EFTA02714460.pdf

Apollo Global Management LLC I April 1.2015 Morgan Stanley MORGAN STANLEY RESEARCH MORGAN STANLEY & co. LLC April 1, 2015 Michael J. Cyprys, CM, CPA Apollo Global Management LLC Nicholas Stelzner, CFA Winter Is Coming: Sell APO Into 1Q Earnings Industry View Stock Rating Price Target In-Line Underweight 523.00 Apollo Global Management LLC ( APO N, APO US US Asset Managers Un tog States of Amenca Stock Rating Underweight Lowering 1Q divi estimate by 38% to 30c; we're now 38% below Industry View In•Une consensus. Risk is that dividends may skew towards our bear case in Price target 523.00 Shr price. dose (Mar 31, 2015) $21.60 2015-16 with APO largely through its harvesting mode. 52-Week Range 531 59-20.02 Near-term we see downside risk to APO shares with our 30c dividend Fiscal Year Ending 12/14 12/15e 12/16e 12/17e estimate in 1Q that is 38% below consensus and 64% lower than 1Q14's ModelWare EPS (5) 1.42 L88 2.15 2.27 Prior ModelWare EPS 1.86 2.07 2.22 84c div. Our 2015 dividend of 1.96c is 6% below consensus and we see (5) downside risk of —36c if the cash performance fees held in Fund VI escrow are P/E 16.6 11.5 10.1 9.5 not released this year (we expect this is released in 4Q15, but if timing is Consensus EPS (5)5 1.64 2.01 2.25 Div yid (%) 12.3 9.1 8.7 8.1 pushed out then our 2015 divi declines to 1.60c which is 23% below Unless otherwise noted. all meows am based on Mogan Stanley al adelivia• loamre** I • COM4tOindliu s worded by Thomsen Rea leis tataiatios consensus). While we see long-term value in APO, given the firm's strong track r • Mag.,. StanIty Rose...eh *amides record of above average market returns, we think the stock will likely QUARTERLY MODELWARE EN :Si underperform peers over the next 12 months due to a declining cash earnings 2015e 2015e 2016e 2016e and dividend trajectory. Also see our 1Q Alts preview here: US Asset Quarter 2014 Prior Current Prior Current Managers: Summer of Realizations: Buy BX and CG into 1Q Earnings (01 Q1 0.55 0.38 0.36 0.58 0.60 Apr 2015). Q2 0.52 0.54 0.56 055 0.57 Q3 0.12 0.42 0.43 0.43 0.45 Q4 0.23 0.51 0.53 0.51 0.53 34 divi expected to be the lowest since 2Q12.If this trend persists, there t • Malian Sunk,/ Reierch *tamales could be a disconnect between near-term share-price performance and longer-term fundamentals. APO's high dividend yield (9.6% currently on cons 2015 divi) is a core part of the APO investment appeal in the short-term, until the outlook for cash earnings improves after another deployment cycle or incremental scaling of the credit business. We see downside risk to consensus dividend estimates and we're 6% below in 2015 (with downside bias to our estimate) and 13% below in 2016. No PE Monetizations Announced in 1Q: APO did not announce any PE exits in 1Q in which they can take cash carry. Yes APO exited Sprouts but that's held in the Fund VI escrow which is not released until the portfolio value exceeds 115% of cost (last at 104% in 4Q and likely declines further in 1Q with the Sprouts exit). We're estimating 3c in cash carry for PE in 1Q as we bake in potential dividend recaps in portfolio companies. APO announced sales of Brit Insurance and Great Wolf in 1Q which we estimate could generate 21c of cash carry but we do not expect these to close until 2Q or 3Q. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict CNS Monitoring fee expired in 4Q, drops to zero in 1Q: this drives a 29% of interest that could affect the objectivity of Morgan decline in credit mgmt fee revenues in 1Q15, worth 8c to EPS. We're relatively Stanley Research. Investors should consider Morgan less concerned about this as it's been expected for some time now and does Stanley Research as only a single factor in making their investment decision. not impact cash earnings or the dividend... but presents headline risk to For analyst certification and other important disclosures, reported EPS. refer to the Disclosure Section, located at the end of this report. Founder and significant shareholder lock-ups expired March 29, could EFTA_R1_02140295 EFTA02714460  Apollo Global Manarmant