EFTA01085858.pdf

EMPIRE VALUATION CONSULTANTS. ac PRIVATE & CONFIDENTIAL February 26, 2015 Alan Halperin, Esq. Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas, Suite 3115 New York, NY 10019-6064 Dear Mr. Halperin: You have requested Empire Valuation Consultants, LLC ("Empire") to estimate the fair market value of a 3.9477% limited partnership interest (the "Interest") in Black Family Partners, LP ("BFP" or the "Partnership") as of December 3, 2014 (the "Valuation Date"). It is our understanding that this summary letter will be used by Mr. Leon Black for estate planning purposes. Valuation Summary Based on the following review and analysis, and subject to the attached Statement of Limiting Conditions, it is our estimate that the fair market value of a 3.9477% limited partnership interest in Black Family Partners, LP is reasonably stated as $75,705,947 as of December 3, 2014. Methodology BFP has been valued on a going concern basis. Since the Partnership is closely-held, and thus without a public market for its ownership interests, this appraisal was conducted according to guidelines established by the Internal Revenue Service ("IRS") and USPAP, and in conformity with the American Society of Appraisers' Principles of Appraisal Practice and Code of Ethics, together with other standards that were deemed relevant to this engagement. 350 Fifth Avenue, Suite 6115, New York, NY 10118 Tel: (212) 714-0122 empireval.com New York Rochester • Boston Cleveland • West Hartford EFTA01085858 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 2 This summary letter is by its nature a "Restricted Use Appraisal Report" under Standards Rule 10-2 of USPAP. As such, it does not contain the required disclosures regarding the nature, history, outlook, ownership, or other factors regarding BFP, nor does it contain details regarding the valuation analyses considered and used. Therefore, it is for the exclusive use of you, and at your request, those of your advisors who have the requisite knowledge to understand the risks, opportunities, and the valuation theories and analyses discussed and applied in this situation. For purposes of this report, fair market value is defined in accordance with Treasury Regulations established for income, estate and gift taxes as the price at which ownership interests would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Sources of Information Information used in determining the fair market value of the Interest was provided by the documents and sources listed below: • A copy of BFP's Amended Limited Partnership Agreement, dated May 17, 2007 as amended December 2009 (the "BFP Agreement"); • A copy of BFP's pro forma tax returns, prepared from Mr. Leon Black's personal tax returns, for the years ending December 31, 2009 through 2012; • A copy of BFP's internally prepared financial statements for the year ended December 31, 2013; • Documents and information regarding BFP's assets include the most current available: (1) capital account statements; (2) K-1 statements; (3) operating agreements, including amendments; and (4) financial statements;' • Conversations and correspondence regarding BFP, its management policies, financial status and investments with Mr. Richard Joslin, BFP's CFO, and Mr. Richard of BFP (collectively referred to as "Management"); and ' See Appendix A for a list of defined terms regarding BFP's investments and key agreements reviewed in this report. EFTA01085859 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 3 • Other reviews, analyses, and research as were deemed necessary. Partnership Profile BFP operated as an investment holding company. The Partnership was formed on May 17, 2007. As of the Valuation Date, the Partnership's primary asset was a 47.01% interest in BRH Holdings LP ("BRH"). BRH owned 88.59% of AP Professional Holdings LP ("Holdings"), which held 57.73% of the Apollo Operating Group ("AOG") units.2 The Partnership was also invested in co-investment funds managed by Apollo Global Management LLC and its consolidated affiliates (the "Company" or "Apollo"). In addition to the Apollo co- investment entities, BFP was invested in additional private investment funds and companies. Additionally, BFP has issued multiple promissory notes. Based on capital account balances available as of the Valuation Date, the Partnership had a capital account balance of $2.518 billion, rounded! Pro forma financial statements for BFP, compiled using the records of Raich, Ende, Malter & Co LLP for 2009 through 2012 and internally prepared financial statements for 2013, are presented in Exhibits A through C. A. Apollo Operating Group Apollo was formed as a Delaware limited liability company on July 3, 2007 and completed a reorganization of its predecessor businesses on July 13, 2007 (the "Reorganization"). Apollo is managed and operated by its manager, AGM Management, LLC, which in turn is wholly-owned and controlled by Leon Black, Joshua Harris and Marc Rowan (the "Managing Partners"). Apollo has three primary business segments: private equity ("PE"); Capital Markets ("CM"); and Real Estate ("RE"). See Apollo's public filings for an organizational diagram for Apollo and its ownership structure. Apollo also entered into an exchange agreement with Holdings that allows the partners in Holdings, subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Apollo Operating Group, to exchange their AOG Units for the Company's Class A shares on a one-for-one basis up to four times each year, subject to