4. VARIABLE INTEREST ENTITIES

The Company consolidates entities that are VIEs for which the Company has been designated as the primary beneficiary. The purpose of such VIEs is to provide strategy-specific investment opportunities for investors in exchange for management and performance based fees. The investment strategies of the entities that the Company manages may vary by entity; however, the fundamental risks of such entities have similar characteristics, including loss of invested capital and the return of carried interest income previously distributed to the Company by certain private equity and credit entities. The nature of the Company’s involvement with VIEs includes direct and indirect investments and fee arrangements. The Company does not provide performance guarantees and has no other financial obligations to provide funding to VIEs other than its own capital commitments. There is no recourse to the Company for the consolidated VIEs’ liabilities.

The assets and liabilities of the consolidated VIEs are comprised primarily of investments and debt, at fair value, and are included within assets and liabilities of consolidated variable interest entities, respectively, in the condensed consolidated statements of financial condition.

Consolidated Variable Interest Entities

Apollo has consolidated VIEs in accordance with the methodology described in note 2. The majority of the consolidated VIEs were formed for the sole purpose of issuing collateralized notes to investors. The assets of these VIEs are primarily comprised of senior secured loans and the liabilities are primarily comprised of debt. Through its role as collateral manager of these VIEs, it was determined that Apollo had the power to direct the activities that most significantly impact the economic performance of these VIEs. Additionally, Apollo determined that the potential fees that it could receive directly and indirectly from these VIEs represent rights to returns that could potentially be significant to such VIEs. As a result, Apollo determined that it is the primary beneficiary and therefore should consolidate the VIEs.

The assets of these consolidated VIEs are not available to creditors of the Company. In addition, the investors in these consolidated VIEs have no recourse against the assets of the Company. The Company has elected the fair value option for financial instruments held by its consolidated VIEs, which includes investments in loans and corporate bonds, as well as debt obligations held by such consolidated VIEs. Other assets include amounts due from brokers and interest receivables. Other liabilities include payables for securities purchased, which represent open trades within the consolidated VIEs and primarily relate to corporate loans that are expected to settle within the next sixty days.

Fair Value Measurements

The following table summarizes the valuation of Apollo’s consolidated VIEs in fair value hierarchy levels as of June 30, 2013 and December 31, 2012:


	Level I				Level II				Level III				Totals
	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Investments, at fair value	$	60	$	168	$	10,463,405	$	11,045,902	$	1,757,857	$	1,643,465	$	12,221,322	$	12,689,535

	Level I				Level II				Level III				Totals
	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Liabilities, at fair value	$	—	$	—	$	—	$	—	$	10,835,271	$	11,834,955	$	10,835,271	$	11,834,955

Level III investments include corporate loan and corporate bond investments held by the consolidated VIEs. Level III liabilities consist of notes and loans, the valuations of which are discussed further in note 2. All Level II investments were valued using broker quotes. Transfers of investments out of Level III and into Level II or Level I, if any, are accounted for as of the end of the reporting period in which the transfer occurred. For the three and six months ended June 30, 2013, there were no transfers between Level I and Level II investments. For the three and six months ended June 30, 2012, transfers from Level II into Level I totaled $164. Transfers into Level I represent those financial instruments for which an unadjusted quoted price in an active market became available for the identical asset.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The following table summarizes the quantitative inputs and assumptions used for investments, at fair value, categorized as Level III in the fair value hierarchy as of June 30, 2013. The disclosure below excludes Level III investments, at fair value, as of June 30, 2013, for which the determination of fair value is based on broker quotes:

Fair Value at
June 30, 2013

Valuation Techniques

Unobservable

Inputs

Ranges

Weighted
Average

Financial Assets:

Bank Debt Term Loans

56,566

Discounted Cash Flow –
Comparable Yields

Discount Rates

10.7%–30.4%

15.7

Stocks

603

Market Comparable
Companies

Comparable
Multiples

6.6x

Total

57,169

The significant unobservable inputs used in the fair value measurement of the bank debt term loans and stocks include the discount rate applied and the multiples applied in the valuation models. These unobservable inputs in isolation can cause significant increases (decreases) in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of an investment; conversely, decreases in the discount rate can significantly increase the fair value of an investment. The discount rate is determined based on the market rates an investor would expect for a similar investment with similar risks. When a comparable multiple model is used to determine fair value, the comparable multiples are generally multiplied by the underlying companies’ earnings before interest, taxes, depreciation and amortization (“EBITDA”) to establish the total enterprise value of the company. The comparable multiple is determined based on the implied trading multiple of public industry peers.

