UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q
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| |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172018
OR
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¨
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001‑36429
ARES MANAGEMENT, L.P.
(Exact name of Registrant as specified in its charter)
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| |
Delaware (State or other jurisdiction of incorporation or organization) | 80‑0962035 (I.R.S. Employer Identification Number) |
2000 Avenue of the Stars, 12th Floor, Los Angeles, CA 90067
(Address of principal executive office) (Zip Code)
(310) 201‑4100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one): |
| | | | |
Large accelerated filer ¨x | Accelerated filer x¨ | Non‑accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ¨ No x
The number of common unitsshares representing limited partner interests outstanding as of OctoberJuly 27, 20172018 was 82,211,302.98,398,340.
TABLE OF CONTENTS
Forward‑Looking Statements
This report contains forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward‑looking statements by the use of forward‑looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. The forward‑looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Such forward‑looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. Some of these factors are described in this report and in our Annual report on Form 10-K for the year ended December 31, 2016,2017, under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the risk factors and other cautionary statements that are included in this report and in our other periodic filings. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these forward‑looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Therefore, you should not place undue reliance on these forward‑looking statements. Any forward‑looking statement speaks only as of the date on which it is made. We do not undertake any obligation to publicly update or review any forward‑looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Under generally accepted accounting principles in the United States (“GAAP”), we are required to consolidate (a) entities other than limited partnerships and entities similar to limited partnerships in which we hold a majority voting interest or have majority ownership and control over the operational, financial and investing decisions of that entity, including Ares‑affiliates and affiliated funds and co‑investment entities, for which we are presumed to have controlling financial interests, and (b) entities that we concluded are variable interest entities (“VIEs”), including limited partnerships and collateralized loan obligations, for which we are deemed to be the primary beneficiary. When an entity is consolidated, we reflect the assets, liabilities, revenues, expenses and cash flows of the entity in our consolidated financial statements on a gross basis, subject to eliminations from consolidation, including the elimination of the management fees, performance feesincome and other fees that we earn from the entity. However, the presentation of performance feerelated compensation and other expenses associated with generating such revenues is not affected by the consolidation process. In addition, as a result of the consolidation process, the net income attributable to third‑party investors in consolidated entities is presented as net income attributable to redeemable interests and non‑controlling interests in Consolidated Funds in our Condensed Consolidated Statements of Operations.
In this form,quarterly report on Form 10-Q, in addition to presenting our results on a consolidated basis in accordance with GAAP, we present revenues, expenses and other results on a (i) “segment basis,” which deconsolidates these entities and therefore shows the results of our reportable segments without giving effect to the consolidation of the entities and (ii) “Stand Alone“Unconsolidated Reporting basis,” which shows the results of our reportable segments on a combined segment basis together with our Operations Management Group. In addition to our three segments, we have an Operations Management Group (the “OMG”) that consists of fivesix independent, shared resource groups to support our reportable segments by providing infrastructure and administrative support in the areas of accounting/finance, operations/operations, information technology, business development/corporate strategy, legal/compliance and human resources. The OMG’s expenses are not allocated to our three reportable segments but we consider the cost structure of the OMG when evaluating our financial performance. This information constitutes non‑GAAP financial information within the meaning of Regulation G, as promulgated by the SEC. Our management uses this information to assess the performance of our reportable segments and our OMG, and we believe that this information enhances the ability of unitholdersshareholders to analyze our performance. For more information, see “Notes to the Condensed Consolidated Financial Statements - Note 14. Segment Reporting.”
Glossary
When used in this report, unless the context otherwise requires:
“ARCC Part I Fees” refers to a quarterly performance feeincome on the investment income from Ares Capital Corporation (NASDAQ: ARCC) (“ARCC”);
“Ares Operating Group Unit” or an “AOG Unit” refer to, collectively, a partnership unit in each of the Ares Operating Group entities;
“assets under management” or “AUM” refers to the assets we manage. For our funds other than CLOs, our AUM represents the sum of the net asset value of such funds, the drawn and undrawn debt (at the fund‑level including amounts subject to restrictions) and uncalled committed capital (including commitments to funds that have yet to commence their investment periods). For our funds that are CLOs, our AUM represents subordinated notes (equity) plus all drawn and undrawn debt tranches;
"“available capital"capital” is comprised of uncalled committed capital and undrawn amounts under credit facilities and may include AUM that may be canceled or not otherwise available to invest (also referred to as "dry powder"“dry powder”).
“CLOs” refers to “our funds” which are structured as collateralized loan obligations;
“Consolidated Funds” refers collectively to certain Ares‑ affiliated funds, related co‑investment entities and certain CLOs that are required under GAAP to be consolidated in our consolidated financial statements;
“Co‑Founders” refers to Michael Arougheti, David Kaplan, John Kissick, Antony Ressler and Bennett Rosenthal;
“Credit Facility” refers to the revolving credit facility of the Ares Operating Group;
“distributable earnings” or “DE”, a non-GAAP measure, is an operating metric that assesses our performance without the effects of our consolidated funds and the impact of unrealized income and expenses, which generally fluctuate with fair value changes. Among other things, this metric also is used to assist in determining amounts potentially available for distribution. However, the declaration, payment, and determination of the amount of distributions to unitholders, if any, is at the sole discretion of our Board of Directors, which may change our distribution policy at any time. Distributable earnings is calculated as the sum of fee related earnings, realized performance fees, realized performance fee compensation, realized net investment and other income, and is reduced by expenses arising from transaction costs associated with acquisitions, placement fees and underwriting costs, expenses incurred in connection with corporate reorganization and depreciation. Distributable earnings differs from income before taxes computed in accordance with GAAP as it is typically presented before giving effect to unrealized performance fees, unrealized performance fee compensation, unrealized net investment income, amortization of intangibles, and equity compensation expense. DE is presented prior to the effect of income taxes attributable to Ares Holdings, Inc. and to distributions made to our preferred unitholders, unless otherwise noted;
“economic net income” or “ENI”, a non-GAAP measure, is an operating metric used by management to evaluate total operating performance, a decision tool for deployment of resources, and an assessment of the performance of our business segments. ENI differs from net income by excluding (a) income tax expense, (b) operating results of our Consolidated Funds, (c) depreciation and amortization expense, (d) the effects of changes arising from corporate actions, and (e) certain other items that we believe are not indicative of our total operating performance. Changes arising from corporate actions include equity-based compensation expenses, the amortization of intangible assets, transaction costs associated with mergers, acquisitions and capital transactions, placement fees and underwriting costs and expenses incurred in connection with corporate reorganization;reorganization. Beginning in 2018, placement fees are no longer excluded but are amortized to match the period over which management fees are recognized. This change had an immaterial impact to FRE and RI for the current period;
“fee paying AUM” or “FPAUM” refers to the AUM on which we directly earn management fees. Fee paying AUM is equal to the sum of all the individual fee bases of our funds that directly contribute to our management fees;
“fee related earnings” or “FRE”, a non-GAAP measure, refers to a component of ENI that is used to assess core operating performance by determining whether recurring revenue, primarily consisting of management fees, is sufficient to cover operating expenses and to generate profits. FRE differs from income before taxes computed in accordance with GAAP as it adjusts for the items included in the calculation of ENI and excludes performance fees,
income, performance feerelated compensation, investment income from our Consolidated Funds and non-consolidated funds and certain other items that we believe are not indicative of our core operating performance;performance. Beginning in 2018, placement fees are no longer excluded but are amortized to match the period over which management fees are recognized. This change had an immaterial impact to FRE for the current period;
“Holdco Members” refers to Messrs. Arougheti, Kaplan, Ressler and Rosenthal and deVeer;Ryan Berry, R. Kipp deVeer and Michael McFerran;
“Incentive generating AUM” or “IGAUM” refers to the AUM of our funds that are currently generating, on a realized or unrealized basis, performance fee revenue.income. It generally represents the NAV of our funds for which we are entitled to receive a performance fee,income, excluding capital committed by us and our professionals (which generally is not subject to a performance fee)income). With respect to ARCC, only ARCC Part II Fees can be generated from IGAUM;
“Incentive eligible AUM” or “IEAUM” refers to the AUM of our funds that are eligible to produce performance fee revenue,income, regardless of whether or not they are currently generating performance fees.income. It generally represents the NAV plus uncalled equity of our funds for which we are entitled to receive a performance fee,income, excluding capital committed by us and our professionals (which generally is not subject to a performance fee)income);
“management fees” refers to fees we earn for advisory services provided to our funds, which are generally based on a defined percentage of fair value of assets, total commitments, invested capital, net asset value, net investment income, total assets or par value of the investment portfolios managed by us and also include ARCC Part I Fees that are classified as management fees as they are predictable and recurring in nature, not subject to contingent repayment and generally cash‑settled each quarter;
“net inflows of capital” refers to net new commitments during the period, including equity and debt commitments and gross inflows into our open-ended managed accounts and sub-advised accounts, as well as equity offerings by our publicly traded vehicles minus redemptions from our open-ended funds, managed accounts and sub-advised accounts.accounts;
“net performance fees”income” refers to performance feesincome net of performance feerelated compensation, which is the portion of the performance feesincome earned from certain funds that is payable to professionals;
“our funds” refers to the funds, alternative asset companies, co-investment vehicles and other entities and accounts that are managed or co‑managed by the Ares Operating Group, and which are structured to pay fees. It also includes funds managed by Ivy Hill Asset Management, L.P., a wholly owned portfolio company of ARCC, and a registered investment adviser;
“permanent capital” refers to capital of our funds that do not have redemption provisions or a requirement to return capital to investors upon exiting the investments made with such capital, except as required by applicable law, which funds currently consist of ARCC, Ares Commercial Real Estate Corporation (“ACRE”) and Ares Dynamic Credit Allocation Fund, Inc. (“ARDC”). Such funds may be required, or elect, to return all or a portion of capital gains and investment income;
“performance fees”income” refers to feesincome we earn based on the performance of a fund, which are generally based on certain specific hurdle rates as defined in the fund’s investment management or partnership agreements and may be either an incentive fee or carried interest;
“performance related earnings” or “PRE”, a non-GAAP measure, is used to assess our investment performance net of performance feerelated compensation. PRE differs from income (loss) before taxes computed in accordance with GAAP as it only includes performance fees,income, performance feerelated compensation and total investment and other income that we earn from our Consolidated Funds and non-consolidated funds;
“realized income” or “RI”, a non-GAAP measure, is an operating metric used by management to evaluate performance of the business based on operating performance and the contribution of each of the business segments to that performance, while removing the fluctuations of unrealized income and expenses, which may or may not be eventually realized at the levels presented and whose realizations depend more on future outcomes than current business operations. RI differs from net income by excluding (a) income tax expense, (b) operating results of our Consolidated Funds, (c) depreciation and amortization expense, (d) the effects of changes arising from corporate actions, (e) unrealized gains and losses related to performance income and investment performance and (f) certain other items that we believe are not indicative of our operating performance. Changes arising from corporate actions include equity-based compensation expenses, the amortization of intangible assets, transaction costs associated with mergers, acquisitions and capital transactions, underwriting costs and expenses incurred in connection with corporate reorganization. Beginning in 2018, placement fees are no longer excluded but are amortized to match the period over which management fees are recognized. This change had an immaterial impact to FRE and RI for the current period. Prior to the introduction of RI, management used distributable earnings for this evaluation. Management believes RI is a more appropriate metric to evaluate the Company's current business operations;
“SEC” refers to the Securities and Exchange Commission;
“Senior Notes” or the "AFC Notes" refers to senior notes of a wholly owned subsidiary of Ares Holding;Holdings; and
“Term Loans” refers to term loans of a wholly owned subsidiary of AM LLC.
References in this Quarterly Report on Form 10-Q to (1) “common units” or “common shares” and “preferred units” or “preferred shares” outstanding prior to March 1, 2018 refer to our common units and preferred units, respectively, previously outstanding prior to March 1, 2018 and (2) “common unitholders” or “common shareholders” and “preferred unitholders” or “preferred shareholders” prior to March 1, 2018 refer to our common unitholders and preferred unitholders, respectively, prior to March 1, 2018. Note that the terms of our common shares and preferred shares, and the associated rights, remain unchanged.
Many of the terms used in this report, including AUM, FPAUM, ENI, FRE, PRE and DE,RI, may not be comparable to similarly titled measures used by other companies. In addition, our definitions of AUM and FPAUM are not based on any definition of AUM or FPAUM that is set forth in the agreements governing the investment funds that we manage and may differ from
definitions of AUM or FPAUM set forth in other agreements to which we are a party. Further, ENI, FRE, PRE and DERI are not measures of performance calculated in accordance with GAAP. We use ENI, FRE, PRE and DERI as measures of operating performance, not as measures of liquidity. ENI, FRE, PRE and DERI should not be considered in isolation or as substitutes for operating income, net income, operating cash flows, or other income or cash flow statement data prepared in accordance with GAAP. The use of ENI, FRE, PRE and DERI without consideration of related GAAP measures is not adequate due to the adjustments described above. Our management compensates for these limitations by using ENI, FRE, PRE and DERI as supplemental measures to our GAAP results. We present these measures to provide a more complete understanding of our performance as our management measures it. Amounts and percentages throughout this report may reflect rounding adjustments and consequently totals may not appear to sum.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Ares Management, L.P.
Condensed Consolidated Statements of Financial Condition
(Amounts in Thousands, Except UnitShare Data)
| | | | As of September 30, | | As of December 31, | As of June 30, | | As of December 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | (unaudited) | | | (unaudited) | | As adjusted |
| Assets | |
| | |
| |
| | |
|
| Cash and cash equivalents | $ | 186,437 |
| | $ | 342,861 |
| $ | 125,448 |
| | $ | 118,929 |
|
| Investments (includes fair value investments of $581,614 and $448,336 at September 30, 2017 and December 31, 2016, respectively) | 584,695 |
| | 468,471 |
| |
| Performance fees receivable | 997,578 |
| | 759,099 |
| |
| Investments (includes accrued carried interest of $985,035 and $1,077,236, at June 30, 2018 and December 31, 2017, respectively) | | 1,466,247 |
| | 1,724,571 |
|
| Due from affiliates | 161,432 |
| | 162,936 |
| 172,428 |
| | 165,750 |
|
| Deferred tax asset, net | 36,661 |
| | 6,731 |
| 42,942 |
| | 8,326 |
|
| Other assets | 103,885 |
| | 65,565 |
| 100,183 |
| | 130,341 |
|
| Intangible assets, net | 44,115 |
| | 58,315 |
| 33,999 |
| | 40,465 |
|
| Goodwill | 143,880 |
| | 143,724 |
| 143,848 |
| | 143,895 |
|
| Assets of Consolidated Funds: | | | | | | |
| Cash and cash equivalents | 799,609 |
| | 455,280 |
| 836,274 |
| | 556,500 |
|
| Investments, at fair value | 4,915,029 |
| | 3,330,203 |
| 6,968,067 |
| | 5,582,842 |
|
| Due from affiliates | 8,047 |
| | 3,592 |
| 13,704 |
| | 15,884 |
|
| Dividends and interest receivable | 10,061 |
| | 8,479 |
| 14,634 |
| | 12,568 |
|
| Receivable for securities sold | 25,926 |
| | 21,955 |
| 225,764 |
| | 61,462 |
|
| Other assets | 2,082 |
| | 2,501 |
| 1,197 |
| | 1,989 |
|
| Total assets | $ | 8,019,437 |
| | $ | 5,829,712 |
| $ | 10,144,735 |
| | $ | 8,563,522 |
|
| Liabilities | | | | | | |
| Accounts payable, accrued expenses and other liabilities | $ | 94,351 |
| | $ | 83,336 |
| $ | 73,227 |
| | $ | 81,955 |
|
| Accrued compensation | 133,799 |
| | 131,736 |
| 87,254 |
| | 27,978 |
|
| Due to affiliates | 17,207 |
| | 17,564 |
| 62,344 |
| | 39,184 |
|
| Performance fee compensation payable | 780,201 |
| | 598,050 |
| |
| Performance related compensation payable | | 730,782 |
| | 822,084 |
|
| Debt obligations | 486,007 |
| | 305,784 |
| 370,628 |
| | 616,176 |
|
| Liabilities of Consolidated Funds: | | | | | | |
| Accounts payable, accrued expenses and other liabilities | 50,992 |
| | 21,056 |
| 69,040 |
| | 64,316 |
|
| Payable for securities purchased | 481,055 |
| | 208,742 |
| 744,534 |
| | 350,145 |
|
| CLO loan obligations, at fair value | 4,476,643 |
| | 3,031,112 |
| 6,333,239 |
| | 4,963,194 |
|
| Fund borrowings | 121,261 |
| | 55,070 |
| 138,438 |
| | 138,198 |
|
| Total liabilities | 6,641,516 |
| | 4,452,450 |
| 8,609,486 |
| | 7,103,230 |
|
| Commitments and contingencies |
| |
|
| |
|
| Preferred equity (12,400,000 units issued and outstanding at September 30, 2017 and December 31, 2016) | 298,761 |
| | 298,761 |
| |
| Preferred equity (12,400,000 shares issued and outstanding at June 30, 2018 and December 31, 2017) | | 298,761 |
| | 298,761 |
|
| Non-controlling interest in Consolidated Funds | 459,723 |
| | 338,035 |
| 577,217 |
| | 528,488 |
|
| Non-controlling interest in Ares Operating Group entities | 348,513 |
| | 447,615 |
| 316,048 |
| | 358,186 |
|
| Controlling interest in Ares Management, L.P.: | |
| | |
| |
| | |
|
| Partners' capital (82,211,302 units and 80,814,732 units issued and outstanding at September 30, 2017 and at December 31, 2016, respectively) | 275,410 |
| | 301,790 |
| |
| Shareholders' equity (98,398,340 shares and 82,280,033 shares issued and outstanding at June 30, 2018 and at December 31, 2017, respectively) | | 349,981 |
| | 279,065 |
|
| Accumulated other comprehensive loss, net of tax | (4,486 | ) | | (8,939 | ) | (6,758 | ) | | (4,208 | ) |
| Total controlling interest in Ares Management, L.P. | 270,924 |
| | 292,851 |
| 343,223 |
| | 274,857 |
|
| Total equity | 1,377,921 |
| | 1,377,262 |
| 1,535,249 |
| | 1,460,292 |
|
| Total liabilities and equity | $ | 8,019,437 |
| | $ | 5,829,712 |
| $ | 10,144,735 |
| | $ | 8,563,522 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management, L.P.
Condensed Consolidated Statements of Operations
(Amounts in Thousands, Except UnitShare Data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | |
| Revenues | | | | | | | |
| Management fees (includes ARCC Part I Fees of $24,036, $76,436 and $33,260, $90,884 for the three and nine months ended September 30, 2017 and 2016, respectively) | $ | 183,177 |
| | $ | 163,609 |
| | $ | 535,990 |
| | $ | 480,563 |
|
| Performance fees | 87,008 |
| | 164,482 |
| | 480,204 |
| | 337,686 |
|
| Administrative and other fees | 13,486 |
| | 7,369 |
| | 43,024 |
| | 22,761 |
|
| Total revenues | 283,671 |
| | 335,460 |
| | 1,059,218 |
| | 841,010 |
|
| Expenses | | | | | | | |
| Compensation and benefits | 129,347 |
| | 111,916 |
| | 384,905 |
| | 335,249 |
|
| Performance fee compensation | 58,637 |
| | 123,173 |
| | 361,044 |
| | 253,739 |
|
| General, administrative and other expenses | 47,104 |
| | 38,197 |
| | 145,193 |
| | 116,845 |
|
| Transaction support expense | — |
| | — |
| | 275,177 |
| | — |
|
| Expenses of the Consolidated Funds | 19,039 |
| | 10,088 |
| | 27,472 |
| | 11,014 |
|
| Total expenses | 254,127 |
| | 283,374 |
| | 1,193,791 |
| | 716,847 |
|
| Other income (expense) | | | | | | | |
| Investment income and net interest expense (includes interest expense of $5,343, $15,576 and $4,136, $13,819 for the three and nine months ended September 30, 2017 and 2016, respectively) | (1,831 | ) | | (1,681 | ) | | (6,218 | ) | | (47 | ) |
| Other income (expense), net | (2,492 | ) | | 23,042 |
| | 16,826 |
| | 33,956 |
|
| Net realized and unrealized gain on investments | 7,209 |
| | 19,358 |
| | 39,943 |
| | 21,349 |
|
| Investment income and net interest income of the Consolidated Funds (includes interest expense of $28,127, $86,324 and $26,413, $67,469 for the three and nine months ended September 30, 2017 and 2016, respectively) | 20,054 |
| | 8,737 |
| | 41,675 |
| | 25,759 |
|
| Net realized and unrealized gain (loss) on investments of the Consolidated Funds | 35,940 |
| | 23,883 |
| | 55,263 |
| | (5,723 | ) |
| Total other income | 58,880 |
| | 73,339 |
| | 147,489 |
| | 75,294 |
|
| Income before taxes | 88,424 |
| | 125,425 |
| | 12,916 |
|
| 199,457 |
|
| Income tax expense (benefit) | 4,552 |
| | 7,641 |
| | (28,459 | ) | | 7,868 |
|
| Net income | 83,872 |
| | 117,784 |
| | 41,375 |
| | 191,589 |
|
| Less: Net income (loss) attributable to non-controlling interests in Consolidated Funds | 18,195 |
| | 7,861 |
| | 25,403 |
| | (3,064 | ) |
| Less: Net income attributable to redeemable interests in Ares Operating Group entities | — |
| | 107 |
| | — |
| | 456 |
|
| Less: Net income (loss) attributable to non-controlling interests in Ares Operating Group entities | 37,839 |
| | 66,511 |
| | (20,610 | ) | | 116,404 |
|
| Net income attributable to Ares Management, L.P. | 27,838 |
| | 43,305 |
| | 36,582 |
|
| 77,793 |
|
| Less: Preferred equity distributions paid | 5,425 |
| | 6,751 |
| | 16,275 |
| | 6,751 |
|
| Net income attributable to Ares Management, L.P. common unitholders | $ | 22,413 |
| | $ | 36,554 |
| | $ | 20,307 |
|
| $ | 71,042 |
|
| Net income attributable to Ares Management, L.P. per common unit: | | | | | | | |
| Basic | $ | 0.26 |
| | $ | 0.45 |
| | $ | 0.22 |
| | $ | 0.87 |
|
| Diluted | $ | 0.26 |
| | $ | 0.43 |
| | $ | 0.22 |
| | $ | 0.86 |
|
| Weighted-average common units: | | | | | | | |
| Basic | 82,166,852 |
| | 80,793,984 |
| | 81,704,815 |
| | 80,741,460 |
|
| Diluted | 82,166,852 |
| | 84,464,591 |
| | 81,704,815 |
| | 82,667,049 |
|
| Distribution declared and paid per common unit | $ | 0.31 |
| | $ | 0.28 |
| | $ | 0.72 |
| | $ | 0.63 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | As adjusted | | | | As adjusted |
| Revenues | | | | | | | |
| Management fees (includes ARCC Part I Fees of $29,866, $58,283 and $19,143, $52,400 for the three and six months ended June 30, 2018 and 2017, respectively) | $ | 194,032 |
| | $ | 180,768 |
| | $ | 383,547 |
| | $ | 352,813 |
|
| Carried interest allocation | (13,444 | ) | | 333,808 |
| | 40,685 |
| | 385,815 |
|
| Incentive fees | 7,740 |
| | 4,216 |
| | 12,811 |
| | 7,381 |
|
| Principal investment income | 1,871 |
| | 38,307 |
| | 6,780 |
| | 40,894 |
|
| Administrative, transaction and other fees | 13,964 |
| | 15,098 |
| | 26,429 |
| | 29,538 |
|
| Total revenues | 204,163 |
| | 572,197 |
| | 470,252 |
| | 816,441 |
|
| Expenses | | | | | | | |
| Compensation and benefits | 138,992 |
| | 131,219 |
| | 273,631 |
| | 255,558 |
|
| Performance related compensation | (13,005 | ) | | 261,705 |
| | 12,873 |
| | 302,407 |
|
| General, administrative and other expenses | 59,918 |
| | 50,751 |
| | 104,368 |
| | 98,089 |
|
| Transaction support expense | — |
| | — |
| | — |
| | 275,177 |
|
| Expenses of Consolidated Funds | 35,112 |
| | 4,522 |
| | 36,428 |
| | 8,433 |
|
| Total expenses | 221,017 |
| | 448,197 |
| | 427,300 |
| | 939,664 |
|
| Other income (expense) | | | | | | | |
| Net realized and unrealized gain (loss) on investments | 3,267 |
| | (6,588 | ) | | 2,428 |
| | (5,700 | ) |
| Interest and dividend income | 2,356 |
| | 1,462 |
| | 5,703 |
| | 3,386 |
|
| Interest expense | (6,076 | ) | | (5,354 | ) | | (12,945 | ) | | (10,233 | ) |
| Other income (expense), net | (1,987 | ) | | 2,822 |
| | (2,298 | ) | | 19,318 |
|
| Net realized and unrealized gain (loss) on investments of Consolidated Funds | 34,487 |
| | (12,713 | ) | | 21,402 |
| | 19,323 |
|
| Interest and other income of Consolidated Funds | 92,633 |
| | 38,326 |
| | 157,055 |
| | 79,818 |
|
| Interest expense of Consolidated Funds | (56,754 | ) | | (26,875 | ) | | (101,179 | ) | | (58,197 | ) |
| Total other income (expense) | 67,926 |
| | (8,920 | ) | | 70,166 |
| | 47,715 |
|
| Income (loss) before taxes | 51,072 |
| | 115,080 |
| | 113,118 |
|
| (75,508 | ) |
| Income tax expense (benefit) | 36,903 |
| | 1,253 |
| | 24,528 |
| | (33,011 | ) |
| Net income (loss) | 14,169 |
| | 113,827 |
| | 88,590 |
| | (42,497 | ) |
| Less: Net income (loss) attributable to non-controlling interests in Consolidated Funds | 9,882 |
| | (8,647 | ) | | 10,249 |
| | 7,208 |
|
| Less: Net income (loss) attributable to non-controlling interests in Ares Operating Group entities | 16,062 |
| | 72,596 |
| | 49,168 |
| | (58,449 | ) |
| Net income (loss) attributable to Ares Management, L.P. | (11,775 | ) | | 49,878 |
| | 29,173 |
|
| 8,744 |
|
| Less: Preferred equity dividend paid | 5,425 |
| | 5,425 |
| | 10,850 |
| | 10,850 |
|
| Net income (loss) attributable to Ares Management, L.P. common shareholders | $ | (17,200 | ) | | $ | 44,453 |
| | $ | 18,323 |
|
| $ | (2,106 | ) |
| Net income (loss) attributable to Ares Management, L.P. per common share: | | | | | | | |
| Basic | $ | (0.20 | ) | | $ | 0.54 |
| | $ | 0.16 |
| | $ | (0.04 | ) |
| Diluted | $ | (0.20 | ) | | $ | 0.53 |
| | $ | 0.16 |
| | $ | (0.04 | ) |
| Weighted-average common shares: | | | | | | | |
| Basic | 98,037,252 |
| | 81,829,086 |
| | 91,861,946 |
| | 81,469,967 |
|
| Diluted | 98,037,252 |
| | 84,319,882 |
| | 91,861,946 |
| | 81,469,967 |
|
| Dividend declared and paid per common share | $ | 0.37 |
| | $ | 0.13 |
| | $ | 0.77 |
| | $ | 0.41 |
|
Substantially all revenue is earned from affiliated funds of the Company. See accompanying notes to the condensed consolidated financial statements.
Ares Management, L.P.
Condensed Consolidated Statements of Comprehensive Income
(Amounts in Thousands)
(unaudited)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Net income | $ | 83,872 |
| | $ | 117,784 |
| | $ | 41,375 |
| | $ | 191,589 |
| |
| | | | | As adjusted | | | | As adjusted |
| Net income (loss) | | $ | 14,169 |
| | $ | 113,827 |
| | $ | 88,590 |
| | $ | (42,497 | ) |
| Other comprehensive income: | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | 6,043 |
| | (2,241 | ) | | 11,514 |
| | (12,566 | ) | (12,377 | ) | | 2,029 |
| | (6,892 | ) | | 5,471 |
|
| Total comprehensive income | 89,915 |
| | 115,543 |
| | 52,889 |
| | 179,023 |
| |
| Total comprehensive income (loss) | | 1,792 |
| | 115,856 |
| | 81,698 |
| | (37,026 | ) |
| Less: Comprehensive income (loss) attributable to non-controlling interests in Consolidated Funds | 18,017 |
| | 7,861 |
| | 25,055 |
| | (3,064 | ) | 4,193 |
| | (8,818 | ) | | 7,735 |
| | 7,038 |
|
| Less: Comprehensive income attributable to redeemable interests in Ares Operating Group entities | — |
| | 105 |
| | — |
| | 409 |
| |
| Less: Comprehensive income (loss) attributable to non-controlling interests in Ares Operating Group entities | 41,143 |
| | 65,125 |
| | (13,201 | ) | | 108,651 |
| 12,131 |
| | 74,461 |
| | 47,340 |
| | (54,344 | ) |
| Comprehensive income attributable to Ares Management, L.P. | $ | 30,755 |
|
| $ | 42,452 |
| | $ | 41,035 |
| | $ | 73,027 |
| |
| Comprehensive income (loss) attributable to Ares Management, L.P. | | $ | (14,532 | ) |
| $ | 50,213 |
| | $ | 26,623 |
| | $ | 10,280 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management, L.P.
Condensed Consolidated Statements of Changes in Equity
(Amounts in Thousands)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred
Equity | | Partners'
Capital | | Accumulated
Other
Comprehensive
Loss | | Non-controlling
Interest in
Ares Operating
Group Entities | | | Non-controlling
Interest in Consolidated
Funds | | Total
Equity |
| Balance at December 31, 2016 | $ | 298,761 |
| | $ | 301,790 |
| | $ | (8,939 | ) | | $ | 447,615 |
| | | $ | 338,035 |
| | $ | 1,377,262 |
|
| Changes in ownership interests | — |
| | (7,482 | ) | | — |
| | (8,994 | ) | | | — |
| | (16,476 | ) |
| Contributions | — |
| | — |
| | — |
| | 1,884 |
| | | 145,717 |
| | 147,601 |
|
| Distributions | (16,275 | ) | | (58,881 | ) | | — |
| | (110,127 | ) | | | (49,084 | ) | | (234,367 | ) |
| Net income (loss) | 16,275 |
| | 20,307 |
| | — |
| | (20,610 | ) | | | 25,403 |
| | 41,375 |
|
| Currency translation adjustment | — |
| | — |
| | 4,453 |
| | 7,409 |
| | | (348 | ) | | 11,514 |
|
| Equity compensation | — |
| | 19,676 |
| | — |
| | 31,336 |
| | | — |
| | 51,012 |
|
| Balance at September 30, 2017 | $ | 298,761 |
|
| $ | 275,410 |
|
| $ | (4,486 | ) |
| $ | 348,513 |
|
|
| $ | 459,723 |
|
| $ | 1,377,921 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred
Equity | | Shareholders'
Equity | | Accumulated
Other
Comprehensive
Loss | | Non-controlling
Interest in
Ares Operating
Group Entities | | | Non-controlling
Interest in Consolidated
Funds | | Total
Equity |
| Balance at December 31, 2017 | $ | 298,761 |
| | $ | 279,065 |
| | $ | (4,208 | ) | | $ | 358,186 |
| | | $ | 528,488 |
| | $ | 1,460,292 |
|
| Cumulative effect of the adoption of ASC 606 | — |
| | (10,827 | ) | | — |
| | (17,117 | ) | | | 5,333 |
| | (22,611 | ) |
| As adjusted balance at January 1, 2018 | 298,761 |
| | 268,238 |
| | (4,208 | ) | | 341,069 |
| | | 533,821 |
| | 1,437,681 |
|
| Adoption of ASU 2018-02 (see note #2) | — |
| | 1,202 |
| | (1,202 | ) | | — |
| | | — |
| | — |
|
| Changes in ownership interests and related tax benefits | — |
| | 7,465 |
| | — |
| | 14,099 |
| | | — |
| | 21,564 |
|
| Contributions | — |
| | 106,283 |
| | — |
| | 764 |
| | | 70,990 |
| | 178,037 |
|
| Dividends/Distributions | (10,850 | ) | | (69,743 | ) | | — |
| | (111,851 | ) | | | (35,329 | ) | | (227,773 | ) |
| Net income | 10,850 |
| | 18,323 |
| | — |
| | 49,168 |
| | | 10,249 |
| | 88,590 |
|
| Currency translation adjustment | — |
| | — |
| | (1,348 | ) | | (1,828 | ) | | | (2,514 | ) | | (5,690 | ) |
| Equity compensation | — |
| | 18,213 |
| | — |
| | 24,627 |
| | | — |
| | 42,840 |
|
| Balance at June 30, 2018 | $ | 298,761 |
|
| $ | 349,981 |
|
| $ | (6,758 | ) |
| $ | 316,048 |
|
|
| $ | 577,217 |
|
| $ | 1,535,249 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management, L.P.
Condensed Consolidated Statements of Cash Flows
(Amounts in Thousands)
(unaudited)
| | | | For the Nine Months Ended September 30, | For the Six Months Ended June 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | | | | | | As adjusted |
| Cash flows from operating activities: | | | | | | |
| Net income | $ | 41,375 |
| | $ | 191,589 |
| |
| Adjustments to reconcile net income to net cash (used in) provided operating activities | (52,314 | ) | | 24,989 |
| |
| Adjustments to reconcile net income to net cash used in operating activities allocable to non-controlling interests in Consolidated Funds | (1,157,088 | ) | | (506,849 | ) | |
| Net income (loss) | | $ | 88,590 |
| | $ | (42,497 | ) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities | | 225,963 |
| | (92,537 | ) |
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities allocable to non-controlling interests in Consolidated Funds | | (1,634,788 | ) | | (61,985 | ) |
| Cash flows due to changes in operating assets and liabilities | (78,593 | ) | | (30,485 | ) | 66,925 |
| | (144,249 | ) |
| Cash flows due to changes in operating assets and liabilities allocable to non-controlling interest in Consolidated Funds | 54,370 |
| | 61,397 |
| |
| Cash flows due to changes in operating assets and liabilities allocable to non-controlling interests in Consolidated Funds | | (34,335 | ) | | 37,108 |
|
| Net cash used in operating activities | (1,192,250 | ) | | (259,359 | ) | (1,287,645 | ) | | (304,160 | ) |
| Cash flows from investing activities: | |
| | |
| |
| | |
|
| Purchase of furniture, equipment and leasehold improvements, net | (27,926 | ) | | (8,167 | ) | (7,126 | ) | | (21,194 | ) |
| Net cash used in investing activities | (27,926 | ) | | (8,167 | ) | (7,126 | ) | | (21,194 | ) |
| Cash flows from financing activities: | |
| | |
| |
| | |
|
| Proceeds from issuance of common shares | | 105,333 |
| | — |
|
| Proceeds from credit facility | 245,000 |
| | 147,000 |
| 325,000 |
| | 165,000 |
|
| Proceeds from term notes | 70,009 |
| | — |
| 44,050 |
| | 70,009 |
|
| Repayments of credit facility | (135,000 | ) | | (257,000 | ) | (410,000 | ) | | (30,000 | ) |
| Proceeds from the issuance of preferred equity, net of issuance costs | — |
| | 298,637 |
| |
| Repayments of term loans | | (206,089 | ) | | — |
|
| Distributions | (169,008 | ) | | (150,424 | ) | (181,594 | ) | | (102,315 | ) |
| Preferred equity distributions | (16,275 | ) | | (6,751 | ) | (10,850 | ) | | (10,850 | ) |
| Net settlement of vested common units | (13,910 | ) | | — |
| |
| Taxes paid in net settlement of vested common shares | | (17,225 | ) | | (13,471 | ) |
| Stock option exercise | 1,036 |
| | — |
| 950 |
| | 1,036 |
|
| Excess tax benefit related to stock option exercise | 81 |
| | — |
| |
| Tax from share-based payment | | 44 |
| | 81 |
|
| Other financing activities | 1,541 |
| | (701 | ) | 764 |
| | 1,583 |
|
| Allocable to non-controlling interest in Consolidated Funds: | |
| | |
| |
| Allocable to non-controlling interests in Consolidated Funds: | | |
| | |
|
| Contributions from non-controlling interests in Consolidated Funds | 145,717 |
| | 93,128 |
| 70,990 |
| | 47,265 |
|
| Distributions to non-controlling interests in Consolidated Funds | (49,084 | ) | | (61,270 | ) | (35,329 | ) | | (46,876 | ) |
| Borrowings under loan obligations by Consolidated Funds | 2,438,491 |
| | 530,731 |
| 2,206,816 |
| | 1,314,026 |
|
| Repayments under loan obligations by Consolidated Funds | (1,466,951 | ) | | (103,648 | ) | (599,801 | ) | | (1,287,425 | ) |
| Net cash provided by financing activities | 1,051,647 |
| | 489,702 |
| 1,293,059 |
| | 108,063 |
|
| Effect of exchange rate changes | 12,105 |
| | (6,876 | ) | 8,231 |
| | 11,686 |
|
| Net change in cash and cash equivalents | (156,424 | ) |
| 215,300 |
| 6,519 |
|
| (205,605 | ) |
| Cash and cash equivalents, beginning of period | 342,861 |
| | 121,483 |
| 118,929 |
| | 342,861 |
|
| Cash and cash equivalents, end of period | $ | 186,437 |
| | $ | 336,783 |
| $ | 125,448 |
| | $ | 137,256 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
1. ORGANIZATION
Ares Management, L.P. ("the Company"), a Delaware limited partnership treated as a corporation for U.S. federal income tax purposes, is a leading global alternative asset management firm that operates three distinct but complementary investment groups: the Credit, Group, the Private Equity Group and the Real Estate Group.Estate. Information about segments should be read together with Note 14, “Segment Reporting.” Subsidiaries of the Company serve as the general partners and/or investment managers to various investment funds and managed accounts within each investment group (the “Ares Funds”), which are generally organized as pass-through entities for income tax purposes.. Such subsidiaries provide investment advisory services to the Ares Funds in exchange for management fees. Ares is managed and operated by its general partner, Ares Management GP LLC. Unless the context requires otherwise, references to “Ares” or the “Company” refer to Ares Management, L.P. together with its subsidiaries.
The Company is a holding partnership,company, and the Company’sits sole assets are equity interests in Ares Holdings Inc. (“AHI”), Ares Offshore Holdings, Ltd., and Ares AI Holdings L.P., each of which is directly or indirectly wholly owned by the Company. In this quarterly report, the following of the Company’s subsidiaries are collectively referred to as the “Ares Operating Group”: Ares Offshore Holdings L.P. (“Ares Offshore”), Ares Holdings L.P. (“Ares Holdings”), and Ares Investments L.P. (“Ares Investments”). The Company, indirectly through its wholly owned subsidiaries, is the general partner of each of the Ares Operating Group entities. The Company operates and controls all of the businesses and affairs of and conducts all of its material business activities through the Ares Operating Group.
Non-Controlling Interests in Ares Operating Group Entities
The non-controlling interests in Ares Operating Group (“AOG”) entities represent a component of equity and net income attributable to the owners of the Ares Operating Group Units (“AOG Units”) that are not held directly or indirectly by the Company. These interests are adjusted for contributions to and distributions from AOG during the reporting period and are allocated income from the AOG entities based on their historical ownership percentage for the proportional number of days in the reporting period.
Change in Company Tax Status Election
Effective March 1, 2018, the Company elected to be treated as a corporation for U.S. federal income tax purposes. The Company’s legal structure remains a Delaware limited partnership. In connection with the tax election, the Company amended and restated its partnership agreement to, among other things, reflect the new tax classification and change the name of its common units and preferred units to common shares and preferred shares, respectively. The terms of such common shares and preferred shares, and the associated rights, otherwise remain unchanged. Further, other terminology has been modified to be consistent with a corporation's results. For example, distributions are now referred to as dividends, and earnings per common unit are now referred to as earnings per common share. Comparative periods conform with the current period's presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”) for interim financial information and instructions to the Quarterly Report on Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 20162017 filed with the SEC.
The condensed consolidated financial statements include the accounts and activities of the AOG entities, their consolidated subsidiaries and certain Consolidated Funds. These Consolidated Funds include certain Ares-affiliated funds, related co-investment entities and collateralized loan obligations (“CLOs”) (collectively, the “Consolidated Funds”) managed by Ares Management LLC (“AM LLC”) and its wholly owned subsidiaries. Including the results of the Consolidated Funds significantly increases the reported amounts of the assets, liabilities, revenues, expenses and cash flows in the accompanying condensed consolidated financial
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
statements; however, the Consolidated Funds results included herein have no direct effect on the net income attributable to controlling interests or on total controlling equity. Instead, economic ownership interests of the investors in the Consolidated Funds are reflected as non-controlling interests in Consolidated Funds in the accompanying condensed consolidated financial statements. Further, cash flows allocable to non-controlling interest in Consolidated Funds are specifically identifiable in the Condensed Consolidated Statements of Cash Flows. All intercompany balances and transactions have been eliminated upon consolidation.
The Company has reclassified certain prior period amounts to conform to the current year presentation.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)ASC 606
Transaction Support Expense
OnEffective January 3, 2017, ARCC and American Capital, Ltd. (“ACAS”) consummated a merger transaction valued at approximately $4.2 billion (the "ARCC-ACAS Transaction"). To support the ARCC-ACAS Transaction,1, 2018, the Company through its subsidiary Ares Capital Management LLC, which serves asadopted the investment adviser to ARCC, paid $275.2 million to ACAS shareholders in accordance with the terms and conditions set forth in the merger agreement.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Financial Accounting Standards Board (“FASB"FASB”) Accounting Standards Updates ("ASU"Topic 606 (“ASC 606”) issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on the Company's condensed consolidated financial statements.
Revenue Recognition:
In May 2014, the FASB issued ASU 2014-09,, Revenue from Contracts with Customers (Topic 606).ASU 2014-09 requires entities The Company adopted ASC 606 to recognizeall applicable contracts under the modified retrospective approach using the practical expedient provided for within paragraph 606-10-65-1(f)(3); therefore, the presentation of prior year periods has not been adjusted. The Company recognized the cumulative effect of initially adopting ASC 606 as an adjustment to the opening balance of components of equity as of January 1, 2018.
Pursuant to ASC 606, the Company recognizes revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entityCompany expects to be entitled to in exchange for those goods or services. The guidance includesUnder this standard, revenue is based on a five-step framework that requires an entity to: (i) identify the contract(s)contract with a customer, (ii) identifydeterminable transaction price and distinct performance obligations with probable collectability. Revenues cannot be recognized until the performance obligationsobligation(s) are satisfied and control is transferred to the customer. The Company's adoption of ASC 606 impacted the timing and recognition of incentive fees in the contract, (iii) determineCompany’s consolidated statements of operations. The adoption of ASC 606 did not have an impact on the Company’s management fees, administrative fees, transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. This ASU provides alternative methods of adoption. In August 2015, the FASB issued ASU 2015-14,Revenue fromContracts with Customers, Deferralfees or other fees. The details of the Effective Date. ASU 2015-14 defers the effective date of ASU 2014-09 by one year to December 15, 2017 for fiscal years,significant changes and interim periods within those years, beginning after that date and permits early adoption of the standard, but not before the original effective date for fiscal years beginning after December 15, 2016. In March, April and May 2016, the FASB issued additional ASUs clarifying certain aspects of ASU 2014-09. The core principle of ASU 2014-09 was not changed by the additional guidance.
During 2016, four ASUs: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients; and ASU2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, were issued to provide clarification to previously issued revenue recognition guidance (ASU 2014-09) that has not yet been implemented. These updates are required to be adopted with ASU 2014-09, but are not expected to change its application by the Company.
The Company has substantially completed its assessment of thequantitative impact of the adoption of ASC 606 are further discussed below.
The adoption of ASC 606 had the following impact on the Company’s revenue recognition guidance. The assessment includes a detailed reviewstreams:
|
| |
| Revenues of the Company | Impact of ASC 606 |
| Management fees | No Impact - Management fees are recognized as revenue in the period advisory services are rendered. |
| Performance income - Carried interest allocation | No impact. See discussion below for change in accounting policy. |
| Performance income - Incentive fees | See discussion below for impact. |
| Administrative, transaction and other fees | No Impact - Administrative, transaction and other fees are recognized as revenue in the period in which the related services are rendered. |
Performance Income
Performance income consists of investment management agreements, establishing which agreements are expected to becarried interest and incentive fees.
Carried Interest
In certain fund structures, typically in place,private equity and understanding when revenue would be recognized under those agreements.
Accordingly, the Company has preliminarily concluded thatreal estate equity funds, carried interests, which are a performance-based capital allocationinterest is allocated to the Company based on cumulative fund performance to date, represent equity method investmentssubject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s governing documents. At the end of each reporting period, a fund will allocate carried interest applicable to the Company based upon an assumed liquidation of that fund's net assets on the reporting date, irrespective of whether such amounts have been realized. Carried interest is recorded to the extent such amounts have been allocated, and may be subject to reversal to the extent that the amount allocated ultimately exceeds the amount due to the Company based on a fund’s cumulative investment returns.
Carried interest is realized when an underlying investment is profitably disposed of and the fund’s cumulative returns are notin excess of the specific hurdle rates as defined in the scope of the amended revenue recognition guidance. Effective January 1, 2018,applicable governing documents. Since carried interest is subject to reversal, the Company will change its policymay need to accrue for recognition and measurementpotential repayment of previously received carried interest. This accounting policy change will not change the timing or amount of revenue recognized relatedaccrual represents all amounts previously distributed to carried interest. These amounts are currently recognized within performance fees in the Condensed Consolidated Statements of Operations. Under the equity method of accounting the Company will recognize its allocations of carried interest or incentive fees along with the allocations proportionatethat would need to be repaid to the Company’s ownership in each fund. The Company will apply a full retrospective application and prior periods presented willfunds if the funds were to be recast. The impact of adoption will be a reclassification of carried interest to equity income and will have no impactliquidated based on net income (loss) attributable to Ares Management, L.P.
The Company has preliminarily concluded that the majority of its performance-based incentive fees are within the scopecurrent fair value of the amended revenue recognition guidance. This accounting change will delay recognition of unrealized incentive fees compared to our current accounting treatment, and it is not expected to have a material impact on the Company’s financial statements.
The Company has evaluated the impactunderlying funds’ investments as of the amended revenue recognition guidance on other revenue streams including management fees and it is not expected to have a material impact on its financial statements.reporting date. The Company is still evaluating considerations for reporting certain revenues gross versus net.actual repayment obligations, however, generally
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
do not become realized until the end of a fund’s life. As of June 30, 2018, if the funds were liquidated at their fair values, there would be a $0.2 million repayment obligation, and accordingly, the Company recorded a contingent repayment liability as June 30, 2018. As of December 31, 2017, if the funds were liquidated at their fair values, there would be no repayment obligation, and accordingly, the Company did not record a contingent repayment liability as of December 31, 2017.
Other Guidance:Prior to January 1, 2018, the Company accounted for carried interest under Method 2 described in ASC 605-20-S99-1, which provides guidance on accounting for incentive-based performance income, including carried interest. Since Method 2 is no longer available following the adoption of ASC 606, the Company has reassessed its accounting policy for carried interest, and has determined that carried interest is within scope of ASC 323, Investments-Equity Method and Joint Ventures, andout of scope under the scoping provision of ASC 606. Therefore, following the election of ASC 323, the Company accounted for carried interest, which represents a performance-based capital allocation from an investment fund to the Company, as earnings from financial assets within the scope of ASC 323. Accordingly, the Company recognizes carried interest allocation as a separate revenue line item in the Condensed Consolidated Statements of Operations. Uncollected carried interest as of the reporting date is recorded within investments in the Condensed Consolidated Statements of Financial Condition.
The Company has applied the change in accounting principle on a full retrospective basis, and prior periods presented have been recast to conform with the current period's presentation. The change in accounting principle did not change the timing or the amount of carried interest recognized. Instead, the change in accounting principle resulted in reclassification from performance income to carried interest allocation, and therefore did not have any impact on net income. See the tables below for the impact of the change in accounting principle of carried interest.
Incentive Fees
Incentive fees earned on the performance of certain fund structures, typically in credit funds, 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.
Prior to January 1, 2018, the Company accounted for incentive fees under Method 2 as described above. However, the accounting for incentive fees is separate and distinct from the accounting for carried interest because the incentive fees are contractual fee arrangements and do not represent allocations of returns from partners' capital accounts. The Company now accounts for incentive fees in accordance with ASC 606. Accordingly, the Company recognizes incentive fee revenue only when the amount is realized and no longer subject to reversal. Therefore, the Company no longer recognizes unrealized incentive fees in revenues in the condensed consolidated financial statements. The adoption of ASC 606 results in the delayed recognition of unrealized incentive fees in the condensed consolidated financial statements until they become realized at the end of the measurement period, which is typically annually.
The Company adopted ASC 606 for incentive fees using the modified retrospective approach with an effective date of January 1, 2018. The cumulative effect of the adoption resulted in the reversal of $22.6 million of unrealized incentive fees and is presented as a reduction to the opening balances of components of equity as of January 1, 2018.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following tables present the adjustments made in connection with the Company's change in accounting principle related to carried interest under ASC 323, Investments-Equity Method and Joint Ventures on the financial statement line items for the periods presented in the condensed consolidated financial statements:
|
| | | | | | | | | | | | |
| Condensed Consolidated Statement of Financial Condition |
| | | | | | | |
| | | As of December 31, 2017 |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| | | (audited) | | | | |
| Assets | | | | | | |
| Investments ($1,077,236 of accrued carried interest) | | $ | 647,335 |
| | $ | 1,077,236 |
| | $ | 1,724,571 |
|
| Performance income receivable | | 1,099,847 |
| | (1,099,847 | ) | | — |
|
| Other assets | | 107,730 |
| | 22,611 |
| (1) | 130,341 |
|
| |
| (1) | Unrealized incentive fees receivable balance as of December 31, 2017. |
|
| | | | | | | | | | | | |
| Condensed Consolidated Statement of Operations |
| | | |
| | | Three Months Ended June 30, 2017 |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| | | | | | | |
| Revenues | | | | | | |
| Performance fees | | $ | 338,024 |
| | $ | (338,024 | ) | | $ | — |
|
| Carried interest allocation | | — |
| | 333,808 |
| | 333,808 |
|
| Incentive fees | | — |
| | 4,216 |
| | 4,216 |
|
| Principal investment income | | — |
| | 38,307 |
| | 38,307 |
|
| Total revenues | | 533,890 |
| | 38,307 |
| | 572,197 |
|
| Other income (expense) | | | |
|
| | |
| Net realized and unrealized gain on investments | | 30,079 |
| | (36,667 | ) | | (6,588 | ) |
| Interest and dividend income | | 3,102 |
| | (1,640 | ) | | 1,462 |
|
|
| | | | | | | | | | | | |
| Condensed Consolidated Statement of Operations |
| | | |
| | | Six Months Ended June 30, 2017 |
| | | As Previously Reported | | Adjustments | | As Adjusted |
| | | | | | | |
| Revenues | | | | | | |
| Performance fees | | $ | 393,196 |
| | $ | (393,196 | ) | | $ | — |
|
| Carried interest allocation | | — |
| | 385,815 |
| | 385,815 |
|
| Incentive fees | | — |
| | 7,381 |
| | 7,381 |
|
| Principal investment income | | — |
| | 40,894 |
| | 40,894 |
|
| Total revenues | | 775,547 |
| | 40,894 |
| | 816,441 |
|
| Other income (expense) | | | |
|
| | |
| Net realized and unrealized gain on investments | | 32,734 |
| | (38,434 | ) | | (5,700 | ) |
| Interest and dividend income | | 5,846 |
| | (2,460 | ) | | 3,386 |
|
The Company's change in accounting policy related to carried interest did not impact the Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements of Changes in Equity or Condensed Consolidated Statements of Cash Flows for the year ended December 31, 2017.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following tables present the impact of incentive fees on the condensed consolidated financial statements upon the adoption of ASC 606 effective January 1, 2018:
Condensed Consolidated Statement of Financial Condition
|
| | | | | | | | | | | |
| | As of January 1, 2018 |
| | As adjusted December 31, 2017 | |
Adjustments | | As Adjusted for ASC 606 adoption |
| Investments | $ | 1,724,571 |
| | $ | — |
| | $ | 1,724,571 |
|
| Other assets | 130,341 |
| | (22,611 | ) | (1) | 107,730 |
|
| Total assets | 8,563,522 |
| | (22,611 | ) | | 8,540,911 |
|
| Total liabilities | 7,103,230 |
| | — |
| | 7,103,230 |
|
| Cumulative effect adjustment to equity(2) | — |
| | (22,611 | ) | | (22,611 | ) |
| Total equity | 1,460,292 |
| | (22,611 | ) | | 1,437,681 |
|
| Total liabilities, non-controlling interests and equity | 8,563,522 |
| | (22,611 | ) | | 8,540,911 |
|
| |
| (1) | Unrealized incentive fees receivable balance as of December 31, 2017. |
Condensed Consolidated Statement of Changes in Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Equity | | Shareholders' Capital | | Accumulated Other Comprehensive Loss | | Non-controlling interest in Ares Operating Group Entities | | Non-Controlling Interest in Consolidated Funds | | Total Equity |
| Balance at December 31, 2017 | | $ | 298,761 |
| | $ | 279,065 |
| | $ | (4,208 | ) | | $ | 358,186 |
| | $ | 528,488 |
| | $ | 1,460,292 |
|
| Cumulative effect of the adoption of ASC 606 | | — |
| | (10,827 | ) | | — |
| | (17,117 | ) | | 5,333 |
| | (22,611 | ) |
| As adjusted balance at January 1, 2018 | | $ | 298,761 |
| | $ | 268,238 |
| | $ | (4,208 | ) | | $ | 341,069 |
| | $ | 533,821 |
| | $ | 1,437,681 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
In accordance with the ASC 606 disclosure requirements, the following tables present the adjustments made by the Company to remove the effects of adopting ASC 606 on the condensed consolidated financial statements as of and for the three and six months ended June 30, 2018:
|
| | | | | | | | | | | | |
| Condensed Consolidated Statement of Financial Condition |
| | | | | | | |
| | | As of June 30, 2018 |
| | | As Reported | | Adjustments | | Balances without adoption of ASC 606 |
| Assets | | | | | | |
| Cash and cash equivalents | | $ | 125,448 |
| | $ | — |
| | $ | 125,448 |
|
| Investments ($985,035 of accrued carried interest) | | $ | 1,466,247 |
| | | | $ | 1,466,247 |
|
| Due from affiliates | | $ | 172,428 |
| | | | $ | 172,428 |
|
| Deferred tax asset, net | | $ | 42,942 |
| | $ | (199 | ) | | $ | 42,743 |
|
| Other assets | | 100,183 |
| | 26,195 |
| | 126,378 |
|
| Total assets | | 10,144,735 |
| | 25,996 |
| | 10,170,731 |
|
| Commitments and contingencies | |
| | | |
|
| Non-controlling interest in Consolidated Funds | | 577,217 |
| | (3,473 | ) | | 573,744 |
|
| Non-controlling interest in Ares Operating Group entities | | 316,048 |
| | 18,109 |
| | 334,157 |
|
| Controlling interest in Ares Management, L.P.: | | | | | | |
| Shareholders' equity (98,398,340 shares issued and outstanding) | | 349,981 |
| | 11,443 |
| | 361,424 |
|
| Accumulated other comprehensive loss, net of tax | | (6,758 | ) | | (83 | ) | | (6,841 | ) |
| Total controlling interest in Ares Management, L.P | | 343,223 |
| | 11,360 |
| | 354,583 |
|
| Total equity | | 1,535,249 |
| | 25,996 |
| | 1,561,245 |
|
| Total liabilities and equity | | 10,144,735 |
| | 25,996 |
| | 10,170,731 |
|
| | | | | | | |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
|
| | | | | | | | | | | | |
| Condensed Consolidated Statement of Operations |
| | | |
| | | Three Months Ended June 30, 2018 |
| | | As Reported | | Adjustments | | Balances without adoption of ASC 606 |
| Revenues | | | | | | |
| Incentive fees | | $ | 7,740 |
| | $ | 2,924 |
| | $ | 10,664 |
|
| Total revenues | | 204,163 |
| | 2,924 |
| | 207,087 |
|
| Expenses | | | | | | |
| Expenses of Consolidated Funds | | 35,112 |
| | — |
| | 35,112 |
|
| Total expenses | | 221,017 |
| | — |
| | 221,017 |
|
| Other income (expense) | | | | | | |
| Other income (expense), net | | (1,987 | ) | | 12 |
| | (1,975 | ) |
| Total other income | | 67,926 |
| | 12 |
| | 67,938 |
|
| Income before taxes | | 51,072 |
| | 2,936 |
| | 54,008 |
|
| Income tax benefit | | 36,903 |
| | (50 | ) | | 36,853 |
|
| Net income | | 14,169 |
| | 2,986 |
| | 17,155 |
|
| Less: Net income (loss) attributable to non-controlling interests in Consolidated Funds | | 9,882 |
| | 3,579 |
| | 13,461 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | | 16,062 |
| | (433 | ) | | 15,629 |
|
| Net income attributable to Ares Management, L.P. | | (11,775 | ) | | (160 | ) | | (11,935 | ) |
| Less: Preferred equity dividend paid | | 5,425 |
| | | | 5,425 |
|
| Net income attributable to Ares Management, L.P. common shareholders | | (17,200 | ) | | (160 | ) | | (17,360 | ) |
|
| | | | | | | | | | | | |
| Condensed Consolidated Statement of Operations |
| | | |
| | | Six Months Ended June 30, 2018 |
| | | As Reported | | Adjustments | | Balances without adoption of ASC 606 |
| Revenues | | | | | | |
| Incentive fees | | $ | 12,811 |
| | $ | 3,780 |
| | $ | 16,591 |
|
| Total revenues | | 470,252 |
| | 3,780 |
| | 474,032 |
|
| Expenses | | | | | | |
| Expenses of Consolidated Funds | | 36,428 |
| | — |
| | 36,428 |
|
| Total expenses | | 427,300 |
| | — |
| | 427,300 |
|
| Income before taxes | | 113,118 |
| | 3,780 |
| | 116,898 |
|
| Income tax benefit | | 24,528 |
| | 200 |
| | 24,728 |
|
| Net income | | 88,590 |
| | 3,580 |
| | 92,170 |
|
| Less: Net income (loss) attributable to non-controlling interests in Consolidated Funds | | 10,249 |
| | 1,860 |
| | 12,109 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | | 49,168 |
| | 1,104 |
| | 50,272 |
|
| Net income attributable to Ares Management, L.P. | | 29,173 |
| | 616 |
| | 29,789 |
|
| Less: Preferred equity dividend paid | | 10,850 |
| | | | 10,850 |
|
| Net income attributable to Ares Management, L.P. common shareholders | | 18,323 |
| | 616 |
| | 18,939 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
Condensed Consolidated Statement of Comprehensive Income
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | As Reported | | Adjustments | | Balances without adoption of ASC 606 |
| | | | | | |
| Net income | $ | 14,169 |
| | $ | 2,986 |
| | $ | 17,155 |
|
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustments | (12,377 | ) | | (444 | ) | | (12,821 | ) |
| Total comprehensive income | 1,792 |
| | 2,542 |
| | 4,334 |
|
| Less: Comprehensive income attributable to non-controlling interests in Consolidated Funds | 4,193 |
| | 3,579 |
| | 7,772 |
|
| Less: Comprehensive income attributable to non-controlling interests in Ares Operating Group entities | 12,131 |
| | — |
| | 12,131 |
|
| Comprehensive income attributable to Ares Management, L.P. | $ | (14,532 | ) | | $ | (1,037 | ) | | $ | (15,569 | ) |
Condensed Consolidated Statement of Comprehensive Income
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | As Reported | | Adjustments | | Balances without adoption of ASC 606 |
| | | | | | |
| Net income | $ | 88,590 |
| | $ | 3,580 |
| | $ | 92,170 |
|
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustments | (6,892 | ) | | (195 | ) | | (7,087 | ) |
| Total comprehensive income | 81,698 |
| | 3,385 |
| | 85,083 |
|
| Less: Comprehensive income attributable to non-controlling interests in Consolidated Funds | 7,735 |
| | 1,860 |
| | 9,595 |
|
| Less: Comprehensive income attributable to non-controlling interests in Ares Operating Group entities | 47,340 |
| | 992 |
| | 48,332 |
|
| Comprehensive income attributable to Ares Management, L.P. | $ | 26,623 |
| | $ | 533 |
| | $ | 27,156 |
|
Condensed Consolidated Statement of Cash Flows
|
| | | | | | | | | | | | |
| | | Six Months Ended June 30, 2018 |
| | | As Reported | | Adjustments | | Balances without adoption of ASC 606 |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 88,590 |
| | $ | 3,580 |
| | $ | 92,170 |
|
| Cash flows due to changes in operating assets and liabilities | | 66,925 |
| | (1,720 | ) | | 65,205 |
|
| Cash flows due to changes in operating assets and liabilities allocable to non-controlling interests in Consolidated Funds | | (34,335 | ) | | (1,860 | ) | | (36,195 | ) |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
Recent Accounting Pronouncements
The Company considers the applicability and impact of all FASB ASUs issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of the guidance in ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and liabilities in the balance sheet and disclosing key information. ASU 2016-02 amends previous lease guidance, which required a lessee to categorize and account for leases as either operating leases or capital leases, and instead requires a lessee to recognize a lease liability and a right-of-use asset on the entity’s balance sheet for all leases with terms that exceed one year. The lease liability and right-of-use asset are to be carried at the present value of remaining expected future lease payments. The guidance should be applied using a modified retrospective approach. ASU 2016-02 is effective for public entities for annual reporting periods beginning after December 15, 2018 and interim periods within those reporting periods, with early adoption permitted. The Company is currently compiling all leases and right–of–use terms to evaluate the impact of this guidance on its condensed consolidated financial statements.
In January 2017,2018, the FASB issued ASU 2017-01,2018-02, Business CombinationsIncome Statement-Reporting Comprehensive Income (Topic 805)220): ClarifyingReclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Public Law No. 115-97 (the “Tax Cuts and Jobs Act”). Consequently, the Definitionamendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a Business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist with evaluating whether a transaction shouldchange in tax laws or rates be accounted for as an acquisition or a disposal of a business.included in income from continuing operations is not affected. This ASU provides specific evaluation process,also requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and factors that should be usedinterim periods within those fiscal years. Early adoption is permitted, including adoption in this determination.any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The guidance should be applied prospectively. ASU 2017-01 is effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods within those reporting periods, with earlyeither in the period of adoption permitted. This guidance will not have a material impact onor retrospectively to each period (or periods) in which the Company's condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Currently, goodwill impairment requires an entity to perform a two-step test to determine the amount of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amounteffect of the reporting unit exceeds its fair value,change in the entity performs Step 2U.S. federal corporate income tax rate in the Tax Cuts and comparesJobs Act is recognized. The Company adopted ASU 2018-02 in the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 simplifies the goodwill impairment test by removing Step 2three months ended March 31, 2018. As a result of the test. An entity will apply a one-step quantitative test and record the amountadoption of goodwill impairment as the excessASU 2018-02, $1.2 million of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance should be applied prospectively. ASU 2017-04 is effective for public entities for annual reporting periods beginning after December 15, 2019 and interim periods within those reporting periods, with early adoption permitted. This guidance will not have a material impact on the Company's condensed consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Lossesstranded tax effects resulting from the Derecognition of Nonfinancial Assets (Subtopic 610-20): ClarifyingTax Cuts and Jobs Act were reclassified from accumulated other comprehensive income to shareholders' equity during the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 clarifies the application of current accounting guidance to the derecognition of nonfinancial assets, including partial sales of nonfinancial assets. This ASU specifies that an entity should allocate the consideration to each distinct asset using the guidance established in ASC 606 on allocating the transaction price to performance obligations. For partial sales of nonfinancial assets, ASU 2017-05 also requires an entity to derecognize a portion of the nonfinancial asset when the entity no longer has a controlling financial interest in the legal entity holding the asset and the entity has transferred control of the asset in accordance with ASC 606. Any noncontrolling or retained interest should be measured at fair value. The guidance should be adopted using either a full or modified retrospective approach. ASU 2017-05 is effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods within those reporting periods, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies the application of current accounting guidance to the modification of share-based compensation awards. This ASU specifies that an entity should account for the impact of an award modification in accordance with ASC Topic 718 unless all of the following conditions are met: (i) the fair value of the modified award is the same as the fair value of the original award prior to the modification; (ii) the vesting conditions of the modified award are the same as the original award prior to the modification; and (iii) the classification of the modified award as an equity instrument or liability instrument is the same as the original award. The guidance should be applied prospectively to awards modified on or after the adoption date. ASU 2017-09 is effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods within thosethree months ended March 31, 2018.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
reporting periods, with early adoption permitted. This guidance will not have a material impact on the Company's condensed consolidated financial statements.
3. GOODWILL AND INTANGIBLE ASSETS
Finite Lived Intangible Assets, Net
The Company's intangible assets include acquired management contracts, client relationships, a trade name, and the future benefits of managing new assets for existing clients that were recognized at fair value as of their acquisition dates.
The following table summarizes the carrying value, net of accumulated amortization, for the Company's intangible assets:
|
| | | | | | | | | |
| | Weighted Average Amortization Period as of June 30, 2018 | | As of June 30, | | As of December 31, |
| | | 2018 | | 2017 |
| Management contracts | 3.0 years | | $ | 42,335 |
| | $ | 67,306 |
|
| Client relationships | 10.0 years | | 38,600 |
| | 38,600 |
|
| Trade name | 4.0 years | | 3,200 |
| | 3,200 |
|
| Other(1) | 0.7 years | | 180 |
| | — |
|
| Intangible assets | | | 84,315 |
|
| 109,106 |
|
| Less: accumulated amortization | | | (50,316 | ) | | (68,641 | ) |
| Intangible assets, net | | | $ | 33,999 |
|
| $ | 40,465 |
|
| |
| (1) | In connection with the CION Ares Diversified Credit Fund, the Company pays upfront commissions to brokers that sell class C shares in the fund. The Company is then entitled to 12 months of service fees from the sold shares, which are recorded as revenue. |
|
| | | | | | | | | |
| | Weighted Average Amortization Period as of September 30, 2017 | | As of September 30, | | As of December 31, |
| | | 2017 | | 2016 |
| Management contracts | 1.9 years | | $ | 67,306 |
| | $ | 111,939 |
|
| Client relationships | 10.8 years | | 38,600 |
| | 38,600 |
|
| Trade name | 4.8 years | | 3,200 |
| | 3,200 |
|
| Intangible assets | | | 109,106 |
|
| 153,739 |
|
| Foreign currency translation | | | — |
| | (3,205 | ) |
| Total intangible assets | | | 109,106 |
|
| 150,534 |
|
| Less: accumulated amortization | | | (64,991 | ) | | (92,219 | ) |
| Intangible assets, net | | | $ | 44,115 |
|
| $ | 58,315 |
|
Amortization expense associated with intangible assets was $3.7$3.3 million and $6.4$5.2 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and $14.2$6.6 million and $20.8$10.5 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and is presented within general, administrative and other expenses within the Condensed Consolidated Statements of Operations. During the first quarter of 2017,2018, the Company removed $41.4$25.0 million of intangible assets that were fully amortized.