customary 2 Percentages based on Apollo Global Management LLC's 10.Q filing as of September 30, 2014. The Tax Receivable Agreement benefits associated with the AOG Units held by BFP and the July 2007 reorganization of Apollo do not have a stated book value and are not included in the $2.518 billion total. The value of these assets are included in the valuation section of this report. EFTA01085860 Alan Halperin, Esq. February 26, 2015 APO1 GRAT No. 2 - Valuation Date: December 3, 2014 Page 4 conversion rate adjustments for splits, unit distributions and reclassifications. A limited partner must exchange one partnership unit in each of the ten Apollo Operating Group partnerships to effect an exchange for one Class A share. On April 4, 2011, Apollo completed the initial public offering ("IPO") of its Class A shares. Apollo received net proceeds from the initial public offering of approximately $382.5 million, which was used to acquire additional AOG Units. Shares of Apollo traded between $23.55 and $24.26 per share and closed at $24.01 per share on the Valuation Date, with the mean value being $23.91 per share. B. Description of Assets BFP was invested in cash, marketable securities, multiple Apollo funds, Apollo Operating Group units through BRH and Holdings and non-Apollo investment funds. Details regarding the assets are provided below. A summary of the capital account balance for each interest is presented in Exhibit D. Cash and Marketable Securities: The Partnership had a checking account held at Bank of America with a balance of $12.7 million as of the Valuation Date. Additionally, BFP had a brokerage account with JP Morgan, which held $187,137 in cash, $4.9 million in Apollo Investment Corp.4 stock (603,632 shares with a mean value of $8.06 per share), $0.9 million in Environmental Solutions Worldwide (Ticker: ESWW)' stock, $0.9 million in AP Alternative Assets, Lr stock (28,730 shares with a mean value of $29.78 per share). Finally, BFP held $1.3 million in K12, Inc.' stock (106,026 shares with a mean value of $11.92 per share) as of the Valuation Date. Apollo Private Equity Investment Funds: BFP participated in Apollo's PE funds, specifically AIF IV, AIF V, AIF VI, and COF III. For each fund, BFP invested in a related co-investor entity established for Apollo affiliates and employees to participate in Apollo's individual PE funds. As of the Valuation Date, the Partnership had a capital account balance in ACIV, ACV, ACVI, and ACC III. The Partnership's co-invest interests were not subject to management or carried 4 Apollo Investment Corp. ("AINV") is a publicly traded business development company ("BDC") managed by Apollo. BFP held 14,392 shares in ESWW. The shares were thinly traded with a most recent closing price of $63 per share. 6 AP Alternative Assets, LP ("AAA") is a publicly traded investment company managed by Apollo. The company is listed on the Amsterdam stock exchange. 7 K12, Inc. ("LRN") was received as an in-kind distribution from BFP's investment in Knowledge Universe Education M. EFTA01085861 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 5 interest fees. In effect, they earned the underlying fund's return on investment, net of any non-fee fund expenses. The AIF funds employed a 1.5% management fee, while COF III employed a 1.25% management fee. For the AIF funds, the management fees could vary based on life-cycle of the fund. The AIF funds and COF III employed a 20% carried interest fee structure. Carried interest was subject to an 8% preferred for its fee-paying limited partners. The fund's limited partners could not withdraw, and transfers required the permission of the respective fund GP entity. The fund size for AIF IV, AIF V, AIF VI, and COF III was $3.6 billion, $5 billion, $10.1 billion, and $867.4 million, respectively. ACIV, ACV, ACVI, ACC III were bound to invest and divest at the same time as AIF IV, AIF V, AIF VI, and COF III, respectively. AIF IV and AIF V were all on extension in order to liquidate remaining positions. ACIV, ACV, ACVI, and ACC III had no control over the funds, or their selection or timing of investment acquisitions or divestitures. Withdrawal from ACIV, ACV, ACVI, and ACC III was not permitted and transfers required the consent of the respective managing members. Apollo Private Equity Co-Invest Entities Capital Account Entity Term Expiration Value" The underlying fund was on indefinite extension. There was ACIV $471,556 no indication when the remaining portfolio companies would be sold. The underlying fund was on contractual extension. There ACV $2,874,857 was no indication when the remaining portfolio companies would be sold. The fund's term expires January 12, 2016. However, the ACVI $29,224,235 fund could be extended for two additional ears. The fund's term expires September 11, 2019.9 However, the ACC III $5,699,210 fund could be extended for three additional years. Apollo Capital Market Fund Interests: ASC and AVC are invested in capital market funds affiliated with Apollo. Apollo's capital market funds held securities 8 Based on most recent quarterly account statements. Capital account balances were adjusted to account for distributions and contributions made between the capital account date and the Valuation Date. According to the COF III agreement, COF Ill's term expires on the 5th anniversary of the final close date. The final close date is defined as the initial closing date of January 7, 2013 or the most current subsequent closing date. According to