ARES MANAGEMENT CORPORATION Ares Management Corporation 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 ofAres Management Corporation 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 and CLOs 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 ofAres Management Corporation 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, 2020 and 2019. For discussion on activity for the year endedDecember 31, 2018 and period-over-period analysis on results for the year endedDecember 31, 2019 to 2018, 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 endedDecember 31, 2019 . 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. 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. As ofDecember 31, 2020 , approximately 67% of our AUM were in funds with a remaining contractual life of three years or more, approximately 74% of our AUM were in funds with an initial duration greater than seven years at time of closing and 90% of our management fees were derived from permanent capital vehicles, CLOs and closed end 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. Global capital markets performance was dominated by the onset of the COVID-19 pandemic and the associated uncertainty and significant market declines in the first half of 2020. The markets experienced a rebound in the second half of 2020, primarily driven by additional fiscal stimulus, accommodative global monetary policy and positive vaccine developments to combat COVID-19. Investor concerns over rising infection rates and newly implemented lockdown measures subsided relative to optimism in connection with the announced approval and initial distribution of vaccines in theU.S. and more broadly. In theU.S. , corporate credit spreads narrowed into year-end and lower quality paper, along with more cyclical segments, drove returns for the quarter. Specifically, theCredit Suisse Leveraged Loan Index ("CSLLI"), a leveraged loan index, returned 2.8% for 2020 compared to a return of 8.2% for the prior year.The ICE BAML High Yield Master II Index, a high yield bond index, returned 6.2% for 2020 compared to a return of 14.4% for the prior year. European credit markets experienced similar results, as European high yield and leveraged loan markets recovered alongside the global capital markets primarily driven by positive vaccine developments. Continued investor confidence in a Brexit trade deal ahead of a formal agreement at year-end, coupled with theEuropean Central Bank's plan to increase the size and extend the time horizon of their asset purchasing programs contributed to positive returns. TheCredit Suisse Western European Leveraged Loan Index returned 2.4% for 2020 compared to a return of 5.0% for the prior year. The ICE BAML European Currency High Yield Index returned 2.9% for 2020 compared to a return of 11.4% for the prior year. The equity market experienced similar performance, rebounding in the second half of the year. In theU.S. , the S&P 500 returned 18.4% for 2020 compared to a return of 31.5% for the prior year. Outside theU.S. , theMSCI All Country World exUSA Index returned 10.7% for 2020 compared to a return of 21.5% for the prior year. Despite the ongoing pandemic and uncertainty surrounding the timing of recovery, private equity transaction volume rose during the fourth quarter. We continue to believe careful target selection, a focus on high-quality assets and a differentiated view to drive value creation are keys to our funds' performance in the current market environment. 92 -------------------------------------------------------------------------------- Table of Contents Re-introduction of social distancing measures inEurope and theU.S. contributed to real estate fundamentals remaining depressed. The impact of the pandemic upon commercial real estate has varied significantly by property sector and geography. Incidences of asset-level distress are elevated, especially for retail and hospitality properties, which have borne much of the impact from COVID-19 restrictions. With many countries beginning vaccination programs, the overall trajectory of economies and real estate markets is positive. European andU.S. publicly-traded real estate investment trusts ("REITs") rose over the fourth quarter, boosted by news surrounding the vaccine. In theU.S. , the FTSE NAREIT All Equity REITs Index returned a negative 8.4% for 2020 compared to a return of 24.0% for the prior year. InEurope , theFTSE EPRA/NAREIT Developed Europe Index returned a negative 13.1% for 2020 compared to a return of 24.7% for the prior year.
In 2020, 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, 2020 , we raised$41.2 billion of gross AUM, both in commingled funds and SMAs, and continued to expand our investor base, raising capital from over 85 different investment vehicles and 358 institutional investors, including 155 direct institutional investors that were new to Ares. Our fundraising efforts helped drive AUM growth of approximately 32% for 2020. During 2021, we expect that our fundraising will come from a combination of our existing and new strategies in theU.S. andEurope . As ofDecember 31, 2020 , we also had$40.0 billion of AUM not yet paying fees, which represents approximately$428.3 million in annual potential management fee revenue. Of the$428.3 million ,$400.9 million relates to$37.1 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 2021. • 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, seeking to meet the needs of insurance companies, 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, 2020 , we deployed$26.7 billion of gross capital across our investment groups compared to$27.4 billion deployed in 2019. As ofDecember 31, 2020 , we had$56.3 billion of capital available for investment and we remain well-positioned to invest our assets opportunistically, compared to$34.6 billion as ofDecember 31, 2019 . • 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, particularly in theCredit Group's direct lending funds, and in the Private Equity's special opportunities funds, which utilize flexible investment mandates to manage portfolios through market cycles. • Our ability to continue to achieve stable dividend payments to investors. Our dividend policy for our Class A common stock is closely aligned with our core management fee business. We intend to provide a steady quarterly dividend for each calendar year that will be pegged to our after-tax fee related earnings, with future potential changes based on the level and growth of our after-tax fee related earnings. Our fixed dividend is reassessed each year based upon our expected level and growth of after-tax fee related earnings. As fee related earnings reflect the core earnings of our business and consists of management fees less compensation and general and administrative expenses, having our recurring dividend pegged to this amount removes volatility from our dividend and enables investors to receive what we believe is an attractive after-tax, qualifying dividend yield. 93 -------------------------------------------------------------------------------- Table of Contents See "Item 1A. Risk Factors" included in this Annual Report on Form 10-K for a discussion of the risks to which our businesses are subject.
Recent Transactions
On
On
OnFebruary 17, 2021 , Ares adopted resolutions authorizing a Second Amended and Restated Certificate of Incorporation in connection with an internal reorganization that is expected to occur on or aboutApril 1, 2021 . The internal reorganization will consist of, among other matters, a merger of each ofAres Investments andAres Offshore Holdings , with and intoAres Holdings . 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. 94 -------------------------------------------------------------------------------- Table of Contents The tables below present rollforwards of our total AUM by segment: Private Equity Real Estate Strategic ($ in millions) Credit 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(1)$ 123,434 $ 25,582 $ 14,180 $ 9,186 $ 172,382 Private Equity Real Estate Strategic Credit Group Group Group Initiatives Total AUM Balance at 12/31/2018$ 95,836 $ 23,487 $ 11,340 $ -$ 130,663 Net new par/equity commitments 6,591 3,151 2,361 - 12,103 Net new debt commitments 10,684 25 633 - 11,342 Capital reductions (1,765) (8) (89) - (1,862) Distributions (2,186) (3,803) (1,600) - (7,589) Redemptions (2,317) (2) - - (2,319) Change in fund value 3,700 2,316 562 - 6,578 Balance at 12/31/2019$ 110,543 $ 25,166 $ 13,207 $ -$ 148,916 Average AUM(1)$ 103,853 $ 24,537 $ 12,142 $ -$ 140,532
(1) Represents a five-point average of quarter-end balances for each period; except for Strategic Initiatives, which calculates the
average using Ares SSG's AUM on the date of the SSG Acquisition,
The components of our AUM are presented below as of ($ in billions): [[Image Removed: ares-20201231_g27.jpg]][[Image Removed: ares-20201231_g28.jpg]]
AUM: $197.0 AUM: $148.9 FPAUM AUM not yet paying fees Non-fee paying(1) General partner and affiliates
(1) Includes
Please refer to "- Results of Operations by Segment" for a more detailed presentation of AUM by segment for each of the periods presented
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Fee Paying Assets Under Management
FPAUM refers to AUM from which we directly earn management fees and is equal to
the sum of all the individual fee bases of our funds that directly contribute to
our management fees.
The tables below present rollforwards of our total FPAUM by segment:
Private Equity Real Estate Strategic
($ in millions) Credit Group Group Group Initiatives Total
FPAUM 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)
FPAUM Balance at 12/31/2020 $ 88,017 $ 21,172 $ 10,252 $ 6,596 $ 126,037
Average FPAUM(1) $ 79,140 $ 18,085 $ 9,239 $ 6,518 $ 112,982
Private Equity Real Estate Strategic
Credit Group Group Group Initiatives Total
FPAUM Balance at 12/31/2018 $ 57,847 $ 17,071 $ 6,952 $ - $ 81,870
Commitments 4,997 362 1,080 - 6,439
Subscriptions/deployment/increase in leverage 13,674 2,019 1,269 - 16,962
Capital reductions (1,557) (202) (217) - (1,976)
Distributions (2,285) (1,364) (650) - (4,299)
Redemptions (2,604) (1) - - (2,605)
Change in fund value 2,181 3 (16) - 2,168
Change in fee basis (373) (848) (455) - (1,676)
FPAUM Balance at 12/31/2019 $ 71,880 $ 17,040 $ 7,963 $ - $ 96,883
Average FPAUM(1) $ 65,278 $ 17,108 $ 7,353 $ - $ 89,739 (1) 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,
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.
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The charts below present FPAUM by its fee basis ($ in billions):
[[Image Removed: ares-20201231_g29.jpg]]
[[Image Removed: ares-20201231_g30.jpg]]
FPAUM: $126.0 FPAUM: $96.9
Collateral
balances (at
Invested capital/other(1) Market value(2) par) Capital commitments (1)Other consists of ACRE's FPAUM, which is based on ACRE's stockholders' equity. (2)Includes$24.5 billion and$19.0 billion from funds that primarily invest in illiquid strategies as ofDecember 31, 2020 and 2019, respectively. The underlying investments held in these funds are generally subject to less market volatility than investments held in liquid strategies.
Incentive Eligible Assets Under Management,
IEAUM generally represents the NAV plus uncalled equity or total assets plus
uncalled debt, as applicable, of our funds from which we are entitled to receive
performance income, excluding capital committed by us and our professionals
(from which we do not earn performance income). With respect to ARCC's AUM, only
ARCC Part II Fees may be generated from IEAUM.
IGAUM generally represents the AUM of our funds that are currently generating
performance income on a realized or unrealized basis. It represents the basis on
which we are entitled to receive performance income. The basis is typically the
NAV or total assets of the fund. We exclude from the basis amounts on which we
do not earn performance income, such as capital committed by us and our
professionals. ARCC is only included in IGAUM when ARCC Part II Fees are being
generated.
