In the interim between its 2008 and 2009 annual reports, Apollo Investment Corporation officially adopted FAS 157. As one would expect, the section of its 2009 annual report describing its valuation policies for Level 3 holdings was significantly longer than the corresponding section of the 2008 report. Below, we look at some of the new language inserted into the 2009 report.
More detail on methodology
The 2009 and 2008 reports both describe the exact same 5-step valuation process, beginning with investment teams doing the initial valuation for each company and ending with an end decision by the board of directors. New to the 2009 report is a section describing the mix of valuation approaches that the firm uses across the portfolio – indicating that Apollo is responding to calls from all quarters for greater GP transparency:
Investments are valued utilising a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing out investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realisable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors.
The 2009 report references two new FASB staff positions, FAS 157-3 and FAS 157-4, and discusses their impact on Apollo’s financial statements. While FAS 157-3, which provided more clarity on how to determine value in inactive markets, wasn’t deemed significantly impactful, the firm says it continues to review FAS 157-4 “and the future impact, if any, it will have on our financial position or results of operations”.
The section seems to replace the following sentence from the 2008 report:
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available fair market value, the value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.