Management, a subsequent closing was completed on September 11, 2014. EFTA01085862 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 6 from all portions of a portfolio company's capital structure, with a focus on distressed companies. BFP's interests in ASC and AVC were not subject to management or performance fees. While ASC's and AVC's legal agreements stated that the funds had annual and quarterly withdrawal provisions, respectively, Apollo's Management indicated that BFP was allowed to make monthly withdrawal requests from ASC and AVC. As of the Valuation Date, BFP was able to withdraw its capital from both ASC and AVC effective December 31, 2014.1° Apollo Capital Market Co-Invest Entities Entity Capital Account Value" ASC $3,071,718 AVC 57,760,965 FCI II: BFP made a $25 million commitment to FCI II on June 21, 2013. FCI II co-invests in FCI Fund as a Schedule I limited partner. FCI Fund purchased a portfolio of 67 life insurance policies from a European bank with a total policy face amount of $371 million for approximately $27 million. The balance of BFP's future capital contributions are expected to be for premiums, fees and expenses. The Partnership's interest in FCI II was not subject to management or carried interest fees. In effect, it earned the underlying fund's return on investment, net of any non-fee fund expenses. BFP's capital account balance was $8.6 million at the Valuation Date. FCI Fund employed a 0.5% management fee and 10% carried interest fee structure. The management fees could vary based on life-cycle of the fund. Carried interest was subject to a 6% preferred return for its fee-paying limited partners. The fund's limited partners could not withdraw, and transfers required the permission of the fund GP. FCI II had no control over the fund, or its selection or timing of investment acquisitions or divestitures. Withdrawal from FCI II was not permitted and transfers required the consent of the general partner. AHL: BFP made a $52 million commitment to AHL on April 21, 2014 to purchase a total of 2.0 million shares at $26 per share. The first capital call of $10.4 million resulted in the purchase of 400,000 shares on the date of the 10 The agreement provisions for ASC require 90 days notice for withdrawals that are permitted annually on the anniversary date (March I) of the investment. The agreement provisions for Apollo VIF Co-Investors, LLC require 65 days notice for withdrawals that are permitted at the end of each calendar quarter. However, based on conversations with Apollo, it was Empire's understanding that BFP's interest in ASC and AVC could be withdrawn at any month end. " Based on the most recent monthly account statements. EFTA01085863 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 7 commitment. BFP's capital account balance was $10.4 million at the Valuation Date. AHL is a life insurance holding company focused principally on the retirement market and whose business, through its subsidiaries, is focused primarily on issuing or reinsuring fixed and equity indexed annuities. AHL's subsidiaries include Athene Annuity & Life Assurance Company, Athene Life Insurance Company, Investors Insurance Corp, and Athene Life Re Ltd. Products offered by AHL, through its subsidiaries, include: (1) retail fixed and equity indexed annuity products; (2) institutional products, such as funding agreements; and (3) co-insurance and reinsurance arrangements with third party life insurance and annuity providers. APTP: APTP is a venture capital fund launched by Apollo principals and managing partners. BFP has a nominal capital account balance of $58,300. The fund has been inactive for years and was not expected to resume investment activities. All remaining assets in APTP were considered side pocket investments. APSHL: APSHL is an investment fund launched by Apollo principals and managing partners. BFP has a nominal capital account balance of $0.12 The fund has been inactive and was not expected to resume investment activities. All remaining assets in APSHL were considered side pocket investments. Apollo Ownership Interests: The Partnership has an indirect ownership position in the Apollo Operating Group through AOG Units held through BRH. In total BFP held 92,727,166 AOG Units. At the Valuation Date, Apollo's stock closed at $24.01 per share, with a mean value of $23.91 per share. AOG Units could be exchanged for Class A shares at various future dates." The agreements governing the AOG Units are discussed in greater detail below. The impact of the agreement provisions was considered in the estimation of fair market value for the AOG Units. On an unadjusted basis the capital account value of the AOG units was $2,216,642,903." This TRA allows BFP to share in the future tax savings provided to Apollo upon the exchange of BFP's AOG Units. In addition to the AOG Units held, the Partnership also received an annual payment from Apollo in connection with the TRA associated with the Apollo ownership sold in the July i2 According to the Partnership's 2013 tax return K-I for APSHL, the Partnership's capital account balance was negative. Therefore, the carrying value was considered de minimis. 13 7.5% of the block of AOG Units became exchangeable on both March 29, 2013 and March 29, 2014. 