EFTA01452642

28 January 2014 Brokers. Asset Managers & Exchanges Alternative Assot Manager Initiation Rating Company Hold North America United States Apollo Global Management Research Analyst Price at 24 Jan 2014 32.20 (USD1 Price Target 31.00 Brokers, Asset APO N APO US 52-week range 36.22-20.94- Managers & Exchanges 11ric,ipitco relairve Strong performer but solid earnings peaking out soon; initiate at Hold Initiating coverage of APO with a Hold Rating and $31 PT We see APO units trading in a range near current levels over the next 12 months for the following reasons: 1) we see APO as more advanced in its fund realization cycle than peers, a condition likely to continue into 2014, causing distributable earnings (DE) to peak in 2013 or 2014 at the latest, 2) despite a very successful capital raise for Fund VIII at $18bn, DE in 2015-16 is likely to remain well below 2013-14 levels as Fund VIII remains in a capital deployment mode through 2016, and distributions from other large funds will likely have waned, and 3) APO's risk profile is above average with more concentrated positions, and this could restrain APO's PE expansion in 2014 if the market becomes choppier vs. 2013. Positively, mgmt is extremely innovative and several growth initiatives may help buffer the valley in the PE cycle, the strongest being the Athene/Aviva acquisition, which will enable APO to further leverage its credit expertise & grow fee earnings. However, we don't think these efforts will fully offset the DE compression post realization cycle. Ear nings outlook We believe DE, from which cash distributions are paid to unit holders, is the most important earnings metric to value the Alts, rather than economic net income (ENI) that forms Consensus estimates. We forecast APO's DE per unit to drop from $3.82 in 2013 to $3.22 in 2014E and $2.70 in 2015E. Key drivers are: 1) exhausting harvested gains over the next several quarters, 2) Fund VIII being in investment mode, partially offset by 3) contribution from Aviva. Valuation & Risk With positive revaluation for the Alts, we still think APO will expand its P/E from 10.6x 2014E ENI to over 11-12x 2015E DE 12 months from now, narrowing its discount to the S&P 500 P/E from -40% to -30%. This drives a $31 PT, which implies a total return of 6% over the next 12 months, inclusive of a 9.5% forecast distribution yield for 2014. Downside risks for APO are: 1) a slowdown in US/global economy, 2) a prolonged equity market correction, 3) an inability to generate strong growth organically and/or from Aviva in 2014 that would further reduce DE in '15. 4) an inability to deploy capital in Fund VIII at a reasonable pace & 5) failure to improve PIE vs. traditional asset managers and the market broadly. Upside risks are: 1) stronger investment returns than expected that drive much higher DE than forecast, and 2) much stronger organic growth at Aviva than forecast. dO 20 20 10 1112 7112 1113 olsodsOlOtolM•00.• SIP 000 MOCK OlOoodd) 7/I Performance I%) 1m 3m 12m Absolute 5.1 -6.3 53.3 S&P 500 INDEX -2.3 2.2 19.8 Sow* Doistoloi ,•:.7vcat i Market Cap IUSID) $12.707 Shares outstanding (ml 393.8- Free float 1%) Volume 124 Jan 2014) 229.268- Option volume lund. slits.. 1M avg.) 24.047- Sow* DeastWe Itripitrxi I•ini.e.;ri'vo!..:14iPt 12011. - NOS - OCOO. ti len 1 1 OR It Jon I2 2 en 12 — duns %Ad mate: Gamma leg Deutsche Bank Securities Inc. Page 33 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0109800 CONFIDENTIAL SDNY_GM_00255984 EFTA01452642