The charts below present our IEAUM and IGAUM by segment ($ in billions):
[[Image Removed: ares-20201231_g31.jpg]]
Credit Private Equity Real Estate Strategic Initiatives
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The charts below present our available capital and AUM not yet paying fees by
segment ($ in billions):
[[Image Removed: ares-20201231_g32.jpg]][[Image Removed: ares-20201231_g33.jpg]]
Credit Private Equity Real Estate Strategic Initiatives
Management Fees Fund Duration
We view the duration of funds we manage as a metric to measure the stability of our future management fees. For the years endedDecember 31, 2020 and 2019, 77% and 81%, respectively, of our segment management fees were attributable to funds with three or more years in duration. The charts below present the composition of our segment management fees by the initial fund duration: [[Image Removed: ares-20201231_g34.jpg]] [[Image Removed: ares-20201231_g35.jpg]] Differentiated Permanent Capital 10 or more years 7 to 9 years 3 to 6 years Fewer than 3 years Managed Managed Accounts Accounts(1) (1) Differentiated managed accounts have been managed by the Company for longer than three years, are investing in illiquid strategies or are co-investments structured to pay management fees. 98 -------------------------------------------------------------------------------- Table of Contents 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 quarterly periods. In addition to management fees, each of our significant funds may generate performance income 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 funds harvesting investments or funds deploying capital to indicate the fund's stage in its life cycle. A fund harvesting investments indicates a fund 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. Management fees are outlined in each fund's investment management agreement. Management fees are generally based on a defined percentage of a fee base, typically average fair value of assets, total commitments, invested capital, NAV, net investment income or par value of the investment portfolios managed by us. The fees are generally based on a quarterly measurement period and can be paid in advance or in arrears. Management fees are recognized as revenue in the period advisory services are rendered, subject to our assessment of collectability. Details regarding our management fees by strategy are presented below:Credit Group : •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 12.6 years as ofDecember 31, 2020 and the fee ranges generally remain unchanged at the close of the re-investment period. 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. The funds in this strategy, (excluding ARDC, which is a permanent capital vehicle), had an average management contract term from the closing date of 11.0 years as ofDecember 31, 2020 . •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 had an average management contract term from the closing date of 7.4 years as ofDecember 31, 2020 . •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 ARCC Part I Fees. The funds in this strategy (excluding ARCC, which is a permanent capital vehicle) had an average management contract term from the closing date of 8.5 years as ofDecember 31, 2020 . 99 -------------------------------------------------------------------------------- Table of ContentsPrivate Equity Group : •Corporate Private Equity and Infrastructure and Power: Typical management fees range from 1.50% 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: (i) the expiration or termination of the investment period and (ii) the activation of a successor fund. 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 11.0 years as ofDecember 31, 2020 . •Special Opportunities: Typical management fees range from 1.00% to 1.50% of the aggregate cost basis of unrealized portfolio investments. The funds in this strategy had an average management contract term from the closing date of 9.9 years as ofDecember 31, 2020 .Real Estate Group : •Real Estate Equity and Debt: Typical management fees range from 0.50% to 1.50% of invested capital, stockholders' equity, 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, which is a permanent capital vehicle) had an average management contract term from the closing date of 11.2 years as ofDecember 31, 2020 . Strategic Initiatives: •Asian Special Situations: Typical management fees range from 1.90% to 2.00% of the aggregate cost basis of unrealized portfolio investments, plus 1.15% to 1.25% of the excess of commitment over current cost basis of unrealized portfolio investments while the fund is still in its commitment period. 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 range from 0.50% to 1.50%, 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 6.7 years as ofDecember 31, 2020 . •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 5.4 years as ofDecember 31, 2020 . Carried Interest Allocation. In certain fund structures, carried interest is allocated to us based on cumulative fund performance to date, subject to the achievement of minimum return levels in accordance with the respective terms in each fund's governing documents. Additional details regarding our carried interest are presented below:Credit Group : •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 20% of each carried interest
eligible fund's profits, subject to a preferred return of approximately 8% per
annum.
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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.
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.
We may be liable to certain funds for previously realized carried interest
allocation if the fund's investment values decline below certain return hurdles,
which vary from fund to fund. For detailed discussion of contingencies on
performance income, see "Note 9. Commitments and Contingencies," to our audited
consolidated financial statements included in this Annual Report on Form 10-K.
Incentive Fees. Incentive fees earned on the performance of certain fund
structures are recognized based on the fund's performance during the period,
subject to the achievement of minimum return levels in accordance with the
respective terms set out in each fund's investment management agreement.
Incentive fees are realized at the end of a measurement period, typically
annually. Once realized, such fees are no longer subject to reversal. Additional
details regarding our incentive fees are presented below:
Credit Group :
•Syndicated Loans and High Yield Bonds: Typical incentive fees 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 incentive fees 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 incentive fees represent 10% to 20%
of each incentive eligible fund's profits and are subject to a preferred return
rate of approximately 5% to 8% per annum. For ARCC, incentive fees represent 20%
of the cumulative aggregate realized capital gains (net of cumulative aggregate
realized losses and unrealized aggregate capital depreciation).
Real Estate Group :
•Real Estate Debt: Incentive fees 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.
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. In
addition, 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.
Expenses
Compensation and Benefits. Compensation generally includes salaries, bonuses,
health and welfare benefits, payroll related taxes, equity-based compensation,
and ARCC Part I Fee incentive compensation expenses. Compensation cost relating
to the issuance of restricted units and options 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
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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.
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 income compensation
generally represents 60-80% of the performance income 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 incentive fees and is not payable until the carried
interest allocation or incentive fee is realized.
Although changes in performance related compensation are directly correlated
with changes in performance income 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
performance income 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.
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 notes,
which have a fixed coupon rate.
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 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. Ares Management Corporation ("AMC") is a corporation for U.S.
federal income tax purposes and is subject to U.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 in the
United States as partnerships or disregarded entities for U.S. federal income
tax purposes and as corporate entities in certain non-U.S. jurisdictions. These
entities, in some cases, are subject to U.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 applicable U.S. federal, state and local income taxes as well as,
in some cases, non-U.S. income taxes. Net taxable
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income is based on AMC's ownership of the AOG entities and special allocations
for preferred units corresponding to the Preferred Stock. 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 in the 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.
Non-Controlling Interests. Net income 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 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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Results of Operations
Consolidated Results of Operations
We consolidate funds 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' rights,
and the creation and termination of funds. The consolidation of these funds 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:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Revenues
Management fees (includes ARCC Part I Fees of $184,141
and $164,396 for the years ended December 31, 2020 and
2019, respectively) $ 1,150,608 $ 979,417 $ 171,191 17 %
Carried interest allocation 505,608 621,872 (116,264) (19)
Incentive fees 37,902 69,197 (31,295) (45)
Principal investment income 28,552 56,555 (28,003) (50)
Administrative, transaction and other fees 41,376 38,397 2,979 8
Total revenues 1,764,046 1,765,438 (1,392) 0
Expenses
Compensation and benefits 767,252 653,352 (113,900) (17)
Performance related compensation 404,116 497,181 93,065 19
General, administrative and other expenses 258,999 270,219 11,220 4
Expenses of Consolidated Funds 20,119 42,045 21,926 52
Total expenses 1,450,486 1,462,797 12,311 1
Other income (expense)
Net realized and unrealized gains (losses) on
investments (9,008) 9,554 (18,562) NM
Interest and dividend income 8,071 7,506 565 8
Interest expense (24,908) (19,671) (5,237) (27)
Other income (expense), net 11,291 (7,840) 19,131 NM
Net realized and unrealized gains (losses) on
investments of Consolidated Funds (96,864) 15,136 (112,000) NM
Interest and other income of Consolidated Funds 463,652 395,599 68,053 17
Interest expense of Consolidated Funds (286,316) (277,745) (8,571) (3)
Total other income 65,918 122,539 (56,621) (46)
Income before taxes 379,478 425,180 (45,702) (11)
Income tax expense 54,993 52,376 (2,617) (5)
Net income 324,485 372,804 (48,319) (13)
Less: Net income attributable to non-controlling
interests in Consolidated Funds 28,085 39,704 (11,619) (29)
Net income attributable to Ares Operating Group
entities 296,400 333,100 (36,700) (11)
Less: Net loss attributable to redeemable interest in
(976) - (976) NM
Less: Net income attributable to non-controlling
interests in Ares Operating Group entities 145,234 184,216 (38,982) (21)
Net income attributable to Ares Management Corporation 152,142 148,884 3,258 2
Less: Series A Preferred Stock dividends paid 21,700 21,700 - -
Net income attributable to Ares Management Corporation Class A common stockholders
$ 130,442 $ 127,184 3,258 3 NM - Not Meaningful 104
-------------------------------------------------------------------------------- Table of Contents Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Consolidated Results of Operations of the Company Management Fees. Total management fees increased by$171.2 million , or 17%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increases were primarily due to theCredit Group , driven by an increase in ARCC Part I Fees and by higher FPAUM from capital deployments in direct lending funds. Management fees increased by$33.2 million in connection with the SSG Acquisition. 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 decreased by$116.3 million , or 19%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The activity was principally composed of the following: Year ended Year ended December 31, Primary Drivers December 31, Primary Drivers ($ in millions) 2020 2019 Four direct lending funds and one alternative credit fund with$12.0 billion of IGAUM generating returns in excess of their hurdle rates, primarily 10 direct lending funds with from: Ares Private Credit$11.2 billion of IGAUM Solutions, L.P. ("PCS") and Ares generating returns in excess of Capital Europe IV, L.P. ("ACE their hurdle rates, primarily IV") generated carried interest from PCS, ACE IV and Ares allocation of$48.9 million and Capital Europe III, L.P. ("ACE$51.5 million , respectively, III") that generated$30.6 driven by net investment income million,$48.6 million and$30.1 on an increasing invested million of carried interest Credit funds$ 146.3 capital base. Net investment$ 129.5 allocation during the period, income for the year was muted by respectively. PCS and ACE IV net unrealized losses on generated carried interest investments that were primarily allocation primarily due to incurred during the first increasing deployment, while ACE quarter of 2020 due to the III is now past its investment market volatility driven by the period and the carried interest COVID-19 pandemic. In addition, allocation it generated was an alternative credit fund primarily driven by a performing generated carried interest portfolio. allocation of$16.0 million primarily driven by net investment income during the period. Ares Corporate Opportunities Fund IV, L.P. ("ACOF IV") generated carried interest allocation of$285.7 million Market appreciation of Ares primarily due to market Corporate Opportunities Fund appreciation of its investment III, L.P.'s ("ACOF III") in The AZEK Company ("AZEK") investments in Floor & Decor following its initial public ("FND") and a professional offering. In addition, market services company; increased fair appreciation across several value of ACOF IV's investment in Private equity funds 304.7 investments generated carried 416.5 National Veterinary Associates interest allocation of$102.6 ("NVA") in connection with the million for Ares Special pending sale of the company Opportunities Fund, L.P. which closed in the first ("ASOF"). Market depreciation quarter of 2020; and market across several energy sector appreciation across several ACOF investments led to the reversal IV and ACOF V portfolio of unrealized carried interest companies. allocation of$75.1 million for Ares Corporate Opportunities Fund V, L.P. ("ACOF V"). Market appreciation from properties within real estate equity funds primarily driven by gains generated across several industrial and multi-family Market appreciation from assets of US Real Estate Fund multiple properties within six Real estate funds 54.6 IX, L.P. ("US IX") in the amount 75.9 of our U.S. real estate equity of$19.9 million . In addition, funds, EF IV and five European there were gains generated in real estate equity funds. multiple funds from the sale of a pan-European logistics portfolio at a higher price than the December 31, 2019 valuation. Carried interest$ 505.6 $ 621.9 allocation 105
-------------------------------------------------------------------------------- Table of Contents Incentive Fees. Incentive fees decreased by$31.3 million , or 45%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The activity was principally composed of the following: Year ended Year ended December 31, Primary Drivers December 31, Primary Drivers ($ in millions) 2020 2019 Seven direct lending funds and two alternative credit funds with incentive fees that 16 direct lending funds with Credit funds$ 37.1 crystallized during the period.$ 67.6 incentive fees that crystallized The number of funds was affected during the period. by the overall economic environment during the year. Real estate funds 0.8 Incentive fees generated from 1.6 Incentive fees generated from ACRE. ACRE. Incentive fees$ 37.9 $ 69.2 Principal Investment Income. Principal investment income decreased by$28.0 million , or 50%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The COVID-19 pandemic caused extreme market volatility during 2020. The global equity and credit markets experienced significant downturns in the first quarter of 2020 due to the COVID-19 pandemic that were largely, but not fully, offset by a recovery in the remainder of the year. 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. The year endedDecember 31, 2019 included gains from a higher fair value of our investment inACOF IV largely driven by higher asset appreciation of NVA recognized in connection with the pending sale of the company that closed in the first quarter of 2020. The year endedDecember 31, 2019 also included gains from a higher fair value of our investment inACOF III predominantly from the market appreciation of FND. Administrative, Transaction and Other Fees. Administrative, transaction and other fees increased by$3.0 million , or 8%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase during the current year was primarily driven by higher administrative fees for certain funds in ourCredit Group that increased with invested capital. Compensation and Benefits. Compensation and benefits increased by$113.9 million , or 17%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was primarily driven by headcount growth, merit increases and equity compensation increases for the comparative period. Average headcount for the 2020 increased by 19% to 1,364 professionals from 1,145 professionals in 2019. Equity compensation expense increased by$25.3 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 primarily due to an increase from discretionary merit-based awards of$17.0 million for the year endedDecember 31, 2020 . Restricted units awarded as part of the annual bonus program increased expense by$11.4 million for the year endedDecember 31, 2020 , driven by headcount growth and a reduction in service period from four years to three years for awards granted beginning in 2019. The change in service period resulted in the current year reflecting two years of higher expenses associated with the reduced vesting period compared to one year in 2019. The year endedDecember 31, 2020 also included$6.1 million of accelerated expense from the vesting of restricted units granted to our Chief Executive Officer as a result of achieving both of the applicable performance conditions. Finally, the final vesting of awards issued in connection with our initial public offering occurred during the second quarter of 2019, reducing equity compensation expense by$8.2 million .