14 Based on the mean value per share of $23.91. EFTA01085864 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 8 2007 transaction which resulted from the reorganization of Apollo and its listing on GSTrUE." Non-Apollo Investment Interests: BFP's other investments included interests in four fixed-term private equity funds, five evergreen hedge funds, five development stage/private companies and multiple promissory notes. All of these investments were non-controlling and non-marketable, and subject to certain restrictions. None of the funds made regular distributions. Each subset is described further below. Private-Equity Funds: These investments were subject to transfer restrictions (i.e. requires fund general partner consent), and withdrawal was not permitted prior to the end of the fund's term. Distributions were only anticipated upon the harvest of underlying investments, and the timing and amount of distributions would be determined by each fund's manager or general partner. A summary of key information associated with these funds is presented in the following table. Non-Apollo Private Equity Investments - Key Terms BFP's Capital Fee Tenn hail .. Description - Account Value16 Structure" Expiration The fund is focused on HAO $3,443,337 investments in Asia, with a 2%/20% 12/5/2015 focus on China. The fund is focused on SWF $18,614,237 timberland properties in the 1%,15% 5/1/2018 southeastern United States. The fund is focused on active minority investments located in WCP $2,079,916 2%/20% 2/23/2019 emerging markets, with a focus on BRIC.1s The fund is targeting $1 million investments in growth stage TEN.' $829,294 2%/20% 4/1/2023 "Big Data" companies. Total fund size is $25 million. 1° GSTrUE is a secondary market for qualified institutional and individual investors. Apollo stopped trading on GSTrUE after its public listing in 2011. 16 Based on most recent quarterly account statements. Capital account balances were adjusted to account for distributions and contributions made between the capital account date and the Valuation Date. 17 Stated annually, as "management fee percentage/performance fee percentage." 18 Brazil, Russia, India and China. EFTA01085865 Alan Halperin, Esq. February 26, 2015 APO1 GRAT No. 2 - Valuation Date: December 3, 2014 Page 9 Hedge Funds: The evergreen funds allowed withdrawal of capital based on a combination of lock-up periods and limited opportunities to withdraw (e.g. annually, quarterly). Although the interests were subject to transfer and other restrictions, the withdrawal rights were considered to be most important. A summary of key information associated with the evergreen funds is presented in the following table. Non-Apollo Hedge Fund Investments — Key Terms I3FP's Capital Fee Withdrawal Emit' Description - tccount Value" Structure' Date:" Debt focused special situations ACP $17,731,170 1.5%120% 6/30/2015 fund. De fundbt and equity event-driven CVRF $19,015,533 1.5%120% 12/31/2015 . Global long/short credit and KSC $1,011,287 1.5 %/20% N/A22 event-driven fund. LC $37,120,924 Lon onl equity fund. 1.75%/0% 3/31/2015 MG $25,789,147 Arbitrage fund 0%23/20% 3/31/2015 Truckast LLC ("Truckast": BFP initially invested in iCrete LLC which had developed proprietary technology for mixing concrete. BFP held a Class B interest in iCrete. According to the Partnership's 2013 K-1, BFP had a capital account balance of $1.2 million and a capital sharing percentage of 0.7655%. iCrete had a $5.9 million members' deficit as of December 31, 201224. As of the writing of this report, and effective December 5, 2013, Pacific Concrete Technologies, LLC acquired of all of the right, title, and interest in and to certain property formerly owned by iCrete, LLC, including 100% of the membership interests of iCrete. Further, on December 5, 2013, Pacific Concrete Technologies, LLC transferred 100% of the membership interests of the company to GKW Holdings. GKW Holdings formed Truckast to hold these interests. KUE: Knowledge Universe Education was a holding company with a portfolio of development stage secondary education companies. The carrying value of BFP's 19 Based on the most recent monthly account statements. 20 Stated annually, as "management fee percentage/performance fee percentage." 21 Withdrawal date represents when BFP was allowed to withdraw its capital from the underlying fund as of the Valuation Date based on the provisions of the respective underlying fund agreement. This applies only to ACP, CVRF, LC and MG. 22 Entire balance is a side pocket investment. KSC retained $117,838 from the withdrawal of unrestricted capital for future management fees with respect to the side pocket investment. 23 There is no management fee. However, partners bear pro rata levels of fund expenses. 24 The most recent financial statement available at the Valuation Date. EFTA01085866 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 10 interest in KUE was estimated to be $34.0 million. Per BFP's K-1, the Partnership had a 4.7328% capital interest. KUE's aggregate book value of equity was $718.5 million as of December 31, 2013. On October 15, 2013 BFP received a $1.4 million cash distribution and $0.8 million stock distribution (105,951 shares of LRN from KUE and 75 shares from KU Management). The distribution was considered a return of contributions to KUE's investors, though not 100%. The KUE Agreement was amended August 9, 2013. The amendment reflected that KUE has a target exit date of October 2015 through an IPO. If an IPO is not successful, KUE will wind down by October 2017 through some other means. When BFP invested in KUE, the investment also included an investment in KU Management Inc. ("KUE GP"), KUE's general partner. Based on the