Good morning, and welcome to Apollo Global Management's Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference call is being recorded. I would now like to turn the call over to Gary Stein, Head of Corporate Communications.

Thanks, operator, and welcome, everyone, to Apollo Global Management's Fourth Quarter 2011 Earnings Conference Call. Joining me today from Apollo are Marc Spilker, President; and Gene Donnelly, Chief Financial Officer. Earlier this morning, we reported GAAP net income per share, per basic and diluted Class A share, of $0.05 for the fourth quarter ended December 31, 2011, and a GAAP net loss per basic and diluted Class A share of $4.18 for the year ended December 31, 2011. For our combined segment results, we also reported non-GAAP after-tax economic net income of $0.80 per share for the fourth quarter of 2011 and an $0.86 loss per share for the full year ending December 31, 2011. Total assets under management, or AUM, was $75 billion, and fee-generating AUM was $58 billion as of the end of December 2011. Based in large part on our strong realized carry performance in the fourth quarter, we declared a cash distribution of $0.46 per share this quarter, bringing our full year distribution total to $1.12 per share. I'd like to remind everyone that today's call may include forward-looking statements representing management's beliefs on future events, which can be uncertain in nature and outside of our control. Actual results and financial conditions may differ possibly materially from the anticipated results and financial position indicated in any such forward-looking statements, and we do not undertake any obligation to update forward-looking statements. We will also be discussing certain non-GAAP measures on this call such as economic net income and after-tax economic net income per share, which are reconciled to our GAAP net income or loss attributable to Class A shareholders and GAAP-weighted average Class A shares outstanding. These reconciliations are included in our current press release, a copy of which is available in the Investor Relations section of our website at www.agm.com. Please also refer to our most recently amended registration statement that was filed with the SEC for cautionary factors surrounding forward-looking statements, additional information on non-GAAP measures and risk factors relating to our business. This conference call is copyrighted property and may not be duplicated, reproduced or rebroadcast without our consent. If you have any questions about any information in the release or on this call, please feel free to follow up with myself or Patrick Parmentier after the call. With that, I'd like to turn the call over to Marc Spilker, President of Apollo Global Management.

Thanks, Gary, and welcome, everyone, to our 2011 fourth quarter year-end earnings call. Looking across the business, there were many positive events during the fourth quarter that I'll be touching on: the announced Stone Tower merger with our capital markets platform; fund-raising success, including our strategic partnership with the Teacher Retirement System of Texas; organic growth across our segments that target specific investment opportunities such as Europe and natural resources; significant deployment and realization activity within our funds; and a large fourth quarter and full year distribution driven by realized investment gains across the Apollo platform. We achieved all of this in just one quarter. As you know, we had similar accomplishments throughout the entire year as we have highlighted on prior earnings calls. Collectively, the milestones we reached in 2011 have provided us with positive momentum going into 2012. As Gary mentioned, we declared a fourth quarter distribution of $0.46 per share, bringing our full year distribution to $1.12 per share, which was based on the strong realized carry results we had in our investment platform. The realizations during the fourth quarter include a special dividend from LyondellBasell; portfolio company sales, including Connections Education and Parallel Petroleum; and lastly, the recurring interest and dividend income generated by investments in multiple private equity and capital markets funds. Later during our call, Gene will provide additional details on the distribution. Importantly, the realizations that drive our quarterly distributions demonstrate our ability to deliver returns to our fund limited partners and shareholders, particularly during challenging market environments. Although unrealized values may fluctuate as we have seen through the year, the longer-dated capital we manage gives us greater flexibility in choosing a negative point that maximizes the value of an investment. Turning to our capital markets segment, there are multiple achievements to cover,…

Thanks, Marc, and good morning, everyone. I'd like to cover the following items before we move on to your questions: the quarterly distribution and related outlook for 2012, Fund VI and its priority return, the Gulf Stream and Stone Tower acquisitions, total AUM and fee-generating AUM, new financial statement disclosures, the performance of our management business and key amounts on our balance sheet. Starting with our distribution, the $0.46 per share in the fourth quarter comprises $0.07 of a regular distribution and $0.39 from our incentive business. Approximately $0.34 relates to the LyondellBasell special dividend and the sales of Connections Education and Parallel Petroleum. We estimate another $0.05 came from our incentive business due to the recurrent portion of our realized carry from interest and dividend income. That $0.05 is lower than prior quarters as a result of Fund VI being below its priority return as of the end of the year. However, interest and dividend income was still earned by Fund VI during the fourth quarter, and Apollo will be eligible to record the related carry when Fund VI goes back above its priority return. It's difficult for us to predict the timing of future realizations and the resulting impact on our quarterly distributions. But as we look to 2012 and a more stable portion of our realized carry, we think it's reasonable to expect a base distribution of $0.07 and another $0.05 to $0.10 from recurring interest and dividend income generated by our funds. The underlying interest and dividend income is subject to our funds continuing to hold the corresponding debt and equity investments, as well as the related portfolio companies continuing to declare their respective dividends. Macro and industry-specific market conditions throughout 2012 will ultimately determine the number of IPOs, portfolio company sales and other realization events…

