ARES MANAGEMENT CORPORATION AMC is aDelaware corporation. Unless the context otherwise requires, references to "Ares," "we," "us," "our," and the "Company" are intended to mean the business and operations of AMC and its consolidated subsidiaries. The following discussion analyzes the financial condition and results of operations of the Company. "Consolidated Funds" refers collectively to certain Ares funds, co-investment entities, CLOs and special purpose acquisition companies that are required under generally accepted accounting principles inthe United States ("GAAP") to be consolidated in our consolidated financial statements included in this Annual Report on Form 10-K. Additional terms used by the Company are defined in the Glossary and throughout the Management's Discussion and Analysis in this Annual Report on Form 10-K. The following discussion and analysis should be read in conjunction with the audited consolidated financial statements of AMC and the related notes included in this Annual Report on Form 10-K. This section of the Annual Report on Form 10-K discusses activity as of and for the years endedDecember 31, 2021 and 2020. For discussion on activity for the year endedDecember 31, 2019 and period-over-period analysis on results for the year endedDecember 31, 2020 to 2019, refer to Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our
Annual Report on Form 10-K for the year ended
Amounts and percentages presented throughout our discussion and analysis of financial condition and results of operations may reflect rounded results in thousands (unless otherwise indicated) and consequently, totals may not appear to sum. In addition, illustrative charts may not be presented at scale.
Trends Affecting Our Business
We believe that our disciplined investment philosophy across our distinct but complementary investment groups contributes to the stability of our performance throughout market cycles. For the year endedDecember 31, 2021 , approximately 95% of our management fees were derived from perpetual capital vehicles and other long-dated funds. Our funds have a stable base of committed capital enabling us to invest in assets with a long-term focus over different points in a market cycle and to take advantage of market volatility. However, our results of operations, including the fair value of our AUM, are affected by a variety of factors, particularly inthe United States andWestern Europe , including conditions in the global financial markets and the economic and political environments. Through the first three quarters of the year, performance across global capital markets continued its positive trajectory as inflationary concerns and the spread of theCOVID-19 Delta variant were overshadowed by improving corporate credit fundamentals and strengthening market demand. In the fourth quarter, global capital markets experienced increased volatility as fears around the Omicron variant and its unknown characteristics created investor uncertainty. However, these fears were assuaged towards quarter-end, andU.S. high yield and leveraged loan prices bounced back alongside equities in the largest price increase of the year. Despite direct remarks from theFederal Reserve and significant yield curve flattening in the fourth quarter,U.S. high yield bonds posted positive returns amid record corporate profits, moderating primary market activity and the expectation for future growth. Specifically, theICE BAML High Yield Master II Index, a high yield bond index, returned 5.4% for 2021 as compared to a return of 6.2% for the prior year. Meanwhile, theCredit Suisse Leveraged Loan Index ("CSLLI"), a leveraged loan index, returned 5.4% for 2021 compared to a return of 2.8% for the prior year. Ongoing retail inflows, strong CLO origination and robust demand amid rising interest rate risk continued to provide a supportive technical backdrop in the asset class. European leveraged loans rallied alongside itsU.S. counterparts; however, European high yield bonds generated negative quarterly returns as concerns surrounding the Omicron variant and inflationary pressures put downward pressure on the asset class. The ICE BAML European Currency High Yield Index returned 3.3% for 2021 compared to a return of 2.9% for the prior year, while theCredit Suisse Western European Leveraged Loan Index returned 4.6% for 2021 compared to a return of 2.4% for the prior year. In 2021, global equity markets continued to rebound from 2020 COVID-19 levels, with the S&P 500 Index nearing all-time highs at year end. In theU.S. , the S&P 500 Index returned 26.9% for 2021 compared to 18.4% the prior year. Outside of theU.S. , theMSCI All Country World exUSA Index returned 13.2% for 2021 compared to a return of 10.7% the prior year. Private equity market activity remained strong throughout 2021 and finished the year off strong. Private equity activity was buoyed by elevated valuations, record amounts of uninvested capital, a robust private equity secondary market and low interest rates. Periods of volatility may be on the horizon due to continued heightened inflation, rising energy prices, supply chain disruptions new COVID-19 variants and geopolitical tension, including the escalation of hostilities betweenRussia andUkraine . Continued asset selectivity, portfolio construction/diversification and a differentiated view to drive value creation are instrumental in delivering attractive returns to investors. 96 -------------------------------------------------------------------------------- Table of Contents The "re-opening" of economies acrossEurope , theU.S. , and theU.K. pushed real estate markets towards recovery in 2021. The easing of pandemic restrictions coupled with monetary and fiscal stimulus helped fuel economic growth that then drove improvement in real estate demand. Leasing activity for the year was higher across all major property types although retail and office properties remain challenged as COVID-19 altered tenant preferences. Rent trends improved over the year with industrial and residential rents hitting new highs in the second half of 2021. Higher inflation globally helped nominal real estate rent growth and values, although higher interest rates caused by the prospect of monetary tightening are likely to raise financing costs incrementally. Over the fourth quarter, Pan-European andU.S. real estate deal activity recovered to its pre-pandemic level signaling a near-complete return of transactional liquidity. The FTSE EPRA/NAREIT Developed Europe and the FTSE NAREIT All Equity REITs indices returned 15.0% and 37.3%, for 2021 compared to a negative return of 13.1% and a negative 8.4%, respectively, for the prior year.
In 2021, some of the considerations pertaining to our strategic decisions included:
• Our ability to fundraise and increase AUM and fee paying AUM. During the year endedDecember 31, 2021 , we raised$76.8 billion of gross AUM, both in commingled funds and SMAs, and continued to expand our investor base, raising capital from over 135 different investment vehicles and 427 institutional investors, including 175 direct institutional investors that were new to Ares. Our fundraising efforts helped drive AUM growth of approximately 55% for 2021. During 2022, we expect that our fundraising will come from a combination of our existing and new strategies in theU.S. ,Europe andAsia Pacific . As ofDecember 31, 2021 , we also had$57.9 billion of AUM not yet paying fees, which represents approximately$568.4 million in annual potential management fee revenue. Of the$568.4 million ,$517.1 million relates to$53.0 billion of AUM available for future deployment. Our pipeline of potential fees, coupled with our future fundraising opportunities, gives us the potential to increase our management fees in 2022. • Our ability to attract new capital and investors with our broad multi asset class product offering. Our ability to attract new capital and investors in our funds is driven, in part, by the extent to which they continue to see the alternative asset management industry generally, and our investment products specifically, as an attractive vehicle for capital appreciation and income generation. We continually seek to create avenues to meet our investors' evolving needs by offering an expansive range of investment funds, developing new products and creating managed accounts and other investment vehicles tailored to our investors' goals. We continue to expand our distribution channels, expanding into the retail channel through our global wealth management offerings, as well as the needs of traditional institutional investors, such as pension funds, sovereign wealth funds, and endowments. If market volatility persists or increases, investors may seek absolute return strategies that seek to mitigate volatility. We offer a variety of investment strategies depending upon investors' risk tolerance and expected returns. • Our disciplined investment approach and successful deployment of capital. Our ability to maintain and grow our revenue base is dependent upon our ability to successfully deploy the capital that our investors have committed to our investment funds. Greater competition, high valuations, cost of credit and other general market conditions have affected and may continue to affect our ability to identify and execute attractive investments. Under our disciplined investment approach, we deploy capital only when we have sourced a suitable investment opportunity at an attractive price. During the year endedDecember 31, 2021 , we deployed$81.0 billion of gross capital across our investment groups compared to$39.9 billion deployed in 2020. As ofDecember 31, 2021 , we had$90.4 billion of capital available for investment and we remain well-positioned to invest our assets opportunistically, compared to$56.3 billion as ofDecember 31, 2020 . • Our ability to invest capital and generate returns through market cycles. The strength of our investment performance affects investors' willingness to commit capital to our funds. The flexibility of the capital we are able to attract is one of the main drivers of the growth of our AUM and the management fees we earn. Current market conditions and a changing regulatory environment have created opportunities for Ares' businesses, which utilize flexible investment mandates to manage portfolios through market cycles.
See "Item 1A. Risk Factors" included in this Annual Report on Form 10-K for a discussion of the risks our businesses are subject to.
Recent Transactions
In
OnFebruary 10, 2022 , Ares completed the acquisition ofAMP Capital's Infrastructure Debt platform, one of the largest infrastructure debt investment platforms globally with approximately$8.0 billion in assets under management as ofDecember 31, 2021 . 97
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Table of Contents Managing Business Performance Operating Metrics
We measure our business performance using certain operating metrics that are common to the alternative asset management industry, which are discussed below.
Assets Under Management
AUM refers to the assets we manage and is viewed as a metric to measure our investment and fundraising performance as it reflects assets generally at fair value plus available uncalled capital.
The tables below present rollforwards of our total AUM by segment ($ in
millions):
Secondary
Credit Private Real Estate Solutions Strategic
Group Equity Group Group Group Initiatives Total AUM
Balance at 12/31/2020 $ 145,472 $ 27,439 $ 14,808 $ - $ 9,261 $ 196,980
Acquisitions - - 13,719 19,513 - 33,232
Net new par/equity commitments 29,961 8,199 6,174 2,331 2,143 48,808
Net new debt
commitments 22,149 200 4,671 - 29 27,049
Capital reductions (2,715) (9) (311) - (29) (3,064)
Distributions (3,999) (5,216) (1,974) (2,306) (235) (13,730)
Redemptions (2,465) - (70) - - (2,535)
Change in fund value 4,307 7,547 4,146 2,581 454 19,035
Balance at 12/31/2021 $ 192,710 $ 38,160 $ 41,163 $ 22,119 $ 11,623 $ 305,775
Average AUM(1) $ 167,623 $ 31,609 $ 25,865 $ 20,463 $ 10,397 $ 255,957
Secondary
Credit Private Real Estate Solutions Strategic
Group Equity Group Group Group Initiatives Total AUM
Balance at 12/31/2019 $ 110,543 $ 25,166 $ 13,207 $ - $ - $ 148,916
Acquisitions 2,693 - - - 9,114 11,807
Net new par/equity commitments 24,233 6,189 2,263 - 205 32,890
Net new debt
commitments 7,527 - 437 - - 7,964
Capital reductions (431) (136) (372) - - (939)
Distributions (2,485) (4,410) (1,212) - (207) (8,314)
Redemptions (2,176) (5) - - - (2,181)
Change in fund value 5,568 635 485 - 149 6,837
Balance at 12/31/2020 $ 145,472 $ 27,439 $ 14,808 $ - $ 9,261 $ 196,980
Average AUM(2) $ 123,434 $ 25,582 $ 14,180 $ - $ 9,186 $ 172,382
(1) Represents a five-point average of quarter-end balances for each period, except for Secondary Solutions, which represents the average calculated
using AUM on the date of the Landmark Acquisition and on each subsequent quarter-end.
(2) Represents a five-point average of quarter-end balances for each period; except for Strategic Initiatives, which represents the average
calculated using Ares SSG's AUM on the date of the SSG Acquisition and on each subsequent quarter-end, and the average calculated using Ares
Insurance Solutions' AUM on the date of the acquisition of Aspida Life Re and the subsequent quarter-end.
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The components of our AUM are presented below as of ($ in billions):
[[Image Removed: ares-20211231_g33.jpg]][[Image Removed: ares-20211231_g34.jpg]]
AUM: $305.8 AUM: $197.0
FPAUM Non-fee paying(1) AUM not yet paying fees
(1) Includes $11.8 billion and $9.0 billion of AUM of funds from which we
indirectly earn management fees as of December 31, 2021 and 2020, respectively
and includes $3.4 billion and $2.4 billion of non-fee paying AUM based on our
general partner commitment as of December 31, 2021 and 2020, respectively.
Please refer to "- Results of Operations by Segment" for a more detailed presentation of AUM by segment for each of the periods presented
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Fee Paying Assets Under Management
FPAUM refers to AUM from which we directly earn management fees and is equal to
the sum of all the individual fee bases of our funds that directly contribute to
our management fees.
The tables below present rollforwards of our total FPAUM by segment ($ in
millions):
Secondary
Credit Private Real Estate Solutions Strategic
Group Equity Group Group Group Initiatives Total
Balance at 12/31/2020 $ 88,017 $ 21,172 $ 10,252 $ - $ 6,596 $ 126,037
Acquisitions - - 7,155 16,839 - 23,994
Commitments 10,497 3,003 3,720 1,352 (130) 18,442
Subscriptions/deployment/increase in leverage 27,496 2,624 3,050 116 1,677 34,963
Capital reductions (1,647) - (162) - (380) (2,189)
Distributions (5,630) (2,629) (1,135) (264) (1,151) (10,809)
Redemptions (2,724) - (86) - - (2,810)
Change in fund value 1,381 5 1,467 262 175 3,290
Change in fee basis - (2,990) (142) 59 -
(3,073)
Balance at 12/31/2021$ 117,390 $ 21,185 $ 24,119 $ 18,364 $ 6,787 $ 187,845 Average FPAUM(1)$ 100,603 $ 19,973 $ 15,789 $ 17,329 $ 6,704 $ 160,398 Secondary Credit Private Real Estate Solutions Strategic Group Equity Group Group Group Initiatives Total Balance at 12/31/2019$ 71,880 $ 17,040 $ 7,963 $ - $ -$ 96,883 Acquisitions 2,596 - - - 6,426 9,022 Commitments 5,230 4,238 1,735 - - 11,203 Subscriptions/deployment/increase in leverage 13,609 1,585 1,222 - 716 17,132 Capital reductions (1,660) - (51) - (25) (1,736) Distributions (3,657) (1,196) (520) - (472) (5,845) Redemptions (2,128) - - - - (2,128) Change in fund value 2,187 (36) 327 - - 2,478 Change in fee basis (40) (459) (424) - (49) (972) Balance at 12/31/2020$ 88,017 $ 21,172 $ 10,252 $ -$ 6,596 $ 126,037 Average FPAUM(2)$ 79,140 $ 18,085 $ 9,239 $ -$ 6,518 $ 112,982 (1) Represents a five-point average of quarter-end balances for each period, except for Secondary Solutions, which represents the average calculated using FPAUM on the date of the Landmark Acquisition and on each subsequent quarter-end. (2) Represents a five-point average of quarter-end balances for each period; except for Strategic Initiatives, which calculates the average using Ares SSG's FPAUM on the date of the SSG Acquisition and on each subsequent quarter-end, and the average usingAres Insurance Solutions' FPAUM on the date of the acquisition of Aspida Life Re and the subsequent quarter-end.
The charts below present FPAUM by its fee basis ($ in billions):
[[Image Removed: ares-20211231_g35.jpg]]
[[Image Removed: ares-20211231_g36.jpg]]
FPAUM: $187.8 FPAUM: $126.0
Collateral
balances (atInvested capital/other(1) Market value(2) Capital commitments par)
(1)Other consists of ACRE's FPAUM, which is based on ACRE's stockholders' equity. (2)Includes$43.7 billion and$24.5 billion from funds that primarily invest in illiquid strategies as ofDecember 31, 2021 and 2020, respectively. The underlying investments held in these funds are generally subject to less market volatility than investments held in liquid strategies. 100 -------------------------------------------------------------------------------- Table of Contents Please refer to "- Results of Operations by Segment" for detailed information by segment of the activity affecting total FPAUM for each of the periods presented.
Incentive Eligible Assets Under Management,
IEAUM generally represents the NAV plus uncalled equity or total assets plus uncalled debt, as applicable, of our funds from which we are entitled to receive carried interest and incentive fees, excluding capital committed by us and our professionals (from which we do not earn carried interest and incentive fees). With respect to ARCC's AUM, only ARCC Part II Fees may be generated from IEAUM. IGAUM generally represents the AUM of our funds that are currently generating carried interest and incentive fees on a realized or unrealized basis. It represents the basis on which we are entitled to receive carried interest and incentive fees. The basis is typically the NAV or total assets of the fund, excluding amounts on which we do not earn carried interest and incentive fees, such as capital committed by us and our professionals. ARCC is only included in IGAUM when ARCC Part II Fees are being generated.
The charts below present our IEAUM and IGAUM by segment ($ in billions):
[[Image Removed: ares-20211231_g37.jpg]]
Credit Private Equity Real Estate Secondary Solutions Strategic Initiatives
101-------------------------------------------------------------------------------- Table of Contents The charts below present our available capital and AUM not yet paying fees by segment ($ in billions):
[[Image Removed: ares-20211231_g38.jpg]][[Image Removed: ares-20211231_g39.jpg]]
Credit Private Equity Real Estate Secondary Solutions Strategic Initiatives
The chart below presents our perpetual capital AUM by segment ($ in billions):
[[Image Removed: ares-20211231_g40.jpg]]
Credit Real Estate Strategic Initiatives
As of December 31, 2021 , perpetual capital AUM included 73% from perpetual
capital - commingled funds and 27% from perpetual capital - managed accounts. As
of December 31, 2020 , perpetual capital AUM included 64% from perpetual capital
- commingled funds and 36% from perpetual capital - managed accounts.
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Management Fees By Type
We view the duration of funds we manage as a metric to measure the stability of
our future management fees. For the years ended December 31, 2021 and 2020, 95%
of management fees were earned from perpetual capital or long-dated funds. The
charts below present the composition of our segment management fees by the
initial fund duration:
[[Image Removed: ares-20211231_g41.jpg]] [[Image Removed: ares-20211231_g42.jpg]]
Long-Dated Funds(1) Perpetual Capital - Perpetual Capital - Other
Commingled Funds Managed Accounts
(1) Long-dated funds generally have a contractual life of five years or more at
inception.
Fund Performance Metrics
Fund performance information for our investment funds considered to be
"significant funds" is included throughout this discussion with analysis to
facilitate an understanding of our results of operations for the periods
presented. Our significant funds are commingled funds that contributed at least
1% of our total management fees or represented at least 1% of the Company's
total FPAUM for the past two consecutive quarters. In addition to management
fees, each of our significant funds may generate carried interest and incentive
fees upon the achievement of performance hurdles. The fund performance
information reflected in this discussion and analysis is not indicative of our
overall performance. An investment in Ares is not an investment in any of our
funds. Past performance is not indicative of future results. As with any
investment, there is always the potential for gains as well as the possibility
of losses. There can be no assurance that any of these funds or our other
existing and future funds will achieve similar returns.
We do not present fund performance metrics for significant funds with less than
two years of investment performance from the date of the fund's first
investment, except for those significant funds that pay management fees on
invested capital, in which case investment performance will be presented on the
earlier of (i) the one-year anniversary of the fund's first investment or (ii)
such time that the fund has invested at least 50% of its capital.
To further facilitate an understanding of the impact a significant fund may have
on our results, we present our drawdown funds as either harvesting investments
or deploying capital to indicate the fund's stage in its life cycle. A fund
harvesting investments is generally not seeking to deploy capital into new
investment opportunities, while a fund deploying capital is generally seeking
new investment opportunities.
Components of Consolidated Results of Operations
Revenues
Management Fees. The investment adviser of our funds generally receive an annual
management fee based on a percentage of the fund's capital commitments,
contributed capital, net asset value or invested capital during the investment
period, which may then change at the end of the investment period, and for
certain of our SMAs, we receive an annual management fee based on a percentage
of invested capital, contributed capital or net asset value throughout the term
of the SMA. We also may receive special fees, including agency and arrangement
fees. In certain circumstances we are contractually required to offset certain
amounts of such special fees against future management fees relating to the
applicable fund.
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The investment adviser of each of our CLOs typically receives annual management
fees based on the gross aggregate collateral balance for CLOs, at par, adjusted
for cash and defaulted or discounted collateral. The management fees of CLOs
accounted for approximately 3% of our total management fees on a consolidated
basis and 6% on an unconsolidated basis for the year ended December 31, 2021 .
The management fees we receive from our drawdown style funds are typically
payable on a quarterly basis over the life of the fund and do not fluctuate with
the changes in investment performance of the fund. The investment management
agreements we enter into with clients in connection with contractual SMAs may
generally be terminated by such clients with reasonably short prior written
notice. Typically, terminations do not require liquidation of the SMAs and such
SMAs will continue to exist until the underlying investments are liquidated. The
management fees we receive from our SMAs are generally paid on a periodic basis
(typically quarterly, subject to the termination rights described above) and are
based on either invested capital or on the net asset value of the separately
managed account.
We receive management fees in accordance with the investment advisory and
management agreements we have with the publicly-traded vehicles and non-traded
REITs we manage. Base management fees we receive from ARCC are paid quarterly
and proportionately increase or decrease based on ARCC's total assets (reduced
by cash and cash equivalents). Part I Fees from ARCC are also generally paid
quarterly and proportionately increase or decrease based on ARCC's net
investment income (before Part I Fees from ARCC and ARCC Part II Fees, subject
to a fixed hurdle rate). Part I Fees from CADC are also generally paid quarterly
and proportionately increase or decrease based on CADC's net investment income,
subject to a fixed hurdle rate. We classify Part I Fees as management fees as
they are predictable and recurring in nature, and not subject to contingent
repayment. Management fees we receive from ARDC are generally paid monthly and
proportionately increase or decrease based on the closed-end fund's total assets
minus liabilities (other than liabilities relating to indebtedness). Management
fees we receive from ACRE are generally paid quarterly based on ACRE's
stockholders' equity. Management fees we receive from AREIT and AIREIT are
generally paid monthly based on a percentage of fund's net asset value. Our
investment management agreements of our publicly-traded vehicles and non-traded
REITs from which we receive management fees must be reviewed or approved
annually by their boards of directors (including a majority of its independent
directors).
