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(Exact name of registrant as specified in its charter)
iDelaware
i20-8880053
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i9 West 57th Street,i42nd Floor
iNew
York,iNew Yorki10019
(Address of principal executive offices) (Zip Code)
(i212)
i515-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
i6.375% Series A Preferred Stock
iAAM.PR A
iNew
York Stock Exchange
i6.375% Series B Preferred Stock
iAAM.PR B
iNew
York Stock Exchange
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. iYesx
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
☐
Accelerated filer ☐
iNon-accelerated filer
x
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
This quarterly report may contain forward-looking statements that are within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, discussions related to Apollo’s expectations regarding the performance of its business, its liquidity and capital resources and the other non-historical statements in the discussion and analysis. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this quarterly report, the words “believe,”“anticipate,”“estimate,”“expect,”“intend,”“target” or future or conditional
verbs, such as “will,”“should,”“could,” or “may,” and variations of such words 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 inflation, market conditions and interest rate fluctuations generally, the impact of COVID-19, the impact of energy market dislocation, our ability to manage our growth, our ability to operate in highly competitive environments, the performance of the funds we manage, our ability to raise new funds, the variability of our revenues, earnings and cash flow, the accuracy of management’s assumptions and estimates, our dependence on certain key personnel, our use of leverage to finance our businesses
and investments by the funds we manage, changes in our regulatory environment and tax status, and litigation risks, among others. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in the Company’s annual report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 1, 2023 (the “2022 Annual Report”), as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report
and in our other filings with the SEC. 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
On January 1, 2022, Apollo Global Management, Inc. completed the previously announced merger transactions with Athene (the “Mergers”). Upon the closing of the Mergers, Apollo Global Management, Inc. was renamed Apollo Asset Management, Inc. (“AAM”) and became a subsidiary of Tango Holdings, Inc., and Tango Holdings, Inc. was renamed Apollo Global Management, Inc. (“AGM”).
In this quarterly report, references to “Apollo,”“we,”“us,”“our,” and the “Company”
refer collectively to AAM and its subsidiaries. References to “Class A shares” refer to the Class A common stock, $0.00001 par value per share, of AAM prior to the Mergers; “Class B share” refers to the Class B common stock, $0.00001 par value per share, of AAM prior to the Mergers; “Class C share” refers to the Class C common stock, $0.00001 par value per share, of AAM prior to the Mergers; “Series A Preferred shares” refers to the 6.375% Series A preferred stock of AAM; “Series B Preferred shares” refers to the 6.375% Series B preferred stock of AAM; and “Preferred shares” refers to the Series A Preferred shares and the Series B Preferred shares, collectively. In addition, references to “common stock” of the Company refer to the authorized shares
of common stock, par value $0.00001 per share, of AAM following the Mergers.
The use of any defined term in this report to mean more than one entity, person, security or other item collectively is solely for convenience of reference and in no way implies that such entities, persons, securities or other items are one indistinguishable group. For example, notwithstanding the use of the defined terms “Apollo,”“we,”“us,”“our,” and the “Company” in this report to refer to AAM and its subsidiaries, each subsidiary of AAM is a standalone legal entity that is separate and distinct from AAM and any of its other subsidiaries. Any AAM entity referenced herein is responsible for its own financial, contractual and legal
obligations.
Apollo
Aligned Alternatives, L.P., together with its parallel funds and alternative investment vehicles
AARe
Athene Annuity Re Ltd., a Bermuda reinsurance subsidiary
ACRA
ACRA 1 and ACRA 2
ACRA 1
Athene Co-Invest Reinsurance Affiliate Holding Ltd., together with its subsidiaries
ACRA 2
Athene
Co-Invest Reinsurance Affiliate Holding 2 Ltd., together with its subsidiaries
ADCF
Apollo Diversified Credit Fund
ADREF
Apollo Diversified Real Estate Fund
AIOF I
Apollo Infra Equity US Fund, L.P. and Apollo Infra Equity International Fund, L.P., including their feeder funds and alternative investment vehicles
AIOF II
Apollo Infrastructure Opportunities Fund II, L.P., together with its parallel funds and alternative investment
vehicles
AMH
Apollo Management Holdings, L.P., a Delaware limited partnership, that is an indirect subsidiary of AAM
ANRP I
Apollo Natural Resources Partners, L.P., together with its alternative investment vehicles
ANRP II
Apollo Natural Resources Partners II, L.P., together with its alternative investment vehicles
ANRP III
Apollo Natural Resources Partners III, L.P., together with its parallel funds and alternative investment vehicles
AOG
Unit Payment
On December 31, 2021, holders of units of the Apollo Operating Group (“AOG Units”) (other than Athene and the Company) sold and transferred a portion of such AOG Units to APO Corp., a wholly-owned consolidated subsidiary of the Company, in exchange for an amount equal to $3.66 multiplied by the total number of AOG Units held by such holders immediately prior to such transaction.
Apollo funds, our funds and references to the funds we manage
The funds (including the parallel funds and alternative investment vehicles of such funds), partnerships, accounts,
including strategic investment accounts or “SIAs,” alternative asset companies and other entities for which subsidiaries of the Apollo Operating Group provide investment management or advisory services.
Apollo Operating Group
(i) The entities through which we currently operate our business and (ii) one or more entities 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.”
The assets of the funds, partnerships and accounts to which we provide investment management, advisory, or certain other investment-related
services, including, without limitation, capital that such funds, partnerships and accounts have the right to call from investors pursuant to capital commitments. Our AUM equals the sum of:
(i) the net asset value, or “NAV,” plus used or available leverage and/or capital commitments, or gross assets plus capital commitments, of the yield and certain hybrid funds, partnerships and accounts for which we provide investment management or advisory services, other than certain collateralized loan obligations (“CLOs”), collateralized debt obligations (“CDOs”), and certain perpetual capital vehicles, which have a fee-generating basis other than the mark-to-market value of the underlying assets; for certain perpetual capital vehicles in yield, gross asset value plus available financing capacity;
(ii) the fair value of the investments of the equity and certain hybrid
funds, partnerships and accounts we manage or advise, plus the capital that such funds, partnerships and accounts are entitled to call from investors pursuant to capital commitments, plus portfolio level financings;
(iii) the gross asset value associated with the reinsurance investments of the portfolio company assets we manage or advise; and
(iv) the fair value of any other assets that we manage or advise for the funds, partnerships and accounts to which we provide investment management, advisory, or certain other investment-related services, plus unused credit facilities, including capital commitments to such funds, partnerships and accounts for investments that may require pre-qualification or other conditions before investment plus any other capital commitments to such funds, partnerships and accounts available for investment that are not otherwise included in the clauses
above.
Our AUM measure includes Assets Under Management for which we charge either nominal or zero fees. Our AUM measure also includes assets for which we do not have investment discretion, including certain assets for which we earn only investment-related service fees, rather than management or advisory fees. Our definition of AUM is not based on any definition of Assets Under Management contained in our governing documents or in any management agreements of the funds we manage. 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 the funds we manage; and (3) the AUM measures that we use internally or believe are used by other investment managers. Given the differences in the investment
strategies and structures among other alternative investment managers, our calculation of AUM may differ from the calculations employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. Our calculation also differs from the manner in which our affiliates registered with the SEC report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways.
We use AUM, Gross capital deployment and Dry powder as performance measurements of our investment activities, as well as to monitor fund size in relation to professional resource and infrastructure needs.
Athene
“Athene Holding” or “AHL” refers to Athene Holding Ltd. (together with its subsidiaries,
“Athene”), a leading financial services company specializing in retirement services that issues, reinsures and acquires retirement savings products designed for the increasing number of individuals and institutions seeking to fund retirement needs, and to which Apollo, through its consolidated subsidiary Apollo Insurance Solutions Group LP (formerly known as Athene Asset Management LLC) (“ISG”), provides asset management and advisory services. Athene Holding is a subsidiary of our parent company, Apollo Global Management, Inc.
Athora
Athora Holding, Ltd. (“Athora Holding” and together with its subsidiaries, “Athora”), a strategic liabilities platform that acquires or reinsures blocks of insurance business in the German
and broader European life insurance market (collectively, the “Athora Accounts”). The Company, through ISGI, provides investment advisory services to Athora. Athora Non-Sub-Advised Assets includes the Athora assets which are managed by Apollo but not sub-advised by Apollo nor invested in Apollo funds or investment vehicles. Athora Sub-Advised includes assets which the Company explicitly sub-advises as well as those assets in the Athora Accounts which are invested directly in funds and investment vehicles Apollo manages.
Atlas
An equity investment of AAA and refers to certain subsidiaries
of Atlas Securitized Products Holdings LP
The committed uninvested capital portion of total AUM not currently earning management fees. The amount depends on the specific terms and conditions of each fund.
Capital solutions fees and other, net
Primarily
includes transaction fees earned by our capital solutions business which we refer to as Apollo Capital Solutions (“ACS”) related to underwriting, structuring, arrangement and placement of debt and equity securities, and syndication for funds managed by Apollo, portfolio companies of funds managed by Apollo, and third parties. Capital solutions fees and other, net also includes advisory fees for the ongoing monitoring of portfolio operations and directors’ fees. These fees also include certain offsetting amounts, including reductions in management fees related to a percentage of these fees recognized (“management fee offset”) and other additional revenue sharing arrangements.
Contributing Partners
Those of our current and former partners and their related parties (other than Messrs. Leon Black, Joshua Harris and Marc Rowan,
our co-founders) who indirectly beneficially owned (through Holdings) AOG units.
Credit Strategies
Apollo Credit Strategies Master Fund Ltd., together with its feeder funds
CS
Credit Suisse AG
Dry Powder
The amount of capital available for investment or reinvestment subject to the provisions of the applicable limited partnership agreements or other governing agreements of the funds, partnerships and accounts we manage. Dry powder excludes uncalled commitments which can only be called for fund fees and expenses and commitments from perpetual capital vehicles.
EPF
Funds
Apollo European Principal Finance Fund, L.P., Apollo European Principal Finance Fund II (Dollar A), L.P., Apollo European Principal Finance Fund III (Dollar A), L.P., and Apollo European Principal Finance Fund IV (Dollar A), L.P., together with their parallel funds and alternative investment vehicles
Equity Plan
Refers collectively to AGM’s 2019 Omnibus Equity Incentive Plan and AGM’s 2019 Omnibus Equity Incentive Plan for Estate Planning Vehicles.
FCI
Funds
Financial Credit Investment I, L.P., Financial Credit Investment II, L.P., together with its feeder funds, Financial Credit Investment Fund III L.P., Financial Credit Investment IV, L.P., together with its feeder funds, and Apollo/Athene Dedicated Investment Program (A), L.P., together with its parallel funds, a series of funds managed by Apollo including third-party capital that, through ACRA, invests alongside Athene in certain investments
Fee-Generating AUM
Fee-Generating AUM consists of assets of the funds, partnerships and accounts
to which we provide investment management, advisory, or certain other investment-related services and on which we earn management fees, monitoring fees or other investment-related fees pursuant to management or other fee agreements on a basis that varies among the Apollo funds, partnerships and accounts. Management fees are normally based on “net asset value,”“gross assets,”“adjusted par asset value,”“adjusted cost of all unrealized portfolio investments,”“capital commitments,”“adjusted assets,”“stockholders’ equity,”“invested capital” or “capital contributions,” each as defined in the applicable management agreement. Monitoring fees, also referred to as advisory fees, with respect to the structured portfolio company investments of the funds, partnerships and accounts we manage or advise, are generally based on the total value of such structured portfolio company investments, which normally includes
leverage, less any portion of such total value that is already considered in Fee-Generating AUM.
Fee Related Earnings, or FRE
Component of Segment Income that is used to assess the performance of the asset management segment. FRE is the sum of (i) management fees, (ii) capital solutions and other related fees, (iii) fee-related performance fees from indefinite term vehicles, that are measured and received on a recurring basis and not dependent on realization events of the underlying investments and (iv) other income, net, less (a) fee-related compensation, excluding equity-based compensation, (b) non-compensation expenses incurred in the normal course of business, (c) placement fees and (d) non-controlling interests in the management companies of certain funds the Company
manages.
Former Managing Partners
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
Fund X
Apollo Investment Fund X, L.P. (together with its parallel funds and alternative investment vehicles)
Gross capital deployment
The gross capital that has been invested by the funds and accounts we manage during the relevant period, but excludes certain investment
activities primarily related to hedging and cash management functions at the firm. Gross capital deployment is not reduced or netted down by sales or refinancings, and takes into account leverage used by the funds and accounts we manage in gaining exposure to the various investments that they have made.
Gross IRR of a traditional private equity or hybrid value fund
The cumulative investment-related
cash flows (i) for a given investment for the fund or funds which made such investment, and (ii) for a given fund, in the relevant fund itself (and not any one investor in the fund), in each case, on the basis of the actual timing of investment inflows and outflows (for unrealized investments assuming disposition on June 30, 2023 or other date specified) aggregated on a gross basis quarterly, and the return is annualized and compounded before management fees, performance fees and certain other expenses (including interest incurred by the fund itself) and measures the returns on the fund’s investments as a whole without regard to whether all of the returns would, if distributed, be payable to the fund’s investors. In addition, gross IRRs at the fund level will differ from those at the individual investor level as a result of, among other factors, timing of investor-level inflows and outflows. Gross IRR does not represent
the return to any fund investor.
Gross Return or Gross ROE of a total return yield fund or the hybrid credit hedge fund
The monthly or quarterly time-weighted return that is equal to the percentage change in the value of a fund’s portfolio, adjusted for all contributions and withdrawals (cash flows) before the effects of management fees, incentive fees allocated to the general partner, or other fees and expenses. Returns for these categories are calculated for all funds and accounts in the respective strategies. Returns over multiple periods are calculated by geometrically linking each period’s return over time. Gross return and gross ROE do not represent the return to any fund investor.
HoldCo
Apollo Global Management,
Inc. (f/k/a Tango Holdings, Inc.)
Holdings
AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership through which our Former Managing Partners and Contributing Partners indirectly beneficially owned their interests in the Apollo Operating Group units.
HVF I
Apollo Hybrid Value Fund, L.P., together with its parallel funds and alternative investment vehicles
Inflows
(i) At the individual strategy level, subscriptions, commitments, and other increases in available capital, such as acquisitions or leverage, net of inter-strategy transfers, and (ii)
on an aggregate basis, the sum of inflows across the yield, hybrid and equity investing strategies.
IPO
Initial Public Offering
ISGI
Refers collectively to Apollo Asset Management Europe LLP, a subsidiary of AAM (“AAME”) and Apollo Asset Management PC LLP, a wholly-owned subsidiary of AAME (“AAME PC”)
MidCap Financial
MidCap FinCo Designated Activity Company
Net IRR of a traditional private equity or the hybrid value funds
The gross IRR
applicable to a fund, including returns for related parties which may not pay fees or performance fees, net of management fees, certain expenses (including interest incurred or earned by the fund itself) and realized performance fees all offset to the extent of interest income, and measures returns at the fund level on amounts that, if distributed, would be paid to investors of the fund. The timing of cash flows applicable to investments, management fees and certain expenses, may be adjusted for the usage of a fund’s subscription facility. To the extent that a fund exceeds all requirements detailed within the applicable fund agreement, the estimated unrealized value is adjusted such that a percentage of up to 20.0% of the unrealized gain is allocated to the general partner of such fund, thereby reducing the balance attributable to fund investors. In addition, net IRR at the fund level will differ from that at the individual investor level as a result of, among other
factors, timing of investor-level inflows and outflows. Net IRR does not represent the return to any fund investor.
Net Return or Net ROE of a total return yield fund or the hybrid credit hedge fund
The gross return after management fees, performance fees allocated to the general partner, or other fees and expenses. Returns over multiple periods are calculated by geometrically linking each period’s return over time. Net return and net ROE do not represent the return to any fund investor.
NYC UBT
New York City Unincorporated Business Tax
Other operating expenses within the Principal Investing segment
Expenses
incurred in the normal course of business and includes allocations of non-compensation expenses related to managing the business.
Performance allocations, Performance fees, Performance revenues, Incentive fees and Incentive income
The interests granted to Apollo by a fund managed by Apollo that entitle Apollo to receive allocations, distributions or fees which are based on the performance of such fund or its underlying investments.
AUM that may eventually produce performance fees. All funds for which we are entitled to receive a performance fee allocation or incentive fee are included in Performance Fee-Eligible AUM, which consists of the following:
(i) “Performance Fee-Generating AUM”, which refers to invested capital of the funds, partnerships and accounts we manage, advise, or to which we provide certain other investment-related services, that is currently above its hurdle rate or preferred return, and profit of such funds, partnerships and accounts is being allocated to, or earned by, the general partner in accordance with the applicable limited partnership agreements or other governing agreements;
(ii) “AUM Not Currently Generating Performance Fees”, which refers to invested capital of the funds, partnerships
and accounts we manage, advise, or to which we provide certain other investment-related services, that is currently below its hurdle rate or preferred return; and
(iii) “Uninvested Performance Fee-Eligible AUM”, which refers to capital of the funds, partnerships and accounts we manage, advise, or to which we provide certain other investment-related services, that is available for investment or reinvestment subject to the provisions of applicable limited partnership agreements or other governing agreements, which capital is not currently part of the NAV or fair value of investments that may eventually produce performance fees allocable to, or earned by, the general partner.
Perpetual capital
Assets under management of certain vehicles with an indefinite duration, which assets may only
be withdrawn under certain conditions or subject to certain limitations, including satisfying required hold periods or percentage limits on the amounts that may be redeemed over a particular period. The investment management, advisory or other service agreements with our perpetual capital vehicles may be terminated under certain circumstances.
Principal Investing Income, or PII
Component of Segment Income that is used to assess the performance of the principal investing segment. For the principal investing segment, PII is the sum of (i) realized performance fees, including certain realizations received in the form of equity, (ii) realized investment income, less (x) realized principal investing compensation expense, excluding expense related to equity-based compensation, and (y) certain corporate compensation and non-compensation expenses.
Principal
investing compensation
Realized performance compensation, distributions related to investment income and dividends, and includes allocations of certain compensation expenses related to managing the business.
Private equity investments
(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.
Redding
Ridge
Redding Ridge Asset Management, LLC and its subsidiaries, which is a standalone, self-managed asset management business established in connection with risk retention rules that manages CLOs and retains the required risk retention interests.
Traditional private equity funds
Apollo Investment Fund I, L.P. (“Fund I”), AIF II, L.P. (“Fund II”), a mirrored investment account established to mirror Fund I and Fund II for investments in debt securities (“MIA”), Apollo Investment Fund III, L.P. (together with its parallel funds, “Fund III”), Apollo Investment Fund IV, L.P. (together with its parallel fund,
“Fund IV”), Apollo Investment Fund V, L.P. (together with its parallel funds and alternative investment vehicles, “Fund V”), Apollo Investment Fund VI, L.P. (together with its parallel funds and alternative investment vehicles, “Fund VI”), Apollo Investment Fund VII, L.P. (together with its parallel funds and alternative investment vehicles, “Fund VII”), Apollo Investment Fund VIII, L.P. (together with its parallel funds and alternative investment vehicles, “Fund VIII”) and Apollo Investment Fund IX, L.P. (together with its parallel funds and alternative investment vehicles, “Fund IX”).
Common
Stock, $ii0.00001/ par value, ii40,000,000/
shares authorized, iiii1,000///
shares issued and outstanding as of June 30, 2023 and December 31, 2022
i—
i—
Additional
paid in capital
i1,353,930
i1,304,378
Retained
earnings
i73,057
i—
Accumulated
other comprehensive loss
(i10,797)
(i10,340)
Total
Apollo Asset Management, Inc. Stockholders’ Equity
i1,970,403
i1,848,251
Non-controlling
interests in consolidated entities
i548,350
i487,909
Non-controlling interests
in Apollo Operating Group
i1,342,847
i1,130,827
Total Stockholders’ Equity
i3,861,600
i3,466,987
Total
Liabilities, Redeemable non-controlling interests and Stockholders’ Equity
$
i13,695,317
$
i13,793,947
See
accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Due to parent, net
(i465,584)
i479,064
Other
financing activities, net
i1,510
(i2,787)
Apollo
Fund and VIE related:
Issuance of debt
i2,795,602
i1,760,996
Principal
repayment of debt
(i2,257,803)
(i668,362)
Distributions
paid to non-controlling interests in consolidated entities
(i34,018)
(i501,522)
Contributions
from non-controlling interests in consolidated entities
i44,493
i1,496,857
Distributions
to redeemable non-controlling interests
(i798,438)
(i776,272)
Net
Cash Provided by (Used in) Financing Activities
$
(i1,291,767)
$
i981,739
Net
Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, and Cash and Cash Equivalents Held at Consolidated Funds and VIEs
(i749,754)
i166,582
Cash
and Cash Equivalents, Restricted Cash and Cash Equivalents, and Cash and Cash Equivalents Held at Consolidated Funds and VIEs, Beginning of Period
i2,358,442
i2,088,334
Cash
and Cash Equivalents, Restricted Cash and Cash Equivalents, and Cash and Cash Equivalents Held at Consolidated Funds and VIEs, End of Period
$
i1,608,688
$
i2,254,916
Supplemental
Disclosure of Cash Flow Information:
Interest paid
$
i60,215
$
i59,590
Interest
paid by consolidated variable interest entities
i33,287
i170,479
Income
taxes paid
i49,925
i75,817
Supplemental
Disclosure of Non-Cash Investing Activities:
Distributions from principal investments
i1,158
i4,580
Supplemental
Disclosure of Non-Cash Financing Activities:
Capital increases related to equity-based compensation
$
i220,941
$
i232,903
Contributions
i—
i334,919
Issuance
of restricted shares
i22,765
i31,469
Other
non-cash financing activities
i—
(i1,361)
Changes
in Consolidation:
Investments, at fair value
$
i—
$
(i16,054,540)
Other
assets
i—
(i184,109)
Debt,
at fair value
i—
i9,350,540
Notes
payable
i—
i2,611,019
Other
liabilities
i—
i528,595
Non-controlling
interest in consolidated entities related to acquisition
i—
i4,693,618
Reconciliation
of Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, and Cash and Cash Equivalents Held at Consolidated Variable Interest Entities to the Consolidated Statements of Financial Condition:
Cash and cash equivalents
$
i1,219,475
$
i1,545,343
Restricted
cash and cash equivalents
i269,721
i693,326
Cash
and cash equivalents held at consolidated variable interest entities
i119,492
i16,247
Total
Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, and Cash and Cash Equivalents Held at Consolidated Variable Interest Entities
$
i1,608,688
$
i2,254,916
See
accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
1.
iORGANIZATION
Apollo Asset Management, Inc. (“AAM”, together with its consolidated subsidiaries, the “Company” or “Apollo”) is a high-growth, global alternative asset manager whose predecessor was founded in 1990. Its primary business is to raise, invest and manage funds, accounts and other vehicles, on behalf of some of the world’s most prominent pension, endowment and sovereign wealth funds and insurance companies, as well as other
institutional and individual investors. For these investment management services, Apollo receives management fees generally related to the amount of assets managed, transaction and advisory fees, incentive fees and performance allocations related to the performance of the respective funds that it manages. As of June 30, 2023, Apollo had itwo primary business segments:
•Asset Management — focuses on ithree
investing strategies: yield, hybrid and equity; yield focuses on generating excess returns through high quality credit underwriting and origination of safe-yielding assets; hybrid focuses across debt and equity to offer a differentiated risk-adjusted return with an emphasis on structured downside protected opportunities across asset classes; and within equity, controlled transactions are principally buyouts, corporate carveouts and distressed investments, while the real estate funds the Company manages generally focus on single asset, portfolio and platform acquisitions.