Goodwill
The following table summarizes the carrying value of the Company's goodwill assets:
|
| | | | | | | | | | | | | | | |
| | Credit | | Private
Equity | | Real
Estate | | Total |
| Balance as of December 31, 2016 | $ | 32,196 |
| | $ | 58,600 |
| | $ | 52,928 |
|
| $ | 143,724 |
|
| Foreign currency translation | — |
| | — |
| | 156 |
| | 156 |
|
| Balance as of September 30, 2017 | $ | 32,196 |
| | $ | 58,600 |
| | $ | 53,084 |
| | $ | 143,880 |
|
|
| | | | | | | | | | | | | | | |
| | Credit | | Private
Equity | | Real
Estate | | Total |
| Balance as of December 31, 2017 | $ | 32,196 |
| | $ | 58,600 |
| | $ | 53,099 |
|
| $ | 143,895 |
|
| Foreign currency translation | — |
| | — |
| | (47 | ) | | (47 | ) |
| Balance as of June 30, 2018 | $ | 32,196 |
| | $ | 58,600 |
| | $ | 53,052 |
| | $ | 143,848 |
|
There was no impairment of goodwill recorded during the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. The impact of foreign currency translation is reflected within other comprehensive income.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
4. INVESTMENTS
The Company’s investments are composedcomprised of: (i) investments presented at fair value as a result of the election of the fair value option or in accordance with investment company accounting, (ii)
|
| | | | | | | | | | | | | |
| | | | Percentage of total investments |
| | June 30, | | December 31, | | June 30, | | December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | As adjusted | | | | As adjusted |
| Private Investment Partnership Interests: | | | | | | | |
| Equity method private investment partnership interests - principal (1) | $ | 348,831 |
| | $ | 340,354 |
| | 23.8 | % | | 19.7 | % |
| Equity method - carried interest (1) | 985,035 |
| | 1,077,236 |
| | 67.2 | % | | 62.5 | % |
| Equity method private investment partnership interests - other | 70,780 |
| | 74,439 |
| | 4.8 | % | | 4.3 | % |
| Other private investment partnership interests | 38,097 |
| | 35,748 |
| | 2.6 | % | | 2.1 | % |
| Total private investment partnership interests | 1,442,743 |
|
| 1,527,777 |
| | 98.4 | % | | 88.6 | % |
| Collateralized loan obligations | 22,125 |
| | 195,158 |
| | 1.5 | % | | 11.3 | % |
| Common stock | 1,379 |
| | 1,636 |
| | 0.1 | % | | 0.1 | % |
| Total investments | $ | 1,466,247 |
|
| $ | 1,724,571 |
|
|
|
|
|
|
|
| |
| (1) | Interest or portion of the interest is denominated in foreign currency and is translated into U.S. dollars at each reporting date. |
Equity Method Investments
The Company’s equity method investments (usinginclude investments that are not consolidated but over which the Company exerts significant influence. The Company evaluates each of its equity method investments to determine if any were significant under SEC guidance. For the three and six months ended June 30, 2018 and 2017, no individual equity method investment held by the Company met the significance criteria.
The Company recognized net gains related to its equity method investments of $3.8 million and $38.3 million for the three months ended June 30, 2018 and 2017, respectively, and $7.3 million and $41.3 million for the six months ended June 30, 2018 and 2017, respectively. These amounts are included within both principal investment income and within net realized and unrealized gain on investments within the Consolidated Statements of Operations.
The material assets of the Company's equity method investments are expected to generate long-term capital appreciation and/or interest income; the material liabilities are debt instruments collateralized by, or related to, the financing of the assets; and net income is materially comprised of the changes in fair value option) and (iii) held-to-maturity investments. of these net assets.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
Fair Value Investments, excluding Equity Method Investments Held at Fair Value
|
| | | | | | | | | | | | | |
| | Fair value at | | Fair value as a percentage of total investments at |
| | September 30, | | December 31, | | September 30, | | December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Private Investment Partnership Interests: | | | | | | | |
| AREA Sponsor Holdings, LLC | $ | 26,002 |
| | $ | 28,898 |
| | 4.6 | % | | 6.8 | % |
| ACE II Master Fund, L.P. (1)(2) | 19,141 |
| | 22,042 |
| | 3.4 | % | | 5.2 | % |
| Ares Corporate Opportunities Fund III, L.P. | 114,674 |
| | 97,549 |
| | 20.3 | % | | 22.9 | % |
| Ares Corporate Opportunities Fund IV, L.P. (2) | 34,990 |
| | 37,308 |
| | 6.2 | % | | 8.7 | % |
| Resolution Life L.P. | 36,439 |
| | 33,410 |
| | 6.5 | % | | 7.8 | % |
| Other private investment partnership interests (1)(3) | 168,732 |
| | 118,075 |
| | 30.0 | % | | 27.7 | % |
| Total private investment partnership interests (cost: $293,804 and $256,638 at September 30, 2017 and December 31, 2016, respectively) | 399,978 |
|
| 337,282 |
| | 71.0 | % | | 79.1 | % |
| Collateralized loan obligations (cost: $163,011 and $89,743 at September 30, 2017 and December 31, 2016, respectively) (3) | 162,261 |
| | 89,111 |
| | 28.8 | % | | 20.9 | % |
| Common stock (cost: $1,132 and $124 at September 30, 2017 and December 31, 2016, respectively) (3) | 1,304 |
| | 100 |
| | 0.2 | % | | 0.0 | % |
| Total fair value investments (cost: $457,947 and $346,505 at September 30, 2017 and December 31, 2016, respectively) | $ | 563,543 |
|
| $ | 426,493 |
|
|
|
|
|
|
|
| |
(1) | Investment or portion of the investment is denominated in foreign currency; fair value is translated into U.S. dollars at each reporting date. |
| |
(2) | Represents underlying security that is held through various legal entities. |
| |
(3) | No single issuer or investment had a fair value that exceeded 5% of the Company's total assets. |
Equity Method Investments
The Company’s equity method investments include investments that are not consolidated but over which the Company exerts significant influence. The Company's equity method investments, including those where the fair value option was elected, are summarized below:
|
| | | | | | | |
| | As of September 30, | | As of December 31, |
| | 2017 | | 2016 |
| Equity method investment | $ | 3,081 |
| | $ | 3,616 |
|
| Equity method investments at fair value | 18,071 |
| | 21,843 |
|
| Total equity method investments | $ | 21,152 |
|
| $ | 25,459 |
|
The material assets of the Company's equity method investments are investments for which long term capital appreciation is expected, the material liabilities are debt instruments collateralized by, or related to, the financing of the assets and net income is primarily composed of the changes in fair value of these net assets.
Held-to-Maturity Investments
The Company classifies certain investments as held-to-maturity investments when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are reported as investments and are recorded at amortized cost. A summary of the cost and fair value of CLO notes classified as held-to maturity investments is as follows:
|
| | | | | | | |
| | As of September 30, | | As of December 31, |
| | 2017 | | 2016 |
| Amortized cost | $ | — |
| | $ | 16,519 |
|
| Unrealized loss, net | — |
| | (116 | ) |
| Fair value | $ | — |
| | $ | 16,403 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
Based on the Company's ability and intent to hold the investments until maturity and the underlying credit performance of such investments, the Company has determined that the net unrealized losses are temporary impairments as of December 31, 2016.
During the third quarter ended September 30, 2017, the Company redeemed its remaining held-to-maturity investments balance of $18.5 million at par, which approximated the amortized cost, with no gain or loss recognized. Redemption occurred in connection with the restructuring and refinancing of the underlying collateral facility during the third quarter ended September 30, 2017.
Investments of the Consolidated Funds
Investments held in the Consolidated Funds are summarized below:
| | | | Fair value at | | Fair value as a percentage of total investments at | Fair value at | | Fair value as a percentage of total investments at |
| | September 30, | | December 31, | | September 30, | | December 31, | June 30, | | December 31, | | June 30, | | December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| United States: | | | | | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | | | | | |
| Consumer discretionary | $ | 1,124,210 |
| | $ | 665,773 |
| | 22.6 | % | | 20.0 | % | $ | 1,714,080 |
| | $ | 1,295,732 |
| | 24.8 | % | | 23.2 | % |
| Consumer staples | 55,357 |
| | 64,840 |
| | 1.1 | % | | 1.9 | % | 76,664 |
| | 55,073 |
| | 1.1 | % | | 1.0 | % |
| Energy | 138,687 |
| | 45,409 |
| | 2.8 | % | | 1.4 | % | 169,208 |
| | 176,836 |
| | 2.4 | % | | 3.2 | % |
| Financials | 234,828 |
| | 139,285 |
| | 4.8 | % | | 4.2 | % | 424,838 |
| | 270,520 |
| | 6.1 | % | | 4.8 | % |
| Healthcare, education and childcare | 396,747 |
| | 246,403 |
| | 8.0 | % | | 7.4 | % | 665,530 |
| | 449,888 |
| | 9.6 | % | | 8.1 | % |
| Industrials | 298,186 |
| | 149,632 |
| | 6.1 | % | | 4.5 | % | 407,280 |
| | 370,926 |
| | 5.8 | % | | 6.6 | % |
| Information technology | 138,390 |
| | 194,394 |
| | 2.8 | % | | 5.8 | % | 175,704 |
| | 167,089 |
| | 2.5 | % | | 3.0 | % |
| Materials | 163,728 |
| | 139,994 |
| | 3.3 | % | | 4.2 | % | 189,786 |
| | 185,170 |
| | 2.7 | % | | 3.3 | % |
| Telecommunication services | 337,695 |
| | 261,771 |
| | 6.9 | % | | 7.9 | % | 625,619 |
| | 399,617 |
| | 9.0 | % | | 7.2 | % |
| Utilities | 54,548 |
| | 47,800 |
| | 1.1 | % | | 1.4 | % | 79,660 |
| | 77,102 |
| | 1.1 | % | | 1.4 | % |
| Total fixed income securities (cost: $2,949,788 and $1,945,977 at September 30, 2017 and December 31, 2016, respectively) | 2,942,376 |
|
| 1,955,301 |
| | 59.5 | % |
| 58.7 | % | |
Total fixed income securities (cost: $4,573,566
and $3,459,318 at June 30, 2018 and December 31, 2017, respectively) | | 4,528,369 |
|
| 3,447,953 |
| | 65.1 | % |
| 61.8 | % |
| Equity securities: | | | | | | | | | | | | | | |
| Energy | 158 |
| | 421 |
| | 0.0 | % | | 0.0 | % | 60 |
| | 126 |
| | 0.0 | % | | 0.0 | % |
| Partnership and LLC interests | 224,010 |
| | 171,696 |
| | 4.6 | % | | 5.2 | % | |
| Total equity securities (cost: $192,265 and $149,872 at September 30, 2017 and December 31, 2016, respectively) | 224,168 |
|
| 172,117 |
| | 4.6 | % |
| 5.2 | % | |
| Total equity securities (cost: $2,265 and $2,265 at June 30, 2018 and December 31, 2017, respectively) | | 60 |
| | 126 |
| | 0.0 | % | | 0.0 | % |
| Partnership and interests | | | | | | | | |
| Partnership and interests | | 251,608 |
| | 232,332 |
| | 3.6 | % | | 4.2 | % |
| Total partnership and LLC interests (cost: $206,000 and $190,000 at June 30, 2018 and December 31, 2017, respectively) | | 251,608 |
|
| 232,332 |
| | 3.6 | % |
| 4.2 | % |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | | Fair value at | | Fair value as a percentage of total investments at | Fair value at | | Fair value as a percentage of total investments at |
| | September 30, | | December 31, | | September 30, | | December 31, | June 30, | | December 31, | | June 30, | | December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Europe: | | | | | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | | | | | |
| Consumer discretionary | $ | 523,953 |
| | $ | 274,678 |
| | 10.6 | % | | 8.2 | % | $ | 772,714 |
| | $ | 604,608 |
| | 11.1 | % | | 10.8 | % |
| Energy | | 14,833 |
| | 2,413 |
| | 0.2 | % | | 0.0 | % |
| Consumer staples | 72,446 |
| | 39,197 |
| | 1.5 | % | | 1.2 | % | 90,207 |
| | 76,361 |
| | 1.3 | % | | 1.4 | % |
| Financials | 43,702 |
| | 28,769 |
| | 0.9 | % | | 0.9 | % | 127,141 |
| | 81,987 |
| | 1.8 | % | | 1.5 | % |
| Healthcare, education and childcare | 199,823 |
| | 111,589 |
| | 4.1 | % | | 3.4 | % | 234,696 |
| | 209,569 |
| | 3.4 | % | | 3.8 | % |
| Industrials | 106,808 |
| | 118,466 |
| | 2.2 | % | | 3.6 | % | 124,690 |
| | 145,706 |
| | 1.8 | % | | 2.6 | % |
| Information technology | 46,512 |
| | 49,507 |
| | 0.9 | % | | 1.5 | % | 21,329 |
| | 21,307 |
| | 0.3 | % | | 0.4 | % |
| Materials | 235,505 |
| | 124,629 |
| | 4.8 | % | | 3.7 | % | 184,342 |
| | 213,395 |
| | 2.6 | % | | 3.8 | % |
| Telecommunication services | 143,972 |
| | 118,632 |
| | 2.9 | % | | 3.6 | % | 256,032 |
| | 182,543 |
| | 3.7 | % | | 3.3 | % |
| Utilities | 9,427 |
| | 4,007 |
| | 0.2 | % | | 0.1 | % | |
| Total fixed income securities (cost: $1,383,866 and $892,108 at September 30, 2017 and December 31, 2016, respectively) | 1,382,148 |
|
| 869,474 |
| | 28.1 | % |
| 26.2 | % | |
| Total fixed income securities (cost: $1,849,235 and $1,545,297 at June 30, 2018 and December 31, 2017, respectively) | | 1,825,984 |
|
| 1,537,889 |
| | 26.2 | % |
| 27.6 | % |
| Equity securities: | | | | | | | | | | | | | | |
| Consumer staples | — |
| | 1,517 |
| | — | % | | 0.0 | % | |
| Healthcare, education and childcare | 57,562 |
| | 41,329 |
| | 1.2 | % | | 1.2 | % | 51,010 |
| | 63,155 |
| | 0.7 | % | | 1.1 | % |
| Telecommunication services | — |
| | 24 |
| | — | % | | 0.0 | % | |
| Total equity securities (cost: $67,198 and $67,290 at September 30, 2017 and December 31, 2016, respectively) | 57,562 |
|
| 42,870 |
| | 1.2 | % |
| 1.2 | % | |
| Total equity securities (cost: $67,198 and $67,198 at June 30, 2018 and December 31, 2017, respectively) | | 51,010 |
|
| 63,155 |
| | 0.7 | % |
| 1.1 | % |
| Asia and other: | | | | | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | | | | | |
| Consumer discretionary | 27,950 |
| | 24,244 |
| | 0.6 | % | | 0.7 | % | 1,878 |
| | 2,008 |
| | 0.0 | % | | 0.0 | % |
| Financials | 22,402 |
| | 1,238 |
| | 0.5 | % | | 0.0 | % | 4,288 |
| | 12,453 |
| | 0.1 | % | | 0.2 | % |
| Healthcare, education and childcare | — |
| | 10,010 |
| | — | % | | 0.3 | % | |
| Telecommunication services | 22,830 |
| | 8,696 |
| | 0.5 | % | | 0.3 | % | 20,888 |
| | 21,848 |
| | 0.3 | % | | 0.4 | % |
| Total fixed income securities (cost: $73,146 and $46,545 at September 30, 2017 and December 31, 2016, respectively) | 73,182 |
|
| 44,188 |
| | 1.6 | % |
| 1.3 | % | |
| Total fixed income securities (cost: $27,737 and $36,180 at June 30, 2018 and December 31, 2017, respectively) | | 27,054 |
|
| 36,309 |
| | 0.4 | % |
| 0.6 | % |
| Equity securities: | | | | | | | | | | | | | | |
| Consumer discretionary | 48,161 |
| | 44,642 |
| | 1.0 | % | | 1.3 | % | 43,647 |
| | 59,630 |
| | 0.6 | % | | 1.1 | % |
| Consumer staples | 47,208 |
| | 50,101 |
| | 1.0 | % | | 1.5 | % | 42,717 |
| | 45,098 |
| | 0.6 | % | | 0.8 | % |
| Healthcare, education and childcare | 44,637 |
| | 32,598 |
| | 0.9 | % | | 1.0 | % | 44,637 |
| | 44,637 |
| | 0.6 | % | | 0.8 | % |
| Industrials | 16,578 |
| | 16,578 |
| | 0.3 | % | | 0.5 | % | 50,795 |
| | 16,578 |
| | 0.7 | % | | 0.3 | % |
| Total equity securities (cost: $122,418 and $122,418 at September 30, 2017 and December 31, 2016, respectively) | 156,584 |
|
| 143,919 |
| | 3.2 | % |
| 4.3 | % | |
| Total equity securities (cost: $122,418 and $122,418 at June 30, 2018 and December 31, 2017, respectively) | | 181,796 |
|
| 165,943 |
| | 2.5 | % |
| 3.0 | % |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | | Fair value at | | Fair value as a percentage of total investments at | Fair value at | | Fair value as a percentage of total investments at |
| | September 30, | | December 31, | | September 30, | | December 31, | June 30, | | December 31, | | June 30, | | December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Canada: | | | | | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | | | | | |
| Consumer discretionary | $ | 4,093 |
| | $ | — |
| | 0.1 | % | | — | % | $ | 7,287 |
| | $ | 6,757 |
| | 0.1 | % | | 0.1 | % |
| Consumer staples | 10,387 |
| | 5,256 |
| | 0.2 | % | | 0.2 | % | 36,420 |
| | 15,351 |
| | 0.5 | % | | 0.3 | % |
| Energy | 28,459 |
| | 12,830 |
| | 0.6 | % | | 0.4 | % | 4,895 |
| | 33,715 |
| | 0.1 | % | | 0.6 | % |
| Healthcare, education and childcare | — |
| | 15,509 |
| | — | % | | 0.5 | % | |
| Industrials | 12,464 |
| | 1,401 |
| | 0.3 | % | | 0.0 | % | 27,356 |
| | 18,785 |
| | 0.4 | % | | 0.3 | % |
| Telecommunication services | 9,725 |
| | 13,852 |
| | 0.2 | % | | 0.4 | % | 12,569 |
| | 6,189 |
| | 0.2 | % | | 0.1 | % |
| Total fixed income securities (cost: $64,567 and $48,274 at September 30, 2017 and December 31, 2016, respectively) | 65,128 |
|
| 48,848 |
| | 1.4 | % |
| 1.5 | % | |
| Total fixed income securities (cost: $89,165 and $80,201 at June 30, 2018 and December 31, 2017, respectively) | | 88,527 |
|
| 80,797 |
| | 1.3 | % |
| 1.4 | % |
| Equity securities: | | | | | | | | | | | | | | |
| Consumer discretionary | 7,862 |
| | 164 |
| | 0.2 | % | | 0.0 | % | — |
| | 5,912 |
| | — | % | | 0.1 | % |
| Total equity securities (cost: $17,202 and $408 at September 30, 2017 and December 31, 2016, respectively) | 7,862 |
| | 164 |
| | 0.2 | % | | 0.0 | % | |
| Total equity securities (cost: $ 0 and $17,202 at June 30, 2018 and December 31, 2017, respectively) | | — |
| | 5,912 |
| | — | % | | 0.1 | % |
| Australia: | | | | | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | | | | | |
| Consumer discretionary | 3,142 |
| | 5,627 |
| | 0.1 | % | | 0.2 | % | 11,932 |
| | 10,863 |
| | 0.2 | % | | 0.2 | % |
| Energy | 2,877 |
| | 6,046 |
| | 0.1 | % | | 0.2 | % | 1,727 |
| | 1,563 |
| | 0.0 | % | | 0.0 | % |
| Industrials | — |
| | 2,926 |
| | — | % | | 0.1 | % | |
| Utilities | — |
| | 21,154 |
| | — | % | | 0.6 | % | |
| Total fixed income securities (cost: $6,910 and $37,975 at September 30, 2017 and December 31, 2016, respectively) | 6,019 |
|
| 35,753 |
| | 0.2 | % |
| 1.1 | % | |
| Equity securities: | | | | | | | | |
| Utilities | — |
| | 17,569 |
| | — | % | | 0.5 | % | |
| Total equity securities (cost: $0 and $18,442 at September 30, 2017 and December 31, 2016, respectively) | — |
|
| 17,569 |
| | — | % |
| 0.5 | % | |
| Total fixed income securities (cost: $13,915 and $12,714 at June 30, 2018 and December 31, 2017, respectively) | | 13,659 |
|
| 12,426 |
| | 0.2 | % |
| 0.2 | % |
| Total fixed income securities | 4,468,853 |
| | 2,953,564 |
| | 90.8 | % | | 88.8 | % | 6,483,593 |
| | 5,115,374 |
| | 93.2 | % | | 91.6 | % |
| Total equity securities | 446,176 |
| | 376,639 |
| | 9.2 | % | | 11.2 | % | 232,866 |
| | 235,136 |
| | 3.2 | % | | 4.2 | % |
| Total partnership interests | | 251,608 |
| | 232,332 |
| | 3.6 | % | | 4.2 | % |
| Total investments, at fair value | $ | 4,915,029 |
|
| $ | 3,330,203 |
|
|
|
|
|
|
| $ | 6,968,067 |
|
| $ | 5,582,842 |
|
|
|
|
|
|
|
At SeptemberJune 30, 20172018 and December 31, 2016,2017, no single issuer or investments,investment, including derivative instruments and underlying portfolio investments of the Consolidated Funds, had a fair value that exceeded 5.0% of the Company’s total assets.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
5. FAIR VALUE
Fair Value Measurements
GAAP establishes a hierarchal disclosure framework that prioritizes 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 for which 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 rates, yield curves, volatilities, prepayment risks, loss severities, credit risks and default rates.
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 more than one level 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. The Company’s assessment of the significance of an input requires judgment and considers factors specific to the instrument. The Company accounts for the transfer of assets into or out of each fair value hierarchy level as of the beginning of the reporting period.
Fair Value of Financial Instruments Held by the Company and Consolidated Funds
The tables below summarize the financial assets and financial liabilities measured at fair value for the Company and Consolidated Funds as of SeptemberJune 30, 2017:2018:
| | | Financial Instruments of the Company | | Level I | | Level II | | Level III | | Investments
Measured
at NAV | | Total | | Level I | | Level II | | Level III | | Investments
Measured
at NAV | | Total |
| Assets, at fair value | | | | | | | | | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | | | | | | | | | |
| Fixed income-collateralized loan obligations | | $ | — |
| | $ | — |
| | $ | 162,261 |
| | $ | — |
| | $ | 162,261 |
| | $ | — |
| | $ | — |
| | $ | 22,125 |
| | $ | — |
| | $ | 22,125 |
|
| Equity securities | | 300 |
| | 1,004 |
| | — |
| | — |
| | 1,304 |
| | 353 |
| | 1,026 |
| | — |
| | — |
| | 1,379 |
|
| Partnership interests | | — |
| | — |
| | 36,439 |
| | 381,610 |
| | 418,049 |
| | — |
| | — |
| | 47,219 |
| | 38,097 |
| | 85,316 |
|
| Total investments, at fair value | | 300 |
|
| 1,004 |
|
| 198,700 |
|
| 381,610 |
|
| 581,614 |
| | 353 |
|
| 1,026 |
|
| 69,344 |
|
| 38,097 |
|
| 108,820 |
|
| Derivatives—foreign exchange contracts | | — |
| | 1,310 |
| | — |
| | — |
| | 1,310 |
| | — |
| | 803 |
| | — |
| | — |
| | 803 |
|
| Total assets, at fair value | | $ | 300 |
|
| $ | 2,314 |
|
| $ | 198,700 |
|
| $ | 381,610 |
|
| $ | 582,924 |
| | $ | 353 |
|
| $ | 1,829 |
|
| $ | 69,344 |
|
| $ | 38,097 |
|
| $ | 109,623 |
|
| Liabilities, at fair value | | | | | | | | | | | | | | | | | | | | |
| Derivatives—foreign exchange contracts | | $ | — |
| | $ | (4,194 | ) | | $ | — |
| | $ | — |
| | $ | (4,194 | ) | | $ | — |
| | $ | (2,252 | ) | | $ | — |
| | $ | — |
| | $ | (2,252 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (4,194 | ) |
| $ | — |
|
| $ | — |
|
| $ | (4,194 | ) | | $ | — |
|
| $ | (2,252 | ) |
| $ | — |
|
| $ | — |
|
| $ | (2,252 | ) |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | Financial Instruments of the Consolidated Funds | | Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
| Assets, at fair value | | | | | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | | | | | |
| Fixed income investments: | | | | | | | | | | | | | | | | |
| Bonds | | $ | — |
| | $ | 91,683 |
| | $ | 7,373 |
| | $ | 99,056 |
| | $ | — |
| | $ | 88,672 |
| | $ | 7,634 |
| | $ | 96,306 |
|
| Loans | | — |
| | 4,037,594 |
| | 312,203 |
| | 4,349,797 |
| | — |
| | 5,886,315 |
| | 474,741 |
| | 6,361,056 |
|
| Collateralized loan obligations | | — |
| | 20,000 |
| | — |
| | 20,000 |
| | — |
| | 26,231 |
| | — |
| | 26,231 |
|
| Total fixed income investments | | — |
|
| 4,149,277 |
|
| 319,576 |
|
| 4,468,853 |
| | — |
|
| 6,001,218 |
|
| 482,375 |
|
| 6,483,593 |
|
| Equity securities | | 65,150 |
| | 158 |
| | 156,858 |
| | 222,166 |
| | 48,283 |
| | — |
| | 184,583 |
| | 232,866 |
|
| Partnership interests | | — |
| | — |
| | 224,010 |
| | 224,010 |
| | — |
| | — |
| | 251,608 |
| | 251,608 |
|
| Total investments, at fair value | | 65,150 |
|
| 4,149,435 |
|
| 700,444 |
|
| 4,915,029 |
| | 48,283 |
|
| 6,001,218 |
|
| 918,566 |
|
| 6,968,067 |
|
| Derivatives—other | | — |
| | — |
| | 1,328 |
| | 1,328 |
| |
| Derivatives: | | | | | | | | | |
| Asset swaps - other | | | — |
| | — |
| | 953 |
| | 953 |
|
| Total assets, at fair value | | $ | 65,150 |
|
| $ | 4,149,435 |
|
| $ | 701,772 |
|
| $ | 4,916,357 |
| | $ | 48,283 |
|
| $ | 6,001,218 |
|
| $ | 919,519 |
|
| $ | 6,969,020 |
|
| Liabilities, at fair value | | | | | | | | | | | | | | | | |
| Derivatives—other | | $ | — |
| | $ | — |
| | $ | (201 | ) | | $ | (201 | ) | |
| Asset swaps - other | | | $ | — |
| | $ | — |
| | $ | (723 | ) | | $ | (723 | ) |
| Loan obligations of CLOs | | — |
| | (4,476,643 | ) | | — |
| | (4,476,643 | ) | | — |
| | (6,333,239 | ) | | — |
| | (6,333,239 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (4,476,643 | ) |
| $ | (201 | ) |
| $ | (4,476,844 | ) | | $ | — |
|
| $ | (6,333,239 | ) |
| $ | (723 | ) |
| $ | (6,333,962 | ) |
The tables below summarize the financial assets and financial liabilities measured at fair value for the Company and Consolidated Funds as of December 31, 2016:2017:
| | | Financial Instruments of the Company | | Level I | | Level II | | Level III | | Investments
Measured
at NAV | | Total | | Level I | | Level II | | Level III | | Investments
Measured
at NAV | | Total |
| Assets, at fair value | | | | | | | | | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | | | | | | | | | |
| Fixed income-collateralized loan obligations | | $ | — |
| | $ | — |
| | $ | 89,111 |
| | $ | — |
| | $ | 89,111 |
| | $ | — |
| | $ | — |
| | $ | 195,158 |
| | $ | — |
| | $ | 195,158 |
|
| Equity securities | | 100 |
| | — |
| | — |
| | — |
| | 100 |
| | 520 |
| | 1,116 |
| | — |
| | — |
| | 1,636 |
|
| Partnership interests | | — |
| | — |
| | 33,410 |
| | 325,715 |
| | 359,125 |
| | — |
| | — |
| | 44,769 |
| | 35,998 |
| | 80,767 |
|
| Total investments, at fair value | | 100 |
|
| — |
|
| 122,521 |
|
| 325,715 |
|
| 448,336 |
| | 520 |
|
| 1,116 |
|
| 239,927 |
|
| 35,998 |
|
| 277,561 |
|
| Derivatives—foreign exchange contracts | | — |
| | 3,171 |
| | — |
| | — |
| | 3,171 |
| | — |
| | 498 |
| | — |
| | — |
| | 498 |
|
| Total assets, at fair value | | $ | 100 |
|
| $ | 3,171 |
|
| $ | 122,521 |
|
| $ | 325,715 |
|
| $ | 451,507 |
| | $ | 520 |
|
| $ | 1,614 |
|
| $ | 239,927 |
|
| $ | 35,998 |
|
| $ | 278,059 |
|
| Liabilities, at fair value | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Contingent considerations | | $ | — |
| | $ | — |
| | $ | (22,156 | ) | | $ | — |
| | $ | (22,156 | ) | |
| Derivatives—foreign exchange contracts | | | $ | — |
| | $ | (2,639 | ) | | $ | — |
| | $ | — |
| | $ | (2,639 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | — |
|
| $ | (22,156 | ) |
| $ | — |
|
| $ | (22,156 | ) | | $ | — |
|
| $ | (2,639 | ) |
| $ | — |
|
| $ | — |
|
| $ | (2,639 | ) |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | Financial Instruments of the Consolidated Funds | | Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
| Assets, at fair value | | | | | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | | | | | |
| Fixed income investments: | | | | | | | | | | | | | | | | |
| Bonds | | $ | — |
| | $ | 104,886 |
| | $ | 37,063 |
| | $ | 141,949 |
| | $ | — |
| | $ | 82,151 |
| | $ | 7,041 |
| | $ | 89,192 |
|
| Loans | | — |
| | 2,606,423 |
| | 199,217 |
| | 2,805,640 |
| | — |
| | 4,755,335 |
| | 260,848 |
| | 5,016,183 |
|
| Collateralized loan obligations | | — |
| | — |
| | 5,973 |
| | 5,973 |
| | — |
| | 10,000 |
| | — |
| | 10,000 |
|
| Total fixed income investments | | — |
|
| 2,711,309 |
|
| 242,253 |
|
| 2,953,562 |
| | — |
|
| 4,847,486 |
|
| 267,889 |
|
| 5,115,375 |
|
| Equity securities | | 56,662 |
| | 17,569 |
| | 130,690 |
| | 204,921 |
| | 72,558 |
| | — |
| | 162,577 |
| | 235,135 |
|
| Partnership interests | | — |
| | — |
| | 171,696 |
| | 171,696 |
| | — |
| | — |
| | 232,332 |
| | 232,332 |
|
| Other | | — |
| | 24 |
| | — |
| | 24 |
| |
| Total investments, at fair value | | 56,662 |
|
| 2,728,902 |
|
| 544,639 |
|
| 3,330,203 |
| | 72,558 |
|
| 4,847,486 |
|
| 662,798 |
|
| 5,582,842 |
|
| Derivatives: | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | | — |
| | 529 |
| | — |
| | 529 |
| |
| Other | | — |
| | — |
| | 291 |
| | 291 |
| |
| Asset swaps - other | | | — |
| | — |
| | 1,366 |
| | 1,366 |
|
| Total derivative assets, at fair value | | — |
|
| 529 |
|
| 291 |
|
| 820 |
| | — |
|
| — |
|
| 1,366 |
|
| 1,366 |
|
| Total assets, at fair value | | $ | 56,662 |
|
| $ | 2,729,431 |
|
| $ | 544,930 |
|
| $ | 3,331,023 |
| | $ | 72,558 |
|
| $ | 4,847,486 |
|
| $ | 664,164 |
|
| $ | 5,584,208 |
|
| Liabilities, at fair value | | | | | | | | | | | | | | | | |
| Derivatives—other | | $ | — |
| | $ | — |
| | $ | (2,999 | ) | | $ | (2,999 | ) | |
| Asset swaps - other | | | $ | — |
| | $ | — |
| | $ | (462 | ) | | $ | (462 | ) |
| Loan obligations of CLOs | | — |
| | (3,031,112 | ) | | — |
| | (3,031,112 | ) | | — |
| | (4,963,194 | ) | | — |
| | (4,963,194 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (3,031,112 | ) |
| $ | (2,999 | ) |
| $ | (3,034,111 | ) | | $ | — |
|
| $ | (4,963,194 | ) |
| $ | (462 | ) |
| $ | (4,963,656 | ) |
The following tables set forth a summary of changes in the fair value of the Level III measurements for the three months ended SeptemberJune 30, 2017:2018:
| | | | | Level III Assets | | Level III Liabilities | | Level III Assets | |
| Level III Assets and Liabilities of the Company | | Fixed Income | | Partnership
Interests | | Total | | Contingent Considerations | | Fixed Income | | Partnership
Interests | | Total | |
| Balance, beginning of period | | $ | 164,807 |
| | $ | 33,410 |
| | $ | 198,217 |
| | $ | 1,940 |
| | $ | 242,984 |
| | $ | 44,769 |
| | $ | 287,753 |
| |
| Purchases(1) | | 29,911 |
| | — |
| | 29,911 |
| | — |
| |
| Sales/settlements(2) | | (33,062 | ) | | — |
| | (33,062 | ) | | (1,000 | ) | | (219,744 | ) | | — |
| | (219,744 | ) | |
| Expired contingent considerations | | — |
| | — |
| | — |
| | (1,000 | ) | |
| Realized and unrealized appreciation, net | | 605 |
| | 3,029 |
| | 3,634 |
| | 60 |
| |
| Realized and unrealized appreciation (depreciation), net | | | (1,115 | ) | | 2,450 |
| | 1,335 |
| |
| Balance, end of period | | $ | 162,261 |
|
| $ | 36,439 |
|
| $ | 198,700 |
|
| $ | — |
| | $ | 22,125 |
|
| $ | 47,219 |
|
| $ | 69,344 |
|
|
| Increase in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date | | $ | 442 |
| | $ | 3,029 |
| | $ | 3,471 |
| | $ | — |
| |
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date | | | $ | (100 | ) | | $ | 2,450 |
| | $ | 2,350 |
| |
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership
Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 160,422 |
| | $ | 240,763 |
| | $ | 252,700 |
| | $ | 86 |
| | $ | 653,971 |
|
| Transfer in | | — |
| | 94,776 |
| | — |
| | — |
| | 94,776 |
|
| Transfer out | | — |
| | (68,328 | ) | | — |
| | — |
| | (68,328 | ) |
| Purchases(1) | | — |
| | 273,879 |
| | 6,000 |
| | — |
| | 279,879 |
|
| Sales/settlements(2) | | — |
| | (57,206 | ) | | — |
| | (17 | ) | | (57,223 | ) |
| Amortized discounts/premiums | | — |
| | (9 | ) | | — |
| | (21 | ) | | (30 | ) |
| Realized and unrealized appreciation (depreciation), net | | 24,161 |
| | (1,500 | ) | | (7,092 | ) | | 182 |
| | 15,751 |
|
| Balance, end of period | | $ | 184,583 |
|
| $ | 482,375 |
|
| $ | 251,608 |
|
| $ | 230 |
|
| $ | 918,796 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | (2,090 | ) | | $ | (3,785 | ) | | $ | — |
| | $ | 134 |
| | $ | (5,741 | ) |
| |
| (1) | Purchases include paid‑in‑kind interest and securities received in connection with restructurings. |
| |
| (2) | Sales/settlements include distributions, principal redemptions and securities disposed of in connection with restructurings. |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following tables set forth a summary of changes in the fair value of the Level III measurements for the three months ended June 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership
Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 146,274 |
| | $ | 187,579 |
| | $ | 217,740 |
| | $ | 2,809 |
| | $ | 554,402 |
|
| Transfer in | | — |
| | 86,420 |
| | — |
| | — |
| | 86,420 |
|
| Transfer out | | (271 | ) | | (60,550 | ) | | — |
| | (4 | ) | | (60,825 | ) |
| Purchases(1) | | — |
| | 139,903 |
| | 15,000 |
| | — |
| | 154,903 |
|
| Sales(2) | | (3,701 | ) | | (49,783 | ) | | (15,000 | ) | | — |
| | (68,484 | ) |
| Additions(3) | | — |
| | 14,479 |
| | — |
| | 1,393 |
| | 15,872 |
|
| Settlements, net | | — |
| | — |
| | — |
| | (3,127 | ) | | (3,127 | ) |
| Amortized discounts/premiums | | — |
| | 63 |
| | — |
| | 101 |
| | 164 |
|
| Realized and unrealized appreciation, net | | 14,556 |
| | 1,465 |
| | 6,270 |
| | (45 | ) | | 22,246 |
|
| Balance, end of period | | $ | 156,858 |
|
| $ | 319,576 |
|
| $ | 224,010 |
|
| $ | 1,127 |
|
| $ | 701,571 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | 12,830 |
| | $ | 920 |
| | $ | 6,270 |
| | $ | (2,021 | ) | | $ | 17,999 |
|
|
| | | | | | | | | | | | | | | | |
| | | Level III Assets | | Level III Liabilities |
| Level III Assets and Liabilities of the Company | | Fixed Income | | Partnership
Interests | | Total | | Contingent Considerations |
| Balance, beginning of period | | $ | 108,253 |
| | $ | 33,410 |
| | $ | 141,663 |
| | $ | 1,909 |
|
| Purchases(1) | | 60,242 |
| | — |
| | 60,242 |
| | — |
|
| Sales/settlements(2) | | (3,324 | ) | | — |
| | (3,324 | ) | | — |
|
| Realized and unrealized depreciation, net | | (364 | ) | | — |
| | (364 | ) | | 31 |
|
| Balance, end of period | | $ | 164,807 |
| | $ | 33,410 |
| | $ | 198,217 |
| | $ | 1,940 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date | | $ | (625 | ) | | $ | — |
| | $ | (625 | ) | | $ | 31 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 142,358 |
| | $ | 278,829 |
| | $ | 196,690 |
| | $ | 845 |
| | $ | 618,722 |
|
| Transfer in | | 444 |
| | 18,356 |
| | — |
| | — |
| | 18,800 |
|
| Transfer out | | — |
| | (108,757 | ) | | — |
| | — |
| | (108,757 | ) |
| Purchases(1) | | — |
| | 56,292 |
| | 50,000 |
| | — |
| | 106,292 |
|
| Sales/settlements(2) | | — |
| | (60,481 | ) | | (30,000 | ) | | (888 | ) | | (91,369 | ) |
| Amortized discounts/premiums | | — |
| | (78 | ) | | — |
| | (100 | ) | | (178 | ) |
| Realized and unrealized appreciation, net | | 3,472 |
| | 3,418 |
| | 1,050 |
| | 2,952 |
| | 10,892 |
|
| Balance, end of period | | $ | 146,274 |
| | $ | 187,579 |
| | $ | 217,740 |
| | $ | 2,809 |
| | $ | 554,402 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | 3,472 |
| | $ | (277 | ) | | $ | 1,050 |
| | $ | 3,145 |
| | $ | 7,390 |
|
| |
| (1) | Purchases include paid‑in‑kind interest and securities received in connection with restructurings. |
| |
| (2) | Sales include distributions, principal redemptions and securities disposed of in connection with restructurings. |
| |
(3) | Additions relate a CLO that was refinanced and restructured that is now consolidated. |
The following tables set forth a summary of changes in the fair value of the Level III measurements for the three months ended September 30, 2016:
|
| | | | | | | | | | | | | | | | |
| | | Level III Assets | | Level III Liabilities |
| Level III Assets and Liabilities of the Company | | Fixed Income | | Partnership
Interests | | Total | | Contingent Considerations |
| Balance, beginning of period | | $ | 54,155 |
| | $ | 44,746 |
| | $ | 98,901 |
| | $ | 41,035 |
|
| Purchases(1) | | 4 |
| | 833 |
| | 837 |
| | — |
|
| Sales/settlements(2) | | (943 | ) | | — |
| | (943 | ) | | (1,000 | ) |
| Realized and unrealized appreciation (depreciation), net | | 2,721 |
| | (12,169 | ) | | (9,448 | ) | | (17,690 | ) |
| Balance, end of period | | $ | 55,937 |
| | $ | 33,410 |
| | $ | 89,347 |
| | $ | 22,345 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date | | $ | 2,479 |
| | $ | (6,237 | ) | | $ | (3,758 | ) | | $ | (17,690 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 143,334 |
| | $ | 237,372 |
| | $ | 115,440 |
| | $ | (2,076 | ) | | $ | 494,070 |
|
| Transfer in | | 18,135 |
| | 54,202 |
| | — |
| | — |
| | 72,337 |
|
| Transfer out | | — |
| | (70,910 | ) | | — |
| | — |
| | (70,910 | ) |
| Purchases(1) | | 6,171 |
| | 94,527 |
| | 21,433 |
| | — |
| | 122,131 |
|
| Sales(2) | | (290 | ) | | (45,002 | ) | | (2,933 | ) | | — |
| | (48,225 | ) |
| Settlements, net | | — |
| | — |
| | — |
| | (543 | ) | | (543 | ) |
| Amortized discounts/premiums | | — |
| | 374 |
| | — |
| | 214 |
| | 588 |
|
| Realized and unrealized appreciation (depreciation), net | | (2,374 | ) | | 2,077 |
| | 5,260 |
| | 2,275 |
| | 7,238 |
|
| Balance, end of period | | $ | 164,976 |
| | $ | 272,640 |
| | $ | 139,200 |
| | $ | (130 | ) | | $ | 576,686 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | (59 | ) | | $ | (2,977 | ) | | $ | 5,261 |
| | $ | 2,143 |
| | $ | 4,368 |
|
| |
(1) | Purchases include paid‑in‑kind interest and securities received in connection with restructurings. |
| |
(2) | SalesSales/settlements include distributions, principal redemptions and securities disposed of in connection with restructurings. |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following tables set forth a summary of changes in the fair value of the Level III measurements for the ninesix months ended SeptemberJune 30, 2017:2018:
| | | | | Level III Assets | | Level III Liabilities | | Level III Assets | |
| Level III Assets and Liabilities of the Company | | Fixed Income | | Partnership
Interests | | Total | | Contingent Considerations | | Fixed Income | | Partnership
Interests | | Total | |
| Balance, beginning of period | | $ | 89,111 |
| | $ | 33,410 |
| | $ | 122,521 |
| | $ | 22,156 |
| | $ | 195,158 |
| | $ | 44,769 |
| | $ | 239,927 |
| |
| Deconsolidation of fund | | | 78 |
| | — |
| | 78 |
| |
| Purchases(1) | | 110,595 |
| | 169 |
| | 110,764 |
| | — |
| | 48,731 |
| | — |
| | 48,731 |
| |
| Sales/settlements(2) | | (38,303 | ) | | — |
| | (38,303 | ) | | (1,000 | ) | | (220,571 | ) | | — |
| | (220,571 | ) | |
| Expired contingent considerations | | — |
| | — |
| | — |
| | (1,000 | ) | |
| Realized and unrealized appreciation (depreciation), net | | 858 |
| | 2,860 |
| | 3,718 |
| | (20,156 | ) | | (1,271 | ) | | 2,450 |
| | 1,179 |
| |
| Balance, end of period | | $ | 162,261 |
| | $ | 36,439 |
| | $ | 198,700 |
| | $ | — |
| | $ | 22,125 |
| | $ | 47,219 |
| | $ | 69,344 |
| |
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date | | $ | 29 |
| | $ | 3,029 |
| | $ | 3,058 |
| | $ | — |
| | $ | (829 | ) | | $ | 2,450 |
| | $ | 1,621 |
| |
| | | Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership
Interests | | Derivatives, Net | | Total | | Equity Securities | | Fixed Income | | Partnership
Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 130,690 |
| | $ | 242,253 |
| | $ | 171,696 |
| | $ | (2,708 | ) | | $ | 541,931 |
| | $ | 162,577 |
| | $ | 267,889 |
| | $ | 232,332 |
| | $ | 904 |
| | $ | 663,702 |
|
| Deconsolidation of fund | | |
|
| | (233 | ) | |
|
| |
|
| | (233 | ) |
| Transfer in | | — |
| | 48,646 |
| | — |
| | — |
| | 48,646 |
| | — |
| | 95,450 |
| | — |
| | — |
| | 95,450 |
|
| Transfer out | | (6,581 | ) | | (100,228 | ) | | — |
| | (4 | ) | | (106,813 | ) | | — |
| | (73,777 | ) | | — |
| | — |
| | (73,777 | ) |
| Purchases(1) | | 6,692 |
| | 224,600 |
| | 88,000 |
| | — |
| | 319,292 |
| | — |
| | 313,462 |
| | 16,000 |
| | — |
| | 329,462 |
|
| Sales(2) | | (3,701 | ) | | (114,286 | ) | | (45,000 | ) | | — |
| | (162,987 | ) | |
| Additions(3) | | — |
| | 14,479 |
| | — |
| | 1,393 |
| | 15,872 |
| |
| Settlements, net | | — |
| | — |
| | — |
| | (976 | ) | | (976 | ) | |
| Sales/settlements(2) | | | — |
| | (117,503 | ) | | — |
| | (194 | ) | | (117,697 | ) |
| Amortized discounts/premiums | | — |
| | 132 |
| | — |
| | 317 |
| | 449 |
| | — |
| | 35 |
| | — |
| | (14 | ) | | 21 |
|
| Realized and unrealized appreciation, net | | 29,758 |
| | 3,980 |
| | 9,314 |
| | 3,105 |
| | 46,157 |
| |
| Realized and unrealized appreciation (depreciation), net | | | 22,006 |
| | (2,948 | ) | | 3,276 |
| | (466 | ) | | 21,868 |
|
| Balance, end of period | | $ | 156,858 |
| | $ | 319,576 |
| | $ | 224,010 |
| | $ | 1,127 |
| | $ | 701,571 |
| | $ | 184,583 |
| | $ | 482,375 |
| | $ | 251,608 |
| | $ | 230 |
| | $ | 918,796 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | 19,175 |
| | $ | (429 | ) | | $ | 9,314 |
| | $ | (787 | ) | | $ | 27,273 |
| | $ | (12,211 | ) | | $ | (1,671 | ) | | $ | 3,276 |
| | $ | (566 | ) | | $ | (11,172 | ) |
| |
| (1) | Purchases include paid‑in‑kind interest and securities received in connection with restructurings. |
| |
| (2) | SalesSales/settlements include distributions, principal redemptions and securities disposed of in connection with restructurings. |
| |
(3) | Additions relate to a CLO that was refinanced and restructured that is now consolidated. |
The following tables set forth a summary of changes in the fair value of the Level III measurements for the nine months ended September 30, 2016:
|
| | | | | | | | | | | | | | | | |
| | | Level III Assets | | Level III Liabilities |
| Level III Assets and Liabilities of the Company | | Fixed Income | | Partnership
Interests | | Total | | Contingent Considerations |
| Balance, beginning of period | | $ | 55,752 |
| | $ | 51,703 |
| | $ | 107,455 |
| | $ | 40,831 |
|
| Purchases(1) | | 11 |
| | 9,000 |
| | 9,011 |
| | — |
|
| Sales/settlements(2) | | (3,236 | ) | | — |
| | (3,236 | ) | | (1,000 | ) |
| Realized and unrealized appreciation (depreciation), net | | 3,410 |
| | (27,293 | ) | | (23,883 | ) | | (17,486 | ) |
| Balance, end of period | | $ | 55,937 |
| | $ | 33,410 |
| | $ | 89,347 |
| | $ | 22,345 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date | | $ | 2,043 |
| | $ | (7,293 | ) | | $ | (5,250 | ) | | $ | (17,486 | ) |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following tables set forth a summary of changes in the fair value of the Level III measurements for the six months ended June 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 129,809 |
| | $ | 249,490 |
| | $ | 86,902 |
| | $ | (10,307 | ) | | $ | 455,894 |
|
| Transfer in | | 15,760 |
| | 64,796 |
| | — |
| | — |
| | 80,556 |
|
| Transfer out | | (344 | ) | | (75,192 | ) | | — |
| | — |
| | (75,536 | ) |
| Purchases(1) | | 15,839 |
| | 132,958 |
| | 34,533 |
| | — |
| | 183,330 |
|
| Sales(2) | | (290 | ) | | (85,430 | ) | | (3,233 | ) | | — |
| | (88,953 | ) |
| Settlements, net | | — |
| | — |
| | — |
| | 45 |
| | 45 |
|
| Amortized discounts/premiums | | — |
| | 1,103 |
| | — |
| | 298 |
| | 1,401 |
|
| Realized and unrealized appreciation (depreciation), net | | 4,202 |
| | (15,085 | ) | | 20,998 |
| | 9,834 |
| | 19,949 |
|
| Balance, end of period | | $ | 164,976 |
| | $ | 272,640 |
| | $ | 139,200 |
| | $ | (130 | ) | | $ | 576,686 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | 4,385 |
| | $ | (10,760 | ) | | $ | 20,998 |
| | $ | 8,617 |
| | $ | 23,240 |
|
|
| | | | | | | | | | | | | | | | |
| | | Level III Assets | | Level III Liabilities |
| Level III Assets and Liabilities of the Company | | Fixed Income | | Partnership
Interests | | Total | | Contingent Considerations |
| Balance, beginning of period | | $ | 89,111 |
| | $ | 33,410 |
| | $ | 122,521 |
| | $ | 22,156 |
|
| Purchases(1) | | 80,684 |
| | 169 |
| | 80,853 |
| | — |
|
| Sales/settlements(2) | | (5,241 | ) | | — |
| | (5,241 | ) | | — |
|
| Realized and unrealized appreciation (depreciation), net | | 253 |
| | (169 | ) | | 84 |
| | (20,216 | ) |
| Balance, end of period | | $ | 164,807 |
| | $ | 33,410 |
| | $ | 198,217 |
| | $ | 1,940 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date | | $ | (155 | ) | | $ | — |
| | $ | (155 | ) | | $ | 61 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 130,690 |
| | $ | 242,253 |
| | $ | 171,696 |
| | $ | (2,708 | ) | | $ | 541,931 |
|
| Transfer in | | — |
| | 34,182 |
| | — |
| | — |
| | 34,182 |
|
| Transfer out | | (6,160 | ) | | (108,806 | ) | | — |
| | — |
| | (114,966 | ) |
| Purchases(1) | | 6,692 |
| | 93,111 |
| | 73,000 |
| | — |
| | 172,803 |
|
| Sales/settlements(2) | | — |
| | (76,714 | ) | | (30,000 | ) | | 1,966 |
| | (104,748 | ) |
| Amortized discounts/premiums | | — |
| | 46 |
| | — |
| | 216 |
| | 262 |
|
| Realized and unrealized appreciation, net | | 15,052 |
| | 3,507 |
| | 3,044 |
| | 3,335 |
| | 24,938 |
|
| Balance, end of period | | $ | 146,274 |
| | $ | 187,579 |
| | $ | 217,740 |
| | $ | 2,809 |
| | $ | 554,402 |
|
| Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | 15,749 |
| | $ | (785 | ) | | $ | 3,044 |
| | $ | 3,914 |
| | $ | 21,922 |
|
| |
| (1) | Purchases include paid‑in‑kind interest and securities received in connection with restructurings. |
| |
| (2) | SalesSales/settlements include distributions, principal redemptions and securities disposed of in connection with restructurings. |
The Company recognizes transfers between the levels as of the beginning of the period. Transfers out of Level III were generally attributable to certain investments that experienced a more significant level of market activity during the period and thus were valued using observable inputs either from independent pricing services or multiple brokers. Transfers into Level III were generally attributable to certain investments that experienced a less significant level of market activity during the period and thus were only able to obtain one or fewer quotes from a broker or independent pricing service. Two ofFor the Company's investments were transferred from a Level II to a Level I fair value measurement as ofsix months ended June 30, 2017 at their fair values totaling $7.5 million as of the transfer date. The investments transferred are equity securities that were previously thinly traded that began to have significant levels of market activity to support quoted market prices during the second quarter of 2017. For the nine months ended September 30, 2016,2018, there were no transfers between Level I and Level II fair value measurements.
The following table summarizes the quantitative inputs and assumptions used for the Company’s Level III measurements as of SeptemberJune 30, 2017:2018:
| | | | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range |
| Assets | | | | |
| Partnership interests | $ | 36,439 |
| | Other | | N/A | | N/A | $ | 47,219 |
| | Other | | N/A | | N/A |
| Collateralized loan obligations | 162,261 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | 22,125 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A |
| Total | $ | 198,700 |
| | $ | 69,344 |
| |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table summarizes the quantitative inputs and assumptions used for the Company’s Level III measurements as of December 31, 2016:2017:
| | | | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range |
| Assets | | | | |
| Partnership interests | $ | 33,410 |
| | Other | | N/A | | N/A | $ | 44,769 |
| | Other | | N/A | | N/A |
| Collateralized loan obligations | 89,111 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | 195,158 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A |
| Total | $ | 122,521 |
| | $ | 239,927 |
| |
| Liabilities | | | |
| Contingent consideration liabilities | | | |
| | $ | 20,278 |
| | Other | | N/A | | N/A | |
| | 1,878 |
| | Discounted cash flow | | Discount rate | | 6.5% | |
| Total | $ | 22,156 |
| | |
The following table summarizes the quantitative inputs and assumptions used for the Consolidated Funds’ Level III measurements as of SeptemberJune 30, 2017:2018:
| | | | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | | Weighted
Average | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | | Weighted
Average |
| Assets | | | | |
| Equity securities | | | | |
| | $ | 57,562 |
| | Enterprise value market multiple analysis | | EBITDA multiple(2) | | 2.8x | | 2.8x | $ | 51,010 |
| | Enterprise value market multiple analysis | | EBITDA multiple(2) | | 7.7x | | 7.7 |
| | 61,215 |
| | Market approach (comparable companies) | | Net income multiple
Illiquidity discount | | 30.0x - 45.0x
25.0% | | 34.7x
25.0% | 44,637 |
| | Market approach (comparable companies) | | Net income multiple | | 51.8x | | 51.8 |
| | 224,010 |
| | Discounted cash flow | | Discount rate | | 18.5% | | 18.5% |
|
| |
| | Illiquidity discount | | 25.0% | | 25.0% |
| | 38,081 |
| | Recent transaction price(1) | | N/A | | N/A | | N/A | 60 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| | | 88,876 |
| | Transaction price(1) | | N/A | | N/A | | N/A |
| Partnership interest | | 251,608 |
| | Discounted cash flow | | Discount rate | | 17.0% | | 17.0% |
| Fixed income securities | | | | |
| | 238,764 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | 434,397 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| | 80,590 |
| | Income approach | | Yield | | 4.9% - 14.3% | | 9.4% | 47,978 |
| | Income approach | | Yield | | 7.8% - 15.2% | | 11.3% |
| | 222 |
| | Market approach (comparable companies) | | EBITDA multiple(2) | | 5.6x | | 5.6x | |
| Derivative instruments of Consolidated Funds | 1,328 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | |
| Derivative instruments | | 953 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total assets | $ | 701,772 |
| | $ | 919,519 |
| |
| Liabilities | | | | |
| Derivatives instruments of Consolidated Funds | $ | (201 | ) | | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | |
| Derivatives instruments | | $ | (723 | ) | | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total liabilities | $ | (201 | ) | | $ | (723 | ) | |
| |
| (1) | Recent transactionTransaction price consists of securities recently purchased or restructured. The Company determined that there was no change to the valuation based on the underlying assumptions used at the closing of such transactions. |
| |
| (2) | “EBITDA” in the table above is a non-GAAP financial measure and refers to earnings before interest, tax, depreciation and amortization. |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table summarizes the quantitative inputs and assumptions used for the Consolidated Funds’ Level III measurements as of December 31, 2016:2017:
| | | | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | | Weighted Average | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | | Weighted Average |
| Assets | | | | |
| Equity securities | | | | |
| | $ | 43,011 |
| | Enterprise value market multiple analysis | | EBITDA multiple(2) | | 2.0x - 11.2x | | 2.3x | $ | 63,155 |
| | Enterprise value market multiple analysis | | EBITDA multiple | | 2.7x | | 2.7x |
| | 32,598 |
| | Market approach (comparable companies) | | Net income multiple
Illiquidity discount | | 30.0x - 40.0x
25.0% | | 35.0x
25.0% | 61,215 |
| | Market approach (comparable companies) | | Net income multiple
Illiquidity discount | | 27.0x - 36.2x
25.0% | | 33.7x
25.0% |
| | 421 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | 126 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| | 171,696 |
| | Discounted cash flow | | Discount rate | | 20% | | 20% | 38,081 |
| | Transaction price(1) | | N/A | | N/A | | N/A |
| | 54,660 |
| | Recent transaction price(1) | | N/A | | N/A | | N/A | |
| Partnership interest | | 232,332 |
| | Discounted cash flow | | Discount rate | | 19.0% | | 19.0% |
| Fixed income securities | | | | |
| | 170,231 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | 222,413 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| | 6,693 |
| | Enterprise value market multiple analysis | | EBITDA multiple(2) | | 7.1x | | 7.1x | 45,243 |
| | Income approach | | Yield | | 10.8% - 22.5% | | 12.1% |
| | 5,473 |
| | Income approach | | Collection rates | | 1.2x | | 1.2x | 233 |
| | Market approach (comparable companies) | | EBITDA multiple | | 6.5x | | 6.5x |
| | 28,595 |
| | Income approach | | Yield | | 6.0% - 13.6% | | 10.9% | |
| | 24,052 |
| | Discounted cash flow | | Discount rate | | 7.8% - 15.3% | | 11.1% | |
| | 1,776 |
| | Market approach (comparable companies) | | EBITDA multiple(2) | | 6.5x | | 6.5x | |
| | 4,887 |
| | Recent transaction price(1) | | N/A | | N/A | | N/A | |
| | 546 |
| | Market approach | | EBITDA multiple(2) | | 6.1x | | 6.1x | |
| Derivative instruments of Consolidated Funds | 291 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | |
| Derivative instruments | | 1,366 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total assets | $ | 544,930 |
| | $ | 664,164 |
| |
| Liabilities | | | | |
| Derivatives instruments of Consolidated Funds | $ | (2,999 | ) | | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | |
| Derivatives instruments | | $ | (462 | ) | | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total liabilities | $ | (2,999 | ) | | $ | (462 | ) | |
| |
| (1) | Recent transactionTransaction price consists of securities purchased or restructured. The Company determined that there has been no change to the valuation based on the underlying assumptions used at the closing of such transactions. |
| |
(2) | “EBITDA” in the table above is a non-GAAP financial measure and refers to earnings before interest, tax, depreciation and amortization. |
The Company's investments valued using net asset value (“NAV”) per share have terms and conditions that do not allow for redemption without certain events or approvals that are outside the Company's control. A summary of fair value by segment and the remaining unfunded commitments are presented below:
|
| | | | | | | | | | | | | | | | |
| | | As of September 30, 2017 | | As of December 31, 2016 |
| Segment | | Fair Value | | Unfunded
Commitments | | Fair Value | | Unfunded
Commitments |
| Credit Group | | $ | 77,220 |
| | $ | 79,303 |
| | $ | 53,131 |
| | $ | 30,896 |
|
| Private Equity Group | | 188,615 |
| | 91,311 |
| | 181,096 |
| | 96,687 |
|
| Real Estate Group | | 83,484 |
| | 48,816 |
| | 71,669 |
| | 35,708 |
|
| Non-core investments(1) | | 32,291 |
| | 20,023 |
| | 19,819 |
| | 34,500 |
|
| Totals | | $ | 381,610 |
|
| $ | 239,453 |
|
| $ | 325,715 |
|
| $ | 197,791 |
|
|
| | | | | | | | | | | | | | | | |
| | | As of June 30, 2018 | | As of December 31, 2017 |
| | | Fair Value | | Unfunded
Commitments | | Fair Value | | Unfunded
Commitments |
| Non-core investments(1) | | $ | 38,097 |
| | $ | 16,286 |
| | $ | 35,998 |
| | $ | 16,492 |
|
| Total | | $ | 38,097 |
|
| $ | 16,286 |
|
| $ | 35,998 |
|
| $ | 16,492 |
|
(1) Non-core investments are reported within the Company's Operations Management Group ("OMG").OMG.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
6. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company and the Consolidated Funds are exposed to certain risks relating to their ongoing operations and use various types of derivative instruments primarily to mitigate against credit and foreign exchange risk. The derivative instruments are not designated as hedging instruments under the accounting standards for derivatives and hedging. The Company recognizes all of its derivative instruments at fair value as either assets or liabilities in the Condensed Consolidated Statements of Financial Condition within other assets or accounts payable, accrued expenses and other liabilities, respectively. These amounts may be offset to the extent that there is a legal right to offset and if elected by management.
The following tables identify the fair value and notional amounts of derivative contracts by major product type on a gross basis for the Company and the Consolidated Funds as of SeptemberJune 30, 20172018 and December 31, 2016: 2017:
| | | | | As of September 30, 2017 | | As of December 31, 2016 | | As of June 30, 2018 | | As of December 31, 2017 |
| | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
| The Company | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value |
| Foreign exchange contracts | | $ | 37,907 |
| | $ | 1,310 |
| | $ | 124,536 |
| | $ | 4,194 |
| | $ | 62,830 |
| | $ | 3,171 |
| | $ | — |
| | $ | — |
| | $ | 13,733 |
| | $ | 803 |
| | $ | 86,130 |
| | $ | 2,252 |
| | $ | 13,724 |
| | $ | 498 |
| | $ | 51,026 |
| | $ | 2,639 |
|
| Total derivatives, at fair value(2) | | $ | 37,907 |
| | $ | 1,310 |
| | $ | 124,536 |
| | $ | 4,194 |
| | $ | 62,830 |
| | $ | 3,171 |
| | $ | — |
| | $ | — |
| | $ | 13,733 |
| | $ | 803 |
| | $ | 86,130 |
| | $ | 2,252 |
| | $ | 13,724 |
| | $ | 498 |
| | $ | 51,026 |
| | $ | 2,639 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of September 30, 2017 | | As of December 31, 2016 |
| | | Assets | | Liabilities | | Assets | | Liabilities |
| Consolidated Funds | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value |
| Foreign exchange contracts | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 25,304 |
| | $ | 529 |
| | $ | — |
| | $ | — |
|
| Other financial instruments | | 6,071 |
| | 1,328 |
| | (2,368 | ) | | (201 | ) | | 3,575 |
| | 291 |
| | (204 | ) | | (2,999 | ) |
| Total derivatives, at fair value(3) | | 6,071 |
|
| 1,328 |
|
| (2,368 | ) |
| (201 | ) |
| 28,879 |
|
| 820 |
|
| (204 | ) |
| (2,999 | ) |
| Other—equity(4) | | — |
| | — |
| | — |
| | — |
| | 253 |
| | 24 |
| | — |
| | — |
|
| Total | | $ | 6,071 |
|
| $ | 1,328 |
|
| $ | (2,368 | ) |
| $ | (201 | ) |
| $ | 29,132 |
|
| $ | 844 |
|
| $ | (204 | ) |
| $ | (2,999 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of June 30, 2018 | | As of December 31, 2017 |
| | | Assets | | Liabilities | | Assets | | Liabilities |
| Consolidated Funds | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value | | Notional(1) | | Fair Value |
| Asset swap - other | | 4,558 |
| | 953 |
| | 1,351 |
| | 723 |
| | 5,363 |
| | 1,366 |
| | 1,840 |
| | 462 |
|
| Total derivatives, at fair value(3) | | 4,558 |
|
| 953 |
|
| 1,351 |
|
| 723 |
|
| 5,363 |
|
| 1,366 |
|
| 1,840 |
|
| 462 |
|
| |
| (1) | Represents the total contractual amount of derivative assets and liabilities outstanding. |
| |
| (2) | As of SeptemberJune 30, 2018 and December 31, 2017, the Company had the right to, but elected not to, offset $1.3$0.8 million and $0.5 million of its derivative assets and liabilities. As of December 31, 2016, the Company did not have any derivative liabilities to offset its derivative assets. |
| |
(3) | As of September 30, 2017 and December 31, 2016, the Consolidated Funds offset $0.7 million and $1.4 million of their derivative assets and liabilities, respectively. |
| |
(4)(3) | Represents the fair valueAs of warrants which are presented as equity securities within investments ofJune 30, 2018 and December 31, 2017, the Consolidated Funds in the Condensed Consolidated Statementsoffset $0.3 million and $0.4 million of Financial Condition.their derivative assets and liabilities, respectively. |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
7. DEBT
The following table summarizes the Company’s and its subsidiaries’ debt obligations:
| | | | | | | As of September 30, 2017 | | As of December 31, 2016 | | | | As of June 30, 2018 | | As of December 31, 2017 |
| | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying
Value | | Interest Rate | | Carrying
Value | | Interest Rate | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying
Value | | Interest Rate | | Carrying
Value | | Interest Rate |
| Credit Facility(1) | Revolver | | 2/24/2022 | | N/A |
| | $ | 110,000 |
| | 2.75% | | $ | — |
| | —% | Revolver | | 2/24/2022 | | N/A |
| | $ | 125,000 |
| | 3.63% | | $ | 210,000 |
| | 3.09% |
| Senior Notes(2) | 10/8/2014 | | 10/8/2024 | | $ | 250,000 |
| | 245,149 |
| | 4.21% | | 244,684 |
| | 4.21% | 10/8/2014 | | 10/8/2024 | | $ | 250,000 |
| | 245,628 |
| | 4.21% | | 245,308 |
| | 4.21% |
| 2015 Term Loan(3) | 9/2/2015 | | 7/29/2026 | | $ | 35,205 |
| | 35,032 |
| | 2.79% | | 35,063 |
| | 2.74% | 9/2/2015 | | 7/29/2026 | | — |
| | — |
| | N/A | | 35,037 |
| | 2.86% |
| 2016 Term Loan(4) | 12/21/2016 | | 1/15/2029 | | $ | 26,376 |
| | 25,999 |
| | 3.02% | | 26,037 |
| | 2.66% | 12/21/2016 | | 1/15/2029 | | — |
| | — |
| | N/A | | 25,948 |
| | 3.08% |
| 2017 Term Loan A(4) | 3/22/2017 | | 1/22/2028 | | $ | 17,600 |
| | 17,474 |
| | 2.70% | | N/A |
| | N/A | 3/22/2017 | | 1/22/2028 | | — |
| | — |
| | N/A | | 17,407 |
| | 2.90% |
| 2017 Term Loan B(4) | 5/10/2017 | | 10/15/2029 | | $ | 35,198 |
| | 35,147 |
| | 2.63% | | N/A |
| | N/A | 5/10/2017 | | 10/15/2029 | | — |
| | — |
| | N/A | | 35,062 |
| | 2.90% |
| 2017 Term Loan C(4) | 6/22/2017 | | 7/30/2029 | | $ | 17,211 |
| | 17,206 |
| | 2.75% | | N/A |
| | N/A | 6/22/2017 | | 7/30/2029 | | — |
| | — |
| | N/A | | 17,078 |
| | 2.88% |
| 2017 Term Loan D(4) | | 11/16/2017 | | 10/15/2030 | | — |
| | — |
| | N/A | | 30,336 |
| | 2.77% |
| Total debt obligations | | | | $ | 486,007 |
| | $ | 305,784 |
| | | | | $ | 370,628 |
| | $ | 616,176 |
| |
| |
| (1) | The AOG entities are borrowers under the Credit Facility, which as amended in February 2017 and increased in September 2017, provides a $1.065 billion revolving line of credit. It has a variable interest rate based on LIBOR or a base rate plus an applicable margin with an unused commitment fee paid quarterly, which is subject to change with the Company’s underlying credit agency rating. As of SeptemberJune 30, 2017,2018, base rate loans bear interest calculated based on the base rate plus 0.50% and the LIBOR rate loans bear interest calculated based on LIBOR plus 1.50%. The unused commitment fee is 0.20% per annum. There is a base rate and LIBOR floor of zero. |
| |
| (2) | The Senior Notes were issued in October 2014 by Ares Finance Co. LLC, a subsidiary of the Company, at 98.268% of the face amount with interest paid semi-annually. The Company may redeem the Senior Notes prior to maturity, subject to the terms of the indenture. |
| |
| (3) | The 2015 Term Loan was entered into in August 2015 by a subsidiary of the Company that acts as a manager to a CLO. The 2015 Term Loan is secured by collateral in the form of CLO senior tranches owned by the Company. To the extent the assets are not sufficient to cover the Term Loan, there is no further recourse to the Company to fund or repay the remaining balance. Interest is paid quarterly, and the Company also pays a fee of 0.025% of a maximum investment amount. |
| |
| (4) | The 2016 and 2017 Term Loans ("(“Term Loans"Loans”) were entered into by a subsidiary of the Company that acts as a manager to a CLO.CLOs. The Term Loans are secured by collateral in the form of CLO senior tranches and subordinated notes owned by the Company. Collateral associated with one of the Term Loans may be used to satisfy outstanding liabilities of another term loanTerm Loan should the collateral fall short. To the extent the assets associated with these Term Loans are not sufficient to cover the Term Loans, there is no further recourse to the Company to fund or repay the remaining balance. Interest is paid quarterly, and the Company also pays a fee of 0.03% of a maximum investment amount. |
As of SeptemberJune 30, 2017,2018, the Company and its subsidiaries were in compliance with all covenants under the Credit Facility, Senior Notes and Term Loandebt obligations.
