10-QPeriod: Q1 FY2020

Ares Management Corp Quarterly Report for Q1 Ended Mar 31, 2020

Filed May 8, 2020For Securities:ARESARES-PB

Summary

Ares Management Corporation (ARES) reported a net loss attributable to Class A common stockholders of $(36,461) thousand for the first quarter of 2020, a significant decrease from a net income of $39,524 thousand in the prior year period. This decline was primarily driven by a substantial negative swing in carried interest allocation, which moved from a positive $197.3 million to a reversal of $230.9 million, largely due to market depreciation across investments amid the COVID-19 pandemic and energy market dislocation. Despite the net loss, total revenues showed an increase of 17% to $263.8 million, primarily boosted by higher management fees. The company also saw an increase in compensation and benefits expenses. The company's financial position as of March 31, 2020, indicated total assets of $13.2 billion and total liabilities of $11.2 billion. A significant development during the quarter was the issuance of Class A common stock to Sumitomo Mitsui Banking Corporation for $383.8 million, strengthening the company's cash position, which stood at $1.2 billion at quarter-end. Management highlighted that despite the challenging market environment driven by COVID-19, the company's liquidity and capital resources are expected to remain sufficient for its foreseeable needs. Ares Management's diversified business segments (Credit, Private Equity, and Real Estate) all experienced impacts from the market volatility, with credit strategies showing a significant decline in carried interest allocation.

Financial Highlights

25 data points
Beta

Revenue

$429.42M

Net Income

-$31.04M

-7.2% Net Margin

Total Assets

$13.22B

Cash & Equivalents

$1.17B

Free Cash Flow

-$363.24M

Financial Statements
Beta
Revenue$429.42M
Operating Expenses$81.96M
Net Income-$31.04M

Key Highlights

  • 1Ares Management reported a net loss attributable to Class A common stockholders of $(36.5) million for Q1 2020, compared to a net income of $39.5 million in Q1 2019.
  • 2Total revenues increased by 17% to $263.8 million, primarily driven by higher management fees across segments, especially in the Credit Group.
  • 3Carried interest allocation significantly decreased, turning from a positive $197.3 million in Q1 2019 to a negative $230.9 million in Q1 2020, reflecting market downturns.
  • 4The company raised $383.8 million in gross proceeds from a private offering of Class A common stock to Sumitomo Mitsui Banking Corporation.
  • 5Cash and cash equivalents stood at $1.2 billion as of March 31, 2020, indicating a strong liquidity position.
  • 6Compensation and benefits expenses increased by 15% to $180.1 million, driven by headcount growth and equity compensation.
  • 7The company noted that the COVID-19 pandemic is causing significant market volatility, impacting valuations and investment performance across its segments.

Frequently Asked Questions

The primary driver for the significant drop in net income was the substantial negative swing in carried interest allocation. This decreased from a positive $197.3 million in Q1 2019 to a negative $230.9 million in Q1 2020. This reversal was mainly due to market depreciation across investments, driven by the COVID-19 pandemic and energy market dislocations, which negatively impacted the valuations of underlying portfolio companies.

The COVID-19 pandemic caused significant market volatility, leading to broad decreases in valuations across equity and credit markets. This volatility directly impacted Ares Management's performance, particularly through the reversal of unrealized carried interest and a decline in principal investment income. The company noted a negative impact on industries like energy, hospitality, and retail, which are sectors where some of their funds have investments.

The private placement of Class A common stock to Sumitomo Mitsui Banking Corporation provided Ares Management with a significant influx of capital, increasing its cash and cash equivalents to $1.2 billion as of March 31, 2020. This strengthened the company's liquidity position, which management believes is sufficient to meet its foreseeable working capital needs, contractual obligations, dividend payments, and strategic initiatives, even amidst the challenging market conditions.

Total management fees increased by 17% to $263.8 million in Q1 2020 compared to Q1 2019. This increase was primarily attributed to the Credit Group, driven by higher ARCC Part I Fees and increased Fee Paying Assets Under Management (FPAUM) from capital deployments in direct lending funds. The Real Estate Group also saw an increase due to new capital commitments for a U.S. real estate equity fund.