•Principal Investing — primarily includes the Company’s general partner investments in the funds it manages, where the
Company earns realized performance fee income based on the investment performance of these funds. Principal investing also includes the Company’s growth capital and liquidity resources. The Company seeks to deploy capital into strategic investments over time to help accelerate the growth of the asset management segment.
As
of June 30, 2023, the Company owned a majority of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group. The remaining economic interests of the Apollo Operating Group were owned directly and indirectly by Apollo Global Management, Inc. (“AGM”).
Apollo and Athene Merger
On January 1, 2022, Apollo and Athene completed the previously announced merger transactions pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) by and among AAM, Tango Holdings, Inc., a Delaware corporation and a then wholly-owned subsidiary
of AAM (“HoldCo”), Blue Merger Sub, Ltd., a Bermuda exempted company and a direct wholly-owned subsidiary of HoldCo (“AHL Merger Sub”), and Green Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of HoldCo (“AAM Merger Sub”). At the closing of the transactions, AHL Merger Sub merged with and into AHL (the “AHL Merger”), with AHL as the surviving entity in the AHL Merger and a subsidiary of HoldCo, and AAM Merger Sub merged with and into AAM (the “AAM Merger” and, together with the AHL Merger, the “Mergers”) with AAM as the surviving entity in the AAM Merger and a subsidiary of HoldCo.
In connection with the closing of the Mergers, HoldCo was renamed “Apollo Global Management, Inc.” Following the closing of the Mergers, all of the common shares of AHL and AAM are owned by AGM.
In connection with the closing
of the Mergers, the Company completed a corporate recapitalization (the “Corporate Recapitalization”) which resulted in the recapitalization of AGM from an umbrella partnership C corporation (“Up-C”) structure to a corporation with a single class of common stock with ione vote per share.
Griffin Capital Contributions
On March 1, 2022, AGM, the parent company of AAM, completed the acquisition of Griffin Capital’s
U.S. wealth distribution business. On May 3, 2022, AGM completed the acquisition of Griffin Capital’s U.S. asset management business. On the dates of each acquisition, AGM concurrently executed agreements pursuant to which AGM contributed its interests in the respective Griffin Capital businesses to subsidiaries of AAM.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
2. iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). These condensed consolidated financial statements should be read in conjunction with the annual financial statements included in the 2022 Annual Report. Certain disclosures included in the annual financial statements have been condensed or omitted as they are not required for interim financial statements under U.S. GAAP and the rules of the SEC. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year.
The results of the Company and its subsidiaries
are presented on a consolidated basis. Any ownership interest other than the Company’s interest in its subsidiaries is reflected as a non-controlling interest. Intercompany accounts and transactions have been eliminated. Management believes it has made all necessary adjustments (consisting only of normal recurring items) so that the condensed consolidated financial statements are presented fairly and that any estimates made are reasonable and prudent. Certain reclassifications have been made to previously reported amounts to conform to the current period’s presentation.
i
Consolidation
The
Company consolidates entities where it has a controlling financial interest unless there is a specific scope exception that prevents consolidation.
The types of entities with which the Company is involved generally include, but are not limited to:
•Subsidiaries, including management companies and general partners of funds that the Company manages
•Funds, including entities that have attributes of an investment company
Each of these entities is assessed for consolidation based on its specific facts and circumstances. In determining whether to consolidate an entity, the Company first evaluates whether the entity is a variable interest entity (“VIE”) or a voting interest entity (“VOE”) and applies the appropriate consolidation model as discussed below. If an entity is not consolidated, then the Company’s investment is generally accounted for under the equity method of accounting or as a financial instrument as discussed in the related policy discussions below.
Investment
Companies
Judgment is required to evaluate whether an entity has the necessary characteristics to be accounted for as an investment company. The funds managed by the Company that meet the investment company criteria are generally not required to consolidate operating companies and generally reflect their investments in operating companies and other investment companies at fair value. The Company has retained this specialized accounting for investment companies in consolidation.
Variable Interest Entities
All entities are first considered under the VIE model. VIEs are entities that (i) do not have sufficient equity at risk to finance their activities without additional
subordinated financial support or (ii) have equity investors at risk that do not have the ability to make significant decisions related to the entity’s operations, absorb expected losses, or receive expected residual returns.
The Company consolidates a VIE if it is the primary beneficiary of the entity. The Company is deemed the primary beneficiary when it has a controlling financial interest in the VIE, which is defined as possessing both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance (“primary beneficiary power”) and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant (“significant variable interest”). The
Company performs the VIE and primary beneficiary assessment at inception of its involvement with a VIE and on an ongoing basis if facts and circumstances change.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
To assess whether the Company has the primary beneficiary power under the VIE consolidation model,
it considers the design of the entity as well as ongoing rights and responsibilities. In general, the parties that can make the most significant decisions regarding asset management have control over servicing, liquidation rights or the unilateral right to remove the decision-makers. To assess whether the Company has a significant variable interest, the Company considers all its economic interests that are considered variable interests in the entity, including interests held through related parties. This assessment requires judgment in considering whether those interests are significant.
Assets and liabilities of the consolidated VIEs, other than SPACs, are primarily shown in separate sections within the condensed consolidated statements of financial
condition. Changes in the fair value of the consolidated VIEs’ assets and liabilities and related interest, dividend and other income and expenses are primarily presented within net gains from investment activities of consolidated variable interest entities in the condensed consolidated statements of operations. The portion attributable to non-controlling interests is reported within net income attributable to non-controlling interests in the condensed consolidated statements of operations. For additional disclosures regarding VIEs, see notes 5, 12 and 13.
Voting Interest Entities
Entities that are not determined to be VIEs are generally considered VOEs. Under the voting interest model, Apollo consolidates those entities it controls through a majority voting interest. Apollo does not consolidate those VOEs in which substantive kick-out rights have been granted to the unrelated investors
to either dissolve the fund or remove the general partner.
i
Non-controlling Interests
For entities that are consolidated, but not wholly owned, a portion of the income or loss and corresponding equity is allocated to owners other than the Company. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in non-controlling interests in the condensed consolidated financial
statements. Prior to the Corporate Recapitalization, the non-controlling interests relating to AGM included the ownership interest in the Apollo Operating Group held by Former Managing Partners and Contributing Partners through their limited partner interests in Holdings. Additionally, Athene held non-controlling interests in the Apollo Operating Group. Subsequent to the closing of the Mergers, Athene’s interest in the Apollo Operating Group was distributed to AGM. Non-controlling interests also include ownership interests in certain consolidated funds and VIEs.
Non-controlling interests are presented as a separate component of stockholders’ equity on the Company’s condensed consolidated statements of financial condition. The primary components of non-controlling interests are separately presented in the
Company’s condensed consolidated statements of changes in stockholders’ equity to clearly distinguish the interest in the Apollo Operating Group and other ownership interests in the consolidated entities. Net income includes the net income attributable to the holders of non-controlling interests on the Company’s condensed consolidated statements of operations. Profits and losses are allocated to non-controlling interests in proportion to their relative ownership interests regardless of their basis.
i
Use of Estimates
The preparation of the condensed
consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts in the financial statements and related footnotes. Apollo’s most significant estimates include goodwill and intangible assets, income taxes, performance allocations, incentive fees, contingent consideration obligations related to an acquisition, non-cash compensation, and fair value of investments and debt. While such impact may change considerably over time, the estimates and assumptions affecting the Company’s condensed consolidated financial statements are based on the best available information as of June 30, 2023. Actual results could differ materially from those estimates.
iCash
and Cash Equivalents
Apollo considers all highly liquid short-term investments, including money market funds and U.S. Treasury securities, with original maturities of three months or less when purchased to be cash equivalents. Interest income from cash and cash equivalents is recorded in interest income in the condensed consolidated statements of operations. The carrying values of the money market funds and U.S. Treasury securities represent their fair values due to their short-term nature. Substantially all of the Company’s cash on deposit is in interest bearing accounts with major financial institutions and exceed insured limits.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
i
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents represent balances that are restricted as to withdrawal or usage.
Restricted
cash and cash equivalents of Apollo Strategic Growth Capital II (“APSG II”), a consolidated SPAC, is held in trust accounts and includes money market funds and U.S. Treasury bills with original maturities of three months or less, that were purchased with funds raised through the initial public offering of the consolidated entity. The $i186.3 million in funds for APSG II as of June 30, 2023 is restricted for use and may only be used for purposes of completing an initial business combination or redemption of public shares as set forth in APSG II’s trust agreement. Refer to note 13 for
further detail.
/
Restricted cash and cash equivalents of Acropolis Infrastructure Acquisition Corp. (“Acropolis”), a consolidated SPAC, is held in a trust account and includes money market funds that were purchased with funds raised through the initial public offering of the consolidated entity. The $i81.3 million in funds as of June 30, 2023 are restricted for use and may only
be used for purposes of completing an initial business combination or redemption of public shares as set forth in the trust agreement. Refer to note 13 for further detail.
i
U.S. Treasury Securities, at fair value
U.S. Treasury securities, at fair value includes U.S. Treasury bills with original maturities greater than three months when purchased. These securities are recorded at fair value within investments in the condensed consolidated statements of financial condition. Interest income on such securities is separately presented from the overall change in fair value and is recognized in interest income in the condensed
consolidated statements of operations. Any remaining change in fair value of such securities, that is not recognized as interest income, is recognized in net gains (losses) from investment activities in the condensed consolidated statements of operations. Securities are generally recognized on a trade date basis.
i
Fair Value of Financial Instruments
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market
participants at the measurement date under current market conditions. Changes in the fair value of financial instruments are recorded and presented in net gains (losses) from investment activities except for certain investments for which the Company is entitled to receive performance allocations. For those investments, changes in fair value are presented in principal investment income and are included within investment income (loss) in the condensed consolidated statement of operations.
Financial instruments are generally recorded at fair value or at carrying values that approximate fair value. The actual realized gains or losses will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which
may ultimately differ significantly from the assumptions on which the valuations were based.
Fair Value Option
Entities are permitted to elect the fair value option (“FVO”) to carry at fair value certain financial assets and financial liabilities. The FVO election is irrevocable and can be applied to eligible financial instruments on an individual basis at initial recognition or at eligible remeasurement events.
The Company has elected the FVO for financial instruments held by its consolidated CLOs, which includes investments in loans and corporate bonds, as well as debt obligations and contingent obligations. Certain consolidated VIEs have applied the FVO for investments in private debt securities that otherwise would not have been carried
at fair value with gains and losses in net income. The Company has also elected the FVO for certain investments otherwise accounted for under the equity method of accounting. Refer to note 3 for additional information and other instances of when the Company has elected the FVO.
Fair Value Hierarchy
U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the
existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
of judgment used in measuring fair value.
Financial instruments measured
and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:
Level I - Quoted prices are available in active markets for identical financial instruments as of the reporting date. The Company does not adjust the quoted price for these financial instruments, even in situations where the Company holds a large position and the sale of such position would likely deviate from the quoted price.
Level II - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the
use of models or other valuation methodologies. These financial instruments exhibit higher levels of liquid market observability as compared to Level III financial instruments.
Level III - Pricing inputs are unobservable for the financial instrument and includes situations where there is little observable market activity for the financial instrument. The inputs into the determination of fair value may require significant management judgment or estimation. Financial instruments that are included in this category generally include investments where the fair value is based on observable inputs as well as unobservable inputs.
When a security is valued based on broker quotes, the Company subjects those quotes to various criteria in making the determination as to whether a particular
financial instrument would qualify for classification as Level II or Level III. These criteria include, but are not limited to, the number and quality of the broker quotes, the standard deviations of the observed broker quotes, and the percentage deviation from external pricing services.
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.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument when the fair value is based
on unobservable inputs.
i
Equity Method Investments
For investments in entities over which the Company exercises significant influence but does not meet the requirements for consolidation and has not elected the fair value option, the Company uses the equity method of accounting. Under the equity method of accounting, the Company
records its share of the underlying income or loss of such entities adjusted for distributions. The Company’s share of the underlying net income or loss of such entities is recorded in investment income (loss) in the condensed consolidated statements of operations.
The carrying amounts of equity method investments are recorded in investments in the condensed consolidated statements of financial condition. Generally, the underlying entities that the Company manages and invests in are primarily investment companies, and the carrying value of the Company’s equity method investments approximates fair value.
i
Reverse
Repurchase Agreements and Repurchase Agreements
A reverse repurchase agreement is a transaction in which the Company purchases financial instruments from a seller and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller at a fixed and determinable price at a future date. A repurchase agreement is a transaction in which the Company sells financial instruments to a buyer, typically in exchange for cash, and simultaneously enters into an agreement to repurchase the same or substantially the same financial instruments from the buyer at a fixed and determinable price at a future date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
Although reverse repurchase and repurchase agreements generally involve the legal transfer of ownership of financial instruments, they are accounted for as financing arrangements because they require the financial instruments to be resold or repurchased before or at the maturity of the agreement. As a result, the collateral received under reverse repurchase agreements are not recognized and the collateral pledged under repurchase agreements are not derecognized in the condensed consolidated statements of financial condition.
Reverse repurchase and repurchase agreements
generally sit within consolidated VIEs and as such, those reverse repurchase and repurchase agreements are reflected as investments and other liabilities, respectively, within the consolidated VIE section of the condensed consolidated statements of financial condition. Reverse repurchase agreements are generally accounted for by electing the fair value option. Earnings from reverse repurchase agreements are included in net gains from investment activities of consolidated variable interest entities on the condensed consolidated statements of operations.
For reverse repurchase agreements, the Company generally requires collateral with a fair value at least equal to the carrying value of the loaned amount, monitors the market value of the collateral on a periodic basis, and delivers or obtains
additional collateral due to changes in the fair value of the collateral, as appropriate, in order to mitigate credit exposure.
i
Financial Instruments held by Consolidated VIEs
The consolidated VIEs managed by the Company are primarily investment companies and CLOs. Their investments include debt and equity securities held at fair value and reverse repurchase agreements. Financial instruments are generally accounted for on a trade date basis.
Under
a measurement alternative permissible for consolidated collateralized financing entities, the Company measures both the financial assets and financial liabilities of consolidated CLOs in its condensed consolidated financial statements in both cases using the fair value of the financial assets or financial liabilities, whichever are more observable.
Where financial assets are more observable, the financial assets of the consolidated CLOs are measured at fair value and the financial liabilities are measured in consolidation as: (i) the sum of the fair value of the financial assets and the carrying value of any non-financial assets that are incidental to the operations of the CLOs less (ii) the sum of the fair value of any beneficial interests retained by the
Company (other than those that represent compensation for services) and the Company’s carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interest retained by the Company) using a reasonable and consistent methodology.
Where financial liabilities are more observable, the financial liabilities of the consolidated CLOs are measured at fair value and the financial assets are measured in consolidation as: (i) the sum of the fair value of the financial liabilities, and the carrying value of any non-financial liabilities that are incidental to the operations of the CLOs less (ii) the carrying value of any non-financial assets
that are incidental to the operations of the CLOs. The resulting amount is allocated to the individual financial assets using a reasonable and consistent methodology.
Net income attributable to Apollo Asset Management, Inc. reflects the Company’s own economic interests in the consolidated CLOs, including (i) changes in the fair value of the beneficial interests retained by the Company and (ii) beneficial interests that represent compensation for collateral management services.
i
Deferred
Revenue
Apollo records deferred revenue, which is a type of contract liability, when consideration is received in advance of management services provided. Deferred revenue is reversed and recognized as revenue over the period that the agreed upon services are performed. It is included in accounts payable, accrued expenses, and other liabilities in the condensed consolidated statements of financial condition.
Apollo also earns management fees which are subject to an offset. When Apollo 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 the relevant fund. Such credit is recorded as deferred revenue in the condensed consolidated statements
of financial condition within the accounts payable, accrued expenses, and other liabilities line item. A portion of any excess advisory and transaction fees may be required to be returned to the limited partners of certain funds upon such fund’s liquidation. As the management fees earned by the Company are presented on a gross basis, any management fee offsets calculated are presented as a reduction to advisory and transaction fees in the condensed consolidated statements of operations.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
Additionally, Apollo earns advisory fees pursuant to the terms of the advisory agreements with certain of the portfolio companies that are owned by the funds Apollo manages. When Apollo receives a payment from a portfolio company that exceeds the advisory fees earned at that point in time, the excess payment is recorded as deferred revenue in the condensed consolidated statements of financial condition. The advisory agreements with the portfolio companies vary in duration and the associated fees are received monthly, quarterly or annually.
Deferred revenue is reversed and recognized as revenue over the period that the agreed upon services are performed. There was $i170.2
million of revenue recognized during the six months ended June 30, 2023 that was previously deferred as of January 1, 2023.
Under the terms of the funds’ partnership agreements, Apollo is normally required to bear organizational expenses over a set dollar amount and placement fees or costs in connection with the offering and sale of interests in the funds it manages to investors. In cases where the limited partners of the funds are determined to be the customer in an arrangement, placement fees may be capitalized as a cost to acquire a customer contract, and amortized over the life of the customer contract. Capitalized placement fees are recorded
within other assets in the condensed consolidated statements of financial condition, while amortization is recorded within general, administrative and other in the condensed consolidated statements of operations. 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.
iRedeemable
non-controlling interests
Redeemable non-controlling interests are attributable to VIEs and primarily represent the shares issued by the Company’s consolidated SPACs whose shares are redeemable for cash by the respective public shareholders in connection with the applicable SPAC’s failure to complete a business combination or its tender offer/stockholder approval provisions. The redeemable non-controlling interests are initially recorded at their original issue price, net of issuance costs and the initial fair value of separately traded warrants. The carrying amount is accreted to its redemption value over the period from the date of issuance to the earliest redemption date of the instrument. The accretion to redemption value is generally recorded against additional paid-in capital. Refer to notes 12 and 13 for further detail.
Revenues
The
Company’s revenues include (i) management fees; (ii) advisory and transaction fees, net; (iii) investment income, which is comprised of performance allocations and principal investment income; and (iv) incentive fees.
The revenue guidance requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services (i.e., the transaction price). When determining the transaction price, under the revenue guidance, an entity may recognize variable consideration only to the extent that it is probable to not be significantly reversed. The revenue guidance also requires disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.
Performance
allocations are accounted for under guidance applicable to equity method investments, and therefore not within the scope of the revenue guidance. The Company recognizes performance allocations within investment income along with the related principal investment income (as further described below) in the condensed consolidated statements of operations and within the investments line in the condensed consolidated statements of financial condition.
Refer to disclosures below for additional information on each of the Company’s revenue streams.
i
Management
Fees
Management fees are recognized over time during the periods in which the related services are performed in accordance with the contractual terms of the related agreement. Management fees are generally based on (1) a percentage of the capital committed during the commitment period, and thereafter based on the remaining invested capital of unrealized investments, or (2) net asset value, gross assets or as otherwise provided in the respective agreements. Included in management fees are certain
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
expense reimbursements where the Company is considered the principal under the agreements and is required to record the expense and related reimbursement revenue on a gross basis.
i
Advisory and Transaction Fees, Net
Advisory
fees, including management consulting fees and directors’ fees, are generally recognized over time as the underlying services are provided in accordance with the contractual terms of the related agreement. The Company receives such fees in exchange for ongoing management consulting services provided to portfolio companies of funds it manages. Transaction fees, including structuring fees and arranging fees related to the Company’s funds, portfolio companies of funds and third parties are generally recognized at a point in time when the underlying services rendered are complete.
The amounts due from fund portfolio companies are recorded in due from related parties on the condensed consolidated statements of financial condition, which is discussed further
in note 13. Under the terms of the limited partnership agreements for certain funds, the management fee payable by the funds may be subject to a reduction based on a certain percentage of such advisory and transaction fees, net of applicable broken deal costs. Advisory and transaction fees are reduced by these management fee offsets in the condensed consolidated statements of operations.
Underwriting fees, which are also included within advisory and transaction fees, net, include gains, losses and fees, arising from securities offerings in which one of the Company’s subsidiaries participates in the underwriter syndicate. Underwriting fees are recognized at a point in time when the underwriting is completed. Underwriting fees recognized but not received
are recorded in other assets on the condensed consolidated statements of financial condition.
During the normal course of business, the Company incurs certain costs related to certain transactions that are not consummated, or “broken deal costs”. These costs (e.g., research costs, due diligence costs, professional fees, legal fees and other related items) are determined to be broken deal costs upon management’s decision to no longer pursue the transaction. In accordance with the related fund agreement, in the event the deal is deemed broken, all of the costs are reimbursed by the funds and then included as a component of the calculation of the management fee offset. If a deal is successfully completed, Apollo is reimbursed by the fund or fund’s portfolio company for all costs incurred and no offset is generated. As the
Company acts as an agent for the funds it manages, any transaction costs incurred and paid by the Company on behalf of the respective funds relating to successful or broken deals are recorded net on the Company’s condensed consolidated statements of operations, and any receivable from the respective funds is recorded in due from related parties on the condensed consolidated statements of financial condition.
i
Investment
Income
Investment income is comprised of performance allocations and principal investment income.
Performance Allocations. Performance allocations are a type of performance revenue (i.e., income earned based on the extent to which an entity’s performance exceeds predetermined thresholds). Performance allocations are generally structured from a legal standpoint as an allocation of capital in which the Company’s capital account receives allocations of the returns of an entity when those returns exceed predetermined thresholds. The determination of which performance revenues are considered performance allocations is primarily based on the terms of an agreement with the entity.
The
Company recognizes performance allocations within investment income along with the related principal investment income (as described further below) in the condensed consolidated statements of operations and within the investments line in the condensed consolidated statements of financial condition.
When applicable, the Company may record a general partner obligation to return previously distributed performance allocations. The general partner obligation is based upon an assumed liquidation of a fund’s net assets as of the reporting date and is reported within due to related parties on the condensed consolidated statements of financial condition. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination
of the fund or as otherwise set forth in the respective governing document of the fund.
Principal Investment Income. Principal investment income includes the Company’s income or loss from equity method investments and certain other investments in entities in which the Company is generally eligible to receive performance allocations. Income from equity method investments includes the Company’s share of net income or loss generated from its investments, which are not consolidated, but in which the Company exerts significant influence.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
i
Incentive Fees
Incentive fees are a type of performance revenue. Incentive fees differ from performance allocations in that incentive fees do not represent an allocation of capital but rather a
contractual fee arrangement with the entity.
Incentive fees are considered a form of variable consideration as they are subject to clawback or reversal and therefore must be deferred until the fees are probable to not be significantly reversed. Accrued but unpaid incentive fees are reported within other assets in the Company’s condensed consolidated statements of financial condition. The Company’s incentive fees are generally received from CLOs, managed accounts and certain other vehicles it manages.
