Why did GAAP earnings decline even though fee-based earnings grew?

GAAP results are heavily affected by unrealized performance income and the related compensation accruals. Carried interest allocation was a $(32.5) million expense in Q1 2024 versus $151.5 million of income in Q1 2023, which reduced GAAP net income to $73.0 million from $94.0 million. Fee Related Earnings, which exclude these unrealized items, grew 18%.

How should investors interpret After-tax Realized Income and Fee Related Earnings?

Management uses these non-GAAP measures to evaluate recurring operating performance. FRE measures whether management fees and fee-related performance revenues cover operating expenses, and After-tax Realized Income adds realized performance and investment income net of taxes. Both are useful for trend analysis, but they are not substitutes for GAAP net income and exclude unrealized items that can be volatile.

What drove the growth in assets under management?

AUM rose $68.0 billion year over year, primarily from commitments to U.S. direct lending funds, the sixth European direct lending fund, and Pathfinder II within Credit, plus additional managed assets from the insurance platform and the Crescent Point acquisition within Private Equity.

Is the $0.93 dividend sustainable?

Ares states that it expects to pay dividends aligned with expected annual Fee Related Earnings after an allocation of current taxes. The Q1 FRE of $301.7 million and the $0.93 quarterly dividend (about $3.72 annualized) should be compared against per-share FRE and cash taxes. The company notes that dividends could be reduced or suspended if FRE cash flows were insufficient over a sustained period.

What is the outlook for future deployment and fee growth?

Management pointed to $64.6 billion of AUM available for future deployment that could generate roughly $621.5 million of potential incremental annual management fees, assuming full deployment and payment of fees. The company cautioned that no assurance can be given that this capital will be deployed or that these fee levels will be achieved, and it noted that some existing fund fee reductions may offset these amounts.

ARES/ARES-PB 8-K: Earnings & Results & Regulation FD

01—Abstract

Summary

Summary of the 8-K filed May 2, 2024. Cited figures are marked; the original filing is the authoritative source.

Ares Management reported first-quarter 2024 results on May 2, 2024, with growth in its recurring, fee-driven earnings alongside a sharp drop in GAAP net income.

GAAP net income attributable to Ares Management Corporation was $73.0 million^a, or $0.33 per share, down from $94.0 million, or $0.49 per share, a year earlier. The decline was driven mainly by a negative carried interest allocation of $(32.5) million, compared with $151.5 million in Q1 2023, which reflects unrealized performance income and related compensation. Management fees rose to $687.7 million from $600.5 million.

The more closely watched non-GAAP metrics were stronger. Fee Related Earnings (FRE) increased 18% to $301.7 million^b, with a 42.1% margin, and After-tax Realized Income rose 14% to $265.1 million, or $0.80 per Class A share versus $0.71. Assets under management grew 19% to $428.3 billion, and fee-paying AUM grew 14% to $267.1 billion.

Gross new capital commitments were $17.4 billion^c, with net inflows of $14.4 billion, and capital deployment reached $18.6 billion. Management highlighted $114.6 billion of available capital (up 29%) and $77.4 billion of AUM not yet paying fees (up 28%), which it views as capacity for growth once transaction activity recovers.

The board declared a quarterly dividend of $0.93^d per Class A share, payable June 28, 2024 to holders of record on June 14, 2024. The filing contains no forward guidance, and the earnings presentation includes internal review annotations that were not finalized in the public version, so some figures should be checked against the company's 10-Q.

02—Key points

Key Highlights

GAAP net income attributable to Ares Management fell to $73.0 million ($0.33 per share) from $94.0 million ($0.49 per share), largely because carried interest allocation swung to a $(32.5) million expense from $151.5 million in income.
Fee Related Earnings rose 18% year over year to $301.7 million, with a 42.1% margin, supported by management fees of $693.4 million on an unconsolidated basis (up 15%).
After-tax Realized Income increased 14% to $265.1 million, or $0.80 per Class A share, up from $0.71 a year earlier (+13%).
Assets under management reached $428.3 billion, up 19% year over year, and fee-paying AUM reached $267.1 billion, up 14%.
Fundraising was robust, with $17.4 billion of gross new capital commitments and $14.4 billion of net inflows; Credit Group contributed $14.2 billion of the total.
Available capital of $114.6 billion (up 29%) and AUM not yet paying fees of $77.4 billion (up 28%) provide significant dry powder for future deployment.
The board declared a $0.93 quarterly dividend per Class A share, payable June 28, 2024 to holders of record as of June 14, 2024.

03—Questions

Frequently Asked Questions

Why did GAAP earnings decline even though fee-based earnings grew?
GAAP results are heavily affected by unrealized performance income and the related compensation accruals. Carried interest allocation was a $(32.5) million expense in Q1 2024 versus $151.5 million of income in Q1 2023, which reduced GAAP net income to $73.0 million from $94.0 million. Fee Related Earnings, which exclude these unrealized items, grew 18%.
How should investors interpret After-tax Realized Income and Fee Related Earnings?
Management uses these non-GAAP measures to evaluate recurring operating performance. FRE measures whether management fees and fee-related performance revenues cover operating expenses, and After-tax Realized Income adds realized performance and investment income net of taxes. Both are useful for trend analysis, but they are not substitutes for GAAP net income and exclude unrealized items that can be volatile.
What drove the growth in assets under management?
AUM rose $68.0 billion year over year, primarily from commitments to U.S. direct lending funds, the sixth European direct lending fund, and Pathfinder II within Credit, plus additional managed assets from the insurance platform and the Crescent Point acquisition within Private Equity.
Is the $0.93 dividend sustainable?
Ares states that it expects to pay dividends aligned with expected annual Fee Related Earnings after an allocation of current taxes. The Q1 FRE of $301.7 million and the $0.93 quarterly dividend (about $3.72 annualized) should be compared against per-share FRE and cash taxes. The company notes that dividends could be reduced or suspended if FRE cash flows were insufficient over a sustained period.
What is the outlook for future deployment and fee growth?
Management pointed to $64.6 billion of AUM available for future deployment that could generate roughly $621.5 million of potential incremental annual management fees, assuming full deployment and payment of fees. The company cautioned that no assurance can be given that this capital will be deployed or that these fee levels will be achieved, and it noted that some existing fund fee reductions may offset these amounts.

04—Continue

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