Debt obligations of the Company and its subsidiaries are reflected at cost. The Company typically incurs and pays debt issuance costs when entering into a new debt obligation or when amending an existing debt agreement. Debt issuance costs related to the Company's Senior Notes and Term Loans are recorded as a reduction of the corresponding debt obligation and debt issuance costs related to the Credit Facility are included in other assets in the Condensed Consolidated Statements of Financial Condition. All debt issuance costs are amortized over the term of the related obligation. The following table shows
Subsequent to the activityremoval of the Company'sU.S. risk retention requirements related to open–market CLO managers, the Company sold $219.3 million of its CLO securities and used the proceeds to pay off the related 2015-2017 Term Loans and settle a repurchase agreement of $206.0 million during the three months ended June 30, 2018. The resulting loss from the debt issuance costs:
|
| | | | | | | | | | | |
| | Credit Facility | | Senior Notes | | Term Loans |
| Unamortized debt issuance costs as of December 31, 2016 | $ | 4,800 |
| | $ | 1,803 |
| | $ | 526 |
|
| Debt issuance costs incurred | 3,387 |
| | — |
| | 253 |
|
| Amortization of debt issuance costs | (1,258 | ) | | (174 | ) | | (48 | ) |
| Unamortized debt issuance costs as of September 30, 2017 | $ | 6,929 |
| | $ | 1,629 |
| | $ | 731 |
|
extinguishment was immaterial.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table presents the activity of the Company's debt issuance costs:
|
| | | | | | | | | | | | | | | |
| | Credit Facility | | Senior Notes | | Term Loans | | Repurchase Agreement Loan |
| Unamortized debt issuance costs as of December 31, 2017 | $ | 6,543 |
| | $ | 1,571 |
| | $ | 1,171 |
| | $ | — |
|
| Debt issuance costs incurred | — |
| | — |
| | 173 |
| | 259 |
|
| Amortization of debt issuance costs | (786 | ) | | (121 | ) | | (56 | ) | | (7 | ) |
| Debt extinguishment expense | — |
| | — |
| | (1,288 | ) | | (252 | ) |
| Unamortized debt issuance costs as of June 30, 2018 | $ | 5,757 |
| | $ | 1,450 |
| | $ | — |
| | $ | — |
|
Loan Obligations of the Consolidated CLOs
Loan obligations of the Consolidated Funds that are CLOs ("Consolidated CLOs") represent amounts due to holders of debt securities issued by the Consolidated CLOs. The Company measures the loan obligations of the Consolidated CLOs using the fair value of the financial assets of its Consolidated CLOs. Several of the Consolidated CLOs issued preferred shares representing the subordinated interests that are mandatorily redeemable upon the maturity dates of the senior secured loan obligations. As a result, these shares have been classified as liabilities and are included in CLO loan obligations in the Condensed Consolidated Statements of Financial Condition.
As of SeptemberJune 30, 20172018 and December 31, 20162017 the following loan obligations were outstanding and classified as liabilities of the Company’s Consolidated CLOs:
| | | | As of September 30, 2017 | | As of December 31, 2016 | As of June 30, 2018 | | As of December 31, 2017 |
| | Loan Obligations | | Fair Value of Loan Obligations | | Weighted
Average
Remaining Maturity
In Years | | Loan
Obligations | | Fair Value of Loan Obligations | | Weighted Average Remaining Maturity In Years | Loan Obligations | | Fair Value of Loan Obligations | | Weighted
Average
Remaining Maturity
In Years | | Loan
Obligations | | Fair Value of Loan Obligations | | Weighted Average Remaining Maturity In Years |
| Senior secured notes(1) | $ | 4,298,009 |
| | $ | 4,279,766 |
| | 10.56 | | $ | 2,839,779 |
| | $ | 2,841,440 |
| | 9.68 | $ | 6,189,246 |
| | $ | 6,111,930 |
| | 11.00 | | $ | 4,801,582 |
| | $ | 4,776,883 |
| | 10.57 |
| Subordinated notes(2) | 274,341 |
| | 196,877 |
| | 11.15 | | 284,046 |
| | 189,672 |
| | 9.97 | 319,840 |
| | 221,309 |
| | 11.40 | | 276,169 |
| | 186,311 |
| | 11.25 |
| Total loan obligations of Consolidated CLOs | $ | 4,572,350 |
| | $ | 4,476,643 |
| | $ | 3,123,825 |
| | $ | 3,031,112 |
| | $ | 6,509,086 |
| | $ | 6,333,239 |
| | $ | 5,077,751 |
| | $ | 4,963,194 |
| |
| |
| (1) | Original borrowings under the senior secured notes totaled $4.3$6.2 billion, with various maturity dates ranging from October 2024 to AprilOctober 2030. The weighted average interest rate as of SeptemberJune 30, 20172018 was 4.25%5.21%. |
| |
| (2) | Original borrowings under the subordinated notes totaled $274.3$319.8 million, with various maturity dates ranging from October 2024 to AprilOctober 2030. TheyThe notes do not have contractual interest rates, but instead holders of the notes receive distributions from the excess cash flows generated by each Consolidated CLO. |
Loan obligations of the Consolidated CLOs are collateralized by the assets held by the Consolidated CLOs, consisting of cash and cash equivalents, corporate loans, corporate bonds and other securities. The assets of one Consolidated CLO may not be used to satisfy the liabilities of another Consolidated CLO. Loan obligations of the Consolidated CLOs include floating rate notes, deferrable floating rate notes, revolving lines of credit and subordinated notes. Amounts borrowed under the notes are repaid based on available cash flows subject to priority of payments under each Consolidated CLO’s governing documents. Based on the terms of these facilities, the creditors of the facilities have no recourse to the Company.
Credit Facilities of the Consolidated Funds
Certain Consolidated Funds maintain credit facilities to fund investments between capital drawdowns. These facilities generally are collateralized by the unfunded capital commitments of the Consolidated Funds’ limited partners, bear an annual commitment fee based on unfunded commitments and contain various affirmative and negative covenants and reporting obligations, including restrictions on additional indebtedness, liens, margin stock, affiliate transactions, dividends and distributions, release of capital commitments and portfolio asset dispositions. The creditors of these facilities have no recourse to the Company except to the extent the debt is guaranteed by a subsidiary or if a general partner is liable for the Consolidated Fund’s liabilities under the applicable law. Credit facilities of the Consolidated Funds are reflected at cost in the Condensed Consolidated Statements of Financial Condition. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the Consolidated Funds were in compliance with all covenants under such credit facilities.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The Consolidated Funds had the following revolving bank credit facilities and term loan outstanding as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | | | | As of September 30, 2017 | | As of December 31, 2016 | | | | | As of June 30, 2018 | | As of December 31, 2017 | |
| Consolidated Funds' Debt Facilities | | Maturity Date | | Total Capacity | | Outstanding Loan(1) | | Effective Rate | | Outstanding Loan(1) | | Effective Rate | | | Maturity Date | | Total Capacity | | Outstanding Loan(1) | | Effective Rate | | Outstanding Loan(1) | | Effective Rate | |
| Credit Facilities: | | | | | | | | | | | | | | |
| | | 1/1/2023 | | $ | 18,000 |
| | $ | 12,942 |
| | 2.75% | | $ | 12,942 |
| | 2.38% | | | 1/1/2023 | | $ | 18,000 |
| | $ | 13,376 |
| | 3.88% | | $ | 12,942 |
| | 2.88% | |
| | | 6/30/2018 | | 47,284 |
| | 30,599 |
| | 1.55% | (2) | 42,128 |
| | 1.55% | (2) | | 6/29/2019 | | 46,632 |
| | 46,632 |
| | EURIBOR + 1.55% | (2) | 48,042 |
| | 1.55% | (2) |
| | | 3/7/2018 | | 71,500 |
| | 71,500 |
| | 2.62% | | N/A |
| | N/A | | | 3/7/2019 | | 71,500 |
| | 71,500 |
| | 3.47% | | 71,500 |
| | 2.88% | |
| Revolving Term Loan | | 8/19/2019 | | 11,429 |
| | 6,220 |
| | 5.74% | | N/A |
| | N/A | | | 1/31/2022 | | 1,900 |
| | 1,216 |
| | 8.07% | | — |
| | —% | |
| | | | 8/19/2019 | | 11,429 |
| | 5,714 |
| | 9.32% | | 5,714 |
| | 5.86% | |
| Total borrowings | | | | $ | 121,261 |
| | $ | 55,070 |
| | | | | $ | 138,438 |
| | $ | 138,198 |
| |
| |
| (1) | The fair values of the borrowings approximate the carrying value as the interest rate on the borrowings is a floating rate. |
| |
| (2) | The effective rate is based on the three month EURIBOR or zero, whichever is higher, plus an applicable margin. |
8. COMMITMENTS AND CONTINGENCIES
Indemnification Arrangements
Consistent with standard business practices in the normal course of business, the Company enters into contracts that contain indemnities for affiliates of the Company, persons acting on behalf of the Company or such affiliates and third parties. The terms of the indemnities vary from contract to contract and the Company’s maximum exposure under these arrangements cannot be determined and has not been recorded in the Condensed Consolidated Statements of Financial Condition. As of SeptemberJune 30, 2017,2018, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Commitments
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had aggregate unfunded commitments of $316.5$284.5 million and $535.3$285.7 million, respectively, including commitments to both non-consolidated funds and Consolidated Funds. Total unfunded commitments included $20.0$16.3 million and $89.2$16.5 million in commitments to funds not managed by the Company as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
In connection with the acquisition of EIF, contingent consideration was payable to EIF’s former membership interest holders if certain funds and co-investment vehicles met certain revenue and fee paying commitment targets during their commitment period. Since the revenue and fee paying targets were not met, the liability associated with the EIF contingent consideration, which was $20.3 million as of December 31, 2016, was reversed in the first quarter of 2017, resulting in a $20.3 million gain recorded within other income (expense) on the Company's Condensed Consolidated Statements of Operations.
ARCC Fee Waiver
In conjunction with the ARCC-ACAS Transaction,ARCC's acquisition of American Capital, Ltd. (“ACAS”), the Company agreed to waive up to $10 million per quarter of ARCC's Part I Fees for ten calendar quarters, which began in the second quarter of 2017. ARCC Part I Fees will only be waived to the extent they are paid. IfThe maximum amount of fees that may be waived in a quarter is $10 million, and if ARCC Part I Fees are less than $10 million in any single quarter, the shortfall will not carryover to the subsequent quarters. As of SeptemberJune 30, 2017,2018, there are eightfive remaining quarters as part of the fee waiver agreement, with a maximum of $80$50 million in potential waivers. ARCC Part I Fees are shownreported net of the fee waiver.
Performance FeesIncome
Generally, if at the termination of a fund (and increasingly at interim points in the life of a fund), the fund has not achieved investment returns that (in most cases) exceed the preferred return threshold or (in all cases) the general partner receives net profits over the life of the fund in excess of its allocable share under the applicable partnership agreement, the Company will be obligated
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
to repay carried interest that was received by the Company in excess of the amounts to which the Company is entitled. This contingent obligation is normally reduced by income taxes paid by the Company related to its carried interest.
At SeptemberJune 30, 20172018 and December 31, 2016,2017, if the Company assumed all existing investments were worthless, the amount of performance feesincome subject to potential repayment, net of tax, which may differ from the recognition of revenue, would have
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
been approximately $471.8$472.9 million and $418.3$476.1 million, respectively, of which approximately $366.6$367.5 million and $323.9$370.0 million, respectively, is reimbursable to the Company by certain professionals who are the recipients of such performance fees.income. Management believes the possibility of all of the investments becoming worthless is remote. As of SeptemberJune 30, 20172018, if the funds were liquidated at their fair values, there would be $0.2 million of repayment obligations, and accordingly, the Company recorded a contingent repayment liability as June 30, 2018. As of December 31, 2016,2017, if the funds were liquidated at their fair values, there would be no repayment obligation, and accordingly, the Company did not record a contingent repayment liability as of either date.December 31, 2017.
Litigation
From time to time, the Company is named as a defendant in legal actions relating to transactions conducted in the ordinary course of business. Although there can be no assurance of the outcome of such legal actions, in the opinion of management, the Company does not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially affect its results of operations, financial condition or cash flows.
9. RELATED PARTY TRANSACTIONS
Substantially all of the Company’s revenue is earned from its affiliates, including management fees, performancecarried interest allocation, incentive fees, investment income, other fees and administrative expense reimbursements. The related accounts receivable are included within due from affiliates within the Condensed Consolidated Statements of Financial Condition, except that performanceaccrued carried interest allocations and incentive fees receivable, which are presented separatelywithin investments and other assets, respectively, within the Condensed Consolidated Statements of Financial Condition.
The Company has investment management agreements with various funds and accounts that it manages. In accordance with these agreements, the Consolidated Funds bear certain operating costs and expenses which are initially paid by the Company and subsequently reimbursed by the Consolidated Funds.
The Company also has entered into agreements with related parties to be reimbursed for its expenses incurred for providing administrative services to such related parties, including ARCC, ACRE, ARDC, Ivy Hill Asset Management, L.P., ACF FinCo I L.P, and CION Ares Diversified Credit Fund.
Employees and other related parties may be permitted to participate in co-investment vehicles that invest in Ares funds alongside fund investors. Participation is limited by law to individuals who qualify under applicable securities laws. These employee co-investment vehicles generally do not require the participants to pay management or performanceincentive fees.
Performance feesincome the Company earns from the funds can be distributed to professionals or their related entities on a current basis, subject to repayment by the subsidiary of the Company that acts as general partner of the relevant fund in the event that certain specified return thresholds are not ultimately achieved. The professionals have personally guaranteed, subject to certain limitations, the obligations of these subsidiaries in respect of this general partner obligation. Such guarantees are several, and not joint, and are limited to distributions received by the relevant recipient.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The Company considers its professionals and non-consolidated funds to be affiliates. Amounts due from and to affiliates were composed of the following:
| | | | As of September 30, | | As of December 31, | As of June 30, | | As of December 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| Due from affiliates: | | | | | | |
| Management fees receivable from non-consolidated funds | $ | 120,242 |
| | $ | 123,781 |
| $ | 132,132 |
| | $ | 126,506 |
|
| Payments made on behalf of and amounts due from non-consolidated funds and employees | 41,190 |
| | 39,155 |
| 40,296 |
| | 39,244 |
|
| Due from affiliates—Company | $ | 161,432 |
| | $ | 162,936 |
| $ | 172,428 |
| | $ | 165,750 |
|
| Amounts due from portfolio companies and non-consolidated funds | $ | 8,047 |
| | $ | 3,592 |
| $ | 13,704 |
| | $ | 15,884 |
|
| Due from affiliates—Consolidated Funds | $ | 8,047 |
| | $ | 3,592 |
| $ | 13,704 |
| | $ | 15,884 |
|
| Due to affiliates: | |
| | |
| |
| | |
|
| Management fee rebate payable to non-consolidated funds | $ | 4,822 |
| | $ | 7,914 |
| $ | 2,603 |
| | $ | 5,213 |
|
| Management fees received in advance | 4,608 |
| | 1,788 |
| 4,746 |
| | 1,729 |
|
| Tax receivable agreement liability | 4,748 |
| | 4,748 |
| 12,925 |
| | 3,503 |
|
| Payable to company employees(1) | | 24,701 |
| | 24,542 |
|
| Payments made by non-consolidated funds on behalf of and payable by the Company | 3,029 |
| | 3,114 |
| 17,369 |
| | 4,197 |
|
| Due to affiliates—Company | $ | 17,207 |
| | $ | 17,564 |
| $ | 62,344 |
| | $ | 39,184 |
|
| |
| (1) | Prior year amount of $24.5 million was reclassified from performance related compensation payable to due to affiliates to conform with current year presentation. |
Due from Ares Funds and Portfolio Companies
In the normal course of business, the Company pays certain expenses on behalf of Consolidated Funds and non-consolidated funds for which it is reimbursed. Amounts advanced on behalf of Consolidated Funds are eliminated in consolidation. Certain expenses initially paid by the Company, primarily professional services, travel and other costs associated with particular portfolio company holdings are subject to reimbursement by the portfolio companies. The Company reimbursed ARCC approximately $0.6 million for certain recurring rent and utilities incurred by ARCC during the first quarter of 2018. In addition, during the three months ended June 30, 2018, the Company reimbursed ARCC approximately $2.2 million, $3.0 million, $3.2 million and $2.9 million of rent and utilities for the years ended 2017, 2016, 2015 and 2014, respectively, for an aggregate reimbursement to ARCC of $11.8 million. Beginning April 1, 2018, the Company will bear these expenses.
ARCC Investment Advisory and Management Agreement
In connection with ARCC's board approval of the modification of the asset coverage requirement applicable to senior securities from 200% to 150% effective on June 21, 2019, (unless ARCC receives earlier stockholder approval), the investment advisory and management agreement will be amended prior to June 21, 2019 (or such earlier date), to reduce the annual base management fee paid to the Company from 1.5% to 1.0% on all assets financed using leverage over 1.0 times debt to equity.
10. INCOME TAXES
Effective March 1, 2018, the Company elected to be treated as a corporation for U.S. federal income tax purposes, while remaining a limited partnership under state law. A portion of the Company’s operations was and continues to be held through AHI and corporate subsidiaries of Ares Investments. AHI and such corporate subsidiaries are U.S. corporations and subject to U.S. corporate tax on earnings that flow through from subsidiary entities. The income of such corporations has historically been subject to U.S. federal, state and local income taxes, and certain of its foreign subsidiaries continue to be subject to foreign income taxes (for which a foreign tax credit can generally offset U.S. corporate taxes imposed on the same income). Prior to March 1, 2018, a substantial portion of the Company’s earnings flowflowed through to owners of the Company without being subject to entity level income taxes. Consequently, a significant portion of the Company’s earnings reflects nodid not reflect a provision for income taxes except those for foreign, state, city and local income taxes incurred at the entity level. ABeginning March 1, 2018, this portion of the Company’s operations is held through AHI, as well as corporate subsidiaries of Ares Holdings and Ares Investments, which are U.S. corporations for tax purposes. AHI isearnings was subject to U.S. corporate tax on earnings that flow through from tax.
Ares Holdings with respectManagement, L.P.
Notes to both AOG Unitsthe Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and preferred units. The income of these U.S. corporations is subject to U.S. federal, state and local income taxes and certain of its foreign subsidiaries are subject to foreign income taxes (for which a foreign tax credit can generally offset U.S. corporate taxes imposed on the same income). As Otherwise Noted)
The Company’s income tax provision includes corporate level income taxes and other entity level income taxes, as well as income taxes incurred by certain affiliated funds that are consolidated in these financial statements. The Company recorded an income tax expense of $36.9 million and $24.5 million for the three and six months ended June 30, 2018, respectively. In connection with its election to be taxed as a corporation effective March 1, 2018, the Company recorded two significant one-time deferred tax items. The first item is a deferred tax liability arising from the embedded net unrealized gains of both carried interest and the investment portfolio that were not previously subject to corporate taxes. Cash taxes will only be paid on unrealized gains to the extent realized. The second item is a deferred tax asset representative of book to tax bases differences resulting from allocations of equity account balances upon ownership changes. This asset will ultimately be unwound on conversion of the AOG units to common shares by the private unitholders, will have no impact on the Statement of Operations and will not result in the Company paying any more or less taxes. During the quarter ended June 30, 2018, the Company determined it did not control the actions of the AOG unitholders and, therefore, the timing of the recognition of the benefit, and established a $28.9 million valuation allowance against the deferred tax asset, effectively increasing the provision for income taxes. Consequently, this deferred tax asset had no impact on the income tax provision for the six months ended June 30, 2018. The Company had an income tax expense of $4.6 millionand$7.6$1.3 million for the three months ended SeptemberJune 30, 2017 and 2016, respectively.2017. For the ninesix months ended SeptemberJune 30, 2017, the Company had an income tax benefit of $28.5$33.0 million primarily driven by the one-time ARCC-ACAS transaction support payment comparedpayment.
Supplemental information on an unaudited pro forma basis, as if the Company's election to anbe treated as a corporation for U.S. federal income tax expense of $7.9 millionpurposes was effective for the ninethree and six months ended SeptemberJune 30, 2016.2017 is as follows:
|
| | | | | | | | | | | | |
| | | | | | | |
| | | Three Months Ended June 30, |
| | | | | | | 2017 |
| | | 2018 | | 2017 | | Pro forma |
| Provision for Income Taxes - The Company | | | | | | |
| Income tax expense of the Company | | $ | 36,834 |
| | $ | 857 |
| | $ | 18,815 |
|
| | | | | | | |
| Provision for Income Taxes - Consolidated Funds | | | | | | |
| Income tax expense of the Consolidated Funds | | 69 |
| | 396 |
| | 396 |
|
| Total Provision for Income Taxes | | $ | 36,903 |
| | $ | 1,253 |
| | $ | 19,211 |
|
|
| | | | | | | | | | | | |
| | | | | | | |
| | | Six Months Ended June 30, |
| | | | | | | 2017 |
| | | 2018 | | 2017 | | Pro forma |
| Provision for Income Taxes - The Company | | | | | | |
| Income tax expense (benefit) of the Company | | $ | 24,459 |
| | $ | (33,875 | ) | | $ | (9,528 | ) |
| | | | | | | |
| Provision for Income Taxes - Consolidated Funds | | | | | | |
| Income tax expense of the Consolidated Funds | | 69 |
| | 864 |
| | 864 |
|
| Total Provision for Income Taxes | | $ | 24,528 |
| | $ | (33,011 | ) | | $ | (8,664 | ) |
The 2017 pro forma tax information was calculated as if the Company's election to be treated as a corporation for U.S. federal income tax purposes was effective for the three and six months ended June 30, 2017.
The Company’s effective income tax rate is dependent on many factors, including the estimated nature of many amounts and the mix of revenues and expenses between U.S. corporate subsidiariesentities that are subject to income taxes and those subsidiaries that are not. For the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company has utilized the discrete effective tax rate method to calculate its interim income tax provision. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year to date period as if it was the annual period and determines the income tax expense or benefit on that basis. Additionally, the Company’s effective tax rate is influenced by the amount of income tax provision recorded for any affiliated funds that are consolidated in these financial statements. Consequently, the effective income tax rate is subject to significant variation from period to period.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local and foreign tax regulators. As of SeptemberJune 30, 2017,2018, the Company’s U.S. federal income tax returns for the years 2014 through 20172018 are open under the normal statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 20132014 to 2017.2018. Foreign tax returns are generally subject to audit from 20122013 to 2017.2018. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s condensed consolidated financial statements.
11. EARNINGS PER COMMON UNITSHARE
Basic earnings per common unitshare are computed by dividing income available to common unitholdersshareholders by the weighted‑average number of common unitsshares outstanding during the period. Diluted earnings per common unitshare are computed using the more dilutive method of either the two-class method or the treasury stock method.
For the three and ninesix months ended SeptemberJune 30, 2018 and the six months June 30, 2017, the two-class method was the more dilutive method for the unvested restricted units. For the three and nine months ended SeptemberJune 30, 2016,2017, the treasury stock method was the more dilutive method for the unvested restricted units. No participating securities had rights to undistributed earnings during any period presented.
The computation of diluted earnings per common unitshare for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 excludes the following options, restricted units and AOG Units, as their effect would have been anti-dilutive:
| | | | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Options | 21,022,924 |
| | 22,164,772 |
| | 21,170,880 |
| | 23,008,147 |
| 19,111,390 |
| | 21,155,026 |
| | 19,471,589 |
| | 21,244,858 |
|
| Restricted units | 13,742,856 |
| | — |
| | 14,223,345 |
| | 62,909 |
| 15,271,381 |
| | 39,082 |
| | 15,811,964 |
| | 14,463,590 |
|
| AOG units | 130,192,448 |
| | 130,852,861 |
| | 130,280,878 |
| | 131,858,404 |
| |
| AOG Units | | 120,231,237 |
| | 130,249,329 |
| | 124,211,007 |
| | 130,325,826 |
|
The following table presents the computation of basic and diluted earnings per common unit:share:
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income attributable to Ares Management, L.P. common unitholders | $ | 22,413 |
| | $ | 36,554 |
| | $ | 20,307 |
| | $ | 71,042 |
|
| Earnings distributed to participating securities (restricted units) | (1,003 | ) | | (480 | ) | | (2,248 | ) | | (895 | ) |
| Preferred stock dividends(1) | — |
| | — |
| | — |
| | (8 | ) |
| Net income available to common unitholders | $ | 21,410 |
| | $ | 36,074 |
| | $ | 18,059 |
| | $ | 70,139 |
|
| Basic weighted-average common units | 82,166,852 |
| | 80,793,984 |
| | 81,704,815 |
| | 80,741,460 |
|
| Basic earnings per common unit | $ | 0.26 |
| | $ | 0.45 |
| | $ | 0.22 |
| | $ | 0.87 |
|
| Net income attributable to Ares Management, L.P. common unitholders | $ | 22,413 |
| | $ | 36,554 |
| | $ | 20,307 |
| | $ | 71,042 |
|
| Earnings distributed to participating securities (restricted units) | (1,003 | ) | | — |
| | (2,248 | ) | | — |
|
| Preferred stock dividends(1) | — |
| | — |
| | — |
| | (8 | ) |
| Net income available to common unitholders | $ | 21,410 |
| | $ | 36,554 |
| | $ | 18,059 |
|
| $ | 71,034 |
|
| Effect of dilutive units: | | | | | | | |
| Restricted units | — |
| | 3,670,607 |
| | — |
| | 1,925,589 |
|
| Diluted weighted-average common units | 82,166,852 |
| | 84,464,591 |
| | 81,704,815 |
| | 82,667,049 |
|
| Diluted earnings per common unit | $ | 0.26 |
| | $ | 0.43 |
| | $ | 0.22 |
| | $ | 0.86 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Net income (loss) attributable to Ares Management, L.P. common shareholders | $ | (17,200 | ) | | $ | 44,453 |
| | $ | 18,323 |
| | $ | (2,106 | ) |
| Earnings distributed to participating securities (restricted units) | (1,970 | ) | | (419 | ) | | (3,877 | ) | | (1,246 | ) |
| Net income (loss) available to common shareholders | $ | (19,170 | ) | | $ | 44,034 |
| | $ | 14,446 |
| | $ | (3,352 | ) |
| Basic weighted-average common shares | 98,037,252 |
| | 81,829,086 |
| | 91,861,946 |
| | 81,469,967 |
|
| Basic earnings (loss) per common share | $ | (0.20 | ) | | $ | 0.54 |
| | $ | 0.16 |
| | $ | (0.04 | ) |
| Net income (loss) attributable to Ares Management, L.P. common shareholders | $ | (17,200 | ) | | $ | 44,453 |
| | $ | 18,323 |
| | $ | (2,106 | ) |
| Earnings distributed to participating securities (restricted units) | (1,970 | ) | | — |
| | (3,877 | ) | | (1,246 | ) |
| Net income (loss) available to common shareholders | $ | (19,170 | ) | | $ | 44,453 |
| | $ | 14,446 |
|
| $ | (3,352 | ) |
| Effect of dilutive shares: | | | | | | | |
| Restricted units | — |
| | 2,490,796 |
| | — |
| | — |
|
| Diluted weighted-average common shares | 98,037,252 |
| | 84,319,882 |
| | 91,861,946 |
| | 81,469,967 |
|
| Diluted earnings (loss) per common share | $ | (0.20 | ) | | $ | 0.53 |
| | $ | 0.16 |
| | $ | (0.04 | ) |
| |
(1) | Dividends relate to the preferred shares that were issued by Ares Real Estate Holdings LLC and were redeemed on July 1, 2016. |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
12. EQUITY COMPENSATION
Equity Incentive Plan
In 2014, the Company adopted the Ares Management, L.P. 2014 Equity Incentive Plan (the "Equity“Equity Incentive Plan"Plan”). Based on a formula as defined in the Equity Incentive Plan, the total number of unitsshares available to be issued under the Equity Incentive Plan resets and may increase on January 1 each year. Accordingly, on January 1, 2017,2018, the total number of unitsshares available for issuance under the Equity Incentive Plan increased to 30,397,280 units,31,853,504 shares, and as of SeptemberJune 30, 2017, 24,550,987 units2018, 29,311,383 shares remain available for issuance.
Generally, unvested phantom units, restricted units and options are forfeited upon termination of employment in accordance with the Equity Incentive Plan. The Company recognizes forfeitures as a reversal of previously recognized compensation expense in the period the forfeiture occurs.
Equity-based compensation expense, net of forfeitures is included in the following table:
| | | | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Restricted units | $ | 14,555 |
| | $ | 5,350 |
| | $ | 40,375 |
| | $ | 14,797 |
| $ | 18,516 |
| | $ | 14,601 |
| | $ | 36,547 |
| | $ | 25,818 |
|
| Options | 3,224 |
| | 2,693 |
| | 10,637 |
| | 11,153 |
| 3,630 |
| | 3,931 |
| | 6,293 |
| | 7,413 |
|
| Phantom units | 312 |
| | 433 |
| | 1,085 |
| | 1,235 |
| 361 |
| | 385 |
| | 754 |
| | 775 |
|
| Equity-based compensation expense | $ | 18,091 |
| | $ | 8,476 |
| | $ | 52,097 |
| | $ | 27,185 |
| $ | 22,507 |
| | $ | 18,917 |
| | $ | 43,594 |
| | $ | 34,006 |
|
Restricted Units
Each restricted unit represents an unfunded, unsecured right of the holder to receive a common unitshare on a specific date. The restricted units generally vest and are settled in common unitsshares either (i) at a rate of one-third per year, beginning on the third anniversary of the grant date, (ii) in their entirety on the fifth anniversary of the grant date, or (iii) at a rate of one quarter per year, beginning on either the first or second anniversary of the grant date. Compensation expense associated with restricted units is recognized on a straight-line basis over the requisite service period of the award.
The holders of restricted units generally have the right to receive as current compensation an amount in cash equal to (i) the amount of any distribution paid with respect to a common unitshare multiplied by (ii) the number of restricted units held at the time such distributions are declared (“DistributionDividend Equivalent”). For the three and ninesix months ended SeptemberJune 30, 2017, Distribution2018, Dividend Equivalents were made to the holders of restricted units in the aggregate amount of $4.3$5.8 million and $10.3$12.4 million, respectively, which are presented as distributionsdividends within the Condensed Consolidated StatementStatements of Changes in Equity. When restricted units are forfeited, the cumulative amount of distributiondividend equivalents previously paid is reclassified to compensation and benefits expense in the Condensed Consolidated Statements of Operations.
The following table presents unvested restricted units’units' activity during the ninesix months ended SeptemberJune 30, 2017:2018:
| | | | Restricted Units | | Weighted Average Grant Date Fair Value Per Unit | Restricted Units | | Weighted Average Grant Date Fair Value Per Unit |
| Balance - January 1, 2017 | 8,058,372 |
| | $ | 16.38 |
| |
| Balance - January 1, 2018 | | 13,751,888 |
| | $ | 17.58 |
|
| Granted | 7,944,144 |
| | 18.61 |
| 3,681,702 |
| | 23.58 |
|
| Vested | (1,833,422 | ) | | 16.56 |
| (1,903,923 | ) | | 16.93 |
|
| Forfeited | (426,238 | ) | | 17.82 |
| (258,286 | ) | | 19.55 |
|
| Balance - September 30, 2017 | 13,742,856 |
| | $ | 17.58 |
| |
| Balance - June 30, 2018 | | 15,271,381 |
| | $ | 19.07 |
|
The total compensation expense expected to be recognized in all future periods associated with the restricted units is approximately $183.2$215.0 million as of SeptemberJune 30, 20172018 and is expected to be recognized over the remaining weighted average period of 3.693.48 years.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
Options
A summary of options activity during the ninesix months ended SeptemberJune 30, 20172018 is presented below:
| | | | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (in years) | | Aggregate Intrinsic Value | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (in years) | | Aggregate Intrinsic Value |
| Balance - January 1, 2017 | 22,232,134 |
| | $ | 18.99 |
| | 7.35 | | | |
| Balance - January 1, 2018 | | 20,495,025 |
| | $ | 18.99 |
| | 6.09 | | $ | 20,611 |
|
| Granted | — |
| | — |
| | — | | | — |
| |
|
| | — | | |
| Exercised | (54,500 | ) | | 19.00 |
| | — | | | (50,000 | ) | | 19.00 |
| | — | | 90 |
|
| Expired | (433,609 | ) | | 19.00 |
| | — | | | (889,432 | ) | | 19.00 |
| | — | | |
| Forfeited | (721,101 | ) | | 19.00 |
| | — | | | (444,203 | ) | | 19.00 |
| | — | | |
| Balance - September 30, 2017 | 21,022,924 |
| | $ | 18.99 |
| | 6.56 | | $ | — |
| |
| Exercisable at September 30, 2017 | 7,106,989 |
| | $ | 19.00 |
| | 6.56 | | $ | — |
| |
| Balance - June 30, 2018 | | 19,111,390 |
| | $ | 18.99 |
| | 5.81 | | $ | 32,655 |
|
| Exercisable at June 30, 2018 | | 12,715,808 |
| | $ | 19.00 |
| | 5.78 | | $ | 21,672 |
|
As of SeptemberJune 30, 2017,2018, there was $26.5$12.3 million of total unrecognized compensation expense that is expected to be recognized over the remaining weighted average period of 1.600.85 years. Net cash proceeds from the exercises of stock options was $1.0 million for the six months ended June 30, 2018. The Company realized tax benefits of approximately $0.04 million from those exercises.
Phantom Units
A summary of unvested phantom unit activity during the ninesix months ended SeptemberJune 30, 20172018 is presented below:
| | | | | Phantom Units | | Weighted Average
Grant Date Fair
Value Per Unit | | Phantom Units | | Weighted Average
Grant Date Fair
Value Per Share |
| Balance - January 1, 2017 | | 266,138 |
| | $ | 19.00 |
| |
| Balance - January 1, 2018 | | | 156,153 |
| | $ | 19.00 |
|
| Vested | | (87,222 | ) | | 19.00 |
| | (70,352 | ) | | 19.00 |
|
| Forfeited | | (20,872 | ) | | 19.00 |
| | (16,200 | ) | | 19.00 |
|
| Balance - September 30, 2017 | | 158,044 |
| | $ | 19.00 |
| |
| Balance - June 30, 2018 | | | 69,601 |
| | $ | 19.00 |
|
The fair value of the phantom unit awards is remeasured at each reporting period and was $18.65$20.70 per unit as of SeptemberJune 30, 2017.2018. Based on the fair value of the awards at SeptemberJune 30, 2017, $2.32018, $1.2 million of unrecognized compensation expense in connection with phantom units outstanding is expected to be recognized over a weighted average period of 1.590.85 years. During the ninesix months ended SeptemberJune 30, 2017,2018, the Company paid $1.7$1.6 million to settle any vested phantom units.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
13. EQUITY
Ares Management, L.P.
Common Units:Shares
Common unitsshares represent limited partnership interests in the Company. The holders of common unitsshares are entitled to participate pro rata in distributions from the Company and to exercise the rights or privileges that are available to common unitholdersshareholders under the Company’s partnership agreement. The common unitholdersshareholders have limited voting rights and have no right to remove the Company’s general partner, Ares Management GP LLC, or, except in limited circumstances, to elect the directors of the general partner. During the quarter ended March 31, 2018, an affiliate of Alleghany Corporation (“Alleghany”) exchanged 9,750,000 of its AOG Units into 9,750,000 common shares.
Common Share Offering
On March 12, 2018, AREC Holdings Ltd., a wholly owned subsidiary of Abu Dhabi Investment Authority (collectively, “ADIA”), and the Company completed a public offering of 15,000,000 common shares. In connection with this offering, ADIA sold 10,000,000 of its previously issued and outstanding common shares from which the Company received no proceeds. Additionally, the Company issued 5,000,000 common shares from which it received $105.9 million in gross proceeds. The Company incurred approximately $0.5 million of expenses in connection with this offering transaction. The expenses have been treated as a reduction of the proceeds received from the offering and are presented on a net basis together with the proceeds from the offering in shareholders' equity in the Condensed Consolidated Statements of Changes in Equity.
In April 2018, the underwriters in the offering exercised a portion of their option to purchase 1,130,000 additional common shares from ADIA. The Company did not receive any of the proceeds from the underwriters' exercise. The expenses incurred by the Company related to the option exercise have been included in other income (expense), net in the Condensed Consolidated Statements of Operations. ADIA paid the underwriting discounts and commissions and/or similar charges incurred for the sale of the common shares.
The following table presents each partner's AOG unitsUnits and corresponding ownership interest in each of the Ares Operating Group entities as of SeptemberJune 30, 20172018 and December 31, 2016,2017, as well as its daily average ownership of AOG Units in each of the Ares Operating Group entities for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017.
| | | | | | | | | | | | | Daily Average Ownership | | | | | | | | | | Daily Average Ownership |
| | | As of September 30, 2017 | | As of December 31, 2016 | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | As of June 30, 2018 | | As of December 31, 2017 | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | | AOG Units | | Direct Ownership Interest | | AOG Units | | Direct Ownership Interest | | 2017 | | 2016 | | 2017 | | 2016 | | AOG Units | | Direct Ownership Interest | | AOG Units | | Direct Ownership Interest | | 2018 | | 2017 | | 2018 | | 2017 |
| Ares Management, L.P. | | 82,211,302 |
| | 38.71 | % | | 80,814,732 |
| | 38.26 | % | | 38.69 | % | | 38.17 | % | | 38.54 | % | | 37.98 | % | | 98,398,340 |
| | 45.03 | % | | 82,280,033 |
| | 38.75 | % | | 44.92 | % | | 38.58 | % | | 42.51 | % | | 38.47 | % |
| Ares Owners Holding L.P. | | 117,673,223 |
| | 55.40 | % | | 117,928,313 |
| | 55.82 | % | | 55.42 | % | | 55.92 | % | | 55.56 | % | | 56.14 | % | | 117,379,305 |
| | 53.71 | % | | 117,576,663 |
| | 55.36 | % | | 53.82 | % | | 55.53 | % | | 54.40 | % | | 55.63 | % |
| Affiliate of Alleghany Corporation | | 12,500,000 |
| | 5.89 | % | | 12,500,000 |
| | 5.92 | % | | 5.89 | % | | 5.91 | % | | 5.90 | % | | 5.88 | % | | 2,750,000 |
| | 1.26 | % | | 12,500,000 |
| | 5.89 | % | | 1.26 | % | | 5.89 | % | | 3.09 | % | | 5.90 | % |
| Total | | 212,384,525 |
| | 100.00 | % | | 211,243,045 |
| | 100.00 | % | | | | | | | | | | 218,527,645 |
| | 100.00 | % | | 212,356,696 |
| | 100.00 | % | | | | | | | | |
Preferred Equity
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had 12,400,000 unitsshares of Series A Preferred Equity (the “Preferred Equity”) outstanding. When, as and if declared by the Company’s board of directors, distributions on the Preferred Equity are payable quarterly at a rate per annum equal to 7.00%. The Preferred Equity may be redeemed at the Company’s option, in whole or in part, at any time on or after June 30, 2021, at a price of $25.00 per unit.
Secondary Offering
Pursuant to a prospectus supplement dated March 2, 2017, AREC Holdings Ltd., a wholly owned subsidiary of Abu Dhabi Investment Authority ("ADIA" or “the selling unitholder”) sold 7,500,000 units of the Company's common units through a public secondary offering. The Company did not receive any of the proceeds from the offering. The transaction closed on March 2, 2017. The Company incurred approximately $0.7 million of expenses related to the secondary offering transaction. The fees related to the secondary offering were non-operating expenses and are included in other income (expense), net in the Condensed Consolidated Statements of Operations. The selling unitholder paid the underwriting discounts and commissions and/or similar charges incurred for the sale of the common units.share.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
14. SEGMENT REPORTING
The Company operates through its three distinct operating segments. During the ninesix months ended SeptemberJune 30, 2017,2018, the Company reclassified certain expenses from OMG to its operating segments. Historical results have been modified to conform to the current period presentation.
The Company’s three operating segments are:
Credit Group: The Company’s Credit Group is a leading manager of credit strategies across the non-investment grade credit universe in the U.S. and Europe, with approximately $70.5$86.9 billion of assets under management and 142152 funds as of SeptemberJune 30, 2017.2018. The Credit Group offers a range of credit strategies across the liquid and illiquid spectrum, including syndicated loans, high yield bonds, credit opportunities, structured credit investments and U.S. and European direct lending. The Credit Group provides solutions for traditional fixed income investors seeking to access the syndicated loans and high yield bond markets and capitalizes on opportunities across traded corporate credit. It additionally provides investors access to directly originated fixed and floating rate credit assets and the ability to capitalize on illiquidity premiums across the credit spectrum. The Credit Group’s syndicated loans strategy focuses on liquid, traded non-investment grade secured loans to corporate issuers. The high yield bond strategy seeks to deliver a diversified portfolio of liquid, traded non-investment grade corporate bonds, including secured, unsecured and subordinated debt instruments. Credit opportunities is a “go anywhere” strategy seeking to capitalize on market inefficiencies and relative value opportunities across the capital structure. The structured credit strategy invests across the capital structures of syndicated collateralized loan obligation vehicles (CLOs) and in directly-originated asset-backed instruments composed of diversified portfolios of consumer and commercial assets. The Company has one of the largest self-originating direct lending platforms in the U.S. and European middle markets, providing one-stop financing solutions for small-to-medium sized companies, which the Company believes are increasingly underserved by traditional lenders. The Company provides investors access to these capabilities through several vehicles, including commingled funds, separately managed accounts and a publicly traded vehicle. The Credit Group conducts its U.S. direct lending activities primarily through ARCC, the largest business development company as of SeptemberJune 30, 2017,2018, by both market capitalization and total assets. In addition, the Credit Group manages a commercial finance business that provides asset-based and cash flow loans to small and middle-market companies, as well as asset-based facilities to specialty finance companies. The Credit Group’s European direct lending platform is one of the most significant participants in the European middle-market, focusing on self-originated investments in illiquid middle-market credits.
Private Equity Group: The Company’s Private Equity Group has approximately $24.6$23.6 billion of assets under management as of SeptemberJune 30, 2017,2018, broadly categorizing its investment strategies as corporate private equity, U.S. power and energy infrastructure and special situations. As of SeptemberJune 30, 20172018 the group managed five corporate private equity commingled funds focused on North America and Europe and twothree focused on greater China, fivesix commingled funds and six related co-investment vehicles focused on U.S. power and energy infrastructure and three special situations funds. In its North American and European flexible capital strategy, the Company targets opportunistic majority or shared-control investments in businesses with strong franchises and attractive growth opportunities in North America and Europe. The U.S. power and energy infrastructure strategy targets U.S. energy infrastructure-related assets across the power generation, transmission and midstream sectors, seeking attractive risk-adjusted equity returns with current cash flow and capital appreciation. The special situations strategy seeks to invest opportunistically across a broad spectrum of distressed or mispriced investments, including corporate debt, rescue capital, private asset-backed investments, post-reorganization securities and non-performing portfolios.
Real Estate Group: The Company’s Real Estate Group manages comprehensive public and private equity and debt strategies, with approximately $10.6$10.9 billion of assets under management across 4243 funds as of SeptemberJune 30, 2017.2018. Real Estate equity strategies focus on applying hands-on value creation initiatives to mismanaged and capital-starved assets, as well as new development, ultimately selling stabilized assets back into the market. The Real Estate Group manages both a value-add strategy and an opportunistic strategy. The value-add strategy seeks to create value by buying assets at attractive valuations and through active asset management of income-producing properties across the U.S. and Western Europe. The opportunistic strategy focuses on manufacturing core assets through development, redevelopment and fixing distressed capital structures across major properties in the U.S. and Europe. The Company’s debt strategies leverage the Real Estate Group’s diverse sources of capital to directly originate and manage commercial mortgage investments on properties that range from stabilized to requiring hands-on value creation. In addition to managing private debt funds, the Real Estate Group makes debt investments through a publicly traded commercial mortgage real estate investment trust, ACRE.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The Company has an Operations Management Group (the “OMG”)OMG that consists of fivesix shared resource groups to support the Company’s operating segments by providing infrastructure and administrative support in the areas of accounting/finance, operations/operations, information technology, business development/corporate strategy, legal/compliance and human resources. Additionally, the OMG provides services to certain of the Company’s investment companies and partnerships, which reimburse the OMG for expenses equal to the costs of services provided. The OMG’s expenses are not allocated to the Company’s three reportable segments but the Company does consider the cost structure of the OMG when evaluating its financial performance.
Non-GAAP Measures: These measures supplement and should be considered in addition to, and not in lieu of, the Consolidated Statements of Operations prepared in accordance with GAAP.
Economic net income (“ENI”), a non-GAAP measure, is an operating metric used by management to evaluate total operating performance, a decision tool for deployment of resources, and an assessment of the performance of the Company’s business segments. ENI differs from net income by excluding (a) income tax expense, (b) operating results of the Consolidated Funds, (c) depreciation and amortization expense, (d) placement fees and underwriting costs, (e) the effects of changes arising from corporate actions, and (f)(e) certain other items that the Company believes are not indicative of its total operating performance. Changes arising from corporate actions include equity-based compensation expenses, the amortization of intangible assets, transaction costs associated with mergers and acquisitions and capital transactions, underwriting costs, and expenses incurred in connection with corporate reorganization. Beginning in 2018, placement fees are no longer excluded but are amortized to match the period over which management fees are recognized. This change had an immaterial impact to FRE and RI for the current period.
Fee related earnings (“FRE”), a non-GAAP measure, refers to a component of ENI that is used to assess core operating performance by determining whether recurring revenue, primarily consisting of management fees, is sufficient to cover operating expenses and to generate profits. FRE differs from income before taxes computed in accordance with GAAP as it adjusts for the items included in the calculation of ENI and excludes performance fees,income, performance feerelated compensation, investment income from the Consolidated Funds and non-consolidated funds and certain other items that the Company believes are not indicative of its core operating performance.
Performance related earnings (“PRE”), a non-GAAP measure, is used to assess the Company’s investment performance net of performance feerelated compensation. PRE differs from income (loss) before taxes computed in accordance with GAAP as it only includes performance fees,income, performance feerelated compensation and total investment and other income earned from the Consolidated Funds and non-consolidated funds.
Distributable earningsRealized income (“DE”RI”), a non-GAAP measure, is an operating metric that assesses the Company’sused by management to evaluate performance without the effects of the Consolidated Fundsbusiness based on operating performance and the impactcontribution of each of the business segments to that performance, while removing the fluctuations of unrealized income and expenses, which generally fluctuate with fair value changes. Among other things, this metric also is used to assist in determining amounts potentially available for distribution. However, the declaration, payment, and determination of the amount of distributions to unitholders, if any, ismay or may not be eventually realized at the sole discretionlevels presented and whose realizations depend more on future outcomes than current business operations. RI differs from net income by excluding (a) income tax expense, (b) operating results of our Consolidated Funds, (c) depreciation and amortization expense, (d) the Company’s Boardeffects of Directors, which may change the distribution policy at any time. Distributable earnings is calculated as the sum of feechanges arising from corporate actions, (e) unrealized gains and losses related earnings, realizedto performance fees, realized performance fee compensation, realized net investment and other income and is reduced byinvestment performance and (f) certain other items that we believe are not indicative of our operating performance. Changes arising from corporate actions include equity-based compensation expenses, arising fromthe amortization of intangible assets, transaction costs associated with mergers, acquisitions placement fees and capital transactions, underwriting costs and expenses incurred in connection with corporate reorganizationreorganization. Beginning in 2018, placement fees are no longer excluded but are amortized to match the period over which management fees are recognized. This change had an immaterial impact to FRE and depreciation. Distributable earnings differs from income before taxes computed in accordance with GAAP as it is typically presented before giving effect to unrealized performance fees, unrealized performance fee compensation, unrealized net investment income, amortization of intangibles and equity compensation expense. DE is presented priorRI for the current period. Prior to the effectintroduction of income taxes attributableRI, management used distributable earnings for this evaluation. Management believes RI is a more appropriate metric to Ares Holdings, Inc. and to distributions made toevaluate the Company’s preferred unitholders, unless otherwise noted.Company's current business operations.
Management makes operating decisions and assesses the performance of each of the Company’s business segments based on financial and operating metrics and other data that is presented before giving effect to the consolidation of any of the Consolidated Funds. Consequently, all segment data excludes the assets, liabilities and operating results related to the Consolidated Funds and non‑consolidated funds.
