these funds. Profit sharing expense is part of our compensation and benefits expense and is generally based upon a fixed percentage of private equity, credit, and real estate carried interest income on a pre-tax and a pre-consolidated basis. Profit sharing expense can reverse during periods when there is a decline in carried interest income that was previously recognized. Profit sharing amounts are normally distributed to employees after the corresponding investment gains have been realized and generally before preferred returns are achieved for the investors. Therefore, changes in our unrealized gains (losses) for investments have the same effect on our profit sharing expense. Profit sharing expense increases when unrealized gains increase. Realizations only impact profit sharing expense to the extent that the effects on investments have not been recognized previously. If losses on other investments within a fund are subsequently realized, the profit sharing amounts previously distributed are normally subject to a general partner obligation to return carried interest income previously distributed back to the funds. This general partner obligation due to the funds would be realized only when the fund is liquidated, which generally occurs at the end of the fund’s term. However, indemnification clauses also exist for pre-reorganization realized gains, which, although our Managing Partners and Contributing Partners would remain personally liable, may indemnify our Managing Partners and Contributing Partners for 17.5% to 100% of the previously distributed profits regardless of the fund’s future performance. Refer to note 15 to our consolidated financial statements for further discussion of indemnification. Salary expense for services rendered by our Managing Partners is limited to $100,000 per year for a five-year period. Additionally, our Managing Partners can receive other forms of compensation. In connection with the 2007 Reorganization, the Managing Partners and Contributing Partners received AOG Units with a vesting period of five to six years and certain employees were granted RSUs that typically have a vesting period of six years. Managing Partners, Contributing Partners and certain employees have also been granted AAA restricted depository units (“RDUs”), or incentive units that provide the right to receive AAA RDUs, which both represent common units of AAA and generally vest over three years for employees and are fully-vested for Managing Partners and Contributing Partners on the grant date. In addition, ARI RSUs, ARI restricted stock and AMTG RSUs have been granted to the Company and certain employees in the real estate and credit segments and generally vest over three years. In addition, the Company granted share options to certain employees that generally vest and become exercisable in quarterly installments or annual installments depending on the contract terms over the next two to six years. -99- Table of Contents Refer to note 14 to our consolidated financial statements for further discussion of AOG Units and other equity-based compensation. Other Expenses. The balance of our other expenses includes interest, litigation settlement, professional fees, placement fees, occupancy, depreciation and amortization and other general operating expenses. Interest expense consists primarily of interest related to the AMH Credit Agreement which has a variable interest amount based on LIBOR and ABR interest rates as discussed in note 12 to our consolidated financial statements. Placement fees are incurred in connection with our capital raising activities. Occupancy expense represents charges related to office leases and associated expenses, such as utilities and maintenance fees. Depreciation and amortization of fixed assets is normally calculated using the straight-line method over their estimated useful lives, ranging from two to sixteen years, taking into consideration any residual value. Leasehold improvements are amortized over the shorter of the useful life of the asset or the expected term of the lease. Intangible assets are amortized based on the future cash flows over the expected useful lives of the assets. Other general operating expenses normally include costs related to travel, information technology and administration. Other Income (Loss) Net Gains (Losses) from Investment Activities. The performance of the consolidated Apollo funds has impacted our net gains (losses) from investment activities. Net gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in our investment portfolio between the opening balance sheet date and the closing balance sheet date. Net unrealized gains (losses) are a result of changes in the fair value of unrealized investments and reversal of unrealized gains (losses) due to dispositions of investments during the reporting period. Significant judgment and estimation goes into the assumptions that drive these models and the actual values realized with respect to investments could be materially different from values obtained based on the use of those models. The valuation methodologies applied impact the reported value of investment company holdings and their underlying portfolios in our consolidated financial statements. Net Gains (Losses) from Investment Activities of Consolidated Variable Interest Entities. Changes in the fair value of the consolidated VIEs’ assets and liabilities and related interest, dividend and other income and expenses subsequent to consolidation are presented within net gains (losses) from investment activities of consolidated variable interest entities and are attributable to Non-Controlling Interests in the consolidated statements of operations. Interest Income. The Company recognizes security transactions on the trade date. Interest income is recognized as earned on an accrual basis. Discounts and premiums on securities purchased are accreted or amortized over the life of the respective securities using the effective interest method. Other Income (Loss), Net. Other income, net includes gains (losses) arising from the remeasurement of foreign currency denominated assets and liabilities of foreign subsidiaries and other miscellaneous income and expenses. Income Taxes . The Apollo Operating Group and its subsidiaries generally operate as partnerships for U.S. Federal income tax purposes. As a result, except as described below, the Apollo Operating Group has not been subject to U.S. income taxes. However, these entities in some cases are subject to NYC UBT and non-U.S. entities, in some cases, are subject to non-U.S. corporate income taxes. In addition, APO Corp., a wholly-owned subsidiary of the Company, is subject to U.S. Federal, state and local corporate income tax, and the Company’s provision for income taxes is accounted for in accordance with U.S. GAAP. As significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties, we recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The tax benefit is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If a tax position is not considered more likely than not to be sustained, then no benefits of the position are recognized. The Company’s tax positions are reviewed and evaluated quarterly to determine whether or not we have uncertain tax positions that require financial statement recognition. -100- Table of Contents Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amount of assets and liabilities and their respective tax basis using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Non-Controlling Interests For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than Apollo. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in Non-Controlling Interest in the consolidated financial statements. The Non-Controlling Interests relating to Apollo Global Management, LLC primarily include the 64.9%, 65.9% and 71.0% ownership interest in the Apollo Operating Group held by the Managing Partners and Contributing Partners through their limited partner interests in Holdings as of December 31, 2012, 2011 and 2010, respectively, and other ownership interests in consolidated entities, which primarily consist of the approximate 97%, 98% and 97% ownership interest held by limited partners in AAA for the years ended December 31, 2012, 2011 and 2010, respectively. Non-Controlling Interests also include limited partner interests of Apollo managed funds in certain consolidated VIEs. The authoritative guidance for Non-Controlling Interests in the consolidated financial statements requires reporting entities to present Non- Controlling Interest as equity and provides guidance on the accounting for transactions between an entity and Non-Controlling Interests. According to the guidance, (1) Non-Controlling Interests are presented as a separate component of shareholders’ equity on the Company’s consolidated statements of financial condition, (2) net income (loss) includes the net income (loss) attributed to the Non-Controlling Interest holders on the Company’s consolidated statements of operations, (3) the primary components of Non-Controlling Interest are separately presented in the Company’s consolidated statements of changes in shareholders’ equity to clearly distinguish the interests in the Apollo Operating Group and other ownership interests in the consolidated entities and (4) profits and losses are allocated to Non-Controlling Interests in proportion to their ownership interests regardless of their basis. On January 1, 2010, the Company adopted amended consolidation guidance issued by the Financial Accounting Standards Board (“FASB”) on issues related to VIEs. The amended guidance significantly affects the overall consolidation analysis, changing the approach taken by companies in identifying which entities are VIEs and in determining which party is the primary beneficiary. The amended guidance requires continuous assessment of the reporting entity’s involvement with such VIEs. The amended guidance also enhances the disclosure requirements for a reporting entity’s involvement with VIEs, including presentation on the consolidated statements of financial condition of assets and liabilities of consolidated VIEs that meet the separate presentation criteria and disclosure of assets and liabilities recognized in the consolidated statements of financial condition and the maximum exposure to loss for those VIEs in which a reporting entity is determined to not be the primary beneficiary but in which it has a variable interest. The guidance provides a limited scope deferral for a reporting entity’s interest in an entity that meets all of the following conditions: (a) the entity has all the attributes of an investment company as defined under the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide, Investment Companies , or does not have all the attributes of an investment company but is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the AICPA Audit and Accounting Guide, Investment Companies , (b) the reporting entity does not have explicit or implicit obligations to fund any losses of the entity that could potentially be significant to the entity and (c) the entity is not a securitization entity, asset-backed financing entity or an entity that was formerly considered a qualifying special-purpose entity. The reporting entity is required to perform a consolidation analysis for entities that qualify for the deferral in accordance with previously issued guidance on variable interest entities. Apollo’s involvement with the funds it manages is such that all three of the above conditions are met with the exception of certain vehicles which fail condition (c) above. As -101- Table of Contents previously discussed, the incremental impact of adopting the amended consolidation guidance has resulted in the consolidation of certain VIEs managed by the Company. Additional disclosures related to Apollo’s involvement with VIEs are presented in note 5 to our consolidated financial statements. Results of Operations Below is a discussion of our consolidated results of operations for the years ended December 31, 2012, 2011 and 2010, respectively. For additional analysis of the factors that affected our results at the segment level, refer to “—Segment Analysis” below: Year Ended December 31, 2012 2011 (in thousands) Amount Change Percentage Year Ended December 31, Change 2011 2010 (in thousands) Amount Change Percentage Change $ 149,544 $ 81,953 $ 67,591 82.5 % $ 81,953 $ 79,782 $ 2,171 2.7 % 580,603 487,559 93,044 19.1 487,559 431,096 56,463 13.1 2,129,818 (397,880 ) 2,527,698 NM (397,880 ) 1,599,020 (1,996,900 ) NM 2,859,965 171,632 2,688,333 NM 171,632 2,109,898 (1,938,266 ) (91.9 ) 598,654 1,149,753 (551,099 ) (47.9 ) 1,149,753 1,118,412 31,341 274,574 251,095 23,479 9.4 251,095 249,571 1,524 2.8 0.6 871,394 (63,453 ) 934,847 NM (63,453 ) 555,225 (618,678 ) NM 739 3,383 (2,644 ) (78.2 ) 3,383 20,142 (16,759 ) (83.2 ) 1,745,361 37,116 64,682 1,340,778 40,850 59,277 404,583 (3,734 ) 5,405 30.2 (9.1 ) 9.1 1,340,778 40,850 59,277 1,943,350 35,436 61,919 (602,572 ) 5,414 (2,642 ) 87,961 22,271 37,218 75,558 3,911 35,816 12,403 18,360 1,402 16.4 469.4 3.9 75,558 3,911 35,816 65,107 4,258 23,067 10,451 (347 ) 12,749 (31.0 ) 15.3 (4.3 ) 16.1 (8.1 ) 55.3 53,236 26,260 26,976 102.7 26,260 24,249 2,011 8.3 2,047,845 1,582,450 465,395 29.4 1,582,450 2,157,386 (574,936 ) (26.6 ) 288,244 (129,827 ) 418,071 NM (129,827 ) 367,871 (497,698 ) NM (71,704 ) 24,201 (95,905 ) NM 24,201 48,206 (24,005 ) (49.8 ) 110,173 9,693 1,964,679 13,923 4,731 205,520 96,250 4,962 1,759,159 NM 104.9 NM 13,923 4,731 205,520 69,812 1,528 195,032 (55,889 ) 3,203 10,488 (80.1 ) 209.6 5.4 2,301,085 118,548 2,182,537 NM 118,548 682,449 (563,901 ) (82.6 ) 3,113,205 (65,410 ) (1,292,270 ) (11,929 ) 4,405,475 (53,481 ) NM (448.3 ) (1,292,270 ) (11,929 ) 634,961 (91,737 ) (1,927,231 ) 79,808 NM (87.0 ) 3,047,795 (1,304,199 ) 4,351,994 NM (1,304,199 ) 543,224 (1,847,423 ) NM (2,736,838 ) 835,373 (3,572,211 ) NM 835,373 (448,607 ) 1,283,980 NM Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income (loss) from affiliates Total Revenues Expenses: Compensation and benefits: Equity-based compensation Salary, bonus and benefits Profit sharing expense Incentive fee compensation Total Compensation and Benefits Interest expense Professional fees General, administrative and other Placement fees Occupancy Depreciation and amortization Total Expenses Other Income: Net gains (losses) from investment activities Net (losses) gains from investment activities of consolidated variable interest entities Income from equity method investments Interest income Other income, net Total Other Income Income (loss) before income tax benefit (provision) Income tax provision Net Income (Loss) Net income (loss) attributable to Non- Controlling Interests Net Income (Loss) Attributable to Apollo Global Management, LLC $ 310,957 $ (468,826 ) $ 779,783 NM $ (468,826 ) $ 94,617 $ (563,443 ) NM “NM” denotes not meaningful. Changes from negative to positive amounts and positive to negative amounts are not considered meaningful. Increases or decreases from zero and changes greater than 500% are also not considered meaningful. Revenues Our revenues and other income include fixed components that result from measures of capital and asset valuations and variable components that result from realized and unrealized investment performance, as well as the value of successfully completed transactions. Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Advisory and transaction fees from affiliates, including directors’ fees and reimbursed broken deal costs, increased by $67.6 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This increase was primarily attributable to an increase in advisory and transaction fees in the private equity segment of $71.6 million during the period. During the year ended December 31, 2012, gross and net advisory fees, including directors’ fees, were $152.1 million and $66.3 million, respectively, and gross and net transaction fees were $176.7 million and $88.5 million, respectively. During the year ended December 31, 2011, gross and net advisory fees, including directors’ fees, were $143.1 million and $56.1 million, respectively, and gross and net transaction fees were $62.9 million and $30.7 million, respectively. The net transaction and advisory fees were further offset by $5.3 million and $4.8 million in broken deal costs during the years ended December 31, 2012 and 2011, respectively, primarily -102- Table of Contents relating to Fund VII. Advisory and transaction fees are reported net of Management Fee Offsets as calculated under the terms of the respective limited partnership agreements. See “—Overview of Results of Operations—Revenues—Advisory and Transaction Fees from Affiliates” for a summary that addresses how the Management Fee Offsets are calculated for each fund. Management fees from affiliates increased by $93.0 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to an increase in management fees earned by our credit, private equity and real estate segments of $113.0 million, $13.8 million and $6.0 million, respectively, as a result of corresponding increases in the net assets managed and fee- generating invested capital with respect to these segments during the period. The remaining change was attributable to an increase of $39.8 million of fees earned from VIEs eliminated in consolidation in our credit segment during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Carried interest income from affiliates increased by $2,527.7 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to increased carried interest income driven by increases in the fair value of portfolio investments held by certain funds, primarily Fund VI, Fund VII, COF I, ACLF, CLOs, Fund V, COF II, AAA and Apollo Credit Fund, which had increased carried interest income of $1,282.5 million, $783.3 million, $134.9 million, $77.4 million, $72.2 million, $69.4 million, $69.1 million, $47.6 million and $25.7 million, respectively, during the year ended December 31, 2012 as compared to the same period in 2011. The remaining change was attributable to an overall increase in the fair value of portfolio investments of the remainder of funds, which generated increased carried interest income of $36.8 million during the period. Included in the above for the year ended December 31, 2012 was a reversal of $75.3 million of the general partner obligation to return previously distributed carried interest income with respect to Fund VI and reversal of previously recognized carried interest income due to the general partner obligation to return previously distributed carried interest income of $1.2 million and $0.3 million for SOMA and APC, respectively. Part of the increase in carried interest income from affiliates was attributable to an increase in carried interest income of $71.2 million earned from consolidated VIEs which are included in the credit segment results but were eliminated in consolidation during year ended December 31, 2012 as compared to the same period in 2011. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Advisory and transaction fees from affiliates, including directors’ fees and reimbursed broken deal costs, increased by $2.2 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This increase was primarily attributable to an increase of advisory fees in the private equity segment during the period of $6.5 million, partially offset by a decline in transaction fees in the credit segment of $4.6 million. During the year ended December 31, 2011, gross and net advisory fees, including directors’ fees, were $143.1 million and $56.1 million, respectively, and gross and net transaction fees were $62.9 million and $30.7 million, respectively. During the year ended December 31, 2010, gross and net advisory fees, including directors’ fees, were $120.7 million and $43.4 million, respectively, and gross and net transaction fees were $102.0 million and $38.2 million, respectively. The net transaction and advisory fees were further offset by $4.8 million and $1.8 million in broken deal costs during the years ended December 31, 2011 and 2010, respectively, primarily relating to Fund VII. Advisory and transaction fees are reported net of Management Fee Offsets as calculated under the terms of the respective limited partnership agreements. See “—Overview of Results of Operations—Revenues—Advisory and Transaction Fees from Affiliates” for a summary that addresses how the Management Fee Offsets are calculated for each fund. Management fees from affiliates increased by $56.5 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to an increase in management fees earned by our real estate, credit and private equity segments by $28.9 million, $26.4 million and $3.8 million, respectively, as a result of corresponding increases in the net assets managed and fee- generating invested capital with respect to these segments during the period. The remaining change was attributable to $2.6 million of fees earned from VIEs eliminated in consolidation during the year ended December 31, 2011. -103- Table of Contents Carried interest (loss) income from affiliates changed by $(1,996.9) million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Carried interest income from affiliates is driven by investment gains and losses of unconsolidated funds. During the year ended December 31, 2011, there was $(1,087.0) million and $689.1 million of unrealized carried interest loss and realized carried interest income, respectively, which resulted in total carried interest loss from affiliates of $(397.9) million. During the year ended December 31, 2010, there was $1,355.4 million and $243.6 million of unrealized and realized carried interest income, respectively, which resulted in total carried interest income from affiliates of $1,599.0 million. The $2,442.4 million decrease in unrealized carried interest income was driven by significant declines in the fair value of portfolio investments held by certain of our private equity and credit funds, which resulted in reversals of previously recognized carried interest income, primarily by Fund VI, Fund VII, Fund IV, Fund V, COF II, COF I, ACLF, AIE II and SOMA, which had decreased carried interest income of $1,371.2 million, $563.0 million, $254.1 million, $81.0 million, $59.5 million, $57.9 million, $49.9 million, $30.4 million and $27.8 million, respectively. Included in the above for the year ended December 31, 2011 was a reversal of previously recognized carried interest income due to general partner obligations to return carried interest income that was previously distributed on Fund VI and SOMA of $75.3 million and $18.1 million, respectively. The $445.5 million increase in realized carried interest income was attributable to increased dispositions along with higher interest and dividend income distributions from portfolio investments held by certain of our private equity and credit funds, primarily by Fund VII, Fund IV and Fund VI of $221.5 million, $204.7 million and $67.6 million, respectively, during the year ended December 31, 2011 as compared to the same period during 2010. Expenses Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Compensation and benefits increased by $404.6 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to an increase in profit sharing expense of $934.8 million driven by an increase in unrealized and realized carried interest income earned from our private equity and credit funds during the period. This increase was partially offset by a decrease in equity-based compensation of $551.1 million, specifically the amortization of AOG Units decreased by $551.8 million due to the expiration of the vesting period for certain Managing Partners, along with an increase in equity-based compensation relating to RSUs and share options of $0.1 million due to additional grants during the year ended December 31, 2012. Included in profit sharing expense is $25.8 million related to change in fair value of our contingent consideration obligations. Included in profit sharing expense is $62.1 million and $35.2 million of expense related to the Incentive Pool (as defined below) for the years ended December 31, 2012 and 2011, respectively. The Company currently intends to, over time, seek to more directly tie compensation of its professionals to realized performance of the Company’s business, which will likely result in greater variability in compensation. As previously disclosed, in June 2011, the Company adopted a performance based incentive arrangement (the “Incentive Pool”) whereby certain partners and employees earned discretionary compensation based on carried interest realizations earned by the Company during the year, which amounts are reflected as profit sharing expense in the Company’s consolidated financial statements. The Company adopted the Incentive Pool to attract and retain, and provide incentive to, partners and employees of the Company and to more closely align the overall compensation of partners and employees with the overall realized performance of the Company. Allocations to the Incentive Pool and to its participants contain both a fixed and a discretionary component and may vary year-to-year depending on the overall realized performance of the Company and the contributions and performance of each participant. There is no assurance that the Company will continue to compensate individuals through performance-based incentive arrangements in the future and there may be periods when the executive committee of the Company’s manager determines that allocations of realized carried interest income are not sufficient to compensate individuals, which may result in an increase in salary, bonus and benefits expense. Interest expense decreased by $3.7 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to decreased interest expense of -104- Table of Contents $4.9 million mainly due to a lower margin rate on the AMH Credit Agreement during the year ended December 31, 2012 as compared to the same period in 2011. Professional fees increased by $5.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was attributable to higher external accounting, tax, audit, legal and consulting fees incurred during the year ended December 31, 2012, as compared to the same period during 2011. General, administrative and other expenses increased by $12.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to increased travel, information technology, recruiting and other expenses incurred associated with the launch of our new funds and continued expansion of our global investment platform during the year ended December 31, 2012 as compared to the same period during 2011. Placement fees increased by $18.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Placement fees are incurred in connection with the raising of capital for new and existing funds. The fees are normally payable to placement agents, who are third parties that assist in identifying potential investors, securing commitments to invest from such potential investors, preparing or revising offering marketing materials, developing strategies for attempting to secure investments by potential investors and/or providing feedback and insight regarding issues and concerns of potential investors. This change was primarily attributable to increased fundraising efforts during the period in connection with our credit funds, primarily EPF II, which incurred $12.9 million of placement fees during the year ended December 31, 2012. Occupancy expense increased by $1.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to additional expenses incurred from additional office space leased as a result of the increase in our headcount to support the expansion of our global investment platform during the year ended December 31, 2012 as compared to the same period during 2011. Depreciation and amortization expense increased by $27.0 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to increased amortization expense due to amortization of intangible assets acquired subsequent to December 31, 2011. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Compensation and benefits decreased by $602.6 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to a reduction of profit sharing expense of $618.7 million driven by the change in carried interest income earned from certain of our private equity and credit funds due to the significant decline in the fair value of the underlying investments in these funds during the period. In addition, incentive fee compensation decreased by $16.8 million as a result of the unfavorable performance of certain of our credit funds during the period. Management business compensation and benefits expense increased by $39.2 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily the result of increased headcount, partially offset by a decrease related to the performance based incentive arrangement discussed below. Interest expense increased by $5.4 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to higher interest expense incurred during 2011 on the AMH Credit Agreement due to the margin rate increase once the maturity date was extended in December 2010. Professional fees decreased by $2.6 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was attributable to lower external accounting, tax, audit, legal and consulting fees incurred during the year ended December 31, 2011, as compared to the same period during 2010. -105- Table of Contents General, administrative and other expenses increased by $10.5 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to increased travel, information technology, recruiting and other expenses incurred associated with the launch of our new funds and continued expansion of our global investment platform during the year ended December 31, 2011 as compared to the same period during 2010. Occupancy expense increased by $12.7 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to additional expense incurred from the extension of existing leases along with additional office space leased as a result of the increase in our headcount to support the expansion of our global investment platform during the year ended December 31, 2011 as compared to the same period during 2010. Other Income (Loss) Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Net (losses) gains from investment activities increased by $418.1 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was attributable to a $412.1 million increase in net unrealized gains related to changes in the fair value of AAA Investments’ portfolio during the period. In addition, there was a $4.7 million increase in unrealized gain related to the change in the fair value of the investment in HFA Holdings Limited (“HFA”) and a $1.2 million increase in net unrealized and realized gains related to changes in the fair value of portfolio investments of Apollo Credit Senior Loan Fund, L.P. (“Apollo Senior Loan Fund”) during the year ended December 31, 2012. Net losses from investment activities of consolidated VIEs increased by $95.9 million during the year ended December 31, 2012 as compared to the year ended December 31, 2011. This was primarily attributable to a change in net realized and unrealized losses of $519.6 million relating to the debt held by the consolidated VIEs, along with higher expenses which resulted in an increased loss of $329.4 million during the period, primarily due to the acquisition of Stone Tower in April 2012. These changes were partially offset by higher net unrealized and realized gains relating to the increase in the fair value of investments held by the consolidated VIEs of $246.5 million and higher interest income of $506.6 million during the year ended December 31, 2012 as compared to the same period during 2011. Income from equity method investments increased by $96.3 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily driven by changes in the fair values of certain Apollo funds in which Apollo has a direct interest. Fund VII, COF I, COF II and ACLF had the most significant impact and together generated $89.5 million of income from equity method investments during the year ended December 31, 2012 as compared to $11.5 million of income from equity method investments during the year ended December 31, 2011 resulting in a net increase of income from equity method investments totaling $77.6 million. Refer to note 4 to our consolidated financial statements for a complete summary of income (loss) from equity method investments by fund for the years ended December 31, 2012 and 2011. Other income, net increased by $1,759.2 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to an increase in gains on acquisitions of $1,755.7 million driven by the $1,951.1 million bargain purchase gain recorded on the Stone Tower acquisition during April 2012, partially offset by the bargain purchase gain on the Gulf Stream acquisition of $195.5 million during October 2011. Refer to note 3 to our consolidated financial statements for further discussion of the Stone Tower and Gulf Stream acquisitions. The remaining change was primarily attributable to losses resulting from fluctuations in exchange rates of foreign denominated assets and liabilities of subsidiaries during the year ended December 31, 2012 as compared to the same period in 2011. Refer to note 10 of our consolidated financial statements for a complete summary of other income, net, for the years ended December 31, 2012 and 2011. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Net gains from investment activities decreased by $497.7 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to a -106- Table of Contents $494.1 million decrease in net unrealized gains related to changes in the fair value of AAA Investments’ portfolio investments during the period. In addition, there was a $5.9 million unrealized loss related to the change in the fair value of the investment in HFA during the year ended December 31, 2011, partially offset by $2.3 million of net unrealized and realized gains related to changes in the fair value of Metals Trading Fund, L.P. (“Metal’s Trading Fund”) portfolio investments during the year ended December 31, 2010. Net gains from investment activities of consolidated VIEs decreased by $24.0 million during the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to a decrease in net realized and unrealized gains (losses) relating to the decrease in the fair value of investments held by the consolidated VIEs of $54.1 million, along with higher expenses of $37.9 million during the period primarily due to the acquisition of Gulf Stream in October 2011. These decreases were partially offset by higher net unrealized and realized gains relating to the debt held by the consolidated VIEs of $55.7 million and higher interest income of $12.3 million during the year ended December 31, 2011 as compared to the same period during 2010. Income from equity method investments decreased by $55.9 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily driven by changes in the fair values of certain Apollo funds in which the Company has a direct interest. Fund VII, COF I, Artus, COF II and ACLF had the most significant impact and together generated $11.9 million of income from equity method investments during the year ended December 31, 2011 as compared to $62.1 million of income from equity method investments during the year ended December 31, 2010 resulting in a net decrease of income from equity method investments totaling $50.2 million. Refer to note 4 to our consolidated financial statements for a complete summary of income (loss) from equity method investments by fund for the years ended December 31, 2011 and 2010. Other income, net increased by $10.5 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to an increase in gains on acquisitions of $166.5 million driven by the $195.5 million bargain purchase gain recorded on the Gulf Stream acquisition during October 2011, partially offset by the bargain purchase gain on the CPI acquisition of $24.1 million during November 2010. This was offset by $162.5 million of insurance reimbursement received during the year ended December 31, 2010 relating to a $200.0 million litigation settlement incurred during 2008, along with $7.8 million of other income attributable to the change in the estimated tax receivable agreement liability. During the year ended December 31, 2011, approximately $8.0 million of offering costs were reimbursed that were incurred during 2009 related to the launch of ARI, offset by approximately $8.0 million of offering costs incurred during the third quarter of 2011 related to the launch of AMTG. The remaining change was primarily attributable to gains resulting from fluctuations in exchange rates of foreign denominated assets and liabilities of subsidiaries during the year ended December 31, 2011 as compared to the same period in 2010. Refer to note 10 of our consolidated financial statements for a complete summary of other income, net, for the years ended December 31, 2011 and 2010. Income Tax Provision Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 The income tax provision increased by $53.5 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. As discussed in note 11 to our consolidated financial statements, the Company’s income tax provision primarily relates to the earnings generated by APO Corp., which is subject to U.S. Federal, state and local taxes. APO Corp. had income before taxes of $130.8 million and $1.7 million for the years ended December 31, 2012 and 2011, respectively, after adjusting for permanent tax differences. The $129.1 million change in income before taxes resulted in increased federal, state and local taxes of $51.3 million during the period utilizing a marginal corporate tax rate, and an increase in the NYC UBT and the taxes on foreign subsidiaries of $2.2 million. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 The income tax provision decreased by $79.8 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. As discussed in note 11 to our consolidated financial -107- Table of Contents statements, the Company’s income tax provision primarily relates to the earnings generated by APO Corp. APO Corp. had income before taxes of $1.7 million and $211.0 million for the years ended December 31, 2011 and 2010, respectively, after adjusting for permanent tax differences. The $209.3 million change in income before taxes resulted in decreased federal, state and local taxes of $77.2 million utilizing a marginal corporate tax rate. The remaining decrease in the income tax provision of $2.6 million in 2011 as compared to 2010 was primarily affected by decreases in the NYC UBT, as well as taxes on foreign subsidiaries. Non-Controlling Interests Net (income) loss attributable to Non-Controlling Interests consisted of the following: (1) AAA Interest in management companies and a co-investment vehicle Other consolidated entities (2) Net (income) loss attributable to Non-Controlling Interests in consolidated entities Net (income) attributable to Appropriated Partners’ Capital Net (income) loss attributable to Non-Controlling Interests in the Apollo (3) Operating Group Net (income) loss attributable to Non-Controlling Interests Net income attributable to Appropriated Partners’ Capital Other Comprehensive Income attributable to Non-Controlling Interests Comprehensive (Income) Loss Attributable to Non-Controlling Interests (4) 2012 Year Ended December 31, 2011 (in thousands) $ (278,454 ) $ 123,400 $ (356,251 ) (16,258 ) (36,847 ) (12,146 ) (13,958 ) (7,307 ) 50,956 2010 (234,805 ) (1,816,676 ) 97,296 (202,235 ) (409,356 ) (11,359 ) (685,357 ) 940,312 (27,892 ) $ (2,736,838 ) $ 835,373 $ (448,607 ) 11,359 (9,219 ) $ (992,172 ) $ 1,032,502 $ (446,467 ) 1,816,676 (2,010 ) 202,235 (5,106 ) (1) Reflects the Non-Controlling Interests in the net loss (income) of AAA and is calculated based on the Non-Controlling Interests ownership percentage in AAA, which was approximately 97% during the year ended December 31, 2012, approximately 98% during the year ended December 31, 2011 and approximately 97% during the year ended 2010, respectively. (2) Reflects the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies. (3) Reflects net income of the consolidated CLOs classified as VIEs. Includes the bargain purchase gain from the Stone Tower acquisition of $1,951.1 million for the year ended December 31, 2012 and the bargain purchase gain from the Gulf Stream acquisition of $0.8 million and $195.4 million for the years ended December 31, 2012 and 2011, respectively. (4) Appropriated Partners’ Capital is included in total Apollo Global Management, LLC shareholders’ equity and is therefore not a component of comprehensive (income) loss attributable to non-controlling interest on the statement of comprehensive income (loss). -108- Table of Contents Initial Public Offering —On April 4, 2011, the Company completed the IPO of its Class A shares, representing limited liability company interests of the Company. Apollo Global Management, LLC received net proceeds from the IPO of approximately $382.5 million, which were used to acquire additional AOG Units. As a result, Holdings’ ownership interest in the Apollo Operating Group decreased from 70.7% to 66.5% and Apollo Global Management, LLC’s ownership interest in the Apollo Operating Group increased from 29.3% to 33.5% upon consummation of the IPO. As such, the difference between the fair value of the consideration paid for the Apollo Operating Group level ownership interest and the book value on the date of the IPO is reflected in Additional Paid in Capital. Net income (loss) attributable to Non-Controlling Interests in the Apollo Operating Group consisted of the following: Net income (loss) Net (income) loss attributable to Non-Controlling Interests in consolidated entities Net income (loss) after Non-Controlling Interests in consolidated entities Adjustments: (1) Income tax provision NYC UBT and foreign tax provision Capital increase related to equity-based compensation Net loss in non-Apollo Operating Group entities (2) Total adjustments Net income (loss) after adjustments Approximate ownership percentage of Apollo Operating Group Net income (loss) attributable to Apollo Operating Group before other adjustments (3) AMH special allocation (4) Net income (loss) attributable to Non-Controlling Interests in Apollo Operating Group 2012 $ 3,047,795 Year Ended December 31, 2011 (in thousands) $ (1,304,199 ) 2010 $ 543,224 (2,051,481 ) (104,939 ) (420,715 ) 996,314 (1,409,138 ) 122,509 65,410 (10,889 ) — 948 55,469 1,051,783 64.9 % 11,929 (8,647 ) (22,797 ) 1,345 (18,170 ) (1,427,308 ) 65.9 % 91,737 (11,255 ) — 4,197 84,679 207,188 71.0 % 685,357 — (940,312 ) — 145,379 (117,487 ) $ 685,357 $ (940,312 ) $ 27,892 (1) Reflects all taxes recorded in our consolidated statements of operations. Of this amount, U.S. Federal, state, and local corporate income taxes attributable to APO Corp. are added back to income (loss) of the Apollo Operating Group before calculating Non-Controlling Interests as the income (loss) allocable to the Apollo Operating Group is not subject to such taxes. (2) Reflects NYC UBT and foreign taxes that are attributable to the Apollo Operating Group and its subsidiaries related to its operations in the U.S. as partnerships and in non-U.S. jurisdictions as corporations. As such, these amounts are considered in the income (loss) attributable to the Apollo Operating Group. (3) This amount is calculated by applying the weighted average ownership percentage range of approximately 65.2%, 67.4% and 71.0% during the years ended December 31, 2012, 2011 and 2010, respectively, to the consolidated net income (loss) of the Apollo Operating Group before a corporate income tax provision and after allocations to the Non-Controlling Interests in consolidated entities. (4) These amounts represent special allocation of income to APO Corp. and reduction of income allocated to Holdings due to the amendment to the AMH partnership agreement as discussed in note 15 to our consolidated financial statements. There was no extension of the special allocation after December 31, 2010. Therefore as a result, the Company did not allocate any additional income from AMH to APO Corp. related to the special allocation. However, the Company will continue to allocate income to APO Corp. based on the current economic sharing percentage. Segment Analysis Discussed below are our results of operations for each of our reportable segments. They represent the segment information available and utilized by our executive management, which consists of our Managing Partners, who operate collectively as our chief operating decision maker, to assess performance and to allocate resources. Management divides its operations into three reportable segments: private equity, credit and real estate. These segments were established based on the nature of investment activities in each fund, including the specific type of investment made, the frequency of trading, and the level of control over the investment. Segment results do not consider consolidation of funds, equity-based compensation expense comprised of AOG Units, income taxes, amortization of intangibles associated with the 2007 -109- Table of Contents Reorganization and acquisitions and Non-Controlling Interests with the exception of allocations of income to certain individuals. In addition to providing the financial results of our three reportable business segments, we further evaluate our individual reportable segments based on what we refer to as our management and incentive businesses. Our management business is generally characterized by the predictability of its financial metrics, including revenues and expenses. The management business includes management fee revenues, advisory and transaction revenues, carried interest income from one of our opportunistic credit funds and expenses, each of which we believe are more stable in nature. The financial performance of our incentive business is partially dependent upon quarterly mark-to-market unrealized valuations in accordance with U.S. GAAP guidance applicable to fair value measurements. The incentive business includes carried interest income, income from equity method investments and profit sharing expense that are associated with our general partner interests in the Apollo funds, which is generally less predictable and more volatile in nature. Our financial results vary, since carried interest, which generally constitutes a large portion of the income from the funds that we manage, as well as the transaction and advisory fees that we receive, can vary significantly from quarter to quarter and year to year. As a result, we emphasize long- term financial growth and profitability to manage our business. Private Equity The following tables set forth our segment statement of operations information and our supplemental performance measure, ENI, for our private equity segment for the years ended December 31, 2012, 2011 and 2010, respectively. ENI represents segment income (loss), excluding the impact of non-cash charges related to RSUs granted in connection with the 2007 private placement and equity-based compensation expense comprising amortization of AOG Units, income taxes, amortization of intangibles associated with the 2007 Reorganization and acquisitions and Non-Controlling Interest with the exception of allocations of income to certain individuals. In addition, segment data excludes the assets, liabilities and operating results of the Apollo funds and consolidated VIEs that are included in the consolidated financial statements. ENI is not a U.S. GAAP measure. Private Equity: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates For the Year Ended December 31, 2012 Incentive Management Total Management For the Year Ended December 31, 2011 Incentive (in thousands) Management For the Year Ended December 31, 2010 Incentive Total Total $ 138,531 $ — $ 138,531 $ 66,913 $ — $ 66,913 $ 60,444 $ — $ 60,444 277,048 — 277,048 263,212 — 263,212 259,395 — 259,395 Carried interest income (loss) from affiliates: Unrealized gain (loss) Realized gains Total Revenues (1) — 854,919 854,919 — 812,616 812,616 — (1,019,748 ) (1,019,748 ) — 1,251,526 1,251,526 69,587 570,540 — 69,587 — (119,083 ) 319,839 1,321,113 1,640,952 415,579 1,667,535 2,083,114 330,125 570,540 (449,208 ) Expenses: Compensation and Benefits: Equity compensation Salary, bonus and benefits Profit sharing expense Total compensation and benefits Other expenses Total Expenses 31,213 — 31,213 31,778 — 31,778 16,182 — 16,182 128,465 — 702,477 702,477 — 128,465 125,145 — — (100,267 ) 125,145 133,999 (100,267 ) — 133,999 — 519,669 519,669 159,678 702,477 862,155 156,923 83,311 83,311 99,338 242,989 702,477 945,466 256,261 — (100,267 ) — (100,267 ) 56,656 150,181 519,669 669,850 97,750 99,338 97,750 155,994 247,931 519,669 767,600 — Other Income: Income from equity method investments Other income, net 50,632 — 162,213 50,632 212,845 Economic Net Income (Loss) $ 177,243 $ 1,039,096 $ 1,216,339 $ 80,945 $ (340,981 ) $ (260,036 ) $ 234,121 $ 852,076 $ 1,086,197 — 7,960 7,081 162,213 15,041 162,213 74,038 4,653 78,691 74,038 — 74,038 7,960 — 7,960 — 7,081 7,081 — 4,653 4,653 Total Other Income 50,632 (1) Included in unrealized carried interest income (loss) from affiliates for the year ended December 31, 2012 was a $75.3 million reversal of the entire general partner obligation to return previously distributed carried interest income with respect to Fund VI. -110- Table of Contents Included in unrealized carried interest income (loss) from affiliates for the year ended December 31, 2011 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $75.3 million for Fund VI. The general partner obligation is recognized based upon a hypothetical liquidation of the funds’ net assets as of the balance sheet date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund. For the Year Ended December 31, For the Year Ended December 31, 2012 2011 Amount Change Change 2011 2010 Percentage Amount Change Percentage Change (in thousands) (in thousands) $ 138,531 $ 277,048 66,913 $ 263,212 71,618 107.0 % $ 5.3 13,836 66,913 $ 60,444 $ 263,212 259,395 6,469 3,817 10.7 % 1.5 Private Equity: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income (loss) from affiliates: Unrealized gains (losses) Realized gains Total carried interest income (losses) from (1) affiliates Total Revenues 854,919 (1,019,748 ) 1,874,667 570,540 242,076 812,616 NM (1,019,748 ) 1,251,526 (2,271,274 ) 500,953 42.4 570,540 69,587 1,667,535 2,083,114 (449,208 ) 2,116,743 (119,083 ) 2,202,197 NM NM (449,208 ) 1,321,113 (1,770,321 ) (119,083 ) 1,640,952 (1,760,035 ) NM NM NM NM Expenses: Compensation and benefits: Equity-based compensation Salary, bonus and benefits Profit sharing expense Total compensation and benefits expense Other expenses Total Expenses Other Income: Income from equity method investments Other income, net Total Other Income Economic Net Income (Loss) 31,213 128,465 702,477 (565 ) 31,778 125,145 3,320 (100,267 ) 802,744 (1.8 ) 2.7 NM 31,778 16,182 125,145 133,999 (100,267 ) 519,669 15,596 (8,854 ) (619,936 ) 96.4 (6.6 ) NM 862,155 83,311 945,466 56,656 805,499 99,338 (16,027 ) 155,994 789,472 NM (16.1 ) NM 56,656 669,850 99,338 97,750 155,994 767,600 (613,194 ) 1,588 (611,606 ) (91.5 ) 1.6 (79.7 ) 74,038 4,653 78,691 7,960 7,081 15,041 NM 66,078 (2,428 ) (34.3 ) 63,650 423.2 % (42,672 ) 7,960 50,632 (155,132 ) 7,081 162,213 (197,804 ) 15,041 212,845 NM $ (260,036 ) $ 1,086,197 $ (1,346,233 ) (84.3 ) (95.6 ) (92.9 )% NM $ 1,216,339 $ (260,036 ) $ 1,476,375 (1) Included in unrealized carried interest income (loss) from affiliates for the year ended December 31, 2012 was a $75.3 million reversal of the entire general partner obligation to return previously distributed carried interest income with respect to Fund VI. Included in unrealized carried interest income (loss) from affiliates for the year ended December 31, 2011 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $75.3 million for Fund VI. The general partner obligation is recognized based upon a hypothetical liquidation of the funds’ net assets as of the balance sheet date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund. Revenues Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Advisory and transaction fees from affiliates, including directors’ fees, termination fees and reimbursed broken deal costs, increased by $71.6 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to an increase in transaction and advisory services rendered during the year, primarily relating to Fund VII of $46.1 million and Fund VI of $11.2 million, as well as $13.5 million relating to AGS, ANRP and AAA Investments. Gross advisory and transaction fees, including directors’ fees and termination fees, were $291.2 million and $164.5 million for the years ended December 31, 2012 and 2011, respectively, an increase of $126.7 million or 77%. The transaction and termination fees earned during the year ended December 31, 2012 primarily related to seven portfolio investment transactions, specifically EP Energy, Realogy, Rexnord, Great Wolf Resorts, Taminco, Smart & Final and Athlon, which together generated $153.8 million and $78.4 million of the gross and net transaction fees, respectively, as compared to transaction and termination fees earned during the year ended December 31, 2011 primarily in connection with five portfolio investment transactions, specifically Constellium (formerly Alcan), Ascometal, Athene Life Re Ltd., Brit Insurance and CORE Media Group (formerly CKx), which together generated $35.5 million and $18.4 million of the gross and net transaction fees, respectively. The advisory fees earned during the year ended December 31, 2012 were principally generated by advisory arrangements with eight portfolio investments including Athene Life Re Ltd, Debt Investment Vehicles, EP Energy, Caesars Entertainment, Berry Plastics, Momentive Performance Materials, CEVA Logistics and Realogy, which generated gross and net -111- Table of Contents fees of $87.5 million and $46.6 million, respectively. The advisory fees earned during the year ended December 31, 2011 were primarily generated by advisory and monitoring arrangements with six portfolio investments including Athene Life Re Ltd., Berry Plastics, Caesars Entertainment, CEVA Logistics, Debt Investment Vehicles and Realogy, which generated gross and net fees of $78.1 million and $34.9 million, respectively. Advisory and transaction fees, including directors’ fees and termination fees, are reported net of Management Fee Offsets totaling $152.7 million and $97.6 million for the years ended December 31, 2012 and 2011, respectively, an increase of $55.1 million or 56.5%. Management fees from affiliates increased by $13.8 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to increased management fees of $17.3 million earned from ANRP, which began paying fees during the third quarter of 2011 based on committed capital. This increase was partially offset by a decrease in the management fees earned from AAA Investments of $2.6 million due to lower adjusted gross assets for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Also offsetting this increase was a decrease in management fees of $0.9 million as a result of lower management fees earned from Fund V, Fund VI and other funds. Carried interest income (loss) from affiliates increased by $2,116.7 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to an increase in net unrealized carried interest income of $1,874.7 million as a result of improvements in the fair values of the underlying portfolio investments held during the year, including an increase of $571.5 million from Fund VII, $60.9 million from Fund V and $62.0 million from AAA Investments and other funds. In addition, net unrealized carried interest income increased by $1,069.2 as a result of unrealized carried interest income recorded in connection with Fund VI. For the year ended December 31, 2011, Fund VI had significant unrealized carried interest losses which resulted in the recognition of a general partner obligation to return previously distributed carried interest income. For the year ended December 31, 2012, the unrealized carried interest losses were recouped and unrealized carried interest income was recognized which resulted in the reversal of the general partner obligation of $75.3 million. Also contributing to the increase in net unrealized carried interest income was a decrease to Fund IV’s net unrealized carried interest loss of $111.1 million during the year ended December 31, 2012. The remaining increase in the carried interest income (loss) from affiliates relates to an increase in realized carried interest income of $242.1 million resulting from increased dispositions of portfolio investments held by Fund VII, Fund VI, Fund V and AAA Investments of $211.8 million, $213.4 million, $8.5 million and $10.2 million, respectively, offset by a decrease in Fund IV of $201.8 million. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Advisory and transaction fees from affiliates, including directors’ fees and reimbursed broken deal costs, increased by $6.5 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to an increase in advisory services rendered during the period, primarily with respect to AAA Investments. Gross advisory and transaction fees, including directors’ fees, were $164.5 million and $162.9 million for the year ended December 31, 2011 and 2010, respectively, an increase of $1.6 million or 1.0%. The transaction fees earned during 2011 primarily related to five portfolio investment transactions, specifically Constellium (formerly Alcan), Ascometal, Athene Life Re Ltd., Brit Insurance and CORE Media Group (formerly CKx), which together generated $35.5 million and $18.4 million of the gross and net transaction fees, respectively, as compared to transaction fees primarily earned during 2010 from four portfolio investment transactions, specifically LyondellBasell, Noranda Aluminum, CKE Restaurants Inc. and EVERTEC, which together generated $58.4 million and $20.1 million of the gross and net transaction fees. The advisory fees earned during 2011 were primarily generated by advisory and monitoring arrangements with six portfolio investments including Athene Life Re Ltd., Berry Plastics, Caesars Entertainment, CEVA Logistics, Debt Investment Vehicles and Realogy, which generated gross and net fees of $78.1 million and $34.9 million, respectively. The advisory fees earned during 2010 were primarily generated by advisory and monitoring arrangements with several portfolio investments including Caesars Entertainment, Debt Investment Vehicles and Realogy which generated gross and net fees of $55.7 million and $20.9 million, respectively. Advisory and transaction fees, including directors’ fees, are reported net of Management Fee Offsets totaling $92.8 million and $100.6 million for the year ended December 31, 2011 and 2010, respectively, a decrease of $7.8 million or 7.8%. The net transaction and advisory fees were further offset by $4.8 million and $1.8 -112- Table of Contents million in broken deal costs during the years ended December 31, 2011 and 2010, respectively, relating to Fund VII. Management fees from affiliates increased by $3.8 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to increased management fees earned from AAA Investments of $3.2 million as a result of increased adjusted gross assets managed during the period. In addition, management fees of $2.9 million were earned from ANRP which began earning fees during the third quarter of 2011 based on committed capital. These increases were partially offset by decreased management fees earned by Fund V of $1.8 million as a result of decreases in fee-generating invested capital. In addition, during the third quarter of 2010, Fund IV started its winding down and no longer earned management fees which resulted in a decrease in management fees of $0.7 million during the year ended December 31, 2011 as compared to the same period during 2010. Carried interest (loss) income from affiliates changed by $(1,770.3) million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributed to a decrease in net unrealized carried interest income of $2,271.2 million driven by significant declines in the fair values of the underlying portfolio investments held during the period which resulted in the reversal of previously recognized carried interest income, primarily by Fund VI, Fund VII, Fund IV and Fund V of $1,371.2 million, $563.0 million, $254.1 million and $81.0 million, respectively. Included in the above for the year ended December 31, 2011 was a reversal of previously recognized carried interest income due to general partner obligations to return previously distributed carried interest income on Fund VI of $75.3 million. The remaining change relates to an increase in realized carried interest income of $500.9 million resulting from increased dispositions along with higher interest and dividend income distributions from portfolio investments held by certain of our private equity funds, primarily by Fund VII, Fund IV and Fund VI and Fund V of $221.5 million, $204.7 million, $67.6 million and $7.1 million, respectively, during the year ended December 31, 2011 as compared to the same period during 2010. Expenses Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Compensation and benefits expense increased by $805.5 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to a $802.7 million increase in profit sharing expense mostly driven by the increase in carried interest income earned from our private equity funds during the year and a $3.3 million increase in salary, bonus and benefits expense as a result of an increase in headcount. Included in profit sharing expense is $25.8 million related to change in fair value of our contingent consideration obligations. Included in profit sharing expense is $25.9 million and $16.2 million of expenses related to the Incentive Pool for the years ended December 31, 2012 and December 31, 2011, respectively. Other expenses decreased by $16.0 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to decreased interest expense of $6.5 million mainly due to a lower margin rate on the AMH Credit Agreement. Also contributing to this decrease were lower professional fees of $1.9 million attributable to lower external accounting, tax, audit, legal and consulting fees incurred and lower occupancy expenses of $2.8 million due to the allocation of occupancy cost based on segment size due to acquisitions in the credit segment during the year ended December 31, 2012 as compared to the same period during 2011. General, administrative and other expenses also decreased by $3.4 million mainly due to a decrease in travel and related expenses and other non-compensation related expenses. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Compensation and benefits expense decreased by $613.2 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily a result of a $619.9 million decrease in profit sharing expense primarily attributable to a change in carried interest income earned by our funds during the period and an $8.9 million decrease in salary, bonus and benefits expense. The Incentive Pool also contributed to the decrease in salary, bonus and benefits expense during the period. -113- Table of Contents These decreases were partially offset by increased non-cash equity-based compensation expense of $15.6 million primarily related to additional grants of RSUs subsequent to December 31, 2010. Other expenses increased by $1.6 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to increased occupancy expense of $4.0 million due to additional office space leased as a result of an increase in our headcount to support the expansion of our investment platform during the period, along with increased interest expense incurred of $3.7 million in connection with the margin rate increase under the AMH Credit Agreement once the maturity date was extended in December 2010. These increases were partially offset by decreased professional fees of $6.7 million due to lower external accounting, tax, audit, legal and consulting fees incurred during the period. Other (Loss) Income Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Income from equity method investments increased by $66.1 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was driven by increases in the fair values of our private equity investments held, primarily relating to Apollo’s ownership interest in Fund VII and AAA, which resulted in increased income from equity method investments of $51.7 million and $11.0 million, respectively, during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Other income net, decreased by $2.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to losses resulting from fluctuations in exchange rates of foreign denominated assets and liabilities of subsidiaries and other adjustments during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Income from equity method investments decreased by $42.7 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was driven by decreases in the fair values of our private equity investments held, primarily relating to Apollo’s ownership interest in Fund VII and AAA units which resulted in decreased income from equity method investments of $27.3 million and $14.2 million, respectively, during the year ended December 31, 2011 as compared to the same period during 2010. Other income net, decreased by $155.1 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to $162.5 million of insurance reimbursement received during the year ended December 31, 2010 relating to the $200.0 million litigation settlement incurred during 2008. The remaining change was primarily attributable to gains (losses) resulting from fluctuations in exchange rates of foreign denominated assets and liabilities of subsidiaries during the year ended December 31, 2011 as compared to the same period during 2010. -114- Table of Contents Credit The following tables set forth segment statement of operations information and ENI for our credit segment for the years ended December 31, 2012, 2011 and 2010, respectively. ENI represents segment income (loss), excluding the impact of non-cash charges related to RSUs granted in connection with the 2007 private placement and equity-based compensation expense comprising of amortization of AOG Units, income taxes, amortization of intangibles associated with the 2007 Reorganization and acquisitions and Non-Controlling Interest with the exception of allocations of income to certain individuals. In addition, segment data excludes the assets, liabilities and operating results of the Apollo funds and consolidated VIEs that are included in the consolidated financial statements. ENI is not a U.S. GAAP measure. Year Ended December 31, 2012 Management Incentive Total Year Ended December 31, 2011 Management Incentive (in thousands) Year Ended December 31, 2010 Management Incentive Total Total $ 10,764 $ — $ 10,764 $ 14,699 $ — $ 14,699 $ 19,338 $ — $ 19,338 299,667 — 299,667 186,700 — 186,700 160,318 — 160,318 Credit Revenues: Advisory and transaction fees from Management fees from affiliates Carried interest income (loss) from affiliates affiliates: Unrealized gains (losses) Realized gains (1) Total Revenues — 301,077 301,077 — 103,918 103,918 37,842 179,933 217,775 44,540 74,113 118,653 47,385 126,604 173,989 348,273 481,010 829,283 245,939 7,261 253,200 227,041 230,522 457,563 — (66,852 ) (66,852 ) Expenses: Compensation and Benefits: Equity-based compensation Salary, bonus and benefits Profit sharing expense Incentive fee compensation Total compensation and benefits Other expenses Total Expenses Other Income (Loss): Net (loss) from investment activities Income from equity method investments Other income (loss), net Total Other Income (Loss) Non-Controlling Interests Economic Net Income (Loss) — 154,787 154,787 739 739 — 26,988 — 26,988 23,283 — 23,283 9,879 122,813 — 122,813 92,898 — 92,898 93,884 — 93,884 — 35,556 35,556 — 35,461 35,461 — 20,142 20,142 3,383 — 3,383 149,801 155,526 305,327 116,181 38,844 155,025 103,763 55,698 159,461 149,051 — 149,051 94,995 — 94,995 80,880 — 80,880 298,852 155,526 454,378 211,176 38,844 250,020 184,643 55,698 240,341 9,879 — (1,142 ) — (1,142 ) — 46,100 46,100 15,008 — 15,008 15,008 44,958 59,966 — — — (5,881 ) 2,143 — 30,678 30,678 (1,978 ) 10,928 — 10,928 (5,716 ) 10,928 30,678 41,606 (8,730 ) (12,146 ) — (12,146 ) (16,258 ) — (16,258 ) $ 55,699 $ 370,442 $ 426,141 $ 20,639 $ (35,321 ) $ (14,682 ) $ 37,068 $ 205,502 $ 242,570 — (5,881 ) — 2,143 (1,978 ) — (1,978 ) (3,738 ) (8,730 ) — (1) Included in unrealized carried interest income from affiliates for the year ended December 31, 2012 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income for SOMA and APC of $1.2 million and $0.3 million, respectively. Included in unrealized carried interest income from affiliates for the year ended December 31, 2011 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income for SOMA of $18.1 million. The general partner obligation is recognized based upon a hypothetical liquidation of the funds’ net assets as of the balance sheet date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund. -115- Table of Contents Credit Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates: For the Year Ended December 31, For the Year Ended December 31, 2012 2011 (in thousands) Amount Change Change 2011 2010 (in thousands) Percentage Amount Change Percentage Change $ 10,764 $ 14,699 $ (3,935 ) 299,667 186,700 112,967 (26.8 )% $ 14,699 $ 19,338 $ 60.5 (4,639 ) 186,700 160,318 26,382 (24.0 )% 16.5 (1) Unrealized gain (loss) Realized gains Total carried interest income from affiliates Total Revenues NM 301,077 (66,852 ) 367,929 83.5 217,775 118,653 99,122 518,852 51,801 467,051 NM 829,283 253,200 576,083 227.5 (66,852 ) 103,918 (170,770 ) 118,653 173,989 (55,336 ) 51,801 277,907 (226,106 ) 253,200 457,563 (204,363 ) NM (31.8 ) (81.4 ) (44.7 ) Expenses: Compensation and benefits Equity-based compensation Salary, bonus and benefits Profit sharing expense Incentive fee compensation Total compensation and benefits Other expenses Total Expenses Other Income (Loss): Net (loss) from investment activities Income from equity method investments Other income (loss), net Total Other Income (Loss) Non-Controlling Interests Economic Net Income (Loss) 15.9 26,988 23,283 3,705 122,813 92,898 29,915 32.2 154,787 35,461 119,326 336.5 (78.2 ) 97.0 56.9 81.7 (2,644 ) 305,327 155,025 150,302 149,051 94,995 54,056 454,378 250,020 204,358 3,383 739 23,283 92,898 93,884 35,461 35,556 (986 ) (95 ) 3,383 20,142 (16,759 ) (4,436 ) 155,025 159,461 94,995 80,880 14,115 9,679 250,020 240,341 9,879 13,404 135.7 (1.1 ) (0.3 ) (83.2 ) (2.8 ) 17.5 4.0 (1,142 ) 46,100 15,008 59,966 (5,881 ) 4,739 2,143 43,957 (1,978 ) 16,986 (5,716 ) 65,682 3,416 $ 426,141 $ (14,682 ) $ 440,823 (8,730 ) (12,146 ) (80.6 ) NM NM NM (28.1 ) NM (5,881 ) — (5,881 ) 2,143 30,678 (28,535 ) (1,978 ) 10,928 (12,906 ) (5,716 ) 41,606 (47,322 ) (12,146 ) (16,258 ) 4,112 $ (14,682 ) $ 242,570 $ (257,252 ) NM (93.0 ) NM NM (25.3 ) NM (1) Included in unrealized carried interest income from affiliates for the year ended December 31, 2012 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income for SOMA and APC of $1.2 million and $0.3 million, respectively. Included in unrealized carried interest income from affiliates for the year ended December 31, 2011 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income for SOMA of $18.1 million. The general partner obligation is recognized based upon a hypothetical liquidation of the funds’ net assets as of the balance sheet date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund. Revenues Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Advisory and transaction fees from affiliates decreased by $3.9 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Gross advisory and transaction fees, including directors’ fees, were $37.4 million and $41.2 million for the years ended December 31, 2012 and 2011, respectively, a decrease of $3.8 million or 9.2%. The transaction fees earned during 2012 primarily related to portfolio investments of EPF I and EPF II which together generated gross and net fees of $9.1 million and $2.4 million, respectively, whereas the transaction fees earned during 2011 primarily related to two portfolio investment transactions of FCI and EPF I which together generated gross and net fees of $9.6 million and $5.7 million, respectively. The advisory fees earned during both periods were primarily generated by deal activity related to investments in LeverageSource, L.P., which resulted in gross and net advisory fees of $23.0 million and $3.4 million, respectively, during the year ended December 31, 2012 and gross and net fees of $25.9 million and $3.3 million, respectively, during the year ended December 31, 2011. Advisory and transaction fees, including directors’ fees, are reported net of Management Fee Offsets totaling $26.6 million and $26.5 million for the years ended December 31, 2012 and 2011, respectively, an increase of $0.1 million or 0.4%. Management fees from affiliates increased by $113.0 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to EPF II which began earning management fees during the second quarter of 2012 totaling $43.1 million. In addition, management fees increased due to the recent acquisitions of Gulf Stream and Stone Tower in October 2011 and April 2012, respectively, resulting in an increase in fees generated from CLOs of $29.3 million and Apollo Credit Fund of $11.6 million during the period. Also, assets managed by Athene Asset Management, LLC, AMTG and AEC, together generated increased fees of $31.5 million during the year -116- Table of Contents ended December 31, 2012 as compared to the same period in 2011. These increases were partially offset by decreased management fees earned from EPF I of $13.3 million during the period due to a change in management fee basis from committed to invested capital as a result of the launch of EPF II in April 2012. In addition, management fees earned from AINV decreased by $6.4 million as a result of a decrease in gross adjusted assets managed of the Company during the period as compared to the same period in 2011. The remaining change was attributable to an overall increase in assets managed by the other credit funds which collectively contributed to an increase of $17.2 million in management fees during the year ended December 31, 2012 as compared to the same period in 2011. Carried interest income from affiliates increased by $467.1 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to an increase in net unrealized carried interest income of $367.9 million driven by an increase in net asset values primarily with respect to COF I, CLOs, COF II, ACLF, AIE II, and ACF resulting in increased net unrealized carried interest income of $74.4 million, $71.8 million, $65.9 million, $65.9 million, $27.0 million, $9.0 million and $7.0 million, respectively, during the period. The remaining change in unrealized carried interest income was attributable to an increase in net asset values of the other credit funds which collectively contributed to an increase of $46.9 million. During the year ended December 31, 2012, there was a reversal of previously recognized carried interest income from SOMA and APC due to general partner obligations to return carried interest income that was previously distributed of $1.2 million and $0.3 million, respectively. In addition, realized carried interest increased by $99.1 million resulting from increased dispositions during the period, primarily by COF I, Apollo Credit Fund, and ACLF of $60.5 million, $16.7 million, $11.5 million and $9.7 million respectively. The remaining change in realized carried interest income was attributable to an overall increase in dispositions of the other credit funds which collectively contributed to an increase of $0.7 million during the period. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Advisory and transaction fees from affiliates decreased by $4.6 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Gross advisory and transaction fees, including directors’ fees, were $41.2 million and $59.8 million for the year ended December 31, 2011 and 2010, respectively, a decrease of $18.6 million or 31.1%. The transaction fees earned during 2011 were primarily related to two portfolio investment transactions of FCI and EPF I which together generated gross and net fees of $9.6 million and $5.7 million, respectively. The transaction fees earning during 2010 were primarily related to certain portfolio investment transactions of EPF I which together generated gross and net fees of $11.0 million and $3.9 million, respectively. In addition, a termination fee was earned from KBC Life Settlements of $7.1 million during the year ended December 31, 2010. The advisory fees earned during both periods were primarily generated by deal activity related to investments in LeverageSource, L.P., which resulted in gross and net advisory fees of $25.9 million and $3.3 million, respectively, during 2011 and gross and net fees of $25.3 million and $3.4 million, respectively, during 2010. Advisory and transaction fees, including directors’ fees, are reported net of Management Fee Offsets totaling $26.5 million and $40.5 million for the year ended December 31, 2011 and 2010, respectively, a decrease of $14.0 million or 34.6%. Management fees from affiliates increased by $26.4 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to increased asset allocation fees earned from Athene of $9.4 million during the year. These fees are partially offset by a corresponding expense categorized as sub-advisory fees and included within professional fees expense. In addition, management fees of $3.4 million were earned from AFT, $1.7 million from FCI and $1.4 million from AMTG, which all began earning management fees in 2011. Gulf Stream CLOs generated $2.5 million of fees and two new Senior Credit Funds, AESI and Palmetto Loan, generated fees of $1.2 million and $1.0 million, respectively, during the year ended December 31, 2011. Furthermore an increase in fee-generating invested capital in COF II, gross adjusted assets managed by AINV and increased value of commitments in EPF I resulted in increased management fees earned of $2.6 million, $2.0 million and $1.4 million, respectively, during the period. These increases were partially offset by decreased management fees earned by ACLF of $1.8 million as a result of a decrease in fee-generating invested capital and by AIE I of $1.4 million as a result of sales of investments and resulting decrease in net assets managed during the period. -117- Table of Contents The remaining change was attributable to overall increased assets managed by the remaining credit funds, which collectively contributed to the increase of management fees by $3.0 million during the period. Carried interest income from affiliates changed by $(226.1) million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to a decrease in net unrealized carried interest income of $170.8 million driven by decreased net asset values, primarily with respect to COF II, COF I, ACLF, AIE II and SOMA which collectively resulted in decreased net unrealized carried interest income of $225.4 million, partially offset by increased unrealized carried interest income earned in 2011 by EPF I of $53.2 million due to increased valuation of investments. During the year ended December 31, 2011, there was a reversal of previously recognized carried interest income from SOMA due to general partner obligations to return carried interest income that was previously distributed of $18.1 million. The remaining change was attributable to a decrease in net realized gains of $55.3 million resulting primarily from a decrease in dividend and interest income on portfolio investments held by certain of our credit funds, primarily by SOMA, during the year ended December 31, 2011 as compared to the same period during 2010. Expenses Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Compensation and benefits expense increased by $150.3 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily a result of an increase in profit sharing expense of $119.3 million due to the favorable performance of certain of our credit funds along with the Incentive Pool, which included $28.9 million and $17.6 million of expense related to the Incentive Pool for the years ended December 31, 2012 and 2011, respectively. In addition, salary, bonus and benefits expense increased by $29.9 and equity based compensation increased by $3.7 million due to an increase in headcount during the period, including new hires related to the Stone Tower acquisition in April 2012. These increases were partially offset by decreased incentive fee compensation expense of $2.6 million due to the performance of certain of our credit funds during the period. Other expenses increased by $54.1 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily a result of increased general, administrative and other expenses of $18.5 million due to higher travel, information technology, recruiting and other expenses incurred during the year ended December 31, 2012 as compared to the same period in 2011. Placement fees also increased by $19.0 million due to increased fundraising activities during the year ended December 31, 2012 as compared to the same period in 2011, primarily relating to EPF II and costs associated with the acquisition of Stone Tower for which the Company incurred fees of $12.9 million and $4.9 million, respectively. