How did Ares perform financially in 2014 and what drove growth?

Revenue grew 26% to $603.9 million, driven mainly by management fees of $486.5 million (up 29.5%). Growth came from additional ARCC capital raises, the Real Estate Group's AREA acquisition and new funds, and the Direct Lending Group's European platform. Performance fees rose modestly to $91.4 million on a GAAP basis, though segment performance-related earnings declined as Tradable Credit returns weakened in late 2014.

Why is GAAP net income attributable to Ares so low compared with its earnings metrics?

GAAP net income attributable to Ares Management, L.P. was $35 million, but it covers only the post-IPO period (May 1 to December 31, 2014) and reflects roughly 38% of Ares Operating Group income. Consolidated funds add large gross-up effects, with $420 million of income attributed to non-controlling interests. A $56.2 million one-time equity compensation charge and $83.2 million of total equity compensation further reduce GAAP income. Management instead emphasizes FRE and distributable earnings, which exclude these items.

How sustainable are distributions to unitholders?

Management targets distributing 80% to 90% of distributable earnings, and fee related earnings were about 63% of 2014 distributable earnings, which supports stability. However, distributable earnings fell about 7% in 2014, and performance fees are volatile and timing-dependent. The company states that distributions can be suspended and that the amount is at the discretion of the general partner.

What are the main concentration and structural risks for investors?

ARCC accounts for about 41% of management fees, including ARCC Part I fees of 20% of total, so any reduction in ARCC's assets or fees would materially affect revenue. Governance is concentrated in the Co-Founders, who hold roughly 78% of voting power, with limited unitholder influence. Clawback exposure was $295.7 million on a gross basis, with about $239 million reimbursable by professionals. A future change in tax law treating the partnership as a corporation would materially reduce after-tax distributions.

What growth catalysts were disclosed for 2015?

The January 1, 2015 acquisition of EIF Management added about $4 billion of power and energy AUM and roughly 40 professionals, with contingent consideration tied to launching a new fund (Fund V). Management highlighted continued fundraising in U.S. and European strategies, $18.2 billion of dry powder, and expansion into insurance and commercial finance distribution. The company also noted $9.2 billion of AUM not yet earning fees, representing about $91.9 million of potential annual management fees.

ARES/ARES-PB 10-K FY2014 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 20, 2015. Cited figures are marked; the original filing is the authoritative source.

Ares Management, L.P.

(NYSE: ARES) reported its first full annual report as a public company for fiscal 2014, following its May 2014 IPO and holding-partnership reorganization. The firm ended 2014 with approximately $82 billion^a of AUM (about $86 billion pro forma for the January 1, 2015 acquisition of EIF Management), up 10.5% for the year (15.8% pro forma), and raised $16.5 billion of gross new capital. Total revenues rose 26% to $603.9 million, and management fees grew 29.5% to $486.5 million, driven largely by ARCC fees and new real estate and direct lending funds.

Performance fees were more modest at $91.4 million^b, and GAAP net income attributable to Ares Management, L.P. was only $35.0 million, reflecting the post-IPO period, consolidation of funds, and a one-time $56.2 million equity compensation charge. The more relevant investor metrics are non-GAAP. Fee related earnings rose 14% to $290.3 million and distributable earnings fell about 7% to $381.6 million, as weaker Tradable Credit performance reduced realized and unrealized performance fees.

The company declared a $0.24^c per-unit quarterly distribution for Q4 2014, payable March 24, 2015, and targets distributing 80% to 90% of distributable earnings. Governance is concentrated: the Co-Founders control roughly 78% of voting power, common unitholders have limited voting rights, and the company relies on NYSE partnership exemptions. Key risks include ARCC fee concentration (about 41% of management fees), fee compression, performance-fee volatility, a $536 million estimated tax receivable agreement obligation, and exposure to potential changes in partnership tax treatment.