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the three months ended SeptemberJune 30, 2017:2018:
| | | | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $24,036) | $ | 120,178 |
| | $ | 51,313 |
| | $ | 17,137 |
| | $ | 188,628 |
| | $ | — |
| | $ | 188,628 |
| |
| Management fees (Credit Group includes ARCC Part I Fees of $29,866) | | $ | 135,848 |
| | $ | 49,318 |
| | $ | 17,138 |
| | $ | 202,304 |
| | $ | — |
| | $ | 202,304 |
|
| Other fees | 5,668 |
| | 449 |
| | 27 |
| | 6,144 |
| | — |
| | 6,144 |
| 6,877 |
| | 337 |
| | 7 |
| | 7,221 |
| | — |
| | 7,221 |
|
| Compensation and benefits | (46,551 | ) | | (19,256 | ) | | (11,398 | ) | | (77,205 | ) | | (27,577 | ) | | (104,782 | ) | (51,892 | ) | | (18,672 | ) | | (8,768 | ) | | (79,332 | ) | | (31,059 | ) | | (110,391 | ) |
| General, administrative and other expenses | (6,851 | ) | | (4,655 | ) | | (2,125 | ) | | (13,631 | ) | | (18,380 | ) | | (32,011 | ) | (11,041 | ) | | (4,175 | ) | | (2,391 | ) | | (17,607 | ) | | (19,489 | ) | | (37,096 | ) |
| Fee related earnings | 72,444 |
|
| 27,851 |
|
| 3,641 |
| | 103,936 |
| | (45,957 | ) | | 57,979 |
| 79,792 |
|
| 26,808 |
|
| 5,986 |
| | 112,586 |
| | (50,548 | ) | | 62,038 |
|
| Performance fees—realized | 3,296 |
| | 173,304 |
| | 2,389 |
| | 178,989 |
| | — |
| | 178,989 |
| |
| Performance fees—unrealized | 33,033 |
| | (142,822 | ) | | 20,366 |
| | (89,423 | ) | | — |
| | (89,423 | ) | |
| Performance fee compensation—realized | (1,466 | ) | | (138,657 | ) | | (856 | ) | | (140,979 | ) | | — |
| | (140,979 | ) | |
| Performance fee compensation—unrealized | (19,820 | ) | | 114,395 |
| | (12,233 | ) | | 82,342 |
| | — |
| | 82,342 |
| |
| Net performance fees | 15,043 |
|
| 6,220 |
|
| 9,666 |
| | 30,929 |
| | — |
| | 30,929 |
| |
| Investment income—realized | 6,206 |
| | 14,268 |
| | 1,997 |
| | 22,471 |
| | 18 |
| | 22,489 |
| |
| Performance income—realized | | 41,672 |
| | 80,415 |
| | 521 |
| | 122,608 |
| | — |
| | 122,608 |
|
| Performance income—unrealized | | (4,568 | ) | | (133,605 | ) | | 13,830 |
| | (124,343 | ) | | — |
| | (124,343 | ) |
| Performance related compensation—realized | | (23,577 | ) | | (64,311 | ) | | 7 |
| | (87,881 | ) | | — |
| | (87,881 | ) |
| Performance related compensation—unrealized | | 2,759 |
| | 106,912 |
| | (8,785 | ) | | 100,886 |
| | — |
| | 100,886 |
|
| Net performance income | | 16,286 |
|
| (10,589 | ) |
| 5,573 |
| | 11,270 |
| | — |
| | 11,270 |
|
| Investment income (loss)—realized | | 595 |
| | 9,016 |
| | (250 | ) | | 9,361 |
| | 798 |
| | 10,159 |
|
| Investment income (loss)—unrealized | (1,123 | ) | | (8,421 | ) | | (767 | ) | | (10,311 | ) | | 4,357 |
| | (5,954 | ) | 1,617 |
| | 290 |
| | (525 | ) | | 1,382 |
| | 2,866 |
| | 4,248 |
|
| Interest and other investment income (expense) | (540 | ) | | 1,129 |
| | 716 |
| | 1,305 |
| | 26 |
| | 1,331 |
| 3,428 |
| | 3,039 |
| | (1,218 | ) | | 5,249 |
| | 623 |
| | 5,872 |
|
| Interest expense | (3,277 | ) | | (1,229 | ) | | (396 | ) | | (4,902 | ) | | (441 | ) | | (5,343 | ) | (3,596 | ) | | (1,440 | ) | | (452 | ) | | (5,488 | ) | | (588 | ) | | (6,076 | ) |
| Net investment income | 1,266 |
|
| 5,747 |
|
| 1,550 |
| | 8,563 |
| | 3,960 |
| | 12,523 |
| |
| Net investment income (loss) | | 2,044 |
|
| 10,905 |
|
| (2,445 | ) | | 10,504 |
| | 3,699 |
| | 14,203 |
|
| Performance related earnings | 16,309 |
|
| 11,967 |
|
| 11,216 |
| | 39,492 |
| | 3,960 |
| | 43,452 |
| 18,330 |
|
| 316 |
|
| 3,128 |
| | 21,774 |
| | 3,699 |
| | 25,473 |
|
| Economic net income | $ | 88,753 |
|
| $ | 39,818 |
|
| $ | 14,857 |
| | $ | 143,428 |
| | $ | (41,997 | ) | | $ | 101,431 |
| $ | 98,122 |
|
| $ | 27,124 |
|
| $ | 9,114 |
| | $ | 134,360 |
| | $ | (46,849 | ) | | $ | 87,511 |
|
| Distributable earnings | $ | 73,120 |
| | $ | 75,809 |
| | $ | 4,736 |
| | $ | 153,665 |
| | $ | (53,214 | ) | | $ | 100,451 |
| |
| Realized income | | $ | 97,921 |
| | $ | 53,408 |
| | $ | 6,479 |
| | $ | 157,808 |
| | $ | (49,754 | ) | | $ | 108,054 |
|
The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the three months ended SeptemberJune 30, 2016:2017:
| | | | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $33,260) | $ | 115,794 |
| | $ | 35,183 |
| | $ | 17,819 |
| | $ | 168,796 |
| | $ | — |
| | $ | 168,796 |
| |
| Management fees (Credit Group includes ARCC Part I Fees of $19,143) | | $ | 112,654 |
| | $ | 56,427 |
| | $ | 16,479 |
| | $ | 185,560 |
| | $ | — |
| | $ | 185,560 |
|
| Other fees | 280 |
| | 309 |
| | 162 |
| | 751 |
| | — |
| | 751 |
| 5,663 |
| | 338 |
| | 19 |
| | 6,020 |
| | — |
| | 6,020 |
|
| Compensation and benefits | (45,222 | ) | | (16,697 | ) | | (9,459 | ) | | (71,378 | ) | | (25,960 | ) | | (97,338 | ) | (45,160 | ) | | (18,388 | ) | | (9,714 | ) | | (73,262 | ) | | (30,584 | ) | | (103,846 | ) |
| General, administrative and other expenses | (7,274 | ) | | (3,925 | ) | | (2,289 | ) | | (13,488 | ) | | (13,386 | ) | | (26,874 | ) | (8,048 | ) | | (4,345 | ) | | (3,091 | ) | | (15,484 | ) | | (18,862 | ) | | (34,346 | ) |
| Fee related earnings | 63,578 |
|
| 14,870 |
|
| 6,233 |
|
| 84,681 |
|
| (39,346 | ) |
| 45,335 |
| 65,109 |
|
| 34,032 |
|
| 3,693 |
|
| 102,834 |
|
| (49,446 | ) |
| 53,388 |
|
| Performance fees—realized | 22,422 |
| | 108,245 |
| | 2,170 |
| | 132,837 |
| | — |
| | 132,837 |
| |
| Performance fees—unrealized | 11,152 |
| | 16,569 |
| | 4,647 |
| | 32,368 |
| | — |
| | 32,368 |
| |
| Performance fee compensation—realized | (7,241 | ) | | (86,537 | ) | | — |
| | (93,778 | ) | | — |
| | (93,778 | ) | |
| Performance fee compensation—unrealized | (11,686 | ) | | (13,387 | ) | | (4,322 | ) | | (29,395 | ) | | — |
| | (29,395 | ) | |
| Net performance fees | 14,647 |
|
| 24,890 |
|
| 2,495 |
|
| 42,032 |
|
| — |
|
| 42,032 |
| |
| Investment income (loss)—realized | 588 |
| | 11,267 |
| | (151 | ) | | 11,704 |
| | (20,005 | ) | | (8,301 | ) | |
| Investment income—unrealized | 5,460 |
| | 7,066 |
| | 6,211 |
| | 18,737 |
| | 15,979 |
| | 34,716 |
| |
| Performance income—realized | | 7,883 |
| | 64,780 |
| | 1,467 |
| | 74,130 |
| | — |
| | 74,130 |
|
| Performance income—unrealized | | 5,093 |
| | 228,747 |
| | 29,789 |
| | 263,629 |
| | — |
| | 263,629 |
|
| Performance related compensation—realized | | (1,898 | ) | | (50,914 | ) | | (161 | ) | | (52,973 | ) | | — |
| | (52,973 | ) |
| Performance related compensation—unrealized | | (6,079 | ) | | (184,021 | ) | | (18,632 | ) | | (208,732 | ) | | — |
| | (208,732 | ) |
| Net performance income | | 4,999 |
|
| 58,592 |
|
| 12,463 |
|
| 76,054 |
|
| — |
|
| 76,054 |
|
| Investment income—realized | | 2,525 |
| | 2,717 |
| | 373 |
| | 5,615 |
| | 1,340 |
| | 6,955 |
|
| Investment income (loss)—unrealized | | (3,450 | ) | | 25,354 |
| | 1,134 |
| | 23,038 |
| | (2,728 | ) | | 20,310 |
|
| Interest and other investment income | 5,940 |
| | 417 |
| | 714 |
| | 7,071 |
| | 15 |
| | 7,086 |
| 2,958 |
| | 1,983 |
| | 1,534 |
| | 6,475 |
| | 225 |
| | 6,700 |
|
| Interest expense | (1,831 | ) | | (1,399 | ) | | (242 | ) | | (3,472 | ) | | (664 | ) | | (4,136 | ) | (3,065 | ) | | (1,397 | ) | | (429 | ) | | (4,891 | ) | | (463 | ) | | (5,354 | ) |
| Net investment income (loss) | 10,157 |
|
| 17,351 |
|
| 6,532 |
|
| 34,040 |
|
| (4,675 | ) |
| 29,365 |
| (1,032 | ) |
| 28,657 |
|
| 2,612 |
|
| 30,237 |
|
| (1,626 | ) |
| 28,611 |
|
| Performance related earnings | 24,804 |
|
| 42,241 |
|
| 9,027 |
|
| 76,072 |
|
| (4,675 | ) |
| 71,397 |
| 3,967 |
|
| 87,249 |
|
| 15,075 |
|
| 106,291 |
|
| (1,626 | ) |
| 104,665 |
|
| Economic net income | $ | 88,382 |
|
| $ | 57,111 |
|
| $ | 15,260 |
|
| $ | 160,753 |
|
| $ | (44,021 | ) |
| $ | 116,732 |
| $ | 69,076 |
|
| $ | 121,281 |
|
| $ | 18,768 |
|
| $ | 209,125 |
|
| $ | (51,072 | ) |
| $ | 158,053 |
|
| Distributable earnings | $ | 81,542 |
| | $ | 45,481 |
| | $ | 6,408 |
| | $ | 133,431 |
| | $ | (66,696 | ) | | $ | 66,735 |
| |
| Realized income | | $ | 73,181 |
| | $ | 50,151 |
| | $ | 5,181 |
| | $ | 128,513 |
| | $ | (48,346 | ) | | $ | 80,167 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the ninesix months ended SeptemberJune 30, 2017:2018:
| | | | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total | | | | | | | | | | | |
| Management fees (Credit Group includes ARCC Part I Fees of $76,436) | $ | 354,179 |
| | $ | 147,559 |
| | $ | 49,231 |
| | $ | 550,969 |
| | $ | — |
| | $ | 550,969 |
| |
| | | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $58,283) | | $ | 267,614 |
| | $ | 99,205 |
| | $ | 32,311 |
| | $ | 399,130 |
| | $ | — |
| | $ | 399,130 |
|
| Other fees | 15,834 |
| | 1,127 |
| | 37 |
| | 16,998 |
| | — |
| | 16,998 |
| 12,607 |
| | 677 |
| | 10 |
| | 13,294 |
| | — |
| | 13,294 |
|
| Compensation and benefits | (142,647 | ) | | (50,862 | ) | | (30,848 | ) | | (224,357 | ) | | (84,881 | ) | | (309,238 | ) | (102,172 | ) | | (37,871 | ) | | (16,407 | ) | | (156,450 | ) | | (61,665 | ) | | (218,115 | ) |
| General, administrative and other expenses | (22,766 | ) | | (13,198 | ) | | (7,947 | ) | | (43,911 | ) | | (56,729 | ) | | (100,640 | ) | (20,670 | ) | | (8,216 | ) | | (4,823 | ) | | (33,709 | ) | | (38,105 | ) | | (71,814 | ) |
| Fee related earnings | 204,600 |
| | 84,626 |
| | 10,473 |
| | 299,699 |
| | (141,610 | ) | | 158,089 |
| 157,379 |
| | 53,795 |
| | 11,091 |
| | 222,265 |
| | (99,770 | ) | | 122,495 |
|
| Performance fees—realized | 19,957 |
| | 238,084 |
| | 3,883 |
| | 261,924 |
| | — |
| | 261,924 |
| 46,743 |
| | 84,813 |
| | 14,159 |
| | 145,715 |
| | — |
| | 145,715 |
|
| Performance fees—unrealized | 41,062 |
| | 118,162 |
| | 64,243 |
| | 223,467 |
| | — |
| | 223,467 |
| 11,524 |
| | (112,539 | ) | | 11,790 |
| | (89,225 | ) | | — |
| | (89,225 | ) |
| Performance fee compensation—realized | (8,649 | ) | | (189,571 | ) | | (1,033 | ) | | (199,253 | ) | | — |
| | (199,253 | ) | (26,665 | ) | | (67,871 | ) | | (8,214 | ) | | (102,750 | ) | | — |
| | (102,750 | ) |
| Performance fee compensation—unrealized | (27,357 | ) | | (95,131 | ) | | (39,303 | ) | | (161,791 | ) | | — |
| | (161,791 | ) | 9,935 |
| | 88,218 |
| | (8,276 | ) | | 89,877 |
| | — |
| | 89,877 |
|
| Net performance fees | 25,013 |
| | 71,544 |
| | 27,790 |
| | 124,347 |
| | — |
| | 124,347 |
| 41,537 |
| | (7,379 | ) | | 9,459 |
| | 43,617 |
| | — |
| | 43,617 |
|
| Investment income—realized | 9,049 |
| | 17,564 |
| | 4,153 |
| | 30,766 |
| | 3,217 |
| | 33,983 |
| 1,366 |
| | 9,687 |
| | 3,100 |
| | 14,153 |
| | 1,636 |
| | 15,789 |
|
| Investment income (loss)—unrealized | 16 |
| | 25,479 |
| | (77 | ) | | 25,418 |
| | 222 |
| | 25,640 |
| 1,348 |
| | (3,860 | ) | | (1,757 | ) | | (4,269 | ) | | 4,097 |
| | (172 | ) |
| Interest and other investment income | 2,399 |
| | 3,264 |
| | 2,069 |
| | 7,732 |
| | 1,125 |
| | 8,857 |
| |
| Interest and other investment income (expense) | | 5,624 |
| | 3,368 |
| | (201 | ) | | 8,791 |
| | 1,870 |
| | 10,661 |
|
| Interest expense | (8,800 | ) | | (4,139 | ) | | (1,257 | ) | | (14,196 | ) | | (1,380 | ) | | (15,576 | ) | (8,269 | ) | | (2,668 | ) | | (872 | ) | | (11,809 | ) | | (1,136 | ) | | (12,945 | ) |
| Net investment income | 2,664 |
| | 42,168 |
| | 4,888 |
| | 49,720 |
| | 3,184 |
| | 52,904 |
| 69 |
| | 6,527 |
| | 270 |
| | 6,866 |
| | 6,467 |
| | 13,333 |
|
| Performance related earnings | 27,677 |
| | 113,712 |
| | 32,678 |
| | 174,067 |
| | 3,184 |
| | 177,251 |
| 41,606 |
| | (852 | ) | | 9,729 |
| | 50,483 |
| | 6,467 |
| | 56,950 |
|
| Economic net income | $ | 232,277 |
| | $ | 198,338 |
| | $ | 43,151 |
| | $ | 473,766 |
| | $ | (138,426 | ) | | $ | 335,340 |
| $ | 198,985 |
| | $ | 52,943 |
| | $ | 20,820 |
| | $ | 272,748 |
| | $ | (93,303 | ) | | $ | 179,445 |
|
| Distributable earnings | $ | 204,402 |
| | $ | 145,696 |
| | $ | 12,596 |
| | $ | 362,694 |
| | $ | (151,642 | ) | | $ | 211,052 |
| |
| Realized income | | $ | 176,778 |
| | $ | 80,735 |
| | $ | 20,148 |
| | $ | 277,661 |
| | $ | (97,534 | ) | | $ | 180,127 |
|
The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the ninesix months ended SeptemberJune 30, 2016:2017:
| | | | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total | | | | | | | | | | | |
| Management fees (Credit Group includes ARCC Part I Fees of $90,884) | $ | 332,182 |
| | $ | 111,100 |
| | $ | 50,794 |
| | $ | 494,076 |
| | $ | — |
| | $ | 494,076 |
| |
| | | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $52,400) | | $ | 234,001 |
| | $ | 96,246 |
| | $ | 32,094 |
| | $ | 362,341 |
| | $ | — |
| | $ | 362,341 |
|
| Other fees | 939 |
| | 983 |
| | 855 |
| | 2,777 |
| | — |
| | 2,777 |
| 10,166 |
| | 678 |
| | 10 |
| | 10,854 |
| | — |
| | 10,854 |
|
| Compensation and benefits | (135,068 | ) | | (46,556 | ) | | (31,327 | ) | | (212,951 | ) | | (77,225 | ) | | (290,176 | ) | (96,863 | ) | | (31,606 | ) | | (19,450 | ) | | (147,919 | ) | | (56,537 | ) | | (204,456 | ) |
| General, administrative and other expenses | (19,383 | ) | | (10,489 | ) | | (8,241 | ) | | (38,113 | ) | | (44,616 | ) | | (82,729 | ) | (16,089 | ) | | (8,543 | ) | | (5,822 | ) | | (30,454 | ) | | (38,175 | ) | | (68,629 | ) |
| Fee related earnings | 178,670 |
| | 55,038 |
| | 12,081 |
| | 245,789 |
| | (121,841 | ) | | 123,948 |
| 131,215 |
| | 56,775 |
| | 6,832 |
| | 194,822 |
| | (94,712 | ) | | 100,110 |
|
| Performance fees—realized | 44,624 |
| | 171,024 |
| | 5,142 |
| | 220,790 |
| | — |
| | 220,790 |
| 16,661 |
| | 64,780 |
| | 1,494 |
| | 82,935 |
| | — |
| | 82,935 |
|
| Performance fees—unrealized | (1,544 | ) | | 109,848 |
| | 10,030 |
| | 118,334 |
| | — |
| | 118,334 |
| 8,029 |
| | 260,984 |
| | 43,877 |
| | 312,890 |
| | — |
| | 312,890 |
|
| Performance fee compensation—realized | (9,978 | ) | | (136,761 | ) | | (53 | ) | | (146,792 | ) | | — |
| | (146,792 | ) | (7,183 | ) | | (50,914 | ) | | (177 | ) | | (58,274 | ) | | — |
| | (58,274 | ) |
| Performance fee compensation—unrealized | (9,853 | ) | | (88,766 | ) | | (8,328 | ) | | (106,947 | ) | | — |
| | (106,947 | ) | (7,537 | ) | | (209,526 | ) | | (27,070 | ) | | (244,133 | ) | | — |
| | (244,133 | ) |
| Net performance fees | 23,249 |
| | 55,345 |
| | 6,791 |
| | 85,385 |
| | — |
| | 85,385 |
| 9,970 |
| | 65,324 |
| | 18,124 |
| | 93,418 |
| | — |
| | 93,418 |
|
| Investment income (loss)—realized | 390 |
| | 14,641 |
| | 412 |
| | 15,443 |
| | (20,093 | ) | | (4,650 | ) | |
| Investment income—realized | | 2,843 |
| | 3,296 |
| | 2,156 |
| | 8,295 |
| | 3,199 |
| | 11,494 |
|
| Investment income (loss)—unrealized | 9,256 |
| | (1,030 | ) | | 7,943 |
| | 16,169 |
| | 4,460 |
| | 20,629 |
| 1,139 |
| | 33,900 |
| | 690 |
| | 35,729 |
| | (4,135 | ) | | 31,594 |
|
| Interest and other investment income (expense) | 21,617 |
| | 8,532 |
| | 1,642 |
| | 31,791 |
| | (53 | ) | | 31,738 |
| |
| Interest and other investment income | | 2,939 |
| | 2,135 |
| | 1,353 |
| | 6,427 |
| | 1,099 |
| | 7,526 |
|
| Interest expense | (6,729 | ) | | (4,201 | ) | | (788 | ) | | (11,718 | ) | | (2,101 | ) | | (13,819 | ) | (5,523 | ) | | (2,910 | ) | | (861 | ) | | (9,294 | ) | | (939 | ) | | (10,233 | ) |
| Net investment income (loss) | 24,534 |
| | 17,942 |
| | 9,209 |
| | 51,685 |
| | (17,787 | ) | | 33,898 |
| 1,398 |
| | 36,421 |
| | 3,338 |
| | 41,157 |
| | (776 | ) | | 40,381 |
|
| Performance related earnings | 47,783 |
| | 73,287 |
| | 16,000 |
| | 137,070 |
| | (17,787 | ) | | 119,283 |
| 11,368 |
| | 101,745 |
| | 21,462 |
| | 134,575 |
| | (776 | ) | | 133,799 |
|
| Economic net income | $ | 226,453 |
| | $ | 128,325 |
| | $ | 28,081 |
| | $ | 382,859 |
| | $ | (139,628 | ) | | $ | 243,231 |
| $ | 142,583 |
| | $ | 158,520 |
| | $ | 28,294 |
| | $ | 329,397 |
| | $ | (95,488 | ) | | $ | 233,909 |
|
| Distributable earnings | $ | 221,357 |
| | $ | 104,162 |
| | $ | 16,867 |
| | $ | 342,386 |
| | $ | (157,550 | ) | | $ | 184,836 |
| |
| Realized income | | $ | 143,126 |
| | $ | 72,496 |
| | $ | 9,769 |
| | $ | 225,391 |
| | $ | (91,551 | ) | | $ | 133,840 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table presents the components of the Company’s operating segments’ revenue, expenses and other income (expense):
| | | | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Segment Revenues | | | | | | | | | | | | | | |
| Management fees (includes ARCC Part I Fees of $24,036, $76,436 and $33,260, $90,884 for the three and nine months ended September 30, 2017 and 2016, respectively) | $ | 188,628 |
| | $ | 168,796 |
| | $ | 550,969 |
| | $ | 494,076 |
| |
| Management fees (includes ARCC Part I Fees of $29,866, $58,283 and $19,143, $52,400 for the three and six months ended June 30, 2018 and 2017, respectively) | | $ | 202,304 |
| | $ | 185,560 |
| | $ | 399,130 |
| | $ | 362,341 |
|
| Other fees | 6,144 |
| | 751 |
| | 16,998 |
| | 2,777 |
| 7,221 |
| | 6,020 |
| | 13,294 |
| | 10,854 |
|
| Performance fees—realized | 178,989 |
| | 132,837 |
| | 261,924 |
| | 220,790 |
| |
| Performance fees—unrealized | (89,423 | ) | | 32,368 |
| | 223,467 |
| | 118,334 |
| |
| Performance income—realized | | 122,608 |
| | 74,130 |
| | 145,715 |
| | 82,935 |
|
| Performance income—unrealized | | (124,343 | ) | | 263,629 |
| | (89,225 | ) | | 312,890 |
|
| Total segment revenues | $ | 284,338 |
| | $ | 334,752 |
| | $ | 1,053,358 |
| | $ | 835,977 |
| $ | 207,790 |
| | $ | 529,339 |
| | $ | 468,914 |
| | $ | 769,020 |
|
| Segment Expenses | | | | | | | | | | | | | | |
| Compensation and benefits | $ | 77,205 |
| | $ | 71,378 |
| | $ | 224,357 |
| | $ | 212,951 |
| $ | 79,332 |
| | $ | 73,262 |
| | $ | 156,450 |
| | $ | 147,919 |
|
| General, administrative and other expenses | 13,631 |
| | 13,488 |
| | 43,911 |
| | 38,113 |
| 17,607 |
| | 15,484 |
| | 33,709 |
| | 30,454 |
|
| Performance fee compensation—realized | 140,979 |
| | 93,778 |
| | 199,253 |
| | 146,792 |
| |
| Performance fee compensation—unrealized | (82,342 | ) | | 29,395 |
| | 161,791 |
| | 106,947 |
| |
| Performance related compensation—realized | | 87,881 |
| | 52,973 |
| | 102,750 |
| | 58,274 |
|
| Performance related compensation—unrealized | | (100,886 | ) | | 208,732 |
| | (89,877 | ) | | 244,133 |
|
| Total segment expenses | $ | 149,473 |
| | $ | 208,039 |
| | $ | 629,312 |
| | $ | 504,803 |
| $ | 83,934 |
| | $ | 350,451 |
| | $ | 203,032 |
| | $ | 480,780 |
|
| Other Income (Expense) | | | | | | | | | | | | | | |
| Investment income—realized | $ | 22,471 |
| | $ | 11,704 |
| | $ | 30,766 |
| | $ | 15,443 |
| $ | 9,361 |
| | $ | 5,615 |
| | $ | 14,153 |
| | $ | 8,295 |
|
| Investment income (loss)—unrealized | (10,311 | ) | | 18,737 |
| | 25,418 |
| | 16,169 |
| 1,382 |
| | 23,038 |
| | (4,269 | ) | | 35,729 |
|
| Interest and other investment income | 1,305 |
| | 7,071 |
| | 7,732 |
| | 31,791 |
| 5,249 |
| | 6,475 |
| | 8,791 |
| | 6,427 |
|
| Interest expense | (4,902 | ) | | (3,472 | ) | | (14,196 | ) | | (11,718 | ) | (5,488 | ) | | (4,891 | ) | | (11,809 | ) | | (9,294 | ) |
| Total other income | $ | 8,563 |
| | $ | 34,040 |
| | $ | 49,720 |
| | $ | 51,685 |
| |
| Total segment other income | | $ | 10,504 |
| | $ | 30,237 |
| | $ | 6,866 |
| | $ | 41,157 |
|
The following table reconciles segment revenue to Ares consolidated revenues:
| | | | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Total segment revenue | $ | 284,338 |
| | $ | 334,752 |
| | $ | 1,053,358 |
| | $ | 835,977 |
| $ | 207,790 |
| | $ | 529,339 |
| | $ | 468,914 |
| | $ | 769,020 |
|
| Revenue of Consolidated Funds eliminated in consolidation | (6,822 | ) | | (5,986 | ) | | (18,738 | ) | | (13,439 | ) | (25,123 | ) | | (169 | ) | | (30,233 | ) | | (18,357 | ) |
| Administrative fees(1) | 7,352 |
| | 6,618 |
| | 26,090 |
| | 19,984 |
| 6,770 |
| | 9,132 |
| | 13,182 |
| | 18,738 |
|
| Performance fees reclass(2) | (1,187 | ) | | 76 |
| | (1,428 | ) | | (1,512 | ) | |
| Performance income reclass(2) | | 31 |
| | (217 | ) | | 1,006 |
| | (241 | ) |
| Principal investment income | | 14,722 |
| | 34,166 |
| | 17,430 |
| | 47,335 |
|
Revenue of non-controlling interests in consolidated subsidiaries(3) | (10 | ) | | — |
| | (64 | ) | | — |
| (27 | ) | | (54 | ) | | (47 | ) | | (54 | ) |
| Total consolidated adjustments and reconciling items | (667 | ) | | 708 |
| | 5,860 |
| | 5,033 |
| (3,627 | ) | | 42,858 |
| | 1,338 |
| | 47,421 |
|
| Total consolidated revenue | $ | 283,671 |
| | $ | 335,460 |
| | $ | 1,059,218 |
|
| $ | 841,010 |
| $ | 204,163 |
| | $ | 572,197 |
| | $ | 470,252 |
|
| $ | 816,441 |
|
| |
| (1) | Represents administrative fees that are presented in administrative, transaction and other fees in the Company’s Condensed Consolidated Statements of Operations and are netted against the respective expenses for segment reporting. |
| |
| (2) | Related to performance feesincome for AREA Sponsor Holdings LLC, an investment pool. Changes in value of this investment are reflected within other income (expense) in the Company’s Condensed Consolidated Statements of Operations. |
| |
| (3) | Adjustments for administrative fees reimbursed and other revenue items attributable to certain of our joint venture partners. |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table reconciles segment expenses to Ares consolidated expenses:
| | | | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Total segment expenses | $ | 149,473 |
| | $ | 208,039 |
| | $ | 629,312 |
| | $ | 504,803 |
| $ | 83,934 |
| | $ | 350,451 |
| | $ | 203,032 |
| | $ | 480,780 |
|
| Expenses of Consolidated Funds added in consolidation | 25,862 |
| | 16,068 |
| | 45,196 |
| | 27,334 |
| 47,382 |
| | 8,825 |
| | 56,011 |
| | 19,334 |
|
| Expenses of Consolidated Funds eliminated in consolidation | (6,823 | ) | | (5,980 | ) | | (17,724 | ) | | (16,320 | ) | (12,270 | ) | | (4,303 | ) | | (19,583 | ) | | (10,901 | ) |
| Administrative fees(1) | 7,352 |
| | 6,618 |
| | 26,090 |
| | 19,984 |
| 6,770 |
| | 9,132 |
| | 13,182 |
| | 18,738 |
|
| OMG expenses | 45,957 |
| | 39,346 |
| | 141,610 |
| | 121,841 |
| 50,548 |
| | 49,446 |
| | 99,770 |
| | 94,712 |
|
| Acquisition and merger-related expenses | 2,818 |
| | 79 |
| | 278,878 |
| | 432 |
| 47 |
| | 724 |
| | (272 | ) | | 276,060 |
|
| Equity compensation expense | 18,091 |
| | 8,476 |
| | 52,097 |
| | 27,185 |
| 22,507 |
| | 18,917 |
| | 43,594 |
| | 34,006 |
|
| Placement fees and underwriting costs | 4,495 |
| | 2,202 |
| | 14,317 |
| | 4,886 |
| 1,852 |
| | 6,383 |
| | 3,516 |
| | 9,822 |
|
| Amortization of intangibles | 3,651 |
| | 6,378 |
| | 14,200 |
| | 20,762 |
| 3,285 |
| | 5,274 |
| | 6,572 |
| | 10,549 |
|
| Depreciation expense | 3,468 |
| | 2,148 |
| | 9,458 |
| | 5,940 |
| 4,426 |
| | 2,774 |
| | 8,315 |
| | 5,990 |
|
| Other expenses(3) | | 11,836 |
| | — |
| | 11,836 |
| | — |
|
| Expenses of non-controlling interests in consolidated subsidiaries(2) | (217 | ) | | — |
| | 357 |
| | — |
| 700 |
| | 574 |
| | 1,327 |
| | 574 |
|
| Total consolidation adjustments and reconciling items | 104,654 |
| | 75,335 |
| | 564,479 |
| | 212,044 |
| 137,083 |
| | 97,746 |
| | 224,268 |
| | 458,884 |
|
| Total consolidated expenses | $ | 254,127 |
| | $ | 283,374 |
| | $ | 1,193,791 |
|
| $ | 716,847 |
| $ | 221,017 |
| | $ | 448,197 |
| | $ | 427,300 |
|
| $ | 939,664 |
|
| |
| (1) | Represents administrative fees that are presented in administrative, transaction and other fees in the Company’s Condensed Consolidated Statements of Operations and are netted against the respective expenses for segment reporting. |
| |
| (2) | Adjustments to eliminate costsCosts being borne by certain of our joint venture partners. |
| |
| (3) | Includes $11.8 million payment to ARCC for rent and utilities for the years ended 2017, 2016, 2015 and 2014, and the first quarter of 2018. |
The following table reconciles segment other income (expense) to Ares consolidated other income:
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Total other income | $ | 8,563 |
| | $ | 34,040 |
| | $ | 49,720 |
| | $ | 51,685 |
|
| Other income from Consolidated Funds added in consolidation, net | 55,227 |
| | 30,181 |
| | 90,522 |
| | 14,545 |
|
| Other income (expense) from Consolidated Funds eliminated in consolidation, net | (9,973 | ) | | (5,549 | ) | | (16,847 | ) | | 6,125 |
|
| Other income of non-controlling interests in consolidated subsidiaries | 9 |
| | — |
| | 14 |
| | — |
|
| OMG other expense | 3,960 |
| | (4,675 | ) | | 3,184 |
| | (17,787 | ) |
| Performance fee reclass(1) | 1,187 |
| | (76 | ) | | 1,428 |
| | 1,512 |
|
| Changes in fair value of contingent consideration | (60 | ) | | 17,690 |
| | 20,156 |
| | 17,486 |
|
| Other non-cash expense | — |
| | 1,728 |
| | — |
| | 1,728 |
|
| Offering costs | (33 | ) | | — |
| | (688 | ) | | — |
|
| Total consolidation adjustments and reconciling items | 50,317 |
| | 39,299 |
| | 97,769 |
| | 23,609 |
|
| Total consolidated other income | $ | 58,880 |
| | $ | 73,339 |
| | $ | 147,489 |
|
| $ | 75,294 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Total segment other income | $ | 10,504 |
| | $ | 30,237 |
| | $ | 6,866 |
| | $ | 41,157 |
|
| Other income (expense) from Consolidated Funds added in consolidation, net | 69,193 |
| | (3,150 | ) | | 76,445 |
| | 35,295 |
|
| Other expense from Consolidated Funds eliminated in consolidation, net | 993 |
| | (410 | ) | | 534 |
| | (433 | ) |
| Other income of non-controlling interests in consolidated subsidiaries | 8 |
| | 5 |
| | 15 |
| | 5 |
|
| OMG other income (expense) | 3,699 |
| | (1,626 | ) | | 6,467 |
| | (776 | ) |
| Performance income reclass(1) | (31 | ) | | 217 |
| | (1,006 | ) | | 241 |
|
| Principal investment income | (14,722 | ) | | (34,166 | ) | | (17,430 | ) | | (47,335 | ) |
| Changes in value of contingent consideration | — |
| | (32 | ) | | — |
| | 20,216 |
|
| Other non-cash expense | (1,715 | ) | | — |
| | (1,722 | ) | | — |
|
| Offering costs | (3 | ) | | 5 |
| | (3 | ) | | (655 | ) |
| Total consolidation adjustments and reconciling items | 57,422 |
| | (39,157 | ) | | 63,300 |
| | 6,558 |
|
| Total consolidated other income | $ | 67,926 |
| | $ | (8,920 | ) | | $ | 70,166 |
|
| $ | 47,715 |
|
| |
| (1) | Related to performance feesincome for AREA Sponsor Holdings LLC. Changes in value of this investment are reflected within other (income) expense in the Company’s Condensed Consolidated Statements of Operations. |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table presents the reconciliation of income before taxes as reported in the Condensed Consolidated Statements of Operations to segment results of ENI, RI, FRE PRE and DE:PRE:
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Economic net income | | | | | | | |
| Income before taxes | $ | 88,424 |
| | $ | 125,425 |
| | $ | 12,916 |
| | $ | 199,457 |
|
| Adjustments: | | | | | | | |
| Amortization of intangibles | 3,651 |
| | 6,378 |
| | 14,200 |
| | 20,762 |
|
| Depreciation expense | 3,468 |
| | 2,148 |
| | 9,458 |
| | 5,940 |
|
| Equity compensation expenses | 18,091 |
| | 8,476 |
| | 52,097 |
| | 27,185 |
|
| Acquisition and merger-related expenses | 2,878 |
| | (17,611 | ) | | 258,722 |
| | (17,054 | ) |
| Placement fees and underwriting costs | 4,495 |
| | 2,202 |
| | 14,317 |
| | 4,886 |
|
| OMG expenses, net | 41,997 |
| | 44,021 |
| | 138,426 |
| | 139,628 |
|
| Offering costs | 33 |
| | — |
| | 688 |
| | — |
|
| Other non-cash expense | — |
| | (1,728 | ) | | — |
| | (1,728 | ) |
| (Income) loss before taxes of non-controlling interests in consolidated subsidiaries | (216 | ) | | — |
| | 407 |
| | — |
|
| (Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations | (19,393 | ) | | (8,558 | ) | | (27,465 | ) | | 3,783 |
|
| Total consolidation adjustments and reconciling items | 55,004 |
| | 35,328 |
|
| 460,850 |
|
| 183,402 |
|
| Economic net income | 143,428 |
| | 160,753 |
|
| 473,766 |
|
| 382,859 |
|
| Total performance fees income - realized | (178,989 | ) | | (132,837 | ) | | (261,924 | ) | | (220,790 | ) |
| Total performance fees income - unrealized | 89,423 |
| | (32,368 | ) | | (223,467 | ) | | (118,334 | ) |
| Total performance fee compensation - realized | 140,979 |
| | 93,778 |
| | 199,253 |
| | 146,792 |
|
| Total performance fee compensation - unrealized | (82,342 | ) | | 29,395 |
| | 161,791 |
| | 106,947 |
|
| Total investment income | (8,563 | ) | | (34,040 | ) | | (49,720 | ) | | (51,685 | ) |
| Fee related earnings | 103,936 |
| | 84,681 |
|
| 299,699 |
|
| 245,789 |
|
| Performance fees—realized | 178,989 |
| | 132,837 |
| | 261,924 |
| | 220,790 |
|
| Performance fee compensation—realized | (140,979 | ) | | (93,778 | ) | | (199,253 | ) | | (146,792 | ) |
| Investment and other income realized, net | 21,160 |
| | 14,777 |
| | 27,067 |
| | 33,605 |
|
| Additional adjustments: | | | | | | | |
| Dividend equivalent(1) | (3,540 | ) | | (1,649 | ) | | (7,741 | ) | | (3,039 | ) |
| One-time acquisition costs(1) | (12 | ) | | (12 | ) | | (35 | ) | | (294 | ) |
| Income tax expense(1) | (343 | ) | | (292 | ) | | (950 | ) | | (773 | ) |
| Non-cash items | 397 |
| | 36 |
| | 533 |
| | 883 |
|
| Placement fees and underwriting costs(1) | (4,495 | ) | | (2,209 | ) | | (14,317 | ) | | (4,894 | ) |
| Depreciation and amortization(1) | (1,448 | ) | | (960 | ) | | (4,233 | ) | | (2,889 | ) |
| Distributable earnings | $ | 153,665 |
| | $ | 133,431 |
|
| $ | 362,694 |
|
| $ | 342,386 |
|
| Performance related earnings | | | | | | | |
| Economic net income | $ | 143,428 |
| | $ | 160,753 |
|
| $ | 473,766 |
|
| $ | 382,859 |
|
| Less: fee related earnings | (103,936 | ) | | (84,681 | ) |
| (299,699 | ) |
| (245,789 | ) |
| Performance related earnings | $ | 39,492 |
|
| $ | 76,072 |
|
| $ | 174,067 |
|
| $ | 137,070 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Economic net income | | | | | | | |
| Income (loss) before taxes | $ | 51,072 |
| | $ | 115,080 |
| | $ | 113,118 |
| | $ | (75,508 | ) |
| Adjustments: | | | | | | | |
| Amortization of intangibles | 3,285 |
| | 5,274 |
| | 6,572 |
| | 10,549 |
|
| Depreciation expense | 4,426 |
| | 2,774 |
| | 8,315 |
| | 5,990 |
|
| Equity compensation expenses | 22,507 |
| | 18,917 |
| | 43,594 |
| | 34,006 |
|
| Acquisition and merger-related expenses | 47 |
| | 756 |
| | (272 | ) | | 255,844 |
|
| Placement fees and underwriting costs | 1,852 |
| | 6,383 |
| | 3,516 |
| | 9,822 |
|
| OMG expenses, net | 46,849 |
| | 51,072 |
| | 93,303 |
| | 95,488 |
|
| Offering costs | 3 |
| | (5 | ) | | 3 |
| | 655 |
|
| Other expense(2) | 13,551 |
| | — |
| | 13,558 |
| | — |
|
| Expense of non-controlling interests in consolidated subsidiaries(1) | 719 |
| | 623 |
| | 1,359 |
| | 623 |
|
| (Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations | (9,951 | ) | | 8,251 |
| | (10,318 | ) | | (8,072 | ) |
| Total consolidation adjustments and reconciling items | 83,288 |
| | 94,045 |
|
| 159,630 |
|
| 404,905 |
|
| Economic net income | 134,360 |
| | 209,125 |
|
| 272,748 |
|
| 329,397 |
|
| Total performance income - unrealized | 124,343 |
| | (263,629 | ) | | 89,225 |
| | (312,890 | ) |
| Total performance related compensation - unrealized | (100,886 | ) | | 208,732 |
| | (89,877 | ) | | 244,133 |
|
| Total investment (income) loss - unrealized | (9 | ) | | (25,715 | ) | | 5,565 |
| | (35,249 | ) |
| Realized income | 157,808 |
| | 128,513 |
| | 277,661 |
| | 225,391 |
|
| Total performance income - realized | (122,608 | ) | | (74,130 | ) | | (145,715 | ) | | (82,935 | ) |
| Total performance related compensation - realized | 87,881 |
| | 52,973 |
| | 102,750 |
| | 58,274 |
|
| Total investment income - realized | (10,495 | ) | | (4,522 | ) | | (12,431 | ) | | (5,908 | ) |
| Fee related earnings | 112,586 |
| | 102,834 |
|
| 222,265 |
|
| 194,822 |
|
| Performance related earnings | | | | | | | |
| Economic net income | $ | 134,360 |
| | $ | 209,125 |
|
| $ | 272,748 |
|
| $ | 329,397 |
|
| Less: fee related earnings | (112,586 | ) | | (102,834 | ) |
| (222,265 | ) |
| (194,822 | ) |
| Performance related earnings | $ | 21,774 |
|
| $ | 106,291 |
|
| $ | 50,483 |
|
| $ | 134,575 |
|
| |
| (1) | Certain costs are reduced by the amountsAdjustments for administrative fees reimbursed and other revenue items attributable to OMG, which is excluded from segment results.
certain of our joint venture partners. |
| |
| (2) | Includes $11.8 million payment to ARCC for rent and utilities for the years ended 2017, 2016, 2015 and 2014, and the first quarter of 2018. |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
15. CONSOLIDATION
Investments in Consolidated Variable Interest Entities
The Company consolidates entities in which the Company has a variable interest and, as the general partner or investment manager, has both the power to direct the most significant activities and a potentially significant economic interest. Investments in the consolidated VIEs are reported at their carrying value, which approximates fair value, and represents the Company’s maximum exposure to loss.
Investments in Non-Consolidated Variable Interest Entities
The Company holds interests in certain VIEs that are not consolidated as the Company is not the primary beneficiary. The Company's interest in such entities generally is in the form of direct equity interests, fixed fee arrangements or both. The maximum exposure to loss represents the potential loss of assets by the Company relating to these non-consolidated entities. Investments in the non-consolidated VIEs are carried at fair value.
The Company's interests and the Consolidated Funds' interests in consolidated and non-consolidated VIEs, as presented in the Condensed Consolidated Statements of Financial Condition, and their respective maximum exposure to loss relating to non-consolidated VIEs are as follows:
| | | | As of September 30, | | As of December 31, | As of June 30, | | As of December 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| Maximum exposure to loss attributable to the Company's investment in non-consolidated VIEs | $ | 364,860 |
| | $ | 268,950 |
| $ | 241,231 |
| | $ | 251,376 |
|
| Maximum exposure to loss attributable to the Company's investment in consolidated VIEs | $ | 162,295 |
| | $ | 153,746 |
| 190,400 |
| | 175,620 |
|
| Assets of consolidated VIEs | $ | 5,760,754 |
| | $ | 3,822,010 |
| 8,059,640 |
| | 6,231,245 |
|
| Liabilities of consolidated VIEs | $ | 5,152,179 |
| | $ | 3,360,329 |
| 7,302,896 |
| | 5,538,054 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss) attributable to non-controlling interests related to consolidated VIEs | $ | 18,195 |
| | $ | 7,861 |
| | $ | 25,403 |
| | $ | (3,064 | ) |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Net income (loss) attributable to non-controlling interests related to consolidated VIEs | $ | 9,882 |
| | $ | (8,647 | ) | | $ | 10,249 |
| | $ | 7,208 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
CONSOLIDATING SCHEDULES
The following supplemental financial information illustrates the consolidating effects of the Consolidated Funds on the Company's financial condition as of SeptemberJune 30, 20172018 and December 31, 20162017 and results from operations for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017.
| | | | As of September 30, 2017 | As of June 30, 2018 |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Assets | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Cash and cash equivalents | $ | 186,437 |
| | $ | — |
| | $ | — |
| | $ | 186,437 |
| $ | 125,448 |
| | $ | — |
| | $ | — |
| | $ | 125,448 |
|
| Investments (includes fair value investments of $581,614) | 746,990 |
| | — |
| | (162,295 | ) | | 584,695 |
| |
| Performance fees receivable | 1,001,581 |
| | — |
| | (4,003 | ) | | 997,578 |
| |
| Investments ($985,035 of accrued carried interest) | | 1,656,647 |
| | — |
| | (190,400 | ) | | 1,466,247 |
|
| Due from affiliates | 166,214 |
| | — |
| | (4,782 | ) | | 161,432 |
| 179,200 |
| | — |
| | (6,772 | ) | | 172,428 |
|
| Deferred tax asset, net | 36,661 |
| | — |
| | — |
| | 36,661 |
| 42,942 |
| | — |
| | — |
| | 42,942 |
|
| Other assets | 103,885 |
| | — |
| | — |
| | 103,885 |
| 100,183 |
| | — |
| | — |
| | 100,183 |
|
| Intangible assets, net | 44,115 |
| | — |
| | — |
| | 44,115 |
| 33,999 |
| | — |
| | — |
| | 33,999 |
|
| Goodwill | 143,880 |
| | — |
| | — |
| | 143,880 |
| 143,848 |
| | — |
| | — |
| | 143,848 |
|
| Assets of Consolidated Funds | |
| | |
| | |
| |
|
| |
| | |
| | |
| |
|
|
| Cash and cash equivalents | — |
| | 799,609 |
| | — |
| | 799,609 |
| — |
| | 836,274 |
| | — |
| | 836,274 |
|
| Investments, at fair value | — |
| | 4,915,029 |
| | — |
| | 4,915,029 |
| — |
| | 6,968,067 |
| | — |
| | 6,968,067 |
|
| Due from affiliates | — |
| | 8,047 |
| | — |
| | 8,047 |
| — |
| | 13,704 |
| | — |
| | 13,704 |
|
| Dividends and interest receivable | — |
| | 10,061 |
| | — |
| | 10,061 |
| — |
| | 14,634 |
| | — |
| | 14,634 |
|
| Receivable for securities sold | — |
| | 25,926 |
| | — |
| | 25,926 |
| — |
| | 225,764 |
| | — |
| | 225,764 |
|
| Other assets | — |
| | 2,082 |
| | — |
| | 2,082 |
| — |
| | 1,197 |
| | — |
| | 1,197 |
|
| Total assets | $ | 2,429,763 |
| | $ | 5,760,754 |
| | $ | (171,080 | ) | | $ | 8,019,437 |
| $ | 2,282,267 |
| | $ | 8,059,640 |
| | $ | (197,172 | ) | | $ | 10,144,735 |
|
| Liabilities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Accounts payable, accrued expenses and other liabilities | $ | 94,351 |
| | $ | — |
| | $ | — |
| | $ | 94,351 |
| $ | 73,227 |
| | $ | — |
| | $ | — |
| | $ | 73,227 |
|
| Accrued compensation | 133,799 |
| | — |
| | — |
| | 133,799 |
| 87,254 |
| | — |
| | — |
| | 87,254 |
|
| Due to affiliates | 17,207 |
| | — |
| | — |
| | 17,207 |
| 62,344 |
| | — |
| | — |
| | 62,344 |
|
| Performance fee compensation payable | 780,201 |
| | — |
| | — |
| | 780,201 |
| |
| Performance related compensation payable | | 730,782 |
| | — |
| | — |
| | 730,782 |
|
| Debt obligations | 486,007 |
| | — |
| | — |
| | 486,007 |
| 370,628 |
| | — |
| | — |
| | 370,628 |
|
| Liabilities of Consolidated Funds | |
| | |
| | |
| |
|
| |
| | |
| | |
| |
|
|
| Accounts payable, accrued expenses and other liabilities | — |
| | 50,992 |
| | — |
| | 50,992 |
| — |
| | 69,040 |
| | — |
| | 69,040 |
|
| Due to affiliates | — |
| | 8,786 |
| | (8,786 | ) | | — |
| — |
| | 6,772 |
| | (6,772 | ) | | — |
|
| Payable for securities purchased | — |
| | 481,055 |
| | — |
| | 481,055 |
| — |
| | 744,534 |
| | — |
| | 744,534 |
|
| CLO loan obligations, at fair value | — |
| | 4,490,085 |
| | (13,442 | ) | | 4,476,643 |
| — |
| | 6,344,112 |
| | (10,873 | ) | | 6,333,239 |
|
| Fund borrowings | — |
| | 121,261 |
| | — |
| | 121,261 |
| — |
| | 138,438 |
| | — |
| | 138,438 |
|
| Total liabilities | 1,511,565 |
| | 5,152,179 |
| | (22,228 | ) | | 6,641,516 |
| 1,324,235 |
| | 7,302,896 |
| | (17,645 | ) | | 8,609,486 |
|
| Commitments and contingencies |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
|
| Preferred equity (12,400,000 units issued and outstanding) | 298,761 |
| | — |
| | — |
| | 298,761 |
| |
| Preferred equity (12,400,000 shares issued and outstanding) | | 298,761 |
| | — |
| | — |
| | 298,761 |
|
| Non-controlling interest in Consolidated Funds | — |
| | 608,575 |
| | (148,852 | ) | | 459,723 |
| — |
| | 756,744 |
| | (179,527 | ) | | 577,217 |
|
| Non-controlling interest in Ares Operating Group entities | 348,513 |
| | — |
| | — |
| | 348,513 |
| 316,048 |
| | — |
| | — |
| | 316,048 |
|
| Controlling interest in Ares Management, L.P.: | |
| | |
| | |
| |
|
| |
| | |
| | |
| |
|
|
| Partners' capital (82,211,302 units issued and outstanding) | 275,410 |
| | — |
| | — |
| | 275,410 |
| |
| Shareholders' equity (98,398,340 shares issued and outstanding) | | 349,981 |
| | — |
| | — |
| | 349,981 |
|
| Accumulated other comprehensive loss, net of tax | (4,486 | ) | | — |
| | — |
| | (4,486 | ) | (6,758 | ) | | — |
| | — |
| | (6,758 | ) |
| Total controlling interest in Ares Management, L.P. | 270,924 |
| | — |
| | — |
| | 270,924 |
| 343,223 |
| | — |
| | — |
| | 343,223 |
|
| Total equity | 918,198 |
|
| 608,575 |
|
| (148,852 | ) |
| 1,377,921 |
| 958,032 |
|
| 756,744 |
|
| (179,527 | ) |
| 1,535,249 |
|
| Total liabilities and equity | $ | 2,429,763 |
|
| $ | 5,760,754 |
|
| $ | (171,080 | ) |
| $ | 8,019,437 |
| $ | 2,282,267 |
|
| $ | 8,059,640 |
|
| $ | (197,172 | ) |
| $ | 10,144,735 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | | | | | | | | | As of December 31, 2017 |
| | As of December 31, 2016 | As adjusted |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Assets | | | |
| | |
| | |
| | | |
| | |
| | |
|
| Cash and cash equivalents | $ | 342,861 |
| | $ | — |
| | $ | — |
| | $ | 342,861 |
| $ | 118,929 |
| | $ | — |
| | $ | — |
| | $ | 118,929 |
|
| Investments (includes fair value investments of $448,336) | 622,215 |
| | — |
| | (153,744 | ) | | 468,471 |
| |
| Performance fees receivable | 767,429 |
| | — |
| | (8,330 | ) | | 759,099 |
| |
| Investments ($1,077,236 of accrued carried interest) | | 1,900,191 |
| | — |
| | (175,620 | ) | | 1,724,571 |
|
| Due from affiliates | 169,252 |
| | — |
| | (6,316 | ) | | 162,936 |
| 171,701 |
| | — |
| | (5,951 | ) | | 165,750 |
|
| Deferred tax asset, net | 6,731 |
| | — |
| | — |
| | 6,731 |
| 8,326 |
| | — |
| | — |
| | 8,326 |
|
| Other assets | 65,565 |
| | — |
| | — |
| | 65,565 |
| 135,674 |
| | — |
| | (5,333 | ) | | 130,341 |
|
| Intangible assets, net | 58,315 |
| | — |
| | — |
| | 58,315 |
| 40,465 |
| | — |
| | — |
| | 40,465 |
|
| Goodwill | 143,724 |
| | — |
| | — |
| | 143,724 |
| 143,895 |
| | — |
| | — |
| | 143,895 |
|
| Assets of Consolidated Funds | | | |
| | |
| |
|
| | | |
| | |
| |
|
|
| Cash and cash equivalents | — |
| | 455,280 |
| | — |
| | 455,280 |
| — |
| | 556,500 |
| | — |
| | 556,500 |
|
| Investments, at fair value | — |
| | 3,330,203 |
| | — |
| | 3,330,203 |
| — |
| | 5,582,842 |
| | — |
| | 5,582,842 |
|
| Due from affiliates | — |
| | 3,592 |
| | — |
| | 3,592 |
| — |
| | 15,884 |
| | — |
| | 15,884 |
|
| Dividends and interest receivable | — |
| | 8,479 |
| | — |
| | 8,479 |
| — |
| | 12,568 |
| | — |
| | 12,568 |
|
| Receivable for securities sold | — |
| | 21,955 |
| | — |
| | 21,955 |
| — |
| | 61,462 |
| | — |
| | 61,462 |
|
| Other assets | — |
| | 2,501 |
| | — |
| | 2,501 |
| — |
| | 1,989 |
| | — |
| | 1,989 |
|
| Total assets | $ | 2,176,092 |
|
| $ | 3,822,010 |
|
| $ | (168,390 | ) |
| $ | 5,829,712 |
| $ | 2,519,181 |
|
| $ | 6,231,245 |
|
| $ | (186,904 | ) |
| $ | 8,563,522 |
|
| Liabilities | | | |
| | |
| | |
| | | |
| | |
| | |
|
| Accounts payable, accrued expenses and other liabilities | $ | 83,336 |
| | $ | — |
| | $ | — |
| | $ | 83,336 |
| $ | 81,955 |
| | $ | — |
| | $ | — |
| | $ | 81,955 |
|
| Accrued compensation | 131,736 |
| | — |
| | — |
| | 131,736 |
| 27,978 |
| | — |
| | — |
| | 27,978 |
|
| Due to affiliates | 17,959 |
| | — |
| | (395 | ) | | 17,564 |
| 39,184 |
| | — |
| | — |
| | 39,184 |
|
| Performance fee compensation payable | 598,050 |
| | — |
| | — |
| | 598,050 |
| |
| Performance related compensation payable | | 822,084 |
| | — |
| | — |
| | 822,084 |
|
| Debt obligations | 305,784 |
| | — |
| | — |
| | 305,784 |
| 616,176 |
| | — |
| | — |
| | 616,176 |
|
| Liabilities of Consolidated Funds | | | |
| | |
| |
|
| | | |
| | |
| |
|
|
| Accounts payable, accrued expenses and other liabilities | — |
| | 21,056 |
| | — |
| | 21,056 |
| — |
| | 64,316 |
| | — |
| | 64,316 |
|
| Due to affiliates | — |
| | 10,599 |
| | (10,599 | ) | | — |
| — |
| | 11,285 |
| | (11,285 | ) | | — |
|
| Payable for securities purchased | — |
| | 208,742 |
| | — |
| | 208,742 |
| — |
| | 350,145 |
| | — |
| | 350,145 |
|
| CLO loan obligations, at fair value | — |
| | 3,064,862 |
| | (33,750 | ) | | 3,031,112 |
| — |
| | 4,974,110 |
| | (10,916 | ) | | 4,963,194 |
|
| Fund borrowings | — |
| | 55,070 |
| | — |
| | 55,070 |
| — |
| | 138,198 |
| | — |
| | 138,198 |
|
| Total liabilities | 1,136,865 |
|
| 3,360,329 |
|
| (44,744 | ) |
| 4,452,450 |
| 1,587,377 |
|
| 5,538,054 |
|
| (22,201 | ) |
| 7,103,230 |
|
| Commitments and contingencies |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
|
| Preferred equity (12,400,000 units issued and outstanding) | 298,761 |
| | — |
| | — |
| | 298,761 |
| |
| Preferred equity (12,400,000 shares issued and outstanding) | | 298,761 |
| | — |
| | — |
| | 298,761 |
|
| Non-controlling interest in Consolidated Funds | — |
| | 461,681 |
| | (123,646 | ) | | 338,035 |
| — |
| | 693,191 |
| | (164,703 | ) | | 528,488 |
|
| Non-controlling interest in Ares Operating Group entities | 447,615 |
| | — |
| | — |
| | 447,615 |
| 358,186 |
| | — |
| | — |
| | 358,186 |
|
| Controlling interest in Ares Management, L.P.: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Partners' capital (80,814,732 units issued and outstanding) | 301,790 |
| | — |
| | — |
| | 301,790 |
| |
| Shareholders' equity (82,280,033 shares issued and outstanding) | | 279,065 |
| | — |
| | — |
| | 279,065 |
|
| Accumulated other comprehensive loss, net of tax | (8,939 | ) | | — |
| | — |
| | (8,939 | ) | (4,208 | ) | | — |
| | — |
| | (4,208 | ) |
| Total controlling interest in Ares Management, L.P. | 292,851 |
| | — |
| | — |
| | 292,851 |
| 274,857 |
| | — |
| | — |
| | 274,857 |
|
| Total equity | 1,039,227 |
|
| 461,681 |
|
| (123,646 | ) |
| 1,377,262 |
| 931,804 |
|
| 693,191 |
|
| (164,703 | ) |
| 1,460,292 |
|
| Total liabilities and equity | $ | 2,176,092 |
|
| $ | 3,822,010 |
|
| $ | (168,390 | ) | | $ | 5,829,712 |
| $ | 2,519,181 |
|
| $ | 6,231,245 |
|
| $ | (186,904 | ) | | $ | 8,563,522 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | | For the Three Months Ended September 30, 2017 | For the Three Months Ended June 30, 2018 |
| | Consolidated
Company Entities | | Consolidated
Funds | | Eliminations | | Consolidated | Consolidated
Company Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Management fees (includes ARCC Part I Fees of $24,036) | $ | 188,628 |
| | $ | — |
| | $ | (5,451 | ) | | $ | 183,177 |
| |
| Performance fees | 88,379 |
| | — |
| | (1,371 | ) | | 87,008 |
| |
| Administrative and other fees | 13,486 |
| | — |
| | — |
| | 13,486 |
| |
| Management fees (includes ARCC Part I Fees of $29,866) | | $ | 202,304 |
| | $ | — |
| | $ | (8,272 | ) | | $ | 194,032 |
|
| Carried interest allocation | | (13,444 | ) | |
|
| | — |
| | (13,444 | ) |
| Incentive fees | | 11,740 |
| |
|
| | (4,000 | ) | | 7,740 |
|
| Principal investment income | | 14,722 |
| | — |
| | (12,851 | ) | | 1,871 |
|
| Administrative, transaction and other fees | | 13,964 |
| | — |
| | — |
| | 13,964 |
|
| Total revenues | 290,493 |
|
| — |
|
| (6,822 | ) |
| 283,671 |
| 229,286 |
|
| — |
|
| (25,123 | ) |
| 204,163 |
|
| Expenses | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Compensation and benefits | 129,347 |
| | — |
| | — |
| | 129,347 |
| 138,992 |
| | — |
| | — |
| | 138,992 |
|
| Performance fee compensation | 58,637 |
| | — |
| | — |
| | 58,637 |
| |
| Performance related compensation | | (13,005 | ) | | — |
| | — |
| | (13,005 | ) |
| General, administrative and other expense | 47,104 |
| | — |
| | — |
| | 47,104 |
| 59,918 |
| | — |
| | — |
| | 59,918 |
|
| Expenses of the Consolidated Funds | — |
| | 25,862 |
| | (6,823 | ) | | 19,039 |
| — |
| | 47,382 |
| | (12,270 | ) | | 35,112 |
|
| Total expenses | 235,088 |
|
| 25,862 |
|
| (6,823 | ) |
| 254,127 |
| 185,905 |
|
| 47,382 |
|
| (12,270 | ) |
| 221,017 |
|
| Other income (expense) | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Investment income and net interest expense (includes interest expense of $5,343) | (1,606 | ) | | — |
| | (225 | ) | | (1,831 | ) | |
| Net realized and unrealized gain on investments | | 4,438 |
| | — |
| | (1,171 | ) | | 3,267 |
|
| Interest and dividend income | | 2,356 |
| | — |
| | — |
| | 2,356 |
|
| Interest expense | | (6,076 | ) | | — |
| | — |
| | (6,076 | ) |
| Other expense, net | (2,492 | ) | | — |
| | — |
| | (2,492 | ) | (2,978 | ) | | — |
| | 991 |
| | (1,987 | ) |
| Net realized and unrealized gain on investments | 17,724 |
| | — |
| | (10,515 | ) | | 7,209 |
| |
| Investment income and net interest income of the Consolidated Funds (includes interest expense of $28,127) | — |
| | 7,169 |
| | 12,885 |
| | 20,054 |
| |
| Net realized and unrealized gain on investments of the Consolidated Funds | — |
| | 48,058 |
| | (12,118 | ) | | 35,940 |
| — |
| | 33,819 |
| | 668 |
| | 34,487 |
|
| Total other income | 13,626 |
|
| 55,227 |
|
| (9,973 | ) |
| 58,880 |
| |
| Interest and other income of the Consolidated Funds | | — |
| | 92,633 |
| | — |
| | 92,633 |
|
| Interest expense of the Consolidated Funds | | — |
| | (57,259 | ) | | 505 |
| | (56,754 | ) |
| Total other income (expense) | | (2,260 | ) |
| 69,193 |
|
| 993 |
|
| 67,926 |
|
| Income before taxes | 69,031 |
|
| 29,365 |
|
| (9,972 | ) |
| 88,424 |
| 41,121 |
|
| 21,811 |
|
| (11,860 | ) |
| 51,072 |
|
| Income tax expense | 3,354 |
| | 1,198 |
| | — |
| | 4,552 |
| 36,834 |
| | 69 |
| | — |
| | 36,903 |
|
| Net income | 65,677 |
|
| 28,167 |
|
| (9,972 | ) |
| 83,872 |
| 4,287 |
|
| 21,742 |
|
| (11,860 | ) |
| 14,169 |
|
| Less: Net income attributable to non-controlling interests in Consolidated Funds | — |
| | 28,167 |
| | (9,972 | ) | | 18,195 |
| — |
| | 21,742 |
| | (11,860 | ) | | 9,882 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | 37,839 |
| | — |
| | — |
| | 37,839 |
| 16,062 |
| | — |
| | — |
| | 16,062 |
|
| Net income attributable to Ares Management, L.P. | 27,838 |
|
| — |
|
| — |
|
| 27,838 |
| |
| Less: Preferred equity distributions paid | 5,425 |
| | — |
| | — |
| | 5,425 |
| |
| Net income attributable to Ares Management, L.P. common unitholders | $ | 22,413 |
|
| $ | — |
|
| $ | — |
|
| $ | 22,413 |
| |
| Net loss attributable to Ares Management, L.P. | | (11,775 | ) |
| — |
|
| — |
|
| (11,775 | ) |
| Less: Preferred equity dividend paid | | 5,425 |
| | — |
| | — |
| | 5,425 |
|
| Net loss attributable to Ares Management, L.P. common shareholders | | $ | (17,200 | ) |
| $ | — |
|
| $ | — |
|
| $ | (17,200 | ) |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2016 |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
|
| Management fees (includes ARCC Part I Fees of $33,260) | $ | 168,796 |
| | $ | — |
| | $ | (5,187 | ) | | $ | 163,609 |
|
| Performance fees | 165,281 |
| | — |
| | (799 | ) | | 164,482 |
|
| Administrative and other fees | 7,369 |
| | — |
| | — |
| | 7,369 |
|
| Total revenues | 341,446 |
|
| — |
|
| (5,986 | ) |
| 335,460 |
|
| Expenses | |
| | |
| | |
| | |
| Compensation and benefits | 111,916 |
| | — |
| | — |
| | 111,916 |
|
| Performance fee compensation | 123,173 |
| | — |
| | — |
| | 123,173 |
|
| General, administrative and other expense | 38,197 |
| | — |
| | — |
| | 38,197 |
|
| Expenses of the Consolidated Funds | — |
| | 16,068 |
| | (5,980 | ) | | 10,088 |
|
| Total expenses | 273,286 |
|
| 16,068 |
|
| (5,980 | ) |
| 283,374 |
|
| Other income (expense) | |
| | |
| | |
| | |
| Investment income and net interest expense (includes interest expense of $4,136) | (675 | ) | | — |
| | (1,006 | ) | | (1,681 | ) |
| Other income, net | 23,042 |
| | — |
| | — |
| | 23,042 |
|
| Net realized and unrealized gain on investments | 26,340 |
| | — |
| | (6,982 | ) | | 19,358 |
|
| Investment income and net interest income of the Consolidated Funds (includes interest expense of $26,413) | — |
| | 6,525 |
| | 2,212 |
| | 8,737 |
|
| Net realized and unrealized gain on investments of the Consolidated Funds | — |
| | 23,656 |
| | 227 |
| | 23,883 |
|
| Total other income | 48,707 |
| | 30,181 |
| | (5,549 | ) | | 73,339 |
|
| Income before taxes | 116,867 |
|
| 14,113 |
|
| (5,555 | ) |
| 125,425 |
|
| Income tax expense | 6,944 |
| | 697 |
| | — |
| | 7,641 |
|
| Net income | 109,923 |
| | 13,416 |
| | (5,555 | ) | | 117,784 |
|
| Less: Net income attributable to non-controlling interests in Consolidated Funds | — |
| | 13,416 |
| | (5,555 | ) | | 7,861 |
|
| Less: Net income attributable to redeemable interests in Ares Operating Group entities | 107 |
| | — |
| | — |
| | 107 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | 66,511 |
| | — |
| | — |
| | 66,511 |
|
| Net income attributable to Ares Management, L.P. | 43,305 |
|
| — |
|
| — |
|
| 43,305 |
|
| Less: Preferred equity distributions paid | 6,751 |
| | — |
| | — |
| | 6,751 |
|
| Net income attributable to Ares Management, L.P. common unitholders | $ | 36,554 |
|
| $ | — |
|
| $ | — |
|
| $ | 36,554 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, 2017 |
| | As adjusted |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
|
| Management fees (includes ARCC Part I Fees of $19,143) | $ | 185,560 |
| | $ | — |
| | $ | (4,792 | ) | | $ | 180,768 |
|
| Carried interest allocation | 333,814 |
| | — |
| | (6 | ) | | 333,808 |
|
| Incentive fees | 3,728 |
| | — |
| | 488 |
| | 4,216 |
|
| Principal investment income | 34,166 |
| | — |
| | 4,141 |
| | 38,307 |
|
| Administrative, transaction and other fees | 15,098 |
| | — |
| | — |
| | 15,098 |
|
| Total revenues | 572,366 |
|
| — |
|
| (169 | ) |
| 572,197 |
|
| Expenses | |
| | |
| | |
| | |
| Compensation and benefits | 131,219 |
| | — |
| | — |
| | 131,219 |
|
| Performance related compensation | 261,705 |
| | — |
| | — |
| | 261,705 |
|
| General, administrative and other expense | 50,751 |
| | — |
| | — |
| | 50,751 |
|
| Expenses of the Consolidated Funds | — |
| | 8,825 |
| | (4,303 | ) | | 4,522 |
|
| Total expenses | 443,675 |
|
| 8,825 |
|
| (4,303 | ) |
| 448,197 |
|
| Other income (expense) | |
| | |
| | |
| | |
| Net realized and unrealized loss on investments | (5,044 | ) | | — |
| | (1,544 | ) | | (6,588 | ) |
| Interest and dividend income | 2,216 |
| | — |
| | (754 | ) | | 1,462 |
|
| Interest expense | (5,354 | ) | | — |
| | — |
| | (5,354 | ) |
| Other income, net | 2,822 |
| | — |
| | — |
| | 2,822 |
|
| Net realized and unrealized gain on investments of the Consolidated Funds | — |
| | 953 |
| | (13,666 | ) | | (12,713 | ) |
| Interest and other income of the Consolidated Funds | — |
| | 38,326 |
| | — |
| | 38,326 |
|
| Interest expense of Consolidated Funds | — |
| | (42,429 | ) | | 15,554 |
| | (26,875 | ) |
| Total other expense | (5,360 | ) | | (3,150 | ) | | (410 | ) | | (8,920 | ) |
| Income (loss) before taxes | 123,331 |
|
| (11,975 | ) |
| 3,724 |
|
| 115,080 |
|
| Income tax expense | 857 |
| | 396 |
| | — |
| | 1,253 |
|
| Net income (loss) | 122,474 |
| | (12,371 | ) | | 3,724 |
| | 113,827 |
|
| Less: Net loss attributable to non-controlling interests in Consolidated Funds | — |
| | (12,371 | ) | | 3,724 |
| | (8,647 | ) |
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | 72,596 |
| | — |
| | — |
| | 72,596 |
|
| Net income attributable to Ares Management, L.P. | 49,878 |
|
| — |
|
| — |
|
| 49,878 |
|
| Less: Preferred equity dividend paid | 5,425 |
| | — |
| | — |
| | 5,425 |
|
| Net income attributable to Ares Management, L.P. common shareholders | $ | 44,453 |
|
| $ | — |
|
| $ | — |
|
| $ | 44,453 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
|
| | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2017 |
| | Consolidated
Company Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
|
| Management fees (includes ARCC Part I Fees of $76,436) | $ | 550,969 |
| | $ | — |
| | $ | (14,979 | ) | | $ | 535,990 |
|
| Performance fees | 483,963 |
| | — |
| | (3,759 | ) | | 480,204 |
|
| Administrative and other fees | 43,024 |
| | — |
| | — |
| | 43,024 |
|
| Total revenues | 1,077,956 |
|
| — |
|
| (18,738 | ) |
| 1,059,218 |
|
| Expenses | |
| | |
| | |
| | |
| Compensation and benefits | 384,905 |
| | — |
| | — |
| | 384,905 |
|
| Performance fee compensation | 361,044 |
| | — |
| | — |
| | 361,044 |
|
| General, administrative and other expense | 145,193 |
| | — |
| | — |
| | 145,193 |
|
| Transaction support expense | 275,177 |
| | — |
| | — |
| | 275,177 |
|
| Expenses of the Consolidated Funds | — |
| | 45,196 |
| | (17,724 | ) | | 27,472 |
|
| Total expenses | 1,166,319 |
|
| 45,196 |
|
| (17,724 | ) |
| 1,193,791 |
|
| Other income (expense) | |
| | |
| | |
| | |
| Investment income and net interest expense (includes interest expense of $15,576) | (4,064 | ) | | — |
| | (2,154 | ) | | (6,218 | ) |
| Other income, net | 16,826 |
| | — |
| | — |
| | 16,826 |
|
| Net realized and unrealized gain on investments | 61,052 |
| | — |
| | (21,109 | ) | | 39,943 |
|
| Investment income and net interest income of the Consolidated Funds (includes interest expense of $86,324) | — |
| | 11,072 |
| | 30,603 |
| | 41,675 |
|
| Net realized and unrealized gain on investments of the Consolidated Funds | — |
| | 79,450 |
| | (24,187 | ) | | 55,263 |
|
| Total other income | 73,814 |
|
| 90,522 |
|
| (16,847 | ) |
| 147,489 |
|
| Income (loss) before taxes | (14,549 | ) |
| 45,326 |
|
| (17,861 | ) |
| 12,916 |
|
| Income tax expense (benefit) | (30,521 | ) | | 2,062 |
| | — |
| | (28,459 | ) |
| Net income | 15,972 |
|
| 43,264 |
|
| (17,861 | ) |
| 41,375 |
|
| Less: Net income attributable to non-controlling interests in Consolidated Funds | — |
| | 43,264 |
| | (17,861 | ) | | 25,403 |
|
| Less: Net loss attributable to non-controlling interests in Ares Operating Group entities | (20,610 | ) | | — |
| | — |
| | (20,610 | ) |
| Net income attributable to Ares Management, L.P. | 36,582 |
|
| — |
|
| — |
|
| 36,582 |
|
| Less: Preferred equity distributions paid | 16,275 |
| | — |
| | — |
| | 16,275 |
|
| Net income attributable to Ares Management, L.P. common unitholders | $ | 20,307 |
|
| $ | — |
|
| $ | — |
|
| $ | 20,307 |
|
|
| | | | | | | | | | | | | | | |
| | For the Six Months Ended June 30, 2018 |
| | Consolidated
Company Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
|
| Management fees (includes ARCC Part I Fees of $58,283) | $ | 399,130 |
| | $ | — |
| | $ | (15,583 | ) | | $ | 383,547 |
|
| Carried interest allocation | 40,685 |
| | — |
| | — |
| | 40,685 |
|
| Incentive fees | 16,811 |
| | — |
| | (4,000 | ) | | 12,811 |
|
| Principal investment income | 17,430 |
| | — |
| | (10,650 | ) | | 6,780 |
|
| Administrative, transaction and other fees | 26,429 |
| | — |
| | — |
| | 26,429 |
|
| Total revenues | 500,485 |
|
| — |
|
| (30,233 | ) |
| 470,252 |
|
| Expenses | |
| | |
| | |
| | |
| Compensation and benefits | 273,631 |
| | — |
| | — |
| | 273,631 |
|
| Performance related compensation | 12,873 |
| | — |
| | — |
| | 12,873 |
|
| General, administrative and other expense | 104,368 |
| | — |
| | — |
| | 104,368 |
|
| Expenses of the Consolidated Funds | — |
| | 56,011 |
| | (19,583 | ) | | 36,428 |
|
| Total expenses | 390,872 |
|
| 56,011 |
|
| (19,583 | ) |
| 427,300 |
|
| Other income (expense) | |
| | |
| | |
| | |
| Net realized and unrealized gain on investments | 3,260 |
| | — |
| | (832 | ) | | 2,428 |
|
| Interest and dividend income | 5,703 |
| | — |
| | — |
| | 5,703 |
|
| Interest expense | (12,945 | ) | | — |
| | — |
| | (12,945 | ) |
| Other expense, net | (2,831 | ) | | — |
| | 533 |
| | (2,298 | ) |
| Net realized and unrealized gain on investments of the Consolidated Funds | — |
| | 21,367 |
| | 35 |
| | 21,402 |
|
| Interest and other income of the Consolidated Funds | — |
| | 157,055 |
| | — |
| | 157,055 |
|
| Interest expense of consolidated Funds | — |
| | (101,977 | ) | | 798 |
| | (101,179 | ) |
| Total other income (expense) | (6,813 | ) |
| 76,445 |
|
| 534 |
|
| 70,166 |
|
| Income before taxes | 102,800 |
|
| 20,434 |
|
| (10,116 | ) |
| 113,118 |
|
| Income tax expense | 24,459 |
| | 69 |
| | — |
| | 24,528 |
|
| Net income | 78,341 |
|
| 20,365 |
|
| (10,116 | ) |
| 88,590 |
|
| Less: Net income attributable to non-controlling interests in Consolidated Funds | — |
| | 20,365 |
| | (10,116 | ) | | 10,249 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | 49,168 |
| | — |
| | — |
| | 49,168 |
|
| Net income attributable to Ares Management, L.P. | 29,173 |
|
| — |
|
| — |
|
| 29,173 |
|
| Less: Preferred equity dividend paid | 10,850 |
| | — |
| | — |
| | 10,850 |
|
| Net income attributable to Ares Management, L.P. common shareholders | $ | 18,323 |
|
| $ | — |
|
| $ | — |
|
| $ | 18,323 |
|
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | | | | | | | | | For the Six Months Ended June 30, 2017 |
| | For the Nine Months Ended September 30, 2016 | As Adjusted |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Management fees (includes ARCC Part I Fees of $90,884) | $ | 494,076 |
| | $ | — |
| | $ | (13,513 | ) | | $ | 480,563 |
| |
| Performance fees | 337,612 |
| | — |
| | 74 |
| | 337,686 |
| |
| Administrative and other fees | 22,761 |
| | — |
| | — |
| | 22,761 |
| |
| Management fees (includes ARCC Part I Fees of $52,400) | | $ | 362,341 |
| | $ | — |
| | $ | (9,528 | ) | | $ | 352,813 |
|
| Carried interest allocation | | 386,829 |
| | — |
| | (1,014 | ) | | 385,815 |
|
| Incentive fees | | 8,755 |
| | — |
| | (1,374 | ) | | 7,381 |
|
| Principal investment income | | 47,335 |
| | — |
| | (6,441 | ) | | 40,894 |
|
| Administrative, transaction and other fees | | 29,538 |
| | — |
| | — |
| | 29,538 |
|
| Total revenues | 854,449 |
| | — |
| | (13,439 | ) | | 841,010 |
| 834,798 |
| | — |
| | (18,357 | ) | | 816,441 |
|
| Expenses | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Compensation and benefits | 335,249 |
| | — |
| | — |
| | 335,249 |
| 255,558 |
| | — |
| | — |
| | 255,558 |
|
| Performance fee compensation | 253,739 |
| | — |
| | — |
| | 253,739 |
| |
| Performance related compensation | | 302,407 |
| | — |
| | — |
| | 302,407 |
|
| General, administrative and other expense | 116,845 |
| | — |
| | — |
| | 116,845 |
| 98,089 |
| | — |
| | — |
| | 98,089 |
|
| Transaction support expense | | 275,177 |
| | — |
| | — |
| | 275,177 |
|
| Expenses of the Consolidated Funds | — |
| | 27,334 |
| | (16,320 | ) | | 11,014 |
| — |
| | 19,334 |
| | (10,901 | ) | | 8,433 |
|
| Total expenses | 705,833 |
| | 27,334 |
| | (16,320 | ) | | 716,847 |
| 931,231 |
| | 19,334 |
| | (10,901 | ) | | 939,664 |
|
| Other income (expense) | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Investment income and net interest income (expense) (includes interest expense of $13,819) | 3,177 |
| | — |
| | (3,224 | ) | | (47 | ) | |
| Net realized and unrealized loss on investments | | (1,291 | ) | | — |
| | (4,409 | ) | | (5,700 | ) |
| Interest and dividend income | | 5,059 |
| | — |
| | (1,673 | ) | | 3,386 |
|
| Interest expense | | (10,233 | ) | | — |
| | — |
| | (10,233 | ) |
| Other income, net | 33,956 |
| | — |
| | — |
| | 33,956 |
| 19,318 |
| | — |
| | — |
| | 19,318 |
|
| Net realized and unrealized gain on investments | 17,491 |
| | — |
| | 3,858 |
| | 21,349 |
| |
| Investment income and net interest income of the Consolidated Funds (includes interest expense of $67,469) | — |
| | 20,133 |
| | 5,626 |
| | 25,759 |
| |
| Net realized and unrealized loss on investments of the Consolidated Funds | — |
| | (5,588 | ) | | (135 | ) | | (5,723 | ) | |
| Net realized and unrealized gain on investments of the Consolidated Funds | | — |
| | 31,392 |
| | (12,069 | ) | | 19,323 |
|
| Interest and other income of the Consolidated Funds | | — |
| | 79,818 |
| | — |
| | 79,818 |
|
| Interest expense of Consolidated Funds | | — |
| | (75,915 | ) | | 17,718 |
| | (58,197 | ) |
| Total other income | 54,624 |
| | 14,545 |
| | 6,125 |
| | 75,294 |
| 12,853 |
| | 35,295 |
| | (433 | ) | | 47,715 |
|
| Income (loss) before taxes | 203,240 |
| | (12,789 | ) | | 9,006 |
| | 199,457 |
| (83,580 | ) | | 15,961 |
| | (7,889 | ) | | (75,508 | ) |
| Income tax expense (benefit) | 8,587 |
| | (719 | ) | | — |
| | 7,868 |
| (33,875 | ) | | 864 |
| | — |
| | (33,011 | ) |
| Net income (loss) | 194,653 |
| | (12,070 | ) | | 9,006 |
| | 191,589 |
| (49,705 | ) | | 15,097 |
| | (7,889 | ) | | (42,497 | ) |
| Less: Net loss attributable to non-controlling interests in Consolidated Funds | — |
| | (12,070 | ) | | 9,006 |
| | (3,064 | ) | |
| Less: Net income attributable to redeemable interests in Ares Operating Group entities | 456 |
| | — |
| | — |
| | 456 |
| |
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | 116,404 |
| | — |
| | — |
| | 116,404 |
| |
| Less: Net income attributable to non-controlling interests in Consolidated Funds | | — |
| | 15,097 |
| | (7,889 | ) | | 7,208 |
|
| Less: Net loss attributable to non-controlling interests in Ares Operating Group entities | | (58,449 | ) | | — |
| | — |
| | (58,449 | ) |
| Net income attributable to Ares Management, L.P. | 77,793 |
| | — |
| | — |
| | 77,793 |
| 8,744 |
| | — |
| | — |
| | 8,744 |
|
| Less: Preferred equity distributions paid | 6,751 |
| | — |
| | — |
| | 6,751 |
| |
| Net income attributable to Ares Management, L.P. common unitholders | $ | 71,042 |
|
| $ | — |
|
| $ | — |
|
| $ | 71,042 |
| |
| Less: Preferred equity dividend paid | | 10,850 |
| | — |
| | — |
| | 10,850 |
|
| Net loss attributable to Ares Management, L.P. common shareholders | | $ | (2,106 | ) |
| $ | — |
|
| $ | — |
|
| $ | (2,106 | ) |
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
16. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred after SeptemberJune 30, 20172018 through the date the condensed consolidated financial statements were issued. During this period the Company had the following material subsequent events that require disclosure:
In November 2017,July 2018, the board of directors of the Company's general partner declared a quarterly distributiondividend of $0.41$0.28 per common unitshare to common unitholdersshareholders of record at the close of business on November 17, 2017,September 14, 2018, with a payment date of December 1, 2017.September 28, 2018.
In November 2017,July 2018, the board of directors of the Company's general partner declared a quarterly distributiondividend of $0.4375 per preferred equity unitshare to preferred equity unitholdersshareholders of record at the close of business on DecemberSeptember 15, 2017,2018, with a payment date of December 31, 2017.September 30, 2018.
In July 2018, the board of directors of the Company's general partner authorized the repurchase, from time to time in open market purchases, privately negotiated transactions or otherwise, of the Company's Preferred Equity with an aggregate liquidation preference of up to $50.0 million. Such purchases, if any, will depend on the prevailing market conditions and other factors.
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Ares Management, L.P. is a Delaware limited partnershiptreated as a corporation for U.S. federal income tax purposes, formed on November 15, 2013. Unless the context otherwise requires, references to “we,” “us,” “our,” “the Partnership” and “the Company” are intended to mean the business and operations of Ares Management, L.P. and its consolidated subsidiaries. The following discussion analyzes the financial condition and results of operations of the Partnership. “Consolidated Funds” refers collectively to certain Ares‑affiliated funds, related co‑ investment entities and certain CLOs 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 and the related notes included in this Quarterly Report on Form 10‑Q and the audited consolidated financial statements and the related notes included in the 20162017 Annual Report on Form 10-K of Ares Management, L.P.
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.
Our Business
We are a leading global alternative asset manager that operates through three distinct but complementary investment groups, which are our reportable segments. Our reportable segments are Credit Group, Private Equity Group and Real Estate Group. For a detailed description of our reportable segments, see Note 14, "Segment“Segment Reporting,"” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. During the ninesix months ended SeptemberJune 30, 2017,2018, we reclassified certain expenses from OMG to our operating segments. Historical results have been modified to conform to the current period presentation.
