01—Abstract
Summary
Summary of the 10-K filed March 1, 2018. Cited figures are marked; the original filing is the authoritative source.
Ares Management Corp (NYSE: ARES) filed its 2017 Form 10-K on March 1, 2018, reporting approximately $106.4 billiona of assets under management (AUM) at December 31, 2017, up about 11.8% for the year and a 12% five-year CAGR.
The firm operates three investment groups (Credit, Private Equity, Real Estate) plus an Operations Management Group. Credit Group accounts for roughly $71.7 billionb of AUM, Private Equity $24.5 billion and Real Estate $10.2 billion. Total GAAP revenues rose 18% to $1.415 billion, and performance fees rose 23% to $636.7 million, while GAAP net income attributable to Ares Management, L.P. common unitholders fell to $54.5 million from $99.6 million, largely because of a one-time $275.2 million transaction support payment tied to ARCC's acquisition of American Capital.
The more important signals for investors are on a non-GAAP basis. Fee related earnings (FRE), the most stable measure, rose 26% to $217.0 millionc, and distributable earnings rose 3% to $271.6 million. Management fees grew 13% to $722.4 million.
Fee related earnings represented about 80% of distributable earnings. Fundraising was $16.7 billiond gross across more than 65 funds, and dry powder (available capital) was $25.1 billion. The filing also describes a structural change effective March 1, 2018: Ares elected to be taxed as a corporation for U.S. federal income tax purposes, while remaining a Delaware limited partnership.
The company adopted a steadier distribution policy of $0.28 per common share per quarter from Q2 2018, based on after-tax FRE, and plans to retain net performance fees for potential share repurchases and growth. Governance remains concentrated: the Holdco Members control roughly 71.6% of voting power, and the company relies on exemptions from NYSE governance rules. The company also carries a tax receivable agreement with an estimated early-termination payment of about $398 million, and consolidated fund activity grosses up the balance sheet substantially.
02—Key points
Key Highlights
- AUM reached approximately $106.4 billion at December 31, 2017, up about 11.8% year over year, with a 5-year AUM CAGR of 12% and 10-year CAGR of 20%.
- GAAP total revenues rose 18% to $1.415 billion; performance fees rose 23% to $636.7 million and management fees rose 13% to $722.4 million.
- Fee related earnings rose 26% to $217.0 million, and distributable earnings rose 3% to $271.6 million; FRE is about 80% of distributable earnings.
- GAAP net income attributable to common unitholders fell 45% to $54.5 million, driven by a one-time $275.2 million transaction support payment for ARCC's acquisition of ACAS.
- Gross fundraising of $16.7 billion across more than 65 funds, with $25.1 billion of dry powder and $15.0 billion of AUM not yet earning fees.
- Effective March 1, 2018, the company is taxed as a corporation, and it adopted a fixed quarterly distribution of $0.28 per common share from Q2 2018 based on after-tax FRE.
- Governance concentration: Holdco Members hold about 71.6% of voting power, and the firm uses NYSE controlled-partnership exemptions; the TRA early-termination liability is estimated at about $398 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed March 1, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $1.48B$964.80M | +53.4% |
| Operating Expenses | $1.50B$1.02B | +48.0% |
| Interest Expense | $21.22M$17.98M | +18.0% |
| Net Income | $76.18M$111.81M | −31.9% |
05—Questions
Frequently Asked Questions
Why did GAAP net income fall even though revenues grew 18%?
GAAP net income attributable to common unitholders fell 45% to $54.5 million mainly because of a one-time $275.2 million transaction support payment made to ACAS shareholders in connection with ARCC's acquisition of American Capital. Excluding that item, underlying results improved, and management's FRE and distributable earnings measures rose.
What is fee related earnings and why does management emphasize it?
Fee related earnings (FRE) is a non-GAAP measure of recurring earnings, primarily management fees less compensation and general and administrative expenses. It excludes volatile performance fees and investment income. Management emphasizes it because it reflects core operating profitability and now underpins the company's distribution policy, and FRE was about 80% of distributable earnings in 2017.
What changed with the company's tax status and distributions?
Effective March 1, 2018, Ares Management, L.P. elected to be taxed as a corporation for U.S. federal income tax purposes, though it remains a Delaware limited partnership. Investors receive Form 1099-DIV rather than Schedule K-1 going forward. The company now targets a steady $0.28 per common share quarterly distribution from Q2 2018, reassessed annually, and plans to retain net performance fees for buybacks and growth. Corporate taxation reduces the cash available to shareholders.
How concentrated is governance and control?
Control is highly concentrated. The Holdco Members, through Ares Owners Holdings L.P. and a special voting share held by Ares Voting LLC, hold about 71.6% of the voting power. Public common shareholders have limited ability to elect the general partner's board or influence decisions, and the company is exempt from several NYSE governance requirements, including independent-director majority and mandatory annual meetings.
What are the main financial risks investors should weigh?
Key risks include the variability of performance fees and carried interest, which can reverse; contingent repayment (clawback) exposure of about $476 million net of tax if all investments were worthless (approximately $370 million reimbursable by professionals); a tax receivable agreement with payments of 85% of realized tax savings and a potential early-termination payment of about $398 million; reliance on ARCC, which generates about 58% of Credit Group management fees; and rising leverage, with $616 million of debt obligations at year end.
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