0001176948 srt:ParentCompanyMember srt:ReportableLegalEntitiesMember us-gaap:AdministrativeServiceMember 2018-01-01 2018-06-30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q10-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 June 30, 20182019
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. 001‑36429001-36429
ARES MANAGEMENT L.P.CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware | 80-0962035 |
(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, CA90067
(Address of principal executive office) (Zip Code)
(310) (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)
Securities registered pursuant to Section 12(b) of the Act: |
| | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Class A common stock, par value $0.01 per share | ARES | New York Stock Exchange |
| 7.00% Series A Preferred Stock, par value $0.01 per share | ARES.PRA | New York Stock Exchange |
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: Yesx 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). Yesx 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, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company.” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):
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Large accelerated filer Accelerated Filer | x | Accelerated filer ¨ Filer | Non‑accelerated filer ¨
(Do not check if a
smaller reporting company)
☐ | Non‑Accelerated Filer | ☐ | Smaller reporting company ¨Reporting Company | ☐ | Emerging growth company ¨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)13(a) of the SecuritiesExchange 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 shares representing limited partner interests outstanding asAs of July 27, 2018 was 98,398,340.
29, 2019 there were 107,486,372 of the registrant’s shares of Class A common stock outstanding, 1,000 shares of the registrant's Class B common stock outstanding, and 1 share of the registrant's Class C common stock outstanding.
TABLEOFCONTENTS
Cautionary Note Regarding Forward‑Looking Statements
This report contains forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which reflect our current views with respect to, among other things, future events, operations 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, other comparable words or other comparable words.statements that do not relate to historical or factual matters. 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, 2017,2018, 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 income and other fees that we earn from the entity. However, the presentation of performance related 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 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) “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 six independent, shared resource groups to support our reportable segments by providing infrastructure and administrative support in the areas of accounting/finance, operations, information technology, business development/corporate strategy legal/and relationship, 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 shareholders 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 income on the investment income fromof Ares Capital Corporation (NASDAQ: ARCC) (“ARCC”);. Such fees from ARCC are classified as management fees as they are paid quarterly, predictable and recurring in nature, are not subject to contingent repayment and are typically cash settled each quarter;
“ARCC Part II Fees” refers to fees that are paid in arrears as of the end of each calendar year when the cumulative aggregate realized capital gains exceed the cumulative aggregate realized capital losses and aggregate unrealized capital depreciation, less the aggregate amount of ARCC Part II Fees paid in all prior years since inception;
“Ares”, “the Company”, “we”, “us” and “our” refer to (i) Ares Management Corporation and its subsidiaries following the Conversion and (ii) Ares Management, L.P. and its subsidiaries prior to the Conversion;
“Ares Operating Group Unit” or an “AOG Unit” referrefers 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;is equal to initial principal amounts adjusted for paydowns;
“available capital” (also referred to as “dry powder”) 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”).invest;
“CLOs” refers to “our funds” whichthat are structured as collateralized loan obligations;
“Conversion” refers to our conversion effective November 26, 2018 from a Delaware limited partnership named Ares Management, L.P. into a Delaware corporation named Ares Management Corporation;
“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;
“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, 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 paying AUM” or “FPAUM” refers to the AUM onfrom 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 income, performance related 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. Beginningperformance;
“GAAP” refers to accounting principles generally accepted 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;United States of America;
“Holdco Members” refers to Messrs.Michael Arougheti, David Kaplan, Antony Ressler, andBennett Rosenthal, and Ryan Berry, R. Kipp deVeer and Michael McFerran;
“Incentive eligible AUM” or “IEAUM” refers to the AUM of our funds from which performance income may be generated, regardless of whether or not they are currently generating performance income. It generally represents the NAV plus uncalled equity or total assets plus uncalled debt, as applicable, of our funds for which we are entitled to receive a performance income, excluding capital committed by us and our professionals (from which we generally do not earn performance income). With respect to ARCC's AUM, only ARCC Part II Fees may be generated from IEAUM;
“Incentive generating AUM” or “IGAUM” refers to the AUM of our funds that are currently generating, on a realized or unrealized basis, performance income. It generally represents the NAV or total assets of our funds, as applicable, for which we are entitled to receive performance income, excluding capital committed by us and our professionals (which(from which we generally isdo not subject toearn performance income). With respect to ARCC,ARCC's AUM, only ARCC Part II Fees canmay be generated from IGAUM;
“Incentive eligible AUM” or “IEAUM” refers to the AUM of our funds that are eligible to produce performance income, regardless of whether or not they are currently generating performance income. It generally represents the NAV plus uncalled equity of our funds for which we are entitled to receive a performance income, excluding capital committed by us and our professionals (which generally is not subject to a performance 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;
“net performance income” refers to performance income net of performance related compensation, which is the portion of the performance income earned from certain funds that is payable to our 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, whichlaw. Such 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 income” refers to income we earn based on the performance of a fund, which arethat is 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 related compensation. PRE differs from income (loss) before taxes computed in accordance with GAAP as it only includes performance income, performance related 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,expense, 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 ofissued by a wholly owned subsidiary of Ares Holdings;
"Series A Preferred Stock" refers to the preferred stock, $0.01 par value per share, of the Company designated as 7.00% Series A Preferred Stock; and
“Term Loans” refers to term loans of aheld by wholly owned subsidiarysubsidiaries of Ares Management LLC (“AM LLC.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 shares of our Class A common unitsstock and preferred units,the Series A Preferred Stock, respectively, previously outstanding prior to March 1, 2018our Conversion and (2) “common unitholders” or “common shareholders” and “preferred unitholders” or “preferred shareholders” prior to March 1, 2018 refer to holders of shares of our Class A common unitholdersstock and preferred unitholders,shares of the Series A Preferred Stock, respectively, prior to March 1, 2018. Note that the terms of our common shares and preferred shares, and the associated rights, remain unchanged.Conversion.
Many of the terms used in this report, including AUM, FPAUM, ENI, FRE PRE and 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.party or definitions used by the SEC or other regulatory bodies. Further, ENI, FRE PRE and RI are not measures of performance calculated in accordance with GAAP. We use ENI, FRE PRE and RI as measures of operating performance, not as measures of liquidity. ENI, FRE PRE and RI 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 RI 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 RI 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.Corporation
Condensed Consolidated Statements of Financial Condition
(Amounts in Thousands, ExceptShareData)
| | | | As of June 30, | | As of December 31, | As of June 30, | | As of December 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (unaudited) | | As adjusted | (unaudited) | | |
| Assets | |
| | |
| |
| | |
|
| Cash and cash equivalents | $ | 125,448 |
| | $ | 118,929 |
| $ | 247,220 |
| | $ | 110,247 |
|
| 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 |
| |
| Investments (includes accrued carried interest of $1,071,954 and $841,079, at June 30, 2019 and December 31, 2018, respectively) | | 1,566,042 |
| | 1,326,137 |
|
| Due from affiliates | 172,428 |
| | 165,750 |
| 234,081 |
| | 199,377 |
|
| Deferred tax asset, net | 42,942 |
| | 8,326 |
| |
| Other assets | 100,183 |
| | 130,341 |
| 358,091 |
| | 377,651 |
|
| Intangible assets, net | 33,999 |
| | 40,465 |
| |
| Goodwill | 143,848 |
| | 143,895 |
| |
| Right-of-use operating lease assets | | 152,579 |
| | — |
|
| Assets of Consolidated Funds: | | | | | | |
| Cash and cash equivalents | 836,274 |
| | 556,500 |
| 376,328 |
| | 384,644 |
|
| Investments, at fair value | 6,968,067 |
| | 5,582,842 |
| 7,926,615 |
| | 7,673,165 |
|
| Due from affiliates | 13,704 |
| | 15,884 |
| 15,888 |
| | 17,609 |
|
| Dividends and interest receivable | 14,634 |
| | 12,568 |
| |
| Receivable for securities sold | 225,764 |
| | 61,462 |
| 76,993 |
| | 42,076 |
|
| Other assets | 1,197 |
| | 1,989 |
| 25,912 |
| | 23,786 |
|
| Total assets | $ | 10,144,735 |
| | $ | 8,563,522 |
| $ | 10,979,749 |
| | $ | 10,154,692 |
|
| Liabilities | | | | | | |
| Accounts payable, accrued expenses and other liabilities | $ | 73,227 |
| | $ | 81,955 |
| $ | 76,838 |
| | $ | 83,221 |
|
| Accrued compensation | 87,254 |
| | 27,978 |
| 114,936 |
| | 29,389 |
|
| Due to affiliates | 62,344 |
| | 39,184 |
| 65,527 |
| | 82,411 |
|
| Performance related compensation payable | 730,782 |
| | 822,084 |
| 772,592 |
| | 641,737 |
|
| Debt obligations | 370,628 |
| | 616,176 |
| 566,277 |
| | 480,952 |
|
| Right-of-use operating lease liabilities | | 179,192 |
| | — |
|
| Liabilities of Consolidated Funds: | | | | | | |
| Accounts payable, accrued expenses and other liabilities | 69,040 |
| | 64,316 |
| 75,647 |
| | 83,876 |
|
| Payable for securities purchased | 744,534 |
| | 350,145 |
| 369,465 |
| | 471,390 |
|
| CLO loan obligations, at fair value | 6,333,239 |
| | 4,963,194 |
| 7,030,841 |
| | 6,678,091 |
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| Fund borrowings | 138,438 |
| | 138,198 |
| 126,110 |
| | 209,284 |
|
| Total liabilities | 8,609,486 |
| | 7,103,230 |
| 9,377,425 |
| | 8,760,351 |
|
| Commitments and contingencies |
| |
|
| |
|
| 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 | 577,217 |
| | 528,488 |
| 613,943 |
| | 503,637 |
|
| Non-controlling interest in Ares Operating Group entities | 316,048 |
| | 358,186 |
| 352,882 |
| | 302,780 |
|
| Controlling interest in Ares Management, L.P.: | |
| | |
| |
| 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 |
| |
| Stockholders' Equity | | | | |
| Series A Preferred Stock, $0.01 par value, 1,000,000,000 shares authorized (12,400,000 shares issued and outstanding at June 30, 2019 and December 31, 2018) | | 298,761 |
| | 298,761 |
|
| Class A common stock, $0.01 par value, 1,500,000,000 shares authorized (107,458,309 shares and 101,594,095 shares issued and outstanding at June 30, 2019 and at December 31, 2018, respectively) | | 1,075 |
| | 1,016 |
|
| Class B common stock, $0.01 par value, 1,000 shares authorized (1,000 shares issued and outstanding at June 30, 2019 and at December 31, 2018) | | — |
| | — |
|
| Class C common stock, $0.01 par value, 499,999,000 shares authorized (1 share issued and outstanding at June 30, 2019 and at December 31, 2018) | | — |
| | — |
|
| Additional paid-in-capital | | 379,789 |
| | 326,007 |
|
| Retained earnings | | (35,247 | ) | | (29,336 | ) |
| Accumulated other comprehensive loss, net of tax | (6,758 | ) | | (4,208 | ) | (8,879 | ) | | (8,524 | ) |
| Total controlling interest in Ares Management, L.P. | 343,223 |
| | 274,857 |
| |
| Total stockholders' equity | | 635,499 |
| | 587,924 |
|
| Total equity | 1,535,249 |
| | 1,460,292 |
| 1,602,324 |
| | 1,394,341 |
|
| Total liabilities and equity | $ | 10,144,735 |
| | $ | 8,563,522 |
| |
| Total liabilities, non-controlling interests and equity | | $ | 10,979,749 |
| | $ | 10,154,692 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management L.P.Corporation
Condensed Consolidated Statements of Operations
(Amounts in Thousands, Except Share Data)
(unaudited)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | | | |
| | 2018 | | 2017 | | 2018 | | 2017 | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | As adjusted | | | | As adjusted | 2019 | | 2018 | | 2019 | | 2018 |
| 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 |
| |
| Management fees (includes ARCC Part I Fees of $39,157, $77,550 and $29,866, $58,283 for the three and six months ended June 30, 2019 and 2018, respectively) | | $ | 237,846 |
| | $ | 194,032 |
| | $ | 462,505 |
| | $ | 383,547 |
|
| Carried interest allocation | (13,444 | ) | | 333,808 |
| | 40,685 |
| | 385,815 |
| 119,712 |
| | (13,444 | ) | | 317,005 |
| | 40,685 |
|
| Incentive fees | 7,740 |
| | 4,216 |
| | 12,811 |
| | 7,381 |
| 10,220 |
| | 7,740 |
| | 27,035 |
| | 12,811 |
|
| Principal investment income | 1,871 |
| | 38,307 |
| | 6,780 |
| | 40,894 |
| 5,844 |
| | 1,871 |
| | 34,603 |
| | 6,780 |
|
| Administrative, transaction and other fees | 13,964 |
| | 15,098 |
| | 26,429 |
| | 29,538 |
| 11,200 |
| | 13,964 |
| | 20,871 |
| | 26,429 |
|
| Total revenues | 204,163 |
| | 572,197 |
| | 470,252 |
| | 816,441 |
| 384,822 |
| | 204,163 |
| | 862,019 |
| | 470,252 |
|
| Expenses | | | | | | | | | | | | | | |
| Compensation and benefits | 138,992 |
| | 131,219 |
| | 273,631 |
| | 255,558 |
| 162,170 |
| | 138,992 |
| | 319,016 |
| | 273,631 |
|
| Performance related compensation | (13,005 | ) | | 261,705 |
| | 12,873 |
| | 302,407 |
| 92,688 |
| | (13,005 | ) | | 249,208 |
| | 12,873 |
|
| General, administrative and other expenses | 59,918 |
| | 50,751 |
| | 104,368 |
| | 98,089 |
| 65,416 |
| | 59,918 |
| | 116,603 |
| | 104,368 |
|
| Transaction support expense | — |
| | — |
| | — |
| | 275,177 |
| |
| Expenses of Consolidated Funds | 35,112 |
| | 4,522 |
| | 36,428 |
| | 8,433 |
| 15,427 |
| | 35,112 |
| | 19,981 |
| | 36,428 |
|
| Total expenses | 221,017 |
| | 448,197 |
| | 427,300 |
| | 939,664 |
| 335,701 |
| | 221,017 |
| | 704,808 |
| | 427,300 |
|
| Other income (expense) | | | | | | | | | | | | | | |
| Net realized and unrealized gain (loss) on investments | 3,267 |
| | (6,588 | ) | | 2,428 |
| | (5,700 | ) | |
| Net realized and unrealized gain on investments | | 521 |
| | 3,267 |
| | 3,997 |
| | 2,428 |
|
| Interest and dividend income | 2,356 |
| | 1,462 |
| | 5,703 |
| | 3,386 |
| 1,652 |
| | 2,356 |
| | 3,496 |
| | 5,703 |
|
| Interest expense | (6,076 | ) | | (5,354 | ) | | (12,945 | ) | | (10,233 | ) | (5,793 | ) | | (6,076 | ) | | (11,382 | ) | | (12,945 | ) |
| Other income (expense), net | (1,987 | ) | | 2,822 |
| | (2,298 | ) | | 19,318 |
| 4,797 |
| | (1,987 | ) | | 300 |
| | (2,298 | ) |
| Net realized and unrealized gain (loss) on investments of Consolidated Funds | 34,487 |
| | (12,713 | ) | | 21,402 |
| | 19,323 |
| (116 | ) | | 34,487 |
| | 4,248 |
| | 21,402 |
|
| Interest and other income of Consolidated Funds | 92,633 |
| | 38,326 |
| | 157,055 |
| | 79,818 |
| 102,206 |
| | 92,633 |
| | 195,390 |
| | 157,055 |
|
| Interest expense of Consolidated Funds | (56,754 | ) | | (26,875 | ) | | (101,179 | ) | | (58,197 | ) | (68,005 | ) | | (56,754 | ) | | (132,917 | ) | | (101,179 | ) |
| 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: | | | | | | | | |
| Total other income | | 35,262 |
| | 67,926 |
| | 63,132 |
| | 70,166 |
|
| Income before taxes | | 84,383 |
| | 51,072 |
| | 220,343 |
|
| 113,118 |
|
| Income tax expense | | 9,505 |
| | 36,903 |
| | 23,889 |
| | 24,528 |
|
| Net income | | 74,878 |
| | 14,169 |
| | 196,454 |
| | 88,590 |
|
| Less: Net income attributable to non-controlling interests in Consolidated Funds | | 8,346 |
| | 9,882 |
| | 25,970 |
| | 10,249 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | | 34,393 |
| | 16,062 |
| | 93,396 |
| | 49,168 |
|
| Net income (loss) attributable to Ares Management Corporation | | 32,139 |
| | (11,775 | ) | | 77,088 |
|
| 29,173 |
|
| Less: Series A Preferred Stock dividends paid | | 5,425 |
| | 5,425 |
| | 10,850 |
| | 10,850 |
|
| Net income (loss) attributable to Ares Management Corporation Class A common stockholders | | $ | 26,714 |
| | $ | (17,200 | ) | | $ | 66,238 |
|
| $ | 18,323 |
|
| Net income (loss) attributable to Ares Management Corporation per share of Class A common stock: | | | | | | | | |
| Basic | $ | (0.20 | ) | | $ | 0.54 |
| | $ | 0.16 |
| | $ | (0.04 | ) | $ | 0.24 |
| | $ | (0.20 | ) | | $ | 0.60 |
| | $ | 0.16 |
|
| Diluted | $ | (0.20 | ) | | $ | 0.53 |
| | $ | 0.16 |
| | $ | (0.04 | ) | $ | 0.23 |
| | $ | (0.20 | ) | | $ | 0.58 |
| | $ | 0.16 |
|
| Weighted-average common shares: | | | | | | | | |
Weighted-average shares of Class A common stock:(1) | | | | | | | | |
| Basic | 98,037,252 |
| | 81,829,086 |
| | 91,861,946 |
| | 81,469,967 |
| 105,188,966 |
| | 98,037,252 |
| | 104,054,035 |
| | 91,861,946 |
|
| Diluted | 98,037,252 |
| | 84,319,882 |
| | 91,861,946 |
| | 81,469,967 |
| 116,603,887 |
| | 98,037,252 |
| | 113,657,864 |
| | 91,861,946 |
|
| Dividend declared and paid per common share | $ | 0.37 |
| | $ | 0.13 |
| | $ | 0.77 |
| | $ | 0.41 |
| |
Dividend declared and paid per share of Class A common stock(1) | | $ | 0.32 |
| | $ | 0.37 |
| | $ | 0.64 |
| | $ | 0.77 |
|
(1) Three and six months ended June 30, 2018 represents common units.
Substantially all revenue is earned from affiliated funds of the Company. See accompanying notes to the condensed consolidated financial statements.
Ares Management L.P.Corporation
Condensed Consolidated Statements of Comprehensive Income
(Amounts in Thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | As adjusted | | | | As adjusted |
| Net income (loss) | $ | 14,169 |
| | $ | 113,827 |
| | $ | 88,590 |
| | $ | (42,497 | ) |
| Other comprehensive income: | | | | | | | |
| Foreign currency translation adjustments | (12,377 | ) | | 2,029 |
| | (6,892 | ) | | 5,471 |
|
| Total comprehensive income (loss) | 1,792 |
| | 115,856 |
| | 81,698 |
| | (37,026 | ) |
| Less: Comprehensive income (loss) attributable to non-controlling interests in Consolidated Funds | 4,193 |
| | (8,818 | ) | | 7,735 |
| | 7,038 |
|
| Less: Comprehensive income (loss) attributable to non-controlling interests in Ares Operating Group entities | 12,131 |
| | 74,461 |
| | 47,340 |
| | (54,344 | ) |
| Comprehensive income (loss) attributable to Ares Management, L.P. | $ | (14,532 | ) |
| $ | 50,213 |
| | $ | 26,623 |
| | $ | 10,280 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net income | $ | 74,878 |
| | $ | 14,169 |
| | $ | 196,454 |
| | $ | 88,590 |
|
| Other comprehensive income: | | | | | | | |
| Foreign currency translation adjustments, net of tax | (1,991 | ) | | (12,377 | ) | | (907 | ) | | (6,892 | ) |
| Total comprehensive income | 72,887 |
| | 1,792 |
| | 195,547 |
| | 81,698 |
|
| Less: Comprehensive income attributable to non-controlling interests in Consolidated Funds | 9,852 |
| | 4,193 |
| | 25,817 |
| | 7,735 |
|
| Less: Comprehensive income attributable to non-controlling interests in Ares Operating Group entities | 32,535 |
| | 12,131 |
| | 92,997 |
| | 47,340 |
|
| Comprehensive income (loss) attributable to Ares Management Corporation | $ | 30,500 |
|
| $ | (14,532 | ) | | $ | 76,733 |
| | $ | 26,623 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management L.P.Corporation
Condensed Consolidated Statements of Changes in Equity
(Amounts in Thousands)
(unaudited)
| | | | Preferred
Equity | | Shareholders'
Equity | | Accumulated
Other
Comprehensive
Loss | | Non-controlling
Interest in
Ares Operating
Group Entities | | Non-controlling
Interest in Consolidated
Funds | | Total
Equity | Series A Preferred Stock | | Class A Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated
Other
Comprehensive
Income (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 | ) | | — |
| | — |
| | — |
| |
| Balance at December 31, 2018 | | $ | 298,761 |
| | $ | 1,016 |
| | $ | 326,007 |
| | $ | (29,336 | ) | | $ | (8,524 | ) | | $ | 302,780 |
| | $ | 503,637 |
| | $ | 1,394,341 |
|
| Relinquished with deconsolidation of funds | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (55 | ) | | (55 | ) |
| Changes in ownership interests and related tax benefits | — |
| | 7,465 |
| | — |
| | 14,099 |
| | — |
| | 21,564 |
| — |
| | 15 |
| | (6,339 | ) | | — |
| | — |
| | (12,073 | ) | | — |
| | (18,397 | ) |
| Contributions | — |
| | 106,283 |
| | — |
| | 764 |
| | 70,990 |
| | 178,037 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,876 |
| | 54,035 |
| | 55,911 |
|
| Dividends/Distributions | (10,850 | ) | | (69,743 | ) | | — |
| | (111,851 | ) | | (35,329 | ) | | (227,773 | ) | (5,425 | ) | | — |
| | — |
| | (35,367 | ) | | — |
| | (40,112 | ) | | (20,736 | ) | | (101,640 | ) |
| Net income | 10,850 |
| | 18,323 |
| | — |
| | 49,168 |
| | 10,249 |
| | 88,590 |
| 5,425 |
| | — |
| | — |
| | 39,524 |
| | — |
| | 59,003 |
| | 17,624 |
| | 121,576 |
|
| Currency translation adjustment | — |
| | — |
| | (1,348 | ) | | (1,828 | ) | | (2,514 | ) | | (5,690 | ) | — |
| | — |
| | — |
| | — |
| | 1,284 |
| | 1,459 |
| | (1,659 | ) | | 1,084 |
|
| Equity compensation | — |
| | 18,213 |
| | — |
| | 24,627 |
| | — |
| | 42,840 |
| — |
| | — |
| | 12,637 |
| | — |
| | — |
| | 14,367 |
| | — |
| | 27,004 |
|
| Balance at June 30, 2018 | $ | 298,761 |
|
| $ | 349,981 |
|
| $ | (6,758 | ) |
| $ | 316,048 |
|
| $ | 577,217 |
|
| $ | 1,535,249 |
| |
| Balance at March 31, 2019 | | 298,761 |
| | 1,031 |
| | 332,305 |
| | (25,179 | ) | | (7,240 | ) | | 327,300 |
| | 552,846 |
| | 1,479,824 |
|
| Changes in ownership interests and related tax benefits | | — |
| | 5 |
| | (32,128 | ) | | — |
| | — |
| | 20,615 |
| | — |
| | (11,508 | ) |
| Repurchases of Class A common stock | | — |
| | (4 | ) | | (10,445 | ) | | — |
| | — |
| | — |
| | — |
| | (10,449 | ) |
| Contributions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 61,464 |
| | 61,464 |
|
| Dividends/Distributions | | (5,425 | ) | | — |
| | — |
| | (36,782 | ) | | — |
| | (40,103 | ) | | (10,219 | ) | | (92,529 | ) |
| Net income | | 5,425 |
| | — |
| | — |
| | 26,714 |
| | — |
| | 34,393 |
| | 8,346 |
| | 74,878 |
|
| Currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | (1,639 | ) | | (1,858 | ) | | 1,506 |
| | (1,991 | ) |
| Equity compensation | | — |
| | — |
| | 11,306 |
| | — |
| | — |
| | 12,535 |
| | — |
| | 23,841 |
|
| Stock option exercises | | — |
| | 43 |
| | 78,751 |
| | — |
| | — |
| | — |
| | — |
| | 78,794 |
|
| Balance at June 30, 2019 | | $ | 298,761 |
| | $ | 1,075 |
| | $ | 379,789 |
| | $ | (35,247 | ) | | $ | (8,879 | ) | | $ | 352,882 |
| | $ | 613,943 |
| | $ | 1,602,324 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management Corporation
Condensed Consolidated Statements of Changes in Equity
(Amounts in Thousands)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred
Equity | | Series A Preferred Stock | | Shareholders'
Equity | | Class A Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated
Other
Comprehensive
Income (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 | — |
| | — |
| | 1,202 |
| | — |
| | — |
| | — |
| | (1,202 | ) | | — |
| | | — |
| | — |
|
| Changes in ownership interests and related tax benefits | — |
| | — |
| | (8,351 | ) | | — |
| | — |
| | — |
| | — |
| | 18,810 |
| | | — |
| | 10,459 |
|
| Contributions | — |
| | — |
| | 105,441 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | 8,000 |
| | 113,441 |
|
| Dividends/Distributions | (5,425 | ) | | — |
| | (33,103 | ) | | — |
| | — |
| | — |
| | — |
| | (58,677 | ) | | | (983 | ) | | (98,188 | ) |
| Net income | 5,425 |
| | — |
| | 35,523 |
| | — |
| | — |
| | — |
| | — |
| | 33,106 |
| | | 367 |
| | 74,421 |
|
| Currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,409 |
| | 2,103 |
| | | 3,175 |
| | 6,687 |
|
| Equity compensation | — |
| | — |
| | 8,285 |
| | — |
| | — |
| | — |
| | — |
| | 12,409 |
| | | — |
| | 20,694 |
|
| Balance at March 31, 2018 | 298,761 |
| | — |
| | 377,235 |
| | — |
| | — |
| | — |
| | (4,001 | ) | | 348,820 |
| | | 544,380 |
| | 1,565,195 |
|
| Changes in ownership interests and related tax benefits | — |
| | — |
| | 15,816 |
| | — |
| | — |
| | — |
| | — |
| | (4,711 | ) | | | — |
| | 11,105 |
|
| Contributions | — |
| | — |
| | 842 |
| | — |
| | — |
| | — |
| | — |
| | 764 |
| | | 62,990 |
| | 64,596 |
|
| Dividends/Distributions | (5,425 | ) | | — |
| | (36,640 | ) | | — |
| | — |
| | — |
| | — |
| | (53,174 | ) | | | (34,346 | ) | | (129,585 | ) |
| Net income | 5,425 |
| | — |
| | (17,200 | ) | | — |
| | — |
| | — |
| | — |
| | 16,062 |
| | | 9,882 |
| | 14,169 |
|
| Currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,757 | ) | | (3,931 | ) | | | (5,689 | ) | | (12,377 | ) |
| Equity compensation | — |
| | — |
| | 9,928 |
| | — |
| | — |
| | — |
| | — |
| | 12,218 |
| | | — |
| | 22,146 |
|
| Balance at June 30, 2018 | 298,761 |
| | — |
| | 349,981 |
| | — |
| | — |
| | — |
| | (6,758 | ) | | 316,048 |
| | | 577,217 |
| | 1,535,249 |
|
| Changes in ownership interests and related tax benefits | — |
| | — |
| | (34,678 | ) | | — |
| | — |
| | — |
| | — |
| | 3,499 |
| | | — |
| | (31,179 | ) |
| Contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 917 |
| | | — |
| | 917 |
|
| Dividends/Distributions | (5,425 | ) | | — |
| | (34,667 | ) | | — |
| | — |
| | — |
| | — |
| | (30,928 | ) | | | (11,466 | ) | | (82,486 | ) |
| Net income | 5,425 |
| | — |
| | 10,485 |
| | — |
| | — |
| | — |
| | — |
| | 18,133 |
| | | 13,169 |
| | 47,212 |
|
| Currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (645 | ) | | (774 | ) | | | (500 | ) | | (1,919 | ) |
| Equity compensation | — |
| | — |
| | 10,600 |
| | — |
| | — |
| | — |
| | — |
| | 12,925 |
| | | — |
| | 23,525 |
|
| Balance at September 30, 2018 | 298,761 |
| | — |
| | 301,721 |
| | — |
| | — |
| | — |
| | (7,403 | ) | | 319,820 |
| | | 578,420 |
| | 1,491,319 |
|
| Consolidation of a new fund | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | 42,942 |
| | 42,942 |
|
| Changes in ownership interests and related tax benefits | — |
| | — |
| | 501 |
| | — |
| | 9,140 |
| | — |
| | — |
| | (1,237 | ) | | | — |
| | 8,404 |
|
| Contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,447 |
| | | 19 |
| | 1,466 |
|
| Dividends/Distributions | — |
| | (5,425 | ) | | (91 | ) | | — |
| | — |
| | (30,348 | ) | | — |
| | (35,018 | ) | | | (112,915 | ) | | (183,797 | ) |
| Net income | — |
| | 5,425 |
| | 5,500 |
| | — |
| | — |
| | 1,012 |
| | — |
| | 7,306 |
| | | (2,906 | ) | | 16,337 |
|
| Currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,121 | ) | | (1,335 | ) | | | (1,923 | ) | | (4,379 | ) |
| Equity compensation | — |
| | — |
| | 7,432 |
| | — |
| | 2,820 |
| | — |
| | — |
| | 11,797 |
| | | — |
| | 22,049 |
|
| Reclassifications resulting from conversion to a corporation | (298,761 | ) | | 298,761 |
| | (315,063 | ) | | 1,016 |
| | 314,047 |
| | — |
| | — |
| | — |
| | | — |
| | — |
|
| Balance at December 31, 2018 | $ | — |
| | $ | 298,761 |
| | $ | — |
| | $ | 1,016 |
| | $ | 326,007 |
| | $ | (29,336 | ) | | $ | (8,524 | ) | | $ | 302,780 |
| | | $ | 503,637 |
| | $ | 1,394,341 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management L.P.Corporation
Condensed Consolidated Statements of Cash Flows
(Amounts in Thousands)
(unaudited)
| | | | For the Six Months Ended June 30, | | | | | |
| | 2018 | | 2017 | For the Six Months Ended June 30, |
| | | | As adjusted | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| 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 | ) | |
| Net income | | $ | 196,454 |
| | $ | 88,590 |
|
| Adjustments to reconcile net income to net cash used in operating activities | | 48,114 |
| | 225,963 |
|
| Adjustments to reconcile net income to net cash used in operating activities allocable to non-controlling interests in Consolidated Funds | | (1,360,106 | ) | | (1,634,788 | ) |
| Cash flows due to changes in operating assets and liabilities | 66,925 |
| | (144,249 | ) | (12,824 | ) | | 66,969 |
|
| Cash flows due to changes in operating assets and liabilities allocable to non-controlling interests in Consolidated Funds | (34,335 | ) | | 37,108 |
| (162,950 | ) | | (34,335 | ) |
| Net cash used in operating activities | (1,287,645 | ) | | (304,160 | ) | (1,291,312 | ) | | (1,287,601 | ) |
| Cash flows from investing activities: | |
| | |
| |
| | |
|
| Purchase of furniture, equipment and leasehold improvements, net | (7,126 | ) | | (21,194 | ) | (5,653 | ) | | (7,126 | ) |
| Net cash used in investing activities | (7,126 | ) | | (21,194 | ) | (5,653 | ) | | (7,126 | ) |
| Cash flows from financing activities: | |
| | |
| |
| | |
|
| Proceeds from issuance of common shares | 105,333 |
| | — |
| — |
| | 105,333 |
|
| Proceeds from credit facility | 325,000 |
| | 165,000 |
| 235,000 |
| | 325,000 |
|
| Proceeds from term notes | 44,050 |
| | 70,009 |
| — |
| | 44,050 |
|
| Repayments of credit facility | (410,000 | ) | | (30,000 | ) | (150,000 | ) | | (410,000 | ) |
| Repayments of term loans | (206,089 | ) | | — |
| — |
| | (206,089 | ) |
| Distributions | (181,594 | ) | | (102,315 | ) | |
| Preferred equity distributions | (10,850 | ) | | (10,850 | ) | |
| Taxes paid in net settlement of vested common shares | (17,225 | ) | | (13,471 | ) | |
| Stock option exercise | 950 |
| | 1,036 |
| |
| Tax from share-based payment | 44 |
| | 81 |
| |
| Dividends and distributions | | (152,364 | ) | | (181,594 | ) |
| Series A Preferred Stock dividends and distributions | | (10,850 | ) | | (10,850 | ) |
| Repurchases of Class A common stock | | (10,449 | ) | | — |
|
| Stock option exercises | | 78,794 |
| | 950 |
|
| Taxes paid related to net share settlement of equity awards | | (31,424 | ) | | (17,225 | ) |
| Other financing activities | 764 |
| | 1,583 |
| (3,258 | ) | | 764 |
|
| Allocable to non-controlling interests in Consolidated Funds: | |
| | |
| |
| | |
|
| Contributions from non-controlling interests in Consolidated Funds | 70,990 |
| | 47,265 |
| 115,499 |
| | 70,990 |
|
| Distributions to non-controlling interests in Consolidated Funds | (35,329 | ) | | (46,876 | ) | (30,955 | ) | | (35,329 | ) |
| Borrowings under loan obligations by Consolidated Funds | 2,206,816 |
| | 1,314,026 |
| 1,934,087 |
| | 2,206,816 |
|
| Repayments under loan obligations by Consolidated Funds | (599,801 | ) | | (1,287,425 | ) | (528,955 | ) | | (599,801 | ) |
| Net cash provided by financing activities | 1,293,059 |
| | 108,063 |
| 1,445,125 |
| | 1,293,015 |
|
| Effect of exchange rate changes | 8,231 |
| | 11,686 |
| (11,187 | ) | | 8,231 |
|
| Net change in cash and cash equivalents | 6,519 |
|
| (205,605 | ) | 136,973 |
|
| 6,519 |
|
| Cash and cash equivalents, beginning of period | 118,929 |
| | 342,861 |
| 110,247 |
| | 118,929 |
|
| Cash and cash equivalents, end of period | $ | 125,448 |
| | $ | 137,256 |
| $ | 247,220 |
| | $ | 125,448 |
|
See accompanying notes to the condensed consolidated financial statements.
