EFTA01101980.pdf

EMPIRE VALUATION CONSULTANTS. ac PRIVATE & CONFIDENTIAL June 24, 2014 Alan S. Halperin, Esq. Paul, Weiss, Ritkind, Wharton & Garrison LLP 1285 Avenue of the Americas, Suite 3115 New York, NY 10019-6064 Dear Mr. Halperin: You have requested Empire Valuation Consultants, LLC ("Empire") to estimate the fair market value of a 34.53% limited partnership interest (the "Interest") in Black Family Partners, LP ("BFP" or the "Partnership") as of December 4, 2013 (the "Valuation Date"). It is our understanding that this report will be used by Mr. Leon Black for estate planning purposes. This report is an Appraisal Report as defined in Standards Rule 10 of The Appraisal Foundation's Uniform Standards of Professional Appraisal Practice ("USPAP"), which specifically applies to the preparation of valuation reports of business interests. This report has also been prepared in accordance with the American Institute of Certified Public Accountants Statement on Standards for Valuation Services 1: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset. Valuation Summary Based on the following review and analysis, and subject to the attached Statement of Limiting Conditions, it is our estimate that the fair market value of a 34.53% limited partnership interest in Black Family Partners, LP is reasonably stated as $780,000,000 as of December 4, 2013. 777 Canal View Blvd., Suite 200, Rochester, NY 14623 Tel: (585) 475-9260 empireval.com New York • Cleveland • Rochester • West Hanford EFTA01101980 Alan S. Halperin, Esq. June 24, 2014 Page 2 Methodology BFP has been valued on a going concern basis. Since the Partnership is closely- held, and thus without a public market for its ownership interests, this appraisal was conducted according to guidelines established by the Internal Revenue Service ("IRS") and USPAP, and in conformity with the American Society of Appraisers' Principles of Appraisal Practice and Code of Ethics, together with other standards that were deemed relevant to this engagement. This appraisal considered all pertinent factors outlined in USPAP Standards Rule 9 and IRS Revenue Ruling 59-60, including, but not limited to, the following: • the nature and history of BFP; • the financial and economic conditions affecting the general economy, the Partnership, and its industry; • the past results, current operations, and future prospects of BFP; • the earning capacity and dividend-paying capacity of the Partnership; • the economic benefit to the Partnership of both its tangible and intangible assets; • the market price of actively traded interests in public entities engaged in the same or similar lines of business as BFP, as well as sales of ownership interests in entities similar to the Partnership; • the prices, terms, and conditions of past sales of ownership interests in BFP; and • the impact on the value of ownership interests in BFP resulting from the existence of buy-sell and option agreements, investment letter stock restrictions, restrictive shareholders agreements, or other such agreements. In defining "fair market value," IRS Revenue Ruling 59-60 refers to Section 25.2512-1 of the Gift Tax Regulations. Fair market value is described therein as the price at which ownership interests would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. EFTA01101981 Alan S. Halperin, Esq. June 24, 2014 Page 3 Sources of Information Information used in determining the fair market value of the Interest was provided by the documents and sources listed below: • A copy of BFP's Amended Limited Partnership Agreement, dated May 17, 2007 as amended December 2009 (the "BFP Agreement"); • A copy of BFP's pro forma tax returns, prepared from Mr. Leon Black's personal tax returns, for the years ending December 31, 2009 through 2012; • Documents and information regarding BFP's assets are presented in Appendix A; • Conversations and correspondence regarding BFP, its management policies, financial status and investments with Ms. Eileen Alexanderson ("Management"); and • Other reviews, analyses, and research as were deemed necessary. Partnership Profile BFP operated as an investment holding company. The Partnership was formed on May 17, 2007. As of the Valuation Date, the Partnership's primary asset was a 45.9% interest in BRH Holdings LP ("BRH"). BRH owned 87.27% of AP Professional Holdings LP ("Holdings"), which held 61.68% of the Apollo Operating Group ("AOG") units. Details about AOG are fully discussed later in this report.' The Partnership was also invested in co-investment funds managed by Apollo Global Management LLC and its consolidated affiliates (the "Company" or "Apollo"). In addition to the Apollo co-investment entities, BFP was invested in additional private investment funds and companies. Additionally, BFP has issued multiple promissory notes. The Partnership's investments are detailed below. Based on capital account balances available as of the Valuation Date, the Partnership had an aggregate book value of $3.1 billion. BFP had net income of $327.4 million in 2012. The Partnership has historically made distributions. BFP does not have audited financial statements. Pro forma financial statements for BFP, prepared from Mr. Black's income tax returns, are presented in Exhibits A through C. Percentages based on Apollo Global Management LLC's 10-Q filing as of September 30, 2013. EFTA01101982 Alan S. Halperin, Esq. June 24, 2014 Page 4 A. BFP Ownership As of