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 decreased by$93.1 million , or 19%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Changes in performance related compensation are directly associated with the changes in carried interest allocation and incentive fees described above. General, Administrative and Other Expenses. General, administrative and other expenses decreased by$11.2 million , or 4%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The year endedDecember 31, 2020 was impacted by the COVID-19 pandemic and resulted in a decrease in certain operating expenses. During the last nine months of 2020, our operating expenses were impacted by limitations in certain business activities, most notably travel, entertainment and marketing sponsorships, and by certain office services and fringe benefits from the modified remote working 106 -------------------------------------------------------------------------------- Table of Contents environment. Collectively, these expenses decreased by$19.9 million for the nine months endedDecember 31, 2020 , when compared to the same period in 2019. While the timing of recovery is uncertain, we expect that future periods will continue to be impacted similarly until we return to pre-pandemic working conditions. Expense decreased by$5.5 million pertaining to anSEC matter related to certain of our compliance policies and procedures. During the fourth quarter of 2019, we recorded$6.5 million of costs pertaining to this matter. During the first half of 2020, we recorded another$1.0 million of net expenses that included costs associated with professional fees and a civil penalty of$1.0 million , offset by insurance proceeds we received of$2.5 million . Certain expenses have also increased during the current period, including occupancy costs to support our growing headcount, information services and information technology to support the expansion of our business and our modified remote working environment. Collectively, these expenses increased by$11.4 million for the year endedDecember 31, 2020 when compared to the same period in 2019. In addition, there was an increase of$6.5 million in one-time expenses that were recorded in 2020 that primarily related to expense concessions made to a limited number of funds. The increase was further driven by a net increase of$1.3 million in amortization expense incurred in 2020 when compared to 2019. In 2020, we recorded amortization expense of$22.8 million related to the intangible assets acquired as part of the purchase of CLO collateral management agreements fromCrestline Denali Capital LLC during the first quarter of 2020 and the SSG Acquisition during the second half of 2020. During the third quarter of 2019, a non-cash impairment charge of$20.0 million was recognized related to certain intangible assets that were recorded as part of our acquisition of the Energy Investors Funds. Net Realized and Unrealized Gains (Losses) on Investments. Net realized and unrealized gains (losses) on investments decreased by$18.6 million to a$9.0 million loss for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . 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 . The activity in the prior year was primarily attributable to net gains from CLO securities that rebounded from the market dislocation at the end of 2018 and from our foreign currency forward contracts to hedge against foreign currency exchange rate risk on certain non-U.S. dollar denominated cash flows. Interest Expense. Interest expense increased by$5.2 million , or 27%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The issuance of the 2030 Senior Notes late in the second quarter of 2020 increased interest expense by$7.3 million for the year endedDecember 31, 2020 . The increase was partially offset by a lower average outstanding balance of the Credit Facility during 2020 when compared to 2019. Other Income (Expense), Net. Other income (expense), net is principally composed of transaction gains (losses) associated with currency fluctuations for our businesses domiciled outside of theU.S. and is based on the fluctuations in currency rates primarily between theU.S. dollar against the British pound and the Euro. Income Tax Expense Income tax expense increased by$2.6 million , or 5%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The change in the comparative period is primarily a result of an increase in taxable net income allocable to AMC. The weighted average daily ownership for AMC common stockholders increased from 48.0% for the year endedDecember 31, 2019 to 54.0% for the year endedDecember 31, 2020 . The increases were primarily driven by the issuance of Class A common stock in connection with stock option exercises, vesting of restricted stock awards, issuance of stock in connection with the SSG Acquisition and by our Offering that occurred afterDecember 31, 2019 . Redeemable and Non-Controlling Interests. Net income (loss) attributable to redeemable and non-controlling interests in AOG entities represents results 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 interest in AOG entities. Net 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 to Crestline Denali Class B membership interests based on the activity of those financial interests. For the year endedDecember 31, 2020 , net income of$0.5 million was allocated to the Crestline Denali Class B membership interests related to the gains from those CLO securities held. 107 -------------------------------------------------------------------------------- Table of Contents Net income attributable to non-controlling interests inAres Operating Group entities decreased by$39.0 million , or 21%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The change in the comparative period is a result of the respective changes in income before taxes and weighted average daily ownership. The weighted average daily ownership for the non-controlling AOG unitholders decreased from 52.0% for the year endedDecember 31, 2019 to 46.0% for the year endedDecember 31, 2020 .
Consolidated Results of Operations of the Consolidated Funds
The following table presents the results of operations of the Consolidated
Funds:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Expenses of the Consolidated Funds $ (20,119) $ (42,045) $ 10,746 35 %
Net realized and unrealized gains (losses) on
investments of Consolidated Funds (96,864) 15,136 (112,000) NM
Interest and other income of Consolidated Funds 463,652 395,599 68,053 17
Interest expense of Consolidated Funds (286,316) (277,745) (8,571) (3)
Income before taxes 60,353 90,945 (30,592) (34)
Income tax benefit (expense) of Consolidated Funds (118) 530 (648) NM
Net income 60,235 91,475 (31,240) (34)
Less: Revenues attributable to Ares Management
Corporation eliminated upon consolidation 36,725 49,177 (12,452) (25)
Less: Other income (expense), net attributable to
(4,575) 2,594 (7,169) NM
Net income attributable to non-controlling interests in
Consolidated Funds $ 28,085 $ 39,704 (11,619) (29)
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 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, 2020 , the expenses were
primarily driven by the issuance of two new European CLOs. For the year ended
December 31, 2019 , the expenses were primarily driven by the issuance of two
European CLOs and three U.S. CLOs. Net realized and unrealized gains fluctuated
for the comparative period, primarily due to a significant change in the value
of loans held by the CLOs. The CSLLI returned 2.8% for the year-to-date period
for 2020 when compared to 8.2% for the year-to-date period for 2019. The
increase in interest and other income and in interest expense was attributable
to the net increase of five CLOs that we began consolidating subsequent to
December 31, 2019 and to the increased size of the assets and liabilities of
recent CLOs launched, resulting in additional interest paying loans and interest
expense from debt issued.
Revenues and other income (expense) attributable to AMC represents management
fees, incentive fees, principal investment income and administrative,
transaction and other fees that are eliminated from the respective components of
AMC's results upon consolidation. The decrease for the comparative period for
other income (expense), principal investment income and incentive fees was
primarily due to the price fluctuations associated with the COVID-19 pandemic
previously mentioned. The decrease was partially offset by management fees that
increased due to the net increase of six consolidated CLOs and private funds and
to administrative fees that increased due to the renegotiation of an
administrative fee agreement with ACF during the third quarter of 2019. The
renegotiated administration fee allowed for more operating expenses to be
reimbursed to us by the fund but eliminated the management fee paid by the fund.
Consolidation and Deconsolidation of Ares Funds
Consolidated Funds represented approximately 7% of our AUM as of December 31,
2020 , 4% of our management fees and less than 1% of our carried interest and
incentive fees for the year ended December 31, 2020 . As of December 31, 2020 , we
consolidated 21 CLOs and nine private funds, and as of December 31, 2019 , we
consolidated 16 CLOs and eight 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
are eliminated upon consolidation.
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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. The net economic ownership interests of our Consolidated
Funds, to which we have no economic rights, are reflected as non-controlling
interests in the Consolidated Funds in our consolidated financial statements.
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, 2020 , one
entity was liquidated/dissolved and one CLO experienced a significant change in
ownership that resulted in deconsolidation of the entity during the period.
During the year ended December 31, 2019 , two entities were liquidated/dissolved
and two entities experienced a significant change in ownership that resulted in
deconsolidation of the fund or CLO 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 16.
Consolidation" to our consolidated financial statements included herein.