The focus of our business model is to provide our investment management capabilities through various funds and products that meet the needs of a wide range of institutional and retail investors. Our revenues primarily consist primarily of management fees, and performancecarried interest allocation, incentive fees, as well as principal investment income and administrative expense reimbursements.reimbursements and transaction fees. Management fees are generally based on a defined percentage of average fair value of assets, total commitments, invested capital, net asset value, net investment income or par value of the investment portfolios we manage. PerformanceCarried interest allocation and incentive fees are based on certain specific hurdle rates as defined in the funds' applicable investment management or partnership agreementsagreements. Carried interest allocation and represent either an incentive fee or carried interest.fees are collectively referred to as performance income in our segment results and non-GAAP measures. Principal investment income consists of interest and dividend income and net realized and unrealized gain (loss) from the equity method investments that we manage. Other income (expense) typically represents the investment income, realized gains (losses) and unrealized appreciation (depreciation) resulting from theequity method investments that we do not mange, investments in collateralized loan obligations and common stock as well as investments of the Company and the Consolidated Funds, as well as interest expense.Funds. Interest expense is also included within other income (expense). We provide administrative services to certain of our affiliated funds that are presented within administrative, transaction and other fees for GAAP reporting, but are presented net of respective expenses for segment reporting purposes. We also receive transaction fees from certain affiliated funds for activities related to fund transactions, such as loan originations. In accordance with GAAP, we are required to consolidate those funds in which we hold a significant economic interest and substantive control rights. However, for segment reporting purposes, we present revenues and expenses on a combined segment basis, which shows the results of our reportable segments without giving effect to the consolidation of the funds. Accordingly, our segment revenues consist of management fees, other income, realized and unrealized performance fees,income, and net investment income. Our segment expenses consist of compensation and benefits, net of administrative fees, general, administrative and other expenses, net of administrative fees, as well as realized and unrealized performance feerelated compensation.
Trends Affecting Our Business
We believe that our disciplined investment philosophy across our three distinct but complementary investment groups contributes to the stability of our firm’s performance throughout market cycles. Additionally, approximately 75%71% of our assets under management were in funds with a contractual life of three years or more and approximately 49%44% were in funds with a contractual life of seven years or more. As of SeptemberJune 30, 2017,2018, our funds have a stable base of committed capital enabling us to invest in assets with a long termlong-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, including conditions in the global financial markets and the economic and political environments, particularly in the United States and Western Europe.
Credit
U.S. credit markets continued to advance throughwere strong in the thirdsecond quarter of 20172018 as a strong fundamental backdrop offset volatility from global trade concerns. The U.S. economy remained fundamentally sound with indicators signaling continued economic expansion and strengthening of the labor market. The Institute for Supply Management PMI increased in the facequarter with June’s reading of various headwinds as healthy corporate fundamentals, fiscal policy optimism and benign macroeconomic volatility supported investor sentiment. Despite elevated concerns around shifting monetary policy, ongoing geopolitical tensions and60.2 marking the impact of Hurricanes Harvey and Irma, capital markets
were resilient and credit spreads tightened22nd consecutive month the index increased at an accelerating rate. The unemployment rate remained low throughout the quarter. As a result,quarter with May’s reading of 3.8% being the high yield market experienced solid returns of 2.04% as measuredlowest level reported since April 2000. Strong indicators on the growth and labor fronts have factored into GDP growth expectations with the New York Federal Reserve Bank predicting the economy will accelerate beyond the 2.2% reported by the BofA Merrill Lynch U.S.Bureau of Economic Analysis for the first quarter of 2018. Corporate earnings contributed to the strong fundamental backdrop as well with S&P 500 companies reporting earnings growth of 24.8% per data released by FactSet. CSLLI, a leveraged loan index, returned 0.78% while ICE BAML High Yield Master II Index, ("H0A0")a high yield bonds index, returned 1.0% for the thirdsecond quarter of 2018. While strong returns were curtailed from intra-quarter peaks as sentiment regarding global trade policy and varying technical factors, an influx of acquisition-related issuance for leveraged loans and interest rate volatility for high yield bonds momentarily weighed on asset prices.
European credit markets diverged from their U.S. counterparts in the second quarter of 2018 as a mixed macroeconomic backdrop, global trade policy and geopolitical developments weighed on investor sentiment in the region. While investors were hopeful that momentum from 2017 with commodity related sectors delivering outsized returns amid rebounding oil prices. Leveraged loans continuedwould continue, growth estimates for 2018 were reduced from 2.4% to benefit from robust CLO formation,2.1% by the overwhelming driver of loan demandEuropean Central Bank (“ECB”) in June. Inflation trends in the region were strong, albeit volatile, during the quarter and as a result,decline in April was followed by increases in May and June, culminating with the ECB’s 2% target being reached at quarter-end. Regarding trade policy, tariffs imposed by the U.S. on European steel and aluminum concerned capital market participants as large industries such as the German auto sector, which comprises 14% of Germany’s DAX benchmark index, could be impacted. Political instability persisted in the region as well and was a contributor to the ECB’s reduced growth expectations as developments in Italy and Spain were met with negative sentiment by capital market participants. For the quarter, Credit Suisse Western European Leveraged Loan Index ("CSLLI") returned 1.06%and ICE BAML European Currency High Yield Index had negative returns of 0.07%, and 1.03%, respectively. While negative, business confidence in the region remains positive and trends in the labor market, the May unemployment rate of 8.5% was the lowest level in the Eurozone since December 2008, suggest recent headwinds for the third quarter of 2017. Against a backdrop of improving corporate earnings and increasing hopes for tax reform, equities (measured byregion may not persist.
In the U.S., the S&P 500 Index) reached record highsIndex increased by 3.4% in September 2017 and returned 4.48% for the quarter, marking the eighth consecutivesecond quarter of gains for2018, following a decrease of 0.8% in the index.
Additionally, Europeanfirst quarter of 2018. Overall performance still remains strong with a total return of 2.7% in the first half of 2018 and 14.4% over the last twelve months. Outside the U.S., global equity markets showed notable stabilitydeclined during the thirdsecond quarter of 2017 as improving growth prospects and employment data in2018 with the region seemedMSCI All Country World ex USA Index decreased 2.6% bringing its year to offset geopolitical and monetary policy concerns.date decline to 3.8%.
For our businesses, theseThese markets and economies have created opportunities, particularly for the Credit Group’s direct lending and liquid alternative credit strategies, which utilize flexible investment mandates to manage portfolios through market cycles. As market conditions shift and default risk and interest rate risk come under greater focus, having the ability to move up and down the capital structure enables the Credit Group to reduce risk and enhance returns. Similarly, given our broad capabilities in leveraged loans, such flexibility enables our Credit Group to reduce sensitivities to changing interest rates by increasing allocations to floating rate leveraged loans. On a market value basis, approximately 76%78% of the debt assets within our Credit Group are floating rate instruments, which we believe helps mitigate volatility associated with changes in the treasury curve.interest rates.
Notwithstanding the potential opportunities represented by market volatility, future earnings, cash flows, dividend payments and distributions are affected by a range of factors, including realizations of our funds’ investments, which are subject to significant fluctuations from period to period.
See "Item 1A. Risk Factors"Change in Our Tax Status Election
Effective March 1, 2018, we filed an election with the Internal Revenue Service (“IRS”) to be treated as a corporation for U.S. federal income tax purposes (collectively, the “Tax Election”). Although we are treated as a corporation for U.S. federal income tax purposes, we remain a limited partnership under state law. In connection with the Tax Election, we amended and restated our Annual Reportpartnership agreement to, among other things, reflect our new tax classification and change the name of our common units and preferred units to common shares and preferred shares, respectively. The terms of such common shares and preferred shares, and the associated rights, otherwise remain unchanged.
Asset managers structured as pass-through entities for income tax purposes have historically traded at substantial discounts to asset managers taxed as corporations. Further, we believe that our pass-through tax structure has historically limited our investor universe due to complexities related to this structure. The Tax Election is intended to simplify our tax structure and expand our eligible investor universe and, in turn, enhance our liquidity and trading volume, which may, among other things, provide us with a more liquid and attractive currency for potential strategic transactions to further long-term growth. Moreover, we historically have paid corporate level taxes on Form 10-K forour fee related earnings, which has averaged over 80% of total fee income since our initial
public offering. This fact, combined with a reduction in the year ended December 31, 2016 and Item 1A. herein, for a discussionstatutory federal corporate tax rate from 35% to 21%, also presented compelling reasons to make the Tax Election. The impact of the risksTax Election on our reported results is limited to increased tax expense on performance related earnings, which our businesses are subject.
ARCCwas previously classified as pass-through income. Taxes on performance related earnings consist of current taxes on realized performance income and American Capital, Ltd. Merger Agreement
On January 3, 2017, ARCC completed its acquisition of American Capital, Ltd. ("ACAS") pursuant to a definitive merger agreement entered intodeferred taxes on unrealized performance related earnings that may change in May 2016 (the "ARCC-ACAS Transaction"). To support the ARCC-ACAS Transaction, we, through our subsidiary Ares Capital Management LLC, which serves as the investment adviser to ARCC, provided $275.2 million of cash consideration to ACAS shareholders upon the closing of the ARCC-ACAS Transaction in accordance with the terms and conditions of the merger agreement. In addition, we agreed to waive up to $10 million per quarter of ARCC's Part I Fees for ten calendar quarters, which began in the second quarter of 2017. We received a favorable private letter ruling from the IRS in the second quarter of 2017 which supports the full deductibility of the $275.2 million support payment in the 2017 tax year.subsequent periods until such income is realized.
Consolidation and Deconsolidation of Ares Funds
Pursuant to GAAP, we consolidate the Consolidated Funds into our financial results as presented in this Quarterly Report on Form 10‑Q. These funds represented approximately 6.0%6.9% of our AUM as of SeptemberJune 30, 2017, 2.7%2018, 3.9% of our management fees and 0.8%7.0% of our performance feesincome for the ninesix months ended SeptemberJune 30, 2017.2018. As of SeptemberJune 30, 2017,2018, we consolidated nine12 CLOs and 11nine private funds, and as of SeptemberJune 30, 2016,2017, we consolidated sixseven CLOs and nine private funds. Four of the CLOs as of September 30, 2017 were consolidated through risk retention vehicles.
The consolidation of these funds significantly impacted interest and other income of Consolidated Funds, interest and other expenses of Consolidated Funds, net investment gains (losses) of Consolidated Funds and non-controlling interests in Consolidated Funds, among others, for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. Further, the consolidation of these funds may impact our management fees, incentive fees and performance feescarried interest allocation reported under GAAP to the extent these fees are eliminated upon consolidation. For the actual impact that consolidation had on our results, see the Consolidating Schedules within Note 15, “Consolidation”, to our condensed consolidated financial statements included herein.
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 direct net effect on theour attributed net income attributable to us.income. 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 condensed consolidated financial statements.
We generally deconsolidate funds we advise and CLOs when we are no longer deemed to have a controlling interest in the entity. During the ninesix months ended SeptemberJune 30, 2017, there was2018, one entity was liquidated/dissolved, and no non-VIEs experienced a significant change in ownership or control that resulted in deconsolidation 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.
Managing Business Performance
Non‑GAAP Financial Measures
We use the following non-GAAP measures to assess and track our performance:
Economic Net Income (ENI)
Fee Related Earnings (FRE)
Performance Related Earnings (PRE)
Distributable Earnings (DE)
Realized Income (RI)
The specific components and calculations of these non‑GAAP measures are discussed in greater detail in Note 14, "Segment“Segment Reporting,"” to our condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q. These non‑GAAP financial measures supplement, and should be considered in addition to and not in lieu of, the results of operations, presented and discussed further under “Results of Operations—Consolidated Results of Operations",Operations,” which are prepared in accordance with GAAP. For a reconciliation of these measures to the most comparable measure in accordance with GAAP, see Note 14, “Segment Reporting,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q.
Operating Metrics
We monitor certain operating metrics that are common to the alternative asset management industry, which are discussed below.
Assets Under Management
Assets under managementAUM refers to the assets we manage. We view AUM as a metric to measure our investment and fundraising performance as it generally reflects assets generally at fair value plus available uncalled capital. For our funds other than CLOs, our AUM equals the sum of the following:
net asset value (“NAV”) of such funds;
the drawn and undrawn debt (at the fund‑level including amounts subject to restrictions); and
uncalled committed capital (including commitments to funds that have yet to commence their investment periods).
NAV refers to the fair value of all the assets of a fund less the fair value of all liabilities of the fund.
For funds that are CLOs, our AUM is equal to subordinated notes (equity) plus all drawn and undrawn debt tranches.
The tables below provide the period-to-period rollforwards of our total AUM by segment for the three months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 6/30/2017 | $ | 67,447 |
| | $ | 25,770 |
| | $ | 10,792 |
| | $ | 104,009 |
| |
| Balance at 3/31/2018 | | $ | 77,310 |
| | $ | 24,303 |
| | $ | 10,896 |
| | $ | 112,509 |
|
| Net new par/equity commitments | 2,624 |
| | — |
| | 246 |
| | 2,870 |
| 9,359 |
| | 350 |
| | 307 |
| | 10,016 |
|
| Net new debt commitments | 2,603 |
| | — |
| | — |
| | 2,603 |
| 1,990 |
| | — |
| | — |
| | 1,990 |
|
| Distributions | (3,312 | ) | | (1,373 | ) | | (642 | ) | | (5,327 | ) | (1,800 | ) | | (1,039 | ) | | (240 | ) | | (3,079 | ) |
| Change in fund value | 1,115 |
| | 178 |
| | 197 |
| | 1,490 |
| (1 | ) | | (12 | ) | | (53 | ) | | (66 | ) |
| Balance at 9/30/2017 | $ | 70,477 |
| | $ | 24,575 |
| | $ | 10,593 |
| | $ | 105,645 |
| |
| Balance at 6/30/2018 | | $ | 86,858 |
| | $ | 23,602 |
| | $ | 10,910 |
| | $ | 121,370 |
|
| Average AUM(1) | $ | 68,963 |
| | $ | 25,173 |
| | $ | 10,693 |
| | $ | 104,829 |
| $ | 82,085 |
| | $ | 23,953 |
| | $ | 10,904 |
| | $ | 116,942 |
|
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 6/30/2016 | $ | 60,325 |
| | $ | 24,814 |
| | $ | 10,124 |
| | $ | 95,263 |
| |
| Balance at 3/31/2017 | | $ | 65,231 |
| | $ | 24,653 |
| | $ | 9,941 |
| | $ | 99,825 |
|
| Net new par/equity commitments | 1,755 |
| | 10 |
| | 273 |
| | 2,038 |
| 2,083 |
| | 281 |
| | 502 |
| | 2,866 |
|
| Net new debt commitments | 2,161 |
| | — |
| | 125 |
| | 2,286 |
| 2,267 |
| | — |
| | 236 |
| | 2,503 |
|
| Distributions | (3,005 | ) | | (841 | ) | | (257 | ) | | (4,103 | ) | (3,446 | ) | | (660 | ) | | (168 | ) | | (4,274 | ) |
| Change in fund value | 808 |
| | 893 |
| | 132 |
| | 1,833 |
| 1,312 |
| | 1,496 |
| | 281 |
| | 3,089 |
|
| Balance at 9/30/2016 | $ | 62,044 |
| | $ | 24,876 |
| | $ | 10,397 |
| | $ | 97,317 |
| |
| Balance at 6/30/2017 | | $ | 67,447 |
| | $ | 25,770 |
| | $ | 10,792 |
| | $ | 104,009 |
|
| Average AUM(1) | $ | 61,185 |
| | $ | 24,846 |
| | $ | 10,262 |
| | $ | 96,293 |
| $ | 66,341 |
| | $ | 25,212 |
| | $ | 10,368 |
| | $ | 101,921 |
|
(1) Represents the quarterly average of beginning and ending balances.
The tables below provide the period-to-period rollforwards of our total AUM by segment for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 12/31/2016 | $ | 60,466 |
| | $ | 25,041 |
| | $ | 9,752 |
| | $ | 95,259 |
|
| Acquisitions | 3,605 |
| | — |
| | — |
| | 3,605 |
|
| Net new par/equity commitments | 6,981 |
| | 323 |
| | 767 |
| | 8,071 |
|
| Net new debt commitments | 5,338 |
| | — |
| | 509 |
| | 5,847 |
|
| Distributions | (8,967 | ) | | (2,676 | ) | | (1,017 | ) | | (12,660 | ) |
| Change in fund value | 3,054 |
| | 1,887 |
| | 582 |
| | 5,523 |
|
| Balance at 9/30/2017 | $ | 70,477 |
| | $ | 24,575 |
| | $ | 10,593 |
| | $ | 105,645 |
|
| Average AUM(1) | $ | 65,906 |
| | $ | 25,011 |
| | $ | 10,270 |
| | $ | 101,187 |
|
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 12/31/2015 | $ | 60,386 |
| | $ | 22,978 |
| | $ | 10,268 |
| | $ | 93,632 |
| |
| Balance at 12/31/2017 | | $ | 71,732 |
| | $ | 24,530 |
| | $ | 10,229 |
| | $ | 106,491 |
|
| Net new par/equity commitments | 4,880 |
| | 2,164 |
| | 787 |
| | 7,831 |
| 12,459 |
| | 363 |
| | 1,164 |
| | 13,986 |
|
| Net new debt commitments | 3,703 |
| | — |
| | 225 |
| | 3,928 |
| 4,745 |
| | — |
| | — |
| | 4,745 |
|
| Distributions | (8,610 | ) | | (1,740 | ) | | (1,125 | ) | | (11,475 | ) | (3,136 | ) | | (1,321 | ) | | (531 | ) | | (4,988 | ) |
| Change in fund value | 1,685 |
| | 1,474 |
| | 242 |
| | 3,401 |
| 1,058 |
| | 30 |
| | 48 |
| | 1,136 |
|
| Balance at 9/30/2016 | $ | 62,044 |
| | $ | 24,876 |
| | $ | 10,397 |
| | $ | 97,317 |
| |
| Balance at 6/30/2018 | | $ | 86,858 |
| | $ | 23,602 |
| | $ | 10,910 |
| | $ | 121,370 |
|
| Average AUM(1) | $ | 60,254 |
| | $ | 24,432 |
| | $ | 10,243 |
| | $ | 94,929 |
| $ | 78,634 |
| | $ | 24,145 |
| | $ | 10,679 |
| | $ | 113,458 |
|
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 12/31/2016 | $ | 60,466 |
| | $ | 25,041 |
| | $ | 9,752 |
| | $ | 95,259 |
|
| Acquisitions | 3,605 |
| | — |
| | — |
| | 3,605 |
|
| Net new par/equity commitments | 4,354 |
| | 323 |
| | 521 |
| | 5,198 |
|
| Net new debt commitments | 2,736 |
| | — |
| | 509 |
| | 3,245 |
|
| Distributions | (5,656 | ) | | (1,303 | ) | | (375 | ) | | (7,334 | ) |
| Change in fund value | 1,942 |
| | 1,709 |
| | 385 |
| | 4,036 |
|
| Balance at 6/30/2017 | $ | 67,447 |
| | $ | 25,770 |
| | $ | 10,792 |
| | $ | 104,009 |
|
| Average AUM(1) | $ | 64,381 |
| | $ | 25,154 |
| | $ | 10,162 |
| | $ | 99,697 |
|
(1) Represents the quarterly average of beginning and ending balances.
Please refer to “— Results of Operations by Segment” for a more detailed presentation of AUM by segment for each of the periods presented.
The graphs below present our Incentive Generating AUM and Incentive Eligible AUM by segment as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| | | | | | | |
| | | Credit | | Private Equity | | Real Estate | |
As of SeptemberJune 30, 20172018 and 2016,2017, our available capital, which we refer to as dry powder, was $25.8$33.3 billion and $24.5$24.8 billion, respectively, primarily attributable to our funds in the Credit Group and the Private Equity Group.
Fee Paying Assets Under Management
The following components generally comprise our FPAUM:
The amount of limited partner, third party capital commitments and debt commitments eligible to pay management fees for certain closed-end funds within the reinvestment period in the Credit Group, funds in the Private Equity Group and certain private funds in the Real Estate Group;
The amount of limited partner invested capital for the aforementioned closed-end funds beyond the reinvestment period as well as the structured assets funds in the Credit Group, certain managed accounts within their reinvestment period, the mezzanine fund in the Credit Group, European commingled funds in the Credit Group and co-invest vehicles in the Real Estate Group;
The gross amount of aggregate collateral balance, for CLOs, at par, adjusted for defaulted or discounted collateral; and
The portfolio value, gross asset value or NAV, adjusted in certain instances for cash or certain accrued expenses, for the remaining funds in the Credit Group, ARCC, certain managed accounts in the Credit Group and certain debt funds in the Real Estate Group.
The tables below provide the period‑to‑period rollforwards of our total FPAUM by segment for the three months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 6/30/2017 | $ | 46,509 |
| | $ | 17,292 |
| | $ | 6,654 |
| | $ | 70,455 |
| |
| FPAUM Balance at 3/31/2018 | | $ | 51,540 |
| | $ | 16,663 |
| | $ | 6,751 |
| | $ | 74,954 |
|
| Commitments | 2,434 |
| | — |
| | 245 |
| | 2,679 |
| 1,888 |
| | 350 |
| | 97 |
| | 2,335 |
|
| Subscriptions/deployment/increase in leverage | 1,229 |
| | 86 |
| | 249 |
| | 1,564 |
| 1,951 |
| | 171 |
| | 280 |
| | 2,402 |
|
| Redemptions/distributions/decrease in leverage | (2,354 | ) | | (502 | ) | | (216 | ) | | (3,072 | ) | (2,109 | ) | | (590 | ) | | (115 | ) | | (2,814 | ) |
| Change in fund value | 816 |
| | (67 | ) | | 60 |
| | 809 |
| 66 |
| | (5 | ) | | (50 | ) | | 11 |
|
| Change in fee basis | (12 | ) | | (25 | ) | | — |
| | (37 | ) | — |
| | — |
| | — |
| | — |
|
| FPAUM Balance at 9/30/2017 | $ | 48,622 |
| | $ | 16,784 |
| | $ | 6,992 |
| | $ | 72,398 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 53,336 |
| | $ | 16,589 |
| | $ | 6,963 |
| | $ | 76,888 |
|
| Average FPAUM(1) | $ | 47,567 |
| | $ | 17,039 |
| | $ | 6,824 |
| | $ | 71,430 |
| $ | 52,439 |
| | $ | 16,627 |
| | $ | 6,858 |
| | $ | 75,924 |
|
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 6/30/2016 | $ | 40,586 |
| | $ | 11,853 |
| | $ | 6,644 |
| | $ | 59,083 |
| |
| FPAUM Balance at 3/31/2017 | | $ | 45,696 |
| | $ | 17,182 |
| | $ | 6,357 |
| | $ | 69,235 |
|
| Commitments | 1,069 |
| | 10 |
| | 251 |
| | 1,330 |
| 1,251 |
| | 281 |
| | 390 |
| | 1,922 |
|
| Subscriptions/deployment/increase in leverage | 1,040 |
| | 41 |
| | 60 |
| | 1,141 |
| 1,265 |
| | 456 |
| | 154 |
| | 1,875 |
|
| Redemptions/distributions/decrease in leverage | (1,462 | ) | | (275 | ) | | (212 | ) | | (1,949 | ) | (2,684 | ) | | (570 | ) | | (96 | ) | | (3,350 | ) |
| Change in fund value | 629 |
| | — |
| | (13 | ) | | 616 |
| 756 |
| | (57 | ) | | 85 |
| | 784 |
|
| Change in fee basis | — |
| | (264 | ) | | — |
| | (264 | ) | 225 |
| | — |
| | (236 | ) | | (11 | ) |
| FPAUM Balance at 9/30/2016 | $ | 41,862 |
| | $ | 11,365 |
| | $ | 6,730 |
| | $ | 59,957 |
| |
| FPAUM Balance at 6/30/2017 | | $ | 46,509 |
| | $ | 17,292 |
| | $ | 6,654 |
| | $ | 70,455 |
|
| Average FPAUM(1) | $ | 41,225 |
| | $ | 11,610 |
| | $ | 6,688 |
| | $ | 59,523 |
| $ | 46,103 |
| | $ | 17,238 |
| | $ | 6,506 |
| | $ | 69,847 |
|
(1) Represents the quarterly average of beginning and ending balances.
The tables below provide the period‑to‑periodperiod-to-period rollforwards of our total FPAUM by segment for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 12/31/2016 | $ | 42,709 |
| | $ | 11,314 |
| | $ | 6,540 |
| | $ | 60,563 |
|
| Acquisitions | 2,789 |
| | — |
| | — |
| | 2,789 |
|
| Commitments | 4,219 |
| | 7,922 |
| | 635 |
| | 12,776 |
|
| Subscriptions/deployment/increase in leverage | 3,511 |
| | 923 |
| | 459 |
| | 4,893 |
|
| Redemptions/distributions/decrease in leverage | (6,856 | ) | | (1,420 | ) | | (487 | ) | | (8,763 | ) |
| Change in fund value | 2,037 |
| | (403 | ) | | 130 |
| | 1,764 |
|
| Change in fee basis | 213 |
| | (1,552 | ) | | (285 | ) | | (1,624 | ) |
| FPAUM Balance at 9/30/2017 | $ | 48,622 |
| | $ | 16,784 |
| | $ | 6,992 |
| | $ | 72,398 |
|
| Average FPAUM(1) | $ | 45,884 |
| | $ | 15,644 |
| | $ | 6,636 |
| | $ | 68,164 |
|
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 12/31/2015 | $ | 39,925 |
| | $ | 12,462 |
| | $ | 6,757 |
| | $ | 59,144 |
| |
| FPAUM Balance at 12/31/2017 | | $ | 49,450 |
| | $ | 16,858 |
| | $ | 6,189 |
| | $ | 72,497 |
|
| Commitments | 2,340 |
| | 10 |
| | 424 |
| | 2,774 |
| 2,818 |
| | 363 |
| | 863 |
| | 4,044 |
|
| Subscriptions/deployment/increase in leverage | 2,870 |
| | 63 |
| | 326 |
| | 3,259 |
| 3,915 |
| | 374 |
| | 415 |
| | 4,704 |
|
| Redemptions/distributions/decrease in leverage | (4,443 | ) | | (436 | ) | | (600 | ) | | (5,479 | ) | (3,334 | ) | | (1,016 | ) | | (298 | ) | | (4,648 | ) |
| Change in fund value | 1,230 |
| | (168 | ) | | (54 | ) | | 1,008 |
| 494 |
| | 10 |
| | (2 | ) | | 502 |
|
| Change in fee basis | (60 | ) | | (566 | ) | | (123 | ) | | (749 | ) | (7 | ) | | — |
| | (204 | ) | | (211 | ) |
| FPAUM Balance at 9/30/2016 | $ | 41,862 |
| | $ | 11,365 |
| | $ | 6,730 |
| | $ | 59,957 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 53,336 |
| | $ | 16,589 |
| | $ | 6,963 |
| | $ | 76,888 |
|
| Average FPAUM(1) | $ | 40,495 |
| | $ | 11,923 |
| | $ | 6,702 |
| | $ | 59,120 |
| $ | 51,443 |
| | $ | 16,703 |
| | $ | 6,635 |
| | $ | 74,781 |
|
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 12/31/2016 | $ | 42,709 |
| | $ | 11,314 |
| | $ | 6,540 |
| | $ | 60,563 |
|
| Acquisitions | 2,789 |
| | — |
| | — |
| | 2,789 |
|
| Commitments | 1,783 |
| | 7,922 |
| | 390 |
| | 10,095 |
|
| Subscriptions/deployment/increase in leverage | 2,282 |
| | 837 |
| | 207 |
| | 3,326 |
|
| Redemptions/distributions/decrease in leverage | (4,503 | ) | | (918 | ) | | (270 | ) | | (5,691 | ) |
| Change in fund value | 1,224 |
| | (336 | ) | | 71 |
| | 959 |
|
| Change in fee basis | 225 |
| | (1,527 | ) | | (284 | ) | | (1,586 | ) |
| FPAUM Balance at 6/30/2017 | $ | 46,509 |
| | $ | 17,292 |
| | $ | 6,654 |
| | $ | 70,455 |
|
| Average FPAUM(1) | $ | 44,971 |
| | $ | 15,262 |
| | $ | 6,517 |
| | $ | 66,750 |
|
(1) 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.
The charts below present FPAUM by its fee basis as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| |
FPAUM: $59,957$76,888 | FPAUM: $72,398$70,455 |
The components of our AUM, including the portion that is FPAUM, are presented below as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| |
AUM: $97,317$121,370 | AUM: $105,645$104,009 |
(1) Includes $5.7$7.0 billion and $8.0$6.4 billion of AUM of funds from which we indirectly earn management fees as of SeptemberJune 30, 20172018 and 2016,2017, respectively.
Fund Performance Metrics
Fund performance information for our investment funds that are 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 include those that contributed at least 1% of our total management fees for the ninesix months ended SeptemberJune 30, 20172018 or composed of at least 1% of the Company’s total FPAUM as of SeptemberJune 30, 2017,2018, and for which we have sole discretion for investment decisions within the fund. In addition to management fees, each of our significant funds may generate performance feesincome 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 the Company 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.
Adoption of New Revenue Guidance and Change in Accounting Principle
Effective January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB") Topic 606 (“ASC 606”) Revenue from Contracts with Customers and implemented a change in accounting principle related to carried interest allocation.
Our adoption of ASC 606 resulted in a change to the recognition of contractual incentive fees and the presentation of these fees within our results. Incentive fees are now presented on the Condensed Consolidated Statements of Operations as a separate line item, and we now only recognize incentive fee revenue when the amount is realized and no longer subject to reversal at the end of the measurement period, which is typically annually. Therefore, we no longer recognize unrealized incentive fees in revenues in the Condensed Consolidated Statements of Operations. We adopted ASC 606 on a modified retrospective basis, as such prior periods have not been adjusted. We recognized the cumulative effect of initially adopting ASC 606 as an adjustment to the opening balances of components of equity as of January 1, 2018. The cumulative effect of the adoption resulted in the reversal of $22.6 million of unrealized incentive fees and is presented as a reduction to the opening balances of components of equity as of January 1, 2018.
Carried interest allocations are now accounted for under the GAAP guidance for equity method investments and presented as a separate line item on the Condensed Consolidated Statements of Operations and within investments on the Condensed Consolidated Statements of Financial Condition. We implemented this change in accounting principle on a full retrospective basis and all prior periods have been modified to conform. The implementation of the change in accounting principle resulted in no change to either our previously reported GAAP or non-GAAP results. Performance income in our results of operations by segment and non-GAAP measures collectively refers to carried interest allocation and incentive fees.
For further detail on our adoption of ASC 606 and change in accounting principles, see Note 2, “Summary of Significant Accounting Policies,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q.
Components of Consolidated Results of Operations - Post Adoption of New Revenue Guidance and Change in Accounting Principle
As a result of our adoption of new revenue guidance and change in accounting principle described above, the following financial statement captions have been updated in the Consolidated Results of Operations. For descriptions of financial statement line items not included below, see “— Components of Consolidated Results of Operations” within Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations in the 2017 Annual Report on Form 10-K of Ares Management, L.P.
Carried Interest Allocation. In certain fund structures, typically in private equity and real estate equity funds, carried interest is allocated to the Company based on cumulative fund performance to date, subject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s governing documents. At the end of each reporting period, a fund will allocate carried interest applicable to the Company based upon an assumed liquidation of that fund's net assets on the reporting date, irrespective of whether such amounts have been realized. Carried interest is recorded to the extent such amounts have been allocated and may be subject to reversal to the extent that the amount allocated ultimately exceeds the amount due to the Company based on a fund’s cumulative investment returns.
Carried interest is realized when an underlying investment is profitably disposed and the fund’s cumulative returns are in excess of the specific hurdle rates as defined in the applicable governing documents. Since carried interest is subject to reversal, the Company may need to accrue for potential repayment of previously received carried interest. This accrual represents all amounts previously distributed to the Company that would need to be repaid to the funds if the funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the reporting date. The actual repayment obligations, however, generally do not become realized until the end of a fund’s life.
Incentive Fees. Incentive fees earned on the performance of certain fund structures, typically in credit funds, 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.
Principal Investment Income. Principal investment income consists of interest and dividend income and net realized and unrealized gain (loss) 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. Net gain (loss) from investment activities include realized and unrealized gains and losses from our equity method investment portfolio. A realized gain (loss) is 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.
Performance Related Compensation. Performance related compensation includes compensation directly related to segment performance income, which generally consists of percentage interests of carried interest and incentive fees that we grant to our professionals. Depending on the nature of each fund, the performance income participation is generally structured as a fixed percentage or as an annual award. The liability is calculated based upon the changes to performance income but is not payable until the performance income is realized. We have an obligation to pay our professionals a portion of the performance income earned from certain funds, including performance income from Consolidated Funds that are eliminated in consolidation.
Although changes in performance related compensation are typically 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 by the fact that incentive fees and carried interest allocation earned from our Consolidated Funds are eliminated upon consolidation while performance related compensation is not eliminated.
Results of Operations
Consolidated Results of Operations
The following table and discussion sets forth information regarding our consolidated results of operations for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. 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 uscommon and preferred shareholders for the periods presented.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Favorable (Unfavorable) | | Nine Months Ended
September 30, | | Favorable (Unfavorable) |
| | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| | (Dollars in thousands) |
| Revenues | | | | | | | | | | | | | | | |
| Management fees (includes ARCC Part I Fees of $24,036, $76,436 and $33,260, $90,884 for the three and nine months ended September 30, 2017 and 2016, respectively) | $ | 183,177 |
| | $ | 163,609 |
| | $ | 19,568 |
| | 12 | % | | $ | 535,990 |
| | $ | 480,563 |
| | $ | 55,427 |
| | 12 | % |
| Performance fees | 87,008 |
| | 164,482 |
| | (77,474 | ) | | (47 | )% | | 480,204 |
| | 337,686 |
| | 142,518 |
| | 42 | % |
| Administrative and other fees | 13,486 |
| | 7,369 |
| | 6,117 |
| | 83 | % | | 43,024 |
| | 22,761 |
| | 20,263 |
| | 89 | % |
| Total revenues | 283,671 |
| | 335,460 |
| | (51,789 | ) | | (15 | )% | | 1,059,218 |
| | 841,010 |
| | 218,208 |
| | 26 | % |
| Expenses | |
| | |
| | | | | | | | | | | | |
| Compensation and benefits | 129,347 |
| | 111,916 |
| | (17,431 | ) | | (16 | )% | | 384,905 |
| | 335,249 |
| | (49,656 | ) | | (15 | )% |
| Performance fee compensation | 58,637 |
| | 123,173 |
| | 64,536 |
| | 52 | % | | 361,044 |
| | 253,739 |
| | (107,305 | ) | | (42 | )% |
| General, administrative and other expenses | 47,104 |
| | 38,197 |
| | (8,907 | ) | | (23 | )% | | 145,193 |
| | 116,845 |
| | (28,348 | ) | | (24 | )% |
| Transaction support expense | — |
| | — |
| | — |
| | NM |
| | 275,177 |
| | — |
| | (275,177 | ) | | NM |
|
| Expenses of the Consolidated Funds | 19,039 |
| | 10,088 |
| | (8,951 | ) | | NM |
| | 27,472 |
| | 11,014 |
| | (16,458 | ) | | (149 | )% |
| Total expenses | 254,127 |
|
| 283,374 |
| | 29,247 |
| | 10 | % | | 1,193,791 |
| | 716,847 |
| | (476,944 | ) | | (67 | )% |
| Other income (expense) | |
| | |
| | | | | | | | | | | | |
| Investment income and net interest expense (includes interest expense of $5,343, $15,576 and $4,136, $13,819 for the three and nine months ended September 30, 2017 and 2016, respectively) | (1,831 | ) | | (1,681 | ) | | (150 | ) | | (9 | )% | | (6,218 | ) | | (47 | ) | | (6,171 | ) | | NM |
|
| Other income (expense), net | (2,492 | ) | | 23,042 |
| | (25,534 | ) | | NM |
| | 16,826 |
| | 33,956 |
| | (17,130 | ) | | (50 | )% |
| Net realized and unrealized gain on investments | 7,209 |
| | 19,358 |
| | (12,149 | ) | | (63 | )% | | 39,943 |
| | 21,349 |
| | 18,594 |
| | 87 | % |
| Investment income and net interest income of the Consolidated Funds (includes interest expense of $28,127, $86,324 and $26,413, $67,469 for the three and nine months ended September 30, 2017 and 2016, respectively) | 20,054 |
| | 8,737 |
| | 11,317 |
| | 130 | % | | 41,675 |
| | 25,759 |
| | 15,916 |
| | 62 | % |
| Net realized and unrealized gain (loss) on investments of the Consolidated Funds | 35,940 |
| | 23,883 |
| | 12,057 |
| | 50 | % | | 55,263 |
| | (5,723 | ) | | 60,986 |
| | NM |
|
| Total other income | 58,880 |
|
| 73,339 |
| | (14,459 | ) | | (20 | )% | | 147,489 |
| | 75,294 |
| | 72,195 |
| | 96 | % |
| Income before taxes | 88,424 |
|
| 125,425 |
| | (37,001 | ) | | (30 | )% | | 12,916 |
| | 199,457 |
| | (186,541 | ) | | (94 | )% |
| Income tax expense (benefit) | 4,552 |
| | 7,641 |
| | 3,089 |
| | 40 | % | | (28,459 | ) | | 7,868 |
| | 36,327 |
| | NM |
|
| Net income | 83,872 |
|
| 117,784 |
| | (33,912 | ) | | (29 | )% | | 41,375 |
| | 191,589 |
| | (150,214 | ) | | (78 | )% |
| Less: Net income (loss) attributable to non-controlling interests in Consolidated Funds | 18,195 |
| | 7,861 |
| | 10,334 |
| | 131 | % | | 25,403 |
| | (3,064 | ) | | 28,467 |
| | NM |
|
| Less: Net income attributable to redeemable interests in Ares Operating Group entities | — |
| | 107 |
| | (107 | ) | | NM |
| | — |
| | 456 |
| | (456 | ) | | NM |
|
| Less: Net income (loss) attributable to non-controlling interests in Ares Operating Group entities | 37,839 |
| | 66,511 |
| | (28,672 | ) | | (43 | )% | | (20,610 | ) | | 116,404 |
| | (137,014 | ) | | NM |
|
| Net income attributable to Ares Management, L.P. | 27,838 |
|
| 43,305 |
| | (15,467 | ) | | (36 | )% | | 36,582 |
| | 77,793 |
| | (41,211 | ) | | (53 | )% |
| Less: Preferred equity distributions paid | 5,425 |
| | 6,751 |
| | 1,326 |
| | 20 | % | | 16,275 |
| | 6,751 |
| | (9,524 | ) | | (141 | )% |
| Net income attributable to Ares Management, L.P. common unitholders | $ | 22,413 |
|
| $ | 36,554 |
| | (14,141 | ) | | (39 | )% | | $ | 20,307 |
| | $ | 71,042 |
| | (50,735 | ) | | (71 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Favorable (Unfavorable) | | Six Months Ended
June 30, | | Favorable (Unfavorable) |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) |
| Revenues | | | | | | | | | | | | | | | |
| Management fees (includes ARCC Part I Fees of $29,866, $58,283 and $19,143, $52,400 for the three and six months ended June 30, 2018 and 2017, respectively) | $ | 194,032 |
| | $ | 180,768 |
| | $ | 13,264 |
| | 7 | % | | $ | 383,547 |
| | $ | 352,813 |
| | $ | 30,734 |
| | 9 | % |
| Carried interest allocation | (13,444 | ) | | 333,808 |
| | (347,252 | ) | | NM |
| | 40,685 |
| | 385,815 |
| | (345,130 | ) | | (89 | )% |
| Incentive fees | 7,740 |
| | 4,216 |
| | 3,524 |
| | 84 | % | | 12,811 |
| | 7,381 |
| | 5,430 |
| | 74 | % |
| Principal investment income | 1,871 |
| | 38,307 |
| | (36,436 | ) | | (95 | )% | | 6,780 |
| | 40,894 |
| | (34,114 | ) | | (83 | )% |
| Administrative, transaction and other fees | 13,964 |
| | 15,098 |
| | (1,134 | ) | | (8 | )% | | 26,429 |
| | 29,538 |
| | (3,109 | ) | | (11 | )% |
| Total revenues | 204,163 |
| | 572,197 |
| | (368,034 | ) | | (64 | )% | | 470,252 |
| | 816,441 |
| | (346,189 | ) | | (42 | )% |
| Expenses | |
| | |
| |
|
| |
|
| | | | | |
|
| |
|
|
| Compensation and benefits | 138,992 |
| | 131,219 |
| | (7,773 | ) | | (6 | )% | | 273,631 |
| | 255,558 |
| | (18,073 | ) | | (7 | )% |
| Performance related compensation | (13,005 | ) | | 261,705 |
| | 274,710 |
| | NM |
| | 12,873 |
| | 302,407 |
| | 289,534 |
| | 96 | % |
| General, administrative and other expenses | 59,918 |
| | 50,751 |
| | (9,167 | ) | | (18 | )% | | 104,368 |
| | 98,089 |
| | (6,279 | ) | | (6 | )% |
| Transaction support expense | — |
| | — |
| | — |
| | NM |
| | — |
| | 275,177 |
| | 275,177 |
| | NM |
|
| Expenses of the Consolidated Funds | 35,112 |
| | 4,522 |
| | (30,590 | ) | | NM |
| | 36,428 |
| | 8,433 |
| | (27,995 | ) | | NM |
|
| Total expenses | 221,017 |
|
| 448,197 |
| | 227,180 |
| | 51 | % | | 427,300 |
| | 939,664 |
| | 512,364 |
| | 55 | % |
| Other income (expense) | |
| | |
| |
|
| |
|
| | | | | |
|
| |
|
|
| Net realized and unrealized gain (loss) on investments | 3,267 |
| | (6,588 | ) | | 9,855 |
| | NM |
| | 2,428 |
| | (5,700 | ) | | 8,128 |
| | NM |
|
| Interest and dividend income | 2,356 |
| | 1,462 |
| | 894 |
| | 61 | % | | 5,703 |
| | 3,386 |
| | 2,317 |
| | 68 | % |
| Interest expense | (6,076 | ) | | (5,354 | ) | | (722 | ) | | (13 | )% | | (12,945 | ) | | (10,233 | ) | | (2,712 | ) | | (27 | )% |
| Other income (expense), net | (1,987 | ) | | 2,822 |
| | (4,809 | ) | | NM |
| | (2,298 | ) | | 19,318 |
| | (21,616 | ) | | NM |
|
| Net realized and unrealized gain (loss) on investments of Consolidated Funds | 34,487 |
| | (12,713 | ) | | 47,200 |
| | NM |
| | 21,402 |
| | 19,323 |
| | 2,079 |
| | 11 | % |
| Interest and other income of the Consolidated Funds | 92,633 |
| | 38,326 |
| | 54,307 |
| | 142 | % | | 157,055 |
| | 79,818 |
| | 77,237 |
| | 97 | % |
| Interest expense of Consolidated Funds | (56,754 | ) | | (26,875 | ) | | (29,879 | ) | | (111 | )% | | (101,179 | ) | | (58,197 | ) | | (42,982 | ) | | (74 | )% |
| Total other income (expense) | 67,926 |
|
| (8,920 | ) | | 76,846 |
| | NM |
| | 70,166 |
| | 47,715 |
| | 22,451 |
| | 47 | % |
| Income (loss) before taxes | 51,072 |
|
| 115,080 |
| | (64,008 | ) | | (56 | )% | | 113,118 |
| | (75,508 | ) | | 188,626 |
| | NM |
|
| Income tax expense (benefit) | 36,903 |
| | 1,253 |
| | (35,650 | ) | | NM |
| | 24,528 |
| | (33,011 | ) | | (57,539 | ) | | NM |
|
| Net income (loss) | 14,169 |
|
| 113,827 |
| | (99,658 | ) | | (88 | )% | | 88,590 |
| | (42,497 | ) | | 131,087 |
| | NM |
|
| Less: Net income (loss) attributable to non-controlling interests in Consolidated Funds | 9,882 |
| | (8,647 | ) | | 18,529 |
| | NM |
| | 10,249 |
| | 7,208 |
| | 3,041 |
| | 42 | % |
| Less: Net income (loss) attributable to non-controlling interests in Ares Operating Group entities | 16,062 |
| | 72,596 |
| | (56,534 | ) | | (78 | )% | | 49,168 |
| | (58,449 | ) | | 107,617 |
| | NM |
|
| Net income (loss) attributable to Ares Management, L.P. | (11,775 | ) |
| 49,878 |
| | (61,653 | ) | | NM |
| | 29,173 |
| | 8,744 |
| | 20,429 |
| | 234 | % |
| Less: Preferred equity dividend paid | 5,425 |
| | 5,425 |
| | — |
| | — | % | | 10,850 |
| | 10,850 |
| | — |
| | — | % |
| Net income (loss) attributable to Ares Management, L.P. common shareholders | $ | (17,200 | ) |
| $ | 44,453 |
| | (61,653 | ) | | NM |
| | $ | 18,323 |
| | $ | (2,106 | ) | | 20,429 |
| | NM |
|
NM - Not Meaningful
The following section discusses the period-over-period fluctuations of our consolidated results of operations for the three and ninesix months ended SeptemberJune 30, 20172018 compared to 2016.2017. Additional details behind the fluctuations attributable to a particular segment are included in "—“—Results of Operations by Segment"Segment” for each of the segments.
Three and NineSix Months Ended SeptemberJune 30, 20172018 Compared to Three and NineSix Months Ended SeptemberJune 30, 20162017
Revenues
Management Fees. Total management fees increased by $19.6$13.3 million, or 12%7%, to $183.2$194.0 million, after giving effect to an increase in management fees of $3.5 million that were eliminated upon consolidation, for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016 and by $55.4 million, or 12%, to $536.0 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increases are primarily attributed to fees generated by our Private Equity Group funds, including the launch of Ares Corporate Opportunities Fund V, L.P. (“ACOF V”), and to an increase in2017. Segment management fees generated by Ares Energy Investors Fund V, L.P. ("EIF V"), which included one-time catch-up fees of $5.8 million in the nine months ended September 30, 2017. Withinattributable to the Credit Group base management fees generated by ARCC increased proportionally with fee paying assets attributable to ARCC's acquisition of ACAS, but were partially offset by a reduction in ARCC Part I Fees in accordance with the $10 million fee waiver under the ARCC-ACAS Transaction agreement, which became effective in the second quarter of 2017. Management fees generated by ourand Real Estate Group remained relatively consistent for the comparative periods.
Performance Fees. Performance fees decreased by $77.5 million to $87.0 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Performance fees increased by $142.5 million to $480.2 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The Private Equity Group had a decrease in consolidated performance fees of $94.3 million for the three month comparative periods, partially offset by increases of $14.7$23.2 million and $2.1$0.7 million, in consolidated performance fees from the Real Estate Grouprespectively, and Credit Group, respectively, for the same period. For the nine months ended September 30, 2017, consolidated performancesegment management fees attributable to the Private Equity Group decreased by $7.1 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017.
Total management fees increased by $30.7 million, or 9%, to $383.5 million, after giving effect to an increase in management fees of $6.1 million that were eliminated upon consolidation, for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Segment management fees attributable to the Credit Group, Private Equity Group and Real Estate Group and Credit Group increased by $71.5$33.6 million, $53.0$3.0 million and $18.0$0.2 million, respectively, for the six months ended June 30, 2018 compared to the ninesix months ended SeptemberJune 30, 2016. 2017.
For more detail regarding the fluctuations of performancemanagement fees within each of the segments see "—“—Results of Operations by Segment" for each of the segments.Segment.”
Administrative and Other Fees.Carried Interest Allocation. Administrative fees and other fees increasedCarried interest allocation decreased by $6.1 million, or 83%, to $13.5$347.3 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $20.3$345.1 million or 89%, for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. The increases in2017.
Carried interest allocation for the current year periods werethree and six months ended June 30, 2018 included the following: (i) $25.4 million and $41.5 million of carried interest allocations for the three and six months ended June 30, 2018, respectively, attributable to the Credit Group primarily due to certain European direct lending funds generating returns in excess of their hurdle rates; (ii) $14.4 million and $27.0 million of carried interest allocations for the three and six months ended June 30, 2018, respectively, attributable to the Real Estate Group primarily due to market appreciation of underlying properties across our U.S. and E.U. real estate funds; offset by (iii) reversals of $53.2 million and $27.7 million of carried interest allocations for the three and six months ended June 30, 2018, respectively, attributable to the Private Equity Group primarily due to a reduction in fair value in an increaseACOF IV industrial portfolio company and by a reduction in fees associated with certain funds withinfair value in an Ares Energy Investors Fund V, L.P. (“EIF V”) energy portfolio company.
Carried interest allocation for the three and six months ended June 30, 2017 included the following: (i) $293.5 million and $324.7 million of carried interest allocations for the three and six months ended June 30, 2017, respectively, attributable to the Private Equity Group primarily due to significant market appreciation in one of Ares Corporate Opportunities Fund III, L.P.'s (“ACOF III”) publicly traded retail portfolio companies following its initial public offering during the period and to an increased fair value in an Ares Corporate Opportunities Fund IV, L.P. (“ACOF IV”) veterinary portfolio company following a minority sale of the company; (ii) $31.0 million and $44.6 million of carried interest allocations for the three and six months ended June 30, 2017, respectively, attributable to the Real Estate Group primarily due to market appreciation of underlying properties across our U.S. and E.U. real estate funds; and (iii) $9.5 million and $16.4 million of carried interest allocations for the three and six months ended June 30, 2017, respectively, attributable to the Credit Group fromprimarily due to certain European direct lending funds generating returns in excess of their hurdle rates.
Incentive Fees. Incentive feesincreased by $3.5 million to $7.7 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $5.4 million to $12.8 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. As a result of our adoption of ASC 606, using the modified retrospective approach, we now recognize incentive fee revenue only when the amount is realized and no longer subject to reversal and no longer recognize unrealized incentive fees in revenues subsequent to January 1, 2018. This adoption results in the delayed recognition of unrealized incentive fees until they become realized at the end of the measurement period, which is typically annually. During the three and six months ended June 30, 2018, we earned transaction fees of $5.1realized $7.7 million and $13.9$12.8 million, respectively, across our direct lending and credit opportunity funds.
Principal Investment Income. Principal investment incomedecreased by $36.4 million to $1.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $34.1 million to $6.8 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decreases were primarily attributable to significant
market appreciation in one of ACOF III's publicly traded retail portfolio companies following its initial public offering during the prior year periods.
Administrative, Transaction and Other Fees. Administrative fees and other fees decreased by $1.1 million, or 8%, to $14.0 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $3.1 million, or 11%, to $26.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Administrative fees decreased by $2.3 million and $5.5 million, for the three and nine months ended September 30, 2017, respectively. We begansix month comparative periods, respectively, primarily due to recognize transaction-based fees from certain direct lending fundshigher reimbursements of costs in the fourth quarter of 2016. These fees will change with the level of deployed capital and the number of new funds earning this type of fee, however not all funds will be eligible or earn this type of fee. In addition, administrative fees included $6.5 million and $23.6 million of compensation and benefits expense reimbursements for the three and nine months ended September 30, 2017, respectively, of which $0.9 million and $6.4 million, respectively, areprior year periods related to temporary employees that are assisting with the integration of ACAS into ARCC. Comparatively, administrative fee reimbursements offsetting compensation and benefitsThese decreases were $6.1offset by increases of $1.3 million and $17.9$2.3 million in transaction-based fees based on loan originations within certain funds in our Credit Group for the three and nine months ended September 30, 2016.six month comparative periods, respectively.
Expenses
Compensation and Benefits. Compensation and benefits expenses increased by $17.4$7.8 million, or 16%6%, to $129.3$139.0 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $49.7$18.1 million, or 15%7%, to $273.6 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. For2017. The increases were primarily driven by merit increases, headcount growth and equity compensation increases for the three and nine months ended September 30, 2017,comparative periods. Equity compensation and benefits expensesexpense increased due to an increase in headcount, including an additional $2.8by $3.6 million and $13.5 million, respectively, attributable to employees hired in connection with ARCC's acquisition of ACAS, of which $0.3 million and $6.4 million, respectively, related to temporary employees assisting with the integration. In addition, equity compensation increased $9.6 million and $24.9 million for the three and nine months ended September 30, 2017 compared to the respective prior yearsix month comparative periods, respectively. The increases in equity compensation expense were primarily due to additional restricted stock units granted in the current year.awarded as part of bonus and retention programs.
Performance FeeRelated Compensation. Performance feerelated compensation decreased by $64.5 million to $58.6$274.7 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $107.3 million to $361.0$289.5 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The changedecreases in performance feerelated compensation expense directly correlateslargely correlate with the changedecreases in our performancecarried interest allocation and incentive fees before giving effect to the performancecarried interest allocation and incentive fees earned from our Consolidated Funds that are eliminated upon consolidation.
General, Administrative and Other Expenses. General, administrative and other expenses increased by $8.9$9.2 million, or 23%18%, to $47.1$59.9 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $28.3$6.3 million, or 24%6%, to $145.2$104.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The current year periods include an $11.8 million one-time reimbursement to ARCC for certain rent and utilities for the first quarter of 2018 and the years ended 2017, 2016, 2015 and 2014. Beginning April 1, 2018, we incurred these expenses resulting in a $0.9 million increase in occupancy expense for the three and six month comparative periods. Professional service fees increased by $0.9 million and $2.2 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Payments tothree and six month comparative periods, respectively. The increases in professional service providers increasedfees for both comparative periods were primarily driven by $2.3our election to change our tax classification from a partnership to a corporation for U.S. income tax purposes, by an increase in operating expenses from a joint venture distribution platform and by an increase in recruiting fees to support our expanding business. Conversely, placement fees decreased by $4.5 million and $6.3 million for the three and nine months ended September 30, 2017,six month comparative periods, respectively, compareddue to the prior year periods due to several information technology initiatives to support various system implementations and process improvement initiatives as well as new fund structuring costs. In addition, placement fees increased $2.3 million and $9.4 million for the three and nine months ended September 30, 2017, respectively, compared to the prior year respective periods, primarily due to twolaunch of certain funds within our Credit Group during the current nine month period. In the currentprior year diligence related costs increased by $2.7 million and $3.2 million for the three and nine month comparative periods, associated with potential acquisitions and capital transactions. Also impacting the nine months ended September 30, 2017 wasperiods. Additionally, we made a $2.5 million one-time non-income tax paidpayment during the first quarter of 2017.
Transaction Support Expense. Transaction support expense representswas a one-timeone–time payment of $275.2 million that we made, through our subsidiary Ares Capital Management LLC, to ACAS shareholders during the first quarter of 2017 upon the closing of ARCC’s acquisition of ACAS. In connection with this acquisition, our AUM increased by $3.6 billion and FPAUM increased by $2.8 billion at closing. No similar expenses were incurred in the other periods presented.
Expenses of the Consolidated Funds. Expenses of the Consolidated Funds increased by $9.0$30.6 million to $19.0$35.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $16.5$28.0 million to $27.5$36.4 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increases were primarily duedriven by fees related to organizationalthe issuance and offering costsrefinancing of CLO debt within our Consolidated Funds during the current year periods. These fees were expensed in the period incurred, as CLO debt is recorded at fair value on our Consolidated Statements of Financial Condition. Expenses of the Consolidated Funds increased by $28.7 million related to launch fourexpenses from two new fundsU.S. CLOs and one new European CLO that we began consolidating induring the current year periods and $4.9 million related to expenses from the refinancing of one U.S. CLO during the current year periods. The increases for the three and six month comparative period were offset by $2.5 million reduction of expenses related to the refinancing of one European CLO during the second quarter and two funds we began consolidatingof 2017. The increase for the six month comparative periods was also offset by reductions in late 2016.other recurring expenses across our Consolidated funds.
Other Income (Expense)
When evaluating the changes in other income (expense), we separately analyze the other income generated by the Company from the investment returns generated by our Consolidated Funds.
Investment IncomeNet Realized and Unrealized Gain (Loss) on Investments. Net realized and unrealized gain (loss) on investments of the Company increased by $9.9 million from a loss of $6.6 million for the three months ended June 30, 2017 to a gain of $3.3 million for the three months ended June 30, 2018. Net realized and unrealized gain (loss) on investments of the Company increased by $8.1 million from a loss of $5.7 million for the six months ended June 30, 2017 to a gain of $2.4 million for the six months ended June 30, 2018. The increases were primarily from an increase of $5.0 million and $6.7 million in net gains for the three and six month comparative periods, respectively, on our non-core fund investments.
Interest and Dividend Income. Interest and dividend income of the Company increased by $0.9 million to $2.4 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $2.3 million to $5.7 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were driven by increases of $0.5 million and $0.9 million in dividend income for the three and six month comparative periods, respectively, from our non-core fund investments and by increases of $0.3 million and $1.3 million in interest income from new CLO investments for the three and six month comparative periods, respectively.
Interest Expense. Investment income and net interestInterest expense of the Company increased by $0.2$0.7 million to $1.8$6.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016. Investment income2017 and net interest expense of the Company increased $6.2by $2.7 million to $6.2$12.9 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increases were primarily driven by borrowings from term loans we entered into subsequent to June 30, 2017 to finance certain investments in CLOs. Interest expense increased $1.2 million and $1.8 million for the three and nine months ended September 30, 2017, respectively, comparedis expected to the prior yeardecrease in future periods as a result ofthese term loans that were entered into in connection with new CLO investments within our syndicated loan strategy. The increases in interest expense for the three and nine months ended September 30, 2017 were partially offset by increases in interest income of $0.9 million and $1.8 million, respectively, from the new CLO investments that we did not hold in the prior year periods. The increase in net expense for the nine months ended September 30, 2017 compared to the prior year period was primarily the result of a partial sale and recapitalization of one of ACOF III's portfolio companies, which resulted in a $8.3 million dividend distribution during 2016 that did not recurpaid off during the current year.year periods.
Other Income (Expense), Net. Other income (expense) of the Company, net decreased by $25.5$4.8 million from net other income of $23.0$2.8 million for the three months ended SeptemberJune 30, 20162017 to other expensenet expenses of $2.5$2.0 million for the three months ended SeptemberJune 30, 2017.2018. The decrease was primarily due to the revaluation of our Energy Investors Funds ("EIF") contingent consideration liability during the third quarter of 2016, resulting indriven by a net gain of $17.7$3.1 million due to lower than expected commitment period management fee revenue. Additionally, transaction gains decreased by $6.0 million from a gain of $3.6 million for the three months ended September 30, 2016 to a loss of $2.4 million for the three months ended September 30, 2017 due to the revaluation of certain assets and liabilities denominated in foreign currencies.
Other income of the Company decreased by $17.1 million to $16.8 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily resulting from a decrease of $17.4 million in transaction gains from the revaluation of certain assets and liabilities denominated in foreign currencies.
Net Realized and Unrealized Gain on Investments. Net gain on investments Subsequent to the removal of the Company decreased by $12.1U.S. risk retention requirements related to open-market CLO managers, we sold $219.3 million of our investments in our CLO securities and used the proceeds to $7.2pay off the related term loans and settle a repurchase agreement of $206.0 million, forresulting in debt extinguishment costs of $1.7 million during the three months ended SeptemberJune 30, 2017 compared to the three months ended September 30, 2016. The decrease is a result of: (i) a $6.32018.
Other income (expense), net decreased by $21.6 million decreasefrom other income of net returns from our investment in ACOF III as the prior year period included gains on a sale of one of its portfolio companies that did not recur in the current quarter, (ii) a $3.2 million decrease of net returns on our investments within our syndicated loans strategy and (iii) a $3.2 million decrease of net returns on our investment in AREA Sponsor Holdings LLC as the appreciation of property values in the prior period was greater than the appreciation of property values in the current period, though the values of the portfolio continued positive improvement.
Net gain on investments of the Company increased by $18.6 million to $39.9$19.3 million for the ninesix months ended SeptemberJune 30, 2017 comparedto $2.3 million of net expenses for the six months ended June 30, 2018. The decrease was primarily a result of a $20.3 million reversal of a contingent consideration related to the prior year period. The increaseEnergy Investors Funds (“EIF”) acquisition that was primarily attributablereflected as a gain during the first quarter of 2017. Subsequent to ACOF III, which had increases in net returns of $23.9 million for the nine month respective period due to market appreciation in one of its portfolio companies that completed its initial public offering. The increase was partially offset by a decrease of $5.0 million in net returns on our investment in EIF V, resulting from a reallocation of capital due to its final equity closing.
Investment Income and Net Interest Incomeremoval of the Consolidated Funds. Investment incomeU.S. risk retention requirements related to open-market CLO managers, we sold $219.3 million of our investments in our CLO securities and net interest incomeused the proceeds to pay off the related term loans and settle a repurchase agreement of $206.0 million, resulting in debt extinguishment costs of $1.7 million during the Consolidated Funds increased by $11.3 million, or 130%, to $20.1 million for the threesix months ended SeptemberJune 30, 2017 compared to the three months ended September 30, 2016 and by $15.9 million, or 62%, to $41.7 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increases were primarily driven by increases in interest and dividend income of the underlying investments of the Consolidated Funds within our Credit Group and Private Equity Group.2018.
Net Realized and Unrealized Gain (Loss) on Investments of the Consolidated Funds. Net gain (loss) on investments of the Consolidated Funds increased by $12.1$47.2 million to $35.9from a net loss of $12.7 million for the three months ended SeptemberJune 30, 2017 compared to a net gain of $34.5 million for the three months ended SeptemberJune 30, 2016.2018. The increase wasnet gain for three months ended June 30, 2018 primarily driven by appreciation onincluded the following: (i) $24.3 million in net gains from increased market value of certain investments within an E.U. direct lending fund and a U.S. direct lending fund, offset by lower valuations of underlying investments in an Asian corporate privativeprivate equity fund; (ii) $25.7 million in net gains from widely traded bank loans held within our consolidated U.S. CLOs primarily driven by market appreciation; offset by (iii) $8.4 million in net losses attributable to a European direct lending fund anddriven by a change in our CLOs.
Net gain (loss) on investmentsmarket value of the Consolidated Funds increased fromfund's sole remaining investment; and (iv) $7.0 million in net losses attributable to decreased market value of certain investments in a commercial finance fund. The net investment loss of $5.7 million for the ninethree months ended SeptemberJune 30, 2016 to2017 primarily included a $12.2 million net investment gain of $55.3 million for the nine months ended September 30, 2017. The increase was driven by unrealized appreciationloss from lower valuations on certain investments in an Asian corporate private equity fund and appreciationfund.
Net gain on investments of the Consolidated Funds increased by $2.1 million to $21.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The net gain for the six months ended June 30, 2018 primarily included the following: (i) $15.9 million in net gains from increased market value of certain investments in an E.U.Asian corporate private equity fund; (ii) $18.1 million in net gains from widely traded bank loans held within our U.S. CLOs primarily driven by market appreciation; offset by (iii) $13.6 million in net losses attributable to a European direct lending fund driven by a change in market value of the strengthening Euro. Thesefund's sole remaining investment.The net gain for the six months ended June 30, 2017 primarily included the following: (i) $3.5 million of net gains were offsetfrom widely traded bank loans held within our consolidated CLOs primarily driven by lower valuationsmarket appreciation; (ii) $9.3 million of underlyingnet gains from a European direct lending fund primarily due to a strengthened Euro against
the U.S. dollar; (iii) $2.9 million of net gains from increased market value of certain investments in an Asian corporate private equity fund; and (iv) $3.1 million of net gains from increased market value of certain investments in a commercial finance fund.
Interest and Other Income Tax Expense (Benefit).of the Consolidated Funds. Not all CompanyInterest and other income of the Consolidated Fund entities are subjectFunds increased by $54.3 million, or 142%, to taxes. As a result, income taxes may not move in tandem with income before taxes. Specifically, the Company’s investment income and performance fees are generally not subject to income tax.
For the three months ended September 30, 2017 we had an income tax expense of $4.6 million compared to $7.6$92.6 million for the three months ended SeptemberJune 30, 2016. For2018 compared to the ninethree months ended SeptemberJune 30, 2017 and by $77.2 million, or 97%, to $157.1 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were primarily driven by additional interest paying assets from four U.S. CLOs and two European CLOs that we began consolidating subsequent to June 30, 2017 resulting in increases in interest income for the comparative periods.
Interest Expense of the Consolidated Funds. Interest expense of the consolidated funds increased by $29.9 million, or 111%, to $56.8 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $43.0 million, or 74%, to $101.2 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were primarily the result of interest expense from the debt issued for four U.S. CLOs and two European CLOs we began consolidating subsequent to June 30, 2017. The increases were partially offset by the deconsolidation of two funds subsequent to June 30, 2017.
Income Tax Expense (Benefit). Income tax expense increased by $35.7 million to $36.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Income tax expense (benefit) decreased by $57.5 million from a tax benefit of $33.0 million for the six months ended June 30, 2017 to tax expense of $24.5 million for the six months ended June 30, 2018. Income tax expense for the three and six months ended June 30, 2018 was primarily driven by two significant one-time deferred tax items related to our election to be taxed as a corporation for U.S. federal income tax benefitpurposes effective March 1, 2018. Income tax expense for the three months ended June 30, 2018 was $28.5primarily driven by a $28.9 million compared to anvaluation allowance recorded during the period against a deferred tax asset, which was established during the three months ended March 31, 2018, effectively eliminating any impact on income tax expense of $7.9 million for the ninesix months ended SeptemberJune 30, 2016. The2018. Income tax expense for the six months ended June 30, 2018 was primarily driven by a deferred tax liability arising from the embedded net unrealized gains of both carried interest and the investment portfolio that were not previously subject to corporate taxes. Income tax benefit for the ninesix months ended SeptemberJune 30, 2017 was largelyprimarily driven by the pre-tax losses recognized by AHI, a corporate taxpayer,U.S. taxable entity, resulting from the $275.2 million transaction support payment made in connection with ARCC's acquisition of ACAS.
Non-Controlling and Redeemable Interests. Net income (loss) attributable to non-controlling and redeemable interests in Ares Operating Group entities represents results attributable to the owners of AOG Units that are not held by Ares Management, L.P. and is allocated based on the weighted average daily ownership of the AOG unitholders. The former owners of Indicus Advisors, LLP, a company we acquired in 2011, exercised the put option on their redeemable interest during the third quarter of 2016, at which time the redeemable interest in Ares Operating Group entities ceased to exist.
Net income attributable to non-controlling and redeemable interests in Ares Operating Group entities decreased $28.8by $56.5 million to $37.8$16.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016.2017. Net income (loss) attributable to non-controlling and redeemable interests in Ares Operating Group entities decreasedincreased from a net income of $116.9 million for the nine months ended September 30, 2016 to a net loss of $20.6$58.4 million for the ninesix months ended SeptemberJune 30, 2017.2017 to net income of $49.2 million for the six months ended June 30, 2018. The weighted average daily ownership for non-controlling and redeemable AOG unitholders was 61.31%55.1% and 61.46%57.5% for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, compared to 61.83%61.4% and 62.02%61.5% for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively. The decreases in non–controlling ownership were primarily driven by our common share offering of 5,000,000 shares and by an affiliate of Alleghany Corporation's exchange of 9,750,000 of its AOG Units into common shares during the first quarter of 2018.
Segment Analysis
For segment reporting purposes, revenues and expenses are presented on a basis that excludesexcluding the results of our Consolidated Funds. As a result, segment revenues from management fees, performance feesincome 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. 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.
Discussed below are our results of operations for each of our three reportable segments. In addition to the three segments, we separately discuss the OMG. This information is used by our management to make operating decisions, assess performance and allocate resources. The results of operations for each of our reportable segments are discussed below.