the Valuation Date, BFP's ownership was as presented in the following table. Table I BFP Ownership Partner Type Interest Black Family GP, LLC GP' 0.0000% AIF IV Management Inc. LP3 0.0000% Judah 2009-A Investment Trust LP 7.8903% Black Family 1997 Trust LP 4.6595% LDB 2011 LLC LP 7.1685% APO! GRAT LP 37.7500% Leon Black LP 42.5317% Total 100.0000% B. Apol o Operating Group According to its most recent SEC filing, Apollo is a global alternative investment manager whose predecessor was founded in 1990. Its primary business is to raise and invest private equity, capital markets and real estate funds as well as managed accounts, on behalf of pension and endowment funds, as well as other institutional and high net worth individual investors. For these investment management services, Apollo receives management fees generally related to the amount of assets under management, transaction and advisory fees for the investments made and carried interest income related to the performance of the respective funds that it manages. Apollo has three primary business segments: • Private Equity ("PE"): PE funds primarily invest in control equity and related debt instruments, convertible securities and distressed debt investments; • Capital Markets ("CM"): CM funds primarily invest in non-control debt and non-control equity investments, including distressed debt securities; and • Real Estate ("RE"): RE funds primarily invest in legacy commercial mortgage-backed securities, commercial first mortgage loans, mezzanine investments and other commercial real estate-related debt investments. Additionally, the Company sponsors real estate funds that focus on 2 General Partner 3 Limited Partner EFTA01101983 Alan S. Halperin, Esq. June 24, 2014 Page 5 opportunistic investments in distressed debt and equity recapitalization transactions. Apollo was formed as a Delaware limited liability company on July 3, 2007 and completed a reorganization of its predecessor businesses on July 13, 2007 (the "Reorganization"). Apollo is managed and operated by its manager, AGM Management, LLC, which in turn is wholly-owned and controlled by Leon Black, Joshua Harris and Marc Rowan (the "Managing Partners"). See Appendix B for an organizational diagram for Apollo and its ownership structure, described below. As of September 30, 2013, Apollo owned, through three intermediate holding companies that include APO Corp., a Delaware corporation that is a domestic corporation for U.S. Federal income tax purposes, APO Asset Co., LLC ("APO Asset"), a Delaware limited liability company that is a disregarded entity for U.S. Federal income tax purposes, and APO (FC), LLC ("APO (FC)"), an Anguilla limited liability company that is treated as a corporation for U.S Federal income tax purposes (collectively, the "Intermediate Holding Companies"), 38.32% of the economic interests of, and operated and controlled all of the businesses and affairs of, the Apollo Operating Group, as general partners. AP Professional Holdings, L.P., a Cayman Islands exempted limited partnership ("Holdings"), is the entity through which the Managing Partners and certain of Apollo's other partners, and their related parties, (the "Contributing Partners") indirectly own (through Holdings) Apollo Operating Group units hold AOG Units. Holdings owned AOG Units that represent 61.68% of the economic interests in the Apollo Operating Group as of September 30, 2013. Apollo also entered into an exchange agreement with Holdings that allows the partners in Holdings, subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Apollo Operating Group, to exchange their AOG Units for the Company's Class A shares on a one-for-one basis up to four times each year, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. A limited partner must exchange one partnership unit in each of the ten Apollo Operating Group partnerships to effect an exchange for one Class A share. On April 4, 2011, Apollo completed the initial public offering ("IPO") of its Class A shares. Apollo received net proceeds from the initial public offering of approximately $382.5 million, which was used to acquire additional AOG Units. Shares of Apollo traded between $29.20 and $30.24 per share and closed at $30.02 per share on the Valuation Date, with the mean value being $29.72 per share. EFTA01101984 Alan S. Halperin, Esq. June 24, 2014 Page 6 C. Description of Assets BFP was invested in cash, multiple Apollo funds, Apollo Operating Group units through BRH and Holdings and a non-Apollo hedge fund. Details regarding the assets are provided below. A summary of the capital account balance for each interest is presented in Exhibit D. Cash and Marketable Securities: The Partnership had a checking account held at Bank of America with a balance of $60.8 million as of the Valuation Date. Additionally, BFP had a brokerage account with JP Morgan, which held $1.4 million in cash, $512,100 in Environmental Solutions World (Ticker:ESWW)4 stock, $5.3 million in Apollo Investment Corp? stock (603,632 shares with a mean value of $8.75 per share) and $0.8 million in AP Alternative Assets, LI" stock (28,730 shares with a mean value of $27.04 per share) as of the Valuation Date. Apollo Private Equity Investment Funds: BFP participated in Apollo's PE funds, specifically AIF III, AIF IV, AIF V and AIF VI. For each fund, BFP invested in a related co-investor entity established for Apollo affiliates and employees to participate