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
1. ORGANIZATION
Ares Management L.P.Corporation ("the Company"), a Delaware limited partnership treated as a corporation, for U.S. federal income tax purposes,together with its subsidiaries, is a leading global alternative asset management firm that operatesinvestment manager operating three distinct but complementary investment groups:integrated businesses across Credit, Private Equity and Real 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”). Such subsidiaries provide investment advisory services to the Ares Funds in exchange for management fees. Ares is managed and operated by its general partner, AresBoard of Directors and Executive Management GP LLC.Committee. Unless the context requires otherwise, references to “Ares” or the “Company” refer to Ares Management, L.P., together with its subsidiaries prior to November 26, 2018 and thereafter to Ares Management Corporation, together with its subsidiaries.
The accompanying unaudited financial statements include the condensed consolidated results of the Company and its subsidiaries. The Company is a holding company, and itsthe Company’s 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.prudent, and that all such adjustments are of a normal recurring nature. 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, 20172018 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 includeAll intercompany balances and transactions have been eliminated upon consolidation.
The Company has reclassified certain Ares-affiliated funds, related co-investment entities and collateralized loan obligationsprior period amounts to conform to the current year presentation.
Adoption of ASC 842
Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board (“CLOs”FASB”) (collectively,Topic 842 (“ASC 842”), Leases. The Company adopted ASC 842 under the “Consolidated Funds”) managed by Ares Management LLC (“AM LLC”) and its wholly owned subsidiaries. Includingmodified retrospective approach using the resultspractical expedient provided for within paragraph 842-10-65-1; therefore, the presentation of prior year periods has not been adjusted. No cumulative effect of initially adopting ASC 842 as an adjustment to the opening balance of components of equity as of January 1, 2019 was necessary as the recognition of the Consolidated Funds significantly increasesright-of-use operating lease assets equaled the reported amounts ofcorresponding lease liabilities. The amount established in conjunction with the assets, liabilities, revenues, expenses and cash flows inimplementation was consistent with the accompanying condensed consolidated financialamount previously disclosed.
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
statements; however,The Company has entered into operating and finance leases for corporate offices and certain equipment and makes the Consolidated Funds resultsdetermination if an arrangement constitutes a lease at inception. Operating leases are 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 investorsin right-of-use operating lease assets and right-of-use operating lease liabilities 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 theCompany's Condensed Consolidated Statements of Cash Flows. All intercompany balancesFinancial Condition. Finance leases are included in accounts payable, accrued expenses and transactions have been eliminated upon consolidation.
The Company has reclassified certain prior period amounts to conform to the current year presentation.
Adoption of ASC 606
Effective January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Topic 606 (“ASC 606”), Revenue from Contracts with Customers. The Company adopted ASC 606 to all 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 Company expects to be entitled in exchange for those goods or services. Under this standard, revenue is based on a contract with a determinable transaction price and distinct performance obligations with probable collectability. Revenues cannot be recognized until the performance obligation(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 Company’s consolidated statements of operations. The adoption of ASC 606 did not have an impact on the Company’s management fees, administrative fees, transaction fees or other fees. The details of the significant changes and quantitative 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 streams:
|
| |
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 carried interest and incentive fees.
Carried Interest
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 of 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
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.
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 investmentsliabilities 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 Leases with an effective dateinitial term 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 Ventures12 months or less are not recorded 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 FlowsFinancial Condition.
Right-of-use leases assets represent the Company's right to use an underlying asset for the year ended December 31, 2017.
Ares Management, L.P.
Noteslease term and right-of-use lease liabilities represent the Company's obligation to make lease payments arising from the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Datalease. Operating lease right-of-use assets and As Otherwise Noted)
The following tables present the impact of incentive feesliabilities are recognized at commencement date based on the condensed consolidated financial statements uponpresent value of lease payments over the adoptionlease term. As most 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 byCompany's leases do not provide an implicit rate, the Company to removeuses the effects of adopting ASC 606its incremental borrowing rate based on the condensed consolidated financial statements asinformation available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The right-of-use operating lease asset also includes any lease prepayments and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the company will exercise that option. Lease expense is primarily recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. However, for certain equipment leases where the non-lease components are not material, the Company account for the threelease and six months ended June 30, 2018:non-lease components as a single lease component.
|
| | | | | | | | | | | | |
| 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 ASUsaccounting standard updates ("ASU") issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on the Company'sits condensed consolidated financial statements.
In FebruaryMay 2016, the FASB issued ASU 2016-02, Leases2016-13, Financial Instruments - Credit Losses (Topic 842)326): Measurement of Credit Losses on Financial Instruments. The objective of the guidance in ASU 2016-022016-13 is to increase transparency and comparability among organizations by recognizing leaseallow entities to recognize estimated credit losses in the period that the change in valuation occurs. ASU 2016-13 requires an entity to present financial assets and liabilities inmeasured on an amortized cost basis on the balance sheet net of an allowance for credit losses. Available for sale and disclosing key information. ASU 2016-02 amends previous lease guidance, whichheld to maturity debt securities are also 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 valueheld net of remaining expected future lease payments.an allowance for credit losses. The guidance should be applied using a modified retrospective approach. ASU 2016-022016-13 is effective for public entities for annual reporting periods beginning after December 15, 2019 and interim periods within those reporting periods. Early adoption is permitted for annual and quarterly reporting periods beginning after December 15, 2018. In April and May 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, were issued to provide clarification to previously issued credit losses guidance (ASU 2016-13) that has not yet been implemented. These updates are required to be adopted with ASU 2016-13. The Company is currently evaluating the impact of these pronouncements on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). ASU 2018-15 amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This ASU aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, ASU 2018-15 amends ASC 350 to include in its scope implementation costs of a cloud computing arrangement that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a cloud computing arrangement that is considered a service contract. The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. In addition, this ASU states that a cloud computing arrangement that is a service contract does not give rise to a recognizable intangible asset because it is an executory service contract. Consequently, any costs incurred to implement a cloud computing arrangement that is a service contract would not be capitalized as an intangible asset since they do not form part of an intangible asset but instead would be characterized in the financial statements in the same manner as other service costs and assets related to service contracts such as prepaid expense. That is, these costs would be capitalized as part of the service contract and the related amortization would be consistent with the ongoing periodic costs of the underlying cloud computing arrangement. ASU 2018-15 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. The guidance may be applied either prospectively or retrospectively. The Company is currently compiling all leases and right–of–use terms to evaluateevaluating the impact of this guidance on its condensed consolidated financial statements.
In January 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification 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 amendments 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 change in tax laws or rates be included in income from continuing operations is not affected. This ASU 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 interim periods within those fiscal years. Early adoption is permitted, including adoption in 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 either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company adopted ASU 2018-02 in the three months ended March 31, 2018. As a result of the adoption of ASU 2018-02, $1.2 million of stranded tax effects resulting from the Tax Cuts and Jobs Act were reclassified from accumulated other comprehensive income to shareholders' equity during the three months ended March 31, 2018.
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU 2018-17, amends ASC 810 to address whether indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a VIE. For example, if a decision maker or service provider owns a 20 percent interest in a related party and that related party owns a 40 percent interest in the legal entity being evaluated, the decision maker’s or service provider’s indirect interest in the VIE held through the related party under common control should be considered the equivalent of an eight percent direct interest for determining whether its fees are variable interests. ASU 2018-17 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. The guidance should be applied retrospectively. The Company is currently evaluating the impact of this guidance on its 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:assets, included within other assets in the Condensed Consolidated Statements of Financial Condition:
| | | | Weighted Average Amortization Period as of June 30, 2018 | | As of June 30, | | As of December 31, | Weighted Average Amortization Period as of June 30, 2019 | | As of June 30, | | As of December 31, |
| | | 2018 | | 2017 | | 2019 | | 2018 |
| Management contracts | 3.0 years | | $ | 42,335 |
| | $ | 67,306 |
| 2.6 years | | $ | 12,498 |
| | $ | 42,335 |
|
| Client relationships | 10.0 years | | 38,600 |
| | 38,600 |
| 9.0 years | | 38,600 |
| | 38,600 |
|
| Trade name | 4.0 years | | 3,200 |
| | 3,200 |
| 3.0 years | | 3,200 |
| | 3,200 |
|
| Other(1) | 0.7 years | | 180 |
| | — |
| |
| Intangible assets | | 84,315 |
|
| 109,106 |
| | 54,298 |
|
| 84,135 |
|
| Less: accumulated amortization | | (50,316 | ) | | (68,641 | ) | | (25,287 | ) | | (52,701 | ) |
| Intangible assets, net | | $ | 33,999 |
|
| $ | 40,465 |
| | $ | 29,011 |
|
| $ | 31,434 |
|
| |
(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. |
Amortization expense associated with intangible assets was $3.3$1.2 million and $5.2$3.3 million for the three months ended June 30, 20182019 and 2017,2018, respectively, and $6.6$2.4 million and $10.5$6.6 million for the six months ended June 30, 20182019 and 2017,2018, respectively, and is presented within general, administrative and other expenses within the Condensed Consolidated Statements of Operations. During the first quarter of 2018,2019, the Company removed $25.0$29.8 million of intangible assets that were fully amortized.
Goodwill
The following table summarizes the carrying value of the Company's goodwill assets:assets, included within other assets in the Condensed Consolidated Statements of Financial Condition:
|
| | | | | | | | | | | | | | | |
| | Credit | | Private
Equity | | Real
Estate | | Total |
| Balance as of December 31, 2018 | $ | 32,196 |
| | $ | 58,600 |
| | $ | 52,990 |
|
| $ | 143,786 |
|
| Foreign currency translation | — |
| | — |
| | (7 | ) | | (7 | ) |
| Balance as of June 30, 2019 | $ | 32,196 |
| | $ | 58,600 |
| | $ | 52,983 |
| | $ | 143,779 |
|
|
| | | | | | | | | | | | | | | |
| | 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 six months ended June 30, 20182019 and 2017.2018. The impact of foreign currency translation is reflected within other comprehensive income.
Ares Management L.P.Corporation
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 comprised of: of the following:
|
| | | | | | | | | | | | | |
| | | | 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 |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
| | | | Percentage of total investments as of |
| | June 30, | | December 31, | | June 30, | | December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Private Investment Partnership Interests and Other: | | | | | | | |
| Equity method private investment partnership interests - principal (1) | $ | 364,109 |
| | $ | 357,655 |
| | 23.3 | % | | 27.0 | % |
| Equity method - carried interest (1) | 1,071,954 |
| | 841,079 |
| | 68.4 | % | | 63.4 | % |
| Equity method private investment partnership interests and other (held at fair value) | 48,785 |
| | 46,450 |
| | 3.1 | % | | 3.5 | % |
| Equity method private investment partnership interests and other | 15,969 |
| | 18,845 |
| | 1.0 | % | | 1.4 | % |
| Total private investment partnership interests and other | 1,500,817 |
|
| 1,264,029 |
| | 95.8 | % | | 95.3 | % |
| Collateralized loan obligations | 26,241 |
| | 20,824 |
| | 1.7 | % | | 1.6 | % |
| Other fixed income | 37,810 |
| | 40,000 |
| | 2.4 | % | | 3.0 | % |
| Collateralized loan obligations and other fixed income, at fair value | 64,051 |
| | 60,824 |
| | 4.1 | % | | 4.6 | % |
| Common stock, at fair value | 1,174 |
| | 1,284 |
| | 0.1 | % | | 0.1 | % |
| Total investments | $ | 1,566,042 |
|
| $ | 1,326,137 |
|
|
|
|
|
|
|
| |
| (1) | InterestInvestment or portion of the interestinvestment 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 include 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. Foras defined by guidance from the SEC. As of and for the three and six months ended June 30, 20182019 and 2017,2018, 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$5.4 million and $38.3$3.8 million for the three months ended June 30, 20182019 and 2017,2018, respectively, and $7.3$34.5 million and $41.3$7.3 million for the six months ended June 30, 2019 and 2018, and 2017, respectively. These amounts areThe net gains were included within both principal investment income, and within net realized and unrealized gain on investments, and interest and dividend income within the Condensed Consolidated Statements of Operations.
The material assets ofWith respect to the Company's equity method investments, the material assets are expected to generate either long-term capital appreciation and/and or interest income;income, the material liabilities are debt instruments collateralized by, or related to, the financing of the assets;assets and net income is materially comprised of the changes in fair value of these net assets.
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
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 as of |
| | June 30, | | December 31, | | June 30, | | December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Fixed income investments: | | | | | | | |
| Bonds | $ | 201,792 |
| | $ | 318,499 |
| | 2.6 | % | | 4.3 | % |
| Loans | 7,229,083 |
| | 6,886,749 |
| | 91.2 | % | | 89.8 | % |
| Collateralized loan obligations | 35,260 |
| | — |
| | 0.4 | % | | — | % |
| Total fixed income investments | 7,466,135 |
| | 7,205,248 |
| | 94.2 | % | | 94.1 | % |
| Equity securities | 166,623 |
| | 196,470 |
| | 2.1 | % | | 2.4 | % |
| Partnership interests | 293,857 |
| | 271,447 |
| | 3.7 | % | | 3.5 | % |
| Total investments, at fair value | $ | 7,926,615 |
| | $ | 7,673,165 |
| | | | |
|
| | | | | | | | | | | | | |
| | Fair value at | | Fair value as a percentage of total investments at |
| | June 30, | | December 31, | | June 30, | | December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| United States: | | | | | | | |
| Fixed income securities: | | | | | | | |
| Consumer discretionary | $ | 1,714,080 |
| | $ | 1,295,732 |
| | 24.8 | % | | 23.2 | % |
| Consumer staples | 76,664 |
| | 55,073 |
| | 1.1 | % | | 1.0 | % |
| Energy | 169,208 |
| | 176,836 |
| | 2.4 | % | | 3.2 | % |
| Financials | 424,838 |
| | 270,520 |
| | 6.1 | % | | 4.8 | % |
| Healthcare, education and childcare | 665,530 |
| | 449,888 |
| | 9.6 | % | | 8.1 | % |
| Industrials | 407,280 |
| | 370,926 |
| | 5.8 | % | | 6.6 | % |
| Information technology | 175,704 |
| | 167,089 |
| | 2.5 | % | | 3.0 | % |
| Materials | 189,786 |
| | 185,170 |
| | 2.7 | % | | 3.3 | % |
| Telecommunication services | 625,619 |
| | 399,617 |
| | 9.0 | % | | 7.2 | % |
| Utilities | 79,660 |
| | 77,102 |
| | 1.1 | % | | 1.4 | % |
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 | 60 |
| | 126 |
| | 0.0 | % | | 0.0 | % |
| 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 |
| | June 30, | | December 31, | | June 30, | | December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Europe: | | | | | | | |
| Fixed income securities: | | | | | | | |
| Consumer discretionary | $ | 772,714 |
| | $ | 604,608 |
| | 11.1 | % | | 10.8 | % |
| Energy | 14,833 |
| | 2,413 |
| | 0.2 | % | | 0.0 | % |
| Consumer staples | 90,207 |
| | 76,361 |
| | 1.3 | % | | 1.4 | % |
| Financials | 127,141 |
| | 81,987 |
| | 1.8 | % | | 1.5 | % |
| Healthcare, education and childcare | 234,696 |
| | 209,569 |
| | 3.4 | % | | 3.8 | % |
| Industrials | 124,690 |
| | 145,706 |
| | 1.8 | % | | 2.6 | % |
| Information technology | 21,329 |
| | 21,307 |
| | 0.3 | % | | 0.4 | % |
| Materials | 184,342 |
| | 213,395 |
| | 2.6 | % | | 3.8 | % |
| Telecommunication services | 256,032 |
| | 182,543 |
| | 3.7 | % | | 3.3 | % |
| 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: | | | | | | | |
| Healthcare, education and childcare | 51,010 |
| | 63,155 |
| | 0.7 | % | | 1.1 | % |
| 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 | 1,878 |
| | 2,008 |
| | 0.0 | % | | 0.0 | % |
| Financials | 4,288 |
| | 12,453 |
| | 0.1 | % | | 0.2 | % |
| Telecommunication services | 20,888 |
| | 21,848 |
| | 0.3 | % | | 0.4 | % |
| 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 | 43,647 |
| | 59,630 |
| | 0.6 | % | | 1.1 | % |
| Consumer staples | 42,717 |
| | 45,098 |
| | 0.6 | % | | 0.8 | % |
| Healthcare, education and childcare | 44,637 |
| | 44,637 |
| | 0.6 | % | | 0.8 | % |
| Industrials | 50,795 |
| | 16,578 |
| | 0.7 | % | | 0.3 | % |
| 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 |
| | June 30, | | December 31, | | June 30, | | December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Canada: | | | | | | | |
| Fixed income securities: | | | | | | | |
| Consumer discretionary | $ | 7,287 |
| | $ | 6,757 |
| | 0.1 | % | | 0.1 | % |
| Consumer staples | 36,420 |
| | 15,351 |
| | 0.5 | % | | 0.3 | % |
| Energy | 4,895 |
| | 33,715 |
| | 0.1 | % | | 0.6 | % |
| Industrials | 27,356 |
| | 18,785 |
| | 0.4 | % | | 0.3 | % |
| Telecommunication services | 12,569 |
| | 6,189 |
| | 0.2 | % | | 0.1 | % |
| 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 | — |
| | 5,912 |
| | — | % | | 0.1 | % |
| 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 | 11,932 |
| | 10,863 |
| | 0.2 | % | | 0.2 | % |
| Energy | 1,727 |
| | 1,563 |
| | 0.0 | % | | 0.0 | % |
| 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 | 6,483,593 |
| | 5,115,374 |
| | 93.2 | % | | 91.6 | % |
| Total equity securities | 232,866 |
| | 235,136 |
| | 3.2 | % | | 4.2 | % |
| Total partnership interests | 251,608 |
| | 232,332 |
| | 3.6 | % | | 4.2 | % |
| Total investments, at fair value | $ | 6,968,067 |
|
| $ | 5,582,842 |
|
|
|
|
|
|
|
At June 30, 2018 and December 31, 2017, no single issuer or 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 price 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.
| |
| • | 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.
