Apollo Management International LLP Pillar 3 Disclosures

Apollo Management International LLP Pillar 3 Disclosures The Capital Requirements Directive ( CRD ) (Directive 2013/36/EU) and the Capital Requirements Regulation ( CRR ) (Regulation (EU) No 575/2013) of the European Union establish the regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain. In the United Kingdom, the CRD has been implemented by the Financial Conduct Authority ( FCA ) in its regulations through the Prudential Sourcebook for Investment Firms ( IFPRU ) and The Interim Prudential Sourcebook for Investment Business ( IPRU(INV)). The CRR, as a regulation, is directly applicable. The FCA framework consists of three Pillars : Pillar 1 sets out the minimum capital amount that meets the firm s credit, market and operational risk; Pillar 2 requires the firm to assess whether its capital reserves, processes, strategies and systems are adequate to meet pillar 1 requirements and further determine whether it should apply additional capital, processes, strategies or systems to cover any other risks to which it may be exposed to; and Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position to encourage market discipline. The CRR set out the provision for Pillar 3 disclosure. This document is designed to meet Apollo Management International LLP s ( AMI, the LLP or the Firm ) Pillar 3 obligations under Part Eight of the CRR (Articles 431-455). The Pillar 3 disclosure document has been prepared by AMI and approved by the Committee (as defined below). Unless otherwise stated, all figures are as at 31 December 2016. Pillar 3 disclosures will be issued at least on an annual basis after the year end and published as soon as practical when the audited annual accounts are finalised. We are permitted to omit required disclosures if we believe that the information is immaterial such that omission would not likely change or influence the decision of a reader relying on that information for the purpose of making economic decisions about the Firm. 1

In addition, AMI may omit required disclosures where it believes that the information is regarded as proprietary or confidential. In the Firm s view, proprietary information is that which, if it were shared, would undermine its competitive position. Information is considered to be confidential where there are obligations binding AMI to confidentiality with its customers, suppliers and counterparties. We have omitted certain data on the grounds of confidentiality, proportionality and/or materiality. We have made no omissions on the grounds that data is proprietary. Scope and application of the requirements AMI is authorised and regulated by the FCA and as such is subject to minimum regulatory capital requirements. The Firm is categorised as an IFPRU Limited License Firm by the FCA for capital purposes. It is an investment management firm and as such has no trading book exposures. AMI is not a member of a group (for FCA purposes) and so is not required to prepare consolidated reporting for prudential purposes. For more information about the Firm s investments in subsidiaries or other nontrading book investments see Section 1.6 of the Accounting Policies Notes of the Firm s annual accounts. Governance arrangements, the management body and competence AMI is governed by its members and by its Management Committee and two sub-committees of its Management Committee the Strategic Committee and Operational Committee (collectively, the "Committees" and references to "the Committee" or "a Committee" are references to the committee which is appropriate to the relevant matter). The Committees are made up of certain senior members of the LLP and the Apollo corporate members of the LLP and determine AMI's business strategy and risk appetite. The Committees meet on a regular and at least quarterly basis. The quarterly meetings have a formal agenda which countenances enterprise wide issues and the risk appetite of the business. Additionally, ad hoc meetings may have agendas circulated in respect of matters being considered. The meetings demonstrate how the Committees oversee and are accountable for the implementation of governance arrangements and ensure the effective and prudent management of the Firm, with due consideration to the appropriate and proportionate segregation of duties and the prevention of conflicts of interest. Under AMI s governance documents, certain matters are reserved to be determined by a particular Committee: some matters, such as strategic decisions 2