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, performance income and
investment income are different than those presented on a consolidated basis in
accordance with GAAP because revenues recognized from Consolidated Funds are
eliminated in consolidation and results attributable to the non-controlling
interests of joint ventures are excluded. 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 making 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. The following table sets forth FRE and RI by
reportable segment and OMG:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Fee Related Earnings:
Credit Group $ 501,373 $ 414,212 $ 87,161 21 %
Private Equity Group 109,064 114,419 (5,355) (5)
Real Estate Group 33,399 25,482 7,917 31
Strategic Initiatives 17,371 - 17,371 NM
Operations Management Group (236,757) (230,454) (6,303) (3)
Fee Related Earnings $ 424,450 $ 323,659 100,791 31
Realized Income:
Credit Group $ 538,683 $ 471,643 $ 67,040 14 %
Private Equity Group 212,695 212,564 131 0
Real Estate Group 58,192 51,757 6,435 12
Strategic Initiatives 16,915 - 16,915 NM
Operations Management Group (244,529) (232,478) (12,051) (5)
Realized Income $ 581,956 $ 503,486 78,470 16
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:
Year ended
December 31,
($ in thousands) 2020 2019
Income before taxes $ 379,478 $ 425,180
Adjustments:
Depreciation and amortization expense 40,662 40,602
Equity compensation expense 122,986 97,691
Acquisition and merger-related expense 11,194 16,266
Deferred placement fees 19,329 24,306
Other (income) expense, net 10,207 (460)
Net expense of non-controlling interests in consolidated subsidiaries
3,817 2,951
Income before taxes of non-controlling interests in Consolidated Funds, net of eliminations
(28,203) (39,174)
Unconsolidated performance (income) loss-unrealized 7,554 (303,142)
Unconsolidated performance related compensation - unrealized (11,552) 206,799
Unconsolidated net investment loss-realized 26,484 32,467
Realized Income 581,956 503,486
Unconsolidated performance income-realized (547,216) (402,518)
Unconsolidated performance related compensation - realized 415,668 290,382
Unconsolidated investment income-realized (25,958) (67,691)
Fee Related Earnings $ 424,450 $ 323,659
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 15. 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 December 31, 2020 Compared to Year Ended December 31,
2019
Fee Related Earnings:
The following table presents the components of the Credit Group's FRE:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Management fees (includes ARCC Part I Fees of $184,141
and $164,396 for the years ended December 31, 2020 and
2019, respectively) $ 841,138 $ 713,853 $ 127,285 18 %
Other fees 18,644 17,124 1,520 9
Compensation and benefits (304,412) (261,662) (42,750) (16)
General, administrative and other expenses (53,997) (55,103) 1,106 2
Fee Related Earnings $ 501,373 $ 414,212 87,161 21
Management Fees. The chart below presents
[[Image Removed: ares-20201231_g36.jpg]]
Management fees on existing direct lending funds increased primarily from
deployment of capital, with ACE IV , PCS and Ares Senior Direct Lending Fund L.P.
("SDL") collectively generating additional fees of $49.6 million for the year
ended December 31, 2020 compared to the year ended December 31, 2019 . Management
fees from ARCC increased $11.7 million from prior year primarily due to an
increase in the average size of ARCC's portfolio, driven by an increase in
leverage. The remaining increase in management fees on funds in existence in
both periods was primarily driven by deployment of capital in other direct
lending funds and SMAs. Management fees from CLOs also increased from the prior
year primarily due to the net
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addition of five CLOs that pay fees and to $7.9 million of fees associated with
managing the seven collateral management contracts acquired from Crestline
Denali. In addition, ARCC Part I Fees increased primarily due to the expiration
of the $10 million quarterly fee waiver at the end of the third quarter of 2019
that was partially offset by a reduction in ARCC's pre-incentive fee net
investment income. Despite ARCC's record deployment in the fourth quarter of
2020, pre-incentive fee net investment income was muted by the decrease in new
commitments for the full year due to the volatility and disruption to the global
economy and capital markets from the COVID-19 pandemic. As a result, the pace of
investment activity was slowed during much of 2020 with a rebound of activity
during the fourth quarter.
The decrease in effective management fee rates for the year ended December 31,
2020 compared to the year ended December 31, 2019 was primarily driven by the
increase in fee paying AUM U.S. CLOs that have fee rates below 0.50% and to
deployment in certain alternative credit funds that have fee rates below 1.00%.
The decrease was also driven by the decrease in ARCC Part I Fees' contribution
to the effective management fee rate due to the proportional increase in fees
from other credit funds.
Compensation and Benefits. Compensation and benefits increased by $42.8 million ,
or 16%, for the year ended December 31, 2020 compared to the year ended December
31, 2019 . The activity was primarily driven by headcount growth as we hired
investment professionals to support our growing U.S. and European direct lending
and alternative credit platforms. Average headcount increased by 8% to 409
investment and investment support professionals for 2020 from 379 professionals
in 2019. The increase was further driven by ARCC Part I Fees compensation
increasing by $11.7 million for the comparative period.
General, Administrative and Other Expenses. General, administrative and other
expenses decreased by $1.1 million , or 2%, for the year ended December 31, 2020
compared to the year ended December 31, 2019 . The year ended December 31, 2020
was impacted by the COVID-19 pandemic and resulted in a decrease in certain
operating expenses. During the last nine months of 2020, our operating expenses
were impacted by limitations in certain business activities, most notably
travel, entertainment and marketing sponsorships, and by certain office services
and fringe benefits from the modified remote working environment. Collectively,
these expenses decreased by $7.3 million for the nine months ended December 31,
2020 , when compared to the same period in 2019.
There were also certain expenses that increased during the current period,
including occupancy costs to support the headcount growth, information services
and information technology to support the expansion of our business and our
modified remote working environment. Collectively, these expenses increased by
$2.7 million for the year ended December 31, 2020 when compared to the same
period in 2019. In addition, there was an increase of $3.5 million in one-time
expenses that were recorded in 2020 that primarily related to expense
concessions made to a limited number of funds.
Realized Income:
The following table presents the components of the
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Fee Related Earnings $ 501,373 $ 414,212 $ 87,161 21 %
Performance income-realized 92,308 104,442 (12,134) (12)
Performance related compensation-realized (60,281) (61,641) 1,360 2
Realized net performance income 32,027 42,801 (10,774) (25)
Investment income (loss)-realized (2,309) 2,457 (4,766) NM
Interest and other investment income-realized 16,314 18,670 (2,356) (13)
Interest expense (8,722) (6,497) (2,225) (34)
Realized net investment income 5,283 14,630 (9,347) (64)
Realized Income $ 538,683 $ 471,643 67,040 14
NM - Not Meaningful
Realized net performance income for the year ended December 31, 2020 was
primarily attributable to incentive fees for seven direct lending funds and two
alternative credit funds that crystallized during the period and to tax
distributions from ACE III and ACE IV . Realized net performance income for the
year ended December 31, 2019 was primarily attributable to 16 direct lending
funds with incentive fees that crystallized during the period and to tax
distributions received from ACE III and certain other direct lending funds.
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Realized net investment income for the year ended December 31, 2020 was
primarily attributable to interest income generated from our CLO investments and
from a term loan investment that was made in the third quarter of 2019 and to
investment income related to a distribution from a U.S. direct lending fund.
Realized net investment income for the year ended December 31, 2019 was
primarily attributable to interest income generated from our CLO investments and
investment income related to distributions from our direct lending funds.
Interest income generated from our CLO investments was lower for the year ended
December 31, 2020 compared to 2019 primarily due to lower cash distributions
received in the current year. Our CLO investments are primarily in subordinated
notes that do not have contractual interest rates and instead receive
distributions based on the excess cash flows of the CLOs. The COVID-19 pandemic
caused market volatility and lower interest rates, resulting in lower cash flows
for distribution to subordinated note holders.
As of December 31,
2020 2019
Accrued Accrued Accrued Net Accrued Accrued Accrued Net
Performance Performance Performance Performance Performance Performance
($ in thousands) Income Compensation Income Income Compensation Income
Accrued Carried Interest
ACE III $ 77,959 $ 46,776 $ 31,183 $ 76,628 $ 45,977 $ 30,651
ACE IV 93,462 57,946 35,516 57,388 35,581 21,807
PCS 101,656 60,084 41,572 52,029 30,751 21,278
Other credit funds 100,238 61,898 38,340 84,297 48,305 35,992
Total accrued carried
interest 373,315 226,704 146,611 270,342 160,614 109,728
Incentive fees 31,653 18,601 13,052 42,653 25,424 17,229
Total Credit Group $ 404,968 $ 245,305 $ 159,663 $ 312,995 $ 186,038 $ 126,957 The following table presents the change in accrued carried interest from the
prior year end to the current year end for the
As of December As of December
31, 2019 Activity during 2020 31, 2020
Accrued Foreign Exchange Accrued
Carried Change in and Other Carried
($ in thousands) Fee Type Interest Unrealized Realized Adjustments Interest
ACE III European $ 76,628 $ 9,147 $ (11,868) $ 4,052 $ 77,959
ACE IV European 57,388 51,471 (21,064) 5,667 93,462
PCS European 52,029 48,888 - 739 101,656
Other credit funds European 84,034 36,809 (22,424) 1,561 99,980
Other credit funds American 263 (5) - - 258
Total Credit Group $ 270,342 $ 146,310 $ (55,356) $ 12,019 $ 373,315
113-------------------------------------------------------------------------------- Table of Contents Credit Group-Assets Under Management The tables below present rollforwards of AUM for theCredit Group : European Multi-Asset Alternative U.S. Direct Direct Total Credit
($ in millions) Syndicated Loans High 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 $ 2,953 $ 12,897 $ 56,516 $ 42,276 $ 145,472 Average AUM(1) $ 25,312$ 2,911 $ 2,703 $ 9,375 $ 51,548 $ 31,585 $ 123,434 European Multi-Asset Alternative U.S. Direct Direct Total Credit Syndicated Loans High Yield Credit Credit Lending Lending Group Balance at 12/31/2018 $ 18,880$ 4,024 $ 2,761 $ 5,448 $ 40,668 $ 24,055 $ 95,836 Net new par/equity commitments 1,124 165 (13) 2,298 2,253 764 6,591 Net new debt commitments 3,360 - - 75 6,060 1,189 10,684 Capital reductions (805) - - - (908) (52) (1,765) Distributions (103) (22) (74) (233) (1,143) (611) (2,186) Redemptions (438) (1,208) (322) (290) (59) - (2,317) Change in fund value 302 533 259 273 1,560 773 3,700 Balance at 12/31/2019 $ 22,320$ 3,492 $ 2,611 $ 7,571 $ 48,431 $ 26,118 $ 110,543 Average AUM(1) $ 20,928$ 3,734 $ 2,569 $ 6,841 $ 44,958 $ 24,823 $ 103,853
(1) Represents a five-point average of quarter-end balances for each period.