Ares Management Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
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 the Consolidated Funds as of June 30, 2018:2019:
| | | 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 | | $ | — |
| | $ | — |
| | $ | 22,125 |
| | $ | — |
| | $ | 22,125 |
| |
| Equity securities | | 353 |
| | 1,026 |
| | — |
| | — |
| | 1,379 |
| |
| Collateralized loan obligations and other fixed income | | | $ | — |
| | $ | — |
| | $ | 64,051 |
| | $ | — |
| | $ | 64,051 |
|
| Common stock and other equity securities | | | 137 |
| | 1,037 |
| | 12,397 |
| | — |
| | 13,571 |
|
| Partnership interests | | — |
| | — |
| | 47,219 |
| | 38,097 |
| | 85,316 |
| | — |
| | — |
| | 35,192 |
| | 1,196 |
| | 36,388 |
|
| Total investments, at fair value | | 353 |
|
| 1,026 |
|
| 69,344 |
|
| 38,097 |
|
| 108,820 |
| | 137 |
|
| 1,037 |
|
| 111,640 |
|
| 1,196 |
|
| 114,010 |
|
| Derivatives—foreign exchange contracts | | — |
| | 803 |
| | — |
| | — |
| | 803 |
| | — |
| | 1,890 |
| | — |
| | — |
| | 1,890 |
|
| Total assets, at fair value | | $ | 353 |
|
| $ | 1,829 |
|
| $ | 69,344 |
|
| $ | 38,097 |
|
| $ | 109,623 |
| | $ | 137 |
|
| $ | 2,927 |
|
| $ | 111,640 |
|
| $ | 1,196 |
|
| $ | 115,900 |
|
| Liabilities, at fair value | | | | | | | | | | | | | | | | | | | | |
| Derivatives—foreign exchange contracts | | $ | — |
| | $ | (2,252 | ) | | $ | — |
| | $ | — |
| | $ | (2,252 | ) | | $ | — |
| | $ | (610 | ) | | $ | — |
| | $ | — |
| | $ | (610 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (2,252 | ) |
| $ | — |
|
| $ | — |
|
| $ | (2,252 | ) | | $ | — |
|
| $ | (610 | ) |
| $ | — |
|
| $ | — |
|
| $ | (610 | ) |
|
| | | | | | | | | | | | | | | | |
| Financial Instruments of the Consolidated Funds | | Level I | | Level II | | Level III | | Total |
| Assets, at fair value | | | | | | | | |
| Investments: | | | | | | | | |
| Fixed income investments: | | | | | | | | |
| Bonds | | $ | — |
| | $ | 201,792 |
| | $ | — |
| | $ | 201,792 |
|
| Loans | | — |
| | 6,954,671 |
| | 274,412 |
| | 7,229,083 |
|
| Collateralized loan obligations | | — |
| | 35,260 |
| | — |
| | 35,260 |
|
| Total fixed income investments | | — |
|
| 7,191,723 |
|
| 274,412 |
|
| 7,466,135 |
|
| Equity securities | | 34,891 |
| | — |
| | 131,732 |
| | 166,623 |
|
| Partnership interests | | — |
| | — |
| | 293,857 |
| | 293,857 |
|
| Total investments, at fair value | | 34,891 |
|
| 7,191,723 |
|
| 700,001 |
|
| 7,926,615 |
|
| Derivatives: | | | | | | | | |
| Foreign exchange contracts | | — |
| | 342 |
| | — |
| | 342 |
|
| Asset swaps - other | | — |
| | — |
| | 705 |
| | 705 |
|
| Total assets, at fair value | | $ | 34,891 |
|
| $ | 7,192,065 |
|
| $ | 700,706 |
|
| $ | 7,927,662 |
|
| Liabilities, at fair value | | | | | | | | |
| Foreign exchange contracts | | $ | — |
| | $ | (345 | ) | | $ | — |
| | $ | (345 | ) |
| Asset swaps - other | | — |
| | — |
| | (647 | ) | | (647 | ) |
| Loan obligations of CLOs | | — |
| | (7,030,841 | ) | | — |
| | (7,030,841 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (7,031,186 | ) |
| $ | (647 | ) |
| $ | (7,031,833 | ) |
Ares Management L.P.Corporation
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 |
| Assets, at fair value | | | | | | | | |
| Investments: | | | | | | | | |
| Fixed income investments: | | | | | | | | |
| Bonds | | $ | — |
| | $ | 88,672 |
| | $ | 7,634 |
| | $ | 96,306 |
|
| Loans | | — |
| | 5,886,315 |
| | 474,741 |
| | 6,361,056 |
|
| Collateralized loan obligations | | — |
| | 26,231 |
| | — |
| | 26,231 |
|
| Total fixed income investments | | — |
|
| 6,001,218 |
|
| 482,375 |
|
| 6,483,593 |
|
| Equity securities | | 48,283 |
| | — |
| | 184,583 |
| | 232,866 |
|
| Partnership interests | | — |
| | — |
| | 251,608 |
| | 251,608 |
|
| Total investments, at fair value | | 48,283 |
|
| 6,001,218 |
|
| 918,566 |
|
| 6,968,067 |
|
| Derivatives: | | | | | | | | |
| Asset swaps - other | | — |
| | — |
| | 953 |
| | 953 |
|
| Total assets, at fair value | | $ | 48,283 |
|
| $ | 6,001,218 |
|
| $ | 919,519 |
|
| $ | 6,969,020 |
|
| Liabilities, at fair value | | | | | | | | |
| Asset swaps - other | | $ | — |
| | $ | — |
| | $ | (723 | ) | | $ | (723 | ) |
| Loan obligations of CLOs | | — |
| | (6,333,239 | ) | | — |
| | (6,333,239 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (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 the Consolidated Funds as of December 31, 2017:2018:
|
| | | | | | | | | | | | | | | | | | | | |
| Financial Instruments of the Company | | Level I | | Level II | | Level III | | Investments
Measured
at NAV | | Total |
| Assets, at fair value | | | | | | | | | | |
| Investments: | | | | | | | | | | |
| Collateralized loan obligations and other fixed income | | $ | — |
| | $ | — |
| | $ | 60,824 |
| | $ | — |
| | $ | 60,824 |
|
| Common stock and other equity securities | | 280 |
| | 1,004 |
| | 10,397 |
| | — |
| | 11,681 |
|
| Partnership interests | | — |
| | — |
| | 35,192 |
| | 861 |
| | 36,053 |
|
| Total investments, at fair value | | 280 |
|
| 1,004 |
|
| 106,413 |
|
| 861 |
|
| 108,558 |
|
| Derivatives-foreign exchange contracts | | — |
| | 1,066 |
| | — |
| | — |
| | 1,066 |
|
| Total assets, at fair value | | $ | 280 |
|
| $ | 2,070 |
|
| $ | 106,413 |
|
| $ | 861 |
|
| $ | 109,624 |
|
| Liabilities, at fair value | | |
| | |
| | |
| | |
| | |
|
| Derivatives—foreign exchange contracts | | $ | — |
| | $ | (869 | ) | | $ | — |
| | $ | — |
| | $ | (869 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (869 | ) |
| $ | — |
|
| $ | — |
|
| $ | (869 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| Financial Instruments of the Company | | Level I | | Level II | | Level III | | Investments
Measured
at NAV | | Total |
| Assets, at fair value | | | | | | | | | | |
| Investments: | | | | | | | | | | |
| Fixed income-collateralized loan obligations | | $ | — |
| | $ | — |
| | $ | 195,158 |
| | $ | — |
| | $ | 195,158 |
|
| Equity securities | | 520 |
| | 1,116 |
| | — |
| | — |
| | 1,636 |
|
| Partnership interests | | — |
| | — |
| | 44,769 |
| | 35,998 |
| | 80,767 |
|
| Total investments, at fair value | | 520 |
|
| 1,116 |
|
| 239,927 |
|
| 35,998 |
|
| 277,561 |
|
| Derivatives—foreign exchange contracts | | — |
| | 498 |
| | — |
| | — |
| | 498 |
|
| Total assets, at fair value | | $ | 520 |
|
| $ | 1,614 |
|
| $ | 239,927 |
|
| $ | 35,998 |
|
| $ | 278,059 |
|
| Liabilities, at fair value | | |
| | |
| | |
| | |
| | |
|
| Derivatives—foreign exchange contracts | | $ | — |
| | $ | (2,639 | ) | | $ | — |
| | $ | — |
| | $ | (2,639 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (2,639 | ) |
| $ | — |
|
| $ | — |
|
| $ | (2,639 | ) |
27 |
| | | | | | | | | | | | | | | | |
| Financial Instruments of the Consolidated Funds | | Level I | | Level II | | Level III | | Total |
| Assets, at fair value | | | | | | | | |
| Investments: | | | | | | | | |
| Fixed income investments: | | | | | | | | |
| Bonds | | $ | — |
| | $ | 316,850 |
| | $ | 1,649 |
| | $ | 318,499 |
|
| Loans | | — |
| | 6,340,440 |
| | 546,309 |
| | 6,886,749 |
|
| Total fixed income investments | | — |
|
| 6,657,290 |
|
| 547,958 |
|
| 7,205,248 |
|
| Equity securities | | 45,718 |
| | — |
| | 150,752 |
| | 196,470 |
|
| Partnership interests | | — |
| | — |
| | 271,447 |
| | 271,447 |
|
| Total investments, at fair value | | 45,718 |
|
| 6,657,290 |
|
| 970,157 |
|
| 7,673,165 |
|
| Derivatives: | | | | | | | | |
| Foreign exchange contracts | | — |
| | 1,881 |
| | — |
| | 1,881 |
|
| Asset swaps - other | | — |
| | — |
| | 1,328 |
| | 1,328 |
|
| Total derivative assets, at fair value | | — |
|
| 1,881 |
|
| 1,328 |
|
| 3,209 |
|
| Total assets, at fair value | | $ | 45,718 |
|
| $ | 6,659,171 |
|
| $ | 971,485 |
|
| $ | 7,676,374 |
|
| Liabilities, at fair value | | | | | | | | |
| Foreign exchange contracts | | $ | — |
| | $ | (1,864 | ) | | $ | — |
| | (1,864 | ) |
| Asset swaps - other | | — |
| | — |
| | (648 | ) | | (648 | ) |
| Loan obligations of CLOs | | — |
| | (6,678,091 | ) | | — |
| | (6,678,091 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (6,679,955 | ) |
| $ | (648 | ) |
| $ | (6,680,603 | ) |
Ares Management L.P.Corporation
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, 2019:
|
| | | | | | | | | | | | | | | | |
| | | Level III Assets |
| Level III Assets of the Company | | Equity Securities | | Fixed Income | | Partnership
Interests | | Total |
| Balance, beginning of period | | $ | 10,397 |
| | $ | 67,190 |
| | $ | 35,192 |
| | $ | 112,779 |
|
| Deconsolidation of fund | | — |
| | 1,883 |
| | — |
| | 1,883 |
|
| Purchases(1) | | 2,000 |
| | — |
| | — |
| | 2,000 |
|
| Sales/settlements(2) | | — |
| | (6,206 | ) | | — |
| | (6,206 | ) |
| Realized and unrealized appreciation, net | | — |
| | 1,184 |
| | — |
| | 1,184 |
|
| Balance, end of period | | $ | 12,397 |
| | $ | 64,051 |
|
| $ | 35,192 |
|
| $ | 111,640 |
|
| Increase in net unrealized appreciation included in earnings related to financial assets still held at the reporting date | | $ | — |
| | $ | 1,818 |
| | $ | — |
| | $ | 1,818 |
|
|
| | | | | | | | | | | | | | | | |
| Financial Instruments of the Consolidated Funds | | Level I | | Level II | | Level III | | Total |
| Assets, at fair value | | | | | | | | |
| Investments: | | | | | | | | |
| Fixed income investments: | | | | | | | | |
| Bonds | | $ | — |
| | $ | 82,151 |
| | $ | 7,041 |
| | $ | 89,192 |
|
| Loans | | — |
| | 4,755,335 |
| | 260,848 |
| | 5,016,183 |
|
| Collateralized loan obligations | | — |
| | 10,000 |
| | — |
| | 10,000 |
|
| Total fixed income investments | | — |
|
| 4,847,486 |
|
| 267,889 |
|
| 5,115,375 |
|
| Equity securities | | 72,558 |
| | — |
| | 162,577 |
| | 235,135 |
|
| Partnership interests | | — |
| | — |
| | 232,332 |
| | 232,332 |
|
| Total investments, at fair value | | 72,558 |
|
| 4,847,486 |
|
| 662,798 |
|
| 5,582,842 |
|
| Derivatives: | | | | | | | | |
| Asset swaps - other | | — |
| | — |
| | 1,366 |
| | 1,366 |
|
| Total derivative assets, at fair value | | — |
|
| — |
|
| 1,366 |
|
| 1,366 |
|
| Total assets, at fair value | | $ | 72,558 |
|
| $ | 4,847,486 |
|
| $ | 664,164 |
|
| $ | 5,584,208 |
|
| Liabilities, at fair value | | | | | | | | |
| Asset swaps - other | | $ | — |
| | $ | — |
| | $ | (462 | ) | | $ | (462 | ) |
| Loan obligations of CLOs | | — |
| | (4,963,194 | ) | | — |
| | (4,963,194 | ) |
| Total liabilities, at fair value | | $ | — |
|
| $ | (4,963,194 | ) |
| $ | (462 | ) |
| $ | (4,963,656 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership
Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 159,032 |
| | $ | 564,304 |
| | $ | 283,059 |
| | $ | (3,031 | ) | | $ | 1,003,364 |
|
| Deconsolidation of fund | | (10,325 | ) | | (115,711 | ) | | — |
| | — |
| | (126,036 | ) |
| Transfer in | | — |
| | 29,438 |
| | — |
| | — |
| | 29,438 |
|
| Transfer out | | — |
| | (261,674 | ) | | — |
| | — |
| | (261,674 | ) |
| Purchases(1) | | 110 |
| | 113,708 |
| | 4,000 |
| | — |
| | 117,818 |
|
| Sales/settlements(2) | | (51 | ) | | (56,530 | ) | | (2,000 | ) | | (555 | ) | | (59,136 | ) |
| Amortized discounts/premiums | | — |
| | (345 | ) | | — |
| | 171 |
| | (174 | ) |
| Realized and unrealized appreciation (depreciation), net | | (17,034 | ) | | 1,222 |
| | 8,798 |
| | 3,473 |
| | (3,541 | ) |
| Balance, end of period | | $ | 131,732 |
|
| $ | 274,412 |
|
| $ | 293,857 |
|
| $ | 58 |
|
| $ | 700,059 |
|
| Increase (decrease) in net unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | (17,031 | ) | | $ | (389 | ) | | $ | 8,798 |
| | $ | 2,865 |
| | $ | (5,757 | ) |
| |
| (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 Corporation
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, 2019: |
| | | | | | | | | | | | | | | | |
| | | Level III Assets |
| Level III Assets of the Company | | Equity Securities | | Fixed Income | | Partnership
Interests | | Total |
| Balance, beginning of period | | $ | 10,397 |
| | $ | 60,824 |
| | $ | 35,192 |
| | $ | 106,413 |
|
| Deconsolidation of fund | | — |
| | 10,021 |
| | — |
| | 10,021 |
|
| Purchases(1) | | 2,000 |
| | 2,146 |
| | — |
| | 4,146 |
|
| Sales/settlements(2) | | — |
| | (11,169 | ) | | — |
| | (11,169 | ) |
| Realized and unrealized appreciation, net | | — |
| | 2,229 |
| | — |
| | 2,229 |
|
| Balance, end of period | | $ | 12,397 |
| | $ | 64,051 |
| | $ | 35,192 |
| | $ | 111,640 |
|
| Increase in net unrealized appreciation included in earnings related to financial assets still held at the reporting date | | $ | — |
| | $ | 2,479 |
| | $ | — |
| | $ | 2,479 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership
Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 150,752 |
| | $ | 547,958 |
| | $ | 271,447 |
| | $ | 680 |
| | $ | 970,837 |
|
| Deconsolidation of fund | | (10,325 | ) | | (174,593 | ) | | — |
| | — |
| | (184,918 | ) |
| Transfer in | | — |
| | 41,245 |
| | — |
| | — |
| | 41,245 |
|
| Transfer out | | — |
| | (247,573 | ) | | — |
| | — |
| | (247,573 | ) |
| Purchases(1) | | 10,882 |
| | 238,870 |
| | 8,000 |
| | — |
| | 257,752 |
|
| Sales/settlements(2) | | (5,137 | ) | | (136,329 | ) | | (2,000 | ) | | (581 | ) | | (144,047 | ) |
| Amortized discounts/premiums | | — |
| | (37 | ) | | — |
| | 22 |
| | (15 | ) |
| Realized and unrealized appreciation (depreciation), net | | (14,440 | ) | | 4,871 |
| | 16,410 |
| | (63 | ) | | 6,778 |
|
| Balance, end of period | | $ | 131,732 |
|
| $ | 274,412 |
|
| $ | 293,857 |
|
| $ | 58 |
|
| $ | 700,059 |
|
| Increase (decrease) in net unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | (14,442 | ) | | $ | 1,114 |
| | $ | 16,410 |
| | $ | (49 | ) | | $ | 3,033 |
|
| |
| (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 Corporation
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, 2018:
| | | | | Level III Assets | | | Level III Assets |
| Level III Assets and Liabilities of the Company | | Fixed Income | | Partnership
Interests | | Total | | |
| Level III Assets of the Company | | | Fixed Income | | Partnership
Interests | | Total |
| Balance, beginning of period | | $ | 242,984 |
| | $ | 44,769 |
| | $ | 287,753 |
| | | $ | 242,984 |
| | $ | 44,769 |
| | $ | 287,753 |
|
| Sales/settlements(2) | | (219,744 | ) | | — |
| | (219,744 | ) | | | (219,744 | ) | | — |
| | (219,744 | ) |
| Realized and unrealized appreciation (depreciation), net | | (1,115 | ) | | 2,450 |
| | 1,335 |
| | | (1,115 | ) | | 2,450 |
| | 1,335 |
|
| Balance, end of period | | $ | 22,125 |
|
| $ | 47,219 |
|
| $ | 69,344 |
|
| | $ | 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 | | $ | (100 | ) | | $ | 2,450 |
| | $ | 2,350 |
| | |
| Increase (decrease) in net unrealized appreciation/depreciation included in earnings related to financial assets 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 net 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 Corporation
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, 2018:
| | | Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership
Interests | | Derivatives, Net | | Total | |
| | | | Level III Assets |
| Level III Assets of the Company | | | Fixed Income | | Partnership
Interests | | Total |
| Balance, beginning of period | | $ | 160,422 |
| | $ | 240,763 |
| | $ | 252,700 |
| | $ | 86 |
| | $ | 653,971 |
| | $ | 195,158 |
| | $ | 44,769 |
| | $ | 239,927 |
|
| Transfer in | | — |
| | 94,776 |
| | — |
| | — |
| | 94,776 |
| |
| Transfer out | | — |
| | (68,328 | ) | | — |
| | — |
| | (68,328 | ) | |
| Deconsolidation of fund | | | 78 |
| | — |
| | 78 |
|
| Purchases(1) | | — |
| | 273,879 |
| | 6,000 |
| | — |
| | 279,879 |
| | 48,731 |
| | — |
| | 48,731 |
|
| Sales/settlements(2) | | — |
| | (57,206 | ) | | — |
| | (17 | ) | | (57,223 | ) | | (220,571 | ) | | — |
| | (220,571 | ) |
| Amortized discounts/premiums | | — |
| | (9 | ) | | — |
| | (21 | ) | | (30 | ) | |
| Realized and unrealized appreciation (depreciation), net | | 24,161 |
| | (1,500 | ) | | (7,092 | ) | | 182 |
| | 15,751 |
| | (1,271 | ) | | 2,450 |
| | 1,179 |
|
| Balance, end of period | | $ | 184,583 |
|
| $ | 482,375 |
|
| $ | 251,608 |
|
| $ | 230 |
|
| $ | 918,796 |
| | $ | 22,125 |
| | $ | 47,219 |
| | $ | 69,344 |
|
| 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 | ) | |
| Increase (decrease) in net unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | | $ | (829 | ) | | $ | 2,450 |
| | $ | 1,621 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 162,577 |
| | $ | 267,889 |
| | $ | 232,332 |
| | $ | 904 |
| | $ | 663,702 |
|
| Deconsolidation of fund | | — |
| | (233 | ) | | — |
| | — |
| | (233 | ) |
| Transfer in | | — |
| | 95,450 |
| | — |
| | — |
| | 95,450 |
|
| Transfer out | | — |
| | (73,777 | ) | | — |
| | — |
| | (73,777 | ) |
| Purchases(1) | | — |
| | 313,462 |
| | 16,000 |
| | — |
| | 329,462 |
|
| Sales/settlements(2) | | — |
| | (117,503 | ) | | — |
| | (194 | ) | | (117,697 | ) |
| Amortized discounts/premiums | | — |
| | 35 |
| | — |
| | (14 | ) | | 21 |
|
| Realized and unrealized appreciation (depreciation), net | | 22,006 |
| | (2,948 | ) | | 3,276 |
| | (466 | ) | | 21,868 |
|
| Balance, end of period | | $ | 184,583 |
| | $ | 482,375 |
| | $ | 251,608 |
| | $ | 230 |
| | $ | 918,796 |
|
| Increase (decrease) in net unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date | | $ | (12,211 | ) | | $ | (1,671 | ) | | $ | 3,276 |
| | $ | (566 | ) | | $ | (11,172 | ) |
| |
| (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 | | 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/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 six months ended June 30, 2018:
|
| | | | | | | | | | | | | |
| | | Level III Assets | |
| Level III Assets and Liabilities of the Company | | Fixed Income | | Partnership
Interests | | Total | |
| Balance, beginning of period | | $ | 195,158 |
| | $ | 44,769 |
| | $ | 239,927 |
| |
| Deconsolidation of fund | | 78 |
| | — |
| | 78 |
| |
| Purchases(1) | | 48,731 |
| | — |
| | 48,731 |
| |
| Sales/settlements(2) | | (220,571 | ) | | — |
| | (220,571 | ) | |
| Realized and unrealized appreciation (depreciation), net | | (1,271 | ) | | 2,450 |
| | 1,179 |
| |
| Balance, end of period | | $ | 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 | | $ | (829 | ) | | $ | 2,450 |
| | $ | 1,621 |
| |
|
| | | | | | | | | | | | | | | | | | | | |
| Level III Assets of Consolidated Funds | | Equity Securities | | Fixed Income | | Partnership
Interests | | Derivatives, Net | | Total |
| Balance, beginning of period | | $ | 162,577 |
| | $ | 267,889 |
| | $ | 232,332 |
| | $ | 904 |
| | $ | 663,702 |
|
| Deconsolidation of fund | |
|
| | (233 | ) | |
|
| |
|
| | (233 | ) |
| Transfer in | | — |
| | 95,450 |
| | — |
| | — |
| | 95,450 |
|
| Transfer out | | — |
| | (73,777 | ) | | — |
| | — |
| | (73,777 | ) |
| Purchases(1) | | — |
| | 313,462 |
| | 16,000 |
| | — |
| | 329,462 |
|
| Sales/settlements(2) | | — |
| | (117,503 | ) | | — |
| | (194 | ) | | (117,697 | ) |
| Amortized discounts/premiums | | — |
| | 35 |
| | — |
| | (14 | ) | | 21 |
|
| Realized and unrealized appreciation (depreciation), net | | 22,006 |
| | (2,948 | ) | | 3,276 |
| | (466 | ) | | 21,868 |
|
| 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 | | $ | (12,211 | ) | | $ | (1,671 | ) | | $ | 3,276 |
| | $ | (566 | ) | | $ | (11,172 | ) |
| |
(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 six months ended June 30, 2017:
|
| | | | | | | | | | | | | | | | |
| | | 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) | Sales/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. For the six months ended June 30, 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 June 30, 2018:
|
| | | | | | | | | |
| | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range |
| Assets | | | | | | | |
| Partnership interests | $ | 47,219 |
| | Other | | N/A | | N/A |
| Collateralized loan obligations | 22,125 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A |
| Total | $ | 69,344 |
| | | | | | |
Ares Management L.P.Corporation
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, 2017:
|
| | | | | | | | | |
| | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range |
| Assets | | | | | | | |
| Partnership interests | $ | 44,769 |
| | Other | | N/A | | N/A |
| Collateralized loan obligations | 195,158 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A |
| Total | $ | 239,927 |
| | | | | | |
The following table summarizes the quantitative inputs and assumptions used for the Consolidated Funds’Funds' Level III measurements as of June 30, 2018:2019:
|
| | | | | | | | | | | |
| | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | | Weighted
Average |
| Assets | | | | | | | | | |
| Equity securities | | | | | | | | | |
| | $ | 51,010 |
| | Enterprise value market multiple analysis | | EBITDA multiple(2) | | 7.7x | | 7.7 |
| | 44,637 |
| | Market approach (comparable companies) | | Net income multiple | | 51.8x | | 51.8 |
| |
|
| |
| | Illiquidity discount | | 25.0% | | 25.0% |
| | 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 | | | | | | | | | |
| | 434,397 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| | 47,978 |
| | Income approach | | Yield | | 7.8% - 15.2% | | 11.3% |
| Derivative instruments | 953 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total assets | $ | 919,519 |
| | | | | | | | |
| Liabilities | | | | | | | | | |
| Derivatives instruments | $ | (723 | ) | | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total liabilities | $ | (723 | ) | | | | | | | | |
|
| | | | | | | | | |
| Level III Measurements of the Company | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range |
| Assets | | | | | | | |
| Equity securities | $ | 12,397 |
| | Transaction price(1) | | N/A | | N/A |
| Partnership interests | 35,192 |
| | Discounted cash flow | | Discount rate | | 8.0% |
| Collateralized loan obligations | 26,241 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A |
| Other fixed income | 37,810 |
| | Other | | N/A | | N/A |
| Total | $ | 111,640 |
| | | | | | |
|
| | | | | | | | | | | |
| Level III Measurements of the Consolidated Funds | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | | Weighted
Average |
| Assets | | | | | | | | | |
| Equity securities | | | | | | | | | |
| | $ | 609 |
| | Enterprise value market multiple analysis | | EBITDA multiple(2) | | 8.7x - 22.4x | | 13.2x |
| | 74,241 |
| | Other | | Net income multiple | | 36.1x - 40.0x | | 37.8x |
| |
|
| |
| | Illiquidity discount | | 25.0% | | 25.0% |
| | 56,882 |
| | Transaction price(1) | | N/A | | N/A | | N/A |
| Partnership interest | 293,857 |
| | Discounted cash flow | | Discount rate | | 21.4% | | 21.4% |
| Fixed income securities | | | | | | | | | |
| | 191,789 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| | 82,623 |
| | Income approach | | Yield | | 5.0% - 13.2% | | 8.9% |
| Derivative instruments | 705 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total assets | $ | 700,706 |
| | | | | | | | |
| Liabilities | | | | | | | | | |
| Derivatives instruments | $ | (647 | ) | | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total liabilities | $ | (647 | ) | | | | | | | | |
| |
| (1) | Transaction 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.Corporation
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 and the Consolidated Funds’Funds' Level III measurements as of December 31, 2017:2018:
|
| | | | | | | | | |
| Level III Measurements of the Company | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range |
| Assets | | | | | | | |
| Equity securities | $ | 10,397 |
| | Transaction price(1) | | N/A | | N/A |
| Partnership interests | 35,192 |
| | Discounted cash flow | | Discount rate | | 8.0% |
| Collateralized loan obligations | 20,824 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A |
| Other fixed income | 40,000 |
| | Other | | N/A | | N/A |
| Total | $ | 106,413 |
| | | | | | |
| | | | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | | Weighted Average | |
| Level III Measurements of the Consolidated Funds | | Fair Value | | Valuation Technique(s) | | Significant Unobservable Input(s) | | Range | | Weighted Average |
| Assets | | | | |
| Equity securities | | | | |
| | $ | 63,155 |
| | Enterprise value market multiple analysis | | EBITDA multiple | | 2.7x | | 2.7x | $ | 23,871 |
| | Enterprise value market multiple analysis | | EBITDA multiple(2) | | 7.2x - 22.9x | | 7.7x |
| | 61,215 |
| | Market approach (comparable companies) | | Net income multiple
Illiquidity discount | | 27.0x - 36.2x
25.0% | | 33.7x
25.0% | 41,562 |
| | Other | | Net income multiple | | 38.8x | | 38.8x |
| | 126 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
|
| | | | Illiquidity discount | | 25.0% | | 25.0% |
| | 38,081 |
| | Transaction price(1) | | N/A | | N/A | | N/A | 271,447 |
| | Discounted cash flow | | Discount rate | | 20.8% | | 20.8% |
| Partnership interest | 232,332 |
| | Discounted cash flow | | Discount rate | | 19.0% | | 19.0% | |
| | | 85,319 |
| | Transaction price(1) | | N/A | | N/A | | N/A |
| Fixed income securities | | |
|
| |
| |
|
| | 222,413 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | |
| | 45,243 |
| | Income approach | | Yield | | 10.8% - 22.5% | | 12.1% | 441,368 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| | 233 |
| | Market approach (comparable companies) | | EBITDA multiple | | 6.5x | | 6.5x | 106,590 |
| | Income approach | | Yield | | 1.0% - 14.8% | | 9.6% |
| Derivative instruments | 1,366 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | 1,328 |
| | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total assets | $ | 664,164 |
| | $ | 971,485 |
| |
| Liabilities | | | | |
| Derivatives instruments | $ | (462 | ) | | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A | $ | (648 | ) | | Broker quotes and/or 3rd party pricing services | | N/A | | N/A | | N/A |
| Total liabilities | $ | (462 | ) | | $ | (648 | ) | |
| |
| (1) | Transaction 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 investmentsCompany has an insurance-related investment in a private fund managed by a third party that is valued using net asset value (“NAV”) per share haveshare. The terms and conditions thatof this fund do not allow for redemptionredemptions without certain events or approvals that are outside the Company's control. A summary ofThis investment had a fair value by segmentof $1.2 million and the remaining$0.8 million as of June 30, 2019 and December 31, 2018, respectively. The Company has no unfunded commitments are presented below:for this investment.
|
| | | | | | | | | | | | | | | | |
| | | 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 OMG.
