Varying opinions

In its Q4 2008 earnings presentation, Apollo Management went into some detail regarding its thoughts on and methods of valuation. On one slide, the firm mused on the pros and cons of FAS 157: on the pro side, “losses can be identified earlier”, it “creates consistency across funds in the industry and improves benchmarking”, and it “increases transparency on all of the assets within a portfolio, particularly those that are illiquid”. The con side was a bit longer however. Some of Apollo's criticisms were that FAS 157 “provides only a ‘snapshot’ of investment performance at a point in time that is not necessarily reflective of underlying fundamentals”, it is “counterintuitive to private equity value creation” because strategic and operational improvements take time, and it “creates increased volatility on a quarter-by-quarter basis that proves distracting to investors as it relates to longer-term return generation”.

Apollo's FAS 157 valuation process

1. At the end of each quarter, the deal teams update the valuation models and revise the outlook for each investment.

2. Deal teams submit detailed valuation memos to the valuation team / finance department, which minimally contain an update on the financial performance of the portfolio company, any realizations (or follow-on investments) that occurred in the quarter, the current valuation methodology, and a comparable company analysis.

3. After the finance department has reviewed, the valuation memos are sent to an independent third party valuation firm for evaluation. The independent third party valuation firm provides negative assurance of the values on most Level 3 type (illiquid) investments.

4. Finance department facilitates meetings / calls between each deal team and the independent third party valuation firm, allowing each investment to be fully vetted prior to sign-off of negative assurance.

5. Investment write-ups are then sent to Apollo's Valuation Committee for review. The Valuation Committee currently consists of: Chief Financial Officer; Chief Legal Officer/ Chief Compliance Officer; Chief Accounting Officer & Controller; 2 Partners – Private Equity; and Partner – Capital Markets.

6. The Valuation Committee meets on a monthly basis and vets each investment. Subsequent to the committee meeting, follow-up items / comments are submitted to each deal team, and responses are circulated to the Valuation Committee.

7. Once the Valuation Committee has fully vetted and approved each investment, the final memos are sent to our external auditor for review.

8. During the Auditor review process each investment is reviewed by our external auditor's audit team and valuation team.

9. The finance department facilitates written questions / comments provided by our external auditor, and arranges calls with the deal teams, if further clarification is needed.

10. Upon final approval by our external auditor, the valuations are concluded and presented in our financial statements.