01—Abstract
Summary
Summary of the 10-K filed February 26, 2019. Cited figures are marked; the original filing is the authoritative source.
Ares Management Corp. (NYSE: ARES) closed 2018 with approximately $130.7 billiona in assets under management, up roughly 23% year over year, and about 1,100 employees across 18 offices.
Its three investment groups are Credit ($95.9Bb AUM), Private Equity ($23.5B) and Real Estate ($11.3B). Management highlights $36.1B of gross new capital raised in 2018 and $22.4B deployed, with $38.1B of dry powder available. Fee-related earnings (FRE) rose 18% to $255.3M, and realized income (RI) rose 21% to $395.4M, driven mainly by the Credit Group.
Management fees grew 11% to $802.5Mc, helped by ARCC Part I fees and new fund launches. GAAP results were noisier. Total revenues fell 35% to $958.5M because carried interest allocation dropped 93% to $42.4M from $620.5M in 2017, when a one-time ARCC-related realization boosted results.
Performance-related compensation fell correspondingly. Net income attributable to Ares Management Corporation Class A common stockholders declined to $35.3Md ($0.30 per share) from $54.5M. Management points to the 2017 comparison base and the 2018 Tax Election, which subjected previously pass-through carried interest to corporate tax, as factors depressing reported GAAP earnings.
The company completed its conversion from a partnership to a Delaware corporation on November 26, 2018, and elected corporate tax treatment effective March 1, 2018. Management set a new dividend policy: $0.32 per quarter for 2019, tied to after-tax FRE rather than volatile performance income.
The board also authorized a $150M share repurchase program. Investors should weigh the attractive fee-based growth and dividend visibility against the earnings volatility of carried interest, consolidated CLO and fund leverage, and the governance concentration created by the Class B/C share structure held by the Holdco Members.
02—Key points
Key Highlights
- AUM reached $130.7B at 12/31/2018, up from $106.5B, with 2018 gross new capital raised of $36.1B across 75+ funds.
- Fee-related earnings rose 18% to $255.3M and realized income rose 21% to $395.4M, with the Credit Group contributing $327.4M of FRE.
- Management fees grew 11% to $802.5M, supported by $128.8M of ARCC Part I Fees and higher fee-paying AUM of $81.9B.
- Total GAAP revenues fell 35% to $958.5M as carried interest allocation dropped 93% to $42.4M from a 2017 peak of $620.5M.
- GAAP net income attributable to Class A common stockholders fell to $35.3M ($0.30 per diluted share) from $54.5M in 2017.
- New dividend policy targets $0.32 per Class A share quarterly for 2019, based on after-tax fee-related earnings; a $150M buyback was authorized in February 2019.
- Corporate conversion and Tax Election create a new tax burden on performance income and a tax receivable agreement liability, with estimated early-termination payments of about $312M.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 26, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $958.46M$1.48B | −35.2% |
| Operating Expenses | $870.36M$1.50B | −42.2% |
| Net Income | $57.02M$76.18M | −25.1% |
05—Questions
Frequently Asked Questions
Why did GAAP earnings fall sharply in 2018 even though fee-related earnings grew?
The 2017 results included a large carried interest allocation, about $620.5M, largely from one ACOF III portfolio company's IPO appreciation and European direct lending funds. In 2018 carried interest fell to $42.4M because of market depreciation in certain private equity funds, and performance-related compensation fell in step. Fee-related earnings, which exclude performance income, rose 18%, so the earnings decline reflects the lumpy nature of performance income rather than deterioration in core fee revenue.
What is the impact of the conversion to a corporation and the Tax Election on investors?
Effective March 1, 2018, Ares is taxed as a corporation, so earnings allocated to the company now bear U.S. corporate income tax, including on previously unrealized carried interest. This produced a $32.2M income tax expense in 2018 versus a benefit in 2017. Dividends to Class A holders are now reported on Form 1099-DIV and may qualify for qualified dividend tax rates. Management argues the change broadens the investor base and eliminates the discount that pass-through structures historically carried.
How secure is the dividend, and what determines it?
The dividend policy targets $0.32 per Class A share per quarter for 2019, set against after-tax fee-related earnings rather than carried interest, which is intended to reduce volatility. Total 2018 dividends declared were $1.33 per share. The board retains sole discretion and can change the policy, and dividends are subject to Delaware law and Credit Facility covenants. The Series A Preferred dividend of 7.00% is discretionary and non-cumulative.
What governance and structural risks should shareholders consider?
Class B and Class C shares, held by entities controlled by the Holdco Members, give them voting control while the Ares Ownership Condition is satisfied, so Class A holders have very limited influence over director elections and most corporate matters. Mr. Ressler, as the sole Class I director, effectively holds a veto over board actions. The company is a controlled company exempt from certain NYSE requirements, and the certificate of incorporation limits the fiduciary duties of the Class B Stockholder and requires Delaware Chancery venue for most suits.
How much leverage and contingent liability does Ares carry?
At year-end 2018 the company had $235.0M drawn on its $1.065B revolving Credit Facility and $250M of 4.000% senior notes due 2024. Consolidated Funds carried about $6.7B of CLO loan obligations and $209M of fund borrowings, which are non-recourse to Ares. Contingent repayment exposure on carried interest was $0.4M if funds were liquidated at fair value, but about $469.0M net of tax if all investments were assumed worthless, of which roughly $364.4M is reimbursable by professionals.
06—Continue