Good morning, and welcome to Apollo Global Management's Second Quarter 2012 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. Joining me today from Apollo are Marc Spilker, President; and Gene Donnelly, Chief Financial Officer. Earlier this morning, we reported non-GAAP after-tax economic net income of $0.05 per share for the second quarter of 2012 compared to $0.31 for the second quarter ended June 30, 2011. For U.S. GAAP purposes, we reported a net loss attributable to Apollo Global Management of $41 million for the second quarter of 2012 compared to a $51 million loss during the second quarter of 2011. Total assets under management, or AUM, was $105 billion as of the end of June, and fee-generating AUM was $77 billion. We declared a cash distribution of $0.24 per share for the second quarter of 2012, which comprises a $0.07 regular distribution and $0.17 attributable to realizations from portfolio company and credit investment dispositions, incremental net transaction fees earned during the period and interest and dividend income earned by our Private Equity and Capital Markets funds. A few weeks ago, we announced the transition of our CFO position. Martin Kelly will be joining Apollo as our new CFO next month, while Gene Donnelly will remain with us as a senior adviser through the end of 2012. We're thankful for Gene's leadership and contributions over the last 2 years, as Apollo became a publicly traded company and further grew and diversified its global investment platform, and we wish Gene the best of luck in his future endeavors. Today's conference call may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law. 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 second quarter earnings 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 recent Form 10-K that was filed with the SEC for 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 me 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 2012 second quarter earnings call. This morning, I'll touch on a few topics, including our current views on the market environment, updates on our business segments and the current status of our fund-raising efforts. Before jumping into these discussion points, I'd like to first touch on the new employment contracts that our managing partners entered into last month. During our last call, we mentioned the expiration of the employment contracts with our managing partners, Leon, Josh and Marc, which were signed in connection with Apollo's private offering transaction back in 2007. On July 19, Leon, Josh and Marc signed new employment agreements, the terms and conditions of which were substantially similar to their original contracts. Under the new 3-year agreements, Apollo's managing partners will continue to receive total annual compensation of $100,000, and the majority of their Apollo income will be derived from the same declared distributions that our Class A shareholders receive. This arrangement reinforces Leon, Josh and Marc's focus and engagement in the business, and collectively, with their 54% ownership in Apollo, continues the strong alignment of interest in building long-term shareholder value and generating meaningful cash distributions for all of Apollo's shareholders. Looking back on the second quarter, we continue to execute our business strategy to enhance our position as a leading global alternative investment manager despite a more challenging economic environment relative to prior 2 quarters. As you know, global equity markets were down during the second quarter, and they have been particularly volatile since May. The market's volatile performance was largely attributable to economic reports indicating slower global growth and the ongoing European debt overhang. The focus on day-to-day headlines addressing possible policy responses by central banks and governments also contributed to this volatility. We think that it's…

Good morning, everybody. I'd like to briefly cover the following items before we move to your questions: the quarterly distribution and related outlook for the rest of the year, performance of our Management Business and Incentive Business, AUM, the financial impact of the Stone Tower acquisition and key amounts from our balance sheet. Starting with our distribution. The $0.24 per share for the second quarter comprises a $0.07 regular distribution, between $0.05 and $0.06 from the recurring portion of our realized carry stemming from interest and dividend income, and the remaining $0.11 to $0.12 is associated with onetime realizations from the sale of equity and debt investments as well as incremental transaction fees. Given the market volatility that we've experienced recently, it's more difficult for us to predict the timing of future realizations and their resulting impact on future declared amounts. But as we continue to analyze the business in 2012 and the more stable portion of our realized carry, we think it's reasonable to continue to expect a regular quarterly distribution of $0.07 plus another $0.05 to $0.10 from the recurring interest and dividend income generated by our funds. As a reminder, the realized carry associated with recurring interest and dividend income can fluctuate quarter-to-quarter based on timing of interest and dividend payments and the investment composition of our fund portfolios. The contractual terms of our fund partnership agreements and whether a fund is above or below its respective priority return also impacts realized carry. Consistent with our distribution policy, there can be no assurance that any distributions will be declared and paid in future periods. Looking at our Management Business results, for the second quarter of 2012, we reported $70 million of ENI, which compares favorably to ENI of $35 million and $31 million during the first quarter…

[Operator Instructions] Your first question comes from the line of Howard Chen with Crédit Suisse.

Marc, you made the comment that you're curtailing your growth forecast. So can you just provide a bit more color on what specifically you're all seeing that makes you want to take that stance? And secondly, could you tie that together with how that impacts your view on fund returns and ultimately monetization?