Details regarding our management fees by strategy are presented below:
•Syndicated Loans and High Yield Bonds: Typical management fees range from 0.35% to 0.50% of par plus cash or of NAV. The syndicated loan funds have an average management contract term from the closing date of 13.7 years as ofDecember 31, 2021 and the fee ranges generally remain unchanged at the close of the re-investment period. In certain cases, CLOs may be called upon demand by subordinated noteholders prior to the management contract term expiration date. The funds in the high-yield strategy generally represent open-ended managed accounts, which typically do not include investment period termination or management contract expiration dates. •Multi-Asset Credit: Typical management fees range from 0.50% to 1.50% of NAV. The funds in this strategy are generally open-ended or managed account structures, which typically do not have investment period termination or management contract expiration dates. The funds in this strategy include ARDC, a publicly-traded closed-end fund, which does not have an investment period termination date, and other perpetual capital vehicles as ofDecember 31, 2021 .
•Alternative Credit: Typical management fees range from 0.50% to 1.50% of NAV,
gross asset value, committed capital or invested capital. The funds in this
strategy (excluding perpetual capital vehicles) had an average management
contract term from the closing date of 7.6 years as of
•U.S. and European Direct Lending: Typical management fees range from 0.75% to 1.50% of invested capital, NAV or total assets (in certain cases, excluding cash and cash equivalents). Following the expiration or termination of the investment period, the fee basis for certain closed-end funds and managed accounts in this strategy generally change either to the aggregate cost or to market value of the portfolio investments. In addition, management fees include the Part I Fees. The funds in this strategy (excluding ARCC, CADC and other perpetual capital vehicles) had an average management contract term from the closing date of 8.2 years as ofDecember 31, 2021 .
Private Equity Group:
•Corporate Private Equity: Typical management fees range from 1.20% to 2.00% of
total capital commitments during the investment period. The management fees for
corporate private equity funds generally step down to between 0.75% and 1.25% of
the aggregate adjusted cost of unrealized portfolio investments following the
earlier to occur of:
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(i) the expiration or termination of the investment period and (ii) the
activation of a successor fund. The funds in this strategy had an average
management contract term from the closing date of 10.4 years as of December 31,
2021 .
•Infrastructure and Power: Typical management fees range from 1.00% to 1.50% of
total capital commitments during the investment period. Certain funds pay a
lower management fee rate on committed capital which increases when such capital
is invested. The infrastructure and power funds generally step down the fee base
to the aggregated adjusted cost of unrealized portfolio investments, while
retaining the same fee rate, following the expiration or termination of the
investment period. The funds in this strategy had an average management contract
term from the closing date of 10.3 years as of December 31, 2021 .
•Special Opportunities: Typical management fees range from 1.00% to 1.50% of
invested capital or the aggregate cost basis of unrealized portfolio
investments. The management fees for special opportunities funds generally step
down to between 1.00% to 1.25% of the invested capital or the aggregate cost
basis of unrealized portfolio investments following the expiration or
termination of the investment period. The funds in this strategy had an average
management contract term from the closing date of 10.2 years as of December 31,
2021 .
Real Estate Group :
•Real Estate Equity and Debt: Typical management fees range from 0.50% to 1.50%
of invested capital, stockholders' equity, net asset value, total capital
commitments or a combination thereof. Certain funds pay a lower management fee
rate on committed capital which increases when such capital is invested.
Following the expiration or termination of the investment period the basis on
which management fees are earned for certain closed-end funds, managed accounts
and co-investment vehicles in this strategy changes from committed capital to
invested capital with no change in the management fee rate. The funds in these
strategies (excluding ACRE, the non-traded REITs and other perpetual capital
vehicles) had an average management contract term from the closing date of
9.0 years as of December 31, 2021 .
Secondary Solutions Group:
•Private Equity, Real Estate and Infrastructure Secondaries: Typical management fees range from 0.50% to 1.00% of capital commitments, NAV of the underlying funds, called capital plus unfunded commitments or NAV plus unfunded commitments. Funds in each strategy are comprised of closed-end funds with either investment period termination or management contract termination dates and certain open-end accounts that generally do not have termination dates. The funds in these strategies had an average management contract term from the closing date of 12.9 years as ofDecember 31, 2021 .
Strategic Initiatives:
•Asian Special Situations: Typical management fees range from 1.15% to 2.00% of total capital commitments, the aggregate cost basis of unrealized portfolio investments or a combination thereof. Certain funds pay a lower management fee rate on committed capital which increases when such capital is invested. The funds in this strategy are comprised of closed-end funds, with investment period termination or management contract termination dates. The funds also include co-investment accounts with fees ranging from 0.50% to 1.50%, which generally do not include investment period termination or management contract termination dates. The funds in this strategy with termination dates had an average management contract term from the closing date of 7.3 years as ofDecember 31, 2021 . •Asian Secured Lending: Typical management fees range from 1.40% to 1.50% of the aggregate cost basis of unrealized portfolio investments. The funds in this strategy are comprised of closed-end funds with investment period termination or management contract termination dates. The funds also include co-investment accounts which generally do not include investment period termination or management contract termination dates. The funds in this strategy had an average management contract term from the closing date of 6.4 years as ofDecember 31, 2021 .
•Ares Insurance Solutions: Typical management fees are 0.30% of the daily
weighted average market value of the assets.
Incentive Fees. The general partners, managers or similar entities of certain of our funds receive performance-based fees. These fees are generally based on the net appreciation per annum of the applicable fund, subject to certain net loss carry-forward provisions, high-watermarks and/or preferred returns. Such performance-based fees may also be based on a fund's cumulative net appreciation to date, in some cases subject to a high-watermark or a preferred return. Incentive fees are realized at the end of a measurement period, typically quarterly or annually. Realized incentive fees are generally higher during the second half of the year due to the nature of certainCredit Group funds that typically realize incentive fees at the end of the 105 -------------------------------------------------------------------------------- Table of Contents calendar year. Once realized, such incentive fees are not subject to repayment. Cash from the realizations is typically received in the period subsequent to the measurement period. Incentive fees are composed of both fee related performance revenues and performance revenues. Fee Related Performance Revenues. Fee related performance revenues refers to incentive fees from perpetual capital vehicles that are (i) measured and expected to be received on a recurring basis and (ii) not dependent on realization events from the underlying investments. Certain vehicles are subject to hold back provisions that limits the amount paid in a particular year. Such hold back amounts may be paid in subsequent years subject to their extended performance conditions.
Additional details regarding our fee related performance revenues are presented below:
Credit Group : •Multi-Asset Credit and Alternative Credit: Typical fee related performance revenues represent 6% to 20% of each incentive eligible fund's profits, subject to a preferred return of approximately 5% to 7% per annum. •U.S. and European Direct Lending: Typical fee related performance revenues represent 10% to 15% of each incentive eligible fund's profits and are subject to a preferred return rate of approximately 5% to 8% per annum.
•Real Estate Equity: Fee related performance revenues we receive from AREIT and AIREIT are based on a 12.5% of the total investment return per annum of each fund, including income and net appreciation, subject to certain net loss carry-forward provisions and a hurdle rate of 5% per annum. •Real Estate Debt: Fee related performance revenues we receive from ACRE are based on a percentage of the difference between ACRE's core earnings (as defined in ACRE's management agreement) and an amount derived from the weighted average issue price per share of ACRE's common stock in its public offerings multiplied by the weighted average number of shares of common stock outstanding.
Performance Revenues: Performance revenues refers to incentive fees that do not meet the criteria of fee related performance revenues.
Additional details regarding our performance revenues are presented below:
•Syndicated Loans and High Yield Bonds: Typical performance revenues represent 10% to 20% of each incentive eligible fund's profits, subject to hurdle rates of approximately 3% to 12% per annum.
•Multi-Asset Credit and Alternative Credit: Typical performance revenues represent 12.5% to 20% of each incentive eligible fund's profits, subject to a preferred return of approximately 5% to 7% per annum.
•U.S. and European Direct Lending: Typical performance revenues represent 10% to 15% of each incentive eligible fund's profits and are subject to a preferred return rate of approximately 5% to 8% per annum. We are entitled to receive incentive fees in accordance with the investment advisory and management agreements we have with ARCC. We may receive ARCC Part II Fees, which are not paid unless ARCC achieves cumulative aggregate realized capital gains (net of cumulative aggregate realized capital losses and aggregate unrealized capital depreciation). For ARCC, incentive fees represent 20% of the cumulative aggregate realized capital gains (net of cumulative aggregate realized losses and aggregate unrealized capital depreciation) and such fees are presented within performance revenues.
•Real Estate Equity: Performance revenues represent 15% to 18% of each incentive
eligible fund's profits, subject to hurdle rates of approximately 6% to 8% per
annum.
Performance Income. We may receive performance income from our funds that may be
either performance revenue, which is a component of incentive fees described
above, or a special allocation of income, which we refer to as carried interest.
Performance income is recorded by us when specified investment returns are
achieved by the fund.
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Carried Interest Allocation. The general partner or an affiliate of certain of
our funds may be entitled to receive carried interest from a fund. Carried
interest entitles the general partner (or an affiliate) to a special allocation
of income and gains from a fund, and is typically structured as a net profits
interest in the applicable fund. Carried interest allocation is recognized based
on changes in valuation of our funds' investments that exceed certain preferred
returns as set forth in each respective partnership agreement. Carried interest
allocation is based on the amount that would be due to us pursuant to the fund
partnership agreement at each period end as if the funds were liquidated at such
date. Accordingly, the amount of carried interest recognized as carried interest
allocation reflects our share of the fair value gains and losses of the
associated funds' underlying investments measured at their then-current fair
values relative to the fair values as of the end of the prior period. Carried
interest is generally calculated and paid on a "realized gain" basis, and the
general partner of a fund is generally entitled to a carried interest between
10% and 20% of the net realized income and gains (generally taking into account
unrealized losses) generated by such fund. Net realized income or loss is not
netted between or among funds.
Funds generally follow either an American-style waterfall or European-style
waterfall. For American-style waterfalls, the general partner is entitled to
receive carried interest after a fund investment is realized if the investors in
the fund have received distributions in excess of the capital contributed for
such investment and all prior realized investments (plus allocable expenses), as
well as the preferred return. For European-style waterfalls, the general partner
is entitled to receive carried interest if the investors in the fund have
received distributions in an amount equal to all prior capital contributions
plus a preferred return.
For most funds, the carried interest is subject to a preferred return ranging
from 5% to 8%, after which there is typically a catch-up allocation to the
general partner. Generally, if at the termination of a fund (and in some cases
at interim points in the life of a fund), the fund has not achieved investment
returns that exceed the preferred return threshold or the general partner
receives net profits over the life of the fund in excess of its allocable share
under the applicable partnership agreement, the general partner will be
obligated to repay an amount equal to the extent the previously distributed
carried interest exceeds the amounts to which the general partner is entitled.
These repayment obligations may be related to amounts previously distributed to
us and our senior professionals and are generally referred to as contingent
repayment obligations.
Contingent repayment obligations operate with respect to only a given fund's net
investment performance and carried interest of other funds are not netted for
determining this contingent obligation. Although a contingent repayment
obligation is several to each person who received a distribution, and not a
joint obligation, and our professionals who receive carried interest have
guaranteed repayment of such contingent obligation, the governing agreements of
our funds generally provide that, if a recipient does not fund his or her
respective share, we may have to fund such additional amounts beyond the amount
of carried interest we retained, although we generally will retain the right to
pursue remedies against those carried interest recipients who fail to fund their
obligations.
Certain funds may make distributions to their partners to provide them with cash
sufficient to pay applicable federal, state and local tax liabilities
attributable to the fund's income that is allocated to them. These distributions
are referred to as tax distributions and are not subject to contingent repayment
obligations.
Additional details regarding our carried interest are presented below:
•Multi-Asset Credit and Alternative Credit: Typical carried interest represents 15% to 20% of each carried interest eligible fund's profits, subject to a preferred return of approximately 6% to 8% per annum.
•U.S. and European Direct Lending: Typical carried interest represents 10% to 20% of each carried interest eligible fund's profits and are subject to a preferred return rate of approximately 5% to 8% per annum.
Private Equity Group:
•Private Equity funds: Carried interest represents 15% to 20% of each carried interest eligible fund's profits, subject to a preferred return of approximately 7% to 8% per annum.Real Estate Group :
•Real Estate funds: Typical carried interest represents 10% to 20% of each carried interest eligible fund's profits, subject to a preferred return of approximately 8% to 10% per annum.
Secondary Solutions Group:
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•Private Equity and Real Estate Secondaries funds: Typical carried interest
represents 10% to 12.5% of each carried interest eligible fund's profits,
subject to a preferred return of approximately 8% per annum.
Strategic Initiatives:
•Asian Secured Lending: Carried interest represents 20% of each carried interest eligible fund's profits, subject to a preferred return of approximately 7% per annum.
For detailed discussion of contingencies on carried interest, see "Note 10. Commitments and Contingencies," to our audited consolidated financial statements and "Item 1A. Risk Factors-We may need to pay "clawback" or "contingent repayment" obligations if and when they are triggered under the governing agreements with our funds" included in this Annual Report on Form 10-K.
Principal Investment Income (Loss). Principal investment income (loss) consists
of interest and dividend income and net realized and unrealized gains (losses)
on equity method investments that we manage. Interest and dividend income are
recognized on an accrual basis to the extent that such amounts are expected to
be collected. A realized gain (loss) may be recognized when we redeem all or a
portion of our investment or when we receive a distribution of capital.
Unrealized gains (losses) on investments result from appreciation (depreciation)
in the fair value of our investments, as well as reversals of previously
recorded unrealized appreciation (depreciation) at the time the gain (loss) on
an investment becomes realized.
Administrative, Transaction and Other Fees. Other fees primarily include revenue
from administrative services provided to certain of our affiliated funds. We may
receive fees from certain affiliated funds based on income to those funds from
loan originations that we refer to as transaction-based fees. In addition, we
generate various property-related fees, such as acquisition, development and
property management, and fees from the distribution of shares in our non-traded
REITs.
Expenses
Compensation and Benefits. Compensation generally includes salaries, bonuses,
health and welfare benefits, payroll related taxes, equity-based compensation
and Part I Fee incentive compensation expenses. Compensation cost relating to
the issuance of restricted units is measured at fair value at the grant date,
reduced for actual forfeitures, and expensed over the vesting period on a
straight-line basis. Bonuses are accrued over the service period to which they
relate. Compensation and benefits expenses are typically correlated to the
operating performance of our segments, which is used to determine
incentive-based compensation for each segment. Certain of our senior partners
are not paid an annual salary or bonus, instead they only receive distributions
based on their ownership interest when declared by our board of directors. We
use changes in headcount, which represents the full-time equivalency of active
employees during each period, to analyze changes in compensation and benefits.
Incremental changes in fair value of certain contingent liabilities established
in connection to the Landmark Acquisition and Black Creek Acquisition are
recognized ratably over the service period and are also presented within
compensation and benefits.
Performance Related Compensation. Performance related compensation includes
compensation directly related to carried interest allocation and incentive fees,
generally consisting of percentage interests that we grant to our professionals.
Depending on the nature of each fund, the performance related compensation
generally represents 60-80% of the carried interest allocation and incentive
fees recognized by us. We have an obligation to pay our professionals a portion
of the carried interest allocation or incentive fees earned from certain funds.
The performance related compensation payable is calculated based upon the
recognition of carried interest allocation and is not paid to recipients until
the carried interest allocation is received. Performance related compensation
may include allocations to charitable organizations as part of our philanthropic
initiatives.
Although changes in performance related compensation are directly correlated
with changes in carried interest allocation and incentive fees reported within
our segment results, this correlation does not always exist when our results are
reported on a fully consolidated basis in accordance with GAAP. This discrepancy
is caused when carried interest allocation and incentive fees earned from our
Consolidated Funds is eliminated upon consolidation and performance related
compensation is not.
General, Administrative and Other Expenses. General and administrative expenses
include costs primarily related to occupancy, professional services, travel,
communication and information services, placement fees, depreciation,
amortization and other general operating items.
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Expenses of Consolidated Funds. Consolidated Funds' expenses consist primarily
of costs incurred by our Consolidated Funds, including professional services
fees, research expenses, trustee fees, travel expenses and other costs
associated with organizing and offering these funds.
Other Income (Expense)
Net Realized and Unrealized Gains (Losses) on Investments. A realized gain (loss) may be recognized when we redeem all or a portion of our investment or when we receive a distribution of capital. Unrealized gains (losses) on investments result from the change in appreciation (depreciation) in the fair value of our investments.
Interest and Dividend Income. Interest and dividend income is primarily generated from investments in products that we manage and other strategic investments. Interest and dividend income are both recognized on an accrual basis to the extent that such amounts are expected to be collected.
Interest Expense. Interest expense includes interest related to our Credit Facility, which has a variable interest rate based upon a credit spread that is adjusted with changes to corporate credit ratings, and to our senior and subordinated notes, each of which have fixed coupon rates.
Other Income (Expense), Net. Other income (expense), net consists of transaction gains (losses) on the revaluation of assets and liabilities denominated in non-functional currencies and other non-operating and non-investment related activity, such as bargain purchase gain, change in fair value of contingent obligations, loss on disposal of assets, among other items. Net Realized and Unrealized Gains (Losses) on Investments of Consolidated Funds. Realized gains (losses) may arise from dispositions of investments held by our Consolidated Funds. Unrealized gains (losses) are recorded to reflect the change in appreciation (depreciation) of investments held by the Consolidated Funds due to changes in fair value of the investments. Interest and Other Income of Consolidated Funds. Interest and other income of Consolidated Funds primarily includes interest and dividend income generated from the underlying investments of our Consolidated Funds. Interest Expense of Consolidated Funds. Interest expense primarily consists of interest related to our Consolidated CLOs' loans payable and, to a lesser extent, revolving credit lines, term loans and notes of other Consolidated Funds. The interest expense of the Consolidated CLOs is solely the responsibility of such CLOs and there is no recourse to us if the CLO is unable to make interest payments. Income Taxes. AMC is a corporation forU.S. federal income tax purposes and is subject toU.S. federal, state and local corporate income taxes at the entity level on its share of net taxable income. In addition, the AOG entities and certain of AMC's subsidiaries operate inthe United States as partnerships or disregarded entities forU.S. federal income tax purposes and as corporate entities in certain non-U.S. jurisdictions. These entities, in some cases, are subject toU.S. state or local income taxes or non-U.S. income taxes. Our effective tax rate is impacted by AMC's net taxable income and the applicableU.S. federal, state and local income taxes as well as, in some cases, non-U.S. income taxes. Net taxable income is based on AMC's ownership of the AOG entities. As such, our effective tax rate will be directly impacted by changes in AMC's ownership of the AOG entities and changes to statutory rates inthe United States and other non-U.S. jurisdictions and, to a lesser extent, income taxes that are recorded for certain affiliated funds and co-investment entities that are consolidated in our financial results.
The majority of our Consolidated Funds are not subject to income tax as the funds' investors are responsible for reporting their share of income or loss. To the extent required by federal, state and foreign income tax laws and regulations, certain funds may incur income tax liabilities.
Redeemable and Non-Controlling Interests. Net income (loss) attributable to non-controlling interests in Consolidated Funds represents the income (loss) related to ownership interests that third parties hold in entities that are consolidated into our consolidated financial statements.
Net income (loss) attributable to redeemable and non-controlling interests in
AOG entities represents income (loss) attributable to the owners of AOG Units
that are not held by AMC. In connection with the SSG Acquisition, the former
owners of SSG retained an ownership interest in certain AOG entities that is
reflected as redeemable interests in AOG entities. Net income (loss)
attributable to redeemable interest in AOG entities is allocated based on the
ownership percentage attributable to the redeemable interest.
For additional discussion on components of our consolidated results of
operations, see "Note 2. Summary of Significant Accounting Policies," to our
audited consolidated financial statements included in this Annual Report on Form
10-K.
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Consolidation and Deconsolidation of Ares Funds
In February 2021 , AAC consummated its initial public offering that raised
capital of $1.0 billion . Prior to the completion of a business combination, the
sponsor, a wholly owned subsidiary, owns the majority of the Class B ordinary
shares outstanding of AAC. We consolidate AAC under the voting interest model
and reflect the results of the SPAC as a Consolidated Fund .
Consolidated Funds represented approximately 5% of our AUM as of December 31,
2021 , 3% of our management fees and less than 1% of our carried interest and
incentive fees for the year ended December 31, 2021 . As of December 31, 2021 , we
consolidated 23 CLOs, 10 private funds and one SPAC, and as of December 31,
2020 , we consolidated 21 CLOs and nine private funds.