Compensation and Benefits
i
Salaries,
Bonus and Benefits
Salaries, bonus and benefits include base salaries, discretionary and non-discretionary bonuses, severance and employee benefits. Bonuses are generally accrued over the related service period.
i
Equity-Based Compensation
Employees and non-employees who provide services to the Company are granted equity-based awards as compensation which are measured based on the grant date fair value of the award. Equity-based
awards that do not require future service (i.e., vested awards) are expensed immediately. Equity-based employee awards that require future service are expensed over the relevant service period. In addition, certain restricted share units (“RSUs”) granted by AGM vest based on both continued service and the Company’s receipt of performance revenues, within prescribed periods, sufficient to cover the associated equity-based compensation expense. In accordance with U.S. GAAP, equity-based compensation expense for such awards, if and when granted, will be recognized on an accelerated recognition method over the requisite service period to the extent the performance revenue metrics are met or deemed probable. The Company accounts for forfeitures of equity-based awards when they occur.
i
Profit
Sharing
Profit sharing expense and profit sharing payable primarily consist of a portion of performance revenues earned from certain funds that are allocated to employees and former employees. Profit sharing amounts are recognized as the related performance revenues are earned. Accordingly, profit sharing amounts can be reversed during periods when there is a decline in performance revenues that were previously recognized. Profit sharing expense is recorded in compensation and benefits in the condensed consolidated statements of operations. Profit sharing payable is recorded in accounts payable, accrued expenses and other liabilities for Asset Management in the condensed consolidated statements of financial condition.
Profit sharing amounts are generally not paid until the related performance revenue is distributed to the general partner upon realization of the fund’s investments.
Under certain profit sharing arrangements, the Company requires that a portion of certain of the performance revenues distributed to its employees be used to purchase restricted common stock issued under AGM’s Equity Plan. Prior to distribution of the performance revenue, the Company records the value of the equity-based awards expected to be granted in other assets and other liabilities within the condensed consolidated statements of financial condition. Such equity-based awards are recorded as equity-based compensation expense over the relevant service period once granted.
Additionally, profit sharing amounts previously distributed may be subject to clawback from employees and former employees. When applicable, the accrual for potential clawback of previously
distributed profit sharing amounts, which is a component of due from related parties on the condensed consolidated statements of financial condition, represents all amounts previously distributed to employees and former employees that would need to be returned to the general partner if the Apollo funds were to be liquidated based on the fair value of the underlying fund’s investments as of the reporting date. The actual general partner receivable, however, would not become realized until the final disposition of a fund’s investments based on the contractual termination of the fund or as otherwise set forth in the respective governing document of the fund.
Profit sharing payable also includes contingent consideration obligations that were recognized in connection with certain Apollo acquisitions. Changes in the fair value of the contingent consideration obligations are reflected in the
Company’s condensed consolidated statements of operations as compensation and benefits.
The Company has performance-based incentive arrangements for certain Apollo partners and employees designed to more closely align compensation on an annual basis with the overall realized performance of the Company. These arrangements
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
enable certain employees to earn discretionary compensation based on performance revenue earned by the Company in a given year, which amounts are reflected in compensation and benefits in the accompanying condensed consolidated financial statements. Apollo may also use dividends it receives from investments in certain perpetual capital vehicles to compensate employees. These amounts are recorded as compensation and benefits in the condensed consolidated statements of operations for asset management.
i
401(k)
Savings Plan
The Company sponsors a 401(k) savings plan (the “401(k) Plan”) whereby U.S.-based employees are entitled to participate in the 401(k) Plan based upon satisfying certain eligibility requirements. The Company matches i50% of eligible annual employee contributions up to i3%
of the eligible employees’ annual compensation. Matching contributions vest after ithree years of service.
/
iGeneral,
Administrative and Other
General, administrative and other primarily includes professional fees, occupancy, depreciation and amortization, travel, information technology, administration expenses and placement fees.
i
Income Taxes
The Company is a Delaware corporation and generally all of its income is subject to U.S. corporate income taxes. Certain subsidiaries
of the Company operate as partnerships for U.S. income tax purposes and are subject to NYC UBT. Certain non-U.S. entities are also subject to non-U.S. corporate income taxes. The Company is included in the U.S. federal consolidated and certain state combined income tax returns with AGM and its other subsidiaries. For purposes of these separate company consolidated financial statements, the Company’s taxes were determined using the separate return method as if the Company had filed tax returns separate from AGM.
As a result, the tax effects of certain activity and the tax treatment of certain transactions included in the condensed consolidated financial statements of AGM may not be the same in the Company’s separate company consolidated financial statements.
Significant judgment is required in determining tax expense and in evaluating certain and uncertain tax positions. The Company recognizes the tax benefit of uncertain tax positions when the position is “more likely than not” to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. 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.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the financial statement carrying amount of assets and liabilities and their respective tax bases using currently enacted tax rates in the period the temporary difference is expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period during which the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized.
i
Recently
Issued Accounting Pronouncements
Fair Value Measurement — Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (ASU 2022-03)
In June 2022, the Financial Accounting Standards Board (“FASB”) issued clarifying guidance that a restriction which is a characteristic of the holding entity rather than a characteristic of the equity security itself should not be considered in its fair value measurement. As a result, the Company is required to measure the fair value of equity securities subject to contractual restrictions attributable to the holding entity on the basis of the market price of the same equity security without those contractual restrictions. Companies are not permitted to
recognize a contractual sale restriction attributable to the holding entity as a separate unit of account. The guidance also requires disclosures for these equity securities.
The new guidance is mandatorily effective for the Company by January 1, 2024 with early adoption permitted. The Company will apply the guidance on a prospective basis as an adjustment to current-period earnings with the adoption impact disclosed in the period of adoption.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
The Company is currently evaluating the new guidance and its impact on the condensed consolidated financial statements.
Investments– Equity Method and Joint Ventures (ASU 2023-02)
In March 2023, the FASB issued guidance in ASU 2023-02 to introduce the option of applying the proportional amortization method (“PAM”) to account for investments made primarily for the purpose of receiving income tax
credits or other income tax benefits when certain requirements are met. Currently, PAM only applies to low-income housing tax credit (“LIHTC”) investments. The guidance becomes mandatorily effective for the Company on January 1, 2024, but early adoption is permitted.
The Company is currently evaluating the new guidance and its impact on the condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
Business Combinations – Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers (ASU 2021-08)
In October 2021, the FASB issued guidance to add contract assets and contract liabilities from contracts with customers acquired in a business combination to the list of exceptions to the fair value recognition and measurement principles that apply to business combinations, and instead require them to be accounted for in accordance with revenue recognition guidance.
The new guidance was adopted by the
Company on January 1, 2023 and applied prospectively. There was no financial statement impact upon adoption.
Reference Rate Reform (Topic 848) — Deferral of the Sunset Date of Topic 848 (ASU 2022-06, ASU 2021-01, ASU 2020-04)
The Company adopted ASU 2020-04 and ASU 2021-01 and elected to apply certain of the practical expedients related to contract modifications, hedge accounting relationships, and derivative modifications pertaining to discounting, margining, or contract price alignment. The main purpose of the practical expedients is to ease the administrative
burden of accounting for contracts impacted by reference rate reform, and these elections did not have, and are not expected to have, a material impact on the Consolidated Financial Statements. ASU 2022-06 amended and deferred the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which the Company will no longer be permitted to apply the expedients provided in Topic 848. We will continue to evaluate the impact of reference rate reform on contract modifications and hedging relationships.
3.
iINVESTMENTS
i
The following table presents Apollo’s investments:
Investments, at fair value, consist of investments for which the fair value option has been elected and primarily include the Company’s investment in Athora, other strategic investments and investments in debt of unconsolidated CLOs. Changes in the fair value related to these investments are presented in net gains (losses) from investment activities except for certain investments for which the Company is entitled to receive performance allocations. For those investments, changes in fair value are presented in principal investment income and are included within investment income in the condensed consolidated statements of operations.
Prior to the Mergers, the
Company’s equity investment in Athene Holding, for which the fair value option was elected, met the significance criteria as defined by the SEC. During the first quarter of 2022, the Company’s investment in Athene Holding was
Realized gains (losses) on sales of investments, net
$
(i6,034)
$
(i3,690)
$
(i961)
$
i207,531
Net
change in unrealized gains (losses) due to changes in fair value
i25,908
i149,744
i19,299
i709,785
Net
gains (losses) from investment activities
$
i19,874
$
i146,054
$
i18,338
$
i917,316
/
Performance
Allocations
Performance allocations receivable is recorded within investments in the condensed consolidated statements of financial condition. iThe table below provides a roll forward of the performance allocations balance:
The
change in fair value of funds excludes the general partner obligation to return previously distributed performance allocations, which is recorded in due to related parties in the condensed consolidated statements of financial condition. See note 13 for further disclosure regarding the general partner obligation.
The timing of the payment of performance allocations due to the general partner or investment manager varies depending on the terms of the applicable fund agreements. Performance allocations with respect to certain funds are payable and are distributed to the fund’s general partner upon realization of an investment if the fund’s cumulative returns are in excess of the preferred return.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
4. iPROFIT SHARING PAYABLE
Profit sharing payable was $i1.6 billion
and $i1.4 billion as of June 30, 2023 and December 31, 2022, respectively. iThe table below provides a roll forward of the profit sharing payable balance:
Profit sharing expense includes (i) changes in amounts payable to employees and former employees entitled to a share of performance revenues in funds managed by Apollo and (ii) changes to the fair value of the contingent consideration obligations recognized in connection with certain Apollo acquisitions. Profit sharing payable excludes the potential
return of profit-sharing distributions that would be due if certain funds were liquidated, which is recorded in due from related parties in the condensed consolidated statements of financial condition. See note 13 for further disclosure regarding the potential return of profit sharing distributions.
As discussed in note 2, under certain profit sharing arrangements, the Company requires that a portion of certain of the performance revenues distributed to its employees be used to purchase restricted shares of AGM’s common stock issued under AGM’s Equity Plan. Prior to distribution of the performance revenues, the Company records the value of the equity-based awards expected to be granted in other assets and other liabilities within the condensed consolidated
statements of financial condition. See note 7 for further disclosure regarding deferred equity-based compensation.
5. iVARIABLE INTEREST ENTITIES
A variable interest in a VIE is an investment or other interest that will absorb portions of the VIE’s expected losses and/or receive expected residual returns. Refer to note 2 for more detail about the
Company’s VIE assessment and consolidation policy. Variable interests in consolidated VIEs and unconsolidated VIEs are discussed separately below.
Consolidated Variable Interest Entities
Consolidated VIEs include consolidated SPACs as well as certain CLOs and funds managed by the Company. See note 13 for further details regarding the Company’s consolidated SPACs.
The assets of consolidated VIEs are not available to creditors of the Company, and the investors in these consolidated VIEs have no recourse against the assets of the
Company. Similarly, there is no recourse to the Company for the consolidated VIEs’ liabilities.
Other assets include interest receivables, receivables from affiliates, due from brokers and reverse repurchase agreements. Other liabilities include payables for securities purchased, which represent open trades within the consolidated CLOs and primarily relate to corporate loans that are expected to settle within i60 days, debt held at amortized cost, short-term payables and repurchase agreements.
Included
within liabilities of the consolidated VIEs are notes payable related to certain funds managed by the Company. Each series of notes in a respective consolidated VIE participates in distributions from the VIE, including principal and interest from underlying investments. Amounts allocated to the noteholders reflect amounts that would be distributed if the VIE’s assets were liquidated for cash equal to their respective carrying values, its liabilities satisfied in accordance with their terms, and all the remaining amounts distributed to the noteholders. The respective VIEs that issue the notes payable are marked at their prevailing net asset value, which approximates fair value.
Results from certain funds managed by the Company are reported on a three month
lag based upon the availability of financial information.
Net
gains from investment activities of consolidated variable interest entities
$
i9,353
$
i36,617
$
i43,390
$
i316,072
(1)
Amounts reflect consolidation eliminations.
/
Senior Secured Notes, Subordinated Notes and Subscription Lines
Included within notes payable and other liabilities are amounts due to third-party institutions by the consolidated VIEs. iThe following table summarizes the principal
provisions of those amounts.
(1)
The notes and subscription lines of the consolidated VIEs are collateralized by assets held by each respective vehicle and assets of one vehicle may not be used to satisfy the liabilities of another vehicle.
Repurchase Agreements
i
The following table summarizes the maturities of repurchase agreements:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
Reverse Repurchase Agreements
As
of June 30, 2023 and December 31, 2022, the fair value of collateral received under reverse repurchase agreements was $i422 million and $i1,522 million,
respectively, and the fair value of collateral rehypothecated was $i0 million and $i1,522 million,
respectively.
Unconsolidated Variable Interest Entities
The Company holds variable interests in certain VIEs which are not consolidated, as it has been determined that Apollo is not the primary beneficiary. iThe following table presents the maximum exposure to losses relating to these VIEs for which Apollo has concluded that it holds a significant variable interest, but
that it is not the primary beneficiary.
(1)
Represents Apollo’s direct investment in those entities in which Apollo holds a significant variable interest and certain other investments. Additionally, cumulative performance allocations are subject to reversal in the event of future losses, as discussed in note 14.
(2) Some amounts included are a quarter in arrears.
6. iFAIR
VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
i
The following tables summarize the Company’s financial assets and financial liabilities recorded at fair value by fair value hierarchy level:
(1)
Cash and cash equivalents as of June 30, 2023 and December 31, 2022 includes $i0.2 million and $i0.4 million,
respectively, of cash and cash equivalents held by consolidated SPACs.
(2) Restricted cash and cash equivalents as of June 30, 2023 and December 31, 2022 includes $i0.3 billion and $i1.0
billion, respectively, of restricted cash and cash equivalents held by consolidated SPACs.
(3) Investments as of June 30, 2023 and December 31, 2022 excludes $i216.9 million and $i198.1
million, respectively, of performance allocations classified as Level III related to certain investments for which the Company elected the fair value option. The Company’s policy is to account for performance allocations as investments.
(4) Due from related parties represents a receivable from a fund.
(5) Derivative assets and derivative liabilities are presented as a component of Other assets and Other liabilities, respectively, in the condensed consolidated statements of financial condition.
(6)
Profit sharing payable includes contingent obligations classified as Level III.
The following tables summarize the changes in fair value in
financial assets measured at fair value for which Level III inputs have been used to determine fair value:
iiiChange
in net unrealized gains included in investment income (loss) related to investments still held at reporting date//
$
i19,589
$
i—
$
i19,589
Change
in net unrealized gains included in net gains from investment activities of consolidated VIEs related to investments still held at reporting date
iiiChange
in net unrealized gains included in investment income (loss) related to investments still held at reporting date//
$
i30,623
$
i—
$
i30,623
Change
in net unrealized gains included in net gains from investment activities of consolidated VIEs related to investments still held at reporting date
i—
i8,637
i8,637
(1)
Transfers between Level II and III were a result of subjecting the broker quotes on these financial assets to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes and the percentage deviation from external pricing services.
Change
in net unrealized gains included in investment income (loss) related to investments still held at reporting date
$
i45,621
$
i—
$
i45,621
Change
in net unrealized gains included in net gains from investment activities of consolidated VIEs related to investments still held at reporting date
Net
transfer in (out) due to consolidation (deconsolidation)
i21,710
(i14,190,236)
(i14,168,526)
Purchases
i105,702
i3,471,182
i3,576,884
Sale
of investments/distributions
(i4,132)
(i1,839,082)
(i1,843,214)
iNet
realized gains (losses)
(i2,966)
i21,157
i18,191
Changes
in net unrealized gains
i59,088
i176,381
i235,469
Cumulative
translation adjustment
(i46,812)
(i10,808)
(i57,620)
Transfer
into Level III(1)
i1,004
i29,803
i30,807
Transfer
out of Level III(1)
i—
(i2,934)
(i2,934)
Balance,
End of Period
$
i1,079,778
$
i843,266
$
i1,923,044
Change
in net unrealized gains included in investment income related to investments still held at reporting date
$
i59,088
$
i—
$
i59,088
Change
in net unrealized gains included in net gains from investment activities of consolidated VIEs related to investments still held at reporting date
i—
i8,782
i8,782
(1)
Transfers between Level II and III were a result of subjecting the broker quotes on these financial assets to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes and the percentage deviation from external pricing services.
i
The following tables summarize the changes in fair value in financial liabilities measured at fair value for which Level III inputs have been used to determine fair value:
1)Changes
in fair value of contingent consideration obligations are recorded in profit sharing expense in the condensed consolidated statements of operations.
2)Transfers between Level II and III were a result of subjecting the broker quotes on these financial assets to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes and the percentage deviation from independent pricing services.
i
The
following tables summarize the quantitative inputs and assumptions used for financial assets and liabilities categorized as Level III under the fair value hierarchy:
(1) Unobservable inputs were weighted based on the fair value of the investments included in the range.
Discounted Cash Flow and Direct Capitalization Model
When a discounted cash flow or direct capitalization 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 or the capitalization rate, respectively. Increases in the discount rate or capitalization rate can significantly lower the fair value of an investment and the contingent consideration obligations; conversely decreases in the discount rate or capitalization rate can significantly increase the fair value of an investment and the contingent consideration
obligations.
Consolidated VIEs’ Investments
The significant unobservable input used in the fair value measurement of the equity securities, bank loans, bonds and warrants is the discount rate applied in the valuation models. This input in isolation can cause significant increases or decreases in fair value, which would result in a significantly lower or higher fair value measurement. The discount rate is determined based on the market rates an investor would expect for a similar investment with similar risks.
Certain investments of VIEs are valued using the NAV per share equivalent calculated by the investment manager as a practical expedient to determine an independent fair value.
Contingent Consideration Obligations
The significant unobservable
input used in the fair value measurement of the contingent consideration obligations is the discount rate applied in the valuation models. This input in isolation can cause significant increases or decreases in fair value. The discount rate was based on the hypothetical cost of equity in connection with the acquisition of Stone Tower. See note 14 for further discussion of the contingent consideration obligations.
Valuation of Underlying Investments
As previously noted, the underlying entities that the Company manages and invests in are primarily investment companies which account for their investments at estimated fair value.
On a quarterly basis, valuation committees consisting of members from senior management review and approve the valuation results
related to the investments of the funds the Company manages. For certain publicly traded vehicles managed by the Company, a review is performed by an independent board of directors. The Company also retains external 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 external valuation firms assist management with validating their valuation results or determining fair value. The Company performs various back-testing procedures to validate their valuation approaches,
including comparisons between expected and observed outcomes, forecast evaluations and variance analyses. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
Yield Investments
Yield
investments are generally valued based on third party vendor prices and/or quoted market prices and valuation models. Valuations using quoted market prices are based on the average of the “bid” and the “ask” quotes provided by multiple brokers wherever possible without any adjustments. Apollo will designate certain brokers to use to value specific securities. In determining the designated brokers, Apollo considers the following: (i) brokers with which Apollo has previously transacted, (ii) the underwriter of the security and (iii) active brokers indicating executable quotes. In addition, when valuing a security based on broker quotes wherever possible Apollo tests the standard deviation amongst the quotes received and the variance between the concluded fair value and the value provided by a pricing service. When broker quotes are not available Apollo considers the use of pricing service quotes or other sources to mark a position. When relying on a pricing
service as a primary source, Apollo (i) analyzes how the price has moved over the measurement period, (ii) reviews the number of brokers included in the pricing service’s population, if available, and (iii) validates the valuation levels with Apollo’s pricing team and traders.
Debt securities that are not publicly traded or whose market prices are not readily available are valued at fair value utilizing a model based approach to determine fair value. Valuation approaches used to estimate the fair value of illiquid credit investments also may include the income approach, as described below. The valuation approaches used consider, as applicable, market risks, credit risks, counterparty risks and foreign currency risks.
Equity and Hybrid Investments
The majority of illiquid equity and hybrid investments are valued using the market approach
and/or the income approach, as described below.
Market Approach
The market approach is driven by current market conditions, including actual trading levels of similar companies and, to the extent available, actual transaction data of similar companies. Judgment is required by management when assessing which companies are similar to the subject company being valued. Consideration may also be given to any of the following factors: (1) the subject company’s historical and projected financial data; (2) valuations given to comparable companies; (3) the size and scope of the subject company’s operations; (4) the subject company’s individual strengths and weaknesses; (5) expectations relating to the market’s receptivity to an offering of the subject company’s securities; (6) applicable restrictions on transfer; (7) industry and market information; (8) general economic and market conditions;
and (9) other factors deemed relevant. Market approach valuation models typically employ a multiple that is based on one or more of the factors described above.
Enterprise value as a multiple of EBITDA is common and relevant for most companies and industries, however, other industry specific multiples are employed where available and appropriate. Sources for gaining additional knowledge related to comparable companies include public filings, annual reports, analyst research reports and press releases. Once a comparable company set is determined, Apollo reviews certain aspects of the subject company’s performance and determines how its performance compares to the group and to certain individuals in the group. Apollo compares certain measurements such as EBITDA margins, revenue growth over certain time periods, leverage ratios and growth
opportunities. In addition, Apollo compares the 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
The income approach provides an indication of fair value based on the present value of cash flows that a business or security is expected to generate in the future. The most widely used methodology for the income approach is a discounted cash flow method. Inherent in the discounted cash flow method are significant assumptions related to the subject company’s expected results, the determination of a terminal value and a calculated discount rate, which is normally based on the subject company’s weighted average cost of capital, or “WACC.” The WACC represents the required rate of return on total capitalization, which is comprised of a required rate of return
on equity, plus the current tax-effected rate of return on debt, weighted by the relative percentages of equity and debt that are typical in the industry. The most critical step in determining the appropriate WACC for each subject company is to select companies that are comparable in nature to the subject company and the credit quality of the subject company. Sources for gaining additional knowledge about the comparable companies include public filings, annual reports, analyst research reports and press releases. The general formula then used for calculating the WACC considers the after-tax rate of return on debt capital and the rate of return on common equity capital, which further considers the risk-free rate of return, market beta, market risk premium and small stock premium, if applicable. The variables used in the WACC formula
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
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.
Certain
of the funds Apollo manages may also enter into foreign currency exchange contracts, total return swap contracts, credit default swap contracts, and other derivative contracts, which may include options, caps, collars and floors. Foreign currency exchange contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. If securities
are held at the end of the period, the changes in value are recorded in income as unrealized. Realized gains or losses are recognized when contracts are settled. Total return swap and credit default swap contracts are recorded at fair value as an asset or liability with changes in fair value recorded as unrealized appreciation or depreciation. Realized gains or losses are recognized at the termination of the contract based on the difference between the close-out price of the total return or credit default swap contract and the original contract
price. Forward contracts are valued based on market rates obtained from counterparties or prices obtained from recognized financial data service providers.
(1)
Deferred equity-based compensation relates to the value of equity-based awards that have been or are expected to be granted in connection with the settlement of certain profit sharing arrangements. A corresponding amount for awards expected to be granted of $i242.0 million and $i227.8
million, as of June 30, 2023 and December 31, 2022, respectively, is included in other liabilities on the condensed consolidated statements of financial condition.
(2) Represents a commitment from an institutional investor as part of a strategic transaction.
/
Depreciation expense was $i13.0
million and $i7.9 million for the three months ended June 30, 2023 and 2022, respectively, and $i25.9 million and $i13.8
million for the six months ended June 30, 2023 and 2022, respectively, and is presented as a component of general, administrative and other expense in the condensed consolidated statements of operations.
8. iLEASES
Apollo has operating leases for office space, data centers, and certain equipment under various lease agreements.
i
The
table below presents operating lease expenses recorded in general, administrative and other in the condensed consolidated statements of operations.