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Compensation and benefits expense decreased by $4.4 million for the ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily a result of a $16.8 million decrease in incentive fee compensation due to unfavorable performance of certain of our capital market funds during the period and a $1.0 million decrease in salary, bonus and benefits. The Incentive Pool also contributed to the decrease in salary, bonus and benefits expense during the period. These decreases were partially offset by increased non-cash equity-based compensation expense of $13.4 million primarily related to additional grants of RSUs subsequent to December 31, 2010. Other expenses increased by $14.1 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to increased professional fees of $5.3 million primarily driven by structuring fees associated with AFT totaling $3.6 million incurred during 2011. In addition, general, administrative and other expenses increased by $6.3 million due to higher travel, information technology, recruiting and other expenses incurred, along with increased occupancy expense of $3.5 million due to additional office spaced leased as a result of an increase in our headcount to support the expansion of our investment platform during the period. These increases were partially offset by decreased placement fees of $1.0 million due to decreased fundraising efforts related to one of our funds during the year ended December 31, 2011 as compared to the same period during 2010. -118- Table of Contents Other Income (Loss) Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Net losses from investment activities decreased by $4.7 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to an unrealized loss related to the change in the fair value of the investment in HFA, which resulted in a decrease in losses from investment activities of $4.7 million during the period. Income from equity method investments increased by $44.0 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was driven by increases in the fair values of investments held by certain of our credit funds, primarily COF I, COF II, and ACLF, which resulted in an increase in income from equity method investments of $17.3 million, $5.7 million and $4.5 million, respectively, during the year ended December 31, 2012 as compared to the same period during 2011. Other income (loss), net increased by $17.0 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. During the year ended December 31, 2011, approximately $8.0 million of offering costs were incurred related to the launch of AMTG. The remaining change was primarily attributable to higher interest income and rental income. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Net losses from investment activities were $5.9 million for the year ended December 31, 2011. This amount was related to an unrealized loss on the change in the fair value of the investment in HFA during the year ended December 31, 2011. Income from equity method investments decreased by $28.5 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was driven by decreases in the fair values of investments held by certain of our credit funds, primarily COF I, Artus, COF II, and ACLF, which resulted in a decrease in income from equity method investments of $10.2 million, $4.5 million $4.3 million and $3.7 million, respectively, during the year ended December 31, 2011 as compared to the same period during 2010. Other (loss) income, net decreased by $12.9 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. During the year ended December 31, 2011, approximately $8.0 million of offering costs were incurred related to the launch of AMTG. The remaining change was primarily attributable to gains (losses) resulting from fluctuations in exchange rates of foreign denominated assets and liabilities of subsidiaries during the year ended December 31, 2011 as compared to the same period in 2010. -119- Table of Contents Real Estate The following tables set forth our segment statement of operations information and our supplemental performance measure, ENI, for our real estate segment for the years ended December 31, 2012, 2011 and 2010, respectively. ENI represents segment income (loss), excluding the impact of non- cash charges related to RSUs granted in connection with the 2007 private placement and equity-based compensation expense comprising amortization of AOG Units, income taxes and Non-Controlling Interests. In addition, segment data excludes the assets, liabilities and operating results of the Apollo funds and consolidated VIEs that are included in the consolidated financial statements. ENI is not a U.S. GAAP measure. Real Estate: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates Unrealized gains Realized gains Total Revenues For the Year Ended December 31, 2012 For the Year Ended December 31, 2011 For the Year Ended December 31, 2010 Management Incentive Total Management Incentive Total Management Incentive Total (in thousands) 749 $ — $ $ — $ — $ — 698 $ — $ 46,326 — 46,326 40,279 — 40,279 11,383 — 11,383 698 $ 749 $ — 10,401 10,401 — 4,673 4,673 — — — — — — 47,075 15,074 62,149 40,977 — 40,977 11,383 — 11,383 — — — — — — Expenses: Compensation and Benefits: Equity-based compensation Salary, bonus and benefits Profit sharing expense 4,408 — 4,408 10,741 — 10,741 13,111 — 13,111 23,296 — 23,296 33,052 — 33,052 21,688 — 21,688 — — — Total compensation and benefits 34,037 14,130 48,167 46,163 1,353 47,516 26,096 — 26,096 24,270 — 24,270 29,663 — 29,663 19,938 — 19,938 58,307 14,130 72,437 75,826 1,353 77,179 46,034 — 46,034 — 1,353 1,353 — 14,130 14,130 Total Expenses Other expenses Other Income (loss): Income (loss) from equity method investments Other income, net Total Other Income (Loss) Economic Net (Loss) Income $ Real Estate: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates Unrealized gains Realized gains Total Revenues Expenses: Compensation and Benefits Equity-based compensation Salary, bonus and benefits Profit sharing expense Other expenses Total compensation and benefits Total Expenses Other Income (Loss): Income (loss) from equity method investments Other income, net Total Other Income Economic Net (Loss) — 982 982 (391 ) 1,271 — 1,271 9,694 — 9,694 23,622 — 23,622 9,694 726 10,420 23,622 (391 ) 23,231 982 2,253 1,271 (9,961 ) $ 1,926 $ (8,035 ) $ (25,155 ) $ (627 ) $ (25,782 ) $ (11,029 ) $ (391 ) $ (11,420 ) — 726 — (391 ) 726 For the Year Ended December 31, Percentage For the Year Ended December 31, 2012 2011 Amount Change Change 2011 2010 (in thousands) Percentage Amount Change Change $ 749 $ 51 46,326 40,279 6,047 698 $ 7.3 % $ 698 $ — $ 698 NM 15.0 40,279 11,383 28,896 253.9 % 10,401 — 10,401 4,673 — 4,673 62,149 40,977 21,172 NM NM 51.7 — — — — — — — — 40,977 11,383 29,594 260.0 10,741 13,111 (2,370 ) 23,296 33,052 (9,756 ) 14,130 1,353 12,777 48,167 47,516 651 24,270 29,663 (5,393 ) 72,437 77,179 (4,742 ) (18.1 ) (29.5 ) NM 1.4 (18.2 ) (6.1 ) 13,111 4,408 8,703 197.4 52.4 33,052 21,688 11,364 NM 1,353 — 1,353 82.1 47,516 26,096 21,420 48.8 29,663 19,938 9,725 67.7 77,179 46,034 31,145 726 982 256 1,271 9,694 (8,423 ) 2,253 10,420 (8,167 ) $ (8,035 ) $ (25,782 ) $ 17,747 726 (391 ) 1,117 35.3 9,694 23,622 (13,928 ) (86.9 ) 10,420 23,231 (12,811 ) (78.4 ) (68.8 )% $ (25,782 ) $ (11,420 ) $ (14,362 ) 125.8 % NM (59.0 ) (55.1 ) -120- Table of Contents Revenues Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Management fees increased by $6.0 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to increased management fees earned of $4.1 million as a result of additional capital raised for the Athene CRE Lending business, AGRE CMBS Accounts, and the launching of the 2012 CMBS funds during the year ended December 31, 2012. In addition, increased management fees were earned from AGRE U.S. Real Estate Fund of $2.5 million due to additional capital commitments raised during the year and due to an increase in invested capital during the year. Also contributing to the increase was a $0.9 million increase in management fees as a result of additional capital raised for ARI during the year and a $2.2 million increase to management fees from other funds. These increases were offset by decreased management fees earned from the CPI funds of $3.6 million as a result of the realization of underlying investments. Carried interest income from affiliates increased by $15.1 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to an increase in net unrealized gains of $10.4 million, driven by an increase in the fair values of the underlying portfolio investments held during the year. The remaining change in the carried interest income from affiliates relates to an increase in realized gains of $4.7 million resulting from increased dispositions of portfolio investments during the year. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Advisory and transaction fees from affiliates were $0.7 million for the year ended December 31, 2011 which were earned from a new fund, AGRE Debt Fund I, L.P. Management fees increased by $28.9 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to an increase of $22.8 million of fees earned from CPI funds that were acquired during November 2010, therefore, 2011 included a full year of management fees earned in comparison to 2010. CPI Capital Partners Europe, CPI Capital Partners Asia Pacific and CPI Capital Partners North America earned increased fees of $8.1 million, $7.4 million and $7.3 million, respectively, during the year ended December 31, 2011 as compared to 2010. In addition, increased net assets managed by ARI, AGRE CMBS Accounts, AGRE U.S. Real Estate Fund and AGRE Debt Fund I, L.P. account resulted in increased management fees earned of $2.7 million, $1.8 million, $1.5 million and $0.2 million, respectively, during the year ended December 31, 2011 as compared to the same period during 2010. Expenses Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Compensation and benefits increased in total by $0.7 million during the year ended December 31, 2012 as compared to the year ended December 31, 2011. The increase was primarily attributable to an increase of $12.8 million in profit sharing expense driven by the increase carried interest income earned from our real estate funds and performance based incentive arrangement the Company adopted in June 2011 for certain Apollo partners and employees. Offsetting this increase were decreases of $9.8 million and $2.4 million in salary, bonus and benefits and equity-based compensation, respectively, due to a decrease in headcount and the Incentive Pool. Included in profit sharing expense are $7.3 million and $1.4 million related to the Incentive Pool for the years ended December 31, 2012 and December 31, 2011, respectively. Other expenses decreased by $5.4 million during the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to decreased occupancy expense of $2.7 million due to headcount reductions and the allocation of occupancy cost based on segment size due to acquisitions in the credit segment. Also contributing to the decrease was decreased general, -121- Table of Contents administrative and other expenses of $2.5 million mainly due to a decrease in travel and related expenses during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Compensation and benefits increased by $21.4 million during the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to an $11.4 million increase in salary, bonus and benefits expense primarily driven by an increase in headcount as a result of the CPI funds that were acquired during November 2010 and expansion of our real estate funds during the year ended December 31, 2011 as compared to the same period during 2010. Additionally, non-cash equity-based compensation expense increased by $8.7 million primarily related to additional grants of RSUs subsequent to December 31, 2010, along with an increase in profit sharing expense of $1.4 million primarily related to the Incentive Pool arrangement. Other expenses increased by $9.7 million during the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to increased occupancy expense of $5.3 million due to additional office space leased as a result of an increase in our headcount to support the expansion of our real estate funds during the year ended December 31, 2011 as compared to the same period during 2010 and an increase in general, administrative and other expenses of $3.7 million driven by increased travel, information technology, recruiting and other expenses incurred associated with the launch of our new real estate funds during the period. These increases were partially offset by decreased professional fees of $1.2 million due to lower external accounting, tax, audit, legal and consulting fees incurred during the period. Other Income (Loss) Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Income from equity method investments increased by $0.3 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was driven by increases in the fair values of our real estate investments held, primarily relating to Apollo’s ownership interest in ARI, which resulted in increased income from equity method investments of $0.8 million during the year ended December 31, 2012 as compared to the year ended December 31, 2011. This increase was offset by decreased income from equity method investments of $0.5 million from Apollo’s ownership interest in the CPI funds, AGRE U.S. Real Estate Fund and other funds. Other income, net decreased by $8.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This change was primarily attributable to a decrease in reimbursed offering costs for the year ended December 31, 2012 as compared to the year ended December 31, 2011. During the year ended December 31, 2011, approximately $8.0 million of reimbursed offering costs was recognized as a result of a one time transaction related to the 2009 launch of ARI. The remaining change was mostly due to losses resulting from fluctuations in exchange rates of foreign denominated assets and liabilities of subsidiaries during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Total other income decreased by $12.8 million during the year ended December 31, 2011 as compared to the year ended December 31, 2010. This change was primarily attributable to a gain of $24.1 million that was recognized on the acquisition of CPI during November 2010, partially offset by the reimbursement during 2011 of approximately $8.0 million of offering costs incurred during 2009 related to the launch of ARI. The remaining change was primarily attributable to gains (losses) resulting from fluctuations in exchange rates of foreign denominated assets and liabilities of subsidiaries during the year ended December 31, 2011 as compared to the same period during 2010. -122- Table of Contents Summary Combined Segment Results for Management Business and Incentive Business The following tables combine our reportable segments’ statements of operations information and supplemental performance measure, ENI, for our management and incentive businesses for the years ended December 31, 2012, 2011 and 2010, respectively. ENI represents segment income (loss), excluding the impact of non-cash charges related to RSUs granted in connection with the 2007 private placement and equity-based compensation expense comprising amortization of AOG Units, income taxes, amortization of intangibles associated with the 2007 Reorganization and acquisitions and Non- Controlling with the exception of allocations of income to certain individuals. In addition, segment data excludes the assets, liabilities and operating results of the Apollo funds and consolidated VIEs that are included in the consolidated financial statements. ENI is not a U.S. GAAP measure. In addition to providing the financial results of our three reportable business segments, we evaluate our reportable segments based on what we refer to as our management and incentive businesses. Our management business is generally characterized by the predictability of its financial metrics, including revenues and expenses. This business includes management fee revenues, advisory and transaction fee revenues, carried interest income from one of our opportunistic credit funds and expenses, each of which we believe are more stable in nature. Management Business Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates Total Revenues Expenses: Equity-based compensation Salary, bonus and benefits Interest expense Professional fees General, administrative and other Placement fees Occupancy Depreciation (1) (2) Total Expenses Other Income: Interest income (2 ) Other income, net (3) Total Other Income Non-Controlling Interests Economic Net Income 2012 $ 150,044 623,041 37,842 810,927 68,942 274,574 37,116 63,250 86,550 22,271 37,218 10,227 600,148 8,149 12,783 20,932 (8,730 ) $ 222,981 Year Ended December 31, 2011 (in thousands) $ 82,310 490,191 44,540 617,041 68,172 251,095 40,850 58,315 73,972 3,911 35,816 11,132 543,263 4,731 10,066 14,797 (12,146 ) $ 76,429 2010 $ 79,782 431,096 47,385 558,263 30,469 249,571 35,436 60,870 63,466 4,258 23,067 11,471 478,608 1,508 195,255 196,763 (16,258 ) $ 260,160 (1) Excludes professional fees related to the consolidated funds. (2) Excludes general and administrative expenses and interest income related to the consolidated funds. (3) Includes $162.5 million of insurance proceeds related to a litigation settlement included in other income during the year ended December 31, 2010. The financial performance of our incentive business, which is dependent upon quarterly mark-to-market unrealized valuations in accordance with U.S. GAAP guidance applicable to fair value measurements, includes carried interest income, income from equity method investments, profit sharing expenses and incentive fee compensation that are associated with our general partner interests in the Apollo funds, which are generally less predictable and more volatile in nature. -123- Table of Contents Incentive Business Revenues: Carried interest income (loss) from affiliates: Unrealized gains (losses) Realized gains (1) Total Revenues Expenses: Compensation and benefits: Profit sharing expense: Unrealized profit sharing expense Realized profit sharing expense (1) Total Profit Sharing Expense Incentive fee compensation Total Compensation and Benefits Other Income: Net (loss) gains from investment activities Income from equity method investments (2) Total Other Income Economic Net Income (Loss) 2012 Year Ended December 31, 2011 (in thousands) 2010 $ 1,166,397 997,222 2,163,619 $ (1,086,600 ) 644,653 (441,947 ) $ 1,355,444 196,191 1,551,635 426,098 445,296 871,394 739 872,133 (370,485 ) 307,032 (63,453 ) 3,383 (60,070 ) (1,142 ) 121,120 119,978 $ 1,411,464 (5,881 ) 10,829 4,948 $ (376,929 ) 504,537 50,688 555,225 20,142 575,367 — 80,919 80,919 $ 1,057,187 (1) Included in unrealized carried interest (loss) income from affiliates for the year ended December 31, 2012 was a reversal of $75.3 million of the entire general partner obligation to return previously distributed carried interest income with respect to Fund VI and reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $1.2 million and $0.3 million for SOMA and APC, respectively. Included in unrealized carried interest (loss) income from affiliates for the year ended December 31, 2011 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $75.3 million and $18.1 million for Fund VI and SOMA, respectively. Included in unrealized profit sharing expense for the year ended December 31, 2012 was a reversal of the entire receivable from Contributing Partners and certain employees of $22.1 million due to the reversal of the general partner obligation. Included in unrealized profit sharing expense for the year ended December 31, 2011 was a reversal of previously realized profit sharing expense for the amounts receivable from Contributing Partners and certain employees due to the general partner obligation to return previously distributed carried interest income of $22.1 million for Fund VI. The general partner obligation is recognized based upon a hypothetical liquidation of the funds’ net assets as of the balance sheet date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund. (2) Excludes investment income and net gains (losses) from investment activities related to consolidated funds and the consolidated VIEs. -124- Table of Contents Summary Below is the summary of our total reportable segments including management and incentive businesses and a reconciliation of ENI to Net Loss attributable to Apollo Global Management, LLC reported in our consolidated statements of operations: Revenues Expenses Other income Non-Controlling Interests Economic Net Income (Loss) Non-cash charges related to equity-based compensation Income tax provision Net (income) loss attributable to Non-Controlling Interests in Apollo Operating Group Net loss of Metals Trading Fund Amortization of intangible assets Net Income (Loss) Attributable to Apollo Global Management, LLC Liquidity and Capital Resources Historical 2012 $ 2,974,546 1,472,281 140,910 (8,730 ) 1,634,445 (529,712 ) (65,410 ) (685,357 ) — (43,009 ) $ 310,957 Year Ended December 31, 2011 (in thousands) $ 175,094 483,193 19,745 (12,146 ) (300,500 ) (1,081,581 ) (11,929 ) 940,312 — (15,128 ) $ (468,826 ) 2010 $ 2,109,898 1,053,975 277,682 (16,258 ) 1,317,347 (1,087,943 ) (91,737 ) (27,892 ) (2,380 ) (12,778 ) 94,617 $ Although we have managed our historical liquidity needs by looking at deconsolidated cash flows, our historical consolidated statement of cash flows reflects the cash flows of Apollo, as well as those of our consolidated Apollo funds. The primary cash flow activities of Apollo are: • • • • Generating cash flow from operations; Making investments in Apollo funds; Meeting financing needs through credit agreements; and Distributing cash flow to equity holders and Non-Controlling Interests. Primary cash flow activities of the consolidated Apollo funds are: • • • • Raising capital from their investors, which have been reflected historically as Non-Controlling Interests of the consolidated subsidiaries in our financial statements; Using capital to make investments; Generating cash flow from operations through distributions, interest and the realization of investments; and Distributing cash flow to investors. While primarily met by cash flows generated through fee income and carried interest income received, working capital needs have also been met (to a limited extent) through borrowings as follows: AMH Credit Agreement CIT secured loan agreements Total Debt (1) Includes the effect of interest rate swaps. Outstanding Balance $ 728,273 9,545 $ 737,818 December 31, 2012 December 31, 2011 Annualized Weighted Average Interest Rate Outstanding Balance $ 728,273 10,243 $ 738,516 Annualized Weighted Average Interest Rate (1) 5.39 % 3.39 5.35 % (in thousands) (1) 4.95 % 3.47 4.93 % We determine whether to make capital commitments to our funds in excess of our minimum required amounts based on a variety of factors, including estimates regarding our liquidity resources over the estimated time period during which commitments will have to be funded, estimates regarding the amounts of capital that may be appropriate for other funds that we are in the process of raising or are considering raising, and our general working capital requirements. We have made one or more distributions to our Managing Partners and Contributing Partners, representing all of the undistributed earnings generated by the businesses contributed to the Apollo -125- Table of Contents Operating Group prior to the Private Offering Transactions. For this purpose, income attributable to carried interest on private equity funds related to either carry-generating transactions that closed prior to the Private Offering Transactions which closed in July 2007 or carry-generating transactions to which a definitive agreement was executed, but that did not close, prior to the Private Offering Transactions are treated as having been earned prior to the Private Offering Transactions. Cash Flows Significant amounts from our consolidated statements of cash flows for the years ended December 31, 2012, 2011 and 2010 are summarized and discussed within the table and corresponding commentary below: Year Ended December 31, 2012 Compared to the Years Ended December 31, 2011 and 2010 Operating Activities Investing Activities Financing Activities Net Increase in Cash and Cash Equivalents Operating Activities Year Ended December 31, 2011 (in thousands) $ 743,821 (129,536 ) (251,823 ) $ 362,462 2012 $ 265,551 (84,791 ) 21,960 $ 202,720 2010 $ (218,051 ) (9,667 ) 243,761 $ 16,043 Net cash provided by operating activities was $265.6 million during the year ended December 31, 2012. During this period, there was $3,047.8 million in net income, to which $598.7 million of equity-based compensation, $1,951.9 million gain on business acquisitions and non-cash expenses were added to reconcile net loss to net cash provided by operating activities. Additional adjustments to reconcile cash provided by operating activities during the year ended December 31, 2012 included $7,182.4 million in proceeds from sales of investments held by the consolidated VIEs, $497.7 million increase in net unrealized losses on debt and $361.6 million increase in profit sharing payable. These favorable cash adjustments were offset by $458.0 million in net unrealized gains from investments held by the consolidated funds and VIEs, a $103.8 million decrease in due to affiliates, $348.1 million change in cash held at consolidated VIEs and $973.6 million increase in carried interest receivable and $7,525.5 million of purchases of investments held by the consolidated VIEs. Net cash provided by operating activities was $743.8 million during the year ended December 31, 2011. During this period, there was $1,304.2 million in net losses, to which $1,149.8 million of equity-based compensation and $196.2 million gain on business acquisitions, non-cash expenses were added to reconcile net loss to net cash provided by operating activities. Additional adjustments to reconcile cash provided by operating activities during the year ended December 31, 2011 included $1,530.2 million in proceeds from sales of investments held by the consolidated VIEs, $113.1 million in net unrealized losses from investments held by the consolidated funds and VIEs, a $43.8 million increase in due to affiliates and $998.5 million decrease in carried interest receivable. The decrease in our carried interest receivable balance during the year ended December 31, 2011 was driven primarily by $304.5 million of carried interest losses from the change in fair value of funds for which we act as general partner, along with fund cash distributions of $692.6 million. These favorable cash adjustments were offset by $1,294.5 million of purchases of investments held by the consolidated VIEs, $325.2 million decrease in profit sharing payable and $41.8 million of realized gains on debt of the consolidated VIEs. Net cash used in operating activities was $218.1 million during the year ended December 31, 2010. During this period, there was $543.2 million in net income, to which $87.6 million of cash held by the consolidated VIEs, $1,240.8 million in net purchases of investments primarily by the consolidated VIEs and $416.6 million of net unrealized gains from investment activities of consolidated funds and consolidated VIEs were each added to reconcile net income to net cash used in operating activities. Additional adjustments to reconcile cash used in operating activities during the year ended December 31, 2010 included a $1,383.2 million increase in our carried interest receivables. The increase in our carried -126- Table of Contents interest receivable balance during the year ended December 31, 2010 was driven by a $1,585.9 million increase in the fair value of the funds for which we act as general partner, offset by fund cash distributions of $204.4 million. These adjustments were offset by $1,118.4 million of equity-based compensation, a non-cash expense, as well as $503.6 million increase in our profit sharing payable, which was also primarily driven by increases in the fair value of the funds for which we act as general partner. Additional offsets include $627.3 million of sales of investments held by the consolidated VIEs, and a $107.9 million increase in other liabilities of the consolidated VIEs, which is primarily due to the refinancing of a portfolio investment. The operating cash flow amounts from the Apollo funds and consolidated VIEs represent the significant variances between net income (loss) and cash flow from operations and were classified as operating activities pursuant to the AICPA Audit and Accounting Guide, Investment Companies . The increasing capital needs reflect the growth of our business while the fund-related requirements vary based upon the specific investment activities being conducted at a point in time. These movements do not adversely affect our liquidity or earnings trends because we currently have sufficient cash reserves compared to planned expenditures. Investing Activities Net cash used in investing activities was $84.8 million for the year ended December 31, 2012, which was primarily comprised of $11.3 million in purchases of fixed assets, $99.2 million relating to the acquisition of Stone Tower (see note 3 to our consolidated financial statements), $126.9 million of cash contributions to equity method investments, partially offset by $152.6 million of cash distributions from equity method investments. Cash contributions to equity method investments were primarily related to EPF I, EPF II, ASCP, Fund VII, AINV and AGRE U.S. Real Estate Fund. Cash distributions from equity method investments were primarily related to Fund VII, ACLF, AGRE U.S. Real Estate Fund, COF I, COF II, Artus, EPF I and EPF II. Net cash used in investing activities was $129.5 million for the year ended December 31, 2011, which was primarily comprised of $21.3 million in purchases of fixed assets, $64.2 million of cash contributions to equity method investments, a $52.1 million investment in HFA, the $29.6 million for the acquisition of Gulf Stream and $26.0 million for the acquisition of investments in the Apollo Senior Loan Fund, partially offset by $64.8 million of cash distributions from equity method investments. Cash contributions to equity method investments were primarily related to EPF I, Fund VII and AGRE U.S. Real Estate Fund. Cash distributions from equity method investments were primarily related to Fund VII, ACLF, COF I, COF II, Artus, EPF I and Vantium C. Net cash used in investing activities was $9.7 million for the year ended December 31, 2010, which was primarily comprised of $63.5 million of cash contributions to equity method investments and $5.6 million of fixed asset purchases, offset by $21.6 million in cash received from business acquisitions and dispositions and $38.9 million of cash distributions from equity method investments. Cash contributions to equity method investments were primarily related to Fund VII, COF I, COF II, Palmetto and EPF I. Cash distributions from equity method investments were primarily related to Fund VII, ACLF, COF I, COF II and Vantium C. Financing Activities Net cash provided by financing activities was $22.0 million for the year ended December 31, 2012, which was primarily comprised of $1,413.3 million related to issuance of debt by consolidated VIEs and $4.1 million in contributions from Non-Controlling Interests in consolidated entities. This amount was offset by $515.9 million in repayment of term loans by consolidated VIEs, $486.7 million in distributions by consolidated VIEs, $335.0 million of distributions paid to Non-Controlling Interests in the Apollo Operating Group, $202.4 million in distributions and $26.0 million related to employee tax withholding payments in connection with deliveries of Class A shares in settlement of RSUs, $8.8 million in distributions to Non- Controlling Interests in consolidated entities and $102.1 million in purchases of AAA Units. -127- Table of Contents Net cash used in financing activities was $251.8 million for the year ended December 31, 2011, which was primarily comprised of $415.9 million in repayment of term loans by consolidated VIEs, $308.8 million in distributions by consolidated VIEs, $199.2 million of distributions paid to Non-Controlling Interests in the Apollo Operating Group, $27.3 million of distributions paid to Non-Controlling Interests in consolidated funds, $102.6 million in distributions and $17.1 million related to employee tax withholding payments in connection with deliveries of Class A shares in settlement of RSUs. These cash outflows were offset by $384.0 million in proceeds from the issuance of Class A shares and $454.4 million of debt issued by consolidated VIEs. Net cash provided by financing activities was $243.8 million for the year ended December 31, 2010, which was primarily comprised of $1,050.4 million related to the issuance of debt by consolidated VIEs. This amount was offset by $331.1 million in repayment of term loans by consolidated VIEs, $146.7 million in distributions by consolidated VIEs, $182.3 million in repayments and repurchases of debt primarily with respect to the AMH Credit Agreement and $48.8 million in purchases of AAA units. In addition, there were $13.6 million of distributions to Non-Controlling Interests in the consolidated entities and $21.3 million and $50.4 million of distributions paid to Class A shareholders and Non-Controlling Interests in the Apollo Operating Group, respectively. Distributions The table below presents the declaration, payment and determination of the amount of quarterly distributions which are at the sole discretion of the Company (in millions, except per share amounts): Distributions Declaration Date May 27, 2010 August 2, 2010 November 1, 2010 January 4, 2011 May 12, 2011 August 9, 2011 November 3, 2011 February 12, 2012 May 8, 2012 August 2, 2012 November 9, 2012 Distributions per Class A Share Amount $ Distributions Payment Date June 15, 2010 August 25, 2010 November 23, 2010 January 14, 2011 June 1, 2011 August 29, 2011 December 2, 2011 February 29, 2012 May 30, 2012 August 31 2012 November 30, 2012 Distributions to AGM Class A Shareholders 6.7 $ 6.9 6.9 16.6 26.8 29.5 24.8 58.1 31.6 31.2 52.0 Distributions to Non-Controlling Interest Holders in the Apollo Operating Group 16.8 $ 16.8 16.8 40.8 52.8 57.6 48.0 110.4 60.0 57.6 96.0 Total Distributions from Distribution Equivalents on Apollo Operating Group Participating Securities $ $ 23.5 23.7 23.7 57.4 79.6 87.1 72.8 168.5 91.6 88.8 148.0 1.0 1.4 1.3 3.3 4.7 5.1 4.3 10.3 6.2 5.3 9.4 0.07 0.07 0.07 0.17 0.22 0.24 0.20 0.46 0.25 0.24 0.40 Future Cash Flows Our ability to execute our business strategy, particularly our ability to increase our AUM, depends on our ability to establish new funds and to raise additional investor capital within such funds. Our liquidity will depend on a number of factors, such as our ability to project our financial performance, which is highly dependent on our funds and our ability to manage our projected costs, fund performance, having access to credit facilities, being in compliance with existing credit agreements, as well as industry and market trends. Also during economic downturns the funds we manage might experience cash flow issues or liquidate entirely. In these situations we might be asked to reduce or eliminate the management fee and incentive fees we charge. As was the situation with AIE I, this could adversely impact our cash flow in the future. For example, the investment performance of AIE I was adversely impacted due to market conditions in 2008 and early 2009, and on July 10, 2009, its shareholders subsequently approved a monetization plan. The primary objective of the monetization plan is to maximize shareholder recovery value by (i) opportunistically selling AIE I’s assets over a three-year period from July 2009 to July 2012 and (ii) reducing the overall costs of the fund. The Company waived management fees of $12.6 million for the year ended December 31, 2008 and an additional $2.0 million for the year ended December 31, 2009 to limit the adverse impact that deteriorating market conditions were having on AIE I’s performance. AIE I management fees were terminated on August 23, 2012 as the fund received a majority vote from shareholders to approve the wind down resolution to terminate the management agreement. Management elected not to seek shareholder approval for a one-year extension and currently aims to wind up the company in a quick and cost efficient manner. Management anticipates that all related corporate entities -128- Table of Contents will be dissolved by the end of 2013 and a final distribution will be made to shareholders of remaining cash, if any, in the first quarter of 2013. However, there can be no assurances that this timeframe will be met. On October 31, 2012, AAA and Apollo Alternative Assets entered into an amendment to the services agreement pursuant to which Apollo Alternative Asset manages AAA’s assets in exchange for a quarterly management fee. Pursuant to the amendment, the parties agreed that there will be no management fees payable by AAA with respect to the Excluded Athene Shares. Likewise, affiliates of Apollo Alternative Assets will not be entitled to receive any carried interest in respect of the Excluded Athene Shares. AAA will continue to pay Apollo Alternative Assets the same management fee on AAA’s investment in Athene (other than the Excluded Athene Shares), except that Apollo Alternative Assets agreed that AAA’s obligation to pay the existing management fee shall terminate on December 31, 2014. The amendment provides for Apollo Alternative Assets to receive a formulaic unwind of its management fee in the event that AAA makes a tender offer for all or substantially all of its outstanding units where the consideration is to be paid in shares of Athene Holding Ltd (or if AAA accomplishes a similar transaction using an alternative structure): up to a cap of $30.0 million if the realization event commences in 2013, $25.0 million if the realization event commences in 2014, $20.0 million if the realization event commences in 2015 and zero if the realization event commences in 2016 or thereafter. Apollo Alternative Assets has further agreed that AAA has the option to settle all such management fees payable either in cash or shares of Athene Holding Ltd. valued at the then fair market value (or an equivalent derivative). Carried interest payable to an affiliate of Apollo Alternative Assets will be paid in shares of Athene Holding Ltd. (valued at the then fair market value) if there is a distribution in kind or paid in cash if AAA sells the shares of Athene Holding Ltd. On April 20, 2010, the Company announced that it entered into a strategic relationship agreement with the CalPERS. The strategic relationship agreement provides that Apollo will reduce fees charged to CalPERS on funds it manages, or in the future will manage, solely for CalPERS by $125 million over a five-year period or as close a period as required to provide CalPERS with that benefit. The agreement further provides that Apollo will not use a placement agent in connection with securing any future capital commitments from CalPERS. In March 2012, the Company received a notice of withdrawal from CalPERS, to withdraw a total of $400 million from SOMA. We currently expect the capital to be distributed over the next several years. Through December 31, 2012, the Company has reduced fees charged to CalPERS on the funds it manages by approximately $66.9 million. An increase in the fair value of our funds’ investments, by contrast, could favorably impact our liquidity through higher management fees where the management fees are calculated based on the net asset value, gross assets and adjusted assets. Additionally, higher carried interest income would generally result when investments appreciate over their cost basis which would not have an impact on the Company’s cash flow. The Company granted approximately 5.4 million and 8.1 million RSUs to its employees during the years ended December 31, 2012 and 2011, respectively. The average estimated fair value per share on the grant date was $13.68 and $14.45 with a total fair value of the grants of $73.5 million and $116.6 million at December 31, 2012 and 2011, respectively. This will impact the Company’s compensation expense as these grants are amortized over their vesting term of three to six years. The Company expects to -129- Table of Contents incur annual compensation expenses on all grants, net of forfeitures, of approximately $82.7 million, $38.7 million, $22.7 million, $10.5 million, $4.5 million and $2.7 million during the years ended December 31, 2013, 2014, 2015, 2016, 2017 and 2018, respectively. Although we expect to pay distributions according to our distribution policy, we may not pay distributions according to our policy, or at all, if, among other things, we do not have the cash necessary to pay the intended distributions. To the extent we do not have cash on hand sufficient to pay distributions, we may have to borrow funds to pay distributions, or we may determine not to pay distributions. The declaration, payment and determination of the amount of our quarterly distributions are at the sole discretion of our manager. Carried interest income from our funds can be distributed to us on a current basis, but is subject to repayment by the subsidiaries of the Apollo Operating Group that act as general partner of such funds in the event that certain specified return thresholds are not ultimately achieved. The Managing Partners, Contributing Partners and certain other investment professionals have personally guaranteed, to the extent of their ownership interest, subject to certain limitations, the obligations of these subsidiaries in respect of this general partner obligation. Such guarantees are several and not joint and are limited to a particular Managing Partner’s or Contributing Partner’s distributions. Pursuant to the shareholders agreement dated July 13, 2007 (the “Managing Partners Shareholders Agreement”), we agreed to indemnify each of our Managing Partners and certain Contributing Partners against all amounts that they pay pursuant to any of these personal guarantees in favor of Fund IV, Fund V and Fund VI (including costs and expenses related to investigating the basis for or objecting to any claims made in respect of the guarantees) for all interests that our Managing Partners and Contributing Partners have contributed or sold to the Apollo Operating Group. Accordingly, in the event that our Managing Partners, Contributing Partners and certain investment professionals are required to pay amounts in connection with a general partner obligation for the return of previously distributed carried interest income with respect to Fund IV, Fund V and Fund VI, we will be obligated to reimburse our Managing Partners and certain Contributing Partners for the indemnifiable percentage of amounts that they are required to pay even though we did not receive the distribution to which that general partner obligation related. On February 8, 2013, the Company declared a cash distribution of $1.05 per Class A share, which was paid on February 28, 2013 to holders of record on February 20, 2013. On January 9, 2013, the Company issued 150,000 Class A shares in settlement of vested RSUs. This issuance caused the Company’s ownership interest in the Apollo Operating Group to increase from 35.1% to 35.2%. On January 28, 2013, the Company issued 23,231 Class A shares in settlement of vested RSUs. The issuance had minimal impact on the Company’s ownership in the Apollo Operating Group. On February 11, 2013, the Company issued 1,912,632 Class A shares in settlement of vested RSUs. This issuance caused the Company’s ownership interest in the Apollo Operating Group to increase from 35.2% to 35.5%. Distributions to Managing Partners and Contributing Partners The three Managing Partners who became employees of Apollo on July 13, 2007 are each entitled to a $100,000 base salary. Additionally, our Managing Partners can receive other forms of compensation. Any additional consideration will be paid to them in their proportional ownership interest in Holdings. Additionally, 85% of any tax savings APO Corp. recognizes as a result of the tax receivable agreement will be paid to any exchanging or selling Managing Partners. It should be noted that subsequent to the 2007 Reorganization, the Contributing Partners retained ownership interests in subsidiaries of the Apollo Operating Group. Therefore, any distributions that flow up to management or general partner entities in which the Contributing Partners retained ownership -130- Table of Contents interests are shared pro rata with the Contributing Partners who have a direct interest in such entities prior to flowing up to the Apollo Operating Group. These distributions are considered compensation expense after the 2007 Reorganization. The Contributing Partners are entitled to receive the following: • Profit Sharing —private equity carried interest income, from direct ownership of advisory entities. Any changes in fair value of the underlying fund investments would result in changes to Apollo Global Management, LLC’s profit sharing payable. • Net Management Fee Income —distributable cash determined by the general partner of each management company, from direct ownership of the management company entity. The Contributing Partners will continue to receive net management fee income payments based on the interests they retained in management companies directly. Such payments are treated as compensation expense after the 2007 Reorganization as described above. • • • Any additional consideration will be paid to them based on their proportional ownership interest in Holdings. No base compensation is paid to the Contributing Partners from the Company, but they are entitled to a monthly draw. Additionally, 85% of any tax savings APO Corp. recognizes as a result of the tax receivable agreement will be paid to any exchanging or selling Contributing Partner. Potential Future Costs We may make grants of RSUs or other equity-based awards to employees and independent directors that we appoint in the future. Critical Accounting Policies This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the consolidated financial statements, which have been prepared in accordance with U.S. GAAP. We also report segment information from our consolidated statements of operations and include a supplemental performance measure, ENI, for our private equity, credit and real estate segments. ENI represents segment income (loss) excluding the impact of non-cash charges related to RSUs granted in connection with the 2007 private placement and equity-based compensation expense comprising amortization of AOG Units, income taxes, amortization of intangibles associated with the 2007 Reorganization as well as acquisitions and Non-Controlling Interests excluding the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies. In addition, segment data excludes the assets, liabilities and operating results of the Apollo funds and consolidated VIEs that are included in the consolidated financial statements. ENI is not a U.S. GAAP measure. The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates. A summary of our significant accounting policies is presented in our consolidated financial statements. The following is a summary of our accounting policies that are affected most by judgments, estimates and assumptions. -131- Table of Contents Consolidation Apollo consolidates those entities it controls through a majority voting interest or through other means, including those funds for which the general partner is presumed to have control (e.g., AAA and Apollo Senior Loan Fund). Apollo also consolidates entities that are VIEs for which Apollo is the primary beneficiary. Under the amended consolidation rules, an enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Certain of our subsidiaries hold equity interests in and/or receive fees qualifying as variable interests from the funds that the Company manages. The amended consolidation rules require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would give it a controlling financial interest. When the VIE has qualified for the deferral of the amended consolidation rules in accordance with U.S. GAAP, the analysis is based on previous consolidation rules, which require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would be expected to absorb a majority of the variability of the entity. Under both guidelines, the determination of whether an entity in which Apollo holds a variable interest is a VIE requires judgments which include determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the success of the entity, determining whether two or more parties’ equity interests should be aggregated, and determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity. Under both guidelines, Apollo determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion continuously. The consolidation analysis can generally be performed qualitatively. However, if it is not readily apparent whether Apollo is the primary beneficiary, a quantitative expected losses and expected residual returns calculation will be performed. Investments and redemptions (either by Apollo, affiliates of Apollo or third parties) or amendments to the governing documents of the respective entity may affect an entity’s status as a VIE or the determination of the primary beneficiary. Apollo assesses whether it is the primary beneficiary and will consolidate or deconsolidate the entity accordingly. Performance of that assessment requires the exercise of judgment. Where the variable interests have qualified for the deferral, judgments are made in estimating cash flows in evaluating which member within the equity group absorbs a majority of the expected profits or losses of the VIE. Where the variable interests have not qualified for the deferral, judgments are made in determining whether a member in the equity group has a controlling financial interest including power to direct activities that most significantly impact the VIE’s economic performance and rights to receive benefits or obligations to absorb losses that are potentially significant to the VIE. Under both guidelines, judgment is made in evaluating the nature of the relationships and activities of the parties involved in determining which party within a related-party group is most closely associated with a VIE. The use of these judgments has a material impact to certain components of Apollo’s consolidated financial statements. The only VIE formed prior to 2010, the adoption date of amended consolidation guidance, was consolidated as of the date of transition resulting in recognition of the assets and liabilities of the consolidated VIE at fair value and recognition of a cumulative effect transition adjustment presented as a component of Non-Controlling Interests in Consolidated Entities in the consolidated statement of changes in shareholders’ equity for the year ended December 31, 2010. The transition adjustment is classified as a component of Non-Controlling Interest rather than an adjustment to appropriated partners’ capital because the VIE is funded with equity and 100% of the equity ownership of the VIE is held by unconsolidated Apollo funds and one unaffiliated third party. Changes in the fair value of assets and liabilities and the related interest, dividend and other income for this VIE are recorded within Non-Controlling Interests in -132- Table of Contents consolidated entities in the consolidated statement of financial condition and within net gains from investment activities of consolidated VIEs and net (income) loss attributable to Non-Controlling Interests in the consolidated statement of operations. Certain of the consolidated VIEs were formed to issue collateralized notes in the legal form of debt backed by financial assets. The difference between the fair value of the assets and liabilities of these VIEs is presented within appropriated partners’ capital in the consolidated statements of financial condition as these VIEs are funded solely with debt. Changes in the fair value of the assets and liabilities of these VIEs and the related interest and other income is presented within net gains from investment activities of consolidated variable interest entities and net (income) loss attributable to Non-Controlling Interests in the consolidated statement of operations. Such amounts are recorded within appropriated partners’ capital as, in each case, the VIE’s note holders, not Apollo, will ultimately receive the benefits or absorb the losses associated with the VIE’s assets and liabilities. Assets and liability amounts of the consolidated VIEs are shown in separate sections within the consolidated statement of financial condition as of December 31, 2012 and 2011. Additional disclosures regarding VIEs are set forth in note 5 to our consolidated financial statements. Inter-company transactions and balances, if any, have been eliminated in consolidation. Revenue Recognition Carried Interest Income from Affiliates. We earn carried interest income from our funds as a result of such funds achieving specified performance criteria. Such carried interest income generally is earned based upon a fixed percentage of realized and unrealized gains of various funds after meeting any applicable hurdle rate or threshold minimum. Carried interest income from certain of the funds that we manage is subject to contingent repayment and is generally paid to us as particular investments made by the funds are realized. If, however, upon liquidation of a fund, the aggregate amount paid to us as carried interest exceeds the amount actually due to us based upon the aggregate performance of the fund, the excess (in certain cases net of taxes) is required to be returned by us to that fund. For a majority of our credit funds, once the annual carried interest income has been determined, there generally is no look-back to prior periods for a potential contingent repayment; however, carried interest income on certain other credit funds can be subject to contingent repayment at the end of the life of the fund. We have elected to adopt Method 2 from U.S. GAAP guidance applicable to accounting for management fees based on a formula, and under this method, we accrue carried interest income quarterly based on fair value of the underlying investments and separately assess if contingent repayment is necessary. The determination of carried interest income and contingent repayment considers both the terms of the respective partnership agreements and the current fair value of the underlying investments within the funds. Estimates and assumptions are made when determining the fair value of the underlying investments within the funds and could vary depending on the valuation methodology that is used. Refer to note 18 to our consolidated financial statements for disclosure of the amounts of carried interest (loss) income from affiliates that was generated from realized versus unrealized losses. See “—Investments, at Fair Value” below for further discussion related to significant estimates and assumptions used for determining fair value of the underlying investments in our private equity, credit and real estate funds. Management Fees from Affiliates. The management fees related to our private equity funds are generally based on a fixed percentage of the committed capital or invested capital. The corresponding fee calculations that consider committed capital or invested capital are both objective in nature and therefore do not require the use of significant estimates or assumptions. Management fees related to our credit funds, by contrast, can be based on net asset value, gross assets, adjusted cost of all unrealized portfolio investments, capital commitments, adjusted assets, or capital contributions, all as defined in the respective partnership agreements. The credit management fee calculations that consider net asset value, gross assets, adjusted cost of all unrealized portfolio investments and adjusted assets, are normally based on the terms of the respective partnership agreements and the current fair value of the underlying investments within the funds. Estimates and assumptions are made when determining the fair value of the underlying investments within the funds and could vary depending on the valuation methodology that is used. The management fees related to our real estate funds are generally based on a specific percentage of the funds’ stockholders’ equity or committed or net invested capital or the capital accounts of the limited partners. See -133- Table of Contents “—Investments, at Fair Value” section below for further discussion related to significant estimates and assumptions used for determining fair value of the underlying investments in our credit and private equity funds. Investments, at Fair Value The Company follows U.S. GAAP attributable to fair value measurements, which among other things, requires enhanced disclosures about investments that are measured and reported at fair value. Investments at fair value represent investments of the consolidated funds, investments of the consolidated VIEs and certain financial instruments for which the fair value option was elected. The unrealized gains and losses resulting from changes in the fair value are reflected as net gains (losses) from investment activities and net gains (losses) from investment activities of the consolidated variable interest entities, respectively, in the consolidated statements of operations. In accordance with U.S. GAAP, investments measured and reported at fair value are classified and disclosed in one of the following categories: Level I —Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed derivatives. As required by U.S. GAAP, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and the sale of such position would likely deviate from the quoted price. Level II —Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives where the fair value is based on observable inputs. These investments exhibit higher levels of liquid market observability as compared to Level III investments. The Company subjects broker quotes to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level II investment. These criteria include, but are not limited to, the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services. Level III —Pricing inputs are unobservable for the investment and includes situations where there is little observable market activity for the investment. The inputs into the determination of fair value may require significant management judgment or estimation. Investments that are included in this category generally include general and limited partnership interests in corporate private equity and real estate funds, opportunistic credit funds, distressed debt and non-investment grade residual interests in securitizations and CDOs and CLOs where the fair value is based on observable inputs as well as unobservable inputs. When a security is valued based on broker quotes, the Company subjects those quotes to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level II or Level III investment. Some of the factors we consider include the number of broker quotes we obtain, the quality of the broker quotes, the standard deviations of the observed broker quotes and the corroboration of the broker quotes to independent pricing services. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment where the fair value is based on unobservable inputs. In cases where an investment or financial instrument measured and reported at fair value is transferred into or out of Level III of the fair value hierarchy, the Company accounts for the transfer as of the end of the reporting period. Equity Method Investments . For investments in entities over which the Company exercises significant influence but which do not meet the requirements for consolidation, the Company uses the equity method of accounting, whereby the Company records its share of the underlying income or loss of -134- Table of Contents such entities. Income (loss) from equity method investments is recognized as part of other income (loss) in the consolidated statements of operations and income (loss) on available-for-sale securities (from equity method investments) is recognized as part of other comprehensive income (loss), net of tax in the consolidated statements of comprehensive income (loss). The carrying amounts of equity method investments are reflected in investments in the consolidated statements of financial condition. As the underlying entities that the Company manages and invests in are, for U.S. GAAP purposes, primarily investment companies which reflect their investments at estimated fair value, the carrying value of the Company’s equity method investments in such entities are at fair value. Private Equity Investments. The majority of the illiquid investments within our private equity funds are valued using the market approach, which provides an indication of fair value based on a comparison of the subject Company to comparable publicly traded companies and transactions in the industry. Market Approach. The market approach is driven by current market conditions, including actual trading levels of similar companies and, to the extent available, actual transaction data of similar companies. Judgment is required by management when assessing which companies are similar to the subject company being valued. Consideration may also be given to any of the following factors: (1) the subject company’s historical and projected financial data; (2) valuations given to comparable companies; (3) the size and scope of the subject company’s operations; (4) the subject company’s individual strengths and weaknesses; (5) expectations relating to the market’s receptivity to an offering of the subject company’s securities; (6) applicable restrictions on transfer; (7) industry and market information; (8) general economic and market conditions; and (9) other factors deemed relevant. Market approach valuation models typically employ a multiple that is based on one or more of the factors described above. Sources for gaining additional knowledge related to comparable companies include public filings, annual reports, analyst research reports, and press releases. Once a comparable company set is determined, we review certain aspects of the subject company’s performance and determine how its performance compares to the group and to certain individuals in the group. We compare certain measurements such as EBITDA margins, revenue growth over certain time periods, leverage ratios, and growth opportunities. In addition, we compare our entry multiple and its relation to the comparable set at the time of acquisition to understand its relation to the comparable set on each measurement date. Income Approach. For investments where the market approach does not provide adequate fair value information, we rely on the income approach. The income approach is also used to value investments or validate the market approach within our private equity funds. The income approach provides an indication of fair value based on the present value of cash flows that a business or security is expected to generate in the future. The most widely used methodology used in the income approach is a discounted cash flow method. Inherent in the discounted cash flow method are significant assumptions related to the subject company’s expected results and a calculated discount rate, which is normally based on the subject company’s weighted average cost of capital, or “WACC.” The WACC represents the required rate of return on total capitalization, which is comprised of a required rate of return on equity, plus the current tax-effected rate of return on debt, weighted by the relative percentages of equity and debt that are typical in the industry. The most critical step in determining the appropriate WACC for each subject company is to select companies that are comparable in nature to the subject company. Sources for gaining additional knowledge about the comparable companies include public filings, annual reports, analyst research reports, and press releases. The general formula then used for calculating the WACC considers the after-tax rate of return on debt capital and the rate of return on common equity capital, which further considers the risk-free rate of return, market beta, market risk premium and small stock premium, if applicable. The variables used in the WACC formula are inferred from the comparable market data obtained. The Company evaluates the comparable companies selected and concludes on WACC inputs based on the most comparable company or analyzes the range of data for the investment. The value of liquid investments, where the primary market is an exchange (whether foreign or domestic) is determined using period end market prices. Such prices are generally based on the close price on the date of determination. On a quarterly basis, Apollo utilizes a valuation committee, consisting of members from senior management, to review and approve the valuation results related to our private equity investments. -135- Table of Contents Management also retains independent valuation firms to provide third-party valuation consulting services to Apollo, which consist of certain limited procedures that management identifies and requests them to perform. The limited procedures provided by the independent valuation firms assist management with validating their valuation results or determining fair value. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. Credit Investments. The majority of investments in Apollo’s credit funds are valued based on quoted market prices and valuation models. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value utilizing recognized pricing services, market participants or other sources. The credit funds also enter into foreign currency exchange contracts, total return swap contracts, credit default swap contracts, and other derivative contracts, which may include options, caps, collars and floors. Foreign currency exchange contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. If securities are held at the end of this period, the changes in value are recorded in income as unrealized. Realized gains or losses are recognized when contracts are settled. Total return swap and credit default swap contracts are recorded at fair value as an asset or liability with changes in fair value recorded as unrealized appreciation or depreciation. Realized gains or losses are recognized at the termination of the contract based on the difference between the close-out price of the total return or credit default swap contract and the original contract price. Forward contracts are valued based on market rates obtained from counterparties or prices obtained from recognized financial data service providers. When determining fair value pricing when no observable market value exists, the value attributed to an investment is based on the enterprise value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation approaches used to estimate the fair value of illiquid investments included in Apollo’s credit investments also may include the market approach and the income approach, as previously described above. The valuation approaches used consider, as applicable, market risks, credit risks, counterparty risks and foreign currency risks. On a quarterly basis, Apollo also utilizes a valuation committee, consisting of members from senior management, to review and approve the valuation results related to our credit investments. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis. Real Estate Investments. For the CMBS portfolio of Apollo’s funds, the estimated fair value of the AAA-rated CMBS portfolio is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. Broker quotes are only indicative of fair value and may not necessarily represent what the funds would receive in an actual trade for the applicable instrument. Additionally, the loans held-for- investment are stated at the principal amount outstanding, net of deferred loan fees and costs. For Apollo’s opportunistic and value added real estate funds, valuations of non-marketable underlying investments are determined using methods that include, but are not limited to (i) discounted cash flow estimates or comparable analysis prepared internally, (ii) third party appraisals or valuations by qualified real estate appraisers, and (iii) contractual sales value of investments/properties subject to bona fide purchase contracts. Methods (i) and (ii) also incorporate consideration of the use of the income, cost, or sales comparison approaches of estimating property values. On a quarterly basis, Apollo also utilizes a valuation committee, consisting of members from senior management, to review and approve the valuation results related to our real estate investments. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis. The fair values of the investments in our private equity, credit and real estate funds can be impacted by changes to the assumptions used in the underlying valuation models. For further discussion on the impact of changes to valuation assumptions refer to “Item 7A. Quantitative and Qualitative Disclosures -136- Table of Contents About Market Risk—Sensitivity”. There have been no material changes to the underlying valuation models during the periods that our financial results are presented. Fair Value of Financial Instruments U.S. GAAP guidance requires the disclosure of the estimated fair value of financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Except for the Company’s debt obligation related to the AMH Credit Agreement, Apollo’s financial instruments are recorded at fair value or at amounts whose carrying value approximates fair value. See “—Investments, at Fair Value” above. While Apollo’s valuations of portfolio investments are based on assumptions that Apollo believes are reasonable under the circumstances, the actual realized gains or losses will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may ultimately differ significantly from the assumptions on which the valuations were based. Other financial instruments’ carrying values generally approximate fair value because of the short-term nature of those instruments or variable interest rates related to the borrowings. As disclosed in note 12, the Company’s long term debt obligation related to the AMH Credit Agreement is believed to have an estimated fair value of approximately $795.6 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities as of December 31, 2012. However, the carrying value that is recorded on the consolidated statement of financial condition is the amount for which we expect to settle the long term debt obligation. The Company has determined that the long term debt obligation related to the AMH Credit Agreement would be categorized as a Level III liability in the fair-value hierarchy. Valuation of Financial Instruments Held by Consolidated VIEs The consolidated VIEs hold investments that are traded over-the-counter. Investments in securities that are traded on a securities exchange or comparable over-the-counter quotation systems are valued based on the last reported sale price at that date. If no sales of such investments are reported on such date, and in the case of over-the-counter securities or other investments for which the last sale date is not available, valuations are based on independent market quotations obtained from market participants, recognized pricing services or other sources deemed relevant, and the prices are based on the average of the “bid” and “ask” prices, or at ascertainable prices at the close of business on such day. Market quotations are generally based on valuation pricing models or market transactions of similar securities adjusted for security-specific factors such as relative capital structure priority and interest and yield risks, among other factors. When market quotations are not available, a model based approach is used to determine fair value. The consolidated VIEs also have debt obligations that are recorded at fair value. The primary valuation methodology used to determine fair value for debt obligation is market quotation. Prices are based on the average of the “bid” and “ask” prices. In the event that market quotations are not available, a model based approach is used. The valuation approach used to estimate the fair values of debt obligations for which market quotations are not available is the discounted cash flow method, which includes consideration of the cash flows of the debt obligation based on projected quarterly interest payments and quarterly amortization. Debt obligations are discounted based on the appropriate yield curve given the loan’s respective maturity and credit rating. Management uses its discretion and judgment in considering and appraising relevant factors for determining the valuations of its debt obligations. Fair Value Option. Apollo has elected the fair value option for the assets and liabilities of the consolidated VIEs. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. Apollo has applied the fair value option for certain corporate loans, other investments and debt obligations held by these entities that otherwise would not have been carried at fair value. For the convertible notes issued by HFA, Apollo has elected to separately present interest income from other changes in the fair value of the convertible notes within the consolidated statement of operations. Refer to note 5 to our consolidated financial statements for further disclosure on financial instruments of the consolidated VIEs for which the fair value option has been elected. -137- Table of Contents Goodwill and Intangible Assets — Goodwill and indefinite-life intangible assets must be reviewed annually for impairment or more frequently if circumstances indicate impairment may have occurred. Identifiable finite-life intangible assets, by contrast, are amortized over their estimated useful lives, which are periodically re-evaluated for impairment or when circumstances indicate an impairment may have occurred. Apollo amortizes its identifiable finite-life intangible assets using a method of amortization reflecting the pattern in which the economic benefits of the finite-life intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, Apollo uses the straight-line method of amortization. At June 30, 2012, the Company performed its annual impairment testing and determined there was no impairment of goodwill or indefinite life intangible assets at such time. Compensation and Benefits Compensation and benefits include salaries, bonuses and benefits, profit sharing expense, incentive fee compensation, and equity-based compensation. Salaries, Bonus and Benefits. Salaries, bonus and benefits includes base salaries, discretionary and non-discretionary bonuses, severance and employee benefits. Bonuses are accrued over the service period. From time to time, the Company may assign profits interests received in lieu of management fees to certain investment professionals. Such assignments of profits interests are treated as compensation and benefits when assigned. The Company sponsors a 401(k) Savings Plan whereby U.S.