The components of our AUM for the
AUM: $145.5 AUM: $110.5 FPAUM AUM not yet paying fees Non-fee paying(1) General partner and affiliates
(1) Includes
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Credit Group-Fee Paying AUM
The tables below present rollforwards of fee paying AUM for the Credit Group :
Multi-Asset Alternative U.S. Direct European Total Credit
($ in millions) Syndicated Loans High Yield Credit Credit Lending Direct Lending Group
FPAUM 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)
FPAUM 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
Multi-Asset Alternative U.S. Direct European Total Credit
Syndicated Loans High Yield Credit Credit Lending Direct Lending Group
FPAUM Balance at 12/31/2018 $ 18,328 $ 4,025 $ 2,196 $ 2,826 $ 21,657 $ 8,815 $ 57,847
Commitments 3,811 162 112 681 231 - 4,997
Subscriptions/deployment/increase in leverage 354 4 38 1,230 7,451 4,597 13,674
Capital reductions (683) - (10) - (596) (268) (1,557)
Distributions (55) (22) (101) (276) (1,435) (396) (2,285)
Redemptions (438) (1,115) (340) (290) (51) (370) (2,604)
Change in fund value 141 441 249 169 858 323 2,181
Change in fee basis - - - - (239) (134) (373)
FPAUM Balance at 12/31/2019 $ 21,458 $ 3,495 $ 2,144 $ 4,340 $ 27,876 $ 12,567 $ 71,880
Average FPAUM(1) $ 20,099 $ 3,735 $ 2,118 $ 3,631 $ 24,880 $ 10,815 $ 65,278 (1) Represents a five-point average of quarter-end balances for each period.
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The charts below present FPAUM for the Credit Group by its fee basis ($ in
billions):
[[Image Removed: ares-20201231_g39.jpg]] [[Image Removed: ares-20201231_g40.jpg]]
FPAUM: $88.0 FPAUM: $71.9
Market value(1) Invested capital Collateral balances (at par)
(1)Includes $20.7 billion and $18.4 billion from funds that primarily invest in
illiquid strategies as of December 31, 2020 and 2019, respectively. The
underlying investments held in these funds are generally subject to less market
volatility than investments held in liquid strategies.
Credit Group-Fund Performance Metrics as of December 31, 2020
ARCC contributed approximately 48% of the Credit Group's total management fees
for the year ended December 31, 2020 . In addition, five other significant funds,
ACE III , ACE IV , Ares Secured Income Master Fund L.P. ("ASIF"), PCS and SDL,
collectively contributed approximately 18% of the Credit Group's management fees
for the year ended December 31, 2020 .
The following table presents the performance data for our significant
non-drawdown funds in the
Returns(%)(1)
($ in millions) Year-To-Date Since Inception(2) Primary
Fund Year of Inception AUM Gross Net Gross Investment Strategy Net
ARCC(3) 2004 $ 19,114 N/A 8.0 N/A 11.5 U.S. Direct Lending
ASIF(4) 2018 1,070 3.6 3.0 3.1 2.4 Alternative Credit
(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 the SEC , which are not part of this report.
(4)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. ASIF 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 in U.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: 2.0% /
1.5% and 1.4% / 0.7%, respectively.
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The following table presents the performance data of our significant drawdown
funds as of December 31, 2020 :
($ 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 Investments
ACE III (7) 2015 $ 5,297 $ 2,822 $ 2,642 $ 720 $ 2,700 $ 3,420 1.4x 1.3x 11.5 8.1 European Direct Lending
Funds Deploying Capital
PCS 2017 3,877 3,365 2,381 344 2,529 2,873 1.2x 1.2x 12.8 9.0 U.S. Direct Lending
ACE IV Unlevered(8) 2018 10,991 2,851 2,143 134 2,190 2,324 1.1x 1.1x 8.4 5.8 European Direct Lending
ACE IV Levered(8) 4,819 3,545 308 3,715 4,023 1.2x 1.1x 12.5 8.8
SDL Unlevered 2018 5,094 922 539 92 483 575 1.1x 1.1x 9.5 6.8 U.S. Direct Lending
SDL Levered 2,045 1,196 284 1,057 1,341 1.2x 1.1x 18.0 12.6
(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.
The gross MoIC would 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.
The net MoIC would 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 likely
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 likely 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 in U.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 the U.S.
dollar denominated feeder fund are 12.6% and 9.0%, respectively. The gross and
net MoIC for the U.S. dollar denominated feeder fund are 1.5x and 1.3x,
respectively. Original capital commitments are converted to U.S. dollars at the
prevailing exchange rate at the time of the fund's closing. All other values for
ACE III are for the combined fund and are converted to U.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 and ACE IV (G) Levered. The gross and net IRR and MoIC presented
in the table are for ACE IV (E) Unlevered and ACE IV (E) Levered. Metrics for
ACE IV (E) Levered are inclusive of a U.S. dollar denominated feeder fund, which
has not been presented separately. The gross and net IRR for ACE IV (G)
Unlevered are 10.7% and 7.4%, respectively. The gross and net MoIC for ACE IV
(G) Unlevered are 1.2x and 1.0x, respectively. The gross and net IRR for ACE IV
(G) Levered are 14.4% and 10.0%, respectively. The gross and net MoIC for ACE IV
(G) Levered are 1.2x and 1.1x, respectively. Original capital commitments are
converted to U.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 to U.S.
dollars at the prevailing quarter-end exchange rate.
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Private Equity Group-Year Ended December 31, 2020 Compared to Year Ended
December 31, 2019
Fee Related Earnings:
The following table presents the components of the Private Equity Group's FRE:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Management fees $ 221,160 $ 211,614 $ 9,546 5 %
Other fees 178 162 16 10
Compensation and benefits (90,129) (78,259) (11,870) (15)
General, administrative and other expenses (22,145) (19,098) (3,047) (16)
Fee Related Earnings $ 109,064 $ 114,419 (5,355) (5)
Management Fees. The chart below presents
[[Image Removed: ares-20201231_g41.jpg]]
Management fees increased for the year ended December 31, 2020 compared to the
year ended December 31, 2019 primarily from deployment in ASOF. Management fees
increased due to the sixth flagship corporate private equity fund paying fees
beginning in the fourth quarter of 2020. We expect a related decrease in fees
beginning in the first quarter of 2021 due to the step down in fee rate and
change in fee base for ACOF V. Management fees also reflect a full year of fees
for the corporate private equity continuation fund following the launch of the
fund in the fourth quarter of 2019. Management fees decreased due
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to ACOF III no longer paying management fees beginning in the fourth quarter of
2019, to a lower fee base from ACOF IV as it continues to monetize its
investments and to one-time catch-up fees from AEOF during the year ended
December 31, 2019 .
The increase in effective management fee rate for the year ended December 31,
2020 compared to the year ended December 31, 2019 was primarily driven by
deployment in ASOF that has a higher rate than the average effective management
fee rate. In addition, ACOF IV continues to reduce its fee basis through the
monetization of investments. As a result, ACOF IV's lower fee rate has a lesser
impact on the effective management fee rate as it represents a smaller portion
of total Private Equity Group management fees.
Compensation and Benefits. Compensation and benefits increased by $11.9 million ,
or 15%, for the year ended December 31, 2020 compared to the year ended December
31, 2019 . The activity was primarily driven by headcount growth as we hired
professionals to support the expansion of our global presence, such as our
growing corporate private equity and special opportunities platforms, and by
higher incentive compensation. Average headcount increased by 6% to 141
investment and investment support professionals for 2020 from 133 professionals
in 2019.
General, Administrative and Other Expenses. General, administrative and other
expenses increased by $3.0 million , or 16%, for the year ended December 31, 2020
compared to the year ended December 31, 2019 . The change was driven by an
increase in placement fees of $3.1 million , primarily associated with new
commitments to ASOF, and by an increase in fundraising costs of $2.1 million ,
primarily associated with the launch of the sixth flagship corporate private
equity fund and ASOF. There were also certain expenses that increased during the
current period, including occupancy costs to support the headcount growth, as
well as information services and information technology to support the expansion
of our business and our modified remote working environment.
The year ended December 31, 2020 was impacted by the COVID-19 pandemic and
resulted in a decrease in certain operating expenses. During the last nine
months of 2020, our operating expenses were impacted by limitations in certain
business activities, most notably travel and marketing, and by certain office
services and fringe benefits from the modified remote working environment.
Collectively, these expenses decreased by $3.0 million for the nine months ended
December 31, 2020 , when compared to the same period in 2019.
Realized Income:
The following table presents the components of the Private Equity Group's RI:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Fee Related Earnings $ 109,064 $ 114,419 $ (5,355) (5) %
Performance income-realized 392,635 264,439 128,196 48
Performance related compensation-realized (315,905) (211,550) (104,355) (49)
Realized net performance income 76,730 52,889 23,841 45
Investment income-realized 29,100 47,696 (18,596) (39)
Interest and other investment income-realized 5,987 5,046 941 19
Interest expense (8,186) (7,486) (700) (9)
Realized net investment income 26,901 45,256 (18,355) (41)
Realized Income $ 212,695 $ 212,564 131 0
Realized net performance income and realized net investment income for the
year ended December 31, 2020 were primarily attributable to realizations from
the sales of ACOF IV's investments in NVA, Valet Living and a healthcare
services company, from the partial sale of ACOF IV's position in AZEK and from
the sale of ACOF III's remaining position in FND.
Realized net investment income for the year ended December 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 ended
December 31, 2020 included realized losses from ACOF III and ACOF 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.
Realized net performance income and realized net investment income for the year
ended December 31, 2019 were primarily attributable to realizations from the
monetization of multiple investments held within ACOF III , including partial
sales of its position in FND, and sales of its positions in a real estate
development portfolio company and a professional services portfolio company.
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Private Equity Group-Carried Interest
The following table presents the accrued carried interest, also referred to as
accrued performance income, and related performance compensation for the Private
Equity Group :
As of December 31,
2020 2019
Accrued Accrued Accrued Net Accrued Accrued Accrued Net
Performance Performance Performance Performance Performance Performance
($ in thousands) Income Compensation Income Income Compensation Income
ACOF III $ 55,022 $ 44,018 $ 11,004 $ 156,053 $ 124,842 $ 31,211
ACOF IV 345,748 276,598 69,150 343,546 274,837 68,709
ACOF V - - - 75,099 60,079 15,020
EIF V 54,086 40,429 13,657 28,242 21,040 7,202
AEOF - - - 27,377 16,426 10,951
ASOF 113,313 79,319 33,994 10,709 7,496 3,213
Other funds 2,799 2,274 525 17,867 11,524 6,343
Total Private Equity Group $ 570,968 $ 442,638 $ 128,330 $ 658,893 $ 516,244 $ 142,649 The following table presents the change in accrued performance income from the
prior year end to the current year end for the
As of December As of December
31, 2019 Activity during 2020 31, 2020
Accrued Accrued
Performance Change in Foreign Exchange and Performance
($ in thousands) Fee Type Income Unrealized Realized Other Adjustments Income
ACOF III American $ 156,053 $ 8,891 $ (109,922) $ - $ 55,022
ACOF IV American 343,546 285,717 (283,515) - 345,748
ACOF V American 75,099 (75,099) - - -
AEOF American 27,377 (27,377) - - -
ASOF European 10,709 102,604 - - 113,313
EIF V European 28,242 25,844 - - 54,086
Other funds European 2,168 (2,141) - (27) -
Other funds American 15,699 (13,702) 802 - 2,799
Total Credit Group $ 658,893 $ 304,737 $ (392,635) $ (27) $ 570,968
120-------------------------------------------------------------------------------- Table of Contents Private Equity Group-Assets Under Management The tables below present rollforwards of AUM for thePrivate Equity Group : Corporate Private Infrastructure & Special Total Private ($ in millions) Equity Power Opportunities Equity Group Balance at 12/31/2019$ 18,406 $ 3,233 $ 3,527$ 25,166 Net new par/equity commitments 3,964 425 1,800 6,189 Capital reductions (11) - (125) (136) Distributions (4,096) (164) (150) (4,410) Redemptions (5) - - (5) Change in fund value (25) (9) 669 635 Balance at 12/31/2020$ 18,233 $ 3,485 $ 5,721$ 27,439 Average AUM(1)$ 17,532 $ 3,297 $ 4,753$ 25,582 Corporate Private Infrastructure & Special Total Private Equity Power Opportunities Equity Group Balance at 12/31/2018$ 17,912 $
3,842 $ 1,733
1,559 - 1,592 3,151
Net new debt commitments - - 25 25
Capital reductions (8) - - (8)
Distributions (3,356) (401) (46) (3,803)
Redemptions (2) - - (2)
Change in fund value 2,301 (208) 223 2,316
Balance at 12/31/2019 $ 18,406 $ 3,233 $ 3,527 $ 25,166
Average AUM(1) $ 18,416 $ 3,549 $ 2,572 $ 24,537 (1) Represents a five-point average of quarter-end balances for each period.