ENI and Other Measures
The following table sets forth FRE, PRE, ENI and DERI by segment for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. FRE, PRE, ENI and DERI are non‑GAAP financial measures our management uses when making resource deployment decisions and in assessing performance of our segments (see the Glossary for(For definitions of each of these non-GAAP financial measures and how they are being used by management)management, see the Glossary).
| | | | Three Months Ended | | Favorable (Unfavorable) | | Nine Months Ended | | Favorable (Unfavorable) | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | September 30, | | September 30, | | June 30, | | June 30, | |
| | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Fee related earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit Group | $ | 72,444 |
| | $ | 63,578 |
| | $ | 8,866 |
| | 14 | % | | $ | 204,600 |
| | $ | 178,670 |
| | $ | 25,930 |
| | 15 | % | $ | 79,792 |
| | $ | 65,109 |
| | $ | 14,683 |
| | 23 | % | | $ | 157,379 |
| | $ | 131,215 |
| | $ | 26,164 |
| | 20 | % |
| Private Equity Group | 27,851 |
| | 14,870 |
| | 12,981 |
| | 87 | % | | 84,626 |
| | 55,038 |
| | 29,588 |
| | 54 | % | 26,808 |
| | 34,032 |
| | (7,224 | ) | | (21 | )% | | 53,795 |
| | 56,775 |
| | (2,980 | ) | | (5 | )% |
| Real Estate Group | 3,641 |
| | 6,233 |
| | (2,592 | ) | | (42 | )% | | 10,473 |
| | 12,081 |
| | (1,608 | ) | | (13 | )% | 5,986 |
| | 3,693 |
| | 2,293 |
| | 62 | % | | 11,091 |
| | 6,832 |
| | 4,259 |
| | 62 | % |
| Operations Management Group | (45,957 | ) | | (39,346 | ) | | (6,611 | ) | | (17 | )% | | (141,610 | ) | | (121,841 | ) | | (19,769 | ) | | (16 | )% | (50,548 | ) | | (49,446 | ) | | (1,102 | ) | | (2 | )% | | (99,770 | ) | | (94,712 | ) | | (5,058 | ) | | (5 | )% |
| Fee related earnings | $ | 57,979 |
| | $ | 45,335 |
| | 12,644 |
| | 28 | % | | $ | 158,089 |
| | $ | 123,948 |
| | 34,141 |
| | 28 | % | $ | 62,038 |
| | $ | 53,388 |
| | 8,650 |
| | 16 | % | | $ | 122,495 |
| | $ | 100,110 |
| | 22,385 |
| | 22 | % |
| Performance related earnings: | | | | | | | | | | | | | | | | | | | |
| |
|
| | | | | |
| |
|
|
| Credit Group | $ | 16,309 |
| | $ | 24,804 |
| | (8,495 | ) | | (34 | )% | | $ | 27,677 |
| | $ | 47,783 |
| | (20,106 | ) | | (42 | )% | $ | 18,330 |
| | $ | 3,967 |
| | 14,363 |
| | NM |
| | $ | 41,606 |
| | $ | 11,368 |
| | 30,238 |
| | 266 | % |
| Private Equity Group | 11,967 |
| | 42,241 |
| | (30,274 | ) | | (72 | )% | | 113,712 |
| | 73,287 |
| | 40,425 |
| | 55 | % | 316 |
| | 87,249 |
| | (86,933 | ) | | (100 | )% | | (852 | ) | | 101,745 |
| | (102,597 | ) | | NM |
|
| Real Estate Group | 11,216 |
| | 9,027 |
| | 2,189 |
| | 24 | % | | 32,678 |
| | 16,000 |
| | 16,678 |
| | 104 | % | 3,128 |
| | 15,075 |
| | (11,947 | ) | | (79 | )% | | 9,729 |
| | 21,462 |
| | (11,733 | ) | | (55 | )% |
| Operations Management Group | 3,960 |
| | (4,675 | ) | | 8,635 |
| | NM |
| | 3,184 |
| | (17,787 | ) | | 20,971 |
| | NM |
| 3,699 |
| | (1,626 | ) | | 5,325 |
| | NM |
| | 6,467 |
| | (776 | ) | | 7,243 |
| | NM |
|
| Performance related earnings | $ | 43,452 |
| | $ | 71,397 |
| | (27,945 | ) | | (39 | )% | | $ | 177,251 |
| | $ | 119,283 |
| | 57,968 |
| | 49 | % | $ | 25,473 |
| | $ | 104,665 |
| | (79,192 | ) | | (76 | )% | | $ | 56,950 |
| | $ | 133,799 |
| | (76,849 | ) | | (57 | )% |
| Economic net income: | | | | | | | | | | | | | | | | | | | |
| |
|
| | | | | |
| |
|
|
| Credit Group | $ | 88,753 |
| | $ | 88,382 |
| | 371 |
| | < 1% |
| | $ | 232,277 |
| | $ | 226,453 |
| | 5,824 |
| | 3 | % | $ | 98,122 |
| | $ | 69,076 |
| | 29,046 |
| | 42 | % | | $ | 198,985 |
| | $ | 142,583 |
| | 56,402 |
| | 40 | % |
| Private Equity Group | 39,818 |
| | 57,111 |
| | (17,293 | ) | | (30 | )% | | 198,338 |
| | 128,325 |
| | 70,013 |
| | 55 | % | 27,124 |
| | 121,281 |
| | (94,157 | ) | | (78 | )% | | 52,943 |
| | 158,520 |
| | (105,577 | ) | | (67 | )% |
| Real Estate Group | 14,857 |
| | 15,260 |
| | (403 | ) | | (3 | )% | | 43,151 |
| | 28,081 |
| | 15,070 |
| | 54 | % | 9,114 |
| | 18,768 |
| | (9,654 | ) | | (51 | )% | | 20,820 |
| | 28,294 |
| | (7,474 | ) | | (26 | )% |
| Operations Management Group | (41,997 | ) | | (44,021 | ) | | 2,024 |
| | 5 | % | | (138,426 | ) | | (139,628 | ) | | 1,202 |
| | 1 | % | (46,849 | ) | | (51,072 | ) | | 4,223 |
| | 8 | % | | (93,303 | ) | | (95,488 | ) | | 2,185 |
| | 2 | % |
| Economic net income | $ | 101,431 |
| | $ | 116,732 |
| | (15,301 | ) | | (13 | )% | | $ | 335,340 |
| | $ | 243,231 |
| | 92,109 |
| | 38 | % | $ | 87,511 |
| | $ | 158,053 |
| | (70,542 | ) | | (45 | )% | | $ | 179,445 |
| | $ | 233,909 |
| | (54,464 | ) | | (23 | )% |
| Distributable earnings: | | | | | | | | | | | | | | | | |
| Realized income: | | | | | |
| |
|
| | | | | |
| |
|
|
| Credit Group | $ | 73,120 |
| | $ | 81,542 |
| | (8,422 | ) | | (10 | )% | | $ | 204,402 |
| | $ | 221,357 |
| | (16,955 | ) | | (8 | )% | $ | 97,921 |
| | $ | 73,181 |
| | 24,740 |
| | 34 | % | | $ | 176,778 |
| | $ | 143,126 |
| | 33,652 |
| | 24 | % |
| Private Equity Group | 75,809 |
| | 45,481 |
| | 30,328 |
| | 67 | % | | 145,696 |
| | 104,162 |
| | 41,534 |
| | 40 | % | 53,408 |
| | 50,151 |
| | 3,257 |
| | 6 | % | | 80,735 |
| | 72,496 |
| | 8,239 |
| | 11 | % |
| Real Estate Group | 4,736 |
| | 6,408 |
| | (1,672 | ) | | (26 | )% | | 12,596 |
| | 16,867 |
| | (4,271 | ) | | (25 | )% | 6,479 |
| | 5,181 |
| | 1,298 |
| | 25 | % | | 20,148 |
| | 9,769 |
| | 10,379 |
| | 106 | % |
| Operations Management Group | (53,214 | ) | | (66,696 | ) | | 13,482 |
| | 20 | % | | (151,642 | ) | | (157,550 | ) | | 5,908 |
| | 4 | % | (49,754 | ) | | (48,346 | ) | | (1,408 | ) | | (3 | )% | | (97,534 | ) | | (91,551 | ) | | (5,983 | ) | | (7 | )% |
| Distributable earnings | $ | 100,451 |
| | $ | 66,735 |
| | 33,716 |
| | 51 | % | | $ | 211,052 |
| | $ | 184,836 |
| | 26,216 |
| | 14 | % | |
| Realized income | | $ | 108,054 |
| | $ | 80,167 |
| | 27,887 |
| | 35 | % | | $ | 180,127 |
| | $ | 133,840 |
| | 46,287 |
| | 35 | % |
NM - Not Meaningful
Reconciliation of Certain Non-GAAP Measures to Consolidated GAAP Financial Measures
Income before provision for income taxes is the GAAP financial measure most comparable to ENI, RI, FRE PRE and DE.PRE. The following table presents the reconciliation of income before taxes as reported in the Condensed Consolidated Statements of Operations to ENI, RI, FRE, PRE and DEPRE (in thousands): | | | | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Economic net income | | | | | | | | | | | | | | |
| Income before taxes | $ | 88,424 |
| | $ | 125,425 |
| | $ | 12,916 |
| | $ | 199,457 |
| |
| Income (loss) before taxes | | $ | 51,072 |
| | $ | 115,080 |
| | $ | 113,118 |
| | $ | (75,508 | ) |
| Adjustments: | | | | | | | | | | | | | | |
| Amortization of intangibles | 3,651 |
| | 6,378 |
| | 14,200 |
| | 20,762 |
| 3,285 |
| | 5,274 |
| | 6,572 |
| | 10,549 |
|
| Depreciation expense | 3,468 |
| | 2,148 |
| | 9,458 |
| | 5,940 |
| 4,426 |
| | 2,774 |
| | 8,315 |
| | 5,990 |
|
| Equity compensation expenses | 18,091 |
| | 8,476 |
| | 52,097 |
| | 27,185 |
| 22,507 |
| | 18,917 |
| | 43,594 |
| | 34,006 |
|
| Acquisition and merger-related expenses | 2,878 |
| | (17,611 | ) | | 258,722 |
| | (17,054 | ) | 47 |
| | 756 |
| | (272 | ) | | 255,844 |
|
| Placement fees and underwriting costs | 4,495 |
| | 2,202 |
| | 14,317 |
| | 4,886 |
| 1,852 |
| | 6,383 |
| | 3,516 |
| | 9,822 |
|
| Offering costs | 33 |
| | — |
| | 688 |
| | — |
| 3 |
| | (5 | ) | | 3 |
| | 655 |
|
| Other non-cash expense | — |
| | (1,728 | ) | | — |
| | (1,728 | ) | |
| (Income) loss before taxes of non-controlling interests in consolidated subsidiaries | (216 | ) | | — |
| | 407 |
| | — |
| |
| (Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations | (19,393 | ) | | (8,558 | ) | | (27,465 | ) | | 3,783 |
| |
| Other expense(1) | | 13,551 |
| | — |
| | 13,558 |
| | — |
|
| Expense of non-controlling interests in consolidated subsidiaries | | 719 |
| | 623 |
| | 1,359 |
| | 623 |
|
| Income before taxes of non-controlling interests in Consolidated Funds, net of eliminations | | (9,951 | ) | | 8,251 |
| | (10,318 | ) | | (8,072 | ) |
| Economic net income | 101,431 |
| | 116,732 |
| | 335,340 |
| | 243,231 |
| 87,511 |
| | 158,053 |
| | 179,445 |
| | 233,909 |
|
| Unconsolidated performance fees income - realized | (178,989 | ) | | (132,837 | ) | | (261,924 | ) | | (220,790 | ) | |
| Unconsolidated performance fees income - unrealized | 89,423 |
| | (32,368 | ) | | (223,467 | ) | | (118,334 | ) | |
| Unconsolidated performance fee compensation - realized | 140,979 |
| | 93,778 |
| | 199,253 |
| | 146,792 |
| |
| Unconsolidated performance fee compensation - unrealized | (82,342 | ) | | 29,395 |
| | 161,791 |
| | 106,947 |
| |
| Unconsolidated performance income - unrealized | | 124,343 |
| | (263,629 | ) | | 89,225 |
| | (312,890 | ) |
| Unconsolidated performance related compensation - unrealized | | (100,886 | ) | | 208,732 |
| | (89,877 | ) | | 244,133 |
|
| Unconsolidated net investment income | | (2,914 | ) | | (22,989 | ) | | 1,334 |
| | (31,312 | ) |
| Realized income | | 108,054 |
| | 80,167 |
| | 180,127 |
| | 133,840 |
|
| Unconsolidated performance income - realized | | (122,608 | ) | | (74,130 | ) | | (145,715 | ) | | (82,935 | ) |
| Unconsolidated performance related compensation - realized | | 87,881 |
| | 52,973 |
| | 102,750 |
| | 58,274 |
|
| Unconsolidated net investment income | (12,523 | ) | | (29,365 | ) | | (52,904 | ) | | (33,898 | ) | (11,289 | ) | | (5,622 | ) | | (14,667 | ) | | (9,069 | ) |
| Fee related earnings | 57,979 |
| | 45,335 |
| | 158,089 |
| | 123,948 |
| $ | 62,038 |
| | $ | 53,388 |
| | 122,495 |
| | 100,110 |
|
| Unconsolidated performance fees—realized | 178,989 |
| | 132,837 |
| | 261,924 |
| | 220,790 |
| |
| Unconsolidated performance fee compensation—realized | (140,979 | ) | | (93,778 | ) | | (199,253 | ) | | (146,792 | ) | |
| Unconsolidated investment and other income realized, net | 20,855 |
| | (5,877 | ) | | 29,922 |
| | 11,381 |
| |
| Adjustments: | | | | | | | | |
| One-time acquisition costs | (2,818 | ) | | (145 | ) | | (3,701 | ) | | (489 | ) | |
| Dividend equivalent | (4,223 | ) | | (2,045 | ) | | (9,428 | ) | | (3,799 | ) | |
| Equity income | 397 |
| | 36 |
| | 533 |
| | 883 |
| |
| Income tax expense | (1,753 | ) | | (5,278 | ) | | (2,571 | ) | | (10,260 | ) | |
| Placement fees and underwriting costs | (4,495 | ) | | (2,202 | ) | | (14,317 | ) | | (4,886 | ) | |
| Non-cash depreciation and amortization | (3,468 | ) | | (2,148 | ) | | (9,458 | ) | | (5,940 | ) | |
| Offering costs | (33 | ) | | — |
| | (688 | ) | | — |
| |
| Distributable earnings | $ | 100,451 |
| | $ | 66,735 |
| | $ | 211,052 |
| | $ | 184,836 |
| |
| Performance related earnings | | | | | | | | | | | | | | |
| Economic net income | $ | 101,431 |
| | $ | 116,732 |
| | $ | 335,340 |
| | $ | 243,231 |
| $ | 87,511 |
| | $ | 158,053 |
| | $ | 179,445 |
| | $ | 233,909 |
|
| Less: fee related earnings | (57,979 | ) | | (45,335 | ) | | (158,089 | ) | | (123,948 | ) | (62,038 | ) | | (53,388 | ) | | (122,495 | ) | | (100,110 | ) |
| Performance related earnings | $ | 43,452 |
| | $ | 71,397 |
| | $ | 177,251 |
| | $ | 119,283 |
| $ | 25,473 |
| | $ | 104,665 |
| | $ | 56,950 |
| | $ | 133,799 |
|
| |
| (1) | Includes $11.8 million payment to ARCC for rent and utilities for the years ended 2017, 2016, 2015 and 2014, and for the first quarter of 2018. The payment included $0.6 million related to the first quarter of 2018 and $0.6 million and $1.3 million related to the three and six months ended June 30, 2017, respectively. Beginning April 1, 2018, the Company paid these expenses and recorded them as a direct operating expense within G&A, which totaled $0.9 million for the quarter ended June 30, 2018. |
The following table reconciles unconsolidated performance fee income to our consolidated carried interest allocation and incentive fees reported in accordance with GAAP performance fee income (in thousands):
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Unconsolidated performance fee income - realized | $ | 178,989 |
| | $ | 132,837 |
| | $ | 261,924 |
| | $ | 220,790 |
|
| Performance fee income - realized earned from Consolidated Funds | — |
| | — |
| | (8,086 | ) | | — |
|
| Performance fee - realized reclass(1) | (981 | ) | | (2,170 | ) | | (2,181 | ) | | (5,053 | ) |
| Performance fee income - realized | 178,008 |
|
| 130,667 |
|
| 251,657 |
|
| 215,737 |
|
| Unconsolidated performance fee income - unrealized | (89,423 | ) | | 32,368 |
| | 223,467 |
| | 118,334 |
|
| Performance fee income - unrealized earned from Consolidated Funds | (1,371 | ) | | (799 | ) | | 4,327 |
| | 74 |
|
| Performance fee - unrealized reclass(1) | (206 | ) | | 2,246 |
| | 753 |
| | 3,541 |
|
| Performance fee income - unrealized | (91,000 | ) |
| 33,815 |
|
| 228,547 |
|
| 121,949 |
|
| Total GAAP performance fee income | $ | 87,008 |
|
| $ | 164,482 |
|
| $ | 480,204 |
|
| $ | 337,686 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Unconsolidated performance income - realized | $ | 122,608 |
| | $ | 74,130 |
| | $ | 145,715 |
| | $ | 82,935 |
|
| Performance income - realized earned from Consolidated Funds | (4,000 | ) | | (4,664 | ) | | (4,000 | ) | | (8,086 | ) |
| Performance income - realized reclass(1) | (521 | ) | | (1,200 | ) | | (521 | ) | | (1,200 | ) |
| Performance income - realized | 118,087 |
|
| 68,266 |
|
| 141,194 |
|
| 73,649 |
|
| Unconsolidated performance income - unrealized | (124,343 | ) | | 263,629 |
| | (89,225 | ) | | 312,890 |
|
| Performance income - unrealized earned from Consolidated Funds | — |
| | 5,146 |
| | — |
| | 5,698 |
|
| Performance income - unrealized reclass(1) | 552 |
| | 983 |
| | 1,527 |
| | 959 |
|
| Performance income - unrealized | (123,791 | ) |
| 269,758 |
|
| (87,698 | ) |
| 319,547 |
|
| Total GAAP carried interest allocation and incentive fees | $ | (5,704 | ) |
| $ | 338,024 |
|
| $ | 53,496 |
|
| $ | 393,196 |
|
(1) Related to performance feesincome for AREA Sponsor Holdings LLC. Changes in value of this investment are reflected within other (income) expense in the Company’s Condensed Consolidated Statements of Operations.
The following table reconciles unconsolidated other income to our consolidated GAAP other income (in thousands):
| | | | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Unconsolidated net investment income | $ | 12,523 |
| | $ | 29,365 |
| | $ | 52,904 |
| | $ | 33,898 |
| $ | 14,203 |
| | $ | 28,611 |
| | $ | 13,333 |
| | $ | 40,381 |
|
| Net investment income from Consolidated Funds | 45,254 |
| | 24,632 |
| | 73,675 |
| | 20,670 |
| |
| Performance fee - reclass(1) | 1,187 |
| | (76 | ) | | 1,428 |
| | 1,512 |
| |
| Net investment income (loss) from Consolidated Funds | | 70,186 |
| | (3,560 | ) | | 76,979 |
| | 34,862 |
|
| Performance income - reclass(1) | | (31 | ) | | 217 |
| | (1,006 | ) | | 241 |
|
| Principal investment income | | (14,722 | ) | | (34,166 | ) | | (17,430 | ) | | (47,335 | ) |
| Change in value of contingent consideration | (60 | ) | | 17,690 |
| | 20,156 |
| | 17,486 |
| — |
| | (32 | ) | | — |
| | 20,216 |
|
| Other non-cash expense | — |
| | 1,728 |
| | — |
| | 1,728 |
| (1,715 | ) | | — |
| | (1,722 | ) | | — |
|
| Offering costs | (33 | ) | | — |
| | (688 | ) | | — |
| (3 | ) | | 5 |
| | (3 | ) | | (655 | ) |
| Income before taxes of non-controlling interests in consolidated subsidiaries(2) | 9 |
| | — |
| | 14 |
| | — |
| |
| Other income of non-controlling interests in consolidated subsidiaries | | 8 |
| | 5 |
| | 15 |
| | 5 |
|
| Total GAAP other income | $ | 58,880 |
|
| $ | 73,339 |
|
| $ | 147,489 |
|
| $ | 75,294 |
| $ | 67,926 |
|
| $ | (8,920 | ) |
| $ | 70,166 |
|
| $ | 47,715 |
|
(1) Related to performance feesincome for AREA Sponsor Holdings LLC. Changes in value of this investment are reflected within other (income) expense in the Company’s Condensed Consolidated Statements of Operations.
(2) Adjustments to eliminate costs being borne by certain of our joint venture partners.
Results of Operations by Segment
Credit Group
The following table sets forth certain statement of operations data and certain other data of our Credit Group segment for the periods presented.
| | | | Three Months Ended | | Favorable (Unfavorable) | | Nine Months Ended | | Favorable (Unfavorable) | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | September 30, | | September 30, | | June 30, | | June 30, | |
| | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Management fees (includes ARCC Part I Fees of $24,036, $76,436 and $33,260, $90,884 for the three and nine months ended September 30, 2017 and 2016, respectively) | $ | 120,178 |
| | $ | 115,794 |
| | $ | 4,384 |
| | 4 | % | | $ | 354,179 |
| | $ | 332,182 |
| | $ | 21,997 |
| | 7 | % | |
| Management fees (includes ARCC Part I Fees of $29,866, $58,283 and $19,143, $52,400 for the three and six months ended June 30, 2018 and 2017, respectively) | | $ | 135,848 |
| | $ | 112,654 |
| | $ | 23,194 |
| | 21 | % | | $ | 267,614 |
| | $ | 234,001 |
| | $ | 33,613 |
| | 14 | % |
| Other fees | 5,668 |
| | 280 |
| | 5,388 |
| | NM |
| | 15,834 |
| | 939 |
| | 14,895 |
| | NM |
| 6,877 |
| | 5,663 |
| | 1,214 |
| | 21 | % | | 12,607 |
| | 10,166 |
| | 2,441 |
| | 24 | % |
| Compensation and benefits | (46,551 | ) | | (45,222 | ) | | (1,329 | ) | | (3 | )% | | (142,647 | ) | | (135,068 | ) | | (7,579 | ) | | (6 | )% | (51,892 | ) | | (45,160 | ) | | (6,732 | ) | | (15 | )% | | (102,172 | ) | | (96,863 | ) | | (5,309 | ) | | (5 | )% |
| General, administrative and other expenses | (6,851 | ) | | (7,274 | ) | | 423 |
| | 6 | % | | (22,766 | ) | | (19,383 | ) | | (3,383 | ) | | (17 | )% | (11,041 | ) | | (8,048 | ) | | (2,993 | ) | | (37 | )% | | (20,670 | ) | | (16,089 | ) | | (4,581 | ) | | (28 | )% |
| Fee Related Earnings | 72,444 |
| | 63,578 |
| | 8,866 |
| | 14 | % | | 204,600 |
| | 178,670 |
| | 25,930 |
| | 15 | % | 79,792 |
| | 65,109 |
| | 14,683 |
| | 23 | % | | 157,379 |
| | 131,215 |
| | 26,164 |
| | 20 | % |
| Performance fees-realized | 3,296 |
| | 22,422 |
| | (19,126 | ) | | (85 | )% | | 19,957 |
| | 44,624 |
| | (24,667 | ) | | (55 | )% | |
| Performance fees-unrealized | 33,033 |
| | 11,152 |
| | 21,881 |
| | 196 | % | | 41,062 |
| | (1,544 | ) | | 42,606 |
| | NM |
| |
| Performance fee compensation-realized | (1,466 | ) | | (7,241 | ) | | 5,775 |
| | 80 | % | | (8,649 | ) | | (9,978 | ) | | 1,329 |
| | 13 | % | |
| Performance fee compensation-unrealized | (19,820 | ) | | (11,686 | ) | | (8,134 | ) | | (70 | )% | | (27,357 | ) | | (9,853 | ) | | (17,504 | ) | | (178 | )% | |
| Net performance fees | 15,043 |
| | 14,647 |
| | 396 |
| | 3 | % | | 25,013 |
| | 23,249 |
| | 1,764 |
| | 8 | % | |
| Performance income-realized | | 41,672 |
| | 7,883 |
| | 33,789 |
| | NM |
| | 46,743 |
| | 16,661 |
| | 30,082 |
| | 181 | % |
| Performance income-unrealized | | (4,568 | ) | | 5,093 |
| | (9,661 | ) | | NM |
| | 11,524 |
| | 8,029 |
| | 3,495 |
| | 44 | % |
| Performance related compensation-realized | | (23,577 | ) | | (1,898 | ) | | (21,679 | ) | | NM |
| | (26,665 | ) | | (7,183 | ) | | (19,482 | ) | | (271 | )% |
| Performance related compensation-unrealized | | 2,759 |
| | (6,079 | ) | | 8,838 |
| | NM |
| | 9,935 |
| | (7,537 | ) | | 17,472 |
| | NM |
|
| Net performance income | | 16,286 |
| | 4,999 |
| | 11,287 |
| | 226 | % | | 41,537 |
| | 9,970 |
| | 31,567 |
| | NM |
|
| Investment income-realized | 6,206 |
| | 588 |
| | 5,618 |
| | NM |
| | 9,049 |
| | 390 |
| | 8,659 |
| | NM |
| 595 |
| | 2,525 |
| | (1,930 | ) | | (76 | )% | | 1,366 |
| | 2,843 |
| | (1,477 | ) | | (52 | )% |
| Investment income (loss)-unrealized | (1,123 | ) | | 5,460 |
| | (6,583 | ) | | NM |
| | 16 |
| | 9,256 |
| | (9,240 | ) | | (100 | )% | 1,617 |
| | (3,450 | ) | | 5,067 |
| | NM |
| | 1,348 |
| | 1,139 |
| | 209 |
| | 18 | % |
| Interest and other investment income (loss) | (540 | ) | | 5,940 |
| | (6,480 | ) | | NM |
| | 2,399 |
| | 21,617 |
| | (19,218 | ) | | (89 | )% | |
| Interest and other investment income | | 3,428 |
| | 2,958 |
| | 470 |
| | 16 | % | | 5,624 |
| | 2,939 |
| | 2,685 |
| | 91 | % |
| Interest expense | (3,277 | ) | | (1,831 | ) | | (1,446 | ) | | (79 | )% | | (8,800 | ) | | (6,729 | ) | | (2,071 | ) | | (31 | )% | (3,596 | ) | | (3,065 | ) | | (531 | ) | | (17 | )% | | (8,269 | ) | | (5,523 | ) | | (2,746 | ) | | (50 | )% |
| Net investment income | 1,266 |
| | 10,157 |
| | (8,891 | ) | | (88 | )% | | 2,664 |
| | 24,534 |
| | (21,870 | ) | | (89 | )% | |
| Net investment income (loss) | | 2,044 |
| | (1,032 | ) | | 3,076 |
| | NM |
| | 69 |
| | 1,398 |
| | (1,329 | ) | | (95 | )% |
| Performance related earnings | 16,309 |
| | 24,804 |
| | (8,495 | ) | | (34 | )% | | 27,677 |
| | 47,783 |
| | (20,106 | ) | | (42 | )% | 18,330 |
| | 3,967 |
| | 14,363 |
| | NM |
| | 41,606 |
| | 11,368 |
| | 30,238 |
| | 266 | % |
| Economic net income | $ | 88,753 |
| | $ | 88,382 |
| | 371 |
| | < 1% |
| | $ | 232,277 |
| | $ | 226,453 |
| | 5,824 |
| | 3 | % | $ | 98,122 |
| | $ | 69,076 |
| | 29,046 |
| | 42 | % | | $ | 198,985 |
| | $ | 142,583 |
| | 56,402 |
| | 40 | % |
| Distributable earnings | $ | 73,120 |
| | $ | 81,542 |
| | (8,422 | ) | | (10 | )% | | $ | 204,402 |
| | $ | 221,357 |
| | (16,955 | ) | | (8 | )% | |
| Realized income | | $ | 97,921 |
| | $ | 73,181 |
| | 24,740 |
| | 34 | % | | $ | 176,778 |
| | $ | 143,126 |
| | 33,652 |
| | 24 | % |
NM - Not meaningful
Accrued performance feescarried interest and incentive fee receivable for the Credit Group are composed ofinclude the following:
| | | | As of September 30, | | As of December 31, | As of June 30, | | As of December 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | (Dollars in thousands) | (Dollars in thousands) |
| CLOs | $ | 1,407 |
| | $ | 8,182 |
| $ | — |
| | $ | 451 |
|
| CSF | 29,103 |
| | 26,416 |
| 20,819 |
| | 28,158 |
|
| ACE II | 22,691 |
| | 16,427 |
| 26,072 |
| | 24,090 |
|
| ACE III | 34,649 |
| | 11,541 |
| 49,734 |
| | 43,595 |
|
| Other credit funds | 66,589 |
| | 42,386 |
| 51,836 |
| | 72,210 |
|
| Total Credit Group | $ | 154,439 |
| | $ | 104,952 |
| $ | 148,461 |
| | $ | 168,504 |
|
NetThe following tables present the components of performance fee revenuesincome for the Credit GroupGroup. The three and six month periods ended June 30, 2017 include unrealized incentive fees, which are composedno longer recognized following our adoption of the following:new revenue recognition standard.
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) | (Dollars in thousands) |
| CLOs | $ | 1,602 |
| | $ | (2,409 | ) | | $ | (807 | ) | | $ | 10,269 |
| | $ | (7,100 | ) | | $ | 3,169 |
| $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | 4,680 |
| | $ | (5,682 | ) | | $ | (1,002 | ) |
| CSF | — |
| | 10,104 |
| | 10,104 |
| | — |
| | 21,226 |
| | 21,226 |
| — |
| | (2,973 | ) | | (2,973 | ) | | — |
| | (2,123 | ) | | (2,123 | ) |
| ACE II | — |
| | 2,745 |
| | 2,745 |
| | 12,124 |
| | (13,669 | ) | | (1,545 | ) | 4,071 |
| | 595 |
| | 4,666 |
| | 3,201 |
| | (652 | ) | | 2,549 |
|
| ACE III | — |
| | 9,621 |
| | 9,621 |
| | — |
| | 3,067 |
| | 3,067 |
| 15,361 |
| | (3,298 | ) | | 12,063 |
| | — |
| | 6,350 |
| | 6,350 |
|
| Other credit funds | 1,694 |
| | 12,972 |
| | 14,666 |
| | 29 |
| | 7,628 |
| | 7,657 |
| 22,214 |
| | 1,108 |
| | 23,322 |
| | 2 |
| | 7,200 |
| | 7,202 |
|
| Total Credit Group | $ | 3,296 |
| | $ | 33,033 |
| | $ | 36,329 |
| | $ | 22,422 |
| | $ | 11,152 |
| | $ | 33,574 |
| $ | 41,672 |
| | $ | (4,568 | ) | | $ | 37,104 |
| | $ | 7,883 |
| | $ | 5,093 |
| | $ | 12,976 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) |
| CLOs | $ | 70 |
| | $ | — |
| | $ | 70 |
| | $ | 4,883 |
| | $ | (4,487 | ) | | $ | 396 |
|
| CSF | — |
| | (7,339 | ) | | (7,339 | ) | | — |
| | (7,418 | ) | | (7,418 | ) |
| ACE II | 4,071 |
| | 2,328 |
| | 6,399 |
| | 3,201 |
| | 2,558 |
| | 5,759 |
|
| ACE III | 15,361 |
| | 7,469 |
| | 22,830 |
| | — |
| | 11,542 |
| | 11,542 |
|
| Other credit funds | 27,241 |
| | 9,066 |
| | 36,307 |
| | 8,577 |
| | 5,834 |
| | 14,411 |
|
| Total Credit Group | $ | 46,743 |
| | $ | 11,524 |
| | $ | 58,267 |
| | $ | 16,661 |
| | $ | 8,029 |
| | $ | 24,690 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net |
| | (Dollars in thousands) |
| CLOs | $ | 6,485 |
| | $ | (6,896 | ) | | $ | (411 | ) | | $ | 27,920 |
| | $ | (16,967 | ) | | $ | 10,953 |
|
| CSF | — |
| | 2,686 |
| | 2,686 |
| | — |
| | 5,436 |
| | 5,436 |
|
| ACE II | 3,201 |
| | 5,303 |
| | 8,504 |
| | 12,124 |
| | (9,275 | ) | | 2,849 |
|
| ACE III | — |
| | 21,163 |
| | 21,163 |
| | — |
| | 9,469 |
| | 9,469 |
|
| Other credit funds | 10,271 |
| | 18,806 |
| | 29,077 |
| | 4,580 |
| | 9,793 |
| | 14,373 |
|
| Total Credit Group | $ | 19,957 |
| | $ | 41,062 |
| | $ | 61,019 |
| | $ | 44,624 |
| | $ | (1,544 | ) | | $ | 43,080 |
|
The following tables present the components of the change in performance feesincome - unrealized for the Credit Group:Group. The three and six month periods ended June 30, 2017 include unrealized incentive fees, which are no longer recognized following our adoption of the new revenue recognition standard.
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) | (Dollars in thousands) |
| CLOs | $ | (1,602 | ) | | $ | — |
| | $ | (807 | ) | | $ | (2,409 | ) | | $ | (10,269 | ) | | $ | 3,241 |
| | $ | (72 | ) | | $ | (7,100 | ) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4,680 | ) | | $ | 233 |
| | $ | (1,235 | ) | | $ | (5,682 | ) |
| CSF | — |
| | 10,104 |
| | — |
| | 10,104 |
| | — |
| | 21,226 |
| | — |
| | 21,226 |
| — |
| | — |
| | (2,973 | ) | | (2,973 | ) | | — |
| | — |
| | (2,123 | ) | | (2,123 | ) |
| ACE II | — |
| | 2,745 |
| | — |
| | 2,745 |
| | (12,124 | ) | | — |
| | (1,545 | ) | | (13,669 | ) | (4,071 | ) | | 4,666 |
| | — |
| | 595 |
| | (3,201 | ) | | 2,549 |
| | — |
| | (652 | ) |
| ACE III | — |
| | 9,621 |
| | — |
| | 9,621 |
| | — |
| | 3,067 |
| | — |
| | 3,067 |
| (15,361 | ) | | 12,063 |
| | — |
| | (3,298 | ) | | — |
| | 6,350 |
| | — |
| | 6,350 |
|
| Other credit funds | (1,694 | ) | | 15,701 |
| | (1,035 | ) | | 12,972 |
| | (29 | ) | | 8,241 |
| | (584 | ) | | 7,628 |
| (10,501 | ) | | 11,837 |
| | (228 | ) | | 1,108 |
| | (2 | ) | | 7,982 |
| | (780 | ) | | 7,200 |
|
| Total Credit Group | $ | (3,296 | ) |
| $ | 38,171 |
|
| $ | (1,842 | ) |
| $ | 33,033 |
| | $ | (22,422 | ) |
| $ | 35,775 |
|
| $ | (2,201 | ) |
| $ | 11,152 |
| $ | (29,933 | ) |
| $ | 28,566 |
|
| $ | (3,201 | ) |
| $ | (4,568 | ) | | $ | (7,883 | ) |
| $ | 17,114 |
|
| $ | (4,138 | ) |
| $ | 5,093 |
|
| | | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | Performance income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) | (Dollars in thousands) |
| CLOs | $ | (6,485 | ) | | $ | 316 |
| | $ | (727 | ) | | $ | (6,896 | ) | | $ | (27,920 | ) | | $ | 11,218 |
| | $ | (265 | ) | | $ | (16,967 | ) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4,883 | ) | | $ | 897 |
| | $ | (501 | ) | | $ | (4,487 | ) |
| CSF | — |
| | 2,686 |
| | — |
| | 2,686 |
| | — |
| | 5,436 |
| | — |
| | 5,436 |
| — |
| | — |
| | (7,339 | ) | | (7,339 | ) | | — |
| | — |
| | (7,418 | ) | | (7,418 | ) |
| ACE II | (3,201 | ) | | 8,504 |
| | — |
| | 5,303 |
| | (12,124 | ) | | 3,115 |
| | (266 | ) | | (9,275 | ) | (4,071 | ) | | 6,399 |
| | — |
| | 2,328 |
| | (3,201 | ) | | 5,759 |
| | — |
| | 2,558 |
|
| ACE III | — |
| | 21,163 |
| | — |
| | 21,163 |
| | — |
| | 9,469 |
| | — |
| | 9,469 |
| (15,361 | ) | | 22,830 |
| | — |
| | 7,469 |
| | — |
| | 11,542 |
| | — |
| | 11,542 |
|
| Other credit funds | (10,271 | ) | | 29,177 |
| | (100 | ) | | 18,806 |
| | (4,580 | ) | | 16,313 |
| | (1,940 | ) | | 9,793 |
| (10,501 | ) | | 19,939 |
| | (372 | ) | | 9,066 |
| | (8,577 | ) | | 14,700 |
| | (289 | ) | | 5,834 |
|
| Total Credit Group | $ | (19,957 | ) | | $ | 61,846 |
| | $ | (827 | ) | | $ | 41,062 |
| | $ | (44,624 | ) | | $ | 45,551 |
| | $ | (2,471 | ) | | $ | (1,544 | ) | $ | (29,933 | ) | | $ | 49,168 |
| | $ | (7,711 | ) | | $ | 11,524 |
| | $ | (16,661 | ) | | $ | 32,898 |
| | $ | (8,208 | ) | | $ | 8,029 |
|
Credit Group—Three and NineSix Months Ended SeptemberJune 30, 20172018 Compared to Three and NineSix Months Ended SeptemberJune 30, 20162017
Fee Related Earnings:
Fee related earnings increased by $8.9$14.7 million, or 14%23%, to $72.4$79.8 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $25.9$26.2 million, or 15%20%, to $204.6$157.4 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. Fee related earnings were impacted by fluctuations of the following components:
Management Fees.Total management fees increased by $4.4$23.2 million, or 4%21%, to $120.2$135.8 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $22.0$33.6 million, or 7%14%, to $354.2$267.6 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. In the current year periods, Ares Capital Europe III, L.P. (“ACE III”) generated additional2017. Additional invested capital into existing funds increased management fees of $2.5by $10.1 million and $7.1$26.1 million for the three and nine months ended Septembersix month comparative periods, respectively. The formation of 26 new funds with FPAUM of $7.3 billion subsequent to June 30, 2017 respectively, as additional capital was deployed for investments. We also earned $2.0increased management fees by $8.3 million and $3.2 million of management fees for the three and nine months ended September 30, 2017, respectively, from 10 new U.S. direct lending funds that began generating management fees subsequent to September 30, 2016. Additionally, ARCC's acquisition of ACAS in the first quarter of 2017 increased FPAUM by approximately $2.8 billion at acquisition, which drove increases of $10.2 million and $23.9 million in management fees generated by ARCC in the current three and nine month periods, respectively. Conversely, ARCC Part I Fees decreased $9.2 million and $14.4$14.0 million for the three and ninesix month respectivecomparative periods, due primarilyrespectively. ARCC Part I Fees increased by $10.7 million to $29.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $5.9 million to $58.3 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were primarily due to ARCC recognizing increased interest income from the growth in the size of its portfolio combined with higher yields from recent increases in LIBOR as well as an increase in capital structuring fees from a greater number of new investment commitments. The increase for the six month comparative periods was partially offset by a $10 million quarterly ARCC Part I Fee waiver that commenced in each of the second and third quartersquarter of 2017. The increases were also offset by the liquidation of 18 funds with FPAUM of $4.5 billion subsequent to June 30, 2017 decreasing management fees by $5.9 million and $12.8 million for the three and six month comparative periods, respectively.
The effective management fee rate decreasedincreased from 1.10% and 1.07%0.97% for the three and nine months ended SeptemberJune 30, 2016, respectively,2017 to 0.97% and 1.01%1.02% for the three and nine months ended SeptemberJune 30, 2017, respectively.2018. ARCC Part I Fees contributed 0.19%Fees' contribution towards the total effective management fee rate of the Credit Group increased from 0.16% for the three months ended SeptemberJune 30, 2017 compared to 0.32%0.23% for the three months ended SeptemberJune 30, 2016. For2018. The increase in the nine months ended September 30, 2017,effective management fee rate for the three month comparative periods was primarily due to increased ARCC Part I Fees contributed 0.22%fees and new direct lending funds with higher effective fee rates. The effective management fee rate remained consistent at 1.03% for the six months ended June 30, 2018 and 2017. ARCC Part I Fees' contribution towards the total effective management fee rate of the Credit Group compared to 0.29%decreased from 0.23% for the ninesix months ended SeptemberJune 30, 2016. In2017 to 0.22% for the second and third quarterssix months ended June 30, 2018. The effective management fee rate remained consistent for the six month comparative periods due to the impact of 2017, we waived in each quarter $10 million ofincreased ARCC Part I Fees which reducedand new direct lending funds with higher effective fee rates being offset by the effective management fee rate attributable to$10 million quarterly ARCC Part I Fees in the current year periods.Fee waiver.
Other Fees. Other fees increased by $5.4$1.2 million, or 21%, to $6.9 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $14.9$2.4 million, or 24%, to $12.6 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increases resultedwere primarily driven by transaction fees generated from a transaction fee based on the amountgrowing volume of loans funded from certain U.S. direct lending funds that we began recognizing in the fourth quarter of 2016.funds.
Compensation and Benefits. Compensation and benefits expenses increased by $1.3$6.7 million, or 3%15%, to $46.6$51.9 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016. Compensation2017 and benefits expenses increased by $7.6$5.3 million, or 6%5%, to $142.6$102.2 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. Excluding the impact of the ARCC-ACAS Transaction, compensation and benefits expenses increased $5.2 million and $10.5 million for the three and nine months ended September 30, 2017, respectively, primarily due to additional headcount and increase of incentive compensation with segment performance, compared to the prior year periods. Compensation costs related to employees hired in connection with the ARCC-ACAS Transaction were $1.7 million and $5.6 million for the three and nine months ended September 30, 2017, respectively. These2017. The increases were offsetprimarily driven by $5.6 million and $8.5 million decreases inhigher compensation expense related to ARCC Part I compensation for the three and nine month respective periods, due to the decrease in ARCC Part I Fee revenue.Fees. Compensation and benefits expenses represented 38.7% and 40.3%38.2% of management fees for both the three and ninesix months ended SeptemberJune 30, 2017, respectively,2018 compared to 39.1%40.1% and 40.7%41.4% for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively.
General, Administrative and Other Expenses. General, administrative and other expenses decreasedincreased by $0.4$3.0 million, or 6%37%, to $6.9$11.0 million for the three months ended SeptemberJune 30, 2017,2018 compared to the three months ended SeptemberJune 30, 2016. There2017 and by $4.6 million, or 28%, to $20.7 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were no significant fluctuations of general, administrativeprimarily driven by marketing expenses to support expanding distribution and other expenses incurredfundraising efforts, including our joint venture distribution platform. Additionally, occupancy costs increased by our Credit Group$0.9 million related to costs previously paid by ARCC for certain rent and utilities for the three month comparative period.
General, administrative and other expenses increased by $3.4 million, or 17%, to $22.8 million for the ninesix months ended SeptemberJune 30, 2017 compared2018 that we expect to the nine months ended September 30, 2016. The increase in the current year period was primarily due to occupancy and business support costs associated with increased staffing levels.
continue.
Performance Related Earnings:
Performance related earnings decreasedincreased by $8.5$14.4 million to $16.3$18.3 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $20.1$30.2 million to $27.7$41.6 million for the ninesix months ended SeptemberJune 30, 2017 2018
compared to the ninesix months ended SeptemberJune 30, 2016.2017. Performance related earnings were impacted by fluctuations of the following components:
Net Performance Fees.Income. Net performance fees includeincome includes realized and unrealized performance fees,income, net of realized and unrealized performance feerelated compensation. The impact of reversals of previously recognized performance fee revenueincome and the corresponding performance feerelated compensation expense is reflected as a reduction in unrealized performance feesincome and unrealized performance feerelated compensation.
Net performance feesincome increased by $0.4$11.3 million to $15.0$16.3 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016. Net performance fees increased2017 and by $1.8$31.6 million to $25.0$41.5 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increases in current year periods were primarily driven by increases in performance fees earned froman increased capital base of certain funds within our direct lending strategies, which generatedfunds generating returns in excess of their hurdle rates for both of the comparative periods. Net performance income for the six month period ended June 30, 2018 included a $13.7 million expense reduction from the reversal of unrealized performance related compensation payable balance at December 31, 2017. During the first quarter of 2018 we determined that the liability balance as of December 31, 2017 was no longer probable of payment based on an increased capital base. These increases were offset by decreased performance fees primarily from our syndicated loans strategy which benefited from a broad-based credit market rally in prior year.the terms of the payment arrangement as payment is not required until revenue is realized.
Net Investment Income.Income (Loss). Net investment income decreased(loss) increased by $8.9$3.1 million to $1.3from a net investment loss of $1.0 million for the three months ended SeptemberJune 30, 2017 to net investment income of $2.0 million for the three months ended June 30, 2018. The increase was primarily due to higher market appreciation across our credit portfolio for the three month comparative period.
Net investment income decreased by $1.3 million to $0.1 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decrease was primarily due to lower market appreciation in our investments in our syndicated loan funds for the six month comparative period, offset by higher market appreciation in our investments in our U.S. direct lending funds for the six month comparative period.
Realized Income:
Realized income increased by $24.7 million, or 34%, to $97.9 million for the three months ended June 30, 2018 compared to the three months ended SeptemberJune 30, 20162017 and by $21.9$33.7 million, or 24%, to $2.7$176.8 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The decreases in the current year periodsincreases were primarily attributable to the revaluationincreases in FRE of certain assets and liabilities denominated in foreign currencies, which resulted in transaction losses of $3.0$14.7 million and $5.1$26.2 million for the three and nine months ended September 30, 2017,six month comparative periods, respectively, comparedand to transaction gainsincreases in net realized performance income of $3.4$12.1 million and $14.3$10.6 million for the three and nine months ended September 30, 2016,six month comparative periods, respectively. Interest expense alsoIncreases in net realized performance income were primarily from increased $1.4distributions generated on a growing capital base within certain direct lending funds that are generating returns in excess of their hurdle rates for the comparative periods. These increases were offset by reductions in net realized investment and other income of $2.1 million and $2.1$3.1 million for the three and nine months ended September 30, 2017,six month comparative periods, respectively, compared toprimarily from our syndicated loan funds in the prior year periods as a result of term loans that were entered into in connection with new CLO investments.period.
Economic Net Income:
Economic net income is composed of fee related earnings and performance related earnings. Economic net income increased by $0.4$29.0 million, or 42%, to $88.8$98.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $5.8$56.4 million, or 3%40%, to $232.3$199.0 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. The increases were2017 as a result of the fluctuations described above.
Distributable Earnings:
DE decreased by $8.4 million, or 10%, to $73.1 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 and by $17.0 million, or 8%, to $204.4 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. DE was lower due to decreases of $5.0 million in net realized investment and other income for the nine months ended September 30, 2017 and of $13.4 million and $23.3 million in net realized performance fees for the three and nine months ended September 30, 2017, respectively. Increases in non-core expenses, primarily driven by placement fees related to new fund launches and by dividend equivalent payments made on unvested restricted stock, of $5.3 million and $14.5 million for the three and nine months ended September 30, 2017, respectively, compared to the prior year periods also contributed to the decrease of DE. These decreases were partially offset by increases in FRE of $8.9 million and $25.9 million for the three and nine months ended September 30, 2017 compared to the prior year periods.
Credit Group—Assets Under Management
The tables below provide the period‑to‑period rollforwards of AUM for the Credit Group for the three months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending(2) | | Total Credit Group |
| Balance at 6/30/2017 | $ | 16,589 |
| | $ | 4,502 |
| | $ | 3,351 |
| | $ | 4,511 |
| | $ | 27,727 |
| | $ | 10,767 |
| | $ | 67,447 |
| |
| Balance at 3/31/2018 | | $ | 17,413 |
| | $ | 4,582 |
| | $ | 3,161 |
| | $ | 4,905 |
| | $ | 34,560 |
| | $ | 12,689 |
| | $ | 77,310 |
|
| Net new par/ equity commitments | 165 |
| | 359 |
| | 12 |
| | 55 |
| | 1,383 |
| | 650 |
| | 2,624 |
| 27 |
| | 56 |
| | 36 |
| | 914 |
| | 1,210 |
| | 7,116 |
| | 9,359 |
|
| Net new debt commitments | 1,668 |
| | — |
| | — |
| | — |
| | 935 |
| | — |
| | 2,603 |
| 457 |
| | — |
| | — |
| | — |
| | 1,533 |
| | — |
| | 1,990 |
|
| Distributions | (1,382 | ) | | (349 | ) | | (73 | ) | | (54 | ) | | (1,257 | ) | | (197 | ) | | (3,312 | ) | (172 | ) | | (295 | ) | | (297 | ) | | (73 | ) | | (862 | ) | | (101 | ) | | (1,800 | ) |
| Change in fund value | 125 |
| | 108 |
| | 69 |
| | 81 |
| | 228 |
| | 504 |
| | 1,115 |
| (98 | ) | | 38 |
| | 31 |
| | 7 |
| | 397 |
| | (376 | ) | | (1 | ) |
| Balance at 9/30/2017 | $ | 17,165 |
| | $ | 4,620 |
| | $ | 3,359 |
| | $ | 4,593 |
| | $ | 29,016 |
| | $ | 11,724 |
| | $ | 70,477 |
| |
| Balance at 6/30/2018 | | $ | 17,627 |
| | $ | 4,381 |
| | $ | 2,931 |
| | $ | 5,753 |
| | $ | 36,838 |
| | $ | 19,328 |
| | $ | 86,858 |
|
| Average AUM(1) | $ | 16,877 |
| | $ | 4,561 |
| | $ | 3,355 |
| | $ | 4,552 |
| | $ | 28,372 |
| | $ | 11,246 |
| | $ | 68,963 |
| $ | 17,520 |
| | $ | 4,482 |
| | $ | 3,046 |
| | $ | 5,329 |
| | $ | 35,699 |
| | $ | 16,009 |
| | $ | 82,085 |
|
| | | | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group |
| Balance at 6/30/2016 | $ | 16,928 |
| | $ | 4,331 |
| | $ | 3,329 |
| | $ | 3,953 |
| | $ | 21,938 |
| | $ | 9,846 |
| | $ | 60,325 |
| |
| Balance at 3/31/2017 | | $ | 16,761 |
| | $ | 4,693 |
| | $ | 3,366 |
| | $ | 4,260 |
| | $ | 26,293 |
| | $ | 9,858 |
| | $ | 65,231 |
|
| Net new par/ equity commitments | 295 |
| | 569 |
| | (5 | ) | | 5 |
| | 741 |
| | 150 |
| | 1,755 |
| 465 |
| | 53 |
| | (35 | ) | | 169 |
| | 1,431 |
| | — |
| | 2,083 |
|
| Net new debt commitments | 752 |
| | — |
| | — |
| | — |
| | 1,409 |
| | — |
| | 2,161 |
| 881 |
| | — |
| | — |
| | — |
| | 815 |
| | 571 |
| | 2,267 |
|
| Distributions | (1,094 | ) | | (43 | ) | | (18 | ) | | (4 | ) | | (1,607 | ) | | (239 | ) | | (3,005 | ) | (1,699 | ) | | (341 | ) | | (15 | ) | | — |
| | (1,094 | ) | | (297 | ) | | (3,446 | ) |
| Change in fund value | 93 |
| | 176 |
| | 104 |
| | 177 |
| | 121 |
| | 137 |
| | 808 |
| 181 |
| | 97 |
| | 35 |
| | 82 |
| | 282 |
| | 635 |
| | 1,312 |
|
| Balance at 9/30/2016 | $ | 16,974 |
| | $ | 5,033 |
| | $ | 3,410 |
| | $ | 4,131 |
| | $ | 22,602 |
| | $ | 9,894 |
| | $ | 62,044 |
| |
| Balance at 6/30/2017 | | $ | 16,589 |
| | $ | 4,502 |
| | $ | 3,351 |
| | $ | 4,511 |
| | $ | 27,727 |
| | $ | 10,767 |
| | $ | 67,447 |
|
| Average AUM(1) | $ | 16,951 |
| | $ | 4,682 |
| | $ | 3,370 |
| | $ | 4,042 |
| | $ | 22,270 |
| | $ | 9,870 |
| | $ | 61,185 |
| $ | 16,675 |
| | $ | 4,598 |
| | $ | 3,359 |
| | $ | 4,386 |
| | $ | 27,010 |
| | $ | 10,313 |
| | $ | 66,341 |
|
(1) | |
| (1) | Represents the quarterly average of beginning and ending balances. |
| |
| (2) | Includes $6.5 billion related to the first close of ACE IV, which had its final close in July 2018 of an additional $1.1 billion to reach its hard cap of $7.6 billion. |
The tables below provide the period‑to‑period rollforwards of AUM for the Credit Group for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending(1) | | E.U. Direct Lending | | Total Credit Group |
| Balance at 12/31/2016 | $ | 17,260 |
| | $ | 4,978 |
| | $ | 3,304 |
| | $ | 4,254 |
| | $ | 21,110 |
| | $ | 9,560 |
| | $ | 60,466 |
|
| Acquisitions | — |
| | — |
| | — |
| | — |
| | 3,605 |
| | — |
| | 3,605 |
|
| Net new par/ equity commitments | 685 |
| | 470 |
| | (16 | ) | | 224 |
| | 4,754 |
| | 864 |
| | 6,981 |
|
| Net new debt commitments | 2,958 |
| | — |
| | — |
| | — |
| | 1,809 |
| | 571 |
| | 5,338 |
|
| Distributions | (4,098 | ) | | (1,115 | ) | | (102 | ) | | (167 | ) | | (2,816 | ) | | (669 | ) | | (8,967 | ) |
| Change in fund value | 360 |
| | 287 |
| | 173 |
| | 282 |
| | 554 |
| | 1,398 |
| | 3,054 |
|
| Balance at 9/30/2017 | $ | 17,165 |
| | $ | 4,620 |
| | $ | 3,359 |
| | $ | 4,593 |
| | $ | 29,016 |
| | $ | 11,724 |
| | $ | 70,477 |
|
| Average AUM(2) | $ | 16,944 |
| | $ | 4,698 |
| | $ | 3,345 |
| | $ | 4,405 |
| | $ | 26,037 |
| | $ | 10,477 |
| | $ | 65,906 |
|
| | | | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending(1) | | E.U. Direct Lending | | Total Credit Group | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending(2) | | Total Credit Group |
| Balance at 12/31/2015 | $ | 17,618 |
| | $ | 3,303 |
| | $ | 3,714 |
| | $ | 3,102 |
| | $ | 23,594 |
| | $ | 9,055 |
| | $ | 60,386 |
| |
| Balance at 12/31/2017 | | $ | 16,530 |
| | $ | 4,630 |
| | $ | 3,333 |
| | $ | 4,791 |
| | $ | 30,640 |
| | $ | 11,808 |
| | $ | 71,732 |
|
| Net new par/ equity commitments | 540 |
| | 1,530 |
| | 248 |
| | 805 |
| | 739 |
| | 1,018 |
| | 4,880 |
| 130 |
| | 200 |
| | 39 |
| | 974 |
| | 3,781 |
| | 7,335 |
| | 12,459 |
|
| Net new debt commitments | 1,262 |
| | — |
| | — |
| | — |
| | 2,109 |
| | 332 |
| | 3,703 |
| 1,574 |
| | — |
| | — |
| | — |
| | 2,925 |
| | 246 |
| | 4,745 |
|
| Distributions | (2,677 | ) | | (186 | ) | | (718 | ) | | (53 | ) | | (4,263 | ) | | (713 | ) | | (8,610 | ) | (580 | ) | | (453 | ) | | (473 | ) | | (76 | ) | | (1,331 | ) | | (223 | ) | | (3,136 | ) |
| Change in fund value | 231 |
| | 386 |
| | 166 |
| | 277 |
| | 423 |
| | 202 |
| | 1,685 |
| (27 | ) | | 4 |
| | 32 |
| | 64 |
| | 823 |
| | 162 |
| | 1,058 |
|
| Balance at 9/30/2016 | $ | 16,974 |
| | $ | 5,033 |
| | $ | 3,410 |
| | $ | 4,131 |
| | $ | 22,602 |
| | $ | 9,894 |
| | $ | 62,044 |
| |
| Balance at 6/30/2018 | | $ | 17,627 |
| | $ | 4,381 |
| | $ | 2,931 |
| | $ | 5,753 |
| | $ | 36,838 |
| | $ | 19,328 |
| | $ | 86,858 |
|
Average AUM(2)(1) | $ | 17,137 |
| | $ | 4,027 |
| | $ | 3,380 |
| | $ | 3,616 |
| | $ | 22,596 |
| | $ | 9,498 |
| | $ | 60,254 |
| $ | 17,190 |
| | $ | 4,531 |
| | $ | 3,142 |
| | $ | 5,150 |
| | $ | 34,013 |
| | $ | 14,608 |
| | $ | 78,634 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group |
| Balance at 12/31/2016 | $ | 17,260 |
| | $ | 4,978 |
| | $ | 3,304 |
| | $ | 4,254 |
| | $ | 21,110 |
| | $ | 9,560 |
| | $ | 60,466 |
|
| Acquisitions | — |
| | — |
| | — |
| | — |
| | 3,605 |
| | — |
| | 3,605 |
|
| Net new par/ equity commitments | 519 |
| | 110 |
| | (28 | ) | | 169 |
| | 3,370 |
| | 214 |
| | 4,354 |
|
| Net new debt commitments | 1,290 |
| | — |
| | — |
| | — |
| | 875 |
| | 571 |
| | 2,736 |
|
| Distributions | (2,716 | ) | | (766 | ) | | (29 | ) | | (114 | ) | | (1,559 | ) | | (472 | ) | | (5,656 | ) |
| Change in fund value | 236 |
| | 180 |
| | 104 |
| | 202 |
| | 326 |
| | 894 |
| | 1,942 |
|
| Balance at 6/30/2017 | $ | 16,589 |
| | $ | 4,502 |
| | $ | 3,351 |
| | $ | 4,511 |
| | $ | 27,727 |
| | $ | 10,767 |
| | $ | 67,447 |
|
| Average AUM(1) | $ | 16,870 |
| | $ | 4,724 |
| | $ | 3,340 |
| | $ | 4,342 |
| | $ | 25,043 |
| | $ | 10,062 |
| | $ | 64,381 |
|
(1) Distributions of $2.8 billion and $4.3 billion for the nine months ended September 30, 2017 and 2016, respectively, include $1.6 billion and $3.0 billion reduction in leverage, respectively, related to the paydown associated with the Senior Secured Loan Program (the "SSLP").
(2) | |
| (1) | Represents the quarterly average of beginning and ending balances. |
| |
| (2) | Includes $6.5 billion related to the first close of ACE IV, which had its final close in July 2018 of an additional $1.1 billion to reach its hard cap of $7.6 billion. |
Credit Group—Fee Paying AUM
The tables below provide the period‑to‑period rollforwards of fee paying AUM for the Credit Group for the three months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group |
| FPAUM Balance at 6/30/2017 | $ | 15,062 |
| | $ | 4,503 |
| | $ | 2,797 |
| | $ | 3,414 |
| | $ | 15,045 |
| | $ | 5,688 |
| | $ | 46,509 |
| |
| FPAUM Balance at 3/31/2018 | | $ | 15,592 |
| | $ | 4,578 |
| | $ | 2,621 |
| | $ | 3,515 |
| | $ | 18,158 |
| | $ | 7,076 |
| | $ | 51,540 |
|
| Commitments | 2,022 |
| | 321 |
| | — |
| | 60 |
| | 31 |
| | — |
| | 2,434 |
| 1,721 |
| | 56 |
| | 1 |
| | 35 |
| | 45 |
| | 30 |
| | 1,888 |
|
| Subscriptions/deployment/increase in leverage | — |
| | 38 |
| | 13 |
| | 131 |
| | 665 |
| | 382 |
| | 1,229 |
| — |
| | — |
| | 25 |
| | 60 |
| | 1,134 |
| | 732 |
| | 1,951 |
|
| Redemptions/distributions/decrease in leverage | (1,336 | ) | | (349 | ) | | (31 | ) | | (244 | ) | | (279 | ) | | (115 | ) | | (2,354 | ) | (163 | ) | | (293 | ) | | (307 | ) | | (188 | ) | | (890 | ) | | (268 | ) | | (2,109 | ) |
| Change in fund value | 129 |
| | 108 |
| | 64 |
| | 66 |
| | 192 |
| | 257 |
| | 816 |
| (6 | ) | | 39 |
| | 29 |
| | 10 |
| | 186 |
| | (192 | ) | | 66 |
|
| Change in fee basis | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | (12 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| FPAUM Balance at 9/30/2017 | $ | 15,877 |
| | $ | 4,621 |
| | $ | 2,843 |
| | $ | 3,427 |
| | $ | 15,654 |
| | $ | 6,200 |
| | $ | 48,622 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 17,144 |
| | $ | 4,380 |
| | $ | 2,369 |
| | $ | 3,432 |
| | $ | 18,633 |
| | $ | 7,378 |
| | $ | 53,336 |
|
| Average FPAUM(1) | $ | 15,470 |
| | $ | 4,562 |
| | $ | 2,820 |
| | $ | 3,421 |
| | $ | 15,350 |
| | $ | 5,944 |
| | $ | 47,567 |
| $ | 16,368 |
| | $ | 4,479 |
| | $ | 2,495 |
| | $ | 3,474 |
| | $ | 18,396 |
| | $ | 7,227 |
| | $ | 52,439 |
|
| | | | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group |
| FPAUM Balance at 6/30/2016 | $ | 15,934 |
| | $ | 4,330 |
| | $ | 2,464 |
| | $ | 2,779 |
| | $ | 10,445 |
| | $ | 4,634 |
| | $ | 40,586 |
| |
| FPAUM Balance at 3/31/2017 | | $ | 15,564 |
| | $ | 4,693 |
| | $ | 2,784 |
| | $ | 3,176 |
| | $ | 14,273 |
| | $ | 5,206 |
| | $ | 45,696 |
|
| Commitments | 547 |
| | 482 |
| | — |
| | — |
| | 40 |
| | — |
| | 1,069 |
| 1,068 |
| | 49 |
| | — |
| | 80 |
| | 54 |
| | — |
| | 1,251 |
|
| Subscriptions/deployment/increase in leverage | 1 |
| | 87 |
| | 111 |
| | 63 |
| | 527 |
| | 251 |
| | 1,040 |
| — |
| | 3 |
| | 18 |
| | 112 |
| | 791 |
| | 341 |
| | 1,265 |
|
| Redemptions/distributions/decrease in leverage | (1,030 | ) | | (43 | ) | | (22 | ) | | (2 | ) | | (184 | ) | | (181 | ) | | (1,462 | ) | (1,704 | ) | | (341 | ) | | (36 | ) | | (40 | ) | | (300 | ) | | (263 | ) | | (2,684 | ) |
| Change in fund value | 97 |
| | 175 |
| | 101 |
| | 163 |
| | 101 |
| | (8 | ) | | 629 |
| 134 |
| | 99 |
| | 31 |
| | 86 |
| | 227 |
| | 179 |
| | 756 |
|
| FPAUM Balance at 9/30/2016 | $ | 15,549 |
| | $ | 5,031 |
| | $ | 2,654 |
| | $ | 3,003 |
| | $ | 10,929 |
| | $ | 4,696 |
| | $ | 41,862 |
| |
| Change in fee basis | | — |
| | — |
| | — |
| | — |
| | — |
| | 225 |
| | 225 |
|
| FPAUM Balance at 6/30/2017 | | $ | 15,062 |
| | $ | 4,503 |
| | $ | 2,797 |
| | $ | 3,414 |
| | $ | 15,045 |
| | $ | 5,688 |
| | $ | 46,509 |
|
| Average FPAUM(1) | $ | 15,742 |
| | $ | 4,681 |
| | $ | 2,559 |
| | $ | 2,891 |
| | $ | 10,687 |
| | $ | 4,665 |
| | $ | 41,225 |
| $ | 15,313 |
| | $ | 4,598 |
| | $ | 2,791 |
| | $ | 3,295 |
| | $ | 14,659 |
| | $ | 5,447 |
| | $ | 46,103 |
|
(1) Represents the quarterly average of beginning and ending balances.
The tables below provide the period‑to‑period rollforwards of fee paying AUM for the Credit Group for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group |
| FPAUM Balance at 12/31/2016 | $ | 15,998 |
| | $ | 4,978 |
| | $ | 2,705 |
| | $ | 3,128 |
| | $ | 11,292 |
| | $ | 4,608 |
| | $ | 42,709 |
| |
| Acquisitions | — |
| | — |
| | — |
| | — |
| | 2,789 |
| | — |
| | 2,789 |
| |
| FPAUM Balance at 12/31/2017 | | $ | 15,251 |
| | $ | 4,629 |
| | $ | 2,809 |
| | $ | 3,434 |
| | $ | 16,869 |
| | $ | 6,458 |
| | $ | 49,450 |
|
| Commitments | 3,545 |
| | 418 |
| | 4 |
| | 140 |
| | 112 |
| | — |
| | 4,219 |
| 2,425 |
| | 189 |
| | 4 |
| | 95 |
| | 75 |
| | 30 |
| | 2,818 |
|
| Subscriptions/deployment/increase in leverage | — |
| | 52 |
| | 55 |
| | 278 |
| | 1,830 |
| | 1,296 |
| | 3,511 |
| — |
| | 12 |
| | 25 |
| | 149 |
| | 2,373 |
| | 1,356 |
| | 3,915 |
|
| Redemptions/distributions/decrease in leverage | (3,966 | ) | | (1,115 | ) | | (80 | ) | | (375 | ) | | (890 | ) | | (430 | ) | | (6,856 | ) | (566 | ) | | (451 | ) | | (499 | ) | | (289 | ) | | (1,136 | ) | | (393 | ) | | (3,334 | ) |
| Change in fund value | 300 |
| | 288 |
| | 159 |
| | 256 |
| | 521 |
| | 513 |
| | 2,037 |
| 38 |
| | 4 |
| | 30 |
| | 43 |
| | 452 |
| | (73 | ) | | 494 |
|
| Change in fee basis | — |
| | — |
| | — |
| | — |
| | — |
| | 213 |
| | 213 |
| (4 | ) | | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (7 | ) |
| FPAUM Balance at 9/30/2017 | $ | 15,877 |
| | $ | 4,621 |
| | $ | 2,843 |
| | $ | 3,427 |
| | $ | 15,654 |
| | $ | 6,200 |
| | $ | 48,622 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 17,144 |
| | $ | 4,380 |
| | $ | 2,369 |
| | $ | 3,432 |
| | $ | 18,633 |
| | $ | 7,378 |
| | $ | 53,336 |
|
| Average FPAUM(1) | $ | 15,625 |
| | $ | 4,699 |
| | $ | 2,782 |
| | $ | 3,286 |
| | $ | 14,066 |
| | $ | 5,426 |
| | $ | 45,884 |
| $ | 15,996 |
| | $ | 4,529 |
| | $ | 2,600 |
| | $ | 3,460 |
| | $ | 17,887 |
| | $ | 6,971 |
| | $ | 51,443 |
|
| | | | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending | | Total Credit Group |
| FPAUM Balance at 12/31/2015 | $ | 17,180 |
| | $ | 3,303 |
| | $ | 2,607 |
| | $ | 2,559 |
| | $ | 10,187 |
| | $ | 4,089 |
| | $ | 39,925 |
| |
| FPAUM Balance at 12/31/2016 | | $ | 15,998 |
| | $ | 4,978 |
| | $ | 2,705 |
| | $ | 3,128 |
| | $ | 11,292 |
| | $ | 4,608 |
| | $ | 42,709 |
|
| Acquisitions | | — |
| | — |
| | — |
| | — |
| | 2,789 |
| | — |
| | 2,789 |
|
| Commitments | 789 |
| | 1,443 |
| | 61 |
| | 7 |
| | 40 |
| | — |
| | 2,340 |
| 1,523 |
| | 96 |
| | 3 |
| | 80 |
| | 81 |
| | — |
| | 1,783 |
|
| Subscriptions/deployment/increase in leverage | 4 |
| | 87 |
| | 199 |
| | 256 |
| | 1,084 |
| | 1,240 |
| | 2,870 |
| — |
| | 14 |
| | 42 |
| | 147 |
| | 1,165 |
| | 914 |
| | 2,282 |
|
| Redemptions/distributions/decrease in leverage | (2,571 | ) | | (185 | ) | | (314 | ) | | (66 | ) | | (794 | ) | | (513 | ) | | (4,443 | ) | (2,630 | ) | | (766 | ) | | (49 | ) | | (131 | ) | | (612 | ) | | (315 | ) | | (4,503 | ) |
| Change in fund value | 147 |
| | 383 |
| | 161 |
| | 247 |
| | 412 |
| | (120 | ) | | 1,230 |
| 171 |
| | 181 |
| | 96 |
| | 190 |
| | 330 |
| | 256 |
| | 1,224 |
|
| Change in fee basis | — |
| | — |
| | (60 | ) | | — |
| | — |
| | — |
| | (60 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | 225 |
| | 225 |
|
| FPAUM Balance at 9/30/2016 | $ | 15,549 |
| | $ | 5,031 |
| | $ | 2,654 |
| | $ | 3,003 |
| | $ | 10,929 |
| | $ | 4,696 |
| | $ | 41,862 |
| |
| FPAUM Balance at 6/30/2017 | | $ | 15,062 |
| | $ | 4,503 |
| | $ | 2,797 |
| | $ | 3,414 |
| | $ | 15,045 |
| | $ | 5,688 |
| | $ | 46,509 |
|
| Average FPAUM(1) | $ | 16,293 |
| | $ | 4,026 |
| | $ | 2,535 |
| | $ | 2,724 |
| | $ | 10,477 |
| | $ | 4,440 |
| | $ | 40,495 |
| $ | 15,541 |
| | $ | 4,725 |
| | $ | 2,762 |
| | $ | 3,239 |
| | $ | 13,537 |
| | $ | 5,167 |
| | $ | 44,971 |
|
(1) Represents the quarterly average of beginning and ending balances.
