01—Abstract
Summary
Summary of the 10-K filed February 27, 2017. Cited figures are marked; the original filing is the authoritative source.
Ares Management Corp. (NYSE: ARES) ended 2016 with approximately $95.3 billiona in assets under management (about $98.9 billion pro forma for the American Capital acquisition by ARCC), up roughly 1.7% for the year.
Gross new capital raised was $13.9 billionb across more than 50 funds, and the firm deployed $10.2 billion, versus about $13.2 billion in 2015. Management fees rose modestly to $642.1 million, while total revenues jumped 47% to $1.20 billion, driven mainly by performance fees of $517.9 million, up from $150.6 million. Consolidated GAAP net income attributable to Ares Management, L.P. was $111.8 million, and fee related earnings (FRE) rose 4% at the segment level to $347.5 million.
Distributable earnings on a segment basis grew 19% to $475.9 millionc, and stand-alone DE rose 15% to $264.3 million. The quality of the 2016 earnings is mixed. Fee related earnings are the more stable and recurring component, representing roughly 65% of distributable earnings, which management argues supports distribution stability.
The sharp rise in performance fees reflects strong private equity realizations and unrealized appreciation, and these are inherently volatile and subject to contingent repayment obligations. The filing shows about $759 milliond of accrued performance fees on the balance sheet, and up to $418.3 million (net of tax) of potential clawback exposure if all investments were worthless, though management considers that scenario remote. Liquidity was solid, with $342.9 million of cash, no drawn balance on the $1.03 billion credit facility (later upsized to $1.04 billion and extended to 2022), and $305.8 million of debt.
Key forward-looking considerations include the ARCC acquisition of American Capital, which closed January 3, 2017. Ares provided about $275 million of cash support and agreed to waive up to $10 million per quarter of ARCC Part I fees for ten quarters, starting Q2 2017. The tax treatment of that payment is uncertain and could materially affect taxable income and distributions.
The company also faces regulatory and tax uncertainty, including possible changes to carried interest taxation and Brexit-related risks to its European business. Common unit distributions for 2016 totaled $0.83 per unit, versus $0.88 in 2015, reflecting the variability of performance-related earnings.
02—Key points
Key Highlights
- AUM reached $95.3 billion at December 31, 2016 (about $98.9 billion pro forma for ACAS), up from $93.6 billion a year earlier; five-year AUM CAGR of 14%.
- Total revenues rose 47% to $1.20 billion, led by performance fees of $517.9 million (up 244%), while management fees were nearly flat at $642.1 million (up 1%).
- Fee related earnings were $347.5 million at the segment level (up 4%), and roughly 65% of 2016 distributable earnings came from FRE, which supports distribution stability.
- Segment distributable earnings rose 19% to $475.9 million; stand-alone distributable earnings rose 15% to $264.3 million.
- GAAP net income attributable to Ares Management, L.P. was $111.8 million, versus $19.4 million in 2015, but results are heavily influenced by performance fee timing and fair value marks.
- Fundraising totaled $13.9 billion across 50+ funds, while capital deployment fell to $10.2 billion from about $13.2 billion, leaving $23.2 billion of dry powder.
- Up to $418.3 million (net of tax) of potential clawback exposure exists if all fund investments were valued at zero, though management views this as remote; $759 million of performance fees receivable is on the balance sheet.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 27, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $964.80M$814.44M | +18.5% |
| Operating Expenses | $1.02B$769.04M | +32.2% |
| Interest Expense | $17.98M$18.95M | −5.1% |
| Net Income | $111.81M$19.38M | +477.0% |
05—Questions
Frequently Asked Questions
What drove the large increase in Ares' 2016 revenue and profit?
Most of the increase came from performance fees, which rose to $517.9 million from $150.6 million, mainly due to strong performance in Private Equity funds such as ACOF III and ACOF IV. Performance fees are volatile and depend on fund valuations and realizations, so the 2016 level may not be repeated. Management fees were roughly flat, which is the more recurring source of revenue.
How stable are Ares' distributions to unitholders?
Management says a high share of distributable earnings comes from fee related earnings (about 65% in 2016), which provides a more stable base than performance-related earnings. However, distributions are at the discretion of the board and are not guaranteed. Common distributions were $0.83 per unit for 2016, down from $0.88 in 2015, and the company targets 80% to 90% of distributable earnings.
What is the financial impact of the ARCC-ACAS acquisition on Ares?
Ares provided about $275 million of cash to ACAS shareholders, funded through its credit facility, and agreed to waive up to $10 million per quarter of ARCC Part I fees for ten quarters beginning Q2 2017. Ares expects the transaction to add about $3 billion of fee-paying AUM. The tax treatment of the $275 million payment is unresolved and could result either in an immediate deduction in 2017 or amortization over about 15 years, which would materially affect taxable income and distributions.
What are the main risks investors should monitor?
Key risks include the volatility of performance fees and the possibility of clawback obligations if fund values decline; dependence on key senior professionals, with no key-person insurance; and concentration of ARCC fees in management revenue. Regulatory and tax risks are also significant, including potential changes to the taxation of carried interest and publicly traded partnerships, Dodd-Frank and CFTC rules, and Brexit's impact on European operations. The Holdco Members control about 72% of voting power, limiting common unitholders' influence.
06—Continue