[Operator Instructions] Your first question comes from the line of Michael Carrier with Deutsche Bank.

First, maybe just on the returns in the quarter and then the outlook. So not focusing too much on any particular quarter, just given how the mark-to-market works, but I think last quarter, as we were in through the reporting season, you guys just gave an update on if things were marked in this environment versus quarter end, where things would stand. And I think probably more importantly, just when you think about on the private side, when you look at how you value those parts of the business, given some of the things that have occurred over the past couple of months versus the fall, whether some of the better macro data, the markets, just what your view is on any changes and assumptions as we go through 2012.

When you say assumptions, you mean the valuation process or...

Right. I think when the public markets move pretty erratically, whether it was in the fourth quarter or the third quarter, and most of the time, when you guys are looking at the private companies on valuations, you're not going to change the assumptions. And so a lot of times, those valuations move a lot slower than what the public markets would dictate. So when I think about in the fall and through the fourth quarter, maybe some of those assumptions got more negative because some of the macro data points were pointing to slower growth. Recently, things have gotten a little bit better, so just how that changes your valuation methodology.

Look, as we say every quarter, the valuation, it's a point-in-time number. And given the economic environment we move in, both markets and sentiment move quickly. And I think what I articulated in the script was you could see the fourth quarter of 2011 versus the fourth quarter of 2012 that EBITDA was down. And I guess my own view is that given the macro events of the third and fourth quarter, that sentiment was probably at a low and that was clearly reflected in the valuation process. And my guess is if you look at the market today, it feels a little bit better, but we'll have to see quarter to quarter. But sentiment is shifting very quickly, and so it's very hard to give you a forward look of where things will be next quarter and beyond. But I will say that we do feel good about the portfolio. And what we say every quarter is that we don't think that those marks necessarily reflect where we will be able to monetize the investments over time, and we think that there's value in the portfolio.

Okay, that's helpful. And then just on the fund-raising side, so you've mentioned the TRS. There could be more strategic accounts in the future. I think you mentioned on one of the products on the credit side, you're tapping like the high-net worth channels. So when you think about the opportunities and particularly, when you look at all the products that you guys can offer and what that channel is looking for, where are the demands? And is that something that you can continue to see growth over the next year or 2 years?

Yes, we've talked about this before, which is the secular shift towards alternatives both in the institutional space and the retail space, and we think that, that secular trend is strong. And over the years, we've actually had a presence in the retail space, but we think there's a big opportunity for us and we will continue to develop product that we think speaks to our core strength on the investment side. And that may be a small -- that may be a subset of our products given what retail investors demand, but we think that there's a big enough overlap of the things that we are good at and retail will want that we're making an investment in building out the retail as a distribution channel for us. And I think it's a big opportunity, and we're going to continue to invest in it.

Okay. And then last one, and I think it's related to older funds, but if we just look at the distribution in both the AUM and the fee-paying AUM roll-forward table, you had a healthy distribution realizations in the quarter, but it doesn't look like it had too much of an impact on the fee-paying AUM. So is it just older funds, so you're not collecting management fees on these assets but you can still realize the realizations?

Yes, Mike, that's right. Sorry. The general distributions were out of funds that we're no longer earning management fees on, such as Fund IV.

Your next question comes from the line of Ken Worthington with JPMorgan.

Maybe first, can you give us a little more flavor on the relationship with TRS? Obviously, it's a competitive market. You guys won a big mandate, others didn't. Dig into maybe why they chose you, and given the persistent low-return environment, what is the outlook for the industry for more of these type relationships? And is it really the public pension funds that are the biggest opportunity here? Like we haven't heard a lot from the sovereign wealth funds, but maybe talk about some of the demand from other client segments as well.