The charts below present FPAUM for the Credit Group by its fee basis as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| |
FPAUM: $41,862$53,336 | FPAUM: $48,622$46,509 |
The components of our AUM, including the portion that is FPAUM, for the Credit Group are presented below as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| |
AUM: $62,044$86,858 | AUM: $70,477$67,447 |
(1) Includes $5.7$7.0 billion and $8.0$6.4 billion of AUM of funds for which we indirectly earn management fees as of SeptemberJune 30, 2018 and 2017, and 2016, respectively.
Credit Group—Fund Performance Metrics as of SeptemberJune 30, 20172018
The Credit Group managed 142152 funds as of SeptemberJune 30, 20172018 across the liquid and illiquid credit strategies. ARCC contributed approximately 57%55% of the Credit Group’s total management fees for the ninesix months ended SeptemberJune 30, 2017.2018. In addition to ARCC, we have sixfour significant funds which contributed approximately 8% of the Credit Group’s management fees for the ninesix months ended SeptemberJune 30, 2017.2018. Our significant funds that are not drawdownnon-drawdown funds are ARCC; one sub-advised fund; Ares ELIS XI, Ltd. ("ELIS XI"), a 2013 vintageand one separately managed account focused on syndicated loans in the United States; and two separately managed accounts over which we exercise sole investment discretion. Our significant drawdown funds are Ares Capital Europe II, L.P. (“ACE II”), a 2013 vintage commingled fund; and Ares Capital Europe III, L.P. (“ACE III,III”), a 2015 vintage commingled fund, both of which focus on direct lending to European middle market companies. We do not present fund performance metrics for significant
funds with less than two years of historical information, except for those significant funds which pay management fees on invested capital, in which case performance is shown at the earlier of (i) the one year anniversary of the fund's first investment and (ii) such time the fund is 50% or more invested.
The following table presents the performance data for our significant funds in the Credit Group that are not drawdown funds:
| | | | | | As of September 30, 2017 | | | | | As of June 30, 2018 | | |
| | | | | | Returns(%)(1) | | | | | | | Returns(%)(1) | | |
| | Year of | | AUM | | Current Quarter | | Year-To-Date | | Since Inception(2) | | Primary Investment Strategy | Year of | | AUM | | Current Quarter | | Year-To-Date | | Since Inception(2) | | Primary Investment Strategy |
| Fund | Inception | | (in millions) | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Inception | | (in millions) | | Gross | | Net | | Gross | | Net | | Gross | | Net | |
| ARCC(3) | 2004 | | $ | 14,479 |
| | N/A | | 1.9 | | N/A | | 7.3 | | N/A | | 11.7 | | U.S. Direct Lending | 2004 | | $ | 15,020 |
| | N/A | | 3.5 | | N/A |
| | 7.0 |
| | N/A | | 11.9 | | U.S. Direct Lending |
| Sub-advised Client A(4) | 2007 | | 733 |
| | 3.0 | | 2.9 | | 7.5 | | 7.3 | | 8.1 | | 7.7 | | High Yield | 2007 | | 618 |
| | 1.2 | | 1.1 | | 0.2 |
| | — |
| | 7.6 | | 7.2 | | High Yield |
| ELIS XI(4) | 2013 | | 726 |
| | 1.4 | | 1.3 | | 3.8 | | 3.4 | | 3.6 | | 3.1 | | Syndicated Loans | |
| Separately Managed Account Client A(4) | 2015 | | 1,138 |
| | 1.9 | | 1.8 | | 8.6 | | 8.2 | | 6.8 | | 6.4 | | Structured Credit | |
| Separately Managed Account Client B(4) | 2016 | | 825 |
| | 1.7 | | 1.6 | | 6.3 | | 6.0 | | 7.4 | | 7.0 | | High Yield | 2016 | | 718 |
| | 0.4 | | 0.3 | | (1.0 | ) | | (1.1 | ) | | 4.7 | | 4.4 | | High Yield |
| |
| (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 any other expenses. Net returns are calculated by subtracting the applicable management fee from the gross returns on a monthly basis. |
The following table presents the performance data of our significant drawdown funds:
| | | | | | | As of September 30, 2017 (Dollars in millions) | | | | | As of June 30, 2018 (Dollars in millions) | |
| | Year of Inception | | AUM | | Original Capital Commitments | | Cumulative Invested Capital | | Realized Proceeds(1) | | Unrealized Value(2) | | Total Value | | MoIC | | IRR(%) | | Primary Investment Strategy | Year of Inception | | AUM | | Original Capital Commitments | | Cumulative Invested Capital | | Realized Proceeds(1) | | Unrealized Value(2) | | Total Value | | MoIC | | IRR(%) | | Primary Investment Strategy |
| Fund | | Gross(3) | | Net(4) | | Gross(5) | | Net(6) | | | Gross(3) | | Net(4) | | Gross(5) | | Net(6) | |
| ACE II(7) | 2013 | | $ | 1,492 |
| | $ | 1,216 |
| | $ | 972 |
| | $ | 390 |
| | $ | 843 |
| | $ | 1,233 |
| | 1.3x | | 1.2x | | 10.3 | | 7.5 | | E.U. Direct Lending | 2013 | | $ | 1,427 |
| | $ | 1,216 |
| | $ | 968 |
| | $ | 577 |
| | $ | 699 |
| | $ | 1,276 |
| | 1.4x | | 1.3x | | 10.4 | | 7.7 | | E.U. Direct Lending |
| ACE III(8) | 2015 | | 5,070 |
| | 2,822 |
| | 1,686 |
| | 74 |
| | 1,810 |
| | 1,884 |
| | 1.2x | | 1.1x | | 18.5 | | 13.7 | | E.U. Direct Lending | 2015 | | 5,060 |
| | 2,822 |
| | 3,068 |
| | 235 |
| | 3,347 |
| | 3,582 |
| | 1.2x | | 1.2x | | 17.8 | | 13.5 | | E.U. Direct Lending |
| |
| (1) | Realized proceeds represent 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 performance fees.income. The gross MoIC is before giving effect to management fees, performance feesincome as applicable and other expenses. |
| |
| (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 performance fees.income. The net MoIC is after giving effect to management fees, performance feesincome as applicable and other expenses. |
| |
| (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 performance fees.income. The cash flow dates used in the gross IRR calculation are based on the actual dates of the cash flows. Gross IRRs are calculated before giving effect to management fees, performance feesincome as applicable, and other expenses. |
| |
| (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 performance fees.income. 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, performance feesincome 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 likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.
| |
| (7) | ACE II is made up of two feeder funds, one denominated in U.S. dollars and one denominated in Euros. The gross and net IRR and gross and net MoIC presented in the chart are for the U.S. dollar denominated feeder fund as that is the larger of the two feeders. The gross and net IRR for the Euro denominated feeder fund are 12.7%12.3% and 9.6%9.3%, respectively. The gross and net MoIC for the Euro denominated feeder |
fund are 1.5x and 1.4x, 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 II are for the combined fund and are converted to U.S. dollars at the prevailing quarter-end exchange rate. The variance between the gross and net MoICs and the net IRRs for the U.S. dollar denominated and Euro denominated feeder funds is driven by the U.S. GAAP mark-to-market reporting of the foreign currency hedging program in the U.S. dollar denominated feeder fund. The feeder fund will be holding the foreign currency hedges until maturity, and therefore is expected to ultimately recognize a gain while mitigating the currency risk associated with the initial principal investments.
| |
| (8) | ACE III is made up of two feeder funds, one denominated in U.S. dollars and one denominated in Euros. The gross and net MoIC presented in the chart are for the Euro denominated feeder fund as that is the larger of the two feeders. The gross and net IRR for the U.S. dollar denominated feeder fund are 18.1%16.4% and 13.3%12.1%, respectively. The gross and net MoIC for the U.S. dollar denominated feeder fund are 1.2x and 1.1x,1.2x, 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. |
Private Equity Group
The following table sets forth certain statement of operations data and certain other data of our Private Equity Group segment for the periods presented.
| | | | Three Months Ended | | Favorable (Unfavorable) | | Nine Months Ended | | Favorable (Unfavorable) | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | September 30, | | September 30, | | June 30, | | June 30, | |
| | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Management fees | $ | 51,313 |
| | $ | 35,183 |
| | $ | 16,130 |
| | 46 | % | | $ | 147,559 |
| | $ | 111,100 |
| | $ | 36,459 |
| | 33 | % | $ | 49,318 |
| | $ | 56,427 |
| | $ | (7,109 | ) | | (13 | )% | | $ | 99,205 |
| | $ | 96,246 |
| | $ | 2,959 |
| | 3 | % |
| Other fees | 449 |
| | 309 |
| | 140 |
| | 45 | % | | 1,127 |
| | 983 |
| | 144 |
| | 15 | % | 337 |
| | 338 |
| | (1 | ) | | — | % | | 677 |
| | 678 |
| | (1 | ) | | — | % |
| Compensation and benefits | (19,256 | ) | | (16,697 | ) | | (2,559 | ) | | (15 | )% | | (50,862 | ) | | (46,556 | ) | | (4,306 | ) | | (9 | )% | (18,672 | ) | | (18,388 | ) | | (284 | ) | | (2 | )% | | (37,871 | ) | | (31,606 | ) | | (6,265 | ) | | (20 | )% |
| General, administrative and other expenses | (4,655 | ) | | (3,925 | ) | | (730 | ) | | (19 | )% | | (13,198 | ) | | (10,489 | ) | | (2,709 | ) | | (26 | )% | (4,175 | ) | | (4,345 | ) | | 170 |
| | 4 | % | | (8,216 | ) | | (8,543 | ) | | 327 |
| | 4 | % |
| Fee Related Earnings | 27,851 |
| | 14,870 |
| | 12,981 |
| | 87 | % | | 84,626 |
| | 55,038 |
| | 29,588 |
| | 54 | % | 26,808 |
| | 34,032 |
| | (7,224 | ) | | (21 | )% | | 53,795 |
| | 56,775 |
| | (2,980 | ) | | (5 | )% |
| Performance fees-realized | 173,304 |
| | 108,245 |
| | 65,059 |
| | 60 | % | | 238,084 |
| | 171,024 |
| | 67,060 |
| | 39 | % | |
| Performance fees-unrealized | (142,822 | ) | | 16,569 |
| | (159,391 | ) | | NM |
| | 118,162 |
| | 109,848 |
| | 8,314 |
| | 8 | % | |
| Performance fee compensation-realized | (138,657 | ) | | (86,537 | ) | | (52,120 | ) | | (60 | )% | | (189,571 | ) | | (136,761 | ) | | (52,810 | ) | | (39 | )% | |
| Performance fee compensation-unrealized | 114,395 |
| | (13,387 | ) | | 127,782 |
| | NM |
| | (95,131 | ) | | (88,766 | ) | | (6,365 | ) | | (7 | )% | |
| Net performance fees | 6,220 |
| | 24,890 |
| | (18,670 | ) | | (75 | )% | | 71,544 |
| | 55,345 |
| | 16,199 |
| | 29 | % | |
| Performance income-realized | | 80,415 |
| | 64,780 |
| | 15,635 |
| | 24 | % | | 84,813 |
| | 64,780 |
| | 20,033 |
| | 31 | % |
| Performance income-unrealized | | (133,605 | ) | | 228,747 |
| | (362,352 | ) | | NM |
| | (112,539 | ) | | 260,984 |
| | (373,523 | ) | | NM |
|
| Performance related compensation-realized | | (64,311 | ) | | (50,914 | ) | | (13,397 | ) | | (26 | )% | | (67,871 | ) | | (50,914 | ) | | (16,957 | ) | | (33 | )% |
| Performance related compensation-unrealized | | 106,912 |
| | (184,021 | ) | | 290,933 |
| | NM |
| | 88,218 |
| | (209,526 | ) | | 297,744 |
| | NM |
|
| Net performance income | | (10,589 | ) | | 58,592 |
| | (69,181 | ) | | NM |
| | (7,379 | ) | | 65,324 |
| | (72,703 | ) | | NM |
|
| Investment income-realized | 14,268 |
| | 11,267 |
| | 3,001 |
| | 27 | % | | 17,564 |
| | 14,641 |
| | 2,923 |
| | 20 | % | 9,016 |
| | 2,717 |
| | 6,299 |
| | 232 | % | | 9,687 |
| | 3,296 |
| | 6,391 |
| | 194 | % |
| Investment income (loss)-unrealized | (8,421 | ) | | 7,066 |
| | (15,487 | ) | | NM |
| | 25,479 |
| | (1,030 | ) | | 26,509 |
| | NM |
| 290 |
| | 25,354 |
| | (25,064 | ) | | (99 | )% | | (3,860 | ) | | 33,900 |
| | (37,760 | ) | | NM |
|
| Interest and other investment income | 1,129 |
| | 417 |
| | 712 |
| | 171 | % | | 3,264 |
| | 8,532 |
| | (5,268 | ) | | (62 | )% | 3,039 |
| | 1,983 |
| | 1,056 |
| | 53 | % | | 3,368 |
| | 2,135 |
| | 1,233 |
| | 58 | % |
| Interest expense | (1,229 | ) | | (1,399 | ) | | 170 |
| | 12 | % | | (4,139 | ) | | (4,201 | ) | | 62 |
| | 1 | % | (1,440 | ) | | (1,397 | ) | | (43 | ) | | (3 | )% | | (2,668 | ) | | (2,910 | ) | | 242 |
| | 8 | % |
| Net investment income | 5,747 |
| | 17,351 |
| | (11,604 | ) | | (67 | )% | | 42,168 |
| | 17,942 |
| | 24,226 |
| | 135 | % | 10,905 |
| | 28,657 |
| | (17,752 | ) | | (62 | )% | | 6,527 |
| | 36,421 |
| | (29,894 | ) | | (82 | )% |
| Performance related earnings | 11,967 |
| | 42,241 |
| | (30,274 | ) | | (72 | )% | | 113,712 |
| | 73,287 |
| | 40,425 |
| | 55 | % | 316 |
| | 87,249 |
| | (86,933 | ) | | (100 | )% | | (852 | ) | | 101,745 |
| | (102,597 | ) | | NM |
|
| Economic net income | $ | 39,818 |
| | $ | 57,111 |
| | (17,293 | ) | | (30 | )% | | $ | 198,338 |
| | $ | 128,325 |
| | 70,013 |
| | 55 | % | $ | 27,124 |
| | $ | 121,281 |
| | (94,157 | ) | | (78 | )% | | $ | 52,943 |
| | $ | 158,520 |
| | (105,577 | ) | | (67 | )% |
| Distributable earnings | $ | 75,809 |
| | $ | 45,481 |
| | 30,328 |
| | 67 | % | | $ | 145,696 |
| | $ | 104,162 |
| | 41,534 |
| | 40 | % | |
| Realized income | | $ | 53,408 |
| | $ | 50,151 |
| | 3,257 |
| | 6 | % | | $ | 80,735 |
| | $ | 72,496 |
| | 8,239 |
| | 11 | % |
NM - Not meaningful
Accrued performance feescarried interest for the Private Equity Group are composed ofincludes the following:
| | | | As of September 30, | | As of December 31, | As of June 30, | | As of December 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | (Dollars in thousands) | (Dollars in thousands) |
| ACOF III | $ | 529,723 |
| | $ | 342,958 |
| $ | 510,993 |
| | $ | 570,578 |
|
| ACOF IV | 184,220 |
| | 234,207 |
| 184,204 |
| | 217,354 |
|
| EIF V | 15,469 |
| | 16,510 |
| — |
| | 16,215 |
|
| Other funds | 12,599 |
| | 30,174 |
| 7,671 |
| | 11,260 |
|
| Total Private Equity Group | $ | 742,011 |
| | $ | 623,849 |
| $ | 702,868 |
| | $ | 815,407 |
|
Net performance fee revenuesPerformance income for the Private Equity Group are composed ofincludes the following:
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) | (Dollars in thousands) |
| ACOF III | $ | 15,588 |
| | $ | 3,239 |
| | $ | 18,827 |
| | $ | 39,993 |
| | $ | (15,550 | ) | | $ | 24,443 |
| $ | 80,415 |
| | $ | (90,234 | ) | | $ | (9,819 | ) | | $ | 4,263 |
| | $ | 206,293 |
| | $ | 210,556 |
|
| ACOF IV | 157,716 |
| | (146,013 | ) | | 11,703 |
| | 41,807 |
| | 43,793 |
| | 85,600 |
| — |
| | (41,578 | ) | | (41,578 | ) | | 55,853 |
| | 41,203 |
| | 97,056 |
|
| ACOF V | | — |
| | — |
| | — |
| | — |
| | (5,719 | ) | | (5,719 | ) |
| EIF V | — |
| | 1,399 |
| | 1,399 |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | (2,477 | ) | | (2,477 | ) |
| Other funds | — |
| | (1,447 | ) | | (1,447 | ) | | 26,445 |
| | (11,674 | ) | | 14,771 |
| — |
| | (1,793 | ) | | (1,793 | ) | | 4,664 |
| | (10,553 | ) | | (5,889 | ) |
| Total Private Equity Group | $ | 173,304 |
|
| $ | (142,822 | ) |
| $ | 30,482 |
| | $ | 108,245 |
| | $ | 16,569 |
| | $ | 124,814 |
| $ | 80,415 |
|
| $ | (133,605 | ) |
| $ | (53,190 | ) | | $ | 64,780 |
| | $ | 228,747 |
| | $ | 293,527 |
|
| | | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) | (Dollars in thousands) |
| ACOF III | $ | 19,851 |
| | $ | 186,765 |
| | $ | 206,616 |
| | $ | 102,078 |
| | $ | (8,205 | ) | | $ | 93,873 |
| $ | 83,209 |
| | $ | (59,584 | ) | | $ | 23,625 |
| | $ | 4,263 |
| | $ | 183,526 |
| | $ | 187,789 |
|
| ACOF IV | 213,569 |
| | (49,987 | ) | | 163,582 |
| | 41,807 |
| | 127,738 |
| | 169,545 |
| 1,604 |
| | (33,150 | ) | | (31,546 | ) | | 55,853 |
| | 96,026 |
| | 151,879 |
|
| ACOF V | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| EIF V | — |
| | (1,040 | ) | | (1,040 | ) | | — |
| | — |
| | — |
| — |
| | (16,215 | ) | | (16,215 | ) | | — |
| | (2,439 | ) | | (2,439 | ) |
| Other funds | 4,664 |
| | (17,576 | ) | | (12,912 | ) | | 27,139 |
| | (9,685 | ) | | 17,454 |
| — |
| | (3,590 | ) | | (3,590 | ) | | 4,664 |
| | (16,129 | ) | | (11,465 | ) |
| Total Private Equity Group | $ | 238,084 |
| | $ | 118,162 |
| | $ | 356,246 |
| | $ | 171,024 |
| | $ | 109,848 |
| | $ | 280,872 |
| $ | 84,813 |
| | $ | (112,539 | ) | | $ | (27,726 | ) | | $ | 64,780 |
| | $ | 260,984 |
| | $ | 325,764 |
|
The following tables present the components of the change in performance feesincome - unrealized for the Private Equity Group:
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) | (Dollars in thousands) |
| ACOF III | $ | (15,588 | ) | | $ | 18,827 |
| | $ | — |
| | $ | 3,239 |
| | $ | (39,993 | ) | | $ | 24,443 |
| | $ | — |
| | $ | (15,550 | ) | $ | (80,415 | ) | | $ | — |
| | $ | (9,820 | ) | | $ | (90,235 | ) | | $ | (4,263 | ) | | $ | 210,556 |
| | $ | — |
| | $ | 206,293 |
|
| ACOF IV | (157,716 | ) | | 11,703 |
| | — |
| | (146,013 | ) | | (41,807 | ) | | 85,600 |
| | — |
| | 43,793 |
| — |
| | — |
| | (41,578 | ) | | (41,578 | ) | | (55,853 | ) | | 97,056 |
| | — |
| | 41,203 |
|
| ACOF V | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,719 | ) | | (5,719 | ) |
| EIF V | — |
| | 1,399 |
| | — |
| | 1,399 |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,477 | ) | | (2,477 | ) |
| Other funds | — |
| | 11 |
| | (1,458 | ) | | (1,447 | ) | | (26,445 | ) | | 14,771 |
| | — |
| | (11,674 | ) | — |
| | — |
| | (1,792 | ) | | (1,792 | ) | | (4,664 | ) | | 5 |
| | (5,894 | ) | | (10,553 | ) |
| Total Private Equity Group | $ | (173,304 | ) | | $ | 31,940 |
| | $ | (1,458 | ) | | $ | (142,822 | ) | | $ | (108,245 | ) | | $ | 124,814 |
| | $ | — |
| | $ | 16,569 |
| $ | (80,415 | ) | | $ | — |
| | $ | (53,190 | ) | | $ | (133,605 | ) | | $ | (64,780 | ) | | $ | 307,617 |
| | $ | (14,090 | ) | | $ | 228,747 |
|
| | | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) | (Dollars in thousands) |
| ACOF III | $ | (19,851 | ) | | $ | 206,616 |
| | $ | — |
| | $ | 186,765 |
| | $ | (102,078 | ) | | $ | 93,873 |
| | $ | — |
| | $ | (8,205 | ) | $ | (83,209 | ) | | $ | 23,625 |
| | $ | — |
| | $ | (59,584 | ) | | $ | (4,263 | ) | | $ | 187,789 |
| | $ | — |
| | $ | 183,526 |
|
| ACOF IV | (213,569 | ) | | 163,582 |
| | — |
| | (49,987 | ) | | (41,807 | ) | | 169,545 |
| | — |
| | 127,738 |
| (1,604 | ) | | — |
| | (31,546 | ) | | (33,150 | ) | | (55,853 | ) | | 151,879 |
| | — |
| | 96,026 |
|
| ACOF V | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| EIF V | — |
| | — |
| | (1,040 | ) | | (1,040 | ) | | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | (16,215 | ) | | (16,215 | ) | | — |
| | — |
| | (2,439 | ) | | (2,439 | ) |
| Other funds | (4,664 | ) | | 1,013 |
| | (13,925 | ) | | (17,576 | ) | | (27,139 | ) | | 20,334 |
| | (2,880 | ) | | (9,685 | ) | — |
| | 961 |
| | (4,551 | ) | | (3,590 | ) | | (4,664 | ) | | 1,014 |
| | (12,479 | ) | | (16,129 | ) |
| Total Private Equity Group | $ | (238,084 | ) | | $ | 371,211 |
| | $ | (14,965 | ) | | $ | 118,162 |
| | $ | (171,024 | ) | | $ | 283,752 |
| | $ | (2,880 | ) | | $ | 109,848 |
| $ | (84,813 | ) | | $ | 24,586 |
| | $ | (52,312 | ) | | $ | (112,539 | ) | | $ | (64,780 | ) | | $ | 340,682 |
| | $ | (14,918 | ) | | $ | 260,984 |
|
Private Equity Group—Three and NineSix Months Ended SeptemberJune 30, 20172018 Compared to Three and NineSix Months Ended SeptemberJune 30, 20162017
Fee Related Earnings:
Fee related earnings increaseddecreased by $13.0$7.2 million, or 87%21%, to $27.9$26.8 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $29.6$3.0 million, or 54%5%, to $84.6$53.8 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. Fee related earnings were impacted by fluctuations of the following components:
Management Fees.Total management fees increaseddecreased by $16.1$7.1 million, or 46%13%, to $51.3$49.3 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017. The decrease was primarily driven by the impact of a $5.5 million one-time catch-up fee related to the final close of EIF V recognized during the three months ended June 30, 2017. Additionally, ACOF III, U.S. Power Fund III, L.P. (“USPF III”) and U.S. Power Fund IV, L.P. (“USPF IV”) sold investments subsequent to June 30, 2017 resulting in a $2.5 million decrease in management fees for the three month comparative periods, as these funds are no longer in their reinvestment periods with management fees based on invested capital. Conversely, capital deployment in Ares Special Situations Fund IV, L.P. (“SSF IV”) increased its fee basis and management fees by $36.5 million, or 33%, to $147.6$1.5 million for the ninethree month comparative periods.
Total management fees increased by $3.0 million, or 3%, to $99.2 million for the six months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increase for the six month comparative periods was primarily attributable to driven by an $18.5 million increase in management fees for the six month comparative periods from Ares Corporate Opportunities Fund V, L.P. (“ACOF V,V”), which began generating fees in March 2017 totaling $27.3and by a $2.4 million and $63.5increase in management fees for the six month comparative periods attributable to increased invested capital in SSF IV in the current year period. Conversely, management fees from ACOF IV decreased by $8.4 million for the three and nine months ended September 30, 2017, respectively. In addition, EIF V held its final close in the second quarter of 2017, generating additional management fees of $1.4 million and $9.3 million for the three and nine months ended September 30, 2017, respectively. Management fees generated by EIF V for the nine months ended September 30, 2017 included $5.8 million of one time catch-up fees. Partially offsetting these increases, management fees generated by Ares Corporate Opportunities Fund IV, L.P. (“ACOF IV”) decreased by $10.8 million and $25.7 million for the three and ninesix month respectivecomparative periods due to a reduced fee rate and change in fee basis in connection with the launch of ACOF V. Additionally offsetting the increase was $5.8 million of one-time catch-up fees related to the final closings of EIF V recognized during the six months ended June 30, 2017. ACOF III, USPF III and USPF IV sold investments subsequent to June 30, 2017, reducing invested capital and resulting in a $4.3 million decrease in management fees attributable to certain U.S. power and energy infrastructure funds decreased $1.5 million and $8.2 million for the three and nine months ended September 30, 2017, respectively, as a result of portfolio realizations which reduced the fee bases of the funds.six month comparative periods.
The effective management fee rate, decreased from 1.23% and 1.26% for the three and nine months ended September 30, 2016, respectively, to 1.19% and 1.20%, excluding the effect of one-time catch-up fees, increased from 1.18% for the three and nine months ended SeptemberJune 30, 2017 respectively.to 1.19% for the three months ended June 30, 2018. The decreases in the effective management fee rate, resultedexcluding the effect of one-time catch-up fees, decreased from 1.20% for the six months ended June 30, 2017 to 1.19% for the six months ended June 30, 2018. The decrease for the six month comparative period was primarily the result of a reduced fee rate at ACOF IV and were partially offset by ACOF V management fees commencing in March 2017.IV.
Compensation and Benefits. Compensation and benefits expenses increased by $2.6$0.3 million, or 15%2%, to $19.3$18.7 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $4.3$6.3 million, or 9%20%, to $50.9$37.9 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increasesincrease for the three and ninesix month comparative periods werewas primarily due to increases in salary and benefits expenses as a result of additional headcount neededto expand our capabilities within the special situations strategy and to support ACOF V's capital deployment,an increasing asset base and pool of investments within our corporate opportunity strategy, as well as merit based increases.an increase in incentive compensation. Compensation and benefits expenses represented 37.5%37.9% and 34.5%38.2% of management fees for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2018 compared to 47.5%32.6% and 41.9%32.8% for the three and ninesix months ended SeptemberJune 30, 2016, respectively.
General, Administrative and Other Expenses. General, administrative and other expenses increased by $0.7 million, or 19%, to $4.7 million for the three months ended September 30, 2017 compared to the prior year period and by $2.7 million, or 26%, to $13.2 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increases in the current year periods were primarily attributable to increases in professional services expenses, including recruiting fees related to staffing needs. The nine month period was also impacted by other business support costs driven by increased headcount.2017.
Performance Related Earnings:
Performance related earnings decreased by $30.3 million to $12.0$86.9 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and increased by $40.4 million to $113.7$102.6 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. Performance related earnings were impacted by fluctuations of the following components:
Net Performance Fees.Income. Net performance fees includeincome includes realized and unrealized performance fees,income, net of realized and unrealized performance feerelated compensation. The impact of reversals of previously recognized performance fee revenueincome and the corresponding performance feerelated compensation expense is reflected as a reduction in unrealized performance feesincome and unrealized performance feerelated compensation.
Net performance feesincome decreased by $18.7 million to $6.2$69.2 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016. The decrease in net2017 and by $72.7 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Net performance feesincome for the three months ended SeptemberJune 30, 2017 was2018 primarily drivenincluded an $8.3 million reversal of net performance income due to a reduction in fair value of one of ACOF IV’s industrial portfolio companies. Net performance income for the six months ended June 30, 2018 included the following: (i) $6.3 million reversal of net performance income due to a
reduction in fair value of one of ACOF IV’s industrial portfolio companies; (ii) $4.9 million reversal of net performance income attributable to EIF V primarily due to a reduction in fair value of one of its energy portfolio companies; offset by lower(iii) $4.7 million of net performance income attributable to ACOF III primarily due to market appreciation in ACOF IVof one of its publicly traded retail portfolio companies compared to the prior year period, when we experienced significant appreciation of certain oil and gas portfolio investments.
companies.
Net performance fees increased by $16.2 million to $71.5 millionincome for the ninethree and six months ended SeptemberJune 30, 2017 compared toincluded the nine months ended September 30, 2016. The increase infollowing: (i) $42.1 million and $37.6 million, respectively, of net performance fees for the nine months ended September 30, 2017 wasincome attributable to ACOF III primarily driven bydue to significant market appreciation inof one of ACOF III'sits publicly traded retail portfolio companies following itsthe company's initial public offering.
offering; and (ii) $19.4 million and $30.4 million, respectively, of net performance income attributable to ACOF IV primarily due to an increased fair value of one of its veterinary portfolio companies following a minority sale of the company.
Net Investment Income. Net investment income decreased by $11.6$17.8 million to $5.7$10.9 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016. Net investment income2017 and by $29.9 million to $6.5 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decreases were primarily driven by lower net gains of $39.4 million and $31.1 million for the three months ended September 30, 2017 represented unrealizedand six month comparative periods, respectively, on our investment in ACOF III attributable to one of the fund’s publicly traded retail portfolio companies following its initial public offering in the prior year period. Offsetting the decrease was an increase in market appreciation of $5.8$17.9 million on our investment in anour Asian corporate private equity fund primarily attributabledue to an increased valuation as a result of a recent round of fundraising of one the fund's portfolio investment in a public consumer products company. Net investment incomecompanies for the three months ended SeptemberJune 30, 2016 included appreciation on our investment in an Asian corporate private equity fund of $5.6 million, primarily attributable2018 compared to its portfolio investment in a public consumer products company, and net realized and unrealized gains on our investments in ACOF III and certain special situations funds of $3.9 million and $4.0 million, respectively, due to appreciation of underlying investments.the three months ended June 30, 2017.
Net investmentRealized Income:
Realized income increased by $24.2$3.3 million, or 6%, to $42.2$53.4 million for the ninethree months ended SeptemberJune 30, 20172018 compared to the ninethree months ended SeptemberJune 30, 2016.2017 and by $8.2 million, or 11%, to $80.7 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase wasincreases were primarily attributable to ACOF III, which had an increase of $23.9 milliondriven by increases in net realized investment and unrealized gainsother income of $8.2 million and $8.1 million for the ninethree and six month comparative periodperiods, respectively, and by increases in net realized performance fees of $2.2 million and $3.1 million for the three and six month comparative periods, respectively. Increases in realized performance fees and realized investment income were primarily due to market appreciation in onerealizations and related distributions from ACOF III's partial sale of its position in a publicly traded retail portfolio companies that completed its initial public offering incompany. Conversely, FRE decreased by $7.2 million and $3.0 million for the current year.
three and six month comparative periods, respectively.
Economic Net Income:
Economic net income is composed of fee related earnings and performance related earnings. Economic net income decreased by $17.3$94.2 million to $39.8$27.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and increased by $70.0$105.6 million to $198.3$52.9 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. The changes were2017, as a result of the fluctuations described above.
Distributable Earnings:
DE increased by $30.3 million, or 67%, to $75.8 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 and by $41.5 million, or 40%, to $145.7 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. DE was positively impacted by increases in FRE of $13.0 million and $29.6 million for the three and nine month respective periods, and increases in net realized performance fees of $12.9 million and $14.3 million for the three and nine months ended September 30, 2017, respectively. The increase in DE was partially offset by a decrease in net realized investment and other income of $3.3 million for the nine months ended September 30, 2017 compared to the prior year period.
Private Equity Group—Assets Under Management
The tables below provide the period‑to‑period rollforwards of AUM for the Private Equity Group for the three months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| Balance at 6/30/2017 | $ | 19,470 |
| | $ | 4,726 |
| | $ | 1,574 |
| | $ | 25,770 |
| |
| Balance at 3/31/2018 | | $ | 18,728 |
| | $ | 4,061 |
| | $ | 1,514 |
| | $ | 24,303 |
|
| Net new equity commitments | | — |
| | 350 |
| | — |
| | 350 |
|
| Distributions | (1,299 | ) | | (46 | ) | | (28 | ) | | (1,373 | ) | (485 | ) | | (545 | ) | | (9 | ) | | (1,039 | ) |
| Change in fund value | 211 |
| | (60 | ) | | 27 |
| | 178 |
| (157 | ) | | 117 |
| | 28 |
| | (12 | ) |
| Balance at 9/30/2017 | $ | 18,382 |
| | $ | 4,620 |
| | $ | 1,573 |
| | $ | 24,575 |
| |
| Balance at 6/30/2018 | | $ | 18,086 |
| | $ | 3,983 |
| | $ | 1,533 |
| | $ | 23,602 |
|
| Average AUM(1) | $ | 18,926 |
| | $ | 4,673 |
| | $ | 1,574 |
| | $ | 25,173 |
| $ | 18,407 |
| | $ | 4,022 |
| | $ | 1,524 |
| | $ | 23,953 |
|
| | | | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| Balance at 6/30/2016 | $ | 18,078 |
| | $ | 4,959 |
| | $ | 1,777 |
| | $ | 24,814 |
| |
| Balance at 3/31/2017 | | $ | 18,384 |
| | $ | 4,574 |
| | $ | 1,695 |
| | $ | 24,653 |
|
| Net new equity commitments | — |
| | 10 |
| | — |
| | 10 |
| (3 | ) | | 284 |
| | — |
| | 281 |
|
| Distributions | (754 | ) | | (55 | ) | | (32 | ) | | (841 | ) | (535 | ) | | (32 | ) | | (93 | ) | | (660 | ) |
| Change in fund value | 632 |
| | 166 |
| | 95 |
| | 893 |
| 1,624 |
| | (100 | ) | | (28 | ) | | 1,496 |
|
| Balance at 9/30/2016 | $ | 17,956 |
| | $ | 5,080 |
| | $ | 1,840 |
| | $ | 24,876 |
| |
| Balance at 6/30/2017 | | $ | 19,470 |
| | $ | 4,726 |
| | $ | 1,574 |
| | $ | 25,770 |
|
| Average AUM(1) | $ | 18,017 |
| | $ | 5,020 |
| | $ | 1,809 |
| | $ | 24,846 |
| $ | 18,927 |
| | $ | 4,650 |
| | $ | 1,635 |
| | $ | 25,212 |
|
| |
| (1) | Represents the quarterly average of beginning and ending balances. |
The tables below provide the period‑to‑period rollforwards of AUM for the Private Equity Group for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| Balance at 12/31/2016 | $ | 18,162 |
| | $ | 5,143 |
| | $ | 1,736 |
| | $ | 25,041 |
|
| Net new equity commitments | 23 |
| | 300 |
| | — |
| | 323 |
|
| Distributions | (1,852 | ) | | (655 | ) | | (169 | ) | | (2,676 | ) |
| Change in fund value | 2,049 |
| | (168 | ) | | 6 |
| | 1,887 |
|
| Balance at 9/30/2017 | $ | 18,382 |
| | $ | 4,620 |
| | $ | 1,573 |
| | $ | 24,575 |
|
| Average AUM(2) | $ | 18,600 |
| | $ | 4,766 |
| | $ | 1,645 |
| | $ | 25,011 |
|
| | | | Corporate Private Equity(1) | | Private Equity - EIF | | Special Situations | | Total Private Equity Group | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| Balance at 12/31/2015 | $ | 15,908 |
| | $ | 5,207 |
| | $ | 1,863 |
| | $ | 22,978 |
| |
| Balance at 12/31/2017 | | $ | 18,557 |
| | $ | 4,423 |
| | $ | 1,550 |
| | $ | 24,530 |
|
| Net new equity commitments | 2,154 |
| | 10 |
| | — |
| | 2,164 |
| 13 |
| | 350 |
| | — |
| | 363 |
|
| Distributions | (1,401 | ) | | (231 | ) | | (108 | ) | | (1,740 | ) | (509 | ) | | (763 | ) | | (49 | ) | | (1,321 | ) |
| Change in fund value | 1,295 |
| | 94 |
| | 85 |
| | 1,474 |
| 25 |
| | (27 | ) | | 32 |
| | 30 |
|
| Balance at 9/30/2016 | $ | 17,956 |
| | $ | 5,080 |
| | $ | 1,840 |
| | $ | 24,876 |
| |
| Balance at 6/30/2018 | | $ | 18,086 |
| | $ | 3,983 |
| | $ | 1,533 |
| | $ | 23,602 |
|
Average AUM(2)(1) | $ | 17,524 |
| | $ | 5,092 |
| | $ | 1,816 |
| | $ | 24,432 |
| $ | 18,457 |
| | $ | 4,156 |
| | $ | 1,532 |
| | $ | 24,145 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| Balance at 12/31/2016 | $ | 18,162 |
| | $ | 5,143 |
| | $ | 1,736 |
| | $ | 25,041 |
|
| Net new equity commitments | 23 |
| | 300 |
| | — |
| | 323 |
|
| Distributions | (553 | ) | | (609 | ) | | (141 | ) | | (1,303 | ) |
| Change in fund value | 1,838 |
| | (108 | ) | | (21 | ) | | 1,709 |
|
| Balance at 6/30/2017 | $ | 19,470 |
| | $ | 4,726 |
| | $ | 1,574 |
| | $ | 25,770 |
|
| Average AUM(1) | $ | 18,672 |
| | $ | 4,814 |
| | $ | 1,668 |
| | $ | 25,154 |
|
| |
| (1) | Net new equity commitments represent commitments to ACOF V for the nine months ended September 30, 2016. |
| |
(2) | Represents the quarterly average of beginning and ending balances. |
Private Equity Group—Fee Paying AUM
The tables below provide the period‑to‑period rollforwards of fee paying AUM for the Private Equity Group for the three months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| FPAUM Balance at 6/30/2017 | $ | 12,437 |
| | $ | 4,081 |
| | $ | 774 |
| | $ | 17,292 |
| |
| FPAUM Balance at 3/31/2018 | | $ | 12,104 |
| | $ | 3,634 |
| | $ | 925 |
| | $ | 16,663 |
|
| Commitments | | — |
| | 350 |
| | — |
| | 350 |
|
| Subscriptions/deployment/increase in leverage | 40 |
| | 28 |
| | 18 |
| | 86 |
| 94 |
| | 33 |
| | 44 |
| | 171 |
|
| Redemptions/distributions/decrease in leverage | (352 | ) | | (8 | ) | | (142 | ) | | (502 | ) | (66 | ) | | (500 | ) | | (24 | ) | | (590 | ) |
| Change in fund value | — |
| | (61 | ) | | (6 | ) | | (67 | ) | (5 | ) | | — |
| | — |
| | (5 | ) |
| Change in fee basis | (25 | ) | | — |
| | — |
| | (25 | ) | |
| FPAUM Balance at 9/30/2017 | $ | 12,100 |
| | $ | 4,040 |
| | $ | 644 |
| | $ | 16,784 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 12,127 |
| | $ | 3,517 |
| | $ | 945 |
| | $ | 16,589 |
|
| Average FPAUM(1) | $ | 12,269 |
| | $ | 4,061 |
| | $ | 709 |
| | $ | 17,039 |
| $ | 12,116 |
| | $ | 3,576 |
| | $ | 935 |
| | $ | 16,627 |
|
| | | | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| FPAUM Balance at 6/30/2016 | $ | 6,678 |
| | $ | 4,331 |
| | $ | 844 |
| | $ | 11,853 |
| |
| FPAUM Balance at 3/31/2017 | | $ | 12,720 |
| | $ | 3,865 |
| | $ | 597 |
| | $ | 17,182 |
|
| Commitments | — |
| | 10 |
| | — |
| | 10 |
| (3 | ) | | 284 |
| | — |
| | 281 |
|
| Subscriptions/deployment/increase in leverage | 34 |
| | 7 |
| | — |
| | 41 |
| 230 |
| | 9 |
| | 217 |
| | 456 |
|
| Redemptions/distributions/decrease in leverage | (226 | ) | | — |
| | (49 | ) | | (275 | ) | (510 | ) | | (24 | ) | | (36 | ) | | (570 | ) |
| Change in fee basis | — |
| | (264 | ) | | — |
| | (264 | ) | |
| FPAUM Balance at 9/30/2016 | $ | 6,486 |
| | $ | 4,084 |
| | $ | 795 |
| | $ | 11,365 |
| |
| Change in fund value | | — |
| | (53 | ) | | (4 | ) | | (57 | ) |
| FPAUM Balance at 6/30/2017 | | $ | 12,437 |
| | $ | 4,081 |
| | $ | 774 |
| | $ | 17,292 |
|
| Average FPAUM(1) | $ | 6,582 |
| | $ | 4,208 |
| | $ | 820 |
| | $ | 11,610 |
| $ | 12,579 |
| | $ | 3,973 |
| | $ | 686 |
| | $ | 17,238 |
|
(1) Represents the quarterly average of beginning and ending balances.
The tables below provide the period‑to‑period rollforwards of fee paying AUM for the Private Equity Group for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| FPAUM Balance at 12/31/2016 | $ | 6,454 |
| | $ | 4,232 |
| | $ | 628 |
| | $ | 11,314 |
|
| Commitments | 7,622 |
| | 300 |
| | — |
| | 7,922 |
|
| Subscriptions/deployment/increase in leverage | 449 |
| | 197 |
| | 277 |
| | 923 |
|
| Redemptions/distributions/decrease in leverage | (873 | ) | | (340 | ) | | (207 | ) | | (1,420 | ) |
| Change in fund value | — |
| | (349 | ) | | (54 | ) | | (403 | ) |
| Change in fee basis | (1,552 | ) | | — |
| | — |
| | (1,552 | ) |
| FPAUM Balance at 9/30/2017 | $ | 12,100 |
| | $ | 4,040 |
| | $ | 644 |
| | $ | 16,784 |
|
| Average FPAUM(1) | $ | 10,928 |
| | $ | 4,055 |
| | $ | 661 |
| | $ | 15,644 |
|
| | | | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| FPAUM Balance at 12/31/2015 | $ | 6,957 |
| | $ | 4,454 |
| | $ | 1,051 |
| | $ | 12,462 |
| |
| FPAUM Balance at 12/31/2017 | | $ | 12,073 |
| | $ | 4,019 |
| | $ | 766 |
| | $ | 16,858 |
|
| Commitments | — |
| | 10 |
| | — |
| | 10 |
| 13 |
| | 350 |
| | — |
| | 363 |
|
| Subscriptions/deployment/increase in leverage | 50 |
| | 17 |
| | (4 | ) | | 63 |
| 123 |
| | 34 |
| | 217 |
| | 374 |
|
| Redemptions/distributions/decrease in leverage | (226 | ) | | (46 | ) | | (164 | ) | | (436 | ) | (80 | ) | | (886 | ) | | (50 | ) | | (1,016 | ) |
| Change in fund value | — |
| | (80 | ) | | (88 | ) | | (168 | ) | (2 | ) | | — |
| | 12 |
| | 10 |
|
| Change in fee basis | (295 | ) | | (271 | ) | | — |
| | (566 | ) | |
| FPAUM Balance at 9/30/2016 | $ | 6,486 |
| | $ | 4,084 |
| | $ | 795 |
| | $ | 11,365 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 12,127 |
| | $ | 3,517 |
| | $ | 945 |
| | $ | 16,589 |
|
| Average FPAUM(1) | $ | 6,702 |
| | $ | 4,325 |
| | $ | 896 |
| | $ | 11,923 |
| $ | 12,101 |
| | $ | 3,723 |
| | $ | 879 |
| | $ | 16,703 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| FPAUM Balance at 12/31/2016 | $ | 6,454 |
| | $ | 4,232 |
| | $ | 628 |
| | $ | 11,314 |
|
| Commitments | 7,622 |
| | 300 |
| | — |
| | 7,922 |
|
| Subscriptions/deployment/increase in leverage | 409 |
| | 169 |
| | 259 |
| | 837 |
|
| Redemptions/distributions/decrease in leverage | (521 | ) | | (332 | ) | | (65 | ) | | (918 | ) |
| Change in fund value | — |
| | (288 | ) | | (48 | ) | | (336 | ) |
| Change in fee basis | (1,527 | ) | | — |
| | — |
| | (1,527 | ) |
| FPAUM Balance at 6/30/2017 | $ | 12,437 |
| | $ | 4,081 |
| | $ | 774 |
| | $ | 17,292 |
|
| Average FPAUM(1) | $ | 10,537 |
| | $ | 4,059 |
| | $ | 666 |
| | $ | 15,262 |
|
(1) | |
| (1) | Represents the quarterly average of beginning and ending balances. |
The charts below present FPAUM for the Private Equity Group by its fee basis as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| |
FPAUM: $11,365$16,589 | FPAUM: $16,784$17,292 |
The components of our AUM, including the portion that is FPAUM, for the Private Equity Group are presented below as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| |
AUM: $24,876$23,602 | AUM: $24,575$25,770 |
Private Equity Group—Fund Performance Metrics as of SeptemberJune 30, 20172018
The Private Equity Group managed 2123 commingled funds and related co-investment vehicles as of SeptemberJune 30, 2017.2018. ACOF III, ACOF IV, ACOF V, U.S. Power FundSSF IV, USPF III, (“USPF III”), U.S. Power Fund IV (“USPF IV”) and EIF V, each considered a significant fund, combined for approximately 93%96% of the Private Equity Group’s management fees for the ninesix months ended SeptemberJune 30, 2017.2018. Our Corporate Private Equity funds focus on majority or shared-control investments, principally in under-capitalized companies in North America, Europe and Asia. Our special situations funds invest opportunistically across a broad spectrum of distressed or mispriced investments. Our U.S. power and energy infrastructure funds focus on generating long-term, stable cash-flowing investments in the power generation, transmission and midstream energy sector. ACOF III. ACOF IV, USPF III and ACOFUSPF IV are in harvest mode, meaning they are generally not seeking to deploy capital into new investment opportunities, while ACOF V, is in deployment mode. Each of our U.S. powerSSF IV and energy infrastructure funds focuses on generating long-term, stable cash-flowing investments in the power generation,
transmission and midstream energy sector. USPF III and USPF IV are in harvest mode, while EIF V isare in deployment mode. We do not present fund performance metrics for significant funds with less than two years of historical information, except for those significant funds whichthat pay management fees on invested capital, in which case performance is shown at the earlier of (i) the one year anniversary of the fund's first investment andor (ii) such time the fund is 50% or more invested.
The following table presents the performance data for our significant funds in the Private Equity Group, all of which are drawdown funds:
| | | | | | | As of September 30, 2017 (Dollars in millions) | | | | | As of June 30, 2018 (Dollars in millions) | | | | | |
| | Year of Inception | | AUM | | Original Capital Commitments | | Cumulative Invested Capital | | Realized Proceeds(1) | | Unrealized Value(2) | | Total Value | | MoIC | | IRR(%) | | Primary Investment Strategy | Year of Inception | | AUM | | Original Capital Commitments | | Cumulative Invested Capital | | Realized Proceeds(1) | | Unrealized Value(2) | | Total Value | | MoIC | | IRR(%) | | Primary Investment Strategy |
| Fund | | Gross(3) | | Net(4) | | Gross(5) | | Net(6) | | | Gross(3) | | Net(4) | | Gross(5) | | Net(6) | |
| USPF III | 2007 | | $ | 906 |
| | $ | 1,350 |
| | $ | 1,808 |
| | $ | 1,753 |
| | $ | 860 |
| | $ | 2,613 |
| | 1.5x | | 1.4x | | 8.1 | | 5.5 | | U.S. Power and Energy Infrastructure | 2007 | | $ | 481 |
| | $ | 1,350 |
| | $ | 1,808 |
| | $ | 2,110 |
| | $ | 448 |
| | $ | 2,558 |
| | 1.4x | | 1.4x | | 7.4 |
| | 4.9 |
| | U.S. Power and Energy Infrastructure |
| ACOF III | 2008 | | 4,340 |
| | 3,510 |
| | 3,867 |
| | 5,952 |
| | 4,021 |
| | 9,973 |
| | 2.6x | | 2.2x | | 31.1 | | 23.1 | | Corporate Private Equity | 2008 | | 4,208 |
| | 3,510 |
| | 3,867 |
| | 6,662 |
| | 3,889 |
| | 10,551 |
| | 2.7x | | 2.3x | | 30.7 |
| | 22.9 |
| | Corporate Private Equity |
| USPF IV | 2010 | | 1,873 |
| | 1,688 |
| | 1,815 |
| | 749 |
| | 1,677 |
| | 2,426 |
| | 1.3x | | 1.2x | | 10.8 | | 7.3 | | U.S. Power and Energy Infrastructure | 2010 | | 1,771 |
| | 1,688 |
| | 1,859 |
| | 933 |
| | 1,608 |
| | 2,541 |
| | 1.4x | | 1.3x | | 10.1 |
| | 6.6 |
| | U.S. Power and Energy Infrastructure |
| ACOF IV | 2012 | | 5,342 |
| | 4,700 |
| | 3,806 |
| | 2,438 |
| | 4,119 |
| | 6,557 |
| | 1.7x | | 1.6x | | 23.7 | | 16.0 | | Corporate Private Equity | 2012 | | 5,295 |
| | 4,700 |
| | 4,107 |
| | 2,520 |
| | 4,427 |
| | 6,947 |
| | 1.7x | | 1.5x | | 20.4 |
| | 13.7 |
| | Corporate Private Equity |
| EIF V | | 2015 | | 787 |
| | 801 |
| | 505 |
| | 146 |
| | 418 |
| | 564 |
| | 1.1x | | 1.0x | | 12.0 |
| | (1.2 | ) | | U.S. Power and Energy Infrastructure |
| SSF IV(7) | | 2015 | | 1,367 |
| | 1,515 |
| | 1,693 |
| | 774 |
| | 801 |
| | 1,576 |
| | 0.9x | | 0.9x | | (7.2 | ) | | (8.9 | ) | | Special Situations |
| ACOF V | 2017 | | 8,006 |
| | 7,850 |
| | 971 |
| | 12 |
| | 1,004 |
| | 1,016 |
| | 1.0x | | 0.9x | | N/A | | N/A | | Corporate Private Equity | 2017 | | 7,838 |
| | 7,850 |
| | 2,943 |
| | 118 |
| | 3,015 |
| | 3,133 |
| | 1.1x | | 1.0x | | NA |
| | NA |
| | Corporate Private Equity |
| EIF V(7) | 2015 | | 884 |
| | 801 |
| | 290 |
| | 76 |
| | 339 |
| | 415 |
| | 1.4x | | 1.6x | | N/A | | N/A | | U.S. Power and Energy Infrastructure | |
| |
| (1) | Realized proceeds represent the sum of all cash dividends, interest income, other fees and cash proceeds from realizations of interests in portfolio investments. |
| |
| (2) | Unrealized value represents the fair market 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 is before giving effect to management fees, performance fees as applicable and other expenses. |
| |
| (4) | The net MoIC for the U.S. power and energy infrastructure and special situation funds 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 those interests attributable to the non-fee paying limited partners and/or the general partner who does not pay management fees or performance fees.income. The net MoIC is after giving effect to management fees, performance feesincome as applicable and other expenses. |
| |
| (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 month-end. The gross IRRs are calculated before giving effect to management fees, performance feesincome as applicable, and other expenses. |
| |
| (6) | The net IRR for the U.S. power and energy infrastructure and special situation funds 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. The cash flow dates used in the net IRR calculations are based on the actual dates of the cash flows. The net IRR for the corporate private equity funds is an annualized since inception net 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. 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. Cash flows used in the net IRR calculations are assumed to occur at month end. For all funds, the net IRRs are calculated after giving effect to management fees, performance feesincome as applicable, and other expenses and exclude commitments by the general partner and Schedule I investors who do not pay either management fees or carried interest. Including the timing on contribution and distributions to and from the corporate private equity funds, net investor IRRs since inception for ACOF III is 22.3%22.2% and for ACOF IV is 15.2%12.9%. |
| |
| (7) | The Gross MoICIn January 2017, a new team assumed portfolio management of SSF IV. In addition to presenting the cumulative performance measure by SSF IV, we have also adopted a new performance measurement called “SSF IV 2.0”. SSF IV 2.0 is lower thana subset of SSF IV positions and is intended to provide insight into the Net MoICnew team’s cumulative investment performance. SSF IV 2.0 investments represent (i) existing and re-underwritten positions by the new team on January 1, 2017 and (ii) all new investments made by the new team since January 1, 2017. As part of the re-underwriting process, each liquid investment in the SSF IV portfolio was evaluated and a determination was made whether to continue to hold such investment in the SSF IV portfolio or dispose of such investment. At the same time, legacy illiquid investments have been excluded from the SSF IV 2.0 track record as it was not possible to dispose of such investments in the near-term due to the fund's utilizationtheir private, illiquid nature. Since January 2017, SSF IV 2.0 has generated gross and net (realized and unrealized) internal rates of a credit facility to fund an investment that is currently under constructionreturn of 15.6% and not generating cash flow.10.8%, respectively, through June 30, 2018.
|
Real Estate Group
The following table sets forth certain statement of operations data and certain other data of our Real Estate Group segment for the periods presented.
| | | | Three Months Ended | | Favorable (Unfavorable) | | Nine Months Ended | | Favorable (Unfavorable) | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | September 30, | | September 30, | | June 30, | | June 30, | |
| | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Management fees | $ | 17,137 |
| | $ | 17,819 |
| | $ | (682 | ) | | (4 | )% | | $ | 49,231 |
| | $ | 50,794 |
| | $ | (1,563 | ) | | (3 | )% | $ | 17,138 |
| | $ | 16,479 |
| | $ | 659 |
| | 4 | % | | $ | 32,311 |
| | $ | 32,094 |
| | $ | 217 |
| | 1 | % |
| Other fees | 27 |
| | 162 |
| | (135 | ) | | (83 | )% | | 37 |
| | 855 |
| | (818 | ) | | (96 | )% | 7 |
| | 19 |
| | (12 | ) | | (63 | )% | | 10 |
| | 10 |
| | — |
| | — | % |
| Compensation and benefits | (11,398 | ) | | (9,459 | ) | | (1,939 | ) | | (20 | )% | | (30,848 | ) | | (31,327 | ) | | 479 |
| | 2 | % | (8,768 | ) | | (9,714 | ) | | 946 |
| | 10 | % | | (16,407 | ) | | (19,450 | ) | | 3,043 |
| | 16 | % |
| General, administrative and other expenses | (2,125 | ) | | (2,289 | ) | | 164 |
| | 7 | % | | (7,947 | ) | | (8,241 | ) | | 294 |
| | 4 | % | (2,391 | ) | | (3,091 | ) | | 700 |
| | 23 | % | | (4,823 | ) | | (5,822 | ) | | 999 |
| | 17 | % |
| Fee Related Earnings | 3,641 |
| | 6,233 |
| | (2,592 | ) | | (42 | )% | | 10,473 |
| | 12,081 |
| | (1,608 | ) | | (13 | )% | 5,986 |
| | 3,693 |
| | 2,293 |
| | 62 | % | | 11,091 |
| | 6,832 |
| | 4,259 |
| | 62 | % |
| Performance fees-realized | 2,389 |
| | 2,170 |
| | 219 |
| | 10 | % | | 3,883 |
| | 5,142 |
| | (1,259 | ) | | (24 | )% | |
| Performance fees-unrealized | 20,366 |
| | 4,647 |
| | 15,719 |
| | NM |
| | 64,243 |
| | 10,030 |
| | 54,213 |
| | NM |
| |
| Performance fee compensation-realized | (856 | ) | | — |
| | (856 | ) | | NM |
| | (1,033 | ) | | (53 | ) | | (980 | ) | | NM |
| |
| Performance fee compensation-unrealized | (12,233 | ) | | (4,322 | ) | | (7,911 | ) | | (183 | )% | | (39,303 | ) | | (8,328 | ) | | (30,975 | ) | | NM |
| |
| Net performance fees | 9,666 |
| | 2,495 |
| | 7,171 |
| | 287 | % | | 27,790 |
| | 6,791 |
| | 20,999 |
| | NM |
| |
| Performance income-realized | | 521 |
| | 1,467 |
| | (946 | ) | | (64 | )% | | 14,159 |
| | 1,494 |
| | 12,665 |
| | NM |
|
| Performance income-unrealized | | 13,830 |
| | 29,789 |
| | (15,959 | ) | | (54 | )% | | 11,790 |
| | 43,877 |
| | (32,087 | ) | | (73 | )% |
| Performance related compensation-realized | | 7 |
| | (161 | ) | | 168 |
| | NM |
| | (8,214 | ) | | (177 | ) | | (8,037 | ) | | NM |
|
| Performance related compensation-unrealized | | (8,785 | ) | | (18,632 | ) | | 9,847 |
| | 53 | % | | (8,276 | ) | | (27,070 | ) | | 18,794 |
| | 69 | % |
| Net performance income | | 5,573 |
| | 12,463 |
| | (6,890 | ) | | (55 | )% | | 9,459 |
| | 18,124 |
| | (8,665 | ) | | (48 | )% |
| Investment income (loss)-realized | 1,997 |
| | (151 | ) | | 2,148 |
| | NM |
| | 4,153 |
| | 412 |
| | 3,741 |
| | NM |
| (250 | ) | | 373 |
| | (623 | ) | | NM |
| | 3,100 |
| | 2,156 |
| | 944 |
| | 44 | % |
| Investment income (loss)-unrealized | (767 | ) | | 6,211 |
| | (6,978 | ) | | NM |
| | (77 | ) | | 7,943 |
| | (8,020 | ) | | NM |
| (525 | ) | | 1,134 |
| | (1,659 | ) | | NM |
| | (1,757 | ) | | 690 |
| | (2,447 | ) | | NM |
|
| Interest and other investment income | 716 |
| | 714 |
| | 2 |
| | < 1% |
| | 2,069 |
| | 1,642 |
| | 427 |
| | 26 | % | |
| Interest and other investment income (expense) | | (1,218 | ) | | 1,534 |
| | (2,752 | ) | | NM |
| | (201 | ) | | 1,353 |
| | (1,554 | ) | | NM |
|
| Interest expense | (396 | ) | | (242 | ) | | (154 | ) | | (64 | )% | | (1,257 | ) | | (788 | ) | | (469 | ) | | (60 | )% | (452 | ) | | (429 | ) | | (23 | ) | | (5 | )% | | (872 | ) | | (861 | ) | | (11 | ) | | (1 | )% |
| Net investment income | 1,550 |
| | 6,532 |
| | (4,982 | ) | | (76 | )% | | 4,888 |
| | 9,209 |
| | (4,321 | ) | | (47 | )% | |
| Net investment income (loss) | | (2,445 | ) | | 2,612 |
| | (5,057 | ) | | NM |
| | 270 |
| | 3,338 |
| | (3,068 | ) | | (92 | )% |
| Performance related earnings | 11,216 |
| | 9,027 |
| | 2,189 |
| | 24 | % | | 32,678 |
| | 16,000 |
| | 16,678 |
| | 104 | % | 3,128 |
| | 15,075 |
| | (11,947 | ) | | (79 | )% | | 9,729 |
| | 21,462 |
| | (11,733 | ) | | (55 | )% |
| Economic net income | $ | 14,857 |
| | $ | 15,260 |
| | (403 | ) | | (3 | )% | | $ | 43,151 |
| | $ | 28,081 |
| | 15,070 |
| | 54 | % | $ | 9,114 |
| | $ | 18,768 |
| | (9,654 | ) | | (51 | )% | | $ | 20,820 |
| | $ | 28,294 |
| | (7,474 | ) | | (26 | )% |
| Distributable earnings | $ | 4,736 |
| | $ | 6,408 |
| | (1,672 | ) | | (26 | )% | | $ | 12,596 |
| | $ | 16,867 |
| | (4,271 | ) | | (25 | )% | |
| Realized income | | $ | 6,479 |
| | $ | 5,181 |
| | 1,298 |
| | 25 | % | | $ | 20,148 |
| | $ | 9,769 |
| | 10,379 |
| | 106 | % |
NM - Not Meaningful
Accrued performance feescarried interest and incentive fee receivable for the Real Estate Group are composed ofinclude the following:
| | | | As of September 30, | | As of December 31, | As of June 30, | | As of December 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | (Dollars in thousands) | (Dollars in thousands) |
| US VIII | $ | 27,528 |
| | $ | 12,575 |
| $ | 37,706 |
| | $ | 32,940 |
|
| EF IV | 40,200 |
| | 4,052 |
| 51,905 |
| | 50,801 |
|
| Other real estate funds | 37,403 |
| | 22,001 |
| 44,117 |
| | 37,528 |
|
| Subtotal | 105,131 |
| | 38,628 |
| 133,728 |
| | 121,269 |
|
| Other fee generating funds(1) | 15,518 |
| | 16,675 |
| 13,313 |
| | 15,362 |
|
| Total Real Estate Group | $ | 120,649 |
| | $ | 55,303 |
| $ | 147,041 |
| | $ | 136,631 |
|
| |
| (1) | Relates to investment income from AREA Sponsor Holdings LLC that is reclassified for segment reporting to align with the character of the underlying income generated. |
NetThe following tables present the components of performance fee revenuesincome for the Real Estate GroupGroup. The three and six month periods ended June 30, 2017 include unrealized incentive fees, which are composedno longer recognized following our adoption of the following:new revenue recognition standard.
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) | (Dollars in thousands) |
| US VIII | $ | — |
| | $ | 6,819 |
| | $ | 6,819 |
| | $ | — |
| | $ | (96 | ) | | $ | (96 | ) | $ | — |
| | $ | 436 |
| | $ | 436 |
| | $ | — |
| | $ | 4,074 |
| | $ | 4,074 |
|
| EF IV | — |
| | 8,094 |
| | 8,094 |
| | — |
| | — |
| | — |
| — |
| | 11,012 |
| | 11,012 |
| | — |
| | 18,964 |
| | 18,964 |
|
| Other real estate funds | 1,408 |
| | 5,248 |
| | 6,656 |
| | — |
| | 6,989 |
| | 6,989 |
| — |
| | 2,934 |
| | 2,934 |
| | 267 |
| | 7,734 |
| | 8,001 |
|
| Subtotal | 1,408 |
|
| 20,161 |
|
| 21,569 |
| | — |
| | 6,893 |
| | 6,893 |
| — |
|
| 14,382 |
|
| 14,382 |
| | 267 |
| | 30,772 |
| | 31,039 |
|
| Other fee generating funds(1) | 981 |
| | 205 |
| | 1,186 |
| | 2,170 |
| | (2,246 | ) | | (76 | ) | 521 |
| | (552 | ) | | (31 | ) | | 1,200 |
| | (983 | ) | | 217 |
|
| Total Real Estate Group | $ | 2,389 |
|
| $ | 20,366 |
|
| $ | 22,755 |
| | $ | 2,170 |
|
| $ | 4,647 |
|
| $ | 6,817 |
| $ | 521 |
|
| $ | 13,830 |
|
| $ | 14,351 |
| | $ | 1,467 |
|
| $ | 29,789 |
|
| $ | 31,256 |
|
| | | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) | (Dollars in thousands) |
| US VIII | $ | — |
| | $ | 14,953 |
| | $ | 14,953 |
| | $ | — |
| | $ | 2,279 |
| | $ | 2,279 |
| $ | — |
| | $ | 4,766 |
| | $ | 4,766 |
| | $ | — |
| | $ | 8,134 |
| | $ | 8,134 |
|
| EF IV | — |
| | 36,149 |
| | 36,149 |
| | — |
| | — |
| | — |
| 12,396 |
| | 1,104 |
| | 13,500 |
| | — |
| | 28,055 |
| | 28,055 |
|
| Other real estate funds | 1,702 |
| | 13,895 |
| | 15,597 |
| | 89 |
| | 11,291 |
| | 11,380 |
| 1,242 |
| | 7,447 |
| | 8,689 |
| | 294 |
| | 8,647 |
| | 8,941 |
|
| Subtotal | 1,702 |
| | 64,997 |
| | 66,699 |
| | 89 |
| | 13,570 |
| | 13,659 |
| 13,638 |
| | 13,317 |
| | 26,955 |
| | 294 |
| | 44,836 |
| | 45,130 |
|
| Other fee generating funds(1) | 2,181 |
| | (754 | ) | | 1,427 |
| | 5,053 |
| | (3,540 | ) | | 1,513 |
| 521 |
| | (1,527 | ) | | (1,006 | ) | | 1,200 |
| | (959 | ) | | 241 |
|
| Total Real Estate Group | $ | 3,883 |
| | $ | 64,243 |
| | $ | 68,126 |
| | $ | 5,142 |
| | $ | 10,030 |
| | $ | 15,172 |
| $ | 14,159 |
| | $ | 11,790 |
| | $ | 25,949 |
| | $ | 1,494 |
| | $ | 43,877 |
| | $ | 45,371 |
|
| |
| (1) | Relates to investment income from AREA Sponsor Holdings LLC that is reclassified for segment reporting to align with the character of the underlying income generated. |
The following tables present the components of the change in performance feesincome - unrealized for the Real Estate Group:Group. The three and six month periods ended June 30, 2017 include unrealized incentive fees, which are no longer recognized following our adoption of the new revenue recognition standard.