-based employees are entitled to participate in the plan based upon satisfying certain eligibility requirements. The Company may provide discretionary contributions from time to time. No contributions relating to this plan were made by the Company for the years ended December 31, 2012, 2011 and 2010, respectively. Profit Sharing Expense. Profit sharing expense is primarily a result of agreements with our Contributing Partners and employees to compensate them based on the ownership interest they have in the general partners of the Apollo funds. Therefore, movements in the fair value of the underlying investments in the funds we manage and advise affect the profit sharing expense. As of December 31, 2012, our total private equity investments were approximately $25.9 billion. The Contributing Partners and employees are allocated approximately 30% to 50% of the total carried interest income which is driven primarily by changes in fair value of the underlying fund’s investments and is treated as compensation expense. Additionally, profit sharing expenses paid may be subject to clawback from employees, former employees and Contributing Partners. Changes in the fair value of the contingent obligations that were recognized in connection with certain Apollo acquisitions will be reflected in the Company’s consolidated settlement of operations as profit sharing expense. Profit sharing expense also includes expense resulting from profits interests issued to certain employees who are entitled to a share in earnings of and any appreciation of the value in a subsidiary of the Company during the term of their employment. Profit sharing expense related to these profits interests is recognized ratably over the requisite service period and thereafter will be recognized at the time the distributions are determined. In June 2011, the Company adopted a performance based incentive arrangement for certain Apollo partners and employees designed to more closely align compensation on an annual basis with the overall realized performance of the Company. This arrangement, which we refer to herein as the Incentive Pool, enables certain partners and employees to earn discretionary compensation based on carried interest realizations earned by the Company in a given year, which amounts are reflected in profit sharing expense in the accompanying consolidated financial statements. Incentive Fee Compensation. Certain employees are entitled to receive a discretionary portion of incentive fee income from certain of our credit funds, based on performance for the year. Incentive fee compensation expense is recognized on accrual basis as the related carried interest income is earned. -138- Table of Contents Incentive fee compensation expense may be subject to reversal during the interim period where there is a decline in the related carried interest income; however it is not subject to reversal once the carried interest income crystallizes. Equity-Based Compensation. Equity-based compensation is accounted for in accordance with U.S. GAAP, which requires that the cost of employee services received in exchange for an award of equity instruments is generally measured based on the grant date fair value of the award. Equity- based awards that do not require future service (i.e., vested awards) are expensed immediately. Equity-based employee awards that require future service are recognized over the relevant service period. Further, as required under U.S. GAAP, the Company estimates forfeitures using industry comparables or historical trends for equity-based awards that are not expected to vest. Apollo’s equity-based compensation awards consist of, or provide rights with respect to, AOG Units, RSUs, share options, AAA RDUs, ARI restricted stock awards, ARI RSUs, and AMTG RSUs. For more information regarding Apollo’s equity-based compensation awards, see note 14 to our consolidated financial statements. The Company’s assumptions made to determine the fair value on grant date and the estimated forfeiture rate are embodied in the calculations of compensation expense. Another significant part of our compensation expense is derived from amortization of the AOG Units subject to forfeiture by our Managing Partners and Contributing Partners. The estimated fair value was determined and recognized over the forfeiture period on a straight-line basis. We have estimated a 0% and 3% forfeiture rate for our Managing Partners and Contributing Partners, respectively, based on the Company’s historical attrition rate for this level of staff as well as industry comparable rates. If either the Managing Partners or Contributing Partners are no longer associated with Apollo or if there is no turnover, we will revise our estimated compensation expense to the actual amount of expense based on the units vested at the balance sheet date in accordance with U.S. GAAP. Additionally, the value of the AOG Units have been reduced to reflect the transfer restrictions imposed on units issued to the Managing Partners and Contributing Partners as well as the lack of rights to participate in future Apollo Global Management, LLC equity offerings. These awards have the following characteristics: • Awards granted to the Managing Partners (i) are not permitted to be sold to any parties outside of the Apollo Global Management, LLC control group and transfer restrictions lapse pro rata during the forfeiture period over 60 or 72 months, and (ii) allow the Managing Partners to initiate a change in control. • Awards granted to the Contributing Partners (i) are not permitted to be sold or transferred to any parties except to the Apollo Global Management, LLC control group and (ii) the transfer restriction period lapses over six years (which is longer than the forfeiture period which lapses ratably over 60 months). As noted above, the AOG Units issued to the Managing Partners and Contributing Partners have different restrictions which affect the liquidity of and the discounts applied to each grant. We utilized the Finnerty Model to calculate a discount on the AOG Units granted to the Contributing Partners. The Finnerty Model provides for a valuation discount reflecting the holding period restriction embedded in a restricted security preventing its sale over a certain period of time. Along with the Finnerty Model we applied adjustments to account for the existence of liquidity clauses specific to the AOG Units granted to the Contributing Partners and a minority interest consideration as compared to the units sold in the Strategic Investors Transaction in 2007. The combination of these adjustments yielded a fair value estimate of the AOG Units granted to the Contributing Partners. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a company’s stock price and the length of restriction. The concept underpinning the Finnerty Model is that restricted security cannot be sold over a certain period of time. Further simplified, a restricted share of equity in a company can be viewed as having forfeited a put on the average price of the marketable equity over the restriction period (also known -139- Table of Contents as an “Asian Put Option”). If we price an Asian Put Option and compare this value to that of the assumed fully marketable underlying security, we can effectively estimate the marketability discount. The assumptions utilized in the model were (i) length of holding period, (ii) volatility, (iii) dividend yield and (iv) risk free rate. Our assumptions were as follows: (i) We assumed a maximum two year holding period. (ii) We concluded based on industry peers, that our volatility annualized would be approximately 40%. (iii) We assumed no distributions. (iv) We assumed a 4.88% risk free rate based on U.S. Treasuries with a two year maturity. For the Contributing Partners’ grants, the Finnerty Model calculation, as detailed above, yielded a marketability discount of 25%. This marketability discount, along with adjustments to account for the existence of liquidity clauses and consideration of non-controlling interests as compared to units sold in the Strategic Investors Transaction in 2007, resulted in an overall discount for these grants of 29%. We determined a 14% discount for the grants to the Managing Partners based on the equity value per share of $24. We determined that the value of the grants to the Managing Partners was supported by the 2007 sale of an identical security to Credit Suisse Management, LLC at $24 per share. Based on an equity value per share of $24, the implied discount for the grants to the Managing Partners was 14%. The Contributing Partners yielded a larger overall discount of 29%, as they are unable to cause a change in control of Apollo. This results in a lower fair value estimate, as their units have fewer beneficial features than those of the Managing Partners. Income Taxes The Apollo Operating Group and its subsidiaries generally operate as partnerships for U.S. Federal income tax purposes. As a result, except as described below, the Apollo Operating Group has not been subject to U.S. income taxes. However, these entities in some cases are subject to NYC UBT and non-U.S. entities, in some cases, are subject to non-U.S. corporate income taxes. In addition, APO Corp., a wholly-owned subsidiary of the Company, is subject to U.S. Federal, state and local corporate income tax, and the Company’s provision for income taxes is accounted for in accordance with U.S. GAAP. As significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties, we recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The tax benefit is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If a tax position is not considered more likely than not to be sustained, then no benefits of the position are recognized. The Company’s tax positions are reviewed and evaluated quarterly to determine whether or not we have uncertain tax positions that require financial statement recognition. Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amount of assets and liabilities and their respective tax basis using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. -140- Table of Contents Fair Value Measurements The following table summarizes the valuation of Apollo’s investments in fair value hierarchy levels as of December 31, 2012 and 2011: Assets, at fair value: Investment in AAA Investments Investments held by Apollo Senior Loan Fund Investments in HFA and Other Total Level I Level II Level III Totals December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, 2012 2011 2012 2011 2012 2011 2012 2011 $ $ — $ — — — $ — $ 1,666,448 $ 1,480,152 $ 1,666,448 $ 1,480,152 — $ 24,213 456 — — 47,757 47,757 — $ 27,063 $ 23,757 $ 1,717,349 $ 1,528,365 $ 1,744,412 $ 1,552,122 — $ 27,063 — 23,757 — 590 50,311 27,653 50,311 Liabilities, at fair value: Interest rate swap agreements Total Level I Level II Level III Totals December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, 2012 2011 2012 2011 2012 2011 2012 2011 $ $ — $ — $ — $ — $ — $ — $ 3,843 $ 3,843 $ — $ — $ — $ — $ — $ — $ 3,843 3,843 There was a transfer of investments from Level III into Level II as well as a transfer from Level II into Level III relating to investments held by the Apollo Senior Loan Fund during 2012, as a result of subjecting the broker quotes on these investments to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services. There were no transfers between Level I, II or III during the year ended December 31, 2011 relating to assets and liabilities, at fair value, noted in the tables above, respectively. The following table summarizes the changes in AAA Investments, which is measured at fair value and characterized as a Level III investment: Balance, Beginning of Period Purchases Distributions Change in unrealized gains (losses), net Balance, End of Period -141- For the Year Ended December 31, 2011 $ 1,637,091 432 (33,425 ) (123,946 ) $ 1,480,152 2012 $ 1,480,152 — (101,844 ) 288,140 $ 1,666,448 2010 $ 1,324,939 375 (58,368 ) 370,145 $ 1,637,091 Table of Contents The following table summarizes the changes in the investment in HFA and Other Investments, which are measured at fair value and characterized as Level III investments: Balance, Beginning of Period Acquisitions related to consolidated fund Purchases Deconsolidation Director Fees Expenses incurred Change in unrealized losses Balance, End of Period For the Year Ended December 31, 2012 $ 47,757 (1) 46,148 5,759 (48,037 ) — — (1,316 ) $ 50,311 (1) 2011 $ — — 57,509 — (1,802 ) (2,069 ) (5,881 ) $ 47,757 (1) During the third quarter of 2012, the Company deconsolidated GSS Holding (Cayman), L.P., which was consolidated by the Company during the second quarter of 2012. The change in unrealized losses, net has been recorded within the caption “Net gains (losses) from investment activities” in the consolidated statements of operations. The following table summarizes the changes in the Apollo Senior Loan Fund, which is measured at fair value and characterized as a Level III investment for the years ended December 31, 2012 and 2011: Balance, Beginning of Period Acquisition Purchases of investments Sale of investments Realized gains Change in unrealized gains Transfers out of Level III Transfers into Level III Balance, End of Period For the Year Ended December 31, 2012 $ 456 — 496 (1,291 ) 20 8 (935 ) 1,836 $ 590 2011 $ — 456 — — — — — — $ 456 The following table summarizes a look-through of the Company’s Level III investments by valuation methodology of the underlying securities held by AAA Investments as of December 31, 2012 and 2011: Approximate values based on net asset value of the underlying funds, which are based on the funds underlying investments that are valued using the following: Discounted cash flow models Comparable company and industry multiples Listed quotes Broker quotes Other net liabilities (1) Total Investments Other net assets (liabilities) (2) Total Net Assets Private Equity December 31, 2012 % of Investment December 31, 2011 % of Investment of AAA of AAA 98.6 % — 1.4 — — 100.0 % $ 1,581,975 — 22,029 — — 1,604,004 62,444 $ 1,666,448 $ 643,031 749,374 139,833 179,621 (33,330 ) 1,678,529 (198,377 ) $ 1,480,152 38.4 % 44.6 8.3 10.7 (2.0 ) 100.0 % (1) Balances include other assets and liabilities of certain funds in which AAA Investments has invested. Other assets and liabilities at the fund level primarily include cash and cash equivalents, broker receivables and payables and amounts due to and from affiliates. Carrying values approximate fair value for other assets and liabilities, and accordingly, extended valuation procedures are not required. (2) Balances include other assets, liabilities and general partner interests of AAA Investments. Balance at December 31, 2012 is primarily comprised of $113.3 million in notes receivable from affiliate. Balance at December 31, 2011 was primarily -142- Table of Contents comprised of $402.5 million in long-term debt offset by cash and cash equivalents. Carrying values approximate fair value for other assets and liabilities (except for debt), and, accordingly, extended valuation procedures are not required. Fair Value Measurements The following table summarizes the valuation of Apollo’s consolidated VIEs in fair value hierarchy levels as of December 31, 2012 and 2011: Investments, at fair value (1) $ 168 $ — $ 11,045,902 $ 3,055,357 $ 1,643,465 $ 246,609 $ 12,689,535 $ 3,301,966 Level I Level II Level III Totals December 31, December 31, December 31, December 31, December 31, December 31, 2012 2011 December 31, 2012 2011 2012 2011 December 31, 2012 2011 Liabilities, at fair value Level I Level II Level III Totals December 31, December 31, December 31, December 31, December 31, December 31, 2012 2011 2012 2011 December 31, 2012 2011 December 31, 2012 2011 $ — $ — $ — $ — $ 11,834,955 $ 3,189,837 $ 11,834,955 $ 3,189,837 (1) During the first quarter of 2011, one of the consolidated VIEs sold all of its investments. The consolidated VIE had a net investment gain of $16.0 million relating to the sale for the year ended December 31, 2011, which is reflected in the net (losses) gains from investment activities of consolidated variable interest entities on the consolidated statement of operations. Level III investments include corporate loan and corporate bond investments held by the consolidated VIEs, while the Level III liabilities consist of notes and loans, the valuations of which are discussed further in note 2 to our consolidated financial statements. All Level II investments were valued using broker quotes. Transfers of investments out of Level III and into Level II or Level I, if any, are accounted for as of the end of the reporting period in which the transfer occurred. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. The following table summarizes the changes in investments of consolidated VIEs, which are measured at fair value and characterized as Level III investments for the years ended December 31, 2012, 2011 and 2010: Balance, Beginning of Period Acquisition of VIEs Transition adjustment relating of consolidation of VIE Deconsolidation of VIE Elimination of investments attributable to consolidation of VIEs Purchases Sale of investments Net realized gains (losses) Changes in net unrealized (losses) gains Transfers out of Level III Transfers into Level III Balance, End of Period Changes in net unrealized gains (losses) included in Net (Losses) Gains from Investment Activities of consolidated VIEs related to investments still held at reporting date 2012 $ 246,609 1,706,145 — — (69,437 ) 1,236,232 (1,561,589 ) 21,603 (56,013 ) (712,040 ) 831,955 $ 1,643,465 For the Year Ended December 31, 2011 $ 170,369 335,353 — — — 663,438 (273,719 ) 980 (7,669 ) (802,533 ) 160,390 $ 246,609 2010 $ — — 1,102,114 (20,751 ) — 840,926 (125,638 ) 131 29,981 (1,663,755 ) 7,361 $ 170,369 $ 7,464 $ (7,253 ) $ (3,638 ) Investments were transferred out of Level III into Level II and into Level III out of Level II, respectively, as a result of subjecting the broker quotes on these investments to various criteria which -143- Table of Contents include the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services. The following table summarizes the changes in liabilities of consolidated VIEs, which are measured at fair value and characterized as Level III liabilities for the years ended December 31, 2012, 2011 and 2010: Balance, Beginning of Period Acquisition of VIEs Transition adjustment relating to consolidation of VIE Additions Repayments Net realized gains on debt Changes in net unrealized losses from debt Deconsolidation of VIE Elimination of debt attributable to consolidated VIEs Balance, End of Period Changes in net unrealized losses (gains) included in Net (Losses) Gains from Investment Activities of consolidated VIEs related to liabilities still held at reporting date 2012 $ 3,189,837 7,317,144 — 1,639,271 (741,834 ) — 497,704 — (67,167 ) $ 11,834,955 For the Year Ended December 31, 2011 $ 1,127,180 2,046,157 — 454,356 (415,869 ) (41,819 ) 19,880 — (48 ) $ 3,189,837 2010 $ — — 706,027 1,050,377 (331,120 ) (21,231 ) 55,040 (329,836 ) (2,077 ) $ 1,127,180 $ 446,649 $ (25,347 ) $ 16,916 Recent Accounting Pronouncements A list of recent accounting pronouncements that are relevant to Apollo and its industry is included in note 2 to our consolidated financial statements. Off-Balance Sheet Arrangements In the normal course of business, we engage in off-balance sheet arrangements, including transactions in derivatives, guarantees, commitments, indemnifications and potential contingent repayment obligations. See note 16 to our consolidated financial statements for a discussion of guarantees and contingent obligations. Contractual Obligations, Commitments and Contingencies As of December 31, 2012, the Company’s material contractual obligations consist of lease obligations, contractual commitments as part of the ongoing operations of the funds and debt obligations. Fixed and determinable payments due in connection with these obligations are as follows: 2013 2014 2015 2016 2017 Thereafter Total (1) Operating lease obligations Other long-term obligations AMH Credit Agreement ( 3 ) CIT secured loan agreements Total Obligations as of December 31, 2012 ( 2 ) (in thousands) $ 36,109 $ 36,853 $ 36,105 $ 35,265 $ 32,680 $ 74,174 $ 251,186 8,368 — 7,418 — 840,207 29,503 9,612 9,612 — $ 82,642 $ 122,010 $ 113,757 $ 60,632 $ 656,158 $ 74,174 $ 1,109,373 250 — 77,402 25,367 — — 700 84,457 — — 623,478 — (1) The Company has entered into sublease agreements and is expected to contractually receive approximately $14.5 million over the remaining periods (2) (3) of 2013 and thereafter. Includes (i) payments on management service agreements related to certain assets and (ii) payments with respect to certain consulting agreements entered into by the Company. Note that a significant portion of these costs are reimbursable by funds. $723.3 million ($995.0 million portion less amount repurchased) of the outstanding AMH loan matures in January 2017 and the remaining $5.0 million portion of the loan matures in April 2014. Amounts represent estimated interest payments until the loan matures using an estimated weighted average annual interest rate of 4.06%. Note: Due to the fact that the timing of certain amounts to be paid cannot be determined or for other reasons discussed below, the following contractual commitments have not been presented in the table above. (i) As noted previously, we have entered into a tax receivable agreement with our Managing Partners and Contributing Partners which requires us to pay to our Managing Partners and Contributing Partners 85% of any tax savings received by APO Corp. from our step-up in tax basis. The tax savings achieved may not ensure that we have sufficient cash available to pay this liability and we might be required to incur additional debt to satisfy this liability. -144- Table of Contents (ii) Debt amounts related to the consolidated VIEs are not presented in the table above as the Company is not a guarantor of these non-recourse liabilities. Commitments Certain of our management companies and general partners are committed to contribute to the funds and affiliates. While a small percentage of these amounts are funded by us, the majority of these amounts have historically been funded by our affiliates, including certain of our employees and certain Apollo funds. The table below presents the commitment and remaining commitment amounts of Apollo and its affiliates, the percentage of total fund commitments of Apollo and its affiliates, the commitment and remaining commitment amounts of Apollo only (excluding affiliates), and the percentage of total fund commitments of Apollo only (excluding affiliates) for each private equity fund, each credit fund and each real estate fund as of December 31, 2012 as follows ($ in millions): Fund Private Equity: Fund VII Fund VI Fund V Fund IV Fund III ANRP AION Credit: (6) (3) (3) EPF I EPF II SOMA COF I COF II ACLF (8) Palmetto AIE II (3) A-A European Senior Debt Fund, L.P. FCI Apollo/Palmetto Loan Portfolio, L.P. Apollo/Palmetto Short-Maturity Loan (9) Portfolio, L.P. (3) AESI AEC Apollo Centre Street Partnership, L.P. Apollo Asia Private Credit Fund, L.P. Apollo SK Strategic Investments, L.P. Stone Tower Structured Credit Recovery Master Fund II, Ltd. Stone Tower Credit Solutions Master Fund Ltd. Real Estate: AGRE U.S. Real Estate Fund CPI Capital Partners North America CPI Capital Partners Europe CPI Capital Partners Asia Pacific London Prime Apartments Guernsey Holdings Limited (Guernsey) Apollo GSS Holding (Cayman), L.P. (10) (3) (10) 2012 CMBS I Fund, L.P 2012 CMBS II Fund, L.P. 2012 CMBS III, Fund, L.P. 2011 A4 Fund, L.P. AGRE CMBS Fund, L.P. Other: Apollo SPN Investments I, L.P. Total Apollo and Affiliates Commitments % of Total Fund Commitments Apollo Only (Excluding Affiliates) Commitments Apollo Only (Excluding Affiliates) % of Total Fund Commitments Apollo and Affiliates Remaining Commitments Apollo Only (Excluding Affiliates) Remaining Commitments $ (1) 467.2 246.2 100.0 100.0 100.6 426.1 127.4 (1) (4) 354.4 415.2 — (7) 451.1 30.5 23.9 18.0 8.6 50.0 150.7 300.0 (1) 200.0 (1) 4.6 7.3 15.0 157.4 2.0 1.5 1.0 613.2 (1) 7.6 7.2 6.9 18.4 10.6 66.2 66.2 68.3 234.7 418.8 30.9 $ 5,307.7 3.18 % 2.43 2.67 2.78 6.71 32.21 46.56 20.74 11.48 — 30.38 1.93 2.43 1.19 3.15 100.00 26.96 100.00 100.00 0.99 2.50 2.44 91.30 0.99 1.80 0.92 78.09 1.27 0.47 0.53 7.80 14.71 100.00 100.00 100.00 100.00 100.00 1.02 $ 180.0 6.1 0.5 0.2 — 9.9 27.4 23.4 77.1 — 29.7 23.4 23.9 18.0 5.3 — — — — 4.6 3.2 15.0 0.1 2.0 — — 13.2 2.1 — 0.5 0.6 3.2 — — — — — 30.9 500.3 $ 1.23 % 0.06 0.01 0.01 — 0.74 10.00 1.37 2.13 — 2.00 1.48 2.43 1.19 1.94 — — — — 0.99 1.08 2.44 0.06 0.99 — — 1.68 0.35 — 0.04 0.23 4.52 — — — — — 1.02 $ 151.4 (1) $ 24.3 6.3 0.5 15.5 (1) 325.8 127.4 (5) 237.4 93.2 366.7 — (7) 0.8 17.3 7.7 0.8 — 57.0 85.0 (1) — (1) 2.1 4.0 10.1 128.8 1.5 — 0.3 496.6 (1) 0.6 1.2 0.7 11.8 2.5 0.9 8.1 12.8 — — 60.4 0.6 — (2) — (2) — 7.7 27.4 7.5 69.1 — 4.2 0.6 17.3 7.7 0.5 — — — — 2.1 1.7 10.1 0.1 1.5 — — 7.7 0.2 — — 0.4 0.7 — — — — — 30.8 $ 2,229.9 $ 30.8 258.3 (1) As of December 31, 2012, Palmetto had commitments and remaining commitment amounts in Fund VII of $110.0 million and $35.0 million, respectively, ANRP of $150.0 million and $114.5 million, respectively, Apollo/Palmetto Loan Portfolio, L.P. of $300.0 million and $85.0 million, respectively, Apollo/Palmetto Short-Maturity Loan Portfolio, L.P. of $200.0 million and $0.0 million, respectively, and AGRE U.S. Real Estate Fund, L.P. of $300 million and $231.8 million, respectively. (2) As of December 31, 2012, Apollo had an immaterial amount of remaining commitments in Fund IV and Fund V. Accordingly, presentation of such remaining commitments was not deemed meaningful for inclusion in the table above. (3) Apollo’s commitment in these funds is denominated in Euros and translated into U.S. dollars at an exchange rate of €1.00 to $1.32 as of December 31, 2012. (4) Of the total commitment amount in EPF I, AAA Investments, L.P., SOMA and Palmetto have approximately €54.5 million, €75.0 million and € 106.0 million, respectively. (5) Of the total remaining commitment amount in EPF I, AAA Investments, L.P., SOMA and Palmetto have approximately €13.9 million, € 19.1 million and € 27.0 million, respectively. -145- Table of Contents (6) Apollo and affiliated investors must maintain an aggregate capital balance in an amount not less than 1% of total capital account balances of the partnership. As of December 31, 2012, Apollo and affiliated investors’ capital balances exceeded the 1% requirement and therefore they are not required to fund a capital commitment. (7) As of December 31, 2012, SOMA had commitments and remaining commitment amounts in COF I of $250.0 million and $202.0 million, respectively. (8) As of December 31, 2012, the general partner of ACLF Co-Invest, a co-investment vehicle that invests alongside ACLF, had committed an immaterial amount to ACLF Co-Invest. Accordingly, presentation of such commitment was not deemed meaningful for inclusion in the table above. (9) As of December 31, 2012, commitments in Palmetto also included commitments related to Apollo Palmetto Athene Partnership, L.P. (10) Apollo’s commitment in these investments is denominated in pound sterling and translated into U.S. dollars at an exchange rate of ₤1.00 to $1.62 as of December 31, 2012. As a limited partner, the general partner and manager of the Apollo private equity, credit and real estate funds, Apollo has unfunded capital commitments at December 31, 2012 and December 31, 2011 of $258.3 million and $137.9 million, respectively. Apollo has an ongoing obligation to acquire additional common units of AAA in an amount equal to 25% of the aggregate after-tax cash distributions, if any, that are made to its affiliates pursuant to the carried interest distribution rights that are applicable to investments made through AAA Investments. On December 21, 2012, the Company agreed to provide up to $100 million of capital support to Athene to the extent such support is necessary in connection with Athene’s pending acquisition of Aviva plc’s annuity and life insurance operations in the United States. The AMH Credit Agreement, which provides for a variable-rate term loan, will have future impacts on our cash uses. Borrowings under the AMH Credit Agreement originally accrued interest at a rate of (i) LIBOR loans (LIBOR plus 1.25%), or (ii) base rate loans (base rate plus 0.50%). The Company had hedged $167 million of the variable-rate loan with fixed rate swaps to minimize our interest rate risk as of December 31, 2011 which expired in May 2012. The loan originally had a maturity date of April 2014. On December 20, 2010, Apollo amended the AMH Credit Agreement to extend the maturity date of $995.0 million (including the $90.9 million of fair value debt repurchased by the Company) of the term loan from April 20, 2014 to January 3, 2017 and modified certain other terms of the AMH Credit Agreement. Pursuant to this amendment, AMH or an affiliate was required to purchase from each lender that elected to extend the maturity date of its term loan a portion of such extended term loan equal to 20% thereof. In addition, AMH or an affiliate is required to repurchase at least $50.0 million aggregate principal amount of the term loan by December 31, 2014 and at least $100.0 million aggregate principal amount of the term loan (inclusive of the previously purchased $50.0 million) by December 31, 2015 at a price equal to par plus accrued interest. The sweep leverage ratio was also extended to end at the new loan term maturity date. The interest rate for the highest applicable margin for the loan portion extended changed to LIBOR plus 4.25% and ABR plus 3.25%. On December 20, 2010, an affiliate of AMH that is a guarantor under the AMH Credit Agreement repurchased approximately $180.8 million of the term loan in connection with the extension of the maturity date of such loan and thus the AMH Credit Agreement (excluding the portions held by AMH affiliates) had a remaining balance of $728.3 million. The Company determined that the amendments to the AMH Credit Agreement resulted in a debt extinguishment which did not result in any gain or loss. The interest rate on the $723.3 million, net ($995.0 million portion less amount repurchased by the Company) of the loan at December 31, 2012 was 4.07% and the interest rate on the remaining $5.0 million portion of the loan at December 31, 2012 was 1.32%. The estimated fair value of the Company’s long-term debt obligation related to the AMH Credit Agreement is believed to be approximately $795.6 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities as of December 31, 2012. The $728.3 million carrying value of debt that is recorded on the consolidated statement of financial condition at December 31, 2012 is the amount for which the Company expects to settle the AMH Credit Agreement. During the second quarter of 2008, the Company entered into four secured loan agreements totaling $26.9 million with CIT Group/Equipment Financing Inc. (“CIT”) to finance the purchase of certain -146- Table of Contents fixed assets. The loans bear interest at LIBOR plus 318 basis points per annum with interest and principal to be repaid monthly and a balloon payment of the remaining principal totaling $9.4 million due at the end of the terms in April 2013. At December 31, 2012, the interest rate was 3.40%. On April 28, 2011, the Company sold its ownership interest in certain assets which served as collateral to the CIT secured loan agreements for $11.3 million with $11.1 million of the proceeds going to CIT directly. As a result of the sale and an additional payment made by the Company of $1.1 million, the Company satisfied the loan associated with the related asset of $12.2 million on April 28, 2011. As of December 31, 2012, the carrying value of the remaining CIT secured loan was $9.5 million. On June 30, 2008, the Company entered into a credit agreement with Fund VI, pursuant to which Fund VI advanced $18.9 million of carried interest income to the limited partners of Apollo Advisors VI, L.P., and who are also employees of the Company. The loan obligation accrues interest at an annual fixed rate of 3.45% and terminates on the earlier of June 30, 2017 or the termination of Fund VI. In March 2011, a right of offset for the indemnified portion of the loan obligation was established between the Company and Fund VI, and therefore the loan was reduced in the amount of $10.9 million, which was offset in carried interest receivable on the consolidated statements of financial condition. During the year ended December 31, 2011, there was a $0.9 million interest paid and $0.3 million accrued interest on the outstanding loan obligation. At December 31, 2011, the total outstanding loan aggregated $9.0 million, including accrued interest of $1.0 million, which approximated fair value, of which approximately $6.5 million was not subject to the indemnity discussed above and is a receivable from the Contributing Partners and certain employees. During the year ended December 31, 2012, there was no interest paid and $1.3 million accrued interest on the outstanding loan obligation. As of December 31, 2012, the total outstanding loan aggregated $9.3 million, including accrued interest of $1.3 million which approximated fair value, of which approximately $6.7 million was not subject to the indemnity discussed above and is a receivable from the Contributing Partners and certain employees. In accordance with the Managing Partners Shareholders Agreement and the above credit agreement with Fund VI, we have indemnified the Managing Partners and certain Contributing Partners (at varying percentages) for any carried interest income distributed from Fund IV, Fund V and Fund VI that is subject to contingent repayment by the general partner. As of the years ended December 31, 2012 and 2011, the Company had not recorded an obligation for any previously made distributions. -147- Table of Contents Contingent Obligations — Carried interest income in private equity and certain credit and real estate funds is subject to reversal in the event of future losses to the extent of the cumulative carried interest recognized in income to date. If all of the existing investments became worthless, the amount of cumulative revenues that has been recognized by Apollo through December 31, 2012 and that would be reversed approximates $3.2 billion. Management views the possibility of all of the investments becoming worthless as remote. Carried interest income is affected by changes in the fair values of the underlying investments in the funds that Apollo manages. Valuations, on an unrealized basis, can be significantly affected by a variety of external factors including, but not limited to, bond yields and industry trading multiples. Movements in these items can affect valuations quarter to quarter even if the underlying business fundamentals remain stable. The table below indicates the potential future reversal of carried interest income: Private Equity Funds: Fund VII Fund VI Fund V Fund IV Other (AAA, Stanhope Life, L.P. “Stanhope”) Total Private Equity Funds Credit Funds (1 ) : U.S. Performing Credit Opportunistic Credit Structured Credit European Credit NPLs Total Credit Funds Real Estate Funds : CPI Other Total Real Estate Funds Total (1) Reclassified to conform to current presentation. December 31, 2012 $ $ $ $ 1,440,907 567,106 213,739 19,739 93,635 2,335,126 656,518 27,222 30,863 47,206 102,101 863,910 10,406 10,406 3,209,442 Additionally, at the end of the life of certain funds that the Company manages, there could be a payment due to a fund by the Company if the Company as general partner has received more carried interest income than was ultimately earned. The general partner obligation amount, if any, will depend on final realized values of investments at the end of the life of each fund. As discussed in note 15 to our consolidated financial statements, the Company has recorded a general partner obligation to return previously distributed carried interest income of $19.3 million and $0.3 million relating to SOMA and APC, respectively, as of December 31, 2012. As of December 31, 2012, the general partner obligation for Fund VI was reversed and there was no liability as discussed in note 15 to our consolidated financial statements. Certain funds may not generate carried interest income as a result of unrealized and realized losses that are recognized in the current and prior reporting period. In certain cases, carried interest income will not be generated until additional unrealized and realized gains occur. Any appreciation would first cover the deductions for invested capital, unreturned organizational expenses, operating expenses, management fees and priority returns based on the terms of the respective fund agreements. One of the Company’s subsidiaries, Apollo Global Securities, provides underwriting commitments in connection with security offerings to the portfolio companies of the funds we manage. As of December 31, 2012, there were no underwriting commitments outstanding related to such offerings. Contingent Consideration In connection with the Stone Tower acquisition, the Company agreed to pay the former owners of Stone Tower a specified percentage of any future realized carried interest income earned from certain of the Stone Tower funds, CLOs, and strategic investment accounts. This contingent consideration liability had an -148- Table of Contents acquisition date fair value of approximately $117.7 million, which was determined based on the present value of estimated future carried interest payments, and is recorded in profit sharing payable in the consolidated statements of financial condition. The fair value of the contingent obligation was $126.9 million as of December 31, 2012. Refer to note 3 to our consolidated financial statements for additional details related to the Stone Tower acquisition. In connection with the Gulf Stream acquisition, as discussed in note 3 to our consolidated financial statements, the Company will also make payments to the former owners of Gulf Stream under a contingent consideration obligation which requires the Company to transfer cash to the former owners of Gulf Stream based on a specified percentage of carried interest income. The contingent liability had a fair value of approximately $14.1 million as of December 31, 2012, which is recorded in profit sharing payable in the consolidated statements of financial condition. The contingent liability had a fair value of approximately $4.7 million as of December 31, 2011, which is recorded in due to affiliates in the consolidated statements of financial condition. In connection with the CPI acquisition, the consideration transferred in the acquisition was a contingent consideration in the form of a liability incurred by Apollo to CPI. The liability is an obligation of Apollo to transfer cash to CPI based on a specified percentage of future earnings. The estimated fair value of the contingent liability was $1.2 million as of December 31, 2012 and is recorded in due to affiliates in the consolidated statements of financial condition. The contingent consideration obligations will be remeasured to fair value at each reporting period until the obligations are satisfied. The changes in the fair value of the contingent consideration obligations will be reflected in profit sharing expense in the consolidated statements of operations. During the one year measurement period, any changes resulting from facts and circumstances that existed as of the acquisition date will be reflected as a retrospective adjustment to the bargain purchase gain and the respective asset acquired or liability assumed. The Company has determined that the contingent consideration obligations are categorized as a Level III liability in the fair value hierarchy as the pricing inputs into the determination of fair value requires significant management judgment and estimation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our predominant exposure to market risk is related to our role as investment manager and general partner for our funds and the sensitivity to movements in the fair value of their investments and resulting impact on carried interest income and management fee revenues. Our direct investments in the funds also expose us to market risk whereby movements in the fair values of the underlying investments will increase or decrease both net gains (losses) from investment activities and income (loss) from equity method investments. For a discussion of the impact of market risk factors on our financial instruments refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Investments, at Fair Value.” The fair value of our financial assets and liabilities of our funds may fluctuate in response to changes in the value of investments, foreign exchange, commodities and interest rates. The net effect of these fair value changes impacts the gains and losses from investments in our consolidated statements of operations. However, the majority of these fair value changes are absorbed by the Non-Controlling Interests. The Company is subject to a concentration risk related to the investors in its funds. Although there are more than approximately 1,000 limited partner investors in Apollo’s active private equity, credit and real estate funds, no individual investor accounts for more than 10% of the total committed capital to Apollo’s active funds. Risks are analyzed across funds from the “bottom up” and from the “top down” with a particular focus on asymmetric risk. We gather and analyze data, monitor investments and markets in detail, and constantly strive to better quantify, qualify and circumscribe relevant risks. -149- Table of Contents Each segment runs its own investment and risk management process subject to our overall risk tolerance and philosophy: • The investment process of our private equity funds involves a detailed analysis of potential acquisitions, and investment management teams assigned to monitor the strategic development, financing and capital deployment decisions of each portfolio investment. • Our credit funds continuously monitor a variety of markets for attractive trading opportunities, applying a number of traditional and customized risk management metrics to analyze risk related to specific assets or portfolios, as well as, fund-wide risks. Impact on Management Fees —Our management fees are based on one of the following: • • • • capital commitments to an Apollo fund; capital invested in an Apollo fund; or the gross, net or adjusted asset value of an Apollo fund, as defined. otherwise defined in the respective agreements. Management fees could be impacted by changes in market risk factors and management could consider an investment permanently impaired as a result of (i) such market risk factors cause changes in invested capital or in market values to below cost, in the case of our private equity funds and certain credit funds, or (ii) such market risk factors causing changes in gross or net asset value, for the credit funds. The proportion of our management fees that are based on NAV is dependent on the number and types of our funds in existence and the current stage of each fund’s life cycle. Impact on Advisory and Transaction Fees —We earn transaction fees relating to the negotiation of private equity, credit and real estate transactions and may obtain reimbursement for certain out-of-pocket expenses incurred. Subsequently, on a quarterly or annual basis, ongoing advisory fees, and additional transaction fees in connection with additional purchases or follow-on transactions, may be earned. Management Fee Offsets and any broken deal costs are reflected as a reduction to advisory and transaction fees from affiliates. Advisory and transaction fees will be impacted by changes in market risk factors to the extent that they limit our opportunities to engage in private equity, credit and real estate transactions or impair our ability to consummate such transactions. The impact of changes in market risk factors on advisory and transaction fees is not readily predicted or estimated. Impact on Carried Interest Income —We earn carried interest income from our funds as a result of such funds achieving specified performance criteria. Our carried interest income will be impacted by changes in market risk factors. However, several major factors will influence the degree of impact: • • • • the performance criteria for each individual fund in relation to how that fund’s results of operations are impacted by changes in market risk factors; whether such performance criteria are annual or over the life of the fund; to the extent applicable, the previous performance of each fund in relation to its performance criteria; and whether each funds’ carried interest income is subject to contingent repayment. As a result, the impact of changes in market risk factors on carried interest income will vary widely from fund to fund. The impact is heavily dependent on the prior and future performance of each fund, and therefore is not readily predicted or estimated. -150- Table of Contents Market Risk —We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues and expenses will be adversely affected by changes in market conditions. Market risk is inherent in each of our investments and activities, including equity investments, loans, short-term borrowings, long-term debt, hedging instruments, credit default swaps, and derivatives. Just a few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity prices, changes in the implied volatility of interest rates and price deterioration. For example, subsequent to the second quarter of 2007, debt credit around the world began to experience significant dislocation, severely limiting the availability of new credit to facilitate new traditional buyouts, and the markets remain volatile. Volatility in debt and equity markets can impact our pace of capital deployment, the timing of receipt of transaction fee revenues, and the timing of realizations. These market conditions could have an impact on the value of investments and our rates of return. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse affects on our results from operations and our overall financial condition. We monitor our market risk using certain strategies and methodologies which management evaluates periodically for appropriateness. We intend to continue to monitor this risk going forward and continue to monitor our exposure to all market factors. Interest Rate Risk— Interest rate risk represents exposure we have to instruments whose values vary with the change in interest rates. These instruments include, but are not limited to, loans, borrowings and derivative instruments. We may seek to mitigate risks associated with the exposures by taking offsetting positions in derivative contracts. Hedging instruments allow us to seek to mitigate risks by reducing the effect of movements in the level of interest rates, changes in the shape of the yield curve, as well as, changes in interest rate volatility. Hedging instruments used to mitigate these risks may include related derivatives such as options, futures and swaps. Credit Risk— Certain of our funds are subject to certain inherent risks through their investments. Certain of our entities invest substantially all of their excess cash in open-end money market funds and money market demand accounts, which are included in cash and cash equivalents. The money market funds invest primarily in government securities and other short-term, highly liquid instruments with a low risk of loss. We continually monitor the funds’ performance in order to manage any risk associated with these investments. Certain of our entities hold derivatives instruments that contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. We seek to minimize our risk exposure by limiting the counterparties with which we enter into contracts to banks and investment banks who meet established credit and capital guidelines. We do not expect any counterparty to default on its obligations and therefore do not expect to incur any loss due to counterparty default. Foreign Exchange Risk— Foreign exchange risk represents exposures we have to changes in the values of current holdings and future cash flows denominated in other currencies and investments in non-U.S. companies. The types of investments exposed to this risk include investments in foreign subsidiaries, foreign currency-denominated loans, foreign currency-denominated transactions, and various foreign exchange derivative instruments whose values fluctuate with changes in currency exchange rates or foreign interest rates. Instruments used to mitigate this risk are foreign exchange options, currency swaps, futures and forwards. These instruments may be used to help insulate us against losses that may arise due to volatile movements in foreign exchange rates and/or interest rates. Non-U.S. Operations— We conduct business throughout the world and are continuing to expand into foreign markets. We currently have offices outside the U.S. in London, Frankfurt, Luxembourg, Mumbai, Hong Kong and Singapore, and have been strategically growing our international presence. Our investments and revenues are primarily derived from our U.S. operations. With respect to our non-U.S. operations, we are subject to risk of loss from currency fluctuations, social instability, changes in governmental policies or policies of central banks, expropriation, nationalization, unfavorable political and diplomatic developments and changes in legislation relating to non-U.S. ownership. We also invest in the securities of corporations which are located in non-U.S. jurisdictions. As we continue to expand globally, we will continue to focus on monitoring and managing these risk factors as they relate to specific non-U.S. investments. -151- Table of Contents Sensitivity Our assets and unrealized gains, and our related equity and net income are sensitive to changes in the valuations of our funds’ underlying investments and could vary materially as a result of changes in our valuation assumptions and estimates. See “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Critical Accounting Policies—Investments, at Fair Value” for details related to the valuation methods that are used and the key assumptions and estimates employed by such methods. We also quantify the Level III investments that are included on our consolidated statements of financial condition by valuation methodology in “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Fair Value Measurements.” We employ a variety of valuation methods. Furthermore, the investments that we manage but are not on our consolidated statements of financial condition, and therefore impact carried interest, also employ a variety of valuation methods of which no single methodology is used more than any other. A 10% change in any single key assumption or estimate that is employed by any of the valuation methodologies that we use will generally not have a material impact on our financial results. Changes in fair value will have the following impacts before a reduction of profit sharing expense and Non-Controlling Interests in the Apollo Operating Group and on a pre-tax basis on our results of operations for the years ended December 31, 2012 and 2011: • Management fees from the funds in our credit segment are based on the net asset value of the relevant fund, gross assets, capital commitments or invested capital, each as defined in the respective management agreements. Changes in the fair values of the investments in credit funds that earn management fees based on net asset value or gross assets will have a direct impact on the amount of management fees that are earned. Management fees earned from our credit segment on a segment basis that were dependent upon estimated fair value during the years ended December 31, 2012 and 2011 would decrease by approximately $11.9 million and $11.1 million, respectively, if the fair values of the investments held by such funds were 10% lower during the same respective periods. By contrast, a 10% increase in fair value would increase management fees for the years ended December 31, 2012 and 2011 by approximately $9.8 million and $10.8 million, respectively. • Management fees for our private equity funds, excluding AAA, range from 0.65% to 1.50% and are charged on either (a) a fixed percentage of committed capital over a stated investment period or (b) a fixed percentage of invested capital of unrealized portfolio investments. Changes in values of investments could indirectly affect future management fees from private equity funds by, among other things, reducing the funds’ access to capital or liquidity and their ability to currently pay the management fees or if such change resulted in a write-down of investments below their associated invested capital. • Management fees earned from AAA and its affiliates range between 1.0% and 1.25% of AAA adjusted assets, defined as invested capital plus proceeds of any borrowings of AAA Investments, plus its cumulative distributable earnings at the end of each quarterly period (taking into account actual distributions but excluding the management fees relating to the period or any non-cash equity compensation expense), net of any amount AAA pays for the repurchase of limited partner interests, as well as capital invested in Apollo funds and temporary investments and any distributable earnings attributable thereto. Management fees earned from AAA Investments during the years ended December 31, 2012 and 2011 would increase or decrease by approximately $1.5 million and $1.7 million, respectively, if the fair values of the investments held by AAA Investments were 10% higher or lower during the same respective periods. • Carried interest income from most of our credit funds, which are quantified in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Analysis,” are impacted directly by changes in the fair value of their investments. Carried interest income from most of our credit funds generally is earned based on achieving specified performance criteria. We anticipate that a -152- Table of Contents 10% decline in the fair values of investments held by all of the credit funds at December 31, 2012 and 2011 would decrease carried interest income on a segment basis for the years ended December 31, 2012 and 2011 by approximately $289.4 million and $121.4 million, respectively. Additionally, the changes to carried interest income from most of our credit funds assume there is no loss in the fund for the relevant period. If the fund had a loss for the period, no carried interest income would be earned by us. By contrast, a 10% increase in fair value would increase carried interest income on a segment basis for the years ended December 31, 2012 and 2011 by approximately $256.6 million and $115.2 million, respectively. • Carried interest income from private equity funds generally is earned based on achieving specified performance criteria and is impacted by changes in the fair value of their fund investments. We anticipate that a 10% decline in the fair values of investments held by all of the private equity funds at December 31, 2012 and 2011 would decrease carried interest income on a segment basis for the years ended December 31, 2012 and 2011 by $848.4 million and $230.6 million, respectively. The effects on private equity fees and income assume that a decrease in value does not cause a permanent write-down of investments below their associated invested capital. By contrast, a 10% increase in fair value would increase carried interest income on a segment basis for the years ended December 31, 2012 and 2011 by $789.2 million and $231.5 million, respectively. • For select Apollo funds, our share of investment income as a limited partner in such funds is derived from unrealized gains or losses on investments in funds included in the consolidated financial statements. For funds in which we have an interest, but are not included in our consolidated financial statements, our share of investment income is limited to our accrued compensation units and direct investments in the funds, which ranges from 0.001% to 22.207%. A 10% decline in the fair value of investments at December 31, 2012 and 2011 would result in an approximate $35.9 million and $31.1 million decrease in investment income at the consolidated level, respectively. By contrast, a 10% increase in the fair value of investments at December 31, 2012 would result in an approximate $35.9 million increase in investment income at the consolidated level. -153- Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Audited Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Condition as of December 31, 2012 and 2011 Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2012, 2011 and 2010 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010 Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010 Notes to Consolidated Financial Statements -154- Page 155 157 158 159 160 162 165 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Apollo Global Management, LLC New York, New York We have audited the accompanying consolidated statements of financial condition of Apollo Global Management, LLC and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2012. We also have audited the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Apollo Global Management, LLC and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three -155- Table of Contents years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. /s/ Deloitte & Touche LLP New York, New York March 1, 2013 -156- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2012 AND DECEMBER 31, 2011 (dollars in thousands, except share data) Assets: Cash and cash equivalents Cash and cash equivalents held at Consolidated Funds Restricted cash Investments Assets of consolidated variable interest entities: Cash and cash equivalents Investments, at fair value Other assets Carried interest receivable Due from affiliates Fixed assets, net Deferred tax assets Other assets Goodwill Intangible assets, net Total Assets Liabilities and Shareholders’ Equity Liabilities: Accounts payable and accrued expenses Accrued compensation and benefits Deferred revenue Due to affiliates Profit sharing payable Debt Liabilities of consolidated variable interest entities: Debt, at fair value Other liabilities Other liabilities Total Liabilities Commitments and Contingencies (see note 16) Shareholders’ Equity: Apollo Global Management, LLC shareholders’ equity: Class A shares, no par value, unlimited shares authorized, 130,053,993 shares and 123,923,042 shares issued and outstanding at December 31, 2012, and 2011, respectively Class B shares, no par value, unlimited shares authorized, 1 share issued and outstanding at December 31, 2012, and 2011 Additional paid in capital Accumulated deficit Appropriated partners’ capital Accumulated other comprehensive income (loss) Total Apollo Global Management, LLC shareholders’ equity Non-Controlling Interests in consolidated entities Non-Controlling Interests in Apollo Operating Group Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity See accompanying notes to consolidated financial statements. -157- December 31, 2012 December 31, 2011 $ 946,225 $ 738,679 6,052 8,289 1,857,465 1,226 8,359 2,138,096 1,682,696 12,689,535 299,978 1,878,256 173,312 53,452 542,208 36,765 48,894 137,856 173,542 3,301,966 57,855 868,582 176,740 52,683 576,304 26,976 48,894 81,846 $ 20,636,858 $ 7,975,873 $ 38,337 $ 56,125 252,157 477,451 857,724 737,818 33,545 45,933 232,747 578,764 352,896 738,516 11,834,955 634,053 44,855 14,933,475 3,189,837 122,264 33,050 5,327,552 — — — 3,043,334 (2,142,020 ) 1,765,360 144 2,666,818 1,893,212 1,143,353 5,703,383 — 2,939,492 (2,426,197 ) 213,594 (488 ) 726,401 1,444,767 477,153 2,648,321 $ 20,636,858 $ 7,975,873 Table of Contents APOLLO GLOBAL MANAGEMENT, LLC CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (dollars in thousands, except share data) Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income (loss) from affiliates Total Revenues Expenses: Compensation and benefits: Equity-based compensation Salary, bonus and benefits Profit sharing expense Incentive fee compensation Total Compensation and benefits Interest expense Professional fees General, administrative and other Placement fees Occupancy Depreciation and amortization Total Expenses Other Income: Net gains (losses) from investment activities Net (losses) gains from investment activities of consolidated variable interest entities Income from equity method investments Interest income Other income, net Total Other Income Income (loss) before income tax provision Income tax provision Net Income (Loss) Net (income) loss attributable to Non-Controlling Interests Net Income (Loss) Attributable to Apollo Global Management, LLC Distributions Declared per Class A Share Net Income (Loss) Per Class A Share: Net Income (Loss) Per Class A Share – Basic and Diluted Weighted Average Number of Class A Shares – Basic Weighted Average Number of Class A Shares – Diluted 2012 2011 2010 $ 149,544 580,603 2,129,818 2,859,965 $ 81,953 487,559 (397,880 ) 171,632 $ 79,782 431,096 1,599,020 2,109,898 598,654 274,574 871,394 739 1,745,361 37,116 64,682 87,961 22,271 37,218 53,236 2,047,845 1,149,753 251,095 (63,453 ) 3,383 1,340,778 40,850 59,277 75,558 3,911 35,816 26,260 1,582,450 1,118,412 249,571 555,225 20,142 1,943,350 35,436 61,919 65,107 4,258 23,067 24,249 2,157,386 288,244 (129,827 ) 367,871 (71,704 ) 110,173 9,693 1,964,679 2,301,085 3,113,205 (65,410 ) 3,047,795 (2,736,838 ) 310,957 1.35 $ $ 24,201 13,923 4,731 205,520 118,548 (1,292,270 ) (11,929 ) (1,304,199 ) 835,373 (468,826 ) 0.83 $ $ 48,206 69,812 1,528 195,032 682,449 634,961 (91,737 ) 543,224 (448,607 ) 94,617 0.21 $ $ $ 2.06 127,693,489 129,540,377 $ (4.18 ) 116,364,110 116,364,110 $ 0.83 96,964,769 96,964,769 See accompanying notes to consolidated financial statements. -158- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (dollars in thousands, except share data) Net Income (Loss) Other Comprehensive Income, net of tax: Net unrealized gain on interest rate swaps (net of taxes of $410, $855 and $1,449 for Apollo Global Management, LLC and $0 for Non-Controlling Interests in Apollo Operating Group for the years ended December 31, 2012, 2011 and 2010, respectively) Net (loss) income on available-for-sale securities (from equity method investment) Total Other Comprehensive Income, net of tax Comprehensive Income (Loss) Comprehensive (Income) Loss attributable to Non-Controlling Interests Comprehensive Income (Loss) Attributable to Apollo Global Management, LLC 2012 2011 2010 $ 3,047,795 $ (1,304,199 ) $ 543,224 2,653 (11 ) 2,642 3,050,437 (922,172 ) 11,435 343 11,778 555,002 (446,467 ) $ 2,128,265 $ (265,194 ) $ 108,535 6,728 (225 ) 6,503 (1,297,696 ) 1,032,502 See accompanying notes to consolidated financial statements. -159- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (dollars in thousands, except share data) Balance at January 1, 2010 Transition adjustment relating to consolidation of variable interest entity compensation Capital increase related to equity-based Reclassification of equity-based compensation Repurchase of Class A shares Purchase of Class A shares Capital contributions Distributions Distributions related to deliveries of Class A shares for RSUs Non-cash distributions Deconsolidation of fund Net transfers of AAA ownership interest to (from) Non-Controlling Interests in consolidated entities Satisfaction of liability related to AAA RDUs Net income Net income on available-for-sale securities (from equity method investment) Net unrealized gain on interest rate swaps (net of taxes of $1,499 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively) compensation Balance at December 31, 2010 Issuance of Class A shares Dilution impact of issuance of Class A shares Capital increase related to equity-based Distributions Distributions related to deliveries of Class A shares for RSUs Repurchase for net settlement of Class A shares Non-cash distributions Net transfers of AAA ownership interest to (from) Non-Controlling Interests in consolidated entities Satisfaction of liability related to AAA RDUs Net (loss) income Net loss on available-for-sale securities (from equity method investment) Net unrealized gain on interest rate swaps (net of taxes of $855 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively) Balance at December 31, 2011 Apollo Global Management, LLC Shareholders Additional Appropriated Class B Accumulated Accumulated Other Comprehensive Class A Shares 95,624,541 Shares Paid in Capital Deficit Partners’ Capital 1 $ 1,729,593 $ (2,029,541 ) $ (Loss) Income (4,088 ) $ — $ Total Apollo Global Management, LLC Total Shareholders’ (Deficit) Equity Non- Controlling Interests in Consolidated Entities Non- Controlling Interests in Apollo Operating Group (304,036 ) $ 1,283,262 $ 319,884 $ Total Shareholders’ Equity 1,299,110 — — — — — 376,380 (3,505 ) — — (43 ) (7,135 ) — — — — — — — (24,115 ) — — — — — — — — — 2,303,826 — — — — — — — — (2,876 ) (18 ) — — — — — — — — — — — — — — — — — (7,014 ) 7,594 — — — 94,617 — — 11,359 — — — — — 97,921,232 — — — 1 $ 2,078,890 $ (1,937,818 ) $ — 21,500,000 — 382,488 — — 132,709 — — 451,543 — — (115,139 ) 4,631,906 — (130,096 ) — — — 11,680 — — (17,081 ) (2,472 ) — — — — — — 11,359 $ — — — — — — — — — — — — — (6,524 ) 3,845 — — — (468,826 ) — — 202,235 — — — — — — — — — — — — — 343 2,216 (1,529 ) $ — (356 ) — — — — — — — — — 411,885 — 411,885 376,380 (3,505 ) (43 ) — — (24,115 ) (2,876 ) (18 ) — — — — (48,768 ) 187 (166,918 ) 735,698 — — — — (50,400 ) 1,112,078 (3,505 ) (43 ) (48,768 ) 187 (241,433 ) — (590 ) (7,204 ) — — — (2,876 ) (608 ) (7,204 ) (7,014 ) 7,594 105,976 7,014 — 409,356 — — 27,892 — 7,594 543,224 343 — — 343 2,216 9,219 150,902 $ 1,888,224 $ 1,042,293 $ — 382,488 132,353 — — — (127,096 ) 11,435 3,081,419 382,488 5,257 451,543 (115,139 ) — (349,509 ) 696,361 (199,199 ) 1,147,904 (663,847 ) (5,401 ) (2,472 ) — — — (3,176 ) — — — (5,401 ) (2,472 ) (3,176 ) (6,524 ) 3,845 (266,591 ) 6,524 — (97,296 ) — — (940,312 ) — 3,845 (1,304,199 ) — — — — — (225 ) (225 ) — — (225 ) 123,923,042 — — — 1 $ 2,939,492 $ (2,426,197 ) $ — — 213,594 $ 1,622 (488 ) $ 1,622 5,106 726,401 $ 1,444,767 $ 477,153 $ — 6,728 2,648,321 See accompanying notes to consolidated financial statements. 160 Table of Contents APOLLO GLOBAL MANAGEMENT, LLC CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (dollars in thousands, except share data) Apollo Global Management, LLC Shareholders Additional Appropriated Class B Accumulated Accumulated Other Comprehensive Class A Shares 123,923,042 Shares Paid in Capital Deficit Partners’ Capital 1 $ 2,939,492 $ (2,426,197 ) $ 213,594 $ (Loss) Income (488 ) $ Total Apollo Global Management, LLC Total Shareholders’ Equity (Deficit) 726,401 $ Non-Controlling Interests in Consolidated Entities Non-Controlling Interests in Apollo Operating Group 1,444,767 $ 477,153 $ Total Shareholders’ Equity 2,648,321 — — 1,589 — — 282,288 — — — — — (203,997 ) — — — — — — — (264,910 ) 6,130,951 — — — — — 9,090 — — (25,992 ) — (788 ) — — — — — 14,001 — — — — — — — — (919 ) — — 1,790 — — — — — — — — — — — — — — — — — — — 1,589 — — 1,589 282,288 — (468,907 ) (16,902 ) — (788 ) — 551,154 (495,506 ) — (102,072 ) (3,605 ) 313,856 — (335,023 ) 596,144 551,154 (1,299,436 ) — — — (16,902 ) (102,072 ) (4,393 ) — 2,547 — 2,547 14,001 — — 14,001 — — 306,351 (46,148 ) — — 306,351 (46,148 ) (919 ) 1,790 919 — — — — 1,790 — — — — — — — — — Balance at January 1, 2012 Dilution impact of issuance of Class A shares Capital increase related to equity-based compensation Capital contributions Distributions Distributions related to deliveries of Class A shares for RSUs Purchase of AAA shares Non-cash distributions Non-cash contributions to Non- controlling interests acquisition (note 3) Non-controlling interests in Capital increase related to business consolidated entities at acquisition date Deconsolidation Net transfers of AAA ownership interest to (from) Non-Controlling Interests in consolidated entities Satisfaction of liability related to AAA RDUs Net income Net loss on available-for-sale securities (from equity method investment) Net unrealized gain on interest rate — — — 310,957 1,816,676 — 2,127,633 234,805 685,357 3,047,795 — — — — — (11 ) (11 ) — — (11 ) swaps (net of taxes of $410 and $0 for Apollo Global Management, LLC and Non-Controlling Interests in Apollo Operating Group, respectively) Balance at December 31, 2012 130,053,993 — — — 1 $ 3,043,334 $ (2,142,020 ) $ — — 1,765,360 $ 643 144 $ 643 2,666,818 $ — 1,893,212 $ 2,010 1,143,353 $ 2,653 5,703,383 See accompanying notes to consolidated financial statements. 161 Table of Contents APOLLO GLOBAL MANAGEMENT, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (dollars in thousands, except share data) Cash Flows from Operating Activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity-based compensation Depreciation and amortization Amortization of intangible assets Amortization of debt issuance costs Losses from investment in HFA Non-cash interest income Income from equity awards received for directors’ fees Income from equity method investment Waived management fees Non-cash compensation expense related to waived management fees Change in fair value of contingent obligations Deferred taxes, net Gain on business acquisitions and dispositions Loss on fixed assets Changes in assets and liabilities: Carried interest receivable Due from affiliates Other assets Accounts payable and accrued expenses Accrued compensation and benefits Deferred revenue Due to affiliates Profit sharing payable Other liabilities Apollo Funds related: Net realized (gains) losses from investment activities Net unrealized (gains) losses from investment activities Net realized gains on debt Net unrealized losses on debt Distributions from investment activities Cash transferred in from consolidated funds Change in cash held at consolidated variable interest entities Purchases of investments Proceeds from sale of investments and liquidating distributions Change in other assets Change in other liabilities Net Cash Provided by (Used in) Operating Activities Cash Flows from Investing Activities: Purchases of fixed assets Acquisitions (net of cash assumed) (see note 3) Proceeds from disposals of fixed assets Cash received from business acquisition and disposition Purchase of investments in HFA (see note 4) Investment in Apollo Senior Loan Fund (see note 4) Cash contributions to equity method investments Cash distributions from equity method investments Change in restricted cash Net Cash Used in Investing Activities See accompanying notes to consolidated financial statements. -162- 2012 2011 2010 $ 3,047,795 $ (1,304,199 ) $ 543,224 598,654 1,149,753 1,118,412 11,472 12,777 44 — — — (69,812 ) (24,826 ) 24,826 — 71,241 (29,741 ) 6,700 11,132 15,128 511 5,881 (2,486 ) (19 ) (13,923 ) (23,549 ) 23,549 — 10,580 (196,193 ) 570 10,226 43,010 511 1,316 (3,187 ) (2,536 ) (110,173 ) (6,161 ) 6,161 25,787 55,309 (1,951,897 ) 923 (973,578 ) 5,779 (7,901 ) 559 8,007 15,000 (103,773 ) 361,606 (5,052 ) 998,491 (1,383,219 ) (11,066 ) (30,241 ) (7,880 ) (7,019 ) (5,052 ) 3,079 24,931 (6,128 ) (69,949 ) (21,934 ) (33,529 ) 43,767 503,589 (325,229 ) (7,573 ) 5,778 11,313 113,114 (41,819 ) 19,880 30,248 6,052 (17,400 ) (77,408 ) (458,031 ) — 497,704 99,675 — (348,138 ) (4,931 ) (416,584 ) (21,231 ) 55,040 58,368 38,033 (87,556 ) (7,525,473 ) (1,294,477 ) (1,240,842 ) 627,278 7,182,392 1,530,194 (8,086 ) (7,109 ) 107,891 56,526 (218,051 ) 743,821 (71,921 ) (49,634 ) 265,551 (11,259 ) (99,190 ) — — — — (126,917 ) 152,645 (70 ) (21,285 ) (29,632 ) 631 — (52,142 ) (26,000 ) (64,226 ) 64,844 (1,726 ) (84,791 ) $ (129,536 ) $ (5,601 ) (1,354 ) — 21,624 — — (63,459 ) 38,868 255 (9,667 ) $ Table of Contents APOLLO GLOBAL MANAGEMENT, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT’D) YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (dollars in thousands, except share data) Cash Flows from Financing Activities: Issuance of Class A shares Repurchase of Class A shares Principal repayments of debt and repurchase of debt Debt issuance costs Issuance costs Distributions related to deliveries of Class A shares for RSUs Distributions to Non-Controlling Interests in consolidated entities Contributions from Non-Controlling Interests in consolidated entities Distributions paid Distributions paid to Non-Controlling Interests in Apollo Operating Group Apollo Funds related: Issuance of debt Principal repayment of debt Purchase of AAA shares Distributions Paid Distributions paid to Non-Controlling Interests in consolidated variable interest entities Distributions paid to Non-Controlling Interests in consolidated entities Contributions to Non-Controlling Interests in consolidated entities Net Cash Provided by (Used in) Financing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Period Cash and Cash Equivalents, End of Period Supplemental Disclosure of Cash Flow Information: Interest paid Interest paid by consolidated variable interest entities Income taxes paid Supplemental Disclosure of Non-Cash Investing Activities: Non-cash contributions on equity method investments Non-cash distributions from equity method investments Non-cash sale of assets held-for-sale for repayment of CIT loan Non-cash distributions from investing activities Change in accrual for purchase of fixed assets -163- 2012 2011 2010 $ — — $ 383,990 $ (2,472 ) — (43 ) (1,939 ) (182,309 ) (698 ) (3,085 ) — — — (2,876 ) (13,628 ) 187 (21,284 ) (50,400 ) — (1,502 ) (25,992 ) (17,081 ) (8,779 ) (13,440 ) — 4,069 (202,430 ) (102,598 ) (335,023 ) (199,199 ) — — 1,413,334 454,356 1,050,377 (515,897 ) (415,869 ) (331,120 ) (102,072 ) (48,768 ) — (264,910 ) (486,727 ) (308,785 ) (146,688 ) (6,602 ) — 21,960 (251,823 ) 243,761 202,720 362,462 16,043 744,731 382,269 366,226 $ 947,451 $ 744,731 $ 382,269 — (27,284 ) — 547,085 $ 49,590 $ 49,296 $ 116,392 20,892 7,128 10,732 38,317 12,522 13,468 4,866 (2,807 ) 9,847 (703 ) — (11,069 ) 3,176 — 967 (659 ) — — — — (814 ) Table of Contents APOLLO GLOBAL MANAGEMENT, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT’D) YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (dollars in thousands, except share data) Supplemental Disclosure of Non-Cash Financing Activities: Non-cash distributions Declared and unpaid distributions Non-cash distributions to Non-Controlling Interests in consolidated entities Non-cash contributions from Non-Controlling Interests in Apollo Operating Group related to equity-based compensation Non-cash contributions from Non-Controlling Interests in consolidated entities Unrealized gain on interest rate swaps to Non-Controlling Interests in Apollo Operating Group, net of taxes Satisfaction of liability related to AAA RDUs Net transfers of AAA ownership interest to Non-Controlling Interests in consolidated entities Net transfer of AAA ownership interest from AGM Unrealized gain on interest rate swaps Unrealized (loss) gain on available for sale securities (from equity method investment) Capital increases related to equity-based compensation Dilution impact of issuance of Class A shares Dilution impact of issuance of Class A shares on Non-Controlling Interests in Apollo Operating Group Deferred tax asset related to interest rate swaps Reclassification of equity-based compensation Reclass of fixed assets to assets held for sale Tax benefits related to deliveries of Class A shares for RSUs Capital increase related to business acquisition Satisfaction of liability related to repayment on CIT loan Net Assets Transferred from Consolidated Funds: Net Assets Transferred from Consolidated Variable Interest Entities: Cash Investments Other assets Debt Other liabilities Non-Controlling interest in consolidated entities related to acquisition Net Assets of Deconsolidated Variable Interest Entities: Cash Investments Other assets Other liabilities Investments Other assets Debt Other liabilities 2012 2011 2010 $ (788 ) $ (1,567 ) (3,605 ) — $ (12,541 ) (3,176 ) (18 ) (2,831 ) (590 ) 313,856 2,547 696,361 735,698 — — 2,010 1,790 919 (919 ) 1,053 (11 ) 282,288 1,589 5,106 3,845 6,524 (6,524 ) 2,477 (225 ) 9,219 7,594 7,014 (7,014 ) 3,715 343 451,543 376,380 — 132,353 — (410 ) — — (9,090 ) 14,001 — (127,096 ) (855 ) — — (11,680 ) — 11,069 — — — — 6,052 24,213 609 (4,874 ) — (1,499 ) (3,505 ) 11,331 — — — 38,033 — 443 — 68,586 169,937 1,161,016 — 8,805,916 2,195,986 1,102,114 28,789 (7,255,172 ) (2,046,157 ) (706,027 ) (12,991 ) — (560,262 ) 260,203 (31,959 ) — 14,039 See accompanying notes to consolidated financial statements. -164- — — — — — 419,198 — 5,180 — (329,836 ) (87,338 ) — Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) 1. ORGANIZATION AND BASIS OF PRESENTATION Apollo Global Management, LLC and its consolidated subsidiaries (the “Company” or “Apollo”), is a global alternative investment manager whose predecessor was founded in 1990. Its primary business is to raise, invest and manage private equity, credit and real estate funds as well as strategic investment accounts, on behalf of pension, endowment and sovereign wealth funds, as well as other institutional and individual investors. For these investment management services, Apollo receives management fees generally related to the amount of assets managed, transaction and advisory fees for the investments made and carried interest income related to the performance of the respective funds that it manages. Apollo has three primary business segments: • • • Private equity —primarily invests in control equity and related debt instruments, convertible securities and distressed debt investments; Credit —primarily invests in non-control corporate and structured debt instruments; and Real estate —primarily invests in legacy commercial mortgage-backed securities, commercial first mortgage loans, mezzanine investments and other commercial real estate-related debt investments. Additionally, the Company sponsors real estate funds that focus on opportunistic investments in distressed debt and equity recapitalization transactions. During the third quarter of 2012, the Company changed the name of its capital markets business segment to the credit segment. The Company believes this new name provides a more accurate description of the types of assets which are managed within this segment. In addition, this segment name change is consistent with the Company’s management reporting and organizational structure as well as the manner in which resource deployment and compensation decisions are made. Basis of Presentation The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company, its wholly-owned or majority-owned subsidiaries, the consolidated entities which are considered to be variable interest entities and for which the Company is considered the primary beneficiary, and certain entities which are not considered variable interest entities but which the Company controls through a majority voting interest. Intercompany accounts and transactions have been eliminated upon consolidation. Reorganization of the Company The Company was formed as a Delaware limited liability company on July 3, 2007 and completed a reorganization of its predecessor businesses on July 13, 2007 (the “2007 Reorganization”). The Company is managed and operated by its manager, AGM Management, LLC, which in turn is indirectly wholly-owned and controlled by Leon Black, Joshua Harris and Marc Rowan (the “Managing Partners”). As of December 31, 2012, the Company owned, through three intermediate holding companies that include APO Corp., a Delaware corporation that is a domestic corporation for U.S. Federal income tax purposes, APO Asset Co., LLC (“APO Asset”), a Delaware limited liability company that is a disregarded entity for U.S. Federal income tax purposes, and APO (FC), LLC (“APO (FC)”), an Anguilla limited liability company that is treated as a corporation for U.S Federal income tax purposes (collectively, the “Intermediate Holding Companies”), 35.1% of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group through its wholly-owned subsidiaries. -165- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership (“Holdings”), is the entity through which the Managing Partners and certain of the Company’s other partners (the “Contributing Partners”) indirectly beneficially own, including in certain cases estate planning vehicles (through Holdings), Apollo Operating Group units (“AOG Units”) that represent 64.9% of the economic interests in the Apollo Operating Group as of December 31, 2012. The Company consolidates the financial results of the Apollo Operating Group and its consolidated subsidiaries. Holdings’ ownership interest in the Apollo Operating Group is reflected as a Non-Controlling Interest in the accompanying consolidated financial statements. Apollo also entered into an exchange agreement with Holdings that allows the partners in Holdings, subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Apollo Operating Group, to exchange their AOG Units for the Company’s Class A shares on a one-for-one basis up to four times each year, upon notice, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. A limited partner in Holdings must exchange one partnership unit in each of the ten Apollo Operating Group partnerships to affect an exchange for one Class A share. Initial Public Offering —On April 4, 2011, the Company completed the initial public offering (“IPO”) of its Class A shares, representing limited liability company interests of the Company. The Company received net proceeds from the IPO of approximately $382.5 million, which were used to acquire additional AOG Units. As a result, Holdings’ ownership interest in the Apollo Operating Group decreased from 70.7% to 66.5% and Apollo Global Management, LLC’s ownership interest in the Apollo Operating Group increased from 29.3% to 33.5% upon consummation of the IPO. As such, the difference between the fair value of the consideration paid for the Apollo Operating Group level ownership interest and the book value on the date of the IPO is reflected in Additional Paid in Capital. