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OFFON

ARES MANAGEMENT CORPORATION

(ARES)
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ARES MANAGEMENT : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/06/2021 | 05:02pm EDT
Ares Management Corporation is a Delaware corporation. Unless the context
otherwise requires, references to "Ares," "we," "us," "our," and the "Company"
are intended to mean the business and operations of Ares 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, CLOs
and special purpose acquisition companies that are required under generally
accepted accounting principles in the United States ("GAAP") to be consolidated
in our condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q. Additional terms used by the Company are defined in the
Glossary and throughout the Management's Discussion and Analysis in this
Quarterly Report on Form 10-Q.
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of Ares Management
Corporation and the related notes included in this Quarterly Report on Form 10-Q
and the audited financial statements and the related notes included in the 2020
Annual Report on Form 10-K of Ares Management Corporation and the related notes.
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 of March 31, 2021, approximately 67% of our AUM
were in funds with a remaining contractual life of three years or more,
approximately 73% of our AUM were in funds with an initial duration greater than
seven years at time of closing and 89% 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 in the United States and
Western Europe, including conditions in the global financial markets and the
economic and political environments.

Performance across global capital markets during the quarter was dominated by
progress in the vaccine rollout and accommodative monetary and fiscal support.
Despite rate volatility and concerns for elevated inflation, U.S. leveraged
credit markets responded favorably to improving economic growth trends and the
rollout of additional economic stimulus in the U.S.

U.S. high yield bond spreads tightened into quarter-end as rising commodity
prices, a wave of rating upgrades and expectations for strong corporate earnings
provided a supportive tailwind to the asset class. Specifically, the ICE BAML
High Yield Master II Index, a high yield bond index, returned 0.9% in the first
quarter of 2021. Meanwhile, U.S. leveraged loans outperformed bonds, as demand
for floating rate instruments increased amid rising rates and strong CLO
origination. Specifically, the Credit Suisse Leveraged Loan Index ("CSLLI"), a
leveraged loan index, returned 2.0% in the quarter.

European high yield and leveraged loan markets rallied alongside its U.S.
counterparts, amid encouraging news surrounding the rollout of vaccines and an
improving macroeconomic outlook. Slower than expected vaccine distribution due
to production issues slightly weighed on performance in March; however,
sentiment was bolstered heading into quarter-end by the European Central Bank's
commitment to increase the pace of its Pandemic Emergency Purchasing Program.
The ICEBAML European Currency High Yield Index returned 1.5% in the first
quarter of 2021, while the Credit Suisse Western European Leveraged Loan Index
returned 1.7%.

Global equity markets also continued to recover from the lows of the COVID-19
pandemic. The S&P 500 Index and the MSCI All Country World ex USA Index had
positive returns of 6.2% and 3.5%, respectively, for the quarter. Private equity
market activity remained robust and has accelerated through the quarter,
particularly for COVID-19-resilient businesses. Deal activity and valuations
continued to rise and were higher in certain sectors, such as technology, amid
an increasingly competitive market due to a variety of factors, including
pent-up demand following the slowdown in 2020. In light of the highly
competitive environment, we believe companies prefer to partner with sponsors
who can help add value and navigate the challenging growth landscape.

With the European and U.S. economies continuing to recover over the quarter,
real estate values have increased following declines caused by the onset of the
global pandemic. The FTSE EPRA/NAREIT Developed Europe and the FTSE NAREIT All
Equity REITs indices returned a negative 0.9% and 7.5%, respectively, for the
quarter. Rents and occupancies for
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certain property types and geographies are still below where they were for the
first quarter of 2020, though the outlook is improved with the acceleration of
vaccinations and progress towards the broader reopening of economies.

Recent Transactions

On March 30, 2021, a subsidiary of Ares entered into a definitive agreement to acquire 100% of Landmark Partners, LLC (collectively with its subsidiaries, "Landmark"), a leading investment manager focused on the secondary markets. Landmark manages private equity, real estate and infrastructure secondaries funds totaling approximately $18.7 billion in AUM as of December 31, 2020. In April 2021, Ares sold approximately $250.0 million of common stock, consisting of non-voting common stock and Class A common stock, to Sumitomo Mitsui Banking Corporation in a private offering and approximately $578.2 million of Class A common stock in connection with a public offering.