The activity of the Consolidated Funds is reflected within the consolidated
financial statement line items indicated by reference thereto. The impact of the
Consolidated Funds also typically will decrease management fees, carried
interest allocation and incentive fees reported under GAAP to the extent these
amounts are eliminated upon consolidation.
The assets and liabilities of our Consolidated Funds are held within separate
legal entities and, as a result, the liabilities of our Consolidated Funds are
typically non-recourse to us. Generally, the consolidation of our Consolidated
Funds has a significant gross-up effect on our assets, liabilities and cash
flows but has no net effect on the net income attributable to us or our
stockholders' equity, except where a reallocation of ownership occurs based on
specific redemption or liquidation preference terms. The net economic ownership
interests of our Consolidated Funds, to which we have no economic rights, are
reflected as redeemable and non-controlling interests in the Consolidated Funds
in our consolidated financial statements. Redeemable interest in Consolidated
Funds represent the shares issued by AAC that are redeemable for cash by the
public shareholders in connection with AAC's failure to complete a business
combination or tender offer associated with stockholder approval provisions.
We generally deconsolidate funds and CLOs when we are no longer deemed to have a
controlling interest in the entity. During the year ended December 31, 2021 , we
deconsolidated one CLO as a result of significant change in ownership and during
the year ended December 31, 2020 , we deconsolidated one private fund as a result
of liquidation/dissolution and one CLO experienced a significant change in
ownership that resulted in deconsolidation of the entity during the period.
The performance of our Consolidated Funds is not necessarily consistent with, or representative of, the combined performance trends of all of our funds.
For the actual impact that consolidation had on our results and further discussion on consolidation and deconsolidation of funds, see "Note 17. Consolidation" to our consolidated financial statements included herein.
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Results of Operations
Consolidated Results of Operations
We consolidate funds and entities where we are deemed to hold a controlling
financial interest. The Consolidated Funds are not necessarily the same entities
in each year presented due to changes in ownership, changes in limited partners'
or investor rights, and the creation and termination of funds and entities. The
consolidation of these funds and entities had no effect on net income
attributable to us for the periods presented. As such, we separate the analysis
of the Consolidated Funds and evaluate that activity in total. The following
table and discussion sets forth information regarding our consolidated results
of operations ($ in thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Revenues
Management fees$ 1,611,047 $ 1,150,608 $ 460,439 40 % Carried interest allocation 2,073,551 505,608 1,567,943 NM Incentive fees 332,876 37,902 294,974 NM Principal investment income 99,433 28,552 70,881 248 Administrative, transaction and other fees 95,184 41,376 53,808 130 Total revenues 4,212,091 1,764,046 2,448,045 139 Expenses Compensation and benefits 1,162,633 767,252 (395,381) (52) Performance related compensation 1,740,786 404,116 (1,336,670) NM General, administrative and other expenses 444,178 258,999 (185,179) (71) Expenses of Consolidated Funds 62,486 20,119 (42,367) (211) Total expenses 3,410,083 1,450,486 (1,959,597) (135) Other income (expense) Net realized and unrealized gains (losses) on investments 19,102 (9,008) 28,110 NM Interest and dividend income 9,865 8,071 1,794 22 Interest expense (36,760) (24,908) (11,852) (48) Other income, net 14,402 11,291 3,111 28 Net realized and unrealized gains (losses) on investments of Consolidated Funds 77,303 (96,864) 174,167 NM Interest and other income of Consolidated Funds 437,818 463,652 (25,834) (6) Interest expense of Consolidated Funds (258,048) (286,316) 28,268 10 Total other income 263,682 65,918 197,764 NM Income before taxes 1,065,690 379,478 686,212 181 Income tax expense 147,385 54,993 (92,392) (168) Net income 918,305 324,485 593,820 183 Less: Net income attributable to non-controlling interests in Consolidated Funds 120,369 28,085 92,284 NM Net income attributable toAres Operating Group entities 797,936 296,400 501,536 169
Less: Net loss attributable to redeemable interest in
(1,341) (976) (365) (37)
Less: Net income attributable to non-controlling
interests in Ares Operating Group entities 390,440 145,234 245,206 169
Net income attributable to Ares Management Corporation 408,837 152,142 256,695 169
Less: Series A Preferred Stock dividends paid 10,850 21,700 (10,850) (50)
Less: Series A Preferred Stock redemption premium 11,239 - (11,239) NM
Net income attributable to Ares Management Corporation Class A and non-voting common stockholders
$ 386,748 $ 130,442 256,306 196 NM - Not Meaningful 111
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Consolidated Results of Operations of the Company
Management Fees. Management fees increased by$460.4 million , or 40%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily driven by higher FPAUM from capital deployment in direct lending funds. Management fees also increased by$97.9 million and$40.5 million in connection with the Landmark Acquisition and Black Creek Acquisition, respectively, that were completed during 2021. In addition, the full year impact of the SSG Acquisition that closed in the third quarter of 2020 increased management fees by$39.7 million for the year endedDecember 31, 2021 when compared to the year endedDecember 31, 2020 . For detail regarding the fluctuations of management fees within each of our segments see "-Results of Operations by Segment." Carried Interest Allocation. Carried interest allocation increased by$1,567.9 million to$2,073.6 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The activity was principally composed of the following ($ in millions): Year ended Year ended December 31, Primary Drivers December 31, Primary Drivers 2021 2020 Primarily from four direct lending Primarily from four direct funds and one alternative credit lending funds and one fund with$17.3 billion of IGAUM alternative credit fund with generating returns in excess of$12.0 billion of IGAUM their hurdle rates. PCS, Ares generating returns in excess Capital Europe IV, L.P. ("ACE IV") of their hurdle rates. PCS and and Ares Capital Europe V, L.P. ACE IV generated carried ("ACE V") generated carried interest interest allocation of$48.9 allocation of$57.9 million ,$99.8 million and$51.5 million , million and$49.0 million , respectively, driven by net respectively. The carried interest investment income on an allocation generated by these funds increasing invested capital Credit funds$ 336.1 was driven by net investment income$ 146.3 base. Net investment income on an increasing invested capital for the year was muted by net base. Ares Capital Europe III, L.P. unrealized losses on ("ACE III") generated carried investments that were interest allocation of$42.7 million primarily incurred during the primarily driven by net investment first quarter of 2020 due to income during the period. In the market volatility driven addition, Ares Pathfinder Fund, L.P. by the COVID-19 pandemic. In ("Pathfinder") generated carried addition, Pathfinder generated interest allocation of$47.1 million carried interest allocation of that was driven by market$16.0 million primarily driven appreciation of various investments. by net investment income during the period. Ares Corporate Opportunities Fund IV, L.P. ("ACOF IV") generated carried interest allocation of ACOF IV generated carried$207.6 million primarily due to interest allocation of$285.7 market appreciation of its million primarily due to investment in The AZEK Company market appreciation of its ("AZEK") driven by its higher stock investment in AZEK following price. In addition, market its initial public offering. appreciation across several In addition, market Private equity funds 1,210.3 portfolio company investments, 304.7 appreciation across several primarily operating in the services investments generated carried and technology, retail and interest allocation of$102.6 healthcare industries, generated million for ASOF. Market carried interest allocation of depreciation across several$666.1 million from Ares Corporate energy sector investments led Opportunities Fund V, L.P. ("ACOF to the reversal of unrealized V"),$225.5 million from Ares carried interest allocation of Special Opportunities Fund, L.P.$75.1 million for ACOF V. ("ASOF") and$70.6 million from ACOF VI. Market appreciation from properties within real estate equity funds, Market appreciation from primarily driven by gains generated properties within real estate across several industrial and equity funds primarily driven multifamily assets, generated by gains generated across carried interest allocation of$24.2 several industrial and million from Ares U.S. Real Estate multi-family assets of US IX Real estate funds 296.7 Opportunity Fund III, L.P. ("AREOF 54.6 in the amount of$19.9 III"),$40.5 million from US Real million. In addition, there Estate Fund VIII, L.P. ("US VIII"), were gains generated in$83.4 million from US Real Estate multiple funds from the sale Fund IX, L.P. ("US IX"),$14.8 of a pan-European logistics million from Ares European Real portfolio at a higher price Estate Fund IV, L.P. ("EF IV") and than the December 31, 2019$69.9 million from Ares European valuation. Real Estate Fund V SCSp. ("EF V"). Market appreciation of certain investments held in Landmark Equity Partners XVI, L.P. ("LEP XVI") and Secondary solutions funds 230.5 Landmark Real Estate Partners VIII, - N/A L.P. ("LREP VIII") that generated carried interest allocation of$122.2 million and$56.4 million , respectively. Carried interest allocation$ 2,073.6 $ 505.6 112 -------------------------------------------------------------------------------- Table of Contents Incentive Fees. Incentive fees increased by$295.0 million to$332.9 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The activity was principally composed of the following ($ in millions): Year ended Year ended December 31, Primary Drivers December 31, 2020 Primary Drivers 2021 Incentive fees that Incentive fees that crystallized during the period crystallized during the period from 22 direct lending funds, from seven direct lending funds including$25.6 million from and two alternative credit Credit funds$ 168.2 ARCC Part II Fees, from one $ 37.1 funds. The number of funds alternative credit fund and generating incentive fees was from one CLO as a result of affected by the overall restructuring activity. economic environment during the year. Incentive fees that crystallized during the period from funds from the Black Creek Acquisition, including$63.3 million from a U.S. real estate equity fund,$15.3 million from Ares Real Estate Income Trust, Inc. ("AREIT") and$81.2 million from Ares Industrial Real Estate Income Trust, Inc. Incentive fees generated from Real estate funds 164.7 ("AIREIT"). We recognized 100% 0.8 ACRE. of the incentive fees earned from AREIT and AIREIT, of which 50% was paid to the sellers during the year ended December 31, 2021 in connection with the terms of the Black Creek Acquisition. We will retain 100% of incentive fees earned from these funds in subsequent periods. Incentive fees$ 332.9 $ 37.9 Principal Investment Income. Principal investment income increased by$70.9 million , or 248%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The activity for the year endedDecember 31, 2021 was primarily driven by market appreciation of various investments withinACOF IV , ACOF VI and within various funds in ourU.S. real estate equity, private equity secondaries, real estate secondaries and special opportunities strategies. The COVID-19 pandemic caused extreme volatility during 2020. The global equity and credit markets experienced significant downturns in the first quarter of 2020 that continued to rebound in 2021. The year endedDecember 31, 2020 also included gains from a higher fair value of our investments inACOF IV , primarily driven by higher asset appreciation of AZEK recognized in connection with the partial sale, and in an infrastructure and power fund, primarily from higher asset appreciation and subsequent sale of an investment in a wind project. Administrative, Transaction and Other Fees. Administrative, transaction and other fees increased by$53.8 million , or 130%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily due to new fee streams following the completion of the Black Creek Acquisition.Black Creek serves as an integrated property development and real estate investment management specialist, generating various property-related fees, such as acquisition, development and property management, and the distribution of shares in our non-traded REITs. These fees collectively contributed$17.9 million for the year endedDecember 31, 2021 , which represents the amount generated in the period following the completion of the Black Creek Acquisition. We also earn fees from theBlack Creek funds that we manage for administrative and other services, which contributed$11.2 million for the year endedDecember 31, 2021 . In addition, certain private credit funds pay administrative fees on invested capital and an increase in deployment resulted in an increase to this fee base. Administrative fees from private funds increased by$4.6 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 was also driven by higher transaction fees of$5.0 million for certain funds as a result of increased originations. Compensation and Benefits. Compensation and benefits increased by$395.4 million , or 52%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily driven by (i) headcount growth to support the expansion of our business, (ii) strategic initiatives and acquisitions, and (iii) higher incentive compensation and equity compensation attributable to improved operating performance and margin expansion from scaling our business. Average headcount for the year-to-date period increased by 30% to 1,771 professionals for the 2021 period from 1,364 professionals for the same period in 2020. Headcount growth attributable to the Landmark Acquisition andBlack Creek Acquisition contributed$81.5 million in recurring employment related costs to the year endedDecember 31, 2021 . The performance-based, acquisition-related compensation arrangements ("earnouts") that were established in connection with the Landmark Acquisition and Black Creek Acquisition also contributed$66.9 million to the year endedDecember 31, 2021 . The earnouts are based on the achievement of revenue targets for certain funds. As both earnouts are subject to the continued and future services of senior professionals and advisors, they are required to be recorded as compensation expense and recognized ratably over the respective service periods. 113 -------------------------------------------------------------------------------- Table of Contents See "Note 10. Commitments and Contingencies" for a further description of the contingent liabilities related to these arrangements.
Compensation and benefits were further driven by an increase in Part I Fees
compensation of
The following table presents equity compensation expense based on the different
types of restricted unit awards. Amounts presented include recurring expense,
accelerated expense recognized in connection with the achievement of a
performance condition and reversal of previously recognized expense resulting
from forfeitures ($ in thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % ChangeNon-recurring awards:
Multi-year future grants$ 35,996 $ -$ (35,996) NM Performance-based awards 22,785 3,514 (19,271) NM Performance-based awards - accelerated 43,426 3,750 (39,676) NM Other non-recurring awards 22,920 26,636 3,716 14 Total non-recurring awards 125,127 33,900 (91,227) (269) Recurring annual awards: Discretionary awards 65,055 49,981 (15,074) (30) Bonus awards 47,010 39,105 (7,905) (20) Total recurring annual awards 112,065 89,086 (22,979) (26) Equity compensation expense, net$ 237,192 $ 122,986 (114,206) (93) NM - Not Meaningful Equity compensation expense increased by$114.2 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to performance-based restricted units granted to certain executive officers in the first quarter of 2021 and to the approval of multi-year future grant awards to these executive officers, as well as to certain other senior leaders, that will be granted during the first quarter of 2022, 2023 and 2024. The 2021 periods included accelerated expense from the performance-based restricted awards from the vesting of Tranche I, II, III and IV of the performance-based restricted units as a result of meeting the applicable performance condition of$55.00 ,$60.00 ,$65.00 and$75.00 per share, respectively. Additional equity compensation expense was incurred for the year endedDecember 31, 2021 from an increase in units awarded as part of the recurring annual award programs. The year endedDecember 31, 2020 included accelerated expense from the vesting of restricted units granted to our Chief Executive Officer as a result of achieving the applicable performance conditions of$35.00 per share.
For detail regarding the fluctuations of compensation and benefits within each of our segments see "-Results of Operations by Segment."
Performance Related Compensation. Performance related compensation increased by$1,336.7 million to$1,740.8 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Changes in performance related compensation are directly associated with the changes in carried interest allocation and incentive fees described above and may include performance allocations to charitable organizations as part of our philanthropic initiatives. General, Administrative and Other Expenses. General, administrative and other expenses increased by$185.2 million , or 71%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The Landmark Acquisition and Black Creek Acquisition have contributed$76.8 million in general, administrative and other expenses to the year endedDecember 31, 2021 . These expenses were driven by amortization expense of$47.1 million for the year endedDecember 31, 2021 related to the intangible assets recorded in connection with the Landmark Acquisition and the Black Creek Acquisition. These expenses were also driven by placement fees of$9.6 million primarily in connection to new commitments to an open-ended industrial real estate fund. The impact from the Landmark Acquisition and Black Creek Acquisition has been excluded from the discussion below. Placement fees for the year endedDecember 31, 2021 increased by$61.9 million , primarily due to new commitments to PCS II, SDL II,Ares Climate Infrastructure Partners, L.P. ("ACIP") and our second special opportunities fund. In addition, the SSG Acquisition during the second half of 2020 resulted in an increase in amortization expense of$17.8 million for the year endedDecember 31, 2021 when compared to the same period in 2020. Certain expenses have also increased during the current 114 -------------------------------------------------------------------------------- Table of Contents period, including occupancy costs to support our growing headcount and information services and information technology to support the expansion of our business. Collectively, these expenses increased by$9.1 million for the year endedDecember 31, 2021 , when compared to the same period in 2020. The increase was also driven by higher professional service fees of$8.6 million for the year endedDecember 31, 2021 , largely as a result of due diligence and legal expenses related to our recent acquisitions and higher recruiting fees to support the expanding platform. There continue to be positive developments in the recovery from the COVID-19 pandemic that have reduced restrictions on travel and gathering. Those operating expenses that were impacted by the pandemic, particularly marketing sponsorships and events, increased during the second half of 2021. We, however, recognized cost savings when comparing the years endedDecember 31, 2021 and 2020. For the three months endedMarch 31, 2020 , our expenses reflected a pre-pandemic cost structure and are not comparable to the lower expenses incurred in our modified work environment during the three months endedMarch 31, 2021 . Our operating expenses, most notably travel, entertainment and marketing sponsorships, and certain office services from the modified remote working environment, decreased by$2.8 million for the year endedDecember 31, 2021 , when compared to the same period in 2020. Despite the significant addition in headcount and the number of funds that we manage, these expenses were$17.6 million lower for the year endedDecember 31, 2021 when compared to the pre-pandemic period in 2019, primarily driven by$14.4 million of travel expenses and$2.2 million of marketing expenses. Net Realized and Unrealized Gains (Losses) on Investments. Net realized and unrealized gains (losses) on investments increased from a loss of$9.0 million for the year endedDecember 31, 2020 to a gain of$19.1 million for the year endedDecember 31, 2021 . The activity for the year endedDecember 31, 2021 was primarily attributable to unrealized gains on certain strategic initiative related investments and on ourU.S. CLO investments. The activity for the year endedDecember 31, 2020 was primarily attributable to unrealized losses recognized on certain strategic initiative related investments and an unrealized loss from market depreciation of properties held byAREA Sponsor Holdings LLC . Interest Expense. Interest expense increased by$11.9 million , or 48%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The issuance of the 2051 Subordinated Notes on the last day of the second quarter increased interest expense by$9.4 million for the year endedDecember 31, 2021 . The issuance of the 2030 Senior Notes late in the second quarter of 2020 increased interest expense by$6.1 million for the year endedDecember 31, 2021 . The increase for the year endedDecember 31, 2021 was partially offset by a lower average outstanding balance of the Credit Facility when compared to the same period in 2020. Other Income, Net. Other income, net increased by$3.1 million , or 28%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Other income, net for the year endedDecember 31, 2021 included a$42.3 million bargain purchase gain from the Black Creek Acquisition. The bargain purchase gain resulted from the fair value of the identifiable tangible and intangible assets that we acquired exceeding the purchase consideration. The purchase agreement withBlack Creek contains provisions that required us to record separate contingent consideration liabilities that are (i) dependent on the achievement of revenue targets for certainBlack Creek funds and (ii) obligated us to pay the sellers 50% of the incentive fees realized for certainBlack Creek funds for the year endedDecember 31, 2021 . Other income, net includes$23.2 million from the revaluation of these contingent considerations for the year endedDecember 31, 2021 . See "Note 10. Commitments and Contingencies" for a further description of the contingencies. Other income, net also included transaction gains (losses) associated with currency fluctuations impacting the revaluation of non-functional currency balances and was based on the fluctuations in currency exchange rates for the years endedDecember 31, 2021 and 2020. Transaction losses during the year endedDecember 31, 2021 were primarily attributable to the British pound strengthening against Euro, while transaction gains during the year endedDecember 31, 2020 were primarily attributable to the British pound weakening against theU.S. dollar. Income Tax Expense Income tax expense increased by$92.4 million , or 168%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The changes in the comparative periods are primarily a result of increases in taxable income and weighted average daily ownership. The weighted average daily ownership for AMC common stockholders increased from 54.0% for the year endedDecember 31, 2020 to 58.5% for the year endedDecember 31, 2021 . The changes in ownership were primarily driven by the issuance of Class A common stock in connection with stock option exercises, vesting of restricted stock awards and private and public offerings of Class A and non-voting common stock. The increase in the weighted average daily ownership for the AMC common stockholders was partially offset by the issuance of AOG Units in connection with the Landmark Acquisition and the Black Creek Acquisition that increased the ownership of AOG Units not held by AMC. Redeemable and Non-Controlling Interests. Net income (loss) attributable to redeemable and non-controlling interests in AOG entities represents results attributable to the holders of AOG Units and other ownership interests that are not held by AMC. In connection with the SSG Acquisition, the former owners of SSG retained an ownership interest in a subsidiary of an 115 -------------------------------------------------------------------------------- Table of Contents AOG entity that is reflected as redeemable interest in AOG entities. Net income (loss) attributable to redeemable interest in AOG entities is allocated based on the ownership percentage for periods presented. Net income (loss) attributable to non-controlling interests in AOG entities is generally allocated based on the weighted average daily ownership of the other AOG unitholders, except for income (loss) generated from certain joint venture partnerships. Net income (loss) is allocated to other strategic distribution partners with whom we have established joint ventures based on the respective ownership percentages and based on the activity of certain membership interests. For the years endedDecember 31, 2021 and 2020, net income of$23.8 million and net loss of$3.2 million , respectively, was allocated based on ownership percentages of the strategic distribution partners and the activity of those membership interests. Net income attributable to non-controlling interests in AOG entities increased by$245.2 million , or 169%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The changes in the comparative periods are a result of the respective changes in income before taxes and weighted average daily ownership. While income before taxes increased, the weighted average daily ownership for the non-controlling AOG unitholders decreased from 46.0% for the year endedDecember 31, 2020 to 41.5% for the year endedDecember 31, 2021 .