The components of our AUM for thePrivate Equity Group are presented below ($ in billions): [[Image Removed: ares-20201231_g42.jpg]] [[Image Removed: ares-20201231_g43.jpg]] AUM:$27.4 AUM:$25.2
FPAUM AUM not yet paying fees Non fee paying General partner and affiliates
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Private Equity Group-Fee Paying AUM
The tables below present rollforwards of fee paying AUM for the Private Equity
Group :
Corporate Infrastructure & Special Total Private
($ in millions) Private Equity Power Opportunities Equity Group
FPAUM Balance at 12/31/2019 $ 11,968 $ 3,352 $ 1,720 $ 17,040
Commitments 3,838 400 - 4,238
Subscriptions/deployment/increase in leverage 38 - 1,547 1,585
Distributions (584) (68) (544) (1,196)
Change in fund value (36) - - (36)
Change in fee basis (454) (5) - (459)
FPAUM Balance at 12/31/2020 $ 14,770 $ 3,679 $ 2,723 $ 21,172
Average FPAUM(1) $ 12,357 $ 3,436 $ 2,292 $ 18,085
Corporate Infrastructure & Special Total Private
Private Equity Power Opportunities Equity Group
FPAUM Balance at 12/31/2018 $ 12,398 $ 3,472 $ 1,201 $ 17,071
Commitments 362 - - 362
Subscriptions/deployment/increase in leverage 1,133 91 795 2,019
Capital reductions - - (202) (202)
Distributions (1,152) (211) (1) (1,364)
Change in fund value 3 - - 3
Change in fee basis (775) - (73) (848)
FPAUM Balance at 12/31/2019 $ 11,968 $ 3,352 $ 1,720 $ 17,040
Average FPAUM(1) $ 12,252 $ 3,416 $ 1,440 $ 17,108 (1) Represents a five-point average of quarter-end balances for each period.
The charts below present FPAUM for thePrivate Equity Group by its fee basis ($ in billions): [[Image Removed: ares-20201231_g44.jpg]] [[Image Removed: ares-20201231_g45.jpg]] FPAUM:$21.2 FPAUM:$17.0 Capital commitments Invested capital 122
-------------------------------------------------------------------------------- Table of Contents Private Equity Group-Fund Performance Metrics as ofDecember 31, 2020 Five significant funds,U.S. Power Fund IV ("USPF IV"),ACOF IV , ACOF V, AEOF and ASOF, collectively contributed approximately 79% of thePrivate Equity Group's management fees for the year endedDecember 31, 2020 .Ares Energy Investors Fund V, L.P. ("EIF V") andAres Special Situations Fund IV, L.P. ("SSF IV") are no longer considered significant funds as they did not meet our significant fund thresholds beginning in the first quarter and fourth quarter of 2020, respectively. The following table presents the performance data as ofDecember 31, 2020 for our significant funds in thePrivate Equity Group , all of which are drawdown funds: ($ 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 Investments USPF IV 2010$ 1,168 $ 1,688 $ 2,121 $ 1,403 $ 1,147 $ 2,550 1.2x 1.1x 4.9 1.0 Infrastructure and PowerACOF IV 2012 4,009 4,700 4,251 6,176 3,301 9,477 2.2x 1.9x 20.8 14.6 Corporate Private EquityFunds Deploying Capital ACOF V 2017 7,566 7,850 6,793 671 6,504 7,175 1.1x 1.0x 2.8 (1.1) Corporate Private Equity AEOF 2018 682 1,120 965 58 536 594 0.6x 0.5x (27.2) (37.7) Corporate Private Equity ASOF 2019 4,085 3,518 2,447 898 2,181 3,079 1.4x 1.3x 71.5 53.5 Special Opportunities (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 and infrastructure and power funds, 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. The gross MoICs for the corporate private equity funds are also calculated before giving effect to any bridge financings. Inclusive of bridge financings, the gross MoIC would be 2.1x forACOF IV , 1.1x for ACOF V and 0.6x for AEOF. 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. The gross MoIC would have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. In the prior quarter, the gross MoIC for the special situations funds was calculated using the same method as is currently used for the corporate private equity and infrastructure and power funds. Using that method, the gross MoIC for ASOF is 1.3x. (4)The net MoIC for USPF IV and ASOF is calculated at the fund-level. 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. The funds may utilize a credit facility during the investment period and for general cash management purposes. The net MoIC would have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. (5)For the corporate private equity and infrastructure and power funds, 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. The gross IRRs for the corporate private equity funds are also calculated before giving effect to any bridge financings. Inclusive of bridge financings, the gross IRRs would be 20.7% forACOF IV , 3.1% for ACOF V and (27.1)% for AEOF. 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 funds may utilize a credit facility during the investment period and for general cash management purposes. Gross fund-level IRRs would likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. In the prior quarter, the gross IRR for the special situations funds was calculated using the same method as is currently used for the corporate private equity and infrastructure and power funds. Using that method, the gross IRR for ASOF is 51.3%. (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 have generally been lower had such fund called capital from its limited partners instead of utilizing the credit facility. 123 -------------------------------------------------------------------------------- Table of Contents Real Estate Group-Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Fee Related Earnings: The following table presents the components of theReal Estate Group's FRE: Year ended December 31, Favorable (Unfavorable) ($ in thousands) 2020 2019 $ Change % Change Management fees$ 97,680 $ 87,063 $ 10,617 12 % Other fees 974 792 182 23 Compensation and benefits (53,004) (49,124) (3,880) (8) General, administrative and other expenses (12,251) (13,249) 998 8 Fee Related Earnings$ 33,399 $ 25,482 7,917 31
Management Fees. The chart below presents
[[Image Removed: ares-20201231_g46.jpg]]
Management fees increased for the year ended December 31, 2020 compared to the
year ended December 31, 2019 primarily due to the full year impact of fees
following the launch of our third U.S. opportunistic real estate equity fund in
the fourth quarter of 2019 and to the launch of our third European value-add
real estate equity fund in the first quarter of 2020. Management fees from real
estate debt funds increased by $3.9 million from the prior year primarily due to
increased
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deployment. For the year ended December 31, 2020 , the increase in management
fees was further driven by our Real Estate Group completing the sale of its
stake in a 40-property pan-European logistics portfolio that resulted in the
recognition of $2.0 million of deferred revenue that will not recur in future
periods. The increase in management fees was offset by one-time catch-up fees
from EF V in the prior year.
The decrease in effective management fee rate for the year ended December 31,
2020 compared to the year ended December 31, 2019 was primarily due to the
increase in committed capital from the launch of our third U.S. opportunistic
real estate equity fund. 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.
Compensation and Benefits. Compensation and benefits increased by $3.9 million ,
or 8%, for the year ended December 31, 2020 compared to the year ended December
31, 2019 . The increase in salaries and benefits was primarily driven by an
increase in headcount during the current year. Average headcount increased by 7%
to 101 investment and investment support professionals for 2020 from 94
professionals in 2019.
General, Administrative and Other Expenses. General, administrative and other
expenses decreased by $1.0 million , or 8%, for the year ended December 31, 2020
compared to the year ended December 31, 2019 . The year ended December 31, 2020
was impacted by the COVID-19 pandemic and resulted in a decrease in certain
operating expenses. During the last nine months of 2020, our operating expenses
were impacted by limitations in certain business activities, most notably
travel, entertainment and marketing sponsorships, and by certain office services
and fringe benefits from the modified remote working environment. Collectively,
these expenses decreased by $1.7 million for the nine months ended December 31,
2020 , when compared to the same period in 2019.
There were also certain expenses that increased during the current period,
including occupancy costs to support the headcount growth, information services
and information technology to support the expansion of our business and our
modified remote working environment. In addition, placement fees increased by
$1.6 million for the year ended December 31, 2020 , associated with new
commitments to our third U.S. opportunistic real estate equity fund.
Realized Income:
The following table presents the components of the Real Estate Group's RI:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Fee Related Earnings $ 33,399 $ 25,482 $ 7,917 31%
Performance income-realized 62,273 33,637 28,636 85
Performance related compensation-realized (39,482) (17,191) (22,291) (130)
Realized net performance income 22,791 16,446 6,345 39
Investment income-realized 3,146 8,020 (4,874) (61)
Interest and other investment income-realized 4,056 5,633 (1,577) (28)
Interest expense (5,200) (3,824) (1,376) (36)
Realized net investment income 2,002 9,829 (7,827) (80)
Realized Income $ 58,192 $ 51,757 6,435 12
Realized net performance income and realized net investment income for the year
ended December 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 was also attributable to interest income generated in U.S. real estate
equity and real estate debt funds.
Realized net performance income and investment income for the year ended
December 31, 2019 was primarily attributable to the sale of multiple properties
held within Ares US Real Estate Fund VIII, L.P. and within various other U.S.
real estate equity funds. Realized net performance income and investment income
for the year ended December 31, 2019 also includes the monetization of several
properties held within a certain European real estate equity fund.