in Apollo's individual PE funds. As of the Valuation Date, the Partnership had a capital account balance in ACIII, ACIV, ACV and ACVI. The Partnership's co-invest interests were not subject to management or carried interest fees. In effect, they earned the underlying fund's return on investment, net of any non-fee fund expenses. BFP's capital account balances in ACIII, ACIV, ACV and ACVI were $2.5 million, $0.5 million, $3.9 million and $40.9, respectively, at the Valuation Date. BFP also retained a 36% interest (720.5 of 2,000 points) in AIF III's general partner's carried interest. As of the Valuation Date, the capital account related to the carry points for AIF III was a deficit of $5.0 million, i.e. the general partner was subject to a clawback based on the market value of AIF III's remaining asset. The AIF funds employed a 1.5% management fee and 20% carried interest fee structure. The management fees could vary based on life-cycle of the fund. Carried interest was subject to an 8% preferred for its fee-paying limited partners. The funds generate value through: (1) classic buyouts; (2) distressed buyouts; and (3) corporate partner buyouts. The fund's limited partners could not withdraw, and 4 BFP held 11,380 shares in ESWW. The shares were thinly traded with a most recent closing price of $45 per share. Apollo Investment Corp. ("AINV") is a publicly traded business development company ("BDC") managed by Apollo. 6 AP Alternative Assets, LP ("AAA") is a publicly traded investment company managed by Apollo. The company is listed on the Amsterdam stock exchange. EFTA01101985 Alan S. Halperin, Esq. June 24, 2014 Page 7 transfers required the permission of the respective fund GP entity. The fund size for AIF III, AIF IV, AIF V and AIF VI was $1.5 billion, $3.6 billion, $5 billion and $10.1 billion, respectively. ACIII, ACIV, ACV and ACVI were bound to invest and divest at the same time as AIF III, AIF IV, AIF V and AIF VI, respectively. AIF III, AIF IV and AIF V were all on extension in order to liquidate remaining positions. ACIII, ACIV, ACV and ACVI had no control over the funds, or their selection or timing of investment acquisitions or divestitures. Withdrawal from ACIII, ACIV, ACV and ACVI was not permitted and transfers required the consent of the respective managing members. Table II Apollo Private Equity Co-Invest Entities Capital Account Entity Term Expiration Value The underlying fund was on extension. At the Valuation ACIII $2,554,400 Date there was no indication when the portfolio company would be sold.8 The underlying fund was on indefinite extension. There was ACIV $546,624 no indication when the portfolio companies would be sold. The underlying fund was on contractual extension. There ACV $3,938,673 was no indication when the portfolio companies would be sold. ACVI $40,883,392 The fund's term expires January 12, 2016. Apollo Capital Market Fund Interests: ASC and AVC are invested in capital market funds affiliated with Apollo. Apollo's capital market funds held securities from all portions of a portfolio company's capital structure, with a focus on distressed companies. BFP's interests in ASC and AVC were not subject to management or performance fees. While ASC's and AVC's legal agreements did not dictate specific provisions for withdrawal, Apollo's Management indicated that members of ASC and AVC were allowed to make monthly withdrawal requests. As of the Valuation Date, BFP was able to withdraw its capital from both ASC and AVC effective December 31, 2013. 7 Based on September 30, 2013 quarterly account statements. Capital account balances were adjusted to account for distributions and contributions made between the capital account date and the Valuation Date. As of the writing of this report, Empire was informed by BFP that Apollo liquidated the remaining portfolio company held by ACIII and AIF III in March 2014. EFTA01101986 Alan S. Halperin, Esq. June 24, 2014 Page 8 Table III Apollo Capital Market Co-Invest Entities Entity Capital Account Value' ASC 52,801,160 AVC $7,765,568 FCI II: BFP made a $25 million commitment to FCI II on June 21, 2013. FCI II co-invests in FCI Fund as a Schedule I limited partner. The fund had its first capital call in July 2013, for which the Partnership contributed $5,509,642, of which $4,096,340 was returned after a subsequent close. BFP's net capital contribution to FCI II is $1.4 million. FCI Fund purchased a portfolio of 67 life insurance policies from a European bank with a total policy face amount of $371 million for approximately $27 million. The balance of BFP's future capital contributions are expected to be for premiums, fees and expenses. The Partnership's interest in FCI II was not subject to management or carried interest fees. In effect, it earned the underlying fund's return on investment, net of any non-fee fund expenses. BFP's capital account balance was $1.6 million at the Valuation Date. FCI Fund employed a 0.5% management fee and 10% carried interest fee structure. The management fees could vary based on life-cycle of the fund. Carried interest was subject to a 6% preferred for its fee-paying limited partners. The fund's limited partners could not withdraw, and transfers required the permission of the fund GP. FCI II had no control over the fund, or its selection or timing of investment acquisitions or divestitures. Withdrawal from FCI II was not permitted and transfers required the