From: Richard Kahn •

From: Richard Kahn • To: "Jeffrey E." <[email protected]> Subject: Fwd: APO US: Apollo Global Management: Price Objective Change - Management takeaways - favorable growth outlook; tax changes could +I- impact sector - NEUTRAL - United States Date: Tue, 22 Nov 2016 21:08:38 +0000 Attachments: Apollo_Global.pdf Inline-Images: flag11687798.jpg; logo11687798.jpg; rpt11687798.jpg; emai111687798.jpg; bamllogo11687798.jpg Richard Kahn HBRK Associates Inc. Begin forwarded message: From: "Ens, Amanda" < Subject: APO US: Apollo Global Management: Price Objective Change - Management takeaways — favorable growth outlook; tax changes could +/- impact sector - NEUTRAL - United States Date: November 22, 2016 at 11:17:25 AM EST To: Rich Kahn Rich — just wanted to share our latest update about Apollo. Regards, Amanda Global Research Apollo Global Management EFTA01060827 Management takeaways - favorable growth outlook; tax changes could +/- impact sector Reiterate Rating: NEUTRAL PO: 21.00 USD I Price: 19.38 USD Equity I 22 November 2016 Key takeaways • We recently met with Apollo Co-Founder Josh Harris and CFO Martin Kelly, who view the growth outlook as attractive. • We discussed the post election outlook, growth areas for APO and potential tax changes that could impact the sector. • While we raise our PO to $21 and the growth outlook is attractive, given valuation and lower DE, we maintain our Neutral. FULL REPORT We recently met with Apollo's management We recently met with Apollo Co-Founder Josh Harris and CFO Martin Kelly, who were optimistic about the growth opportunities for the firm and the recurring fee outlook, although they expect meaningful upside in DE (distributable earnings) to take time given seasoning of funds. While it is too early to have a clear view on the potential tax impact to APO and the sector from a tax overhaul, management is keeping a close eye on all potential scenarios (carried interest tax rate, C-corp vs. PTP with lower corp tax, and interest deductibility). While we are raising our PO to $21 and continue to see attractive growth for APO, given valuation and muted DE levels, we maintain our Neutral rating. Post-election outlook for their business Management sees the election outcome (Trump and Republican Congress) to be likely favorable for GDP growth (portfolio company EBITDA trends), with the potential for rising rates and inflation to eventually create some volatility and uncertainty on multiples. In addition, potential de-regulation could create more competition in some areas that the alternative asset managers have expanded into over the last few years, although the team still sees ample opportunity for growth. Potential tax changes a mixed bag There are three primary tax items that could potentially impact APO and the industry. First, the tax rate on carried interest could go higher, which would increase the tax rate on carry for employees and on a portion of the distribution for some unitholders (this has generally been expected at some point, given bi-partisan support). Second, if the corporate tax rate is reduced to 15-20%, this could create an incentive for firms to shift from a partnership structure to a c-corp structure, which would simplify the tax issues and entertain a larger investor base (including possible index inclusion). Finally, if the corporate tax rate is lowered, it has to be funded with an offset to have enough support EFTA01060828 and, as of now, the primary item being considered is the loss of corporate interest tax deductibility, which would be a significant negative for the sector. Given the pros and cons and it being very early in the process, there is no clear cut view, but tax reform will be an important item for the industry moving forward. Attractive growth and FRE outlook ahead Management sees the growth outlook as attractive, particularly in Credit. Apollo has multiple areas to drive double-digit growth, including Athene, Mid-Cap Financial, AAME (Apollo Asset Management Europe) and Total Return. Rising interest rates could be a near-term risk to credit valuations, but APO's overall duration is low or matched, and higher interest rates could benefit yields and make it easier to achieve hurdles in certain products. Longer term, the team wants Real Estate to be more significant. Importantly, with Apollo starting the process for PE Fund IX, the combination of this fund with growth in Credit bodes well for the FRE (fee-related earnings) outlook into 2017-18. DE will take a bit of time, but Fund VIII looks attractive The outlook for DE is favorable with rising FRE, but the real lift will be driven by carried interest over time. The key fund to drive meaningfully higher DE is Fund VIII and, while still early in its life cycle, given its strong performance, the outlook into 2018-20 is attractive. We estimate that Fund VIII could return more than $2.0B of cash carry for unitholders, or around $5 per share, assuming a 2.0x MOIC and typical compensation. Michael Carrier, CFA Research Analyst MLPF&S This report is intended for Click here to access the Research Library Read the research report, available through the link above, for complete information including important disclosures and analyst certification(s). 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