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Table of
As of December 31,
2020 2019
Accrued Accrued Accrued Net Accrued Accrued Accrued Net
Performance Performance Performance Performance Performance Performance
($ in thousands) Income Compensation Income Income Compensation Income
Accrued Carried Interest
US IX $ 26,704 $ 16,556 $ 10,148 $ 6,844 $ 4,243 $ 2,601
EF IV 55,829 33,498 22,331 70,440 42,265 28,175
Other real estate funds 119,036 75,062 43,974 128,448 80,747 47,701
Other fee generating funds(1) 2,786 - 2,786 7,268 - 7,268
Total accrued carried interest 204,355 125,116 79,239 213,000 127,255 85,745 Incentive fees 525 315 210 378 227 151Total Real Estate Group $ 204,880 $ 125,431 $ 79,449 $ 213,378 $ 127,482 $ 85,896
(1)Relates to investment income from
The following table presents the change in accrued carried interest from the
prior year end to the current year end for the
As of December As of December
31, 2019 Activity during 2020 31, 2020
Accrued Foreign Exchange Accrued
Carried Change in and Other Carried
($ in thousands) Waterfall Type Interest Unrealized Realized Adjustments Interest
US IX European $ 6,844 $ 19,860 $ - $ - $ 26,704
EF IV American 70,440 (7,364) (7,833) 586 55,829
Other real estate funds European 87,657 16,179 (17,244) - 86,592
Other real estate funds American 40,791 25,885 (35,790) 1,558 32,444 Other fee generating funds(1) European 1,786 (630) (552) (178) 426 Other fee generating funds(1) American 5,482 (3,096) (26) - 2,360Total Real Estate Group $ 213,000
$ 50,834 $ (61,445) $ 1,966$ 204,355
(1)Relates to investment income from
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Real Estate Group-Assets Under Management
The tables below present rollforwards of AUM for the
Real Estate Equity Real Estate Equity Total Real Estate
($ in millions) - U.S. - Europe Real Estate Debt 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
Real Estate Equity Real Estate Equity Total Real Estate
- U.S. - Europe Real Estate Debt Group
Balance at 12/31/2018 $ 4,163 $ 3,711 $ 3,466 $ 11,340
Net new par/equity commitments 452 1,102 807 2,361
Net new debt commitments - - 633 633
Capital reductions - - (89) (89)
Distributions (1,147) (408) (45) (1,600)
Change in fund value 325 183 54 562
Balance at 12/31/2019 $ 3,793 $ 4,588 $ 4,826 $ 13,207
Average AUM(1) $ 3,742 $ 4,175 $ 4,225 $ 12,142 (1) Represents a five-point average of quarter-end balances for each period.
The components of our AUM for theReal Estate Group are presented below ($ in billions): [[Image Removed: ares-20201231_g47.jpg]] [[Image Removed: ares-20201231_g48.jpg]] AUM:$14.8 AUM:$13.2
FPAUM AUM not yet paying fees Non-fee paying General partner and affiliates
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Real Estate Group-Fee Paying AUM
The tables below present rollforwards of fee paying AUM for the Real Estate
Group :
Real Estate Equity Real Estate Equity Total Real
($ in millions) - U.S. - Europe Real Estate Debt Estate GroupFPAUM 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) FPAUM Balance at 12/31/2020 $ 3,659 $ 4,088 $ 2,505$ 10,252 Average FPAUM(1) $ 3,337 $ 3,961 $ 1,941$ 9,239 Real Estate Equity Real Estate Equity Total Real - U.S. - Europe Real Estate Debt Estate Group FPAUM Balance at 12/31/2018 $ 2,739 $ 3,269 $ 944$ 6,952 Commitments 290 790 - 1,080 Subscriptions/deployment/increase in leverage 230 277 762 1,269 Capital reductions (8) (35) (174) (217) Distributions (393) (213) (44) (650) Change in fund value (1) (63) 48 (16) Change in fee basis (222) (233) - (455) FPAUM Balance at 12/31/2019 $ 2,635 $ 3,792 $ 1,536$ 7,963 Average FPAUM(1) $ 2,593 $ 3,565 $ 1,195$ 7,353
(1) Represents a five-point average of quarter-end balances for each period.
The charts below present FPAUM for theReal Estate Group by its fee basis ($ in billions): [[Image Removed: ares-20201231_g49.jpg]] [[Image Removed: ares-20201231_g50.jpg]] FPAUM:$10.2 FPAUM:$8.0 Capital commitments Invested capital/other(1)
Market value(2)
(1)Other consists of ACRE's FPAUM, which is based on ACRE's stockholders'
equity.
(2)Amounts represent FPAUM from funds that primarily invest in illiquid
strategies. The underlying investments held in these funds are generally subject
to less market volatility than investments held in liquid strategies.
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Real Estate Group-Fund Performance Metrics as of December 31, 2020
Two significant funds, European Real Estate Fund V SCSp ("EF V") and our third
U.S. opportunistic real estate equity fund, collectively contributed
approximately 39% of the Real Estate Group's management fees for the year ended
December 31, 2020 . EF IV and US IX are no longer considered significant funds as
they did not meet our significant fund thresholds beginning in the first quarter
and third quarter of 2020, respectively.
The following table presents the performance data as of December 31, 2020 for
our significant funds in the Real Estate Group , all of which are drawdown funds:
($ 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 Deploying Capital
EF V(7) 2018 $ 2,120 $ 1,968 $ 986 $ 52 $ 1,052 $ 1,104 1.1x 1.0x 12.1 0.8 European Real Estate Equity
Third U.S. opportunistic
real estate equity fund 2019 1,372 1,189 128 - 121 121 0.9x 0.8x NA NA U.S. Real Estate Equity
(1)Realized value includes distributions of operating income, sales and
financing proceeds received.
(2)Unrealized value represents the fair value of remaining investments. 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. Net fund-level MoICs would generally likely
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 likely 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 in U.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 for the U.S.
dollar denominated parallel fund are 1.1x and 1.0x, respectively. The gross and
net IRRs for the U.S. dollar denominated parallel fund are 12.1% and 2.4%,
respectively. Original capital commitments are converted to U.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 to U.S. dollars at the prevailing
quarter-end exchange rate.
129-------------------------------------------------------------------------------- Table of Contents Strategic Initiatives-Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Strategic Initiatives represents an all-other category formed in 2020 that includes operating segments and strategic investments that are seeking to broaden our distribution channels or expand our access to global markets. It includes the AUM and results of Ares SSG subsequent to the completion of the SSG Acquisition onJuly 1, 2020 and ofAspida Life Re Ltd subsequent to the acquisition of the outstanding common shares of F&G Re onDecember 18, 2020 . Strategic Initiatives-Fund Performance Metrics as ofDecember 31, 2020 Strategic Initiatives includes two significant funds,SSG Capital Partners IV, L.P. ("SSG Fund IV") andSSG Capital Partners V, L.P. ("SSG Fund V"), that collectively contributed approximately 66.6% of the management fees reported in Strategic Initiatives for the year endedDecember 31, 2020 . The following table presents the performance data as ofDecember 31, 2020 for our significant funds reported in Strategic Initiatives, all of which are drawdown funds: ($ 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 StrategyFunds Deploying Capital SSG Fund IV 2016$ 1,325 $ 1,181 $ 1,287 $ 759 $ 670 $ 1,429 1.2x 1.1x 14.4 8.1 Asian Special Situations SSG Fund V 2018 1,960 1,878 802 187 697 884 1.2x 1.1x N/A N/A 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. The gross MoIC would 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. The net MoIC would 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 IRR would 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 likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.
Operations Management Group-Year Ended
Fee Related Earnings:
The following table presents OMG's operating expenses that are a component of
FRE:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Compensation and benefits $ (155,979) $ (139,162) $ (16,817) (12) %
General, administrative and other expenses (80,778) (91,292) 10,514 12
Fee Related Earnings $ (236,757) $ (230,454) (6,303) (3)
Compensation and Benefits. Compensation and benefits increased by $16.8 million ,
or 12%, for the year ended December 31, 2020 compared to the year ended December
31, 2019 . The increases were primarily driven by the headcount growth from the
expansion of our strategy and relationship management teams to support global
fundraising and other strategic growth initiatives, from the SSG Acquisition and
from the expansion of our business operations teams. Average headcount for
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the year-to-date period increased by 25% to 674 operation management
professionals for the 2020 period from 539 professionals for the same period in
2019. Average headcount for our operations management professionals increased by
the expansion of our team in India and by the SSG Acquisition of 101 and 21,
respectively.
The expansion of our business operations teams internalized certain business
processes and included opening a new office in India during the second half of
2019. The compensation expense growth associated with our business operations
initiative of $3.1 million for the year ended December 31, 2020 is offset by
reduced outsourced third party service provider expenses for accounting and
information technology support that are reflected within general, administrative
and other expenses.
General, Administrative and Other Expenses. General, administrative and other
expenses decreased by $10.5 million , or 12%, for the year ended December 31,
2020 compared to the year ended December 31, 2019 . The decrease was driven by a
reduction in costs resulting from our efforts to build out operations in India .
While occupancy and overhead costs increased, the reduction to outsourced third
party service provider expenses resulted in the net reduction in total expenses
of $5.8 million for the year ended December 31, 2020 . We also incurred $0.7
million of start-up costs related to our operations in India in the first half
of 2019 that did not recur in the current year.
The year ended December 31, 2020 was impacted by the COVID-19 pandemic and
resulted in a decrease in certain operating expenses. During the last nine
months of 2020, our operating expenses were impacted by limitations in certain
business activities, most notably travel, entertainment and marketing
sponsorships, and by certain office services and fringe benefits from the
modified remote working environment. Collectively, these expenses decreased by
$7.8 million for the nine months ended December 31, 2020 , when compared to the
same period in 2019.
Expense decreased by $5.5 million pertaining to an SEC matter related to certain
of our compliance policies and procedures. During the fourth quarter of 2019, we
recorded $6.5 million of costs pertaining to this matter. During the first half
of 2020, we recorded another $1.0 million of net expenses that included costs
associated with professional fees and a civil penalty of $1.0 million , offset by
insurance proceeds we received of $2.5 million .
There were also certain expenses that increased during the current period,
including occupancy costs to support the headcount growth, information services
and information technology to support the expansion of our business and our
modified remote working environment. Collectively, these expenses increased by
$6.3 million for the year ended December 31, 2020 when compared to the same
period in 2019.
Realized Income:
The following table presents the components of the OMG's RI:
Year ended December 31, Favorable (Unfavorable)
($ in thousands) 2020 2019 $ Change % Change
Fee Related Earnings $ (236,757) $ (230,454) $ (6,303) (3) %
Investment loss-realized (5,698) - (5,698) NM
Interest and other investment loss-realized (739) (160) (579) NM
Interest expense (1,335) (1,864) 529 28
Realized net investment loss (7,772) (2,024) (5,748) (284)
Realized Income $ (244,529) $ (232,478) (12,051) (5)
NM - Not Meaningful
Realized net investment loss was $7.8 million for the year ended December 31,
2020 primarily driven by a realized loss associated with the sale of a non-core
insurance-related investment.
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Liquidity and Capital Resources
Management assesses liquidity in terms of our ability to generate cash to fund
operating, investing and financing activities. In the wake of the COVID-19
pandemic, 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.
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, which are collected monthly,
quarterly or semi-annually, and net realized performance income, which is
unpredictable as to amount and timing, (4) fund distributions related to our
investments that are also unpredictable as to amount and timing and (5) net
borrowing from the Credit Facility. As of December 31, 2020 , our cash and cash
equivalents were $539.8 million , and we had no 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, 2020 . 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. 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.