initial investment, BFP's capital contribution was allocated 99.9% to KUE and 0.1% to KUE GP. KUE GP's carrying value was estimated at $34,040. ESWW Convertible Notes: ESWW, through its wholly-owned subsidiaries, is engaged in the designing, developing, manufacturing and selling of emissions control technologies. The company also provides emissions testing and environmental certification services with its primary focus on the North American on-road and off- road diesel retrofit market. ESWW manufactures and markets a line of catalytic emission control and enabling technologies for a number of applications. ESWW is focused on the international medium duty and heavy duty diesel engine market for on-road and off-road vehicles, as well as the utility engine, mining, marine, locomotive and military industries. ESWW also offers engine and after treatment emissions verification testing and certification services. In 2013, BFP invested $2.9 million in ESWW in the form of convertible notes? The notes pay 10% interest that is compounded quarterly and paid semi-annually. The notes will convert at a rate of $80 per share to common equity on March 22, 2018, or sooner if a majority of the note holders elect to convert the notes to common stock. Rally Labs: Rally Labs LLC markets and distributes an over-the-counter drug called Blowfish, which is an effervescent, morning-after hangover remedy. BFP invested $200,000 on June 28, 2013 as part of Rally Labs effort to raise $2 million in investment capital in order to finance its general business operations and marketing initiatives to support a national rollout. The Partnership bought 20,000 units at a price per unit of $10.00. The total offering was 200,000 units. The full allotment of units offered by the company represents 25% of the Rally Lab's fully-diluted capitalization. BFP's carrying value was estimated at $188,015. 23 The total aggregate offering was $4,596,929. EFTA01085867 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 11 T-INK, Inc.: T-INK markets and develops technology enabled ink and printing capabilities. BFP invested $100,003 to purchase 6,094 common shares on December 9, 2013 as part of T-INK's effort to raise investment capital. Artbinder, Inc.: Artbinder has developed and is marketing a digital platform for art galleries. BFP invested $9,998 to purchase 1,715 series A preferred shares on May 9, 2014 as part of Artbinder's effort to raise capital for capital expenditures, working capital, and general corporate purposes. Promissory Notes and Receivables: As of the Valuation Date, the Partnership had the following notes with related parties: (1) three outstanding notes (two receivable and one payable) with Leon Black, totaling $31.6 million, net, including accrued interest; and (2); two notes with PLB LLC totaling $3.2 million (including accrued interest). Note terms end between March 13, 2016 and April 28, 2017. Annual interest rates are between 0.18% and 2.20% for the notes. All notes are interest only with principal payments due at the end of each note's term. As of the Valuation Date, the Partnership had a receivable from BRH Holdings, LP in the amount of $286,821. As of the Valuation Date, BFP held notes payable by Phaidon Global with a balance of $13.6 million, including accrued interest. Interest accrues on the notes at 1-month LIBOR plus 200 basis points. The notes are a result of a $15.0 million credit line to Phaidon Global which expired on September 30, 2014. Liabilities: BFP had no liabilities at the Valuation Date. Summary: Based on the most recent capital account statements and holdings information provided by Apollo and BFP Management, the Partnership's total assets had an aggregate market value of $2.5 billion (which excluded the TRA benefit). Since BFP had no liabilities, its aggregate partners' capital was $2.5 billion (based on the mean value per share for each of the marketable securities as of the Valuation Date). See Exhibit D. Valuation adjustments necessary to reflect the market value of the Partnership's individual assets taking into consideration various restrictions that hinder BFP's control over the assets and lack of a ready market to dispose of or trade its assets is considered in detail in the valuation section of this report. EFTA01085868 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 12 C. BFP Agreement Provisions BFP was formed pursuant to Delaware Revised Uniform Limited Partnership Act (the "Act"). The BFP Agreement dictates the rights, responsibilities and restrictions placed on the Interest. A summary of key provisions impacting the fair market value of the Interest is presented below. • Management: The Partnership shall be managed solely at the discretion of the GP (i.e. Black Family GP, LLC). (7.1-7.2.) No LP shall have the ability to act on behalf of the Partnership in its capacity as such. (7.6.) There are no restrictions on the actions of the GP, and the GP may not be removed. (7.4.) Upon an event of withdrawal by the GP, a successor GP shall be appointed by a majority in interest of the LPs. (7.7.) • Allocations and Distributions: allocations shall be made on a pro rata basis. (5.2.) The timing and amount of distributions shall be determined by the GP in its sole and absolute discretion. Such distributions are based on sharing ratios. (5.4.) • Costs: Any costs incurred by the GP on behalf of the Partnership for its operations shall be reimbursed by the Partnership. (Article 4.) • Restrictions on Transfer: Transfers of