There's a long-term relationship that exists between Apollo and TRS, and I think that the returns that we've provided for them over time and the relationship and the trust is really essential, and that was obviously a big element. And then we keep saying this, when we look at our platform, we think it's very appealing given the possibilities in investment returns and the integrated and diversified platform that we offer, and we think that that's very appealing. I do think that there's not an unlimited universe of large, strategic managed accounts. The investors have to have large pools of capital. They have to be very sophisticated. And very importantly, a relationship needs to exist because we really are partners. And so we, as we've articulated in 2011, we've done a small handful of these, with TRS being the largest one. We don't think there's an unlimited pool. There's a handful others that we're going after, and it's very hard to do these for much smaller amounts. And so we're going to continue to drive that, and I would expect that to continue to grow, but maybe not necessarily at the pace -- not necessarily at the pace that we've had. And then to your other question, it's important to note that it's not just pension plans, it's sovereign wealth funds, and we've done with both. And I think that that's large pension plans and sovereign wealth funds is where the majority of the activity is.

Okay, great. And then market, obviously, seems more accommodative for harvesting. I guess how accommodative is it? And I guess the real question is how hard are you hitting the road right now?

Look, like we've always said, one of the values in our platform is that the investment team is very flexible. When it's time to invest, we can focus on that. When it's time to harvest, we can focus on that, and we can do both. And so I'm not sure I would say that it's a robust time to harvest. But obviously, you look at 2011, and we had a fair amount of realizations and we've been very focused on it through the cycle. And so the team is working very hard where appropriate to look for exits.

Okay. Lastly for me, talk about the competitive landscape in the credit area. Obviously, there's a lot of interest with perceived opportunities being large here, but the competitive environment also seems to be increasing. So what does it mean for the outlook? How do you distinguish yourself versus peers? And you're obviously really bulked up here. Is this – does mass prove massier. The fact that you're getting to be so much bigger than you had been? Does that attract a disproportional amount of interest to your franchise?

Well, as we said, on a pro forma basis, assuming the close of Stone Tower, $50 billion. On the one hand, that's a large number, but when you look at the market, it's still not a large number in the context of the market. And the fact that competition is coming in, I think is a good thing because other people are seeing the same opportunity. And as the investor base, the capital allocator base are starting to get more comfortable allocating money to credit, we think we'll be a big beneficiary of that. And yes, I do think that success breeds success, that our -- not just our recent performance but our long-term track record. But our recent successes in raising funds is really a vote of confidence by our sophisticated LPs, and that certainly helps when we go on the road, bringing on new LPs. And so the market is extremely large. And when you look at the size of other asset management companies like PIMCO and BlackRock, and they're not all credit, but they have significantly larger credit businesses than we do. And so in our mind, that there's a very large growth opportunity. And as we build scale, I think we're doing it in a more efficient way, and I think that will help our growth on a go-forward basis.

Your next question comes from the line of Roger Freeman with Barclays Capital.

Let me just pick up on Ken's last question there. On Europe, particularly around the asset sale opportunity, it seems like, a, that the banks are -- that the assets are coming out somewhat slowly. I'd be interested in views on that. They seem to be spending more time tinkering with RWA calculations than shrinking the balance sheet. I guess I'm just wondering if you think there's any risk that that opportunity ends up being less than many seem to think, just kind of like the resi sell-down and the opportunity in the U.S. was.

Well, I think the real issue is one of scale. And so if you look at -- if you do all your calculations of the amount of assets that need to be disposed and the percentage of them that have already been disposed, you could say that they're coming out slowly. But when you look at the size of our funds in Apollo, transactions are happening and, for us, it's significant. So we don't need the whole industry to turn over in order for it to be a significant opportunity. I do think that there is more pressure in Europe to dispose assets than there was in the U.S. to dispose assets, and we're seeing that. And so our confidence level of the opportunity remaining is still pretty high.

Okay, that's helpful. And on the EPF II, when do you anticipate to have a final close on that, or how long do you expect to do fund-raising?

Yes, I'm not going to -- we're going to grow that platform. I'm not going to speculate when we'll have the final close.

Okay. And then, I guess on harvesting, you touched on it already. But where do you expect that to be concentrated this year in terms of secondary strategic sales, probably less certain IPOs?

As you know, it's all opportunity and market-related. So hopefully, there'll be a harvesting environment. If there is, I think we'll do well in it, but it's hard to predict where that will be.

Okay. And then the teachers, you said that's going to start funding this spring. Should we think about a 2- to 3-year time horizon for full deployment?

It's being worked on now. I would just say the way to think about it is probably the majority of the assets will be deployed over the first 3 to 5 years. And if opportunities come quicker, it will be faster.