One of our sources of cash from operations is ARCC Part I Fees. Under certain
circumstances, ARCC Part I Fees that have been earned and recorded by us as
revenue may be deferred for payment under the terms of the applicable investment
advisory and management agreement with ARCC. ARCC Part I Fees are earned based
on ARCC's net investment income, which does not include any realized gains or
losses or any unrealized gains or losses resulting from changes in fair value.
Cash payment of ARCC Part I Fees that we have earned is deferred if, during the
most recent four full calendar quarter periods ending on or prior to the date
such payment is to be made, the sum of (a) aggregate distributions to ARCC's
stockholders and (b) ARCC's change in net assets (defined as ARCC's total assets
less indebtedness and before taking into account any income based fees or
capital gains incentive fees accrued during the period) is less than 7.0% of
ARCC's net assets (defined as total assets less indebtedness) at the beginning
of such period. These calculations will be adjusted for any share issuances or
repurchases. Once earned, ARCC Part I Fees are not reversible even if payment is
deferred. All fees deferred for payment will be carried over for payment in
subsequent calculation periods to the extent the payment hurdle is achieved in
accordance with the investment advisory and management agreement with ARCC. The
ongoing effects of COVID-19 are unknown and may cause the ARCC Part I Fees to
continue to be earned yet deferred for payment. In such cases, we may continue
to recognize the revenue, and such earned but unpaid amounts would result in a
larger receivable from affiliates. The impact of this deferral mechanic to our
liquidity is offset by the fact that 60% of ARCC Part I Fees are due to certain
professionals as compensation, which is recorded as a liability but may not be
paid until the related cash is received by us. Therefore, the potential
liquidity impact of a deferral of the payment of ARCC Part I Fees is limited to
40% of the total amount of ARCC Part I Fees earned. As of December 31, 2020 , no
payments were deferred under the terms of the investment advisory and management
agreement.
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
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 common stockholders and the Series A Preferred
stockholders in accordance with our dividend policies and (9) pay distributions
to AOG unitholders.
In the normal course of business, we expect to pay dividends that are aligned
with the expected changes in our after-tax fee related earnings. 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. Unless quarterly dividends have been declared and paid (or
declared and set apart for payment) on the Series A Preferred Stock, we may not
declare or pay or set apart payment for dividends on any shares of our Class A
common stock during the period. Dividends on Series A Preferred Stock are not
cumulative and the Series A Preferred Stock is not convertible into our Class A
common stock or any other security.
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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 7. Debt" and "Note 14. 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.
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 16. Consolidation" to our audited
consolidated financial statements included in this Annual Report on Form 10-K.
Year ended December 31,
($ in thousands) 2020 2019
Net cash provided by operating activities $ 281,204 $ 305,741 Net cash used in the Consolidated Funds' operating activities, net of eliminations
(706,863) (2,388,762)
Net cash used in operating activities (425,659) (2,083,021)
Net cash used in the Company's investing activities (136,764) (16,796)
Net cash provided by (used in) the Company's financing activities 239,736
(260,366)
Net cash provided by the Consolidated Funds' financing activities, net of eliminations
704,159 2,382,696
Net cash provided by financing activities 943,895 2,122,330
Effect of exchange rate changes 19,956 5,624
Net change in cash and cash equivalents $ 401,428 $ 28,137
Operating Activities
Cash flow from operations is composed of (i) cash generated from our core
business activities, primarily consisting of profits generated principally from
management fees after covering for operating expenses, (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 of the last two years. Although
cash generated from our core business activities increased significantly when
compared to the prior year, cash provided by the Company's operating activities
decreased from $305.7 million for the year ended December 31, 2019 to $281.2
million for the year ended December 31, 2020 . This decrease was largely
attributable to net purchases associated with our investment portfolio.
Net cash used in the Consolidated Funds' operating activities was principally
attributable to purchases of investment securities by recently launched funds
during both years.
Our increasing working capital needs reflect 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. The
movements within our Consolidated Funds do not adversely impact our liquidity or
earnings trends. We believe that our ability to generate cash from operations,
as well as the capacity under the Credit Facility, provides us with the
necessary liquidity to manage short-term fluctuations in working capital and to
meet our short-term commitments.
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Investing Activities
Year ended December 31,
2020 2019Purchase of furniture, equipment and leasehold improvements, net of disposals
$ (15,942) $ (16,796) Acquisitions, net of cash acquired (120,822) - Net cash used in investing activities$ (136,764) $ (16,796) Net cash used in the Company's investing activities was principally composed of cash used to complete the SSG Acquisition and to purchase CLO collateral management agreements from Crestline Denali in the current year. And to a lesser extent, we used cash to purchase furniture, fixtures, equipment and leasehold improvements purchased during both years to support the growth in our staffing levels and our expanding global presence. Financing Activities Year ended December 31, 2020 2019 Net proceeds from issuance of Class A common stock$ 383,154 $ 206,705 Net repayments of credit facility (70,000) (165,000) Proceeds from senior notes 399,084 - Class A common stock dividends (231,446) (148,666) AOG unitholder distributions (215,334) (175,001) Series A Preferred Stock dividends (21,700) (21,700) Repurchases of Class A common stock - (10,449) Stock option exercises 92,877 90,511 Taxes paid related to net share settlement of equity awards (95,368) (33,554) Other financing activities (1,531) (3,212)
Net cash provided by (used in) the Company's financing activities
$ (260,366) Net cash provided by the Company's financing activities for the year endedDecember 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 during this period of uncertainty and to finance strategic growth initiatives, including business and management fee contract acquisitions. A portion of these proceeds were used to repay 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 toSumitomo Mitsui Banking Corporation ("SMBC") that further strengthened the Company's capital position. These proceeds were partially offset by cash used to pay higher dividends and distributions to Class A common stockholders and AOG unitholders, respectively, as we generated higher fee related earnings on an increased number of Class A shares outstanding compared to the prior year. Net cash used in the Company's financing activities for the year endedDecember 31, 2019 was principally composed of cash used to pay dividends and distributions to Class A common stockholders and AOG unitholders and net repayments on the Company's Credit Facility, offset by proceeds from our Class A common stock offering and from exercises of stock options.
Year ended
2020 2019
Contributions from non-controlling interests in Consolidated Funds, net of eliminations
$
132,430
(251,507) (96,282)
Borrowings under loan obligations by Consolidated Funds 1,013,291 3,341,837
Repayments under loan obligations by Consolidated Funds
(190,055) (1,035,710)
Net cash provided by the Consolidated Funds' financing activities
Net cash provided by Consolidated Funds' financing activities was principally attributable to borrowings of newly issued CLOs for both years. There were two and five newly issued CLOs during the years endedDecember 31, 2020 and 2019, respectively. 134 -------------------------------------------------------------------------------- Table of Contents Capital Resources We intend to use a portion of our available liquidity to pay cash dividends to our Series A Preferred stockholders and our Class A common stockholders on a quarterly basis in accordance with our dividend policies. Our ability to make cash dividends to the Series A Preferred stockholders and our Class A common stockholders 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 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 and certain subsidiaries operating outside theU.S. These net capital requirements 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 ofDecember 31, 2020 , we were required to maintain approximately$35.9 million in liquid 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 forU.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, inU.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$62.5 million and$26.5 million as ofDecember 31, 2020 and 2019, respectively. In 2020, there were exchanges of 4.1 million of AOG Units for shares of our Class A common stock and we recognized deferred tax benefits of$44.1 million , which increased additional paid in capital by$6.6 million and our TRA liability by$37.5 million . The TRA liability also decreased by$1.5 million primarily due to a cash payment made from the realized tax benefit for the 2019 tax year. For a discussion of our debt obligations, including the debt obligations of our consolidated funds, see "Note 7. Debt," to our audited consolidated financial statements included in this Annual Report on Form 10-K. Series A Preferred Stock For a discussion of our equity, including our Series A Preferred Stock, see "Note 14. 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 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.
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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 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 hierarchal 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 5. 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, the excess of the purchase consideration over
the fair value of net assets acquired is recorded as goodwill. 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,
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
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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.
Equity-Based Compensation
We granted certain restricted units with a vesting condition based upon the volume-weighted, average closing price of shares of our Class A common stock meeting or exceeding a stated price for 30 consecutive calendar days on or prior toJanuary 1, 2028 , 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 price target is not achieved by the close of business onJanuary 1, 2028 , the unvested market condition awards will be automatically canceled and forfeited, 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 was 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 theMonte Carlo simulations where the market condition was achieved. The market condition was met for the market condition awards and the associated compensation expense was accelerated during the year endedDecember 31, 2020 .
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 valuation date$20.95 Risk-free interest rate 2.95% Volatility 30.0% Dividend yield 5.0% Cost of equity 10.0% 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," in the "Notes to the Consolidated Financial Statements" included in this Annual Report on Form 10-K. 137 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements In the normal course of business, we engage in off-balance sheet arrangements, including transactions in derivatives, guarantees, commitments, indemnifications and potential contingent repayment obligations. See "Note 9. Commitments and Contingencies," to our audited consolidated financial statements included in this Annual Report on Form 10-K.
Contractual Obligations, Commitments and Contingencies
The following table sets forth information relating to our contractual
obligations of the Company and of the Consolidated Funds as of
Less than 1 year 1 - 3 years 4 - 5 years Thereafter Total
The Company:
Operating lease obligations(1) $ 35,571 $ 73,733 $ 63,402 $ 38,712 $ 211,418
Debt obligations payable(2) - - 247,285 395,713 642,998
Capital lease obligations 519 644 163 - 1,326
Interest obligations on debt(3) 27,603 55,206 41,726 58,500 183,035
Capital commitments(4) 784,221 - - - 784,221
Subtotal 847,914 129,583 352,576 492,925 1,822,998
Consolidated Funds:
Debt obligations payable 104,000 17,909 - 10,427,759 10,549,668
Interest obligations on debt(3) 188,510 374,568 374,767 958,844 1,896,689
Capital commitments of Consolidated Funds(4) 15,599 - - - 15,599 Total$ 1,156,023 $ 522,060 $ 727,343 $ 11,879,528 $ 14,284,954 (1)The table includes future minimum commitments for our operating leases. Office space, computer and communication equipment are leased under agreements with expirations ranging from one-year contracts to lease commitments through 2030. Rent expense includes only base contractual rent. These amounts include total rent payments of$11.5 million under the terms of an operating lease that did not commence as ofDecember 31, 2020 . (2)Debt obligations include$650.0 million of senior notes, net of unamortized discount. (3)Interest obligations reflect future interest payments on outstanding debt obligations with stated interest rates. (4)Represents commitments to fund certain investments. These amounts are generally due on demand and are therefore presented as obligations payable in the 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 byAres Management Corporation from any step-up in tax basis resulting from an exchange ofAres 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 9. Commitments and Contingencies," to our audited consolidated financial statements included in this Annual Report on Form 10-K. 138
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