Consolidated Results of Operations of the Consolidated Funds
The following table presents the results of operations of the Consolidated Funds
($ in thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Expenses of the Consolidated Funds $ (62,486) $ (20,119) $ (42,367) (211)%
Net realized and unrealized gains (losses) on
investments of Consolidated Funds 77,303 (96,864) 174,167 NM
Interest and other income of Consolidated Funds 437,818 463,652 (25,834) (6)
Interest expense of Consolidated Funds (258,048) (286,316) 28,268 10
Income before taxes 194,587 60,353 134,234 222
Income tax expense of Consolidated Funds (88) (118) 30 25
Net income 194,499 60,235 134,264 223
Less: Revenues attributable to Ares Management
Corporation eliminated upon consolidation 76,300 36,725 39,575 108
Less: Other expense, net attributable to
(2,170) (4,575) 2,405 53
Net income attributable to non-controlling interests in
Consolidated Funds $ 120,369 $ 28,085 92,284 NM
NM - Not Meaningful
The results of operations of the Consolidated Funds primarily represents
activity from certain CLOs that we are deemed to control. Expenses primarily
reflect professional fees that were incurred as a result of debt issuance costs
related to the issuance of new, refinanced or restructured CLOs. These fees were
expensed in the period incurred, as CLO debt is recorded at fair value on our
Consolidated Statements of Financial Condition. For the year ended December 31,
2021 , expenses were driven by professional fees incurred from the issuance of
three new U.S. CLOs and the restructure of our European CLO legal entities. For
the year ended December 31, 2020 , expenses were primarily driven by the issuance
of two European CLO. Net realized and unrealized gains fluctuated for the
comparative periods, primarily due to a significant change in the value of loans
held by the CLOs. The CSLLI returned 5.4% for 2021 when compared to 2.8% for the
prior year. The decrease in interest expense was attributable to lower interest
rates from refinanced CLOs since the third quarter of 2020 and from the
deconsolidation of one CLO as a result of significant change in ownership during
the year ended December 31, 2020 , which was partially offset by newly issued
CLOs at lower interest rates during the year ended December 31, 2021 .
Revenues and other expense attributable to AMC represents management fees,
incentive fees, principal investment income and administrative, transaction and
other fees that are attributable to AMC's proportional share in the activity of
the Consolidated Funds and is eliminated from the respective components of AMC's
results upon consolidation. The price fluctuations associated with the COVID-19
pandemic previously mentioned resulted in an increase in principal investment
income and a decrease in other expense.
Segment Analysis
For segment reporting purposes, revenues and expenses are presented before
giving effect to the results of our Consolidated Funds and the results
attributable to non-controlling interests of joint ventures that we consolidate.
As a result, segment revenues from management fees, fee related performance
revenues, performance income and investment income are different than those
presented on a consolidated basis in accordance with GAAP. Revenues recognized
from Consolidated
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Funds are eliminated in consolidation and results attributable to the
non-controlling interests of joint ventures have been excluded by us.
Furthermore, expenses and the effects of other income (expense) are different
than related amounts presented on a consolidated basis in accordance with GAAP
due to the exclusion of the results of Consolidated Funds and the
non-controlling interests of joint ventures.
Non-GAAP Financial Measures
We use the following non-GAAP measures to make operating decisions, assess performance and allocate resources:
•Fee Related Earnings ("FRE")
•Realized Income ("RI")
These non-GAAP financial measures supplement and should be considered in
addition to and not in lieu of, the results of operations, which are discussed
further under "-Components of Consolidated Results of Operations" and are
prepared in accordance with GAAP. Beginning in the fourth quarter of 2021, fee
related performance revenues, together with fee related performance
compensation, has been presented within FRE because it represents incentive fees
from perpetual capital vehicles that is measured and received on a recurring
basis and is not dependent on realization events from the underlying
investments. Fee related performance revenues and fee related performance
compensation were previously presented within realized net performance income.
Historical periods have been modified to conform to the current period
presentation. The following table sets forth FRE and RI by reportable segment
and OMG ($ in thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Fee Related Earnings:
Credit Group $ 719,111 $ 507,834 $ 211,277 42%
Private Equity Group 114,879 109,064 5,815 5
Real Estate Group 99,107 33,719 65,388 194
Secondary Solutions Group 65,868 - 65,868 NM
Strategic Initiatives 32,235 17,371 14,864 86
Operations Management Group (318,892) (236,757) (82,135) (35)
Fee Related Earnings $ 712,308 $ 431,231 281,077 65
Realized Income:
Credit Group $ 808,985 $ 538,683 $ 270,302 50%
Private Equity Group 162,207 212,695 (50,488) (24)
Real Estate Group 140,447 58,192 82,255 141
Secondary Solutions Group 67,333 - 67,333 NM
Strategic Initiatives 23,167 16,915 6,252 37
Operations Management Group (319,202) (244,529) (74,673) (31)
Realized Income $ 882,937 $ 581,956 300,981 52
NM - Not Meaningful
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Income before provision for income taxes is the GAAP financial measure most
comparable to RI and FRE. The following table presents the reconciliation of
income before taxes as reported in the Consolidated Statements of Operations to
RI and FRE of the reportable segments and OMG ($ in thousands):
Year ended December
31,
2021 2020
Income before taxes $ 1,065,690 $ 379,478
Adjustments:
Depreciation and amortization expense 106,705 40,662
Equity compensation expense 237,191 122,986
Acquisition-related compensation expense(1) 66,893 -
Acquisition-related incentive fees(2) (47,873) -
Acquisition and merger-related expense 21,162 11,194
Deferred placement fees 78,883 19,329
Other (income) expense, net (19,886) 10,207Net (income) expense of non-controlling interests in consolidated subsidiaries
(23,397) 3,817
Income before taxes of non-controlling interests in Consolidated Funds, net of eliminations
(120,457) (28,203)
Total performance (income) loss-unrealized (1,744,056) 7,554
Total performance related compensation-unrealized 1,316,205 (11,552)
Total net investment (income) loss-unrealized (54,123) 26,484
Realized Income 882,937 581,956
Total performance income-realized (474,427) (524,229)
Total performance related compensation-realized 328,583 399,462
Total investment income-realized (24,785) (25,958)
Fee Related Earnings $ 712,308 $ 431,231
(1)Represents components of the purchase agreements associated with earnouts
resulting from the Landmark Acquisition and the Black Creek Acquisition that are
recorded as compensation expense and are presented within compensation and
benefits in the Company's Consolidated Statements of Operations.
(2)Represents a component of the purchase price from incentive fees associated
with one-time contingent consideration recorded in connection with the Black
Creek Acquisition. 100% of the fees recognized in 2021 is presented within
incentive fees in the Company's Consolidated Statements of Operations of which
50% is included on an unconsolidated basis for segment reporting purposes.
For the specific components and calculations of these non-GAAP measures, as well
as a reconciliation of the reportable segments to the most comparable measures
in accordance with GAAP, see "Note 16. Segment Reporting", to our audited
consolidated financial statements included in this Annual Report on Form 10-K.
Discussed below are our results of operations for our reportable segments and
OMG.
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Results of Operations by Segment
Credit Group-Year Ended
Fee Related Earnings: The following table presents the components of theCredit Group's FRE ($ in thousands): Year ended December 31, Favorable (Unfavorable) 2021 2020 $ Change % Change Management fees$ 1,070,608 $ 841,138 $ 229,470 27% Fee related performance revenues 86,480 22,160 64,320 290 Other fees 27,103 18,644 8,459 45 Compensation and benefits (410,394) (320,111) (90,283) (28) General, administrative and other expenses (54,686) (53,997) (689) (1) Fee Related Earnings$ 719,111 $ 507,834 211,277 42
Management Fees. The chart below presents
[[Image Removed: ares-20211231_g43.jpg]]
Management fees on existing direct lending funds increased primarily from
deployment of capital with Pathfinder, ACE IV , ACE V and SDL, collectively
generating additional fees of $63.0 million for the year ended December 31, 2021
compared to the year ended December 31, 2020 . Management fees from ARCC,
excluding Part I Fees described below, increased by $36.6 million over the
period primarily due to an increase in the average size of ARCC's portfolio. The
remaining increases in management fees from funds in existence in both periods
was primarily driven by deployment of capital in other direct lending funds and
SMAs. Part I Fees increased primarily due to an increase in pre-incentive fee
net investment income generated by ARCC and CADC, driven by an increase in
originations and in the average size of their portfolios. Management fees from
CLOs also increased primarily due to the net addition of three CLOs for the year
ended December 31, 2021 compared
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to the year ended December 31, 2020 . The launch of PCS II during the fourth
quarter of 2020 and SDL II during 2021 also contributed to the increase in
management fees, generating fees of $17.3 million for the year ended December
31, 2021 .
The decrease in effective management fee rate for the year ended December 31,
2021 compared to the year ended December 31, 2020 was driven by the decrease in
Part I Fees' contribution to the effective management fee rate due to the
proportional increase in fees from other credit funds.
Fee Related Performance Revenues. Fee related performance revenues increased by
$64.3 million for the year ended December 31, 2021 compared to the year ended
December 31, 2020 . The increase was primarily attributable to fee related
performance revenues from direct lending SMAs driven by increased deployment,
which resulted in higher net investment income on a larger invested capital
base, together with a recovery of valuations following the significant downturns
experienced in the global credit markets at the onset of the COVID-19 pandemic
in 2020.
Other Fees. Other fees increased by $8.5 million , or 45%, for the year ended
December 31, 2021 compared to the year ended December 31, 2020 . The increase was
primarily driven by administrative fees from private funds. Certain private
credit funds pay administrative fees on invested capital and an increase in
deployment resulted in an increase to the fee basis. The increase was also
driven by higher transaction fees for certain funds as a result of increased
originations.
Compensation and Benefits. Compensation and benefits increased by $90.3 million ,
or 28%, for the year ended December 31, 2021 compared to the year ended December
31, 2020 . The increase was primarily driven by (i) an increase in fee related
performance compensation of $39.4 million from direct lending SMAs, (ii) higher
Part I Fees compensation of $25.4 million , (iii) higher incentive compensation
attributable to improved operating performance and margin expansion from scaling
our business and (iv) headcount growth and merit increases for the year ended
December 31, 2021 , when compared to the same period in 2020. The increase in
compensation and benefits was further driven by the increase in payroll related
taxes of $5.6 million for the year ended December 31, 2021 compared to the year
ended December 31, 2020 , primarily attributable to the vesting of non-recurring
equity compensation awards. The increase in salaries and benefits is partially
offset by lower discretionary payments of $7.0 million made during the year
ended December 31, 2021 when compared to the same period in 2020.
Average headcount for the year-to-date period increased by 6% to 433 investment
and investment support professionals for the 2021 period from 409 professionals
for the same period in 2020 as we added additional investment professionals to
support our growing U.S. and European direct lending platforms.
General, Administrative and Other Expenses. General, administrative and other
expenses increased by $0.7 million , or 1%, for the year ended December 31, 2021
compared to the year ended December 31, 2020 . In connection with our fundraising
efforts, placement fees increased by $4.5 million for the year ended December
31, 2021 when compared to the same periods in 2020. The increase was primarily
associated with new commitments to PCS II, ACE V, SDL II and an alternative
credit fund. Certain expenses have also increased during the current period,
including information services and information technology to support the
expansion of our business. Collectively, these expenses increased by $1.9
million for the year ended December 31, 2021 when compared to the same period in
2020.
There continue to be positive developments in the recovery from the COVID-19
pandemic that have reduced restrictions on travel and gathering. Those operating
expenses that were impacted by the pandemic, particularly marketing sponsorships
and events, increased during the second half of 2021. We, however, recognized
cost savings when comparing the years ended December 31, 2021 and 2020. For the
three months ended March 31, 2020 , our expenses reflected a pre-pandemic cost
structure and are not comparable to the lower expenses incurred in our modified
work environment during the three months ended March 31, 2021 . Our operating
expenses, most notably travel, entertainment and marketing sponsorships, and
certain office services from the modified remote working environment, decreased
by $2.2 million for the year ended December 31, 2021 , when compared to the same
period in 2020.
During 2020, we also recorded
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Realized Income:
The following table presents the components of the Credit Group's RI ($ in
thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Fee Related Earnings $ 719,111 $ 507,834 $ 211,277 42%
Performance income-realized 207,446 70,148 137,298 196
Performance related compensation-realized (131,900) (44,582) (87,318) (196)
Realized net performance income 75,546 25,566 49,980 195
Investment income (loss)-realized 1,989 (2,309) 4,298 NM
Interest and other investment income-realized 20,377 16,314 4,063 25
Interest expense (8,038) (8,722) 684 8
Realized net investment income 14,328 5,283 9,045 171
Realized Income $ 808,985 $ 538,683 270,302 50
NM - Not Meaningful
Realized net performance income for the years ended December 31, 2021 and 2020
was primarily attributable to tax distributions on direct lending funds with
European-style waterfalls, driven by net investment income on an increasing
invested capital base of those funds. The tax distributions were made to provide
cash sufficient to pay tax liabilities attributable to the funds' taxable income
that is allocated to its carry participants prior to the funds making carried
interest distributions. Realized net performance income for the year ended
December 31, 2021 also included performance revenues from eight direct lending
funds, including ARCC Part II fees of $25.6 million . Realized net performance
income for the year ended December 31, 2020 was also attributable to performance
revenues for two alternative credit funds that crystallized during the period.
Realized net investment income for the years ended December 31, 2021 and 2020
was primarily attributable to interest income generated from our CLO investments
and income recognized in connection with distributions from a commercial finance
fund. Realized net investment income for the year ended December 31, 2021 also
included income recognized in connection with distributions from an alternative
credit fund, while the year ended December 31, 2020 included a term loan
investment that generated interest income.
Credit Group-Performance Income
The following table presents the accrued carried interest, also referred to as accrued performance income, and related performance compensation for theCredit Group . Accrued net performance income excludes net performance income realized but not yet received as of the reporting date ($ in thousands): As of December 31, 2021 2020 Accrued Accrued Accrued Net Accrued Accrued Accrued Net Performance Performance Performance Performance Performance Performance Income Compensation Income Income Compensation Income ACE III$ 99,551 $ 59,731 $ 39,820 $ 77,959 $ 46,776 $ 31,183 ACE IV 146,580 90,879 55,701 93,462 57,946 35,516 ACE V 51,482 30,889 20,593 2,435 1,461 974 PCS 132,050 77,780 54,270 101,656 60,084 41,572 Other credit funds 165,770 110,409 55,361 97,803 60,437 37,366Total Credit Group $ 595,433 $ 369,688 $ 225,745 $ 373,315 $ 226,704 $ 146,611 121
-------------------------------------------------------------------------------- Table of Contents The following table presents the change in accrued performance income for theCredit Group ($ in thousands): As of December As of December 31, 2020 Activity during the period 31, 2021 Accrued Accrued Performance Change in Performance Waterfall Type Income Unrealized Realized Other Adjustments Income Accrued Carried Interest ACE III European$ 77,959 $ 42,712 $ (21,789) $ 669$ 99,551 ACE IV European 93,462 99,813 (47,414) 719 146,580 ACE V European 2,435 49,047 - - 51,482 PCS European 101,656 57,857 (28,363) 900 132,050 Other credit funds European 97,545 86,368 (23,129) 4,723 165,507 Other credit funds American 258 5 - - 263 Total accrued carried interest 373,315 335,802 (120,695) 7,011 595,433 ARCC Part II Fees Incentive - 25,569 (25,569) - - Other credit funds Incentive - 61,182 (61,182) - -Total Credit Group $ 373,315 $ 422,553 $ (207,446) $ 7,011$ 595,433
Credit Group-Assets Under Management
The tables below present rollforwards of AUM for theCredit Group ($ in millions): European High Multi-Asset Alternative U.S. Direct Direct Total Credit Syndicated Loans Yield Credit Credit Lending Lending Group Balance at 12/31/2020 $ 27,967$ 2,863
Net new par/equity commitments 1,179 858 2,090 5,788 14,891 5,155 29,961 Net new debt commitments 3,647 - 100 - 15,021 3,381 22,149 Capital reductions (632) - - - (1,935) (148) (2,715) Distributions (98) - 16 (633) (1,832) (1,452) (3,999) Redemptions (295) (270) (211) (1,221) (168) (300) (2,465) Change in fund value (277) 181 264 593 3,356 190 4,307 Balance at 12/31/2021 $ 31,491$ 3,632 $ 5,212 $ 17,424 $ 85,849 $ 49,102 $ 192,710 Average AUM(1) $ 29,428$ 3,193 $ 3,977 $ 15,255 $ 69,331 $ 46,439 $ 167,623 European High Multi-Asset Alternative U.S. Direct Direct Total Credit Syndicated Loans Yield Credit Credit Lending Lending Group Balance at 12/31/2019 $ 22,320$ 3,492
$ 2,611 $ 7,571 $ 48,431 $ 26,118 $ 110,543 Acquisitions 2,693 - - - - - 2,693 Net new par/equity commitments 551 451 470 5,516 4,036 13,209 24,233 Net new debt commitments 2,406 - - - 4,002 1,119 7,527 Capital reductions (121) - - - (144) (166) (431) Distributions (69) - (16) (376) (1,181) (843) (2,485) Redemptions (282) (1,163) (276) (354) (101) - (2,176) Change in fund value 469 83 164 540 1,473 2,839 5,568 Balance at 12/31/2020 $ 27,967$ 2,863
$ 25,312 $ 2,911 (1) Represents a five-point average of quarter-end balances for each period.
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The components of our AUM for the
[[Image Removed: ares-20211231_g44.jpg]] [[Image Removed: ares-20211231_g45.jpg]]
AUM: $192.7 AUM: $145.5
FPAUM AUM not yet paying fees Non-fee paying(1)
(1) Includes $11.8 billion and $9.0 billion of AUM of funds from which we
indirectly earn management fees as of December 31, 2021 and 2020, respectively
and includes $0.9 billion of non-fee paying AUM based on our general partner
commitment as of December 31, 2021 and 2020.
Credit Group-Fee Paying AUM
The tables below present rollforwards of fee paying AUM for theCredit Group ($ in millions): High Multi-Asset Alternative U.S. Direct European Total Credit Syndicated Loans Yield Credit Credit Lending Direct Lending Group
Balance at 12/31/2020 $ 27,171$ 2,861 $ 2,457 $ 6,331 $ 32,337 $ 16,860 $ 88,017 Commitments 3,961 858 1,916 1,659 2,103 - 10,497 Subscriptions/deployment/increase in leverage 715 - 398 2,641 14,342 9,400 27,496 Capital reductions (583) - (18) - (790) (256) (1,647) Distributions (51) - (83) (646) (3,469) (1,381) (5,630) Redemptions (295) (267) (206) (1,092) (143) (721) (2,724) Change in fund value (591) 180 250 (151) 1,748 (55) 1,381 Balance at 12/31/2021 $ 30,327$ 3,632 $ 4,714 $ 8,742 $ 46,128 $ 23,847 $ 117,390 Average FPAUM(1) $ 28,265$ 3,192 $ 3,473 $ 7,670 $ 37,198 $ 20,805 $ 100,603 High Multi-Asset Alternative U.S. Direct European Total Credit Syndicated Loans Yield Credit Credit Lending Direct Lending Group Balance at 12/31/2019 $ 21,458$ 3,495 $ 2,144 $ 4,340 $ 27,876 $ 12,567 $ 71,880 Acquisitions 2,596 - - - - - 2,596 Commitments 3,364 438 468 469 491 - 5,230 Subscriptions/deployment/increase in leverage 15 13 91 2,282 6,892 4,316 13,609 Capital reductions (139) - (59) (227) (934) (301) (1,660) Distributions (49) - (41) (481) (2,371) (715) (3,657) Redemptions (283) (1,127) (278) (306) (93) (41) (2,128) Change in fund value 209 82 132 254 476 1,034 2,187 Change in fee basis - (40) - - - - (40) Balance at 12/31/2020 $ 27,171$ 2,861 $ 2,457 $ 6,331 $ 32,337 $ 16,860 $ 88,017 Average FPAUM(1) $ 24,510$ 2,901 $ 2,193 $ 5,110 $ 29,653 $ 14,773 $ 79,140 pa
(1) Represents a five-point average of quarter-end balances for each period.
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The charts below present FPAUM for the
[[Image Removed: ares-20211231_g46.jpg]] [[Image Removed: ares-20211231_g47.jpg]]
FPAUM: $117.4 FPAUM: $88.0
Invested capital Market value(1) Collateral balances (at par)
(1)Includes $27.4 billion and $20.7 billion from funds that primarily invest in
illiquid strategies as of December 31, 2021 and 2020, respectively. The
underlying investments held in these funds are generally subject to less market
volatility than investments held in liquid strategies.