Okay. And last, last question. On the discretionary comp plan, how do we -- how should we think about this insofar as I can certainly understand having some discretionary funds available, where cash carry isn't coming through? But as that cash carry eventually comes through, is that considered -- I guess it can't really be, but I mean, it feels a little bit like people are getting comps sort of in advance of cash carry coming through and then they'll get it again when it actually comes through?

No, I think Gene articulated it very clearly that it is discretionary based upon how -- what the performance of the firm is.

So it's based on realized carry, Roger, realized carry.

Oh, okay. I thought you had said something about when cash carry isn't coming through, that you have that discretionary comp. But I guess...

What we said, Roger, was that there is variability with this. And to the extent that there isn't realized carry, additional...

Okay, got it. That's clear.

Your next question comes from the line of Robert Lee with KBW.

Actually, maybe a follow-up to the last question. On this new comp plan, is there a cap in terms of what proportion of realized carry you will pay out even in incentive, or is it kind of open-ended? Is it like capped like no more than 50% of realized cash carry can go out in comp in total? Or it's just discretionary with however you guys decide it, whatever you decide is appropriate?

Yes, there is no formal cap. This is a plan just launched in June, as we discussed earlier, and consistent with the philosophy of aligning compensation more and more with the firm performance. I think you could expect that the profit share percentage would grow, but I don't think that there's any set target for what that would grow to.

Well, I guess maybe along those lines, just kind of philosophically, I mean, your -- aside from the 3 principles, your insider ownership by employees is relatively low compared to some peers. So philosophically, why go that route instead of maybe encouraging more unit ownership instead of going through with kind of the carry?

It's a good question, and the answer is yes, and we think that that's important as well. And we are doing both and we'll continue to do both.

Okay. And then sticking with the comp theme, June, the 3 principles, compensation arrangements I guess are due for renegotiation. And I guess I understand that you don't have that finalized likely, but maybe just any sense you can give of is it even necessary to change it, given their ownership stakes and everything. Or should we think it's going to be pretty much as is?

I believe it's July, and we'll get to this conversation over time. But I'll say what I said last quarter, which is that the 3 founders are fully engaged day to day. And my expectation is that they will be -- continue to be engaged through the contract period. And when something changes or there's something more specific, certainly, obviously, everyone will know about that.

Your next question comes from the line of Patrick Davitt with Bank of America Merrill Lynch.

A lot of your very large public positions have rallied pretty significantly from September and are probably well above historical kind of MOAC [ph] levels that you would start harvesting. Can you kind of help us understand what the thought process is when you have a large public position and how you sell that down? And to what extent you have locked up some of those large public positions and how much you can sell?

Yes, I mean, it's a good question, but every situation is different, and so it's hard to generalize. But just suffice to say that the philosophy around here is the investment team underwrites the position every single day and will continue to do that. And some cases, there are specific restrictions, and that will be put into the kind of underlying underwriting process, but it's very hard to generalize like that.

Okay. If the markets are favorable, would you expect that you'd have opportunities to sell down some of those stakes? Or you just won't go there?

I mean, I can't say specifically. But in general, it'd be reasonable to assume that the better the markets are, the better it's going to be for monetizations and exits. But again, the teams will continue to focus investment by investment on what's right to do for each investment.

Okay. I think you mentioned that there was, along with the TRS commitment, a managed account with a sovereign wealth fund focused on European credit. Have you said how big that is? Is it of the same scale or...

Yes, I think last quarter, we said it was $500 million.

All right, great. And then it looks like even without kind of the onetime issues, you mentioned that you typically have a seasonal uptick in non-comp in the fourth quarter. Is that the case, and should we expect that to be ongoing?

I don't know that you should expect nonrecurring expenses to be ongoing. We talked in my comments about $15 million of additional legal and professional fees. Largely attributable to nonrecurring events, particularly Stone Tower and the Gulf Stream transactions. Whether or not they'll occur -- a similar transaction will occur in the fourth quarter next year is anybody's guess.

Right. But there is -- away from the onetime is what I meant. Is there not some seasonal uptick in 4Q in professional fees anyway? Because it seems to happen last year as well.

It may be coincidental that it happened the fourth quarter in '10 and fourth quarter '11. I don't know that we have any seasonality in our professional fees.

Okay. And finally, on the management fee in capital markets, it looks like it came down pretty meaningfully. I assume that's just from the mix of the new assets coming in. Could you kind of help us walk through kind of the mechanics of where the new assets kind of were relative to where you were running?

Could you repeat the first part of that question? I thought you said a decline.

The management fee rate, yes. Yes, yes. Sorry.

