01—Abstract
Summary
Summary of the 10-K filed February 29, 2016. Cited figures are marked; the original filing is the authoritative source.
Ares Management Corp. (NYSE: ARES) reported its first full year as a public holding partnership for 2015, with assets under management (AUM) of approximately $93.6 billiona, up roughly 14.5% from $81.8 billion at year-end 2014, driven by $22.0 billion of gross commitments and $1.1 billion of change in fund value, partially offset by distributions and capital reductions.
Management highlighted fee-related earnings (FRE) of $334.8 millionb, up about 15% year over year, with management fees rising 30% to $634.4 million on a GAAP basis. However, GAAP net income attributable to Ares Management, L.P. fell to $19.4 million from $35.0 million, reflecting a sharp decline in performance-related earnings (PRE) to $40.1 million from $141.9 million, mainly due to Tradable Credit Group mark-to-market reversals of performance fees and $35.9 million of merger-related costs tied to the terminated Kayne Anderson Capital Advisors (KACALP) transaction. Distributable earnings were roughly flat at $398.5 million on a segment basis, and the company declared $0.88 per unit in distributions during 2015.
The consolidated GAAP picture is heavily affected by consolidated funds, which were significantly reduced in 2015 after the adoption of ASU 2015-02 (56 entities deconsolidated), shrinking total assets from $21.6 billion to $4.3 billionc. Investors should focus on the segment (non-GAAP) measures and on the quality of fee revenue: roughly 77% of distributable earnings came from fee-related earnings, but performance fees are volatile, and the credit market weakness in late 2015 reduced fund values.
Management also announced in February 2016 the combination of the Tradable Credit and Direct Lending groups into a single Credit Group, effective Q1 2016. Key risks flagged in the filing include the company's dependence on ARCC-related management fees (ARCC Part I Fees were $121.5 milliond), the proposed or potential taxation of publicly traded partnerships as corporations, carried interest tax proposals, clawback exposure of roughly $322.2 million (net of tax, before professional reimbursements), a $444.0 million estimated tax receivable agreement termination liability, and a concentrated governance structure in which the co-founders control about 78% of voting power.
02—Key points
Key Highlights
- AUM grew to approximately $93.6 billion at December 31, 2015 (up from $81.8 billion), with 2015 gross commitments of $22.0 billion and approximately 14.5% AUM growth; dry powder stood at $22.4 billion.
- Management fees rose 30.4% to $634.4 million (GAAP) and fee-related earnings reached $334.8 million on a segment basis (up about 15%), with FRE representing about 77% of distributable earnings.
- GAAP net income attributable to Ares Management, L.P. declined to $19.4 million from $35.0 million, while performance-related earnings fell to $40.1 million from $141.9 million due to performance fee reversals and Tradable Credit Group losses.
- Distributable earnings were $398.5 million on a segment basis (vs. $381.6 million in 2014), and 2015 distributions declared totaled $0.88 per common unit.
- Deconsolidation of 56 funds under ASU 2015-02 reduced consolidated total assets from $21.6 billion to $4.3 billion; this gross-up change has no effect on net income attributable to the company.
- Announced combination of the Tradable Credit and Direct Lending groups into the Ares Credit Group (AUM $62.2 billion; fee-earning AUM $50.1 billion), effective Q1 2016 reporting.
- Costs of $35.9 million tied to the terminated KACALP merger and governance concentration (co-founders hold roughly 78% of voting power) are notable investor considerations.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 29, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $814.44M$603.89M | +34.9% |
| Operating Expenses | $769.04M$860.04M | −10.6% |
| Interest Expense | $18.95M— | — |
| Net Income | $19.38M$34.99M | −44.6% |
05—Questions
Frequently Asked Questions
Why did GAAP net income attributable to Ares fall in 2015 even though management fees grew strongly?
Management fees rose to $634.4 million, but performance fees were volatile: Tradable Credit Group recorded net performance fee reversals of about $28.7 million as credit markets weakened, and net performance fees fell sharply. The company also incurred $35.9 million in costs related to the terminated KACALP merger and higher general and administrative expenses, which pulled GAAP net income attributable to Ares down to $19.4 million from $35.0 million.
What is fee-related earnings and why does management emphasize it?
Fee-related earnings (FRE) measure the ability to cover direct base compensation and operating expenses from management fees, excluding performance fees and investment income. FRE was $334.8 million in 2015, up from $290.3 million, and comprised about 77% of distributable earnings, which management views as providing more stable distributions than performance-driven income.
How exposed is Ares to ARCC and to changes in tax law?
ARCC Part I Fees were $121.5 million in 2015, and total ARCC management fees were $255.8 million, so a reduction in ARCC's assets or net investment income would materially affect revenue. The filing also highlights proposals to tax carried interest as ordinary income and to repeal the publicly traded partnership exception, which, if enacted, could significantly increase the company's effective tax rate and reduce distributable cash.
What is the potential clawback and tax receivable agreement exposure?
If all existing investments were valued at zero, carried interest subject to clawback would be approximately $322.2 million net of tax, of which about $247.9 million is reimbursable by professionals. Separately, the estimated early termination payment under the tax receivable agreement is about $444.0 million, assuming a $12.93 unit price and LIBOR of 1.25%. Both are contingent and could affect liquidity.
What is the outlook for AUM and fundraising?
Management reports 2015 gross commitments of $22.0 billion across more than 60 funds and approximately 191 institutional investors, with 69 new direct institutional investors. About $15.5 billion of AUM was not yet earning fees, representing roughly $179.4 million of potential annual management fees. Management expects 2016 fundraising to come from existing and new strategies primarily in the U.S. and Europe, though it notes that fee-earning AUM could decline if distributions outpace new commitments.
06—Continue