01—Abstract
Summary
Summary of the 10-K filed February 28, 2020. Cited figures are marked; the original filing is the authoritative source.
Ares Management Corp. (NYSE: ARES) closed 2019 with $148.9 billiona of assets under management, up roughly 14% year over year, and reported GAAP net income attributable to Class A common stockholders of $127.2 million, or $1.06 diluted EPS, versus $0.30 in 2018.
Headline results were driven by a sharp swing in performance income: carried interest allocation rose to $621.9 millionb from $42.4 million, largely on market appreciation in private equity and real estate funds, and performance related compensation rose correspondingly to $497.2 million. Investors should therefore focus on the non-GAAP measures management uses to assess the recurring business. Fee related earnings (FRE) increased 27% to $323.7 million, and realized income (RI) rose 27% to $503.5 million, with the Credit Group contributing the majority of both.
The core fee franchise remains strong. Management fees grew 22% to $979.4 millionc, supported by ARCC Part I Fees ($164.4 million) and higher fee-paying AUM, which reached $96.9 billion at year-end. Gross new capital raised was $23.8 billion across more than 75 funds, and $27.4 billion was deployed.
The firm reported $34.6 billiond of available capital and $27.1 billion of AUM not yet paying fees, representing roughly $255.6 million of potential annual management fees. Management also set a fixed quarterly Class A dividend policy of $0.40 per share for 2020, anchored to after-tax FRE. Pending transactions include the acquisition of a controlling stake in Asian manager SSG Capital (expected 2Q/3Q 2020) and the Aspida insurance platform acquisition.
Key risks include the high volatility of performance income, which can reverse and create contingent repayment obligations; ARCC's concentration in management fees (about 52% of Credit Group management fees); and a governance structure in which the Holdco Members control voting through Class B and Class C shares. Ares also has $316.6 million of debt, a $878.5 million hypothetical tax receivable agreement termination estimate, and exposure to Brexit, COVID-19 (cited as a risk factor), and evolving regulation. Management also disclosed a $20.0 million impairment on EIF intangibles and $6.5 million of costs related to an ongoing SEC compliance matter.
02—Key points
Key Highlights
- AUM reached $148.9 billion at December 31, 2019, up about 14% from $130.7 billion, with a five-year AUM CAGR of 13%.
- Management fees rose 22% to $979.4 million, and FRE increased 27% to $323.7 million (Credit Group FRE $414.2 million), reflecting higher fee-paying AUM and ARCC Part I Fees.
- Carried interest allocation increased to $621.9 million from $42.4 million, primarily from private equity fund appreciation (e.g., ACOF III/IV) and real estate funds; this drove GAAP net income up sharply, and performance related compensation rose to $497.2 million.
- Realized income increased 27% to $503.5 million; GAAP diluted EPS was $1.06 versus $0.30 in 2018.
- Fundraising totaled $23.8 billion from 151 institutional investors and $7.6 billion via intermediaries, with $27.4 billion of capital deployed and $34.6 billion of available capital.
- Quarterly Class A dividend set at $0.40 per share for 2020, based on after-tax FRE; $150 million buyback program renewed through March 2021 (only $10.4 million repurchased in 2019).
- Pending SSG Capital acquisition (controlling stake, mostly Class A shares) and Aspida insurance platform acquisition expected to close in 2020; the firm's Holdco Members retain significant voting control through Class B and Class C stock.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 28, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $1.77B$958.46M | +84.2% |
| Operating Expenses | $1.46B$870.36M | +68.1% |
| Net Income | $148.88M$57.02M | +161.1% |
05—Questions
Frequently Asked Questions
How much of Ares' 2019 earnings growth came from recurring fee income versus volatile performance income?
Most of the headline GAAP increase came from performance income. Carried interest allocation rose by about $579 million, and performance related compensation rose by $467 million, so the net effect is a large but volatile contribution. Recurring fee-related earnings grew 27% to $323.7 million, which is a steadier measure of the core business. Investors typically focus on FRE and RI because these exclude unrealized performance income.
Is Ares' dividend sustainable?
Management's policy ties the quarterly Class A dividend to after-tax fee-related earnings, reassessed annually, and it set $0.40 per share for each quarter of 2020. Because FRE grew 27% in 2019, the dividend appears covered by recurring fee income. However, the company notes that dividends are at the board's sole discretion and that Ares Operating Group distributions may be constrained by tax distributions, the credit facility covenants, and tax receivable agreement payments.
What are the main risks from Ares' reliance on ARCC and performance income?
ARCC accounts for a significant share of management fees (about 52% of Credit Group management fees), and its advisory agreement can be terminated on 60 days' notice, so a loss of ARCC fees would materially hurt revenue. Performance income is also subject to reversal and contingent repayment obligations if fund values decline; the company reported $233.4 million of potential repayment exposure assuming all investments were worthless, of which $175.1 million is reimbursable by professionals.
How concentrated is voting control at Ares?
Control is highly concentrated. The Class B and Class C stockholders, which are controlled by the Holdco Members, effectively control director elections while the Ares Ownership Condition is met, and the Class I director (Antony Ressler) has a veto over board actions. Public Class A holders have very limited ability to influence governance, and Ares is a 'controlled company' exempt from certain NYSE governance requirements.
What is the outlook for Ares' AUM and fee growth?
Management highlighted $27.1 billion of AUM not yet paying fees, representing about $255.6 million of potential annual management fees, of which $233.5 million relates to $25.2 billion of AUM available for future deployment. Combined with a strong fundraising pipeline concentrated in the U.S. and Europe and the SSG and Aspida acquisitions, this suggests further fee growth, though outcomes depend on deployment pace, market conditions, and investor demand.
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