Ares Management L.P.Corporation
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 June 30, 20182019 and December 31, 2017: 2018:
| | | | | As of June 30, 2018 | | As of December 31, 2017 | | As of June 30, 2019 | | As of December 31, 2018 |
| | | 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 | | $ | 13,733 |
| | $ | 803 |
| | $ | 86,130 |
| | $ | 2,252 |
| | $ | 13,724 |
| | $ | 498 |
| | $ | 51,026 |
| | $ | 2,639 |
| | $ | 37,667 |
| | $ | 1,890 |
| | $ | 75,252 |
| | $ | 610 |
| | $ | 33,026 |
| | $ | 1,066 |
| | $ | 27,140 |
| | $ | 869 |
|
| Total derivatives, at fair value(2) | | $ | 13,733 |
| | $ | 803 |
| | $ | 86,130 |
| | $ | 2,252 |
| | $ | 13,724 |
| | $ | 498 |
| | $ | 51,026 |
| | $ | 2,639 |
| | $ | 37,667 |
| | $ | 1,890 |
| | $ | 75,252 |
| | $ | 610 |
| | $ | 33,026 |
| | $ | 1,066 |
| | $ | 27,140 |
| | $ | 869 |
|
| | | | | As of June 30, 2018 | | As of December 31, 2017 | | As of June 30, 2019 | | As of December 31, 2018 |
| | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
| Consolidated Funds | | 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 | | | $ | 342 |
| | $ | 342 |
| | $ | 342 |
| | $ | 345 |
| | $ | 1,881 |
| | $ | 1,881 |
| | $ | 1,881 |
| | $ | 1,864 |
|
| Asset swap - other | | 4,558 |
| | 953 |
| | 1,351 |
| | 723 |
| | 5,363 |
| | 1,366 |
| | 1,840 |
| | 462 |
| | 4,830 |
| | 705 |
| | 2,292 |
| | 647 |
| | 5,226 |
| | 1,328 |
| | 2,605 |
| | 648 |
|
| Total derivatives, at fair value(3) | | 4,558 |
|
| 953 |
|
| 1,351 |
|
| 723 |
|
| 5,363 |
|
| 1,366 |
|
| 1,840 |
|
| 462 |
| | $ | 5,172 |
|
| $ | 1,047 |
|
| $ | 2,634 |
|
| $ | 992 |
|
| $ | 7,107 |
|
| $ | 3,209 |
|
| $ | 4,486 |
|
| $ | 2,512 |
|
| |
| (1) | Represents the total contractual amount of derivative assets and liabilities outstanding. |
| |
| (2) | As of June 30, 20182019 and December 31, 2017,2018, the Company had the right to, but elected not to, offset $0.8$0.6 million and $0.5$0.9 million of its derivative assets and liabilities, respectively. |
| |
| (3) | As of June 30, 20182019 and December 31, 2017,2018, the Consolidated Funds offset $0.3$10.6 million and $0.4$5.7 million of their derivative assets and liabilities, respectively. |
Ares Management L.P.Corporation
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 June 30, 2018 | | As of December 31, 2017 |
| | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying
Value | | Interest Rate | | Carrying
Value | | Interest Rate |
| Credit Facility(1) | 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 |
| | 245,628 |
| | 4.21% | | 245,308 |
| | 4.21% |
| 2015 Term Loan(3) | 9/2/2015 | | 7/29/2026 | | — |
| | — |
| | N/A | | 35,037 |
| | 2.86% |
| 2016 Term Loan(4) | 12/21/2016 | | 1/15/2029 | | — |
| | — |
| | N/A | | 25,948 |
| | 3.08% |
| 2017 Term Loan A(4) | 3/22/2017 | | 1/22/2028 | | — |
| | — |
| | N/A | | 17,407 |
| | 2.90% |
| 2017 Term Loan B(4) | 5/10/2017 | | 10/15/2029 | | — |
| | — |
| | N/A | | 35,062 |
| | 2.90% |
| 2017 Term Loan C(4) | 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 | | | | | | | $ | 370,628 |
| | | | $ | 616,176 |
| | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | As of June 30, 2019 | | As of December 31, 2018 |
| | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying
Value | | Interest Rate | | Carrying
Value | | Interest Rate |
| Credit Facility(1) | Revolver | | 3/21/2024 | | N/A |
| | $ | 320,000 |
| | 3.69% | | $ | 235,000 |
| | 4.00% |
| Senior Notes(2) | 10/8/2014 | | 10/8/2024 | | $ | 250,000 |
| | 246,277 |
| | 4.21% | | 245,952 |
| | 4.21% |
| Total debt obligations | | | | | | | $ | 566,277 |
| | | | $ | 480,952 |
| | |
| |
| (1) | The AOG entities are borrowers under the Credit Facility, which 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. On March 21, 2019, the Company amended the Credit Facility to, among other things, extend the maturity date from February 2022 to March 2024 and to reduce borrowing costs on the drawn and undrawn amounts. As of June 30, 2018,2019, base rate loans bear interest calculated based on the base rate plus 0.50%0.25% and the LIBOR rate loans bear interest calculated based on LIBOR plus 1.50%1.25%. The unused commitment fee is 0.20%0.15% 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”) were entered into by a subsidiary of the Company that acts as a manager to 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 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 June 30, 2018,2019, the Company and its subsidiaries were in compliance with all covenants under the debt obligations.
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 remaining term of the related obligation.
Subsequent to the removal of the U.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 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 |
| Unamortized debt issuance costs as of December 31, 2018 | $ | 4,972 |
| | $ | 1,334 |
|
| Debt issuance costs incurred | 1,521 |
| | — |
|
| Amortization of debt issuance costs | (677 | ) | | (116 | ) |
| Unamortized debt issuance costs as of June 30, 2019 | $ | 5,816 |
| | $ | 1,218 |
|
|
| | | | | | | | | | | | | | | |
| | 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.
Ares Management Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
As of June 30, 20182019 and December 31, 20172018, the following loan obligations were outstanding and classified as liabilities of the Company’s Consolidated CLOs:
| | | | As of June 30, 2018 | | As of December 31, 2017 | As of June 30, 2019 | | As of December 31, 2018 |
| | 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) | $ | 6,189,246 |
| | $ | 6,111,930 |
| | 11.00 | | $ | 4,801,582 |
| | $ | 4,776,883 |
| | 10.57 | $ | 6,879,407 |
| | $ | 6,789,415 |
| | 11.14 | | $ | 6,642,616 |
| | $ | 6,391,643 |
| | 10.94 |
| Subordinated notes(2) | 319,840 |
| | 221,309 |
| | 11.40 | | 276,169 |
| | 186,311 |
| | 11.25 | 383,443 |
| | 241,426 |
| | 11.20 | | 455,333 |
| | 286,448 |
| | 11.21 |
| Total loan obligations of Consolidated CLOs | $ | 6,509,086 |
| | $ | 6,333,239 |
| | $ | 5,077,751 |
| | $ | 4,963,194 |
| | $ | 7,262,850 |
| | $ | 7,030,841 |
| | $ | 7,097,949 |
| | $ | 6,678,091 |
| |
| |
| (1) | Original borrowings under the senior secured notes totaled $6.2$6.9 billion, with various maturity dates ranging from October 2024July 2028 to October 2030.April 2032. The weighted average interest rate as of June 30, 20182019 was 5.21%3.56%. |
| |
| (2) | Original borrowings under the subordinated notes totaled $319.8$383.4 million, with various maturity dates ranging from October 2024July 2028 to October 2030.April 2032. The notes do not have contractual interest rates, 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 exceptand only have recourse to a subsidiary of the Company to the extent the debt is guaranteed by a subsidiary or if a general partner is liable for the Consolidated Fund’s liabilities under applicable law.such subsidiary. Credit facilities of the Consolidated Funds are reflected at cost in the Condensed Consolidated Statements of Financial Condition. As of June 30, 20182019 and December 31, 2017,2018, the Consolidated Funds were in compliance with all covenants under such credit facilities.
Ares Management L.P.Corporation
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 June 30, 20182019 and December 31, 2017:2018:
| | | | | | | As of June 30, 2018 | | As of December 31, 2017 | | | | | As of June 30, 2019 | | As of December 31, 2018 | |
| 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 |
| | $ | 13,376 |
| | 3.88% | | $ | 12,942 |
| | 2.88% | | | 1/1/2023 | | $ | 18,000 |
| | $ | 16,153 |
| | 4.00% | | $ | 14,953 |
| | 3.98% | |
| | | 6/29/2019 | | 46,632 |
| | 46,632 |
| | EURIBOR + 1.55% | (2) | 48,042 |
| | 1.55% | (2) | | 12/29/2019(2) | | 28,033 |
| | 28,033 |
| | 1.55% | (3) | 43,624 |
| | 1.55% | (3) |
| | | 3/7/2019 | | 71,500 |
| | 71,500 |
| | 3.47% | | 71,500 |
| | 2.88% | | | 3/7/2020 | | 71,500 |
| | 71,500 |
| | 3.47% | | 71,500 |
| | 3.47% | |
| | | | 6/30/2021 | | 200,375 |
| | — |
| | N/A | | 38,844 |
| | 1.00% | (3) |
| | | | 7/15/2028 | | 75,000 |
| | 9,000 |
| | 4.75% | | 39,000 |
| | 4.75% | |
| Revolving Term Loan | | 1/31/2022 | | 1,900 |
| | 1,216 |
| | 8.07% | | — |
| | —% | | | 1/31/2022 | | 1,900 |
| | 1,424 |
| | 8.07% | | 1,363 |
| | 8.07% | |
| | | 8/19/2019 | | 11,429 |
| | 5,714 |
| | 9.32% | | 5,714 |
| | 5.86% | | |
| Total borrowings | | | | $ | 138,438 |
| | $ | 138,198 |
| | |
| Total borrowings of Consolidated Funds | | | | | $ | 126,110 |
| | $ | 209,284 |
| |
| |
| (1) | The fair values of the borrowings approximate the carrying value as the interest rate on the borrowings is a floating rate. |
| |
| (2) | On June 27, 2019, one of the Consolidated Funds amended the Credit Facility to, among other things, extend the maturity date from June 2019 to December 2019 and to reduce the facility size from €40.0 million to €24.6 million. |
| |
| (3) | 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 June 30, 2018,2019, 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 June 30, 20182019 and December 31, 2017,2018, the Company had aggregate unfunded commitments of $284.5$304.1 million and $285.7$267.6 million, respectively, including commitments to both non-consolidated funds and Consolidated Funds. Total unfunded commitments included $16.3 million and $16.5 million in commitments to funds not managed by the Company as of June 30, 2018 and December 31, 2017, respectively.
ARCC Fee Waiver
In conjunction with 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. The 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 carryovercarry over to subsequent quarters. As of June 30, 2018,2019, there are fiveis one remaining quartersquarter as part of the fee waiver agreement, with a maximum of $50$10 million in potential waivers. ARCC Part I Fees are reported net of the fee waiver.
Performance Income
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.
At June 30, 20182019 and December 31, 2017,2018, if the Company assumed all existing investments were worthless, the amount of performance income subject to potential repayment, net of tax, which may differ from the recognition of revenue, would have
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
been approximately $472.9$401.0 million and $476.1$469.0 million, respectively, of which approximately $367.5$297.5 million and $370.0$351.9 million, respectively, is reimbursable to the Company by certain professionals who are the recipients of such performance income. Management believes the possibility of all of the investments becoming worthless is remote. As of June 30, 2019 and December 31, 2018, if the funds were liquidated at their fair values, there would be $0.2$0.6 million and $0.4 million, respectively, of repayment obligations, and accordingly,so the Company recorded a contingent repayment liability as June 30, 2018. As of December 31, 2017, ifeach respective period that is presented on a gross basis within accrued carried interest within investments and performance related compensation payable on 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 asCompany's Condensed Consolidated Statements of December 31, 2017.Financial Condition.
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.
Leases
The Company leases office space and certain office equipment. The Company's leases have remaining lease terms of one to 11 years. The tables below present certain supplemental quantitative disclosures regarding the Company's leases as of and for the period ending June 30, 2019:
|
| | | | | | |
| | | Classification | | As of June 30, 2019 |
| Operating lease assets | | Right-of-use operating lease assets | | $ | 152,579 |
|
| Finance lease assets | | Other assets(1) | | 1,313 |
|
| Total lease assets | | | | $ | 153,892 |
|
| | | | | |
| Operating lease liabilities | | Right-of-use operating lease liabilities | | $ | 179,192 |
|
| Finance lease obligations | | Accounts payable, accrued expenses and other liabilities | | 1,009 |
|
| Total lease liabilities | | | | $ | 180,201 |
|
(1)Finance lease assets are recorded net of accumulated amortization of $0.4 million as of June 30, 2019.
|
| | | | | | | | | | |
| | | Classification | | Three months ended June 30, 2019 | | Six months ended June 30, 2019 |
| Operating lease expense | | General, administrative and other expenses | | $ | 7,211 |
| | $ | 14,149 |
|
| Finance lease expense: | | | | | | |
| Amortization of finance lease assets | | General, administrative and other expenses | | 78 |
| | 105 |
|
| Interest on finance lease liabilities | | Interest expense | | 8 |
| | 21 |
|
| Total lease expense | | | | $ | 7,297 |
| | $ | 14,275 |
|
|
| | | | | | | | |
| Maturity of lease liabilities | | Operating Leases | | Finance Leases |
| 2019 | | $ | 16,006 |
| | $ | 32 |
|
| 2020 | | 29,516 |
| | 356 |
|
| 2021 | | 28,627 |
| | 356 |
|
| 2022 | | 30,067 |
| | 321 |
|
| 2023 | | 26,923 |
| | — |
|
| After 2023 | | 74,530 |
| | — |
|
| Total future payments | | 205,669 |
| | 1,065 |
|
| Less: interest | | 26,477 |
| | 56 |
|
| Total lease liabilities | | $ | 179,192 |
| | $ | 1,009 |
|
Ares Management Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
|
| | | |
| Lease term and discount rate | | As of June 30, 2019 |
| Weighted-average remaining lease terms (in years): | | |
| Operating leases | | 6.9 |
|
| Finance leases | | 2.8 |
|
| Weighted-average discount rate: | |
|
| Operating leases | | 4.00 | % |
| Finance leases | | 3.43 | % |
|
| | | | |
| Other information | | Six months ended June 30, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating cash flows from operating leases | | $ | 15,313 |
|
| Operating cash flows from finance leases | | 52 |
|
| Financing cash flows from finance leases | | 264 |
|
| Leased assets obtained in exchange for new finance lease liabilities | | 114 |
|
| Leased assets obtained in exchange for new operating lease liabilities | | 47,866 |
|
9. RELATED PARTY TRANSACTIONS
Substantially all of the Company’s revenue is earned from its affiliates, including management fees, carried interest allocation, incentive fees, principal 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 accrued carried interest allocations and incentive fees receivable, which are predominantly due from affiliated funds, are presented separately within investments and other assets, respectively, within the Condensed Consolidated Statements of Financial Condition.
The Company has investment management agreements with various funds and accountsAres Funds that it manages. In accordance with these agreements, the Consolidatedthese Ares Funds may bear certain operating costs and expenses which are initially paid by the Company and subsequently reimbursed by the ConsolidatedAres Funds.
The Company also has entered into agreements with related parties to be reimbursed for its expenses incurred for providing administrative services to suchcertain 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 generally 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 participantsthese individuals to pay management or incentive fees.performance income.
Performance income 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.Corporation
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 June 30, | | As of December 31, |
| | 2019 | | 2018 |
| Due from affiliates: | | | |
| Management fees receivable from non-consolidated funds | $ | 174,668 |
| | $ | 151,455 |
|
| Payments made on behalf of and amounts due from non-consolidated funds and employees | 59,413 |
| | 47,922 |
|
| Due from affiliates—Company | $ | 234,081 |
| | $ | 199,377 |
|
| Amounts due from portfolio companies and non-consolidated funds | $ | 15,888 |
| | $ | 17,609 |
|
| Due from affiliates—Consolidated Funds | $ | 15,888 |
| | $ | 17,609 |
|
| Due to affiliates: | |
| | |
|
| Management fee rebate payable to non-consolidated funds | $ | 2,125 |
| | $ | 2,105 |
|
| Management fees received in advance | 3,724 |
| | 5,491 |
|
| Tax receivable agreement liability | 24,927 |
| | 24,927 |
|
| Undistributed carried interest and incentive fees | 25,700 |
| | 31,162 |
|
| Payments made by non-consolidated funds on behalf of and payable by the Company | 9,051 |
| | 18,726 |
|
| Due to affiliates—Company | $ | 65,527 |
| | $ | 82,411 |
|
|
| | | | | | | |
| | As of June 30, | | As of December 31, |
| | 2018 | | 2017 |
| Due from affiliates: | | | |
| Management fees receivable from non-consolidated funds | $ | 132,132 |
| | $ | 126,506 |
|
| Payments made on behalf of and amounts due from non-consolidated funds and employees | 40,296 |
| | 39,244 |
|
| Due from affiliates—Company | $ | 172,428 |
| | $ | 165,750 |
|
| Amounts due from portfolio companies and non-consolidated funds | $ | 13,704 |
| | $ | 15,884 |
|
| Due from affiliates—Consolidated Funds | $ | 13,704 |
| | $ | 15,884 |
|
| Due to affiliates: | |
| | |
|
| Management fee rebate payable to non-consolidated funds | $ | 2,603 |
| | $ | 5,213 |
|
| Management fees received in advance | 4,746 |
| | 1,729 |
|
| Tax receivable agreement liability | 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 | 17,369 |
| | 4,197 |
|
| Due to affiliates—Company | $ | 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, duringin the three monthssecond quarter 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 beardirectly incurs 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 bewas amended prior toeffective June 21,6, 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 and state income tax purposes while remaining a limited partnership under state law. A portion(the “Tax Election”). Upon the effectiveness of the Company’s operations was and continues to be held through AHI and corporate subsidiaries of Ares Investments. AHI and such corporate subsidiariesthis election, all earnings 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 beare 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 earningsCompany's share of carried interest and investment income flowed through to owners of the Companyinvestors without being subject to entitycorporate level income taxes. Consequently, a significant portion of the Company’s earningsCompany did not reflect a provision for income taxes on such income except those for foreign, state city and local income taxes incurred at the entity level. Beginning March 1, 2018, this portionthe Company's share of the Company’s earnings wasunrealized gains and income items became subject to U.S. corporate tax.
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The Company’s income tax provision includes corporate 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. TheFor the three and six months ended June 30, 2019, the Company recorded anincome tax expense of $9.5 million and $23.9 million, respectively. For the three and six monthsended June 30, 2018, the Company recorded 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 twoa 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 $1.3 million for the three months ended June 30, 2017. For the six months ended June 30, 2017, the Company had an income tax benefit of $33.0 million primarily driven by the one-time ARCC-ACAS transaction support payment.
Supplemental information on an unaudited pro forma basis, 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 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 and amounts of many amounts and the mix of revenuesincome and expenses between U.S. corporate entities that areallocated to the non-controlling interests without being subject to federal, state and local income taxes and those subsidiaries that are not. Forat the three and six months ended June 30, 2018 and 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.corporate level. Additionally, the Company’s effective tax rate is influenced by the amount of income tax provision recorded for any affiliated funds and co-investment entities that are consolidated in thesethe Company's condensed consolidated financial statements. Consequently,For the effectivethree and six months ended June 30, 2019, the Company recorded its interim income tax provision utilizing the estimated annual effective tax rate. In 2018, the Company utilized the discrete effective tax rate is subjectmethod to calculate its interim income tax provision since the conversion to a U.S. corporation for tax purposes occurred in an interim period.
The income tax effects of temporary differences give rise to significant variation from period to period.
Ares Management, L.P.
Notes todeferred tax assets and liabilities, which are presented on a net basis. As of June 30, 2019 and December 31, 2018, the UnauditedCompany recorded a net deferred tax asset of $42.4 million and $42.1 million, respectively, within other assets in the Condensed Consolidated Statements of Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
Condition.
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 U.S. federal, state, local and foreign tax regulators. As of June 30, 2018,authorities. With limited exceptions, the Company’s U.S. federalCompany is no longer subject to income tax returnsaudits by taxing authorities for theany years 2014 through 2018 are open under the normal statute of limitations and therefore subjectprior to examination. State and local tax returns are generally subject to audit from 2014 to 2018. Foreign tax returns are generally subject to audit from 2013 to 2018.2015. 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 SHARE
Basic earnings per share of Class A common share arestock is computed by dividing income available to common shareholders byusing the weighted‑average number of common shares outstanding during the period.two-class method. Diluted earnings per share of Class A common share arestock is computed using the more dilutive method of either the two-class method or the treasury stock method.
For the three and six months ended June 30, 2019, the treasury stock method was the more dilutive method. For the three and six months ended June 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 months ended June 30, 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.method.
The computation of diluted earnings per common share for the three and six months ended June 30, 20182019 and 20172018 excludes the following options, restricted units and AOG Units, as their effect would have been anti-dilutive:
|
| | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Options | 9,841,385 |
| | 19,111,390 |
| | 10,788,784 |
| | 19,471,589 |
|
| Restricted units | 9,172,641 |
| | 15,271,381 |
| | 10,036,334 |
| | 15,811,964 |
|
| AOG Units | 116,831,583 |
| | 120,231,237 |
| | 116,913,353 |
| | 124,211,007 |
|
|
| | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Options | 19,111,390 |
| | 21,155,026 |
| | 19,471,589 |
| | 21,244,858 |
|
| Restricted units | 15,271,381 |
| | 39,082 |
| | 15,811,964 |
| | 14,463,590 |
|
| 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 share:
|
| | | | | | | | | | | | | | | |
| | 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 | ) |
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table presents the computation of basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net income (loss) attributable to Ares Management Corporation Class A common stockholders | $ | 26,714 |
| | $ | (17,200 | ) | | $ | 66,238 |
| | $ | 18,323 |
|
| Distributions on participating unvested restricted units | (1,886 | ) | | (1,970 | ) | | (3,693 | ) | | (3,877 | ) |
| Net income (loss) available to Class A common stockholders | $ | 24,828 |
| | $ | (19,170 | ) | | $ | 62,545 |
| | $ | 14,446 |
|
| Basic weighted-average shares of Class A common stock | 105,188,966 |
|
| 98,037,252 |
|
| 104,054,035 |
|
| 91,861,946 |
|
| Basic earnings (loss) per share of Class A common stock | $ | 0.24 |
| | $ | (0.20 | ) | | $ | 0.60 |
| | $ | 0.16 |
|
| Net income (loss) attributable to Ares Management Corporation Class A common stockholders | $ | 26,714 |
| | $ | (17,200 | ) | | $ | 66,238 |
| | $ | 18,323 |
|
| Distributions on unvested restricted units | — |
| | (1,970 | ) | | — |
| | (3,877 | ) |
| Net income (loss) available to Class A common stockholders | $ | 26,714 |
| | $ | (19,170 | ) | | $ | 66,238 |
| | $ | 14,446 |
|
| Effect of dilutive shares: | | | | | | | |
| Restricted units | 7,212,754 |
| | — |
| | 6,349,061 |
| | — |
|
| Options | 4,202,167 |
| | — |
| | 3,254,768 |
| | — |
|
| Diluted weighted-average shares of Class A common stock | 116,603,887 |
|
| 98,037,252 |
|
| 113,657,864 |
|
| 91,861,946 |
|
| Diluted earnings (loss) per share of Class A common stock | $ | 0.23 |
| | $ | (0.20 | ) | | $ | 0.58 |
| | $ | 0.16 |
|
| Dividends declared and paid per Class A common stock | $ | 0.32 |
|
| $ | 0.37 |
|
| $ | 0.64 |
|
| $ | 0.77 |
|
12. EQUITY COMPENSATION
Equity Incentive Plan
In 2014, the Company adopted the Ares Management, L.P. 2014 Equity Incentive Plan, as amended and restated on March 1, 2018 and as further amended and restated effective November 26, 2018 (the “Equity Incentive Plan”Plan”). Based on a formula as defined in the Equity Incentive Plan, the total number of shares available to be issued under the Equity Incentive Plan resets and may increase on January 1 each year. Accordingly, on January 1, 2018,2019, the total number of shares available for issuance under the Equity Incentive Plan increasedreset to 31,853,50432,792,005 shares, and as of June 30, 2018, 29,311,3832019, 29,536,100 shares remain available for issuance.
Generally, unvested phantom units,shares, 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
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Restricted units | $ | 21,783 |
| | $ | 18,516 |
| | $ | 44,796 |
| | $ | 36,547 |
|
| Restricted units with a market condition | 901 |
| | — |
| | 1,791 |
| | — |
|
| Options | 1,157 |
| | 3,630 |
| | 4,258 |
| | 6,293 |
|
| Phantom shares | 188 |
| | 361 |
| | 736 |
| | 754 |
|
| Equity-based compensation expense | $ | 24,029 |
| | $ | 22,507 |
| | $ | 51,581 |
| | $ | 43,594 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Restricted units | $ | 18,516 |
| | $ | 14,601 |
| | $ | 36,547 |
| | $ | 25,818 |
|
| Options | 3,630 |
| | 3,931 |
| | 6,293 |
| | 7,413 |
|
| Phantom units | 361 |
| | 385 |
| | 754 |
| | 775 |
|
| Equity-based compensation expense | $ | 22,507 |
| | $ | 18,917 |
| | $ | 43,594 |
| | $ | 34,006 |
|
Restricted Units
Each restricted unit represents an unfunded, unsecured right of the holder to receive a share of the Company's Class A common sharestock on a specific date. The restricted units generally vest and are settled in shares of Class A common sharesstock either (i) at a rate of one-thirdone‑third per year, beginning on the third anniversary of the grant date, (ii) in their entirety on the fifth anniversary of the
Ares Management Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
grant date, or (iii) at a rate of one quarter per year, beginning on either the first or second anniversary of the grant date.date or the holder's employment commencement date, or (iv) at a rate of one third per year, beginning on the first anniversary of the grant date in each case generally subject to the holder’s continued employment as of the applicable vesting date (subject to accelerated vesting upon certain qualifying terminations of employment). 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 other than the market condition awards described below generally have the right to receive as current compensation an amount in cash equal to (i) the amount of any distributiondividend paid with respect to a share of Class A common sharestock multiplied by (ii) the number of restricted units held at the time such distributionsdividends are declared (“Dividend Equivalent”). During the six months ended June 30, 2019, the Company declared dividends of $0.32 and $0.32 per share to Class A common stockholders at the close of business on March 15, 2019 and June 14, 2019, respectively. For the three and six months ended June 30, 2018,2019, Dividend Equivalents were made to the holders of restricted units in the aggregate amount of $5.8$5.2 million and $12.4$10.8 million, respectively, which are presented as dividends within the Condensed Consolidated Statements of Changes in Equity. When restricted units are forfeited, the cumulative amount of dividend equivalents previously paid is reclassified to compensation and benefits expense in the Condensed Consolidated Statements of Operations.
The following table presents unvested restricted units' activity during the six months ended June 30, 2018:2019:
|
| | | | | | |
| | Restricted Units | | Weighted Average Grant Date Fair Value Per Unit |
| Balance - January 1, 2019 | 16,255,475 |
| | $ | 19.21 |
|
| Granted | 3,881,203 |
| | 20.01 |
|
| Vested | (3,534,621 | ) | | 17.92 |
|
| Forfeited | (216,662 | ) | | 19.21 |
|
| Balance - June 30, 2019 | 16,385,395 |
| | $ | 19.68 |
|
|
| | | | | | |
| | Restricted Units | | Weighted Average Grant Date Fair Value Per Unit |
| Balance - January 1, 2018 | 13,751,888 |
| | $ | 17.58 |
|
| Granted | 3,681,702 |
| | 23.58 |
|
| Vested | (1,903,923 | ) | | 16.93 |
|
| Forfeited | (258,286 | ) | | 19.55 |
|
| 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 $215.0$229.0 million as of June 30, 20182019 and is expected to be recognized over the remaining weighted average period of 3.483.08 years.
Restricted Unit Awards with a Market Condition
The following table presents the unvested market condition awards' activity during the six months ended June 30, 2019:
|
| | | | | | |
| | Market Condition Awards Units | | Weighted Average
Grant Date Fair
Value Per Unit |
| Balance - January 1, 2019 | 1,333,334 |
| | $ | 9.30 |
|
| Granted | — |
| | — |
|
| Vested | — |
| | — |
|
| Forfeited | — |
| | — |
|
| Balance - June 30, 2019 | 1,333,334 |
| | $ | 9.30 |
|
The total compensation expense expected to be recognized in all future periods associated with the market condition awards is approximately $9.1 million as of June 30, 2019 and is expected to be recognized over the remaining weighted average period of 2.66 years.
Ares Management L.P.Corporation
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 six months ended June 30, 20182019 is presented below:
|
| | | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (in years) | | Aggregate Intrinsic Value |
| Balance - January 1, 2019 | 18,741,504 |
| | $ | 18.99 |
| | 4.88 |
| | $ | — |
|
| Exercised | (4,289,316 | ) | | 19.00 |
| | — |
| | — |
|
| Expired | (366,366 | ) | | 19.00 |
| | — |
| | — |
|
| Forfeited | (42,270 | ) | | 19.00 |
| | — |
| | — |
|
| Balance - June 30, 2019 | 14,043,552 |
| | $ | 18.99 |
| | 4.75 |
| | $ | 100,858 |
|
| Exercisable at June 30, 2019 | 13,933,735 |
| | $ | 18.99 |
| | 4.74 |
| | $ | 100,015 |
|
|
| | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (in years) | | Aggregate Intrinsic Value |
| Balance - January 1, 2018 | 20,495,025 |
| | $ | 18.99 |
| | 6.09 | | $ | 20,611 |
|
| Granted | — |
| |
|
| | — | | |
| Exercised | (50,000 | ) | | 19.00 |
| | — | | 90 |
|
| Expired | (889,432 | ) | | 19.00 |
| | — | | |
| Forfeited | (444,203 | ) | | 19.00 |
| | — | | |
| 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 June 30, 2018, there was $12.3 million of total unrecognized compensation expense that is expected to be recognized over the remaining weighted average period of 0.85 years. Net cash proceeds from the exercises of stock options was $1.0were $78.8 million for the six months ended June 30, 2018.2019. The Company realized tax benefits of approximately $0.04$3.3 million from those exercises.