regarding the capital structure of the Firm and a decision to accept any new business mandates, also require the consent of at least one of the corporate members. Additionally, certain matters are reserved to be determined by all of the members of the LLP (the Members ), such as the approval of the audited accounts of the Firm and any material change in the nature of the business carried on by the Firm. The Members meet annually, or as required on an ad hoc basis. The Firm considers that appropriate policies are in place to ensure the fitness and propriety of all staff at the time of employment and on an annual basis thereafter, including the Members and the members of the Committees. In particular, the Committees are structured such that their members collectively bring to the Firm a balance of the skills, knowledge and experience required to understand the activities of the Firm, including its main risks. Additionally, all staff undergo training on a variety of compliance policies/procedures and regulatory topics at the time of employment and on an annual basis thereafter, at a minimum. The Members and the members of the Committees are experienced industry professionals and any senior appointments are subject to the approval of the relevant Committee with due consideration to the reputation, fitness and experience of the candidate as well as the long term strategic goals of the business. Such appointments are also made in accordance with the principles of diversity set out in AMI's Equal Opportunity Policy. The members of the Committees do not hold more directorships than is appropriate taking into consideration FCA requirements in this area. Risk management AMI has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The risk management process is overseen by a dedicated risk team, with the relevant Committee taking overall responsibility for this process and the fundamental risk appetite of the Firm. The Compliance team, along with the risk function, finance, HR and senior management, have responsibility for the implementation and enforcement of the Firm s risk principles. The relevant Committee also determines how the risk AMI s business faces may be mitigated, and assess on an ongoing basis the arrangements to manage those risks. The Committee is aware of, and has individually and collectively approved, current projections for profitability, cash flow, regulatory capital management, and business planning and risk management. The Committee manages the Firm s risks though a framework of policies and procedures having regard to relevant laws, standards, principles and rules (including FCA principles 3

and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required. The Committee has identified that business, operational, market and credit risks are the main areas of risk to which the Firm is exposed. Business and operational risk are addressed below, while market and credit risk are addressed in detail in Member s Report section of the Firm s annual accounts. Annually the Committee formally reviews the Firm s risks, controls and other risk mitigation arrangements and assesses their effectiveness. Where the Committee becomes aware of any material risks, they consider the potential financial impact of these risks as part of the Firm s business planning and capital management and conclude whether the amount of regulatory capital is adequate. Business risk AMI s revenue is reliant on the performance of the existing funds under its management and sub-advisory arrangements, as well as its ability to launch new funds / obtain new mandates. As such, the risk posed to the Firm relates to underperformance resulting in a decline in revenue and adverse market conditions hindering the launch of new funds. This risk is mitigated inter alia by: use of investment guidelines and restrictions; regular portfolio review; the continued support of the Firm by its US parent company; and significant levels of capital held by the Firm which we believe will continue to cover all expenses of the business. Operational risk AMI places strong reliance on the operational procedures and controls that it has in place in order to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect. The Firm has identified a number of key operational risks to manage. These relate to risk such as systems failure, key man, potential for serious regulatory breaches, market abuse and poor business continuity / disaster recovery planning. Appropriate polices are in place to mitigate against these risks. Liquidity The Firm is required to maintain sufficient liquidity to ensure that there is no significant risk that its liabilities cannot be met as they fall due or to ensure that it can secure additional financial resources in the event of a stress scenario. The Firm retains an amount it considers suitable for providing sufficient liquidity to meet the working capital requirements under normal business conditions. The Firm has always had sufficient liquidity within the business to meet its obligations 4

and there are no perceived threats to this given the cash deposits it holds and implicit support it receives from the US parent company. The Firm maintains a liquidity risk policy within its ICAAP which formalises this approach. Other In addition to the above risks, the Firm considers the cost of an orderly winddown and the Fixed Overheads Requirement ( FOR ). The FOR is based on annual expenses net of variable costs deducted, which include discretionary bonuses paid to staff, severance pay and temporary help. The Firm monitors its expenditure on a quarterly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year. The overall adequacy of regulatory capital is monitored by the Firm s Director of Finance and, from time to time, reported to the relevant Committee. Unencumbered assets In accordance with Article 443 of the CRR, the below table provides details of encumbered and unencumbered assets. An asset is considered encumbered if: it has been pledged; or it is subject to any form of arrangement to secure, collateralise or creditenhance any on-balance-sheet or off-balance-sheet transaction from which it cannot be freely withdrawn Assets Carrying amount of encumbered assets Fair value of encumbered assets Carrying amount of unencumbered assets Assets Equity instruments Debt securities 83,778,571 83,778,571 Other assets 878,222 95,242,583 Fair value of unencumbered assets Encumbered debt securities comprise the Firm s investments in the CLO retention stakes it holds. Encumbered assets/collateral received and associated liabilities 5