As
of June 30, 2023, the Company’s total lease payments by maturity are presented in the following table:
Operating Lease Payments
Remaining 2023
$
i32,325
2024
i74,256
2025
i74,113
2026
i70,191
2027
i72,766
Thereafter
i516,646
Total
lease payments
$
i840,297
Less imputed interest
(i139,125)
Present
value of lease payments
$
i701,172
/
The Company has undiscounted future operating lease payments of $i44.3
million related to leases that have not commenced that were entered into as of June 30, 2023. Such lease payments are not yet included in the table above or the Company’s condensed consolidated statements of financial condition as lease assets and lease liabilities. These operating leases are anticipated to commence in 2024 with lease terms of approximately i12 years.
Supplemental information related to leases is as follows:
The Company’s income tax provision totaled $i51.9 million and $i7.6 million
for the three months ended June 30, 2023 and 2022, respectively, and $i113.4 million and $i141.8 million for the six months ended June
30, 2023 and 2022, respectively. The Company’s effective tax rate was approximately i16.4% and i4.0% for the three months
ended June 30, 2023 and 2022, respectively, and i15.5% and i8.8% for the six months ended June 30, 2023 and 2022,
respectively.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains a number of tax-related provisions, including a 15% minimum corporate income tax on certain large corporations, as well as an excise tax on stock repurchases. It is unclear how the IRA will be implemented by the U.S. Department of the Treasury through regulation. The Company is evaluating the tentative impact of the IRA on its tax liability, which tax liability could also be affected by how the provisions of the IRA are implemented through such regulation. The Company will continue to evaluate the IRA’s impact as further information becomes available.
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 resolution of any related appeals or litigation processes, based on the technical merits of the position. As of June 30, 2023, the Company recorded $i17.3 million of unrecognized tax benefits for uncertain tax positions. Approximately all of the unrecognized
tax benefits, if recognized, would affect the effective tax rate. The Company does not anticipate a material change to its unrecognized tax benefits over the next twelve months.
The primary jurisdictions in which the Company operates and incurs income taxes are the United States and the United Kingdom. There are no unremitted earnings with respect to the United Kingdom and other foreign entities.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
In the normal course of business, the Company is subject to examination by U.S. federal, state, local and foreign tax authorities. As of June 30, 2023, the Company’s U.S. federal, state, local and foreign income tax returns for the years 2019 through 2021 are open under the general statute of limitations provisions and therefore subject to examination. Currently, the Internal Revenue Service is examining the tax returns of the Company and certain subsidiaries
for tax years 2019 to 2021. The State and City of New York are examining certain subsidiaries’ tax returns for tax years 2011 to 2021. The United Kingdom tax authorities are currently examining certain subsidiaries’ tax returns for tax year 2017. There are other examinations ongoing in other foreign jurisdictions, which the Company operates. No provisions with respect to these examinations have been recorded, other than the unrecognized tax benefits discussed above.
The Company has historically recorded deferred tax assets resulting from the step-up in the tax basis of assets,
including intangibles resulting from exchanges of AOG Units for Class A shares by the Former Managing Partners and Contributing Partners. A related liability has historically been recorded in “Due to Related Parties” in the condensed consolidated statements of financial condition for the expected payments under the tax receivable agreement entered into by and among the Company, the Former Managing Partners, the Contributing Partners, and other parties thereto (as amended, the “tax receivable agreement”) (see note 13). The benefit the Company has historically obtained from the difference in the tax asset recognized and the related liability resulted in an increase to additional paid in capital. The amortization period for the portion of the increase in tax basis related to intangibles
is i15 years. The realization of the remaining portion of the increase in tax basis relates to the disposition of the underlying assets to which the step-up is attributed. The associated deferred tax assets reverse at the time of the corresponding asset disposition.
After the Mergers, the Former Managing Partners and Contributing Partners no longer own AOG Units. Therefore, there were no new exchanges subject to the tax receivable agreement during the three and six months ended June 30, 2023 and 2022.
(1)
Interest rate is calculated as weighted average annualized.
(2) Includes amortization of note discount, as applicable, totaling $i14.6 million and $i15.8 million
as of June 30, 2023 and December 31, 2022, respectively. Outstanding balance is presented net of unamortized debt issuance costs.
(3) Fair value is based on a discounted cash flow method. These notes are classified as a Level III liability within the fair value hierarchy.
(4) Fair value is based on obtained broker quotes. These notes are classified as a Level II liability within the fair value hierarchy based on the number and quality of broker quotes obtained, the standard deviations of the observed broker quotes and the percentage deviation from external pricing services.
/
As
of June 30, 2023, the indentures governing the 2024 Senior Notes, the 2026 Senior Notes, the 2029 Senior Notes, the 2030 Senior Notes, the 2048 Senior Notes and the 2050 Subordinated Notes (the “Indentures”) include covenants that restrict the ability of AMH and, as applicable, the guarantors of the notes under the Indentures to incur indebtedness secured by liens on voting stock or profit participating equity interests of their respective subsidiaries, or merge, consolidate or sell, transfer or lease assets. The Indentures
also provide for customary events of default.
Apollo’s debt obligations contain various customary loan covenants. As of June 30, 2023, the Company was not aware of any instances of non-compliance with the financial covenants contained in the documents governing the Company’s debt obligations.
The commitment fee on the $i1.0
billion undrawn 2022 AMH credit facility as of June 30, 2023 was i0.08%.
/
On October
12, 2022, AMH, as borrower, entered into a $i1.0 billion revolving credit facility with Citibank, N.A., as administrative agent, which matures on October 12, 2027 (“2022 AMH credit facility”). Borrowings under the 2022 AMH credit facility may be used for working capital and general corporate purposes, including, without limitation, permitted acquisitions. As of June 30, 2023, AMH, the borrower under the facility, could incur incremental facilities in an aggregate
amount not to exceed $i250 million plus additional amounts so long as AMH was in compliance with a net leverage ratio not to exceed i4.00 to 1.00.
As of June 30,
2023, there were ino amounts outstanding under the 2022 AMH credit facility and the Company was in compliance with all financial covenants under the facility.
i
The
following table presents the interest expense incurred related to the Company’s debt:
(1)
Debt issuance costs incurred are amortized into interest expense over the term of the debt arrangement, as applicable.
/
11. iEQUITY-BASED COMPENSATION
Under
AGM’s Equity Plan, AGM is permitted to grant equity awards representing ownership interests in AGM common stock to employees of AAM. Equity-based awards granted to employees and non-employees as compensation are measured based on the grant date fair value of the award, which considers the public share price of AGM’s common stock subject to certain discounts, as applicable.
AGM grants both service and performance-based awards. The estimated total grant date fair value for service-based awards is charged to compensation expense on a straight-line basis over the vesting period, which is generally one to isix
years from the date of grant. Certain service-based awards are tied to profit sharing arrangements in which a portion of the performance fees distributed to the general partner are required to be used by employees to purchase restricted shares of common stock or is delivered in the form of RSUs, which are granted under AGM’s Equity Plan. Performance-based awards vest subject to continued employment and AGM’s achievement of specified performance goals. In accordance with U.S. GAAP, equity-based compensation expense for performance grants are typically recognized on an accelerated recognition method over the requisite service period to the extent the performance revenue metrics are met or deemed probable. Equity-based awards that do not require future service (i.e., vested awards) are expensed immediately.
For the three months endedJune
30, 2023 and 2022, AAM recorded equity-based compensation expense of $i126.4 million and $i112.5
million, respectively. For the six months endedJune 30, 2023 and 2022, AAM recorded equity-based compensation expense of $i250.4 million and $i268.8
million, respectively. As of June 30, 2023, there was $i819.1 million of estimated unrecognized compensation expense related to unvested RSU awards. This cost is expected to be recognized over a weighted-average period of i2.7
years.
Service-Based Awards
During the six months ended June 30, 2023 and 2022, AGM awarded service-based RSUs of i4.1 million and i3.4
million, respectively, with a grant date fair value of $i280.4 million and $i208.7
million, respectively.
During the three months ended June 30, 2023 and 2022, the Company recorded equity-based compensation expense on service-based RSUs of $i69.4 million and $i47.3
million, respectively. During the six months ended June 30, 2023 and 2022, the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
Company recorded equity-based compensation expense on service-based RSUs of $i125.0
million and $i106.1 million, respectively.
Performance-Based Awards
During the six months ended June 30, 2023 and 2022, AGM awarded performance-based RSUs of i1.3
million and i2.6 million, respectively, with a grant date fair value of $i80.8
million and $i147.6 million, respectively, which primarily vest subject to continued employment and the Company’s receipt of performance revenues, within prescribed periods, sufficient to cover the associated equity-based compensation.
During the three months ended June
30, 2023 and 2022, the Company recorded equity-based compensation expense on performance-based awards of $i41.3 million and $i50.2
million, respectively. During the six months ended June 30, 2023 and 2022, the Company recorded equity-based compensation expense on performance-based awards of $i96.0 million and $i124.0
million, respectively.
In December 2021, the Company awarded one-time grants to the Company’s Co-Presidents of i6 million RSUs which vest on a cliff basis subject to continued employment over ifive
years, with i2 million of those RSUs also subject to AGM’s achievement of certain fee related earnings and spread related earnings per share metrics.
During the three months ended June 30, 2023 and 2022, the
Company recorded equity-based compensation expense for service-based awards related to these one-time grants of $i13.9 million and $i13.9 million, respectively. During the six months ended June
30, 2023 and 2022, the Company recorded equity-based compensation expense for service-based awards related to these one-time grants of $i27.8 million and $i27.8
million, respectively.
During the three months ended June 30, 2023 and 2022, the Company recorded equity-based compensation expense for performance-based awards related to these one-time grants of $i5.9 million and $i5.9
million, respectively. During the six months ended June 30, 2023 and 2022, the Company recorded equity-based compensation expense for performance-based awards related to these one-time grants of $i11.8 million and $i11.8
million, respectively.
Restricted Stock Awards
During the six months ended June 30, 2023 and 2022, AGM awarded i0.3 million and i0.5
million restricted stock awards, respectively, from profit sharing arrangements with a grant date fair value of $i23.0 million and $i31.5
million, respectively.
During the three months ended June 30, 2023 and 2022, the Company recorded equity-based compensation expense related to restricted stock awards from profit sharing arrangements of $i11.5 million and $i13.7
million, respectively. During the six months ended June 30, 2023 and 2022, the Company recorded equity-based compensation expense related to restricted stock awards from profit sharing arrangements of $i20.6 million and $i32.8
million, respectively.
12. iEQUITY
Preferred Stock
The Company has ii11,000,000/
Series A Preferred shares and ii12,000,000/ Series B Preferred shares issued and outstanding as of June 30,
2023.
Dividends on the Preferred shares are discretionary and non-cumulative. During 2023, quarterly cash dividends were $ii0.398438/
per Series A Preferred share and Series B Preferred share.
Subject to certain exceptions, unless dividends have been declared and paid or declared and set apart for payment on the Preferred shares for a quarterly dividend period, during the remainder of that dividend period Apollo may not declare or pay or set apart payment for dividends on any shares of common stock or any other equity securities that the Company may issue in the future ranking, as to the payment of dividends, junior to the Preferred shares (“Junior Stock”) and Apollo may not repurchase any Junior Stock.
The Series A Preferred shares and the Series B Preferred shares may be redeemed at Apollo’s option, in whole or in part, at any time on or after March 15, 2022 and March
15, 2023, respectively, at a price of $i25.00 per share, plus declared and unpaid dividends to, but excluding, the redemption date, without payment of any undeclared dividends. Holders of the Preferred shares have no right to require the redemption of the Preferred shares and there is no maturity date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
If a certain change of control event or a certain tax redemption event occurs prior to March 15, 2023 for the Series B Preferred shares, the Series B Preferred shares may be redeemed at Apollo’s option, in whole but not in part, upon at least i30 days’ notice, within i60
days of the occurrence of such change of control event or such tax redemption event, as applicable, at a price of $i25.25 per share, plus declared and unpaid dividends to, but excluding, the redemption date, without payment of any undeclared dividends. If a certain rating agency event occurs prior to March 15, 2023, the Series B Preferred shares may be redeemed at Apollo’s option, in whole but not in part, upon at least i30
days’ notice, within i60 days of the occurrence of such rating agency event, at a price of $i25.50 per share, plus declared and unpaid dividends to, but excluding, the redemption date, without payment of any undeclared dividends. If (i) a change of control event
occurs and (ii) Apollo does not give notice prior to the 31st day following the change of control event to redeem all the outstanding Preferred shares, the dividend rate per annum on the Preferred shares will increase by i5.00%, beginning on the 31st day following such change of control event.
The Preferred shares are not convertible into common stock and have no voting rights, except in limited circumstances as provided in the Company’s certificate
of incorporation.
Dividends
On August 3, 2023, the Company declared a cash dividend of $ii0.398438/
per share of Series A Preferred shares and Series B Preferred shares, which will be paid on September 15, 2023 to holders of record at the close of business on September 1, 2023.
Redeemable Non-Controlling Interests
As discussed in note 2, redeemable non-controlling interests primarily represent the shares issued by the Company’s consolidated SPACs. iThe table below
presents the activities associated with the redeemable non-controlling interests.
13.
iRELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED ENTITIES
Management fees, transaction and advisory fees and reimbursable expenses from the funds the Company manages and their portfolio companies are included in due from related parties in the condensed consolidated statements of financial condition. The Company also typically facilitates the payment of certain operating costs incurred
by the funds that it manages as well as their related parties. These costs are normally reimbursed by such funds and are included in due from related parties. Other related party transactions include loans to employees, periodic sales of ownership interests in Apollo funds to employees, and receivables from and payables to AGM.
Due to Former Managing Partners and Contributing Partners(2)
$
i736,190
$
i874,406
Due
to parent
i122,852
i579,354
Due to funds
i155,530
i123,734
Total
Due to Related Parties
$
i1,014,572
$
i1,577,494
(1)
Includes $i34.3 million and $i43.4 million as of June 30, 2023 and December 31, 2022, respectively, related to a receivable from a fund in connection with
the Company’s sale of a platform investment to such fund. The amount is payable to the Company over ifive years and is held at fair value.
(2) Includes $i262.9 million
and $i350.5 million as of June 30, 2023 and December 31, 2022, respectively, related to the purchase of limited partnership interests, payable in equal quarterly installments through December 31, 2024.
/
Tax Receivable Agreement
Prior
to the consummation of the Mergers, each of the Former Managing Partners and Contributing Partners had the right to exchange vested AOG Units for Class A shares, subject to certain restrictions. All Apollo Operating Group entities have made, or will make, an election under Section 754 of the U.S. Internal Revenue Code (“IRC”), which will result in an adjustment to the tax basis of the assets owned by the Apollo Operating Group entities at the time an exchange was made. The election results in an increase to the tax basis of underlying assets which will reduce the amount of gain and associated tax that the Company and its subsidiaries will otherwise be required to pay in the future.
The tax receivable agreement (“TRA”) provides for payment
to the Former Managing Partners and Contributing Partners of i85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income taxes that Apollo realizes as a result of the increases in tax basis of assets that resulted from transactions and other exchanges of AOG Units for Class A shares that occurred in prior years. AGM and its subsidiaries retain the benefit from the remaining i15%
of actual cash tax savings. 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.
Following the closing of the Mergers, as the Former Managing Partners and Contributing Partners no longer own AOG Units, there are no new exchanges subject to the TRA.
AOG Unit Payment
On December 31, 2021, holders of AOG Units (other than Athene and the Company) sold and transferred a portion of such AOG Units to APO Corp., a wholly-owned consolidated subsidiary of the
Company, in exchange for an amount equal to $i3.66 multiplied by the total number of AOG Units held by such holders immediately prior to such transaction (such payment, the “AOG Unit Payment”). The remainder of the AOG Units held by such holders were exchanged for shares of AGM common stock concurrently with the consummation of the Mergers on January 1, 2022.
As of June 30, 2023, the outstanding payable amount to Former Managing
Partners and Contributing Partners was $i262.9 million, which is payable in equal quarterly installments through December 31, 2024.
Due from Employees and Former Employees
As of June 30, 2023 and December 31, 2022, due from employees and former employees includes various amounts due to the Company, including employee
loans and return of profit sharing distributions. As of June 30, 2023 and December 31, 2022, the balance included interest-bearing employee loans receivable of $i10.8 million and $i8.8
million, respectively. The outstanding
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
principal amount of the loans as well as all accrued and unpaid interest is required to be repaid at the earlier of the eighth anniversary of the date of the relevant loan or at the date of the relevant employee’s resignation from the
Company.
The Company recorded a receivable from certain employees and former employees for the potential return of profit sharing distributions that would be due if certain funds were liquidated as of June 30, 2023 and December 31, 2022 of $i82.5 million and $i72.1
million, respectively.
Indemnity
Performance revenues from certain funds can be distributed to the Company on a current basis, but are subject to repayment by the subsidiaries of the Apollo Operating Group that act as general partners of the funds in the event that certain specified return thresholds are not ultimately achieved. The Former 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 Former Managing Partners’ or Contributing Partner’s distributions. The Company has agreed to indemnify each of the Company’s Former 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 Former Managing Partners and Contributing Partners contributed or sold to the Apollo Operating Group.
The
Company recorded an indemnification liability in respect of this indemnification obligation of $i13.2 million and $i13.2 million as of June 30, 2023 and December 31, 2022, respectively.
Due
to Funds
Based upon an assumed liquidation of certain of the funds the Company manages, the Company has recorded a general partner obligation to return previously distributed performance allocations, which represents amounts due to these funds. The general partner obligation is recognized based upon an assumed liquidation of a fund’s net assets as of the reporting date. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of a fund’s investments based on the contractual termination of the fund or as otherwise set forth in the respective governing document of the fund.
The
Company recorded general partner obligations to return previously distributed performance allocations related to certain funds of $i133.6 million and $i106.5 million as of June 30, 2023 and December 31,
2022, respectively.
Athene Fee Arrangement
The Company provides asset management and advisory services to Athene, including asset allocation services, direct asset management services, asset and liability matching management, mergers and acquisitions, asset diligence hedging and other asset management services. On March 31, 2022, Athene and Apollo agreed to revise the existing fee arrangements (the “amended fee agreement”) between Athene and Apollo. The Company began recording fees pursuant to the amended fee agreement on January 1, 2022. The amended fee agreement provides for sub-allocation fees which
vary based on portfolio allocation differentiation, as described below.
i
The amended fee agreement provides for a monthly fee to be payable by Athene to the Company in arrears, with retroactive effect to the month beginning on January 1, 2022, in an amount equal to the following, to the extent not otherwise payable to the Company pursuant to any one or more investment
management or sub-advisory agreements or arrangements:
(i) The Company, through its consolidated subsidiary Apollo Insurance Solutions Group LP, or ISG, earns a base management fee of i0.225% per year on the aggregate book value of substantially all of the assets in substantially all of the accounts of or relating to Athene (collectively, the “Athene Accounts”) up to $i103.4
billion (the “Backbook Value”) and i0.150% per year on all assets in excess of $i103.4 billion (the “Incremental Value”), respectively; plus
(ii) with respect to each asset in an Athene Account, subject to certain exceptions, that is managed by the
Company and that belongs to a specified asset class tier (“core,”“core plus,”“yield,” and “high alpha”), a sub-allocation fee as follows:
(1) Core assets include public investment grade corporate bonds, municipal securities, agency residential or commercial mortgage backed securities and obligations of any governmental agency or government sponsored entity that is not expressly backed by the U.S. government.
(2)
Core plus assets include private investment grade corporate bonds, fixed rate first lien commercial mortgage loans and obligations issued or assumed by a financial institution (such an institution, a “financial issuer”) and determined by Apollo to be “Tier 2 Capital” under the Basel III recommendations developed by the Basel Committee on Banking Supervision (or any successor to such recommendations).
(3) Yield assets include non-agency residential mortgage-backed securities, investment grade collateralized loan obligations, certain asset-backed securities, commercial mortgage-backed securities, emerging market investments, below investment grade corporate bonds, subordinated debt obligations, hybrid securities or surplus notes issued or assumed by a financial issuer, as rated preferred equity, residential mortgage loans, bank loans, investment grade
infrastructure debt and certain floating rate commercial mortgage loans.
(4) High alpha assets include subordinated commercial mortgage loans, below investment grade collateralized loan obligations, unrated preferred equity, debt obligations originated by MidCap Financial, below investment grade infrastructure debt, certain loans originated directly by Apollo and agency mortgage derivatives.
(5) Other Assets include cash, treasuries, equities and alternatives. With respect to equities and alternatives, Apollo earns performance revenues of i0%
to i20%.
Merger Agreement
On January 1, 2022, Apollo and Athene completed the previously announced Mergers. Following the closing of the Mergers, all of the common stock of AAM and AHL is owned by AGM and both AAM and AHL became consolidated subsidiaries of AGM. Subsequent to the closing of the Mergers and during the three months ended March 31,
2022, the Company distributed its interest in AHL’s Class A common shares to AGM.
Athora
The Company, through ISGI, provides investment advisory services to certain portfolio companies of funds managed by Apollo and Athora, a strategic platform that acquires or reinsures blocks of insurance business in the European life insurance market (collectively, the “Athora Accounts”). The Company had equity commitments outstanding of up to $i349.1
million as of June 30, 2023, subject to certain conditions.
Athora Sub-Advised
The Company, through ISGI, provides sub-advisory services with respect to a portion of the assets in certain portfolio companies of Apollo funds and the Athora Accounts. The Company broadly refers to “Athora Sub-Advised” assets as those assets in the Athora Accounts which the Company explicitly sub-advises as well as those assets in the Athora Accounts which are invested directly in funds and investment vehicles Apollo manages.
The
Company earns a base management fee on the aggregate market value of substantially all of the investment accounts of or relating to Athora and also a sub-advisory fee on the Athora Sub-Advised assets, which varies depending on the specific asset class.
On December 15, 2021, the Company executed an amended and restated fee agreement with Athora. The new fee agreement revised the base fee paid to the Company for managing certain assets on behalf of Athora and removed Athora’s previous reimbursement of certain costs incurred by Apollo. These changes had retroactive effect to January 1, 2021.
Revenues earned in aggregate from Athene and Athora, net(1)
$
i314,788
$
i291,812
$
i684,200
$
i617,373
(1)
Consisting of management fees, sub-advisory fees, and performance revenues from Athene and Athora, as applicable.
Regulated Entities and Affiliated Service Providers
Apollo Global Securities, LLC (“AGS”)is a registered broker-dealer with the SEC and is a member of the Financial Industry Regulatory Authority, subject to the minimum net capital requirements of the SEC. AGS was in compliance with these requirements at June 30, 2023. From time to time, AGS, as well as other Apollo affiliates provide services to related parties of Apollo, including Apollo funds and their portfolio companies, whereby the Company or its affiliates earn fees for providing such services.
Griffin
Capital Securities, LLC (“GCS”) is a registered broker-dealer with the SEC and is a member of the Financial Industry Regulatory Authority, subject to the minimum net capital requirements of the SEC. GCS was in compliance with these requirements as of June 30, 2023.
Due to/from parent
The Company has receivables from its parent company, AGM, related to funding operations and expense allocations. The balance outstanding was $i210.6 million
and $i150.6 million as of June 30, 2023 and December 31, 2022, respectively.