Phantom UnitsShares
A summary of unvested phantom unitshares' activity during the six months ended June 30, 20182019 is presented below:
|
| | | | | | | |
| | | Phantom Shares | | Weighted Average
Grant Date Fair
Value Per Share |
| Balance - January 1, 2019 | | 66,287 |
| | $ | 19.00 |
|
| Vested | | (61,502 | ) | | 19.00 |
|
| Forfeited | | (4,785 | ) | | 19.00 |
|
| Balance - June 30, 2019 | | — |
| | $ | — |
|
|
| | | | | | | |
| | | Phantom Units | | Weighted Average
Grant Date Fair
Value Per Share |
| Balance - January 1, 2018 | | 156,153 |
| | $ | 19.00 |
|
| Vested | | (70,352 | ) | | 19.00 |
|
| Forfeited | | (16,200 | ) | | 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 $20.70 per unit as of June 30, 2018. Based on the fair value of the awards at June 30, 2018, $1.2 million of unrecognized compensation expense in connection with phantom units outstanding is expected to be recognized over a weighted average period of 0.85 years. During the six months ended June 30, 2018,2019 the Company paid $1.6$1.5 million to settle vested phantom units.shares.
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 Stock
Common Shares
CommonThe Company completed its conversion from a Delaware limited partnership to a Delaware corporation (the "Conversion") effective on November 26, 2018. Prior to the Conversion, common shares representrepresented limited partnership interests in the Company. The holders of common shares arewere entitled to participate pro rata in distributions from the Company and to exercise the rights or privileges that arewere available to common shareholders under the Company’s limited partnership agreement. The common shareholders havehad limited voting rights and havehad 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
Since the quarter ended March 31,Conversion on November 26, 2018, an affiliatethe Company's common stock consists of Alleghany Corporation (“Alleghany”) exchanged 9,750,000Class A, Class B and Class C common stock. As a result of its AOG Units into 9,750,000the Conversion on November 26, 2018, (i) each outstanding common shares.
Common Share Offering
On March 12, 2018, AREC Holdings Ltd., a wholly owned subsidiary of Abu Dhabi Investment Authority (collectively, “ADIA”), andshare representing limited partner interests in the Company completed a public offering of 15,000,000 common shares. In connection with this offering, ADIA sold 10,000,000 of its previouslybefore the Conversion converted into one issued and outstanding, fully paid and nonassessable share of Class A common shares from whichstock, $0.01 par value per share, of the Company, received no proceeds. Additionally,(ii) the general partner share of the Company before the Conversion converted into 1,000 issued 5,000,000and outstanding, fully paid and nonassessable shares of Class B common sharesstock, $0.01 par value per share, of the Company and (iii) the special voting share of the Company before the Conversion converted into one issued and outstanding, fully paid and nonassessable share, of Class C common stock, $0.01 par value per share, of the Company.
Ares Management Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The Class B common stock and Class C common stock are non-economic and holders are not entitled to (i) dividends from which it received $105.9 millionthe Company or (ii) receive any assets of the Company in gross proceeds. The Company incurred approximately $0.5the event of any dissolution, liquidation or winding up of the Company. Ares Management GP LLC is the sole holder of the Class B common stock and Ares Voting LLC is the sole holder of the Class C common stock.
In February 2019, the Company's board of directors authorized the repurchase of up to $150 million of expensesshares of Class
A common stock. Under this stock repurchase program, shares may be repurchased from time to time in connection with this offering transaction. The expenses have been treated as a reductionopen market purchases,
privately negotiated transactions or otherwise, including in reliance on Rule 10b5-1 of the proceeds received fromSecurities Act. The program is scheduled to expire in February 2020. Repurchases under the offeringprogram, if any, will depend on the prevailing market conditions and are presented on a net basis together withother factors. During the proceeds fromthree and six months ended June 30, 2019, 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 commonCompany repurchased 0.4 million shares from ADIA. The Company did not receive anyas part of the proceeds fromstock repurchase program at a total cost of $10.4 million. As of June 30, 2019, the underwriters' exercise. amount remaining available for repurchases under the program was $139.6 million.
The expenses incurred byfollowing table presents the Company related to the option exercise have been includedchanges in other income (expense), net in the Condensed Consolidated Statementseach class of Operations. ADIA paid the underwriting discounts and commissions and/or similar charges incurredcommon stock for the sale of the common shares.six months ended June 30, 2019:
|
| | | | | | | | | | | |
| | Class A Common Stock | | Class B Common Stock | | Class C Common Stock | | Total |
| Balance - January 1, 2019 | 101,594,095 |
| | 1,000 |
| | 1 |
| | 101,595,096 |
|
| Exchanges of AOG Units | 97,493 |
| | — |
| | — |
| | 97,493 |
|
| Stock option exercises | 4,168,449 |
| | — |
| | — |
| | 4,168,449 |
|
| Repurchases of stock | (400,000 | ) | | — |
| | — |
| | (400,000 | ) |
| Vesting of restricted stock awards | 1,998,272 |
| | — |
| | — |
| | 1,998,272 |
|
| Balance outstanding - June 30, 2019 | 107,458,309 |
| | 1,000 |
| | 1 |
| | 107,459,310 |
|
The following table presents each partner's AOG Units and corresponding ownership interest in each of the Ares Operating Group entities as of June 30, 20182019 and December 31, 2017,2018, as well as its daily average ownership of AOG Units in each of the Ares Operating Group entities for the three and six months ended June 30, 20182019 and 2017.2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Daily Average Ownership |
| | | As of June 30, 2019 | | As of December 31, 2018 | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | | AOG Units | | Direct Ownership Interest | | AOG Units | | Direct Ownership Interest | | 2019 | | 2018 | | 2019 | | 2018 |
| Ares Management Corporation | | 107,458,309 |
| | 47.94 | % | | 101,594,095 |
| | 46.47 | % | | 47.38 | % | | 44.92 | % | | 47.09 | % | | 42.51 | % |
| Ares Owners Holding L.P. | | 116,707,849 |
| | 52.06 | % | | 117,019,274 |
| | 53.53 | % | | 52.62 | % | | 53.82 | % | | 52.91 | % | | 54.4 | % |
| Affiliate of Alleghany Corporation | | — |
| | — | % | | — |
| | — | % | | — | % | | 1.26 | % | | — | % | | 3.09 | % |
| Total | | 224,166,158 |
| | 100.00 | % | | 218,613,369 |
| | 100.00 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Daily Average Ownership |
| | | 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 | | 2018 | | 2017 | | 2018 | | 2017 |
| Ares Management, L.P. | | 98,398,340 |
| | 45.03 | % | | 82,280,033 |
| | 38.75 | % | | 44.92 | % | | 38.58 | % | | 42.51 | % | | 38.47 | % |
| Ares Owners Holding L.P. | | 117,379,305 |
| | 53.71 | % | | 117,576,663 |
| | 55.36 | % | | 53.82 | % | | 55.53 | % | | 54.40 | % | | 55.63 | % |
| Affiliate of Alleghany Corporation | | 2,750,000 |
| | 1.26 | % | | 12,500,000 |
| | 5.89 | % | | 1.26 | % | | 5.89 | % | | 3.09 | % | | 5.90 | % |
| Total | | 218,527,645 |
| | 100.00 | % | | 212,356,696 |
| | 100.00 | % | | | | | | | | |
Preferred EquityStock
In connection with the Conversion on November 26, 2018, each 7.00% Series A preferred share of the Company before the Conversion was converted into one share of 7.00% Series A Preferred Stock, $0.01 par value per share of the Company. As of June 30, 20182019 and December 31, 2017,2018, the Company had 12,400,000 shares of the Series A Preferred Equity (the “Preferred Equity”)Stock outstanding. When, as and if declared by the Company’s board of directors, distributionsdividends on the Series A Preferred EquityStock are payable quarterly at a rate per annum equal to 7.00%. The Series A Preferred EquityStock 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 per share of $25.00 per share.$25.00.
Ares Management L.P.Corporation
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 six months ended June 30, 2018,2019, the Company reclassified certain expenses from OMG to its operating segments. HistoricalThe Company has modified historical results have been modified to conform to thewith its 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 $86.9$105.5 billion of assets under managementAUM and 152170 funds as of June 30, 2018.2019. The Credit Group offers a range of credit strategies across the liquid and illiquid spectrum, including syndicated loans, high yield bonds, credit opportunities, structuredalternative 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.borrowers. 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 structuredalternative credit strategy invests across the capital structuresseeks investment opportunities that fall outside of syndicated collateralized loan obligation vehicles (CLOs)traditional, well-defined markets such as corporate debt, real estate and in directly-originatedprivate equity. Alternative credit investments include certain structural features designed to protect value and minimize loss such as asset security, seniority, covenants, and cash flow prioritization. These investments include asset-backed instruments composed of diversified portfolios of consumersecurities, specialty assets, real assets, and commercial assets.structured credit. 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 June 30, 2018,2019, 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 $23.6$24.7 billion of assets under managementAUM as of June 30, 2018,2019, broadly categorizing its investment strategies as corporate private equity, U.S.infrastructure and power, special opportunities and energy infrastructure and special situations.opportunities. As of June 30, 20182019 the group managed five corporate private equity commingled funds focused on North America and Europe and three focused on greater China, sixfive commingled funds and six related co-investment vehicles focused on U.S. power and energy infrastructure and power, three commingled special situations funds.opportunities funds and the Company's first energy opportunities fund. In its North American and European flexible capital corporate private equity 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.infrastructure and power and energy infrastructure strategy targets U.S. energy infrastructure-related assets across the power generation, transmission, and midstream sectors and renewables seeking attractive risk-adjusted equity returns with current cash flow and capital appreciation. The special situationsopportunities 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. The energy opportunities strategy targets investments in the energy industry where its flexible capital can provide attractive risk-adjusted returns while mitigating commodity risk.
Real Estate Group: The Company’s Real Estate Group manages comprehensive public and private equity and debt strategies, with approximately $10.9$11.9 billion of assets under managementAUM across 4345 funds as of June 30, 2018.2019. 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
Ares Management Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
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,REIT, 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 OMG that consists of six shared resource groups to support the Company’s operating segments by providing infrastructure and administrative support in the areas of accounting/finance, operations, information technology, business development/corporate strategy legal/and relationship management, 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) the effects of changes arising from corporate actions, and (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 income, performance related 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 related compensation. PRE differs from income (loss) before taxes computed in accordance with GAAP as it only includes performance income, performance related compensation and total investment and other income earned from the Consolidated Funds and non-consolidated funds.
Realized income (“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 ourthe 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 believethe Company believes 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 from RI 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.
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.Corporation
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 June 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $39,157) | $ | 172,347 |
| | $ | 52,162 |
| | $ | 21,770 |
| | $ | 246,279 |
| | $ | — |
| | $ | 246,279 |
|
| Other fees | 3,939 |
| | — |
| | 672 |
| | 4,611 |
| | — |
| | 4,611 |
|
| Compensation and benefits | (64,965 | ) | | (21,291 | ) | | (11,928 | ) | | (98,184 | ) | | (33,994 | ) | | (132,178 | ) |
| General, administrative and other expenses | (13,381 | ) | | (4,912 | ) | | (3,523 | ) | | (21,816 | ) | | (19,874 | ) | | (41,690 | ) |
| Fee related earnings | 97,940 |
|
| 25,959 |
|
| 6,991 |
| | 130,890 |
| | (53,868 | ) | | 77,022 |
|
| Performance income—realized | 15,959 |
| | 18,369 |
| | 1,666 |
| | 35,994 |
| | — |
| | 35,994 |
|
| Performance related compensation—realized | (9,564 | ) | | (14,696 | ) | | (969 | ) | | (25,229 | ) | | — |
| | (25,229 | ) |
| Realized net performance income | 6,395 |
| | 3,673 |
| | 697 |
| | 10,765 |
| | — |
| | 10,765 |
|
| Investment income (loss)—realized | (310 | ) | | 1,030 |
| | 1,546 |
| | 2,266 |
| | — |
| | 2,266 |
|
| Interest and other investment income (expense) —realized | 4,631 |
| | 3,318 |
| | 2,119 |
| | 10,068 |
| | (17 | ) | | 10,051 |
|
| Interest expense | (1,908 | ) | | (2,436 | ) | | (1,050 | ) | | (5,394 | ) | | (399 | ) | | (5,793 | ) |
| Realized net investment income (loss) | 2,413 |
| | 1,912 |
| | 2,615 |
| | 6,940 |
| | (416 | ) | | 6,524 |
|
| Realized income | $ | 106,748 |
| | $ | 31,544 |
| | $ | 10,303 |
| | $ | 148,595 |
| | $ | (54,284 | ) | | $ | 94,311 |
|
The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the three months ended June 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $29,866) | $ | 135,848 |
| | $ | 49,318 |
| | $ | 17,138 |
| | $ | 202,304 |
| | $ | — |
| | $ | 202,304 |
|
| Other fees | 6,877 |
| | 337 |
| | 7 |
| | 7,221 |
| | — |
| | 7,221 |
|
| Compensation and benefits | (52,271 | ) | | (18,672 | ) | | (8,768 | ) | | (79,711 | ) | | (30,680 | ) | | (110,391 | ) |
| General, administrative and other expenses | (11,294 | ) | | (4,175 | ) | | (2,391 | ) | | (17,860 | ) | | (19,236 | ) | | (37,096 | ) |
| Fee related earnings | 79,160 |
| | 26,808 |
| | 5,986 |
| | 111,954 |
| | (49,916 | ) | | 62,038 |
|
| Performance income—realized | 41,672 |
| | 80,415 |
| | 521 |
| | 122,608 |
| | — |
| | 122,608 |
|
| Performance related compensation—realized | (23,577 | ) | | (64,311 | ) | | 7 |
| | (87,881 | ) | | — |
| | (87,881 | ) |
| Realized net performance income | 18,095 |
| | 16,104 |
| | 528 |
| | 34,727 |
| | — |
| | 34,727 |
|
| Investment income (loss)—realized | 595 |
| | 9,016 |
| | (250 | ) | | 9,361 |
| | 798 |
| | 10,159 |
|
| Interest and other investment income—realized | 3,035 |
| | 2,920 |
| | 667 |
| | 6,622 |
| | 584 |
| | 7,206 |
|
| Interest expense | (3,596 | ) | | (1,440 | ) | | (452 | ) | | (5,488 | ) | | (588 | ) | | (6,076 | ) |
| Realized net investment income (loss) | 34 |
| | 10,496 |
| | (35 | ) | | 10,495 |
| | 794 |
| | 11,289 |
|
| Realized income | $ | 97,289 |
| | $ | 53,408 |
| | $ | 6,479 |
| | $ | 157,176 |
| | $ | (49,122 | ) | | $ | 108,054 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $29,866) | $ | 135,848 |
| | $ | 49,318 |
| | $ | 17,138 |
| | $ | 202,304 |
| | $ | — |
| | $ | 202,304 |
|
| Other fees | 6,877 |
| | 337 |
| | 7 |
| | 7,221 |
| | — |
| | 7,221 |
|
| Compensation and benefits | (51,892 | ) | | (18,672 | ) | | (8,768 | ) | | (79,332 | ) | | (31,059 | ) | | (110,391 | ) |
| General, administrative and other expenses | (11,041 | ) | | (4,175 | ) | | (2,391 | ) | | (17,607 | ) | | (19,489 | ) | | (37,096 | ) |
| Fee related earnings | 79,792 |
|
| 26,808 |
|
| 5,986 |
| | 112,586 |
| | (50,548 | ) | | 62,038 |
|
| 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 | 1,617 |
| | 290 |
| | (525 | ) | | 1,382 |
| | 2,866 |
| | 4,248 |
|
| Interest and other investment income (expense) | 3,428 |
| | 3,039 |
| | (1,218 | ) | | 5,249 |
| | 623 |
| | 5,872 |
|
| Interest expense | (3,596 | ) | | (1,440 | ) | | (452 | ) | | (5,488 | ) | | (588 | ) | | (6,076 | ) |
| Net investment income (loss) | 2,044 |
|
| 10,905 |
|
| (2,445 | ) | | 10,504 |
| | 3,699 |
| | 14,203 |
|
| Performance related earnings | 18,330 |
|
| 316 |
|
| 3,128 |
| | 21,774 |
| | 3,699 |
| | 25,473 |
|
| Economic net income | $ | 98,122 |
|
| $ | 27,124 |
|
| $ | 9,114 |
| | $ | 134,360 |
| | $ | (46,849 | ) | | $ | 87,511 |
|
| 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 June 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $19,143) | $ | 112,654 |
| | $ | 56,427 |
| | $ | 16,479 |
| | $ | 185,560 |
| | $ | — |
| | $ | 185,560 |
|
| Other fees | 5,663 |
| | 338 |
| | 19 |
| | 6,020 |
| | — |
| | 6,020 |
|
| Compensation and benefits | (45,160 | ) | | (18,388 | ) | | (9,714 | ) | | (73,262 | ) | | (30,584 | ) | | (103,846 | ) |
| General, administrative and other expenses | (8,048 | ) | | (4,345 | ) | | (3,091 | ) | | (15,484 | ) | | (18,862 | ) | | (34,346 | ) |
| Fee related earnings | 65,109 |
|
| 34,032 |
|
| 3,693 |
|
| 102,834 |
|
| (49,446 | ) |
| 53,388 |
|
| 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 | 2,958 |
| | 1,983 |
| | 1,534 |
| | 6,475 |
| | 225 |
| | 6,700 |
|
| Interest expense | (3,065 | ) | | (1,397 | ) | | (429 | ) | | (4,891 | ) | | (463 | ) | | (5,354 | ) |
| Net investment income (loss) | (1,032 | ) |
| 28,657 |
|
| 2,612 |
|
| 30,237 |
|
| (1,626 | ) |
| 28,611 |
|
| Performance related earnings | 3,967 |
|
| 87,249 |
|
| 15,075 |
|
| 106,291 |
|
| (1,626 | ) |
| 104,665 |
|
| Economic net income | $ | 69,076 |
|
| $ | 121,281 |
|
| $ | 18,768 |
|
| $ | 209,125 |
|
| $ | (51,072 | ) |
| $ | 158,053 |
|
| Realized income | $ | 73,181 |
| | $ | 50,151 |
| | $ | 5,181 |
| | $ | 128,513 |
| | $ | (48,346 | ) | | $ | 80,167 |
|
Ares Management L.P.Corporation
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 six months ended June 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real
Estate Group | | Total
Segments | | OMG | | Total |
| Management fees (Credit Group includes ARCC Part I Fees of $77,550) | $ | 335,313 |
| | $ | 103,558 |
| | $ | 40,420 |
| | $ | 479,291 |
| | $ | — |
| | $ | 479,291 |
|
| Other fees | 7,005 |
| | — |
| | 681 |
| | 7,686 |
| | — |
| | 7,686 |
|
| Compensation and benefits | (125,313 | ) | | (42,487 | ) | | (21,212 | ) | | (189,012 | ) | | (66,655 | ) | | (255,667 | ) |
| General, administrative and other expenses | (26,886 | ) | | (8,969 | ) | | (6,655 | ) | | (42,510 | ) | | (40,506 | ) | | (83,016 | ) |
| Fee related earnings | 190,119 |
| | 52,102 |
| | 13,234 |
| | 255,455 |
| | (107,161 | ) | | 148,294 |
|
| Performance income—realized | 37,884 |
| | 62,492 |
| | 4,191 |
| | 104,567 |
| | — |
| | 104,567 |
|
| Performance related compensation—realized | (22,227 | ) | | (49,993 | ) | | (2,226 | ) | | (74,446 | ) | | — |
| | (74,446 | ) |
| Realized net performance income | 15,657 |
| | 12,499 |
| | 1,965 |
| | 30,121 |
| | — |
| | 30,121 |
|
| Investment income—realized | 548 |
| | 11,966 |
| | 5,026 |
| | 17,540 |
| | — |
| | 17,540 |
|
| Interest and other investment income (expense) —realized | 7,536 |
| | 3,612 |
| | 3,224 |
| | 14,372 |
| | (2 | ) | | 14,370 |
|
| Interest expense | (3,807 | ) | | (4,611 | ) | | (2,169 | ) | | (10,587 | ) | | (795 | ) | | (11,382 | ) |
| Realized net investment income (loss) | 4,277 |
| | 10,967 |
| | 6,081 |
| | 21,325 |
| | (797 | ) | | 20,528 |
|
| Realized income | $ | 210,053 |
| | $ | 75,568 |
| | $ | 21,280 |
| | $ | 306,901 |
| | $ | (107,958 | ) | | $ | 198,943 |
|
The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the six months ended June 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 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 | 12,607 |
| | 677 |
| | 10 |
| | 13,294 |
| | — |
| | 13,294 |
|
| Compensation and benefits | (102,172 | ) | | (37,871 | ) | | (16,407 | ) | | (156,450 | ) | | (61,665 | ) | | (218,115 | ) |
| General, administrative and other expenses | (20,670 | ) | | (8,216 | ) | | (4,823 | ) | | (33,709 | ) | | (38,105 | ) | | (71,814 | ) |
| Fee related earnings | 157,379 |
| | 53,795 |
| | 11,091 |
| | 222,265 |
| | (99,770 | ) | | 122,495 |
|
| Performance fees—realized | 46,743 |
| | 84,813 |
| | 14,159 |
| | 145,715 |
| | — |
| | 145,715 |
|
| Performance fees—unrealized | 11,524 |
| | (112,539 | ) | | 11,790 |
| | (89,225 | ) | | — |
| | (89,225 | ) |
| Performance fee compensation—realized | (26,665 | ) | | (67,871 | ) | | (8,214 | ) | | (102,750 | ) | | — |
| | (102,750 | ) |
| Performance fee compensation—unrealized | 9,935 |
| | 88,218 |
| | (8,276 | ) | | 89,877 |
| | — |
| | 89,877 |
|
| Net performance fees | 41,537 |
| | (7,379 | ) | | 9,459 |
| | 43,617 |
| | — |
| | 43,617 |
|
| Investment income—realized | 1,366 |
| | 9,687 |
| | 3,100 |
| | 14,153 |
| | 1,636 |
| | 15,789 |
|
| Investment income (loss)—unrealized | 1,348 |
| | (3,860 | ) | | (1,757 | ) | | (4,269 | ) | | 4,097 |
| | (172 | ) |
| Interest and other investment income (expense) | 5,624 |
| | 3,368 |
| | (201 | ) | | 8,791 |
| | 1,870 |
| | 10,661 |
|
| Interest expense | (8,269 | ) | | (2,668 | ) | | (872 | ) | | (11,809 | ) | | (1,136 | ) | | (12,945 | ) |
| Net investment income | 69 |
| | 6,527 |
| | 270 |
| | 6,866 |
| | 6,467 |
| | 13,333 |
|
| Performance related earnings | 41,606 |
| | (852 | ) | | 9,729 |
| | 50,483 |
| | 6,467 |
| | 56,950 |
|
| Economic net income | $ | 198,985 |
| | $ | 52,943 |
| | $ | 20,820 |
| | $ | 272,748 |
| | $ | (93,303 | ) | | $ | 179,445 |
|
| Realized income | $ | 176,778 |
| | $ | 80,735 |
| | $ | 20,148 |
| | $ | 277,661 |
| | $ | (97,534 | ) | | $ | 180,127 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | 12,607 |
| | 677 |
| | 10 |
| | 13,294 |
| | — |
| | 13,294 |
|
| Compensation and benefits | (102,965 | ) | | (37,871 | ) | | (16,407 | ) | | (157,243 | ) | | (60,872 | ) | | (218,115 | ) |
| General, administrative and other expenses | (21,148 | ) | | (8,216 | ) | | (4,823 | ) | | (34,187 | ) | | (37,627 | ) | | (71,814 | ) |
| Fee related earnings | 156,108 |
| | 53,795 |
| | 11,091 |
| | 220,994 |
| | (98,499 | ) | | 122,495 |
|
| Performance income—realized | 46,743 |
| | 84,813 |
| | 14,159 |
| | 145,715 |
| | — |
| | 145,715 |
|
| Performance related compensation—realized | (26,665 | ) | | (67,871 | ) | | (8,214 | ) | | (102,750 | ) | | — |
| | (102,750 | ) |
| Realized net performance income | 20,078 |
| | 16,942 |
| | 5,945 |
| | 42,965 |
| | — |
| | 42,965 |
|
| Investment income—realized | 1,366 |
| | 9,687 |
| | 3,100 |
| | 14,153 |
| | 1,636 |
| | 15,789 |
|
| Interest and other investment income—realized | 6,224 |
| | 2,979 |
| | 884 |
| | 10,087 |
| | 1,736 |
| | 11,823 |
|
| Interest expense | (8,269 | ) | | (2,668 | ) | | (872 | ) | | (11,809 | ) | | (1,136 | ) | | (12,945 | ) |
| Realized net investment income (loss) | (679 | ) | | 9,998 |
| | 3,112 |
| | 12,431 |
| | 2,236 |
| | 14,667 |
|
| Realized income | $ | 175,507 |
| | $ | 80,735 |
| | $ | 20,148 |
| | $ | 276,390 |
| | $ | (96,263 | ) | | $ | 180,127 |
|
The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the six months ended June 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 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 | 10,166 |
| | 678 |
| | 10 |
| | 10,854 |
| | — |
| | 10,854 |
|
| Compensation and benefits | (96,863 | ) | | (31,606 | ) | | (19,450 | ) | | (147,919 | ) | | (56,537 | ) | | (204,456 | ) |
| General, administrative and other expenses | (16,089 | ) | | (8,543 | ) | | (5,822 | ) | | (30,454 | ) | | (38,175 | ) | | (68,629 | ) |
| Fee related earnings | 131,215 |
| | 56,775 |
| | 6,832 |
| | 194,822 |
| | (94,712 | ) | | 100,110 |
|
| Performance fees—realized | 16,661 |
| | 64,780 |
| | 1,494 |
| | 82,935 |
| | — |
| | 82,935 |
|
| Performance fees—unrealized | 8,029 |
| | 260,984 |
| | 43,877 |
| | 312,890 |
| | — |
| | 312,890 |
|
| Performance fee compensation—realized | (7,183 | ) | | (50,914 | ) | | (177 | ) | | (58,274 | ) | | — |
| | (58,274 | ) |
| Performance fee compensation—unrealized | (7,537 | ) | | (209,526 | ) | | (27,070 | ) | | (244,133 | ) | | — |
| | (244,133 | ) |
| Net performance fees | 9,970 |
| | 65,324 |
| | 18,124 |
| | 93,418 |
| | — |
| | 93,418 |
|
| Investment income—realized | 2,843 |
| | 3,296 |
| | 2,156 |
| | 8,295 |
| | 3,199 |
| | 11,494 |
|
| Investment income (loss)—unrealized | 1,139 |
| | 33,900 |
| | 690 |
| | 35,729 |
| | (4,135 | ) | | 31,594 |
|
| Interest and other investment income | 2,939 |
| | 2,135 |
| | 1,353 |
| | 6,427 |
| | 1,099 |
| | 7,526 |
|
| Interest expense | (5,523 | ) | | (2,910 | ) | | (861 | ) | | (9,294 | ) | | (939 | ) | | (10,233 | ) |
| Net investment income (loss) | 1,398 |
| | 36,421 |
| | 3,338 |
| | 41,157 |
| | (776 | ) | | 40,381 |
|
| Performance related earnings | 11,368 |
| | 101,745 |
| | 21,462 |
| | 134,575 |
| | (776 | ) | | 133,799 |
|
| Economic net income | $ | 142,583 |
| | $ | 158,520 |
| | $ | 28,294 |
| | $ | 329,397 |
| | $ | (95,488 | ) | | $ | 233,909 |
|
| Realized income | $ | 143,126 |
| | $ | 72,496 |
| | $ | 9,769 |
| | $ | 225,391 |
| | $ | (91,551 | ) | | $ | 133,840 |
|
Ares Management L.P.Corporation
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):realized net investment income: |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Segment revenues | | | | | | | |