The following table summarizes the changes in investments of consolidated VIEs, which are measured at fair value and characterized as Level III investments:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Balance, Beginning of Period	$	1,765,988		$	215,246		$	1,643,465		$	246,609
Acquisition of VIEs		—			1,482,057			—			1,482,057
Elimination of investments attributable to consolidation of VIEs		19,302			(59,764	)		15,400			(59,764	)
Purchases		538,507			210,721			922,668			437,666
Sale of investments		(319,231	)		(935,739	)		(506,092	)		(975,013	)
Net realized (losses) gains		(2,566	)		5,850			(7,008	)		1,192
Changes in net unrealized gains (losses)		6,304			(9,377	)		4,951			2,215
Transfers out of Level III		(444,462	)		(55,913	)		(782,135	)		(346,430	)
Transfers into Level III		194,015			144,885			466,608			209,434

Balance, End of Period	$	1,757,857		$	997,966		$	1,757,857		$	997,966

Changes in net unrealized gains (losses) included in Net (Losses) Gains from Investment Activities of consolidated VIEs related to investments still held at reporting date	$	3,850		$	(2,063	)	$	(6,916	)	$	5,437

Investments were transferred out of Level III into Level II and into Level III out of Level II, respectively, as a result of subjecting the broker quotes on these investments to various criteria which include the number and quality of broker quotes, the standard deviation of obtained broker quotes, and the percentage deviation from independent pricing services.

The following table summarizes the changes in liabilities of consolidated VIEs, which are measured at fair value and characterized as Level III liabilities:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Balance, Beginning of Period	$	11,347,332		$	3,700,536		$	11,834,955		$	3,189,837
Acquisition of VIEs		—			7,317,144			—			7,317,144
Borrowings		—			503,848			332,250			929,532
Repayments		(508,400	)		(243,343	)		(1,420,175	)		(246,134	)
Net realized gains on debt		(91,000	)		—			(83,397	)		—
Changes in net unrealized losses from debt		68,013			14,247			156,249			102,825
Elimination of debt attributable to consolidated VIEs		19,326			(59,772	)		15,389			(60,544	)

Balance, End of Period	$	10,835,271		$	11,232,660		$	10,835,271		$	11,232,660

Changes in net unrealized (gains) losses included in Net (Losses) Gains from Investment Activities of consolidated VIEs related to liabilities still held at reporting date	$	(17,662	)	$	8,456		$	75,214		$	93,021

Net (Losses) Gains from Investment Activities of Consolidated Variable Interest Entities

The following table presents net (losses) gains from investment activities of the consolidated VIEs for the three and six months ended June 30, 2013 and 2012, respectively:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Net unrealized (losses) gains from investment activities	$	(138,181	)	$	(18,021	)	$	(113,061	)	$	51,998
Net realized gains from investment activities		32,988			12,349			83,918			14,634

Net (losses) gains from investment activities		(105,193	)		(5,672	)		(29,143	)		66,632

Net unrealized losses from debt		(68,013	)		(14,247	)		(156,249	)		(102,825	)
Net realized gains from debt		91,000			—			83,397			—

Net gains (losses) from debt		22,987			(14,247	)		(72,852	)		(102,825	)

Interest and other income		152,501			171,229			329,626			216,860
Other expenses		(105,493	)		(119,547	)		(214,968	)		(165,105	)

Net (Losses) Gains from Investment Activities of Consolidated VIEs	$	(35,198	)	$	31,763		$	12,663		$	15,562

Senior Secured Notes and Subordinated Notes—Included within debt are amounts due to third-party institutions of the consolidated VIEs. The following table summarizes the principal provisions of the debt of the consolidated VIEs as of June 30, 2013 and December 31, 2012:


	June 30, 2013							December 31, 2012
	Principal Outstanding		Weighted Average Interest Rate			Weighted Average Remaining Maturity in Years		Principal Outstanding		Weighted Average Interest Rate			Weighted Average Remaining Maturity in Years
Senior Secured Notes⁽²⁾⁽³⁾	$	10,379,364		1.04	%		7.0	$	11,409,825		1.30	%		7.3
Subordinated Notes⁽²⁾⁽³⁾		929,278		N/A	⁽¹⁾		7.6		1,074,904		N/A	⁽¹⁾		7.7

Total	$	11,308,642						$	12,484,729

(1)	The subordinated notes do not have contractual interest rates but instead receive distributions from the excess cash flows of the VIEs.