Credit Group-Fund Performance Metrics as of
ARCC contributed approximately 45% of theCredit Group's total management fees for the year endedDecember 31, 2021 . In addition, seven other significant funds,ACE III ,ACE IV , ACE V, CADC, PCS, SDL and an open-ended secured finance fund, collectively contributed approximately 21% of theCredit Group's management fees for the year endedDecember 31, 2021 . The following table presents the performance data for our significant funds that are not drawdown funds in theCredit Group as ofDecember 31, 2021 ($ in millions): Returns(%)(1) Year-To-Date Since Inception(2) Primary Fund Year of Inception AUM Gross Net Gross Investment Strategy Net
ARCC(3) 2004$ 24,114 N/A 22.0 N/A 12.1U.S. Direct Lending CADC(4) 2017 3,129 N/A 8.9 N/A 6.7U.S. Direct Lending Open-ended secured finance 2018 2,126 3.6 3.0 3.2 2.6 Alternative Credit fund(5) (1)Returns are time-weighted rates of return and include the reinvestment of income and other earnings from securities or other investments and reflect the deduction of all trading expenses. (2)Since inception returns are annualized. (3)Net returns are calculated using the fund's NAV and assume dividends are reinvested at the closest quarter-end NAV to the relevant quarterly ex-dividend dates. Additional information related to ARCC can be found in its financial statements filed with theSEC , which are not part of this report. (4)Returns are shown for institutional share class. Net returns are calculated using the fund's NAV and assume distributions are reinvested at the NAV on the date of distribution. Additional information related to CADC can be found in its financial statements filed with theSEC , which are not part of this report. (5)Gross returns do not reflect the deduction of management fees or other expenses. Net returns are calculated by subtracting the applicable management fees and other expenses from the gross returns on a monthly basis. This fund is a master/feeder structure and its AUM and returns include activity from its' investment in an affiliated Ares fund. Returns presented in the table are expressed inU.S. Dollars and are for the master fund, excluding the share class hedges. The year-to-date and since inception returns (gross / net) for the pound sterling hedged Cayman feeder, the fund's sole feeder, are as follows: 3.3% / 2.7% and 1.9% / 1.3%. 124 -------------------------------------------------------------------------------- Table of Contents The following table presents the performance data of our significant drawdown funds as ofDecember 31, 2021 ($ in millions): Capital MoIC IRR(%) Original Capital Invested to Realized Unrealized Fund Year of Inception AUM Commitments Date Value(1) Value(2) Total Value Gross(3) Net(4) Gross(5) Net(6) Primary Investment Strategy Funds Harvesting InvestmentsACE III (7) 2015$ 5,114 $ 2,822 $ 2,507 $ 1,023 $ 2,489 $ 3,512 1.5x 1.4x 11.9 8.6 European Direct Lending PCS 2017 3,849 3,365 2,649 1,188 2,232 3,420 1.3x 1.2x 13.4 9.7U.S. Direct LendingFunds Deploying Capital ACE IV Unlevered(8) 2018 10,654 2,851 2,399 315 2,421 2,736 1.2x 1.1x 8.9 6.4 European Direct Lending ACE IV Levered(8) 4,819 4,008 697 4,195 4,892 1.3x 1.2x 13.3 9.7 SDL Unlevered 2018 5,826 922 740 131 689 820 1.1x 1.1x 9.7 7.3U.S. Direct Lending SDL Levered 2,045 1,641 445 1,531 1,976 1.3x 1.2x 18.9 14.1 ACE V Unlevered(9) 2020 15,445 7,026 2,097 16 2,205 2,221 1.1x 1.1x 13.4 10.2 European Direct Lending ACE V Levered(9) 6,376 1,898 29 2,050 2,079 1.1x 1.1x 21.9 16.4 (1)Realized value represents the sum of all cash distributions to all partners and if applicable, exclude tax and incentive distributions made to the general partner. (2)Unrealized value represents the fund's NAV reduced by the accrued incentive allocation, if applicable. There can be no assurance that unrealized values will be realized at the valuations indicated. (3)The gross multiple of invested capital ("MoIC") is calculated at the fund-level and is based on the interests of the fee-paying limited partners and if applicable, excludes interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The gross MoIC is before giving effect to management fees, carried interest and other expenses, as applicable, but after giving effect to credit facility interest expenses, as applicable. The funds may utilize a credit facility during the investment period and for general cash management purposes. Early in the life of a fund, the gross fund-level MoICs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (4)The net MoIC is calculated at the fund-level and is based on the interests of the fee-paying limited partners and if applicable, excludes those interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The net MoIC is after giving effect to management fees and carried interest, other expenses and credit facility interest expenses, as applicable. The funds may utilize a credit facility during the investment period and for general cash management purposes. Early in the life of a fund, the net fund-level MoICs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (5)The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from the fund and the fund's residual value at the end of the measurement period. Gross IRR reflects returns to the fee-paying limited partners and, if applicable, excludes interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The cash flow dates used in the gross IRR calculation are based on the actual dates of the cash flows. The gross IRRs are calculated before giving effect to management fees, carried interest and other expenses, as applicable, but after giving effect to credit facility interest expenses, as applicable. The funds may utilize a credit facility during the investment period and for general cash management purposes. Gross fund-level IRRs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (6)The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund's residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying limited partners and, if applicable, exclude interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The cash flow dates used in the net IRR calculations are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees and carried interest, other expenses and credit facility interest expenses, as applicable. The funds may utilize a credit facility during the investment period and for general cash management purposes. Net fund-level IRRs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (7)ACE III is made up of two feeder funds, one denominated inU.S. dollars and one denominated in Euros. The gross and net IRR and MoIC presented in the table are for the Euro denominated feeder fund. The gross and net IRR for theU.S. dollar denominated feeder fund are 12.8% and 9.5%, respectively. The gross and net MoIC for theU.S. dollar denominated feeder fund are 1.6x and 1.4x, respectively. Original capital commitments are converted toU.S. dollars at the prevailing exchange rate at the time of the fund's closing. All other values forACE III are for the combined fund and are converted toU.S. dollars at the prevailing quarter-end exchange rate. (8)ACE IV is made up of four parallel funds, two denominated in Euros and two denominated in pound sterling:ACE IV (E) Unlevered,ACE IV (G) Unlevered,ACE IV (E) Levered andACE IV (G) Levered. The gross and net IRR and MoIC presented in the table are forACE IV (E) Unlevered andACE IV (E) Levered. Metrics forACE IV (E) Levered are inclusive of aU.S. dollar denominated feeder fund, which has not been presented separately The gross and net IRR forACE IV (G) Unlevered are 10.4% and 7.5%, respectively. The gross and net MoIC forACE IV (G) Unlevered are 1.2x and 1.2x, respectively. The gross and net IRR forACE IV (G) Levered are 14.6% and 10.6%, respectively. The gross and net MoIC forACE IV (G) Levered are 1.3x and 1.2x, respectively. Original capital commitments are converted toU.S. dollars at the prevailing exchange rate at the time of the fund's closing. All other values for ACE IV Unlevered and ACE IV Levered are for the combined levered and unlevered parallel funds and are converted toU.S. dollars at the prevailing quarter-end exchange rate. (9)ACE V is made up of four parallel funds, two denominated in Euros and two denominated in pound sterling: ACE V (E) Unlevered, ACE V (G) Unlevered, ACE V (E) Levered, and ACE V (G) Levered. The gross and net MoIC presented in the chart are for ACE V (E) Unlevered and ACE V (E) Levered. Metrics for ACE V (E) Unlevered are inclusive of a Japanese yen denominated feeder fund, which has not been presented separately. Metrics for ACE V (E) Levered are inclusive of aU.S. dollar denominated feeder fund, which has not been presented separately. The gross and net IRR for ACE V (G) Unlevered are 13.0% and 9.8%, respectively. The gross and net MoIC for ACE V (G) Unlevered are 1.1x and 1.1x, respectively. The gross and net IRR for ACE V (G) Levered are 21.2% and 15.4%, respectively. The gross and net MoIC for ACE V (G) Levered are 1.1x and 1.1x, respectively. Original capital commitments are converted toU.S. dollars at the prevailing exchange rate at the time of the fund's closing. All other values for ACE V Unlevered and ACE V Levered are for the combined levered and unlevered parallel funds and are converted toU.S. dollars at the prevailing quarter-end exchange rate. IRRs are presented on a non-annualized basis. 125
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Private Equity Group-Year Ended
Fee Related Earnings:
The following table presents the components of thePrivate Equity Group's FRE ($ in thousands): Year ended December 31, Favorable (Unfavorable) 2021 2020 $ Change % Change
Management fees$ 231,282 $ 221,160 $ 10,122 5% Other fees 1,126 178 948 NM Compensation and benefits (92,485) (90,129) (2,356) (3) General, administrative and other expenses (25,044) (22,145) (2,899) (13) Fee Related Earnings$ 114,879 $ 109,064 5,815 5 NM - Not Meaningful
Management Fees. The chart below presents
[[Image Removed: ares-20211231_g48.jpg]]
Management fees increased primarily due to additional commitments and one-time
catch up fees. Excluding one-time catch up fees of $2.5 million , management fees
from ACOF VI increased by $62.1 million for the year ended December 31, 2021
compared to year ended December 31, 2020 , offset by a decrease in management
fees of $73.9 million from ACOF V due to the step down in fee rate and change in
fee base from committed capital to invested capital in the first quarter of 2021
as a result of ACOF VI beginning to pay fees in the fourth quarter of 2020.
Excluding one-time catch up fees of $4.0 million , management fees from ACIP
increased by $11.4 million over the comparative period. Management fees from
ASOF increased by $21.0 million from the prior period, driven by increased
deployment.
The decrease in effective management fee rate for the year ended December 31,
2021 compared to the year ended December 31, 2020 was primarily driven by the
step down in fee rate to 0.75% for ACOF V, partially offset by increased
deployment in ASOF that has a higher fee rate than the Private Equity Group's
average effective management fee rate.
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General, Administrative and Other Expenses. General, administrative and other
expenses increased by $2.9 million , or 13%, for the year ended December 31, 2021
compared to the year ended December 31, 2020 . In connection with our fundraising
efforts, placement fees increased by $4.6 million for the year ended December
31, 2021 when compared to the same period in 2020. The increase was primarily
associated with new commitments to ASOF, ACOF VI and ACIP. Certain expenses have
also increased during the current period, including professional service fees,
information services and information technology to support the expansion of our
business. Collectively, these expenses increased by $1.2 million for the year
ended December 31, 2021 when compared to the same period in 2020.
There continue to be positive developments in the recovery from the COVID-19
pandemic that have reduced restrictions on travel and gathering. Those operating
expenses that were impacted by the pandemic, particularly marketing sponsorships
and events, increased during the second half of 2021. We, however, recognized
cost savings when comparing the years ended December 31, 2021 and 2020. For the
three months ended March 31, 2020 , our expenses reflected a pre-pandemic cost
structure and are not comparable to the lower expenses incurred in our modified
work environment during the three months ended March 31, 2021 . Our operating
expenses, most notably travel, entertainment and marketing sponsorships, and
certain office services from the modified remote working environment, decreased
by $0.8 million for the year ended December 31, 2021 , when compared to the same
period in 2020.
For the year ended
Realized Income:
The following table presents the components of thePrivate Equity Group's RI ($ in thousands): Year ended December 31, Favorable (Unfavorable) 2021 2020 $ Change % Change Fee Related Earnings$ 114,879 $ 109,064 $ 5,815 5% Performance income-realized 171,637 392,635 (220,998) (56) Performance related compensation-realized (137,576) (315,905) 178,329 56 Realized net performance income 34,061 76,730 (42,669) (56) Investment income-realized 9,259 29,100 (19,841) (68) Interest and other investment income-realized 12,819 5,987 6,832 114 Interest expense (8,811) (8,186) (625) (8) Realized net investment income 13,267 26,901 (13,634) (51) Realized Income$ 162,207 $ 212,695 (50,488) (24) Realized net performance income and realized net investment income for the year endedDecember 31, 2021 was primarily attributable to realizations from monetization ofACOF IV's investment in Farrow & Ball following the sale of the company and to realizations from partial sales ofACOF IV's position in AZEK. Realized net investment income for the year endedDecember 31, 2021 was also attributable to the monetization of various assets in an infrastructure and power fund and a special opportunities fund, offset by a realized loss recognized in connection with an Asian corporate private equity fund's sale of its investment in a dairy farm company. Realized net performance income and realized net investment income for the year endedDecember 31, 2020 were primarily attributable to realizations from the sale ofACOF III's remaining position in Floor & Decor Holdings, Inc., from the partial sale ofACOF IV's position in AZEK and from the monetization ofACOF IV's investment inNational Veterinary Associates , Valet Living and a healthcare services company. Realized net investment income for the year endedDecember 31, 2020 was also attributable to the monetization of an infrastructure and power fund's investment in a wind project. Realized net investment income for the year endedDecember 31, 2020 included realized losses fromACOF III andACOF IV due to its investment in a luxury retailer undergoing a reorganization and from the corporate private equity continuation fund due to its investment in a retail portfolio company exacerbated by the impact of the COVID-19 pandemic on the sector. 127 -------------------------------------------------------------------------------- Table of Contents Private Equity Group-Performance Income The following table presents the accrued carried interest, also referred to as accrued performance income, and related performance compensation for thePrivate Equity Group ($ in thousands): As of December 31, 2021 2020 Accrued Accrued Accrued Net Accrued Accrued Accrued Net Performance Performance Performance Performance Performance Performance Income Compensation Income Income Compensation Income ACOF III$ 43,510 $ 34,808 $ 8,702 $ 55,022 $ 44,018 $ 11,004 ACOF IV 387,901 310,321 77,580 345,748 276,598 69,150 ACOF V 666,074 532,859 133,215 - - - ACOF VI 73,261 58,608 14,653 2,624 2,099 525 ASOF 338,857 237,200 101,657 113,313 79,319 33,994 EIF V 62,592 46,787 15,805 54,086 40,429 13,657 Other funds 37,837 24,790 13,047 175 175 -
$ 364,659 $ 570,968 $ 442,638 $ 128,330
The following table presents the change in accrued carried interest for the
As of December As of December
31, 2020 Activity during the period 31, 2021
Accrued Carried Change in Accrued Carried
Waterfall Type Interest Unrealized Realized Other Adjustments Interest
ACOF III American $ 55,022 $ (5,320) $ (6,192) $ - $ 43,510
ACOF IV American 345,748 207,598 (165,445) - 387,901
ACOF V American - 666,074 - - 666,074
ACOF VI American 2,624 70,637 - - 73,261
ASOF European 113,313 225,544 - - 338,857
EIF V European 54,086 8,506 - - 62,592
Other funds European - 11,298 - 368 11,666
Other funds American 175 25,996 - - 26,171
Total Private Equity
Group $ 570,968 $ 1,210,333 $ (171,637) $ 368 $ 1,610,032
128-------------------------------------------------------------------------------- Table of Contents Private Equity Group-Assets Under Management The tables below present rollforwards of AUM for thePrivate Equity Group ($ in millions): Corporate Private Special Infrastructure & Total Private Equity Opportunities Power Equity Group Balance at 12/31/2020$ 18,233 $ 5,721 $ 3,485$ 27,439 Net new par/equity commitments 1,554 4,876 1,769 8,199 Net new debt commitments - 200 - 200 Capital reductions (9) - - (9) Distributions (3,613) (670) (933) (5,216) Change in fund value 5,474 1,638 435 7,547 Balance at 12/31/2021$ 21,639 $ 11,765 $ 4,756$ 38,160 Average AUM(1)$ 20,375 $ 7,345 $ 3,889$ 31,609 Corporate Private Special Infrastructure & Total Private Equity Opportunities Power Equity Group Balance at 12/31/2019$ 18,406 $ 3,527 $ 3,233$ 25,166 Net new par/equity commitments 3,964 1,800 425 6,189 Capital reductions (11) (125) - (136) Distributions (4,096) (150) (164) (4,410) Redemptions (5) - - (5) Change in fund value (25) 669 (9) 635 Balance at 12/31/2020$ 18,233 $ 5,721 $ 3,485$ 27,439 Average AUM(1)$ 17,532 $ 4,753 $ 3,297$ 25,582
(1) Represents a five-point average of quarter-end balances for each period.
The components of our AUM for the
[[Image Removed: ares-20211231_g49.jpg]] [[Image Removed: ares-20211231_g50.jpg]]
AUM: $38.2 AUM: $27.4
FPAUM Non-fee paying(1) AUM not yet paying fees
(1) Includes
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Private Equity Group-Fee Paying AUM
The tables below present rollforwards of fee paying AUM for the Private Equity
Group ($ in millions):
Corporate Special Infrastructure & Total Private
Private Equity Opportunities Power Equity Group
Balance at 12/31/2020 $ 14,770 $ 2,723 $ 3,679 $ 21,172
Commitments 1,579 - 1,424 3,003
Subscriptions/deployment/increase in leverage 556 1,849 219 2,624
Distributions (1,623) (356) (650) (2,629)
Change in fund value 6 - (1) 5
Change in fee basis (2,815) - (175) (2,990)
Balance at 12/31/2021 $ 12,473 $ 4,216 $ 4,496 $ 21,185
Average FPAUM(1) $ 12,718 $ 3,388 $ 3,867 $ 19,973
Corporate Special Infrastructure & Total Private
Private Equity Opportunities Power Equity Group
Balance at 12/31/2019 $ 11,968 $ 1,720 $ 3,352 $ 17,040
Commitments 3,838 - 400 4,238
Subscriptions/deployment/increase in leverage 38 1,547 - 1,585
Distributions (584) (544) (68) (1,196)
Change in fund value (36) - - (36)
Change in fee basis (454) - (5) (459)
Balance at 12/31/2020 $ 14,770 $ 2,723 $ 3,679 $ 21,172
Average FPAUM(1) $ 12,357 $ 2,292 $ 3,436 $ 18,085 (1) Represents a five-point average of quarter-end balances for each period.
The charts below present FPAUM for the
[[Image Removed: ares-20211231_g51.jpg]][[Image Removed: ares-20211231_g52.jpg]]
FPAUM: $21.2 FPAUM: $21.2
Invested capital Capital commitments
130-------------------------------------------------------------------------------- Table of Contents Private Equity Group-Fund Performance Metrics as ofDecember 31, 2021
Three significant funds, ACOF V, ASOF and ACOF VI, collectively contributed
approximately 62% of the
The following table presents the performance data of our significant drawdown
funds as of
Capital MoIC IRR(%)
Original Capital Invested to Realized Unrealized
Fund Year of Inception AUM Commitments Date Value(1) Value(2) Total Value Gross(3) Net(4) Gross(5) Net(6)
Primary Investment Strategy
Funds Deploying Capital
ACOF V 2017 $ 9,285 $ 7,850
1.6x 1.4x 16.9 12.1 Corporate Private Equity
ASOF 2019 5,452 3,518 4,892 2,354 4,354 6,708 1.7x 1.5x 55.2 43.1 Special Opportunities
ACOF VI 2020 6,159 5,743 2,706 230 2,983 3,213 1.2x 1.1x N/A N/A Corporate Private Equity
(1)Realized value represents the sum of all cash dividends, interest income,
other fees and cash proceeds from realizations of interests in portfolio
investments. Realized value excludes any proceeds related to bridge financings.
(2)Unrealized value represents the fair market value of remaining investments.
Unrealized value does not take into account any bridge financings. There can be
no assurance that unrealized investments will be realized at the valuations
indicated.
(3)For the corporate private equity, the gross MoIC is calculated at the
investment-level and is based on the interests of all partners. The gross MoIC
is before giving effect to management fees, carried interest, as applicable, and
other expenses. For the special opportunities funds, the gross MoIC is
calculated at the fund-level and is based on the interests of the fee-paying
limited partners and if applicable, excludes interests attributable to the
non-fee paying limited partners and/or the general partner which does not pay
management fees or carried interest. The gross MoIC is before giving effect to
management fees, carried interest as applicable, and other expenses, but after
giving effect to credit facility interest expenses, as applicable. The funds may
utilize a credit facility during the investment period and for general cash
management purposes. Early in the life of a fund, the gross fund-level MoICs
would generally have been lower had such fund called capital from its limited
partners instead of utilizing the credit facility. The gross MoICs for the
corporate private equity and special opportunities funds are also calculated
before giving effect to any bridge financings. Inclusive of bridge financings,
the gross MoIC would be 1.5x for ACOF V, 1.1x for ACOF VI, and 1.6x for ASOF.
(4)The net MoIC for ASOF is calculated at the fund-level. The funds may utilize
a credit facility during the investment period and for general cash management
purposes. Early in the life of a fund, the net fund-level MoICs would generally
have been lower had such fund called capital from its limited partners instead
of utilizing the credit facility. The net MoIC for the corporate private equity
funds is calculated at the investment level. For all funds, the net MoIC is
based on the interests of the fee-paying limited partners and if applicable,
excludes interests attributable to the non-fee paying limited partners and/or
the general partner which does not pay management fees or performance fees. The
net MoIC is after giving effect to management fees and carried interest, other
expenses and credit facility interest expenses, as applicable.
