SEC subpoenas Apollo over IRR calculations

  • Apollo received subpoena in December; is cooperating
  • Firm previously settled with SEC for $52.7 mln last year
  • Raising Fund IX, which could be largest traditional buyout fund

The SEC subpoenaed Apollo Global Management in December for information related to the calculation of internal rates of return for certain funds, as well as payments to a European service provider and personnel changes, according to SEC filings and due-diligence materials obtained by Buyouts.

The due-diligence report, obtained through a public-records request, also said the SEC subpoenaed documents relating to portfolio-company fee revenues.

“Apollo has stated that this inquiry is generally consistent with issues raised by two former employees which were found to be unsubstantiated,” the due-diligence report from StepStone Group says.

Apollo said in a filing it is cooperating with the SEC in the inquiry.

“These topics generally track matters with which the company is familiar and has previously examined. The company is fully cooperating with the SEC in this matter,” Apollo wrote in its annual 10-K filing with the SEC, in reference to the subpoena.

Apollo and the SEC declined to comment.

The SEC has included as part of its examinations of private equity firms how they calculate and report IRRs. Without a formal industry standard, firms vary in how they calculate IRRs, which complicates apples-to-apples comparisons of the performance of funds raised by different managers.

For example, Apollo reports net IRR inclusive of returns for entities that may not pay fees or carried interest, such as capital from Apollo executives, according to SEC filings. Reuters has reported that other large-cap PE firms, including Blackstone Group, Bain Capital and Carlyle Group, do not include this capital in their net IRR calculations.

“We do include GP capital in our net IRR calculations. And the reason we do that is because we calculate IRRs at the fund level and not at the investor level,” Apollo Chief Financial Officer Martin Kelly said in a 2014 earnings call. “We are very transparent in our disclosures to our investors. And if you look at the impact of including versus not, the GP capital in the calculation, it’s small.”

Apollo previously settled with the SEC over allegations it misled investors and failed to protect fund clients from inappropriate expenses. The firm paid $52.7 million in its settlement last year. The firm did not admit or deny wrongdoing.

Apollo is raising Apollo Investment Fund IX, which is expected to collect more than $23 billion. The firm has not set a firm target or hard cap, and Oregon Investment Council documents indicate the fund might be the largest of all time upon final close.

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Leon Black, chairman and CEO of Apollo Global Management, takes part in the Private Equity: Rebalancing Risk session during the 2014 Milken Institute Global Conference in Beverly Hills, California, on April 29, 2014. Photo courtesy Reuters/Kevork Djansezian