economic interests are permitted. However, no transferee shall become a partner without the prior written consent of the GP. (9.1.) Upon death, a partner's economic rights shall be transferred to his legal representative. (9.3.) In addition to the required consent of the GP, other administrative tasks must be completed in order to effect the admission of a transferee as a substitute LP. (9.4.) • Restrictions on Withdrawal: Any Partner may withdraw any portion of his, her, or its capital account at any time. Upon such withdrawal, the Partnership shall distribute to such Partner assets of the Partnership with an aggregate fair market value equal to (i) the value of all of the assets of the Partnership, multiplied by (ii) such Partner's Sharing Ratio, multiplied by (iii) the percentage of such Partner's capital account being withdrawn by such Partner. If the Partnership's assets consist of assets other than cash or marketable securities, the FMV shall be determined by a qualified appraiser selected by the GP. (3.4.) • Books and Information: The GP shall cause complete books and records to be maintained at the principal offices of the Partnership. Such records shall EFTA01085869 Alan Halperin, Esq. February 26, 2015 APOI GRAT No. 2 - Valuation Date: December 3, 2014 Page 13 be open to inspection and examination of all partners in person or by their duly authorized representatives, who have the right to make copies at their own expense during normal business hours. (8.1.) The GP may, but is not required to, have annual financial statements prepared. Such statements need not be audited. If prepared, copies of such statements shall be delivered to the LPs. (8.2.) The Partnership's accountants shall prepare all federal, state and local income tax returns for the Partnership. (8.3(a).) • Dissolution: The Partnership will be dissolved at such time as the first of the following should occur: (1) the bankruptcy or dissolution of the GP; (2) the determination of the GP to dissolve the Partnership; (3) the entry of a decree of judicial dissolution; (4) any event under the act sufficient to cause dissolution. (10.1.) • Amendment: The Agreement may only be amended by the unanimous agreement of the Partners. (12.1.) AOG Unit Agreement Provisions The Interest and AOG Units are subject to provisions of multiple agreements. The impact of these agreements is that the value of an AOG Unit will vary from the value of a share of Apollo's Class A stock, based on the restrictions and benefits imposed on the AOG Units. Transfer and exchange restrictions remove the ability to participate in a liquid market. The TRA outlines how the tax benefit derived from an AOG Unit exchange is shared between the exchanging unit holder and Apollo. Empire reviewed the key agreements, as well as the summary for each agreement that is included in Apollo's public filings. The descriptions provided below are paraphrased from the content provided in the filings, and are intended to have the meaning conveyed therein. A. The Exchange Agreement BFP entered into an exchange agreement with Holdings which provides for the exchange of AOG Units owned by Holdings for Class A shares of Apollo. Subject to certain procedures and restrictions26 and upon 60 days' written notice prior to a 26 Restrictions include the vesting schedules applicable to the Managing Partners, as well as any applicable transfer restrictions and lock-up agreements. EFTA01085870 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 14 designated quarterly date, each of Holdings' owners27 has the right to cause Holdings to exchange the AOG Units owned indirectly by such owner for BFP Class A shares. The Class A shares received in the exchange would then be sold immediately at the prevailing market price, or at a lower acceptable price, and the net proceeds distributed to the owner affecting the exchange. In connection with the exchange, BFP's interest in the AOG Units will be correspondingly increased and the voting power of the Class B share will be correspondingly decreased. B. The Principals Agreement The Principals Agreement provides that each Managing Partner's Pecuniary Interest28 in the AOG Units that he holds indirectly through Holdings shall be subject to vesting. The Managing Partners own Holdings in accordance with their respective sharing percentages. Pursuant to the Principals Agreement, the AOG Units attributable to each of the managing partners is fully vested as of the Valuation Date. C. The Shareholder Agreement While the Exchange Agreement allows for quarterly exchanges of AOG Units into Class A shares of BFP, the Shareholder Agreement restricts the amount and timing of such exchanges involving a Managing Partner's aggregate equity interest ("Equity Interests") via its transfer restrictions. These restrictions are described below. No Managing Partner" may affect cumulative transfers of Equity Interests, representing more than: 1. 0.0% of his Equity Interests at any time prior to the second anniversary of the date on which the registration statement of which the S-1 forms a part became effective (the "shelf effectiveness date"), i.e. March 29, 2011; 2. 7.5% of his Equity Interests at any time on or after the second anniversary and prior to the third anniversary of the shelf effectiveness date; 3. 15% of his Equity Interests at any time on or after the third anniversary and prior to the fourth anniversary of the shelf effectiveness date; 27 Including Managing Partners, contributing partners, and certain transferees thereof. 