(5)For the corporate private equity, the gross IRR is an annualized since
inception gross internal rate of return of cash flows to and from investments
and the residual value of the investments at the end of the measurement period.
Gross IRRs reflect returns to all partners. The cash flow dates used in the
gross IRR calculation are assumed to occur at month-end. The gross IRRs are
calculated before giving effect to management fees, carried interest, as
applicable, and other expenses. For the special opportunities funds the gross
IRR is an annualized since inception gross internal rate of return of cash flows
to and from the fund and the fund's residual value at the end of the measurement
period. Gross IRRs reflect returns to the fee-paying limited partners and, if
applicable, excludes interests attributable to the non-fee paying limited
partners and/or the general partner which does not pay management fees or
carried interest. The cash flow dates used in the gross IRR calculation are
based on the actual dates of the cash flows. The gross IRRs are calculated
before giving effect to management fees, carried interest, as applicable, and
other expenses, but after giving effect to credit facility interest expenses, as
applicable. The gross IRRs for the corporate private equity and special
opportunities funds are also calculated before giving effect to any bridge
financings. Inclusive of bridge financings, the gross IRRs would be 16.8% for
ACOF V, "N/A" for ACOF VI, and 53.7% for ASOF.
(6)The net IRR is an annualized since inception net internal rate of return of
cash flows to and from the fund and the fund's residual value at the end of the
measurement period. Net IRRs reflect returns to the fee-paying limited partners
and if applicable, exclude interests attributable to the non-fee paying limited
partners and/or the general partner which does not pay management fees or
carried interest. The cash flow dates used in the net IRR calculation are based
on the actual dates of the cash flows. The net IRRs are calculated after giving
effect to management fees, carried interest as applicable, and other expenses
and exclude commitments by the general partner and non-fee paying limited
partners who do not pay either management fees or carried interest. The funds
may utilize a credit facility during the investment period and for general cash
management purposes. Net fund-level IRRs would generally have been lower had
such fund called capital from its limited partners instead of utilizing the
credit facility.
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Real Estate Group-Year Ended
Fee Related Earnings:
The following table presents the components of theReal Estate Group's FRE ($ in thousands): Year ended December 31, Favorable (Unfavorable) 2021 2020 $ Change % Change Management fees$ 168,838 $ 97,680 $ 71,158 73% Fee related performance revenues 51,399 827 50,572 NM Other fees 12,982 974 12,008 NM Compensation and benefits (113,350) (53,511) (59,839) (112) General, administrative and other expenses (20,762) (12,251) (8,511) (69) Fee Related Earnings$ 99,107 $ 33,719 65,388 194 NM - Not Meaningful
Management Fees. The chart below presents
[[Image Removed: ares-20211231_g53.jpg]]
Management fees increased for the year ended December 31, 2021 compared to the
year ended December 31, 2020 primarily due to the Black Creek Acquisition,
additional commitments and one-time catch up fees. Excluding one-time catch up
fees of $7.0 million , management fees from Ares European Property Enhancement
Partners III, SCSp. ("EPEP III") increased by $11.5 million for the year ended
December 31, 2021 compared to the year ended December 31, 2020 . Excluding
one-time catch up fees of $2.9 million , management fees from AREOF III increased
by $3.8 million for the year ended December 31, 2021 compared to the year ended
December 31, 2020 . Management fees from real estate debt funds increased by
$6.9 million for the period primarily due to the continued fundraising and
subsequent deployment within these open-ended funds. Management fees included
$2.0 million of one-time fees for the year ended December 31, 2020 , driven by
our Real Estate Group completing the sale of its stake in a 40-property
pan-European logistics portfolio.
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The decrease in effective management fee rate for the year ended December 31,
2021 compared to the year ended December 31, 2020 was primarily due to
deployment in real estate debt funds with effective management fee rates below
0.75% and to certain funds previously managed by Black Creek with effective
management fee rates below 0.75%. The decrease in effective management fee rate
is partially offset by an increase in management fees from real estate equity
funds. Our most recent real estate equity funds pay a fee on committed capital
that increases once that capital is invested. As a result, our effective
management fee rate decreases immediately following capital raising and
increases as capital is subsequently deployed.
Fee Related Performance Revenues. Fee related performance revenues increased by
$50.6 million for the year ended December 31, 2021 compared to the year ended
December 31, 2020 . The increase was primarily attributable to fee related
performance revenues generated from the management contracts that we acquired
from the Black Creek Group , including AREIT and AIREIT. In connection with the
Black Creek Acquisition, we acquired the investment management contracts that
entitle us to 100% of the incentive fees earned from AREIT and AIREIT. The
purchase agreement stipulated that approximately 50% of the incentive fees
earned from AREIT and AIREIT for the year ended December 31, 2021 , representing
those fees generated prior to the completion of the Black Creek Acquisition, are
payable to the sellers. We presented the portion of the fees retained by us
during the year ended December 31, 2021 within fee related performance revenues,
which will increase to 100% in subsequent years.
Other Fees: Other fees increased by
Compensation and Benefits. Compensation and benefits increased by$59.8 million , or 112%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase in salaries and benefits was primarily driven by (i) fee related performance compensation of$30.2 million and (ii) compensation and benefit expenses of$16.8 million associated with the investment and investment support professionals hired as part of the Black Creek Acquisition. The increase in salaries and benefits was also driven by headcount growth from theU.S. real estate equity team and by higher incentive compensation attributable to improved operating performance and margin expansion from scaling our business. Average headcount for the year-to-date period increased by 68% to 170 investment and investment support professionals for the 2021 period from 101 professionals for the same period in 2020, including 60 professionals from the Black Creek Acquisition. General, Administrative and Other Expenses. General, administrative and other expenses increased by$8.5 million , or 69%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The change was principally driven by an increase in expenses of$3.4 million , primarily occupancy costs and information technology to support the expanding platform following the Black Creek Acquisition and travel, entertainment and marketing sponsorships expenses from theBlack Creek Group . The increase was also driven by a non-recurring integration costs of$3.1 million and by an increase in placement fees of$1.1 million , primarily associated with new commitments to AREOF III and a real estate debt fund. Realized Income: The following table presents the components of theReal Estate Group's RI ($ in thousands): Year ended December 31, Favorable (Unfavorable) 2021 2020 $ Change % Change Fee Related Earnings$ 99,107 $ 33,719 $ 65,388 194% Performance income-realized 95,270 61,446 33,824 55 Performance related compensation-realized (59,056) (38,975) (20,081) (52) Realized net performance income 36,214 22,471 13,743 61 Investment income-realized 4,687 3,146 1,541 49 Interest and other investment income-realized 5,947 4,056 1,891 47 Interest expense (5,508) (5,200) (308) (6) Realized net investment income 5,126 2,002 3,124 156 Realized Income$ 140,447 $ 58,192 82,255 141 133
-------------------------------------------------------------------------------- Table of Contents Realized net performance income for the year endedDecember 31, 2021 was primarily attributable to performance revenues from a former Black CreekU.S. real estate equity fund generated by market appreciation of industrial assets and tax distributions from real estate equity funds driven by asset sales and operating income. Realized net performance income and realized net investment income for the year endedDecember 31, 2021 was also attributable to the sale of multiple properties held inU.S. real estate equity funds. Realized net investment income for the year endedDecember 31, 2021 also included distributions from real estate debt vehicles, driven by operating income during the period. Realized net performance income and realized net investment income for the year endedDecember 31, 2020 was primarily attributable to the sale of a 40-property pan-European logistics portfolio held within multiple European real estate funds and to tax distributions from real estate equity funds. Realized net investment income for the year endedDecember 31, 2020 was also attributable to interest income generated inU.S. real estate equity and real estate debt funds.
Real Estate Group-Performance Income
The following table presents the accrued carried interest, also referred to as accrued performance income, and related performance compensation for theReal Estate Group . Accrued net performance income excludes net performance income realized but not yet received as of the reporting date ($ in thousands): As of December 31, 2021 2020 Accrued Accrued Accrued Net Accrued Accrued Accrued Net Performance Performance Performance Performance Performance Performance Income Compensation Income Income Compensation Income US VIII$ 88,112 $ 56,391 $ 31,721 $ 57,074 $ 36,527 $ 20,547 US IX 110,074 68,246 41,828 26,704 16,556 10,148 EF IV 70,600 42,361 28,239 55,829 33,498 22,331 EF V 69,946 48,962 20,984 - - - AREOF III 24,204 14,523 9,681 - - - Other real estate funds 105,845 65,596 40,249 61,962 38,535 23,427 Other fee generating funds(1) 3,777 - 3,777 2,786 - 2,786Total Real Estate Group $ 472,558 $ 296,079 $ 176,479 $ 204,355 $ 125,116 $ 79,239
(1)Relates to investment income from
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The following table presents the change in accrued performance income for the
Real Estate Group ($ in thousands):
As of December As of December
31, 2020 Activity during the period 31, 2021
Accrued Accrued
Waterfall Performance Change in Other Performance
Type Income Unrealized Realized Adjustments Income
Accrued Carried Interest US VIII European$ 57,074 $ 40,455 $ (9,417) $ -$ 88,112 US IX European 26,704 83,370 - - 110,074 EF IV American 55,829 14,771 - - 70,600 EF V American - 69,945 - 1 69,946 AREOF III European - 24,204 - - 24,204 Other real estate funds European 29,518 14,945 (7,587) -
36,876
Other real estate funds American 32,444 49,031 (12,598) 92 68,969 Other fee generating funds(1) European 426 17 93 (536) - Other fee generating funds(1) American 2,360 1,417 - - 3,777 Total accrued carried interest 204,355 298,155 (29,509) (443) 472,558 Other real estate funds Incentive - 65,761 (65,761) -
-
Total Real Estate Group $ 204,355 $ 363,916 $ (95,270) $ (443) $ 472,558
(1)Relates to investment income from
Real Estate Group-Assets Under Management
The tables below present rollforwards of AUM for theReal Estate Group ($ in millions): U.S. Real European Real Real Estate Total Real Estate Equity Estate Equity Debt Estate Group Balance at 12/31/2020$ 4,404 $ 4,811 $ 5,593 $ 14,808 Acquisitions 13,719 - - 13,719 Net new par/equity commitments 3,180 1,974 1,020 6,174 Net new debt commitments 1,134 203 3,334 4,671 Capital reductions - - (311) (311) Distributions (1,216) (612) (146) (1,974) Redemptions (63) - (7) (70) Change in fund value 3,519 451 176 4,146 Balance at 12/31/2021$ 24,677 $ 6,827 $ 9,659 $ 41,163 Average AUM(1)$ 12,157 $ 5,724 $ 7,984 $ 25,865 U.S. Real European Real Real Estate Total Real Estate Equity Estate Equity Debt Estate Group Balance at 12/31/2019$ 3,793 $ 4,588 $ 4,826 $ 13,207 Net new par/equity commitments 854 699 710 2,263 Net new debt commitments - - 437 437 Capital reductions - - (372) (372) Distributions (314) (820) (78) (1,212) Change in fund value 71 344 70 485 Balance at 12/31/2020$ 4,404 $ 4,811 $ 5,593 $ 14,808 Average AUM(1)$ 4,142 $ 4,639 $ 5,399 $ 14,180
(1) Represents a five-point average of quarter-end balances for each period.
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The components of our AUM for the Real Estate Group are presented below ($ in
billions):
[[Image Removed: ares-20211231_g54.jpg]] [[Image Removed: ares-20211231_g55.jpg]]
AUM: $41.2 AUM: $14.8
FPAUM Non-fee paying(1) AUM not yet paying fees
(1) Includes
Real Estate Group-Fee Paying AUM
The tables below present rollforwards of fee paying AUM for theReal Estate Group ($ in millions): U.S. Real European Real Real Estate Total Real Estate Equity Estate Equity Debt Estate Group Balance at 12/31/2020$ 3,659 $ 4,088 $ 2,505 $ 10,252 Acquisitions 7,155 - - 7,155 Commitments 2,463 1,053 204 3,720 Subscriptions/deployment/increase in leverage 1,555 346 1,149 3,050 Capital reductions - - (162) (162) Distributions (484) (332) (319) (1,135) Redemptions (63) - (23) (86) Change in fund value 1,539 (234) 162 1,467 Change in fee basis (137) (5) - (142) Balance at 12/31/2021$ 15,687 $ 4,916 $ 3,516 $ 24,119 Average FPAUM(1)$ 8,277 $ 4,461 $ 3,051 $ 15,789 U.S. Real European Real Real Estate Total Real Estate Equity Estate Equity Debt Estate Group Balance at 12/31/2019$ 2,635 $ 3,792 $ 1,536 $ 7,963 Commitments 1,056 606 73 1,735 Subscriptions/deployment/increase in leverage 118 184 920 1,222 Capital reductions - (18) (33) (51) Distributions (112) (331) (77) (520) Change in fund value - 241 86 327 Change in fee basis (38) (386) - (424) Balance at 12/31/2020$ 3,659 $ 4,088 $ 2,505 $ 10,252 Average FPAUM(1)$ 3,337 $ 3,961 $ 1,941 $ 9,239
(1) Represents a five-point average of quarter-end balances for each period.
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The charts below present FPAUM for the Real Estate Group by its fee basis ($ in
billions):
[[Image Removed: ares-20211231_g56.jpg]] [[Image Removed: ares-20211231_g57.jpg]]
FPAUM: $24.1 FPAUM: $10.2
Market value(1) Capital commitments Invested capital/other(2)
(1)Amounts represent FPAUM from funds that primarily invest in illiquid strategies. The underlying investments held in these funds are generally subject to less market volatility than investments held in liquid strategies. (2)Other consists of ACRE's FPAUM, which is based on ACRE's stockholders' equity.
Real Estate Group-Fund Performance Metrics as of
Four significant funds, EF V, AREIT, AIREIT and an open-ended industrial real
estate fund, collectively contributed approximately 37% of the
The following table presents the performance data for our significant funds that are not drawdown funds in theReal Estate Group as ofDecember 31, 2021 ($ in millions): Returns(%)(1) Year-To-Date Since Inception(2) Primary Fund Year of Inception AUM Gross Net Gross Investment Strategy Net Open-ended industrial real estate 2017$ 5,063 43.2 35.9 28.6 23.5U.S. Real Estate fund(3) Equity 2012 3,777 N/A 13.8 N/A 7.4U.S. Real Estate AREIT(4) Equity 2017 5,183 N/A 29.7 N/A 11.3U.S. Real Estate AIREIT(5) Equity (1)Returns are time-weighted rates of return and include the reinvestment of income and other earnings from securities or other investments and reflect the deduction of all trading expenses. (2)Since inception returns are annualized. (3)Gross returns do not reflect the deduction of management fees, incentive fees, as applicable, or other expenses. Net returns are calculated by subtracting the applicable management fees, incentive fees, as applicable and other expenses from the gross returns on a quarterly basis. (4)Returns are shown for institutional share class. Net returns are calculated using the fund's NAV and assume distributions are reinvested at the NAV on the date of distribution. The inception date used in the calculation of the since inception return is the date in which the first shares of common stock were sold after converting to a NAV-based REIT. Additional information related to AREIT can be found in its financial statements filed with theSEC , which are not part of this report. (5)Returns are shown for institutional share class. Net returns are calculated using the fund's NAV and assume distributions are reinvested at the NAV on the date of distribution. Additional information related to AIREIT can be found in its financial statements filed with theSEC , which are not part of this report. 137
-------------------------------------------------------------------------------- Table of Contents The following table presents the performance data of our significant drawdown fund as ofDecember 31, 2021 ($ in millions): Capital MoIC IRR(%) Original Capital Invested to Realized Unrealized Fund Year of Inception AUM Commitments Date Value(1) Value(2) Total Value Gross(3) Net(4) Gross(5) Net(6) Primary Investment StrategyFund Deploying Capital EF V(7) 2018$ 2,282 $ 1,968 $ 1,105 $ 411 $ 1,178 $ 1,589 1.4x 1.2x 23.4 15.8 European Real Estate Equity (1)Realized value includes distributions of operating income, sales and financing proceeds received. (2)Unrealized value represents the fair market value of remaining investments. Unrealized value does not take into account any bridge financings. There can be no assurance that unrealized investments will be realized at the valuations indicated. (3)The gross MoIC is calculated at the investment level and is based on the interests of all partners. The gross MoIC for all funds is before giving effect to management fees, carried interest and other expenses, as applicable. (4)The net MoIC is calculated at the fund-level and is based on the interests of the fee-paying partners and, if applicable, excludes interests attributable to the non fee-paying partners and/or the general partner which does not pay management fees, carried interest or has such fees rebated outside of the fund. The net MoIC is after giving effect to management fees, carried interest as applicable and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. Early in the life of a fund, the net fund-level MoICs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (5)The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from investments and the residual value of the investments at the end of the measurement period. Gross IRRs reflect returns to all partners. Cash flows used in the gross IRR calculation are assumed to occur at quarter-end. The gross IRRs are calculated before giving effect to management fees, carried interest and other expenses, as applicable. (6)The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund's residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying partners and, if applicable, exclude interests attributable to the non fee-paying partners and/or the general partner which does not pay management fees or carried interest or has such fees rebated outside of the fund. The cash flow dates used in the net IRR calculation are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees, carried interest as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. Net fund-level IRRs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (7)EF V is made up of two parallel funds, one denominated inU.S. dollars and one denominated in Euros. The gross and net IRR and MoIC presented in the table are for the Euro denominated parallel fund. The gross and net MoIC and IRR presented in the chart is for the Euro denominated parallel fund. The gross and net MoIC for theU.S. Dollar denominated parallel fund are 1.4x and 1.3x, respectively. The gross and net IRR for theU.S. Dollar denominated parallel fund are 23.4% and 17.0%, respectively. Original capital commitments are converted toU.S. dollars at the prevailing exchange rate at the time of fund's closing. All other values for EF V are for the combined fund and are converted toU.S. dollars at the prevailing quarter-end exchange rate. 138 -------------------------------------------------------------------------------- Table of Contents Secondary Solutions Group-Year EndedDecember 31, 2021 The following table presents the components of theSecondary Solutions Group's FRE and RI ($ in thousands): For the period June 2, 2021 through December 31, 2021 Management fees $ 97,945 Compensation and benefits (25,215) General, administrative and other expenses
(6,862)
Fee Related Earnings $
65,868
Realized net performance income
21
Realized net investment income 1,444 Realized Income $ 67,333
Secondary Solutions Group-Management Fees
The activity for the period presented represents management fees recognized since the closing of the Landmark Acquisition onJune 2, 2021 . The effective management fee rate for the period fromJune 2, 2021 throughDecember 31, 2021 was 0.90%.
Secondary Solutions Group-Performance Income
In theSecondary Solutions Group , we are entitled to carried interest from the funds with closings subsequent to the completion of the Landmark Acquisition and to carried interest we acquired through the purchase of an ownership interest in certain Landmark GP Entities. The following table presents accrued carried interest, also referred to as accrued performance income, and related performance compensation for theSecondary Solutions Group ($ in thousands): As of December 31, 2021 Accrued Accrued Accrued Net Performance Performance Performance Income Compensation Income LEP XVI$ 159,490 $ 135,566 $ 23,924 LREP VIII 80,772 68,656 12,116 Other fee generating funds 58,013 49,108 8,905Total Secondary Solutions Group $ 298,275 $ 253,379 $ 44,896
The following table presents the change in accrued carried interest for the
Opening balance
as of June 2, As of December
2021 Activity during the period 31, 2021
Accrued
Accrued Carried Change in Carried
Waterfall Type Interest Unrealized Realized Interest
LEP XVI European $ 37,281 $ 122,209 $ - $ 159,490
LREP VIII European 24,398 56,374 - 80,772
Other fee generating funds European 15,146 42,867 - 58,013
Total Secondary Solutions Group $ 76,825 $ 221,450 $ - $ 298,275
139-------------------------------------------------------------------------------- Table of Contents Secondary Solutions Group-Assets Under Management The table below presents the rollforward of AUM for theSecondary Solutions Group ($ in millions): Total Secondary Private Equity Real Estate Infrastructure Solutions Secondaries Secondaries Secondaries Group Balance at 12/31/2020 $ - $ - $ - $ - Acquisitions 12,275 5,641 1,597 19,513 Net new par/equity commitments 1,571 760 - 2,331 Distributions (1,860) (421) (25) (2,306) Change in fund value 1,847 682 52 2,581 Balance at 12/31/2021$ 13,833 $ 6,662 $ 1,624$ 22,119 Average AUM(1)$ 13,021 $ 5,840 $ 1,602$ 20,463
(1) Represents the average calculated using AUM on the date of the Landmark Acquisition and on each subsequent quarter-end.