LLC I April 1.2015 Morgan Stanley MORGAN STANLEY RESEARCH potentially see insider share sales post black-out period in May: this is worth 7.6% of sharecount, which could pressure the shares near -term. While its possible none could sell, history suggests partial selling. Where we could be wrong: higher than expected divi could be driven by 1) dividend recap that may not be reported in the press/loan data services, for which we pencil in 3c, 2) greater monetization of APO's GP stake in funds beyond the beyond the 4c that we model in 1Q for realized investment income, 3) dividend payout greater than 90% of cash earnings using on- balance sheet cash or funded through debt issuance (which we think is highly unlikely), 4) greater than expected management fee-related earnings which we estimate at 19c pre-tax, 15c after-tax, 5) greater net realized cash performance fees from the credit business which we model at 450m or 12c pre-tax. Changes to our Estimates: Lowering 1Q divi by 38% to 30c and lowering 1Q EPS estimate by 7% to 36c. Our 2015-16 dividend estimates decline by 15%/6% to 51.96/51.88 (that's 696/13% below cons). 2 EFTA_R1_02140296 EFTA02714461  Apollo Global Management LLC I April 1.2015 Morgan Stanley MORGAN STANLEY RESEARCH Apollo Global Management (APO, $21.60, Underweight, PT $23) Less attractive risk-reward as largely through cash harvesting vs peers; long-term potential in unlocking value from Athene but still early days Why Underweight? $ 40 • Less upside relative to our Overweight stocks, 35 driven by Apollo's early cycle skew. We see lower 532 CO b44%i cash earnings over the next several years as APO 30 harvested its investments earlier than peers (80% 25 thru harvesting vs peers at 45.65% thru) which $23/401•11111 • leaves less upside at this point in APO's cycle. 20 • Athene catalyst longer tailed with IPO potentially delayed to 2016 but we would look to 15 015 00 01%) get more positive as cash monetization 10 approaches. • Expect lower fundraising at 19% of AVM in 5 2015-16 vs. peer average of 30% this drives fee- paying AUM CAGR of 5% in 2014-17 (below peer 0 MY-15 544.13 w ,-1. 54.14 Mails 5•5-15 010,-10 avg of 11%) a Ore Can Oaf 141 —macro pm. 4•4••••••• • Oren SNVi.P4 • Founder and significant shareholder lock-ups S0uKK•'. Thomson Revues. Morgan slant•), ****** ch expire March 29th (worth 7.6% of share count) could weigh on the stock near-term $23 Based on DCF and sum-of-the-parts; back into implied multiple Key Value Drivers Bull $32 Returns more in-line with historical. Fundraising +50% and deployment +25% above base case; faster Athene asset growth; • Athene: IPO as early as 4Q15 but most likely in 11.3x 2016e Bull Case EPS carry taxed as ordinary income. 2016, resolution of internal control weaknesses, strategic actions should accelerate already strong asset growth: and shifting earnings profile toward Base $23 Below historical returns with rising allocations to alternatives: fee-related earnings 10.7x 2016e Base Case EPS 5% fee-paying AVM CAGR declining pace of harvesting investments; ramp to full corp. tax rate in 2019-20. • Strategic actions: including acquisitions to further scale the credit and real estate businesses Bear $15 Challenging exit and investing environment negative near- nix 2016e Bear Case EPS term marks on accrued performance fees, delayed eats; returns Potential Catalysts well below historical average, slower capital deployment and • Stronger fundraising weaker fundraising environment; full corp. tax rate in 2018. • Continued pace of realizations Exhibit 1: Bull to Bear Drivers • Strategic actions • Potential share buybacks Impact ($lshare) Risks to Our Price Target 4 .9 Bun 3200 • Upside: Better FPAuM growth, capital deployment accelerates, better returns 114 075 134 • Downside: declining valuations reduce cash 0 23 Target 23.00 earnings (fewer exits or lower multiples); slower Pncit 22.01 ID 49) deployment (2 ICI) (043) KO Bear 15 00 45- flow — 50) Fundraising Investment Invynamoot LP capital aiMne lace% and Myna 10010 woods deployed ollocadorp 3 EFTA_R1_02140297 EFTA02714462  Apollo