The addition of Gulf Stream has a lower fee than each of those products have a lower fee. And then Athene also generated a significant increase in our AUM, and the fee base on those products are generally lower than our historic average fee rates in capital markets.

Your next question comes from the line of Alex Bolstein with Goldman Sachs.

Marc, I wanted to circle back on your comments just probably around capital formation. It sounds like you guys are seeing a lot of traction across lots of different products, lots of different platforms. I was hoping maybe you could help us kind of aggregate into 1 or 2 numbers and say, okay, given what you've raised, that's not currently in your fee-related AUM, and I guess we understand that this is going to kind of trickle in over time. Do you have a sense what is that number? Clearly, there's $3 billion from Texas teachers, then there's EPF II that you guys are currently, I guess, now collecting fees on. So what is the kind of like the total of all of those things together?

So I understood the question broadly, but I didn't understand specifically. Are you talking about the difference between fee-paying and non-fee-paying AUM or...

No. So you guys have raised money that's currently -- that you already locked it in, but it's not in your fee-paying AUM yet. But it also kind of spans across bunch of different buckets. So I was hoping you could just give us a number of what that is.

Sure, this is Gene. Perhaps I can start. With the potential of the Stone Tower acquisition, that's going to drive significant increase in management fees. As we continue to raise EPF II, we talked about some initial raises there that will drive management fees. Natural resources, the same, will drive management fees. So I think Marc did a good job describing earlier the progress that we've made in capital formation, and all that's going to start generating fees for us in 2012, if they haven't already.

I don't have a specific estimate for what the run rate revenue could be on all of that.

Okay, fair enough. And Gene, I just wanted to follow up on your comments around distribution. So it sounds like there's going to be a catch-up in some of the recurring carry you guys are getting from Fund VI that you didn't recognize this quarter. Once Fund VI actually crosses about the 8% hurdle, do you have a sense of what that catch-up would be from a distribution perspective?

Well, based on the waterfalls to date and given Fund VI is below its preferred return, we have an estimate that says it's around $0.04 of interest and dividend income that would have been earned at Apollo, but for that fund being below its preferred return.

Got it. So $0.04 is really the catch-up to the $0.05 to $0.10 number that you're talking about more on a recurring basis, right?

And that's all dependent upon Fund VI crossing its preferred return threshold.

Sure, all right. And then staying, I guess, with the distribution theme, do you guys have a sense of looking across your portfolio of companies, are there opportunities for more of a similar kind of special dividends like you've seen with Lyondell? Or future distributions should really be relying more on capital market activity and more of a traditional sort of exits?

It's very hard to speculate on that.

Okay. And then, Gene, just one last one for me. I want to go back to the comments you made on comp and just maybe attack it a little bit from a different angle. So if you look at your total salaries and benefits in the management fee business, take down about $20 million sequentially, assuming there's no big realized carry next quarter, does that number go back to like a mid-60s run rate? Or do you think we'll stay in kind of a $40 million to $50 million range?

I think that's some forward-looking information that we should probably not get too specific with. I think it's fair to say that as we continue to grow the platform that our headcount will grow and would grow -- our expectations should grow with the rate we've been growing, so you should expect an uptick in the run rate of that cost. What the mix will be is entirely dependent upon how that plan is implemented and the realizations that occur, et cetera.

Your final question comes from the line of William Katz with Citi.

This is Neil filling in for Bill. Just a quick question. What is the tenor of your recent conversations with LPs maybe in terms of risk tolerance, increasing allocations to alternatives, interest in credit, et cetera?

Thanks for the question. I would say it really hadn't changed much over the last handful of quarters. Just the general backdrop is we're looking for longer-term investments. Our LPs are comfortable with -- they're comfortable looking for things on the illiquid side. And therefore, our dialogue with them about the portfolio tends not to be day to day. And when markets go up, they're expecting we're focusing on realizations. When they go down, they're expecting us to focus on putting capital to work. And therefore, that dialogue has remained largely the same. We see the desire to put capital to work, particularly in our areas of focus, which are Europe and natural resources. And we think that the dialogue remains quite healthy with the majority of our LPs. And that's why it gives us some degree of optimism about our ability to grow our platform going forward.

Great. And final question, any shift in economics generally with the LPs?

Again, we've seen very little focus on that.

That was our final question. And I'd like to turn the floor back over to Mr. Stein for any closing remarks.

Thanks, operator. I want to thank you all for joining us today on the call. We are available to take your questions after the call. Please don't hesitate to call me or Patrick Parmentier. And we look forward to speaking to you again next quarter. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.