The components of our AUM for the
[[Image Removed: ares-20211231_g58.jpg]]
AUM: $22.1
FPAUM Non-fee paying(1) AUM not yet paying fees
(1) Includes
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Secondary Solutions Group-Fee Paying AUM
The table below presents the rollforward of fee paying AUM for the
Private Equity Real Estate Infrastructure Total Secondary
Secondaries Secondaries Secondaries Solutions Group
Balance at 12/31/2020 $ - $ - $ - $ -
Acquisitions 10,740 4,928 1,171 16,839
Commitments 813 539 - 1,352
Subscriptions/deployment/increase in leverage 95 11 10 116
Distributions (142) (114) (8) (264)
Change in fund value 191 56 15 262
Change in fee basis 90 (31) - 59
Balance at 12/31/2021 $ 11,787 $ 5,389 $ 1,188 $ 18,364
Average FPAUM(1) $ 11,117 $ 5,034 $ 1,178 $ 17,329 (1) Represents the average calculated using FPAUM on the date of the Landmark Acquisition and on each subsequent quarter-end.
The chart below presents FPAUM for the
[[Image Removed: ares-20211231_g59.jpg]]
FPAUM: $18.3
Capital commitments Market value(1) Investedcapital/other
(1)Amounts represent FPAUM from funds that primarily invest in illiquid strategies. The underlying investments held in these funds are generally subject to less market volatility than investments held in liquid strategies.
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Secondary Solutions Group-Fund Performance Metrics as of December 31, 2021
Secondary Solutions includes three significant funds, Landmark Equity Partners
XV, L.P. ("LEP XV"), LEP XVI and LREP VIII, that collectively contributed
approximately 64% of the Secondary Solutions Group's management fees for the
year ended December 31, 2021 .
The following table presents the performance data of our significant drawdown
funds as of
Capital MoIC IRR(%)
Original Capital Invested to Realized Unrealized
Fund Year of Inception AUM Commitments Date Value(1) Value(2) Total Value Gross(3) Net(4) Gross(5) Net(6) Primary Investment Strategy Fund Harvesting Investments LEP XV(7)
2013 $ 2,183 $
3,250
$ 3,873 1.6x 1.5x 20.4 14.9 Private Equity SecondariesFunds Deploying Capital LEP XVI (7) 2016 5,712 4,896 2,211 667 3,154 3,821 1.9x 1.7x 67.5 43.9 Private Equity Secondaries LREP VIII(7) 2016 3,706 3,300 1,581 837 1,383 2,220 1.6x 1.4x 30.5 20.8 Real Estate Secondaries * For all funds in theSecondary Solutions Group , returns are calculated from results that are generally reported on a three month lag and may not include the impact of economic and market activities occurring in the current reporting period. (1)Realized value represents the sum of all cash distributions to all limited partners and if applicable, exclude tax and incentive distributions made to the general partner. (2)Unrealized value represents the limited partners' share of fund's NAV reduced by the accrued incentive allocation, if applicable. There can be no assurance that unrealized values will be realized at the valuations indicated. (3)The gross MoIC is calculated at the fund-level and is based on the interests of all partners. If applicable, limiting the gross MoIC to exclude interests attributable to the non-fee paying limited partners and/or the general partner who does not pay management fees or carried interest would have no material impact on the result. The gross MoIC is before giving effect to management fees, carried interest as applicable and other expenses, but after giving effect to credit facility interest expenses, as applicable. The funds may utilize a short-term credit facility for general cash management purposes, as well as a long-term credit facility as permitted by the respective fund's governing documentation. The gross fund-level MoIC would have generally been lower had such fund called capital from its partners instead of utilizing the credit facility. (4)The net MoIC is calculated at the fund-level and is based on the interests of the fee-paying limited partners and if applicable, excludes those interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The net MoIC is after giving effect to management fees and other expenses, carried interest and credit facility interest expense, as applicable. The funds may utilize a short-term credit facility for general cash management purposes, as well as a long-term credit facility as permitted by the respective fund's governing documentation. The net fund-level MoICs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (5)The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from the fund and the fund's residual value at the end of the measurement period. Gross IRR reflects returns to all partners. If applicable, limiting the gross IRR to exclude interests attributable to the non-fee paying limited partners and/or the general partner who does not pay management fees or carried interest would have no material impact on the result. The cash flow dates used in the gross IRR calculation are based on the actual dates of the cash flows. The gross IRRs are calculated before giving effect to management fees, carried interest, as applicable, and other expenses, but after giving effect to credit facility interest expenses, as applicable. The funds may utilize a short-term credit facility for general cash management purposes, as well as a long-term credit facility as permitted by the respective fund's governing documents. The gross fund-level IRR would generally have been lower had such fund called capital from its partners instead of utilizing the credit facility. (6)The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund's residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying limited partners and, if applicable, exclude interests attributable to the non-fee paying limited partners and/or the general partner who does not pay management fees or carried interest. The cash flow dates used in the net IRR calculations are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees and other expenses, carried interest and credit facility interest expenses, as applicable. The funds may utilize a short-term credit facility for general cash management purposes, as well as a long-term credit facility as permitted by the respective fund's governing documents. Net fund-level IRRs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (7)The results of each fund is presented on a combined basis with the affiliated parallel funds or accounts, given that the investments are substantially the same. 142
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Strategic Initiatives-Year Ended
Fee Related Earnings:
The following table presents the components of Strategic Initiatives' FRE ($ in
thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Management fees $ 66,604 $ 26,587 $ 40,017 151%
Other fees 82 152 (70) (46)
Compensation and benefits (26,673) (6,442) (20,231) NM
General, administrative and other expenses (7,778) (2,926) (4,852) (166)
Fee Related Earnings $ 32,235 $ 17,371 14,864 86
NM - Not Meaningful
Management Fees. The chart below presents Strategic Initiatives management fees and effective management fee rates ($ in millions):
[[Image Removed: ares-20211231_g60.jpg]]
Management fees increased for the year ended December 31, 2021 compared to the
year ended December 31, 2020 primarily due to the full annual impact of the SSG
Acquisition which closed at the beginning of the third quarter of 2020. In
addition, the increase was driven by the acquisition of Aspida Life Re that
occurred late in the fourth quarter of 2020 and by $3.6 million as a result of
additional commitments to SLO III .
The decrease in effective management fee rate for the year ended December 31,
2021 compared to the year ended December 31, 2020 was primarily driven by the
acquisition of Aspida Life Re that occurred in the fourth quarter of 2020. The
insurance strategy has an effective management fee rate of 0.30% and is driving
the decrease in the overall effective management fee rate.
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Compensation and Benefits. Compensation and benefits increased by $20.2 million
to $26.7 million for the year ended December 31, 2021 compared to the year ended
December 31, 2020 . The increase in salaries and benefits for the year ended
December 31, 2021 when compared to the same period in 2020 was primarily driven
by (i) the full impact of the SSG Acquisition which closed at the beginning of
the third quarter of 2020 and (ii) the insurance platform which has been
included within Strategic Initiatives subsequent to the acquisition of Aspida
Life Re in the fourth quarter of 2020. The increase in salaries and benefits for
the year ended December 31, 2021 also included $1.6 million of non-recurring
compensation expense.
The increase in salaries and benefits for the year ended December 31, 2021 was
also driven by headcount growth across the Asian special situations, Asian
secured lending and insurance strategies. Average headcount for the year-to-date
period increased by 167% to 48 investment and investment support professionals
for the 2021 period from 18 professionals for the same period in 2020.
General, Administrative and Other Expenses. General, administrative and other
expenses increased by $4.9 million , or 166%, for the year ended December 31,
2021 compared to the year ended December 31, 2020 . The increase for the year
ended December 31, 2021 compared to the year ended December 31, 2020 was due to
the full impact of the SSG Acquisition which closed at the beginning of the
third quarter of 2020.
Realized Income:
The following table presents the components of the Strategic Initiatives RI ($
in thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Fee Related Earnings $ 32,235 $ 17,371 $ 14,864 86%
Performance income-realized 4 - 4 NM
Performance related compensation-realized (2) - (2) NM
Realized net performance income 2 - 2 NM
Investment income-realized 13 13 - -
Interest and other investment income (loss)-realized 3,948 996 2,952 296
Interest expense (13,031) (1,465) (11,566) NM
Realized net investment loss (9,070) (456) (8,614) NM
Realized Income $ 23,167 $ 16,915 6,252 37
NM - Not Meaningful
Realized net investment loss for the years ended December 31, 2021 and 2020 was
primarily attributable to interest expense allocations based on the cost basis
of investments. The activity for the year ended December 31, 2021 also included
realized net investment income attributable to distributions from an investment
vehicle that manages a portfolio of non-performing loans.
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Strategic Initiatives-Assets Under Management
The tables below present rollforwards of AUM for the Strategic Initiatives ($ in
millions):
Asian Special Asian Secured Total Strategic
Situations Lending Insurance SPACs Initiatives
Balance at 12/31/2020 $ 5,154 $ 1,864 $ 2,243 $ - $ 9,261
Net new par/equity commitments(1) 818 620 (295) 1,000 2,143
Distributions (93) (12) (130) - (235)
Change in fund value 360 (16) 110 - 454
Balance at 12/31/2021 $ 6,239 $ 2,456 $ 1,928 $ 1,000 $ 11,623
Average AUM(2) $ 5,382 $ 2,229 $ 1,986 $ 800 $ 10,397
Asian Special Asian Secured Total Strategic
Situations Lending Insurance SPACs Initiatives
Balance at 12/31/2019 $ - $ - $ - $ - $ -
Acquisitions 5,220 1,651 2,243 - 9,114
Net new par/equity commitments - 205 - - 205
Distributions (207) - - - (207)
Change in fund value 141 8 - - 149
Balance at 12/31/2020 $ 5,154 $ 1,864 $ 2,243 $ - $ 9,261
Average AUM(3) $ 5,157 $ 1,786 $ 2,243 $ - $ 9,186
(1) Insurance includes the reversal of prior period commitments that were reallocated to other investment strategies and are sub-advised by Ares
vehicles.
(2) Represents a five-point average of quarter-end balances for each period.
(3) Represents average calculated using Ares SSG's AUM on the date of the SSG Acquisition and on each subsequent quarter-end, and the average using
Ares Insurance
Solutions' AUM on the date of the acquisition of Aspida Life Re and the subsequent quarter-end
The components of our AUM for the Strategic Initiatives are presented below ($ in billions):
[[Image Removed: ares-20211231_g61.jpg]] [[Image Removed: ares-20211231_g62.jpg]]
AUM: $11.6 AUM: $9.3
FPAUM AUM not yet paying fees Non-fee paying(1)
(1) Includes
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Strategic Initiatives-Fee Paying AUM
The tables below present rollforwards of fee paying AUM for the Strategic Initiatives ($ in millions):
Asian Special Asian Secured Total Strategic
Situations Lending Insurance Initiatives
Balance at 12/31/2020 $ 3,614 $ 739 $ 2,243 $ 6,596
Commitments - - (130) (130)
Subscriptions/deployment/increase in leverage 1,070 697 (90) 1,677
Capital reductions (259) (121) - (380)
Distributions (820) (181) (150) (1,151)
Change in fund value - (19) 194 175
Balance at 12/31/2021 $ 3,605 $ 1,115 $ 2,067 $ 6,787
Average FPAUM(1) $ 3,659 $ 961 $ 2,084 $ 6,704
Asian Special Asian Secured Total Strategic
Situations Lending Insurance Initiatives
Balance at 12/31/2019 $ - $ - $ - $ -
Acquisition 3,615 568 2,243 6,426
Subscriptions/deployment/increase in leverage 346 370 - 716
Capital reductions (25) - - (25)
Distributions (273) (199) - (472)
Change in fee basis (49) - - (49)
Balance at 12/31/2020 $ 3,614 $ 739 $ 2,243 $ 6,596
Average FPAUM(2) $ 3,600 $ 675 $ 2,243 $ 6,518
(1) Represents a five-point average of quarter-end balances for each period.
(2) Represents average calculated using Ares SSG's FPAUM on the date of the SSG Acquisition and on each subsequent quarter-end, and
the average using Ares Insurance
Solutions' FPAUM on the date of the acquisition of Aspida Life Re and the subsequent quarter-end
The charts below present FPAUM for the Strategic Initiatives by its fee basis ($ in billions):
[[Image Removed: ares-20211231_g63.jpg]] [[Image Removed: ares-20211231_g64.jpg]]
FPAUM: $6.8 FPAUM: $6.6
Market value Capital commitments Invested capital/other
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Strategic Initiatives-Fund Performance Metrics as of
Strategic Initiatives includes one significant fund,SSG Capital Partners V, L.P. ("SSG Fund V"), that contributed approximately 35% of the management fees reported in Strategic Initiatives for the year endedDecember 31, 2021 .
The following table presents the performance data of our significant drawdown
fund as of
Capital MoIC IRR(%)
Original Capital Invested to Realized Unrealized
Fund Year of Inception AUM Commitments Date Value(1) Value(2) Total Value Gross(3) Net(4) Gross(5) Net(6) Primary Investment Strategy
Fund Deploying Capital
SSG Fund V 2018 $ 2,121 $ 1,878 1,939 1.2x 1.1x 41.7 24.4 Asian Special Situations (1)Realized value represents the sum of all cash distributions to all partners and if applicable, exclude tax and incentive distributions made to the general partner. (2)Unrealized value represents the fund's NAV reduced by the accrued incentive allocation, if applicable. There can be no assurance that unrealized values will be realized at the valuations indicated. (3)The gross MoIC is calculated at the fund-level and is based on the interests of the fee-paying limited partners and if applicable, excludes interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The gross MoIC is before giving effect to management fees, carried interest as applicable and other expenses, but after giving effect to credit facility interest expenses, as applicable. The funds may utilize a credit facility during the investment period and for general cash management purposes. Early in the life of a fund, the gross fund-level MoICs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (4)The net MoIC is calculated at the fund-level and is based on the interests of the fee-paying limited partners and if applicable, excludes those interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The net MoIC is after giving effect to management fees and other expenses, carried interest and credit facility interest expense, as applicable. The funds may utilize a credit facility during the investment period and for general cash management purposes. Early in the life of a fund, the net fund-level MoICs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (5)The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from the fund and the fund's residual value at the end of the measurement period. Gross IRR reflects returns to the fee-paying limited partners and, if applicable, excludes interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The cash flow dates used in the gross IRR calculation are based on the actual dates of the cash flows. The gross IRRs are calculated before giving effect to management fees, carried interest, as applicable, and other expenses, but after giving effect to credit facility interest expenses, as applicable. The funds may utilize a credit facility during the investment period and for general cash management purposes. The gross fund-level IRR would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (6)The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund's residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying limited partners and, if applicable, exclude interests attributable to the non-fee paying limited partners and/or the general partner who does not pay management fees or carried interest. The cash flow dates used in the net IRR calculations are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees and other expenses, carried interest and credit facility interest expenses, as applicable. The funds may utilize a credit facility during the investment period and for general cash management purposes. Net fund-level IRRs would generally have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.
Operations Management Group-Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Fee Related Earnings:
The following table presents the components of the Operations Management Group's
FRE ($ in thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Other fees $ 8,478 $ - $ 8,478 NM
Compensation and benefits (226,725) (155,979) $ (70,746) (45)
General, administrative and other expenses (100,645) (80,778) (19,867) (25)
Fee Related Earnings $ (318,892) $ (236,757) (82,135) (35)
NM - Not Meaningful
Other Fees. Other fees of $8.5 million for the year ended December 31, 2021
represents fees earned through AWMS primarily for the sale and distribution of
our non-traded REITs, net of amounts reallowed to participating broker-dealers.
The fees earned include trade-based fees and dealer manager fees, as well as
distribution-related fees that we earn following the Black Creek Acquisition.
Compensation and Benefits. Compensation and benefits increased by $70.7 million,
or 45%, for the year ended December 31, 2021 compared to the year ended December
31, 2020. The increase was primarily driven by (i) the headcount growth from the
Black Creek Acquisition and Landmark Acquisition, (ii) the expansion of our
strategy and relationship management teams to support global fundraising, and
(iii) the expansion of our business operations teams to support the growth
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of our business and other strategic initiatives. In connection with the sale and
distribution of shares in our non-traded REITs, we incurred employee commission
expense of $10.2 million during the year ended December 31, 2021. The increase
in compensation and benefits was further driven by the increase in payroll
related taxes of $6.0 million for the year ended December 31, 2021 compared to
the year ended December 31, 2020, primarily attributable to the vesting of
non-recurring equity compensation awards.
Average headcount for the year-to-date period increased by 33% to 925 operations
management professionals from 695 professionals for the same period in 2020.
Average headcount for our operations management professionals increased by 122
professionals from the Landmark Acquisition and Black Creek Acquisition,
including the increase from AWMS. Average headcount also increased by 46 to
support the expansion of our team in India and by 25 in connection with the SSG
Acquisition.
General, Administrative and Other Expenses. General, administrative and other
expenses increased by $19.9 million, or 25%, for the year ended December 31,
2021 compared to the year ended December 31, 2020. The change included an
increase in general, administrative and other expenses of $4.2 million from the
Landmark Acquisition and Black Creek Acquisition for the year ended December 31,
2021. The impact from the acquisitions has been excluded from the discussion
below.
Certain expenses have also increased during the current period, including
occupancy costs to support our growing headcount and information services and
information technology to support the expansion of our business, despite the
temporary cost savings recognized with our transition to a modified remote
working environment. Collectively, these expenses increased by $4.5 million for
the year ended December 31, 2021 when compared to the same period in 2020. The
increase was also driven by higher professional service fees, recruiting fees
and insurance costs of $5.0 million for the year ended December 31, 2021,
largely to support the expanding platform. The year ended December 31, 2021 also
included a $3.0 million charitable contribution to the AltFinance program that
launched in the second quarter of 2021. AltFinance is an initiative designed to
diversify the alternative investment industry by attracting, training and
providing career opportunities for college students attending historically black
colleges and universities, and we expect to make annual charitable contributions
of $3.0 million for at least the next 10 years to the initiative.
There continue to be positive developments in the recovery from the COVID-19
pandemic that have reduced restrictions on travel and gathering. Those operating
expenses that were impacted by the pandemic, particularly marketing sponsorships
and events increased by $0.4 million for the year ended December 31, 2021 when
compared to the same period in 2020.
Realized Income:
The following table presents the components of the OMG's RI ($ in thousands):
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Fee Related Earnings $ (318,892) $ (236,757) $ (82,135) (35)%
Investment loss-realized - (5,698) 5,698 100
Interest and other investment income
(loss)-realized 226 (739) 965 NM
Interest expense (536) (1,335) 799 60
Realized net investment loss (310) (7,772) 7,462 96
Realized Income $ (319,202) $ (244,529) (74,673) (31)
NM - Not Meaningful
Realized net investment loss for the year ended December 31, 2020 was primarily driven by a realized loss associated with the sale of a non-core insurance-related investment.
Liquidity and Capital Resources
Management assesses liquidity in terms of our ability to generate cash to fund
operating, investing and financing activities. Management believes that the
Company is well-positioned and its liquidity will continue to be sufficient for
its foreseeable working capital needs, contractual obligations, dividend
payments, pending acquisitions and strategic initiatives. For further discussion
regarding the potential risks and impact of the COVID-19 pandemic on the
Company, see "Item 1A. Risk Factors" in this Annual Report on Form 10-K.
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Sources and Uses of Liquidity
Our sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash
from operations, including management fees and fee related performance revenues,
which are collected monthly, quarterly or semi-annually, and net realized
performance income, which may be unpredictable as to amount and timing, (4) fund
distributions related to our investments that are unpredictable as to amount and
timing and (5) net borrowing from the Credit Facility. As of December 31, 2021,
our cash and cash equivalents were $343.7 million, and we had $415.0 million
borrowings outstanding under our Credit Facility. Our ability to draw from the
Credit Facility is subject to a leverage and other covenants. We remain in
compliance with all covenants as of December 31, 2021. We believe that these
sources of liquidity will be sufficient to fund our working capital requirements
and to meet our commitments in the ordinary course of business and under the
current market conditions for the foreseeable future. Cash flows from management
fees may be impacted by a slowdown or declines in deployment, declines or write
downs in valuations, or a slowdown or negatively impacted fundraising. In
addition, management fees may be subject to deferral and fee related performance
revenues may be subject to hold backs. Declines or delays and transaction
activity may impact our fund distributions and net realized performance income
which could adversely impact our cash flows and liquidity. Market conditions may
make it difficult to extend the maturity or refinance our existing indebtedness
or obtain new indebtedness with similar terms.
We expect that our primary liquidity needs will continue to be to (1) provide
capital to facilitate the growth of our existing investment management
businesses, (2) fund our investment commitments, (3) provide capital to
facilitate our expansion into businesses that are complementary to our existing
investment management businesses as well as other strategic growth initiatives,
(4) pay operating expenses, including cash compensation to our employees, and
make payments under the tax receivable agreement ("TRA"), (5) fund capital
expenditures, (6) service our debt, (7) pay income taxes, (8) make dividend
payments to our Class A and non-voting common stockholders in accordance with
our dividend policy and (9) pay distributions to AOG unitholders.