consent of the general partner. AP Technology Partners LLC ("APTP"): APTP is a venture capital fund launched by Apollo principals and managing partners. BFP has a nominal capital account balance of $13,863. The fund has been inactive for years and was not expected to resume investment activities. All remaining assets in APTP were considered side pocket investments. Apollo Ownership Interests: The Partnership has an indirect ownership position in the Apollo Operating Group through AOG Units held through BRH. In total BFP held 92,727,166 AOG Units. At the Valuation Date, Apollo's stock closed at $30.02 per share, with a mean value of $29.72 per share. AOG Units could be exchanged for Class A shares at various future dates.10 The agreements governing the AOG Units are discussed in greater detail below. The impact of the agreement 9 Based on September 30, 2013 monthly account statements. 10 7.5% of the block of AOG Units became exchangeable on March 29, 2013. EFTA01101987 Alan S. Halperin, Esq. June 24, 2014 Page 9 provisions was considered in the estimation of fair market value for the AOG Units. On an unadjusted basis the capital account value of the AOG units was $2,755,851,374." In addition to the AOG Units held, the Partnership also received an annual payment from Apollo in connection with the tax receivable agreement ("TRA") associated with Apollo ownership sold in the July 2007 transaction which resulted from the reorganization of Apollo and its listing on GSTrUE.12 Non-Apollo Investment Interests: BFP's other investments included interests in four fixed-term private equity funds, five evergreen hedge funds, four development stage/private companies and multiple promissory notes. All of these investments were non-controlling and non-marketable, and subject to certain restrictions. None of the funds made regular distributions. Each subset is described further below. Private-Equity Funds: These investments were subject to transfer restrictions (i.e. requires fund general partner consent), and withdrawal was not permitted prior to the end of the fund's term. Distributions were only anticipated upon the harvest of underlying investments, and the timing and amount of distributions would be determined by each fund's manager or general partner. A summary of key information associated with these funds is presented in the following table. [SPACE LEFT BLANK INTENTIONALLY] Based on the mean value per share of $29.72. 11 GSTrUE is a secondary market for qualified institutional and individual investors. Apollo stopped trading on GSTrUE after its public listing in 2011. EFTA01101988 Alan S. Halperin, Esq. June 24, 2014 Page 10 Table IV Non-Apollo Private Equity Investments — Key Terms BFP's Capital Fee Term Entity Description Account Value Structure Expiration As of the Valuation Date, BFP contributed $4.6 million of a I I AO $3,796,002 $6.0 million commitment. The 2%/20% 12 5:2015 fund is focused on investments in Asia, with a focus on China. As of the Valuation Date, BFP contributed $20.0 million of a $20.0 million commitment. The ,, \A i $18,224,766 1%,15% 5/1/2018 fund is focused on timberland properties in the southeastern United States. As of the Valuation Date, BFP contributed $4.7 million of a $5.0 million commitment. The \A c I' $2,416,630 fund is focused on active 2%/20% 2/23/2019 minority investments located in emerging markets, with a focus on BRIC.1° As of the Valuation Date, BFP contributed $177,896 of a $1.5 million commitment. The fund II \4 $359,525 is targeting $I million 2%/20% 4/1/2023 investments in growth stage "Big Data" companies. Total fund size is $25 million. Hedge Funds: The evergreen funds allowed withdrawal of cap'tal based on a combination of lock-up periods and limited opportunities to withdraw (e.g. annually, quarterly). Although the interests were subject to transfer and other restrictions, the withdrawal rights were considered to be most important. A summary of key information associated with the evergreen funds is presented in the following table. 13 Based on September 30, 2013 quarterly account statements. Capital account balances were adjusted to account for distributions and contributions made between the capital account date and the Valuation Date. 14 Stated annually, as "management fee percentage/performance fee percentage." 1° Brazil, Russia, India and China. EFTA01101989 Alan S. Halperin, Esq. June 24, 2014 Page 11 Table V Non-Apollo Hedge Fund Investments — Key Terms Fee BFP's Capital Withdrawal Entity Description Structure Account Value"' 17 pate n Debt focused special situations ACP $16.511'696 1.5%/20% 3/31/2014 fund. Debt and equity event-driven CVRF $17,544,966 fund. 1.5%/20% 12/31/2013 Global long/short credit and KSC $961,291 event-driven fund. 1.5%/20% 12/31/2013 LC $32,572,504 Long only equity fund. 1.75%/0% 3/31/2014 MG $23,567,119 Arbitrage fund 0%19/20% 3/31/2014 iCrete: iCre e LLC had developed proprietary technology for mixing concrete. BFP held a Class B interest in iCrete. According to the Partnership's 2012 K-1, BFP had a capital account balance of $1.3 million and a capital sharing percentage of 0.849%. iCrete had a $5.8 million members' deficit as of December 31, 2012 and has been unprofitable since inception. KUE: Knowledge Universe Education L.P. was a holding company with a portfolio of development stage secondary education companies. The carrying value of BFP's interest in KUE was estimated to be $33.6 million based on its 2012 K-1 capital account balance. Per BFP's K-1, the Partnership had a 1.4289% capital interest. KUE's aggregate book value of equity was $803.5 million as of December 31, 2012. On October 15, 2013 BFP received a $1.4 million distribution from KUE. The distribution was considered a return of contributions to KUE's investors, though not 100%. The KUE Agreement was amended August 9, 2013. The amendment reflected that a KUE has a target exit date of October 2015 through an IPO. If an IPO is not successfully KUE will wind down by October 2017 through some other means. 