Following the merger with Athene, the Company has a revolving loan agreement with AGM to manage cash balances and to fund liquidity for general corporate use. The balance outstanding on this loan to AGM was $i122.9 million
and $i579.4 million as of June 30, 2023 and December 31, 2022, respectively, including accrued interest payable to AGM.
MidCap Financial
During the three months ended June 30, 2023, the Company modified a performance allocation arrangement with MidCap Financial which included a reversal of unrealized performance allocations
of $i124.0 million. This resulted in a modification to the calculation of performance allocations beginning in June 2023 to be based solely on net income.
Investment in SPACs
In October 2020, APSG I, a SPAC, completed an IPO, ultimately raising total gross proceeds of $i816.8 million.
APSG Sponsor, L.P., a subsidiary of Apollo, held Class B ordinary shares of APSG I, and consolidated it as a VIE. In May 2022, APSG I completed a business combination with American Express Global Business Travel. As a result of the business combination, Apollo no longer consolidates APSG I as a VIE. The deconsolidation resulted in an unrealized gain of $i162.0 million, which includes $i81.5 million
of unrealized gains related to previously held Class B ordinary shares, which converted to Class A ordinary shares of the newly merged entity, for the three months ended June 30, 2022 and is presented in Net gains from investment activities within Other income in the condensed consolidated statements of operations. Apollo continues to hold a non-controlling interest in the merged entity at fair value, elected under the fair value option, which is primarily presented within Investments in the condensed consolidated statements of financial condition.
On February 12, 2021, APSG II, a SPAC sponsored by Apollo, completed an IPO, raising total gross proceeds of $i690.0 million.
APSG Sponsor II, L.P., a subsidiary of Apollo, holds Class B ordinary shares of APSG II, and consolidates APSG II as a VIE. In May 2023, APSG II amended its articles of association and now has until February 12, 2024 to complete an initial business combination. Also in May 2023, shareholders holding an aggregate of i51,089,882 of APSG II’s Class A ordinary shares exercised their right to redeem their shares. Following such redemptions,
i17,910,118 Class A ordinary shares remain outstanding and approximately $i186.3 million remained in APSG II’s trust account as of June 30, 2023.
On July 13,
2021, Acropolis, a SPAC sponsored by Apollo, completed an IPO, ultimately raising total gross proceeds of $i345.0 million. Acropolis Infrastructure Acquisition Sponsor, L.P., a subsidiary of Apollo, holds Class B common stock of Acropolis, and consolidates Acropolis as a VIE. In June 2023, Acropolis amended its certificate of incorporation and now has
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
until July 13, 2024 to complete an initial business combination. Also in June 2023, shareholders holding an aggregate of i26,499,201 shares of Acropolis’ Class
A common stock exercised their right to redeem their shares. Following such redemptions, i8,000,799 shares of Class A common stock remain outstanding and approximately $i82.6 million remained in Acropolis’s trust account as of June 30, 2023.
As
described in note 2, the Company consolidates entities that are VIEs for which the Company has been designated as the primary beneficiary. Through its interests in the respective sponsors, the Company has the power to direct the activities that most significantly impact the economic performance of these SPACs. In addition, the Company’s combined interests in these VIEs are significant. Assets and liabilities of the consolidated SPACs are shown within the respective line items of the condensed consolidated financial statements. See note 12 for further disclosure regarding redeemable non-controlling interests associated with the
SPACs.
14. iCOMMITMENTS AND CONTINGENCIES
Investment Commitments
As a limited partner, general partner and manager of the Apollo funds, Apollo had unfunded capital commitments as of June 30, 2023 of $i695.8
million.
Litigation and Regulatory Matters
Apollo is, from time to time, party to various legal actions arising in the ordinary course of business, including claims and lawsuits, reviews, investigations or proceedings by governmental and self-regulatory agencies regarding its business.
On August 3, 2017, a complaint was filed in the United States District Court for the Middle District of Florida against AAM, a senior partner of Apollo and a former principal of Apollo by Michael McEvoy on behalf of a purported class of employees of subsidiaries of CEVA Group, LLC (“CEVA Group”) who purchased shares in CEVA Investment Limited (“CIL”), the former parent company of CEVA Group. The complaint
alleged that the defendants breached fiduciary duties to and defrauded the plaintiffs by inducing them to purchase shares in CIL and subsequently participating in a debt restructuring of CEVA Group in which shareholders of CIL did not receive a recovery. The complaint was determined by a bankruptcy court to be void ab initio because it asserted claims that were property of CIL’s bankruptcy estate. On December 7, 2018, McEvoy revised his complaint to attempt to assert claims that do not belong to CIL. The amended complaint no longer named any individual defendants, but Apollo Management VI, L.P. and CEVA Group were added as defendants. The amended complaint sought damages of approximately €i30 million
and asserted, among other things, claims for violations of the Investment Advisers Act, breach of fiduciary duties, and breach of contract. On January 6, 2020, the Florida court granted in part Apollo’s motion to dismiss, dismissing McEvoy’s Investment Advisers Act claim with prejudice, and denying without prejudice Apollo’s motion with respect to the remaining claims, and directing the parties to conduct limited discovery, and submit new briefing, solely with respect to the statute of limitations. After extensive motion practice, the District Court granted defendants’ motion for summary judgment on statute of limitations grounds on March 10, 2022 and entered judgment in defendants’ favor. Plaintiff appealed the District Court’s decision to the United States Court of Appeals for
the Eleventh Circuit. On March 30, 2023, the Eleventh Circuit affirmed the District Court’s decision, and subsequently denied Plaintiff’s motion for rehearing on May 1, 2023. This matter is now concluded.
On December 21, 2017, several entities referred to collectively as “Harbinger” commenced an action in New York Supreme Court captioned Harbinger Capital Partners II LP et al. v. Apollo Global Management LLC, et al. (No. 657515/2017). The complaint named as defendants AAM, and funds managed by Apollo that invested in SkyTerra Communications, Inc. (“SkyTerra”), among others. The complaint alleged that during the period of Harbinger’s various equity and debt investments in SkyTerra from 2004 to 2010, the defendants concealed
from Harbinger material defects in SkyTerra technology. The complaint further alleged that Harbinger would not have made investments in SkyTerra totaling approximately $i1.9 billion had it known of the defects, and that the public disclosure of these defects ultimately led to SkyTerra filing for bankruptcy in 2012 (after it had been renamed LightSquared). The complaint sought $i1.9 billion
in damages, as well as punitive damages, interest, costs, and fees. On June 12, 2019, Harbinger voluntarily discontinued the state action without prejudice. On June 8, 2020, Harbinger refiled its litigation in New York Supreme Court, captioned Harbinger Capital Partners II, LP et al. v. Apollo Global Management, LLC et al. (No. 652342/2020). The complaint adds ieight new defendants and ithree
new claims relating to Harbinger’s contention that the new defendants induced Harbinger to buy CCTV One Four Holdings, LLC (“CCTV”) to support SkyTerra’s network even though they allegedly knew that the network had material defects. On November 23, 2020, Defendants refiled a bankruptcy motion, and on November 24, 2020, filed in the state court a motion to stay the state court
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share data, except where noted)
proceedings pending a ruling by the bankruptcy court on the bankruptcy motion. On February 1, 2021, the bankruptcy court denied the bankruptcy motion. Defendants filed their motions to dismiss the New York Supreme Court action on March 31, 2021, which were granted in part and denied in part on May 23, 2023. The court granted in full the Defendants’ motion to dismiss Harbinger’s complaint as time-barred and denied as moot the Defendants’ motion to dismiss the complaint for failure to state a claim. Plaintiffs have appealed the court’s decision. Apollo believes the claims in this action are without merit. Because this action is in the early stages, no reasonable estimate of possible loss, if any, can be made at this time.
In
March 2020, Frank Funds, which claims to be a former shareholder of MPM Holdings, Inc. (“MPM”), commenced an action in the Delaware Court of Chancery, captioned Frank Funds v. Apollo Global Management, Inc., et al., C.A. No. 2020-0130, against AAM, certain former MPM directors (including ithree Apollo officers and employees), and members of the consortium that acquired MPM in a May 2019 merger. The complaint asserted, on behalf of a putative class of former MPM shareholders, a claim against Apollo for breach of its
fiduciary duties as MPM’s alleged controlling shareholder in connection with the May 2019 merger. Frank Funds seeks unspecified compensatory damages. On July 23, 2019, a group of former MPM shareholders filed an appraisal petition in Delaware Chancery Court seeking the fair value of their MPM shares that were purchased through MPM’s May 15, 2019 merger, in an action captioned In re Appraisal of MPM Holdings, Inc., C.A. No. 2019-0519 (Del. Ch.). On June 3, 2020, petitioners moved for leave to file a verified amended appraisal petition and class-action complaint that included claims for breach of fiduciary duty and/or aiding and abetting breaches of fiduciary duty against AAM, the Apollo-affiliated fund that owned MPM’s shares before the merger, certain former MPM directors
(including three Apollo employees), and members of the consortium that acquired MPM, based on alleged actions related to the May 2019 merger. The petitioners also sought to consolidate their appraisal proceeding with the Frank Funds action. On November 13, 2020, the Chancery Court granted the parties’ stipulated order to consolidate the two matters, and on December 21, 2020, the Chancery Court granted petitioners’ motion for leave to file the proposed amended complaint. This new consolidated action is captioned In Re MPM Holdings Inc. Appraisal and Stockholder Litigation, C.A. No. 2019-0519 (Del Ch.). On January 13, 2022, the Chancery Court denied Apollo’s motion to dismiss. Apollo believes the claims in this action are without merit. Because this action is in the early stages,
no reasonable estimate of possible loss, if any, can be made at this time.
On August 4, 2020, a putative class action complaint was filed in the United States District Court for the District of Nevada against PlayAGS Inc. (“PlayAGS”), all of the members of PlayAGS’s board of directors (including three directors who are affiliated with Apollo), certain underwriters of PlayAGS (including Apollo Global Securities, LLC), as well as AAM, Apollo Investment Fund VIII, L.P., Apollo Gaming Holdings, L.P., and Apollo Gaming Voteco, LLC (these last four parties, together, the “Apollo Defendants”). The complaint asserted claims against all defendants arising under the Securities Act of 1933 in connection with certain secondary offerings of PlayAGS stock conducted in August 2018 and March 2019, alleging that the registration statements issued in connection with those offerings
did not fully disclose certain business challenges facing PlayAGS. The complaint further asserted a control person claim under Section 20(a) of the Exchange Act against the Apollo Defendants and the director defendants (including the directors affiliated with Apollo), alleging such defendants were responsible for certain misstatements and omissions by PlayAGS about its business. On December 2, 2022, the Court dismissed all claims against the underwriters (including Apollo Global Securities, LLC) and the Apollo Defendants, but allowed a claim against PlayAGS and two of PlayAGS’s executives to proceed. No reasonable estimate of possible loss, if any, can be made at this time.
Certain of Apollo’s investment adviser subsidiaries have received a request for information and documents from
the SEC in connection with an investigation concerning compliance with record retention requirements relating to business communications sent or received via electronic messaging channels. As has been publicly reported, the SEC is conducting similar investigations of other investment advisers.
Commitments and Contingencies
Other long-term obligations relate to payments with respect to certain consulting agreements entered into by Apollo Investment Consulting LLC, a subsidiary of Apollo, as well as long-term service contracts. A significant portion of these costs are reimbursable by funds or portfolio companies. iAs
of June 30, 2023, fixed and determinable payments due in connection with these obligations were as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
Contingent Obligations
Performance allocations with respect to certain funds are subject to reversal in the event of future losses to the extent of the cumulative revenues recognized in income to date. If all of the existing investments became worthless, the amount of cumulative revenues that have been recognized by Apollo through June 30, 2023 and that would be reversed approximates $i4.9
billion. Management views the possibility of all of the investments becoming worthless as remote. Performance allocations are affected by changes in the fair values of the underlying investments in the funds that Apollo manages. Valuations, on an unrealized basis, can be significantly affected by a variety of external factors, including, but not limited to, bond yields and industry trading multiples. Movements in these items can affect valuations quarter to quarter even if the underlying business fundamentals remain stable.
Additionally, at the end of the life of certain funds that the Company manages, there could be a payment due to a fund by the Company if the Company,
as general partner, has received more performance allocations than was ultimately earned. The general partner obligation amount, if any, will depend on final realized values of investments at the end of the life of each fund or as otherwise set forth in the respective limited partnership agreement of the fund. See note 13 to our condensed consolidated financial statements for further details regarding the general partner obligation.
Certain funds may not generate performance allocations as a result of unrealized and realized losses that are recognized in the current and prior reporting period. In certain cases, performance allocations will not be generated until additional unrealized and realized gains occur. Any appreciation would first cover the deductions for invested capital, unreturned organizational expenses, operating expenses, management fees and priority returns based on the terms of the respective fund agreements.
iOne
of the Company’s subsidiaries, AGS, provides underwriting commitments in connection with securities offerings of related parties of Apollo, including portfolio companies of the funds Apollo manages, as well as third parties. As of June 30, 2023 and December 31, 2022, there were iino/
open underwriting commitments.
As of June 30, 2023, one of the Company’s subsidiaries had unfunded contingent commitments of $i46.0 million, to facilitate fundings at closing by the lead arrangers for a syndicated term loan issued by a portfolio company of a fund managed by Apollo. The commitments expire on August
10, 2023. As of August 3, 2023, the unfunded commitments were approximately $i0.2 million.
The Company and Athene, together with a third-party institutional investor, have committed to provide financing to a consolidated VIE that invests across Apollo’s capital markets platform (such VIE, the “Apollo Capital Markets Partnership”). Pursuant to these arrangements, the
Company and Athene have committed equity financing to the Apollo Capital Markets Partnership. The Apollo Capital Markets Partnership also has a revolving credit facility with Sumitomo Mitsui Banking Corporation, as lead arranger, administrative agent and letter of credit issuer, Mizuho Bank Ltd., and other lenders party thereto, pursuant to which it may borrow up to $i2.25 billion. The revolving credit facility, which has a final maturity date of April 1, 2025, is non-recourse to the
Company and Athene, except that the Company and Athene provided customary comfort letters with respect to their capital contributions to the Apollo Capital Markets Partnership. As of June 30, 2023, the Apollo Capital Markets Partnership had funded commitments of $i1.39 billion, on a net basis, to transactions across Apollo’s capital markets platform, all of which were funded through the revolving credit facility and other asset-based financing. No capital had been funded by the
Company or Athene to the Apollo Capital Markets Partnership pursuant to their commitments.
Whether the commitments of the Apollo Capital Markets Partnership are actually funded, in whole or in part, depends on the contractual terms of such commitments, including the satisfaction or waiver of any conditions to closing or funding. It is expected that between the time the Apollo Capital Markets Partnership makes a commitment and funding of such commitment, efforts will be made to syndicate such commitment to, among others, third parties, which should reduce its risk when committing to certain transactions. The Apollo Capital Markets Partnership may also, with respect to a particular transaction, enter into other arrangements with third parties which reduce its commitment risk.
Contingent Consideration
In connection with the acquisition
of Stone Tower in April 2012, the Company agreed to pay the former owners of Stone Tower a specified percentage of any future performance revenues earned from certain of the Stone Tower funds, CLOs, and strategic investment accounts. This contingent consideration liability was determined based on the present value of estimated future performance revenue payments, and is recorded in profit sharing payable in the condensed consolidated statements of financial
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
condition. The fair value of the remaining contingent obligation was $i52.0 million and $i55.0
million as of June 30, 2023 and December 31, 2022, respectively.
The contingent consideration obligations will be remeasured to fair value at each reporting period until the obligations are satisfied and are characterized as Level III liabilities. The changes in the fair value of the contingent consideration obligations is reflected in profit sharing expense in the condensed consolidated statements of operations. See note 6 for further information regarding fair value measurements.
Atlas
In connection with AGM and CS’s previously announced transaction, whereby Atlas acquired certain assets of the CS Securitized Products Group, each of AARe, a wholly-owned subsidiary of Athene, and AAM has issued an assurance letter to CS to guarantee the
full ifive year deferred purchase obligation of Atlas in the amount of $i3.3 billion. AAA and Athene have provided guarantees to support AARe, and the Company has provided a guarantee for up to $i3.3 billion
to support AAA. The fair value of the liability related to AAM’s guarantee is not material to the Company’s condensed consolidated financial statements.
15. iSEGMENT REPORTING
Apollo conducts its business primarily in the United States through itwo
reportable segments: (i) asset management and (ii) principal investing. Segment information is utilized by our chief operating decision makers to assess performance and to allocate resources.
The performance is measured by the Company’s chief operating decision makers on an unconsolidated basis because the chief operating decision makers make operating decisions and assesses the performance of each of Apollo’s business segments based on financial and operating metrics and data that exclude the effects of consolidation of any of the affiliated funds.
Segment Income
Segment Income is the key performance measure used by management in evaluating the performance of the asset management and principal investing segments. Management uses Segment Income to
make key operating decisions such as the following:
•decisions relatedto the allocation of resources such as staffing decisions, including hiring and locations for deployment of the new hires;
•decisionsrelated to capital deployment such as providing capital to facilitate growth for the business and/or to facilitate expansion into new businesses;
•decisions related to expenses, such as determining annual discretionary bonuses and compensation to employees. With respect to compensation, management seeks to align the interests of certain professionals and selected other individuals with those of the investors in the funds and those of Apollo’s stockholders by providing
such individuals a profit sharing interest in the performance fees earned in relation to the funds. To achieve that objective, a certain amount of compensation is based on Apollo’s performance and growth for the year.
Segment Income is a measure of profitability and has certain limitations in that it does not take into account certain items included under U.S. GAAP. Segment Income represents the amount of Apollo’s net realized earnings, excluding the effects of the consolidation of any of the related funds and SPACs, interest and preferred dividends paid to Preferred shareholders, taxes and related payables, transaction-related charges and any acquisitions. Transaction-related charges includes equity-based compensation charges, the amortization of intangible assets, contingent consideration, and certain other charges associated with acquisitions, and restructuring charges. In addition, Segment Income excludes non-cash revenue
and expense related to equity awards granted by unconsolidated related parties to employees of the Company, compensation and administrative related expense reimbursements, as well as the assets, liabilities and operating results of the funds and variable interest entities that are included in the condensed consolidated financial statements. Segment Income also excludes impacts of the remeasurement of the tax receivable agreement liability recorded in other income, which arises from changes in the associated deferred tax balance.
Segment Income may not be comparable to similarly titled measures used by other companies and is not a measure of performance calculated in accordance with U.S. GAAP. We use Segment Income as a measure of operating performance, not as
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
a measure of liquidity. Segment Income should not be considered in isolation or as a substitute for net income or other income data prepared in accordance with U.S. GAAP. The use of Segment Income without consideration of related U.S. GAAP measures is not adequate due to the adjustments described above. Management compensates for these limitations by using Segment Income as a supplemental measure to U.S. GAAP results, to provide a more complete understanding of our performance as management measures it. A reconciliation of Segment Income to its most directly comparable U.S. GAAP measure of income (loss) before income
tax provision can be found in this footnote.
Fee Related Earnings
Fee Related Earnings (“FRE”) is a component of Segment Income that is used to assess the performance of the asset management segment. FRE is the sum of (i) management fees, (ii) capital solutions and other related fees, (iii) fee-related performance fees from indefinite term vehicles, that are measured and received on a recurring basis and not dependent on realization events of the underlying investments and (iv) other income, net, less (a) fee-related compensation, excluding equity-based compensation, (b) non-compensation expenses incurred in the normal course of business, (c) placement fees and (d) non-controlling interests in the management companies of certain funds the Company manages.
Principal
Investing Income
Principal Investing Income (“PII”)is a component of Segment Income that is used to assess the performance of the principal investing segment. For the principal investing segment, PII is the sum of (i) realized performance fees, including certain realizations received in the form of equity, (ii) realized investment income, less (x) realized principal investing compensation expense, excluding expense related to equity-based compensation, and (y) certain corporate compensation and non-compensation expenses.
i
The
following tables present financial data for the Company’s reportable segments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share data, except where noted)
i
The
following table presents the reconciliation of income before income tax provision reported in the condensed consolidated statements of operations to Segment Income:
Merger-related
transaction and integration costs(3)
i4,952
i18,741
i11,561
i36,487
(Gains)
losses from changes in tax receivable agreement liability
i—
i—
i—
i14,184
Net
income attributable to non-controlling interests in consolidated entities
(i48,480)
(i49,080)
(i82,897)
(i259,189)
Unrealized
performance fees
i86,551
i487,524
(i152,574)
i42,881
Unrealized
profit sharing expense
i1,104
(i188,553)
i136,105
i2,700
Net
interest expense
i14,898
i26,471
i30,316
i56,771
Unrealized
principal investment income (loss)
(i29,722)
(i71,832)
(i39,359)
i10,296
Unrealized
net (gains) losses from investment activities and other
i961
(i147,605)
i12,398
(i684,313)
Segment
Income
$
i465,407
$
i367,858
$
i887,060
$
i1,082,487
(1)
Equity-based profit sharing expense and other includes certain profit sharing arrangements in which a portion of performance fees distributed to the general partner are required to be used by employees of Apollo to purchase restricted shares of common stock or is delivered in the form of RSUs, which are granted under AGM’s Equity Plan. Equity-based profit sharing expense and other also includes performance grants which are tied to the Company’s receipt of performance fees, within prescribed periods, sufficient to cover the associated equity-based compensation expense.
(2) Transaction-related charges include contingent consideration, equity-based compensation charges and the amortization of intangible
assets and certain other charges associated with acquisitions, and restructuring charges.
(3) Merger-related transaction and integration costs includes advisory services, technology integration, equity-based compensation charges and other costs associated with the Mergers.
/i
The
following table presents the reconciliation of the Company’s total reportable segment assets to total assets:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
Apollo Asset Management, Inc.’s condensed consolidated financial statements and the related notes within this quarterly report. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in the section entitled “Risk Factors” in the 2022 Annual Report. The highlights listed below have had significant effects on many items within our condensed consolidated financial statements and affect the comparison of the current period’s activity with those of prior periods. Target returns included in this report are presented gross and do not account for fees, expenses and taxes, which will reduce returns. Target returns are neither guarantees nor predictions or projections of future performance. There can be no assurance that target returns
will be achieved or that Apollo will be successful in implementing the applicable strategy. Actual gross and net returns for funds managed by Apollo, and individual investors participating directly or indirectly in funds managed by Apollo, may vary significantly from the target returns set forth herein.
General
Our Businesses
Founded in 1990, Apollo is a high-growth, global alternative asset manager. Apollo conducts its business primarily in the United States through the following two reportable segments: asset management and principal investing. These business segments are differentiated based on the investment services they provide as well as varying investing strategies. Apollo had a team of 2,654 employees, including
733 investment professionals, as of June 30, 2023.
Asset Management
Our asset management segment focuses on three investing strategies: yield, hybrid and equity. We have a flexible mandate in many of the funds we manage which enables the funds to invest opportunistically across a company’s capital structure. We raise, invest and manage funds, accounts and other vehicles on behalf of some of the world’s most prominent pension, endowment and sovereign wealth funds and insurance companies, as well as other institutional and individual investors. As of June 30, 2023, we had total AUM of $617 billion.