Yes, the comment was made in the context of portfolio companies having the same view that we're hearing from the general market, which is expectation of slow growth, so within that context at the portfolio company level. But as you know, given the volatility, the underlying market, expectations of growth are shifting around quite dramatically. So in the short run, when expectations are lower, we see lower mark-to-markets on portfolio companies, but that's going to vary from quarter-to-quarter. And, if anything, maybe it pushes realizations out a little bit. But I also made the comment that given the nature of our portfolio, we think that there are things that are right for monetization when the -- when the window opens up, subject to better market conditions. So that was the context that I said it in.

Okay. Great. And then secondly, the firm's [ph] has been amongst the most active of your peers in Europe, but you've also been of the belief that maybe some of the near-term market opportunity was a bit overhyped by some. So I guess how would you describe the progression of the European landscape today?

We've taken the view that this is the nature of the financial markets are changing in Europe and the issues that they have are going to take a long time to fix, and so we think this is really structural and secular and so we're being very patient. And as we've described before, we think the opportunity comes in 2 forms, one is over time, we believe the bank balance sheets in Europe will decrease and opportunities to buy things, and it's certainly not setting up as a classic distressed opportunity, but we're seeing many opportunities in the NPL space and in the real estate space, and as mentioned, in EPF I and II continuing to take advantage of that. And recognize that the pace may seem slow, but given the size of our funds relative to the overall size of the market, for us there's enough interesting things to do. And we're very focused on that. I also think that, that's an opportunity that requires a lot more than just capital. I think having partnerships with the sellers, being able to have the capital to close the transactions, being able to structure because many of these things are very complicated. And the thing that we have mentioned many times in the past is if you look at the acquisitions that we've made, the sheer number of on-the-ground services we have in Europe, we believe that will continue to create an ongoing competitive advantage. And then the other thing I referenced in our script is the other side of the opportunity, where our capital is still needed, both at the institutional and individual level in Europe. And we continue to find ways to bring -- either buy secondary loans and bonds at prices that are really attractive or participate in creating new primary loans because Europe needs a new capital source, and we believe that partnering with the existing financial institutions is going to be a big opportunity for us on an ongoing basis. And that business is continuing to grow. And I'll just say what I've said every quarter, that this is going to take a really long time, and so I think that you really need to be patient as you build this business.

Understood. And then just finally for us, a small numbers-related question. But what's the driver of why the fee yield in Capital Markets increased this quarter?

Which number are you referring to, Howard?

I think when we were walking through everything, the fee yield within the Capital Markets business was going up and we thought it might be going down?

Yes. We -- so we added, in the quarter, we've got AUM additions from not just Stone Tower but also EPF II coming on board. I kind of think that's probably what you're seeing coming through, helping to drive that yield back up from Q1, which is what I think you're referring to.

Yes. Howard, I think Marc commented on absolute dollar growth and not yield.

No, no. I guess, Gene, just to clarify, we thought the inclusion of the CLOs might bring that yield down a bit more.

Yes, there were 2 effects, Howard. One is the inclusion of Stone Tower and the incremental EPF II fund-raise. And given the fees on EPF II, relative to the CLO business, from a average fee basis, it was actually accretive.

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

Marc, I think you mentioned that you're putting money out in distressed situations for Fund VII. I was wondering if you can elaborate on that? It sounded like you said it was sort of in some existing investments. And then maybe you can just put a little color on sort of where you see the incremental opportunities to put capital to work there.

I can't shed any specific light on any one opportunities other than we have built a handful of positions that we think are going to create long-term value and continue to see opportunities just to reinvest in those positions. And we think we're in this kind of environment where that will continue. And in general, in the larger scheme of where we see opportunities, I still think we're on the same themes that we've been talking about for the last 3, 4, 5 quarters, which is Europe, that I just discussed, natural resources. And we'll continue where we see opportunities in stressed and distressed to grow those positions.

Okay. And it seems like you've got a lot of credit oriented type of strategies already in place to capitalize on those themes. I guess if you look at Fund VII, relatively fully invested at this point, almost fully invested, how should we think about Fund VIII on the opportunistic side in terms of maybe the size of that fund and what should we think about from fund-raising there?

Given where we are in Fund VII, I think it's reasonable to expect that later this year we will launch Fund VIII. And so we're getting much closer.

Okay. And then just, Marc, on the separate accounts, it sounds like maybe -- or the strategic accounts, it sounds like maybe there's the opportunity set there, how you mentioned it will be slower. Is that just, given the fact that you did have some large wins and sort of the rate of change is slower, you're seeing something different in the way that institutions are looking to put money to work.