16 Based on November 30, 2013 monthly account statements. CVRF and LC are based on September 30, 2013 quarterly account statement. I7 Stated annually, as "management fee percentage/performance fee percentage." la Withdrawal date represents when BFP was allowed to withdraw its capital from the underlying fund as of the Valuation Date based on the provisions of the respective underlying fund agreement. This applies only to ACP, CVRF, LC and MG. BFP has submitted a withdrawal request to KSC. Full withdrawal will be based on the final December 31, 2013 capital account balance. 19 There is no management fee, However, partners bear pro rata levels of fund expenses. EFTA01101990 Alan S. Halperin, Esq. June 24, 2014 Page 12 ESWW: ESWW, through its wholly-owned subsidiaries, is engaged in the designing, developing, manufacturing and selling of emissions control technologies. The company also provides emissions testing and environmental certification services with its primary focus on the North American on-road and off-road diesel retrofit market. ESWW manufactures and markets a line of catalytic emission control and enabling technologies for a number of applications. ESWW is focused on the international medium duty and heavy duty diesel engine market for on-road and off- road vehicles, as well as the utility engine, mining, marine, locomotive and military industries. ESWW also offers engine and after treatment emissions verification testing and certification services. In 2013, BFP invested $2.9 million in ESWW in the form of a convertible note.20 The note pays 10% simple interest, semi-annually. The note will convert at a rate of $80 per share to common equity on March 22, 2018, or sooner if a majority of the note holders elect to convert the note to common stock. Rally Labs: Rally Labs LLC markets and distributes an over-the-counter drug called Blowfish, which is an effervescent, morning-after hangover remedy. BFP invested $200,000 on June 28, 2013 as part of Rally Labs effort to raise to $2 million in investment capital in order to finance its general business operations and marketing initiatives to support a national rollout. The Partnership bought 20,000 units at a price per unit of $10.00. The total offering was 200,000 units. The full allotment of units offered by the company represents 25% of the Rally Lab's fully-diluted capitalization. Related Party Receivables: The Partnership has issued 17 promissory notes. There are 11 outstanding notes with Leon Black, totaling $56.4 million, the Black Family 1997 Trust has two notes totaling $8.2 million, PLB LLC has two notes totaling $3.2 million. One note totaling $25.0 million is due from Narrow Holdings LLC. BFP also had a promissory note due from AIF IV Management Inc. in the amount of $7,471,005. Note terms end between March 13, 2014 and August 5, 2016. Annual interest rates are between 0.18% and 0.32% for 15 of the notes. One note, due from the 1997 Trust, is related to Phaidon and charges 3.0% interest annually. All notes are interest only with principal payments due at the end of each note's term. Additionally, BFP opened a $15.0 million credit line to Phaidon Global which was drawn $7.3 million at the Valuation Date. Interest on the Phaidon Global credit line was 1-month LIBOR plus 200 basis points. The credit line is available through September 2014. Liabilities: BFP had no liabilities at the Valuation Date, with the exception of the clawback liability related to carried interest points for AIF III. 20 The total aggregate offering was $4,596,929. EFTA01101991 Alan S. Halperin, Esq. June 24, 2014 Page 13 Summary: Based on the most recent capital account statements and holdings information provided by Apollo and BFP Management, the Partnership's total assets had an aggregate market value of $3.1 billion. Since BFP had only a $5.0 clawback liability its aggregate partners' capital was $3.1 billion (based on the mean value per share of Apollo at $29.72, AINV's stock at $8.75 and AAA's stock at $27.04 as of the Valuation Date). See Exhibit D. Valuation adjustments necessary to reflect the market value of the Partnership's individual assets taking into consideration various restrictions that hinder BFP's control over the assets and lack of a ready market to dispose of or trade its assets is considered in detail in the valuation section of this report. D. BFP Agreement Provisions BFP was formed pursuant to Delaware Revised Uniform Limited Partnership Act (the "Act"). The BFP Agreement dictates the rights, responsibilities and restrictions placed on the Interest. A summary of key provisions impacting the fair market value of the Interest is presented below. • Management: The Partnership shall be managed solely at the discretion of the GP (i.e. Black Family GP, LLC). (7.1-7.2.) No LP shall have the ability to act on behalf of the Partnership