| Management fees (includes ARCC Part I Fees of $39,157, $77,550 and $29,866, $58,283 for the three and six months ended June 30, 2019 and 2018, respectively) | $ | 246,279 |
| | $ | 202,304 |
| | $ | 479,291 |
| | $ | 399,130 |
|
| Other fees | 4,611 |
| | 7,221 |
| | 7,686 |
| | 13,294 |
|
| Performance income—realized | 35,994 |
| | 122,608 |
| | 104,567 |
| | 145,715 |
|
| Total segment revenues | $ | 286,884 |
| | $ | 332,133 |
| | $ | 591,544 |
| | $ | 558,139 |
|
| Segment expenses | | | | | | | |
| Compensation and benefits | $ | 98,184 |
| | $ | 79,711 |
| | $ | 189,012 |
| | $ | 157,243 |
|
| General, administrative and other expenses | 21,816 |
| | 17,860 |
| | 42,510 |
| | 34,187 |
|
| Performance related compensation—realized | 25,229 |
| | 87,881 |
| | 74,446 |
| | 102,750 |
|
| Total segment expenses | $ | 145,229 |
| | $ | 185,452 |
| | $ | 305,968 |
| | $ | 294,180 |
|
| Segment realized net investment income | | | | | | | |
| Investment income—realized | $ | 2,266 |
| | $ | 9,361 |
| | $ | 17,540 |
| | $ | 14,153 |
|
| Interest and other investment income- realized | 10,068 |
| | 6,622 |
| | 14,372 |
| | 10,087 |
|
| Interest expense | (5,394 | ) | | (5,488 | ) | | (10,587 | ) | | (11,809 | ) |
| Total segment realized net investment income | $ | 6,940 |
| | $ | 10,495 |
| | $ | 21,325 |
| | $ | 12,431 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Segment 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) | $ | 202,304 |
| | $ | 185,560 |
| | $ | 399,130 |
| | $ | 362,341 |
|
| Other fees | 7,221 |
| | 6,020 |
| | 13,294 |
| | 10,854 |
|
| 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 | $ | 207,790 |
| | $ | 529,339 |
| | $ | 468,914 |
| | $ | 769,020 |
|
| Segment Expenses | | | | | | | |
| Compensation and benefits | $ | 79,332 |
| | $ | 73,262 |
| | $ | 156,450 |
| | $ | 147,919 |
|
| General, administrative and other expenses | 17,607 |
| | 15,484 |
| | 33,709 |
| | 30,454 |
|
| 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 | $ | 83,934 |
| | $ | 350,451 |
| | $ | 203,032 |
| | $ | 480,780 |
|
| Other Income (Expense) | | | | | | | |
| Investment income—realized | $ | 9,361 |
| | $ | 5,615 |
| | $ | 14,153 |
| | $ | 8,295 |
|
| Investment income (loss)—unrealized | 1,382 |
| | 23,038 |
| | (4,269 | ) | | 35,729 |
|
| Interest and other investment income | 5,249 |
| | 6,475 |
| | 8,791 |
| | 6,427 |
|
| Interest expense | (5,488 | ) | | (4,891 | ) | | (11,809 | ) | | (9,294 | ) |
| Total segment other income | $ | 10,504 |
| | $ | 30,237 |
| | $ | 6,866 |
| | $ | 41,157 |
|
The following table reconciles the Company's consolidated revenues to segment revenue to Ares consolidated revenues:revenue:
| | | | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Total segment revenue | $ | 207,790 |
| | $ | 529,339 |
| | $ | 468,914 |
| | $ | 769,020 |
| |
| Revenue of Consolidated Funds eliminated in consolidation | (25,123 | ) | | (169 | ) | | (30,233 | ) | | (18,357 | ) | |
| Total consolidated revenue | | $ | 384,822 |
| | $ | 204,163 |
| | $ | 862,019 |
| | $ | 470,252 |
|
| Performance income-unrealized | | (98,662 | ) | | 124,343 |
| | (245,237 | ) | | 89,225 |
|
| Management fees of Consolidated Funds eliminated in consolidation | | 8,735 |
| | 8,272 |
| | 17,148 |
| | 15,583 |
|
| Incentive fees of Consolidated Funds eliminated in consolidation | | 4,750 |
| | 4,000 |
| | 5,184 |
| | 4,000 |
|
| Principal investment income of Consolidated Funds eliminated in consolidation | | (4,265 | ) | | 12,851 |
| | (3,132 | ) | | 10,650 |
|
| Administrative fees(1) | 6,770 |
| | 9,132 |
| | 13,182 |
| | 18,738 |
| (6,602 | ) | | (6,770 | ) | | (13,204 | ) | | (13,182 | ) |
| Performance income reclass(2) | 31 |
| | (217 | ) | | 1,006 |
| | (241 | ) | (26 | ) | | (31 | ) | | 580 |
| | (1,006 | ) |
| Principal investment income | 14,722 |
| | 34,166 |
| | 17,430 |
| | 47,335 |
| (1,579 | ) | | (14,722 | ) | | (31,471 | ) | | (17,430 | ) |
Revenue of non-controlling interests in consolidated subsidiaries(3) | (27 | ) | | (54 | ) | | (47 | ) | | (54 | ) | |
| Total consolidated adjustments and reconciling items | (3,627 | ) | | 42,858 |
| | 1,338 |
| | 47,421 |
| |
| Total consolidated revenue | $ | 204,163 |
| | $ | 572,197 |
| | $ | 470,252 |
|
| $ | 816,441 |
| |
| Net (revenue) expense of non-controlling interests in consolidated subsidiaries | | (289 | ) | | 27 |
| | (343 | ) | | 47 |
|
| Total consolidation adjustments and reconciling items | | (97,938 | ) | | 127,970 |
| | (270,475 | ) | | 87,887 |
|
| Total segment revenue | | $ | 286,884 |
| | $ | 332,133 |
| | $ | 591,544 |
| | $ | 558,139 |
|
| |
| (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 income for AREA Sponsor Holdings LLC, an investment pool. Changes in value of this investment are reflected within other income (expense)net realized and unrealized gain (loss) on investments in the Company’s Condensed Consolidated Statements of Operations. |
| |
(3) | Adjustments for administrative fees reimbursed attributable to certain of our joint venture partners. |
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
The following table reconciles segmentthe Company's consolidated expenses to Ares consolidatedsegment expenses:
| | | | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Total segment expenses | $ | 83,934 |
| | $ | 350,451 |
| | $ | 203,032 |
| | $ | 480,780 |
| |
| Total consolidated expenses | | $ | 335,701 |
| | $ | 221,017 |
| | $ | 704,808 |
| | $ | 427,300 |
|
| Performance related compensation-unrealized | | (67,459 | ) | | 100,886 |
| | (174,762 | ) | | 89,877 |
|
| Expenses of Consolidated Funds added in consolidation | 47,382 |
| | 8,825 |
| | 56,011 |
| | 19,334 |
| (28,912 | ) | | (47,382 | ) | | (42,313 | ) | | (56,011 | ) |
| Expenses of Consolidated Funds eliminated in consolidation | (12,270 | ) | | (4,303 | ) | | (19,583 | ) | | (10,901 | ) | 13,485 |
| | 12,270 |
| | 22,332 |
| | 19,583 |
|
| Administrative fees(1) | 6,770 |
| | 9,132 |
| | 13,182 |
| | 18,738 |
| (6,602 | ) | | (6,770 | ) | | (13,204 | ) | | (13,182 | ) |
| OMG expenses | 50,548 |
| | 49,446 |
| | 99,770 |
| | 94,712 |
| (53,868 | ) | | (49,916 | ) | | (107,161 | ) | | (98,499 | ) |
| Acquisition and merger-related expenses | 47 |
| | 724 |
| | (272 | ) | | 276,060 |
| |
| Acquisition and merger-related expense | | (4,207 | ) | | (47 | ) | | (5,980 | ) | | 272 |
|
| Equity compensation expense | 22,507 |
| | 18,917 |
| | 43,594 |
| | 34,006 |
| (24,029 | ) | | (22,507 | ) | | (51,581 | ) | | (43,594 | ) |
| Placement fees and underwriting costs | 1,852 |
| | 6,383 |
| | 3,516 |
| | 9,822 |
| |
| Amortization of intangibles | 3,285 |
| | 5,274 |
| | 6,572 |
| | 10,549 |
| |
| Depreciation expense | 4,426 |
| | 2,774 |
| | 8,315 |
| | 5,990 |
| |
| Other expenses(3) | 11,836 |
| | — |
| | 11,836 |
| | — |
| |
| Expenses of non-controlling interests in consolidated subsidiaries(2) | 700 |
| | 574 |
| | 1,327 |
| | 574 |
| |
| Unamortized placement fees | | (12,432 | ) | | (1,852 | ) | | (12,953 | ) | | (3,516 | ) |
| Depreciation and amortization expense | | (5,221 | ) | | (7,711 | ) | | (11,045 | ) | | (14,887 | ) |
| Other expense(2) | | — |
| | (11,836 | ) | | — |
| | (11,836 | ) |
| Expense of non-controlling interests in consolidated subsidiaries | | (1,227 | ) | | (700 | ) | | (2,173 | ) | | (1,327 | ) |
| Total consolidation adjustments and reconciling items | 137,083 |
| | 97,746 |
| | 224,268 |
| | 458,884 |
| (190,472 | ) | | (35,565 | ) | | (398,840 | ) | | (133,120 | ) |
| Total consolidated expenses | $ | 221,017 |
| | $ | 448,197 |
| | $ | 427,300 |
|
| $ | 939,664 |
| |
| Total segment expenses | | $ | 145,229 |
| | $ | 185,452 |
| | $ | 305,968 |
| | $ | 294,180 |
|
| |
| (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) | Costs being borne by certain of our joint venture partners. |
| |
(3) | Includes2018 period 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 segmentthe Company's consolidated other income (expense) to Ares consolidated othersegment realized net investment income:
|
| | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Total consolidated other income | $ | 35,262 |
| | $ | 67,926 |
| | $ | 63,132 |
| | $ | 70,166 |
|
| Investment (income) loss - unrealized | 7,618 |
| | (1,382 | ) | | (8,565 | ) | | 4,269 |
|
| Interest and other investment (income) loss - unrealized | (4,628 | ) | | 1,373 |
| | 350 |
| | 1,296 |
|
| Other expense from Consolidated Funds added in consolidation, net | (33,008 | ) | | (69,193 | ) | | (64,215 | ) | | (76,445 | ) |
| Other (income) expense from Consolidated Funds eliminated in consolidation, net | 282 |
| | (993 | ) | | (90 | ) | | (534 | ) |
| OMG other income | (188 | ) | | (3,699 | ) | | (158 | ) | | (6,467 | ) |
| Performance income reclass(1) | 26 |
| | 31 |
| | (580 | ) | | 1,006 |
|
| Principal investment income | 1,579 |
| | 14,722 |
| | 31,471 |
| | 17,430 |
|
| Other expense, net | 2 |
| | 1,718 |
| | 1 |
| | 1,725 |
|
| Other income of non-controlling interests in consolidated subsidiaries | (5 | ) | | (8 | ) | | (21 | ) | | (15 | ) |
| Total consolidation adjustments and reconciling items | (28,322 | ) | | (57,431 | ) | | (41,807 | ) | | (57,735 | ) |
| Total segment realized net investment income | $ | 6,940 |
| | $ | 10,495 |
| | $ | 21,325 |
| | $ | 12,431 |
|
| |
| (1) | Related to performance income for AREA Sponsor Holdings LLC. Changes in value of this investment are reflected within other (income) expensenet realized and unrealized gain (loss) on investments in the Company’s Condensed Consolidated Statements of Operations. |
Ares Management L.P.Corporation
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 and PRE:FRE:
|
| | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Income before taxes | $ | 84,383 |
| | $ | 51,072 |
| | $ | 220,343 |
| | $ | 113,118 |
|
| Adjustments: | | | | | | | |
| Depreciation and amortization expense | 5,221 |
| | 7,711 |
| | 11,045 |
| | 14,887 |
|
| Equity compensation expense | 24,029 |
| | 22,507 |
| | 51,581 |
| | 43,594 |
|
| Acquisition and merger-related expense | 4,207 |
| | 47 |
| | 5,980 |
| | (272 | ) |
| Unamortized placement fees | 12,432 |
| | 1,852 |
| | 12,953 |
| | 3,516 |
|
| OMG expense, net | 53,680 |
| | 46,217 |
| | 107,003 |
| | 92,032 |
|
| Other expense, net(1) | 2 |
| | 13,554 |
| | 1 |
| | 13,561 |
|
| Expense of non-controlling interests in consolidated subsidiaries | 933 |
| | 719 |
| | 1,809 |
| | 1,359 |
|
| Income before taxes of non-controlling interests in Consolidated Funds, net of eliminations | (8,079 | ) | | (9,951 | ) | | (25,124 | ) | | (10,318 | ) |
| Total performance income - unrealized | (98,662 | ) | | 124,343 |
| | (245,237 | ) | | 89,225 |
|
| Total performance related compensation - unrealized | 67,459 |
| | (100,886 | ) | | 174,762 |
| | (89,877 | ) |
| Total investment (income) loss - unrealized | 2,990 |
| | (9 | ) | | (8,215 | ) | | 5,565 |
|
| Realized income | 148,595 |
| | 157,176 |
| | 306,901 |
| | 276,390 |
|
| Total performance income - realized | (35,994 | ) | | (122,608 | ) | | (104,567 | ) | | (145,715 | ) |
| Total performance related compensation - realized | 25,229 |
| | 87,881 |
| | 74,446 |
| | 102,750 |
|
| Total investment income - realized | (6,940 | ) | | (10,495 | ) | | (21,325 | ) | | (12,431 | ) |
| Fee related earnings | $ | 130,890 |
| | $ | 111,954 |
|
| $ | 255,455 |
| | $ | 220,994 |
|
| |
| (1) | Adjustments for administrative fees reimbursed and other revenue items attributable to certain of our joint venture partners. |
| |
(2) | Includes2018 period 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.Corporation
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 representsrepresent 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 theirits respective maximum exposure to loss relating to non-consolidated VIEs are as follows:
| | | | As of June 30, | | As of December 31, | As of June 30, | | As of December 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| Maximum exposure to loss attributable to the Company's investment in non-consolidated VIEs | $ | 241,231 |
| | $ | 251,376 |
| $ | 224,154 |
| | $ | 222,477 |
|
| Maximum exposure to loss attributable to the Company's investment in consolidated VIEs | 190,400 |
| | 175,620 |
| 197,296 |
| | 186,455 |
|
| Assets of consolidated VIEs | 8,059,640 |
| | 6,231,245 |
| 8,421,736 |
| | 8,141,280 |
|
| Liabilities of consolidated VIEs | 7,302,896 |
| | 5,538,054 |
| 7,634,429 |
| | 7,479,383 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net income attributable to non-controlling interests related to consolidated VIEs | $ | 8,346 |
| | $ | 9,882 |
| | $ | 25,970 |
| | $ | 10,249 |
|
|
| | | | | | | | | | | | | | | |
| | 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.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
CONSOLIDATING SCHEDULESConsolidating Schedules
The following supplemental financial information illustrates the consolidating effects of the Consolidated Funds on the Company's financial condition as of June 30, 20182019 and December 31, 20172018 and results from operations for the three and six months ended June 30, 20182019 and 2017.2018.
| | | | As of June 30, 2018 | As of June 30, 2019 |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Assets | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Cash and cash equivalents | $ | 125,448 |
| | $ | — |
| | $ | — |
| | $ | 125,448 |
| $ | 247,220 |
| | $ | — |
| | $ | — |
| | $ | 247,220 |
|
| Investments ($985,035 of accrued carried interest) | 1,656,647 |
| | — |
| | (190,400 | ) | | 1,466,247 |
| |
| Investments (includes $1,071,954 of accrued carried interest) | | 1,763,338 |
| | — |
| | (197,296 | ) | | 1,566,042 |
|
| Due from affiliates | 179,200 |
| | — |
| | (6,772 | ) | | 172,428 |
| 242,515 |
| | — |
| | (8,434 | ) | | 234,081 |
|
| Deferred tax asset, net | 42,942 |
| | — |
| | — |
| | 42,942 |
| |
| Other assets | 100,183 |
| | — |
| | — |
| | 100,183 |
| 358,091 |
| | — |
| | — |
| | 358,091 |
|
| Intangible assets, net | 33,999 |
| | — |
| | — |
| | 33,999 |
| |
| Goodwill | 143,848 |
| | — |
| | — |
| | 143,848 |
| |
| Right-of-use operating lease assets | | 152,579 |
| | — |
| | — |
| | 152,579 |
|
| Assets of Consolidated Funds | |
| | |
| | |
| |
|
| |
| | |
| | |
| |
|
|
| Cash and cash equivalents | — |
| | 836,274 |
| | — |
| | 836,274 |
| — |
| | 376,328 |
| | — |
| | 376,328 |
|
| Investments, at fair value | — |
| | 6,968,067 |
| | — |
| | 6,968,067 |
| — |
| | 7,926,615 |
| | — |
| | 7,926,615 |
|
| Due from affiliates | — |
| | 13,704 |
| | — |
| | 13,704 |
| — |
| | 15,888 |
| | — |
| | 15,888 |
|
| Dividends and interest receivable | — |
| | 14,634 |
| | — |
| | 14,634 |
| |
| Receivable for securities sold | — |
| | 225,764 |
| | — |
| | 225,764 |
| — |
| | 76,993 |
| | — |
| | 76,993 |
|
| Other assets | — |
| | 1,197 |
| | — |
| | 1,197 |
| — |
| | 25,912 |
| | — |
| | 25,912 |
|
| Total assets | $ | 2,282,267 |
| | $ | 8,059,640 |
| | $ | (197,172 | ) | | $ | 10,144,735 |
| $ | 2,763,743 |
| | $ | 8,421,736 |
| | $ | (205,730 | ) | | $ | 10,979,749 |
|
| Liabilities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Accounts payable, accrued expenses and other liabilities | $ | 73,227 |
| | $ | — |
| | $ | — |
| | $ | 73,227 |
| $ | 76,838 |
| | $ | — |
| | $ | — |
| | $ | 76,838 |
|
| Accrued compensation | 87,254 |
| | — |
| | — |
| | 87,254 |
| 114,936 |
| | — |
| | — |
| | 114,936 |
|
| Due to affiliates | 62,344 |
| | — |
| | — |
| | 62,344 |
| 65,527 |
| | — |
| | — |
| | 65,527 |
|
| Performance related compensation payable | 730,782 |
| | — |
| | — |
| | 730,782 |
| 772,592 |
| | — |
| | — |
| | 772,592 |
|
| Debt obligations | 370,628 |
| | — |
| | — |
| | 370,628 |
| 566,277 |
| | — |
| | — |
| | 566,277 |
|
| Right-of-use operating lease liabilities | | 179,192 |
| | — |
| | — |
| | 179,192 |
|
| Liabilities of Consolidated Funds | |
| | |
| | |
| |
|
| |
| | |
| | |
| |
|
|
| Accounts payable, accrued expenses and other liabilities | — |
| | 69,040 |
| | — |
| | 69,040 |
| — |
| | 75,647 |
| | — |
| | 75,647 |
|
| Due to affiliates | — |
| | 6,772 |
| | (6,772 | ) | | — |
| — |
| | 8,434 |
| | (8,434 | ) | | — |
|
| Payable for securities purchased | — |
| | 744,534 |
| | — |
| | 744,534 |
| — |
| | 369,465 |
| | — |
| | 369,465 |
|
| CLO loan obligations, at fair value | — |
| | 6,344,112 |
| | (10,873 | ) | | 6,333,239 |
| — |
| | 7,054,773 |
| | (23,932 | ) | | 7,030,841 |
|
| Fund borrowings | — |
| | 138,438 |
| | — |
| | 138,438 |
| — |
| | 126,110 |
| | — |
| | 126,110 |
|
| Total liabilities | 1,324,235 |
| | 7,302,896 |
| | (17,645 | ) | | 8,609,486 |
| 1,775,362 |
| | 7,634,429 |
| | (32,366 | ) | | 9,377,425 |
|
| Commitments and contingencies |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
|
| Preferred equity (12,400,000 shares issued and outstanding) | 298,761 |
| | — |
| | — |
| | 298,761 |
| |
| Non-controlling interest in Consolidated Funds | — |
| | 756,744 |
| | (179,527 | ) | | 577,217 |
| — |
| | 787,307 |
| | (173,364 | ) | | 613,943 |
|
| Non-controlling interest in Ares Operating Group entities | 316,048 |
| | — |
| | — |
| | 316,048 |
| 352,882 |
| | — |
| | — |
| | 352,882 |
|
| Controlling interest in Ares Management, L.P.: | |
| | |
| | |
| |
|
| |
| Shareholders' equity (98,398,340 shares issued and outstanding) | 349,981 |
| | — |
| | — |
| | 349,981 |
| |
| Stockholders' Equity | | | | | | | | |
| Series A Preferred Stock, $0.01 par value, 1,000,000,000 shares authorized (12,400,000 shares issued and outstanding) | | 298,761 |
| | — |
| | — |
| | 298,761 |
|
| Class A common stock, $0.01 par value, 1,500,000,000 shares authorized (107,458,309 shares issued and outstanding) | | 1,075 |
| | — |
| | — |
| | 1,075 |
|
| Class B common stock, $0.01 par value, 1,000 shares authorized (1,000 shares issued and outstanding) | | — |
| | — |
| | — |
| | — |
|
| Class C common stock, $0.01 par value, 499,999,000 shares authorized (1 share issued and outstanding) | | — |
| | — |
| | — |
| | — |
|
| Additional paid-in-capital | | 379,789 |
| | — |
| | — |
| | 379,789 |
|
| Retained earnings | | (35,247 | ) | | — |
| | — |
| | (35,247 | ) |
| Accumulated other comprehensive loss, net of tax | (6,758 | ) | | — |
| | — |
| | (6,758 | ) | (8,879 | ) | | — |
| | — |
| | (8,879 | ) |
| Total controlling interest in Ares Management, L.P. | 343,223 |
| | — |
| | — |
| | 343,223 |
| |
| Total stockholders' equity | | 635,499 |
| | — |
| | — |
| | 635,499 |
|
| Total equity | 958,032 |
|
| 756,744 |
|
| (179,527 | ) |
| 1,535,249 |
| 988,381 |
|
| 787,307 |
|
| (173,364 | ) |
| 1,602,324 |
|
| Total liabilities and equity | $ | 2,282,267 |
|
| $ | 8,059,640 |
|
| $ | (197,172 | ) |
| $ | 10,144,735 |
| |
| Total liabilities, non-controlling interests and equity | | $ | 2,763,743 |
|
| $ | 8,421,736 |
|
| $ | (205,730 | ) |
| $ | 10,979,749 |
|
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Assets | | | |
| | |
| | |
|
| Cash and cash equivalents | $ | 110,247 |
| | $ | — |
| | $ | — |
| | $ | 110,247 |
|
| Investments (includes $841,079 of accrued carried interest) | 1,512,592 |
| | — |
| | (186,455 | ) | | 1,326,137 |
|
| Due from affiliates | 207,924 |
| | — |
| | (8,547 | ) | | 199,377 |
|
| Other assets | 377,651 |
| | — |
| | — |
| | 377,651 |
|
| Assets of Consolidated Funds | |
| | |
| | |
| |
|
|
| Cash and cash equivalents | — |
| | 384,644 |
| | — |
| | 384,644 |
|
| Investments, at fair value | — |
| | 7,673,165 |
| | — |
| | 7,673,165 |
|
| Due from affiliates | — |
| | 17,609 |
| | — |
| | 17,609 |
|
| Receivable for securities sold | — |
| | 42,076 |
| | — |
| | 42,076 |
|
| Other assets | — |
| | 23,786 |
| | — |
| | 23,786 |
|
| Total assets | $ | 2,208,414 |
|
| $ | 8,141,280 |
|
| $ | (195,002 | ) |
| $ | 10,154,692 |
|
| Liabilities | | | |
| | |
| | |
|
| Accounts payable, accrued expenses and other liabilities | $ | 83,221 |
| | $ | — |
| | $ | — |
| | $ | 83,221 |
|
| Accrued compensation | 29,389 |
| | — |
| | — |
| | 29,389 |
|
| Due to affiliates | 82,411 |
| | — |
| | — |
| | 82,411 |
|
| Performance related compensation payable | 641,737 |
| | — |
| | — |
| | 641,737 |
|
| Debt obligations | 480,952 |
| | — |
| | — |
| | 480,952 |
|
| Liabilities of Consolidated Funds | | | |
| | |
| |
|
|
| Accounts payable, accrued expenses and other liabilities | — |
| | 83,876 |
| | — |
| | 83,876 |
|
| Due to affiliates | — |
| | 8,547 |
| | (8,547 | ) | | — |
|
| Payable for securities purchased | — |
| | 471,390 |
| | — |
| | 471,390 |
|
| CLO loan obligations | — |
| | 6,706,286 |
| | (28,195 | ) | | 6,678,091 |
|
| Fund borrowings | — |
| | 209,284 |
| | — |
| | 209,284 |
|
| Total liabilities | 1,317,710 |
|
| 7,479,383 |
|
| (36,742 | ) |
| 8,760,351 |
|
| Commitments and contingencies |
|
| |
|
| |
|
| |
|
|
| Non-controlling interest in Consolidated Funds | — |
| | 661,897 |
| | (158,260 | ) | | 503,637 |
|
| Non-controlling interest in Ares Operating Group entities | 302,780 |
| | — |
| | — |
| | 302,780 |
|
| Stockholders' Equity | | | | | | | |
| Series A Preferred Stock, $0.01 par value, 1,000,000,000 shares authorized (12,400,000 units issued and outstanding) | 298,761 |
| | — |
| | — |
| | 298,761 |
|
| Class A common stock, $0.01 par value, 1,500,000,000 shares authorized (101,594,095 shares issued and outstanding) | 1,016 |
| | — |
| | — |
| | 1,016 |
|
| Class B common stock, $0.01 par value, 1,000 shares authorized (1,000 shares issued and outstanding) | — |
| | — |
| | — |
| | — |
|
| Class C common stock, $0.01 par value, 499,999,000 shares authorized (1 share issued and outstanding) | — |
| | — |
| | — |
| | — |
|
| Additional paid-in-capital | 326,007 |
| | — |
| | — |
| | 326,007 |
|
| Retained earnings | (29,336 | ) | | — |
| | — |
| | (29,336 | ) |
| Accumulated other comprehensive loss, net of taxes | (8,524 | ) | | — |
| | — |
| | (8,524 | ) |
| Total stockholders' equity | 587,924 |
| | — |
| | — |
| | 587,924 |
|
| Total equity | 890,704 |
| | 661,897 |
| | (158,260 | ) | | 1,394,341 |
|
| Total liabilities, non-controlling interests and equity | $ | 2,208,414 |
| | $ | 8,141,280 |
| | $ | (195,002 | ) | | $ | 10,154,692 |
|
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | As adjusted |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Assets | | | |
| | |
| | |
|
| Cash and cash equivalents | $ | 118,929 |
| | $ | — |
| | $ | — |
| | $ | 118,929 |
|
| Investments ($1,077,236 of accrued carried interest) | 1,900,191 |
| | — |
| | (175,620 | ) | | 1,724,571 |
|
| Due from affiliates | 171,701 |
| | — |
| | (5,951 | ) | | 165,750 |
|
| Deferred tax asset, net | 8,326 |
| | — |
| | — |
| | 8,326 |
|
| Other assets | 135,674 |
| | — |
| | (5,333 | ) | | 130,341 |
|
| Intangible assets, net | 40,465 |
| | — |
| | — |
| | 40,465 |
|
| Goodwill | 143,895 |
| | — |
| | — |
| | 143,895 |
|
| Assets of Consolidated Funds | | | |
| | |
| |
|
|
| Cash and cash equivalents | — |
| | 556,500 |
| | — |
| | 556,500 |
|
| Investments, at fair value | — |
| | 5,582,842 |
| | — |
| | 5,582,842 |
|
| Due from affiliates | — |
| | 15,884 |
| | — |
| | 15,884 |
|
| Dividends and interest receivable | — |
| | 12,568 |
| | — |
| | 12,568 |
|
| Receivable for securities sold | — |
| | 61,462 |
| | — |
| | 61,462 |
|
| Other assets | — |
| | 1,989 |
| | — |
| | 1,989 |
|
| Total assets | $ | 2,519,181 |
|
| $ | 6,231,245 |
|
| $ | (186,904 | ) |
| $ | 8,563,522 |
|
| Liabilities | | | |
| | |
| | |
|
| Accounts payable, accrued expenses and other liabilities | $ | 81,955 |
| | $ | — |
| | $ | — |
| | $ | 81,955 |
|
| Accrued compensation | 27,978 |
| | — |
| | — |
| | 27,978 |
|
| Due to affiliates | 39,184 |
| | — |
| | — |
| | 39,184 |
|
| Performance related compensation payable | 822,084 |
| | — |
| | — |
| | 822,084 |
|
| Debt obligations | 616,176 |
| | — |
| | — |
| | 616,176 |
|
| Liabilities of Consolidated Funds | | | |
| | |
| |
|
|
| Accounts payable, accrued expenses and other liabilities | — |
| | 64,316 |
| | — |
| | 64,316 |
|
| Due to affiliates | — |
| | 11,285 |
| | (11,285 | ) | | — |
|
| Payable for securities purchased | — |
| | 350,145 |
| | — |
| | 350,145 |
|
| CLO loan obligations, at fair value | — |
| | 4,974,110 |
| | (10,916 | ) | | 4,963,194 |
|
| Fund borrowings | — |
| | 138,198 |
| | — |
| | 138,198 |
|
| Total liabilities | 1,587,377 |
|
| 5,538,054 |
|
| (22,201 | ) |
| 7,103,230 |
|
| Commitments and contingencies |
|
| |
|
| |
|
| |
|
|
| Preferred equity (12,400,000 shares issued and outstanding) | 298,761 |
| | — |
| | — |
| | 298,761 |
|
| Non-controlling interest in Consolidated Funds | — |
| | 693,191 |
| | (164,703 | ) | | 528,488 |
|
| Non-controlling interest in Ares Operating Group entities | 358,186 |
| | — |
| | — |
| | 358,186 |
|
| Controlling interest in Ares Management, L.P.: | |
| | |
| | |
| | |
|
| Shareholders' equity (82,280,033 shares issued and outstanding) | 279,065 |
| | — |
| | — |
| | 279,065 |
|
| Accumulated other comprehensive loss, net of tax | (4,208 | ) | | — |
| | — |
| | (4,208 | ) |
| Total controlling interest in Ares Management, L.P. | 274,857 |
| | — |
| | — |
| | 274,857 |
|
| Total equity | 931,804 |
|
| 693,191 |
|
| (164,703 | ) |
| 1,460,292 |
|
| Total liabilities and equity | $ | 2,519,181 |
|
| $ | 6,231,245 |
|
| $ | (186,904 | ) | | $ | 8,563,522 |
|
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | | For the Three Months Ended June 30, 2018 | For the Three Months Ended June 30, 2019 |
| | Consolidated
Company Entities | | Consolidated
Funds | | Eliminations | | Consolidated | Consolidated
Company Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Management fees (includes ARCC Part I Fees of $29,866) | $ | 202,304 |
| | $ | — |
| | $ | (8,272 | ) | | $ | 194,032 |
| |
| Management fees (includes ARCC Part I Fees of $39,157) | | $ | 246,581 |
| | $ | — |
| | $ | (8,735 | ) | | $ | 237,846 |
|
| Carried interest allocation | (13,444 | ) | |
|
| | — |
| | (13,444 | ) | 119,712 |
| | — |
| | — |
| | 119,712 |
|
| Incentive fees | 11,740 |
| |
|
| | (4,000 | ) | | 7,740 |
| 14,970 |
