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.
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."
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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.
"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.