The yield, hybrid and equity investing strategies of our asset management segment reflect the range of investment capabilities across our platform
based on relative risk and return. As an asset manager, we earn fees for providing investment management services and expertise to our client base. The amount of fees charged for managing these assets depends on the underlying investment strategy, liquidity profile, and, ultimately, our ability to generate returns for our clients. We also earn capital solutions fees as part of our growing capital solutions business and as part of monitoring and deployment activity alongside our sizeable private equity franchise. After expenses, we call the resulting earnings stream “Fee Related Earnings” or “FRE”, which represents the primary performance measure for the asset management segment.
Yield
Yield is our largest asset management strategy with $450 billion of AUM as of June 30, 2023. Our yield strategy focuses on generating
excess returns through high-quality credit underwriting and origination. Beyond participation in the traditional issuance and secondary credit markets, through our origination platforms and corporate solutions capabilities we seek to originate attractive and safe-yielding assets for the investors in the funds we manage. Within our yield strategy, we target 4% to 10% returns for our clients. Since inception, the total return yield fund has generated a 5% gross Return on Equity (“ROE”) and a 4% net ROE annualized through June 30, 2023.
Hybrid
Our hybrid strategy, with $62 billion of AUM as of June 30, 2023, brings together our capabilities across debt and equity to seek to offer a differentiated risk-adjusted return with an emphasis on structured downside protected opportunities
across asset classes. We target 8% to 15% returns within our hybrid strategy by pursuing investments in all market environments, deploying capital during both periods of dislocation and market strength, and focusing on different investing strategies and asset classes. The flagship hybrid credit hedge fund we manage has generated an 11% gross ROE and a 7% net ROE annualized and the hybrid value funds we manage have generated a 20% gross IRR and a 16% net IRR from inception through June 30, 2023.
Our equity strategy manages $105 billion of AUM as of June 30,
2023. Our equity strategy emphasizes flexibility, complexity, and purchase price discipline to drive opportunistic-like returns for our clients throughout market cycles. Apollo’s equity team has experience across sectors, industries, and geographies in both private equity and real estate equity. Our control equity transactions are principally buyouts, corporate carveouts and distressed investments, while the real estate funds we manage generally transact in single asset, portfolio and platform acquisitions. Within our equity strategy, we target upwards of 15% returns in the funds we manage. We have consistently produced attractive long-term investment returns in the traditional private equity funds we manage, generating a 39% gross IRR and a 24% net IRR on a compound annual basis from inception through June 30, 2023.
Principal Investing
Our
principal investing segment is comprised of our realized performance fee income, realized investment income from our balance sheet investments, and certain allocable expenses related to corporate functions supporting the entire company. The principal investing segment also includes our growth capital and liquidity resources. We expect to deploy capital into strategic investments over time that will help accelerate the growth of our asset management segment, by broadening our investment management and/or product distribution capabilities or increasing the efficiency of our operations. We believe these investments will translate into greater compounded annual growth of Fee Related Earnings.
Given the cyclical nature of performance fees, earnings from our principal investing segment, or Principal Investing Income (“PII”), is inherently more volatile in nature than earnings from the asset management segment. We earn fees
based on the investment performance of the funds we manage and compensate our employees, primarily investment professionals, with a meaningful portion of these proceeds to align our team with the investors in the funds we manage and incentivize them to deliver strong investment performance over time. We expect to increase the proportion of performance fee income we pay to our employees over time, and as such proportion increases, we expect PII to represent a relatively smaller portion of our total company earnings.
The diagram below depicts our current organizational structure:
Note: The organizational structure chart above depicts
a simplified version of the Apollo structure. It does not include all legal entities in the structure.
(1)Includes direct and indirect ownership by AGM.
Business Environment
As a global alternative asset manager, we are affected by the condition of global financial markets and the economy. Price fluctuations within equity, credit, commodity, foreign exchange markets, as well as interest rates and global inflation, which
may be volatile and mixed across geographies, can significantly impact the
performance of our business, including, but not limited to, the valuation of investments, including those of the funds we manage, and related income we may recognize.
Adverse economic conditions may result from domestic and global economic and political developments, including plateauing or decreasing economic growth and business activity, civil unrest, geopolitical tensions or military action, such as the armed conflict between Ukraine and Russia and corresponding sanctions imposed by the United States and other countries, and new or evolving legal and regulatory requirements on business investment, hiring, migration, labor supply and global supply chains.
We carefully monitor economic and market conditions that could potentially give rise to global market volatility and affect our business operations, investment portfolios and derivatives, which includes global inflation. The
global financial system has experienced increased volatility in 2023 due to the failure of certain financial institutions, primarily U.S. regional banks. The current macroeconomic environment, recent bank failures and consolidations, changes in business and consumer behavior and other events affecting financial institutions, have also contributed to volatility in the commercial real estate market, and concerns regarding commercial real estate liquidity, financing availability and asset values, particularly in the office subsector. The potential impacts of rising interest rates and continued deposit outflows on global markets, financial institutions and macroeconomic conditions, generally, remain uncertain. Episodes of increased economic and market volatility may continue to occur and could worsen if there are additional instances of actual or threatened bank failures. For further information on the risks related to market or economic conditions and commercial real estate,
see the section entitled “Item 1A. Risk Factors” in the 2022 Annual Report.
U.S. inflation continued to recede during the second quarter of 2023, however the U.S. Federal Reserve continued its interest rate hiking cycle given that the Consumer Price Index (“CPI”) persisted above the 2% target. The U.S. Bureau of Labor Statistics reported that the annual U.S. inflation rate edged down to 3.0% as of June 30, 2023, compared to 5.0% as of March 31, 2023, as action from the U.S. Federal Reserve continues to temper inflation. While declining, the heightened U.S. inflation rate persists due to a combination of supply and demand factors. As a result, in July 2023, the Federal Reserve raised the benchmark interest rate to a target range of 5.25% to 5.50%, up from a target range of 4.75% to 5.00%
in March 2023, which marked the fourth interest rate hike in 2023.
Equity market performance continued to rally during the second quarter alongside a rebound in credit markets. In the U.S., the S&P 500 Index increased by 8.3% during the second quarter of 2023, following an increase of 7.0% during the first quarter of 2023. Global equity markets also increased during the quarter, with the MSCI All Country World ex USA Index increasing 3.3%, following an increase of 8.2% in the first quarter of 2023.
Conditions in the credit markets have a significant impact on our business. Credit markets were positive in the second quarter of 2023, with the BofAML HY Master II Index increasing by 1.6%, while the S&P/LSTA Leveraged Loan Index increased by 3.3%. The U.S. 10-year Treasury yield ended the quarter at 3.81%.
In
terms of economic conditions in the U.S., the Bureau of Economic Analysis reported real GDP increased at an annual rate of 2.4% in the second quarter of 2023, following an increase of 2.0% in the first quarter of 2023. As of July 2023, the International Monetary Fund estimated that the U.S. economy will expand by 1.8% in 2023 and 1.0% in 2024. The U.S. Bureau of Labor Statistics reported that the U.S. unemployment rate increased to 3.6% as of June 30, 2023.
Foreign exchange rates can materially impact the valuations of our investments and those of the funds we manage that are denominated in currencies other than the U.S. dollar. The U.S. dollar weakened in the second quarter of 2023 compared to the euro and the British pound. Relative to the U.S. dollar, the euro appreciated 0.6% during second quarter of 2023, after appreciating 1.3% in the first quarter of 2023, while the
British pound appreciated 3.0% in the second quarter of 2023, after appreciating 2.1% in the first quarter of 2023. Oil finished a volatile quarter down 6.6%, after depreciating by 5.7% in the first quarter of 2023, as the general downward trend from 2022 has continued into 2023.
We are actively monitoring the developments in Ukraine resulting from the Russia/Ukraine conflict and the economic sanctions and restrictions imposed against Russia, Belarus, and certain Russian and Belarussian entities and individuals. Apollo continues to (i) identify and assess any exposure to designated persons or entities across Apollo’s business; (ii) ensure existing surveillance and controls are calibrated to the evolving sanctions; and (iii) ensure appropriate levels of communication across Apollo, and with other relevant market participants, as appropriate.
As of June 30,
2023, the funds we manage have no investments that would cause Apollo or any Apollo managed fund to be in violation of current international sanctions, and we believe the direct exposure of investment portfolios of the funds we manage to Russia and Ukraine is insignificant. Apollo and the funds we manage do not intend to make any new material investments in Russia, and have appropriate controls in place to ensure review of any new exposure.
Institutional investors continue to allocate capital towards alternative investment managers in search of more attractive returns, and we believe the business environment
remains generally accommodative to raise larger successor funds, launch new products, and pursue attractive strategic growth opportunities.
Overview of Results of Operations
Revenues
Management Fees
The significant growth of the assets we manage has had a positive effect on our revenues. Management fees are typically calculated based upon any of “net asset value,”“gross assets,”“adjusted par asset value,”“adjusted costs of all unrealized portfolio investments,”“capital commitments,”“invested capital,”“adjusted assets,”“capital contributions,” or “stockholders’ equity,” each as defined
in the applicable limited partnership agreement and/or management agreement of the unconsolidated funds or accounts.
Advisoryand Transaction Fees, Net
As a result of providing advisory services with respect to actual and potential investments, we are entitled to receive fees for transactions related to the acquisition and, in certain instances, disposition and financing of companies, some of which are portfolio companies of the funds we manage, as well as fees for ongoing monitoring of portfolio company operations and directors’ fees. We also receive advisory fees for advisory services provided to certain 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 (up to 100%) of such advisory and transaction fees, net of applicable broken deal costs (“Management Fee Offset”). Such amounts are presented as a reduction to advisory and transaction fees, net, in the condensed consolidated statements of operations (see note 2 to our condensed consolidated financial statements for more detail on advisory and transaction fees, net).
Performance Fees
The general partners of the funds we manage are entitled to an incentive return of normally up to 20% of the total returns of a fund’s capital, depending upon performance of the underlying funds and subject to preferred returns and high water marks, as applicable. Performance fees, categorized as performance allocations, are accounted for as an equity method investment, and effectively, the performance
fees for any period are based upon an assumed liquidation of the funds’ assets at the reporting date, and distribution of the net proceeds in accordance with the funds’ allocation provisions. Performance fees categorized as incentive fees, which are not accounted for as an equity method investment, are deferred until fees are probable to not be significantly reversed. The majority of performance fees are comprised of performance allocations.
As of June 30, 2023, approximately 44% of the value of the investments of the funds we manage on a gross basis was determined using market-based valuation methods (i.e., reliance on broker or listed exchange quotes) and the remaining 56% was determined primarily by comparable company and industry multiples or discounted cash flow models. See “Item 1A. Risk Factors—Risks Relating to our Business—The performance
of the funds we manage, and our performance, may be adversely affected by the financial performance of portfolio companies of the funds we manage and the industries in which the funds we manage invest” in the 2022 Annual Report for discussion regarding certain industry-specific risks that could affect the fair value of certain of the portfolio company investments of the funds we manage.
In certain funds we manage, generally in our equity strategy, the Company does not earn performance fees until the investors have achieved cumulative investment returns on invested capital (including management fees and expenses) in excess of an 8% hurdle rate. Additionally, certain of the yield and hybrid funds we manage have various performance fee rates and hurdle rates. Certain of the yield and hybrid funds we manage allocate
performance fees to the general partner in a similar manner as the equity funds. In certain funds we manage, as long as the investors achieve their priority returns, there is a catch-up formula whereby the Company earns a priority return for a portion of the return until the Company’s performance fees equate to its performance fee rate for that fund; thereafter, the Company participates in returns from the fund at the performance fee rate. Performance fees, categorized as performance allocations, are subject to reversal to the extent that the performance fees distributed exceed the amount due to the general partner based on a fund’s cumulative investment returns. The
Company recognizes potential repayment of previously received performance fees as a general partner obligation representing all amounts previously distributed to the general partner that would need to be repaid to the Apollo funds if these funds were to be liquidated based on the current fair value of the underlying fund’s investments as of the reporting date. The actual general partner obligation, however, would not become payable or realized until the end of a fund’s life or as otherwise set forth in the respective limited partnership agreement of the fund.
The table below presents an analysis of Apollo’s (i) performance fees receivable on an unconsolidated
basis and (ii) realized and unrealized performance fees:
As
of June 30,
Performance Fees for the Three Months Ended June 30, 2023
Performance Fees for the Six Months Ended June 30, 2023
2023
(in thousands)
Performance
Fees Receivable on an Unconsolidated Basis
Unrealized
Realized
Total
Unrealized
Realized
Total
AIOF
I and II
$
20,528
$
10,462
$
—
$
10,462
$
9,782
$
—
$
9,782
ANRP
I, II and III(1)
34,508
(8,694)
750
(7,944)
(23,791)
1,196
(22,595)
EPF
Funds(1)
76,528
6,877
—
6,877
4,325
—
4,325
FCI
Funds
142,095
3,123
—
3,123
3,966
—
3,966
Fund
IX
1,590,443
29,803
110,671
140,474
328,609
134,078
462,687
Fund
VIII
142,745
(59,286)
—
(59,286)
(226,498)
118,272
(108,226)
Fund
VII(2)
37,357
(1,912)
1,039
(873)
(2,575)
1,657
(918)
Fund
VI
21,416
(135)
2,291
2,156
(273)
4,024
3,751
Fund
IV and Fund V(1)
—
(45)
—
(45)
(98)
—
(98)
HVF
I
46,806
3,482
9,567
13,049
2,963
20,840
23,803
Real
Estate Equity
57,011
(12,719)
907
(11,812)
(13,979)
1,131
(12,848)
Corporate
Credit
33,669
7,739
10,115
17,854
13,891
18,888
32,779
Structured
Finance and ABS
96,295
12,334
7,352
19,686
20,074
15,105
35,179
Direct
Origination
67,052
(159,114)
42,699
(116,415)
(147,544)
53,062
(94,482)
Other(1)(3)
564,168
79,513
26,796
106,309
178,270
34,322
212,592
Total
$
2,930,621
$
(88,572)
$
212,187
$
123,615
$
147,122
$
402,575
$
549,697
Total,
net of profit sharing payable(4)/expense
1,426,852
(87,655)
79,894
(7,761)
14,750
114,768
129,518
(1)As
of June 30, 2023, certain funds had $133.6 million in general partner obligations to return previously distributed performance fees. The fair value gain on investments and income at the fund level needed to reverse the general partner obligations was $1.8 billion, as of June 30, 2023.
(2)As of June 30, 2023, the remaining investments and escrow cash of Fund VII was valued at 110% of the fund’s unreturned capital, which was below the required escrow ratio of 115%. As a result, the fund is required to place in escrow current and future performance fee distributions to the general partner until the specified return ratio of 115% is met (at the time of a future distribution) or upon liquidation. As of June 30,
2023, Fund VII had $85.5 million of gross performance fees, or $48.7 million net of profit sharing, in escrow. With respect to Fund VII, realized performance fees currently distributed to the general partner are limited to potential tax distributions and interest on escrow balances per the fund’s partnership agreements. Performance fees receivable as of June 30, 2023 and realized performance fees for the three and six months ended June 30, 2023 include interest earned on escrow balances that is not subject to contingent repayment.
(3)Other includes certain SIAs.
(4)There was a corresponding profit sharing payable of $1.5 billion as of June 30, 2023, including profit sharing payable
related to amounts in escrow and contingent consideration obligations of $52.0 million.
The general partners of certain of the funds we manage accrue performance fees, categorized as performance allocations, when the fair value of investments exceeds the cost basis of the individual investors’ investments in the fund, including any allocable share of expenses incurred in connection with such investments, which we refer to as “high water marks.” These high water marks are applied on an individual investor basis. Certain funds we manage have investors with various high water marks, the achievement of which is subject to market conditions and investment performance.
Performance fees from certain funds we manage are subject to contingent repayment by the general partner in the event of future losses to the extent that the cumulative performance fees distributed
from inception to date exceeds the amount computed as due to the general partner at the final distribution. These general partner obligations, if applicable, are included in due to related parties on the condensed consolidated statements of financial condition.
The following table summarizes our performance fees since inception for our combined segments through June 30, 2023:
Performance
Fees Since Inception(1)
(In millions)
Undistributed by Fund and Recognized
Distributed by Fund and Recognized(2)
Total Undistributed and Distributed by Fund and Recognized(3)
General Partner Obligation(3)
Maximum Performance Fees Subject to Potential Reversal(4)
AIOF I and
II
$
20.5
$
58.4
$
78.9
$
—
$
48.4
ANRP I, II and III
34.5
159.1
193.6
45.1
37.8
EPF
Funds
76.5
490.7
567.2
43.0
245.7
FCI Funds
142.1
24.2
166.3
—
142.1
Fund
IX
1,590.4
723.6
2,314.0
—
2,028.5
Fund VIII
142.7
1,779.1
1,921.8
—
1,295.2
Fund
VII
37.4
3,227.3
3,264.7
—
11.0
Fund VI
21.4
1,663.9
1,685.3
—
—
Fund
IV and Fund V
—
2,053.1
2,053.1
31.4
—
HVF I
46.8
222.2
269.0
—
157.6
Real
Estate Equity
57.0
69.8
126.8
7.6
61.3
Corporate Credit
33.7
928.1
961.8
—
23.9
Structured
Finance and ABS
96.3
52.3
148.6
—
81.6
Direct Origination
67.1
82.2
149.3
—
23.3
Other(5)
564.2
1,713.6
2,277.8
6.5
735.7
Total
$
2,930.6
$
13,247.6
$
16,178.2
$
133.6
$
4,892.1
(1)Certain
funds are denominated in euros and historical figures are translated into U.S. dollars at an exchange rate of €1.00 to $1.09 as of June 30, 2023. Certain funds are denominated in pounds sterling and historical figures are translated into U.S. dollars at an exchange rate of £1.00 to $1.27 as of June 30, 2023.
(2)Amounts in “Distributed by Fund and Recognized” for the Citi Property Investors (“CPI”), Gulf Stream Asset Management, LLC (“Gulf Stream”), Stone Tower Capital LLC and its related companies (“Stone Tower”) funds and SIAs are presented for activity subsequent to the respective acquisition dates. Amounts exclude certain performance fees from business development companies and Redding Ridge Holdings LP (“Redding Ridge Holdings”), an affiliate
of Redding Ridge.
(3)Amounts were computed based on the fair value of fund investments on June 30, 2023. Performance fees have been allocated to and recognized by the general partner. Based on the amount allocated, a portion is subject to potential reversal or, to the extent applicable, has been reduced by the general partner obligation to return previously distributed performance fees at June 30, 2023. The actual determination and any required payment of any such general partner obligation would not take place until the final disposition of the fund’s investments based on contractual termination of the fund.
(4)Represents the amount of performance fees that would be reversed if remaining fund investments became worthless on June 30,
2023. Amounts subject to potential reversal of performance fees include amounts undistributed by a fund (i.e., the performance fees receivable), as well as a portion of the amounts that have been distributed by a fund, net of taxes and not subject to a general partner obligation to return previously distributed performance fees, except for those funds that are gross of taxes as defined in the respective funds’ governing documents.
(5)Other includes certain SIAs.
Expenses
Compensation and Benefits
Our most significant expense is compensation and benefits expense. This consists of fixed salary, discretionary and non-discretionary bonuses, profit sharing expense associated with the performance fees earned and compensation expense associated
with the vesting of non-cash equity-based awards.
Our compensation arrangements with certain employees contain a significant performance-based incentive component. Therefore, as our net revenues increase, our compensation costs rise. Our compensation costs also reflect the increased investment in people as we expand geographically and create new funds.
In addition, certain professionals and selected other individuals have a profit sharing interest in the performance fees earned in order to better align their interests with our own and with those of the investors in the funds we manage. Profit sharing expense is part of our compensation and benefits expense and is generally based upon a fixed percentage of performance fees. Certain of our performance-based incentive arrangements provide for compensation based on realized performance fees which includes fees earned by the general
partners of the funds we manage under the applicable fund limited partnership agreements based upon transactions that have closed or other rights to incentive income cash that have become fixed in the applicable calendar year period. Profit sharing expense can reverse during periods when there is a decline in performance fees that were previously recognized. Profit sharing amounts are normally distributed to employees after the corresponding investment gains have been realized and generally before preferred returns are achieved for the investors. Therefore, changes in our unrealized performance
fees have the same effect on our profit sharing expense.
Profit sharing expense increases when unrealized performance fees 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 performance fees previously distributed back to the funds. This general partner obligation due to the funds would be realized only when the fund is liquidated, which generally occurs at the end of the fund’s term. However, indemnification obligations also exist for realized gains with respect to Fund IV, Fund V and Fund VI, which, although our Former Managing Partners and Contributing Partners would remain personally liable, may indemnify our Former Managing Partners and Contributing Partners for 17.5% to 100% of the previously distributed profits regardless of the fund’s future performance.
See note 13 to our condensed consolidated financial statements for further information regarding the Company’s indemnification liability.
Under AGM’s Equity Plan, the Company grants equity awards to certain employees, including RSUs and restricted shares of common stock, that generally vest and become exercisable in quarterly installments or annual installments depending on the award terms. In some instances, vesting of an RSU is also subject to the Company’s receipt of performance fees, within prescribed periods, sufficient to cover the associated equity-based compensation expense. See note 11 to our consolidated financial statements for further discussion of equity-based
compensation.
Other Expenses
The balance of our other expenses includes interest, placement fees, and general, administrative and other operating expenses. Interest expense consists primarily of interest related to the 2024 Senior Notes, the 2026 Senior Notes, the 2029 Senior Notes, the 2030 Senior Notes, the 2048 Senior Notes and the 2050 Subordinated Notes as discussed in note 10 to our condensed consolidated financial statements. Placement fees are incurred in connection with our capital raising activities. In cases where the limited partners of the funds are determined to be the customer in an arrangement, placement fees may be capitalized as a cost to acquire a customer contract, and amortized over the life of the customer contract.
General, administrative and other expenses includes occupancy expense, depreciation and amortization, professional fees and costs related to travel, information technology and administration. Occupancy expense represents charges related to office leases and associated expenses, such as utilities and maintenance fees. Depreciation and amortization of fixed assets is normally calculated using the straight-line method over their estimated useful lives, ranging from two to sixteen years, taking into consideration any residual value. Leasehold improvements are amortized over the shorter of the useful life of the asset or the expected term of the lease. Intangible assets are amortized based on the future cash flows over the expected useful lives of the assets.
Other Income (Loss)
Net Gains (Losses) from Investment Activities
Net
gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in our investment portfolio between the opening reporting date and the closing reporting date. Net unrealized gains (losses) are a result of changes in the fair value of unrealized investments and reversal of unrealized gains (losses) due to dispositions of investments during the reporting period. Significant judgment and estimation goes into the assumptions that drive these models and the actual values realized with respect to investments could be materially different from values obtained based on the use of those models. The valuation methodologies applied impact the reported value of investment company holdings and their underlying portfolios in our condensed consolidated financial statements.
Net Gains (Losses) from Investment Activities of Consolidated Variable Interest Entities(“VIEs”)
Changes in the fair value of the consolidated VIEs’ assets and liabilities and related interest, dividend and other income and expenses subsequent to consolidation are presented within net gains (losses) from investment activities of consolidated variable interest entities and are attributable to non-controlling interests in the condensed consolidated statements of operations.