29 Pecuniary Interest - With respect to each Managing Partner, the number of AOG units that would be distributable to such Managing Partner assuming that Holdings were liquidated and its assets distributed in accordance with its governing agreements. 29 This applies to Managing Partners and their permitted transferees. EFTA01085871 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 15 4. 22.5% of his Equity Interests at any time on or after the fourth anniversary and prior to the fifth anniversary of the shelf effectiveness date; 5. 30% of his Equity Interests at any time on or after the fifth anniversary and prior to the sixth anniversary of the shelf effectiveness date; or 6. 100% of his Equity Interests at any time on or after the sixth anniversary of the shelf effectiveness date. Certain transfers were not subject to the restrictions described above, including transfers: (1) from one founder to another founder; (2) to a permitted transferee of such Managing Partner; and (3) in connection with a sale by one or more of the Managing Partners in one or a related series of transactions resulting in the Managing Partners owning or controlling, directly or indirectly, less than 50.1% of the economic or voting interests in Apollo or AOG, or any other person exercising control in Apollo or the AOG by contract, which would include a transfer of control of their manager. D. Tax Receivable Agreement In the event that an exchange pursuant to the Exchange Agreement is a taxable transaction, Apollo Management Holdings, •. and the AOG entities that it controls will make a Section 754 election which may result in an adjustment to the tax basis of a portion of the assets owned by the AOG at the time of the exchange. The taxable exchanges may result in increases in the tax depreciation and amortization deductions from depreciable and amortizable assets, as well as an increase in the tax basis of other assets, of AOG that otherwise would not have been available. A portion of any increase in depreciation and amortization tax deductions, as well as the increase in the tax basis of such other assets, will reduce the amount of tax that APO Corp. would otherwise be required to pay on future income. Additionally, Apollo's acquisition of AOG Units in such an exchange may result in increases in tax deductions and tax basis that reduces the amount of tax that APO Corp. would otherwise be required to pay in the future. This occurred in connection with the Apollo's acquisition of AOG Units from the Managing Partners in the strategic investors' transaction in July 2007. The TRA requires APO Corp. to pay the Managing Partner (or to a permitted transferee of such Managing Partner, i.e. BFP) or contributing partner involved in such an exchange 85% of the amount of actual cash savings, if any, in U.S. EFTA01085872 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 16 Federal, state, local and foreign income tax that APO Corp. realizes30 as a result of these increases in tax deductions and tax basis, and certain other tax benefits, including imputed interest expense. APO Corp. expects to benefit from the remaining 15% of actual cash savings, if any, in income tax that it realizes. For purposes of the TRA, cash savings in income tax will be computed by comparing APO Corp's actual income tax liability to the amount of such taxes that APO Corp. would have been required to pay had there been no increase to the tax basis of the tangible and intangible assets of the applicable AOG entity as a result of the transaction and had APO Corp. not entered into the TRA. The tax savings achieved may not ensure that APO Corp. has sufficient cash available to pay the tax liability or generate additional distributions to its investors. Also, APO Corp. may need to incur additional debt to repay the TRA if its cash flows are not met. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless APO Corp. exercises the right to terminate the TRA by paying an amount based on the present value of payments remaining to be made under the agreement with respect to units that have been exchanged or sold and units which have not yet been exchanged or sold. The present value of remaining payments will be determined based on certain assumptions, including that APO Corp. would have sufficient taxable income to fully utilize the deductions that would have arisen from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. No payments will be made if a Managing Partner or contributing partner elects to exchange his or her AOG Units in a tax-free transaction. In the event that other of Apollo's current or future subsidiaries become taxable as corporations and acquire AOG Units in the future, or if Apollo becomes taxable as a corporation for U.S. Federal income tax purposes, each will become subject to a tax receivable agreement with substantially similar terms. Valuation of Black Family Partners, LP A. Introduction Generally, there are three commonly used approaches, to determine the value of a company/asset, none of which is necessarily superior to the others. These three approaches are the Income, Market and Cost Approaches. The nature of the J0 Oris deemed to realize in the ease of an early termination payment by APO Corp. or a change of control. EFTA01085873 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 17 business, industry, and economic circumstances of the particular company/asset being valued at the specific valuation date, as well as the