I think the dialogue is exactly the same that it's been for the last 6, 8 quarters. But just given the significant number of large wins that we had, we don't think that, that's a sustainable pace. But I also tried to reference in my opening script that dialogues about cross-platform, solution-driven business is still continuing. And so we're focused on that business, and I do think that we will see more, and there may be down the road more large wins, but I think it's more reasonable to expect smaller wins and we hope that we'll see larger ones, but I don't think it's reasonable to expect the same pace going forward. But to make the point, which you bring up, is that it's really important to note that the nature of the dialogue is very similar, that we're seeing many accounts who are looking at the global opportunity in credit and want to try to access the platform across multiple products, and that's a trend that we think is here for awhile.

Your next question comes from the line of Alex Kramm with UBS.

Just coming back to, I guess, the line of questions around Europe earlier, I think you made the prepared remark comment that there's obviously long-term secular changes. So I think most of that was in relation to, obviously, the Credit business. But can you also touch on the Private Equity business a little bit? Do you think some of the changes over there will motivate sellers more, maybe prices come down? And do you see particular industries where you might be a little more active here in the midterm?

No, our current view is that obviously, classic private equity is far more challenged in Europe, for obvious reasons, and where the majority of our focus has been on credit. It doesn't mean -- and we're still doing what you would expect us to do as we have a great team in Europe, and we're continuing to look for opportunities. But it just seems at this point in the cycle that the risk-adjusted returns on the credit side of the business and the areas that I describe is far more attractive. It's entirely likely that the thesis you lay out that over time there will be some very interesting private equity situations that will develop, but that's probably a little bit down the road.

Okay. Great. And then just in terms of realizations, I think you talked about the IPO item [ph] a little bit. What about strategic buyers? Any changes you're seeing in terms of, again, some of the portfolio companies that you have or just the dialogue increasing or are strategic buyers a little bit shellshocked at this volatile environment as well?

No, I think it's the same that it's has been, where -- and I know this is a generalization, but strategic buyers continue to look for ways to grow their company, and they continue to have lots of cash on the balance sheet. And so given where many, as I describe, given where many of our company -- many of the companies in our portfolio -- in our funds are, that it means that there's some healthy dialogue and that continues. And so I don't know exactly where that will go, but I would say that the dialogue is where it's been in the last handful of quarters. And we described 2 situations last quarter, and our expectation and hope is that will continue.

[Operator Instructions] Your next question comes from the line of Ken Worthington with JPMorgan.

A couple of questions on real estate. I know it's a smaller business for you, but one, the real estate business, kind of industry-wide, has been more active. How do you think the wave of realizations here kind of play -- how does the -- how do you think about this wave of realization relative to your own real estate portfolio? And do you think this is an environment where you're seeing more opportunities for realizations or perhaps deployment as well? And then secondly, some of your competitors have made forays into the real estate housing market, trying to make that work. And I think you've partnered to explore that class in London. Is there also opportunity to explore it in the U.S. and, I don't know, your gauge of the LP interest in that model here?

Yes, I would say on the first, I'm not sure necessarily what you mean about realizations. I would say we're -- we have our legacy CPI funds that we continue to work on and our new real estate fund that we continue to invest. And on the investment side, as I've mentioned in my opening script, we're very focused as well on the debt side of the business. And then when you put that all together, the second part of your question is, we do see significant opportunity in, I guess it's being referred to as the own-to-rent business, interesting cash yields, a segment of the market that needs capital, and we're building expertise in that. So we see opportunities as others do. And I think that, that's going to be an interesting segment to allocate capital to. And we're going to do so in the context of the size of our funds, but that's something that I think will be a growing opportunity.

Okay. In the U.S. and in Europe? In terms of the...

Right now, we're focused on the U.S.

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

This is actually Neil filling in for Bill. You might have addressed this earlier, but can you go over some of the dynamics of the carried interest of this quarter? I notice the gross carry was positive, yet the profit share actually broadened out. If you could just provide a little more color.

Sure. I think, in large part, it's a Fund VI phenomena. And we discussed this on the call for the previous quarter as well. You can have situations where the fund will generate realized carry, yet at the end of the quarter, on a GAAP basis, when you value all the hypothetical -- you value all the fund's investments on a hypothetical basis, you come up with a different result. And so the interplay of Fund VI having a realization event during the quarter and then the valuation at the end of the quarter on a hypothetical liquidation basis for GAAP purposes drives some of the differences.

Thank you. This concludes today's teleconference. Please disconnect your lines at this time and have a wonderful day.