Apollo Global Management LLC reported a 37 percent drop in fourth-quarter profit per share on Friday, failing to match its carried interest income from a year ago, yet the result beat most analysts' expectations on stronger fund values.
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Apollo took advantage of red-hot capital markets to cash out on investments throughout 2013, an approach epitomized by co-founder and Chief Executive Leon Black last April with the phrase: "We are selling everything that is not nailed down."
Besides management fees, Apollo receives performance fees for the private equity funds it manages, typically 20 percent of a fund's profits, in the form of carried interest, once the fund's investment returns exceed a specified hurdle rate.
One of its funds, Fund VI, crossed its 8 percent hurdle rate in the fourth quarter of 2012, paying out carried interest that had accrued through a "catch-up" mechanism that no longer applied in the fourth quarter of 2013.
As a result, economic net income after taxes, a metric that includes the mark-to-market value of Apollo's assets, totaled $1.06 per share, compared with $1.69 a year earlier. Analysts, on average, looked for 82 cents, according to a Thomson Reuters poll.
Apollo's private equity funds appreciated 9 percent in the fourth quarter, the same level of appreciation as a year ago but more than analysts expected. Peer KKR & Co LP has reported an 8.4 percent rise in the value of its private equity assets in the same quarter, while Blackstone Group LP reported an 11.5 percent rise.
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"With carried interest on the balance sheet up, and secondary markets still open, the outlook for continued distribution strength (for Apollo) remains favorable," Sterne Agee analyst Jason Weyeneth wrote in a note.
During the fourth quarter, Apollo sold shares in companies including LyondellBasell Industries NV, Sprouts Farmers Market Inc, Evertec Inc, Norwegian Cruise Line Holdings Ltd, Taminco Corp and Countrywide Plc .
It also sold CKE Restaurants Inc to buyout firm Roark Capital Group in a deal that people familiar with the matter said valued the company at between $1.65 billion to $1.75 billion.
Assets under management reached $161.2 billion at the end of December, up from $112.7 billion at the end of September, mainly driven by its insurance subsidiary Athene Holding Ltd's acquisition in October of Aviva USA Corp that boosted its assets by $44 billion.
With most of the Aviva USA annuity assets invested in debt, the deal also boosted the profits of Apollo's debt investment unit, which saw management fees soar as a result of the jump in assets under management.
Last month, Apollo also completed fundraising for the largest private equity fund raised since the financial crisis, amassing $17.5 billion from investors.
Apollo declared a fourth-quarter distribution of $1.08 per share, bringing total distributions for 2013 to $3.98 per share, its highest ever.