Global Manarmant LLC I April 1.2015 Morgan Stanley MORGAN STANLEY RESEARCH Headwinds for APO Declining performance fee (carry) receivable balance: this balance sheet receivable represents the amount of performance fees that could be realized in cash if the fund investments were liquidated. During 2014 the balance declined from $3.49 in 2013 to $1.31/share with about 70% of the beginning of period balance realized in cash in 2014 worth $2.33 to cash earnings. A similar 70% realization rate during 2015 would imply cash performance fees of $0.90 in 2015. This suggests downside risk to our $1.39 realized cash performance fee estimate (our est implies a 106% realization rate). Deployment in Fund um set to pick-up in 2015 (-7% invested and almost 20% committed) but realizations are still a few years away. Exhibit 2: EOP Gross Performance Fee (Carry) Receivable Balance (Smm) 2,500 2,367 -45-- 1,867 1,878 484 2,000 1,500 1,000 500 2010 2011 2012 2013 2014 ■ Private Equity Credit ■ Real Estate SOU1CO: COIN/Any Oati. Morgan Stinky AAAAA ICA 4 EFTA_R1_02140298 EFTA02714463  Apollo Global Manarmant LLC I Aced 1.2015 Morgan Stanley MORGAN STANLEY RESEARCH Exhibit 3: EOP Net Performance Fee Receivable Balance Per Share vs. Realized Carry Flow Through Rate 160% $4.00 140% $3.50 120% $3.00 100% $2.50 80% $2.00 60% $1.50 40% $1.00 20% $0.50 0% $0.00 2011 2012 2013 2014 2015E Realized Carry Flow Through Rate Performance Fee (Carry) Receivable Balance (RHS) Note. Realized carry flow through rate is calculated as the net realized carry tor the period as a % of the BOP net performance fee gainfirecewable balance. Source. Company Data. Morgan Stanley Research Exhibit 4: Net Performance Fee Receivable Balance Per Share Roll Forward Net Performance Fee (Carry) Receivable Balance Rollfoward 2011 2012 2013 2014 2015E BoP $3.41 $1.39 $2.64 $3.49 $1.31 Add: Fund Apprec ($1.10) $2.68 $4.60 $0.15 $1.00 Less: Realized Gain ($0.92) ($1.43) ($3.75) ($2.33) ($1.39) EoP $1.39 $2.64 $3.49 $1.31 $0.92 Flow Through Rate (%): Represents % of BoP Carry Balance that is Realized in Cash 2011 2012 2013 2014 2015E Realized Carry 26.9% 103.0% 142.0% 66.8% 106.2% Total Carry -32.3% 193.5% 173.9% 4.3% 76.2% Note Realized carry flow through rete is calculated as the net realized carry for the period as a % of the BOP net performance fee (cany)resenfable per share balance; Source. Company Data. Morgan Stanley Research Fee-paying AUM outflows In credit: net outflows to fee-paying AUM in credit of -$475m in 2014 or -0.5%, improved vs outflows of -$1.5b in 2013 or -3.1%. In our forward look we expect this stabilizes and build in solid growth from Athene. All in, were expecting about -513b in gross fee-paying inflows in each 2015-16, and on a net basis (net of outflows) we're expecting net inflows of $9.2b and $6.1b in 2015-16. Additionally, we're baking in $3b of additional sub-advised assets from Athene in each 2015-16. Potential upside to estimates if APO successfully scales the newly announced sub-advised relationship with Oppenheimer, but it's still early days and details of the product remain light (questions around specific type of credit products, liquidity provisions for retail, economics, risk mgmt etc). 5 EFTA_R1_02140299 EFTA02714464  Apollo Global Manarmant LLC I Aced 1.2015 Morgan Stanley MORGAN STANLEY RESEARCH Exhibit 5: Net Organic Fee-Paying AUM Flows in Credit (SMM) 2,500 2,017 2,000 1,500 1,031 1,000 500 0 (500) (444) (472) (1,000) (1,500) (2,000) (1,541) 2010 2011 2012 2013 2014 Note Net organic flows in credit ere tolcutsted by summing the subsenptoonsicapdel fused, distcobutoons and redemptions Imes m {PAO.. roll forward table. Source Company Data. ao•gen Stanley linear°, Founder and significant shareholder lock-ups expire March 29th: this is worth 7.6% of share count which could pressure the shares near -term. White its possible none could sell, history suggests partial selling. CNS Monitoring fee expires in 4Q14, drops to zero in 1Q15: We flag as a headline risk given the magnitude with an expected 29% decline in credit management fee revenues in 1Q15. This is worth 8c to 1Q15 EPS. But, we're not as concerned about this falling out of the run rate in 1Q15 because its been expected for some time now and does not impact cash earnings nor the dividend. 