On April 1, 2021, Ares and certain of its subsidiaries entered into a series of
transactions that simplified the organizational structure, including merging
Ares Offshore and Ares Investments with and into Ares Holdings, with Ares
Holdings surviving. Accordingly, the separate existence of each of Ares Offshore
and Ares Investments ceased. Prior to these series of transactions, Ares
Offshore and Ares Investments were part of the Ares Operating Group. Following
these series of transactions, Ares Holdings became the sole entity in the Ares
Operating Group.

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.
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The tables below present rollforwards of our total AUM by segment:
                                           Credit             Private            Real Estate            Strategic
($ in millions)                            Group           Equity Group             Group              Initiatives           Total AUM
Balance at 12/31/2020                   $ 145,472          $   27,439          $     14,808          $       9,261          $ 196,980

Net new par/equity
commitments(1)                              4,519                 (21)                  730                    700              5,928
Net new debt commitments                    2,543                   -                 1,880                      -              4,423
Capital reductions                           (545)                 (2)                 (232)                     -               (779)
Distributions                                (740)               (634)                 (171)                  (131)            (1,676)
Redemptions                                  (536)                  -                     -                      -               (536)
Change in fund value                          403               2,237                   114                     64              2,818
Balance at 3/31/2021                    $ 151,116          $   29,019          $     17,129          $       9,894          $ 207,158
Average AUM(2)                          $ 148,296          $   28,230          $     15,970          $       9,578          $ 202,074

                                           Credit             Private            Real Estate            Strategic
                                           Group           Equity Group             Group              Initiatives           Total AUM
Balance at 12/31/2019                   $ 110,543          $   25,166          $     13,207          $           -          $ 148,916
Acquisitions                                2,693                   -                     -                      -              2,693
Net new par/equity commitments              2,036                 364                 1,560                      -              3,960
Net new debt commitments                    2,219                   -                   226                      -              2,445
Capital reductions                            (47)                (25)                    -                      -                (72)
Distributions                                (632)             (1,838)                 (643)                     -             (3,113)
Redemptions                                  (464)                  -                     -                      -               (464)
Change in fund value                       (3,836)             (1,652)                 (238)                     -             (5,726)
Balance at 3/31/2020                    $ 112,512          $   22,015          $     14,112          $           -          $ 148,639
Average AUM(2)                          $ 111,528          $   23,591          $     13,660          $           -          $ 148,779

(1) Reallocation of capital among the segments may occur for pools of capital with investment mandates in more than one investment strategy. This reallocation activity is presented within net new par/equity commitments and may result in balances presented to be negative. (2) Represents the quarterly average of beginning and ending balances.

The components of our AUM are presented below as of ($ in billions):

 [[Image Removed: ares-20210331_g2.jpg]][[Image Removed: ares-20210331_g3.jpg]]
                                AUM: $207.2       AUM: $148.6


FPAUM AUM not yet paying fees Non-fee paying(1) General partner and affiliates

(1) Includes $9.1 billion and $8.0 billion of AUM of funds from which we indirectly earn management fees as of March 31, 2021 and 2020, respectively.

Please refer to "- Results of Operations by Segment" for a more detailed presentation of AUM by segment for each of the periods presented

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Fee Paying Assets Under Management
FPAUM refers to AUM from which we directly earn management fees and is equal to
the sum of all the individual fee bases of our funds that directly contribute to
our management fees.
The tables below present rollforwards of our total FPAUM by segment:
                                                        Credit             Private           Real Estate           Strategic
($ in millions)                                          Group          Equity Group            Group             Initiatives             Total
FPAUM Balance at 12/31/2020                           $ 88,017          $   21,172          $   10,252          $       6,596          $ 126,037

Commitments(1)                                           1,585                  79                 496                   (231)             1,929
Subscriptions/deployment/increase in leverage            4,539                 592                 337                    538              6,006
Capital reductions                                        (837)                  -                 (32)                    (1)              (870)
Distributions                                           (1,322)               (576)               (141)                  (256)            (2,295)
Redemptions                                               (646)                  -                   -                      -               (646)
Change in fund value                                       279                  (1)                (92)                   (20)               166
Change in fee basis                                          -              (2,739)                  -                      -             (2,739)
FPAUM Balance at 3/31/2021                            $ 91,615          $   18,527          $   10,820          $       6,626          $ 127,588
Average FPAUM(2)                                      $ 89,817          $   19,850          $   10,537          $       6,611          $ 126,815