in its capacity as such. (7.6.) There are no restrictions on the actions of the GP, and the GP may not be removed. (7.4.) Upon an event of withdrawal by the GP, a successor GP shall be appointed by a majority in interest of the LPs. (7.7.) • P&L Allocations and Distributions: P&L allocations shall be made on a pro rata basis. (5.2.) The timing and amount of distributions shall be determined by the GP in its sole and absolute discretion. Such distributions are based on sharing ratios. (5.4.) • Costs: Any costs incurred by the GP on behalf of the Partnership for its operations shall be reimbursed by the Partnership. (Article 4.) • Restrictions on Transfer: Transfers of economic interests are permitted. However, no transferee shall become a partner without the prior written consent of the GP. (9.1.) Upon death, a partner's economic rights shall be transferred to his legal representative. (9.3.) In addition to the required consent of the GP, other administrative tasks must be completed in order to effect the admission of a transferee as a substitute LP. (9.4.) EFTA01101992 Alan S. Halperin, Esq. June 24, 2014 Page 14 • Restrictions on Withdrawal: Any Partner may withdraw any portion of his, her, or its capital account at any time. Upon such withdrawal, the Partnership shall distribute to such Partner assets of the Partnership with an aggregate fair market value equal to (i) the value of all of the assets of the Partnership, multiplied by (ii) such Partner's Sharing Ratio, multiplied by (iii) the percentage of such Partner's capital account being withdrawn by such Partner. If the Partnership's assets consist of assets other than cash or marketable securities, the FMV shall be determined by a qualified appraiser selected by the GP. (3.4.) • Books and Information: The GP shall cause complete books and records to be maintained at the principal offices of the Partnership. Such records shall be open to inspection and examination of all partners in person or by their duly authorized representatives, who have the right to make copies at their own expense during normal business hours. (8.1.) The GP may, but is not required to, have annual financial statements prepared. Such statements need not be audited. If prepared, copies of such statements shall be delivered to the LPs. (8.2.) The Partnership's accountants shall prepare all federal, state and local income tax returns for the Partnership. (8.3(a).) • Dissolution: The Partnership will be dissolved at such time as the first of the following should occur: (1) the bankruptcy or dissolution of the GP; (2) the determination of the GP to dissolve the Partnership; (3) the entry of a decree of judicial dissolution; (4) any event under the act sufficient to cause dissolution. (10.1.) • Amendment: The Agreement may only be amended by the unanimous agreement of the Partners. (12.1.) AOG Unit Agreement Provisions The Interest and AOG Units are subject to provisions of multiple agreements. The impact of these agreements is that the value of an AOG Unit will vary from the value of a share of Apollo's Class A stock, based on the restrictions and benefits imposed on the AOG Units. Transfer and exchange restrictions remove the ability to participate in a liquid market. The TRA outlines how the tax benefit derived from an AOG Unit exchange is shared between the exchanging unit holder and Apollo. Empire reviewed the key agreements, as well as the summary for each agreement that is included in Apollo's S-1. The descriptions provided below are paraphrased EFTA01101993 Alan S. Halperin, Esq. June 24, 2014 Page 15 from the content provided in the S-1, and are intended to have the meaning conveyed therein. A. The Exchange Agreement BFP entered into an exchange agreement with Holdings which provides for the exchange of AOG Units owned by Holdings for Class A shares of Apollo. Subject to certain procedures and restrictions21 and upon 60 days' written notice prior to a designated quarterly date, each of Holdings' owners22 has the right to cause Holdings to exchange the AOG Units owned indirectly by such owner for BFP Class A shares. The Class A shares received in the exchange would then be sold immediately at the prevailing market price, or at a lower acceptable price, and the net proceeds distributed to the owner affecting the exchange. In connection with the exchange, BFP's interest in the AOG Units will be correspondingly increased and the voting power of the Class B share will be correspondingly decreased. B. The Principals Agreement The Principals Agreement provides that each Managing Partner's Pecuniary Interest23 in the AOG Units that he holds indirectly through Holdings shall be subject to vesting. The Managing Partners own Holdings in accordance with their respective sharing percentages. Pursuant to the Principals Agreement, the AOG Units attributable to each of Messrs. Harris and Rowan will vest in in 60 equal monthly installments. The AOG Units attributable to Mr. Black in which BFP has an indirect interest will vest in 72 equal monthly installments. Although the Principals Agreement was entered into on July 13, 2007, AOG's Managing Partners are credited for their employment as of January 1, 2007 for purposes of its vesting provisions. C. The Shareholder Agreement While the Exchange Agreement allows for quarterly exchanges of AOG Units into Class A shares of BFP, the Shareholder Agreement restricts the amount and timing of such exchanges involving a Managing Partner's aggregate equity interest ("Equity Interests") via its transfer restrictions. These restrictions are described below. 