In the normal course of business, we expect to pay dividends to our Class A and
non-voting common stockholders that are aligned with our expected fee related
earnings after an allocation of current taxes paid. For the purposes of
determining this amount, we allocate the current taxes paid to FRE and to
realized incentive and investment income in a manner that may be disproportional
to earnings generated by these metrics and the actual taxes paid on these
metrics should they be considered separately. Additionally, our methodology uses
the tax benefits from certain expenses that are not included in these non-GAAP
metrics, such as equity-based compensation from the vesting of restricted units
and the exercise of stock options and from the amortization of intangible
assets, among others. We allocate the taxes by multiplying the statutory tax
rate currently in effect by our realized performance and net investment income
and removing this amount from total current taxes. This remainder is the amount
that we allocate to FRE. We use this method to allocate the current provision
for income taxes to approximate the amount of cash that is available to pay
dividends to our shareholders. If cash flows from operations were insufficient
to fund dividends over a sustained period of time, we expect that we would
suspend or reduce paying such dividends. In addition, there is no assurance that
dividends would continue at the current levels or at all.
The final dividend was paid to our Series A Preferred stockholders in connection with the redemption on June 30, 2021.
Our ability to obtain debt financing and complete stock offerings provides us
with additional sources of liquidity. For further discussion of financing
transactions occurring in the current period, see "Cash Flows" within this
section and "Note 8. Debt" and "Note 15. Equity and Redeemable Interest" to our
audited consolidated financial statements included in this Annual Report on Form
10-K.
Our consolidated financial statements reflect the cash flows of our operating
businesses as well as those of our Consolidated Funds. The assets of our
Consolidated Funds, on a gross basis, are significantly larger than the assets
of our operating businesses and therefore have a substantial effect on our
reported cash flows. The primary cash flow activities of our Consolidated Funds
include: (1) raising capital from third-party investors, which is reflected as
non-controlling interests of our Consolidated Funds, (2) financing certain
investments by issuing debt, (3) purchasing and selling investment securities,
(4) generating cash through the realization of certain investments,
(5) collecting interest and dividend income and (6) distributing cash to
investors. Our Consolidated Funds are generally accounted for as investment
companies under GAAP; therefore, the character and classification of all
Consolidated Fund transactions are presented as cash flows from operations.
Liquidity available at our Consolidated Funds is typically not available for
corporate liquidity needs, and debt of the Consolidated Funds is non-recourse to
the Company except to the extent of the Company's investment in the fund.
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Cash Flows
We consolidate funds where we are deemed to hold a controlling interest. The
Consolidated Funds are not necessarily the same entities in each year presented
due to changes in ownership, changes in limited partners' rights and the
creation or termination of funds. The consolidation of these funds had no effect
on cash flows attributable to us for the periods presented. As such, we evaluate
the activity of the Consolidated Funds and the eliminations resulting from
consolidation separately. The following tables and discussion summarize our
consolidated statements of cash flows by activities attributable to the Company
and to our Consolidated Funds. For more details on the activity of the Company
and Consolidated Funds, refer to "Note 17. Consolidation" to our audited
consolidated financial statements included in this Annual Report on Form 10-K.
Year ended December 31,
($ in thousands) 2021 2020
Net cash provided by operating activities $ 300,755 $ 281,204
Net cash used in the Consolidated Funds' operating activities, net of eliminations
(2,896,800) (706,863)
Net cash used in operating activities (2,596,045) (425,659)
Net cash used in the Company's investing activities (1,084,633) (136,764)
Net cash provided by the Company's financing activities 600,698 239,736
Net cash provided by the Consolidated Funds' financing activities, net of eliminations
2,902,927 704,159
Net cash provided by financing activities 3,503,625 943,895
Effect of exchange rate changes (19,104) 19,956
Net change in cash and cash equivalents $ (196,157) $ 401,428
Operating Activities
In the table below cash flows from operations has been summarized to present (i)
cash generated from our core operating activities, primarily consisting of
profits generated principally from management fees and fee related performance
revenues after covering for operating expenses and fee related performance
compensation, (ii) net realized performance income and (iii) net cash from
investment related activities including purchases, sales and net realized
investment income. We generated meaningful cash flow from operations in each
period presented. Although cash generated from our core operating activities
increased when compared to the prior year, net purchases associated with our
investment portfolio, which represent a use of cash, also increased when
compared to the prior year period.
Year ended December 31, Favorable (Unfavorable)
2021 2020 $ Change % Change
Core operating activities $ 537,141 $ 322,341 $ 214,800 67%
Net realized performance income 19,421 95,701 (76,280) (80)
Net cash used in investment related
activities (255,806) (136,841) (118,965) 87
Net cash provided by operating activities $ 300,756 $ 281,201 19,555 7
Net cash used in the Consolidated Funds' operating activities continues to be
principally attributable to net purchases of investment securities by recently
launched funds during both years.
Our working capital needs are generally rising to support the growth of our
business, while the capital requirements needed to support fund-related
activities vary based upon the specific investment activities being conducted
during such period.
Investing Activities
Year ended December 31,
2021 2020Purchase of furniture, equipment and leasehold improvements, net of disposals
$ (27,226) $ (15,942)
Acquisitions, net of cash acquired (1,057,407) (120,822)
Net cash used in investing activities $ (1,084,633) $ (136,764)
Net cash used in the Company's investing activities was principally composed of
cash used to complete the Landmark Acquisition and Black Creek Acquisition in
the current year and cash used to complete the SSG Acquisition and to purchase
CLO collateral management agreements from Crestline Denali Capital LLC in the
prior year. We also used cash to purchase furniture, fixtures, equipment and
leasehold improvements during both years to support the growth in our staffing
levels and expanding our global presence.
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Financing Activities
Year ended December 31,
2021 2020Net proceeds from issuance of Class A and non-voting common stock $ 827,430
$ 383,154
Net borrowings of Credit Facility 415,000 (70,000)
Proceeds from issuance of senior and subordinated notes 450,000 399,084
Class A and non-voting common stock dividends (324,306) (231,446)
AOG unitholder distributions (269,200) (215,334)
Series A Preferred Stock dividends (10,850) (21,700)
Redemption of Series A Preferred Stock (310,000) -
Stock option exercises 37,216 92,877
Taxes paid related to net share settlement of equity awards (226,101) (95,368)
Other financing activities 11,509 (1,531)
Net cash provided by the Company's financing activities $ 600,698 $ 239,736
Net cash provided by the Company's financing activities for the year ended
December 31, 2021 was principally composed of net proceeds from the public
offering of Class A common stock, a private offering of Class A common stock and
non-voting common stock to SMBC and the issuance of the 2051 Subordinated Notes.
A portion of the proceeds were used to redeem the Series A Preferred Stock. As a
result of generating higher fee related earnings, we increased the level of
dividends paid to a growing shareholder base of Class A and non-voting common
stockholders and of distributions paid to AOG unitholders.
In connection with the vesting of restricted units that are granted to our
employees under the Equity Incentive Plan, we withhold shares equal to the fair
value of our employee's withholding tax liabilities and pay the taxes on their
behalf. This use of cash increased from the prior period primarily as a result
of our appreciating stock price, which is the basis on which employee
compensation is recognized. The net settlement of shares minimizes the dilutive
impact of our Equity Incentive Plan as fewer shares are issued upon vesting. For
the years ended December 31, 2021 and 2020, we retained and did not issue
3.8 million shares and 2.5 million shares, respectively.
Net cash provided by the Company's financing activities for year ended December
31, 2020 was principally composed of net proceeds from the issuance of the 2030
Senior Notes to provide additional liquidity at a reduced cost of capital in
response to the uncertainty caused by the COVID-19 pandemic and to leverage our
growth in future periods. A portion of these proceeds was used to repay
revolving borrowings under our Credit Facility. In addition, net cash provided
by the Company's financing activities includes cash proceeds from the private
offering of Class A common stock to SMBC. These proceeds were partially offset
by cash used to pay higher dividends and distributions to Class A common
stockholders and AOG unitholders, respectively.
Year ended December 31,
2021 2020
Contributions from redeemable and non-controlling interests in Consolidated Funds, net of eliminations
$ 1,033,644 $ 132,430 Distributions to non-controlling interests in Consolidated Funds, net of eliminations
(98,897) (251,507)
Borrowings under loan obligations by Consolidated Funds 2,048,932 1,013,291
Repayments under loan obligations by Consolidated Funds (80,752) (190,055)
Net cash provided by the Consolidated Funds' financing activities $ 2,902,927 $ 704,159
Net cash provided by the Consolidated Funds' financing activities for the year
ended December 31, 2021 was principally attributable to contributions from
shareholders in the initial public offering of the SPAC and to the borrowings of
three newly issued CLOs.
Net cash provided by the Consolidated Funds' financing activities for the year
ended December 31, 2020 was principally attributable to the borrowings of two
newly issued CLOs.
Capital Resources
We intend to use a portion of our available liquidity to pay cash dividends to
our Class A and non-voting common stockholders on a quarterly basis in
accordance with our dividend policy. Our ability to make cash dividends is
dependent on a myriad of factors, including among others: general economic and
business conditions; our strategic plans and prospects; our business and
investment opportunities; timing of capital calls by our funds in support of our
commitments; our financial condition and operating results; working capital
requirements and other anticipated cash needs; contractual restrictions and
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obligations; legal, tax and regulatory restrictions; restrictions on the payment
of distributions by our subsidiaries to us and other relevant factors.
We are required to maintain minimum net capital balances for regulatory purposes
for our broker-dealer entities and certain subsidiaries operating outside the
U.S. These net capital requirements in the U.S. are met in part by retaining
cash, cash equivalents and investment securities. As a result, we may be
restricted in our ability to transfer cash between different operating entities
and jurisdictions. As of December 31, 2021, we were required to maintain
approximately $39.1 million in net assets within these subsidiaries to meet
regulatory net capital and capital adequacy requirements. We remain in
compliance with all regulatory requirements.
Holders of AOG Units, subject to the terms of the exchange agreement, may
exchange their AOG Units for shares of our Class A common stock on a one-for-one
basis. These exchanges are expected to result in increases in the tax basis of
the tangible and intangible assets of AMC that otherwise would not have been
available. These increases in tax basis may increase depreciation and
amortization for U.S. income tax purposes and thereby reduce the amount of tax
that we would otherwise be required to pay in the future. We entered into the
TRA that provides payment to the TRA recipients of 85% of the amount of actual
cash savings, if any, in U.S. federal, state, local and foreign income tax or
franchise tax that we actually realize as a result of these increases in tax
basis and of certain other tax benefits related to entering into the TRA,
including tax benefits attributable to payments under the TRA and interest
accrued thereon. Future payments under the TRA in respect of subsequent
exchanges are expected to be substantial. The TRA liability balance was $100.5
million and $62.5 million as of December 31, 2021 and 2020, respectively. In
2021, there were exchanges of approximately 2.5 million of AOG Units for shares
of our Class A common stock and we recognized deferred tax benefits of $46.1
million, which increased additional paid in capital by $6.9 million and our TRA
liability by $39.2 million. The TRA liability also decreased by $1.2 million
primarily due to a cash payment made from the realized tax benefit for the 2020
tax year.
For a discussion of our debt obligations, including the debt obligations of our
consolidated funds, see "Note 8. Debt," to our audited consolidated financial
statements included in this Annual Report on Form 10-K.
Series A Preferred Stock
The Series A Preferred Stock was redeemed in full on June 30, 2021. For a discussion of our equity, including the redemption of our Series A Preferred Stock, see "Note 15. Equity and Redeemable Interest," to our audited consolidated financial statements included in this Annual Report on Form 10-K.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change the underlying assumptions, estimates or judgments. See "-Components of Consolidated Results of Operations" and "Note 2. Summary of Significant Accounting Policies," to our audited consolidated financial statements included in this Annual Report on Form 10-K for a summary of our significant accounting policies.
Principles of Consolidation
We consolidate entities based on either a variable interest model or voting
interest model. As such, for entities that are determined to be variable
interest entities ("VIEs"), we consolidate those entities where we have both
significant economics and the power to direct the activities of the entity that
impact economic performance. For limited partnerships and similar entities
evaluated under the voting interest model, we do not consolidate those entities
for which we act as the general partner unless we hold a majority voting
interest.
The consolidation guidance requires qualitative and quantitative analysis to
determine whether our involvement, through holding interests directly or
indirectly in the entity or contractually through other variable interests
(e.g., management and performance related income), would give us a controlling
financial interest. This analysis requires judgment. These judgments include:
(1) determining whether the equity investment at risk is sufficient to permit
the entity to finance its activities without additional subordinated financial
support, (2) evaluating whether the equity holders, as a group, can make
decisions that
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have a significant effect on the success of the entity, (3) determining whether
two or more parties' equity interests should be aggregated, (4) determining
whether the equity investors have proportionate voting rights to their
obligations to absorb losses or rights to receive returns from an entity and (5)
evaluating the nature of relationships and activities of the parties involved in
determining which party within a related-party group is most closely associated
with a VIE and hence would be deemed the primary beneficiary.
The creditors of the consolidated VIEs do not have recourse to us other than to the assets of the consolidated VIEs. The assets and liabilities of the consolidated VIEs are comprised primarily of investments and loans payable, respectively.
Fair Value Measurement
GAAP establishes a hierarchical disclosure framework prioritizing the inputs used in measuring financial instruments at fair value into three levels based on their market observability. Market price observability is affected by a number of factors, including the type of instrument and the characteristics specific to the instrument. Financial instruments with readily available quoted prices from an active market or where fair value can be measured based on actively quoted prices generally have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.
Financial assets and liabilities measured and reported at fair value are classified as follows:
•Level I-Quoted prices in active markets for identical instruments.
•Level II-Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in inactive markets; and model-derived valuations with directly or indirectly observable significant inputs. Level II inputs include prices in markets with few transactions, non-current prices, prices for which little public information exists or prices that vary substantially over time or among brokered market makers. Other inputs include interest rate, yield curve, volatility, prepayment risk, loss severity, credit risk and default rate. •Level III-Valuations that rely on one or more significant unobservable inputs. These inputs reflect the Company's assessment of the assumptions that market participants would use to value the instrument based on the best information available. In some instances, an instrument may fall into multiple levels of the fair value hierarchy. In such instances, the instrument's level within the fair value hierarchy is based on the lowest of the three levels (with Level III being the lowest) that is significant to the fair value measurement. Our assessment of the significance of an input requires judgment and considers factors specific to the instrument. See "Note 6. Fair Value," to our consolidated financial statements included in this Annual Report on Form 10-K for a summary of our valuation of investments and other financial instruments by fair value hierarchy levels.
Acquisitions
Management's determination of fair value of assets acquired and liabilities
assumed at the acquisition date is based on the best information available in
the circumstances and may incorporate management's own assumptions and involve a
significant degree of judgment. We use our best estimates and assumptions to
accurately assign fair value to the tangible and identifiable intangible assets
acquired and liabilities assumed at the acquisition date as well as the useful
lives of those acquired intangible assets. For business combinations accounted
for under the acquisition method, including the fair value of certain elements
of contingent consideration as of the acquisition date over the fair value of
net assets acquired is recorded as goodwill. Conversely, any excess of the fair
value of the net assets acquired over the purchase consideration is recognized
as a bargain purchase gain. Examples of critical estimates in valuing certain of
the intangible assets we have acquired include, but are not limited to, future
expected cash inflows and outflows, future fundraising assumptions, expected
useful life, discount rates and income tax rates. Our estimates for future cash
flows are based on historical data, various internal estimates and certain
external sources, and are based on assumptions that are consistent with the
plans and estimates we are using to manage the underlying assets acquired. We
estimate the useful lives of the intangible assets based on the expected period
over which we anticipate generating economic benefit from the asset. We base our
estimates on assumptions we believe to be reasonable but that are unpredictable
and inherently uncertain. Unanticipated events and circumstances may occur that
could affect the accuracy or validity of such assumptions, estimates or actual
results.
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Equity-Based Compensation
We granted certain restricted units with a vesting condition based upon the
volume-weighted, average closing price of our Class A common stock meeting or
exceeding a stated price for 30 consecutive calendar days on or prior to January
22, 2029, referred to as the market condition. Vesting is also generally subject
to continued employment at the time such market condition is achieved. Under the
terms of the awards, if the target price of the applicable market condition is
not achieved by the close of business on January 22, 2029, the unvested market
condition awards will be automatically canceled and forfeited for no
consideration, with any expense that was previously recognized reversed.
The grant date fair values are based on a probability distributed Monte-Carlo
simulation. Due to the existence of the market condition, the vesting period for
the awards is not explicit, and as such, compensation expense is recognized on a
straight-line basis over the median vesting period derived from the positive
iterations of the Monte Carlo simulations where the market condition is
achieved.
Below is a summary of the significant assumptions used to estimate the grant date fair value of market condition awards:
Closing price of the Company's common shares as of grant date $45.76
Risk-free interest rate 0.88%
Volatility 35.0%
Dividend yield 3.5%
Cost of equity 10.0%
See "Note 14. Equity Compensation," to our audited consolidated financial statements included in this Annual Report on Form 10-K for further discussion and activity of these awards.
Income Taxes The Company is taxed as corporation forU.S. federal and state income tax purposes. We use the liability method of accounting for deferred income taxes pursuant to GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the statutory tax rates expected to be applied in the periods in which those temporary differences are settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. A valuation allowance is recorded on our net deferred tax assets when it is more likely than not that such assets will not be realized or when timing is unknown. When evaluating the realizability of our deferred tax assets, all evidence, both positive and negative, is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies and expectations of future earnings. Under GAAP, the amount of tax benefit to be recognized is the amount of benefit that is more likely than not to be sustained upon examination. We analyze our tax filing positions in all of theU.S. federal, state, local and foreign tax jurisdictions where we are required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, we determine that uncertainties in tax positions exist, a liability is established. We recognize accrued interest and penalties related to unrecognized tax positions in interest expense and general, administrative and other expenses, respectively, in the Consolidated Statements of Operations. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties under GAAP. We review our tax positions quarterly and adjust our tax balances as new legislation is passed or new information becomes available.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements and their impact on the
Company can be found in "Note 2. Summary of Significant Accounting Policies," to
our audited consolidated financial statements included in this Annual Report on
Form 10-K.
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Table of Contents Contractual Obligations, Commitments and Contingencies and Other Arrangements
In the normal course of business, we enter into contractual obligations that may require future cash payments. We may also engage in off-balance sheet arrangements, including transactions in derivatives, guarantees, capital commitments to funds, indemnifications and potential contingent repayment obligations. The following table sets forth our contractual obligations and capital commitments of the Company and of the Consolidated Funds as of December 31, 2021 ($ in thousands):
Less than 1 year 1 - 3 years 4 - 5 years Thereafter Total
The Company: Operating lease obligations(1) $ 44,128 $ 76,009 $ 63,173 $ 39,245 $ 222,555 Debt obligations payable(2) - 247,979 415,000 840,730 1,503,709 Capital lease obligations 624 325 11 1 961 Interest obligations on debt(3) 43,030 86,060 64,951 500,323
694,364
Other long-term obligations(4) 1,789 1,416 - - 3,205 Capital commitments(5) 677,259 - - - 677,259 Subtotal 766,830 411,789 543,135 1,380,299 3,102,053 Consolidated Funds: Debt obligations payable 71,500 56,271 1,007,594 10,027,107 11,162,472 Interest obligations on debt(3) 198,593 394,747 383,414 784,835
1,761,589
Capital commitments of Consolidated Funds(5) 1,206,144 - - - 1,206,144
$ 2,243,067 $ 862,807 $ 1,934,143 $ 12,192,241 $ 17,232,258
(1)The table includes future minimum commitments for our operating leases,
including short-term leases that are not recorded as operating lease
liabilities. Office space, computer and communication equipment are leased under
agreements with expirations ranging from one-year contracts to lease commitments
through 2033. Rent expense includes only base contractual rent.
(2)Debt obligations include $650.0 million of senior notes and $450.0 million of
subordinated notes, net of unamortized discount, and outstanding balance under
the Credit Facility as of December 31, 2021.
(3)Interest obligations reflect future interest payments on outstanding debt
obligations with stated interest rates.
(4)Represents payment obligations with respect to long-term service contracts
entered into by the Company.
(5)Represents commitments to fund certain investments. These amounts are
generally due on demand and are therefore presented as obligations payable in
less than one-year.
We entered into a TRA with the TRA Recipients that requires us to pay them 85%
of any cash tax savings, if any, realized by AMC from any step-up in tax basis
resulting from an exchange of Ares Operating Group Units for shares of our Class
A common stock or, at our option, for cash. Because the timing of amounts to be
paid under the TRA cannot be determined, this contractual commitment has not
been presented in the table above. The cash tax savings, if any, achieved may
not ensure that we have sufficient cash available to pay this liability, and we
may be required to incur additional debt to satisfy this liability.
For further discussion of our capital commitments, indemnification arrangements
and contingent obligations, see "Note 10. Commitments and Contingencies," to our
audited consolidated financial statements included in this Annual Report on Form
10-K.
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