Variable Interest Entities

3 Months Ended

Mar. 31, 2014

VARIABLE INTEREST ENTITIES

As described in note 2, the Company consolidates entities that are VIEs for which the Company has been designated as the primary beneficiary. 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, credit, and real estate 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 policy 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 60 days.

Net Gains from Investment Activities of Consolidated Variable Interest Entities

The following table presents net gains from investment activities of the consolidated VIEs for the three months ended March 31, 2014 and 2013, respectively:



	For the Three Months Ended March 31,
	2014			2013
Net unrealized (losses) gains from investment activities	$	(911	)	$	25,120
Net realized gains from investment activities	17,014			50,930
Net gains from investment activities	16,103			76,050
Net unrealized losses from debt	(14,119		)	(88,236		)
Net realized gains (losses) from debt	357			(7,603		)
Net losses from debt	(13,762		)	(95,839		)
Interest and other income	170,994			177,125
Interest and other expenses	(125,600		)	(109,475		)
Net Gains from Investment Activities of Consolidated VIEs	$	47,735		$	47,861

Senior Secured Notes and Subordinated Notes—Included within debt are amounts due to third-party institutions by the consolidated VIEs. The following table summarizes the principal provisions of the debt of the consolidated VIEs as of March 31, 2014 and December 31, 2013:



	As of March 31, 2014						As of December 31, 2013
	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⁾	$	12,006,603	1.33	%		7.3	$	11,877,744	1.31	%		7.3
Subordinated Notes⁽²⁾⁽³⁾	947,357		N/A		⁽¹⁾	8.1	963,099		N/A		⁽¹⁾	8.1
Total	$	12,953,960					$	12,840,843


(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 Notes and Subordinated Notes as of March 31, 2014 and December 31, 2013 was $12,528 million and $12,424 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 vehicle. As of March 31, 2014 and December 31, 2013, the fair value of the consolidated VIE assets was $15,960 million and $15,502 million, respectively. This collateral consisted of cash and cash equivalents, investments, at fair value, and other assets.

The consolidated VIEs’ debt obligations contain various customary loan covenants as described above. As of March 31, 2014, the Company was not aware of any instances of non-compliance with any of these covenants.

Variable Interest Entities Which are Not Consolidated

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

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 March 31, 2014 and December 31, 2013. In addition, the tables present the maximum exposure to losses relating to those VIEs.



	As of March 31, 2014
	Total Assets			Total Liabilities				Apollo Exposure
Private Equity	$	7,641,759		$	(11,748	)		$	1,243
Credit	4,575,031			(481,817		)		33,962
Real Estate	414,869			(268,946		)		—
Total	$	12,631,659	⁽¹⁾	$	(762,511	)	⁽²⁾	$	35,205	⁽³⁾


(1)	Consists of $278,131 in cash, $11,622,052 in investments and $731,476 in receivables.


(2)	Represents $608,225 in debt and other payables, $150,658 in securities sold, not purchased, and $3,628 in capital withdrawals payable.

(3)

Represents Apollo’s direct equity method investment in those entities in which Apollo holds a significant variable interest. Additionally, cumulative carried interest income is subject to reversal in the event of future losses. The maximum amount of future reversal of carried interest income from all of Apollo's funds, including those entities in which Apollo holds a significant variable interest, is $4,904 million as of March 31, 2014 as discussed in note 14.



	As of December 31, 2013
	Total Assets			Total Liabilities				Apollo Exposure
Private Equity	$	7,631,592		$	(38,970	)		$	3,424
Credit	3,926,347			(321,888		)		31,241
Real Estate	1,308,559			(950,421		)		—
Total	$	12,866,498	⁽¹⁾	$	(1,311,279	)	⁽²⁾	$	34,665	⁽³⁾


(1)	Consists of $354,686 in cash, $12,034,487 in investments and $477,325 in receivables.


(2)	Represents $1,161,549 in debt and other payables, $106,532 in securities sold, not purchased, and $43,198 in capital withdrawals payable.

(3)

- Definition

Tabular disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide.

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