Matching liabilities, contingent liabilities or securities lent Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered Carrying amount of selected financial liabilities 84,656,793 Financial liabilities above comprise secured loans on the Firm s retention stake investment in CLOs. Regulatory capital AMI is a limited liability partnership and its capital arrangements are established in its Limited Liability Partnership Agreement. The main features of the Firm s capital resources for regulatory purposes at 31 December 2016 are as follows: Capital item 000 Common Equity Tier 1 capital 41,323 Additional Tier 1 capital - Tier 2 Capital Deductions from Tiers 1 and 2 - Total capital resources, net of deductions 41,323 The Firm s risk weighted exposure amount for credit, counterparty credit and dilution risks and free deliveries is limited to foreign exchange risk on its assets and liabilities including accounts receivable and payable in foreign currency, and credit risk from its assets, including where it has a retention stake or any such investments in CLOs, investment management, advisory and other performance fees receivable from the funds under its management and sub-advisory arrangements with its Clients. The Firm follows the standardised approach to foreign exchange risk and the simplified standard approach to credit risk. The Firm is subject to the FOR and is not required to calculate an operational risk capital charge though it considers this as part of its process to identify the level of risk based capital required. The Firm places strong reliance on the operational procedures and controls that it has in place in order to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect. Appropriate action is taken where risks are identified which fall outside of AMI s tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the Firm s mitigating controls. 6

As discussed above, the Firm is a limited license firm and as such its capital requirements are the greater of: Its base capital requirement of 50,000; or The sum of its foreign exchange and credit risk requirements; or Its FOR. The FOR is calculated in accordance with the FCA rules, based on the AMI s previous years audited expenditure. However, if forecast expenditure increases by 20% or causes the capital requirement to increase by 2m, then the increased forecast is used. It is the Firm s experience that either the FOR or the capital requirements for foreign exchange and credit risk establish its capital requirement. foreign exchange risk arises primarily on the CLO transactions in EUR and credit risk arises primarily on the investments in CLO s and fees due from clients. Capital requirement AMI s total risk exposure amount has been determined by reference to the capital requirements for foreign exchange risk and credit risk, as they exceed the FOR, and also the base capital requirement of 50,000. Remuneration code disclosure The Firm is subject to FCA Rules on remuneration. These are contained in the FCA s Remuneration Code ( the RemCode ) located in the SYSC Sourcebook of the FCA s Handbook. The RemCode covers an individual s total remuneration, fixed and variable. The Firm incentivises staff through a combination of the two. The Firm s remuneration policy is designed to ensure that it complies with the RemCode and compensation arrangements: 1. are consistent with and promote sound and effective risk management; 2. do not encourage excessive risk taking; 3. include measures to avoid conflicts of interest; and 4. are in line with the Firm's business strategy, objectives, values and longterm interests. Proportionality Enshrined in the European remuneration provisions is the principle of proportionality. The FCA has sought to apply proportionality in the first instance by categorising firms into 3 levels. AMI falls within the FCA s third proportionality level and as such this disclosure is made in line with the requirements for a Level 3 Firm. 7

Application of the requirements AMI is required to disclose certain information on at least an annual basis regarding its remuneration policy and practices for those staff whose professional activities have a material impact on the risk profile of the Firm. AMI s disclosure is made in accordance with its size, internal organisation and the nature, scope and complexity of its activities. The Firm s full Remuneration Policy Statement is available at the request of all staff. The Firm s policy has been agreed by the relevant Committee in line with the RemCode principles laid down by the FCA. The Firm s policy will be reviewed as part of annual process and procedures, or following a significant change to the business requiring an update to its internal capital adequacy assessment. There is limited involvement of the Firm in deriving asset prices. The Firm s ability to pay bonus is based on the performance of the Firm overall and derived after its fund s financial returns have been materially finalized. Individuals are rewarded based on their contribution to the overall strategy of the business. a. Investment Generation b. Investment Trading c. Sales & Marketing d. Operations Other factors such as staff performance, reliability, effectiveness of controls, business development and contribution to the business are taken into account when assessing the performance of the senior staff responsible for the infrastructure of the Firm. Below is aggregate quantitative information on remuneration, for staff whose actions have a material impact on the risk profile of the Firm. Code Staff Aggregate compensation expense for the year ended 31 December 2016 ($ 000) Senior Management: $19,196 We may omit required disclosures on the grounds of data protection and where we believe that the information could be regarded as prejudicial to the UK or other national transposition of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data. UK Financial Reporting Council s Stewardship Code 8

FCA COBS 2.2.3R requires FCA authorised firms to disclose whether they conform to the requirements of the UK Financial Reporting Council s Stewardship Code (the Code ). Adherence to the Code is voluntary. While AMI supports the principles of the Code, it does not consider it appropriate to conform to the Code at this time. 9