6 EFTA_R1_02140300 EFTA02714465  Apollo Global Management LLC I Aprd 17015 Morgan Stanley MORGAN STANLEY RESEARCH Model Summary Exhibit 6: APO Model Summary ••••• 044~40444944." ~VOW ~we 1, 3 I 1, 3 " n 4•4. I et. 4% 04" P " CO " M/• 21n% •H in I» 454 2.2.1r• An ft7 " V ra Pk 4> I> 12 I3 on us" OS An T ^ 2341 la tan "Me on >I" IS al .n aa Wadi Wear », 5.3• X0 ln rr r• na 91,3 lot %2 »2 t2 »2 »2 ;2 Tr IA» in. On IMO I.40 441/15 1i a rii AA 1014 >n hasp 09•94 Rtnan 35% 1.15 In IA )A 30% atil• Van. 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Morgan Stanley eeeeerdt EFTA_R1_02140301 EFTA02714466  Apollo Global Manarmant LLC I April 1.2015 Morgan Stanley MORGAN STANLEY RESEARCH Valuation and Risks Alternative Asset Managers: We value the stocks using a sum of the parts valuation supported by a discounted cash flow. Our DCF (COE of 11-14%, free cash flow = distributable earnings, terminal growth rate = 3% and betas benchmarked off BX's 1.6x) captures the long-term value of the business model, while the sum of the parts captures some of the shorter-term volatility. For our SOTP, we use 201.6 "Core FRE and apply a 15x multiple which is a 1-2 turn premium to traditionals reflecting value in long term locked up capital; apply 12x multiple on BDC income share; use DCF to estimate future carry and apply discount rate to represent volatile nature of carry; 10% haircut on accrued carry; 10% haircut on B/S assets. Apollo Global Management Upside risks include better FPAuM growth, accelerated capital deployment and better returns. Downside risks: declining valuations reduce cash earnings (fewer exits or lower multiples); slower deployment. 8 EFTA_R1_02140302 EFTA02714467  Apollo Global Manarmant LLC I April 1.2015 Morgan Stanley MORGAN STANLEY RESEARCH Disclosure Section The information and °priors in Morgan Staley Research were prepared by Morgan Staley & Co. LLC. andor Morgan Staley CT.V.M. S.A. anda Morgan Staley Mexico, Casa de Boise SA de C.V., at Morgan Stanley Canada United. As used in this disclosure section, "Morgan Staley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A. Morgan Staley Mexico. Casa de Boise SA de CV., Nagai Staley Canada United and their affiliates as necessary. Fa important disclosures. stock price charts and equity rating histories regaling conparies that are the subject of Was report, please see the Morgan Staley Research Molests° Website at bwiwinaganstarley.canfreseerclxisclostres. a contact your imestment representatia a Morgan Stanley Research at 1585 Broadway. (Attention: Research Management). New Yak. hhe. 10036 USA. Fa valuation methodology and risks associated with any nice targets referenced in this research report, please contact the Oient Swart Teen as idiom: US/Canada +1 800 303-2495; Hag Kong +852 2848-5999 Latin America +1 718 759-5444 (U.S.)-, union +44 (0)20-7425-8169: Singapore +65 68346860, Sydney +61 (0)2-9770-1505: Tokyo +81 (0)3-6836-9303. Alternalnely you may contact your imestment representatne a Maw Stanley Research* 1585 Broadway. (Attention: Research Management), New Yak. NY 10036 USA Analyst Certification The following analysts hereby certify that their dens about the comparies at their securities dscussed in this repot are accurately expressed and that they have not maned at win not recast direct a indrect compensation in exchange fix expressing specific recornmendaticnsoniews in ttis report: Nichael CYprys. Bless otherwise stated, the inchiduals listed on the we page of this report we research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our solid managemerd party, which is malaria at www.morganstanley.carYinstitutionanresearchrcarlictpolicies. Important US Regulatory Disclosures on Subject Companies As of February 27. 