02—Key points

Key Highlights

AUM reached about $82 billion at December 31, 2014 (about $86 billion pro forma for EIF), up 10.5% for 2014 and 15.8% pro forma, with 2014 gross new capital raised of $16.5 billion.
Total revenues increased 26% to $603.9 million, led by management fees up 29.5% to $486.5 million; ARCC Part I fees were $118.5 million.
Fee related earnings rose 14% to $290.3 million, while distributable earnings declined about 7% to $381.6 million, mainly due to lower Tradable Credit performance-related earnings.
GAAP net income attributable to Ares Management, L.P. was $34.99 million (basic EPS $0.43) for the May 1 to December 31, 2014 post-IPO period, reduced by a one-time $56.2 million equity compensation charge tied to the Reorganization.
Quarterly distribution of $0.24 per common unit declared for Q4 2014 ($19.4 million), with a stated target of distributing 80% to 90% of distributable earnings.
Co-Founders control about 78% of voting power; common unitholders have limited voting rights and the company uses NYSE exemptions for limited partnerships.
Estimated early-termination tax receivable agreement payments of about $536 million and potential legislative risk to partnership tax status are significant contingent items for unitholders.

03—One dollar

04—Financials

Financial Highlights

10-KFY2014filed March 20, 2015

Revenue$603.89M Net Income$34.99M5.8% Net Margin Total Assets$21.64B Free Cash Flow$1.52B

Financial Statements

FY2014 against FY2013

Line item	FY2014FY2013	FY2013	Change
Revenue	$603.89M$478.65M	$478.65M	+26.2%
Operating Expenses	$860.04M$801.90M	$801.90M	+7.3%
Net Income	$34.99M$813.38M	$813.38M	−95.7%
Shares Outstanding (Basic)	80.36M—	—	—

05—Questions

Frequently Asked Questions

How did Ares perform financially in 2014 and what drove growth?
Revenue grew 26% to $603.9 million, driven mainly by management fees of $486.5 million (up 29.5%). Growth came from additional ARCC capital raises, the Real Estate Group's AREA acquisition and new funds, and the Direct Lending Group's European platform. Performance fees rose modestly to $91.4 million on a GAAP basis, though segment performance-related earnings declined as Tradable Credit returns weakened in late 2014.
Why is GAAP net income attributable to Ares so low compared with its earnings metrics?
GAAP net income attributable to Ares Management, L.P. was $35 million, but it covers only the post-IPO period (May 1 to December 31, 2014) and reflects roughly 38% of Ares Operating Group income. Consolidated funds add large gross-up effects, with $420 million of income attributed to non-controlling interests. A $56.2 million one-time equity compensation charge and $83.2 million of total equity compensation further reduce GAAP income. Management instead emphasizes FRE and distributable earnings, which exclude these items.
How sustainable are distributions to unitholders?
Management targets distributing 80% to 90% of distributable earnings, and fee related earnings were about 63% of 2014 distributable earnings, which supports stability. However, distributable earnings fell about 7% in 2014, and performance fees are volatile and timing-dependent. The company states that distributions can be suspended and that the amount is at the discretion of the general partner.
What are the main concentration and structural risks for investors?
ARCC accounts for about 41% of management fees, including ARCC Part I fees of 20% of total, so any reduction in ARCC's assets or fees would materially affect revenue. Governance is concentrated in the Co-Founders, who hold roughly 78% of voting power, with limited unitholder influence. Clawback exposure was $295.7 million on a gross basis, with about $239 million reimbursable by professionals. A future change in tax law treating the partnership as a corporation would materially reduce after-tax distributions.
What growth catalysts were disclosed for 2015?
The January 1, 2015 acquisition of EIF Management added about $4 billion of power and energy AUM and roughly 40 professionals, with contingent consideration tied to launching a new fund (Fund V). Management highlighted continued fundraising in U.S. and European strategies, $18.2 billion of dry powder, and expansion into insurance and commercial finance distribution. The company also noted $9.2 billion of AUM not yet earning fees, representing about $91.9 million of potential annual management fees.

06—Continue

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