availability of data will dictate which approach(es) will ultimately be used in determining the company's/asset's value. B. Valuation Methodologies Applied 1. Income Approach Discounted Cash Flows Methodology ("DCF"): The discounted future income methodology can use cash flows as a basis to forecast the income which the business or asset will generate. Thereafter, an aggregate present value is calculated for the future cash flows using a required rate of return known as the discount rate. The strength of this methodology is that it facilitates the analysis of operational practices and their impact upon the business' value. Its weakness, however, is that it relies heavily upon projections of cash flows or net income which, for some firms, are difficult to make with any accuracy. The DCF method was applied to value certain BFP assets represented by expected future cash flow sources. For BFP, as an investment holding company, an asset based approach was considered more appropriate. 2. Market Approach Guideline Company Methodology: The objective of the guideline company methodology is to identify business entities that have publicly traded securities, as well as business and financial risks, which are comparable to those of the entity being valued. The pricing multiples of the selected public companies are then used to derive a market value for the owners' capital of the company under analysis. For an investment holding company, comparison with similar publicly traded investment companies, such as closed-end funds, is generally considered appropriate. There are two important pricing multiples that can be derived from the freely traded shares in investment holding companies: (1) discount to net asset value ("NAV"); and (2) price to yield. Discount (or premium) to NAV is calculated by dividing the company's market price by its reported NAV per share, and then subtracting the result (as a percentage) from 100%. A discount to NAV is also referred to as an investment company discount ("ICD"). The other important pricing measure for public investment holding companies, particularly for those that earn substantial income (e.g., municipal bonds, utility stocks, commercial real estate) and pay out most of this income, is yield (i.e., the dividend per share divided by EFTA01085874 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 18 the market price per share). When either of these pricing measures is applied to the closely held investment company's corresponding financial figures, the end result is the fully marketable value of owners' capital on a non-controlling (i.e., minority) interest basis. This methodology was applied, in conjunction with a variant of the NAV method, described below, to derive the fair market value of BFP. 3. Asset Accumulation Method The asset accumulation method ("AAM") focuses primarily on the balance sheet. It requires restatement of the company's assets and liabilities in order to reflect their market values. Using this method, the value of the subject enterprise's equity is equal to the market values of its assets less its liabilities. The general method of individual asset and liability revaluation has also been referred to as the net asset value method, the adjusted net asset value method, the adjusted book value method, and the asset build-up method. Application of this method will typically indicate the value of 100% of the subject company equity on a controlling ownership interest basis. However, the method's relevance generally weakens when valuing an operating company whose value is best reflected as a going concern. Exceptions are when sale of the company's net assets is considered highly probable, when the realizable value of its net assets equals, or exceeds, the value of its distributions to its owners, or when the company's value is tied directly to the value of its underlying investments. Note that unless otherwise noted, use of this method assumes that transaction and built-in gains tax costs are reflected in the consideration of the discounts for lack of control and marketability. Because the Interest is an investment in an investment holding company, the value of its underlying assets and any related liabilities are important to an investor. This is true even though a minority interest is being valued, and such an interest obviously does not have the right to liquidate the Partnership or its assets. Therefore, the AAM was used to determine the minority value of the Interest. C. Valuation Summary The AAM was used to value the Interest. First, the adjusted book value of BFP's assets (except cash and marketable securities) were calculated. The summary of which is presented in Exhibit D. EFTA01085875 Alan Halperin, Esq. February 26, 2015 APO' GRAT No. 2 - Valuation Date: December 3, 2014 Page 19 The assets were placed in three groups. The first group consisted of the interests in fixed-term funds," most of which were not expected to liquidate for several years after the Valuation Date. The most recent available capital account balances were used as a starting point, reflecting the pro rata NAV in each fund associated with the subject interests. A restriction period discount was then applied to reflect the rights and restrictions associated with each investment, together with its economic characteristics. Application of this adjustment resulted in a cash equivalent value (i.e. fair market value) that was included in the derivation of BFP's adjusted book value ("ABV"). This analysis is presented