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation —Apollo consolidates those entities it controls through a majority voting interest or through other means, including those funds in which the general partner is presumed to have control (e.g., AP Alternative Assets, L.P., (“AAA”) and the Apollo Credit Senior Loan Fund, L.P. (“Apollo Senior Loan Fund”)). Apollo also consolidates entities that are VIEs for which Apollo is the primary beneficiary. Under the amended consolidation rules, an enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Certain of the Company’s subsidiaries hold equity interests in and/or receive fees qualifying as variable interests from the funds that the Company manages. The amended consolidation rules require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would give it a controlling financial interest. When the VIE has qualified for the deferral of the amended consolidation rules in accordance with U.S. GAAP, the analysis is based on previous consolidation rules, which require an analysis to determine whether (a) an entity in which Apollo holds a variable interest is a VIE and (b) Apollo’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., carried interest and management fees), would be expected to absorb a majority of the variability of the entity. Under both the previous and amended consolidation rules, the determination of whether an entity in which Apollo holds a variable interest is a VIE requires judgments which include determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the success of the entity, determining whether two or more parties’ equity -166- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) interests should be aggregated, and determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity. Under both the previous and amended consolidation rules, Apollo determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion continuously. The consolidation analysis can generally be performed qualitatively. However, if it is not readily apparent whether Apollo is the primary beneficiary, a quantitative expected losses and expected residual returns calculation will be performed. Investments and redemptions (either by Apollo, affiliates of Apollo or third parties) or amendments to the governing documents of the respective Apollo fund may affect an entity’s status as a VIE or the determination of the primary beneficiary. Apollo assesses whether it is the primary beneficiary and will consolidate or deconsolidate the entity accordingly. Performance of that assessment requires the exercise of judgment. Where the variable interests have qualified for the deferral, judgments are made in estimating cash flows in evaluating which member within the equity group absorbs a majority of the expected profits or losses of the VIE. Where the variable interests have not qualified for the deferral, judgments are made in determining whether a member in the equity group has a controlling financial interest including power to direct activities that most significantly impact the VIE’s economic performance and rights to receive benefits or obligations to absorb losses that are potentially significant to the VIE. Under both guidelines, judgment is made in evaluating the nature of the relationships and activities of the parties involved in determining if there is a related-party group, and if so, which party within the related-party group is most closely associated with the VIE. The use of these judgments has a material impact to certain components of Apollo’s consolidated financial statements. The only VIE formed prior to 2010, the adoption date of amended consolidation guidance, was consolidated as of the date of transition resulting in recognition of the assets and liabilities of the consolidated VIE at fair value and recognition of a cumulative effect transition adjustment presented as a component of Non-Controlling Interests in Consolidated Entities in the consolidated statement of changes in shareholders’ equity for the year ended December 31, 2010. The transition adjustment is classified as a component of Non-Controlling Interest rather than an adjustment to appropriated partners’ capital because the VIE is funded with equity and 100% of the equity ownership of the VIE is held by unconsolidated Apollo funds and one unaffiliated third party. Changes in the fair value of assets and liabilities and the related interest, dividend and other income for this VIE are recorded within Non-Controlling Interests in consolidated entities in the consolidated statement of financial condition and within net gains from investment activities of consolidated VIEs and net (income) loss attributable to Non-Controlling Interests in the consolidated statement of operations. Certain of the consolidated VIEs were formed to issue collateralized notes in the legal form of debt backed by financial assets. The difference between the fair value of the assets and liabilities of these VIEs is presented within appropriated partners’ capital in the consolidated statements of financial condition as these VIEs are funded solely with debt. Changes in the fair value of the assets and liabilities of these VIEs and the related interest and other income is presented within net gains from investment activities of consolidated variable interest entities and net (income) loss attributable to Non-Controlling Interests in the consolidated statement of operations. Such amounts are recorded within appropriated partners’ capital as, in each case, the VIE’s note holders, not Apollo, will ultimately receive the benefits or absorb the losses associated with the VIE’s assets and liabilities. Assets and liability amounts of the consolidated VIEs are shown in separate sections within the consolidated statements of financial condition as of December 31, 2012 and 2011. Refer to additional disclosures regarding VIEs in note 5 to our consolidated financial statements. Intercompany transactions and balances, if any, have been eliminated in consolidation. Equity Method Investments —For investments in entities over which the Company exercises significant influence but which do not meet the requirements for consolidation, the Company uses the equity method of accounting, whereby the Company records its share of the underlying income or loss of -167- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) such entities. Income (loss) from equity method investments is recognized as part of other income (loss) in the consolidated statements of operations. The carrying amounts of equity method investments are reflected in investments in the consolidated statements of financial condition. As the underlying entities that the Company manages and invests in are, for U.S. GAAP purposes, primarily investment companies which reflect their investments at estimated fair value, the carrying value of the Company’s equity method investments in such entities are at fair value. Non-Controlling Interests —For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than Apollo. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in Non-Controlling Interest in the consolidated financial statements. As of December 31, 2012, the Non-Controlling Interests relating to Apollo Global Management, LLC primarily includes the 64.9% ownership interest in the Apollo Operating Group held by the Managing Partners and Contributing Partners through their limited partner interests in Holdings and other ownership interests in consolidated entities, which primarily consist of the approximately 97% ownership interest held by limited partners in AAA as of December 31, 2012. Non-Controlling Interests also include limited partner interests of Apollo managed funds in certain consolidated VIEs. Non-Controlling Interests are presented as a separate component of shareholders’ equity on the Company’s consolidated statements of financial condition; net income (loss) includes the net income (loss) attributed to the holders of Non-Controlling Interests on the Company’s consolidated statements of operations; the primary components of Non-Controlling Interests are separately presented in the Company’s consolidated statements of changes in shareholders’ equity to clearly distinguish the interests in the Apollo Operating Group and other ownership interests in the consolidated entities; and profits and losses are allocated to Non-Controlling Interests in proportion to their ownership interests regardless of their basis. Cash and Cash Equivalents —Apollo considers all highly liquid short-term investments with original maturities of 90 days or less when purchased to be cash equivalents. Substantially all amounts are on deposit in interest-bearing accounts with major financial institutions and exceed insured limits. Restricted Cash —Restricted cash represents cash deposited at a bank, which is pledged as collateral in connection with leased premises. Revenues —Revenues are reported in three separate categories that include (i) advisory and transaction fees from affiliates, which relate to the investments of the funds and may include individual monitoring agreements with the portfolio companies and debt investment vehicles of the private equity funds and credit funds; (ii) management fees from affiliates, which are based on committed capital, invested capital, net asset value, gross assets or as otherwise defined in the respective agreements; and (iii) carried interest income (loss) from affiliates, which is normally based on the performance of the funds subject to preferred return. Advisory and Transaction Fees from Affiliates —Advisory and transaction fees, including directors’ fees are recognized when the underlying services rendered are substantially completed in accordance with the terms of the transaction and advisory agreements. Additionally, during the normal course of business, the Company incurs certain costs related to certain transactions that are not consummated (“broken deal costs”). These costs (e.g. research costs, due diligence costs, professional fees, legal fees and other related items) are determined to be broken deal costs upon management’s decision to no longer pursue the transaction. In accordance with the related fund agreement, in the event the deal is deemed broken, all of the costs are reimbursed by the funds and then included in the calculation of the Management Fee Offset described below. If a deal is successfully completed, Apollo is reimbursed by the fund or fund’s portfolio company of all costs incurred and no offset is generated. Advisory and Transaction fees from Affiliates also include underwriting fees. Underwriting fees include gains, losses and fees, net of syndicate expenses, arising from securities offerings in which one of -168- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) the Company’s subsidiaries participates in the underwriter syndicate. Underwriting fees are recognized at the time the underwriting is completed and the income is reasonably assured and are included in the consolidated statements of operations. Fees recognized but not received are included in other assets on the consolidated statements of financial condition. As a result of providing advisory services to certain private equity and credit portfolio companies, Apollo is generally entitled to receive fees for transactions related to the acquisition, in certain cases, and disposition of portfolio companies as well as ongoing monitoring of portfolio company operations and directors’ fees. The amounts due from portfolio companies are included in “—Due from Affiliates,” which is discussed further in note 15. Under the terms of the limited partnership agreements for certain funds, the management fee payable by the funds may be subject to a reduction based on a certain percentage of such advisory and transaction fees, net of applicable broken deal costs (“Management Fee Offset”). Such amounts are presented as a reduction to Advisory and Transaction Fees from Affiliates in the consolidated statements of operations. Management Fees from Affiliates —Management fees for private equity funds, real estate funds and certain credit funds are recognized in the period during which the related services are performed in accordance with the contractual terms of the related agreement, and are generally based upon (1) a percentage of the capital committed during the commitment period, and thereafter based on the remaining invested capital of unrealized investments, or (2) net asset value, gross assets or as otherwise defined in the respective agreements. Carried Interest Income from Affiliates —Apollo is entitled to an incentive return that can normally amount to as much as 20% of the total returns on funds’ capital, depending upon performance. Performance-based fees are assessed as a percentage of the investment performance of the funds. The carried interest income from affiliates for any period is based upon an assumed liquidation of the fund’s net assets on the reporting date, and distribution of the net proceeds in accordance with the fund’s income allocation provisions. Carried interest receivable is presented separately in the consolidated statements of financial condition. The carried interest income from affiliates may be subject to reversal to the extent that the carried interest income recorded exceeds the amount due to the general partner based on a fund’s cumulative investment returns. When applicable, the accrual for potential repayment of previously received carried interest income, which is a component of due to affiliates, represents all amounts previously distributed to the general partner that would need to be repaid to the Apollo funds if these funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the reporting date. The actual general partner obligation, however, would not become payable or realized until the end of a fund’s life. Management Fee Waiver and Notional Investment Program —Under the terms of certain investment fund partnership agreements, Apollo may from time to time elect to forgo a portion of the management fee revenue that is due from the funds and instead receive a right to a proportionate interest in future distributions of profits of those funds. Waived fees recognized during the period are included in management fees from affiliates in the consolidated statements of operations. This election allows certain employees of Apollo to waive a portion of their respective share of future income from Apollo and receive, in lieu of a cash distribution, title and ownership of the profits interests in the respective fund. Apollo immediately assigns the profits interests received to its employees. Such assignments of profits interests are treated as compensation and benefits when assigned. The investment period for Fund VII and ANRP for the management fee waiver plan was terminated as of December 31, 2012. Deferred Revenue —Apollo earns management fees subject to the Management Fee Offset. When advisory and transaction fees are earned by the management company, the Management Fee Offset reduces the management fee obligation of the fund. When the management company receives cash for advisory and transaction fees, a certain percentage of such advisory and/or transaction fees, as applicable, is allocated as a credit to reduce future management fees, otherwise payable by such fund. Such credit is classified as deferred revenue in the consolidated statements of financial condition. As the management fees earned by the management company are presented on a gross basis, any Management Fee Offsets calculated are -169- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) presented as a reduction to Advisory and Transaction Fees from Affiliates in the consolidated statements of operations. Additionally, Apollo earns advisory fees pursuant to the terms of the advisory agreements with certain of the portfolio companies that are owned by the funds. When Apollo receives a payment from a portfolio company that exceeds the advisory fees earned at that point in time, the excess payment is classified as deferred revenue in the consolidated statements of financial condition. The advisory agreements with the portfolio companies vary in duration and the associated fees are received monthly, quarterly or annually. Deferred revenue is reversed and recognized as revenue over the period that the agreed upon services are performed. Under the terms of the funds’ partnership agreements, Apollo is normally required to bear organizational expenses over a set dollar amount and placement fees or costs in connection with the offering and sale of interests in the funds to investors. The placement fees are payable to placement agents, who are independent third parties that assist in identifying potential investors, securing commitments to invest from such potential investors, preparing or revising offering and marketing materials, developing strategies for attempting to secure investments by potential investors and/or providing feedback and insight regarding issues and concerns of potential investors, when a limited partner either commits or funds a commitment to a fund. In certain instances the placement fees are paid over a period of time. Based on the management agreements with the funds, Apollo considers placement fees and organizational costs paid in determining if cash has been received in excess of the management fees earned. Placement fees and organizational costs are normally the obligation of Apollo but can be paid for by the funds. When these costs are paid by the fund, the resulting obligations are included within deferred revenue. The deferred revenue balance will also be reduced during future periods when management fees are earned but not paid. Interest and Other Income —Apollo recognizes security transactions on the trade date. Interest income is recognized as earned on an accrual basis. Discounts and premiums on securities purchased are accreted or amortized over the life of the respective securities using the effective interest method. Realized gains and losses are recorded based on the specific identification method. Due from/to Affiliates —Apollo considers its existing partners, employees, certain former employees, portfolio companies of the funds and non-consolidated private equity, credit and real estate funds to be affiliates or related parties. Investments, at Fair Value —The Company follows U.S. GAAP attributable to fair value measurements, which among other things, requires enhanced disclosures about investments that are measured and reported at fair value. Investments, at fair value, represent investments of the consolidated funds, investments of the consolidated VIEs and certain financial instruments for which the fair value option was elected. The unrealized gains and losses resulting from changes in the fair value are reflected as net gains (losses) from investment activities and net gains (losses) from investment activities of the consolidated variable interest entities, respectively, in the consolidated statements of operations. In accordance with U.S. GAAP, investments measured and reported at fair value are classified and disclosed in one of the following categories: Level I —Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed derivatives. As required by U.S. GAAP, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and the sale of such position would likely deviate from the quoted price. Level II —Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives where the fair value is based on observable inputs. These investments exhibit -170- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) higher levels of liquid market observability as compared to Level III investments. The Company subjects broker quotes to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level II investment. These criteria include, but are not limited to, the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services. Level III —Pricing inputs are unobservable for the investment and includes situations where there is little observable market activity for the investment. The inputs into the determination of fair value may require significant management judgment or estimation. Investments that are included in this category generally include general and limited partnership interests in corporate private equity and real estate funds, opportunistic credit funds, distressed debt and non-investment grade residual interests in securitizations and CDOs and CLOs where the fair value is based on observable inputs as well as unobservable inputs. When a security is valued based on broker quotes, the Company subjects those quotes to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level II or Level III investment. Some of the factors we consider include the number of broker quotes we obtain, the quality of the broker quotes, the standard deviations of the observed broker quotes and the corroboration of the broker quotes to independent pricing services. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment when the fair value is based on unobservable inputs. In cases where an investment or financial instrument that is measured and reported at fair value is transferred into or out of Level III of the fair value hierarchy, the Company accounts for the transfer as of the end of the reporting period. Private Equity Investments The value of liquid investments, where the primary market is an exchange (whether foreign or domestic) is determined using period end market prices. Such prices are generally based on the close price on the date of determination. Valuation approaches used to estimate the fair value of investments that are less liquid include the income approach and the market approach. The market approach provides an indication of fair value based on a comparison of the subject company to comparable publicly traded companies and transactions in the industry. The market approach is driven more by current market conditions, including actual trading levels of similar companies and, to the extent available, actual transaction data of similar companies. Judgment is required by management when assessing which companies are similar to the subject company being valued. Consideration may also be given to such factors as the Company’s historical and projected financial data, valuations given to comparable companies, the size and scope of the Company’s operations, the Company’s strengths, weaknesses, expectations relating to the market’s receptivity to an offering of the Company’s securities, applicable restrictions on transfer, industry and market information and assumptions, general economic and market conditions and other factors deemed relevant. The income approach provides an indication of fair value based on the present value of cash flows that a business or security is expected to generate in the future. The most widely used methodology used in the income approach is a discounted cash flow method. Inherent in the discounted cash flow method are assumptions of expected results and a calculated discount rate. On a quarterly basis, Apollo utilizes a valuation committee, consisting of members from senior management, to review and approve the valuation results related to our private equity investments. The Company also retains independent valuation firms to provide third-party valuation consulting services to Apollo, which consist of certain limited procedures that management identifies and requests them to -171- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) perform. The limited procedures provided by the independent valuation firms assist management with validating their valuation results or determining fair value. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. Credit Investments The majority of the investments in Apollo’s credit funds are valued based on quoted market prices and valuation models. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value utilizing recognized pricing services, market participants or other sources. The credit funds also enter into foreign currency exchange contracts, total return swap contracts, credit default swap contracts, and other derivative contracts, which may include options, caps, collars and floors. Foreign currency exchange contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. If securities are held at the end of this period, the changes in value are recorded in income as unrealized. Realized gains or losses are recognized when contracts are settled. Total return swap contracts and credit default swap contracts are recorded at fair value as an asset or liability with changes in fair value recorded as unrealized appreciation or depreciation. Realized gains or losses are recognized at the termination of the contract based on the difference between the close-out price of the total return or credit default swap contract and the original contract price. Forward contracts are valued based on market rates obtained from counterparties or prices obtained from recognized financial data service providers. When determining fair value pricing when no market value exists, the value attributed to an investment is based on the enterprise value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation approaches used to estimate the fair value of illiquid investments included in Apollo’s credit funds also may use the income approach or market approach. The valuation approaches used consider, as applicable, market risks, credit risks, counterparty risks and foreign currency risks. On a quarterly basis, Apollo utilizes a valuation committee, consisting of members from senior management, to review and approve the valuation results related to our credit investments. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis. Real Estate Investments For the CMBS portfolio of Apollo’s funds, the estimated fair value is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. Broker quotes are only indicative of fair value and may not necessarily represent what the funds would receive in an actual trade for the applicable instrument. Additionally, the loans held-for-investment are stated at the principal amount outstanding, net of deferred loan fees and costs for certain investments. For Apollo’s opportunistic and value added real estate funds, valuations of non-marketable underlying investments are determined using methods that include, but are not limited to (i) discounted cash flow estimates or comparable analysis prepared internally, (ii) third party appraisals or valuations by qualified real estate appraisers, and (iii) contractual sales value of investments/properties subject to bona fide purchase contracts. Methods (i) and (ii) also incorporate consideration of the use of the income, cost, or sales comparison approaches of estimating property values. On a quarterly basis, Apollo utilizes a valuation committee, consisting of members from senior management, to review and approve the valuation results related to our real estate investments. The Company performs various back-testing procedures to validate their valuation approaches, including comparisons between expected and observed outcomes, forecast evaluations and variance analysis. -172- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Except for the Company’s debt obligation related to the AMH Credit Agreement (as defined in note 12), Apollo’s financial instruments are recorded at fair value or at amounts whose carrying value approximates fair value. See “—Investments, at Fair Value” above. While Apollo’s valuations of portfolio investments are based on assumptions that Apollo believes are reasonable under the circumstances, the actual realized gains or losses will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may ultimately differ significantly from the assumptions on which the valuations were based. Other financial instruments carrying values generally approximate fair value because of the short-term nature of those instruments or variable interest rates related to the borrowings. As disclosed in note 12, the Company’s long term debt obligation related to the AMH Credit Agreement is believed to have an estimated fair value of approximately $795.6 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities as of December 31, 2012. However, the carrying value that is recorded on the consolidated statements of financial condition is the amount for which we expect to settle the long term debt obligation. The Company has determined that the long term debt obligation related to the AMH Credit Agreement would be categorized as a Level III liability in the fair-value hierarchy. Fair Value Option —Apollo has elected the fair value option for the convertible notes issued by HFA and for the assets and liabilities of the consolidated VIEs. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. Apollo has applied the fair value option for certain corporate loans, other investments and debt obligations held by the consolidated VIEs that otherwise would not have been carried at fair value. For the convertible notes issued by HFA, Apollo has elected to separately present interest income from other changes in the fair value of the convertible notes in the consolidated statements of operations. Refer to notes 4 and 5 for further disclosure on the investment in HFA and financial instruments of the consolidated VIEs for which the fair value option has been elected. Interest Rate Swap Agreements —Apollo recognizes derivatives as either an asset or liability measured at fair value. In order to reduce interest rate risk, Apollo entered into interest rate swap agreements which were formally designated as cash flow hedges. To qualify for cash flow hedge accounting, interest rate swaps must meet certain criteria, including (a) the items to be hedged expose Apollo to interest rate risk and (b) the interest rate swaps are highly effective in reducing Apollo’s exposure to interest rate risk. Apollo formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, its strategy for undertaking the hedge transaction and Apollo’s evaluation of effectiveness. Effectiveness is periodically assessed based upon a comparison of the relative changes in the cash flows of the interest rate swaps and the items being hedged. For derivatives that have been formally designated as cash flow hedges, the effective portion of changes in the fair value of the derivatives are recorded in accumulated other comprehensive (loss) income (“OCI”). Amounts in OCI are reclassified into earnings when interest expense on the underlying borrowings is recognized. If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as a gain or loss in the consolidated statements of operations. Financial Instruments held by Consolidated VIEs The consolidated VIEs hold investments that are traded over-the-counter. Investments in securities that are traded on a securities exchange or comparable over-the-counter quotation systems are valued based -173- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) on the last reported sale price at that date. If no sales of such investments are reported on such date, and in the case of over-the-counter securities or other investments for which the last sale date is not available, valuations are based on independent market quotations obtained from market participants, recognized pricing services or other sources deemed relevant, and the prices are based on the average of the “bid” and “ask” prices, or at ascertainable prices at the close of business on such day. Market quotations are generally based on valuation pricing models or market transactions of similar securities adjusted for security-specific factors such as relative capital structure priority and interest and yield risks, among other factors. When market quotations are not available a model based approach is used to determine fair value. The consolidated VIEs also have debt obligations that are recorded at fair value. The primary valuation methodology used to determine fair value for debt obligation is market quotation. Prices are based on the average of the “bid” and “ask” prices. In the event that market quotations are not available a model based approach is used. The valuation approach used to estimate the fair values of debt obligations for which market quotations are not available is the discounted cash flow method, which includes consideration of the cash flows of the debt obligation based on projected quarterly interest payments and quarterly amortization. Debt obligations are discounted based on the appropriate yield curve given the loan’s respective maturity and credit rating. Management uses its discretion and judgment in considering and appraising relevant factors for determining the valuations of its debt obligations. Pending Deal Costs Pending deal costs consist of certain costs incurred (e.g. research costs, due diligence costs, professional fees, legal fees and other related items) related to private equity, credit and real estate fund transactions that we are pursuing but which have not yet been consummated. These costs are deferred until such transactions are broken or successfully completed. A transaction is determined to be broken upon management’s decision to no longer pursue the transaction. In accordance with the related fund agreements, in the event the deal is broken, all of the costs are generally reimbursed by the funds and considered in the calculation of the Management Fee Offset. These offsets are included in Advisory and Transaction Fees from Affiliates in the Company’s consolidated statements of operations. If a deal is successfully completed, Apollo is reimbursed by the fund or a fund’s portfolio company for all costs incurred. Fixed Assets Fixed Assets consist primarily of ownership interests in aircraft, leasehold improvements, furniture, fixtures and equipment, computer hardware and software and are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the assets’ estimated useful lives and in the case of leasehold improvements the lesser of the useful life or the term of the lease. Aircraft engine overhauls are capitalized and depreciated until the next expected overhaul. Expenditures for repairs and maintenance are charged to expense when incurred. The Company evaluates long-lived assets for impairment periodically and whenever events or changes in circumstances indicate the carrying amounts of the assets may be impaired. Business Combinations —The Company accounts for acquisitions using the purchase method of accounting in accordance with U.S. GAAP. Under the purchase method of accounting, the purchase price of an acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill and Intangible Assets —Goodwill and indefinite-life intangible assets must be reviewed annually for impairment or more frequently if circumstances indicate impairment may have occurred. Identifiable finite-life intangible assets, by contrast, are amortized over their estimated useful lives, which are periodically re-evaluated for impairment or when circumstances indicate an impairment may have occurred. Apollo amortizes its identifiable finite-life intangible assets using a method of amortization reflecting the pattern in which the economic benefits of the finite-life intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, Apollo uses the straight-line method of -174- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) amortization. At June 30, 2012, the Company performed its annual impairment testing and determined there was no impairment of goodwill or indefinite life intangible assets at such time. Profit Sharing Payable —Profit sharing payable primarily represents the amounts payable to employees and former employees who are entitled to a proportionate share of carried interest income in one or more funds. This portion of the liability is calculated based upon the changes to realized and unrealized carried interest and is therefore not payable until the carried interest itself is realized. Profit sharing payable also includes amounts payable to certain employees of the Company who are entitled to a share in the earnings of and any appreciation in the value in one of the Company’s subsidiaries, during the term of their employment. This portion of the liability is recognized ratably over the requisite service period and thereafter will be recognized at the time the distributions are determined. This amount shall be payable out of distributable funds based upon proceeds received by the subsidiary through management fees earned. Profit sharing payable also includes contingent obligations that were recognized in connection with certain Apollo acquisitions. Debt Issuance Costs —Debt issuance costs consist of costs incurred in obtaining financing and are amortized over the term of the financing using the effective interest method. These costs are included in Other Assets on the consolidated statements of financial condition. Foreign Currency —The Company may, from time to time, hold foreign currency denominated assets and liabilities. Such assets and liabilities are translated using the exchange rates prevailing at the end of each reporting period. The functional currency of the Company’s international subsidiaries is the U.S. Dollar, as their operations are considered an extension of U.S. parent operations. Non-monetary assets and liabilities of the Company’s international subsidiaries are remeasured into the functional currency using historical exchange rates specific to each asset and liability. The results of the Company’s foreign operations are normally remeasured using an average exchange rate for the respective reporting period. All currency remeasurement adjustments are included within other income (loss), net in the consolidated statements of operations. Gains and losses on the settlement of foreign currency transactions are also included within other income (loss), net in the consolidated statements of operations. Compensation and Benefits Equity-Based Compensation —Equity-based compensation is measured based on the grant date fair value of the award. Equity-based awards that do not require future service (i.e., vested awards) are expensed immediately. Equity-based employee awards that require future service are expensed over the relevant service period. The Company estimates forfeitures for equity-based awards that are not expected to vest. Equity-based awards granted to non-employees for services provided to the affiliates are remeasured to fair value at the end of each reporting period and expensed over the relevant service period. Salaries, Bonus and Benefits —Salaries, bonus and benefits includes base salaries, discretionary and non-discretionary bonuses, severance and employee benefits. Bonuses are generally accrued over the related service period. From time to time, the Company may assign profits interests received in lieu of management fees to certain investment professionals. Such assignments of profits interests are treated as compensation and benefits when assigned. The Company sponsors a 401(k) Savings Plan whereby U.S.-based employees are entitled to participate in the plan based upon satisfying certain eligibility requirements. The Company may provide discretionary contributions from time to time. No contributions relating to this plan were made by the Company for the years ended December 31, 2012, 2011 and 2010, respectively. -175- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Profit Sharing Expense —Profit sharing expense consists of a portion of carried interest recognized in one or more funds allocated to employees and former employees. Profit sharing expense is recognized on an accrued basis as the related carried interest income is earned. Profit sharing expense can be reversed during periods when there is a decline in carried interest income that was previously recognized. Additionally, profit sharing expenses previously distributed may be subject to clawback from employees, former employees and Contributing Partners. Changes in the fair value of the contingent obligations that were recognized in connection with certain Apollo acquisitions will be reflected in the Company’s consolidated statements of operations as profit sharing expense. Profit sharing expense is also the result of profits interests issued to certain employees whereby they are entitled to a share in earnings of and any appreciation of the value in a subsidiary of the Company during their term of employment. Profit sharing expense related to these profits interests is recognized ratably over the requisite service period and thereafter will be recognized at the time the distributions are determined. In June 2011, the Company adopted a performance based incentive arrangement for certain Apollo partners and employees designed to more closely align compensation on an annual basis with the overall realized performance of the Company. This arrangement enables certain partners and employees to earn discretionary compensation based on carried interest realizations earned by the Company in a given year, which amounts are reflected in profit sharing expense in the accompanying consolidated financial statements. Incentive Fee Compensation —Certain employees are entitled to receive a discretionary portion of incentive fee income from certain of our credit funds, based on performance for the year. Incentive fee compensation expense is recognized on an accrual basis as the related carried interest income is earned. Incentive fee compensation expense may be subject to reversal until the carried interest income crystallizes. Other Income (Loss) Net Gains (Losses) from Investment Activities —Net gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in the Company’s investment portfolio between the opening balance sheet date and the closing balance sheet date. The consolidated financial statements include the net realized and unrealized gains (losses) of investments at fair value. Net Gains from Investment Activities of Consolidated Variable Interest Entities —Changes in the fair value of the consolidated VIEs’ assets and liabilities and related interest, dividend and other income and expenses subsequent to consolidation are presented within net gains (losses) from investment activities of consolidated variable interest entities and are attributable to Non-Controlling Interests in the consolidated statements of operations. Other Income (Loss), Net —Other income, net includes the recognition of bargain purchase gains as a result of Apollo acquisitions, gains (losses) arising from the remeasurement of foreign currency denominated assets and liabilities of foreign subsidiaries, and other miscellaneous non- operating income and expenses. Comprehensive (Loss) Income —U.S. GAAP guidance establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. U.S. GAAP requires that the Company classify items of OCI by their nature in the financial statements and display the accumulated balance of OCI separately in the shareholders’ equity section of the Company’s consolidated statements of financial condition. Comprehensive income (loss) consists of net income (loss) and OCI. Apollo’s OCI is primarily comprised of the effective portion of changes in the fair value of the interest rate swap agreements discussed -176- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) previously. If, at any time, any of the Company’s subsidiaries’ functional currency becomes non-U.S. dollar denominated, the Company will record foreign currency cumulative translation adjustments in OCI. Income Taxes —The Apollo Operating Group and its subsidiaries generally operate as partnerships for U.S. Federal income tax purposes. As a result, except as described below, the Apollo Operating Group has not been subject to U.S. income taxes. However, these entities in some cases are subject to New York City unincorporated business taxes (“ NYC UBT”) and non-U.S. entities, in some cases, are subject to non-U.S. corporate income taxes. In addition, APO Corp., a wholly-owned subsidiary of the Company, is subject to U.S. Federal, state and local corporate income tax, and the Company’s provision for income taxes is accounted for in accordance with U.S. GAAP. As significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties, we recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The tax benefit is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If a tax position is not considered more likely than not to be sustained, then no benefits of the position are recognized. The Company’s tax positions are reviewed and evaluated quarterly to determine whether or not we have uncertain tax positions that require financial statement recognition. Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amount of assets and liabilities and their respective tax basis using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Net Income (Loss) Per Class A Share —U.S. GAAP requires use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for distributions declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for distributions declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity. The remaining earnings are allocated to Class A Shares and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding common shares and all potential common shares assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from a hypothetical conversion of these potential common shares. Use of Estimates— The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Apollo’s most significant estimates include goodwill, intangible assets, income taxes, carried interest income from affiliates, contingent consideration obligations related to acquisitions, non-cash compensation and fair value of investments and debt in the consolidated and unconsolidated funds and VIEs. Actual results could differ materially from those estimates. -177- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Recent Accounting Pronouncements In December 2011, the FASB issued guidance to enhance disclosures about financial instruments and derivative instruments that are either (1) offset or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. Under the guidance, an entity is required to disclose quantitative information relating to recognized assets and liabilities that are offset or subject to an enforceable master netting arrangement or similar agreement, including the gross amounts of those recognized assets and liabilities, the amounts offset to determine the net amount presented in the statement of financial position, and the net amount presented in the statement of financial position. With respect to amounts subject to an enforceable master netting arrangement or similar agreement which are not offset, disclosure is required of the amounts related to recognized financial instruments and other derivative instruments, the amount related to financial collateral (including cash collateral), and the overall net amount after considering amounts that have not been offset. The guidance is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods and retrospective application is required. As the amendments are limited to disclosure only, the adoption of this guidance will not have a material impact on the Company’s financial statements. In July 2012, the FASB issued amended guidance related to testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the revised guidance, entities have the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite- lived intangible asset is impaired. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not to be less than the carrying amount, then the entity must perform the quantitative impairment test; otherwise, further testing would not be required. The amendments are effective for all entities for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance will not have an impact on the Company’s consolidated financial statements when the Company performs its annual impairment test in June 2013. In February 2013, the FASB issued an update which includes amendments that require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income (OCI) on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other required disclosures that provide additional detail about those amounts. The new requirement presents information on amounts reclassified out of accumulated OCI and their corresponding effect on net income in one place or in some cases, provides for cross-references to related footnote disclosures. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. As the amendments are limited to disclosure only, the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. -178- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) 3. ACQUISITIONS AND BUSINESS COMBINATIONS Business Combinations Stone Tower On April 2, 2012, the Company completed its previously announced acquisition of the membership interests of Stone Tower Capital LLC and its related management companies (“Stone Tower”), a leading alternative credit manager. The acquisition was consummated by the Company for total consideration at fair value of approximately $237.2 million. The transaction added significant scale and several new credit product capabilities and increased the assets under management of the credit segment. Consideration exchanged at closing included a payment of approximately $105.5 million, which the Company funded from its existing cash resources, and equity granted to the former owners of Stone Tower with grant date fair value of $14.0 million valued using the Company’s closing stock price on April 2, 2012 of $14.40. Additionally, the Company will also make payments to the former owners of Stone Tower under a contingent consideration obligation which requires the Company to transfer cash to the former owners of Stone Tower based on a specified percentage of carried interest income. The contingent consideration obligation had an acquisition date fair value of approximately $117.7 million, which was determined based on the present value of the estimated future carried interest payments of approximately $139.4 million using a discount rate of 9.5%, and is reflected in profit sharing payable in the consolidated statements of financial condition. As a result of the acquisition, the Company incurred $4.6 million in acquisition costs, of which $2.8 million was incurred during the year ended December 31, 2012. Tangible assets acquired in the acquisition consisted of management and carried interest receivable and other assets. Intangible assets acquired consisted primarily of certain management contracts providing economic rights to management fees, senior fees, subordinate fees, and carried interest from existing CLOs, funds and strategic investment accounts. -179- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The Company has performed an analysis and an evaluation of the net assets acquired and liabilities assumed. The estimated fair value of the assets acquired exceeded the estimated fair value of the liabilities assumed as of the acquisition date resulting in a bargain purchase gain of approximately $1,951.1 million for the year ended December 31, 2012. The bargain purchase gain is reflected in other income, net within the consolidated statements of operations with corresponding amounts reflected as components of appropriated partners’ capital within the consolidated statements of changes in shareholders’ equity. The estimated fair values for the net assets acquired and liabilities assumed are summarized in the following table: Tangible Assets: Cash Carried Interest Receivable Due from Affiliates Other Assets Total assets of consolidated variable interest entities Intangible Assets: Management Fees Contracts Senior Fees Contracts Subordinate Fees Contracts Carried Interest Contracts Non-Compete Covenants Fair Value of Assets Acquired Liabilities Assumed: Accounts payable and accrued expenses Due to Affiliates Other Liabilities Total liabilities of consolidated variable interest entities Fair Value of Liabilities Assumed Fair Value of Net Assets Acquired Less: Net assets attributable to Non-Controlling Interests in consolidated entities Less: Fair Value of Consideration Transferred Gain on Acquisition $ 6,310 36,097 1,642 2,492 10,136,869 9,658 568 2,023 85,071 200 10,280,930 3,570 4,410 8,979 7,815,434 7,832,393 2,448,537 260,203 237,201 $ 1,951,133 The bargain purchase gain was recorded in other income, net in the consolidated statements of operations. During the one year measurement period, any changes resulting from facts and circumstances that existed as of the acquisition date will be reflected as a retrospective adjustment to the bargain purchase gain and the respective asset acquired or liability assumed. The acquisition related intangible assets valuation and related amortization are as follows: Management Fees contracts Senior Fees Contracts Subordinate Fees Contracts Carried Interest Contracts Non-Compete Covenants Total Intangible Assets Less: Accumulated amortization Net Intangible Assets Weighted Average Useful Life in Years 2.2 2.4 2.5 3.7 2.0 As of December 31, 2012 9,658 $ 568 2,023 85,071 200 97,520 (20,456 ) $ 77,064 -180- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The results of operations of the acquired business since the acquisition date included in the Company’s consolidated statements of operations for the period from April 2, 2012 to December 31, 2012 were as follows: Total Revenues Net Income Attributable to Non-Controlling Interest Net Income Attributable to Apollo Global Management, LLC For the Period from April 2, 2012 to December 31 2012 $ $ $ 51,719 (1,925,053 ) 12,446 Unaudited Supplemental Pro Forma Information Unaudited supplemental pro forma results of operations of the combined entity for the years ended December 31, 2012 and 2011 assuming the acquisition had occurred as of January 1, 2011 are presented below. This pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company’s results would have been had the acquisition been completed on January 1, 2011, nor does it purport to be indicative of any future results. Total Revenues Net (Income) Attributable to Non-Controlling Interest Net Income (Loss) Attributable to Apollo Global Management, LLC Net Income (Loss) per Class A Share: Net Income (Loss) per Class A Share – Basic and Diluted Weighted Average Number of Class A Shares – Basic Weighted Average Number of Class A Shares – Diluted For the Year Ended December 31, 2012 2011 (in millions, except for per share data) $ 2,873,903 (739,862 ) $ 321,420 $ 217,347 $ $ (1,194,226 ) (456,112 ) $ 2.14 $ 127,693,489 129,540,377 (4.07 ) $ 116,364,110 116,364,110 The supplemental pro forma earnings include an adjustment to exclude $5.5 million of compensation expense not expected to recur due to termination of certain contractual arrangements as part of the closing of the acquisition. Gulf Stream On October 24, 2011, the Company completed its previously announced acquisition of 100% of the membership interests of Gulf Stream Asset Management, LLC (“Gulf Stream”), a manager of collateralized loan obligations. The acquisition was consummated by the Company for total consideration at fair value of approximately $39.0 million. The transaction broadens Apollo’s existing senior credit business by expanding our credit coverage as well as investor relationships and increases the assets under management of Apollo’s credit business. Consideration exchanged at closing consisted of payment of approximately $29.6 million, of which $6.7 million was used to repay subordinated notes and debt due to the existing shareholder on behalf of Gulf Stream. The Company funded the consideration exchanged at closing from its existing cash resources. Additional consideration of $4.0 million having an acquisition date fair value of $3.9 million will be paid to the former owners of Gulf Stream on the fourteen-month anniversary of the closing date. The Company will also make payments to the former owners of Gulf Stream under a contingent -181- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) consideration obligation which requires the Company to transfer cash to the former owners of Gulf Stream based on a specified percentage of carried interest income. The contingent consideration liability had an acquisition date fair value of approximately $5.4 million, which was determined based on the present value of the estimated range of future carried interest payments between $0 and approximately $8.7 million using a discount rate of 13.7%. Tangible assets acquired in the acquisition consisted of a management fee receivable. Intangible assets acquired consisted primarily of certain management contracts providing economic rights to senior fees, subordinate fees, and incentive fees from existing CLOs managed by Gulf Stream. Additionally, as part of the acquisition, the Company acquired the assets and liabilities of six consolidated CLOs. The Company has performed an analysis and an evaluation of the net assets acquired and liabilities assumed. The estimated fair value of the assets acquired exceeded the estimated fair value of the liabilities assumed as of the acquisition date resulting in a bargain purchase gain of approximately $196.2 million. The bargain purchase gain is reflected in other income, net within the consolidated statements of operations with a corresponding amount reflected in appropriated partners’ capital within the consolidated statements of changes in shareholders’ equity. The estimated fair values for the net assets acquired and liabilities assumed are summarized in the following table: Tangible Assets: Receivable, management fees Total assets of consolidated CLOs Intangible Assets: Management Contracts Fair Value of Assets Acquired Liabilities assumed: Deferred Tax Liability Total liabilities of consolidated CLOs Fair Value of Liabilities Assumed Fair Value of Net Assets Acquired Less: Fair Value of Consideration Transferred Gain on Acquisition $ 1,720 2,278,612 33,900 2,314,232 871 2,078,117 2,078,988 235,244 39,026 $ 196,218 The Company’s rights under all management contracts acquired will be amortized over six years. The management contract valuation and related amortization are as follows: Management contracts Less: Accumulated amortization Net intangible assets Weighted Average Useful Life in Years December 31, December 31, 2012 2011 3.7 $ 33,900 (1) (9,351 ) $ 32,400 (284 ) $ 24,549 $ 32,116 (1) During 2012 the Company recorded a purchase price adjustment of $1.5 million to management contracts acquired as part of the Gulf Stream acquisition. -182- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The results of operations of the acquired business since the acquisition date included in the Company’s consolidated statements of operations for the period from October 24, 2011 to December 31, 2011 were as follows: Total Revenues Net Income Attributable to Non-Controlling Interest Net Income Attributable to Apollo Global Management, LLC For the Period from October 24, 2011 to December 31, 2011 2,107 $ 194,852 $ 473 $ Unaudited Supplemental Pro Forma Information Unaudited supplemental pro forma results of operations of the combined entity for the years ended December 31, 2011 and 2010, assuming the Gulf Stream acquisition had occurred as of January 1, 2010 are presented below. This pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company’s results would have been had the acquisition been completed on January 1, 2010, nor does it purport to be indicative of any future results. Total Revenues Net (Income) Loss Attributable to Non-Controlling Interest Net (Loss) Income Attributable to Apollo Global Management, LLC Net (Loss) Income per Class A Share: Net (Loss) Income per Class A Share – Basic and Diluted Weighted Average Number of Class A Shares – Basic and Diluted For the Year Ended December 31, 2011 2010 (in million, except for share data) $ $ $ 174.9 (1,097.1 ) (468.7 ) $ $ $ 2,115.7 652.1 95.9 (4.18 ) $ 116,364,110 0.84 $ 96,964,769 The 2011 and 2010 supplemental pro forma earnings include an adjustment to exclude $4.9 million and $9.7 million, respectively of compensation expense not expected to recur due to termination of certain contractual arrangements as part of the closing of the acquisition. Other Acquisitions On February 1, 2010, the Company acquired substantially all of the assets of a limited company incorporated under the laws of Hong Kong and related entities thereto. The Company paid cash consideration of $1.4 million for identifiable assets with a combined fair value of $0.4 million, which resulted in $1.0 million of additional goodwill. CPI On November 12, 2010, Apollo completed the acquisition of substantially all of the assets of Citi Property Investors (“CPI”), the real estate investment management group of Citigroup Inc. CPI had AUM of approximately $3.6 billion as of December 31, 2010. CPI is an integrated real estate investment platform with investment professionals located in Asia, Europe and North America. As part of the acquisition, Apollo received cash of $15.5 million and acquired general partner interests in, and advisory agreements with, various real estate investment funds and co-invest vehicles and added to its team of real estate professionals. The consideration transferred in the acquisition is a contingent consideration in the form of a liability incurred by Apollo to CPI. The liability is an obligation of Apollo to transfer cash to CPI based on a specified percentage of future earnings. The estimated fair value of the contingent liability was $1.2 million as of November 12, 2010. The acquisition was accounted for as a business combination and the Company recorded a $24.1 million gain on acquisition which is included in other income (loss), net in the accompanying consolidated statements of operations for the year ended December 31, 2010. -183- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The finite-life intangible assets relate to management contracts associated with the CPI funds. The fair value of the management contracts was estimated to be $8.3 million. The Company also received $15.5 million of cash and recorded a receivable valued at $1.5 million as of December 31, 2010. The Company has performed an analysis and an evaluation of the net assets acquired and liabilities assumed. The Company has determined the following estimated fair values for the acquired assets and liabilities assumed: Tangible Assets: Cash Receivables, at fair value Intangible Assets: Management Contracts Total Assets Less: Contingent consideration, at fair value Gain on Acquisition $ 15,468 1,500 8,300 25,268 (1,200 ) $ 24,068 The estimated useful life of the management contracts is 2.5 years. The Company is amortizing the management contracts over their estimated useful life using the straight-line method. Management contracts Less: Accumulated amortization of intangibles Net intangible assets Intangible Assets Intangible assets, net consists of the following: Finite-lived intangible assets/management contracts Accumulated amortization Intangible assets, net The changes in intangible assets, net consist of the following: Balance, beginning of year Amortization expense Acquisitions Balance, end of year Useful Life in Years 2.5 As of December 31, 2012 $ 8,300 (7,081 ) $ 1,219 2011 $ 8,300 (3,761 ) $ 4,539 As of December 31, 2012 $ 240,020 (102,164 ) $ 137,856 2011 $ 141,000 (59,154 ) $ 81,846 For the Year Ended December 31, 2012 $ 81,846 (43,009 ) 99,019 $ 137,856 (1) 2011 $ 64,574 (15,128 ) 32,400 $ 81,846 (1) Includes impact of purchase price adjustments related to Gulf Stream acquisition Amortization expense related to intangible assets was $43.0 million, $15.1 million, and $12.8 million for the years ended December 31, 2012, 2011, and 2010, respectively. Expected amortization of these intangible assets for each of the next 5 years and thereafter is as follows: -184- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Amortization of intangible assets 4. INVESTMENTS The following table represents Apollo’s investments: Investments, at fair value Other investments Total Investments Investments, at Fair Value 2013 2016 $ 41,351 $ 36,246 $ 33,714 $ 7,881 $ 4,952 $ 13,712 $ 137,856 Total 2015 2017 2014 There- After December 31, December 31, 2012 $ 1,744,412 393,684 $ 2,138,096 2011 $ 1,552,122 305,343 $ 1,857,465 Investments, at fair value consist of financial instruments held by AAA, investments held by the Apollo Senior Loan Fund, the Company’s investment in HFA and other investments held by the Company at fair value. As of December 31, 2012 and 2011, the net assets of the consolidated funds (excluding VIEs) were $1,691.3 million and $1,505.5 million, respectively. The following investments, except the investment in HFA and other investments, are presented as a percentage of net assets of the consolidated funds: Investments, at Fair Value – Affiliates Investments held by: AAA Investments held by Apollo Senior Loan Fund HFA Other Investments Total Securities December 31, 2012 December 31, 2011 Fair Value % of Net Assets of Consolidated Fair Value % of Net Assets of Consolidated Private Equity Credit Total Cost Funds Private Equity Credit Total Cost Funds $ 1,666,448 $ — $ 1,666,448 $ 1,561,154 27,296 57,815 3,563 $ 1,668,036 $ 76,376 $ 1,744,412 $ 1,649,828 — 27,653 — 48,723 1,588 — 27,653 48,723 1,588 98.5 % $ 1,480,152 $ — $ 1,480,152 $ 1,662,999 24,569 1.5 54,628 N/A 2,881 N/A 100.0 % $ 1,481,231 $ 70,891 $ 1,552,122 $ 1,745,077 — 24,213 — 46,678 1,079 — 24,213 46,678 1,079 98.4 % 1.6 N/A N/A 100.0 % At December 31, 2012 and 2011, the sole investment held by AAA was its investment in AAA Investments, L.P. (“AAA Investments”), which is measured based on AAA’s share of net asset value of AAA investments. The following tables represent each investment of AAA Investments constituting more than five percent of the net assets of the funds that the Company consolidates (excluding VIEs) as of the aforementioned dates: December 31, 2012 % of Net Assets of Consolidated Athene Holding Ltd. (1) Instrument Type Equity Cost $ 1,276,366 Fair Value $ 1,578,954 Funds 93.4 % (1) Two subsidiaries of AAA Investments, AAA Guarantor-Athene, L.P. and Apollo Life Re Ltd., own the majority of the equity of Athene Holding Ltd. AAA Investments owns through its subsidiaries the majority of the equity of Athene Holding Ltd. (“Athene”), the direct or indirect parent of the following principal operating subsidiaries: Athene Life Re Ltd., a Bermuda-based reinsurance company focused on the fixed annuity reinsurance sector, Athene Annuity & Life Assurance Company (formerly Liberty Life Insurance Company), a Delaware-domiciled (formerly South Carolina- domiciled) stock life insurance company focused on retail sales and reinsurance in the retirement services market, Athene Life Insurance Company, a Delaware-domiciled (formerly Indiana-domiciled) stock -185- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) life insurance company focused on the institutional funding agreement backed note and funding agreement markets, and Presidential Life Corporation, a New-York-domiciled stock life insurance company focused on retail sales of fixed annuity products principally in New York. During the fourth quarter of 2012, AAA and AAA Investments consummated a transaction whereby a wholly-owned subsidiary of AAA Investments contributed substantially all of its investments to Athene Holding Ltd. in exchange for common shares of Athene Holding Ltd., cash and a short term promissory note (the “AAA Transaction”). After the AAA Transaction, Athene Holding Ltd. was AAA’s only material investment and as of December 31, 2012, AAA through its investment in AAA Investments was the largest shareholder of Athene Holding Ltd with an approximate 77% ownership stake (without giving to effect to restricted common shares issued under Athene’s management equity plan). Apollo Life Re Ltd. Apollo Strategic Value Offshore Fund, Ltd. Rexnord Corporation LeverageSource, L.P. Apollo Asia Opportunity Offshore Fund, Ltd. Momentive Performance Materials December 31, 2011 Instrument Type Equity Investment Fund Equity Equity Investment Fund Equity Cost $ 358,241 105,889 37,461 139,913 88,166 80,657 Fair Value $ 430,800 164,811 139,100 102,834 86,329 85,300 % of Net Assets of Consolidated Funds 28.6 % 10.9 9.2 6.8 5.7 5.7 Apollo Strategic Value Offshore Fund, Ltd. (the “Apollo Strategic Value Fund”) has an ownership interest in a special purpose vehicle, Apollo VIF/SVF Bradco LLC, which owns interests in Bradco Supply Corporation. AAA Investments’ combined share of these investments is greater than 5.0% of the net assets of the consolidated funds valued at $80.9 million at December 31, 2011. In addition to the AAA Investments’ private equity co-investment in Momentive Performance Materials (“Momentive”) noted above, AAA Investments had an ownership interest in the debt of Momentive. AAA Investments’ combined share of these debt and equity investments is greater than 5% of the net assets of the consolidated funds and is valued at $85.9 million at December 31, 2011. The Apollo Strategic Value Fund primarily invests in the securities of leveraged companies in North America and Europe through three core strategies: distressed investments, value-driven investments and special opportunities. In connection with the redemptions requested by AAA Investments of its investment in the Apollo Strategic Value Fund, the remainder of AAA Investments’ investment in the Apollo Strategic Value Fund was converted into liquidating shares issued by the Apollo Strategic Value Fund. The liquidating shares were initially allocated a pro rata portion of each of the Apollo Strategic Value Fund’s existing investments and liabilities, and as those investments are sold, AAA Investments is allocated the proceeds from such disposition less its proportionate share of any current expenses incurred by the Apollo Strategic Value Fund. During the first quarter of 2012, the general partner of the Apollo Asia Opportunity Offshore Fund, Ltd. (the “Apollo Asia Opportunity Fund”) determined that it was in the best interests of the limited partners in the Apollo Asia Opportunity Fund to wind down the fund and begin making distributions to investors as investments are liquidated. The remainder of the investment in the Apollo Asia Opportunity Fund is currently expected to be distributed as the less liquid investments are realized, with the final liquidation expected to occur in 2013, although the actual timing of the realizations may differ substantially from this estimate. Apollo Senior Loan Fund On December 31, 2011, the Company invested $26.0 million in the Apollo Credit Senior Loan Fund, L.P. (“Apollo Senior Loan Fund”). As a result, the Company became the sole investor in the fund and therefore consolidated the assets and liabilities of the fund. The fund invests in U.S. denominated -186- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) senior secured loans, senior secured bonds and other income generating fixed-income investments. At least 90% of the Apollo Senior Loan Fund’s portfolio of investments must consist of senior secured, floating rate loans or cash or cash equivalents. Up to 10% of the Apollo Senior Loan Fund’s portfolio may consist of non-first lien fixed income investments and other income generating fixed income investments, including but not limited to senior secured bonds. The Apollo Senior Loan Fund may not purchase assets rated (tranche rating) at B3 or lower by Moody’s, or equivalent rating by another nationally recognized rating agency. The Company has classified the instruments associated with the Apollo Senior Loan Fund investment as Level II and Level III investments. All Level II and Level III investments of the Apollo Senior Loan Fund were valued using broker quotes. HFA On March 7, 2011, the Company invested $52.1 million (including expenses related to the purchase) in a convertible note with an aggregate principal amount of $50.0 million and received 20,833,333 stock options issued by HFA, an Australian based specialist global funds management company. The terms of the convertible note allow the Company to convert the note, in whole or in part, into common shares of HFA at an exchange rate equal to the principal plus accrued payment-in-kind interest (or “PIK” interest) divided by US$0.98 at any time, and convey participation rights, on an as- converted basis, in any dividends declared in excess of $6.0 million per annum, as well as seniority rights over HFA common equity holders. Unless previously converted, repurchased or cancelled, the note will be converted on the eighth anniversary of its issuance on March 11, 2019. Additionally, the note has a percentage coupon interest of 6% per annum, paid via principal capitalization (PIK interest) for the first four years, and thereafter either in cash or via principal capitalization at HFA’s discretion. The PIK interest provides for the Company to receive additional common shares of HFA if the note is converted. The Company has elected the fair value option for the convertible note. The convertible note is valued using an “if-converted basis,” which is based on a hypothetical exit through conversion to common equity( for which quoted price exists) as of the valuation date. The Company separately presents interest income in the consolidated statements of operations from other changes in the fair value of the convertible note. For the years ended December 31, 2012 and 2011 the Company has recorded $3.1 million and $2.5 million, respectively in PIK interest income included in interest income in the consolidated statements of operations. The terms of the stock options allow for the Company to acquire 20,833,333 fully paid ordinary shares of HFA at an exercise price in Australian Dollars (“A$”) of A$8.00 (exchange rate of A$1.00 to $1.04 and A$1.00 to $0.84 as of December 31, 2012 and 2011, respectively) per stock option. The stock options became exercisable upon issuance and expire on the eighth anniversary of the issuance date. The stock options are accounted for as a derivative and are valued at their fair value under U.S. GAAP at each balance sheet date. As a result, for the years ended December 31, 2012 and 2011, the Company recorded an unrealized loss of approximately $1.1 million and $5.9 million, respectively, related to the convertible note and stock options within net gains (losses) from investment activities in the consolidated statements of operations. The Company has classified the instruments associated with the HFA investment as Level III investments. -187- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Net Gains (Losses) from Investment Activities Net gains (losses) from investment activities in the consolidated statements of operations include net realized gains from sales of investments, and the change in net unrealized gains (losses) resulting from changes in fair value of the consolidated funds’ investments and realization of previously unrealized gains (losses). Additionally net gains (losses) from investment activities include changes in the fair value of the investment in HFA and other investments held at fair value. The following tables present Apollo’s net gains (losses) from investment activities for the years ended December 31, 2012, 2011 and 2010: Realized gains on sales of investments Change in net unrealized gains due to changes in fair values Net Gains from Investment Activities Change in net unrealized (losses) gains due to changes in fair values Net (Losses) Gains from Investment Activities Realized (losses) gains on sales of investments Change in net unrealized gains (losses) due to changes in fair values Net Gains (Losses) from Investment Activities -188- Private Equity $ — 288,140 $ 288,140 Private Equity $ (123,946 ) $ (123,946 ) For the Year Ended December 31, 2012 Credit $ $ 443 (339 ) 104 For the Year Ended December 31, 2011 Credit $ $ (5,881 ) (5,881 ) Total $ 443 287,801 $ 288,244 Total $ (129,827 ) $ (129,827 ) For the Year Ended December 31, 2010 Credit Private Equity $ — $ 370,145 370,145 $ $ (2,240 ) $ (34 ) (2,274 ) $ Total (2,240 ) 370,111 367,871 Table of Contents Other Investments APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Other Investments primarily consist of equity method investments. Apollo’s share of operating income (loss) generated by these investments is recorded within income from equity method investments in the consolidated statements of operations. The following table presents income from equity method investments for the years ended December 31, 2012, 2011 and 2010: Investments: Private Equity Funds: AAA Investments Apollo Investment Fund IV, L.P. (“Fund IV”) Apollo Investment Fund V, L.P. (“Fund V”) Apollo Investment Fund VI, L.P. (“Fund VI”) Apollo Investment Fund VII, L.P. (“Fund VII”) Apollo Natural Resources Partners, L.P. (“ANRP”) AION Capital Management Limited (“AION”) Credit Funds: Apollo Special Opportunities Managed Account, L.P. (“SOMA”) Apollo Value Investment Fund, L.P. (“VIF”) Apollo Strategic Value Fund, L.P. (“SVF”) Apollo Credit Liquidity Fund, L.P. (“ACLF”) Apollo/Artus Investors 2007-I, L.P. (“Artus”) Apollo Credit Opportunity Fund I, L.P. (“COF I”) Apollo Credit Opportunity Fund II, L.P. (“COF II”) Apollo European Principal Finance Fund, L.P. (“EPF I”) Apollo Investment Europe II, L.P. (“AIE II”) Apollo Palmetto Strategic Partnership, L.P. (“Palmetto”) Apollo Senior Floating Rate Fund (“AFT”) Apollo/ JH Loan Portfolio Apollo Residential Mortgage, Inc. (“AMTG”) Apollo European Credit, L.P. (“AEC”) Apollo European Strategic Investments, L.P. (“AESI”) Apollo Centre Street Partnership, L.P. (“ACSP”) Apollo Investment Corporation (“AINV”) Apollo European Principle Finance Fund II, L.P. (“EPF II”) Apollo SK Strategic Investments, L.P. Apollo SPN Investments I, L.P. Real Estate: Apollo Commercial Real Estate Finance, Inc. (“ARI”) AGRE US Real Estate Fund, L.P. CPI Capital Partners North America CPI Capital Partners Asia Pacific Apollo GSS Holding (Cayman), L.P. Other Equity Method Investments: VC Holdings, L.P. Series A (“Vantium A/B”) VC Holdings, L.P. Series C (“Vantium C”) VC Holdings, L.P. Series D (“Vantium D”) Total Income from Equity Method Investments (1) Amounts are as of September 30, 2012. (2) Amounts are as of September 30, 2011. (3) Amounts are as of September 30, 2010. -189- For the Years Ended December 31, 2011 2010 2012 $ 195 $ (2 ) 20 3,947 60,576 (55 ) 8 (9 ) 2,090 10,156 (141 ) — (71 ) 71 (793 ) 843 (25 ) 19 (21 ) 15 (295 ) 4,219 368 1,466 2,410 19,731 (737 ) 4,989 1,729 3,933 (308 ) 1,948 (100 ) 2,228 (16 ) 14 — 5 (80 ) ( 1) (10 ) 203 21 576 — 433 — 1,761 — 568 18 — (10 ) — 1,053 ( 2 ) $ 215 24 39 599 37,499 — — 1,106 29 21 3,431 4,895 12,618 3,610 2,568 1,496 903 — — — — — — — — — — 636 1,100 ( 2 ) (1) (79 ) (172 ) 98 17 72 71 (39 ) — ( 3 ) (390 ) — — — — (306 ) (1,860 ) 580 165 285 588 $ 13,923 $ 110,173 (951 ) 1,370 730 $ 69,812 Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Other investments as of December 31, 2012 and 2011 consisted of the following: Investments: Private Equity Funds: AAA Investments Fund IV Fund V Fund VI Fund VII ANRP AION Credit Funds: SOMA VIF SVF ACLF Artus COF I COF II EPF I AIE II Palmetto AFT Apollo/JH Loan Portfolio, L.P. AMTG AEC AESI ACSP AINV (5) EPF II Apollo SK Strategic Investments, L.P. Asia Private Credit (“APC”) Apollo SPN Investments I, L.P. CION Investment Corporation ( 3 ) (5) Real Estate: ( 3 ) (5) ARI AGRE U.S. Real Estate Fund CPI Capital Partners North America CPI Capital Partners Europe CPI Capital Partners Asia Pacific Apollo GSS Holding (Cayman), L.P. Other Equity Method Investments: Vantium A/B Vantium C Vantium D Portfolio Company Holdings Total Other Investments December 31, December 31, Equity Held as of 2012 % of Ownership 2011 % of Ownership $ 998 0.057 % $ 9 0.015 173 0.014 9,814 0.094 859 15 202 7,752 164,773 1.316 139,765 1,982 — 2,355 0.903 625 10.000 0.057 % 0.010 0.014 0.082 1.318 2.544 — 5,887 0.643 141 0.093 137 0.076 9,281 2.579 667 6.156 39,416 1.924 19,654 1.429 18,329 1.363 7,207 2.205 13,614 1.186 98 0.034 — 0.000 0.811 4,380 1,604 1.079 3,076 0.991 5,327 2.457 (1) (1) 51,761 (1) 2.955 (1) 5,337 1.316 1,002 0.988 17 0.058 90 0.083 1,000 22.207 11,469 (1) 2.729 (1) 5,210 1.845 455 0.413 5 0.001 186 0.039 2,428 4.621 5,051 122 123 14,449 6,009 37,806 22,979 14,423 7,845 10,739 84 100 4,000 ( 2 ) 542 1,704 — — — — — — — 0.525 0.081 0.059 2.465 6.156 1.977 1.472 1.363 2.076 1.186 0.034 0.189 1.850 ( 2 ) 1.053 1.035 — — — — — — — 11,288 ( 2 ) 5,884 564 5 256 — 2.730 ( 2 ) 2.065 0.344 0.001 0.039 — 54 6.450 5,172 2.071 1,933 6.345 — N/A (4) $ 393,684 359 6,944 1,345 2,147 $ 305,343 6.450 2.300 6.300 N/A (4) (1) Amounts are as of September 30, 2012. (2) Amounts are as of September 30, 2011. (3) Investment value includes the fair value of RSUs granted to the Company as of the grant date. These amounts are not considered in the percentage of ownership until the RSUs are vested, at which point the RSUs are converted to common stock and delivered to the Company. (4) Ownership percentages are not presented for these equity method investments in our portfolio companies as we only present ownership percentages for the funds in which we are the general partner. All equity methods of investments were sold during the year ended December 31, 2012. (5) The value of the Company’s investment in AINV was $51,351 based on the quoted market price as of December 31, 2012. -190- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The most recently issued summarized aggregated financial information of the funds and other equity method investments in which Apollo has equity method investments is as follows: Balance Sheet Information Investments Assets Liabilities Equity Private Equity As of December 31, 2012 ( 2 )( 3 ) 2011 Credit As of December 31, 2012 2011 2012 ( 2 )( 3 ) (1) Real Estate As of December 31, 2011 (1) $ 25,896,569 $ 22,759,853 $ 17,089,006 $ 10,004,744 $ 1,912,369 $ 1,980,613 2,196,460 587,576 1,608,884 24,219,637 686,558 23,533,079 19,397,579 7,823,274 11,574,305 11,335,170 2,773,163 8,562,007 26,606,324 101,803 26,504,521 2,038,877 290,392 1,748,485 (1) Certain real estate amounts are as of September 30, 2012 and 2011. (2) Certain equity investment amounts are as of September 30, 2012 and 2011. (3) Financial information of certain equity method investments is not available as of December 31, 2012 and 2011. Balance Sheet Information Investments Assets Liabilities Equity Aggregate Totals as of December 31, 2012 $ 44,897,944 48,042,780 8,215,469 39,827,311 2011 $ 34,745,210 37,751,267 4,047,297 33,703,970 Private Equity For the Years Ended December 31, ( 2 )( 3 ) Credit For the Years Ended December 31, 2011 Real Estate For the Years Ended December 31, 2011 (1) Income Statement Information 2012 Revenues/Investment Income $ 1,682,837 $ 1,522,831 $ 610,899 $ 1,330,160 $ 852,282 $ 304,332 $ 54,720 $ 46,654 $ 14,468 Expenses 275,126 377,985 286,719 699,250 290,843 145,138 32,077 30,350 6,377 Net Investment Income 1,407,711 1,144,846 324,180 630,910 561,439 159,194 22,643 16,304 8,091 Net Realized and Unrealized Gain (Loss) 6,856,074 2,239,373 5,918,694 2,053,440 (537,017 ) 1,531,056 275,659 172,018 (1,058 ) Net Income $ 8,263,785 $ 3,384,219 $ 6,242,874 $ 2,684,350 $ 24,422 $ 1,690,250 $ 298,302 $ 188,322 $ 7,033 2012 2010 2011 ( 2 )( 3 ) 2010 2010 2012 (1) (1) (1) Certain real estate amounts are as of September 30, 2012, 2011 and 2010. (2) Certain equity investment amounts are as of September 30, 2012 and 2011. (3) Financial information of certain equity method investments is not available as of December 31, 2012 and 2011. Income Statement Information Revenues/Investment Income Expenses Net Investment Income Net Realized and Unrealized Gain Net Income Aggregate Totals for the Years Ended December 31, 2011 $ 2,421,767 699,178 1,722,589 1,874,374 $ 3,596,963 2012 $ 3,067,717 1,006,453 2,061,264 9,185,173 $ 11,246,437 2010 $ 929,699 438,234 491,465 7,448,692 $ 7,940,157 -191- Table of Contents Fair Value Measurements APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table summarizes the valuation of Apollo’s investments in fair value hierarchy levels as of December 31, 2012 and 2011: Level I Level II Level III Totals December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, Assets, at fair value: Investment in AAA Investments $ Investments held by Apollo Senior Loan Fund Investments in HFA and Other Total $ 2012 2011 2012 2011 2012 2011 2012 2011 — $ — — — $ — $ 1,666,448 $ 1,480,152 $ 1,666,448 $ 1,480,152 — $ 24,213 456 590 — — 47,757 47,757 50,311 — $ 27,063 $ 23,757 $ 1,717,349 $ 1,528,365 $ 1,744,412 $ 1,552,122 — $ 27,063 — 27,653 50,311 23,757 — Liabilities, at fair value: Interest rate swap agreements Total Level I Level II Level III Totals December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, 2012 2011 2012 2011 2012 2011 2012 2011 $ $ — $ — $ — $ — $ — $ — $ 3,843 $ 3,843 $ — $ — $ — $ — $ — $ — $ 3,843 3,843 There was a transfer of investments from Level III into Level II as well as a transfer from Level II into Level III relating to investments held by the Apollo Senior Loan Fund during 2012, as a result of subjecting the broker quotes on these investments to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services. There were no transfers between Level I, II or III during the year ended December 31, 2011 relating to assets and liabilities, at fair value, noted in the tables above, respectively. The following table summarizes the changes in AAA Investments, which is measured at fair value and characterized as a Level III investment: Balance, Beginning of Period Purchases Distributions Change in unrealized gains (losses), net Balance, End of Period -192- 2012 $ 1,480,152 — (101,844 ) 288,140 $ 1,666,448 For the Year Ended December 31, 2011 $ 1,637,091 432 (33,425 ) (123,946 ) $ 1,480,152 2010 $ 1,324,939 375 (58,368 ) 370,145 $ 1,637,091 Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table summarizes the changes in the investment in HFA and Other Investments, which are measured at fair value and characterized as Level III investments: Balance, Beginning of Period Acquisitions related to consolidated fund Purchases Deconsolidation Director Fees Expenses incurred Change in unrealized losses Balance, End of Period For the Year Ended December 31, 2012 $ 47,757 (1) 46,148 5,759 (48,037 ) — — (1,316 ) $ 50,311 (1) 2011 $ — — 57,509 — (1,802 ) (2,069 ) (5,881 ) $ 47,757 (1) During the third quarter of 2012, the Company deconsolidated GSS Holding (Cayman), L.P., which was consolidated by the Company during the second quarter of 2012. The change in unrealized losses, net has been recorded within the caption “Net gains (losses) from investment activities” in the consolidated statements of operations. The following table summarizes the changes in the Apollo Senior Loan Fund, which is measured at fair value and characterized as a Level III investment for the years ended December 31, 2012 and 2011: Balance, Beginning of Period Acquisition Purchases of investments Sale of investments Realized gains Change in unrealized gains Transfers out of Level III Transfers into Level III Balance, End of Period -193- For the Year Ended December 31, 2012 456 $ — 496 (1,291 ) 20 8 (935 ) 1,836 590 $ 2011 $ — 456 — — — — — — $ 456 Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table summarizes a look-through of the Company’s Level III investments by valuation methodology of the underlying securities held by AAA Investments as of December 31, 2012 and 2011: Private Equity December 31, 2012 % of Investment December 31, 2011 % of Investment of AAA of AAA Approximate values based on net asset value of the underlying funds, which are based on the funds underlying investments that are valued using the following: Discounted cash flow models Comparable company and industry multiples Listed quotes Broker quotes Other net liabilities (1) Total Investments Other net assets (liabilities) (2) Total Net Assets $ 1,581,975 — 22,029 — — 38.4 % 44.6 8.3 10.7 (2.0 ) 1,604,004 100.0 % 1,678,529 100.0 % 98.6 % $ 643,031 — 749,374 1.4 139,833 — 179,621 (33,330 ) — 62,444 $ 1,666,448 (198,377 ) $ 1,480,152 (1) Balances include other assets and liabilities of certain funds in which AAA Investments has invested. Other assets and liabilities at the fund level primarily include cash and cash equivalents, broker receivables and payables and amounts due to and from affiliates. Carrying values approximate fair value for other assets and liabilities, and accordingly, extended valuation procedures are not required. (2) Balances include other assets, liabilities and general partner interests of AAA Investments. Balance at December 31, 2012 is primarily comprised of $113.3 million in notes receivable from affiliate. Balance at December 31, 2011 was primarily comprised of $402.5 million in long-term debt offset by cash and cash equivalents. Carrying values approximate fair value for other assets and liabilities (except for debt), and, accordingly, extended valuation procedures are not required. The significant unobservable inputs used in the fair value measurement of the Level III investments are the comparable multiples and weighed average cost of capital rates applied in the valuation models for each investment. These inputs in isolation can cause significant increases or decreases in fair value. Specifically, the comparable multiples are generally multiplied by the underlying companies embedded value to establish the total enterprise value of our portfolio company investments. The comparable multiple is determined based on the implied trading multiple of public industry peers. Similarly, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. An increase in the discount rate can significantly lower the fair value of an investment; conversely a decrease in the discount rate can significantly increase the fair value of an investment. The discount rate is determined based on the weighted average cost of capital calculation that weights the cost of equity and the cost of debt based on comparable debt to equity ratios. 