(2)	The fair value of Senior Secured and Subordinated Notes as of June 30, 2013 and December 31, 2012 was $10,835 million and $11,835 million, respectively.

(3)

The debt at fair value of the consolidated VIEs is collateralized by assets of the consolidated VIEs and assets of one vehicle may not be used to satisfy the liabilities of another. As of June 30, 2013 and December 31, 2012, the fair value of the consolidated VIE assets was $14,150 million and $14,672 million, respectively. This collateral consisted of cash and cash equivalents, investments, at fair value, and other assets.

The following table provides a summary of the quantitative inputs and assumptions used for liabilities, at fair value, categorized as Level III in the fair value hierarchy as of June 30, 2013. The disclosure below excludes Level III liabilities, at fair value, as of June 30, 2013 for which the determination of fair value is based on broker quotes:


	As of June 30, 2013
	Fair Value		Valuation Technique	Unobservable Input	Ranges	Weighted Average
Subordinated Notes	$	766,611	Discounted Cash	Discount Rate	10.0%-12.0%		10.3	%
			Flow	Default Rate	1.0%-1.5%		1.2	%
				Recovery Rate	75.0%		75.0	%
Senior Secured Notes	$	2,071,470	Discounted Cash	Discount Rate	1.9%–2.1%		2.0	%
			Flow	Default Rate	2.0%		2.0	%
				Recovery Rate	30.0%–65.0%		59.9	%

The significant unobservable inputs used in the fair value measurement of the subordinated and senior secured notes include the discount rate applied in the valuation models, default and recovery rates applied in the valuation models. These inputs in isolation can cause significant increases (decreases) in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair value of subordinated and senior secured notes; conversely, decreases in the discount rate can significantly increase the fair value of subordinated and senior secured notes. The discount rate is determined based on the market rates an investor would expect for similar subordinated and senior secured notes with similar risks.

The consolidated VIEs have elected the fair value option to value the notes payable. The general partner uses its discretion and judgment in considering and appraising relevant factors in determining valuation of these loans. As of June 30, 2013, the debt, at fair value, is classified as Level III liabilities. Because of the inherent uncertainty in the valuation of the notes payable, which are not publicly traded, estimated values may differ significantly from the values that would have been reported had a ready market for such investments existed.

The consolidated VIEs’ debt obligations contain various customary loan covenants as described above. As of June 30, 2013, the Company is not aware of any instances of noncompliance with any of these covenants.

Variable Interest Entities Which are Not Consolidated

The Company holds variable interests in certain VIEs which are not consolidated, as it has been determined that Apollo is not the primary beneficiary.

The following tables present the carrying amounts of the assets and liabilities of the VIEs for which Apollo has concluded that it holds a significant variable interest, but that it is not the primary beneficiary as of June 30, 2013 and December 31, 2012. In addition, the tables present the maximum exposure to loss relating to those VIEs.


	June 30, 2013
	Total Assets			Total Liabilities			Apollo Exposure
Private Equity	$	10,490,123		$	(49,067	)	$	5,802
Credit		2,926,982			(255,900	)		15,967
Real Estate		1,562,431			(1,143,349	)		—

Total	$	14,979,536	⁽¹⁾	$	(1,448,316	)⁽²⁾	$	21,769	⁽³⁾

(1)	Consists of $435,924 in cash, $14,022,771 in investments and $520,841 in receivables.

(2)	Represents $1,402,393 in debt and other payables, $45,824 in securities sold, not purchased, and $99 in capital withdrawals payable.

(3)	Apollo’s exposure is limited to its direct and indirect investments in those entities in which Apollo holds a significant variable interest.


	December 31, 2012
	Total Assets			Total Liabilities			Apollo Exposure
Private Equity	$	13,498,100		$	(34,438	)	$	7,105
Credit		3,276,198			(545,547	)		12,605
Real Estate		1,685,793			(1,237,462	)		—

Total	$	18,460,091	⁽¹⁾	$	(1,817,447	)⁽²⁾	$	19,710	⁽³⁾

(1)	Consists of $452,116 in cash, $17,092,814 in investments and $915,161 in receivables.

(2)	Represents $1,752,294 in debt and other payables, $32,702 in securities sold, not purchased, and $32,451 in capital withdrawals payable.

(3)	Apollo’s exposure is limited to its direct and indirect investments in those entities in which Apollo holds a significant variable interest.