2015. Morgan Staley beneficially owned 1% a more declass of common equity secuities of the blowing companies ocnered in Morgan Staley Research: Apollo Global Management LLC. EllaricRook Inc.. KKR & CO. LP.. Oaktree Capital Group. LLC. The Blackstone Gap LP., The Carlyle Groin LP., WisdornTree hastments, Inc.. Within the last 12 months. Morgan Stanley managed a coneraged a pudic offering (a 144A °kiting) of securities d Apollo Global Management U.C. Ares Management. LP.. FraNdin Resources Inc.. Imesco, KKR & CO. L.P., Legg Mason Inc.. Oaktree Capital Group LLC. OA Asset Management Plc, Be Blackstone Grow LP., The Carlyle Group LP.. Within the last 12 months, Morgan Stanley has received compensation for imestment barking senices bon Apollo Global Management LW, Ares Management. LP.. BlackFtcli Inc.. Franklin Resources Inc.. Imesco. KKR & CO. L.P., Legg Mason hc.. Oaktree Capital Gap. LLC, CM Asset Mareigelt Plc. lte Blackstone Group L.P., The Carlyle Group LP.. Virtus Imestment Partners Inc.. In the next 3 nuts, Morgan Stanley expects to receive a intends to seek carpersation fa irrastment banking senices from AllianceBemstein Hddng L.P., Apollo Global Management LLC. Ares Managernent. L.P., Black Inc.. Franklin Resources Inc.. [mesa KKR & CO. LP.. Legg Mason Inc.. LPL hwestment hbldngs Inc., Oaktree Capital Gap. LLC. OM Asset Management Plc. T. Rowe Price Gran. Inc.. The Blackstone Grow LP.. Be Carlyle Gap LP., VOUS Imestment Parties Inc., Waddell & Reed Financial Inc, Wiwi:entree blast:ants, it .. Wittin the last 12 months. Morgan Stanley has maned compensation for products and senices other than imestment baking sautes from AllianceBemstein Hoeing LP.. Apollo Global Management LLC. Ares Management. LP.. BlackRod< Inc.. Federated Inastors. hc.. Franklin Reserves Inc., Masco, Janus Capital Gap Inc., KKR & CO. LP., Legg Mason Inc., LPL it estment Holdings Inc., Oaktree Capital Grap, LLC. CM Asset Management Plc, T. Rowe Price Gap, Inc., The Blackstone Crap LP., The Carlyle Gap LP., Wits kwestment Partners Inc., Waddell & Reed Financial Inc. WisdomTree nestments. hc.. YOU-in the last 12 nulls. Mogan Staley has prodded a is proidrg imestment banking senices to, a has an iniestmant banking client relationship with, the following company: AllianceBenstein Holding LP., Apollo Global Management LLC, Ares Managtmant, LP.. BlackRodc Inc.. Frarklin Resources Inc., Immo°. KKR & CO. LP.. Legg Mason Inc.. LPL Imestment Hollings Inc., Oaktree Capital Gap. LLC. OM Asset Management Plc. T. Rowe Price Group. Inc.. The Blackstone Gap LP.. The Catyle Gap LP.. Virtus hiastmerd Partners Inc.. Waddell & Reed Financial Inc. ViAsdomTree Imestments, Inc.. Within the last 12 months. Morgan Stanley has either graded or is waking non-irwestrtent balking, securities-related senices to andict in the past has entered into an agreement to pride senices a has a chant relationship with the fdlowirg company. AllianoeBernstein Holdng LP.. Apollo Global Management LLC. Ares Management, LP., BlackRock Inc., Federated !mesh:es, Inc., Franldin Resources Inc., !mesa, Janis Capital Grow Inc., KKR & CO. LP.. Legg Mason Inc., LPL Imestment Holdings hc., Oaktree Capital Gap. LLC. OM Asset Management Plc. T. Rowe Rice Gap, Inc., The Blackstone Grap LP.. The Carlyle Group L.P., Virtus nestment Partners Inc.. Wadden & Reed Financial Inc. WisdomTree Intestments. Inc.. Morgan Staley & Co. LLC makes a market in the securities of AJlianceBemstein lioldng LP., Apollo Global Management LLC, BlackRoth Federated Imestors, Inc., Ratan Resources Inc., kwesco, Janus Capital Grap Inc., KKR & CO. LP.. Legg Mason Inc., LPL Imestment Hckings Oaktree Capital Gap. U.C. T. Rom Price Group Inc., Be Elladutate Group LP.. The Carlyle Gap L.P., Virtus iwastment Partners Inc.. Waddell & Reed Financial Inc, WisdanTree Irrestments. Inc.. The equity research analysts a strategsts principally responsible for the preparation of Morgan Staley Researth tea recoiled conpenSati0n based upon arias factors. incluing quality of research. investor dial feedback, stock picking, competitive factors. firm re ales and email iniestment balking reanues. Morgan Staley and Its affiliates do business that relates to companies/instruments cowed in Morgan Staley Research, inducing market