5. VARIABLE INTEREST ENTITIES The Company consolidates entities that are VIEs for which the Company has been designated as the primary beneficiary. The purpose of such VIEs is to provide strategy-specific investment opportunities for investors in exchange for management and performance based fees. The investment strategies of the entities that the Company manages may vary by entity, however, the fundamental risks of such entities have similar characteristics, including loss of invested capital and the return of carried interest income previously distributed to the Company by certain private equity and credit entities. The nature of the Company’s involvement with VIEs includes direct and indirect investments and fee arrangements. The Company does not provide performance guarantees and has no other financial obligations to provide funding to VIEs other than its own capital commitments. There is no recourse to the Company for the consolidated VIEs’ liabilities. The assets and liabilities of the consolidated VIEs are comprised primarily of investments and debt, at fair value, and are included within assets and liabilities of consolidated variable interest entities, respectively, in the consolidated statements of financial condition. -194- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Consolidated Variable Interest Entities In accordance with the methodology described in note 2, Apollo has consolidated VIEs as of December 31, 2012, in connection with the Company’s October 2011 acquisition of Gulf Stream Asset Management, LLC and the Company’s April 2012 acquisition of Stone Tower. Refer to note 3 for further discussion of the Stone Tower and Gulf Stream acquisitions. The majority of the consolidated VIEs were formed for the sole purpose of issuing collateralized notes to investors. The assets of these VIEs are primarily comprised of senior secured loans and the liabilities are primarily comprised of debt. Through its role as collateral manager of these VIEs, it was determined that Apollo had the power to direct the activities that most significantly impact the economic performance of these VIEs. Additionally, Apollo determined that the potential fees that it could receive directly and indirectly from these VIEs represent rights to returns that could potentially be significant to such VIEs. As a result, Apollo determined that it is the primary beneficiary and therefore should consolidate the VIEs. The assets of these consolidated VIEs are not available to creditors of the Company. In addition, the investors in these consolidated VIEs have no recourse against the assets of the Company. The Company has elected the fair value option for financial instruments held by its consolidated VIEs, which includes investments in loans and corporate bonds, as well as debt obligations held by such consolidated VIEs. Other assets include amounts due from brokers and interest receivables. Other liabilities include payables for securities purchased, which represent open trades within the consolidated VIEs and primarily relate to corporate loans that are expected to settle within the next sixty days. Fair Value Measurements The following table summarizes the valuation of Apollo’s consolidated VIEs in fair value hierarchy levels as of December 31, 2012 and 2011: Investments, at fair value (1) $ 168 $ — $ 11,045,902 $ 3,055,357 $ 1,643,465 $ 246,609 $ 12,689,535 $ 3,301,966 Level I Level II Level III Totals December 31, December 31, December 31, December 31, December 31, December 31, 2012 2011 December 31, 2012 2011 2012 2011 December 31, 2012 2011 Liabilities, at fair value Level I Level II Level III Totals December 31, December 31, December 31, December 31, December 31, December 31, 2012 2011 2012 2011 December 31, 2012 2011 December 31, 2012 2011 $ — $ — $ — $ — $ 11,834,955 $ 3,189,837 $ 11,834,955 $ 3,189,837 (1) During the first quarter of 2011, one of the consolidated VIEs sold all of its investments. The consolidated VIE had a net investment gain of $16.0 million relating to the sale for the year ended December 31, 2011, which is reflected in the net (losses) gains from investment activities of consolidated variable interest entities on the consolidated statement of operations. Level III investments include corporate loan and corporate bond investments held by the consolidated VIEs, while the Level III liabilities consist of notes and loans, the valuations of which are discussed further in note 2. All Level II investments were valued using broker quotes. Transfers of investments out of Level III and into Level II or Level I, if any, are accounted for as of the end of the reporting period in which the transfer occurred. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. The following table summarizes the fair value transfers between Level I and Level II: -195- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Transfers from Level II into Level I (1) December 31, 2012 164 $ December 31, 2011 — $ (1) Transfers into Level I represents those financial instruments for which an unadjusted quoted price in an active market became available for the identical asset. The following table summarizes the quantitative inputs and assumptions used for Investments, at fair value, categorized as Level III in the fair value hierarchy as of December 31, 2012. The disclosure below excludes Level III Investments, at fair value as of December 31, 2012, for which the determination of fair value is based on broker quotes: Financial Assets: Bank Debt Term Loans Stocks Total Fair Value at December 31, 2012 Valuation Techniques $ 67,920 Discounted Cash Flow – Comparable Yields Unobservable Inputs Discount Rates Comparable Weighted Ranges Average 11.8%–25.2% 16.3 % 3,624 Market Comparable Companies Multiples 6.63x 6.63x $ 71,544 The significant unobservable inputs used in the fair value measurement of the bank debt term loans and stocks include the discount rate applied and the multiples applied in the valuation models. These unobservable inputs in isolation can cause significant increases (decreases) in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of an investment; conversely decreases in the discount rate can significantly increase the fair value of an investment. The discount rate is determined based on the market rates an investor would expect for a similar investment with similar risks. When a comparable multiple model is used to determine fair value, the comparable multiples are generally multiplied by the underlying companies EBITDA to establish the total enterprise value of the company. The comparable multiple is determined based on the implied trading multiple of public industry peers. The following table summarizes the changes in investments of consolidated VIEs, which are measured at fair value and characterized as Level III investments: Balance, Beginning of Period Acquisition of VIEs Transition adjustment relating of consolidation of VIE Deconsolidation of VIE Elimination of investments attributable to consolidation of VIEs Purchases Sale of investments Net realized gains (losses) Changes in net unrealized (losses) gains Transfers out of Level III Transfers into Level III Balance, End of Period Changes in net unrealized gains (losses) included in Net (Losses) Gains from Investment Activities of consolidated VIEs related to investments still held at reporting date For the Year Ended December 31, 2011 2010 2012 — — (69,437 ) $ 246,609 $ 170,369 $ 1,706,145 335,353 — — — 1,102,114 (20,751 ) — — — 840,926 1,236,232 663,438 (125,638 ) (1,561,589 ) (273,719 ) 131 980 29,981 (7,669 ) (712,040 ) (802,533 ) (1,663,755 ) 7,361 831,955 160,390 $ 1,643,465 $ 246,609 $ 170,369 21,603 (56,013 ) $ 7,464 $ (7,253 ) $ (3,638 ) Investments were transferred out of Level III into Level II and into Level III out of Level II, respectively, as a result of subjecting the broker quotes on these investments to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services. -196- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table summarizes the changes in liabilities of consolidated VIEs, which are measured at fair value and characterized as Level III liabilities: Balance, Beginning of Period Acquisition of VIEs Transition adjustment relating to consolidation of VIE Additions Repayments Net realized gains on debt Changes in net unrealized losses from debt Deconsolidation of VIE Elimination of debt attributable to consolidated VIEs Balance, End of Period Changes in net unrealized losses (gains) included in Net (Losses) Gains from For the Year Ended December 31, 2011 2012 2010 — $ 3,189,837 $ 1,127,180 $ 7,317,144 2,046,157 — — — 706,027 1,639,271 454,356 1,050,377 (741,834 ) (415,869 ) (331,120 ) (21,231 ) 55,040 — (329,836 ) (2,077 ) (48 ) $ 11,834,955 $ 3,189,837 $ 1,127,180 — 497,704 — (67,167 ) (41,819 ) 19,880 Investment Activities of consolidated VIEs related to liabilities still held at reporting date $ 446,649 $ (25,347 ) $ 16,916 Net (Losses) Gains from Investment Activities of Consolidated Variable Interest Entities The following table presents net (losses) gains from investment activities of the consolidated VIEs for the years ended December 31, 2012 and 2011, respectively: Net unrealized gains from investment activities Net realized gains (losses) from investment activities Net gains (losses) from investment activities Net unrealized losses from debt Net realized gains from debt Net (losses) gains from debt Interest and other income Other expenses Net (Losses) Gains from Investment Activities of Consolidated VIEs -197- For the Year Ended December 31, 2011 $ 10,832 (11,313 ) (481 ) (19,880 ) 41,819 21,939 75,004 (72,261 ) $ 24,201 2012 $ 169,087 76,965 246,052 (497,704 ) — (497,704 ) 581,610 (401,662 ) $ (71,704 ) 2010 $ 46,406 7,239 53,645 (55,040 ) 21,231 (33,809 ) 62,696 (34,326 ) $ 48,206 Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Senior Secured Notes, Subordinated Note, Term Loans —Included within debt are amounts due to third-party institutions of the consolidated VIEs. The following table summarizes the principal provisions of the debt of the consolidated VIEs as of December 31, 2012 and 2011: Senior Secured Notes Subordinated Notes (2)(3) (2)(3) December 31, 2012 December 31, 2011 Weighted Average Remaining Maturity in Years Weighted Average Interest Rate 1.30 % N/A (1) 7.3 7.7 Weighted Average Remaining Maturity in Years Weighted Average Interest Rate 1.35 % N/A (1) 8.9 8.8 Principal Outstanding $ 3,121,126 416,275 $ 3,537,401 Principal Outstanding $ 11,409,825 1,074,904 $ 12,484,729 (1) The subordinated notes do not have contractual interest rates but instead receive distributions from the excess cash flows of the VIEs. (2) The fair value of Senior Secured and Subordinated Notes as of December 31, 2012 and December 31, 2011 was $11,835 million and $3,190 million, respectively. (3) The debt at fair value of the consolidated VIEs is collateralized by assets of the consolidated VIEs and assets of one vehicle may not be used to satisfy the liabilities of another. As of December 31, 2012 and December 31, 2011, the fair value of the consolidated VIE assets was $14,672 million and $3,533 million, respectively. This collateral consists of cash and cash equivalents, investments at fair value and other assets. The following table summarizes the quantitative inputs and assumptions used for Liabilities, at fair value categorized as Level III in the fair value hierarchy as of December 31, 2012. The disclosure below excludes Level III Liabilities, at fair value as of December 31, 2012, for which the determination of fair value is based on broker quotes: Subordinated Notes Senior Secured Notes As of December 31, 2012 Unobservable Input Fair Value Valuation Technique $ 195,357 Discounted Cash Discount Rate Default Rate Flow Recovery Rate $ 2,066,250 Discounted Cash Discount Rate Default Rate Flow Recovery Rate Ranges 17.0% 1.5%–4.0% 80.0% 1.65%–1.95% 2.0% 30.0%–60.0% The significant unobservable inputs used in the fair value measurement of the subordinated and senior secured notes include the discount rate applied in the valuation models, default and recovery rates applied in the valuation models. These inputs in isolation can cause significant increases (decreases) in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of subordinated and senior secured notes; conversely decrease in the discount rate can significantly increase the fair value of subordinated and senior secured notes. The discount rate is determined based on the market rates an investor would expect for similar subordinated and senior secured notes with similar risks. The consolidated VIEs have elected the fair value option to value the term loans and notes payable. The general partner uses its discretion and judgment in considering and appraising relevant factors in determining valuation of these loans. As of December 31, 2012, the debt, at fair value, is classified as Level III liabilities. Because of the inherent uncertainty in the valuation of the term loans and notes payable, which are not publicly traded, estimated values may differ significantly from the values that would have been reported had a ready market for such investments existed. -198- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The consolidated VIEs’ debt obligations contain various customary loan covenants as described above. As of the balance sheet date, the Company was not aware of any instances of noncompliance with any of the covenants. As of December 31, 2012, the table below presents the maturities for debt of the consolidated VIEs: Secured notes Subordinated notes Total Obligations as of December 31, 2012 2013 2014 2015 2016 2017 Thereafter Total $ — $ — $ — $ 2,175,000 $ 378,999 $ 8,855,826 $ 11,409,825 1,074,904 $ 22,000 $ — $ — $ 2,175,000 $ 467,249 $ 9,820,480 $ 12,484,729 964,654 88,250 22,000 — — — Note: All of the CLOs are past their call date and therefore the collateral manager can call the CLO and liquidate (with the consent of each of the majority of the subordinated notes). Variable Interest Entities Which are Not Consolidated The Company holds variable interests in certain VIEs which are not consolidated, as it has been determined that Apollo is not the primary beneficiary. The following tables present the carrying amounts of the assets and liabilities of the VIEs for which Apollo has concluded that it holds a significant variable interest, but that it is not the primary beneficiary. In addition, the tables present the maximum exposure to loss relating to those VIEs. Private Equity Credit Real Estate Total Total Assets $ 13,498,100 3,276,198 1,685,793 $ 18,460,091 (1) December 31, 2012 Total Liabilities (34,438 ) $ (545,547 ) (1,237,462 ) $ (1,817,447 ) (2) Apollo Exposure 7,105 $ 12,605 — 19,710 (3) $ (1) Consists of $452,116 in cash, $17,092,814 in investments and $915,161 in receivables. (2) Represents $1,752,294 in debt and other payables, $32,702 in securities sold, not purchased, and $32,451 in capital withdrawals payable. (3) Apollo’s exposure is limited to its direct and indirect investments in those entities in which Apollo holds a significant variable interest. Private Equity Credit Real Estate Total Total Assets $ 11,879,948 3,274,288 2,216,870 $ 17,371,106 (1) December 31, 2011 Total Liabilities $ (146,374 ) (1,095,266 ) (1,751,280 ) $ (2,992,920 ) (2) Apollo Exposure 8,753 $ 11,305 — 20,058 (3) $ (1) Consists of $383,017 in cash, $16,507,142 in investments and $480,947 in receivables. (2) Represents $2,874,394 in debt and other payables, $86,102 in securities sold, not purchased, and $32,424 in capital withdrawals payable. (3) Apollo’s exposure is limited to its direct and indirect investments in those entities in which Apollo holds a significant variable interest. At December 31, 2011, AAA Investments, the sole investment of AAA, invested in certain of the Company’s unconsolidated VIEs, including LeverageSource, L.P. and AutumnLeaf, L.P. At December 31, 2011, the aggregate amount of such investments was $131.8 million. The Company’s ownership interest in AAA was 2.45% at December 31, 2011. As of December 31, 2012 AAA Investments did not hold investments in any of the Company’s unconsolidated VIEs. -199- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) 6. CARRIED INTEREST RECEIVABLE Carried interest receivable from private equity, credit, and real estate funds consists of the following: Private equity Credit Real Estate Total Carried Interest Receivable For the Year Ended December 31, 2012 $ 1,413,306 454,155 10,795 $ 1,878,256 2011 $ 672,952 195,630 — $ 868,582 The table below provides a roll-forward of the carried interest receivable balance for the years ended December 31, 2012 and 2011: ( 1 ) ( 2 ) Carried interest receivable, January 1, 2011 Change in fair value of funds Fund cash distributions to the Company Carried Interest Receivable, December 31, 2011 Change in fair value of funds Acquisition of Stone Tower Fund cash distributions to the Company Carried Interest Receivable, December 31, 2012 ( 1 ) Private Equity $ 1,578,135 (373,906 ) (531,277 ) $ 672,952 1,592,234 — (851,880 ) $ 1,413,306 Credit $ 288,938 67,971 (161,279 ) $ 195,630 448,670 36,097 (226,242 ) $ 454,155 Real Estate $ — — — $ — 15,074 — (4,279 ) $ 10,795 Total $ 1,867,073 (305,935 ) (692,556 ) $ 868,582 2,055,978 36,097 (1,082,401 ) $ 1,878,256 (1) Included in change in fair value of funds for the year ended December 31, 2012 was a reversal of $75.3 million of the entire general partner obligation to return previously distributed carried interest income with respect to Fund VI and reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $1.2 million and $0.3 million for SOMA and APC, respectively. Included in change in fair value of funds for the year ended December 31, 2011 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $75.3 million and $18.1 million for Fund VI and SOMA, respectively. The general partner obligation is recognized based upon a hypothetical liquidation of the funds’ net assets as of the balance sheet date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund. (2) Reclassified to include related foreign exchange loss attributable to credit segment in order to conform to current period presentation. The timing of the payment of carried interest due to the general partner or investment manager varies depending on the terms of the applicable fund agreements. Generally, carried interest with respect to the private equity funds is payable and is distributed to the fund’s general partner upon realization of an investment if the fund’s cumulative returns are in excess of the preferred return. For most credit funds, carried interest is payable based on realizations after the end of the relevant fund’s fiscal year or fiscal quarter, subject to high watermark provisions. -200- Table of Contents 7. FIXED ASSETS Fixed assets consist of the following: APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Ownership interests in aircraft Leasehold improvements Furniture, fixtures and other equipment Computer software and hardware Other Total fixed assets Less – accumulated depreciation and amortization Fixed Assets, net Useful Life in December 31, Years 15 8-16 4-10 2-4 4 2012 $ 10,184 48,610 16,047 27,744 509 103,094 (49,642 ) $ 53,452 2011 $ 10,184 44,433 14,455 22,789 506 92,367 (39,684 ) $ 52,683 In December 2010, the Company committed to a plan to sell its ownership interests in certain aircraft, which occurred in the first half of 2011. Accordingly, in 2010, the Company reclassified the assets to assets held for sale and measured the assets at the lower of cost or fair value less costs to sell. As a result of reclassifying the assets to assets held for sale, the Company recognized a loss of $2.8 million during the year ended December 31, 2010 on the assets held for sale, which is included in other income (loss), net in the accompanying consolidated statements of operations. As part of the plan to liquidate its ownership interest in aircraft, the Company determined that the remaining interests in aircraft were higher than its current fair value. In 2010, the Company recognized an impairment loss of $3.1 million related to its remaining ownership in aircraft. This loss is included in other income (loss), net in the accompanying consolidated statements of operations. Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was $10.2 million, $11.1 million and $11.5 million, respectively. 8. OTHER ASSETS Other assets consist of the following: Prepaid expenses Tax receivables Underwriting fee receivable Receivable from broker Debt issuance costs Rent deposits Other Total Other Assets December 31, December 31, 2012 $ 12,650 5,380 5,569 3,537 2,113 1,336 6,180 $ 36,765 2011 $ 6,271 10,465 — 604 2,624 1,482 5,530 $ 26,976 -201- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) 9. OTHER LIABILITIES Other liabilities consist of the following: Deferred rent Deferred taxes Unsettled trades and redemption payable Deferred payment related to acquisition (note 3) Interest rate swap agreements Other Total Other Liabilities December 31, December 31, 2012 $ 14,829 13,717 3,986 — — 12,323 $ 44,855 2011 $ 14,798 2,774 2,902 3,858 3,843 4,875 $ 33,050 Interest Rate Swap Agreements —The principal financial instruments used for cash flow hedging purposes are interest rate swaps. Apollo enters into interest rate swap agreements to manage its exposure to interest rate changes. The swaps effectively converted a portion of the Company’s variable rate debt under the AMH Credit Agreement (discussed in note 12) to a fixed rate, without exchanging the notional principal amounts. Apollo entered into interest rate swap agreements whereby Apollo receives floating rate payments in exchange for fixed rate payments of 5.175%, on the notional amount of $167.0 million, effectively converting a portion of its floating rate borrowings to a fixed rate. The interest rate swap agreement related to the $167.0 million notional amount expired in May 2012. Apollo had hedged only the risk related to changes in the benchmark interest rate (three month LIBOR). As of December 31, 2012 and 2011, the Company has recorded a liability of $0.0 million and $3.8 million, to recognize the fair value of these derivatives. The Company has determined that the valuation of the interest rate swaps fall within Level II of the fair value hierarchy. The Company estimates the fair value of its interest rate swaps using discounted cash flow models, which project future cash flows based on the instruments’ contractual terms using market-based expectations for interest rates. The Company also includes a credit risk adjustment to the cash flow discount rate to incorporate the impact of non-performance risk in the recognized measure of the fair value of the swaps. This adjustment is based on the counterparty’s credit risk when the swaps are in a net asset position and on the Company’s own credit risk when the swaps are in a net liability position. 10. OTHER INCOME, NET Other income, net consists of the following: Insurance proceeds Tax receivable agreement adjustment Gain on acquisitions and dispositions Loss on assets held for sale Impairment of fixed assets AMTG offering costs ARI reimbursed offering costs Foreign exchange translation Rental income Other Total Other Income, Net -202- 2012 $ — 3,937 1,951,897 — — — — (790 ) 4,387 5,248 $ 1,964,679 For the Year Ended December 31, 2011 $ — (137 ) 196,193 — — (8,000 ) 8,000 6,169 1,999 1,296 $ 205,520 2010 $ 162,500 7,614 29,741 (2,768 ) (3,101 ) — — (3,025 ) 1,699 2,372 $ 195,032 Table of Contents 11. INCOME TAXES APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The Company is treated as a partnership for income tax purposes and is therefore not subject to U.S. Federal and State income taxes. APO Corp., a wholly-owned subsidiary of the Company, is subject to U.S. Federal, State and Local corporate income taxes. In addition, certain subsidiaries of the Company are subject to NYC UBT attributable to the Company’s operations apportioned to New York City. Certain non-U.S. subsidiaries of the Company are subject to income taxes in their local jurisdictions. APO Corp. is required to file a standalone Federal corporate income tax return, as well as file standalone corporate state and local income tax returns in California, New York State and New York City. The Company’s provision for income taxes is accounted for in accordance with U.S. GAAP. The Company’s (provision) benefit for income taxes totaled $(65.4) million, $(11.9) and $(91.7) million for the years ended December 31, 2012, 2011 and 2010, respectively. The Company’s effective tax rate was approximately 2.10%, (0.92) % and 14.45% for the years ended December 31, 2012, 2011 and 2010, respectively. The provision for income taxes is presented in the following table: Current: Federal income tax Foreign income tax State and local income tax Subtotal Deferred: Federal income tax Foreign income tax State and local income tax (net of federal (benefit) provision) Subtotal Total Income Tax Provision For the Year Ended December 31, 2011 2010 2012 $ — (3,411 ) (7,722 ) (11,133 ) (55,114 ) 277 560 (54,277 ) $ (65,410 ) $ (856 ) (3,705 ) (6,943 ) (11,504 ) 248 301 (974 ) (425 ) $ (11,929 ) $ (8,051 ) (3,726 ) (8,648 ) (20,425 ) (64,633 ) 260 (6,939 ) (71,312 ) $ (91,737 ) For the years ended 2012, 2011 and 2010, the amount of federal income tax provision netted in the deferred state and local income tax amounts was $(0.4) million, $1.4 million and $4.2 million, respectively. The following table reconciles the provision for taxes to the U.S. Federal statutory tax rate: U.S. Statutory Tax Rate Income Passed Through to Non-Controlling Interest Income passed through to Class A holders Equity Based Compensation – AOG Units Foreign income tax State and Local Income Taxes (net of Federal Benefit) Amortization & Other Accrual Adjustments Effective Income Tax Rate For the Year Ended December 31, 2011 2012 35.00 % (30.88 ) (4.41 ) 1.84 0.10 0.20 0.25 2.10 % 35.00 % (24.67 ) (1.28 ) (9.12 ) (0.17 ) (0.56 ) (0.12 ) (0.92 )% 2010 35.00 % (24.54 ) (15.93 ) 16.49 0.54 2.32 0.57 14.45 % Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated statements of financial condition. These temporary differences result in taxable or deductible amounts in future years. -203- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The Company’s deferred tax assets and liabilities on the consolidated statements of financial condition consist of the following: Deferred Tax Assets: Depreciation and amortization Revenue recognition Net operating loss carry forward Equity-based compensation – RSUs and AAA RDUs Other Total Deferred Tax Assets Deferred Tax Liabilities: Unrealized gains from investments Other Total Deferred Tax Liabilities For the Year Ended December 31, 2012 2011 $ 448,372 40,597 5,514 41,083 6,642 542,208 $ 476,812 36,732 17,238 37,336 8,186 576,304 12,882 835 $ 13,717 1,307 1,467 $ 2,774 As of December 31, 2012, the Company has approximately $4.8 million of federal net operating loss (NOL) carryforwards and $60.7 million of state and local NOL carryforwards available to be utilized in future periods. If the Company is unable to utilize its NOL carryforwards, they will begin to expire in 2031. For tax year ended December 31, 2012, the Company expects to utilize NOLs carried forward from prior periods to offset its entire federal and state taxable income. In addition, the Company has foreign tax credit carryforwards of $6.0 million that will begin to expire in 2020. The Company has recorded a significant deferred income tax asset for the future amortization of tax basis intangibles as a result of the 2007 Reorganization. The amortization period for these tax basis intangibles is 15 years and accordingly, the related deferred income tax assets will reverse over the same period. The Company considered its historical and current year earnings in addition to the 15-year amortization period of the tax basis of its intangible assets in evaluating whether it should establish a valuation allowance. The Company also considered large recurring book expenses that do not provide a corresponding reduction in taxable income. The Company’s short-term and long-term projections anticipate positive book income. In addition, the Company’s projection of future taxable income, including the effects of originating and reversing temporary differences including those for the tax basis intangibles, indicates that deferred income tax liabilities will reverse substantially in the same period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred income tax assets. Based upon this positive evidence, the Company has concluded it is more likely than not, that the deferred income tax assets will be realized and that no valuation allowance is needed at December 31, 2012. Under U.S. GAAP, a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Based upon the Company’s review of its federal, state, local and foreign income tax returns and tax filing positions, the Company determined that no unrecognized tax benefits for uncertain tax positions were required to be recorded. In addition, the Company does not believe that it has any tax positions for which it is reasonably possible that it will be required to record significant amounts of unrecognized tax benefits within the next twelve months. The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and certain state, local and foreign tax authorities. With a few exceptions, as of December 31, 2012, Apollo and its predecessor entities’ U.S. Federal, state, local and foreign income tax returns for the years 2009 through 2012 are open under the general statute of limitations provisions and therefore subject to examination. In addition, the State of New York is examining APO Corp.’s tax returns for tax years 2008 to 2010 and the -204- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Internal Revenue Service is examining APO Corp.’s tax returns for tax years 2010 and 2011 in connection with the NOL carryback claim from tax year 2011 to tax year 2010. 12. DEBT Debt consists of the following: AMH Credit Agreement CIT secured loan agreements Total Debt (1) Includes the effect of interest rate swaps. December 31, 2012 December 31, 2011 Outstanding Balance $ 728,273 9,545 $ 737,818 Annualized Weighted Average Interest Rate (1) 4.95 % 3.47 4.93 % Outstanding Balance $ 728,273 10,243 $ 738,516 Annualized Weighted Average Interest Rate (1) 5.39 % 3.39 5.35 % AMH Credit Agreement —On April 20, 2007, Apollo Management Holdings, L.P. (“AMH”), a subsidiary of the Company which is a Delaware limited partnership owned by APO Corp. and Holdings, entered into a $1.0 billion seven year credit agreement (the “AMH Credit Agreement”). Interest payable under the AMH Credit Agreement may from time to time be based on Eurodollar (“LIBOR”) or Alternate Base Rate (“ABR”) as determined by the borrower. Through the use of interest rate swaps, AMH irrevocably elected three-month LIBOR for $167 million of the debt for five years from the closing date of the AMH Credit Agreement, which expired in May 2012. The interest rate of the Eurodollar loan, which was amended as discussed below, is the daily Eurodollar rate plus the applicable margin rate (3.75% for $995 million of the loan, as discussed below, and 1.00% for $5 million of the loan as of December 31, 2012 and 3.75% for $995 million of the loan and 1.00% for $5 million of the loan as of December 31, 2011). The interest rate on the ABR term loan, which was amended as discussed below, for any day, will be the greatest of (a) the prime rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.5% and (c) the one-month Eurodollar Rate plus 1.00%, in each case plus the applicable margin. The AMH Credit Agreement originally had a maturity date of April 2014. On December 20, 2010, Apollo amended the AMH Credit Agreement to extend the maturity date of $995.0 million (including the $90.9 million of fair value debt repurchased by the Company) of the term loan from April 20, 2014 to January 3, 2017 and modified certain other terms of the AMH Credit Agreement. Pursuant to this amendment, AMH or an affiliate was required to purchase from each lender that elected to extend the maturity date of its term loan a portion of such extended term loan equal to 20% thereof. In addition, AMH or an affiliate is required to repurchase at least $50.0 million aggregate principal amount of the term loan by December 31, 2014 and at least $100.0 million aggregate principal amount of the term loan (inclusive of the previously purchased $50.0 million) by December 31, 2015 at a price equal to par plus accrued interest. The sweep leverage ratio was also extended to end at the new loan term maturity date. The interest rate for the highest applicable margin for the loan portion extended changed to LIBOR plus 4.25% and ABR plus 3.25%. On December 20, 2010, an affiliate of AMH that is a guarantor under the AMH Credit Agreement repurchased approximately $180.8 million of the term loan in connection with the extension of the maturity date of such loan and thus the AMH Credit Agreement (excluding the portions held by AMH affiliates) had a remaining balance of $728.3 million. The Company determined that the amendments to the AMH Credit Agreement resulted in a debt extinguishment which did not result in any gain or loss. The interest rate on the $723.3 million, net ($995.0 million portion less amount repurchased by the Company) of the loan at December 31, 2012 was 4.07% and the interest rate on the remaining $5.0 million portion of the loan at December 31, 2012 was 1.32%. The estimated fair value of the Company’s long-term debt obligation related to the AMH Credit Agreement is believed to be approximately $795.6 million based on a yield analysis using available market data of comparable securities with similar terms and remaining maturities. The $728.3 million carrying value of debt that is recorded on the consolidated statement of -205- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) financial condition at December 31, 2012 is the amount for which the Company expects to settle the AMH Credit Agreement. As of December 31, 2012 and 2011, the AMH Credit Agreement was guaranteed by, and collateralized by, substantially all of the assets of Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH, as well as cash proceeds from the sale of assets or similar recovery events and any cash deposited pursuant to the excess cash flow covenant, which will be deposited as cash collateral to the extent necessary as set forth in the AMH Credit Agreement. As of December 31, 2012, the consolidated net assets (deficit) of Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH and its consolidated subsidiaries were $94.9 million, $91.1 million, $62.3 million, $217.5 million and $(858.9) million, respectively. As of December 31, 2011, the consolidated net assets (deficit) of Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH were $56.6 million, $46.2 million, $50.1 million, $131.9 million and $(1,014.3) million, respectively. In accordance with the AMH Credit Agreement as of December 31, 2012, Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Principal Holdings V, L.P., Apollo Principal Holdings IX, L.P. and AMH and their respective subsidiaries were subject to certain negative and affirmative covenants. Among other things, the AMH Credit Agreement includes an excess cash flow covenant and an asset sales covenant. The AMH Credit Agreement does not contain any financial maintenance covenants. If AMH’s debt to EBITDA ratio (the “Leverage Ratio”) as of the end of any fiscal year exceeds the level set forth in the next sentence (the “Excess Sweep Leverage Ratio”), AMH must deposit in the cash collateral account the lesser of (a) 100% of its Excess Cash Flow (as defined in the AMH Credit Agreement) and (b) the amount necessary to reduce the Leverage Ratio on a pro forma basis as of the end of such fiscal year to 0.25 to 1.00 below the Excess Sweep Leverage Ratio. The Excess Sweep Leverage Ratio is: for 2011, 4.00 to 1.00; for 2012, 4.00 to 1.00; for 2013, 4.00 to 1.00; for 2014, 3.75 to 1.00; and for 2015 and thereafter, 3.50 to 1.00. In addition, AMH must deposit the lesser of (a) 50% of any remaining Excess Cash Flow and (b) the amount required to reduce the Leverage Ratio on a pro forma basis at the end of each fiscal year to a level 0.25 to 1.00 below the Sweep Leverage Ratio (as defined in the next paragraph) for such fiscal year. If AMH receives net cash proceeds from certain non-ordinary course asset sales, then such net cash proceeds shall be deposited in the cash collateral account as necessary to reduce its Leverage Ratio on a pro forma basis as of the last day of the most recently completed fiscal quarter (after giving effect to such non-ordinary course asset sale and such deposit) to (the following specified levels for the specified years, the “Sweep Leverage Ratio”) (i) for 2011, 2012 and 2013, a Leverage Ratio of 3.50 to 1.00, (ii) for 2014, a Leverage Ratio of 3.25 to 1.00, (iii) for 2015, a Leverage Ratio of 3.00 to 1.00 and (iv) for all other years, a Leverage Ratio of 3.00 to 1.00. The AMH Credit Agreement contains customary events of default, including events of default arising from non-payment, material misrepresentations, breaches of covenants, cross default to material indebtedness, bankruptcy and changes in control of AMH. As of December 31, 2012, the Company was not aware of any instances of non-compliance with the AMH Credit Agreement. CIT Secured Loan Agreements —During the second quarter of 2008, the Company entered into four secured loan agreements totaling $26.9 million with CIT Group/Equipment Financing Inc. (“CIT”) to finance the purchase of certain fixed assets. The loans bear interest at LIBOR plus 318 basis points per annum with interest and principal to be repaid monthly and a balloon payment of the remaining principal totaling $9.4 million due at the end of the terms in April 2013. At December 31, 2012, the interest rate was 3.40%. On April 28, 2011, the Company sold its ownership interest in certain assets which served as collateral to the CIT secured loan agreements for $11.3 million with $11.1 million of the proceeds going to -206- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) CIT directly. As a result of the sale and an additional payment made by the Company of $1.1 million, the Company satisfied the loan associated with the related asset of $12.2 million on April 28, 2011. As of December 31, 2012, the carrying value of the remaining CIT secured loan is $9.5 million. Apollo has determined that the carrying value of this debt approximates fair value as the loans are primarily variable rate in nature. As of December 31, 2012, the table below presents the contractual maturities for the AMH Credit Agreement and CIT secured loan agreements: AMH Credit Agreement CIT secured loan agreements Total Obligations as of December 31, 2012 13. NET INCOME (LOSS) PER CLASS A SHARE 2013 2014 2015 2016 2017 Total $ — $ 55,000 $ 50,000 $ — $ 623,273 $ 728,273 9,545 $ 9,545 $ 55,000 $ 50,000 $ — $ 623,273 $ 737,818 — — — 9,545 — U.S. GAAP requires use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for distributions declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for distributions declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity. The remaining earnings are allocated to Class A Shares and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding common shares and all potential common shares assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential common shares. -207- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The table below presents basic and diluted net income (loss) per Class A share using the two-class method for the years ended December 31, 2012, 2011 and 2010: Numerator: Net income (loss) attributable to Apollo Global Management, LLC Distributions declared on Class A shares Distributions on participating securities Earnings allocable to participating securities Undistributed Income (Loss) Attributable to Class A Shareholders Denominator: Weighted average number of Class A shares outstanding Net income (loss) per Class A share: Basic and Diluted Distributable Earnings Undistributed income (loss) Net Income (Loss) per Class A Share ( 5 ) Basic and Diluted For the Year Ended December 31, 2011 2012 $ $ (1) 310,957 (172,887 ) (31,175 ) (16,855 ) 90,040 $ $ ( 2 ) $ (468,826 ) (97,758 ) (17,381 ) — (4) $ (583,965 ) 2010 ( 3 ) 94,617 (20,453 ) (3,662 ) (10,357 ) 60,145 127,693,489 116,364,110 96,964,769 $ $ 1.35 0.71 2.06 $ $ 0.84 (5.02 ) (4.18 ) $ $ 0.21 0.62 0.83 (1) The Company declared a $0.46 distribution on Class A shares on February 10, 2012, a $0.25 distribution on Class A shares on May 8, 2012, a $0.24 distribution on Class A shares on August 12, 2012, and a $0.40 distribution on Class A shares on November 9, 2012. As a result, there is a decrease in undistributed income attributable to Class A shareholders presented during the year ended December 31, 2012 (2) The Company declared a $0.17 distribution on Class A shares on January 4, 2011, a $0.22 distribution on Class A shares on May 12, 2011, a $0.24 distribution on Class A shares on August 9, 2011, and a $0.20 distribution on Class A shares on November 3, 2011. As a result, there is an increase in undistributed loss attributable to Class A shareholders presented during the year ended December 31, 2011. (3) The Company declared a $0.07 distribution on Class A shares on May 27, 2010, August 2, 2010 and November 1, 2010. As a result, there is a decrease in undistributed income attributable to Class A shareholders presented during the year ended December 31, 2010. (4) No allocation of losses was made to the participating securities as the holders do not have a contractual obligation to share in losses of the Company with the Class A shareholders. (5) For the year ended December 31, 2012, unvested RSUs and share options were determined to be dilutive and accordingly included in the diluted earnings per share calculation. For the year ended December 31, 2011, unvested RSUs, share options, AOG Units and RSUs that participate in dividends were determined to be anti-dilutive. For the year ended December 31, 2010, unvested RSUs were determined to be dilutive and accordingly included in the diluted earnings per share calculation. The resulting diluted earnings per share amounts were not significantly different from basic earnings per share and therefore were presented as the same amount. The AOG Units and RSUs that participate in dividends were determined to be anti-dilutive for the years ended December 31, 2012 and 2010. The share options were also determined to be anti-dilutive for the year ended December 31, 2010. On October 24, 2007, the Company commenced the granting of restricted share units (“RSUs”) that provide the right to receive, upon vesting, Class A shares of Apollo Global Management, LLC, pursuant to the Company’s 2007 Omnibus Equity Incentive Plan. Certain RSU grants to employees during 2011 and 2012 provide the right to receive distribution equivalents on vested RSUs on an equal basis any time a distribution is declared. The Company refers to these RSU grants as “Plan Grants.” For certain Plan Grants made before 2010, distribution equivalents are paid in January of the calendar year next following the calendar year in which a distribution on Class A shares was declared. In addition, certain RSU grants to employees in 2011 and 2012 (the Company refers to these as “Bonus Grants”) provide that both vested and unvested RSUs participate in distribution equivalents on an equal basis with the Class A shareholders any time a distribution is declared. As of December 31, 2012, approximately 22.5 million vested RSUs and 4.4 million unvested RSUs were eligible for participation in distribution equivalents. Any distribution equivalent paid to an employee will not be returned to the Company upon forfeiture of the award by the employee. Vested and unvested RSUs that are entitled to non-forfeitable -208- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) distribution equivalents qualify as participating securities and are included in the Company’s basic and diluted earnings per share computations using the two-class method. The holder of an RSU participating security would have a contractual obligation to share in the losses of the entity if the holder is obligated to fund the losses of the issuing entity or if the contractual principal or mandatory redemption amount of the participating security is reduced as a result of losses incurred by the issuing entity. Because the RSU participating securities do not have a mandatory redemption amount and the holders of the participating securities are not obligated to fund losses, neither the vested RSUs nor the unvested RSUs are subject to any contractual obligation to share in losses of the Company. Holders of AOG Units are subject to the vesting requirements and transfer restrictions set forth in the agreements with the respective holders, and may up to four times each year, upon notice (subject to the terms of the exchange agreement), exchange their AOG Units for Class A shares on a one- for-one basis. A limited partner must exchange one partnership unit in each of the ten Apollo Operating Group partnerships to affect an exchange for one Class A share. If fully converted, the result would be an additional 240,000,000 Class A shares added to the diluted earnings per share calculation. Apollo has one Class B share outstanding, which is held by BRH Holdings GP, Ltd. The voting power of the Class B share is reduced on a one vote per one AOG Unit basis in the event of an exchange of AOG Units for Class A shares, as discussed above. The Class B share has no net income (loss) per share as it does not participate in Apollo’s earnings (losses) or distributions. The Class B share has no distribution or liquidation rights. The Class B share has voting rights on a pari passu basis with the Class A shares. The Class B share currently has a super voting power of 240,000,000 votes. -209- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The table below presents transactions in Class A shares during the years ended December 31, 2012, 2011 and 2010 and the resulting impact on the Company’s and Holdings’ ownership interests in the Apollo Operating Group: Date March 12, 2010 July 9, 2010 July 23, 2010 September 16, 2010 September 30, 2010 January 8, 2011 March 15, 2011 April 4, 2011 April 7, 2011 July 11, 2011 August 15, 2011 October 10, 2011 November 10, 2011 November 22, 2011 January 18, 2012 February 13, 2012 March 5, 2012 April 3, 2012 July 9, 2012 August 6, 2012 October 9, 2012 November 12, 2012 November 19, 2012 Number of Shares Issued (Repurchased/Cancelled) in AGM Class A Shares Transaction (in thousands) AGM ownership% in AOG before AGM Class A AGM ownership% in AOG after AGM Class A Shares Transaction Shares Transaction Holdings ownership% in AOG before AGM Class A Shares Transaction Holdings ownership% in AOG after AGM Class A Shares Transaction 721 1,540 31 (7 ) 11 2 1,548 21,500 750 77 1,191 52 1,011 (130 ) 394 1,994 50 150 1,452 1,962 150 25 5 (1) (1) 28.5 % 28.6 % N/A (1) N/A N/A N/A (1) 29.0 % 29.3 % 33.5 % N/A (1) 33.7 % N/A (1) 33.9 % N/A (1) 34.1 % 34.1 % N/A (1) N/A (1) 34.5 % 34.7 % N/A (1) N/A N/A (1) (1) (1) (1) 28.6 % 29.0 % N/A (1) N/A N/A N/A (1) 29.3 % 33.5 % 33.7 % N/A (1) 33.9 % N/A (1) 34.1 % N/A (1) 34.1 % 34.5 % N/A (1) N/A (1) 34.7 % 35.1 % N/A (1) N/A N/A (1) (1) (1) (1) 71.5 % 71.4 % N/A (1) N/A N/A N/A (1) 71.0 % 70.7 % 66.5 % N/A (1) 66.3 % N/A (1) 66.1 % N/A (1) 65.9 % 65.9 % N/A (1) N/A (1) 65.5 % 65.3 % N/A (1) N/A N/A (1) (1) (1) (1) 71.4 % 71.0 % N/A (1) N/A N/A N/A (1) 70.7 % 66.5 % 66.3 % N/A (1) 66.1 % N/A (1) 65.9 % N/A (1) 65.9 % 65.5 % N/A (1) N/A (1) 65.3 % 64.9 % N/A (1) N/A N/A (1) (1) Type of AGM Class A Shares Transaction Issuance Issuance Issuance Net Settlement Issuance Issuance Issuance Issuance Issuance Issuance Issuance Issuance Issuance Net Settlement Issuance Issuance Issuance Issuance Issuance Issuance Issuance Issuance Issuance (1) Transaction did not have a material impact on ownership. 14. EQUITY-BASED COMPENSATION AOG Units The fair value of the AOG Units of approximately $5.6 billion is charged to compensation expense on a straight-line basis over the five or six year service period, as applicable. For the years ended December 2012, 2011 and 2010, $480.9 million, $1,032.8 million and $1,032.9 million of compensation expense was recognized, respectively. The estimated forfeiture rate was 0% for Contributing Partners and 0% for Managing Partners based on actual forfeitures as well as the Company’s future forfeiture expectations. As of December 31, 2012, there was $30.0 million of total unrecognized compensation cost related to unvested AOG Units that are expected to vest over the next 6 months. -210- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table summarizes the activity of the AOG Units for the years ended December 31, 2012, 2011 and 2010: Balance at January 1, 2010 Granted Forfeited Vested Balance at December 31, 2010 Granted Forfeited Vested Balance at December 31, 2011 Granted Forfeited Vested Balance at December 31, 2012 Apollo Operating Group Units 110,832,094 1,404,650 (1,404,650 ) (44,089,188 ) 66,742,906 — — (44,149,696 ) 22,593,210 199,050 (199,050 ) (21,092,844 ) 1,500,366 Weighted Average Grant Date Fair Value 23.35 11.96 20.00 23.43 23.13 — — 23.39 22.64 17.36 20.00 22.80 20.00 $ $ $ Units Expected to Vest —As of December 31, 2012, 1,500,366 AOG Units are expected to vest over the next 6 months. RSUs On October 24, 2007, the Company commenced the granting of RSUs under the Company’s 2007 Omnibus Equity Incentive Plan. These grants are accounted for as a grant of equity awards in accordance with U.S. GAAP. All grants after March 29, 2011 consider the public share price of the Company. The fair value of grants made in 2012, 2011 and 2010 was approximately $73.5 million, $116.6 million and $120.2 million, respectively. Of these awards, 972,266 RSUs relate to awards granted as part of the Stone Tower acquisition. The fair value of these awards was not charged to compensation expense, but charged to additional paid in capital in the consolidated statements of changes in shareholder’s equity. Refer to note 3 for further discussion of the Stone Tower acquisition. For Plan Grants, the fair value is based on grant date fair value, and is discounted for transfer restrictions and lack of distributions until vested. For Bonus Grants, the valuation methods consider transfer restrictions and timing of distributions. The total fair value is charged to compensation expense on a straight-line basis over the vesting period, which is generally up to 24 quarters (for Plan Grants) or annual vesting over three years (for Bonus Grants). The actual forfeiture rate was 3.9%, 2.3% and 7.9% for the years ended December 31, 2012, 2011 and 2010, respectively. For the years ended December 31, 2012, 2011 and 2010, $110.2 million, $108.2 million and $78.9 million of compensation expense was recognized, respectively. Delivery of Class A Shares During 2012 and 2011, the Company delivered Class A Shares for vested RSUs. The Company generally allows RSU participants to settle their tax liabilities with a reduction of their Class A share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a tax liability and a corresponding accumulated deficit adjustment. The adjustment was $26.0 million and $19.6 million in 2012 and 2011, respectively, and is disclosed in the consolidated statement of equity. The delivery of RSUs does not cause a transfer of amounts in the Consolidated Statement of Changes in Shareholders’ Equity to the Class A Shareholders. The delivery of Class A shares for vested RSUs causes the income allocated to the Non-Controlling Interests to shift to the Class A shareholders from the date of delivery forward. During the year ended December 31, 2012, the Company delivered 6.1 -211- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) million Class A shares in settlement of vested RSUs, which caused the Company’s ownership interest in the Apollo Operating Group to increase to 35.1% from 34.1%. The following table summarizes RSU activity for the years ended December 31, 2012, 2011 and 2010: Balance at January 1, 2010 Granted Forfeited Delivered Vested Balance at December 31, 2010 Granted Forfeited Delivered Vested Balance at December 31, 2011 Granted Forfeited Delivered Vested Balance at December 31, 2012 Unvested 19,937,996 12,861,969 (2,578,992 ) — (6,778,057 ) 23,442,916 8,068,735 (737,372 ) — (10,293,506 ) 20,480,773 5,377,562 (966,725 ) — (10,167,136 ) 14,724,474 Weighted Average Grant Date Fair Value $ $ 10.87 9.34 10.07 6.74 10.40 10.25 14.45 12.59 10.12 11.13 11.38 13.68 11.02 11.69 12.28 11.62 Vested 12,092,019 — — (3,227,155 ) 6,778,057 15,642,921 — — (5,696,419 ) 10,293,506 20,240,008 — — (7,894,214 ) 10,167,136 22,512,930 Total Number of RSUs Outstanding 32,030,015 12,861,969 (2,578,992 ) (3,227,155 ) — 39,085,837 8,068,735 (737,372 ) (5,696,419 ) — 40,720,781 (1) 5,377,562 (966,725 ) (7,894,214 ) — 37,237,404 (1) Amount excludes RSUs which have vested and have been issued in the form of Class A shares. Units Expected to Vest —As of December 31, 2012, approximately 13,841,000 RSUs are expected to vest during the next six years. Share Options Under the Company’s 2007 Omnibus Equity Incentive Plan, 5,000,000 options were granted on December 2, 2010. These options vested and became exercisable with respect to 4/24 of the option shares on December 31, 2011 and the remainder vest in equal installments over each of the remaining 20 quarters with full vesting on December 31, 2016. In addition, 555,556 options were granted on January 22, 2011 and 25,000 options were granted on April 9, 2011. Of the options granted on January 22, 2011, half of such options that vested and became exercisable on December 31, 2011 were exercised on March 5, 2012 and the other half that were due to become exercisable on December 31, 2012 were forfeited during the quarter ended March 31, 2012. The options granted on April 9, 2011 vested and became exercisable with respect to half of the options shares on December 31, 2011 and the other half vests in four equal quarterly installments starting on March 31, 2012 and ending on December 31, 2012. In addition, 50,000 and 200,000 options were granted on July 9, 2012 and December 28, 2012, respectively. These options will vest and become exercisable with respect to 4/24 of the option shares on June 30, 2013 and the remainder vest in equal installments over each of the remaining 20 quarters with full vesting on June 30, 2018. For the years ended December 31, 2012, 2011, and 2010, $4.8 million, $6.9 million, and $0.3 million of compensation expense were recognized as a result of option grants, respectively. -212- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Apollo measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options awarded during 2012 and 2011: Assumptions: Risk-free interest rate Weighted average expected dividend yield Expected volatility factor Expected life in years Fair value of options per share (1) (2) 2012 1.11 % 8.13 % 45.00 % 6.66 $ 3.01 (2) 2011 2.79 % 2.25 % 40.22 % 5.72 $ 8.44 2010 2.34 % 2.79 % 40.00 % 6.79 $ 5.62 (1) The Company determined its expected volatility based on comparable companies using daily stock prices and the Company’s volatility. (2) Represents weighted average of 2012 and 2011 grants, respectively. The following table summarizes the share option activity for the years ended December 31, 2012, 2011 and 2010: Balance at January 1, 2010 Granted Exercised Forfeited Balance at December 31, 2010 Granted Exercised Forfeited Balance at December 31, 2011 Granted Exercised Forfeited Balance at December 31, 2012 Exercisable at December 31, 2012 Weighted Average Exercise Price $ — 8.00 — — 8.00 9.39 — — 8.14 16.26 9.00 9.00 8.44 $ 8.15 Aggregate Fair Value $ — 28,100 — — $ 28,100 4,896 — — $ 32,996 752 (2,364 ) (2,364 ) $ 29,020 $ 9,535 Options Outstanding — 5,000,000 — — 5,000,000 580,556 — — 5,580,556 250,000 (277,778 ) (277,778 ) 5,275,000 1,691,665 Weighted Average Remaining Contractual Term — 9.92 — — 9.92 9.09 — — 8.93 9.90 — — 8.01 7.92 Units Expected to Vest — As of December 31, 2012, approximately 3,368,000 options are expected to vest. The expected life of the options granted represents the period of time that options are expected to be outstanding and is based on the contractual term of the option. Unamortized compensation cost related to unvested share options at December 31, 2012 was $18.3 million and is expected to be recognized over a weighted average period of 4.0 years. The total intrinsic value of options exercised during the year ended December 31, 2012 was $1.4 million. AAA RDUs Incentive units that provide the right to receive AAA restricted depository units (“RDUs”) following vesting are granted periodically to employees of Apollo. These grants are accounted for as equity awards in accordance with U.S. GAAP. The incentive units granted to employees generally vest over three years. In contrast, the Company’s Managing Partners and Contributing Partners have received distributions of fully-vested AAA RDUs. The fair value at the date of the grants is recognized on a straight-line basis over the vesting period (or upon grant in the case of fully vested AAA RDUs). The grant date fair value is based on the public share price of AAA. Vested AAA RDUs can be converted into ordinary common units of AAA subject to applicable securities law restrictions. During the years ended December 31, 2012, 2011 -213- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) and 2010, the actual forfeiture rate was 0%, 0% and 1.5%, respectively. For the years ended December 31, 2012, 2011 and 2010, $1.0 million, $0.5 million and $5.5 million of compensation expense was recognized, respectively. During the years ended December 31, 2012, 2011 and 2010, the Company delivered 60,702, 389,785 and 596,375 RDUs, respectively, to individuals who had vested in these units. The deliveries in 2012, 2011 and 2010 resulted in a satisfaction of liability of $1.8 million, $3.8 million and $7.6 million, respectively, and the recognition of a net decrease of additional paid in capital in 2012 of $2.5 million and a net decrease and increase in 2011 and 2010 of $2.7 million and $0.6 million, respectively. These amounts are presented in the consolidated statement of changes in shareholders’ equity. There was $1.0 million and $0.5 million of liability for undelivered RDUs included in accrued compensation and benefits in the consolidated statements of financial condition as of December 31, 2012 and 2011, respectively. The following table summarizes RDU activity for the years ended December 31, 2012, 2011 and 2010: Balance at January 1, 2010 Granted Forfeited Delivered Vested Balance at December 31, 2010 Granted Forfeited Delivered Vested Balance at December 31, 2011 Granted Forfeited Delivered Vested Balance at December 31, 2012 Weighted Average Grant Date Fair Value $ 12.95 7.34 13.00 12.73 9.36 7.20 10.30 — 10.54 8.69 8.17 9.45 — 8.69 9.02 8.85 $ Total Number of RDUs Outstanding 616,669 547,974 (11,816 ) (596,375 ) — 556,452 90,688 — (389,785 ) — 257,355 256,673 — (60,702 ) — 453,326 Vested 395,448 — — (596,375 ) 590,712 389,785 — — (389,785 ) 60,702 60,702 — — (60,702 ) 114,896 114,896 Unvested 221,221 547,974 (11,816 ) — (590,712 ) 166,667 90,688 — — (60,702 ) 196,653 256,673 — — (114,896 ) 338,430 -214- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Units Expected to Vest —As of December 31, 2012, approximately 318,000 RDUs are expected to vest over the next three years. The following table summarizes the activity of RDUs available for future grants: Balance at January 1, 2010 Purchases Granted Forfeited Balance at December 31, 2010 Purchases Granted Forfeited Balance at December 31, 2011 Purchases Granted/Issued Forfeited Balance at December 31, 2012 RDUs Available For Future Grants 2,418,528 96,661 (547,974 ) 11,816 1,979,031 59,494 (90,688 ) — 1,947,837 187,261 (449,753 ) — 1,685,345 (1) (1) During 2012, the Company delivered 193,080 RDUs to certain employees as part of AAA’s carry reinvestment program. This resulted in a decrease in profit sharing payable of $1.2 million in the consolidated statements of financial condition. No additional compensation expense was recognized. Restricted Stock and Restricted Stock Unit Awards—Apollo Commercial Real Estate Finance, Inc. (“ARI”) On September 29, 2009, 97,500 and 145,000 shares of ARI restricted stock were granted to the Company and certain of the Company’s employees, respectively. Additionally, on December 31, 2009, 5,000 shares of ARI restricted stock were granted to an employee of the company. The fair value of the Company and employee awards granted was $1.8 million and $2.7 million, respectively. These awards generally vest over three years or twelve quarters, with the first quarter vesting on January 1, 2010. On March 23, 2010, July 1, 2010 and July 21, 2010, 102,084, 5,000 and 16,875 shares of ARI restricted stock units (“ARI RSUs”), respectively, were granted to certain of the Company’s employees. Pursuant to the March 23, 2010 and July 21, 2010 issuances, 102,084 and 16,875 shares of ARI restricted stock, respectively, were forfeited by the Company’s employees. As the fair value of ARI RSUs was not greater than the forfeiture of the restricted stock, no additional value will be amortized. On April 1, 2011 and August 4, 2011, 5,000 and 152,750 ARI RSUs, respectively, were granted to certain of the Company’s employees. On August 4, 2011, 156,000 ARI RSUs were granted to the Company. On December 28, 2011, the Company issued 45,587 ARI RSUs to certain of the Company’s employees. On March 15, 2012, 20,000 ARI RSUs were granted to an employee of the Company. The awards granted to the Company are accounted for as investments and deferred revenue in the consolidated statements of financial condition. As these awards vest, the deferred revenue is recognized as management fees. The investment is accounted for using the equity method of accounting for awards granted to the Company and as a deferred compensation asset for the awards granted to employees. Compensation expense will be recognized on a straight line-basis over the vesting period for the awards granted to the employees. The Company recorded an asset and a liability upon receiving the awards on behalf of the Company’s employees. The fair value of the awards to employees is based on the grant date fair value, which utilizes the public share price of ARI, less discounts for transfer restrictions and timing of distributions. The awards granted to the Company’s employees are remeasured each period to reflect the fair value of the asset and other liabilities and any changes in these values are recorded in the consolidated statements of operations. For the years ended December 31, 2012, 2011 and 2010, $2.3 million, $2.9 million and $1.5 million of management fees and $1.5 million, $1.3 million and $0.8 million of compensation expense were recognized in the consolidated statements of operations, respectively. The actual forfeiture rate for unvested ARI restricted stock awards and ARI RSUs was 1%, 7% and 2% for the years ended December 31, 2012, 2011 and 2010, respectively. -215- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table summarizes activity for the ARI restricted stock awards and ARI RSUs that were granted to both the Company and certain of its employees for the years ended December 31, 2012, 2011 and 2010: Balance at January 1, 2010 Granted to employees of the Company Forfeited by employees of the Company Vested awards employees of the Company Vested awards for the Company Balance at December 31, 2010 Granted to employees of the Company Granted to the Company Forfeited by employees of the Company Vested awards for employees of the Company Vested awards of the Company Balance at December 31, 2011 Granted to employees of the Company Granted to the Company Forfeited by employees of the Company Vested awards for employees of the Company Vested awards of the Company Balance at December 31, 2012 ARI Restricted Stock Unvested 242,500 — (118,959 ) (26,039 ) (32,500 ) 65,002 — — — — (32,500 ) 32,502 — — — — (32,502 ) — Weighted Average Grant Date ARI RSUs Fair Value Unvested — $ 18.47 16.97 123,959 18.41 (5,000 ) 17.77 (22,709 ) 18.48 — 17.57 96,250 14.34 203,337 14.85 156,000 14.85 (30,000 ) 16.95 (50,833 ) 18.48 — 15.12 374,754 15.17 20,000 — — 14.09 (5,522 ) 15.43 (99,690 ) (52,000 ) 16.25 237,542 $ 14.62 ARI RSUs Vested — — — 22,709 — 22,709 — — — 50,833 — 73,542 — — — 99,690 52,000 225,232 Total Number of RSUs Outstanding — 123,959 (5,000 ) — — 118,959 203,337 156,000 (30,000 ) — — 448,296 20,000 — (5,522 ) — — 462,774 Units Expected to Vest —As of December 31, 2012, approximately 230,000 shares of ARI RSUs are expected to vest. Restricted Stock Unit Awards—Apollo Residential Mortgage, Inc. (“AMTG”) On July 27, 2011, 18,750 and 11,250 AMTG restricted stock units (“AMTG RSUs”) were granted to the Company and certain of the Company’s employees, respectively. On September 26, 2011, 875 AMTG RSUs were granted to certain employees of the Company. The fair value of the Company and employee awards granted were $0.3 million and $0.2 million, respectively. These awards generally vest over three years or twelve calendar quarters, with the first quarter vesting on October 1, 2011. On June 30, 2012 and September 30, 2012, 5,000 AMTG RSUs were granted to employees of the Company with a Fair Value of $0.1 million. On November 26, 2012, 133,244 AMTG RSUs were granted to employees of the Company with a fair value of $2.8 million. The awards granted to the Company are accounted for as investments and deferred revenue in the consolidated statement of financial condition. As these awards vest, the deferred revenue is recognized as management fees. The investment is accounted for using the equity method of accounting for awards granted to the Company and as a deferred compensation asset for the awards granted to employees. Compensation expense will be recognized on a straight line-basis over the vesting period for the awards granted to the employees. The Company recorded an asset and a liability upon receiving the awards on behalf of the Company’s employees. The awards granted to the Company’s employees are remeasured each period to reflect the fair value of the asset and other liabilities and any changes in these values are recorded in the consolidated statements of operations. The fair value of the awards to employees is based on the grant date fair value, which utilizes the public share price of AMTG less discounts for transfer restrictions and timing of distributions. For the year ended December 31, 2012, $0.2 million of management fees and $0.1 million of compensation expense were recognized in the consolidated statements of operations. For the year ended December 31, 2011, $0.1 million of management fees and $0.0 million of compensation expense were recognized in the consolidated statement of operations. The actual forfeiture rate for AMTG RSUs was 0% for the years ended December 31, 2012 and December 31, 2011. -216- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table summarizes activity for the AMTG RSUs that were granted to both the Company and certain of its employees for the years ended December 31, 2012 and December 31, 2011: Balance at January 1, 2011 Granted to employees of the Company Granted to the Company Forfeited by employees of the Company Vested awards of the employees of the Company Vested awards of the Company Balance at December 31, 2011 Granted to employees of the Company Granted to the Company Forfeited by employees of the Company Vested awards of the employees of the Company Vested awards of the Company Balance at December 31, 2012 AMTG RSUs Unvested — 12,125 18,750 — (1,008 ) (1,562 ) 28,305 143,244 — — (4,042 ) (6,250 ) 161,257 Weighted Average Grant Date Fair Value $ — 16.57 18.20 — 16.57 18.20 17.56 20.62 — — 16.57 18.20 $ 20.28 Total Number of RSUs Outstanding — 12,125 18,750 — — — 30,875 143,244 — — — — 174,119 Vested — — — — 1,008 1,562 2,570 — — — 4,042 6,250 12,862 Units Expected to Vest —As of December 31, 2012, approximately 152,000 AMTG RSUs are expected to vest. Equity-Based Compensation Allocation Equity-based compensation is allocated based on ownership interests. Therefore, the amortization of the AOG Units is allocated to Shareholders’ Equity attributable to Apollo Global Management, LLC and the Non-Controlling Interests, which results in a difference in the amounts charged to equity-based compensation expense and the amounts credited to shareholders’ equity attributable to Apollo Global Management, LLC in the Company’s consolidated financial statements. Below is a reconciliation of the equity-based compensation allocated to Apollo Global Management, LLC for the year ended December 31, 2012: AOG Units RSUs and Share Options ARI Restricted Stock Awards, ARI RSUs and AMTG RSUs AAA RDUs Total Equity-Based Compensation Less ARI Restricted Stock Awards, ARI RSUs and AMTG RSUs Capital Increase Related to Equity-Based Compensation Allocated to Non- Controlling Non- Controlling Interest % in Apollo Operating Group Allocated to Apollo Global Management, LLC Interest in Apollo Operating (1) Group 64.9 % $ 313,856 $ 167,075 — — 115,013 581 1,093 64.9 360 676 64.9 315,625 283,029 (741 ) $ 313,856 $ 282,288 (1,769 ) Total Amount $ 480,931 115,013 1,674 1,036 $ 598,654 (1) Calculated based on average ownership percentage for the period considering Class A share issuances during the period. -217- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Below is a reconciliation of the equity-based compensation allocated to Apollo Global Management, LLC for the year ended December 31, 2011: AOG Units RSUs and Share Options ARI Restricted Stock Awards, ARI RSUs and AMTG RSUs AAA RDUs Total Equity-Based Compensation Less ARI Restricted Stock Awards, ARI RSUs and AMTG RSUs Capital Increase Related to Equity-Based Compensation Non- Controlling Interest % in Apollo Operating Group LLC Allocated to Apollo Global Management, Allocated to Non- Controlling Interest in Apollo Operating (1) Group 65.9 % $ 696,361 $ 336,401 — 115,142 — 450 870 65.9 180 349 65.9 697,580 452,173 (630 ) $ 696,361 $ 451,543 (1,219 ) Total Amount $ 1,032,762 115,142 1,320 529 $ 1,149,753 (1) Calculated based on average ownership percentage for the period considering Class A share issuances during the period. Below is a reconciliation of the equity-based compensation allocated to Apollo Global Management, LLC for the year ended December 31, 2010: AOG Units RSUs and Share Options ARI Restricted Stock Awards and ARI RSUs AAA RDUs Total Equity-Based Compensation Less AAA RDUs, ARI Restricted Stock Awards and ARI RSUs Capital Increase Related to Equity-Based Compensation Allocated to Non- Controlling Non- Controlling Interest % in Apollo Operating Group Allocated to Apollo Global Management, LLC Interest in Apollo Operating (1) Group 71.0 % $ 735,698 $ 297,211 79,169 — — 71.0 232 569 1,603 3,930 71.0 740,197 378,215 (1,835 ) $ 735,698 $ 376,380 (4,499 ) Total Amount $ 1,032,909 79,169 801 5,533 $ 1,118,412 (1) Calculated based on average ownership percentage for the period considering Class A share issuance during the period. -218- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) 15. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED ENTITIES The Company typically facilitates the initial payment of certain operating costs incurred by the funds that it manages as well as their affiliates. These costs are normally reimbursed by such funds and are included in due from affiliates. Due from affiliates and due to affiliates are comprised of the following: Due from Affiliates: Due from private equity funds Due from portfolio companies Management and advisory fees receivable from credit funds Due from credit funds Due from Contributing Partners, employees and former employees Due from real estate funds Other Total Due from Affiliates Due to Affiliates: Due to Managing Partners and Contributing Partners in connection with the tax receivable agreement Due to private equity funds Due to credit funds Due to real estate funds Distributions payable to employees Other (1) Total Due to Affiliates As of December 31, 2012 2011 $ 28,201 46,048 46,000 22,278 9,536 17,950 3,299 $ 173,312 $ 28,465 61,867 23,545 15,822 30,353 13,453 3,235 $ 176,740 $ 441,997 12,761 19,926 1,200 1,567 — $ 477,451 $ 451,743 86,500 18,817 1,200 12,532 7,972 $ 578,764 (1) As of December 31, 2011, includes a $4.7 million contingent consideration liability at fair value due to former owners of Gulf Stream as discussed in note 3 to the consolidated financial statements. Tax Receivable Agreement and Other Subject to certain restrictions, each of the Managing Partners and Contributing Partners has the right to exchange their vested AOG Units for the Company’s Class A shares. Certain Apollo Operating Group entities have made an election under Section 754 of the U.S. Internal Revenue Code of 1986, as amended, which will result in an adjustment to the tax basis of the assets owned by Apollo Operating Group at the time of the exchange. These exchanges will result in increases in tax deductions that will reduce the amount of tax that APO Corp. will otherwise be required to pay in the future. Additionally, the further acquisition of AOG Units from the Managing Partners and Contributing Partners also may result in increases in tax deductions and tax basis of assets that will further reduce the amount of tax that APO Corp. will otherwise be required to pay in the future. APO Corp. entered into a tax receivable agreement (“TRA”) with the Managing Partners and Contributing Partners that provides for the payment to the Managing Partners and Contributing Partners of 85% of the amount of cash savings, if any, in U.S. Federal, state, local and foreign income taxes that APO Corp. would realize as a result of the increases in tax basis of assets that resulted from the 2007 Reorganization. If the Company does not make the required annual payment on a timely basis as outlined in the TRA, interest is accrued on the balance until the payment date. These payments are expected to occur approximately over the next 20 years. In connection with the amendment of the AMH partnership agreement in April of 2010, the tax receivable agreement was revised to reflect the Managing Partners’ agreement to defer 25% or $12.1 million of the required payments pursuant to the TRA that is attributable to the 2010 fiscal year for a period of four years until April 5, 2014. -219- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) In April 2011, Apollo made cash payments of $39.8 million, in connection with the TRA to the Managing Partners and Contributing Partners resulting from realized tax benefits for the 2010 tax year. Included in the 2011 payment was $29.0 thousand and $3.0 thousand of interest paid to the Managing Partners and Contributing Partners, respectively. In April 2012, Apollo made a $5.8 million cash payment pursuant to the TRA resulting from the realized tax benefit for the 2011 tax year. Included in the payment was approximately $1.2 million and approximately $0.1 million of interest paid to the Managing Partners and Contributing Partners, respectively. Because distributions from the Apollo Operating Group are made pari passu to all unit holders, the TRA payment noted above resulted in an additional $11.0 million distribution to Holdings. In addition, Apollo adjusted the remaining liability by $(3.9) million, $(0.1) million and $7.6 million and recorded a corresponding gain in other income (loss), net in the consolidated statement of operations during the years ended December 31, 2012 and 2011, respectively, and a corresponding loss in other income (loss), net in the consolidated statement of operations for the year ended December 31, 2010 due to changes in projected income estimates and fluctuations in the tax rates. Special Allocation In December 2009, the AMH partnership agreement was amended to provide for special allocations of income to APO Corp. and a reduction of income allocated to Holdings for the 2009 and 2010 calendar years. The amendment allowed for a maximum allocation of income from Holdings of $22.1 million in 2009 and $117.5 million in 2010. There was no extension of the special allocation after December 31, 2010. Therefore as a result, the Company did not allocate any additional income from AMH to APO Corp. related to the special allocation beyond such date. The Company will continue to allocate income to APO Corp. based on the current economic sharing percentage. Due from Contributing Partners, Employees and Former Employees For the year ended December 31, 2011, the Company accrued $22.1 million in receivables from the Contributing Partners and certain employees and former employees of Fund VI for the potential return of carried interest income that would be due if the private equity fund were liquidated at the balance sheet date. For the year ended December 31, 2012, the Company has no liability to Fund VI in connection with the potential general partner obligation to return previously distributed carried interest income. As a result, for the year ended December 31, 2012, the Company has no receivables from the Contributing Partners, certain employees and former employees of Fund VI in connection with the potential general partner obligation to return previously distributed carried interest income. Management Fee Waiver and Notional Investment Program Apollo has forgone a portion of management fee revenue that it would have been entitled to receive in cash and instead received profits interests and assigned these profits interests to employees and partners. The amount of management fees waived and related compensation expense amounted to $6.2 million, $23.5 million and $24.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. The investment period for Fund VII and ANRP for the management fee waiver plan was terminated as of December 31, 2012. -220- Table of Contents Distributions APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) In addition to other distributions such as TRA payments, the table below presents information regarding the quarterly distributions which were made at the sole discretion of the manager of the Company during 2010, 2011, and 2012 (in millions, except per share amounts): Distributions per Class A Share Amount $ 0.07 0.07 0.07 0.17 0.22 0.24 0.20 0.46 0.25 0.24 0.40 Distributions Payment Date June 15, 2010 August 25, 2010 November 23, 2010 January 14, 2011 June 1, 2011 August 29, 2011 December 2, 2011 February 29, 2012 May 30, 2012 August 31, 2012 November 30, 2012 Distributions to AGM Class A Shareholders 6.7 $ 6.9 6.9 16.6 26.8 29.5 24.8 58.1 31.6 31.2 52.0 Distributions to Non-Controlling Interest Holders in the Apollo Operating Group 16.8 $ 16.8 16.8 40.8 52.8 57.6 48.0 110.4 60.0 57.6 96.0 Total Distributions from Distribution Equivalents on Apollo Operating Group Participating Securities $ $ 23.5 23.7 23.7 57.4 79.6 87.1 72.8 168.5 91.6 88.8 148.0 1.0 1.4 1.3 3.3 4.7 5.1 4.3 10.3 6.2 5.3 9.4 Distributions Declaration Date May 27, 2010 August 2, 2010 November 1, 2010 January 4, 2011 May 12, 2011 August 9, 2011 November 3, 2011 February 12, 2012 May 8, 2012 August 2, 2012 November 9, 2012 Indemnity Carried interest income from certain funds that the Company manages can be distributed to us on a current basis, but is subject to repayment by the subsidiary of the Apollo Operating Group that acts as general partner of the fund in the event that certain specified return thresholds are not ultimately achieved. The Managing Partners, Contributing Partners and certain other investment professionals have personally guaranteed, subject to certain limitations, the obligation of these subsidiaries in respect of this general partner obligation. Such guarantees are several and not joint and are limited to a particular Managing Partner’s or Contributing Partner’s distributions. An existing shareholders agreement includes clauses that indemnify each of the Company’s Managing Partners and certain Contributing Partners against all amounts that they pay pursuant to any of these personal guarantees in favor of certain funds that the Company manages (including costs and expenses related to investigating the basis for or objecting to any claims made in respect of the guarantees) for all interests that the Company’s Managing Partners and Contributing Partners have contributed or sold to the Apollo Operating Group. Accordingly, in the event that the Company’s Managing Partners, Contributing Partners and certain investment professionals are required to pay amounts in connection with a general partner obligation for the return of previously made distributions, we will be obligated to reimburse the Company’s Managing Partners and certain Contributing Partners for the indemnifiable percentage of amounts that they are required to pay even though we did not receive the certain distribution to which that general partner obligation related. The Company recorded an indemnification liability of $0.8 million as of December 31, 2011. There was no indemnification liability as of December 31, 2012. Due to Private Equity Funds On June 30, 2008, the Company entered into a credit agreement with Fund VI, pursuant to which Fund VI advanced $18.9 million of carried interest income to the limited partners of Apollo Advisors VI, L.P., who are also employees of the Company. The loan obligation accrues interest at an annual fixed rate of 3.45% and terminates on the earlier of June 30, 2017 or the termination of Fund VI. In March 2011, a right of offset for the indemnified portion of the loan obligation was established between the Company and Fund VI, therefore the loan was reduced in the amount of $10.9 million, which is offset in carried interest receivable on the consolidated statements of financial condition. During the year ended December 31, 2011, there was a $0.9 million interest paid and $0.3 million accrued interest on the outstanding loan obligation. At December 31, 2011, the total outstanding loan aggregated $9.0 million, including accrued interest of $1.0 million, which approximated fair value, of which approximately $6.5 million was not subject to the indemnity discussed above and is a receivable from the Contributing Partners and certain employees. During the year ended December 31, 2012, there was no interest paid and $1.3 million accrued interest on the outstanding loan obligation. As of December 31, 2012, the total outstanding loan aggregated -221- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) $9.3 million, including accrued interest of $1.3 million which approximated fair value, of which approximately $6.7 million was not subject to the indemnity discussed above and is a receivable from the Contributing Partners and certain employees. As of December 31, 2011, the Company had also accrued a liability to Fund VI of $75.3 million, in connection with the potential general partner obligation to return carried interest income that was previously distributed from Fund VI. Of this amount, approximately $22.1 million was a receivable from Contributing Partners, employees and former employees. As of December 31, 2012, the general partner obligation was reversed and there was no liability. Due to Credit Funds In connection with the Gulf Stream acquisition during October 2011, the Company will also make payments to the former owners of Gulf Stream under a contingent consideration obligation which requires the Company to transfer cash to the former owners of Gulf Stream based on a specified percentage of incentive fee revenue. Additionally the Company has deferred a payment obligation to the former owners. This obligation was $3.9 million at date of acquisition and was paid in December 2012. The contingent consideration liability had a fair value of approximately $4.7 million as of October 24, 2011 (the date of acquisition) and $14.1 million as of December 31, 2012. As of December 31, 2012, the former owner is no longer an employee of Apollo therefore the contingent consideration is reported within profit sharing payable in the consolidated statements of financial condition. Similar to the private equity funds, certain credit funds allocate carried interest income to the Company. As of December 31, 2011, the Company had accrued a liability to SOMA of $18.1 million, in connection with the potential general partner obligation for carried interest income that was previously distributed from SOMA. This amount increased by $1.2 million during the year ended December 31, 2012. The Company also accrued a liability to APC of $0.3 million, in connection with the potential general obligation for carried interest income that was previously distributed from APC as of December 31, 2012. As such, there was a general partner obligation to return previously distributed carried interest income of $19.6 million accrued as of December 31, 2012. Due to Real Estate Funds In connection with the acquisition of CPI during November 2010, Apollo has a contingent liability to Citigroup Inc. based on a specified percentage of future earnings from the date of acquisition through December 31, 2012. The estimated fair value of the contingent liability was $1.2 million as of December 31, 2012 and 2011, which was determined based on discounted cash flows from the date of acquisition through December 31, 2012 using a discount rate of 7%. Regulated Entities During 2011, the Company formed Apollo Global Securities, LLC (“AGS”), which is a registered broker dealer with the United States Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority, subject to the minimum net capital requirements of the SEC. AGS is in compliance with these requirements at December 31, 2012. From time to time, this entity is involved in transactions with affiliates of Apollo, including portfolio companies of the funds we manage, whereby AGS earns underwriting and transaction fees for its services. The Company also has an entity based in London which is subject to the capital requirements of the U.K. Financial Services Authority. This entity has continuously operated in excess of these regulatory capital requirements. All of the investment advisors of the Apollo funds are affiliates of certain subsidiaries of the Company that are registered as investment advisors with the SEC. Registered investment advisors are subject to the requirements and regulations of the Investment Advisers Act of 1940, as amended. -222- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Underwriting Fee Paid for ARI During 2009, the Company incurred $8.0 million in underwriting expenses for the benefit of ARI, which may be repaid to the Company if during any period of four consecutive calendar quarters during the sixteen full calendar quarters after the consummation of ARI’s IPO on September 29, 2009, ARI’s core earnings, as defined in the corresponding management agreement, for any such four-quarter period exceeds an 8% performance hurdle rate. During the second quarter of 2011, the core earnings had exceeded the hurdle rate and the Company recorded $8.0 million of other income in the consolidated statement of operations. Interests in Consolidated Entities The table below presents equity interests in Apollo’s consolidated, but not wholly-owned, subsidiaries and funds. Net (income) loss attributable to Non-Controlling Interests consisted of the following: (1) AAA Interest in management companies and a co-investment vehicle Other consolidated entities (2) Net (income) loss attributable to Non-Controlling Interests in consolidated entities Net (income) attributable to Appropriated Partners’ Capital Net (income) loss attributable to Non-Controlling Interests in the Apollo Operating (3) Group Net (income) loss attributable to Non-Controlling Interests Net income attributable to Appropriated Partners’ Capital Other Comprehensive Income attributable to Non-Controlling Interests Comprehensive (Income) Loss Attributable to Non-Controlling Interests (4) 2012 2010 Year Ended December 31, 2011 (in thousands) $ (278,454 ) $ 123,400 $ (356,251 ) (12,146 ) (16,258 ) (13,958 ) (36,847 ) 97,296 (409,356 ) (1,816,676 ) (202,235 ) (11,359 ) (7,307 ) 50,956 (234,805 ) (685,357 ) 940,312 (27,892 ) $ (2,736,838 ) $ 835,373 $ (448,607 ) 1,816,676 202,235 11,359 (9,219 ) $ (922,172 ) $ 1,032,502 $ (446,467 ) (5,106 ) (2,010 ) (1) Reflects the Non-Controlling Interests in the net (income) loss of AAA and is calculated based on the Non-Controlling Interests ownership percentage in AAA, which was approximately 97% during the year ended December 31, 2012, approximately 98% during the year ended December 31, 2011 and approximately 97% during the year ended 2010, respectively. (2) Reflects the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies. (3) Reflects net income of the consolidated CLOs classified as VIEs. Includes the bargain purchase gain from the Stone Tower acquisition of $1,951.1 million for the year ended December 31, 2012 and the bargain purchase gain from the Gulf Stream acquisition of $0.8 million and $195.4 million for the years ended December 31, 2012 and 2011, respectively. (4) Appropriated Partners’ Capital is included in total Apollo Global Management, LLC shareholders’ equity and is therefore not a component of comprehensive (income) loss attributable to non-controlling interest on the statement of comprehensive income (loss). 16. COMMITMENTS AND CONTINGENCIES Financial Guarantees— Apollo has provided financial guarantees on behalf of certain employees for the benefit of unrelated third-party lenders, in connection with their capital commitment to certain funds managed by the Company. As of December 31, 2012, the maximum exposure relating to these financial guarantees approximated $3.4 million. Apollo has historically not incurred any liabilities as a result of these agreements and does not expect to in the future. Accordingly, no liability has been recorded in the accompanying consolidated financial statements. -223- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) As the general partner of Apollo/Artus Investor 2007-I, L.P. (“Artus”), the Company may be obligated for certain losses in excess of those allocable to the limited partners to the extent that there is negative equity in that fund. As of December 31, 2012, the Company had no current obligations to Artus. Investment Commitments— As a limited partner, general partner and manager of the Apollo private equity funds, credit and real estate funds, Apollo has unfunded capital commitments as of December 31, 2012 and 2011 of $258.3 million and $137.9 million, respectively. Apollo has an ongoing obligation to acquire additional common units of AAA in an amount equal to 25% of the aggregate after-tax cash distributions, if any, that are made to its affiliates pursuant to the carried interest distribution rights that are applicable to investments made through AAA Investments. On December 21, 2012, the Company agreed to provide up to $100 million of capital support to Athene to the extent such support is necessary in connection with Athene’s pending acquisition of Aviva plc’s annuity and life insurance operations in the United States. Debt Covenants— Apollo’s debt obligations contain various customary loan covenants. As of the balance sheet date, the Company was not aware of any instances of noncompliance with any of these covenants. Litigation and Contingencies— We are, from time to time, party to various legal actions arising in the ordinary course of business, including claims and litigation, reviews, investigations and proceedings by governmental and self-regulatory agencies regarding our business. On July 16, 2008, Apollo was joined as a defendant in a pre-existing purported class action pending in Massachusetts federal court against, among other defendants, numerous private equity firms. The suit alleges that beginning in mid-2003, Apollo and the other private equity firm defendants violated the U.S. antitrust laws by forming “bidding clubs” or “consortia” that, among other things, rigged the bidding for control of various public corporations, restricted the supply of private equity financing, fixed the prices for target companies at artificially low levels, and allocated amongst themselves an alleged market for private equity services in leveraged buyouts. The suit seeks class action certification, declaratory and injunctive relief, unspecified damages, and attorneys’ fees. On August 27, 2008, Apollo and its co-defendants moved to dismiss plaintiffs’ complaint and on November 20, 2008, the Court granted Apollo’s motion. The court also dismissed two other defendants, Permira and Merrill Lynch. On September 17, 2010, the plaintiffs filed a motion to amend the complaint by adding an additional eight transactions and adding Apollo as a defendant. On October 6, 2010, the court granted plaintiffs’ motion to file that amended complaint. Plaintiffs’ fourth amended complaint, filed on October 7, 2010, adds Apollo as a defendant. Apollo joined in the other defendants’ October 21, 2010 motion to dismiss the third claim for relief and all claims by the PanAmSat Damages Sub-class in the fourth amended complaint, which motion was granted on January 13, 2011. On November 4, 2010, Apollo moved to dismiss, arguing that the claims against Apollo are time-barred and that the allegations against Apollo are insufficient to state an antitrust conspiracy claim. On February 17, 2011, the court denied Apollo’s motion to dismiss, ruling that Apollo should raise the statute of limitations issues on summary judgment after discovery is completed. Apollo filed its answer to the fourth amended complaint on March 21, 2011. On July 11, 2011, the plaintiffs filed a motion for leave to file a fifth amended complaint, adding ten additional transactions and expanding the scope of the class seeking relief. On September 7, 2011, the court denied the motion for leave to amend without prejudice and gave plaintiffs permission to take limited discovery on the ten additional transactions. By court order, the parties concluded discovery on May 21, 2012. The plaintiffs then filed a fifth amended complaint on June 14, 2012. One week later, the defendants filed a motion to dismiss portions of the Fifth Amended Complaint. On July 18, 2012, the court granted the defendants’ motion in part and denied it in part. On July 21, 2012, all defendants filed motions for summary judgment. While those motions were pending, the New York Times moved to intervene and unseal the fifth amended complaint. After a court order, the defendants submitted a version of the complaint containing only four redactions. The court publicly filed this version of the fifth amended complaint on the case docket on October 10, 2012. On December 18 and 19, 2012, the court heard oral argument on the defendants’ motions -224- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) for summary judgment. Those motions remain pending. Apollo does not believe that a loss from liability in this case is either probable or reasonably estimable. Apollo believes the plaintiffs’ claims lack factual and legal merit and intends to defend it vigorously. For these reasons, no estimate of possible loss, if any, can be made at this time. In March 2012, plaintiffs filed two putative class actions, captioned Kelm v. Chase Bank (No. 12-cv-332) and Miller v. 1-800-Flowers.com, Inc. (No. 12-cv-396), in the District of Connecticut on behalf of a class of consumers alleging online fraud. The defendants included, among others, Trilegiant Corporation, Inc. (“Trilegiant”), its parent company, Affinion Group, LLC (“Affinion”), and Apollo Global Management, LLC, which is affiliated with funds that are the beneficial owners of 69% of Affinion’s common stock. In both cases, plaintiffs allege that Trilegiant, aided by its business partners, who include e-merchants and credit card companies, developed a set of business practices intended to create consumer confusion and ultimately defraud consumers into unknowingly paying fees to clubs for unwanted services. Plaintiffs allege that Apollo is a proper defendant because of its indirect stock ownership and ability to appoint the majority of Affinion’s board. The complaints assert claims under the Racketeer Influenced Corrupt Organizations Act; the Electronic Communications Privacy Act; the Connecticut Unfair Trade Practices Act; and the California Business and Professional Code, and seek, among other things, restitution or disgorgement, injunctive relief, compensatory, treble and punitive damages, and attorneys’ fees. The allegations in Kelm and Miller are substantially similar to those in Schnabel v. Trilegiant Corp. (No. 3:10-cv-957), a putative class action filed in the District of Connecticut in 2010 that names only Trilegiant and Affinion as defendants. The court has consolidated the Kelm, Miller, and Schnabel cases under the caption In re: Trilegiant Corporation, Inc. and ordered that they proceed on the same schedule. On June 18, 2012, the court appointed lead plaintiffs’ counsel, and on September 7, 2012, plaintiffs filed their consolidated amended complaint (“CAC”), which alleges the same causes of action against Apollo as did the complaints in the Kelm and Miller cases. Defendants filed motions to dismiss on December 7, 2012, and plaintiffs filed opposition papers on February 7, 2013. Defendants’ replies are due on March 11, 2013. On December 5, 2012, plaintiffs filed another putative class action, captioned Frank v. Trilegiant Corp. (No. 12-cv-1721), in the District of Connecticut, naming the same defendants and containing allegations substantially similar to those in the CAC. On January 23, 2013, plaintiffs moved to transfer and consolidate Frank into In re: Trilegiant, and on February 15, 2013, the Frank Court extended all defendants’ deadlines to respond to the Frank complaint until the earlier of (i) April 1, 2013 or (ii) a ruling on the motion to transfer and consolidate. Apollo believes that plaintiffs’ claims against it in these cases are without merit. For this reason, and because the claims against Apollo are in their early stages, no reasonable estimate of possible loss, if any, can be made at this time. On July 9, 2012, Apollo was served with a subpoena by the New York Attorney General’s Office regarding Apollo’s fee waiver program. The subpoena is part of what we understand to be an industry-wide investigation by the New York Attorney General into the tax implications of the fee waiver program implemented by numerous private equity and hedge funds. Under the fee waiver program, individual fund managers for Apollo-managed funds may elect to prospectively waive their management fees. Program participants receive an interest in the future profits, if any, earned on the invested amounts that represent waived fees. They receive such profits from time to time in the ordinary course when distributions are made generally, as provided for in the applicable fund governing documents and waiver agreements. Four Apollo funds have implemented the program. Apollo believes its fee waiver program complies with all applicable laws, and is cooperating with the investigation. Various state attorneys general and federal and state agencies have initiated industry-wide investigations into the use of placement agents in connection with the solicitation of investments, particularly with respect to investments by public pension funds. Certain affiliates of Apollo have received subpoenas and other requests for information from various government regulatory agencies and investors in Apollo’s funds, seeking information regarding the use of placement agents. CalPERS, one of our Strategic Investors, announced on October 14, 2009, that it had initiated a special review of placement agents and related issues. The Report of the CalPERS Special Review was issued on March 14, 2011. That report does not allege any wrongdoing on the part of Apollo or its affiliates. Apollo is continuing to cooperate with all such investigations and other reviews. In addition, on May 6, 2010, the California Attorney General filed a civil complaint against Alfred Villalobos and his company, Arvco Capital Research, LLC (“Arvco”) (a placement agent that Apollo has used) and Federico Buenrostro Jr., the former Chief Executive Officer of -225- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) CalPERS, alleging conduct in violation of certain California laws in connection with CalPERS’s purchase of securities in various funds managed by Apollo and another asset manager. Apollo is not a party to the civil lawsuit and the lawsuit does not allege any misconduct on the part of Apollo. On December 29, 2011, the United States Bankruptcy Court for the District of Nevada approved an application made by Mr. Villalobos, Arvco and related entities (the “Arvco Debtors”) in their consolidated bankruptcy proceedings to hire special litigation counsel to pursue certain claims on behalf of the bankruptcy estates of the Arvco Debtors, including potential claims against Apollo (a) for fees that Apollo purportedly owes the Arvco Debtors for placement agent services, and (b) for indemnification of legal fees and expenses arising out of the Arvco Debtors’ defense of the California Attorney General action described above. To date, no such claims have been brought. On April 23, 2012, the SEC filed a lawsuit alleging securities fraud on the part of Arvco, as well as Messrs. Buenrostro and Villalobos, in connection with their activities concerning certain CalPERS investments in funds managed by Apollo. This lawsuit also does not allege wrongdoing on the part of Apollo, and in fact alleges that Apollo was defrauded by Arvco, Villalobos, and Buenrostro. Apollo believes that it has handled its use of placement agents in an appropriate manner. Apollo denies the merit of any such claims and will vigorously contest them, if they are brought. Although the ultimate outcome of these matters cannot be ascertained at this time, we are of the opinion, after consultation with counsel, that the resolution of any such matters to which we are a party at this time will not have a material effect on our financial statements. Legal actions material to us could, however, arise in the future. Commitments— Apollo leases office space and certain office equipment under various lease and sublease arrangements, which expire on various dates through 2022. As these leases expire, it can be expected that in the normal course of business, they will be renewed or replaced. Certain lease agreements contain renewal options, rent escalation provisions based on certain costs incurred by the landlord or other inducements provided by the landlord. Rent expense is accrued to recognize lease escalation provisions and inducements provided by the landlord, if any, on a straight-line basis over the lease term and renewal periods where applicable. Apollo has entered into various operating lease service agreements in respect of certain assets. As of December 31, 2012, the approximate aggregate minimum future payments required for operating leases were as follows: Aggregate minimum future payments 2013 2016 $ 36,109 $ 36,853 $ 36,105 $ 35,265 $ 32,680 $ 74,174 $ 251,186 Thereafter Total 2015 2014 2017 Expenses related to non-cancellable contractual obligations for premises, equipment, auto and other assets were $41.2 million, $38.3 million and $28.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. Other Long-term Obligations— These obligations relate to payments on management service agreements related to certain assets and payments with respect to certain consulting agreements entered into by Apollo Investment Consulting, LLC. A significant portion of these costs are reimbursable by funds or portfolio companies. As of December 31, 2012, fixed and determinable payments due in connection with these obligations are as follows: Other long-term obligations 2013 2014 2015 2016 2017 Thereafter Total $ 7,418 $ 700 $ 250 $ — $ — $ — $ 8,368 Contingent Obligations— Carried interest income in private equity funds and certain credit and real estate funds is subject to reversal in the event of future losses to the extent of the cumulative carried interest recognized in income to date. If all of the existing investments became worthless, the amount of cumulative revenues that has been recognized by Apollo through December 31, 2012 and that would be -226- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) reversed approximates $3.2 billion. Management views the possibility of all of the investments becoming worthless as remote. Carried interest income is affected by changes in the fair values of the underlying investments in the funds that Apollo manages. Valuations, on an unrealized basis, can be significantly affected by a variety of external factors including, but not limited to, bond yields and industry trading multiples. Movements in these items can affect valuations quarter to quarter even if the underlying business fundamentals remain stable. The table below indicates the potential future reversal of carried interest income: Private Equity Funds: Fund VII Fund VI Fund V Fund IV Other (AAA, Stanhope Life, L.P. “Stanhope”) Total Private Equity Funds : U.S. Performing Credit Opportunistic Credit Structured Credit European Credit Non-Performing Loans Total Credit Funds Credit Funds ( 1 ) Real Estate Funds : CPI Other Total Real Estate Funds Total (1) Reclassified to conform to current presentation. December 31, 2012 $ 1,440,907 567,106 213,739 19,739 93,635 2,335,126 656,518 27,222 30,863 47,206 102,101 863,910 10,406 10,406 3,209,442 $ Additionally, at the end of the life of certain funds that the Company manages, there could be a payment due to a fund by the Company if the Company as general partner has received more carried interest income than was ultimately earned. The general partner obligation amount, if any, will depend on final realized values of investments at the end of the life of each fund. As discussed in note 15, the Company has recorded a general partner obligation to return previously distributed carried interest income of $19.3 million and $0.3 million relating to SOMA and APC, respectively, as of December 31, 2012. As of December 31, 2012, the general partner obligation for Fund VI was reversed and there was no liability as discussed in note 15. Certain funds may not generate carried interest income as a result of unrealized and realized losses that are recognized in the current and prior reporting period. In certain cases, carried interest income will not be generated until additional unrealized and realized gains occur. Any appreciation would first cover the deductions for invested capital, unreturned organizational expenses, operating expenses, management fees and priority returns based on the terms of the respective fund agreements. One of the Company’s subsidiaries, AGS, provides underwriting commitments in connection with security offerings to the portfolio companies of the funds we manage. As of December 31, 2012 and 2011, there were no underwriting commitments outstanding related to such offerings. Contingent Consideration In connection with the Stone Tower acquisition, the Company agreed to pay the former owners of Stone Tower a specified percentage of any future carried interest income earned from certain of the Stone Tower funds, CLOs, and strategic investment accounts. This contingent consideration liability had an acquisition date fair value of $117.7 million, which was determined based on the present value of estimated future carried interest payments, and is recorded in profit sharing payable in the consolidated statements of -227- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) financial condition. The fair value of the contingent obligation was $126.9 million as of December 31, 2012. Refer to note 3 for additional details related to the Stone Tower acquisition. In connection with the Gulf Stream acquisition, as discussed in note 3, the Company will also make payments to the former owners of Gulf Stream under a contingent consideration obligation which requires the Company to transfer cash to the former owners of Gulf Stream based on a specified percentage of carried interest income. The contingent liability had a fair value of approximately $14.1 million as of December 31, 2012, which is recorded in profit sharing payable in the consolidated statements of financial condition. The contingent liability had a fair value of approximately $4.7 million as of December 31, 2011, which is recorded in due to affiliates in the consolidated statements of financial condition. In connection with the CPI acquisition, the consideration transferred in the acquisition was a contingent consideration in the form of a liability incurred by Apollo to CPI. The liability is an obligation of Apollo to transfer cash to CPI based on a specified percentage of future earnings. The estimated fair value of the contingent liability is $1.2 million as of December 31, 2012 and 2011 and is recorded in due to affiliates in the consolidated statements of financial condition. The contingent consideration obligations will be remeasured to fair value at each reporting period until the obligations are satisfied. The changes in the fair value of the contingent consideration obligations will be reflected in profit sharing expense in the consolidated statements of operations. During the one year measurement period, any changes resulting from facts and circumstances that existed as of the acquisition date will be reflected as a retrospective adjustment to the bargain purchase gain and the respective asset acquired or liability assumed. The Company has determined that the contingent consideration obligations are categorized as a Level III liability in the fair value hierarchy as the pricing inputs into the determination of fair value requires significant management judgment and estimation. The following table summarizes the quantitative inputs and assumptions used for the contingent consideration obligations categorized in Level III of the fair value hierarchy as of December 31, 2012: Financial Assets: Contingent consideration obligations Fair Value at December 31, 2012 Valuation Techniques Unobservable Inputs Ranges $ 142,219 Discounted cash flow Discount rate 7.0%-11.6% -228- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The significant unobservable input used in the fair value measurement of the contingent obligations is the discount rate applied in the valuation models. This input in isolation can cause significant increases (decreases) in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of the contingent consideration obligations; conversely decrease in the discount rate can significantly increase the fair value of the contingent consideration obligations. In order to determine the discount rate the Company considered the following: the weighted average cost of capital for the Company, the implied internal rate of return for the transaction, and weighted average return on assets. The following table summarizes the changes in contingent consideration obligations, which are measured at fair value and characterized as Level III liabilities: Balance, Beginning of Period Acquisition (see note 3) Payments Purchase accounting adjustments Change in fair value Balance, End of Period 17. MARKET AND CREDIT RISK For the Year Ended December 31, 2012 $ 5,900 117,700 (8,168 ) 1,000 25,787 $ 142,219 2011 $ 1,200 4,700 — — 2010 $ — 1,200 — — $ 5,900 $ 1,200 In the normal course of business, Apollo encounters market and credit risk concentrations. Market risk reflects changes in the value of investments due to changes in interest rates, credit spreads or other market factors. Credit risk includes the risk of default on Apollo’s investments, where the counterparty is unable or unwilling to make required or expected payments. The Company is subject to a concentration risk related to the investors in its funds. As of December 31, 2012, there were more than 1,000 limited partner investors in Apollo’s active private equity, credit and real estate funds, and no individual investor accounted for more than 10% of the total committed capital to Apollo’s active funds. Apollo’s derivative financial instruments contain credit risk to the extent that its counterparties may be unable to meet the terms of the agreements. Apollo seeks to minimize this risk by limiting its counterparties to highly rated major financial institutions with good credit ratings. Management does not expect any material losses as a result of default by other parties. Substantially all amounts on deposit with major financial institutions that exceed insured limits are invested in interest-bearing accounts with U.S. money center banks. Apollo is exposed to economic risk concentrations insofar as Apollo is dependent on the ability of the funds that it manages to compensate it for the services the management companies provide to these funds. Further, the incentive income component of this compensation is based on the ability of such funds to generate returns above certain specified thresholds. Additionally, Apollo is exposed to interest rate risk. Apollo has debt obligations that have variable rates. Interest rate changes may therefore affect the amount of interest payments, future earnings and cash flows. At December 31, 2012 and 2011, $737.8 million and $738.5 million of Apollo’s debt balance (excluding debt of the consolidated VIEs) had a variable interest rate, respectively. However, as of December 31, 2011, $167.0 million of the debt had been effectively converted to a fixed rate using interest -229- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) rate swaps as discussed in note 12. As the interest rate swap expired in May 2012, the $167 million of debt was no longer converted to a fixed rate. 18. SEGMENT REPORTING Apollo conducts its management and incentive businesses primarily in the United States and substantially all of its revenues are generated domestically. These businesses are conducted through the following three reportable segments: • • • Private Equity —primarily invests in control equity and related debt instruments, convertible securities and distressed debt investments; Credit —primarily invests in non-control corporate and structured debt instruments; and Real Estate —primarily invests in legacy commercial mortgage-backed securities, commercial first mortgage loans, mezzanine investments and other commercial real estate-related debt investments. Additionally, the Company sponsors real estate funds that focus on opportunistic investments in distressed debt and equity recapitalization transactions. These business segments are differentiated based on the varying investment strategies. The performance is measured by management on an unconsolidated basis because management makes operating decisions and assesses the performance of each of Apollo’s business segments based on financial and operating metrics and data that exclude the effects of consolidation of any of the affiliated funds. The Company’s financial results vary, since carried interest, which generally constitutes a large portion of the income from the funds that Apollo manages, as well as the transaction and advisory fees that the Company receives, can vary significantly from quarter to quarter and year to year. As a result, the Company emphasizes long-term financial growth and profitability to manage its business. The tables below present the financial data for Apollo’s reportable segments further separated between the management and incentive business as of December 31, 2012, 2011 and 2010 and for the years ended December 31, 2012, 2011 and 2010, respectively, which management believes is useful to the reader. The Company’s management business has fairly stable revenues and expenses except for transaction fees, while its incentive business is more volatile and can have significant fluctuations as it is affected by changes in the fair value of investments due to market performance of the Company’s business. The financial results of the management entities, as reflected in the “management” business section of the segment tables that follow, generally include management fee revenues, advisory and transaction fees and expenses exclusive of profit sharing expense. The financial results of the advisory entities, as reflected in the “incentive” business sections of the segment tables that follow, generally include carried interest income, investment income, profit sharing expense and incentive fee based compensation. During the third quarter of 2012, the Company changed the name of its capital markets business segment to the credit segment. The Company believes this new name provides a more accurate description of the types of assets which are managed within this segment. In addition, this segment name change aligns with the Company’s management reporting and organizational structure and is consistent with the manner in which resource deployment and compensation decisions are made. Economic Net Income (Loss) Economic Net Income (“ENI”) is a key performance measure used by management in evaluating the performance of Apollo’s private equity, credit and real estate segments. Management also believes the components of ENI such as the amount of management fees, advisory and transaction fees and carried interest income are indicative of the Company’s performance. Management also uses ENI in making key operating decisions such as the following: -230- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) • • • Decisions related to the allocation of resources such as staffing decisions including hiring and locations for deployment of the new hires; Decisions related to capital deployment such as providing capital to facilitate growth for the business and/or to facilitate expansion into new businesses; and Decisions relating to expenses, such as determining annual discretionary bonuses and equity-based compensation awards to its employees. With respect to compensation, management seeks to align the interests of certain professionals and selected other individuals with those of the investors in such funds and those of the Company’s shareholders by providing such individuals a profit sharing interest in the carried interest income earned in relation to the funds. To achieve that objective, a certain amount of compensation is based on the Company’s performance and growth for the year. ENI is a measure of profitability and has certain limitations in that it does not take into account certain items included under U.S. GAAP. ENI represents segment income (loss) attributable to Apollo Global Management, LLC, which excludes the impact of (i) non-cash charges related to RSUs granted in connection with the 2007 private placement and amortization of AOG Units, (ii) income tax expense, (iii) amortization of intangibles associated with the 2007 Reorganization as well as acquisitions and (iv) Non-Controlling Interests excluding the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies. In addition, segment data excludes the assets, liabilities and operating results of the funds and VIEs that are included in the consolidated financial statements. During the fourth quarter 2011, the Company modified the measurement of ENI to better evaluate the performance of Apollo’s private equity, credit and real estate segments in making key operating decisions. These modifications include a reduction to ENI for equity-based compensation expense for RSUs (excluding RSUs granted in connection with the 2007 private placement) and share options, reduction for non-controlling interests related to the remaining interest held by certain individuals who receive an allocation of income from certain of our credit management companies and an add-back for amortization of intangibles associated with the 2007 Reorganization and acquisitions. These modifications to ENI have been reflected in the prior period presentation of our segment results. The impact of this modification on ENI is reflected in the table below for the year ended December 31, 2010: For the year ended December 31, 2010 -231- Impact of Modification on ENI Private Equity Segment $ (6,525 ) Credit Segment $ (23,449 ) Real Estate Segment $ (3,975 ) Total Reportable Segments $ (33,949 ) Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table presents the financial data for Apollo’s reportable segments as of and for the year ended December 31, 2012: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates Total Revenues Expenses Other Income Non-Controlling Interests Economic Net Income (Loss) Total Assets As of and for the Year Ended December 31, 2012 Private Equity Segment Credit Segment Real Estate Segment Total Reportable Segments $ 138,531 277,048 1,667,535 2,083,114 945,466 78,691 — $ 1,216,339 $ 2,589,645 $ 10,764 299,667 518,852 829,283 454,378 59,966 (8,730 ) $ 426,141 $ 1,791,814 $ 749 46,326 15,074 62,149 72,437 2,253 — $ (8,035 ) $ 76,851 $ 150,044 623,041 2,201,461 2,974,546 1,472,281 140,910 (8,730 ) $ 1,634,445 $ 4,458,310 The following table reconciles the total segments to Apollo Global Management, LLC’s consolidated financial statements for the year ended December 31, 2012: Revenues Expenses Other income Non-Controlling Interests Economic Net Income Total Assets Total Reportable Segments $ 2,974,546 1,472,281 140,910 (8,730 ) (4) $ 1,634,445 $ 4,458,310 As of and for the Year Ended December 31, 2012 Consolidation Adjustments and Other $ (114,581 ) 575,564 (2) 2,160,175 (3) (2,728,108 ) N/A (5) $ 16,178,548 (1) Consolidated $ 2,859,965 2,047,845 2,301,085 (2,736,838 ) N/A $ 20,636,858 (1) Represents advisory, management fees and carried interest income earned from consolidated VIEs which are eliminated in consolidation. (2) Represents the addition of expenses of consolidated funds and the consolidated VIEs and expenses related to RSUs granted in connection with the 2007 private placement and equity-based compensation expense comprising amortization of AOG Units and amortization of intangible assets. (3) Results from the following: Net gains from investment activities Net losses from investment activities of consolidated variable interest entities Loss from equity method investments Interest and other income Gain on acquisition Total Consolidation Adjustments For the Year Ended December 31, 2012 $ 289,386 (71,704 ) (10,947 ) 1,543 1,951,897 $ 2,160,175 (4) The reconciliation of Economic Net Loss to Net Loss attributable to Apollo Global Management, LLC reported in the consolidated statements of operations consists of the following: -232- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Economic Net Income Income tax provision Net income attributable to Non-Controlling Interests in Apollo Operating Group Non-cash charges related to equity-based compensation Amortization of intangible assets Net Income Attributable to Apollo Global Management, LLC (6) For the Year Ended December 31, 2012 $ 1,634,445 (65,410 ) (685,357 ) (529,712 ) (43,009 ) $ 310,957 (5) Represents the addition of assets of consolidated funds and the consolidated VIEs. (6) Includes impact of non-cash charges related to amortization of AOG Units and RSU Plan Grants made in connection with the 2007 private placement as discussed in note 14 to our consolidated financial statements. The following tables present additional financial data for Apollo’s reportable segments for the year ended December 31, 2012: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates: Unrealized gains Realized gains (1) Total Revenues Compensation and benefits Other expenses (2) (2) Total Expenses Other Income Non-Controlling Interests Economic Net Income For the Year Ended December 31, 2012 Management Private Equity Incentive Total Management Credit Incentive Total $ 138,531 $ 277,048 — $ 138,531 $ 10,764 $ — $ 10,764 — 299,667 — 277,048 299,667 — 854,919 854,919 — — 812,616 812,616 37,842 415,579 1,667,535 2,083,114 348,273 159,678 702,477 862,155 149,801 83,311 83,311 149,051 — 242,989 702,477 945,466 298,852 78,691 15,008 (8,730 ) 301,077 301,077 179,933 217,775 481,010 829,283 155,526 305,327 — 149,051 155,526 454,378 44,958 59,966 (8,730 ) — — $ 177,243 $ 1,039,096 $ 1,216,339 $ 55,699 $ 370,442 $ 426,141 74,038 — 4,653 — (1) Included in unrealized carried interest (loss) income from affiliates for the year ended December 31, 2012 was a reversal of $75.3 million of the entire general partner obligation to return previously distributed carried interest income with respect to Fund VI and reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $1.2 million and $0.3 million for SOMA and APC, respectively. The general partner obligation is recognized based upon a hypothetical liquidation of the funds’ net assets as of December 31, 2012. The actual determination and any required payment of a general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund. (2) Pursuant to the modification in the ENI measurement as discussed above, compensation and benefits includes equity-based compensation expense related to the management business for RSUs (excluding RSUs granted in connection with the 2007 private placement) and share options. In addition, other expenses excludes amortization of intangibles associated with the 2007 Reorganization as well as acquisitions. Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates: Unrealized gains Realized gains Total Revenues For the Year Ended December 31, 2012 Real Estate Management Incentive Total $ 749 46,326 $ — — $ 749 46,326 — — 47,075 10,401 4,673 15,074 10,401 4,673 62,149 Compensation and benefits Other expenses (1) (1) Total Expenses Other Income Economic Net (Loss) Income 34,037 24,270 58,307 1,271 (9,961 ) $ 14,130 — 14,130 982 $ 1,926 48,167 24,270 72,437 2,253 $ (8,035 ) (1) Pursuant to the modification in the ENI measurement as discussed above, compensation and benefits includes equity-based compensation expense related to the management business for RSUs (excluding RSUs granted in connection with the 2007 private placement) and share options. In addition, other expenses excludes amortization of intangibles associated with the 2007 Reorganization as well as acquisitions. -233- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) The following table presents the financial data for Apollo’s reportable segments as of and for the year ended December 31, 2011: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest (loss) income from affiliates Total Revenues Expenses Other Income (Loss) Non-Controlling Interests Economic Net Loss Total Assets As of and for the Year Ended December 31, 2011 Private Equity Segment $ 66,913 263,212 (449,208 ) (119,083 ) 155,994 15,041 — $ (260,036 ) $ 1,764,166 Credit Segment $ 14,699 186,700 51,801 253,200 250,020 (5,716 ) (12,146 ) $ (14,682 ) $ 1,123,654 Real Estate Segment Total Reportable Segments $ 698 40,279 — 40,977 77,179 10,420 — $ (25,782 ) $ 61,970 $ 82,310 490,191 (397,407 ) 175,094 483,193 19,745 (12,146 ) $ (300,500 ) $ 2,949,790 The following table reconciles the total segments to Apollo Global Management, LLC’s consolidated financial statements for the year ended December 31, 2011: As of and for the Year Ended December 31, 2011 Consolidation Revenues Expenses Other income Non-Controlling Interests Economic Net Loss Total Assets Total Reportable Segments $ 175,094 483,193 19,745 (12,146 ) $ (300,500 ) $ 2,949,790 (4) Adjustments and Other (1) (3,462 ) $ 1,099,257 (2) 98,803 (3) 847,519 N/A (5) $ 5,026,083 Consolidated $ 171,632 1,582,450 118,548 835,373 N/A $ 7,975,873 (1) Represents advisory and management fees earned from consolidated VIEs which are eliminated in consolidation. (2) Represents the addition of expenses of consolidated funds and the consolidated VIEs and expenses related to RSUs granted in connection with the 2007 private placement and equity-based compensation expense comprising amortization of AOG Units and amortization of intangible assets. (3) Results from the following: -234- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Net losses from investment activities Net gains from investment activities of consolidated variable interest entities Gain from equity method investments Gain on acquisition Total Consolidation Adjustments For the Year Ended December 31, 2011 $ (123,946 ) 24,201 3,094 195,454 $ 98,803 (4) The reconciliation of Economic Net Loss to Net Loss attributable to Apollo Global Management, LLC reported in the consolidated statements of operations consists of the following: Economic Net Loss Income tax provision Net loss attributable to Non-Controlling Interests in Apollo Operating Group Non-cash charges related to equity-based compensation Amortization of intangible assets Net Loss Attributable to Apollo Global Management, LLC (6 ) For the Year Ended December 31, 2011 $ (300,500 ) (11,929 ) 940,312 (1,081,581 ) (15,128 ) $ (468,826 ) (5) Represents the addition of assets of consolidated funds and the consolidated VIEs. (6) Includes impact of non-cash charges related to amortization of AOG Units and RSU Plan Grants made in connection with the 2007 private placement as discussed in note 14 to our consolidated financial statements. The following tables present additional financial data for Apollo’s reportable segments for the year ended December 31, 2011: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest (loss) income from affiliates: Unrealized losses Realized gains (1) Total Revenues Compensation and benefits Other expenses (2) (2) Total Expenses Other Income (Loss) Non-Controlling Interests Economic Net Income (Loss) Management Private Equity Incentive Total Management Credit Incentive Total For the Year Ended December 31, 2011 $ 66,913 $ 263,212 — $ — 66,913 $ 14,699 $ — $ 14,699 186,700 186,700 — 263,212 — — 330,125 156,923 99,338 256,261 7,081 — (66,852 ) (1,019,748 ) 118,653 570,540 253,200 (119,083 ) 155,025 56,656 94,995 99,338 250,020 155,994 (5,716 ) 15,041 (12,146 ) — $ 80,945 $ (340,981 ) $ (260,036 ) $ 20,639 $ (35,321 ) $ (14,682 ) (1,019,748 ) 570,540 (449,208 ) (100,267 ) — (100,267 ) 7,960 — — 44,540 245,939 116,181 94,995 211,176 (1,978 ) (12,146 ) (66,852 ) 74,113 7,261 38,844 — 38,844 (3,738 ) — (1) Included in unrealized carried interest (loss) income from affiliates for the year ended December 31, 2011 was a reversal of previously realized carried interest income due to the general partner obligation to return previously distributed carried interest income of $75.3 million and $18.1 million with respect to Fund VI and SOMA, respectively. The general partner obligation is recognized based upon a hypothetical liquidation of the funds’ net assets as of December 31, 2011. The actual determination and any required payment of a general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund. (2) Pursuant to the modification in the ENI measurement as discussed above, compensation and benefits includes equity-based compensation expense related to the management business for RSUs (excluding RSUs granted in connection with the 2007 private placement) and share options. In addition, other expenses excludes amortization of intangibles associated with the 2007 Reorganization as well as acquisitions. -235- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates Total Revenues Compensation and benefits Other expenses (1) (1) Total Expenses Other Income Economic Net Loss For the Year Ended December 31, 2011 Real Estate Management Incentive Total $ 698 40,279 — 40,977 46,163 29,663 75,826 9,694 $ (25,155 ) $ — — — — 1,353 — 1,353 726 $ (627 ) $ 698 40,279 — 40,977 47,516 29,663 77,179 10,420 $ (25,782 ) (1) Pursuant to the modification in the ENI measurement as discussed above, compensation and benefits includes equity-based compensation expense related to the management business for RSUs (excluding RSUs granted in connection with the 2007 private placement) and share options. In addition, other expenses excludes amortization of intangibles associated with the 2007 Reorganization as well as acquisitions. The following table reconciles the total reportable segments to Apollo Global Management, LLC’s financial statements for the year ended December 31, 2010: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest loss from affiliates Total Revenues Expenses Other Income Non-Controlling Interests Economic Net Income (Loss) Total Assets Revenues Expenses Other income Non-Controlling Interests Economic Net Income Total Assets As of and for the Year Ended December 31, 2010 Private Equity Segment Credit Segment Real Estate Segment Total Reportable Segments $ 60,444 259,395 1,321,113 1,640,952 767,600 212,845 — $ 1,086,197 $ 2,271,564 $ 19,338 160,318 277,907 457,563 240,341 41,606 (16,258 ) $ 242,570 $ 1,152,389 $ — 11,383 — 11,383 46,034 23,231 — $ (11,420 ) $ 46,415 $ 79,782 431,096 1,599,020 2,109,898 1,053,975 277,682 (16,258 ) $ 1,317,347 $ 3,470,368 For the Year Ended December 31, 2010 Consolidation Adjustments and Other — (1) $ 1,103,411 404,767 (432,349 ) N/A (2) $ 3,082,004 (4) Total Reportable Segments $ 2,109,898 1,053,975 277,682 (16,258 ) (3) $ 1,317,347 $ 3,470,368 Consolidated $ 2,109,898 2,157,386 682,449 (448,607 ) N/A $ 6,552,372 (1) Represents the addition of expenses of consolidated funds and the consolidated VIEs and expenses related to RSUs granted in connection with the 2007 private placement, equity-based compensation expense comprising amortization of AOG Units, and amortization of intangible assets. -236- Table of Contents (2) Results from the following: APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Net gains from investment activities Net gains from investment activities of consolidated variable interest entities Loss from equity method investments Interest income Other loss Total Consolidation Adjustments For the Year Ended December 31, 2010 $ 367,871 48,206 (11,107 ) 20 (223 ) $ 404,767 (3) The reconciliation of Economic Net Income to Net Loss Attributable to Apollo Global Management, LLC reported in the consolidated statements of operations consists of the following: Economic Net Income Income tax provision Net income attributable to Non-Controlling Interests in Apollo Operating Group Non-cash charges related to equity-based compensation Net loss of Metals Trading Fund Amortization of intangible assets Net Income Attributable to Apollo Global Management, LLC ( 5 ) For the Year Ended December 31, 2010 $ 1,317,347 (91,737 ) (27,892 ) (1,087,943 ) (2,380 ) (12,778 ) 94,617 $ (4) Represents the addition of assets of consolidated funds and consolidated VIEs. (5) Includes impact of non-cash charges related to amortization of AOG Units and RSU Plan Grants made in connection with the 2007 private placement as discussed in note 14 to the consolidated financial statements. The following tables present additional financial data for Apollo’s reportable segments for the year ended December 31, 2010: Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates: Unrealized gains Realized gains Total Revenues Compensation and benefits Other expenses (1) ( 1 ) Total Expenses Other Income Non-Controlling Interests Economic Net Income For the Year Ended December 31, 2010 Management Private Equity Incentive Total Management Credit Incentive Total $ 60,444 $ 259,395 — $ 60,444 $ 19,338 $ — $ 19,338 — 160,318 — 259,395 160,318 — 1,251,526 1,251,526 — — 69,587 47,385 319,839 1,321,113 1,640,952 227,041 69,587 103,918 103,918 126,604 173,989 230,522 457,563 150,181 519,669 669,850 103,763 97,750 97,750 80,880 — 247,931 519,669 767,600 184,643 55,698 159,461 — 80,880 55,698 240,341 162,213 — 30,678 41,606 — (16,258 ) $ 234,121 $ 852,076 $ 1,086,197 $ 37,068 $ 205,502 $ 242,570 50,632 212,845 10,928 — (16,258 ) — (1) Pursuant to the modification in the ENI measurement as discussed above, compensation and benefits includes equity-based compensation expense related to the management business for RSUs (excluding RSUs granted in connection with the 2007 private placement) and share options. In addition, other expenses excludes amortization of intangibles associated with the 2007 Reorganization as well as acquisitions. -237- Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Revenues: Advisory and transaction fees from affiliates Management fees from affiliates Carried interest income from affiliates Total Revenues Compensation and benefits Other expenses (1) (1) Total Expenses Other Income (Loss) Economic Net Loss For the Year Ended December 31, 2010 Real Estate Management Incentive Total $ — 11,383 — 11,383 26,096 19,938 46,034 23,622 $ (11,029 ) $ — — — — — — — (391 ) $ (391 ) $ — 11,383 — 11,383 26,096 19,938 46,034 23,231 $ (11,420 ) (1) Pursuant to the modification in the ENI measurement as discussed above, compensation and benefits includes equity-based compensation expense related to the management business for RSUs (excluding RSUs granted in connection with the 2007 private placement) and share options. In addition, other expenses excludes amortization of intangibles associated with the 2007 Reorganization as well as acquisitions. 19. SUBSEQUENT EVENTS On January 9, 2013, the Company issued 150,000 Class A shares in settlement of vested RSUs. This issuance caused the Company’s ownership interest in the Apollo Operating Group to increase from 35.1% to 35.2%. On January 28, 2013, the Company issued 23,231 Class A shares in settlement of vested RSUs. The issuance had minimal impact on the Company’s ownership in the Apollo Operating Group. On February 11, 2013, the Company issued 1,912,632 Class A shares in settlement of vested RSUs. This issuance caused the Company’s ownership interest in the Apollo Operating Group to increase from 35.2% to 35.5%. On February 8, 2013, the Company declared a cash distribution of $1.05 per Class A share, which was paid on February 28, 2013 to holders of record on February 20, 2013. 20. QUARTERLY FINANCIAL DATA (UNAUDITED) Revenues Expenses Other Income Income Before Provision for Taxes Net Income Income (Loss) attributable to Apollo Global Management, LLC. Net Income (Loss) per Class A Share – Basic and Diluted -238- For the Three Months Ended September 30, December 31, March 31, 2012 $ 776,743 523,230 192,188 $ 445,701 $ 431,141 $ 98,043 0.66 $ June 30, 2012 $ 211,628 316,962 1,950,461 $ 1,845,127 $ 1,834,477 (41,386 ) $ (0.38 ) $ 2012 $ 712,373 520,008 27,348 $ 219,713 $ 197,796 82,791 $ 0.55 $ 2012 $ 1,159,221 687,645 131,088 $ 602,664 $ 584,381 $ 171,509 1.12 $ Table of Contents APOLLO GLOBAL MANAGEMENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) Revenues Expenses Other Income (Loss) Income (Loss) Before Provision for Taxes Net Income (Loss) Income (Loss) attributable to Apollo Global Management, LLC. Net Income (Loss) per Class A Share – Basic and Diluted -239- For the Three Months Ended March 31, 2011 $ 696,342 641,581 205,164 $ 259,925 $ 251,105 $ 38,156 0.33 $ June 30, 2011 $ 308,876 480,006 70,035 $ (101,095 ) $ (104,645 ) $ (50,989 ) (0.46 ) $ September 30, 2011 $ (1,479,580 ) (158,100 ) (442,310 ) $ (1,763,790 ) $ (1,743,943 ) $ (466,926 ) (3.86 ) $ December 31, 2011 $ 645,994 618,963 285,659 $ 312,690 $ 293,284 $ 10,933 0.05 $ Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. ITEM 9A. CONTROLS AND PROCEDURES We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives. Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective at the reasonable assurance level to accomplish their objectives of ensuring that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, its principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. The internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on its financial statements. Management conducted an assessment of the effectiveness of Apollo’s internal control over financial reporting as of December 31, 2012 based on the framework established in Internal Control—Integrated Framework issued by the Committee of Organizations of the Treadway Commission. Based on this assessment, management has determined that Apollo’s internal control over financial reporting as of December 31, 2012 was effective. No changes in our internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Securities Exchange Act) occurred during our most recent quarter, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. -240- Table of Contents Our independent registered public accounting firm, Deloitte & Touche LLP, has issued its attestation report on our internal control over financial reporting which is included in “Item 8. Financial Statements and Supplementary Data.” ITEM 9B. OTHER INFORMATION None. -241- Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors and Executive Officers The following table presents certain information concerning our board of directors and executive officers: Name Leon Black Joshua Harris Marc Rowan Marc Spilker Martin Kelly Barry Giarraputo John Suydam James Zelter Michael Ducey Paul Fribourg A.B. Krongard Pauline Richards Position(s) Age 61 Chairman, Chief Executive Officer and Director 48 Senior Managing Director and Director 50 Senior Managing Director and Director 48 President 45 Chief Financial Officer 49 Chief Accounting Officer and Controller 53 Chief Legal Officer and Chief Compliance Officer 50 Managing Director – Credit 64 Director 58 Director 76 Director 64 Director Leon Black. Mr. Black is the Chairman of the board of directors and Chief Executive Officer of Apollo and a Managing Partner of Apollo Management, L.P. In 1990, Mr. Black founded Apollo Management, L.P. and Lion Advisors, L.P. to manage investment capital on behalf of a group of institutional investors, focusing on corporate restructuring, leveraged buyouts and taking minority positions in growth-oriented companies. From 1977 to 1990, Mr. Black worked at Drexel Burnham Lambert Incorporated, where he served as a Managing Director, head of the Mergers & Acquisitions Group, and co-head of the Corporate Finance Department. Mr. Black also serves on the board of directors of the general partner of AAA and previously served on the board of directors of Sirius XM Radio Inc. Mr. Black is a trustee of The Museum of Modern Art, The Mount Sinai Medical Center, The Metropolitan Museum of Art, and The Asia Society. He is also a member of The Council on Foreign Relations and The Partnership for New York City. He is also a member of the boards of directors of FasterCures and the Port Authority Task Force. Mr. Black graduated summa cum laude from Dartmouth College in 1973 with a major in Philosophy and History and received an MBA from Harvard Business School in 1975. Mr. Black has significant experience making and managing private equity investments on behalf of Apollo and has over 34 years experience financing, analyzing and investing in public and private companies. In his prior positions with Drexel and in his positions at Apollo, Mr. Black is responsible for leading and overseeing teams of professionals. His extensive experience allows Mr. Black to provide insight into various aspects of Apollo’s business and is of significant value to the board of directors. Joshua Harris. Mr. Harris is a Senior Managing Director and a member of the board of directors of Apollo and Managing Partner of Apollo Management, L.P., which he co-founded in 1990. Prior to 1990, Mr. Harris was a member of the Mergers and Acquisitions Group of Drexel Burnham Lambert Incorporated. Mr. Harris currently serves on the boards of directors of Berry Plastics Group Inc., LyondellBasell Industries B.V., CEVA Group plc, Momentive Performance Materials Holdings LLC, EPE Acquisition, LLC and the holding company for Alcan Engineered Products. Mr. Harris has previously served on the boards of directors of Verso Paper Corp., Metals USA, Inc., Nalco Corporation, Allied Waste Industries, Inc., Pacer International, Inc., General Nutrition Centers, Inc., Furniture Brands International Inc., Compass Minerals International, Inc., Alliance Imaging, Inc., NRT Inc., Covalence Specialty Materials Corp., United Agri Products, Inc., Quality Distribution, Inc., Whitmire Distribution Corp. and Noranda Aluminum Holding Corporation. Mr. Harris is actively involved in charitable and political organizations. He also serves on the Corporate Affairs Committee of the Council on Foreign Relations. Mr. Harris serves as Chairman of the Department of Medicine Advisory Board for The Mount Sinai Medical Center and is on the board of trustees of the Mount Sinai Medical Center. He is also a member of The Federal Reserve Bank of New York Investors Advisory Committee on Financial Markets and a member of The University of Pennsylvania’s Wharton Undergraduate Executive Board and is on the board of trustees for The Allen-Stevenson School and the Harvard Business School. Mr. Harris graduated summa cum laude -242- Table of Contents and Beta Gamma Sigma from the University of Pennsylvania’s Wharton School of Business with a BS in Economics and received his MBA from the Harvard Business School, where he graduated as a Baker and Loeb Scholar. Mr. Harris has significant experience in making and managing private equity investments on behalf of Apollo and has over 24 years experience in financing, analyzing and investing in public and private companies. Mr. Harris’s extensive knowledge of Apollo’s business and experience in a variety of senior leadership roles enhance the breadth of experience of the board of directors. Marc Rowan. Mr. Rowan is a Senior Managing Director and member of the board of directors of Apollo and Managing Partner of Apollo Management, L.P., which he co-founded in 1990. Prior to 1990, Mr. Rowan was a member of the Mergers & Acquisitions Group of Drexel Burnham Lambert Incorporated, with responsibilities in high yield financing, transaction idea generation and merger structure negotiation. Mr. Rowan currently serves on the boards of directors of the general partner of AAA, Athene Holding Ltd, Athene Life Re Ltd., Caesars Entertainment Corporation and Norwegian Cruise Lines. He has previously served on the boards of directors of AMC Entertainment, Inc., Cablecom GmbH, Culligan Water Technologies, Inc., Countrywide Holdings Limited, Furniture Brands International Inc., Mobile Satellite Ventures, LLC, National Cinemedia, Inc., National Financial Partners, Inc., New World Communications, Inc., Quality Distribution, Inc., Samsonite Corporation, SkyTerra Communications Inc., Unity Media SCA, Vail Resorts, Inc. and Wyndham International, Inc. Mr. Rowan is also active in charitable activities. He is a founding member and Chairman of the Youth Renewal Fund and is a member of the boards of directors of the National Jewish Outreach Program, Inc., the Undergraduate Executive Board of the University of Pennsylvania’s Wharton School of Business and the New York City Police Foundation. Mr. Rowan graduated summa cum laude from the University of Pennsylvania’s Wharton School of Business with a BS and an MBA in Finance. Mr. Rowan has significant experience making and managing private equity investments on behalf of Apollo and has over 26 years experience financing, analyzing and investing in public and private companies. Mr. Rowan’s extensive financial background and expertise in private equity investments enhance the breadth of experience of the board of directors. Marc Spilker. Mr. Spilker joined Apollo as President in 2010. Mr. Spilker retired from Goldman Sachs in May 2010 following a 20-year career with the firm, where he served as the co-head of Goldman Sachs’ Investment Management Division and also as a member of the firm-wide Management Committee. Mr. Spilker joined IMD in 2006 as head of Global Alternative Asset Management and became chief operating officer in 2007. Prior to that, Mr. Spilker was responsible for Goldman Sachs’ U.S. Equities Trading and Global Equity Derivatives and was head of Fixed Income, Currency and Commodities in Japan from 1997 to 2000. Mr. Spilker joined Goldman Sachs in 1990 and was named partner in 1996. Mr. Spilker is a member of the University of Pennsylvania’s Wharton Undergraduate Executive Board, is on the board of directors of The New 42nd Street, Inc., is the Founder of Third Way’s Capital Markets Initiative and chairs the RFK Leadership Council at the Robert F. Kennedy Center for Justice & Human Rights. Mr. Spilker is also a board member of the Samuel Bronfman Department of Medicine Advisory Board at Mount Sinai School of Medicine, an Advisory Board member for Mount Sinai’s Institute for Genomics and Multiscale Biology, a board member of the New York State Financial Control Board and a member of the Council of Economic and Fiscal Advisors for Governor Andrew Cuomo. He has previously been a member of the Google Investment Advisory Committee, the American Stock Exchange and the Chicago Mercantile Exchange, and has served on the Boards of the Philadelphia Stock Exchange, the Stone and Bridge Street funds, BrokerTec and Bondbook, LLC. Mr. Spilker graduated with a B.S. in Economics from the Wharton School of the University of Pennsylvania. Martin Kelly. Mr. Kelly joined Apollo as Chief Financial Officer in 2012. Prior to that time, Mr. Kelly was a Managing Director at Barclays and served as the Chief Financial Officer of Barclays’ Americas division since 2009 and also served as the Global Head of Financial Control for Barclays’ Corporate and Investment Bank since 2011. From September 2008 to March 2009, Mr. Kelly served in a variety of senior finance roles at Barclays. Prior to his tenure at Barclays, Mr. Kelly was employed in a variety of roles at Lehman Brothers since 2000, including serving as a Managing Director and as Global Financial Controller from 2007 to 2008. From 2000 to 2007, Mr. Kelly provided accounting and regulatory expertise to support the development and distribution of investment and financing products to corporate and financial institution clients. Prior to joining Lehman Brothers in 2000, Mr. Kelly spent thirteen years with PricewaterhouseCoopers, where he served in the Financial Services Group in New York from 1994 to 2000. He was appointed a partner of the firm in 1999. Mr. Kelly received a degree in Commerce, majoring in Finance and Accounting, from the University of New South Wales in 1989. -243- Table of Contents Barry Giarraputo . Mr. Giarraputo joined Apollo in 2006. Before joining Apollo, Mr. Giarraputo was a Senior Managing Director at Bear Stearns & Co. where he served in a variety of finance roles over nine years. Prior to that, Mr. Giarraputo was with the accounting and auditing firm of PricewaterhouseCoopers LLP for 12 years where he was a member of the firm’s Audit and Business Services Group and was responsible for a number of capital markets clients including broker-dealers, money-center banks, domestic investment companies and offshore hedge funds and related service providers. Mr. Giarraputo is on the Board of Directors for the Association for Children with Down Syndrome where he also serves as the Treasurer and Chairman of the audit committee. Mr. Giarraputo has also served as an Adjunct Professor of Accounting at Baruch College where he graduated cum laude with a BBA in Accountancy. John Suydam. Mr. Suydam joined Apollo in 2006 and serves as Apollo’s Chief Legal Officer and Chief Compliance Officer. From 2002 to 2006, Mr. Suydam was a partner at O’Melveny & Myers LLP where he served as head of Mergers and Acquisitions and co-head of the Corporate Department. Prior to that time, Mr. Suydam served as Chairman of the law firm O’Sullivan, LLP which specialized in representing private equity investors. Mr. Suydam serves on the boards of Environmental Solutions Worldwide, Inc. and New York University School of Law, and is a member of the Department of Medicine Advisory Board of the Mount Sinai Medical Center. Mr. Suydam received his J.D. from New York University and graduated magna cum laude with a B.A. in History from the State University of New York at Albany. James Zelter. Mr. Zelter joined Apollo in 2006. Mr. Zelter is the Managing Director of Apollo’s credit business, Chief Executive Officer and director of AINV. Prior to joining Apollo, Mr. Zelter was with Citigroup Inc. and its predecessor companies from 1994 to 2006. From 2003 to 2005, Mr. Zelter was Chief Investment Officer of Citigroup Alternative Investments, and prior to that he was responsible for the firm’s Global High Yield franchise. Prior to joining Citigroup in 1994, Mr. Zelter was a High Yield Trader at Goldman, Sachs & Co. Mr. Zelter has significant experience in global credit markets and has overseen the broad expansion of Apollo’s credit platform. Mr. Zelter is a board member of DUMAC, the investment management company that oversees the Duke Endowment and Duke Foundation, and is on the board of the Dalton School. Mr. Zelter has a degree in Economics from Duke University. Paul Fribourg . Mr. Fribourg has served as an independent director of Apollo and as a member of the conflicts committee of our board of directors since 2011. From 1997 to the present, Mr. Fribourg has served as Chairman and Chief Executive Officer of Continental Grain Company. Prior to 1997, Mr. Fribourg served in a variety of other roles at Continental Grain Company, including Merchandiser, Product Line Manager, Group President and Chief Operating Officer. Mr. Fribourg serves on the boards of directors of Burger King Holdings, Inc., Loews Corporation, Castleton Commodities International LLC and The Estee Lauder Companies, Inc. He also serves as a board member of the Rabobank International North American Agribusiness Advisory Board, the Harvard Business School Board of Dean’s Advisors, the New York University Mitchell Jacobson Leadership Program in Law and Business Advisory Board, the America-China Society, Endeavor Global Inc. and Teach For America–New York. Mr. Fribourg is also a member of the Council on Foreign Relations, the Brown University Advisory Council on China, the International Business Leaders Advisory Council for The Mayor of Shanghai. Mr. Fribourg graduated magna cum laude from Amherst College and completed the Advanced Management Program at Harvard Business School. Mr. Fribourg’s extensive corporate experience enhances the breadth of experience and independence of the board of directors. A.B. Krongard. Mr. Krongard has served as an independent director of Apollo and as a member of the audit committee of our board of directors since 2011. From 2001 to 2004, Mr. Krongard served as Executive Director of the Central Intelligence Agency. From 1998 to 2001, Mr. Krongard served as Counselor to the Director of Central Intelligence. Prior to 1998, Mr. Krongard served in various capacities at Alex Brown, Incorporated, including serving as Chief Executive Officer beginning in 1991 and assuming additional duties as Chairman of the board of directors in 1994. Upon the merger of Alex Brown, Incorporated with Bankers Trust Corporation in 1997, Mr. Krongard served as Vice-Chairman of the Board of Bankers Trust Corporation and served in such capacity until joining the Central Intelligence Agency. Mr. Krongard serves as the Lead Director and audit committee Chairman of Under Armour, Inc. and also serves as a board member of Iridium Communications Inc. Mr. Krongard graduated with honors from Princeton University and received a J.D. from the University of Maryland School of Law, where he also graduated with honors. Mr. Krongard also serves as the interim Chairman of the Johns Hopkins Health System. Mr. -244- Table of Contents Krongard’s comprehensive corporate background contributes to the range of experience of the board of directors. Pauline Richards. Ms. Richards has served as an independent director of Apollo and as Chairman of the audit committee of our board of directors since 2011. From 2008 to the present, Ms. Richards served as Chief Operating Officer of Armour Reinsurance Group Limited. Prior to 2008, Ms. Richards served as Director of Development of Saltus Grammar School from 2003 to 2008, as Chief Financial Officer of Lombard Odier Darier Hentsch (Bermuda) Limited from 2001 to 2003, and as Treasurer of Gulf Stream Financial Limited from 1999 to 2000. Ms. Richards also serves as a member of the audit committee and Chairman of the corporate governance committee of the board of directors of Butterfield Bank and as a member of the audit and compensation committees of the board of directors of Wyndham Worldwide. Ms. Richards also serves as the Treasurer of the board of directors of PRIDE (Bermuda), a drug prevention organization. Ms. Richards graduated from Queen’s University, Ontario, Canada, with a BA in psychology and has obtained certification as a Certified Management Accountant. Ms. Richards’ extensive finance experience and her service on the boards of other public companies add significant value to the board of directors. Michael Ducey. Mr. Ducey has served as an independent director of Apollo and a member of the audit committee and as Chairman of the conflicts committee of our board of directors since 2011. Most recently, Mr. Ducey was with Compass Minerals International, Inc., from March 2002 to May 2006, where he served in a variety of roles, including as President, Chief Executive Officer and Director prior to his retirement in May 2006. Prior to joining Compass Minerals International, Inc., Mr. Ducey worked for nearly 30 years at Borden Chemical, Inc., in various management, sales, marketing, planning and commercial development positions, and ultimately as President, Chief Executive Officer and Director. Mr. Ducey is currently a director of and serves as the Chairman of the audit committee of Verso Paper Holdings, Inc. He is also the Chairman of the compliance and governance committee and the nominations committee of the board of directors of HaloSource, Inc. From September 2009 to December 2012, Mr. Ducey was the non-executive Chairman of TPC Group, Inc. and served on the audit committee and the environmental health and safety committee. From June 2006 to May 2008, Mr. Ducey served on the board of directors of and as a member of the governance and compensation committee of the board of directors of UAP Holdings Corporation. Also, from July 2010 to May 2011, Mr. Ducey was a member of the board of directors and served on the audit committee of Smurfit-Stone Container Corporation. Mr. Ducey graduated from Otterbein University with a degree in Economics and an M.B.A. in finance from the University of Dayton. Mr. Ducey’s comprehensive corporate background and his experience serving on various boards and committees add significant value to the board of directors. Our Manager Our operating agreement provides that so long as the Apollo Group beneficially owns at least 10% of the aggregate number of votes that may be cast by holders of outstanding voting shares, our manager, which is owned and controlled by our Managing Partners, will manage all of our operations and activities and will have discretion over significant corporate actions, such as the issuance of securities, payment of distributions, sales of assets, making certain amendments to our operating agreement and other matters, and our board of directors will have no authority other than that which our manager chooses to delegate to it. We refer to the Apollo Group’s beneficial ownership of at least 10% of such voting power as the “Apollo control condition.” For purposes of our operating agreement, the “Apollo Group” means (i) our manager and its affiliates, including their respective general partners, members and limited partners, (ii) Holdings and its affiliates, including their respective general partners, members and limited partners, (iii) with respect to each managing partner, such managing partner and such managing partner’s “group” (as defined in Section 13(d) of the Exchange Act), (iv) any former or current investment professional of or other employee of an “Apollo employer” (as defined below) or the Apollo Operating Group (or such other entity controlled by a member of the Apollo Operating Group), (v) any former or current executive officer of an Apollo employer or the Apollo Operating Group (or such other entity controlled by a member of the Apollo Operating Group); and (vi) any former or current director of an Apollo employer or the Apollo Operating Group (or such other entity controlled by a member of the Apollo Operating Group). With respect to any person, “Apollo employer” means Apollo Global Management, LLC or such other entity controlled by Apollo Global Management, LLC or its successor as may be such person’s employer. -245- Table of Contents Decisions by our manager are made by its executive committee, which is composed of our three Managing Partners and our President, the latter of which serves as a non-voting member. Each Managing Partner will remain on the executive committee for so long as he is employed by us, provided that Mr. Black, upon his retirement, may at his option remain on the executive committee until his death or disability or any commission of an act that would constitute cause if Mr. Black had still been employed by us. Other than those actions that require unanimous consent, actions by the executive committee are determined by majority vote of its voting members, except as to the following matters, as to which Mr. Black will have the right of veto: (i) the designations of directors to our board, or (ii) a sale or other disposition of the Apollo Operating Group and/or its subsidiaries or any portion thereof, through a merger, recapitalization, stock sale, asset sale or otherwise, to an unaffiliated third party (other than through an exchange of Apollo Operating Group units and interests in our Class B share for Class A shares, transfers by a founder or a permitted transferee to another permitted transferee, or the issuance of bona fide equity incentives to any of our non-founder employees) that constitutes (x) a direct or indirect sale of a ratable interest (or substantially ratable interest) in each entity that constitutes the Apollo Operating Group or (y) a sale of all or substantially all of the assets of Apollo. Exchanges of Apollo Operating Group units for Class A shares that are not pro rata among our Managing Partners or in which each Managing Partner has the option not to participate are not subject to Mr. Black’s right of veto. Subject to limited exceptions described in our operating agreement, our manager may not sell, exchange or otherwise dispose of all or substantially all of our assets and those of our subsidiaries, taken as a whole, in a single transaction or a series of related transactions without the approval of holders of a majority of the aggregate number of voting shares outstanding; provided, however, that this does not preclude or limit our manager’s ability, in its sole discretion, to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets and those of our subsidiaries (including for the benefit of persons other than us or our subsidiaries, including affiliates of our manager). We will reimburse our manager and its affiliates for all costs incurred in managing and operating us, and our operating agreement provides that our manager will determine the expenses that are allocable to us. The agreement does not limit the amount of expenses for which we will reimburse our manager and its affiliates. Board Composition and Limited Powers of Our Board of Directors For so long as the Apollo control condition is satisfied, our manager shall (i) nominate and elect all directors to our board of directors, (ii) set the number of directors of our board of directors and (iii) fill any vacancies on our board of directors. After the Apollo control condition is no longer satisfied, each of our directors will be elected by the vote of a plurality of our shares entitled to vote, voting as a single class, to serve until his or her successor is duly elected or appointed and qualified or until his or her earlier death, retirement, disqualification, resignation or removal. Our board currently consists of seven members. For so long as the Apollo control condition is satisfied, our manager may remove any director, with or without cause, at anytime. After such condition is no longer satisfied, a director or the entire board of directors may be removed by the affirmative vote of holders of 50% or more of the total voting power of our shares. As noted, so long as the Apollo control condition is satisfied, our manager will manage all of our operations and activities, and our board of directors will have no authority other than that which our manager chooses to delegate to it. In the event that the Apollo control condition is not satisfied, our board of directors will manage all of our operations and activities. Pursuant to a delegation of authority from our manager, which may be revoked, our board of directors has established and at all times will maintain audit and conflicts committees of the board of directors that have the responsibilities described below under “—Committees of the Board of Directors—Audit Committee” and “—Committees of the Board of Directors—Conflicts Committee.” Where action is required or permitted to be taken by our board of directors or a committee thereof, a majority of the directors or committee members present at any meeting of our board of directors or any committee thereof at which there is a quorum shall be the act of our board or such committee, as the case may be. Our board of directors or any committee thereof may also act by unanimous written consent. -246- Table of Contents Under the Agreement Among Managing Partners, the vote of a majority of the independent members of our board of directors will decide the following: (i) in the event that a vacancy exists on the executive committee of our manager and the remaining members of the executive committee cannot agree on a replacement, the independent members of our board of directors shall select one of the two nominees to the executive committee of our manager presented to them by the remaining members of such executive committee to fill the vacancy on such executive committee and (ii) in the event that at any time after December 31, 2009, Mr. Black wishes to exercise his ability to cause (x) the direct or indirect sale of a ratable interest (or substantially ratable interest) in each Apollo Operating Group entity, or (y) a sale of all or substantially all of our assets, through a merger, recapitalization, stock sale, asset sale or otherwise, to an unaffiliated third party, the affirmative vote of the majority of the independent members of our board of directors shall be required to approve such a transaction. We are not a party to the Agreement Among Managing Partners, and neither we nor our shareholders (other than our Strategic Investors, as described under “Item 13. Certain Relationships and Related Transactions—Lenders Rights Agreement—Amendments to Managing Partner Transfer Restrictions”) have any right to enforce the provisions described above. Such provisions can be amended or waived upon agreement of our Managing Partners at any time. Committees of the Board of Directors We have established an audit committee as well as a conflicts committee. Our audit committee has adopted a charter that complies with current SEC and NYSE rules relating to corporate governance matters. Our board of directors may from time to time establish other committees of our board of directors. Audit Committee The primary purpose of our audit committee is to assist our manager in overseeing and monitoring (i) the quality and integrity of our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) our independent registered public accounting firm’s qualifications and independence and (iv) the performance of our independent registered public accounting firm. The current members of our audit committee are Messrs. Ducey, Krongard and Ms. Richards. Ms. Richards currently serves as Chairman of the committee. Each of the members of our audit committee meets the independence standards and financial literacy requirements for service on an audit committee of a board of directors pursuant to the Exchange Act and NYSE rules applicable to audit committees and corporate governance. Furthermore, our manager has determined that Ms. Richards is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K. Our audit committee has a charter which is available at the Investor Relations section of our Internet website at www.agm.com. Conflicts Committee The current members of our conflicts committee are Messrs. Ducey and Fribourg. Mr. Ducey currently serves as Chairman of the committee. The purpose of the conflicts committee is to review specific matters that our manager believes may involve conflicts of interest. The conflicts committee will determine whether the resolution of any conflict of interest submitted to it is fair and reasonable to us. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us and not a breach by us of any duties that we may owe to our shareholders. In addition, the conflicts committee may review and approve any related person transactions, other than those that are approved pursuant to our related person policy, as described under “Item 13. Certain Relationships and Related Party Transactions—Statement of Policy Regarding Transactions with Related Persons,” and may establish guidelines or rules to cover specific categories of transactions. Code of Business Conduct and Ethics We have a Code of Business Conduct and Ethics, which applies to, among others, our principal executive officer, principal financial officer and principal accounting officer. A copy of our Code of Business Conduct and Ethics is available on our Internet website at www.agm.com under the “Investor Relations” section. We intend to disclose any amendment to or waiver of the Code of Business Conduct and Ethics on behalf of an executive officer or director either on our Internet website or in an 8-K filing. -247- Table of Contents Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities to file initial reports of ownership and reports of changes in ownership with the SEC and furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on our review of the copies of such reports furnished to us or written representations from such persons that they were not required to file a Form 5 to report previously unreported ownership or changes in ownership, we believe that, with respect to the fiscal year ended December 31, 2012, such persons complied with all such filing requirements. ITEM 11. EXECUTIVE COMPENSATION Compensation Discussion and Analysis Overview of Compensation Philosophy Alignment of Interests with Investors and Shareholders. Our principal compensation philosophy is to align the interests of our Managing Partners, Contributing Partners, and other senior professionals with those of our Class A shareholders and fund investors. This alignment, which we believe is a key driver of our success, has been achieved principally by our Managing Partners’, Contributing Partners’, and other investment professionals’ direct beneficial ownership of equity in our business in the form of AOG Units and Class A shares, their ownership of rights to receive a portion of the incentive income earned from our funds, the direct investment by our investment professionals in our funds, and our practice of paying annual incentive compensation partly in the form of equity-based grants that are subject to vesting. As a result of this alignment, the compensation of our professionals is closely tied to the performance of our businesses. Significant Personal Investment. Like our fund investors and Class A shareholders, certain of our investment professionals make significant personal investments in our funds (as more fully described under “Item 13. Certain Relationships and Related Party Transactions”), directly or indirectly, and our professionals who receive carried interests in our funds are generally required to invest their own capital in the funds they manage in amounts that are generally proportionate to the size of their participation in incentive income. We believe that these investments help to ensure that our professionals have capital at risk and reinforce the linkage between the success of the funds we manage, the success of the Company and the compensation paid to our professionals. Long-Term Performance and Commitment. Most of our professionals have been issued RSUs, which provide rights to receive Class A shares and distributions on those shares. The vesting requirements and minimum retained ownership requirements for these awards and the AOG Units beneficially owned by our Managing Partners and Contributing Partners contribute to our professionals’ focus on long-term performance while enhancing retention of these professionals. Discouragement of Excessive Risk-Taking. Although investments in alternative assets can pose risks, we believe that our compensation program includes significant elements that discourage excessive risk-taking while aligning the compensation of our professionals with our long-term performance. For example, notwithstanding that we accrue compensation for our carried interest programs (described below) as increases in the value of the portfolio investments are recorded in the related funds, we generally make payments in respect of carried interest allocations to our employees only after profitable investments have actually been realized. This helps to ensure that our professionals take a long-term view that is consistent with the Company’s and our shareholders’ interests. Moreover, if a fund fails to achieve specified investment returns due to diminished performance of later investments, our carried interest program relating to that fund generally permits, for the benefit of the limited partner investors in that fund, the return of carried interest payments (generally net of tax) previously made to us, our Contributing Partners or our other employees. These provisions discourage excessive risk-taking and promote a long-term view that is consistent with the interests of our investors and shareholders. Our general requirement that our professionals invest in the funds we manage further aligns the interests of our professionals, fund investors and Class A shareholders. Finally, the vesting provisions and minimum retained ownership requirements of our RSUs and AOG Units noted above discourage excessive risk-taking because the value of these units is tied directly to the long-term performance of our Class A shares. -248- Table of Contents Compensation Elements for Named Executive Officers Consistent with our emphasis on alignment of interests with our fund investors and Class A shareholders, compensation elements tied to the profitability of our different businesses and that of the funds that we manage are the primary means of compensating our six executive officers listed in the tables below, or the “named executive officers.” The key elements of the compensation of our named executive officers during fiscal year 2012 are described below. We distinguish among the compensation components applicable to our six named executive officers as appropriate in the below summary. Mr. Black is a member of the group referred to elsewhere in this report as the “Managing Partners,” and Mr. Zelter is a member of the group referred to elsewhere in this report as the “Contributing Partners.” Annual Salary . Each of our named executive officers other than Mr. Zelter receives an annual salary. The base salaries of our named executive officers are set forth in the Summary Compensation Table below, and those base salaries were set by our Managing Partners in their judgment after considering the historic compensation levels of the officer, competitive market dynamics, and each officer’s level of responsibility and anticipated contributions to our overall success. RSUs. Most of our professionals, including our named executive officers other than Messrs. Black and Zelter, received a Plan Grant (as defined below) of RSUs, either at the time of the 2007 Reorganization or in connection with their subsequent commencement of employment. In 2012, a portion of our named executive officers’ compensation (other than for Messrs. Black and Donnelly) was also paid in the form of RSUs. We refer to our annual grants of RSUs as Bonus Grants. Mr. Zelter received a special grant of RSUs in 2012, based on a determination by our Managing Partners in their discretion that his contributions merited such grant, and Mr. Azrack received a special grant of RSUs in 2012 consistent with the terms of his employment agreement. The RSUs are subject to multi-year vesting and minimum retained ownership requirements. In 2012, all named executive officers were required to retain at least 85% of any Class A shares issued to them pursuant to RSU awards (net of an assumed rate of 50% of gross shares sold or netted to pay applicable income or employment taxes). The named executive officer Plan Grants, Bonus Grants and special grants are described below under “— Narrative Disclosure to the Summary Compensation Table and Grants of Plan-Based Awards Table—Awards of Restricted Share Units Under the Equity Plan.” Carried Interest. Carried interests with respect to our funds confer rights to receive distributions if a distribution is made to investors following the realization of an investment or receipt of operating profit from an investment by the fund. These rights provide their holders with substantial incentives to attain strong returns in a manner that does not subject their capital investment in the Company to excessive risk. Distributions of carried interest generally are subject to contingent repayment (generally net of tax) if the fund fails to achieve specified investment returns due to diminished performance of later investments. The actual gross amount of carried interest allocations available is a function of the performance of the applicable fund. For these reasons, we believe that carried interest participation aligns the interests of our professionals with those of our Class A shareholders and fund investors. We currently have two principal types of carried interest programs, dedicated and incentive pool. Messrs. Black, Zelter, Suydam and Azrack have been awarded rights to participate in a dedicated percentage of the carried interest income earned by the general partners of certain of our funds. Participation in dedicated carried interest is typically subject to vesting, which rewards long-term commitment to the firm and thereby enhances the alignment of participants’ interests with the Company. Our financial statements characterize the carried interest income allocated to participating professionals in respect of their dedicated interests as compensation. Actual distributions in respect of dedicated carried interests are included in the “All Other Compensation” column of the summary compensation table. Our performance based incentive arrangement referred to as the incentive pool further aligns the overall compensation of our professionals to the realized performance of our business. The incentive pool provides for discretionary compensation based on carried interest realizations earned by us during the year and enhances our capacity to offer competitive compensation opportunities to our professionals. “Carried interest realizations earned” means carried interest earned by the general partners of our funds under the applicable fund limited partnership agreements based upon transactions that have closed or other rights to cash that have become fixed in the applicable calendar year period. Under this arrangement, Messrs. Kelly, Zelter, Suydam and Azrack, among other of our professionals, were awarded incentive pool compensation based on carried interest realizations we earned during 2012. Allocations to participants in the incentive pool contain both a fixed component ($18,000 in 2012) and a discretionary component, both of which may vary year-to-year, including as a result of our overall realized performance and the contributions and performance of each participant. The Managing Partners determine the amount of the carried interest realizations to place into the incentive pool in their discretion after considering various factors, including Company profitability, management company cash requirements and anticipated future costs, provided that -249- Table of Contents the incentive pool consists of an amount equal to at least one percent (1%) of the carried interest realizations attributable to profits generated after creation of the incentive pool program that were taxable in the applicable year and not allocable to dedicated carried interests. The $18,000 figure noted above was chosen as an amount that was in excess of this one percent (1%) threshold, without exceeding the minimum distribution that the Managing Partners determined that all incentive pool participants were entitled to receive. Our financial statements characterize the carried interest income allocated to participating professionals in respect of incentive pool interests as compensation. The “All Other Compensation” column of the summary compensation table includes actual distributions paid from the incentive pool. Bonus . Three of our named executive officers, Messrs. Kelly, Donnelly and Zelter, received cash bonuses in 2012. Pursuant to his employment agreement, Mr. Kelly received a special one-time sign-on bonus in connection with entering into his employment agreement. Mr. Donnelly’s separation agreement entitled him to a cash bonus for his services in 2012, including with respect to the filing of our Form 10-Q for the period ending June 30, 2012 and as a full-time senior advisor assisting us in the transition of his responsibilities as chief financial officer to Mr. Kelly. Mr. Zelter is entitled to receive an annual bonus based on the management fee and incentive income of certain of our businesses in which he participates, which encourages him to maintain a long-term focus on the performance of those businesses. Because Mr. Zelter’s bonus is performance-based, nondiscretionary, and not a retention bonus, we report it in the “Non-Equity Incentive Plan” column of the summary compensation table. Determination of Compensation of Named Executive Officers Our Managing Partners make all final determinations regarding named executive officer compensation. Decisions about the variable elements of a named executive officer’s compensation, including participation in our carried interest programs and grants of equity-based awards, are based primarily on our Managing Partners’ assessment of such named executive officer’s individual performance, operational performance for the department or division in which the officer (other than a Managing Partner) serves, and the officer’s impact on our overall operating performance and potential to contribute to long-term shareholder value. In evaluating these factors, our Managing Partners do not utilize quantitative performance targets but rather rely upon their judgment about each named executive officer’s performance to determine an appropriate reward for the current year’s performance. The determinations by our Managing Partners are ultimately subjective, are not tied to specified annual, qualitative or individual objectives or performance factors, and reflect discussions among the Managing Partners. Key factors that our Managing Partners consider in making such determinations include the officer’s type, scope and level of responsibilities and the officer’s overall contributions to our success. Our Managing Partners also consider each named executive officer’s prior-year compensation, the appropriate balance between incentives for long-term and short-term performance, competitive market dynamics and the compensation paid to the named executive officer’s peers within the Company. Note on Distributions on Apollo Operating Group Units We note that all of our Managing Partners and Contributing Partners, including Mr. Black, beneficially own AOG Units. In particular, as of December 31, 2012, the Managing Partners beneficially owned, through their interest in Holdings, approximately 57% of the total limited partner interests in the Apollo Operating Group. When made, distributions on these units (which are made on both vested and unvested units) are in the same amount per unit as distributions made to us in respect of the AOG Units we hold. Accordingly, although distributions on AOG Units are distributions on equity rather than compensation, they play a central role in aligning our Managing Partners’ and Contributing Partners’ interests with those of our Class A shareholders, which is consistent with our compensation philosophy. In 2012, the Managing Partners, including Mr. Black, and Contributing Partners, including Mr. Zelter, were required to retain 100% of their AOG Units. Compensation Committee Interlocks and Insider Participation Our board of directors does not have a compensation committee. Our Managing Partners make all such compensation determinations, as discussed above under “—Determination of Compensation of Named Executive Officers.” For a description of certain transactions between us and the Managing Partners, see “Item 13. Certain Relationships and Related Party Transactions.” -250- Table of Contents Compensation Committee Report As noted above, our board of directors does not have a compensation committee. The executive committee of the board of directors identified below has reviewed and discussed with management the foregoing Compensation Discussion and Analysis and, based on such review and discussion, has determined that the Compensation Discussion and Analysis should be included in this Annual Report on Form 10-K. Leon Black, Chairman Joshua Harris Marc Rowan Summary Compensation Table The following summary compensation table sets forth information concerning the compensation earned by, awarded to or paid to our principal executive officer, our principal financial officer, and our three other most highly compensated executive officers for the fiscal year ended December 31, 2012. Managing Partners Messrs. Harris and Rowan are not included in the table because their compensation, as tabulated in accordance with applicable rules, does not result in either of them being among the three most highly compensated executive officers after our principal executive and principal financial officers. Our Managing Partners’ earnings derive predominantly from distributions they receive as a result of their indirect beneficial ownership of AOG Units and their rights under the tax receivable agreement (described elsewhere in this report, including above under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Cash Distribution Policy”), rather than from compensation, and accordingly are not included in the below tables. The officers named in the table are referred to as the named executive officers. Name and Principal Position Leon Black, Chairman, Chief Executive Officer and Director Martin Kelly, Chief Financial Officer (assumed this position effective September 13, 2012) Gene Donnelly, Chief Financial Officer and Vice President (ceased serving in this position on August 14, 2012) James Zelter, Managing Director, Credit John Suydam, Year Salary ($) Bonus (1) ($) Non-Equity Incentive Plan All Other Compensation (3) ($) (4) ($) Stock Awards ($) (2) Total ($) 2012 100,000 — — — 187,368 287,368 2011 2010 100,000 100,000 — — — 7,391,825 2012 300,000 200,000 4,687,530 372,996 1,312,412 — 472,996 — 8,804,237 — 1,433,411 6,620,941 2012 875,000 1,000,000 500,000 1,487,500 — 1,360,000 1,556,592 2,049,194 3,630,000 — — — — 1,360,000 — 3,919,092 4,409,194 5,490,000 — — — — 2,606,310 5,099,193 14,959,920 22,665,423 — 2,631,239 2,230,843 8,227,188 13,089,270 — 1,338,548 5,373,638 3,070,459 9,782,645 2011 2010 2012 2011 2010 2012 3,000,000 Chief Legal Officer and Chief Compliance Officer 2011 3,000,000 — 496,715 2010 3,000,000 — 1,487,500 1,555,133 945,566 2012 791,667 2011 500,000 — 1,994,702 — 11,149,657 — — — — — 3,405,953 6,902,668 6,341,244 5,695,378 1,786,111 262,312 208,333 2,994,702 519,750 12,169,407 Joseph Azrack, Managing Director, Real Estate (1) Amounts shown for 2012 represent cash bonuses earned in 2012. (2) Represents the aggregate grant date fair value of stock awards granted, as applicable, computed in accordance with FASB ASC Topic 718. See note 14 to our consolidated financial statements for further information concerning the assumptions made in valuing our RSU awards. The amounts shown do not reflect compensation actually received by the named executive officers, but instead represent the aggregate grant date fair value of the awards. Mr. Black’s 2010 amount represents an allocation of AOG Units to him in accordance with the Agreement Among Managing Partners upon the forfeiture of such AOG Units by a retiring contributing partner. For Mr. Donnelly, the Accounting Standards Codification (“ASC”) amount represents the incremental fair value for accounting purposes, computed in accordance with FASB ASC Topic 718, of the vesting on December 31, 2012 of 25% of his unvested RSUs that had been granted in prior years, in accordance with his separation agreement. Mr. Donnelly -251- Table of Contents did not receive a new grant of RSUs in 2012. (3) Mr. Zelter’s annual cash compensation is derived from the management fee and incentive income generated by various of our funds in which he participates pursuant to his employment agreement. (4) Amounts included for 2012, 2011 and 2010 represent, in part, actual distributions in respect of dedicated carried interest allocations relating to the named executive officers in those years. Of these 2012 distribution amounts, $18,108 and $5,432, respectively, was paid in the form of AAA RDUs for Messrs. Zelter and Suydam, which RDUs are not subject to vesting. To the extent that compensation expense recorded by us on an accrual basis in respect of dedicated carried interest allocations had been included in the table for 2012 (rather than actual distributions), the accrued amounts would have been $0 for Mr. Black, $15,522,718 for Mr. Zelter, and $1,875,426 for Mr. Suydam. For financial statement reporting purposes, accrued carried interest related to investments is classified as compensation expense for the relevant period (we note that this expense can be negative in a given year, in the event of a reversal of previously allocated carried interest due to negative adjustments in the fair value on certain portfolio investments). The ultimate amount of actual dedicated carried interest distributions that may be generated in connection with fund investments and subsequently distributed to our named executive officers in future years, as well as the associated compensation expense, may be more or less than the accrued amounts stated in this footnote. Additionally, such amounts are generally subject to vesting conditions and to contingent repayment (generally net of tax) in certain instances. For 2012, the “All Other Compensation” column also includes actual incentive pool distributions ($1,433,411 for Mr. Kelly, $18,000 for Mr. Zelter, $500,000 for Mr. Suydam and $208,333 for Mr. Azrack). The “All Other Compensation” column also includes the following amounts for 2012: (a) Costs relating to Company-provided cars and drivers for the business and personal use of Messrs. Black and Suydam. We provide this benefit because we believe that its cost is outweighed by the convenience, increased efficiency and added security and confidentiality that it offers. The personal use cost was approximately $166,718 for Mr. Black and $36,639 for Mr. Suydam. For Mr. Black, this amount includes both fixed and variable costs, including lease costs, driver compensation, driver meals, fuel, parking, tolls, repairs, maintenance and insurance. For Mr. Suydam, this amount includes the costs to the Company associated with his use of a car service. (b) Tickets to sporting events for Mr. Black’s personal use having an aggregate incremental cost (based on the full price of the tickets used) of $12,400. Except as discussed above in paragraphs (a) and (b) of this footnote 4, no 2012 perquisites or personal benefits individually exceeded the greater of $25,000 or 10% of the total amount of all perquisites and other personal benefits reported for the named executive officer. The cost of excess liability insurance provided to our named executive officers falls below this threshold. None of Messrs. Kelly, Donnelly, Zelter or Azrack received perquisites or personal benefits in 2012, except for incidental benefits having an aggregate value of less than $10,000 per individual. Our named executive officers also receive occasional secretarial support with respect to personal matters. We incur no incremental cost for the provision of such additional benefits. Finally, Mr. Black makes business and personal use of various aircraft in which we have fractional interests, and he bears the aggregate incremental cost of his personal usage. Accordingly, no such amount is included in the Summary Compensation Table. -252- Table of Contents Narrative Disclosure to the Summary Compensation Table and Grants of Plan-Based Awards Table Employment, Non-Competition and Non-Solicitation Agreement with Chairman and Chief Executive Officer In July 2012, we entered into an employment, non-competition and non-solicitation agreement with Leon Black, our chairman and chief executive officer and a member of our manager’s executive committee, which agreement supersedes and is substantially similar to the agreement we entered into with Mr. Black dated July 13, 2007. The term of the agreement concludes on July 19, 2015. Mr. Black has the right to terminate his employment voluntarily at any time, but we may terminate his employment only for cause or by reason of death or disability (as such terms are defined in his employment agreements.) Mr. Black is entitled during his employment to an annual salary of $100,000 and to participate in our employee benefit plans, as in effect from time to time. The employment agreement requires Mr. Black to protect the confidential information of Apollo both during and after employment. In addition, until one year after his employment terminates, Mr. Black is required to refrain from soliciting employees under specified circumstances or interfering with our relationships with investors and to refrain from competing with us in a business that involves primarily ( i.e. , more than 50%) third-party capital, whether or not the termination occurs during the term of the agreement or thereafter. These post-termination covenants survive any termination or expiration of the Agreement Among Managing Partners. If Mr. Black becomes subject to a potential termination for cause or by reason of disability, our manager may appoint an investment professional to perform his functional responsibilities and duties until cause or disability definitively results in his termination or is determined not to have occurred, but the manager may so appoint an investment professional only if Mr. Black is unable to perform his responsibilities and duties or, as a matter of fiduciary duty, should be prohibited from doing so. During any such period, Mr. Black shall continue to serve on the executive committee of our manager unless otherwise prohibited from doing so pursuant to the Agreement Among Managing Partners. Under his employment agreement, if we terminate Mr. Black’s employment for cause or his employment is terminated by reason of death or disability, or he terminates his employment voluntarily, he will be paid only his accrued but unpaid salary through the date of termination. Employment, Non-Competition and Non-Solicitation Agreement with Chief Financial Officer Martin Kelly On July 2, 2012, we entered into an employment, non-competition and non-solicitation agreement with Martin Kelly, who became our chief financial officer on September 13, 2012. Pursuant to his employment agreement, Mr. Kelly received a sign-on bonus in the amount of $200,000, which amount is subject to repayment if he resigns without good reason or is terminated with cause (as such terms are defined in his employment agreement) within one year after payment. His annual base salary is $1,000,000, which amount was prorated for 2012. As provided in his employment agreement, Mr. Kelly received a Plan Grant of 375,000 RSUs in connection with his commencement of employment. He is eligible for an annual bonus in an amount to be determined by us in our discretion, except that his minimum bonus for services performed in 2012 was $1,890,000 and his minimum bonus for services performed in 2013 shall be $1,500,000, a portion of which bonuses is subject to payment in the form of Bonus Grants. Consistent with his employment agreement, Mr. Kelly participates in the incentive pool carried interest program and is eligible to receive discretionary distributions thereunder. Any distributions actually received under the incentive pool reduce his 2012 and 2013 bonuses by an equivalent amount. We may terminate Mr. Kelly’s employment with or without cause, and we will provide 90 days’ notice (or payment in lieu of such period of notice) prior to a termination without cause. Under the employment agreement, Mr. Kelly will give us 90 days’ notice prior to a resignation for any reason. If Mr. Kelly’s employment is terminated by us without cause or he resigns for good reason, we will pay him the balance of the 2013 minimum annual bonus not yet paid. If such termination or resignation occurs after the payment of the 2013 annual bonus, Mr. Kelly will be entitled to severance of six months’ base pay and reimbursement of health insurance premiums paid in the six months following his employment termination. The employment agreement obligates Mr. Kelly to protect the confidential information of Apollo both during and after employment. In addition, the agreement provides that during the term and for 12 -253- Table of Contents months after employment, Mr. Kelly will refrain from soliciting our employees, interfering with our relationships with investors or other business relations, and competing with us in a business that manages or invests in assets substantially similar to those managed or invested in by Apollo or its affiliates. If we terminate Mr. Kelly’s employment without cause or he resigns for good reason, he will vest in 50% of any unvested portion of his RSU Plan Grant. If his employment is terminated by reason of death or disability, he will vest in 50% of any unvested portion of his Bonus Grant RSUs. Employment, Non-Competition and Non-Solicitation Agreement and subsequent Separation Letter with former Chief Financial Officer Gene Donnelly Our former chief financial officer, Gene Donnelly, ceased employment with us effective December 31, 2012. On July 2, 2012, our employment, non-competition and non-solicitation agreement with Mr. Donnelly, dated May 13, 2012, was superseded in part by a letter agreement entered into by Mr. Donnelly and Apollo, which we refer to as the separation letter. Under his employment agreement, Mr. Donnelly had been entitled to an annual salary of $1,000,000 and to an annual bonus determined by the Managing Partners in their discretion. Mr. Donnelly’s annual target bonus was 170% of his base salary. During his employment, Mr. Donnelly was eligible to participate in our employee benefit plans as in effect from time to time. In accordance with the separation letter, Mr. Donnelly remained our chief financial officer until August 14, 2012 and thereafter served as a senior advisor, assisting us in the transition of his previous responsibilities to his successor, until December 31, 2012. Consistent with the separation letter, Mr. Donnelly received a payment of $1,487,500 for services performed on or before December 31, 2012, and vested in 25% of his RSUs that remained unvested as of December 31, 2012. Pursuant to his separation letter and employment agreement, Mr. Donnelly is required to protect the confidential information of Apollo after employment. In addition, Mr. Donnelly is required, for 12 months after employment, to refrain from soliciting our employees or interfering with our relationships with investors and other business relations, and for six (6) months after employment, to refrain from competing with us in a business that manages or invests in assets substantially similar to those invested in or managed by Apollo or its affiliates. Employment, Non-Competition and Non-Solicitation Agreement and Roll-Up Agreement with Managing Director—Credit We entered into an employment agreement with our Managing Director—Credit, James Zelter, on May 15, 2006. The agreement was amended in connection with the 2007 Reorganization, when Mr. Zelter entered into a Roll-Up Agreement dated as of July 13, 2007, and this discussion refers to the employment agreement as so amended. The agreement provides Mr. Zelter with the right to participate in management fee net income and incentive income attributable to various funds managed by us. It also entitles Mr. Zelter to dedicated carried interests in one of our private equity funds, which carried interest rights are subject to vesting. A portion of Mr. Zelter’s total annual compensation is payable in the form of a Bonus Grant, as discussed below under the section entitled, “Awards of Restricted Share Units Under the Equity Plan.” In connection with the management and incentive income rights provided to him under the employment agreement, Mr. Zelter is required to make investments of his own capital in various of our funds. In the event of his termination without cause and other than by reason of death or disability, Mr. Zelter will continue to receive payments with respect to certain funds for one year after his employment termination. Upon his termination by reason of death or disability, without cause, or due to his resignation for good reason (as these terms are defined in the Roll-Up Agreement), Mr. Zelter will generally vest in additional AOG Units equal to one half of his then-unvested AOG Units. Upon his termination by reason of death or disability, Mr. Zelter will vest in 50% of his then unvested Bonus Grant RSUs granted after March 2011 and 50% of his then unvested special grant RSUs. Mr. Zelter is subject to the restrictive covenants contained in his Roll-Up Agreement, as discussed under “Certain Relationships and Related Party Transactions—Roll-Up Agreements.” Employment Terms of Chief Legal Officer and Chief Compliance Officer John Suydam, our chief legal officer and chief compliance officer, does not have an employment agreement with us. Pursuant to the RSU award agreement provided in connection with his Plan Grant, Mr. Suydam is required to protect our confidential information at all times. The Plan Grant agreement also provides that during his employment and for one year thereafter, Mr. Suydam will refrain from soliciting -254- Table of Contents our employees, interfering with our relationships with investors or other business relations, and competing with us in a business that manages or invests in assets substantially similar to those invested in or managed by Apollo or its affiliates. If Mr. Suydam’s employment is terminated by reason of death or disability, he will vest in 50% of his then unvested Bonus Grant RSUs granted after March 2011 and 50% of his then unvested Plan Grant RSUs. If his employment is terminated without cause or due to his resignation for good reason, Mr. Suydam will vest in 50% of his then unvested Plan Grant RSUs. Employment, Non-Competition and Non-Solicitation Agreement with Managing Director—Real Estate On June 1, 2012, we amended and restated the employment, non-competition and non-solicitation agreement with Joseph Azrack. Pursuant to the agreement, Mr. Azrack transitioned from being Managing Partner of AGRE to its Chairman, effective January 1, 2013, whereupon he ceased to be one of our executive officers. Under the amended agreement, Mr. Azrack’s annual base pay while serving as Managing Partner of AGRE was increased from $500,000 to $1,000,000 for the balance of 2012 in acknowledgement of his level of responsibility in that role. His annual base pay as Chairman of AGRE is $350,000. Mr. Azrack is also entitled to carried interests with respect to various real estate funds or investments that we manage. During his employment, Mr. Azrack is eligible to participate in our employee benefit plans as in effect from time to time. We may terminate Mr. Azrack’s employment without cause on 30 days’ written notice. No notice is required if his employment is terminated for cause. If Mr. Azrack remains employed with us through December 31, 2013 or his employment is terminated before that date without cause or by him for good reason, grants of our RSUs made to him prior to 2012 will vest immediately, our RSU grant made to him in 2012 will be vested as if his employment had terminated on December 31, 2013, and we will recommend that grants of ARI RSUs made to him prior to 2012 will also vest immediately. Upon his termination by reason of death or disability, Mr. Azrack will vest in 50% of the RSUs that are then unvested under his 2011 special grant. In addition, if Mr. Azrack remains employed on December 31, 2013 or his employment is terminated without cause or he resigns for good reason prior to that date, his carried interest in AGRE U.S. Real Estate Advisors, L.P., the general partner of one of our real estate funds, as of his termination date will be equal to what would have vested had his employment terminated on June 30, 2014. However, if he continues to be employed after June 30, 2014, the regular vesting schedule for the carried interests shall apply and any interests that remain unvested at his termination date shall be forfeited. The agreement entitles Mr. Azrack to up to two additional RSU grants, each to be made on the last day of any calendar quarter in which the aggregate assets under management of our real estate funds reach dollar thresholds set forth in the agreement. Any such additional RSUs shall vest 25% on the first anniversary of the grant date, and thereafter in equal quarterly installments over the next three years. Mr. Azrack’s agreement requires him to protect our confidential information at all times. It also provides that during his service with us, and for six months after his termination without cause or resignation for good reason (12 months after his termination for any other reason), Mr. Azrack will refrain from interfering with our relationships with investors or other business relations, soliciting our employees, and competing with us in any entity specified in his employment agreement. Until the later of September 30, 2013 or 90 days after he ceases providing services to us, Mr. Azrack is required to refrain from competing with us in any other business that manages or invests in assets substantially similar to those invested in or managed by Apollo or its affiliates. Mr. Azrack may terminate his employment on 30 days’ notice. Awards of Restricted Share Units Under the Equity Plan On October 23, 2007, we adopted our 2007 Omnibus Equity Incentive Plan. Grants of RSUs under the plan have been made to certain of our named executive officers primarily pursuant to two programs, which we call the “Plan Grants” and the “Bonus Grants.” Following the 2007 Reorganization, Plan Grants were made to Mr. Suydam and a broad range of our other employees. Plan Grants have also been made to subsequent hires, including Messrs. Kelly, Donnelly and Azrack. The Plan Grants generally vest over six years (although Mr. Azrack’s Plan Grant vests over three and one-half years), with the first installment becoming vested approximately one year after grant and the balance vesting thereafter in equal quarterly installments. Holders of Plan Grant RSUs become entitled to distribution equivalents on their vested RSUs if we pay ordinary distributions on our outstanding Class A shares. Once vested, the Class A shares -255- Table of Contents underlying Plan Grants granted prior to 2012 generally are issued on fixed dates, with 7.5% of the shares generally issued once each year over a four-year period and the remaining 70% issued in seven equal quarterly installments commencing in the fifth year. Vested Class A shares underlying Plan Grants issued in 2012 are generally issuable by March 15th after the year in which they vest. The administrator of the 2007 Omnibus Equity Incentive Plan determines when shares issued pursuant to the RSU awards may be disposed of, except that a participant will generally be permitted to sell shares if necessary to cover taxes. In 2012, all named executive officers were required to retain at least 85% of any Class A shares issued to them pursuant to RSU awards (net of an assumed rate of 50% of gross shares sold or netted to pay applicable income or employment taxes). During the restricted period set forth in a participant’s award agreement evidencing his Plan Grant (or, for Messrs. Kelly and Donnelly, his employment agreement), the participant will not (i) engage in any business activity in which the Company operates, (ii) render any services to any competitive business or (iii) acquire a financial interest in, or become actively involved with, any competitive business (other than as a passive holding of less than a specified percentage of publicly traded companies). In addition, the grant recipient will be subject to non-solicitation, non-hire and non- interference covenants during employment and for a specified period thereafter. Each grant recipient is generally also bound to a non-disparagement covenant with respect to us and the Managing Partners and to confidentiality restrictions. Any resignation by a grant recipient shall generally require at least 90 days’ notice. Any restricted period applicable to the grant recipient will commence after the notice of termination period. The RSUs advance several goals of our compensation program. The Plan Grants align employee interests with those of our shareholders by making our employees, upon delivery of the underlying Class A shares, shareholders themselves. Because they vest over time, the Plan Grants reward employees for sustained contributions to the Company and foster retention. The size of the Plan Grants is determined by the Plan administrator based on the grantee’s level of responsibility and contributions to the Company. The restrictive covenants contained in the RSU agreements reinforce our culture of fiduciary protection of our investors by requiring RSU holders to abide by the provisions regarding non-competition, confidentiality and other limitations on behavior described in the immediately preceding paragraph. In 2012 we also awarded special RSU grants to each of Messrs. Zelter and Azrack. Mr. Zelter’s grant was made by our Managing Partners in their discretion based on their determination that his contributions merited such grant and Mr. Azrack’s grant was awarded in accordance with the terms of his employment agreement. The Bonus Grants are also grants of RSUs under the 2007 Omnibus Equity Incentive Plan. However, the Bonus Grants constitute payment of a portion of the annual compensation earned by certain of our professionals, including Messrs. Kelly, Donnelly and Suydam, subject to the employee’s continued service through the vesting dates. Our named executive officers’ Bonus Grants differ from their Plan Grants in the following principal ways: • • • The RSU Shares underlying Bonus Grants are scheduled to vest in three equal annual installments. Distribution equivalents are earned on Bonus Grant RSUs (whether or not vested) when ordinary distributions are made on Class A shares after the grant date, but distribution equivalents are earned on Plan Grant RSUs only after they have vested. Bonus Grants generally do not contain restrictive covenants (however, an individual who has received both a Plan Grant and a Bonus Grant remains subject to the restrictive covenants contained in his or her Plan Grant). Grants of Plan-Based Awards The following table presents information regarding the awards granted to the named executive officers under a plan in 2012. All such awards were granted under the Apollo Global Management, LLC 2007 Omnibus Equity Incentive Plan. No options were granted to a named executive officer in 2012. -256- Table of Contents Name Leon Black Martin Kelly Gene Donnelly James Zelter John Suydam Joseph Azrack Award — Bonus Grant RSUs Plan Grant RSUs Various RSUs Bonus Grant RSUs Special Grant RSUs Bonus Grant RSUs Special Grant RSUs Grant Date — December 28, 2012 September 30, 2012 — April 5, 2012 December 28, 2012 December 28, 2012 June 30, 2012 Stock Awards: Number of Shares of Stock or Units Grant Date Fair Value of Stock Awards ($) (1) (2) (1) — 27,033 375,000 94,179 54,902 148,016 30,343 204,166 (1) (1) (1) (1) — (3) 442,530 4,245,000 1,556,592 645,099 1,961,212 496,715 1,994,702 (3) (4) (3) (3) (3) (3) (1) Represents the aggregate number of RSUs covering our Class A shares (none of the Bonus Grants awarded in 2012 vested in 2012 except for Mr. Zelter’s April 5, 2012 Bonus Grant, the first vesting date for which was December 31, 2012). For a discussion of these grants, please see the discussion above under “—Narrative Disclosure to the Summary Compensation Table and Grants of Plan-Based Awards Table—Awards of Restricted Share Units Under the Equity Plan.” One sixth of Mr. Zelter’s special RSU grant vests on December 31, 2013 and the balance vests in twenty substantially equal quarterly installments thereafter. Mr. Azrack’s special RSU grant vests in equal installments on the last day of the 12 calendar quarters that begin March 31, 2013. (2) Represents the number of RSUs granted to Mr. Donnelly prior to 2012 for which vesting was accelerated in 2012 pursuant to Mr. Donnelly’s separation agreement. (3) Represents the aggregate grant date fair value of the RSUs granted in 2012, computed in accordance with FASB ASC Topic 718. The amount shown does not reflect compensation actually received, but instead represents the aggregate grant date fair value of the award. (4) Represents the incremental fair value for accounting purposes, computed in accordance with FASB ASC Topic 718, of the vesting on December 31, 2012 of 25% of Mr. Donnelly’s unvested RSUs that had been granted in prior years, in accordance with his separation agreement. Mr. Donnelly did not receive a new grant of RSUs in 2012. Outstanding Equity Awards at Fiscal Year-End The following table presents information regarding the outstanding unvested equity awards made by us to each of our named executive officers on or prior to December 31, 2012. Name Leon Black Martin Kelly Gene Donnelly James Zelter John Suydam Joseph Azrack Source of Award — 2007 Omnibus Equity Incentive Plan — AOG Units 2007 Omnibus Equity Incentive Plan 2007 Omnibus Equity Incentive Plan 2007 Omnibus Equity Incentive Plan -257- Stock Awards Number of Unearned Shares, Units or Other Rights That Have Not Vested Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) 375,000 27,033 — (1) (2) — (3) 200,160 148,016 51,023 36,602 95,487 21,355 27,710 30,343 204,166 46,719 204,166 (4) (5) (6) (7) (5) (8) (2) (8) (9) (10) (11) (12) (12) (13) (14) (12) (12) (12) (12) (12) (12) (12) (12) (12) — 6,510,000 469,293 — 3,474,778 2,569,558 885,759 635,411 1,657,654 370,723 481,046 526,754 3,544,322 811,042 3,544,322 (12) Table of Contents (1) Plan Grant RSUs, one sixth of which vest on September 30, 2013, with the balance vesting in substantially equal installments over the next 20 calendar quarters. (2) Bonus Grant RSUs that vest in substantially equal annual installments on December 31 of each of 2013, 2014 and 2015. (3) AOG Units that vest in six substantially equal monthly installments beginning January 31, 2013. (4) Special grant RSUs, one sixth of which vest on December 31, 2013, with the balance vesting in substantially equal installments over the next 20 calendar quarters. (5) Bonus Grant RSUs that vest on December 31, 2013. (6) Bonus Grant RSUs that vest in equal annual installments on December 31 of each of 2013 and 2014. (7) Plan Grant RSUs that vest in equal installments on March 31, 2013 and June 30, 2013. (8) Special grant RSUs, one quarter of which vest on March 31, 2013, with the balance vesting in substantially equal installments over the next 12 calendar quarters. (9) Bonus Grant RSUs that vest on December 31, 2013. (10) Special grant RSUs that vest in four equal quarterly installments beginning March 31, 2013. (11) Mr. Black vested in all of his AOG Units on December 31, 2012 in accordance with their vesting schedule. (12) Amounts calculated by multiplying the number of unvested RSUs held by the named executive officer by the closing price of $17.36 per Class A share on December 31, 2012. (13) In connection with his December 31, 2012 employment termination, Mr. Donnelly vested in 94,179 RSUs and forfeited his 282,537 RSUs that had not vested. (14) Amounts calculated by multiplying the number of unvested AOG Units held by Mr. Zelter by the closing price of $17.36 per Class A share on December 31, 2012. Option Exercises and Stock Vested The following table presents information regarding the number of outstanding initially unvested RSUs made to our named executive officers that vested during 2012. The amounts shown below do not reflect compensation actually received by the named executive officers, but instead are calculations of the number of RSUs or AOG Units that vested during 2012 based on the closing price of our Class A shares on the date of vesting. Name Leon Black Martin Kelly Gene Donnelly James Zelter John Suydam Joseph Azrack Type of Award AOG Units — RSUs AOG Units RSUs RSUs RSUs Stock Awards (3) Number of Shares Acquired on Vesting 15,663,846 — 243,372 400,320 114,899 254,654 391,247 Value Realized on Vesting ($) 221,262,568 (1) — (2) 3,911,137 5,647,514 1,994,647 3,908,034 6,004,048 (1) (2) (2) (2) (1) Amounts calculated by multiplying the number of AOG Units beneficially held by the named executive officer that vested on each month-end vesting date in 2012 by the closing price per Class A share on that date. (2) Amounts calculated by multiplying the number of RSUs held by the named executive officer that vested on each applicable quarter-end or year-end vesting date in 2012 by the closing price per Class A share on that date. Class A shares underlying these vested RSUs are issued to the named executive officer in accordance with the schedules described above under “—Narrative Disclosure to the Summary Compensation Table and Grants of Plan-Based Awards Table—Awards of Restricted Share Units Under the Equity Plan.” (3) No options to purchase Class A shares were exercised by a named executive officer in 2012. Potential Payments upon Termination or Change in Control None of the named executive officers is entitled to payment or other benefits in connection with a change in control. -258- Table of Contents Mr. Black’s employment agreement does not provide for severance or other payments or benefits in connection with an employment termination. Pursuant to the Agreement Among Managing Partners, Mr. Black vested in his interest in AOG Units in equal monthly installments over the 72-month period that concluded on December 31, 2012. We may not terminate Mr. Black except for cause or by reason of disability (as such terms are defined in his employment agreement). If Mr. Kelly’s employment is terminated by us without cause or he resigns for good reason, we will pay him the balance of the 2013 minimum annual bonus not yet paid. If such termination or resignation occurs after the payment of the 2013 annual bonus, Mr. Kelly will be entitled to severance of six months’ base pay and reimbursement of health insurance premiums paid in the six months following his employment termination. If Mr. Kelly’s employment is terminated by us without cause or he resigns for good reason, or his employment is terminated by reason of death or disability, he will vest in 50% of any unvested portion of his Plan Grant RSUs. If his employment is terminated by reason of death or disability, he will vest in 50% of any unvested portion of his Bonus Grant RSUs. On July 2, 2012, Mr. Donnelly entered into a separation letter entitling him, if he remained employed until December 31, 2012, to a one-time bonus of $1,487,500 in January 2013, and to immediate vesting in 25% of his outstanding RSUs that remained unvested as of that date. Upon his termination without cause and other than by reason of death or disability, Mr. Zelter will continue to receive payments with respect to certain funds for one year after his employment termination. Upon his termination by reason of death or disability, without cause, or due to his resignation for good reason, Mr. Zelter will generally vest in additional AOG Units equal to one half of his then-unvested AOG Units. Upon his termination by reason of death or disability, Mr. Zelter will vest in 50% of his then unvested Bonus Grant RSUs granted after March 2011 and 50% of his then unvested special grant RSUs. If Mr. Suydam’s employment is terminated by reason of death or disability, he will vest in 50% of his then unvested Bonus Grant RSUs granted after March 2011 and 50% of his then unvested Plan Grant RSUs. If his employment is terminated without cause or due to his resignation for good reason, Mr. Suydam will vest in 50% of his then unvested Plan Grant RSUs. If Mr. Azrack’s employment is terminated before December 31, 2013 without cause or by him for good reason, grants of our RSUs made to him prior to 2012 will vest immediately, our RSU grant made to him in 2012 will be vested as if his employment had terminated on December 31, 2013, and we will recommend that grants of ARI RSUs made to him prior to 2012 will also vest immediately. Upon his termination by reason of death or disability, Mr. Azrack will vest in 50% of the RSUs that are then unvested under his 2011 special grant. In addition, if Mr. Azrack’s employment is terminated without cause or he resigns for good reason prior to December 31, 2013, his carried interest in AGRE U.S. Real Estate Advisors, L.P. as of his termination, if any, will be vested to the extent it would have been had had his employment terminated on June 30, 2014. Our named executive officers’ post-employment obligations, and their entitlements upon employment termination, are described above in the discussion of employment, non-competition and non-solicitation agreements and the discussion titled, “Awards of Restricted Share Units Under the Equity Plan,” in each case in the section, “—Narrative Disclosure to the Summary Compensation Table and Grants of Plan-Based Awards Table.” The named executive officers’ obligations during and after employment were considered by the Managing Partners in determining appropriate post- employment payments and benefits for the named executive officers. The following table lists the estimated amounts that would have been payable to each of our named executive officers in connection with a termination that occurred on the last day of our last completed fiscal year and the value of any additional equity that would vest upon such termination (where indicated, this table shows the actual amount that became payable to Mr. Donnelly in connection with his separation from employment effective December 31, 2012). When listing the potential payments to named executive officers under the plans and agreements described above, we have assumed that the applicable triggering event occurred on December 31, 2012 and that the price per share of our common stock was $17.36, which is equal to the closing price on such date. For purposes of this table, RSU and option acceleration values are based on the $17.36 closing price. -259- Table of Contents Name Leon Black Martin Kelly Gene Donnelly James Zelter John Suydam Joseph Azrack Reason for Employment Termination Cause Death, disability Without cause; by executive for good reason Death, disability Actual termination effective December 31, 2012 Without cause; by executive for good reason Death; disability Without cause; by executive for good reason Death; disability Without cause; by executive for good reason Death, disability Estimated Value Estimated Value of Cash Payments ($) of Equity Acceleration ($) 1,500,000 1,487,500 3,128,688 — — (1) — (2) (3) — — — — — — — (4) 3,255,000 3,489,646 1,634,947 1,737,389 3,339,873 828,827 1,332,727 4,444,686 1,772,161 (4) (5) (6) (4) (4) (4) (4) (4) (1) This amount would have been payable to Mr. Kelly had his employment been terminated by the Company without cause (and other than by reason of death or disability) or for good reason on December 31, 2012. (2) This amount became payable to Mr. Donnelly in connection with his actual employment termination on December 31, 2012. (3) Pursuant to Mr. Zelter’s employment agreement, had his employment terminated on December 31, 2012, he would have been entitled to be treated as if he had remained employed, for purposes of receiving distributions in respect of certain funds, for 12 additional months. The value of any such future distributions is unknowable at this time, so we have assumed, for purposes of determining the value of this right, that such distributions are equal to those earned for 2012 from the applicable funds. (4) This amount represents the additional equity vesting that the named executive officer would have received had his employment terminated in the circumstances described in the column, “Reason for Employment Termination,” on December 31, 2012, based on the closing price of a Class A share on such date. Please see our “Outstanding Equity Awards at Fiscal Year-End” table above for information regarding the named executive officer’s unvested equity as of December 31, 2012. (5) This amount represents the additional equity vesting that Mr. Donnelly received upon his actual employment termination on December 31, 2012, based on the closing price of a Class A share on such date. Upon his employment termination, Mr. Donnelly forfeited his 282,537 RSUs that had not vested. (6) This amount represents the additional equity vesting that Mr. Zelter would have received had his employment terminated in the circumstances described in the column, “Reason for Employment Termination,” on December 31, 2012, based on the closing price of a Class A share on such date. Please see our “Outstanding Equity Awards at Fiscal Year-End” table above for information regarding his unvested equity as of December 31, 2012. Director Compensation We do not pay additional remuneration to our employees, including Mr. Black, for their service on our board of directors. The 2012 compensation of Mr. Black is set forth above on the Summary Compensation Table. Each independent director receives (1) an annual director fee of $100,000, (2) an additional annual director fee of $25,000 if he or she a member of the audit committee, (3) an additional annual director fee of $10,000 if he or she is a member of the conflicts committee, (4) an additional annual director fee of $25,000 (incremental to the fee described in (2)) if he or she serves as the chairperson of the audit -260- Table of Contents committee, and (5) an additional annual director fee of $15,000 (incremental to the fee described in (3)) if he or she serves as the chairperson of the conflicts committee. The following table provides the compensation for our independent directors during the year ended December 31, 2012. The directors received no equity awards in 2012. Name Michael Ducey Paul Fribourg A. B. Krongard Pauline Richards Fees Earned or Paid in $ $ $ $ Cash 150,000 110,000 125,000 150,000 Stock Awards — — — — Total $ 150,000 $ 110,000 $ 125,000 $ 150,000 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth information regarding the beneficial ownership of our Class A shares as of February 26, 2013 by (i) each person known to us to beneficially own more than 5% of the voting Class A shares of Apollo Global Management, LLC, (ii) each of our directors, (iii) each person who is a named executive officer for 2012 and (iv) all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC. To our knowledge, each person named in the table below has sole voting and investment power with respect to all of the Class A shares and interests in our Class B share shown as beneficially owned by such person, except as otherwise set forth in the notes to the table and pursuant to applicable community property laws. Unless otherwise indicated, the address of each person named in the table is c/o Apollo Global Management, LLC, 9 West 57th Street, New York, NY 10019. In respect of our Class A shares, the table set forth below assumes the exchange by Holdings of all AOG Units for our Class A shares with respect to which the person listed below has the right to direct such exchange pursuant to the exchange agreement described under “Item 13. Certain Relationships and Related Party Transactions—Exchange Agreement,” and the distribution of such shares to such person as a limited partner of Holdings. -261- Table of Contents : (3) ( 4 )( 5 ) ( 4 )( 5 ) Directors and Executive Officers Leon Black Joshua Harris Marc Rowan ( 4 )( 5 ) Pauline Richards Alvin Bernard Krongard Michael Ducey Paul Fribourg Martin Kelly Gene Donnelly Joseph Azrack John Suydam ( 7 ) James Zelter All directors and executive officers as a group (twelve persons) ( 6 ) ( 8 ) (5 ) ( 9 ) BRH AP Professional Holdings, L.P. 5% Stockholders: Waddell & Reed Financial, Inc. Fidelity Management & Research Company ( 10 ) ( 11 ) (1 2 ) Class A Shares Beneficially Owned Class B Share Beneficially Owned Number of Shares Percent (1) 92,727,166 59,008,262 59,008,262 6,181 256,181 10,481 25,181 — 292,918 287,244 412,446 2,816,159 41.2 % 30.9 % 30.9 % * * * * — * * * 2.1 % Total Percentage of Voting (2) Power 76.9 % 76.9 % 76.9 % * * * * — * * * * Number of Shares Percent 1 1 1 — — — — — — — — — 100 % 100 % 100 % — — — — — — — — — Total Percentage of Voting (2) Power 76.9 % 76.9 % 76.9 % — — — — — — — — — 216,874,128 — 240,000,000 62.5 % — 64.5 % 69.1 % — 76.9 % 1 1 — 100 % 100 % — 76.9 % 76.9 % — 15,140,260 7,287,097 11.5 % 5.5 % 4.9 % 2.3 % — — — — — — Represents less than 1%. * (1) The percentage of beneficial ownership of our Class A shares is based on voting and non-voting Class A shares outstanding. (2) The total percentage of voting power is based on voting Class A shares and the Class B share. (3) The shares beneficially owned by the directors and executive officers reflected above do not include the following number of Class A shares that will be delivered to the respective individual more than 60 days after February 26, 2013 in settlement of vested restricted share units: Gene Donnelly—268,624; Joseph Azrack—1,006,771; John Suydam—792,535; and all directors and executive officers as a group – 1,413,368. (4) The number of Class A shares presented are held by estate planning vehicles, for which this individual disclaims beneficial ownership except to the extent of his pecuniary interest therein. The number of Class A shares presented do not include any Class A shares owned by Holdings with respect to which this individual, as one of the three owners of all of the interests in BRH, the general partner of Holdings, or as a party to the Agreement Among Managing Partners described under “Item 13. Certain Relationships and Related Party Transactions—Agreement Among Managing Partners” or the Managing Partner Shareholders Agreement described under “Item 13. Certain Relationships and Related Party Transactions— Managing Partner Shareholders Agreement,” may be deemed to have shared voting or dispositive power. Each of these individuals disclaims any beneficial ownership of these shares, except to the extent of his pecuniary interest therein. (5) BRH, the holder of the Class B share, is one third owned by Mr. Black, one third owned by Mr. Harris and one third owned by Mr. Rowan. Pursuant to the Agreement Among Managing Partners, the Class B share is to be voted and disposed of by BRH based on the determination of at least two of the three Managing Partners; as such, they share voting and dispositive power with respect to the Class B share. (6) On August 14, 2012, Mr. Donnelly ceased to be the Chief Financial Officer of the Company and on December 31, 2012, Mr. Donnelly’s (7) employment with the Company and its subsidiaries terminated. Includes 49,827 Class A shares held by a trust for the benefit of Mr. Suydam’s spouse and children, for which Mr. Suydam’s spouse is the trustee. Mr. Suydam disclaims beneficial ownership with respect to such shares, except to the extent of his pecuniary interest therein. Includes 879,103 Class A shares held by a trust for the benefit of certain of Mr. Zelter’s family members, for which Mr. Zelter is a trustee. Mr. Zelter disclaims beneficial ownership with respect to such shares, except to the extent of his pecuniary interest therein. (9) Refers to shares beneficially owned by the individuals who were directors and executive officers as of February 26, 2013. (10) Assumes that no Class A shares are distributed to the limited partners of Holdings. The general partner of AP Professional Holdings, L.P. is BRH, (8) which is one third owned by Mr. Black, one third owned by Mr. Harris and one third owned by Mr. Rowan. BRH is also the general partner of BRH Holdings, L.P., the limited partnership through which Messrs. Black, Harris and Rowan indirectly beneficially own (through estate planning vehicles) their limited partner interests in AP Professional Holdings, L.P. These individuals disclaim any beneficial ownership of these Class A shares, except to the extent of their pecuniary interest therein. (11) Based on a Schedule 13G/A filed on February 7, 2013 by Waddell & Reed Financial, Inc. (“WDR”), Ivy Investment Management Company (“IICO”), Waddell & Reed Investment Management Company (“WRIMCO”), Waddell & Reed, Inc. (“WRI”) and Waddell & Reed Financial Services, Inc. (“WRFSI”) as joint reporting persons. These shares are beneficially owned by one or more open-end investment companies or other managed accounts that are advised or sub-advised by IICO, an investment advisory subsidiary of WDR or WRIMCO, an investment advisory subsidiary of WRI. WRI is a broker-dealer and underwriting subsidiary of WRFSI, a parent holding company. In turn, WRFSI is a subsidiary of WDR, a publicly traded company. The investment advisory contracts grant IICO and WRIMCO all investment and/or voting power over securities owned by such advisory clients. The investment sub-advisory contracts grant IICO and WRIMCO investment power over securities owned by such sub-advisory clients and, in most cases, voting power. Any investment restriction of a sub-advisory contract does not restrict investment discretion or power in a material manner As of December 31, 2012, WDR indirectly has sole voting and dispositive power over 15,140,260 Class A shares; WRFSI indirectly has sole voting and dispositive power over 2,180,720 of -262- Table of Contents the Class A shares; WRI indirectly has sole voting and dispositive power over 2,180,720 of the Class A shares; WRIMCO directly has sole voting and dispositive power over 2,180,720 of the Class A shares and IICO directly has sole voting and dispositive power over 12,959,540 of the Class A shares. The address of the beneficial owners is 6300 Lamar Avenue, Overland Park, KS 66202. (12) Based on a Schedule 13G/A filed on February 14, 2013 by FMR LLC and Edward C. Johnson 3d as joint reporting persons. Fidelity Management & Research Company (“Fidelity”), a wholly owned subsidiary of FMR LLC, is the beneficial owner of 7,287,097 of the Class A shares as a result of acting as investment adviser to various investment companies. FMR LLC and Edward C. Johnson 3d, through their control of Fidelity and its funds, have sole power to dispose of the 7,287,097 shares owned by the Fidelity funds. Neither FMR LLC nor Edward C. Johnson 3d has the sole power to vote or direct the voting of the shares owned directly by the Fidelity funds, which power resides with the funds’ Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the funds’ Boards of Trustees. The address of the beneficial owner is 82 Devonshire Street, Boston, MA 02109. Securities Authorized for Issuance under Equity Incentive Plans The following table sets forth information concerning the awards that may be issued under the Company’s Omnibus Equity Incentive Plan as of December 31, 2012. Plan Category Equity Compensation Plans Approved by Security Holders Equity Compensation Plans Not Approved by Security Holders Total Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) (a) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))(2) (c) 42,512,404 $ — 42,512,404 $ 8.44 — 8.44 39,558,144 — 39,558,144 (1) Reflects the aggregate number of outstanding options and RSUs granted under the Company’s 2007 Omnibus Equity Incentive Plan (the “Equity Plan”) as of December 31, 2012. (2) The Class A shares reserved under the Equity Plan are increased on the first day of each fiscal year by (i) the amount (if any) by which (a) 15% of the number of outstanding Class A shares and AOG Units exchangeable for Class A shares on a fully converted and diluted basis on the last day of the immediately preceding fiscal year exceeds (b) the number of shares then reserved and available for issuance under the Equity Plan, or (ii) such lesser amount by which the administrator may decide to increase the number of Class A shares. The number of shares reserved under the Equity Plan is also subject to adjustment in the event of a share split, share dividend, or other change in our capitalization. Generally, employee shares that are forfeited, canceled, surrendered or exchanged from awards under the Equity Plan will be available for future awards. We have filed a registration statement and intend to file additional registration statements on Form S-8 under the Securities Act to register Class A shares under the Equity Plan (including pursuant to automatic annual increases). Any such Form S-8 registration statement will automatically become effective upon filing. Accordingly, Class A shares registered under such registration statement will be available for sale in the open market. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Agreement Among Managing Partners Our Managing Partners have entered into the Agreement Among Managing Partners, which provides that each Managing Partner’s Pecuniary Interest (as defined below) in the AOG Units that he holds indirectly through Holdings would be subject to vesting. The Managing Partners own Holdings in accordance with their respective sharing percentages, or “Sharing Percentages,” as set forth in the Agreement Among Managing Partners. For the purposes of the Agreement Among Managing Partners, “Pecuniary Interest” means, with respect to each Managing Partner, the number of AOG Units that would be distributable to such Managing Partner assuming that Holdings was liquidated and its assets distributed in accordance with its governing agreements. Pursuant to the Agreement Among Managing Partners, each of Messrs. Harris and Rowan vested in his interest in the AOG Units in 60 equal monthly installments, and Mr. Black vested in his interest in the AOG Units in 72 equal monthly installments. Although the Agreement Among Managing Partners was entered into on July 13, 2007, for purposes of its vesting provisions, our Managing Partners were credited for their employment with us since January 1, 2007. We may not terminate a Managing Partner except for cause or by reason of disability. -263- Table of Contents The transfer by a Managing Partner of any portion of his Pecuniary Interest to a permitted transferee will in no way affect any of his obligations under the Agreement Among Managing Partners; provided, that all permitted transferees are required to sign a joinder to the Agreement Among Managing Partners. The Managing Partners’ respective Pecuniary Interests in certain funds, or the “Heritage Funds,” within the Apollo Operating Group are not held in accordance with the Managing Partners’ respective Sharing Percentages. Instead, each Managing Partner’s Pecuniary Interest in such Heritage Funds is held in accordance with the historic ownership arrangements among the Managing Partners, and the Managing Partners continue to share the operating income in such Heritage Funds in accordance with their historic ownership arrangement with respect to such Heritage Funds. The Agreement Among Managing Partners may be amended and the terms and conditions of the Agreement Among Managing Partners may be changed or modified upon the unanimous approval of the Managing Partners. We, our shareholders (other than the Strategic Investors, as set forth under “—Lenders Rights Agreement—Amendments to Managing Partner Transfer Restrictions”) and the Apollo Operating Group have no ability to enforce any provision thereof or to prevent the Managing Partners from amending the Agreement Among Managing Partners. The Managing Partners differ on the interpretation of a provision in the Agreement Among Managing Partners regarding benefits provided by the Company to the Managing Partners. The amounts involved are not material. Managing Partner Shareholders Agreement We have entered into the Managing Partner Shareholders Agreement with our Managing Partners. The Managing Partner Shareholders Agreement provides the Managing Partners with certain rights with respect to the approval of certain matters and the designation of nominees to serve on our board of directors, as well as registration rights for our securities that they own. -264- Table of Contents Board Representation The Managing Partner Shareholders Agreement requires our board of directors, so long as the Apollo control condition is satisfied, to nominate individuals designated by our manager such that our manager will have a majority of the designees on our board. Transfer Restrictions No Managing Partner may, nor shall any of such Managing Partner’s permitted transferees, directly or indirectly, voluntarily effect cumulative transfers of Equity Interests, representing more than: (i) 0.0% of his Equity Interests at any time prior to the second anniversary of our IPO (the “registration effectiveness date”), (ii) 7.5% of his Equity Interests at any time on or after the second anniversary and prior to the third anniversary of the registration effectiveness date; (iii) 15% of his Equity Interests at any time on or after the third anniversary and prior to the fourth anniversary of the registration effectiveness date; (iv) 22.5% of his Equity Interests at any time on or after the fourth anniversary and prior to the fifth anniversary of the registration effectiveness date; (v) 30% of his Equity Interests at any time on or after the fifth anniversary and prior to the sixth anniversary of the registration effectiveness date; and (vi) 100% of his Equity Interests at any time on or after the sixth anniversary of the registration effectiveness date, other than, in each case, with respect to transfers (a) from one founder to another founder, (b) to a permitted transferee of such Managing Partner, or (c) in connection with a sale by one or more of our Managing Partners in one or a related series of transactions resulting in the Managing Partners owning or controlling, directly or indirectly, less than 50.1% of the economic or voting interests in us or the Apollo Operating Group, or any other person exercising control over us or the Apollo Operating Group by contract, which would include a transfer of control of our manager. The percentages referenced in the preceding paragraph will apply to the aggregate amount of Equity Interests held by each Managing Partner (and his permitted transferees) as of July 13, 2007 and adjusted for any additional Equity Interests received by such Managing Partner upon the forfeiture of Equity Interests by another Managing Partner. Any Equity Interests received by a Managing Partner pursuant to the forfeiture provisions of the Agreement Among Managing Partners (described above) will remain subject to the foregoing restrictions in the receiving Managing Partner’s hands; provided, that each Managing Partner shall be permitted to sell without regard to the foregoing restrictions such number of forfeitable interests received by him as are required to pay taxes payable as a result of the receipt of such interests, calculated based on the maximum combined U.S. Federal, New York State and New York City tax rate applicable to individuals; and, provided further, that each Managing Partner who is not required to pay taxes in the applicable fiscal quarter in which he receives Equity Interests as a result of being in the U.S. Federal income tax “safe harbor” will not effect any such sales prior to the six-month anniversary of the applicable termination date which gave rise to the receipt of such Equity Interests. After six years, each Managing Partner and his permitted transferees may transfer all of the Equity Interests of such Managing Partner to any person or entity in accordance with Rule 144, in a registered public offering or in a transaction exempt from the registration requirements of the Securities Act. The above transfer restrictions will lapse with respect to a Managing Partner if such Managing Partner dies or becomes disabled. A “permitted transferee” means, with respect to each Managing Partner and his permitted transferees, (i) such Managing Partner’s spouse, (ii) a lineal descendant of such Managing Partner’s parents (or any such descendant’s spouse), (iii) a charitable institution controlled by such Managing Partner, (iv) a trustee of a trust (whether inter vivos or testamentary), the current beneficiaries and presumptive remaindermen of which are one or more of such Managing Partner and persons described in clauses (i) through (iii) above, (v) a corporation, limited liability company or partnership, of which all of the outstanding shares of capital stock or interests therein are owned by one or more of such Managing Partner and persons described in clauses (i) through (iv) above, (vi) an individual mandated under a qualified domestic relations order, (vii) a legal or personal representative of such Managing Partner in the event of his death or disability, (viii) any other Managing Partner with respect to transactions contemplated by the Managing Partner Shareholders Agreement, and (ix) any other Managing Partner who is then employed by Apollo or any of its affiliates or any permitted transferee of such Managing Partner in respect of any transaction not contemplated by the Managing Partner Shareholders Agreement, in each case that agrees in writing to be bound by these transfer restrictions. -265- Table of Contents Any waiver of the above transfer restrictions may only occur with our consent. As our Managing Partners control the management of our company, however, they have discretion to cause us to grant one or more such waivers. Accordingly, the above transfer restrictions might not be effective in preventing our Managing Partners from selling or transferring their Equity Interests. Indemnity Carried interest income from our funds can be distributed to us on a current basis, but is subject to repayment by the subsidiaries of the Apollo Operating Group that act as general partner of the funds in the event that certain specified return thresholds are not ultimately achieved. The Managing Partners, Contributing Partners and certain other investment professionals have personally guaranteed, subject to certain limitations, the obligations of these subsidiaries in respect of this general partner obligation. Such guarantees are several and not joint and are limited to a particular Managing Partner’s or Contributing Partner’s distributions. Pursuant to the Managing Partner Shareholders Agreement, we agreed to indemnify each of our Managing Partners and certain Contributing Partners against all amounts that they pay pursuant to any of these personal guarantees in favor of Fund IV, Fund V and Fund VI (including costs and expenses related to investigating the basis for or objecting to any claims made in respect of the guarantees) for all interests that our Managing Partners and Contributing Partners have contributed or sold to the Apollo Operating Group. Accordingly, in the event that our Managing Partners, Contributing Partners and certain other investment professionals are required to pay amounts in connection with a general partner obligation for the return of previously made distributions with respect to Fund IV, Fund V and Fund VI, we will be obligated to reimburse our Managing Partners and certain Contributing Partners for the indemnifiable percentage of amounts that they are required to pay even though we did not receive the distribution to which that general partner obligation related. Registration Rights Pursuant to the Managing Partner Shareholders Agreement, we have granted Holdings, an entity through which our Managing Partners and Contributing Partners own their Apollo Operating Group units, and its permitted transferees the right, under certain circumstances and subject to certain restrictions, to require us to register under the Securities Act our Class A shares held or acquired by them. Under the Managing Partner Shareholders Agreement, the registration rights holders (i) will have “demand” registration rights, exercisable two years after the registration effectiveness date, but unlimited in number thereafter, which require us to register under the Securities Act the Class A shares that they hold or acquire, (ii) may require us to make available registration statements permitting sales of Class A shares they hold or acquire in the market from time to time over an extended period and (iii) have the ability to exercise certain piggyback registration rights in connection with registered offerings requested by other registration rights holders or initiated by us. We have agreed to indemnify each registration rights holders and certain related parties against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which they sell our shares, unless such liability arose from such holder’s misstatement or omission, and each registration rights holder has agreed to indemnify us against all losses caused by his misstatements or omissions. Roll-Up Agreements Pursuant to the Roll-Up Agreements, the Contributing Partners received interests in Holdings, which we refer to as “Holdings Units,” in exchange for their contribution of assets to the Apollo Operating Group. The Holdings Units received by our Contributing Partners and any units into which they are exchanged generally vest over six years in equal monthly installments with additional vesting (i) on death, disability, a termination without cause or a resignation by the Contributing Partner for good reason, (ii) with consent of BRH, which is controlled by our Managing Partners, and (iii) in connection with certain other transactions involving sales of interests in us and with transfers by our Managing Partners in connection with their registration rights to the extent that our Contributing Partners do not have sufficient vested securities to otherwise allow them to participate pro rata. Holdings Units are subject to a lock-up until two years after the registration effectiveness date. Thereafter, 7.5% of the Holdings Units will become tradable on each of the second, third, fourth and fifth anniversaries of the registration effectiveness date, with the remaining Holdings Units becoming tradable on the sixth anniversary of the registration -266- Table of Contents effectiveness date or upon subsequent vesting. A Holdings Unit that is forfeited will revert to the Managing Partners. Our Contributing Partners have the ability to direct Holdings to exercise Holdings’ registration rights described above under “—Managing Partner Shareholders Agreement—Registration Rights.” Our Contributing Partners are subject to a noncompetition provision for the applicable period of time as follows: (i) if the Contributing Partner is still providing services as a partner to us on the fifth anniversary of the date of his Roll-Up Agreement, the first anniversary of the date of termination of his service as a partner to us, or (ii) if the Contributing Partner is terminated for any reason such that he is no longer providing services to us prior to the fifth anniversary of the date of his Roll-Up Agreement, the earlier to occur of (A) the second anniversary of such date of termination and (B) the sixth anniversary of the date of his Roll-Up Agreement. During that period, our Contributing Partners will be prohibited from (i) engaging in any business activity that we operate in, (ii) rendering any services to any alternative asset management business (other than that of us or our affiliates) that involves primarily (i.e., more than 50%) third-party capital or (iii) acquiring a financial interest in, or becoming actively involved with, any competitive business (other than as a passive holding of a specified percentage of publicly traded companies). In addition, our Contributing Partners are subject to nonsolicitation, nonhire and noninterference covenants during employment and for two years thereafter. Our Contributing Partners are also bound to a nondisparagement covenant with respect to us and our Contributing Partners and to confidentiality restrictions. Any resignation by any of our Contributing Partners shall require ninety days’ notice. Any restricted period applicable to a Contributing Partner will commence after the ninety day notice of termination period. Exchange Agreement We have entered into an exchange agreement with Holdings under which, subject to certain procedures and restrictions (including the vesting schedules applicable to our Managing Partners and any applicable transfer restrictions and lock-up agreements described above) upon 60 days’ written notice prior to a designated quarterly date, each Managing Partner and Contributing Partner (or certain transferees thereof) has the right to cause Holdings to exchange the AOG Units that he owns through Holdings for our Class A shares and to sell such Class A shares at the prevailing market price (or at a lower price that such Managing Partner or Contributing Partner is willing to accept) and distribute the net proceeds of such sale to such Managing Partner or Contributing Partner. Under the exchange agreement, to effect the exchange, a Managing Partner or Contributing Partner, through Holdings, must then simultaneously exchange one AOG Unit (being an equal limited partner interest in each Apollo Operating Group entity) for each Class A share received from our intermediate holding companies. As a Managing Partner or Contributing Partner exchanges his AOG Units, our interest in the AOG Units will be correspondingly increased and the voting power of the Class B share will be correspondingly decreased. We may, from time to time, at the discretion of our manager, provide the opportunity for Holdings and any other holders of AOG Units at such time to sell AOG Units to us, provided that the aggregate amount of designated quarterly dates for exchanges and such opportunities for the sale of such units may not exceed four. We will use an independent, third-party valuation expert for purposes of determining the purchase price of any such purchases of AOG Units. Tax Receivable Agreement With respect to any exchange by a Managing Partner or Contributing Partner of AOG Units (together with the corresponding interest in our Class B share) that he owns through Holdings for our Class A shares in a taxable transaction, each of AMH Holdings (Cayman), L.P. and the Apollo Operating Group entities controlled by it or Apollo Management Holdings, L.P. has made or will make an election under Section 754 of the Internal Revenue Code, which may result in an adjustment to the tax basis of a portion of the assets owned by the Apollo Operating Group at the time of the exchange. The taxable exchanges may result in increases in the tax depreciation and amortization deductions from depreciable and amortizable assets, as well as an increase in the tax basis of other assets, of the Apollo Operating Group that otherwise would not have been available. A portion of these increases in tax depreciation and amortization deductions, as well as the increase in the tax basis of such other assets, will reduce the amount of tax that APO Corp. would otherwise be required to pay in the future. Additionally, our acquisition of AOG Units from the Managing Partners or Contributing Partners, such as our acquisition -267- Table of Contents of AOG Units from the Managing Partners in the Strategic Investors Transaction, may result in increases in tax deductions and tax basis that reduces the amount of tax that APO Corp. would otherwise be required to pay in the future. APO Corp. has entered into a tax receivable agreement with our Managing Partners and Contributing Partners that provides for the payment by APO Corp. to an exchanging or selling Managing Partner or Contributing Partner of 85% of the amount of actual cash savings, if any, in U.S. Federal, state, local and foreign income tax that APO Corp. realizes (or is deemed to realize in the case of an early termination payment by APO Corp. or a change of control, as discussed below) as a result of these increases in tax deductions and tax basis, and certain other tax benefits, including imputed interest expense, related to entering into the tax receivable agreement. APO Corp. expects to benefit from the remaining 15% of actual cash savings, if any, in income tax that it realizes. For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability to the amount of such taxes that APO Corp. would have been required to pay had there been no increase to the tax basis of the tangible and intangible assets of the applicable Apollo Operating Group entity as a result of the transaction and had APO Corp. not entered into the tax receivable agreement. The tax savings achieved may not ensure that we have sufficient cash available to pay our tax liability or generate additional distributions to our investors. Also, we may need to incur additional debt to repay the tax receivable agreement if our cash flows are not met. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless APO Corp. exercises the right to terminate the tax receivable agreement by paying an amount based on the present value of payments remaining to be made under the agreement with respect to units that have been exchanged or sold and units which have not yet been exchanged or sold. Such present value will be determined based on certain assumptions, including that APO Corp. would have sufficient taxable income to fully utilize the deductions that would have arisen from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. No payments will be made if a Managing Partner or Contributing Partner elects to exchange his or her AOG Units in a tax-free transaction. In the event that other of our current or future subsidiaries become taxable as corporations and acquire AOG Units in the future, or if we become taxable as a corporation for U.S. Federal income tax purposes, each will become subject to a tax receivable agreement with substantially similar terms. In connection with an amendment of the AMH partnership agreement in April 2010, the tax receivable agreement was revised to reflect the Managing Partners’ agreement to defer 25% of required payments pursuant to the tax receivable agreement that are attributable to the 2010 fiscal year for a period of four years. The IRS could challenge our claim to any increase in the tax basis of the assets owned by the Apollo Operating Group that results from the exchanges entered into by the Managing Partners or Contributing Partners. The IRS could also challenge any additional tax depreciation and amortization deductions or other tax benefits we claim as a result of such increase in the tax basis of such assets. If the IRS were to successfully challenge a tax basis increase or tax benefits we previously claimed from a tax basis increase, our Managing Partners and Contributing Partners would not be obligated under the tax receivable agreement to reimburse APO Corp. for any payments previously made to it (although future payments would be adjusted to reflect the result of such challenge). As a result, in certain circumstances, payments could be made to our Managing Partners and Contributing Partners under the tax receivable agreement in excess of 85% of APO Corp.’s actual cash tax savings. In general, estimating the amount of payments that may be made to our Managing Partners and Contributing Partners under the tax receivable agreement is by its nature, imprecise, in the absence of an actual transaction, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and the amount and timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including: • the timing of the transactions—for instance, the increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable or amortizable assets of the Apollo Operating Group entities at the time of the transaction; • the price of our Class A shares at the time of the transaction—the increase in any tax deductions, as well as tax basis increase in other assets, of the Apollo Operating Group entities, is directly proportional to the price of the Class A shares at the time of the transaction; -268- Table of Contents • • the taxability of exchanges—if an exchange is not taxable for any reason, increased deductions will not be available; and the amount and timing of our income—APO Corp. will be required to pay 85% of the tax savings as and when realized, if any. If APO Corp. does not have taxable income, it is not required to make payments under the tax receivable agreement for that taxable year because no tax savings were actually realized. In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of business combination or certain other changes of control, APO Corp.’s (or its successor’s) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of control) would be based on certain assumptions, including that APO Corp. would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. As noted above, no payments will be made if a Managing Partner or Contributing Partner elects to exchange his or her AOG Units in a tax-free transaction. Strategic Investors Transaction On July 13, 2007, we sold securities to the Strategic Investors in return for a total investment of $1.2 billion. Through our intermediate holding companies, we used all of the proceeds from the issuance of such securities to the Strategic Investors to purchase from our Managing Partners 17.4% of their AOG Units for an aggregate purchase price of $1,068 million, and to purchase from our Contributing Partners a portion of their points for an aggregate purchase price of $156 million. The Strategic Investors hold non-voting Class A shares, which represented 46.1% of our issued and outstanding Class A shares and 16.2% of the economic interest in the Apollo Operating Group, in each case as of December 31, 2012. As all of their holdings in us are non-voting, neither of the Strategic Investors has any means for exerting control over our company. Strategic Relationship Agreement On April 20, 2010, we announced a new strategic relationship agreement with CalPERS, whereby we agreed to reduce management fees and other fees charged to CalPERS on funds we manage, or in the future will manage, solely for CalPERS by $125 million over a five-year period or as close a period as required to provide CalPERS with that benefit. The agreement further provides that we will not use a placement agent in connection with securing any future capital commitments from CalPERS. Through December 31, 2012, the Company has reduced fees charged to CalPERS on the funds it manages by approximately $66.9 million. Lenders Rights Agreement In connection with the Strategic Investors Transaction, we entered into a shareholders agreement, or the “Lenders Rights Agreement,” with the Strategic Investors. Transfer Restrictions Except in connection with the drag-along covenants provided for in the Lenders Rights Agreement, prior to the second anniversary of the registration effectiveness date, each Strategic Investor may not transfer its rights, other than to an “Investor Permitted Transferee,” as defined below, without the prior written consent of our Managing Partners. Following the registration effectiveness date, each Strategic Investor may transfer its non-voting Class A shares up to the percentages set forth below during the relevant periods identified: -269- Table of Contents Period Registration Effectiveness Date – 2nd anniversary of the Registration Effectiveness Date 2nd – 3rd anniversary of Registration Effectiveness Date 3rd – 4th anniversary of Registration Effectiveness Date 4th – 5th anniversary of Registration Effectiveness Date 5th anniversary of Registration Effectiveness Date (and thereafter) Maximum Cumulative Amount 0 % 25 % 50 % 75 % 100 % Notwithstanding the foregoing, at no time following the registration effectiveness date may a Strategic Investor make a transfer representing 2% or more of our total Class A shares to any one person or group of related persons. An “Investor Permitted Transferee” shall include any entity controlled by, controlling or under common control with a Strategic Investor, or certain of its affiliates so long as such entity continues to be an affiliate of the Strategic Investor at all times following such transfer. Registration Rights Pursuant to the Lenders Rights Agreement, following the second anniversary of the registration effectiveness date, each Strategic Investor shall be afforded four demand registrations with respect to non-voting Class A shares, covering offerings of at least 2.5% of our total equity ownership and customary piggyback registration rights. All cut-backs between the Strategic Investors and Holdings (or its members) in any such demand registration shall be pro rata based upon the number of shares available for sale at such time (regardless of which party exercises a demand). Amendments to Managing Partner Transfer Restrictions Each Strategic Investor has a consent right with respect to any amendment or waiver of any transfer restrictions that apply to our Managing Partners. Apollo Operating Group Limited Partnership Agreements Pursuant to the partnership agreements of the Apollo Operating Group partnerships, the wholly-owned subsidiaries of Apollo Global Management, LLC that are the general partners of those partnerships have the right to determine when distributions will be made to the partners of the Apollo Operating Group and the amount of any such distributions. If a distribution is authorized, such distribution will be made to the partners of Apollo Operating Group pro rata in accordance with their respective partnership interests. The partnership agreements of the Apollo Operating Group partnerships also provide that substantially all of our expenses, including substantially all expenses solely incurred by or attributable to Apollo Global Management, LLC (such as expenses incurred in connection with the Private Offering Transactions), will be borne by the Apollo Operating Group; provided that obligations incurred under the tax receivable agreement by Apollo Global Management, LLC and its wholly-owned subsidiaries (which currently consist of our three intermediate holding companies, APO Corp., APO (FC), LLC and APO Asset Co., LLC), income tax expenses of Apollo Global Management, LLC and its wholly-owned subsidiaries and indebtedness incurred by Apollo Global Management, LLC and its wholly-owned subsidiaries shall be borne solely by Apollo Global Management, LLC and its wholly-owned subsidiaries. Fee Waiver Program Under the terms of certain investment fund partnership agreements, Apollo may from time to time elect to forgo a portion of the management fee revenue that is due from the funds and instead receive a right to a proportionate interest in future distributions of profits of those funds. This election allows certain executive officers and other professionals of Apollo to waive a portion of their respective share of future income from Apollo and receive, in lieu of a cash distribution, title and ownership of the profits interests in the respective fund. Apollo immediately assigns the profits interests received to the participating individuals. The investment period for Fund VII and ANRP for the management fee waiver plan was terminated as of December 31, 2012. -270- Table of Contents Employment Arrangements Please see the section entitled “Item 11. Executive Compensation—Narrative Disclosure to the Summary Compensation Table and Grants of Plan-Based Awards Table” for a description of the employment agreements of our named executive officers who have employment agreements. In addition, Joshua M. Black, a son of Leon Black, is employed by the Company as an Associate in the Company’s private equity business. He is entitled to receive a base salary, incentive compensation and other employee benefits that are offered to similarly situated employees of the Company. He is also eligible to receive an annual performance-based bonus in an amount determined by the Company in its discretion. Reimbursements In the normal course of business, our personnel have made use of aircraft owned as personal assets by Messrs. Black and Rowan. Messrs. Black and Rowan paid for their purchases of the aircraft and bear all operating, personnel and maintenance costs associated with their operation for personal use. Payment by us for the business use of these aircraft by Messrs. Black and Rowan and other of our personnel totaled $1,219,890 and $2,053,580 for 2012 for Mr. Black and Mr. Rowan, respectively (which amounts exclude fixed costs of operating the aircraft). In addition, Mr. Harris makes business and personal use of various aircraft in which we have fractional interests, and pays the contractual cost of his personal usage. Mr. Harris paid $525,761 for this personal usage in 2012. We also have fractional interests in an aircraft owned by Heliflite Shares, LLC (“Heliflite”). For 2012, Mr. Harris paid Heliflite $95,377 for his use of this aircraft, and we paid Heliflite $300,457 for its use by individuals other than Mr. Harris. Mr. Spilker, our President, has an approximately 21% indirect ownership interest in Heliflite and serves as a member of its board of directors. Investments In Apollo Funds Our directors and executive officers are generally permitted to invest their own capital (or capital of estate planning vehicles that they control) directly in our funds, and in general, such investments are not subject to management fees, and in certain instances, may not be subject to carried interest. The opportunity to invest in our funds is available to all of the senior Apollo professionals and to those of our employees whom we have determined to have a status that reasonably permits us to offer them these types of investments in compliance with applicable laws. From our inception through December 31, 2012, our professionals have committed or invested approximately $1.0 billion of their own capital to our funds. The amount invested in our investment funds by our directors and executive officers (and their estate planning vehicles) during 2012 was $46,868, $1,671,679, $97,631, $2,500,851, $977,358, and $605,857, for Messrs Black, Rowan, Harris, Zelter, Suydam, and Giarraputo, respectively. The amount of distributions, including profits and return of capital to our directors and executive officers (and their estate planning vehicles) during 2012 was $88,449,682, $26,233,366, $32,969,759, $14,964,478, $3,043,697, and $1,598,657, for Messrs Black, Rowan, Harris, Zelter, Suydam and Giarraputo. Sub-Advisory Arrangements and Strategic Investment Accounts From time to time, we may enter into sub-advisory arrangements with, or establish strategic investment accounts for, our directors and executive officers or vehicles they manage. Such arrangements would be approved in advance in accordance with our policy regarding transactions with related persons. In addition, any such sub-advisory arrangement or strategic investment account would be entered into with, or advised by, an Apollo entity serving as investment advisor registered under the Investment Advisers Act, and any fee arrangements, if applicable would be on an arms-length basis. Indemnification of Directors, Officers and Others Under our operating agreement, in most circumstances we will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts: our manager; any departing manager; any person who is or was an affiliate of our manager -271- Table of Contents or any departing manager; any person who is or was a member, partner, tax matters partner, officer, director, employee, agent, fiduciary or trustee of us or our subsidiaries, our manager or any departing manager or any affiliate of us or our subsidiaries, our manager or any departing manager; any person who is or was serving at the request of our manager or any departing manager or any affiliate of our manager or any departing manager as an officer, director, employee, member, partner, agent, fiduciary or trustee of another person; or any person designated by our manager. We have agreed to provide this indemnification unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that these persons acted in bad faith or engaged in fraud or willful misconduct. We have also agreed to provide this indemnification for criminal proceedings. Any indemnification under these provisions will only be out of our assets. We may purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against liabilities under our operating agreement. We have entered into indemnification agreements with each of our directors, executive officers and certain of our employees which set forth the obligations described above. We have also agreed to indemnify each of our Managing Partners and certain Contributing Partners against certain amounts that they are required to pay in connection with a general partner obligation for the return of previously made carried interest distributions in respect of Fund IV, Fund V and Fund VI. See the above description of the indemnity provisions of the Managing Partners Shareholders Agreement. Statement of Policy Regarding Transactions with Related Persons Our board of directors has adopted a written statement of policy regarding transactions with related persons, which we refer to as our “related person policy.” Our related person policy requires that a “related person” (as defined in paragraph (a) of Item 404 of Regulation S-K) must promptly disclose to our Chief Legal Officer any “related person transaction” (defined as any transaction that is reportable by us under Item 404(a) of Regulation S- K in which we were or are to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest) and all material facts with respect thereto. Our Chief Legal Officer will then promptly communicate that information to our manager. No related person transaction will be consummated without the approval or ratification of the executive committee of our manager or any committee of our board of directors consisting exclusively of disinterested directors. It is our policy that persons interested in a related person transaction will recuse themselves from any vote of a related person transaction in which they have an interest. Director Independence Because more than fifty percent of our voting power is controlled by Holdings, we are considered a “controlled company” as defined in the • listing standards of the NYSE and we are exempt from the NYSE rules that require that: our board of directors be comprised of a majority of independent directors; we establish a compensation committee composed solely of independent directors; and we establish a nominating and corporate governance committee composed solely of independent directors. • • While our board of directors is currently comprised of a majority of independent directors, we plan on availing ourselves of the controlled company exceptions. Our board of directors has determined that four of our seven directors meet the independence standards under the NYSE and the SEC. These directors are Messrs. Ducey, Fribourg and Krongard and Ms. Richards. At such time that we are no longer deemed a controlled company, our board of directors will take all action necessary to comply with all applicable rules within the applicable time period under the NYSE listing standards. -272- Table of Contents ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table summarizes the aggregate fees for professional services provided by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the “Deloitte Entities”) for the years ended December 31, 2012 and 2011: Audit fees Audit fees for Apollo fund entities Audit-related fees Tax fees Tax fees for Apollo fund entities Other fees Year Ended December 31, 2012 12,100 $ 18,470 875 1,550 12,125 775 (1) (2) (5) (2) (6) (3)(4) Year Ended December 31, 2011 6,692 $ 13,612 896 1,505 5,205 140 (1) (2) (5) (2) (6) (3)(4) (1) Audit Fees consisted of fees for (a) the audits of our consolidated financial statements in our Annual Report on Form 10-K and services attendant to, or required by, statute or regulation; (b) reviews of the interim consolidated financial statements included in our quarterly reports on Form 10-Q. (2) Audit and Tax Fees for Apollo fund entities consisted of services to investment funds managed by Apollo in its capacity as the general partner. (3) Audit-Related Fees consisted of comfort letters, consents and other services related to SEC and other regulatory filings. (4) (5) Tax Fees consisted of fees for services rendered for tax compliance and tax planning and advisory services. (6) Consisted of certain agreed upon procedures. Includes audit-related fees for Apollo fund entities of $0.6 million and $0.1 million for the year ended December 31, 2012 and 2011, respectively. Our audit committee charter requires the audit committee to approve in advance all audit and non-audit related services to be provided by our independent registered public accounting firm in accordance with the audit and non-audit related services pre-approval policy. All services reported in the Audit, Audit-Related, Tax and Other categories above were approved by the audit committee. -273- Table of Contents PART IV ITEM 15. EXHIBITS Exhibit Number 3.1 3.2 4.1 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 Exhibit Description Certificate of Formation of Apollo Global Management, LLC (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Amended and Restated Limited Liability Company Agreement of Apollo Global Management, LLC (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Specimen Certificate evidencing the Registrant’s Class A shares (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Amended and Restated Limited Liability Company Operating Agreement of AGM Management, LLC dated as of July 10, 2007 (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Third Amended and Restated Limited Partnership Agreement of Apollo Principal Holdings I, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Third Amended and Restated Limited Partnership Agreement of Apollo Principal Holdings II, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Third Amended and Restated Exempted Limited Partnership Agreement of Apollo Principal Holdings III, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Third Amended and Restated Exempted Limited Partnership Agreement of Apollo Principal Holdings IV, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Registration Rights Agreement, dated as of August 8, 2007, by and among Apollo Global Management, LLC, Goldman Sachs & Co., J.P. Morgan Securities Inc. and Credit Suisse Securities (USA) LLC (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Investor Rights Agreement, dated as of August 8, 2007, by and among Apollo Global Management, LLC, AGM Management, LLC and Credit Suisse Securities (USA) LLC (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Apollo Global Management, LLC 2007 Omnibus Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Agreement Among Principals, dated as of July 13, 2007, by and among Leon D. Black, Marc J. Rowan, Joshua J. Harris, Black Family Partners, L.P., MJR Foundation LLC, AP Professional Holdings, L.P. and BRH Holdings, L.P. (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Shareholders Agreement, dated as of July 13, 2007, by and among Apollo Global Management, LLC, AP Professional Holdings, L.P., BRH Holdings, L.P., Black Family Partners, L.P., MJR Foundation LLC, Leon D. Black, Marc J. Rowan and Joshua J. Harris (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Exchange Agreement, dated as of July 13, 2007, by and among Apollo Global Management, LLC, Apollo Principal Holdings I, L.P., Apollo Principal Holdings II, L.P., Apollo Principal Holdings III, L.P., Apollo Principal Holdings IV, L.P., Apollo Management Holdings, L.P. and the Apollo Principal Holders (as defined therein), from time to time party thereto (incorporated by reference -274- Table of Contents Exhibit Number 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 10.24 10.25 10.26 to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Exhibit Description Tax Receivable Agreement, dated as of July 13, 2007, by and among APO Corp., Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P., Apollo Management Holdings, L.P. and each Holder defined therein (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Credit Agreement dated as of April 20, 2007 among Apollo Management Holdings, L.P., as borrower, Apollo Management, L.P., Apollo Capital Management, L.P., Apollo International Management, L.P., Apollo Principal Holdings II, L.P., Apollo Principal Holdings IV, L.P. and AAA Holdings, L.P., as guarantors, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Employment Agreement with Leon D. Black, dated July 19, 2012 (incorporated by reference to Exhibit 10.43 to the Registrant’s Form 10- Q for the period ended June 30, 2012 (File No. 001-35107)). Employment Agreement with Marc. J. Rowan, dated July 19, 2012 (incorporated by reference to Exhibit 10.44 to the Registrant’s Form 10-Q for the period ended June 30, 2012 (File No. 001-35107)). Employment Agreement with Joshua J. Harris, dated July 19, 2012 (incorporated by reference to Exhibit 10.45 to the Registrant’s Form 10-Q for the period ended June 30, 2012 (File No. 001-35107)). Employment Agreement with Barry Giarraputo (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Amended and Restated Employment Agreement with Joseph F. Azrack, dated June 1, 2012 (incorporated by reference to Exhibit 10.40 to the Registrant’s Form 10-Q for the period ended June 30, 2012 (File No. 001-35107)). Employment Agreement with Henry Silverman (incorporated by reference to Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Second Amended and Restated Limited Partnership Agreement of Apollo Principal Holdings V, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Second Amended and Restated Limited Partnership Agreement of Apollo Principal Holdings VI, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.21 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Second Amended and Restated Exempted Limited Partnership Agreement of Apollo Principal Holdings VII, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Second Amended and Restated Limited Partnership Agreement of Apollo Principal Holdings VIII, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Second Amended and Restated Exempted Limited Partnership Agreement of Apollo Principal Holdings IX, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Third Amended and Restated Limited Partnership Agreement of Apollo Management Holdings, L.P. dated as of April 14, 2010 (incorporated by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Settlement Agreement, dated December 14, 2008, by and among Huntsman Corporation, Jon M. Huntsman, Peter R. Huntsman, Hexion Specialty Chemicals, Inc., Hexion LLC, Nimbus Merger Sub, Inc., Craig O. Morrison, Leon Black, Joshua J. Harris and Apollo Global Management, LLC and certain of its affiliates (incorporated by reference to Exhibit 10.26 to the Registrant’s -275- Table of Contents Exhibit Number 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 10.35 10.36 10.37 10.38 10.39 10.40 10.41 Registration Statement on Form S-1 (File No. 333-150141)). Exhibit Description First Amendment and Joinder, dated as of August 18, 2009, to the Shareholders Agreement, dated as of July 13, 2007, by and among Apollo Global Management, LLC, AP Professional Holdings, L.P., BRH Holdings, L.P., Black Family Partners, L.P., MJR Foundation LLC, Leon D. Black, Marc J. Rowan and Joshua J. Harris (incorporated by reference to Exhibit 10.27 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Form of Indemnification Agreement (incorporated by reference to Exhibit 10.28 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Employment Agreement with James Zelter (incorporated by reference to Exhibit 10.29 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Roll-Up Agreement with James Zelter (incorporated by reference to Exhibit 10.30 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Form of Restricted Share Unit Award Agreement under the Apollo Global Management, LLC 2007 Omnibus Equity Incentive Plan (for Plan Grants) (incorporated by reference to Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Form of Restricted Share Unit Award Agreement under the Apollo Global Management, LLC 2007 Omnibus Equity Incentive Plan (for Bonus Grants) (incorporated by reference to Exhibit 10.32 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Form of Lock-up Agreement (incorporated by reference to Exhibit 10.33 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Apollo Management Companies AAA Unit Plan (incorporated by reference to Exhibit 10.34 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Employment Agreement with Marc Spilker (incorporated by reference to Exhibit 10.35 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). First Amendment and Joinder, dated as of April 14, 2010, to the Tax Receivable Agreement (incorporated by reference to Exhibit 10.36 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Employment Agreement with Gene Donnelly (incorporated by reference to Exhibit 10.37 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). First Amendment, dated as of May 16, 2007, to the Credit Agreement, dated as of April 20, 2007, among Apollo Management Holdings, L.P., as borrower, the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent, and the other parties party thereto (incorporated by reference to Exhibit 10.38 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Second Amendment, dated as of December 20, 2010, to the Credit Agreement, dated as of April 20, 2007, as amended by the First Amendment thereto dated as of May 16, 2007, among Apollo Management Holdings, L.P., as borrower, the lenders party thereto from time to time JPMorgan Chase Bank as administrative agent and the other parties party thereto (incorporated by reference to Exhibit 10.39 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Non-Qualified Share Option Agreement pursuant to the Apollo Global Management, LLC 2007 Omnibus Equity Incentive Plan with Marc Spilker dated December 2, 2010 (incorporated by reference to Exhibit 10.40 to the Registrant’s Registration Statement on Form S-1 (File No. 333-150141)). Non-Qualified Share Option Agreement pursuant to the Apollo Global Management, LLC 2007 Omnibus Equity Incentive Plan with Henry Silverman dated January 21, 2011 (incorporated by reference to Exhibit 10.41 to the Registrant’s Registration Statement on Form S- 1 (File No. 333-150141)). 10.42 Form of Independent Director Engagement Letter (incorporated by reference to Exhibit 10.42 to -276- Table of Contents Exhibit Number 10.43 10.44 10.45 10.46 *21.1 *23.1 *31.1 *31.2 *32.1 *32.2 the Registrant’s Form 10-Q for the quarter period ended March 31, 2011 (File No. 001-35107)). Exhibit Description Separation Agreement with Henry Silverman (incorporated by reference to Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-35107)). Separation Agreement with Eugene Donnelly, dated July 2, 2012 (incorporated by reference to Exhibit 10.41 to the Registrant’s Form 10-Q for the period ended June 30, 2012 (File No. 001-35107)). Employment Agreement with Martin Kelly, dated July 2, 2012 (incorporated by reference to Exhibit 10.42 to the Registrant’s Form 10-Q for the period ended June 30, 2012 (File No. 001-35107)). Amended and Restated Exempted Limited Partnership Agreement of AMH Holdings, L.P., dated October 30, 2012. (incorporated by reference to Exhibit 10.46 to the Registrant’s Form 10-Q for the period ended September 30, 2012 (File No. 001-35107)). Subsidiaries of Apollo Global Management, LLC Consent of Deloitte & Touche LLP Certification of the Chief Executive Officer pursuant to Rule 13a-14(a). Certification of the Chief Financial Officer pursuant to Rule 13a-14(a). Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). †*101.INS †*101.SCH †*101.CAL †*101.DEF †*101.LAB †*101.PRE XBRL Instance Document XBRL Taxonomy Extension Scheme Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document * † Filed herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time. -277- Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 1, 2013 Apollo Global Management, LLC (Registrant) By: /s/ Martin Kelly Name: Martin Kelly Title: Chief Financial Officer (principal financial officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Name /s/ Leon Black Leon Black /s/ Martin Kelly Martin Kelly /s/ Barry Giarraputo Barry Giarraputo /s/ Joshua Harris Joshua Harris /s/ Marc Rowan Marc Rowan /s/ Michael Ducey Michael Ducey /s/ Paul Fribourg Paul Fribourg /s/ AB Krongard AB Krongard /s/ Pauline Richards Pauline Richards Title Chairman and Chief Executive Officer and Director (principal executive officer) Chief Financial Officer (principal financial officer) Chief Accounting Officer (principal accounting officer) Date March 1, 2013 March 1, 2013 March 1, 2013 Senior Managing Director and Director March 1, 2013 Senior Managing Director and Director March 1, 2013 Director Director Director Director -278- March 1, 2013 March 1, 2013 March 1, 2013 March 1, 2013 LIST OF SUBSIDIARIES Exhibit 21.1 Entity Name Apollo Capital Management IV, Inc. Apollo Advisors IV, L.P. Apollo Capital Management V, Inc. Apollo Advisors V, L.P. Apollo Principal Holdings I, L.P. Apollo Capital Management VI, LLC Apollo Advisors VI, L.P. APO Asset Co., LLC Apollo Principal Holdings I GP, LLC Apollo Principal Holdings III GP, Ltd. Apollo Advisors V (EH), LLC Apollo Advisors V (EH Cayman), L.P. Apollo Principal Holdings III, L.P. Apollo Advisors VI (EH-GP), Ltd. Apollo Advisors VI (EH), L.P. AAA Guernsey Limited Apollo Alternative Assets, L.P. AAA MIP Limited AAA Associates, L.P. APO Corp. Apollo SVF Capital Management, LLC Apollo SVF Advisors, L.P. Apollo SVF Administration, LLC Apollo SOMA Capital Management, LLC Apollo SOMA Advisors, L.P. Apollo Principal Holdings II GP, LLC Apollo Asia Capital Management, LLC Apollo Asia Advisors, L.P. Apollo Asia Administration, LLC Apollo Value Capital Management, LLC Apollo Value Advisors, L.P. Apollo Value Administration, LLC Apollo Principal Holdings II, L.P. Apollo Principal Holdings IV, L.P. Apollo EPF Capital Management, Limited Apollo EPF Advisors, L.P. Apollo EPF Administration, Limited Apollo Management Holdings, L.P. Apollo Management, L.P. AIF III Management, LLC Apollo Management III, L.P. AIF V Management, LLC Apollo Management V, L.P. Jurisdiction of Organization Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Anguilla Cayman Islands Cayman Islands Cayman Islands Cayman Islands Guernsey Cayman Islands Guernsey Guernsey Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Cayman Islands Cayman Islands Cayman Islands Delaware Delaware Delaware Delaware Delaware Delaware LIST OF SUBSIDIARIES Entity Name AIF VI Management, LLC Apollo Management VI, L.P. Apollo Management IV, L.P. Apollo International Management, L.P. Apollo Alternative Assets GP Limited Apollo Management International LLP Apollo Management Advisors GmbH AMI (Holdings), LLC AAA Holdings GP Limited AAA Holdings, L.P. Apollo International Management GP, LLC Apollo Capital Management GP, LLC AEM GP, LLC Apollo Europe Management, L.P. ACC Management, LLC Apollo Investment Management, L.P. Apollo SVF Management GP, LLC Apollo SVF Management, L.P. Apollo Value Management GP, LLC Apollo Value Management, L.P. Apollo Asia Management GP, LLC Apollo Asia Management, L.P. Apollo Management Singapore Pte Ltd Apollo EPF Management GP, LLC Apollo EPF Management, L.P. Apollo Capital Management, L.P. Apollo Principal Holdings IV GP, Ltd. Apollo Management Holdings GP, LLC Apollo Management VII, L.P. AIF VII Management, LLC Apollo Advisors VII, L.P. Apollo Capital Management VII, LLC Apollo Credit Liquidity Management, L.P. Apollo Credit Liquidity Management GP, LLC Apollo Credit Liquidity Capital Management, LLC Apollo Credit Liquidity Investor, LLC Apollo Credit Liquidity Advisors, L.P. Apollo Investment Consulting LLC Apollo Life Asset Ltd Apollo Management GP, LLC AP Transport AP Alternative Assets, L.P. Apollo Management (UK), L.L.C. Apollo Investment Administration, LLC Jurisdiction of Organization Delaware Delaware Delaware Delaware Cayman Islands UK Germany Delaware Guernsey Guernsey Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Singapore Delaware Delaware Delaware Cayman Islands Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Delaware Delaware Guernsey Delaware Maryland LIST OF SUBSIDIARIES Entity Name A/A Capital Management, LLC A/A Investor I, LLC Apollo/Artus Management, LLC Apollo Fund Administration VII, LLC Apollo Management (UK) VI, LLC Apollo COF Investor, LLC Apollo Credit Opportunity Management, LLC Apollo Co-Investors VII (D), L.P. Apollo EPF Co-Investors (B), L.P. Apollo Management (AOP) VII, LLC Apollo Co-Investors Manager, LLC Apollo Commodities Management GP, LLC Apollo Commodities Management, L.P. Apollo Commodities Partners Fund Administration, LLC Apollo Fund Administration IV, L.L.C. Apollo Fund Administration V, L.L.C. Apollo Fund Administration VI, LLC VC GP, LLC Apollo Management (Germany) VI, LLC Apollo Advisors VII (EH-GP), Ltd. Apollo Advisors VII (EH), L.P. Apollo Co-Investors VII (EH-D), LP Apollo Verwaltungs V GmbH Apollo AIE II Co-Investors (B), L.P. Apollo Credit Co-Invest II GP, LLC Apollo Europe Advisors, L.P. Apollo Europe Capital Management, Ltd LeverageSource Management, LLC AMI (Luxembourg) S.a.r.l. Apollo Principal Holdings V, L.P. Apollo Principal Holdings VI, L.P. Apollo Principal Holdings VII, L.P. Apollo Principal Holdings V GP, LLC Apollo Principal Holdings VI GP, LLC ACC Advisors D, LLC Apollo Principal Holdings VII GP, Ltd. ACC Advisors C, LLC APO (FC), LLC ACC Advisors A/B, LLC Apollo Master Fund Feeder Management, LLC Apollo Palmetto Management, LLC Apollo Master Fund Feeder Advisors, L.P. Apollo Palmetto Advisors, L.P. Apollo Master Fund Administration, LLC Jurisdiction of Organization Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Cayman Islands Anguilla Germany Cayman Islands Delaware Cayman Islands Cayman Islands Delaware Luxembourg Delaware Delaware Cayman Islands Delaware Delaware Delaware Cayman Islands Delaware Anguilla Delaware Delaware Delaware Delaware Delaware Delaware LIST OF SUBSIDIARIES Entity Name Apollo Global Real Estate Management GP, LLC Apollo Global Real Estate Management, L.P. Apollo Advisors VI (APO FC-GP), LLC Apollo Advisors VII (APO FC-GP), LLC Apollo Advisors VI (APO DC-GP), LLC Apollo Advisors VII (APO DC-GP), LLC Apollo Anguilla B LLC Apollo Advisors VI (APO DC), L.P. Apollo Advisors VII (APO DC), L.P. Apollo Advisors VI (APO FC), L.P. Apollo Advisors VII (APO FC), L.P. VC GP C, LLC APH I (SUB I), Ltd APH III (SUB I), Ltd Apollo Strategic Advisors, L.P. Apollo SOMA II Advisors, L.P. Apollo Strategic Management GP, LLC Apollo Strategic Management, L.P. Apollo Strategic Capital Management, LLC Ohio Haverly Finance Company GP, LLC Ohio Haverly Finance Company, L.P. AGM India Advisors Private Limited Apollo Principal Holdings VIII GP, Ltd. Apollo Principal Holdings VIII, L.P. Apollo Principal Holdings IX GP, Ltd. Apollo Principal Holdings IX, L.P. Blue Bird GP, Ltd. Green Bird GP, Ltd. Red Bird GP, Ltd. August Global Management, LLC ACREFI Management, LLC New York Haverly Finance Company GP, LLC Apollo COF I Capital Management, LLC Apollo Credit Opportunity Advisors I, L.P. Apollo COF II Capital Management, LLC Apollo Credit Opportunity Advisors II, L.P. Apollo Co-Investors VI (D), L.P. Apollo Co-Investors VI (DC-D), L.P. Apollo Co-Investors VI (EH-D), LP Apollo Co-Investors VI (FC-D), LP Athene Asset Management, LLC Apollo Credit Opportunity CM Executive Carry I, L.P. Apollo Credit Opportunity CM Executive Carry II, L.P. Apollo Credit Liquidity CM Executive Carry, L.P. Jurisdiction of Organization Delaware Delaware Anguilla Anguilla Delaware Delaware Anguilla Delaware Delaware Cayman Islands Cayman Islands Delaware Cayman Islands Cayman Islands Cayman Islands Cayman Islands Delaware Delaware Delaware Delaware Delaware India Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Florida Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Anguilla Anguilla Delaware Delaware Delaware Delaware Entity Name Apollo Laminates Agent, LLC Apollo Management Asia Pacific Limited Apollo ALS Holdings II GP, LLC Apollo Resolution Servicing GP, LLC Apollo Resolution Servicing, L.P. AGRE CMBS Management LLC AGRE CMBS GP LLC Apollo Co-Investors VII (FC-D), L.P. Apollo Co-Investors VII (DC-D), L.P. Apollo Credit Management (CLO), LLC Apollo Global Securities, LLC Apollo Advisors (Mauritius) Ltd. AAA Life Re Carry, L.P. AGRE Asia Pacific Management, LLC AGRE NA Management, LLC AGRE Europe Management, LLC AGRE - DCB, LLC Apollo Parallel Partners Administration, LLC Apollo Credit Capital Management, LLC Apollo Credit Advisors I, LLC Apollo Credit Management (Senior Loans), LLC Apollo Asian Infrastructure Management, LLC Apollo CKE GP, LLC ALM Loan Funding 2010-1, LLC AGRE NA Legacy Management, LLC AGRE Europe Legacy Management, LLC AGRE Asia Pacific Legacy Management, LLC AGRE GP Holdings, LLC Apollo Gaucho GenPar, Ltd Apollo Credit Advisors II, LLC AP TSL Funding, LLC AGRE - E Legacy Management, LLC Financial Credit I Capital Management, LLC Financial Credit Investment I Manager, LLC AGRE CMBS GP II LLC AGRE CMBS Management II LLC Financial Credit Investment Advisors I, L.P. APH HFA Holdings, L.P. APH HFA Holdings GP, Ltd AGRE - E2 Legacy Management, LLC AP AOP VII Transfer Holdco, LLC ALM Loan Funding 2010-3, Ltd. Apollo Credit Management, LLC Apollo Capital Credit Management, LLC LIST OF SUBSIDIARIES Jurisdiction of Organization Delaware Hong Kong Delaware Delaware Delaware Delaware Delaware Anguilla Delaware Delaware Delaware Mauritius Cayman Islands Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Delaware Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Cayman Islands Cayman Islands Delaware Delaware Cayman Islands Delaware Delaware LIST OF SUBSIDIARIES Entity Name Apollo India Credit Opportunity Management, LLC AGRE U.S. Real Estate Advisors, L.P. AGRE U.S. Real Estate Advisors GP, LLC Apollo AGRE USREF Co-Investors (B), LLC CPI Capital Partners Asia Pacific GP Ltd. CPI Asia G-Fdr General Partner GmbH CPI Capital Partners Asia Pacific MLP II Ltd. CPI Capital Partners Europe GP Ltd. CPI European Fund GP LLC CPI European Carried Interest, L.P. CPI CCP EU-T Scots GP Ltd. CPI NA GP LLC CPI NA Fund GP LP CPI NA Cayman Fund GP, L.P. CPI NA WT Fund GP LP Apollo Administration GP Ltd. Apollo Achilles Co-Invest GP, LLC Apollo Palmetto HFA Advisors, L.P. Apollo Credit Co-Invest II, L.P. ARM Manager, LLC Stanhope Life Advisors, L.P. AION Capital Management Limited Greenhouse Holdings, Ltd. Apollo ALST GenPar, Ltd. Apollo Palmetto Athene Advisors, L.P. Apollo ANRP Co-Investors (D), L.P. Apollo Co-Investors VII (NR DC-D), L.P. Apollo Co-Investors VII (NR D), L.P. Apollo Co-Investors VII (NR FC-D), LP Apollo Co-Investors (NR EH-D), LP ALM IV, Ltd. APH Holdings, L.P. APH Holdings (DC), L.P. APH Holdings (FC), L.P. Apollo Longevity, LLC Apollo ANRP Capital Management, LLC Apollo ANRP Advisors, L.P. Apollo ALST Voteco, LLC AGRE CRE Debt Manager, LLC Apollo GSS GP Limited Apollo ANRP Advisors (IH-GP), LLC Apollo ANRP Advisors (IH), L.P. Apollo ANRP Co-Investors (IH-D), LP AGRE Debt Fund I GP, Ltd. Jurisdiction of Organization Delaware Delaware Delaware Delaware Cayman Islands Germany Cayman Islands Cayman Islands Delaware Delaware Scotland Delaware Delaware Cayman Islands Delaware Cayman Islands Anguilla Delaware Delaware Delaware Cayman Islands Mauritius Cayman Islands Cayman Islands Delaware Delaware Delaware Delaware Anguilla Anguilla Cayman Islands Cayman Islands Cayman Islands Cayman Islands Delaware Delaware Delaware Delaware Delaware Channel Islands Anguilla Cayman Islands Anguilla Cayman Islands LIST OF SUBSIDIARIES Entity Name Apollo APC Capital Management, LLC Apollo APC Advisors, L.P. Apollo European Senior Debt Advisors, LLC Apollo European Strategic Advisors, LLC Apollo European Strategic Advisors, L.P. Apollo European Strategic Management, LLC Apollo European Strategic Management, L.P. Apollo Credit Management (European Senior Debt), LLC Apollo European Senior Debt Management, LLC Apollo Credit Advisors III, LLC Apollo EPF Advisors II, L.P. Apollo EPF Management II GP, LLC Apollo EPF Management II, L.P. Apollo VII TXU Administration, LLC Apollo APC Management, L.P. Apollo APC Management GP, LLC Apollo EPF Co-Investors II (D), L.P. Apollo Executive Carry VII (NR), L.P. Apollo Executive Carry VII (NR APO DC), L.P. Apollo Executive Carry VII (NR APO FC), L.P. Apollo Executive Carry VII (NR EH), L.P. Apollo European Credit Advisors, L.P. Apollo European Credit Advisors, LLC Apollo European Credit Management, L.P. Apollo European Credit Management, LLC GSAM Apollo Holdings, LLC Gulf Stream - Compass CLO 2007, Ltd. Gulf Stream - Compass CLO 2005-II, Ltd. Gulf Stream - Sextant CLO 2007-I, Ltd. Gulf Stream - Sextant CLO 2006-I, Ltd. Gulf Stream - Rashinban CLO 2006-I, Ltd. Neptune Finance CCS, Ltd. Apollo Senior Loan Fund Co-Investors (D), L.P. Apollo European Strategic Co-Investors, LLC ST Holdings GP, LLC ST Management Holdings, LLC Apollo Credit Senior Loan Fund, L.P. Apollo Athlon GenPar, Ltd. Apollo SPN Capital Management, LLC Apollo SPN Advisors, L.P. Apollo SPN Management, LLC Apollo SPN Co-Investors (D), L.P. Apollo SPN Capital Management (APO FC-GP), LLC Apollo SPN Advisors (APO FC), L.P. Jurisdiction of Organization Anguilla Cayman Islands Delaware Delaware Cayman Islands Delaware Delaware Delaware Delaware Delaware Cayman Islands Delaware Delaware Delaware Delaware Delaware Cayman Islands Delaware Cayman Islands Delaware Cayman Islands Cayman Islands Delaware Delaware Delaware Delaware Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Delaware Delaware Delaware Delaware Delaware Cayman Islands Anguilla Cayman Islands Delaware Anguilla Anguilla Cayman Islands LIST OF SUBSIDIARIES Entity Name Apollo SPN Co-Investors (FC-D), L.P. Apollo SPN Capital Management (APO DC-GP), LLC Apollo SPN Advisors (APO DC), L.P. Apollo SPN Co-Investors (DC-D), L.P. Apollo AGRE Prime Co-Investors (D), LLC Apollo European Credit Co-Investors, LLC Gulf Stream Asset Management, LLC Apollo Centre Street Management, LLC Apollo Centre Street Advisors (APO DC-GP), LLC Apollo Centre Street Advisors (APO DC), LLC Apollo Centre Street Co-Investors (DC-D), L.P. Apollo ANRP Advisors (APO FC), L.P. Apollo ANRP Advisors (APO FC-GP), LLC Apollo ANRP Co-Investors (FC-D), L.P. Apollo ANRP Advisors (APO DC), L.P. Apollo ANRP Advisors (APO DC-GP), LLC Apollo ANRP Fund Administration, LLC Stone Tower Capital LLC Apollo ST Debt Advisors LLC Stone Tower Europe LLC Stone Tower Europe Limited Apollo ST Fund Management LLC Stone Tower Operating LP Stone Tower Loan Value Recovery Fund GP LLC Apollo ST Credit Partners GP LLC Apollo ST Credit Strategies GP LLC Stone Tower Credit Solutions GP LLC Stone Tower Offshore Ltd. ANRP Talos GenPar, Ltd. Apollo Talos GenPar, Ltd. Stone Tower Structured Credit Recovery Partners GP, LLC Apollo ST Structured Credit Recovery Partners II GP LLC Apollo EPF II Capital Management, LLC Apollo European Senior Debt Advisors II, LLC Apollo ST CLO Holdings GP, LLC 2012 CMBS-I GP LLC (fka 2012 CMBS GP LLC) 2012 CMBS-I Management LLC (fka 2012 CMBS Management LLC) 2012 CMBS-II GP LLC 2012 CMBS-II Management LLC 2012 CMBS-III GP LLC 2012 CMBS-III Management LLC Apollo Credit Fund LP (fka Stone Tower Credit Fund LP) Jurisdiction of Organization Anguilla Anguilla Cayman Islands Anguilla Anguilla Delaware North Carolina Delaware Delaware Delaware Delaware Cayman Islands Anguilla Anguilla Delaware Delaware Delaware Delaware Delaware Ireland Ireland Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Cayman Islands Cayman Islands Delaware Delaware Marshall Islands Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware LIST OF SUBSIDIARIES Entity Name Apollo Offshore Credit Fund Ltd. (fka Stone Tower Offshore Credit Fund Ltd) Apollo Credit Funding I Ltd. (fka Stone Tower Credit Funding I Ltd.) AGRE U.S. Real Estate Advisors Cayman, Ltd. Rampart CLO 2006-1 Ltd. Rampart CLO 2007 Ltd. Stone Tower CLO II Ltd. Stone Tower CLO III Ltd. Stone Tower CLO IV Ltd. Stone Tower CLO V Ltd. Stone Tower CLO VI Ltd. Stone Tower CLO VII Ltd. Granite Ventures II Ltd. Granite Ventures III Ltd. Cornerstone CLO Ltd. Stone Tower Credit Solutions Fund LP EPE Acquisition Holdings, LLC ALM VI, Ltd Apollo AION Capital Partners Apollo SK Strategic Management, LLC Apollo SK Strategic Co-Investors (FC-D), LLC Apollo SK Strategic Advisors, L.P. Apollo SK Strategic Advisors, LLC AION Co-Investors (D) Ltd EPF II Team Carry Plan, L.P. Apollo Credit Management (Senior Loans) II, LLC AGRE Asia Pacific Real Estate Advisors GP, Ltd. Apollo AGRE APREF Co-Investors (D), LP AGRE Asia Pacific Real Estate Advisors, L.P. Smart & Final Holdco LLC ALM VII, Ltd. Apollo Credit Income Co-Investors (D) LLC Apollo Credit Income Advisors LLC Apollo Credit Income Management LLC Apollo BSL Management, LLC Apollo Credit Opportunity Management III LLC Apollo Credit Opportunity Advisors III, L.P. Apollo Credit Opportunity Advisors III GP LLC Apollo Credit Opportunity Co-Investors III (D) LLC AMH Holdings (Cayman), L.P. AMH Holdings GP, Ltd. AIF VIII Management, LLC Apollo Management VIII, L.P. Apollo Co-Investors VIII (D), L.P. Jurisdiction of Organization Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Delaware Delaware Delaware Cayman Islands Delaware Marshall Islands Cayman Islands Anguilla Mauritius Marshall Islands Delaware Cayman Islands Cayman Islands Cayman Islands Delaware Cayman Islands Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Cayman Islands Cayman Islands Delaware Delaware Delaware LIST OF SUBSIDIARIES Entity Name Apollo Fund Administration VIII, LLC Apollo Capital Management VIII, LLC Apollo Advisors VIII, L.P. Apollo Palmetto Athene Management, LLC CAI Strategic European Real Estate Advisors GP, LLC CAI Strategic European Real Estate Advisors, L.P. Apollo ANRP Co-Investors (DC-D), L.P. ALM V, Ltd. London Prime Apartments Guernsey Holdings Limited London Prime Apartments Guernsey Limited ANRP PG GenPar, Ltd. Apollo PG GenPar, Ltd. Apollo Management (AOP) VIII, LLC Jurisdiction of Organization Delaware Delaware Delaware Delaware Marshall Islands Marshall Islands Delaware Cayman Islands Guernsey Guernsey Cayman Islands Cayman Islands Delaware CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements of our report, dated March 1, 2013, relating to the consolidated financial statements of Apollo Global Management, LLC and subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2012: Exhibit 23.1 • • Registration Statement No. 333-182844 on Form S-3ASR Registration Statement No. 333-173161 on Form S-8. /s/ DELOITTE & TOUCHE LLP New York, New York March 1, 2013 CHIEF EXECUTIVE OFFICER CERTIFICATION Exhibit 31.1 I, Leon Black, certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2012 of Apollo Global Management, LLC; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15 (f)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: March 1, 2013 /s/ Leon Black Leon Black Chief Executive Officer CHIEF FINANCIAL OFFICER CERTIFICATION Exhibit 31.2 I, Martin Kelly, certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2012 of Apollo Global Management, LLC Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15 (f)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: March 1, 2013 /s/ Martin Kelly Martin Kelly Chief Financial Officer Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 In connection with the Annual Report of Apollo Global Management, LLC (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leon Black, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2013 /s/ Leon Black Leon Black Chief Executive Officer * The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 In connection with the Annual Report of Apollo Global Management, LLC (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Martin Kelly, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2013 /s/ Martin Kelly Martin Kelly Chief Financial Officer * The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. 

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