Other Income (Losses), Net
Other income (losses), net includes gains (losses) arising from the remeasurement of foreign currency denominated assets and liabilities, remeasurement of the tax receivable agreement liability and other miscellaneous non-operating income and expenses.
Income Taxes
Significant
judgment is required in determining the provision for income taxes and in evaluating income tax positions, including evaluating uncertainties. We recognize the income tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the positions. The tax benefit is measured as the largest amount of benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. If a tax position is not considered more likely than not to be sustained, then no benefits of the position are
recognized. The Company’s income tax positions are reviewed and evaluated quarterly to determine whether or not we have uncertain tax positions that require financial statement recognition or de-recognition.
Deferred tax assets and liabilities are recognized for the expected future tax consequences, using currently enacted tax rates, of differences between the carrying amount of assets and liabilities and their respective tax basis. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Non-Controlling Interests
For
entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than Apollo. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in non-controlling interests in the condensed consolidated financial statements. Non-controlling interests primarily relate to the minority ownership interest in the Apollo Operating Group held directly by AGM. Non-controlling interests also include limited partner interests in certain consolidated funds and VIEs.
The authoritative guidance for non-controlling interests in the condensed consolidated financial statements requires reporting entities to present non-controlling interest as equity and provides guidance on the accounting for transactions between an entity and non-controlling
interests. According to the guidance, (1) non-controlling interests are presented as a separate component of stockholders’ equity on the Company’s condensed consolidated statements of financial condition, (2) net income (loss) includes the net income (loss) attributable to the non-controlling interest holders on the Company’s condensed consolidated statements of operations, (3) the primary components of non-controlling interest are separately presented in the Company’s condensed consolidated statements of changes in stockholders’ 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.
Below is a discussion of our condensed consolidated results of operations for the three and six months ended June 30, 2023 and 2022. For additional analysis of the factors that affected our results at the segment level, see “—Segment Analysis” below:
For
the Three Months Ended June 30,
Total Change
Percentage Change
For the Six Months Ended June 30,
Total Change
Percentage Change
2023
2022
2023
2022
(in
thousands)
(in thousands)
Revenues:
Management
fees
$
687,143
$
560,010
$
127,133
22.7%
$
1,318,983
$
1,082,946
$
236,037
21.8%
Advisory
and transaction fees, net
170,654
110,492
60,162
54.4
325,253
176,278
148,975
84.5
Investment
income (loss)
137,201
(192,178)
329,379
NM
578,786
510,137
68,649
13.5
Incentive
fees
25,534
1,953
23,581
NM
40,999
7,803
33,196
425.4
Total
Revenues
1,020,532
480,277
540,255
112.5
2,264,021
1,777,164
486,857
27.4
Expenses:
Compensation
and benefits
Salary, bonus and benefits
256,695
234,012
22,683
9.7
511,310
452,267
59,043
13.1
Equity-based
compensation
126,398
112,470
13,928
12.4
250,389
268,758
(18,369)
(6.8)
Profit
sharing expense
133,446
(37,578)
171,024
NM
424,407
321,984
102,423
31.8
Total
compensation and benefits
516,539
308,904
207,635
67.2
1,186,106
1,043,009
143,097
13.7
Interest
expense
34,784
31,432
3,352
10.7
69,086
64,425
4,661
7.2
General,
administrative and other
223,077
150,721
72,356
48.0
406,105
291,084
115,021
39.5
Total
Expenses
774,400
491,057
283,343
57.7
1,661,297
1,398,518
262,779
18.8
Other
Income:
Net gains from investment activities
19,874
146,054
(126,180)
(86.4)
18,338
917,316
(898,978)
(98.0)
Net
gains from investment activities of consolidated variable interest entities
9,353
36,617
(27,264)
(74.5)
43,390
316,072
(272,682)
(86.3)
Interest
income
28,497
5,786
22,711
392.5
60,781
8,622
52,159
NM
Other
income (loss), net
12,360
12,170
190
1.6
4,944
(13,013)
17,957
NM
Total
Other Income
70,084
200,627
(130,543)
(65.1)
127,453
1,228,997
(1,101,544)
(89.6)
Income
before income tax provision
316,216
189,847
126,369
66.6
730,177
1,607,643
(877,466)
(54.6)
Income
tax provision
(51,908)
(7,627)
(44,281)
NM
(113,380)
(141,801)
28,421
(20.0)
Net
Income
264,308
182,220
82,088
45.0
616,797
1,465,842
(849,045)
(57.9)
Net
income attributable to non-controlling interests
(151,472)
(114,099)
(37,373)
32.8
(286,578)
(800,753)
514,175
(64.2)
Net
Income Attributable to Apollo Asset Management, Inc.
112,836
68,121
44,715
65.6
330,219
665,089
(334,870)
(50.3)
Series
A Preferred Stock Dividends
(4,383)
(4,383)
—
—
(8,766)
(8,766)
—
—
Series
B Preferred Stock Dividends
(4,782)
(4,782)
—
—
(9,563)
(9,563)
—
—
Net
Income Attributable to Apollo Asset Management, Inc. Common Stockholders
$
103,671
$
58,956
$
44,715
75.8%
$
311,890
$
646,760
$
(334,870)
(51.8)%
Note:
“NM” denotes not meaningful. Changes from negative to positive amounts and positive to negative amounts are not considered meaningful. Increases or decreases from zero and changes greater than 500% are also not considered meaningful.
In this section, references to 2023 refer to the three months ended June 30, 2023 and references to 2022 refer to the three months ended June 30, 2022.
Revenues
Revenues were $1.0 billion in 2023, an increase of $540.3 million from $480.3 million in 2022, primarily driven by higher
investment income. Investment income increased $329.4 million in 2023 to $137.2 million compared to a loss of $192.2 million in 2022. The increase in investment income of $329.4 million in 2023 was driven by an increase in performance allocations of $421.2 million, partially offset by a decrease in principal investment income of $91.8 million.
Significant drivers for performance allocations in 2023 were performance allocations earned from Fund IX, Credit Strategies, Redding Ridge Holdings and HVF I of $144.0 million, $27.2 million, $16.5 million and $13.9 million, respectively, partially offset by performance allocation
losses from MidCap Financial of $123.4 million. The performance allocation losses in 2022 were primarily driven by losses of $328.7 million from Fund VIII.
See below for details on the respective performance allocations in 2023.
The performance allocations earned from Fund IX in 2023 were primarily driven by appreciation and realization of the fund’s investments in the media, telecom and technology, and leisure sectors.
The performance allocations earned from Credit Strategies in 2023 were primarily driven by the net income generated by the fund’s investments.
The performance allocations earned from Redding Ridge Holdings in 2023 were primarily driven by new CLO issuances and accumulation of warehouse assets.
The performance allocations earned from
HVF I in 2023 were primarily driven by appreciation and realization of the fund’s investments in the leisure, consumer and retail, and consumer services sectors.
The performance allocation losses from MidCap Financial in 2023 were primarily driven by the reversal of unrealized performance allocations in connection with the modification of a performance allocation arrangement with MidCap Financial. This resulted in a realization of performance allocations and a modification to the calculation of performance allocations beginning in June 2023 to be based solely on net income. See note 13 to the condensed consolidated financial statements for further information.
Management fees increased by $127.1 million to $687.1 million in 2023 from $560.0 million in 2022. The increase in management fees was primarily attributable to management fees earned from the net impact of the commencement
of Fund X’s fees and the fee basis step-down of Fund IX from committed to remaining invested capital, which added net fees of $38.6 million, inclusive of Fund X catch-up fees of $18.1 million. Management fees also benefited from increases in management fees earned from Athene of $36.2 million, which was driven by higher fee-generating AUM as a result of growth in Retirement Services clients.
Advisory and transaction fees increased by $60.2 million to $170.7 million in 2023 from $110.5 million in 2022. Advisory and transaction fees earned during 2023 were primarily attributable to advisory and transaction fees earned from companies in the real estate, media, telecom and technology, manufacturing and financial services sectors.
Expenses
Expenses were $774.4 million in 2023, an increase of $283.3 million from $491.1 million in 2022, primarily
due to an increase in profit sharing expense of $171.0 million, resulting from the corresponding higher investment income during 2023. In any period, the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance allocations in the period. Additionally, there was an increase in salary, bonus and benefits of $22.7 million due to an increase in headcount and an increase in equity-based compensation expense of $13.9 million in 2023. Equity-based compensation expense, in any given period, is generally comprised of: (i) performance grants which are tied to the Company’s receipt of performance fees, within prescribed periods and are typically recognized on an accelerated recognition method over the requisite service period to the extent the performance revenue metrics are met or deemed probable, and (ii) the impact of 2021 one-time
grants awarded to the Co-Presidents, all of which vest on a cliff basis subject to continued employment over five years, and a portion of which also vest on AGM’s achievement of FRE and Spread Related Earnings (“SRE”) per share metrics.
General, administrative and other expenses were $223.1 million in 2023, an increase of $72.4 million from $150.7 million in 2022. The increase in 2023 was primarily driven by an increase in professional fees, higher travel and entertainment expenses and an increase in technology expenses.
Other Income
Other Income was $70.1 million in 2023, a decrease of $130.5 million from $200.6 million in 2022. Other Income in 2022 was primarily attributable to a gain from one of the Company’s balance sheet investments and
income earned as a result of APSG I’s deconsolidation event, partially offset by foreign currency losses. Other income in 2023 was primarily attributable to interest income earned on the Company’s money market funds and U.S. Treasury securities, as a result of the rising interest rate environment, as well as interest income and net gains earned through the Company’s consolidated SPACs.
The income tax provision totaled
$51.9 million and $7.6 million in 2023 and 2022, respectively. The change was primarily related to the increase in pre-tax income. The provision for income taxes includes U.S. federal, state, local and foreign income taxes resulting in an effective income tax rate of 16.4% and 4.0% for 2023 and 2022, respectively. The most significant reconciling items between the U.S. federal statutory income tax rate and the effective income tax rate were due to the following: (i) income passed through to non-controlling interests, (ii) foreign, state and local income taxes, including NYC UBT, and (iii) equity-based compensation net of the limiting provisions for executive compensation under IRC Section 162(m) (see note 9 to the condensed consolidated financial statements for further details regarding the Company’s income tax provision).
In this section, references to 2023 refer to the six months ended June 30, 2023 and references to 2022 refer to the six months ended June 30, 2022.
Revenues
Revenues were $2.3 billion in 2023, an increase of $486.9 million from $1.8 billion in 2022, primarily driven by an increase in management fees, advisory and transaction fees, net and investment income. Management fees increased by $236.0 million to $1.3 billion in 2023 from $1.1 billion in 2022 due to increases in management fees earned from Athene, and ADREF and ADCF of $59.8 million and $30.2 million, respectively. The increases
in management fees earned from Athene, and ADREF and ADCF were driven by higher fee-generating AUM as a result of growth in Retirement Services clients and the management fee contribution from the Griffin Capital U.S. asset management business, respectively. Management fees also benefited from the net impact of the commencement of Fund X’s fees and the fee basis step-down of Fund IX from committed to remaining invested capital, which added net fees of $53.9 million, inclusive of Fund X catch-up fees of $21.4 million.
Advisory and transaction fees increased by $149.0 million to $325.3 million in 2023 from $176.3 million in 2022. Advisory and transaction fees earned during 2023 were primarily attributable to advisory and transaction fees earned from companies in the financial services, business services, real estate, media, telecom and technology and manufacturing sectors.
Investment
income increased $68.6 million in 2023 to $578.8 million compared to $510.1 million in 2022. The increase in investment income of $68.6 million in 2023 was driven by an increase in performance allocations of $291.5 million, partially offset by a decrease in principal investment income of $222.9 million.
Significant drivers for performance allocations in 2023 were performance allocations primarily earned from Fund IX, Credit Strategies and Redding Ridge Holdings of $474.3 million, $65.1 million and $29.8 million, respectively, partially offset by performance allocation losses from Fund VIII and MidCap Financial of $112.4 million and $107.0 million, respectively.
See below for details on the respective performance allocations in 2023.
The performance allocations earned from Fund IX in 2023 were primarily driven by appreciation and realization
of the fund’s investments in the media, telecom and technology, and leisure sectors.
The performance allocations earned from Credit Strategies in 2023 were primarily driven by the net income generated by the fund’s investments.
The performance allocations earned from Redding Ridge Holdings in 2023 were primarily driven by new CLO issuances and accumulation of warehouse assets.
The performance allocation losses from Fund VIII in 2023 were primarily driven by depreciation and realization of the fund’s investments in the consumer services, and media, telecom and technology sectors.
The performance allocation losses from MidCap Financial in 2023 were primarily driven by the reversal of unrealized performance allocations in connection with the modification of the performance allocation arrangement
with MidCap Financial. This resulted in a realization of performance allocations and a modification to the calculation of performance allocations beginning in June 2023 to be based solely on net income. See note 13 to the condensed consolidated financial statements for further information.
The decrease in principal investment income in 2023 was driven by the depreciation in value of investments held by certain funds we manage in which the Company has a direct interest, as a result of the continued equity market volatility in 2023.
Expenses
were $1.7 billion in 2023, an increase of $262.8 million from $1.4 billion in 2022, primarily due to an increase in profit sharing expense of $102.4 million, resulting from the higher investment income during 2023. Additionally, there was an increase in salary, bonus and benefits of $59.0 million due to an increase in headcount in 2023, partially offset by a decrease in equity-based compensation expense of $18.4 million due to a decrease in RSU amortization.
General, administrative and other expenses were $406.1 million in 2023, an increase of $115.0 million from $291.1 million in 2022. The increase in 2023 was primarily driven by an increase in professional fees, higher travel and entertainment expenses, amortization expense from the Company’s commitment asset and other intangible assets, and an increase in technology expenses.
Other
Income
Other Income was $127.5 million in 2023, a decrease of $1.1 billion from $1.2 billion in 2022. This decrease was primarily driven by decreases in net gains from investment activities and decreases in net gains from investment activities of consolidated VIEs. Other income in 2022 was primarily attributable to net gains from investment activities as a result of realized investment income from dividend income earned on one of our balance sheet investments and income earned as a result of APSG I’s deconsolidation event in 2022. Other income in 2023 was primarily attributable to interest income earned on the Company’s money market funds and U.S. treasury securities, as a result of the rising interest rate environment, as well as interest income and net gains earned through the
Company’s consolidated SPACs.
Income Tax Provision
The income tax provision totaled $113.4 million and $141.8 million in 2023 and 2022, respectively. The change was primarily related to the decrease in pre-tax income. The provision for income taxes includes U.S. federal, state, local and foreign income taxes resulting in an effective income tax rate of 15.5% and 8.8% for 2023 and 2022, respectively. The most significant reconciling items between the U.S. federal statutory income tax rate and the effective income tax rate were due to the following: (i) income passed through to non-controlling interests, (ii) foreign, state and local income taxes, including NYC UBT, and (iii) equity-based compensation net of the limiting provisions for executive compensation under IRC Section 162(m) (see note 9 to the condensed consolidated financial statements for further details regarding the
Company’s income tax provision).
Managing Business Performance
We believe that the presentation of Segment Income supplements a reader’s understanding of the economic operating performance of our segments.
Segment Income
Segment Income is the key performance measure used by management in evaluating the performance of Apollo’s asset management and principal investing segments. See note 15 to the condensed consolidated financial statements for more details regarding the components of Segment Income.
We believe that Segment Income 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 above in “—Overview of Results of Operations” that have been prepared in accordance with U.S. GAAP. See note 15 to the condensed consolidated financial statements for more details regarding management’s consideration of segment earnings.
Fee Related Earnings and Principal Investing Income
FRE is a component of Segment Income and represents the performance measure used to assess the performance of the asset management segment.
PII is a component of Segment Income and represents the performance measure used to assess the performance of the principal investing segment.
See note 15 to the condensed
consolidated financial statements for more details regarding the components of FRE and PII.
We use Segment Income, FRE and PII as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation or as a substitute for net income or other income data prepared in accordance with U.S.
GAAP. The use of these measures without consideration of their related U.S. GAAP measures is not adequate due to the adjustments described above.
Segment
Analysis
Discussed below are our results of operations for each of our reportable segments. They represent the segment information available and utilized by management to assess performance and to allocate resources. See note 15 to our condensed consolidated financial statements for more information regarding our segment reporting.
Our financial results vary, since performance fees, which generally constitute a large portion of the income from the funds that we manage, as well as the capital solutions and other 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.
Asset Management
The following table presents Fee Related Earnings, the performance measure of our asset
management segment.
In this section, references to 2023 refer to the three months ended June 30, 2023 and references to 2022 refer to the three months ended June 30, 2022.
FRE was $442.8 million in 2023, an increase of $101.7 million compared to $341.1 million in 2022. This increase was primarily attributable to increases in management fees and capital solutions fees and other, net.
The increase in management fees was primarily attributable to management fees earned from the net impact of the commencement of Fund X’s fees and the fee basis step-down of Fund IX from committed to remaining
invested capital, which added net fees of $38.6 million, inclusive of Fund X catch-up fees of $18.1 million. Management fees also benefited from increases in management fees earned from Athene of $35.5 million, which was primarily driven by higher fee-generating AUM as a result of growth in retirement services clients.
Capital solutions fees earned in 2023 were primarily attributable to fees earned from companies in the real estate, media, telecom and technology, manufacturing and financial services sectors.
The growth in revenues was offset, in part, by increases in other operating expenses and fee-related compensation expense associated with increased headcount to support the Company’s growth.
In this section, references to 2023 refer to the six months ended June 30, 2023 and references to 2022 refer to the six months ended June 30, 2022.
FRE was $840.8 million in 2023, an increase of $189.7 million compared to $651.1 million in 2022. This increase was primarily attributable to increases in management fees and capital solutions fees and other, net.
The increase in management fees was primarily attributable to management fees earned from Athene of $58.0 million, which was driven by higher fee-generating AUM as a result of growth in retirement services clients. Management fees also benefited
from the net impact of the commencement of Fund X’s fees and the fee basis step-down of Fund IX from committed to remaining invested capital, which added net fees of $53.9 million, inclusive of Fund X catch-up fees of $21.4 million.
Capital solutions fees earned in 2023 were primarily attributable to fees earned from companies in the financial services, business services, real estate, media, telecom and technology and manufacturing sectors.
The growth in revenues was offset, in part, by increases in other operating expenses and fee-related compensation expense associated with the re-basing of cost structure and increased headcount to support the Company’s growth, as well as costs associated with the acquisition of Griffin Capital’s
U.S. asset management business occurring in the second quarter of 2022.
Asset Management Operating Metrics
We monitor certain operating metrics that are common to the alternative asset management industry and directly impact the performance of our asset management segment. These operating metrics include Assets Under Management, gross capital deployment and uncalled commitments.
Assets Under Management
The following presents Apollo’s Total AUM and Fee-Generating AUM by investing strategy (in billions):
The following presents Apollo’s AUM with Future Management Fee Potential by investing strategy (in billions):
Note: Totals may not add due to rounding
The following tables present the components of Performance Fee-Eligible AUM for each of Apollo’s three investing strategies within the asset management segment:
(1) Performance Fee-Generating AUM of $3.7 billion,
$3.1 billion and $3.9 billion as of June 30, 2023, June 30, 2022 and December 31, 2022, respectively, are above the hurdle rates or preferred returns and have been deferred to future periods when the fees are probable to not be significantly reversed.
(1) The weighted
average remaining life of the traditional private equity funds as of December 31, 2022 was 76 months.
Apollo, through its consolidated subsidiary, ISG, provides asset management services to Athene with respect to assets in the Athene Accounts, including asset allocation services, direct asset management services, asset and liability matching management, mergers and acquisitions, asset diligence, hedging and other asset management services and receives management fees for providing these services. Apollo, through ISG, also provides sub-allocation services with respect to a portion of the assets in the Athene Accounts. See note 13 to the condensed consolidated financial statements for more details regarding the fee rates of the investment management and sub-allocation fee arrangements with respect to the assets in the Athene Accounts. Apollo managed or
advised $257.9 billion, $236.0 billion and $225.4 billion of AUM on behalf of Athene as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively.
Apollo, through ISGI, provides investment advisory services with respect to certain assets in certain portfolio companies of Apollo funds and sub-advises the Athora Accounts and broadly refers to “Athora Sub-Advised” assets as those assets in the Athora Accounts which the Company explicitly sub-advises as well as those assets in the Athora Accounts which are invested directly in funds and investment vehicles Apollo manages. The Company refers to
the portion of the Athora AUM that is not Athora Sub-Advised AUM as “Athora Non-Sub Advised” AUM. See note 13 to the condensed consolidated financial statements for more details regarding the fee arrangements with respect to the assets in the Athora Accounts. Apollo managed or advised $50.6 billion, $52.6 billion and $44.1 billion of AUM on behalf of Athora as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively.
(1)
At the individual strategy level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income.
(2) Outflows for Total AUM include redemptions of $1.5 billion and $0.8 billion during the three months ended June 30, 2023 and 2022, respectively.
(3) Includes foreign exchange impacts of $0.5
billion and $(4.7) billion during the three months ended June 30, 2023 and 2022, respectively.
(1)
At the individual strategy level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income.
(2) Outflows for Total AUM include redemptions of $3.8 billion and $1.4 billion during the six months ended June 30, 2023 and 2022, respectively.
(3) Includes foreign exchange impacts of $1.5
billion and $(7.2) billion during the six months ended June 30, 2023 and 2022, respectively.
(1)
At the individual strategy level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income.
(2) Outflows for Fee-Generating AUM include redemptions of $1.3 billion and $0.5 billion during the three months ended June 30, 2023 and 2022, respectively.
(3) Includes foreign exchange impacts
of $0.4 billion and $(3.8) billion during the three months ended June 30, 2023 and 2022, respectively.
(1)
At the individual strategy level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income.
(2) Outflows for Fee-Generating AUM include redemptions of $3.6 billion and $0.9 billion during the six months ended June 30, 2023 and 2022, respectively.
(3) Includes foreign exchange impacts
of $1.1 billion and $(5.7) billion during the six months ended June 30, 2023 and 2022, respectively.
Gross Capital Deployment and Uncalled Commitments
Gross capital deployment represents the gross capital that has been invested by the funds and accounts we manage during the relevant period, but excludes certain investment activities primarily related to hedging and cash management functions at the firm. Gross capital deployment is not reduced or netted down by sales or refinancings, and takes into account leverage used by the funds and accounts we manage in gaining exposure to the various investments that they have made.
Uncalled commitments, by contrast, represent unfunded capital commitments that certain of the
funds we manage have received from fund investors to fund future or current fund investments and expenses.
Gross capital deployment and uncalled commitments are indicative of the pace and magnitude of fund capital that is deployed or will be deployed, and which therefore could result in future revenues that include management fees, transaction fees and performance fees to the extent they are fee-generating. Gross capital deployment and uncalled commitments can also give rise to future costs that are related to the hiring of additional resources to manage and account for the additional capital that is deployed or will be deployed. Management uses gross capital deployment and uncalled commitments as key operating metrics since we believe the results are measures of investment activities of the funds we manage.
The following presents gross capital deployment and uncalled commitments (in billions):
As of June 30, 2023 and December 31, 2022, Apollo had $55.7 billion and $51.2 billion of dry powder, respectively, which represents the amount of capital available for investment or reinvestment subject to the provisions of the applicable governing agreements of the funds, partnerships and accounts we manage. These amounts exclude uncalled commitments which can only
be called for fund fees and expenses, and commitments from perpetual capital vehicles.