21 Restrictions include the vesting schedules applicable to the Managing Partners, as well as any applicable transfer restrictions and lock-up agreements. 22 Including Managing Partners, contributing partners, and certain transferees thereof. 23 Pecuniary Interest - With respect to each Managing Partner, the number of AOG units that would be distributable to such Managing Partner assuming that Holdings were liquidated and its assets distributed in accordance with its governing agreements. EFTA01101994 Alan S. Halperin, Esq. June 24, 2014 Page 16 No Managing Partner' may affect cumulative transfers of Equity Interests, representing more than: 1. 0.0% of his Equity Interests at any time prior to the second anniversary of the date on which the registration statement of which the S-1 forms a part became effective (the "shelf effectiveness date"), i.e. March 29, 2011; 2. 7.5% of his Equity Interests at any time on or after the second anniversary and prior to the third anniversary of the shelf effectiveness date; 3. 15% of his Equity Interests at any time on or after the third anniversary and prior to the fourth anniversary of the shelf effectiveness date; 4. 22.5% of his Equity Interests at any time on or after the fourth anniversary and prior to the fifth anniversary of the shelf effectiveness date; 5. 30% of his Equity Interests at any time on or after the fifth anniversary and prior to the sixth anniversary of the shelf effectiveness date; or 6. 100% of his Equity Interests at any time on or after the sixth anniversary of the shelf effectiveness date. Certain transfers were not subject to the restrictions described above, including transfers: (1) from one founder to another founder; (2) to a permitted transferee of such Managing Partner; and (3) in connection with a sale by one or more of the Managing Partners in one or a related series of transactions resulting in the Managing Partners owning or controlling, directly or indirectly, less than 50.1% of the economic or voting interests in Apollo or AOG, or any other person exercising control in Apollo or the AOG by contract, which would include a transfer of control of their manager. D. Tax Receivable Agreement In the event that an exchange pursuant to the Exchange Agreement is a taxable transaction, Apollo Management Holdings, L.P. and the AOG entities that it controls will make a Section 754 election which may result in an adjustment to the tax basis of a portion of the assets owned by the AOG at the time of the exchange. The taxable exchanges may result in increases in the tax depreciation and amortization deductions from depreciable and amortizable assets, as well as an increase in the tax basis of other assets, of AOG that otherwise would not have been available. A portion of any increase in depreciation and amortization tax 24 This applies to Managing Partners and their permitted transferees. EFTA01101995 Alan S. Halperin, Esq. June 24, 2014 Page 17 deductions, as well as the increase in the tax basis of such other assets, will reduce the amount of tax that APO Corp. would otherwise be required to pay on future income. Additionally, Apollo's acquisition of AOG Units in such an exchange may result in increases in tax deductions and tax basis that reduces the amount of tax that APO Corp. would otherwise be required to pay in the future. This occurred in connection with the Apollo's acquisition of AOG Units from the Managing Partners in the strategic investors' transaction in July 2007. The TRA requires APO Corp. to pay the Managing Partner (or to a permitted transferee of such Managing Partner, i.e. BFP) or contributing partner involved in such an exchange 85% of the amount of actual cash savings, if any, in U.S. Federal, state, local and foreign income tax that APO Corp. realizes as a result of these increases in tax deductions and tax basis, and certain other tax benefits, including imputed interest expense. APO Corp. expects to benefit from the remaining 15% of actual cash savings, if any, in income tax that it realizes. For purposes of the TRA, cash savings in income tax will be computed by comparing APO Corp's actual income tax liability to the amount of such taxes that APO Corp. would have been required to pay had there been no increase to the tax basis of the tangible and intangible assets of the applicable AOG entity as a result of the transaction and had APO Corp. not entered into the TRA. The tax savings achieved may not ensure that APO Corp. has sufficient cash available to pay the tax liability or generate additional distributions to its investors. Also, APO Corp. may need to incur additional debt to repay the TRA if its cash flows are not met. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless APO Corp. exercises the right to terminate the TRA by paying an amount based on the present value of payments remaining to be made under the agreement with respect to units that have been exchanged or sold and units which have not yet been exchanged or sold. The present value of remaining payments will be determined based on certain assumptions, including that APO Corp. would have sufficient taxable income to fully utilize the deductions that would have arisen from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. No payments will be made if a Managing Partner or contributing partner elects to exchange his or her AOG Units in a tax-free transaction. In the event that other 23 Or is deemed to realize in the ease of an early termination payment by APO Corp. or a change of control. EFTA01101996 Alan S. Halperin, Esq. June 24, 2014 Page 18 of Apollo's current or future subsidiaries become taxable as corporations and acquire AOG Units in the future, or if Apollo becomes taxable as a corporation for U.S. Federal income tax purposes, each will become subject to a tax receivable agreement with substantially similar terms. Economic, Industry and Company Outlook In the appraisal of any company, the general economic factors prevailing at the valuation date, as well as those foreseen then, must be considered. Assimilation of these facts and forecasts provides insight into the economic climate in which investors are dealing. Although individual factors may or may not have a direct impact upon a particular industry, the overall economy and its outlook have a strong influence on how investors perceive investment opportunities. A. Domestic Economic Outlook For this analysis, the general economic climate and outlook for the domestic economy that prevailed through the Valuation Date was considered. This section of the report contains an overview of selected economic factors, such as gross domestic product ("GDP"), inflation, United States ("U.S.") monetary and fiscal policy, corporate earnings, and unemployment. According to Value Line,26 while first quarter GDP growth was just 1.1%, GDP grew 2.5% through June, and 2.8% in the third quarter of 2013. Unfortunately, some of the more recent growth pick-up included increases that could not be sustained, including June's gains in consumer spending. Moving into 2013's fourth quarter, those spending gains weakened slightly, due to strength in inventory building. Based on the improving trends in employment, housing, consumer expenditures, and business outlays, and taking note of the costs of the earlier government shutdown, Value Line predicted that the nation's aggregate output would show an increase of a little more than 2% in the final period of 2013. Value Line believed that the shutdown would strip a few tenths of a percentage point off of GDP growth in the fourth quarter. Assuming no further government shutdown in the coming months, the economy was positioned to pick up slowly but steadily over the following quarters, with growth edging up toward 3% by the end of 2014, but averaging closer to 2.5% for the year. A resumption of the upswing in housing, additional gains in business investment, further modest employment increases, and a corresponding reduction in the U.S. jobless rate underscored Value Line's positive expectations for 2014. Is Quarterly Economic Review, Value Line Publishing LLC ("Value Line"), November 22, 2013. EFTA01101997 Alan S. Halperin, Esq. June 24, 2014 Page 19 Inflation: The possibility of deflation remained on the minds of some Federal Reserve governors, as they continued an easy money course in the hopes of minimizing the deflation risk. Value Line considered deflation risk to be relatively small, especially after four years of uninterrupted economic growth. Still, the long- term goal of the Federal Reserve was to keep inflation in the 2% range. The central bank was relatively unconcerned about upward price pressure, and was unlikely to change its position in the near term. Value line believed that, in the intermediate-term, inflation would stay benign. Eventually, though, the aggressive monetary easing undertaken by the central bank, including the historic levels of bond buying, would pressure prices upward. The magnitude and timeframe of that future pressure were difficult to predict. Interest Rates: Because the Federal Reserve was not preoccupied with containing inflation, it could focus on its other mandate, namely, fostering maximum employment. Despite a strong 204,000 increase in non-farm payrolls in October, there remained ample room for improvement. If the October payroll increase rate were sustained, it would reduce the jobless rate. Accordingly, the historically low level of interest rates was likely to persist through at least 2014. Short-term interest rates, which the Fed controlled directly via its federal funds target, were anticipated to be held near zero over that span. Longer-term interest rates, in particular, the benchmark 10-year Treasury note, which were used to set mortgage rates, ranged from 2.4% to 2.8%; Value Line expected a modest, albeit steady, climb back toward the 4.0% level by the end of the decade. Importantly, rates were not expected to increase quickly enough to derail the housing recovery. Corporate Profits: As of November 2013, the third-quarter earnings season had concluded for the most part, and aggregate results were relatively good. Of note, most companies met or exceeded their profit targets, though many of those targets were reduced over the course of the three-month period. Such a pattern, moreover, had been in place for many quarters. An already strong stock market was, if anything, given more energy by the concluding earnings season. Looking ahead, Value Line expected with small but steady overall profit growth in the final quarter of 2013 and during 2014. Other Economic Indicators: For the years 2013 through 2015, Value Line hypothesized the economic environment as shown in the table below: