10-QPeriod: Q2 FY2018

Ares Management Corp Quarterly Report for Q2 Ended Jun 30, 2018

Filed August 6, 2018For Securities:ARESARES-PB

Summary

Ares Management, L.P. (ARES) reported its financial results for the period ending June 29, 2018. The company experienced a significant increase in total assets, reaching $10.14 billion, primarily driven by growth in consolidated funds. Management and administrative fees showed steady growth, reflecting the company's expanding AUM across its Credit, Private Equity, and Real Estate segments. The company also reported a notable shift in its tax status, electing to be treated as a corporation for U.S. federal income tax purposes effective March 1, 2018. This change, along with new accounting standards adoption (ASC 606), impacted revenue recognition and tax expenses. Operationally, while total revenues decreased due to a substantial decline in carried interest allocation (largely a timing difference and impact from prior year's strong performance), management fees continued to grow, signaling underlying business strength. Expenses also saw changes, with performance-related compensation decreasing in line with carried interest, while compensation and benefits increased due to growth and equity awards. The company's liquidity remains robust, supported by cash on hand and credit facilities, enabling continued investment and operational activities.

Financial Highlights

20 data points
Beta

Revenue

$204.16M

Net Income

-$11.78M

-5.8% Net Margin

Total Assets

$10.14B

Free Cash Flow

-$1.37B

Financial Statements
Beta
Revenue$204.16M
Operating Expenses$221.02M
Net Income-$11.78M

Key Highlights

  • 1Total assets grew to $10.14 billion, up from $8.56 billion at the end of 2017, driven by increased assets in consolidated funds.
  • 2Management fees increased by 9% year-over-year for the six months ended June 30, 2018, reaching $383.5 million, indicating consistent fee-earning AUM growth.
  • 3Carried interest allocation saw a significant year-over-year decrease of $345.1 million for the six months ended June 30, 2018, primarily due to a reduction in fair value of certain Private Equity investments and a strong prior year performance.
  • 4The company adopted ASC 606, impacting the timing of incentive fee recognition, delaying recognition of unrealized incentive fees until realization.
  • 5Ares Management elected to be treated as a corporation for U.S. federal income tax purposes effective March 1, 2018, leading to increased tax expense on performance-related earnings.
  • 6Equity-based compensation expenses increased year-over-year, driven by higher restricted unit awards.
  • 7Despite a decrease in total revenues, Fee Related Earnings (FRE) increased by 22% year-over-year for the six months ended June 30, 2018, highlighting improved core operational profitability.

Frequently Asked Questions

The decrease in total revenues was primarily driven by a substantial year-over-year decline in carried interest allocation for the six months ended June 30, 2018. This was mainly due to a reduction in the fair value of certain Private Equity investments and a comparison against a strong prior year performance which significantly boosted carried interest in the previous period.

The adoption of ASC 606 changed the recognition of incentive fees. The company now recognizes incentive fee revenue only when it is realized and no longer subject to reversal. This means unrealized incentive fees are recognized later, at the end of the measurement period (typically annually), leading to a delay in recognizing certain incentive fee revenues compared to prior accounting methods.

Ares Management elected to be treated as a corporation for U.S. federal income tax purposes effective March 1, 2018. This strategic decision is intended to simplify its tax structure, potentially expand its investor base, and enhance liquidity and trading volume. While it resulted in increased tax expense on performance-related earnings, the company believes this change aligns better with the tax treatment of many asset managers and may offer strategic advantages for future growth and transactions.

Ares Management's total AUM increased to $121.4 billion as of June 30, 2018. The Credit Group saw the largest growth, reaching $86.9 billion, followed by the Real Estate Group at $10.9 billion, and the Private Equity Group at $23.6 billion. This growth reflects continued fundraising success and capital deployment across its diversified strategies.