Principal Investing
The following table presents Principal Investing Income, the performance measure of our principal investing segment.
Three
Months Ended June 30,
Total Change
Percentage Change
Six Months Ended June 30,
Total Change
Percentage Change
2023
2022
2023
2022
(in
thousands)
(in thousands)
Principal Investing:
Realized
performance fees
$
176,783
$
150,862
$
25,921
17.2%
$
340,549
$
278,051
$
62,498
22.5%
Realized
investment income
2,678
36,958
(34,280)
(92.8)
30,207
476,366
(446,159)
(93.7)
Principal
investing compensation
(144,391)
(154,998)
(10,607)
(6.8)
(312,002)
(310,986)
1,016
0.3
Other
operating expenses
(12,447)
(6,072)
6,375
105.0
(12,477)
(12,036)
441
3.7
Principal
Investing Income (PII)
$
22,623
$
26,750
$
(4,127)
(15.4)%
$
46,277
$
431,395
$
(385,118)
(89.3)%
As
described in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—General”, earnings from our principal investing segment are inherently more volatile in nature than earnings from our asset management segment due to the intrinsic cyclical nature of performance fees, one of the key drivers of PII performance.
In this section, references to 2023 refer to the three months ended June 30, 2023 and references to 2022 refer to the three months ended June 30, 2022.
PII was $22.6 million in 2023, a decrease of $4.1 million,
as compared to $26.8 million in 2022. This decrease was primarily attributable to a decrease in realized investment income of $34.3 million. Realized investment income in 2022 was primarily driven by realized gains earned from one of our balance sheet investments.
The decrease was offset, in part, by an increase in realized performance fees and a decrease in principal investing compensation expense. The increase in realized performance fees of $25.9 million in 2023 was primarily driven by an increase in realized performance fees generated from Fund IX and MidCap Financial, partially offset by a decrease in realized performance fees
earned
from HVF I and EPF III. The increase in realized performance fees in 2023 remained relatively light as equity market volatility continued to delay monetization activity. Principal investing compensation expense of $144.4 million in 2023 decreased $10.6 million, as compared to $155.0 million in 2022. The decrease in 2023 was primarily due to a decrease in profit sharing expense attributable to the Incentive Pool, a compensation program through which certain employees are allocated discretionary compensation based on realized performance fees in a given year, partially offset by an increase in profit sharing expense associated with the corresponding increase in realized performance fees. In any period, the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance allocations in the period. Additionally, included in principal investing compensation are expenses related to the Incentive Pool. The Incentive Pool
is separate from the fund related profit sharing expense and may result in greater variability in compensation and have a variable impact on the blended profit sharing percentage during a particular period.
In this section, references to 2023 refer to the six months ended June 30, 2023 and references to 2022 refer to the six months ended June 30, 2022.
PII was $46.3 million in 2023, a decrease of $385.1 million, as compared to $431.4 million in 2022. This decrease was primarily attributable to a decrease in realized investment income of $446.2 million. Realized investment
income in 2022 was primarily attributable to dividends earned from one of our balance sheet investments and realized gains on the transfer to Athene of certain of Apollo’s general partner fund co-investments that were subsequently transferred to AAA in the second quarter of 2022. The increase in realized performance fees of $62.5 million in 2023 was primarily driven by an increase in realized performance fees generated from Fund VIII and Fund IX, partially offset by decreases in realized performance fees from EPF III, HVF I and Fund VII. The increase in realized performance fees in 2023 remained relatively light as equity market volatility continued to delay monetization activity. Principal investing compensation expense of $312.0 million in 2023 remained relatively flat, with an increase of $1.0 million in 2023, as compared to $311.0 million in 2022. The increase in 2023 was primarily due to an increase in profit sharing expense associated with the corresponding increase
in realized performance fees, partially offset by a decrease in profit sharing expense attributable to the Incentive Pool.
Liquidity and Capital Resources
Overview
Apollo’s business model primarily derives revenues and cash flows from the assets it manages. Based on management’s experience, we believe that the Company’s current liquidity position, together with the cash generated from revenues will be sufficient to meet the Company’s anticipated expenses and other working capital needs for at least the next 12 months. Apollo targets operating expense
levels such that fee income exceeds total operating expenses each period. The Company requires limited capital resources to support the working capital or operating needs of the business. For Apollo’s longer-term liquidity needs, we expect to continue to fund the Company’s operations through management fees and performance fees received. Liquidity needs are also met (to a limited extent) through proceeds from borrowings and equity issuances as described in notes 10 and 12 to the condensed consolidated financial statements, respectively. From time to time, if the Company determines that market conditions are favorable after taking into account our liquidity requirements, we may seek to raise proceeds through the
issuance of additional debt or equity instruments.
As of June 30, 2023, the Company had $1.2 billion of unrestricted cash and cash equivalents and $248.5 million of U.S. Treasury Securities as well as $1.0 billion of available funds from the 2022 AMH credit facility.
Primary Sources and Uses of Cash
Over the next 12 months, we expect the Company’s primary liquidity needs will be to:
•pay the Company’s operating expenses, including, compensation, general, administrative
and other expenses;
•pay interest and principal on the Company’s financing arrangements;
•pay cash dividends;
•make payments under the tax receivable agreement;
•pay taxes and tax related payments;
•make payments related to the mandatory exchange; and
•support
the future growth of Apollo’s businesses through strategic corporate investments.
Over the long term, we believe we will be able to grow Apollo’s Assets Under Management and generate positive investment performance in the funds we manage, which we expect will allow us to grow the Company’s management fees and performance fees in amounts sufficient to cover our long-term liquidity requirements, which may include:
•supporting the future growth of Apollo’s businesses;
•creating new or enhancing existing products and investment platforms;
•pursuing new strategic corporate investment opportunities;
•paying
interest on and repaying outstanding short-term and long-term borrowings;
•paying cash dividends;
•making payments under the tax receivable agreement; and
•making payments related to the mandatory exchange.
Cash Flow Analysis
The section below discusses in more detail the Company’s primary sources and uses of cash and the primary drivers of cash flows within the Company’s condensed consolidated statements of cash flows:
Net Increase (Decrease) in Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, and Cash and Cash Equivalents Held at Consolidated Variable Interest Entities
$
(749,754)
$
166,582
The
assets of our consolidated funds and VIEs (including SPACs), on a gross basis, can be substantially larger than the assets of our core business and, accordingly, could have a substantial effect on the accompanying statement of cash flows. Because our consolidated funds and VIEs are generally treated as investment companies for accounting purposes, their investing cash flow amounts are included in our cash flows from operations. The table below summarizes our condensed consolidated statements of cash flow by activity attributable to the Company and to our consolidated funds and VIEs.
The Company’s operating activities support its asset management activities
and underlying investment strategies. The primary sources of cash within the operating activities section include: (a) management fees, (b) advisory and transaction fees, (c) realized performance revenues, (d) due from related parties and (e) realized principal investment income. The primary uses of cash within the operating activities section include: (a) compensation and non-compensation related expenses, (b) interest and taxes, and (c) due to related parties.
•During the six months ended June 30, 2023, cash provided by the Company’s operating activities includes cash inflows from the receipt of management fees, advisory and transaction fees, realized performance revenues, and realized principal investment income, offset by cash outflows for compensation, general,
administrative, and other expenses. Cash provided by operating activities reflects operating activities of our consolidated funds and VIEs, which primarily includes cash inflows from the sale of investments, offset by cash outflows for purchases of investments, including reverse repurchase agreements.
•During the six months ended June 30, 2022, cash used in operating activities reflects operating activities of our consolidated funds and VIEs, which primarily includes cash outflows for purchases of investments. Cash provided by the Company’s operating activities includes cash inflows from the receipt of management fees, advisory and transaction fees, realized performance revenues, and realized principal investment income, offset by cash outflows for compensation, general,
administrative, and other expenses.
Investing Activities
The Company’s investing activities support the growth of its business. The primary sources of cash within the investing activities section include proceeds from maturities in U.S. Treasury securities. The primary uses of cash within the investing activities section include: (a) capital expenditures, (b) investment purchases, including purchases of U.S. Treasury securities, and (c) issuances of related party loans.
•During the six months ended June 30, 2023, cash provided by investing activities primarily reflects net inflows from the sale of U.S. Treasury securities, offset, in part, by net cash outflows for the purchase
of investments and net cash contributions to our principal investments.
•During the six months ended June 30, 2022, cash provided by investing activities primarily reflects net proceeds from the sale of U.S. Treasury securities of a SPAC, offset by purchases of investments.
Financing Activities
The Company’s financing activities reflect its capital market transactions and transactions with owners. The primary uses of cash within the financing activities section include: (a) dividends, (b) issuances of warrants, (c) share repurchases, (d) cash paid to settle tax withholding obligations in connection with net share settlements of equity-based awards, (e) repayments of debt and
(f) issuances of debt.
•During the six months ended June 30, 2023, net cash used in financing activities reflects the financing activity of our consolidated funds and VIEs, which primarily includes cash outflows from the repayment of debt, including repurchase agreements, offset by issuances of debt and net repayments of related party loans, dividends paid and distributions to redeemable non-controlling interests.
•During the six months ended June 30, 2022, net cash provided by financing activities reflects the financing activity of our consolidated funds and VIEs, which primarily includes cash inflows from the issuance of debt and the net proceeds from related party loans.
Future Debt Obligations
The
Company had long-term debt of $2.8 billion at June 30, 2023, which includes notes with maturities in 2024, 2026, 2029, 2030, 2048 and 2050. See note 10 to the condensed consolidated financial statements for further information regarding the Company’s debt arrangements.
Contractual Obligations, Commitments and Contingencies
For a summary and a description of the nature of the Company’s commitments, contingencies and contractual obligations, see note 14 to the condensed consolidated financial statements and “—Contractual Obligations, Commitments and Contingencies.”The
Company’s commitments are primarily fulfilled through cash flows from operations and (to a limited extent) through
borrowings and equity issuances as described in notes 10 and 12 to the condensed consolidated financial statements, respectively.
Consolidated Funds and VIEs
The Company manages its liquidity needs by evaluating unconsolidated cash flows; however, the Company’s condensed consolidated
financial statements reflect the financial position of Apollo as well as Apollo’s consolidated funds and VIEs (including SPACs). The primary sources and uses of cash at Apollo’s consolidated funds and VIEs include: (a) raising capital from their investors, which have been reflected historically as non-controlling interests of the consolidated subsidiaries in our condensed consolidated financial statements, (b) using capital to make investments, (c) generating cash flows from operations through distributions, interest and the realization of investments, (d) distributing cash flow to investors, (e) issuing debt to finance investments (CLOs), (f) entering into repurchase and reverse repurchase agreements and (g) raising capital through SPAC vehicles for future acquisition of targeted entities.
Other Liquidity and Capital Resource Considerations
Future
Cash Flows
Our ability to execute our business strategy, particularly our ability to increase our AUM, depends on our ability to establish new funds and to raise additional investor capital within such funds. Our liquidity will depend on a number of factors, such as our ability to project our financial performance, which is highly dependent on the funds we manage and our ability to manage our projected costs, fund performance, access to credit facilities, compliance with existing credit agreements, as well as industry and market trends. Additionally, during economic downturns, the funds we manage may experience cash flow issues or liquidate entirely. In these situations, the Company may be asked to reduce or eliminate the management fee and performance fees we charge, which could adversely impact our cash flow in the future.
An
increase in the fair value of the investments of the funds we manage, by contrast, could favorably impact our liquidity through higher management fees where the management fees are calculated based on the net asset value, gross assets or adjusted assets. Additionally, higher performance fees not yet realized would generally result when investments appreciate over their cost basis which would not have an impact on the Company’s cash flow until realized.
Consideration of Financing Arrangements
As noted above, in limited circumstances, the Company may issue debt or equity to supplement its liquidity. The decision to enter into a particular financing arrangement is made after careful consideration of various factors,
including the Company’s cash flows from operations, future cash needs, current sources of liquidity, demand for the Company’s debt or equity, and prevailing interest rates.
Revolver Facility
Under the 2022 AMH credit facility, AMH may borrow in an aggregate amount not to exceed $1.0 billion and may incur incremental facilities in an aggregate amount not to exceed $250 million plus additional amounts so long as AMH is in compliance with a net leverage ratio not to exceed 4.00 to 1.00. Borrowings under the 2022 AMH credit facility may be used for working capital and general corporate purposes, including without limitation, permitted acquisitions. The 2022 AMH credit facility
has a final maturity date of October 12, 2027. See note 10 to the condensed consolidated financial statements for details regarding the 2022 AMH credit facility.
Dividends
Although the Company currently expects to pay dividends on our Preferred shares and may pay dividends on our common stock in the future, we may not pay dividends if, among other things, we do not have the cash necessary to pay the dividends. To the extent we do not have cash on hand sufficient to pay dividends, we may have to borrow funds to pay dividends, or we may determine not to pay dividends. Our ability to pay dividends on our Preferred shares and our common stock will depend on our ability to satisfy applicable law with respect to payment of such dividends and receive
distributions from our subsidiaries, who must also satisfy applicable law prior to distributing any funds to us. The declaration, payment and determination of the amount of our dividends are at the sole discretion of our board of directors.
Dividends on common stock
All of the Company’s common stock is held by its parent company AGM. We have paid $144.2 million in common stock dividends to AGM for the six months ended June 30, 2023.
The tax receivable agreement provides for the payment to the Former 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 AGM and its subsidiaries
realize subject to the agreement. For more information regarding the tax receivable agreement, see note 13 to the condensed consolidated financial statements.
AOG Unit Payment
On December 31, 2021, holders of AOG Units (other than Athene and the Company) sold and transferred a portion of such AOG Units to APO Corp., a consolidated subsidiary of the Company, in exchange for an amount equal to $3.66 multiplied by the total number of AOG Units held by such holders immediately prior to such transaction (such payment, the “AOG Unit Payment”). The remainder of the AOG Units held by such holders were exchanged for shares of HoldCo common stock concurrently with
the consummation of the Mergers on January 1, 2022.
As of June 30, 2023, the outstanding AOG Unit Payment amount was $262.9 million, payable in equal quarterly installments through December 31, 2024. See note 13 to the condensed consolidated financial statements for more information.
Athora
Athora is a strategic liabilities platform that acquires and reinsures traditional closed life insurance policies and provides capital and reinsurance solutions to insurers in Europe. In 2017, Apollo made a €125 million commitment to Athora, which was fully drawn as of April 2020. Apollo committed an incremental €58 million in 2020 to purchase new equity interests. Additionally, in 2021, Apollo acquired
approximately €21.9 million of new equity interests in Athora.
In December 2021, Apollo committed an additional €250 million to purchase new equity interests to support Athora’s ongoing growth initiatives, of which €180 million was drawn as of June 30, 2023.
The Company and Athene are minority investors in Athora with a long-term strategic relationship. Through its share ownership, Apollo has approximately 19.9% of the total voting power in Athora, and Athene holds shares in Athora representing 10% of the total voting power in Athora. In addition, Athora shares held by funds and other accounts managed by Apollo represent, in the aggregate, approximately 15.1% of the total voting power in Athora.
Fund
Escrow
As of June 30, 2023, the remaining investments and escrow cash of Fund VII was valued at 110% of the fund’s unreturned capital which was below the required escrow ratio of 115%. As a result, the fund is required to place in escrow current and future performance fee distributions to the general partner until the specified return ratio of 115% is met (at the time of a future distribution) or upon liquidation. Realized performance fees currently distributed to the general partner are limited to potential tax distributions and interest on escrow balances per the fund’s partnership agreement.
Clawback
Performance fees from certain of the funds we manage are subject to contingent repayment by the general partner in the event of future losses to the extent that the cumulative performance
fees distributed from inception to date exceeds the amount computed as due to the general partner at the final distribution. See “—Overview of Results of Operations—Performance Fees” for the maximum performance fees subject to potential reversal by each fund.
Indemnification Liability
The Company recorded an indemnification liability in the event that the Former Managing Partners, Contributing Partners and certain investment professionals are required to pay amounts in connection with a general partner obligation to return previously distributed performance fees. See note 13 to the condensed consolidated financial statements for further information regarding the Company’s indemnification liability.
The Company provides asset management and advisory services to Athene as described in note 13 to the condensed consolidated financial statements.
The base management fee covers a range of investment services that Athene receives from the Company, including investment management, asset allocation, mergers and acquisition asset diligence and certain operational support services such as investment compliance, tax, legal and risk management support, among others. The Company’s fee agreement with Athene provides for a possible
payment by the Company to Athene, or a possible payment by Athene to the Company, equal to 0.00625% of the Incremental Value as of the end of each quarter, depending upon the percentage of Athene’s investments that consist of core assets and core plus assets. In furtherance of yield support for Athene, if more than 60% of Athene’s invested assets which are subject to the sub-allocation fees are invested in core and core plus assets, Athene will receive a 0.00625% fee reduction on the Incremental Value. As an incentive for differentiated asset management, if less than 50% of Athene’s invested assets which are subject to the sub-allocation fee are invested in core and core plus assets, thereby reflecting a higher allocation toward assets with the highest alpha-generating abilities, Athene will pay
an additional fee of 0.00625% on Incremental Value.
Critical Accounting Estimates and Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates. A summary of our significant accounting policies is presented in note 2 to our condensed consolidated financial statements and should
be read in conjunction with our significant accounting policies described in note 2 of our consolidated financial statements in our 2022 Annual Report.
The following is a summary of our accounting policies that are affected most by judgments, estimates and assumptions.
•Consolidation of VIEs
•Revenue Recognition
◦Performance Fees within Investment Income
◦Management Fees
•Investments, at fair value
•Fair value of financial instruments
•Income
taxes
The above critical accounting estimates and judgments are discussed in detail in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Policies” of our 2022 Annual Report.
Recent Accounting Pronouncements
A list of recent accounting pronouncements that are relevant to Apollo and its industry is included in note 2 to our condensed consolidated financial statements.
Contractual Obligations, Commitments and Contingencies
The Company’s material contractual obligations consisted of lease obligations, contractual commitments as part of the ongoing operations of the funds, debt obligations, and the AOG Unit Payment. Fixed and determinable payments due in connection with these obligations are as follows as of June 30, 2023:
Remaining
2023
2024 - 2025
2026 - 2027
2028 and Thereafter
Total
(in thousands)
Operating lease obligations(1)
$
33,042
$
153,606
$
149,088
$
549,760
$
885,496
Other
long-term obligations(2)
17,258
7,008
—
—
24,266
2022 AMH credit facility(3)
400
1,600
1,427
—
3,427
Debt
obligations(3)
59,797
739,038
661,883
2,495,718
3,956,436
AOG Unit Payment (4)
87,633
175,267
—
—
262,900
Obligations
$
198,130
$
1,076,519
$
812,398
$
3,045,478
$
5,132,525
(1)
Operating lease obligations excludes $221.9 million of other operating expenses associated with operating leases.
(2) 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.
(3) See note 10 of the condensed consolidated financial statements for further discussion of these debt obligations.
(4) See note 13 to the condensed consolidated financial statements for more information
regarding the AOG Unit Payment.
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, the tax receivable agreement requires us to pay to our Former Managing Partners and Contributing Partners 85% of any tax savings received by AGM and its subsidiaries from our step-up in tax basis. The tax savings achieved may not ensure that we have sufficient cash available to pay this liability and we might be required to incur additional debt to satisfy this liability.
(ii)Debt amounts related to the consolidated
VIEs are not presented in the table above as the Company is not a guarantor of these non-recourse liabilities.
(iii)In connection with the Stone Tower acquisition, the Company agreed to pay the former owners of Stone Tower a specified percentage of any future performance fees earned from certain of the Stone Tower funds, CLOs and strategic investment accounts. This contingent consideration liability is remeasured to fair value at each reporting period until the obligations are satisfied. See note 14 to the condensed consolidated financial statements for further information regarding the contingent consideration liability.
(iv)Commitments from certain of our subsidiaries
to contribute to the funds we manage and certain related parties.
Commitments
The 2022 AMH credit facility, 2024 Senior Notes, 2026 Senior Notes, 2029 Senior Notes, 2030 Senior Notes, 2048 Senior Notes and the 2050 Subordinated Notes will have future impacts on our cash uses. See note 10 of our condensed consolidated financial statements for information regarding the Company’s debt arrangements.
Contingent Obligation
Performance fees with respect to certain funds are subject to reversal in the event of future losses to the extent of the cumulative performance fees recognized in income to date. See note 14 of our condensed consolidated financial statements for a description of our contingent obligation.
One
of the Company’s subsidiaries, AGS, provides underwriting commitments in connection with securities offerings of related parties of Apollo, including portfolio companies of the funds Apollo manages, as well as third parties. As of June 30, 2023 and December 31, 2022, there were no open underwriting commitments.
Atlas Securitized Products Holdings LP
In connection with AGM and CS’s previously announced transaction, certain subsidiaries of Atlas acquired certain assets of the CS Securitized Products Group (the “Transaction”).
Under the terms of the Transaction, Atlas has agreed to pay CS $3.3 billion, $0.4 billion of which is deferred until February 8, 2026, and $2.9 billion of which is deferred until February 8, 2028. This deferred purchase price is an obligation first of Atlas, second of AAA, third of the Company (which has issued a guarantee to AAA), fourth of AHL and fifth of AARe. Each of AARe and AAM has issued an assurance letter to CS for the full deferred purchase obligation amount of $3.3 billion. In exchange for the purchase price, Atlas received approximately $0.4 billion in cash and a portfolio of senior secured warehouse assets, subject to debt, with approximately $1 billion of tangible equity value. These warehouse assets are senior secured assets at industry standard loan-to-value ratios,
structured to investment grade-equivalent criteria, and were approved by Atlas in connection with this Transaction. In addition, Atlas received an investment management contract to manage certain unrelated assets on behalf of CS, providing for quarterly payments expected to total approximately $1.1 billion net to Atlas over 5 years. Finally, Atlas shall also benefit generally from the net spread earned on its
assets in excess of its cost of financing. As a result, the fair value of the liability related to the
Company’s guarantee is not material to the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of incurring losses due to adverse changes in market rates and prices. Our predominant exposure to market risk is related to our role as investment manager and general partner for the funds we manage and the sensitivity to movements in the fair value of their investments and resulting impact on performance fees and management fee revenues. Our direct investments in the funds we manage 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. A description of our market risk exposures may be found under “Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of our 2022 Annual Report.
There have been no material changes to market risk exposures from those previously disclosed in our 2022 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
We maintain “disclosure controls and procedures”, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Co-Presidents 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 Co-Presidents 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 Co-Presidents 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 SEC rules and forms, and that such information is accumulated and communicated to our management, including our Co-Presidents and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
No changes in our internal control over financial
reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) occurred during our most recent quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See
a summary of the Company’s legal proceedings set forth in note 14 to our condensed consolidated financial statements, which is incorporated by reference herein.
ITEM 1A.RISK FACTORS
For a discussion of our potential risks and uncertainties, see the information under the heading "Risk Factors" in our 2022 Annual Report, which is accessible on the Securities and Exchange Commission's website at www.sec.gov. There have been no
material changes to the risk factors for the three months ended June 30, 2023.
The risks described in our 2022 Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the three months ended June 30, 2023, no director or officer of AAM iiadopted/
or iiterminated/ a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
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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.
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.