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) | (Dollars in thousands) |
| US VIII | $ | — |
| | $ | 6,819 |
| | $ | — |
| | $ | 6,819 |
| | $ | — |
| | $ | — |
| | $ | (96 | ) | | $ | (96 | ) | $ | — |
| | $ | 436 |
| | $ | — |
| | $ | 436 |
| | $ | — |
| | $ | 4,074 |
| | $ | — |
| | $ | 4,074 |
|
| EF IV | — |
| | 8,094 |
| | — |
| | 8,094 |
| | — |
| | — |
| | — |
| | — |
| — |
| | 11,012 |
| | — |
| | 11,012 |
| | — |
| | 18,964 |
| | — |
| | 18,964 |
|
| Other real estate funds | (1,408 | ) | | 6,887 |
| | (231 | ) | | 5,248 |
| | — |
| | 7,942 |
| | (953 | ) | | 6,989 |
| — |
| | 4,875 |
| | (1,941 | ) | | 2,934 |
| | (267 | ) | | 8,117 |
| | (116 | ) | | 7,734 |
|
| Subtotal | (1,408 | ) |
| 21,800 |
|
| (231 | ) |
| 20,161 |
|
| — |
|
| 7,942 |
|
| (1,049 | ) |
| 6,893 |
| — |
|
| 16,323 |
|
| (1,941 | ) |
| 14,382 |
|
| (267 | ) |
| 31,155 |
|
| (116 | ) |
| 30,772 |
|
| Other fee generating funds(1) | (981 | ) | | 1,186 |
| | — |
| | 205 |
| | (2,170 | ) | | 640 |
| | (716 | ) | | (2,246 | ) | (521 | ) | | 337 |
| | (368 | ) | | (552 | ) | | (1,200 | ) | | 827 |
| | (610 | ) | | (983 | ) |
| Total Real Estate Group | $ | (2,389 | ) |
| $ | 22,986 |
|
| $ | (231 | ) |
| $ | 20,366 |
|
| $ | (2,170 | ) |
| $ | 8,582 |
|
| $ | (1,765 | ) |
| $ | 4,647 |
| $ | (521 | ) |
| $ | 16,660 |
|
| $ | (2,309 | ) |
| $ | 13,830 |
|
| $ | (1,467 | ) |
| $ | 31,982 |
|
| $ | (726 | ) |
| $ | 29,789 |
|
| | | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | | Performance Fees - Realized | | Increases | | Decreases | | Performance Fees - Unrealized | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) | (Dollars in thousands) |
| US VIII | $ | — |
| | $ | 14,953 |
| | $ | — |
| | $ | 14,953 |
| | $ | — |
| | $ | 2,279 |
| | $ | — |
| | $ | 2,279 |
| $ | — |
| | $ | 4,766 |
| | $ | — |
| | $ | 4,766 |
| | $ | — |
| | $ | 8,134 |
| | $ | — |
| | $ | 8,134 |
|
| EF IV | — |
| | 36,149 |
| | — |
| | 36,149 |
| | — |
| | — |
| | — |
| | — |
| (12,396 | ) | | 13,500 |
| | — |
| | 1,104 |
| | — |
| | 28,055 |
| | — |
| | 28,055 |
|
| Other real estate funds | (1,702 | ) | | 16,137 |
| | (540 | ) | | 13,895 |
| | (89 | ) | | 12,629 |
| | (1,249 | ) | | 11,291 |
| (1,242 | ) | | 10,801 |
| | (2,112 | ) | | 7,447 |
| | (294 | ) | | 9,456 |
| | (515 | ) | | 8,647 |
|
| Subtotal | (1,702 | ) | | 67,239 |
| | (540 | ) | | 64,997 |
| | (89 | ) | | 14,908 |
| | (1,249 | ) | | 13,570 |
| (13,638 | ) | | 29,067 |
| | (2,112 | ) | | 13,317 |
| | (294 | ) | | 45,645 |
| | (515 | ) | | 44,836 |
|
| Other fee generating funds(1) | (2,181 | ) | | 1,987 |
| | (560 | ) | | (754 | ) | | (5,053 | ) | | 2,950 |
| | (1,437 | ) | | (3,540 | ) | (521 | ) | | 302 |
| | (1,308 | ) | | (1,527 | ) | | (1,200 | ) | | 1,149 |
| | (908 | ) | | (959 | ) |
| Total Real Estate Group | $ | (3,883 | ) | | $ | 69,226 |
| | $ | (1,100 | ) | | $ | 64,243 |
| | $ | (5,142 | ) | | $ | 17,858 |
| | $ | (2,686 | ) | | $ | 10,030 |
| $ | (14,159 | ) | | $ | 29,369 |
| | $ | (3,420 | ) | | $ | 11,790 |
| | $ | (1,494 | ) | | $ | 46,794 |
| | $ | (1,423 | ) | | $ | 43,877 |
|
| |
| (1) | Relates to investment income from AREA Sponsor Holdings LLC that is reclassified for segment reporting to align with the character of the underlying income generated. |
Real Estate Group—Three and NineSix Months Ended SeptemberJune 30, 20172018 Compared to Three and NineSix Months Ended SeptemberJune 30, 20162017
Fee Related Earnings:
Fee related earnings decreasedincreased by $2.6$2.3 million, or 42%62%, to $3.6$6.0 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $1.6$4.3 million, or 13%62%, to $10.5$11.1 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. Fee related earnings were impacted by fluctuations of the following components:
Management Fees. Total management fees decreasedincreased by $0.7 million, or 4%, to $17.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and decreased by $1.6$0.2 million, or 3%1%, to $49.2$32.3 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. The decreases in2017. Management fees for the current year periods are partially attributable tothree and six months ended June 30, 2018 included $2.1 million and $2.6 million, respectively, from the winding down of onelaunch of our new flagship E.U. real estate equity fund that began generating management fees during the first quarter of 2018. Additionally, a recently launched flagship U.S. Real Estate Equity funds, which resulted inreal estate equity fund increased management fee reductions of $0.4fees by $1.8 million and $1.9$3.0 million for the three and nine month comparative periods. Ares Real Estate Fund VIII ("US VIII") also had decreases in management fees of $0.4 million and $0.8 million for the three and ninesix month comparative periods, duerespectively, of which $0.9 million and $1.1 million were attributable to a change in the fee basis in connection with the launch of its successor fund. For the three months ended September 30, 2017, fees generated by Ares European Property Enhancement Program II, L.P. ("EPEP II") were $1.3 million lower than the prior year period, which included $1.8 million of one-time catch up fees. Partially offsetting these decreases, one of our U.S. Real Estate Equity funds began generating fees in the current year, contributing $1.1 million and $1.4 million of management fees for the three and nine months ended September 30, 2017.six month comparative periods, respectively. These increases were primarily offset by decreases of $0.7 million and $1.4 million caused by the liquidation of one of our European real estate equity funds for the three and six month comparative periods, respectively, combined with the sale of investments within certain of other real estate equity funds nearing the end of their fund terms.
The effective management fee rate, excluding the effect of one-time catch-up fees, remained consistent at 1.03%decreased from 0.97% for the three and six months ended June 30, 2017 to 0.92% for the three months ended SeptemberJune 30, 20172018 and 2016. Theto 0.93% for the six months ended June 30, 2018. Fluctuations in effective management fee rates between periods are primarily due to a change in composition of committed capital to invested capital across our real estate funds, where the fee rate excluding the effect of one-time catch-up fees increased from 0.98% for the nine months ended September 30, 2016 to 0.99% for the nine months ended September 30, 2017.on committed capital increases as capital is invested.
Compensation and Benefits. Compensation and benefits expenses increaseddecreased by $1.9$0.9 million, or 20%10%, to $11.4$8.8 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016. The compensation2017 and benefits expenses for the three month period should be considered in conjunction with the nine month period as certain adjustments were made to our expectation of incentive compensation payable for the annual period during the third quarter.
Compensation and benefits expenses decreased by $0.5$3.0 million, or 2%16%, to $30.8$16.4 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The decrease was due to a reorganization of the group's management team that occurreddecreases were primarily driven by reductions in the latter half of 2016, partially offset by an increase in incentive based compensation. Compensation and benefits expenses represented 66.5%51.2% and 62.7%50.8% of management fees for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2018 compared to 53.1%58.9% and 61.7%60.6% for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2017.
General, Administrative and Other Expenses.General, administrative and other expenses decreased $0.2by $0.7 million, or 7%23%, to $2.1$2.4 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $0.3$1.0 million, or 4%17%, to $7.9$4.8 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. There2017. The decreases were no significant fluctuationsprimarily due to fundraising and related travel incurred in the prior year periods related to the launch of general, administrative and other expenses incurred by our Real Estate Group for the comparative periods.new flagship U.S. real estate equity fund.
Performance Related Earnings:
Performance related earnings increaseddecreased by $2.2$11.9 million, or 79%, to $11.2$3.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $16.7$11.7 million, or 55%, to $32.7$9.7 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. Performance related earnings were impacted by fluctuations of the following components:
Net Performance Fees.Income. Net performance fees includeincome includes realized and unrealized performance fees,income, net of realized and unrealized performance feerelated compensation. The impact of reversals of previously recognized performance fee revenueincome and the corresponding performance feerelated compensation expense is reflected as a reduction in unrealized performance feesincome and performance feerelated compensation.
Net performance fees increasedincome decreased by $7.2$6.9 million, or 55%, to $9.7$5.6 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $21.0$8.7 million, or 48%, to $27.8$9.5 million for the ninesix months ended SeptemberJune 30,
2017 2018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increasesdecreases were primarily due to greater market appreciation of U.S. and E.U. equity funds' investments in net performance fees forthe prior year periods compared to the current year periods were primarily driven by favorable real estate market fundamentals in both the U.S. and Europe that have resulted in appreciation across the portfolio of properties in our funds, including net performance fees attributable to Ares European Real Estate Fund IV (“EF IV”) and US VIII which collectively increased $6.0 million and $19.5 million for the three and nine month comparative periods.
Net Investment Income.Income (Loss). Net investment income (loss) decreased by $5.0$5.1 million to $1.6from net investment income of $2.6 million for the three months ended SeptemberJune 30, 2017 to a net investment loss of $2.4 million for the three months ended June 30, 2018. Net investment income decreased by $3.1 million to $0.3 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Transaction gains from the revaluation of certain assets and liabilities denominated in foreign
currencies of $1.3 million and $1.0 million for the three and six months ended June 30, 2017 decreased by $3.2 million and $2.1 million, respectively, to transaction losses of $1.9 million and $1.1 million, for the three and six months ended June 30, 2018, respectively. Additionally, investments in our U.S. and E.U. equity funds experienced decreases in net gains of $2.2 million and $1.5 million for the three and six month comparative periods, respectively, as a result of lower appreciation in property values during the current year periods compared to the prior year periods.
Realized Income:
Realized incomeincreased by $1.3 million, or 25%, to $6.5 million for the three months ended SeptemberJune 30, 2016. Net investment income decreased2018 compared to the three months ended June 30, 2017 and by $4.3$10.4 million, or 106%, to $4.9$20.1 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The decreases wereincrease for the three month comparative periods was primarily driven by decreasesan increase in FRE of $4.5$2.3 million, offset by a decrease in net realized performance income of $0.8 million and unrealized gains on ourby a decrease in net realized investment and other income of $0.2 million. The increase for the six month comparative periods was primarily driven by an increase in AREA Sponsor Holdings LLCFRE of $4.3 million, by an increase in net realized performance income of $4.6 million and by an increase in net realized investment and other income of $1.5 million. Distributions from Ares European Real Estate Fund IV L.P. (“EF IV”) of investment income and performance income for both the three and ninesix months ended SeptemberJune 30, 2017 as the appreciation2018 exceeded distributions of property values in the prior period was greater than the appreciation of property values in the current period, however the values of the portfolio continued to increase.year comparative period.
Economic Net Income:
Economic net income is composed of fee related earnings and performance related earnings. Economic net income decreased by $0.4$9.7 million, or 3%51%, to $14.9$9.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and increased by $15.1$7.5 million, or 26%, to $43.2$20.8 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. The changes were2017, as a result of the fluctuations described above.
Distributable Earnings:
DE decreased by $1.7 million, or 26%, to $4.7 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 and by $4.3 million, or 25%, to $12.6 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. DE was lower due to decreases in FRE of $2.6 million and $1.6 million and by decreases in net realized performance fees of $0.6 million and $2.2 million for the three and nine month respective periods. In addition, DE was negatively impacted by increases in non-core expenses, primarily driven by placement fees of $0.1 million and $2.2 million for the three and nine months ended September 30, 2017, respectively, compared to the prior year periods. The decreases in DE were partially offset by increases in net realized investment and other income of $1.4 million and $1.8 million for the three and nine month respective periods.
Real Estate Group—Assets Under Management
The tables below provide the period‑to‑period rollforwards of AUM for the Real Estate Group for the three months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| Balance at 6/30/2017 | $ | 4,659 |
| | $ | 3,143 |
| | $ | 2,990 |
| | $ | 10,792 |
| |
| Balance at 3/31/2018 | | $ | 4,505 |
| | $ | 3,388 |
| | $ | 3,003 |
| | $ | 10,896 |
|
| Net new equity commitments | 246 |
| | — |
| | — |
| | 246 |
| 110 |
| | 197 |
| | — |
| | 307 |
|
| Distributions | (197 | ) | | (437 | ) | | (8 | ) | | (642 | ) | (133 | ) | | (99 | ) | | (8 | ) | | (240 | ) |
| Change in fund value | 107 |
| | 79 |
| | 11 |
| | 197 |
| 72 |
| | (135 | ) | | 10 |
| | (53 | ) |
| Balance at 9/30/2017 | $ | 4,815 |
| | $ | 2,785 |
| | $ | 2,993 |
| | $ | 10,593 |
| |
| Balance at 6/30/2018 | | $ | 4,554 |
| | $ | 3,351 |
| | $ | 3,005 |
| | $ | 10,910 |
|
| Average AUM(1) | $ | 4,737 |
| | $ | 2,964 |
| | $ | 2,992 |
| | $ | 10,693 |
| $ | 4,530 |
| | $ | 3,370 |
| | $ | 3,004 |
| | $ | 10,904 |
|
| | | | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| Balance at 6/30/2016 | $ | 4,545 |
| | $ | 3,095 |
| | $ | 2,484 |
| | $ | 10,124 |
| |
| Balance at 3/31/2017 | | $ | 4,136 |
| | $ | 3,050 |
| | $ | 2,755 |
| | $ | 9,941 |
|
| Net new equity commitments | 17 |
| | 256 |
| | — |
| | 273 |
| 502 |
| | — |
| | — |
| | 502 |
|
| Net new debt commitments | — |
| | — |
| | 125 |
| | 125 |
| — |
| | — |
| | 236 |
| | 236 |
|
| Distributions | (208 | ) | | (63 | ) | | 14 |
| | (257 | ) | (74 | ) | | (86 | ) | | (8 | ) | | (168 | ) |
| Change in fund value | 62 |
| | 50 |
| | 20 |
| | 132 |
| 95 |
| | 179 |
| | 7 |
| | 281 |
|
| Balance at 9/30/2016 | $ | 4,416 |
| | $ | 3,338 |
| | $ | 2,643 |
| | $ | 10,397 |
| |
| Balance at 6/30/2017 | | $ | 4,659 |
| | $ | 3,143 |
| | $ | 2,990 |
| | $ | 10,792 |
|
| Average AUM(1) | $ | 4,481 |
| | $ | 3,217 |
| | $ | 2,564 |
| | $ | 10,262 |
| $ | 4,398 |
| | $ | 3,097 |
| | $ | 2,873 |
| | $ | 10,368 |
|
(1) Represents the quarterly average of beginning and ending balances.
The tables below provide the period‑to‑period rollforwards of AUM for the Real EstatePrivate Equity Group for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| Balance at 12/31/2016 | $ | 4,106 |
| | $ | 3,100 |
| | $ | 2,546 |
| | $ | 9,752 |
|
| Net new equity commitments | 767 |
| | — |
| | — |
| | 767 |
|
| Net new debt commitments | — |
| | — |
| | 509 |
| | 509 |
|
| Distributions | (290 | ) | | (641 | ) | | (86 | ) | | (1,017 | ) |
| Change in fund value | 232 |
| | 326 |
| | 24 |
| | 582 |
|
| Balance at 9/30/2017 | $ | 4,815 |
| | $ | 2,785 |
| | $ | 2,993 |
| | $ | 10,593 |
|
| Average AUM(1) | $ | 4,429 |
| | $ | 3,020 |
| | $ | 2,821 |
| | $ | 10,270 |
|
| | | | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| Balance at 12/31/2015 | $ | 4,616 |
| | $ | 3,059 |
| | $ | 2,593 |
| | $ | 10,268 |
| |
| Balance at 12/31/2017 | | $ | 4,578 |
| | $ | 2,704 |
| | $ | 2,947 |
| | $ | 10,229 |
|
| Net new equity commitments | 317 |
| | 470 |
| | — |
| | 787 |
| 144 |
| | 965 |
| | 55 |
| | 1,164 |
|
| Net new debt commitments | — |
| | — |
| | 225 |
| | 225 |
| |
| Distributions | (717 | ) | | (197 | ) | | (211 | ) | | (1,125 | ) | (267 | ) | | (248 | ) | | (16 | ) | | (531 | ) |
| Change in fund value | 200 |
| | 6 |
| | 36 |
| | 242 |
| 99 |
| | (70 | ) | | 19 |
| | 48 |
|
| Balance at 9/30/2016 | $ | 4,416 |
| | $ | 3,338 |
| | $ | 2,643 |
| | $ | 10,397 |
| |
| Balance at 6/30/2018 | | $ | 4,554 |
| | $ | 3,351 |
| | $ | 3,005 |
| | $ | 10,910 |
|
| Average AUM(1) | $ | 4,529 |
| | $ | 3,154 |
| | $ | 2,560 |
| | $ | 10,243 |
| $ | 4,546 |
| | $ | 3,148 |
| | $ | 2,985 |
| | $ | 10,679 |
|
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| Balance at 12/31/2016 | $ | 4,106 |
| | $ | 3,100 |
| | $ | 2,546 |
| | $ | 9,752 |
|
| Net new equity commitments | 521 |
| | — |
| | — |
| | 521 |
|
| Net new debt commitments | — |
| | — |
| | 509 |
| | 509 |
|
| Distributions | (93 | ) | | (204 | ) | | (78 | ) | | (375 | ) |
| Change in fund value | 125 |
| | 247 |
| | 13 |
| | 385 |
|
| Balance at 6/30/2017 | $ | 4,659 |
| | $ | 3,143 |
| | $ | 2,990 |
| | $ | 10,792 |
|
| Average AUM(1) | $ | 4,300 |
| | $ | 3,098 |
| | $ | 2,764 |
| | $ | 10,162 |
|
(1) Represents the quarterly average of beginning and ending balances.
Real Estate Group—Fee Paying AUM
The tables below provide the period‑to‑period rollforwards of fee paying AUM for the Real Estate Group for the three months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 6/30/2017 | $ | 3,003 |
| | $ | 2,536 |
| | $ | 1,115 |
| | $ | 6,654 |
| |
| FPAUM Balance at 3/31/2018 | | $ | 3,008 |
| | $ | 2,729 |
| | $ | 1,014 |
| | $ | 6,751 |
|
| Commitments | 245 |
| | — |
| | — |
| | 245 |
| 97 |
| | — |
| | — |
| | 97 |
|
| Subscriptions/deployment/increase in leverage | 225 |
| | 24 |
| | — |
| | 249 |
| 14 |
| | 240 |
| | 26 |
| | 280 |
|
| Redemptions/distributions/decrease in leverage | (107 | ) | | (77 | ) | | (32 | ) | | (216 | ) | (67 | ) | | (40 | ) | | (8 | ) | | (115 | ) |
| Change in fund value | 3 |
| | 46 |
| | 11 |
| | 60 |
| 7 |
| | (67 | ) | | 10 |
| | (50 | ) |
| FPAUM Balance at 9/30/2017 | $ | 3,369 |
| | $ | 2,529 |
| | $ | 1,094 |
| | $ | 6,992 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 3,059 |
| | $ | 2,862 |
| | $ | 1,042 |
| | $ | 6,963 |
|
| Average FPAUM(1) | $ | 3,186 |
| | $ | 2,533 |
| | $ | 1,105 |
| | $ | 6,824 |
| $ | 3,034 |
| | $ | 2,796 |
| | $ | 1,028 |
| | $ | 6,858 |
|
| | | | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 6/30/2016 | $ | 2,999 |
| | $ | 2,503 |
| | $ | 1,142 |
| | $ | 6,644 |
| |
| FPAUM Balance at 3/31/2017 | | $ | 2,758 |
| | $ | 2,484 |
| | $ | 1,115 |
| | $ | 6,357 |
|
| Commitments | — |
| | 251 |
| | — |
| | 251 |
| 390 |
| | — |
| | — |
| | 390 |
|
| Subscriptions/deployment/increase in leverage | 60 |
| | — |
| | — |
| | 60 |
| 153 |
| | — |
| | 1 |
| | 154 |
|
| Redemptions/distributions/decrease in leverage | (139 | ) | | (41 | ) | | (32 | ) | | (212 | ) | (62 | ) | | (26 | ) | | (8 | ) | | (96 | ) |
| Change in fund value | (30 | ) | | 9 |
| | 8 |
| | (13 | ) | — |
| | 78 |
| | 7 |
| | 85 |
|
| FPAUM Balance at 9/30/2016 | $ | 2,890 |
| | $ | 2,722 |
| | $ | 1,118 |
| | $ | 6,730 |
| |
| Change in fee basis | | (236 | ) | | — |
| | — |
| | (236 | ) |
| FPAUM Balance at 6/30/2017 | | $ | 3,003 |
| | $ | 2,536 |
| | $ | 1,115 |
| | $ | 6,654 |
|
| Average FPAUM(1) | $ | 2,945 |
| | $ | 2,613 |
| | $ | 1,130 |
| | $ | 6,688 |
| $ | 2,881 |
| | $ | 2,510 |
| | $ | 1,115 |
| | $ | 6,506 |
|
(1) Represents the quarterly average of beginning and ending balances.
The tables below provide the period‑to‑period rollforwards of fee paying AUM for the Real Estate Group for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in millions):
| | | | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 12/31/2016 | $ | 2,891 |
| | $ | 2,531 |
| | $ | 1,118 |
| | $ | 6,540 |
| |
| FPAUM Balance at 12/31/2017 | | $ | 3,062 |
| | $ | 2,064 |
| | $ | 1,063 |
| | $ | 6,189 |
|
| Commitments | 635 |
| | — |
| | — |
| | 635 |
| 126 |
| | 737 |
| | — |
| | 863 |
|
| Subscriptions/deployment/increase in leverage | 432 |
| | 24 |
| | 3 |
| | 459 |
| 51 |
| | 338 |
| | 26 |
| | 415 |
|
| Redemptions/distributions/decrease in leverage | (306 | ) | | (123 | ) | | (58 | ) | | (487 | ) | (148 | ) | | (83 | ) | | (67 | ) | | (298 | ) |
| Change in fund value | 2 |
| | 97 |
| | 31 |
| | 130 |
| 5 |
| | (27 | ) | | 20 |
| | (2 | ) |
| Change in fee basis | (285 | ) | | — |
| | — |
| | (285 | ) | (37 | ) | | (167 | ) | | — |
| | (204 | ) |
| FPAUM Balance at 9/30/2017 | $ | 3,369 |
| | $ | 2,529 |
| | $ | 1,094 |
| | $ | 6,992 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 3,059 |
| | $ | 2,862 |
| | $ | 1,042 |
| | $ | 6,963 |
|
| Average FPAUM(1) | $ | 3,005 |
| | $ | 2,520 |
| | $ | 1,111 |
| | $ | 6,636 |
| $ | 3,043 |
| | $ | 2,552 |
| | $ | 1,040 |
| | $ | 6,635 |
|
| | | | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 12/31/2015 | $ | 3,204 |
| | $ | 2,555 |
| | $ | 998 |
| | $ | 6,757 |
| |
| FPAUM Balance at 12/31/2016 | | $ | 2,891 |
| | $ | 2,531 |
| | $ | 1,118 |
| | $ | 6,540 |
|
| Commitments | 59 |
| | 365 |
| | — |
| | 424 |
| 390 |
| | — |
| | — |
| | 390 |
|
| Subscriptions/deployment/increase in leverage | 137 |
| | 48 |
| | 141 |
| | 326 |
| 204 |
| | — |
| | 3 |
| | 207 |
|
| Redemptions/distributions/decrease in leverage | (484 | ) | | (69 | ) | | (47 | ) | | (600 | ) | (198 | ) | | (46 | ) | | (26 | ) | | (270 | ) |
| Change in fund value | (26 | ) | | (54 | ) | | 26 |
| | (54 | ) | — |
| | 51 |
| | 20 |
| | 71 |
|
| Change in fee basis | — |
| | (123 | ) | | — |
| | (123 | ) | (284 | ) | | — |
| | — |
| | (284 | ) |
| FPAUM Balance at 9/30/2016 | $ | 2,890 |
| | $ | 2,722 |
| | $ | 1,118 |
| | $ | 6,730 |
| |
| FPAUM Balance at 6/30/2017 | | $ | 3,003 |
| | $ | 2,536 |
| | $ | 1,115 |
| | $ | 6,654 |
|
| Average FPAUM(1) | $ | 3,042 |
| | $ | 2,593 |
| | $ | 1,067 |
| | $ | 6,702 |
| $ | 2,884 |
| | $ | 2,517 |
| | $ | 1,116 |
| | $ | 6,517 |
|
(1) Represents the quarterly average of beginning and ending balances.
The charts below present FPAUM for the Real Estate Group by its fee basis as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| |
FPAUM: $6,730$6,963 | FPAUM: $6,992$6,654 |
(1) Market value/other includes ACRE fee paying AUM, which is based on ACRE's stockholders' equity.
The components of our AUM, including the portion that is FPAUM, for the Real Estate Group are presented below as of SeptemberJune 30, 20162018 and 2017 (in millions):
|
| |
AUM: $10,397$10,910 | AUM: $10,593$10,792 |
Real Estate Group—Fund Performance Metrics as of SeptemberJune 30, 20172018
The Real Estate Group managed 4243 funds in real estate debt and in real estate equity as of SeptemberJune 30, 2017.2018. Two funds in our Real Estate Group, each considered a significant fund, combined for approximately 33%25% of the Real Estate Group’s management fees for the ninesix months ended SeptemberJune 30, 2017:2018: EF IV, a commingled fund focused on real estate assets located in Europe, primarily in the United Kingdom, France and Germany; and Ares European Property Enhancement Program II, L.P. (“EPEP II,II”), a commingled equity fund focused on real estate assets located in Europe.
The following table presents the performance data for our significant funds in the Real Estate Group, alleach of which are drawdown funds:
| | | | | | | As of September 30, 2017 (Dollars in millions) | | | | | As of June 30, 2018 (Dollars in millions) | |
| | Year of Inception | | AUM | | Original Capital Commitments | | Cumulative Invested Capital | | Realized Proceeds(1) | | Unrealized Value(2) | | Total Value | | MoIC | | IRR(%) | | Primary Investment Strategy | Year of Inception | | AUM | | Original Capital Commitments | | Cumulative Invested Capital | | Realized Proceeds(1) | | Unrealized Value(2) | | Total Value | | MoIC | | IRR(%) | | Primary Investment Strategy |
| Fund | | Gross(3) | | Net(4) | | Gross(5) | | Net(6) | | | Gross(3) | | Net(4) | | Gross(5) | | Net(6) | |
| EF IV(7) | 2014 | | $ | 1,040 |
| | $ | 1,302 |
| | $ | 985 |
| | $ | 384 |
| | $ | 933 |
| | $ | 1,317 |
| | 1.3x | | 1.2x | | 20.0 | | 13.4 | | E.U. Real Estate Equity | 2014 | | $ | 990 |
| | $ | 1,302 |
| | $ | 1,103 |
| | $ | 534 |
| | $ | 1,029 |
| | $ | 1,563 |
| | 1.4x | | 1.2x | | 20.8 | | 13.6 | | E.U. Real Estate Equity |
| EPEP II(8) | 2015 | | 704 |
| | 747 |
| | 255 |
| | 113 |
| | 200 |
| | 313 |
| | 1.2x | | 1.2x | | N/A | | N/A | | E.U. Real Estate Equity | 2015 | | 680 |
| | 747 |
| | 342 |
| | 132 |
| | 289 |
| | 422 |
| | 1.2x | | 1.1x | | 18.4 | | 21.3 | | E.U. Real Estate Equity |
| |
| (1) | Realized proceeds include distributions of operating income, sales and financing proceeds received. |
| |
| (2) | Unrealized value represents the fair market 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, performance feesincome as applicable and other expenses. |
| |
| (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 who does not pay management fees or performance feesincome or has such fees rebated outside of the fund. The net MoIC is after giving effect to management fees, performance feesincome as applicable and other expenses. |
| |
| (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, performance feesincome as applicable, and other expenses. |
| |
| (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, excludes interests attributable to the non fee-paying partners and/or the general partner who does not pay management fees or performance feesincome 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, performance feesincome 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 likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.
| |
| (7) | EF IV is made up of two parallel funds, one denominated in U.S. dollars and one denominated in Euros. The gross and net MoIC and gross and net IRRs presented in the chart are for the U.S. dollar denominated parallel fund as that is the larger of the two funds. The gross and net IRRs for the Euro denominated parallel fund are 20.3%21.1% and 13.9%14.2%, respectively. The gross and net MoIC for the Euro denominated parallel fund are 1.3x1.4x and 1.2x, 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 IV are for the combined fund and are converted to U.S. dollars at the prevailing quarter-end exchange rate. |
| |
| (8) | EPEP II is made up of dual currency investors and Euro currency investors. The gross and net MoIC presented in the chart are for dual currency investors as dual currency investors represent the largest group of investors in the fund. Multiples exclude foreign currency gains and losses since dual currency investors fund capital contributions and receive distributions in local deal currency (GBP or EUR) and therefore, do not realize foreign currency gains or losses. The gross and net IRRs for the euro currency investors, which include foreign currency gains and losses, are 17.9% and 20.3%, respectively. The gross and net MoIC for the Euro currency investors, which include foreign currency gains and losses, 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 fund's closing. All other values for EPEP II are for the combined fund and are converted to U.S. dollars at the prevailing quarter-end exchange rate. |
Operations Management Group
The following table sets forth certain statement of operations data and certain other data of the OMG on a standalone basis for the periods presented.
| | | | Three Months Ended | | Favorable (Unfavorable) | | Nine Months Ended | | Favorable (Unfavorable) | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | September 30, | | September 30, | | June 30, | | June 30, | |
| | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Compensation and benefits | $ | (27,577 | ) | | $ | (25,960 | ) | | $ | (1,617 | ) | | (6 | )% | | $ | (84,881 | ) | | $ | (77,225 | ) | | $ | (7,656 | ) | | (10 | )% | $ | (31,059 | ) | | $ | (30,584 | ) | | $ | (475 | ) | | (2 | )% | | $ | (61,665 | ) | | $ | (56,537 | ) | | $ | (5,128 | ) | | (9 | )% |
| General, administrative and other expenses | (18,380 | ) | | (13,386 | ) | | (4,994 | ) | | (37 | )% | | (56,729 | ) | | (44,616 | ) | | (12,113 | ) | | (27 | )% | (19,489 | ) | | (18,862 | ) | | (627 | ) | | (3 | )% | | (38,105 | ) | | (38,175 | ) | | 70 |
| | — | % |
| Fee Related Earnings | (45,957 | ) | | (39,346 | ) | | (6,611 | ) | | (17 | )% | | (141,610 | ) | | (121,841 | ) | | (19,769 | ) | | (16 | )% | (50,548 | ) | | (49,446 | ) | | (1,102 | ) | | (2 | )% | | (99,770 | ) | | (94,712 | ) | | (5,058 | ) | | (5 | )% |
| Investment income (loss)-realized | 18 |
| | (20,005 | ) | | 20,023 |
| | NM |
| | 3,217 |
| | (20,093 | ) | | 23,310 |
| | NM |
| |
| Investment income-unrealized | 4,357 |
| | 15,979 |
| | (11,622 | ) | | (73 | )% | | 222 |
| | 4,460 |
| | (4,238 | ) | | (95 | )% | |
| Interest and other investment income (loss) | 26 |
| | 15 |
| | 11 |
| | 73 | % | | 1,125 |
| | (53 | ) | | 1,178 |
| | NM |
| |
| Investment income-realized | | 798 |
| | 1,340 |
| | (542 | ) | | (40 | )% | | 1,636 |
| | 3,199 |
| | (1,563 | ) | | (49 | )% |
| Investment income (loss)-unrealized | | 2,866 |
| | (2,728 | ) | | 5,594 |
| | NM |
| | 4,097 |
| | (4,135 | ) | | 8,232 |
| | NM |
|
| Interest and other investment income | | 623 |
| | 225 |
| | 398 |
| | 177 | % | | 1,870 |
| | 1,099 |
| | 771 |
| | 70 | % |
| Interest expense | (441 | ) | | (664 | ) | | 223 |
| | 34 | % | | (1,380 | ) | | (2,101 | ) | | 721 |
| | 34 | % | (588 | ) | | (463 | ) | | (125 | ) | | (27 | )% | | (1,136 | ) | | (939 | ) | | (197 | ) | | (21 | )% |
| Net investment income (loss) | 3,960 |
| | (4,675 | ) | | 8,635 |
| | NM |
| | 3,184 |
| | (17,787 | ) | | 20,971 |
| | NM |
| 3,699 |
| | (1,626 | ) | | 5,325 |
| | NM |
| | 6,467 |
| | (776 | ) | | 7,243 |
| | NM |
|
| Performance related earnings | 3,960 |
| | (4,675 | ) | | 8,635 |
| | NM |
| | 3,184 |
| | (17,787 | ) | | 20,971 |
| | NM |
| 3,699 |
| | (1,626 | ) | | 5,325 |
| | NM |
| | 6,467 |
| | (776 | ) | | 7,243 |
| | NM |
|
| Economic net income | $ | (41,997 | ) | | $ | (44,021 | ) | | 2,024 |
| | 5 | % | | $ | (138,426 | ) | | $ | (139,628 | ) | | 1,202 |
| | 1 | % | $ | (46,849 | ) | | $ | (51,072 | ) | | 4,223 |
| | 8 | % | | $ | (93,303 | ) | | $ | (95,488 | ) | | 2,185 |
| | 2 | % |
| Distributable earnings | $ | (53,214 | ) | | $ | (66,696 | ) | | 13,482 |
| | 20 | % | | $ | (151,642 | ) | | $ | (157,550 | ) | | 5,908 |
| | 4 | % | |
| Realized income | | $ | (49,754 | ) | | $ | (48,346 | ) | | (1,408 | ) | | (3 | )% | | $ | (97,534 | ) | | $ | (91,551 | ) | | (5,983 | ) | | (7 | )% |
NM - Not Meaningful
Operations Management Group—Three and NineSix Months Ended SeptemberJune 30, 20172018 Compared to Three and NineSix Months Ended SeptemberJune 30, 20162017
Fee Related Earnings:
Fee related earnings decreased by $6.6$1.1 million, or 2%, for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $19.8$5.1 million, or 5%, for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. Fee related earnings were impacted by fluctuations of the following components:following:
Compensation and Benefits. Compensation and benefits expenses increased by $1.6$0.5 million, or 2%, to $27.6$31.1 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and by $7.7$5.1 million, or 9%, to $84.9$61.7 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increases were due to additionalprimarily driven by annual merit increases and headcount and merit based increases. Some of the additional headcount included employees hired in connection with ARCC's acquisition of ACAS, however ACAS-related compensation expenses were largely offset by the corresponding administrative fee reimbursements that are presented as a reduction to compensation expense.
General, Administrative and Other Expenses. General, administrative and other expenses increased by $5.0 million, or 37%, to $18.4 million for three months ended September 30, 2017 compared to the three months ended September 30, 2016 and by $12.1 million, or 27%, to $56.7 milliongrowth for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increases in the current year periods were primarily due to several information technology initiatives to support various system implementations and process improvement initiatives, as well as increased occupancy and business support costs associated with increased staffing levels. For the nine months ended September 30, 2017, general, administrative and other expenses also includes a $2.5 million non–recurring non-income tax paid during the first quarter of 2017.comparative periods.
Performance Related Earnings:
Performance related earnings increased by $8.6 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 and by $21.0 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Performance related earnings were impacted by the fluctuations in net investment loss.
Net Investment Income (Loss)(loss). Net investment income (loss) increased by $8.6$5.3 million from a net investment loss of $4.7$1.6 million for the three months ended SeptemberJune 30, 20162017 to net investment income of $4.0$3.7 million for the three months ended SeptemberJune 30, 2017.2018. Net investment income (loss) increased by $21.0$7.2 million from a net investment loss of $17.8$0.8 million for the ninesix months ended SeptemberJune 30, 20162017 to net investment income of $3.2$6.5 million for the ninesix months ended SeptemberJune 30, 2017. In the third quarter of 2016, we realized a $20.0 million loss on our minority interest equity method investment in Deimos Management Holdings LLC2018. The increases were primarily due to the winding down of its operations. Of the $20.0 million realized loss, $14.1 million was recognized as an unrealized loss in the second quarter of 2016. In addition, our other fund investments in non-core investment strategies experienced increases in net investment incomegains of $2.6$5.0 million and $0.5$6.7 million from our non-core fund investments for the three and six month comparative periods, respectively.
Realized Income:
Realized income decreased by $1.4 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $6.0 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decreases were primarily driven by decreases in FRE of $1.1 million and $5.1 million for the three and nine months ended September 30, 2017,six month comparative periods, respectively, compared toand by decreases in net realized investment and other income of $0.3 million and $0.9 million for the prior year periods.three and six month comparative periods, respectively.
Economic Net Income:
Economic net income is composed of fee related earnings and performance related earnings. Economic net income increased by $2.0$4.2 million or 5%, for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and increased by $1.2$2.2 million or 1%, for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016.2017. The increase and decreaseincreases were a result of the fluctuations described above.
Distributable Earnings:
DE increased by $13.5 million, or 20%, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 and by $5.9 million, or 4%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. DE increased primarily due to net realized investment and other losses of $20.7 million and $22.2 million for the three and nine months ended September 30, 2016, respectively, that did not recur in the current year periods. The increases were partially offset by FRE decreases of $6.6 million and $19.8 million for the three and nine month respective periods compared to the prior year.
Liquidity and Capital Resources
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 fees,income, which areis unpredictable as to amount and timing, and(4) fund distributions related to our investments that are also unpredictable as to amount and timing and (4)(5) net borrowing provided byfrom the Credit Facility. As of SeptemberJune 30, 2017,2018, our cash and cash equivalents were $186.4$125.4 million including investments in money market funds, and we had $110.0$125.0 million of borrowings outstanding under our $1.065 billion Credit Facility. Our ability to draw from the Credit Facility is subject to a leverage covenant.debt covenants. 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 for the foreseeable future.
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 a portion of our investment commitments, (3) provide capital to facilitate our expansion into businesses that are complementary to our existing investment management businesses, (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 and (8) make distributionsdividend payments to our common and preferred unitholdersshareholders in accordance with our distributiondividend policy.
In the normal course of business, we have made distributionsintend to our existing owners, including distributions sourcedpay dividends from investment income and performance fees.core operations, which we define as FRE. If cash flows from core operations were insufficient to fund distributionsdividends over a sustained period of time, we expect that we would suspend paying such distributions.dividends. Unless quarterly distributionsdividends have been declared and paid (or declared and set apart for payment) on the preferred units,shares, we may not declare or pay or set apart payment for distributionsdividends on any common unitsshares during the period. Dividends on the preferred unitsshares are not cumulative and the preferred unitsshares are not convertible into common unitsshares or any other security.
Net realized performance feesincome also provideprovides a source of liquidity. Performance fees areincome is realized when a portfolio investment is profitably monetized and the fund’s cumulative returns are in excess of the preferred return or hurdle rate. Performance fees areincome is typically realized at the end of each fund’s measurement period when investment performance exceeds a stated benchmark or hurdle rate.
Our accrued performance feescarried interest by segment as of SeptemberJune 30, 2017 are2018 is set forth below:below.
| | | | As of September 30, 2017 | As of June 30, 2018 |
| | Accrued Performance Fees | | Eliminations(1) | | Consolidated Accrued Performance Fees | Accrued Carried Interest | | Eliminations(1) | | Consolidated Accrued Carried Interest |
| Segment | (Dollars in thousands) | (Dollars in thousands) |
| Credit Group | $ | 154,439 |
| | $ | (4,003 | ) | | $ | 150,436 |
| $ | 148,461 |
| | $ | — |
| | $ | 148,461 |
|
| Private Equity Group | 742,011 |
| | — |
| | 742,011 |
| 702,868 |
| |
|
| | 702,868 |
|
| Real Estate Group | 105,131 |
| | — |
| | 105,131 |
| 133,728 |
| | — |
| | 133,728 |
|
| Total | $ | 1,001,581 |
| | $ | (4,003 | ) | | $ | 997,578 |
| $ | 985,057 |
| | $ | — |
| | $ | 985,057 |
|
| |
| (1) | Amounts represent accrued performance feesincome earned from Consolidated Funds that are eliminated in consolidation. |
Our condensed consolidated financial statements reflect the cash flows of our operating businesses as well as the results 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 when required to be consolidated into our condensed consolidated financial statements, (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 treated as investment companies for financial accounting purposes under GAAP; therefore, the character and classification of all Consolidated Fund transactionsFunds' investment activities are presented as cash flows from operations.
Cash Flows
The significant captions and amounts from our consolidated financial statements, which include the effects of our Consolidated Funds and CLOs in accordance with GAAP, are summarized below. Negative amounts represent a net outflow, or use of cash.
| | | | Nine Months Ended September 30, | Six Months Ended June 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Statements of cash flows data | | | | | | |
|
| Net cash used in operating activities | $ | (1,192 | ) | | $ | (260 | ) | (1,288 | ) | | (304 | ) |
| Net cash used in investing activities | (28 | ) | | (8 | ) | (7 | ) | | (21 | ) |
| Net cash provided by financing activities | 1,052 |
| | 490 |
| 1,293 |
| | 108 |
|
| Effect of foreign exchange rate change | 12 |
| | (7 | ) | 8 |
| | 12 |
|
| Net change in cash and cash equivalents | $ | (156 | ) | | $ | 215 |
| $ | 6 |
| | $ | (205 | ) |
Operating Activities
Net cash used in operating activities is primarily driven by our earnings in the respective periods after adjusting for non-cash compensation and unrealized performance fees. Cash used to purchase investments, as well as the proceeds from the sale of such investments, is also reflected in the operating activities of the Company and our Consolidated Funds.
Our net cash flows used in operating activities were $1.2was $1.3 billion for the ninesix months ended SeptemberJune 30, 20172018 compared to $259.4$304.2 million for the ninesix months ended SeptemberJune 30, 2016.2017. For the ninesix months ended SeptemberJune 30, 2017,2018, net purchases of investments were $1.2$1.4 billion compared to $495.3$143.7 million for the ninesix months ended SeptemberJune 30, 2016.2017. The change in cash used in operating activities was alsoprimarily driven by fluctuationsa $1.6 billion increase in net purchases of investments of our Consolidated Funds for the comparative periods due to the launch of two new U.S. CLOs and one new European CLO and the refinancing of one U.S. CLO during the six months ended June 30, 2018. Conversely, net income.proceeds from the sale of investments of the Company increased by $257.3 million for the comparative periods primarily due to the sale of CLO securities during the six months ended June 30, 2018. Subsequent to the removal of the U.S. risk retention requirements related to open-market CLO managers, we sold $206.0 million of CLO securities and used the proceeds to pay off the related term loans and settle our repurchase agreement during the six months ended June 30, 2018.
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.
Investing Activities
Our investing activities generally reflect cash used for certain acquisitions and purchases of fixed assets. Purchases of fixed assets were $27.9$7.1 million and $8.2$21.2 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. The increase in fixed asset purchases largely relates todecrease for the comparative periods was primarily driven by furniture, fixtures, equipment and leasehold improvements related topurchased for a new office location in Los Angeles.Angeles during the six months ended June 30, 2017.
Financing Activities
Net cash flows provided by financing activities were $1.1was $1.3 billion and $489.7for the six months ended June 30, 2018 compared to $108.1 million for the ninesix months ended SeptemberJune 30, 2017. For the six months ended June 30, 2018, net cash inflows were primarily due to net borrowings on debt facilities of our Consolidated Funds and net proceeds from our common share issuance offset by net repayments on debt facilities of the Company and distributions to AOG unitholders and common shareholders. For the six months ended June 30, 2017, and 2016, respectively. For the nine months ended September 30, 2017, financing activities represented a source ofnet cash inflows were primarily from net borrowings on debt facilities of the Company and our Consolidated funds. For the nine months ended September 30, 2016, net cash inflows were primarily due to net proceeds from our preferred stock issuance and net borrowings on debt facilities of the Consolidated funds, which wereFunds partially offset by distributions to AOG unitholders and common unitholders and by net repayments on the Company's debt facilities. For our Consolidated Funds, net contributions were $96.6 million and $31.9 million for the nine months ended September 30, 2017 and 2016, respectively.shareholders.
Net borrowings fromrepayments of our debt obligations were $180.0$247.0 million for the ninesix months ended SeptemberJune 30, 20172018 compared to net repaymentsborrowings of $110.0$205.0 million for the ninesix months ended SeptemberJune 30, 2016. In2017. During the current year period,six months ended June 30, 2018, we had net repayments under the Credit Facility, paid off our term loans and settled our repurchase agreement. During the six months ended June 30, 2017, net borrowings under the Credit Facility and the new Term Loanswere used to support purchasespayments of CLOs that we manage within our risk retention vehicles.2016 annual bonuses, whereas 2017 annual bonuses were paid in 2017. Our Consolidated Funds had net borrowings of $971.5 million for nine months ended September 30, 2017 from their debt obligations as compared to $427.1$1.6 billion and $26.6 million for the ninesix months ended SeptemberJune 30, 2016.2018 and 2017, respectively. The increase inwas primarily driven by net borrowing activity in 2017 for the Consolidated Funds is related toborrowings from the launch of two new CLOs.U.S. CLOs and one new European CLO and the refinancing of one U.S. CLO during the six months ended June 30, 2018.
Distributions to our preferred, AOG and common unitholdersshareholders were $185.3$192.4 million for the ninesix months ended SeptemberJune 30, 20172018 compared to $157.2$113.2 million for the ninesix months ended SeptemberJune 30, 2016.2017. The increase in distributions is consistent withwas primarily driven by a change in the increasetiming of dividend payments to common shareholders as a result of our election to be treated as a corporation for U.S. federal income tax purposes. Dividends paid in distributable earnings.the first quarter of 2017 reflected a portion of realized income generated in the fourth quarter of 2016, whereas dividends paid in the first quarter of 2018 reflected a portion of realized income generated in the five months ended on February 28, 2018, the last day we were treated as a partnership for U.S. federal income tax purposes. For our Consolidated Funds, net contributions were $35.7 million and $0.4 million for the six months ended June 30, 2018 and 2017, respectively.
Capital Resources
The following table summarizes the Company's debt obligations (in thousands):
| | | | | | | As of September 30, 2017 | | December 31, 2016 | | | | As of June 30, 2018 | | December 31, 2017 |
| | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying
Value | | Interest Rate | | Carrying
Value | | Interest Rate | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying
Value | | Interest Rate | | Carrying
Value | | Interest Rate |
| Credit Facility(1) | Revolver | | 2/24/2022 | | N/A |
| | $ | 110,000 |
| | 2.75% | | $ | — |
| | —% | Revolver | | 2/24/2022 | | N/A |
| | $ | 125,000 |
| | 3.63% | | $ | 210,000 |
| | 3.09% |
| Senior Notes(2) | 10/8/2014 | | 10/8/2024 | | $ | 250,000 |
| | 245,149 |
| | 4.21% | | 244,684 |
| | 4.21% | 10/8/2014 | | 10/8/2024 | | $ | 250,000 |
| | 245,628 |
| | 4.21% | | 245,308 |
| | 4.21% |
| 2015 Term Loan(3) | 9/2/2015 | | 7/29/2026 | | $ | 35,205 |
| | 35,032 |
| | 2.79% | | 35,063 |
| | 2.74% | 9/2/2015 | | 7/29/2026 | | $ | — |
| | — |
| | N/A | | 35,037 |
| | 2.86% |
| 2016 Term Loan(4) | 12/21/2016 | | 1/15/2029 | | $ | 26,376 |
| | 25,999 |
| | 3.02% | | 26,037 |
| | 2.66% | 12/21/2016 | | 1/15/2029 | | $ | — |
| | — |
| | N/A | | 25,948 |
| | 3.08% |
| 2017 Term Loan A(4) | 3/22/2017 | | 1/22/2028 | | $ | 17,600 |
| | 17,474 |
| | 2.70% | | N/A |
| | N/A | 3/22/2017 | | 1/22/2028 | | $ | — |
| | — |
| | N/A | | 17,407 |
| | 2.90% |
| 2017 Term Loan B(4) | 5/10/2017 | | 10/15/2029 | | $ | 35,198 |
| | 35,147 |
| | 2.63% | | N/A |
| | N/A | 5/10/2017 | | 10/15/2029 | | $ | — |
| | — |
| | N/A | | 35,062 |
| | 2.90% |
| 2017 Term Loan C(4) | 6/22/2017 | | 7/30/2029 | | $ | 17,211 |
| | 17,206 |
| | 2.75% | | N/A |
| | N/A | 6/22/2017 | | 7/30/2029 | | $ | — |
| | — |
| | N/A | | 17,078 |
| | 2.88% |
| 2017 Term Loan D(4) | | 11/16/2017 | | 10/15/2030 | | $ | — |
| | — |
| | N/A | | 30,336 |
| | 2.77% |
| Total debt obligations | | | | $ | 486,007 |
| | $ | 305,784 |
| | | | | $ | 370,628 |
| | $ | 616,176 |
| |
| |
| (1) | The AOG entities are borrowers under the Credit Facility, which as amended in February 2017 and increased in September 2017, provides a $1.065 billion revolving line of credit. It has a variable interest rate based on LIBOR or a base rate plus an applicable margin with an unused commitment fee paid quarterly, which is subject to change with the Company’s underlying credit agency rating. As of SeptemberJune 30, 2017,2018, base rate loans bear interest calculated based on the base rate plus 0.50% and the LIBOR rate loans bear interest calculated based on LIBOR plus 1.50%. The unused commitment fee is 0.20% per annum. There is a base rate and LIBOR floor of zero. |
| |
| (2) | The Senior Notes were issued in October 2014 by Ares Finance Co. LLC, a subsidiary of the Company, at 98.268% of the face amount with interest paid semi-annually. The Company may redeem the Senior Notes prior to maturity, subject to the terms of the indenture. |
| |
| (3) | The 2015 Term Loan was entered into in August 2015 by a subsidiary of the Company that acts as a manager to a CLO. The 2015 Term Loan is secured by collateral in the form of CLO senior tranches owned by the Company. To the extent the assets are not sufficient to cover the Term Loan, there is no further recourse to the Company to fund or repay the remaining balance. Interest is paid quarterly, and the Company also pays a fee of 0.025% of a maximum investment amount. |
| |
| (4) | The 2016 and 2017 Term Loans ("(“Term Loans"Loans”) were entered into by a subsidiary of the Company that acts as a manager to a CLO.CLOs. The Term Loans are secured by collateral in the form of CLO senior tranches and subordinated notes owned by the Company. Collateral associated with one of the Term Loans may be used to satisfy outstanding liabilities of another term loanTerm Loan should the collateral fall short. To the extent the assets associated with these Term Loans are not sufficient to cover the Term Loans, there is no further recourse to the Company to fund or repay the remaining balance. Interest is paid quarterly, and the Company also pays a fee of 0.03% of a maximum investment amount. |
Subsequent to the removal of the U.S. risk retention requirements related to open-market CLO managers, we sold $219.3 million of CLO securities and used the proceeds to pay off the related 2015-2017 Term Loans and settle a repurchase agreement of $206.0 million during the three months ended June 30, 2018. The resulting loss from the debt extinguishment was immaterial.
As of SeptemberJune 30, 2017,2018, we were in compliance with all covenants under the Credit Facility, Senior Notes and Term Loanour debt obligations.
On February 24, 2017, we amended our Credit Facility to, among other things, increase the size of the Credit Facility from $1.03 billion to $1.04 billion and extend the maturity date from April 2019 to February 2022. Under the terms of the amended Credit Facility, based on our current credit agency ratings, the stated interest rate is LIBOR plus 1.50% with an unused commitment fee of 0.20%.
In September 2017, we increased our Credit Facility to $1.065 billion from $1.04 billion. The $25 million increase resulted from the exercise of the facility’s accordion feature and the addition of a new bank to the facility. No other terms of the revolving credit facility were impacted by the increase.
We intend to use a portion of our available liquidity to make cash distributionsdividends to our preferred and common unitholdersshareholders on a quarterly basis in accordance with our distributiondividend policies. Our ability to make cash distributionsdividends to our preferred and common unitholdersshareholders 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 United Kingdom subsidiary and for our subsidiary that operates as a broker-dealer.broker-dealer subsidiary. 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 of SeptemberJune 30, 2017,2018, we were required to maintain approximately $24.2$26.8 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 Ares Management, L.P. common unitsshares on a one-for-one basis. Subsequent exchanges are expected tomay result in increases in the tax basis of the tangible and intangible assets of Ares Management, L.P. that otherwise would not have been available. These increases in tax basis may increase (for tax purposes) depreciation and amortization for U.S. federal income tax purposes and thereforethereby reduce the amount of tax that Ares Management, L.P.’s wholly owned subsidiaries that are taxable as corporations for U.S. federal income purposes, which we refer to as the “corporate taxpayers,” would otherwise be required to pay in the future. The corporate taxpayers entered intoWe and our wholly owned subsidiaries are parties to the TRA with the TRA recipients that will provide for thetax receivable agreement (“TRA”), which provides payment by the corporate taxpayers to the TRA Recipientsrecipients of 85% of the amount of actual cash savings, if any, in U.S. federal, state, local and foreign income tax or franchise tax that the corporate taxpayersAres Management, L.P. actually realizerealizes as a result of thesesuch increases in tax basis, and of certain otherincluding increases in tax benefits related to entering into the TRA, including tax benefitsbasis attributable to payments under the TRA and certain interest accrued thereon. This payment obligation is an obligation of the corporate taxpayers and not of Ares Management, L.P. or its wholly owned subsidiaries. Future payments under the TRA in respect of subsequent exchanges are expected to be substantial.
Common Share Offering
On March 12, 2018, we and AREC Holdings Ltd., a wholly owned subsidiary of Abu Dhabi Investment Authority (collectively, “ADIA”), completed a public offering of 15,000,000 common shares. In connection with this offering, ADIA sold 10,000,000 of its previously issued and outstanding common shares from which we received no proceeds. Additionally, we issued 5,000,000 common shares from which we received $105.9 million in gross proceeds. We incurred approximately $0.5 million of expenses in connection with this offering. The expenses have been treated as a reduction of the proceeds received from the offering and are presented on a net basis with the proceeds from the offering in shareholders' equity in the Condensed Consolidated Statements of Changes in Equity.
In April 2018, the underwriters in the offering exercised a portion of their option to purchase 1,130,000 additional common shares from ADIA. We did not receive any of the proceeds from the underwriters' exercise. The expenses incurred by us related to the option exercise have been included in other income (expense), net in the Condensed Consolidated Statements of Operations. ADIA paid the underwriting discounts and commissions and/or similar charges incurred for the sale of the common shares.
Preferred Equity
As of SeptemberJune 30, 20172018 and December 31, 2016, the Company2017, we had 12,400,000 unitsshares of Series A Preferred UnitsEquity (the “Preferred Equity”) outstanding. When, as and if declared by the Company’sour board of directors, distributions on the Preferred Equity are paid quarterly at a rate per annum equal to 7.00%. The Preferred Equity may be redeemable at our option, in whole or in part, at any time on or after June 30, 2021, at a price of $25.00 per unit.share.
Cash distributionsdividends to our common unitholdersshareholders may be impacted by any corporate tax liability owed by Ares Holdings, Inc. (“AHI”), the wholly owned U.S. corporate subsidiary of the Company.us. In connection with the Preferred Equity issuance, the Ares Operating Group issued mirror preferred units (“GP Mirror Units”), to our wholly owned subsidiaries, which pay the same 7.00% rate per annumannum. Although income allocated to our wholly owned subsidiaries of the Company including AHI. Although income allocated in respect of distributions on the GP Mirror Units made to AHI is subject to tax, cash distributionsdividends to our preferred unitholdersshareholders will not be reduced on account of any income taxes owed by AHI.us. As a result, the amounts ultimately distributed by us to our common unitholdersshareholders may be reduced by any corporate taxes imposed on AHI.us.
In July 2018, the board of directors of the general partner authorized the repurchase, from time to time in open market purchases, privately negotiated transactions or otherwise, of our Preferred Equity with an aggregate liquidation preference of up to $50 million. Such purchases, if any, will depend on the prevailing market conditions and other factors.
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. For a summary of our significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q and in our Annual Report on Form 10-K. For a summary of our critical accounting estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates" in our Annual Report on Form 10-K.
Fair Value Measurement
The table below summarizes the valuation of investments and other financial instruments included within our AUM, by segment and fair value hierarchy levels, as of September 30, 2017:
|
| | | | | | | | | | | | | | | |
| | Credit | | Private Equity | | Real Estate | | Total |
| | (Dollars in millions) |
| Level I | $ | 622 |
| | $ | 2,785 |
| | $ | — |
| | $ | 3,407 |
|
| Level II | 9,640 |
| | 404 |
| | (78 | ) | | 9,966 |
|
| Level III | 28,116 |
| | 11,478 |
| | 5,330 |
| | 44,924 |
|
| Total fair value | 38,378 |
| | 14,667 |
| | 5,252 |
| | 58,297 |
|
| Other net asset value and available capital(1) | 32,099 |
| | 9,908 |
| | 5,341 |
| | 47,348 |
|
| Total AUM | $ | 70,477 |
| | $ | 24,575 |
| | $ | 10,593 |
| | $ | 105,645 |
|
| | | | | |
(1) | Includes fund net non-investment assets, AUM for funds that are not reported at fair value and available capital (uncalled equity capital and undrawn debt).
| | | | | | |
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 Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10‑Q and in our Annual Report on Form 10-K.
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 8, "Commitments“Commitments and Contingencies,"” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Commitments and Contingencies
Capital Commitments
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, we had aggregate unfunded commitments of $316.5$284.5 million and $535.3$285.7 million, respectively, including commitments to both non-consolidated funds and Consolidated Funds. Total unfunded commitments included $20.0$16.3 million and $89.2$16.5 million in unfunded commitments to funds not managed by us as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
ARCC Fee Waiver
In conjunction with ARCC's acquisition of American Capital, Ltd. (“ACAS”), the ARCC-ACAS Transaction, weCompany agreed to waive up to $10 million per quarter of ARCC's Part I Fees for ten calendar quarters, which began in the second quarter of 2017. ARCC Part I Fees will only be waived to the extent they are paid. IfThe maximum amount of fees that may be waived in a quarter is $10 million, and if ARCC Part I Fees are less than $10 million in any single quarter, the shortfall will not carryover to the subsequent quarters.
There As of June 30, 2018, there are eightfive remaining quarters as part of the fee waiver agreement, with a maximum of $80$50 million in potential waivers. ARCC Part I Fees are presented hereinreported net of the fee waiver.
Indemnifications
Consistent with standard business practices in the normal course of business, we enter into contracts that contain indemnities for our affiliates, persons acting on our behalf or such affiliates and third parties. The terms of the indemnities vary from contract to contract and the maximum exposure under these arrangements, if any, cannot be determined and has not been recorded in our consolidated financial statements. As of SeptemberJune 30, 2017,2018, we have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Contingent Obligations
Generally, if at the termination of a fund (and increasingly at interim points in the life of a fund), the fund has not achieved investment returns that (in most cases) exceed the preferred return threshold or (in all cases) the general partner receives net profits over the life of the fund in excess of its allocable share under the applicable partnership agreement, the Company will be obligated to repay carried interest that was received by the Company in excess of the amounts to which the Company is entitled. This contingent obligation is normally reduced by income taxes paid by the Company related to its carried interest.
The partnership documents governing our funds generally include a contingent repayment provision that, if triggered, may give rise to a contingent obligation that may require the general partner to return amounts to the fund for distribution to investors. Therefore, performance fees,income, generally, areis subject to reversal in the event that the funds incur future losses. These losses are limited to the extent of the cumulative performance feesincome recognized in income to date. Due in part to our investment performance and the fact that our performance fees areincome is generally determined on a liquidation basis, as of September 30, 2017 and December 31, 2016, if the funds were liquidated at their fair values as of June 30, 2018, there would have been no$0.2 million of contingent repayment obligation or liability. No contingent repayment obligation existed as of December 31, 2017. There can be no assurance that we will not incur aadditional contingent repayment obligation in the future. If all of the existing investments were deemed worthless, the amount of cumulative revenues that hashave been recognized would be reversed. We believe that the possibility of all of the existing investments becoming worthless is remote. At SeptemberJune 30, 20172018 and December 31, 2016,2017, had we assumed all existing investments were worthless, the amount of carried interest, net of tax, subject to contingent repayment would have been approximately $471.8$472.9 million and $418.3$476.1 million, respectively, of which approximately $366.6$367.5 million and $323.9$370.0 million, respectively, would be reimbursable to the Company by certain professionals who are the recipients of such performance fees.carried interest.
Performance fees areincome is also affected by changes in the fair values of the underlying investments in the funds that we advise. Valuations, on an unrealized basis, can be significantly affected by a variety of external factors including, but not limited to, bond yields and industry trading multiples.
Our senior professionals who have received carried interest distributions are responsible for funding their proportionate share of any contingent repayment obligations. However, the governing agreements of certain of our funds provide that if a current or former professional does not fund his or her respective share for such fund, then we may have to fund additional amounts beyond what we received in carried interest, although we will generally retain the right to pursue any remedies that we have under such governing agreements against those carried interest recipients who fail to fund their obligations.
Additionally, at the end of the life of the funds there could be a payment due to a fund by us if we have recognized more performance feesincome than was ultimately earned. The general partner obligation amount, if any, will depend on final realized values of investments at the end of the life of the fund.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk is related to our role as general partner or investment adviser to our investment funds and the sensitivity to movements in the fair value of their investments, including the effect on management fees, performance feesincome and investment income.
The market price of investments may significantly fluctuate during the period of investment. Investments may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of an investment may decline due to general market conditions which are not specifically related to such investment, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. TheyIt may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.
Our credit orientation has been a central tenet of our business across our debt and equity investment strategies. Our investment professionals benefit from our independent research and relationship networks in over 50approximately 60 industries and insights from our portfolio of active investments. We believe the combination of high-quality proprietary information flow and a consistent, rigorous approach to managing investments across our strategies has been, and we believe will continue to be, a major driver of our strong risk-adjusted returns and the stability and predictability of our income.
There have been no material changes in our market risks for the ninesix months ended SeptemberJune 30, 2017.2018. For additional information on our market risks, refer to our Annual Report on Form 10-K for the year ended December 31, 2016,2017, which is accessible on the SEC's website at sec.gov.
Item 4. Controls And Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our co-principal executive officers and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2017.2018. Based upon that evaluation and subject to the foregoing, our principal executive officers and principal financial officer concluded that, as of SeptemberJune 30, 2017,2018, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II.
Item 1. Legal Proceedings
From time to time we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business, some of which may be material. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, we were not subject to any material pending legal proceedings. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us.
Item 1A. Risk Factors
For a discussion of our other potential risks and uncertainties, see the information under “Item 1A. Risk Factors” in our Annual Report on Form 10‑K for the year ended December 31, 2016,2017, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors disclosed in our 20162017 Form 10‑K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.In accordance with applicable SEC rules, the foregoing is intended to satisfy the Company’s Item 5.02 Form 8-K reporting obligations by making timely disclosure in accordance with Item 5(a) of Form 10-Q.
Effective January 1, 2018, Michael J Arougheti was appointed as Chief Executive Officer of the Company. Mr. Arougheti also continues to serve as the Co-Founder and the President of the Company. In recognition of Mr. Arougheti’s appointment as CEO of the Company, on July 31, 2018 the board of directors of the Company’s general partner, Ares Management GP LLC, approved a grant of two million restricted units to Mr. Arougheti (the “Restricted Units”). The Restricted Units are eligible to vest as follows: 666,666 restricted units will vest in four equal installments on January 1 of each of 2020, 2021, 2022 and 2023, subject to Mr. Arougheti’s continued service through the applicable vesting date (the “Service Vesting Units”); 666,667 restricted units will vest if, over all trading days that occur during any 30 consecutive calendar day period, the volume weighted average price per Company common share is at least $35.00; and 666,667 restricted units will vest if, over all trading days that occur during any 30 consecutive calendar day period, the volume weighted average price per Company common share is at least $45.00, in each case subject to Mr. Arougheti’s continued service through the applicable vesting date. Any unvested restricted units will be forfeited upon the earlier of Mr. Arougheti’s termination of service (subject to accelerated or continued vesting, as applicable, if Mr. Arougheti’s service with the Company is terminated without cause, due to death or disability, or on account of his resignation for good reason, including following a change in control event, in each case as described in the restricted unit agreement) and January 1, 2028. Following vesting, Mr. Arougheti will be entitled to receive one Company common share in respect of each vested restricted unit. At any time that the Company makes a cash distribution in respect of its common shares, Mr. Arougheti will be entitled to receive a corresponding distribution equivalent payment in respect of each then-outstanding Service Vesting Unit. No other Restricted Units accrue dividend equivalent payments.
The foregoing is qualified in its entirety by reference to the terms of the Restricted Unit Agreement, which is filed herewith as Exhibit 10.1 and is incorporated by reference.
Item 6. Exhibits, Financial Statement Schedules
(a)Exhibits.
The following is a list of all exhibits filed or furnished as part of this report.
|
| | |
Exhibit No. | | Description |
| | Certificate of Limited Partnership of Ares Management, L.P. (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-36429, filed with the SEC on February 29, 2016). |
| | SecondThird Amended and Restated Limited Partnership Agreement of Ares Management, L.P. dated June 8, 2016March 1, 2018 (incorporated by reference to Exhibit 3.13.2 to the Registrant’s CurrentAnnual Report on Form 8‑K10-K for the year ended December 31, 2017 (File No. 001‑36429)001-36429, filed with the SEC on June 9, 2016)March 1, 2018). |
| | Restricted Unit Agreement, dated as of July 31, 2018, by and between Michael J Arougheti and Ares Management, L.P. |
| | Certification of the Chief Executive Officer pursuant to Rule 13a‑14(a). |
| | Certification of the Chief Financial Officer pursuant to Rule 13a‑14(a). |
| | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
| 101.INS* | | XBRL Instance Document. |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document. |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
* Filed herewith.
SIGNATURES
|
| | | |
| | ARES MANAGEMENT, L.P. |
| | | | |
| | | | |
| | By: | | Ares Management GP LLC, its general partner |
| | | | |
Dated: NovemberAugust 6, 20172018 | By: | | /s/ Antony P. ResslerMichael J Arougheti |
| | | Name: | Antony P. ResslerMichael J Arougheti |
| | | Title: | Chairman, Co‑Founder, & Chief Executive Officer & President (Principal Executive Officer) |
| | | | |
| | | | |
Dated: NovemberAugust 6, 20172018 | By: | | /s/ Michael R. McFerran |
| | | Name: | Michael R. McFerran |
| | | Title: | Executive Vice PresidentChief Financial Officer & Chief FinancialOperating Officer (Principal Financial and Accounting Officer) |
| | | | |
| | | | |