| | — |
| | (4,750 | ) | | 10,220 |
|
| Principal investment income | 14,722 |
| | — |
| | (12,851 | ) | | 1,871 |
| 1,579 |
| | — |
| | 4,265 |
| | 5,844 |
|
| Administrative, transaction and other fees | 13,964 |
| | — |
| | — |
| | 13,964 |
| 11,200 |
| | — |
| | — |
| | 11,200 |
|
| Total revenues | 229,286 |
|
| — |
|
| (25,123 | ) |
| 204,163 |
| 394,042 |
|
| — |
|
| (9,220 | ) |
| 384,822 |
|
| Expenses | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Compensation and benefits | 138,992 |
| | — |
| | — |
| | 138,992 |
| 162,170 |
| | — |
| | — |
| | 162,170 |
|
| Performance related compensation | (13,005 | ) | | — |
| | — |
| | (13,005 | ) | 92,688 |
| | — |
| | — |
| | 92,688 |
|
| General, administrative and other expense | 59,918 |
| | — |
| | — |
| | 59,918 |
| 65,416 |
| | — |
| | — |
| | 65,416 |
|
| Expenses of the Consolidated Funds | — |
| | 47,382 |
| | (12,270 | ) | | 35,112 |
| — |
| | 28,912 |
| | (13,485 | ) | | 15,427 |
|
| Total expenses | 185,905 |
|
| 47,382 |
|
| (12,270 | ) |
| 221,017 |
| 320,274 |
|
| 28,912 |
|
| (13,485 | ) |
| 335,701 |
|
| Other income (expense) | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Net realized and unrealized gain on investments | 4,438 |
| | — |
| | (1,171 | ) | | 3,267 |
| 927 |
| | — |
| | (406 | ) | | 521 |
|
| Interest and dividend income | 2,356 |
| | — |
| | — |
| | 2,356 |
| 2,324 |
| | — |
| | (672 | ) | | 1,652 |
|
| Interest expense | (6,076 | ) | | — |
| | — |
| | (6,076 | ) | (5,793 | ) | | — |
| | — |
| | (5,793 | ) |
| Other expense, net | (2,978 | ) | | — |
| | 991 |
| | (1,987 | ) | |
| Net realized and unrealized gain on investments of the Consolidated Funds | — |
| | 33,819 |
| | 668 |
| | 34,487 |
| |
| Other income, net | | 5,078 |
| | — |
| | (281 | ) | | 4,797 |
|
| Net realized and unrealized loss on investments of the Consolidated Funds | | — |
| | (486 | ) | | 370 |
| | (116 | ) |
| Interest and other income of the Consolidated Funds | — |
| | 92,633 |
| | — |
| | 92,633 |
| — |
| | 102,206 |
| | — |
| | 102,206 |
|
| Interest expense of the Consolidated Funds | — |
| | (57,259 | ) | | 505 |
| | (56,754 | ) | — |
| | (68,712 | ) | | 707 |
| | (68,005 | ) |
| Total other income (expense) | (2,260 | ) |
| 69,193 |
|
| 993 |
|
| 67,926 |
| |
| Total other income | | 2,536 |
|
| 33,008 |
|
| (282 | ) |
| 35,262 |
|
| Income before taxes | 41,121 |
|
| 21,811 |
|
| (11,860 | ) |
| 51,072 |
| 76,304 |
|
| 4,096 |
|
| 3,983 |
|
| 84,383 |
|
| Income tax expense | 36,834 |
| | 69 |
| | — |
| | 36,903 |
| |
| Income tax expense (benefit) | | 9,772 |
| | (267 | ) | | — |
| | 9,505 |
|
| Net income | 4,287 |
|
| 21,742 |
|
| (11,860 | ) |
| 14,169 |
| 66,532 |
|
| 4,363 |
|
| 3,983 |
|
| 74,878 |
|
| Less: Net income attributable to non-controlling interests in Consolidated Funds | — |
| | 21,742 |
| | (11,860 | ) | | 9,882 |
| — |
| | 4,363 |
| | 3,983 |
| | 8,346 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | 16,062 |
| | — |
| | — |
| | 16,062 |
| 34,393 |
| | — |
| | — |
| | 34,393 |
|
| 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 | ) | |
| Net income attributable to Ares Management Corporation | | 32,139 |
|
| — |
|
| — |
|
| 32,139 |
|
| Less: Series A Preferred Stock dividends paid | | 5,425 |
| | — |
| | — |
| | 5,425 |
|
| Net income attributable to Ares Management Corporation Class A common stockholders | | $ | 26,714 |
|
| $ | — |
|
| $ | — |
|
| $ | 26,714 |
|
Ares Management L.P.Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)
| | | | For the Three Months Ended June 30, 2017 | | | | | | | | | |
| | As adjusted | 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 $19,143) | $ | 185,560 |
| | $ | — |
| | $ | (4,792 | ) | | $ | 180,768 |
| |
| Management fees (includes ARCC Part I Fees of $29,866) | | $ | 202,304 |
| | $ | — |
| | $ | (8,272 | ) | | $ | 194,032 |
|
| Carried interest allocation | 333,814 |
| | — |
| | (6 | ) | | 333,808 |
| (13,444 | ) | | | | — |
| | (13,444 | ) |
| Incentive fees | 3,728 |
| | — |
| | 488 |
| | 4,216 |
| 11,740 |
| | | | (4,000 | ) | | 7,740 |
|
| Principal investment income | 34,166 |
| | — |
| | 4,141 |
| | 38,307 |
| 14,722 |
| | — |
| | (12,851 | ) | | 1,871 |
|
| Administrative, transaction and other fees | 15,098 |
| | — |
| | — |
| | 15,098 |
| 13,964 |
| | — |
| | — |
| | 13,964 |
|
| Total revenues | 572,366 |
|
| — |
|
| (169 | ) |
| 572,197 |
| 229,286 |
|
| — |
|
| (25,123 | ) |
| 204,163 |
|
| Expenses | |
| | |
| | |
| | | | | | | | | |
| Compensation and benefits | 131,219 |
| | — |
| | — |
| | 131,219 |
| 138,992 |
| | — |
| | — |
| | 138,992 |
|
| Performance related compensation | 261,705 |
| | — |
| | — |
| | 261,705 |
| (13,005 | ) | | — |
| | — |
| | (13,005 | ) |
| General, administrative and other expense | 50,751 |
| | — |
| | — |
| | 50,751 |
| 59,918 |
| | — |
| | — |
| | 59,918 |
|
| Expenses of the Consolidated Funds | — |
| | 8,825 |
| | (4,303 | ) | | 4,522 |
| — |
| | 47,382 |
| | (12,270 | ) | | 35,112 |
|
| Total expenses | 443,675 |
|
| 8,825 |
|
| (4,303 | ) |
| 448,197 |
| 185,905 |
|
| 47,382 |
|
| (12,270 | ) |
| 221,017 |
|
| Other income (expense) | |
| | |
| | |
| | | | | | | | | |
| Net realized and unrealized loss on investments | (5,044 | ) | | — |
| | (1,544 | ) | | (6,588 | ) | 4,438 |
| | — |
| | (1,171 | ) | | 3,267 |
|
| Interest and dividend income | 2,216 |
| | — |
| | (754 | ) | | 1,462 |
| 2,356 |
| | — |
| | — |
| | 2,356 |
|
| Interest expense | (5,354 | ) | | — |
| | — |
| | (5,354 | ) | (6,076 | ) | | — |
| | — |
| | (6,076 | ) |
| Other income, net | 2,822 |
| | — |
| | — |
| | 2,822 |
| |
| Other expense, net | | (2,978 | ) | | — |
| | 991 |
| | (1,987 | ) |
| Net realized and unrealized gain on investments of the Consolidated Funds | — |
| | 953 |
| | (13,666 | ) | | (12,713 | ) | — |
| | 33,819 |
| | 668 |
| | 34,487 |
|
| Interest and other income of the Consolidated Funds | — |
| | 38,326 |
| | — |
| | 38,326 |
| — |
| | 92,633 |
| | — |
| | 92,633 |
|
| 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 |
| |
| 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 | | 41,121 |
|
| 21,811 |
|
| (11,860 | ) |
| 51,072 |
|
| Income tax expense | 857 |
| | 396 |
| | — |
| | 1,253 |
| 36,834 |
| | 69 |
| | — |
| | 36,903 |
|
| 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 | ) | |
| Net income | | 4,287 |
| | 21,742 |
| | (11,860 | ) | | 14,169 |
|
| Less: Net income attributable to non-controlling interests in Consolidated Funds | | — |
| | 21,742 |
| | (11,860 | ) | | 9,882 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | 72,596 |
| | — |
| | — |
| | 72,596 |
| 16,062 |
| | — |
| | — |
| | 16,062 |
|
| 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 |
| |
| Net loss attributable to Ares Management L.P. | | (11,775 | ) |
| — |
|
| — |
|
| (11,775 | ) |
| Less: Preferred equity dividends paid | | 5,425 |
| | — |
| | — |
| | 5,425 |
|
| Net loss attributable to Ares Management L.P. common shareholders | | $ | (17,200 | ) |
| $ | — |
|
| $ | — |
|
| $ | (17,200 | ) |
Ares Management L.P.Corporation
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, 2018 | For the Six Months Ended June 30, 2019 |
| | Consolidated
Company Entities | | Consolidated
Funds | | Eliminations | | Consolidated | Consolidated
Company Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Management fees (includes ARCC Part I Fees of $58,283) | $ | 399,130 |
| | $ | — |
| | $ | (15,583 | ) | | $ | 383,547 |
| |
| Management fees (includes ARCC Part I Fees of $77,550) | | $ | 479,653 |
| | $ | — |
| | $ | (17,148 | ) | | $ | 462,505 |
|
| Carried interest allocation | 40,685 |
| | — |
| | — |
| | 40,685 |
| 317,005 |
| | — |
| | — |
| | 317,005 |
|
| Incentive fees | 16,811 |
| | — |
| | (4,000 | ) | | 12,811 |
| 32,219 |
| | — |
| | (5,184 | ) | | 27,035 |
|
| Principal investment income | 17,430 |
| | — |
| | (10,650 | ) | | 6,780 |
| 31,471 |
| | — |
| | 3,132 |
| | 34,603 |
|
| Administrative, transaction and other fees | 26,429 |
| | — |
| | — |
| | 26,429 |
| 20,871 |
| | — |
| | — |
| | 20,871 |
|
| Total revenues | 500,485 |
|
| — |
|
| (30,233 | ) |
| 470,252 |
| 881,219 |
| | — |
| | (19,200 | ) | | 862,019 |
|
| Expenses | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Compensation and benefits | 273,631 |
| | — |
| | — |
| | 273,631 |
| 319,016 |
| | — |
| | — |
| | 319,016 |
|
| Performance related compensation | 12,873 |
| | — |
| | — |
| | 12,873 |
| 249,208 |
| | — |
| | — |
| | 249,208 |
|
| General, administrative and other expense | 104,368 |
| | — |
| | — |
| | 104,368 |
| 116,603 |
| | — |
| | — |
| | 116,603 |
|
| Expenses of the Consolidated Funds | — |
| | 56,011 |
| | (19,583 | ) | | 36,428 |
| — |
| | 42,313 |
| | (22,332 | ) | | 19,981 |
|
| Total expenses | 390,872 |
|
| 56,011 |
|
| (19,583 | ) |
| 427,300 |
| 684,827 |
| | 42,313 |
| | (22,332 | ) | | 704,808 |
|
| Other income (expense) | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Net realized and unrealized gain on investments | 3,260 |
| | — |
| | (832 | ) | | 2,428 |
| 5,351 |
| | — |
| | (1,354 | ) | | 3,997 |
|
| Interest and dividend income | 5,703 |
| | — |
| | — |
| | 5,703 |
| 4,648 |
| | — |
| | (1,152 | ) | | 3,496 |
|
| Interest expense | (12,945 | ) | | — |
| | — |
| | (12,945 | ) | (11,382 | ) | | — |
| | — |
| | (11,382 | ) |
| Other expense, net | (2,831 | ) | | — |
| | 533 |
| | (2,298 | ) | |
| Other income, net | | 210 |
| | — |
| | 90 |
| | 300 |
|
| Net realized and unrealized gain on investments of the Consolidated Funds | — |
| | 21,367 |
| | 35 |
| | 21,402 |
| — |
| | 3,262 |
| | 986 |
| | 4,248 |
|
| Interest and other income of the Consolidated Funds | — |
| | 157,055 |
| | — |
| | 157,055 |
| — |
| | 195,390 |
| | — |
| | 195,390 |
|
| Interest expense of consolidated Funds | — |
| | (101,977 | ) | | 798 |
| | (101,179 | ) | |
| Interest expense of the Consolidated Funds | | — |
| | (134,437 | ) | | 1,520 |
| | (132,917 | ) |
| Total other income (expense) | (6,813 | ) |
| 76,445 |
|
| 534 |
|
| 70,166 |
| (1,173 | ) | | 64,215 |
| | 90 |
| | 63,132 |
|
| Income before taxes | 102,800 |
|
| 20,434 |
|
| (10,116 | ) |
| 113,118 |
| 195,219 |
| | 21,902 |
| | 3,222 |
| | 220,343 |
|
| Income tax expense | 24,459 |
| | 69 |
| | — |
| | 24,528 |
| |
| Income tax expense (benefit) | | 24,735 |
| | (846 | ) | | — |
| | 23,889 |
|
| Net income | 78,341 |
|
| 20,365 |
|
| (10,116 | ) |
| 88,590 |
| 170,484 |
| | 22,748 |
| | 3,222 |
| | 196,454 |
|
| Less: Net income attributable to non-controlling interests in Consolidated Funds | — |
| | 20,365 |
| | (10,116 | ) | | 10,249 |
| — |
| | 22,748 |
| | 3,222 |
| | 25,970 |
|
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | 49,168 |
| | — |
| | — |
| | 49,168 |
| 93,396 |
| | — |
| | — |
| | 93,396 |
|
| 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 |
| |
| Net income attributable to Ares Management Corporation | | 77,088 |
| | — |
| | — |
| | 77,088 |
|
| Less: Series A Preferred Stock dividends paid | | 10,850 |
| | — |
| | — |
| | 10,850 |
|
| Net income attributable to Ares Management Corporation Class A common stockholders | | $ | 66,238 |
| | $ | — |
| | $ | — |
| | $ | 66,238 |
|
Ares Management L.P.Corporation
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, 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 the 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 dividends paid | 10,850 |
| | — |
| | — |
| | 10,850 |
|
| Net income attributable to Ares Management L.P. common shareholders | $ | 18,323 |
| | $ | — |
| | $ | — |
| | $ | 18,323 |
|
|
| | | | | | | | | | | | | | | |
| | For the Six Months Ended June 30, 2017 |
| | As Adjusted |
| | Consolidated
Company
Entities | | Consolidated
Funds | | Eliminations | | Consolidated |
| Revenues | |
| | |
| | |
| | |
|
| 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 | 834,798 |
| | — |
| | (18,357 | ) | | 816,441 |
|
| Expenses | |
| | |
| | |
| | |
| Compensation and benefits | 255,558 |
| | — |
| | — |
| | 255,558 |
|
| Performance related compensation | 302,407 |
| | — |
| | — |
| | 302,407 |
|
| General, administrative and other expense | 98,089 |
| | — |
| | — |
| | 98,089 |
|
| Transaction support expense | 275,177 |
| | — |
| | — |
| | 275,177 |
|
| Expenses of the Consolidated Funds | — |
| | 19,334 |
| | (10,901 | ) | | 8,433 |
|
| Total expenses | 931,231 |
| | 19,334 |
| | (10,901 | ) | | 939,664 |
|
| Other income (expense) | |
| | |
| | |
| | |
| 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 | 19,318 |
| | — |
| | — |
| | 19,318 |
|
| 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 | 12,853 |
| | 35,295 |
| | (433 | ) | | 47,715 |
|
| Income (loss) before taxes | (83,580 | ) | | 15,961 |
| | (7,889 | ) | | (75,508 | ) |
| Income tax expense (benefit) | (33,875 | ) | | 864 |
| | — |
| | (33,011 | ) |
| Net income (loss) | (49,705 | ) | | 15,097 |
| | (7,889 | ) | | (42,497 | ) |
| 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. | 8,744 |
| | — |
| | — |
| | 8,744 |
|
| 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.Corporation
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 June 30, 20182019 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 July 2018,2019, the Company's board of directors of the Company's general partner declared a quarterly dividend of $0.28$0.32 per share of Class A common sharestock payable on September 30, 2019 to common shareholdersstockholders of record at the close of business on September 14, 2018, with a payment date of September 28, 2018.16, 2019.
In July 2018,2019, the Company's board of directors of the Company's general partner declared a quarterly dividend of $0.4375 per preferred equity share of Series A Preferred Stock payable on September 30, 2019 to preferred equity shareholdersstockholders of record at the close of business on September 15, 2018, with2019. As September 15, 2019 falls on a paymentSunday, the effective record date offor the dividend will be Friday, September 30, 2018.13, 2019.
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 AnalysisOf Financial Condition And Results Of Operations
Ares Management L.P.Corporation is a Delaware corporation, which was formerly a limited partnershiptreated as a corporation for U.S. federal income tax purposes, formed on November 15, 2013.2013 and which converted to a Delaware corporation effective on November 26, 2018. Unless the context otherwise requires, references to “Ares,” “we,” “us,” “our,” “the Partnership” and “the Company” are intended to mean the business and operations of Ares Management L.P.Corporation and its consolidated subsidiaries. The following discussion analyzes the financial condition and results of operations of the Partnership.Company. “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 20172018 Annual Report on Form 10-K of Ares Management L.P.Corporation.
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 assetinvestment manager that operates through three distinct but complementary investment groups,integrated businesses, 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 Reporting,” to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. During the six months ended June 30, 2018,2019, 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 of management fees, carried interest allocation, incentive fees, as well as principal investment income, and administrative expense 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. Carried interest allocation and incentive fees are based on certain specific hurdle rates as defined in the funds' applicable investment management or partnership agreements. Carried interest allocation and incentive 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 investment income, realized gains (losses) and unrealized appreciation (depreciation) resulting from equity methodour other investments that we do not mange, investments in collateralized loan obligations and common stock as well as investments of the Consolidated Funds. Interest expense is also included withina component of 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 ofnetted against the 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 whichwhere we holdhave a significant economic interest and substantive control rights. However, for segment reporting purposes, we present revenues, expenses and expensesrealized net investment income (loss) on a combined segment basis, which showsreflects 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,fees and realized and unrealized performance income, and net investment income. Our segment expenses consist of compensation and benefits, net of administrative fees, general, administrative and other expenses and realized performance income compensation, net of administrative fees, as well asfees. Our segment realized net investment income (loss) consist of realized net investment income, interest and unrealized performance related compensation.other realized investment income and interest expense.
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,As of June 30, 2019, approximately 71%72% of our assets under management were in funds with a remaining contractual life of three years or more, and approximately 44%74% were in funds with a contractual life ofan initial duration greater than seven years or more. Asat time of June 30, 2018,closing and 89% of our management fees are derived from permanent capital, CLOs and closed end funds. Our funds have a stable base of committed capital enabling us to invest in assets with a long-term focus over different points in a market cycle and to take advantage of market volatility. However, our results of operations, including the fair value of our AUM, are affected by a variety of factors, particularly in the United States and Western Europe, including conditions in the global financial markets and the economic and political environments, particularly in the United States and Western Europe.environments.
U.S. credit markets were strongexperienced positive performance in the second quarter of 2018 as a strong fundamental backdropFederal Reserve policy and stable credit conditions largely offset volatility from global trade concerns.tensions and increasing uncertainty surrounding future economic growth. The U.S. economy remained fundamentally sound with indicators signaling continued economic expansion and strengtheningexpectations of the labor market. The Institute for Supply Management PMI increased in the quarter with June’s reading of 60.2 marking the 22nd consecutive month the index increased at an accelerating rate. The unemploymenta potential rate remained low throughout the quarter with May’s reading of 3.8% being the lowest 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 Bureau of Economic Analysis for the first quarter of 2018. Corporate earningscut contributed to the strong fundamental backdrop as well with S&P 500 companies reporting earnings growth of 24.8% per data released by FactSet.higher leveraged loan and high yield bond prices. The CSLLI, a leveraged loan index, returned 0.78%1.6% in the second quarter of 2019 while the ICE BAML High Yield Master II Index, a high yield bondsbond index, returned 1.0% for the second 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. counterparts2.6% 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 momentum2019.
European credit markets experienced similar performance behind accommodative statements from 2017 would continue, growth estimates for 2018 were reduced from 2.4% to 2.1% by the European Central Bank (“ECB”) in June. Inflation trends in the region wereand strong albeit volatile, during the quarter as a 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,corporate earnings. The Credit Suisse Western European Leveraged Loan Index andreturned 1.1% during the second quarter of 2019 while the 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 region may not persist.returned 2.4%.
In the U.S., the S&P 500 Index increased by 3.4%continued its strong rally to start the year with the index growing 4.3% in the second quarter of 2018, following a decrease of 0.8% in the first 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.2019 bringing year to date appreciation to 18.5%. Outside the U.S., the global equity markets declined during the second quarter of 2018saw broad based appreciation as well with the MSCI All Country World ex USA Index decreased 2.6%increasing 3.0% in the second quarter of 2019 bringing its year to date decline to 3.8%appreciation of 13.6%.
These markets The intermediated private equity auction market remains highly competitive and economies have created opportunities, particularly forleveraged buy out purchase price multiples remained near historical highs during 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, havingsecond quarter of 2019. Amidst a significant expansion in 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 78%size of the corporate debt market, leverage levels continue to increase and are even higher when EBITDA-adjustments are taken into account. These dynamics have led to a significant compression in private equity risk premiums. We continue to believe careful company selection, a focus on high-quality assets withinand a differentiated view to drive value creation is of paramount importance in the current market environment.
European and U.S. real estate fundamentals and pricing appear to have held steady or improved over the second quarter of 2019. While the global macroeconomic backdrop is clouded by trade tensions among other geopolitical volatilities, European and U.S. property performance have been bolstered by consumer spending, low unemployment rates and accommodative central bank policies. Leverage continued to be accretive to property values and the availability of investment capital maintained transaction volumes. Across our Credit Group are floating rate instruments, whichtargeted markets in both the U.S. and Europe, we believe helps mitigate volatility associated with changes in interest rates.continue to find opportunities to capitalize on our deep understanding of local market and overall industry dynamics to acquire and lend on commercial real estate.
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.
Change in Our Tax Status ElectionRecent Transactions
Effective March 1, 2018,
On July 9, 2019, we filed an election withexpanded our existing insurance platform, Ares Insurance Solutions, through the Internal Revenue Servicelaunch of Aspida Financial (“IRS”) to be treated as a corporation for U.S. federal income tax purposes (collectively, the “Tax Election”Aspida”). 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 partnershipAspida entered into an agreement to amongacquire a Michigan-domiciled insurance company and its insurance operations for approximately $75 million in cash. The transaction is expected to close prior to the end of 2019, subject to regulatory approval and 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 our 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 statutory federal corporate tax rate from 35% to 21%, also presented compelling reasons to make the Tax Election. The impact of the Tax Election on our reported results is limited to increased tax expense on performance related earnings, which was previously classified as pass-through income. Taxes on performance related earnings consist of current taxes on realized performance income and deferred taxes on unrealized performance related earnings that may change in subsequent periods until such income is realized.closing conditions.
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 6.9%6.4% of our AUM as of June 30, 2018, 3.9%2019, 3.6% of our management fees and 7.0%1.5% of our performance income for the six months ended June 30, 2018.2019. As of June 30, 2019, we consolidated 14 CLOs and eight private funds, and as of June 30, 2018, we consolidated 12 CLOs and nine private funds,funds.
Our CLOs serve as long-term, non-recourse financing for debt investments and as a way to minimize refinancing and maturity risk and secure a fixed cost of funds over an underlying market interest rate. As of June 30, 2017, we consolidated seven CLOs and nine private funds.2019, our maximum exposure of loss for CLO securities was $100.8 million.
The consolidation of these funds significantly impacted interest and other income of Consolidated Funds, interest and other expensesexpense of Consolidated Funds, net investment gains (losses)realized and unrealized gain (loss) on investments of Consolidated Funds and non-controlling interests in Consolidated Funds, among others, for the three and six months ended June 30, 20182019 and 2017. Further,2018. Also, the consolidation of these funds maytypically has the impact ourof decreasing management fees, incentive fees and carried interest allocation and incentive fees reported under GAAP to the extent these 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 our attributedthe net income.income attributable to us. 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 six months ended June 30, 2019, two entities were liquidated/dissolved and two entities experienced a significant change in ownership that resulted in deconsolidation of the fund and CLO during the period. During the six months ended June 30, 2018, 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)
Realized Income (RI)
The specific components and calculations of these non‑GAAP measures are discussed in greater detail in Note 14, “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 andwhich are discussed further under “Results“—Components of Operations—Consolidated Results of Operations,” whichOperations” and are prepared in accordance with GAAP. For the specific components and calculations of these non-GAAP measures, as well as 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
AUMAssets under management (“AUM”) 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 of 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 subordinatedinitial principal amounts of notes (equity) plus all drawn and undrawn debt tranches.adjusted for paydowns.