                                                        Credit             Private           Real Estate           Strategic
                                                         Group          Equity Group            Group             Initiatives             Total
FPAUM Balance at 12/31/2019                           $ 71,880          $   17,040          $    7,963          $           -          $  96,883
Acquisitions                                             2,596                   -                   -                      -              2,596
Commitments                                              1,240                   -               1,368                      -              2,608
Subscriptions/deployment/increase in leverage            4,563                 352                 480                      -              5,395
Capital reductions                                        (101)                  -                 (11)                     -               (112)
Distributions                                           (1,031)               (367)               (226)                     -             (1,624)
Redemptions                                               (481)                  -                   -                      -               (481)
Change in fund value                                    (2,906)                 (5)                (48)                     -             (2,959)
Change in fee basis                                          -                   -                (311)                     -               (311)
FPAUM Balance at 3/31/2020                            $ 75,760          $   17,020          $    9,215          $           -          $ 101,995
Average FPAUM(2)                                      $ 73,821          $   17,031          $    8,590          $           -          $  99,442

(1) Reallocation of capital among the segments may occur for pools of capital with investment mandates in more than one investment strategy. This reallocation activity is presented within commitments and may result in balances presented to be negative. (2) Represents the quarterly average of beginning and ending balances.

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-20210331_g4.jpg]] [[Image Removed: ares-20210331_g5.jpg]]
                              FPAUM: $127.6        FPAUM: $102.0



                                                           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 $24.8 billion and $20.5 billion from funds that primarily invest in
illiquid strategies as of March 31, 2021 and 2020, respectively. The underlying
investments held in these funds are generally subject to less market volatility
than investments held in liquid strategies.

Incentive Eligible Assets Under Management, Incentive Generating Assets Under Management and Available Capital


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, excluding 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-20210331_g6.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-20210331_g7.jpg]][[Image Removed: ares-20210331_g8.jpg]]
                Credit      Private Equity       Real Estate       Strategic Initiatives



As of March 31, 2021, AUM not yet paying fees of $40.2 billion could generate
approximately $423.1 million in potential incremental annual management fees, of
which $395.7 million relates to $37.6 billion of AUM that is available for
future deployment. As of March 31, 2020, AUM not yet paying fees of
$23.1 billion could generate approximately $222.3 million in potential
incremental annual management fees, of which $199.8 million relates to
$21.0 billion of AUM that is available for future deployment.

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 three months ended March 31, 2021 and 2020,
77% and 78%, 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-20210331_g9.jpg]]  [[Image Removed: ares-20210331_g10.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.

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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.

Consolidation and Deconsolidation of Ares Funds
In February 2021, our first sponsored SPAC, Ares Acquisition Corporation
("AAC"), consummated its initial public offering that generated gross proceeds
of $1.0 billion. Prior to the completion of a business combination, the sponsor,
a wholly owned subsidiary, owns the majority of the Class B ordinary shares
outstanding of AAC. We consolidate AAC under the voting interest model and
reflect the results of the SPAC as a Consolidated Fund.

Consolidated Funds represented approximately 7% of our AUM as of March 31,
2021, 4% of our management fees and less than 1% of our carried interest and
incentive fees for the three months ended March 31, 2021. As of March 31, 2021,
we consolidated 21 CLOs, nine private funds and one SPAC, and as of March 31,
2020, we consolidated 21 CLOs and seven private funds.
The activity of the Consolidated Funds is reflected within the condensed
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.
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 redeemable and
non-controlling interests in the Consolidated Funds in our condensed
consolidated financial statements. Redeemable interest in Consolidated Funds
represent the shares issued by AAC that are redeemable for cash by the public
shareholders in connection with AAC's failure to complete a business combination
or tender offer associated with stockholder approval provisions.
We generally deconsolidate funds and CLOs when we are no longer deemed to have a
controlling interest in the entity. During the three months ended March 31,
2021, we did not deconsolidate any entities and during the three months ended
March 31, 2020, we deconsolidated one entity as a result of
liquidation/dissolution.
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 15.
Consolidation" to our condensed consolidated financial statements included
herein.

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Results of Operations
Consolidated Results of Operations
We consolidate funds and entities where we are deemed to hold a controlling
financial interest. The Consolidated Funds are not necessarily the same entities
in each year presented due to changes in ownership, changes in limited partners'
or investor rights, and the creation and termination of funds and entities. The
consolidation of these funds and entities had no effect on net income
attributable to us for the periods presented. As such, we separate the analysis
of the Consolidated Funds and evaluate that activity in total. The following
table and discussion sets forth information regarding our consolidated results
of operations:

© Edgar Online, source Glimpses

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