The tables below provide the period-to-period rollforwards of our total AUM by segment for the three months ended June 30, 20182019 and 20172018 (in millions):
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 3/31/2018 | $ | 77,310 |
| | $ | 24,303 |
| | $ | 10,896 |
| | $ | 112,509 |
| |
| Balance at 3/31/2019 | | $ | 101,076 |
| | $ | 23,778 |
| | $ | 11,810 |
| | $ | 136,664 |
|
| Net new par/equity commitments | 9,359 |
| | 350 |
| | 307 |
| | 10,016 |
| 2,350 |
| | 997 |
| | 455 |
| | 3,802 |
|
| Net new debt commitments | 1,990 |
| | — |
| | — |
| | 1,990 |
| |
| Net change in debt commitments | | 3,341 |
| | — |
| | 111 |
| | 3,452 |
|
| Distributions | (1,800 | ) | | (1,039 | ) | | (240 | ) | | (3,079 | ) | (2,376 | ) | | (559 | ) | | (650 | ) | | (3,585 | ) |
| Change in fund value | (1 | ) | | (12 | ) | | (53 | ) | | (66 | ) | 1,114 |
| | 519 |
| | 142 |
| | 1,775 |
|
| Balance at 6/30/2018 | $ | 86,858 |
| | $ | 23,602 |
| | $ | 10,910 |
| | $ | 121,370 |
| |
| Balance at 6/30/2019 | | $ | 105,505 |
| | $ | 24,735 |
| | $ | 11,868 |
| | $ | 142,108 |
|
| Average AUM(1) | $ | 82,085 |
| | $ | 23,953 |
| | $ | 10,904 |
| | $ | 116,942 |
| $ | 103,292 |
| | $ | 24,257 |
| | $ | 11,840 |
| | $ | 139,389 |
|
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 3/31/2017 | $ | 65,231 |
| | $ | 24,653 |
| | $ | 9,941 |
| | $ | 99,825 |
| |
| Balance at 3/31/2018 | | $ | 77,310 |
| | $ | 24,303 |
| | $ | 10,896 |
| | $ | 112,509 |
|
| Net new par/equity commitments | 2,083 |
| | 281 |
| | 502 |
| | 2,866 |
| 9,359 |
| | 350 |
| | 307 |
| | 10,016 |
|
| Net new debt commitments | 2,267 |
| | — |
| | 236 |
| | 2,503 |
| |
| Net change in debt commitments | | 1,990 |
| | — |
| | — |
| | 1,990 |
|
| Distributions | (3,446 | ) | | (660 | ) | | (168 | ) | | (4,274 | ) | (1,800 | ) | | (1,039 | ) | | (240 | ) | | (3,079 | ) |
| Change in fund value | 1,312 |
| | 1,496 |
| | 281 |
| | 3,089 |
| (1 | ) | | (12 | ) | | (53 | ) | | (66 | ) |
| Balance at 6/30/2017 | $ | 67,447 |
| | $ | 25,770 |
| | $ | 10,792 |
| | $ | 104,009 |
| |
| Balance at 6/30/2018 | | $ | 86,858 |
| | $ | 23,602 |
| | $ | 10,910 |
| | $ | 121,370 |
|
| Average AUM(1) | $ | 66,341 |
| | $ | 25,212 |
| | $ | 10,368 |
| | $ | 101,921 |
| $ | 82,085 |
| | $ | 23,953 |
| | $ | 10,904 |
| | $ | 116,942 |
|
(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 six months ended June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 12/31/2018 | $ | 95,836 |
| | $ | 23,487 |
| | $ | 11,340 |
| | $ | 130,663 |
|
| Net new par/equity commitments | 4,915 |
| | 1,028 |
| | 617 |
| | 6,560 |
|
| Net new debt commitments | 6,306 |
| | — |
| | 583 |
| | 6,889 |
|
| Distributions | (3,724 | ) | | (1,199 | ) | | (989 | ) | | (5,912 | ) |
| Change in fund value | 2,172 |
| | 1,419 |
| | 317 |
| | 3,908 |
|
| Balance at 6/30/2019 | $ | 105,505 |
| | $ | 24,735 |
| | $ | 11,868 |
| | $ | 142,108 |
|
| Average AUM(1) | $ | 100,805 |
| | $ | 24,000 |
| | $ | 11,673 |
| | $ | 136,478 |
|
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total AUM |
| Balance at 12/31/2017 | $ | 71,732 |
| | $ | 24,530 |
| | $ | 10,229 |
| | $ | 106,491 |
|
| Net new par/equity commitments | 12,459 |
| | 363 |
| | 1,164 |
| | 13,986 |
|
| Net new debt commitments | 4,745 |
| | — |
| | — |
| | 4,745 |
|
| Distributions | (3,136 | ) | | (1,321 | ) | | (531 | ) | | (4,988 | ) |
| Change in fund value | 1,058 |
| | 30 |
| | 48 |
| | 1,136 |
|
| Balance at 6/30/2018 | $ | 86,858 |
| | $ | 23,602 |
| | $ | 10,910 |
| | $ | 121,370 |
|
| Average AUM(1) | $ | 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.
The components of our AUM, including the portion that is FPAUM, are presented below as of June 30, 2019 and 2018 (in millions):
|
| |
| AUM: $142,108 | AUM: $121,370 |
|
| | | | | | | |
| FPAUM | | AUM not yet earning fees | | Non-fee paying(1) | | General partner and affiliates |
(1) Includes $7.8 billion and $7.0 billion of AUM of funds from which we indirectly earn management fees as of June 30, 2019 and 2018, respectively.
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 June 30, 2018 and 2017 (in millions):
|
| | | | | | | |
| | Credit | | Private Equity | | Real Estate | |
As of June 30, 2018 and 2017, our available capital, which we refer to as dry powder, was $33.3 billion and $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, certain 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 June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 3/31/2018 | $ | 51,540 |
| | $ | 16,663 |
| | $ | 6,751 |
| | $ | 74,954 |
|
| Commitments | 1,888 |
| | 350 |
| | 97 |
| | 2,335 |
|
| Subscriptions/deployment/increase in leverage | 1,951 |
| | 171 |
| | 280 |
| | 2,402 |
|
| Redemptions/distributions/decrease in leverage | (2,109 | ) | | (590 | ) | | (115 | ) | | (2,814 | ) |
| Change in fund value | 66 |
| | (5 | ) | | (50 | ) | | 11 |
|
| Change in fee basis | — |
| | — |
| | — |
| | — |
|
| FPAUM Balance at 6/30/2018 | $ | 53,336 |
| | $ | 16,589 |
| | $ | 6,963 |
| | $ | 76,888 |
|
| Average FPAUM(1) | $ | 52,439 |
| | $ | 16,627 |
| | $ | 6,858 |
| | $ | 75,924 |
|
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 3/31/2017 | $ | 45,696 |
| | $ | 17,182 |
| | $ | 6,357 |
| | $ | 69,235 |
|
| Commitments | 1,251 |
| | 281 |
| | 390 |
| | 1,922 |
|
| Subscriptions/deployment/increase in leverage | 1,265 |
| | 456 |
| | 154 |
| | 1,875 |
|
| Redemptions/distributions/decrease in leverage | (2,684 | ) | | (570 | ) | | (96 | ) | | (3,350 | ) |
| Change in fund value | 756 |
| | (57 | ) | | 85 |
| | 784 |
|
| Change in fee basis | 225 |
| | — |
| | (236 | ) | | (11 | ) |
| FPAUM Balance at 6/30/2017 | $ | 46,509 |
| | $ | 17,292 |
| | $ | 6,654 |
| | $ | 70,455 |
|
| Average FPAUM(1) | $ | 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-period rollforwards of our total FPAUM by segment for the six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 3/31/2019 | $ | 62,924 |
| | $ | 17,322 |
| | $ | 6,975 |
| | $ | 87,221 |
|
| Commitments | 1,570 |
| | — |
| | 279 |
| | 1,849 |
|
| Subscriptions/deployment/increase in leverage | 2,695 |
| | 188 |
| | 402 |
| | 3,285 |
|
| Redemptions/distributions/decrease in leverage | (2,992 | ) | | (324 | ) | | (229 | ) | | (3,545 | ) |
| Change in fund value | 566 |
| | 2 |
| | 36 |
| | 604 |
|
| FPAUM Balance at 6/30/2019 | $ | 64,763 |
| | $ | 17,188 |
| | $ | 7,463 |
| | $ | 89,414 |
|
| Average FPAUM(1) | $ | 63,845 |
| | $ | 17,256 |
| | $ | 7,220 |
| | $ | 88,321 |
|
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 12/31/2017 | $ | 49,450 |
| | $ | 16,858 |
| | $ | 6,189 |
| | $ | 72,497 |
|
| Commitments | 2,818 |
| | 363 |
| | 863 |
| | 4,044 |
|
| Subscriptions/deployment/increase in leverage | 3,915 |
| | 374 |
| | 415 |
| | 4,704 |
|
| Redemptions/distributions/decrease in leverage | (3,334 | ) | | (1,016 | ) | | (298 | ) | | (4,648 | ) |
| Change in fund value | 494 |
| | 10 |
| | (2 | ) | | 502 |
|
| Change in fee basis | (7 | ) | | — |
| | (204 | ) | | (211 | ) |
| FPAUM Balance at 6/30/2018 | $ | 53,336 |
| | $ | 16,589 |
| | $ | 6,963 |
| | $ | 76,888 |
|
| Average FPAUM(1) | $ | 51,443 |
| | $ | 16,703 |
| | $ | 6,635 |
| | $ | 74,781 |
|
| | | | Credit Group | | Private Equity Group | | Real Estate Group | | Total | 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 |
| |
| FPAUM Balance at 3/31/2018 | | $ | 51,540 |
| | $ | 16,663 |
| | $ | 6,751 |
| | $ | 74,954 |
|
| Commitments | 1,783 |
| | 7,922 |
| | 390 |
| | 10,095 |
| 1,888 |
| | 350 |
| | 97 |
| | 2,335 |
|
| Subscriptions/deployment/increase in leverage | 2,282 |
| | 837 |
| | 207 |
| | 3,326 |
| 1,951 |
| | 171 |
| | 280 |
| | 2,402 |
|
| Redemptions/distributions/decrease in leverage | (4,503 | ) | | (918 | ) | | (270 | ) | | (5,691 | ) | (2,109 | ) | | (590 | ) | | (115 | ) | | (2,814 | ) |
| Change in fund value | 1,224 |
| | (336 | ) | | 71 |
| | 959 |
| 66 |
| | (5 | ) | | (50 | ) | | 11 |
|
| Change in fee basis | 225 |
| | (1,527 | ) | | (284 | ) | | (1,586 | ) | |
| FPAUM Balance at 6/30/2017 | $ | 46,509 |
| | $ | 17,292 |
| | $ | 6,654 |
| | $ | 70,455 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 53,336 |
| | $ | 16,589 |
| | $ | 6,963 |
| | $ | 76,888 |
|
| Average FPAUM(1) | $ | 44,971 |
| | $ | 15,262 |
| | $ | 6,517 |
| | $ | 66,750 |
| $ | 52,439 |
| | $ | 16,627 |
| | $ | 6,858 |
| | $ | 75,924 |
|
(1) Represents the quarterly average of beginning and ending balances.
The tables below provide rollforwards of our total FPAUM by segment for the six months ended June 30, 2019 and 2018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 12/31/2018 | $ | 57,847 |
| | $ | 17,071 |
| | $ | 6,952 |
| | $ | 81,870 |
|
| Commitments | 3,408 |
| | 81 |
| | 365 |
| | 3,854 |
|
| Subscriptions/deployment/increase in leverage | 6,628 |
| | 500 |
| | 559 |
| | 7,687 |
|
| Redemptions/distributions/decrease in leverage | (4,457 | ) | | (468 | ) | | (410 | ) | | (5,335 | ) |
| Change in fund value | 1,471 |
| | 4 |
| | (3 | ) | | 1,472 |
|
| Change in fee basis | (134 | ) | | — |
| | — |
| | (134 | ) |
| FPAUM Balance at 6/30/2019 | $ | 64,763 |
| | $ | 17,188 |
| | $ | 7,463 |
| | $ | 89,414 |
|
| Average FPAUM(1) | $ | 61,844 |
| | $ | 17,194 |
| | $ | 7,130 |
| | $ | 86,168 |
|
|
| | | | | | | | | | | | | | | |
| | Credit Group | | Private Equity Group | | Real Estate Group | | Total |
| FPAUM Balance at 12/31/2017 | $ | 49,450 |
| | $ | 16,858 |
| | $ | 6,189 |
| | $ | 72,497 |
|
| Commitments | 2,818 |
| | 363 |
| | 863 |
| | 4,044 |
|
| Subscriptions/deployment/increase in leverage | 3,915 |
| | 374 |
| | 415 |
| | 4,704 |
|
| Redemptions/distributions/decrease in leverage | (3,334 | ) | | (1,016 | ) | | (298 | ) | | (4,648 | ) |
| Change in fund value | 494 |
| | 10 |
| | (2 | ) | | 502 |
|
| Change in fee basis | (7 | ) | | — |
| | (204 | ) | | (211 | ) |
| FPAUM Balance at 6/30/2018 | $ | 53,336 |
| | $ | 16,589 |
| | $ | 6,963 |
| | $ | 76,888 |
|
| Average FPAUM(1) | $ | 51,443 |
| | $ | 16,703 |
| | $ | 6,635 |
| | $ | 74,781 |
|
(1) Represents the quarterly average of beginning and ending balances.
Incentive Eligible Assets Under Management, Incentive Generating Assets Under Management and Available Capital
Please referIEAUM generally represents the NAV plus uncalled equity or total assets plus uncalled debt, as applicable, of our funds from which we are entitled to “— Resultsreceive a performance income, excluding capital committed by us and our professionals (from which we generally do not earn performance income). With respect to ARCC's AUM, only ARCC Part II Fees may be generated from IEAUM.
IGAUM generally represents the AUM of Operationsour funds that are currently generating on a realized or unrealized basis, performance income. It generally represents the NAV or total assets of our funds, as applicable, for which we are entitled to receive performance income, excluding capital committed by Segment” for detailed information by segment of the activity affecting total FPAUM for each of the periods presented.
us and our professionals (from which we generally do not earn performance income). With respect to ARCC's AUM, only ARCC Part II Fees may be generated from IGAUM.
The charts below present FPAUMour IEAUM and IGAUM by its fee basissegment as of June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | |
FPAUM: $76,888 | FPAUM: $70,455 | Credit | | Private Equity | | Real Estate | |
The components of our AUM, including the portion that is FPAUM, are presented below asAs of June 30, 2019 and 2018, our available capital, which we refer to as dry powder, was $37.1 billion and 2017 (in millions):$33.3 billion, respectively, primarily attributable to our funds in the Credit Group.
Management Fees Fund Duration
We view the duration of funds we manage as a metric to measure the stability of our future management fees. For the three months ended June 30, 2019 and 2018, 83% and 81%, respectively, of our unconsolidated management fees were attributable to funds with three or more years in duration. The charts below present the composition of our unconsolidated management fees by the initial fund duration for the three months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | |
AUM: $121,370 | AUM: $104,009Permanent Capital | | 3 to 6 years | | 7 to 9 years | | 10 or more years | | Differentiated Managed Accounts(1) | | Fewer Than 3 years | | Managed Accounts |
(1) Includes $7.0 billion and $6.4 billion of AUM of funds from which we indirectly earn Differentiated managed accounts have been managed by the Company for longer than three years, are investing in illiquid strategies or are co-investments structured to pay management fees as of June 30, 2018 and 2017, respectively.fees.
Fund Performance Metrics
Fund performance information for our investment funds considered to be “significant funds” is included throughout this discussion with analysis to facilitate an understanding of our results of operations for the periods presented. Our significant funds include those that contributed at least 1% of our total management fees for the six months ended June 30, 20182019 or composed ofrepresented at least 1% of the Company’s total FPAUM as of June 30, 2018,2019, 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 income upon the achievement of performance hurdles. The fund performance information reflected in this discussion and analysis is not indicative of our overall performance. An investment in the CompanyAres 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 six months ended June 30, 2018 and 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 common and preferred shareholdersus for the periods presented. The following table and discussion sets forth information regarding our consolidated results of operations for the three and six months ended June 30, 2019 and 2018 ($ in thousands):
| | | | Three Months Ended
June 30, | | Favorable (Unfavorable) | | Six Months Ended
June 30, | | Favorable (Unfavorable) | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | (Dollars in thousands) | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| 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 | % | |
| Management fees (includes ARCC Part I Fees of $39,157, $77,550 and $29,866, $58,283 for the three and six months ended June 30, 2019 and 2018, respectively) | | $ | 237,846 |
| | $ | 194,032 |
| | $ | 43,814 |
| | 23 | % | | $ | 462,505 |
| | $ | 383,547 |
| | $ | 78,958 |
| | 21 | % |
| Carried interest allocation | (13,444 | ) | | 333,808 |
| | (347,252 | ) | | NM |
| | 40,685 |
| | 385,815 |
| | (345,130 | ) | | (89 | )% | 119,712 |
| | (13,444 | ) | | 133,156 |
| | NM |
| | 317,005 |
| | 40,685 |
| | 276,320 |
| | NM |
|
| Incentive fees | 7,740 |
| | 4,216 |
| | 3,524 |
| | 84 | % | | 12,811 |
| | 7,381 |
| | 5,430 |
| | 74 | % | 10,220 |
| | 7,740 |
| | 2,480 |
| | 32 | % | | 27,035 |
| | 12,811 |
| | 14,224 |
| | 111 | % |
| Principal investment income | 1,871 |
| | 38,307 |
| | (36,436 | ) | | (95 | )% | | 6,780 |
| | 40,894 |
| | (34,114 | ) | | (83 | )% | 5,844 |
| | 1,871 |
| | 3,973 |
| | 212 | % | | 34,603 |
| | 6,780 |
| | 27,823 |
| | NM |
|
| Administrative, transaction and other fees | 13,964 |
| | 15,098 |
| | (1,134 | ) | | (8 | )% | | 26,429 |
| | 29,538 |
| | (3,109 | ) | | (11 | )% | 11,200 |
| | 13,964 |
| | (2,764 | ) | | (20 | )% | | 20,871 |
| | 26,429 |
| | (5,558 | ) | | (21 | )% |
| Total revenues | 204,163 |
| | 572,197 |
| | (368,034 | ) | | (64 | )% | | 470,252 |
| | 816,441 |
| | (346,189 | ) | | (42 | )% | 384,822 |
| | 204,163 |
| | 180,659 |
| | 88 | % | | 862,019 |
| | 470,252 |
| | 391,767 |
| | 83 | % |
| Expenses | |
| | |
| |
|
| |
|
| | | | | |
|
| |
|
| | | | | | | | | | | | | | | |
| Compensation and benefits | 138,992 |
| | 131,219 |
| | (7,773 | ) | | (6 | )% | | 273,631 |
| | 255,558 |
| | (18,073 | ) | | (7 | )% | 162,170 |
| | 138,992 |
| | (23,178 | ) | | (17 | )% | | 319,016 |
| | 273,631 |
| | (45,385 | ) | | (17 | )% |
| Performance related compensation | (13,005 | ) | | 261,705 |
| | 274,710 |
| | NM |
| | 12,873 |
| | 302,407 |
| | 289,534 |
| | 96 | % | 92,688 |
| | (13,005 | ) | | (105,693 | ) | | NM |
| | 249,208 |
| | 12,873 |
| | (236,335 | ) | | NM |
|
| General, administrative and other expenses | 59,918 |
| | 50,751 |
| | (9,167 | ) | | (18 | )% | | 104,368 |
| | 98,089 |
| | (6,279 | ) | | (6 | )% | 65,416 |
| | 59,918 |
| | (5,498 | ) | | (9 | )% | | 116,603 |
| | 104,368 |
| | (12,235 | ) | | (12 | )% |
| 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 |
| |
| Expenses of Consolidated Funds | | 15,427 |
| | 35,112 |
| | 19,685 |
| | 56 | % | | 19,981 |
| | 36,428 |
| | 16,447 |
| | 45 | % |
| Total expenses | 221,017 |
|
| 448,197 |
| | 227,180 |
| | 51 | % | | 427,300 |
| | 939,664 |
| | 512,364 |
| | 55 | % | 335,701 |
| | 221,017 |
| | (114,684 | ) | | (52 | )% | | 704,808 |
| | 427,300 |
| | (277,508 | ) | | (65 | )% |
| 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 |
| |
| Net realized and unrealized gain on investments | | 521 |
| | 3,267 |
| | (2,746 | ) | | (84 | )% | | 3,997 |
| | 2,428 |
| | 1,569 |
| | 65 | % |
| Interest and dividend income | 2,356 |
| | 1,462 |
| | 894 |
| | 61 | % | | 5,703 |
| | 3,386 |
| | 2,317 |
| | 68 | % | 1,652 |
| | 2,356 |
| | (704 | ) | | (30 | )% | | 3,496 |
| | 5,703 |
| | (2,207 | ) | | (39 | )% |
| Interest expense | (6,076 | ) | | (5,354 | ) | | (722 | ) | | (13 | )% | | (12,945 | ) | | (10,233 | ) | | (2,712 | ) | | (27 | )% | (5,793 | ) | | (6,076 | ) | | 283 |
| | 5 | % | | (11,382 | ) | | (12,945 | ) | | 1,563 |
| | 12 | % |
| Other income (expense), net | (1,987 | ) | | 2,822 |
| | (4,809 | ) | | NM |
| | (2,298 | ) | | 19,318 |
| | (21,616 | ) | | NM |
| 4,797 |
| | (1,987 | ) | | 6,784 |
| | NM |
| | 300 |
| | (2,298 | ) | | 2,598 |
| | 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 | % | (116 | ) | | 34,487 |
| | (34,603 | ) | | NM |
| | 4,248 |
| | 21,402 |
| | (17,154 | ) | | (80 | )% |
| Interest and other income of the Consolidated Funds | 92,633 |
| | 38,326 |
| | 54,307 |
| | 142 | % | | 157,055 |
| | 79,818 |
| | 77,237 |
| | 97 | % | |
| Interest and other income of Consolidated Funds | | 102,206 |
| | 92,633 |
| | 9,573 |
| | 10 | % | | 195,390 |
| | 157,055 |
| | 38,335 |
| | 24 | % |
| Interest expense of Consolidated Funds | (56,754 | ) | | (26,875 | ) | | (29,879 | ) | | (111 | )% | | (101,179 | ) | | (58,197 | ) | | (42,982 | ) | | (74 | )% | (68,005 | ) | | (56,754 | ) | | (11,251 | ) | | (20 | )% | | (132,917 | ) | | (101,179 | ) | | (31,738 | ) | | (31 | )% |
| 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 |
| |
| Total other income | | 35,262 |
| | 67,926 |
| | (32,664 | ) | | (48 | )% | | 63,132 |
| | 70,166 |
| | (7,034 | ) | | (10 | )% |
| Income before taxes | | 84,383 |
| | 51,072 |
| | 33,311 |
| | 65 | % | | 220,343 |
| | 113,118 |
| | 107,225 |
| | 95 | % |
| Income tax expense | | 9,505 |
| | 36,903 |
| | 27,398 |
| | 74 | % | | 23,889 |
| | 24,528 |
| | 639 |
| | 3 | % |
| Net income | | 74,878 |
| | 14,169 |
| | 60,709 |
| | NM |
| | 196,454 |
| | 88,590 |
| | 107,864 |
| | 122 | % |
| Less: Net income attributable to non-controlling interests in Consolidated Funds | | 8,346 |
| | 9,882 |
| | (1,536 | ) | | (16 | )% | | 25,970 |
| | 10,249 |
| | 15,721 |
| | 153 | % |
| Less: Net income attributable to non-controlling interests in Ares Operating Group entities | | 34,393 |
| | 16,062 |
| | 18,331 |
| | 114 | % | | 93,396 |
| | 49,168 |
| | 44,228 |
| | 90 | % |
| Net income (loss) attributable to Ares Management Corporation | | 32,139 |
| | (11,775 | ) | | 43,914 |
| | NM |
| | 77,088 |
| | 29,173 |
| | 47,915 |
| | 164 | % |
| Less: Series A Preferred Stock dividends paid | | 5,425 |
| | 5,425 |
| | — |
| | — | % | | 10,850 |
| | 10,850 |
| | — |
| | — | % |
| Net income (loss) attributable to Ares Management Corporation Class A common stockholders | | $ | 26,714 |
| | $ | (17,200 | ) | | 43,914 |
| | NM |
| | $ | 66,238 |
| | $ | 18,323 |
| | 47,915 |
| | 262 | % |
NM - Not Meaningful
The following section discusses the period-over-period fluctuations of our condensed consolidated results of operations for the three and six months ended June 30, 20182019 compared to 2017. Additional details behind the fluctuations attributable to a particular segment are included in “—Results of Operations by Segment” for each of the segments.2018.
Three and Six Months Ended June 30, 20182019Compared to Three and Six Months Ended June 30, 20172018
Revenues
Management Fees. Total management fees increased by $13.3$43.8 million, or 7%23%, to $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 June 30, 20182019 compared to the three months ended June 30, 2017. Segment management fees attributable to the Credit Group2018 and Real Estate Group increased by $23.2 million and $0.7 million, respectively, and segment 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$79.0 million, or 9%21%, 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, 20182019 compared to the six months ended June 30, 2017. Segment2018. The increases in total management fees attributable towere primarily driven by increases in ARCC Part I Fees and by higher FPAUM fromcapital deployments and new commitments during the Credit Group, Private Equity Group and Real Estate Group increased by $33.6 million, $3.0 million and $0.2 million, respectively, for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.
current year periods. For more detail regarding the fluctuations of management fees within each of theour segments see “—Results of Operations by Segment.”
Carried Interest Allocation. Carried interest allocation decreasedincreased by $347.3$133.2 million to $119.7 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $345.1$276.3 million to $317.0 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018.
Carried interest allocation for the three and six months ended June 30, 2019 and 2018 includedwas principally composed of the following: (i) $25.4following (in millions):
|
| | | | | | | | | |
| | Three Months Ended June 30, 2019 | Primary Drivers | | Six Months Ended June 30, 2019 | Primary Drivers |
| Credit funds | $ | 35.9 |
| Nine direct lending funds with $8.3 billion of IGAUM as of June 30, 2019 generating returns in excess of their hurdle rates. Ares Capital Europe III, L.P. (“ACE III”) and Ares Capital Europe IV, L.P. (“ACE IV”) generated $6.8 million and $7.2 million of carried interest allocation during the period, respectively | | $ | 72.7 |
| Nine direct lending funds with $9.3 billion of IGAUM as of June 30, 2019 generating returns in excess of their hurdle rates. ACE III and ACE IV generated $20.0 million and $19.7 million of carried interest allocation during the period, respectively |
| Private equity funds | 65.0 |
| Increased fair value of Ares Corporate Opportunities Fund IV, L.P.'s (“ACOF IV”) investment in a portfolio company resulting from a pending sale of the company | | 209.1 |
| Market appreciation of Ares Corporate Opportunities Fund III, L.P.'s (“ACOF III”) investment in Floor & Decor Holdings, Inc.(“Floor & Decor”); increased fair value of ACOF IV's investment in a portfolio company resulting from a pending sale of the company; and market appreciation across multiple ACOF IV portfolio companies |
| Real estate funds | 18.8 |
| Market appreciation from multiple properties within three of our U.S. real estate equity funds, Ares European Real Estate Fund IV L.P. (“EF IV”) and certain European real estate equity funds | | 35.2 |
| Market appreciation from multiple properties within four of our U.S. real estate equity funds, EF IV and two European real estate equity funds |
| Carried interest allocation | $ | 119.7 |
| | | $ | 317.0 |
| |
|
| | | | | | | | | |
| | Three Months Ended June 30, 2018 | Primary Drivers | | Six Months Ended June 30, 2018 | Primary Drivers |
| Credit funds | $ | 25.4 |
| Seven direct lending funds with $4.5 billion of IGAUM as of June 30, 2018 generating returns in excess of their hurdle rates. ACE III generated $12.1 million of carried interest allocation during the period | | $ | 41.5 |
| Seven direct lending funds with $4.5 billion of IGAUM as of June 30, 2018 generating returns in excess of their hurdle rates. ACE III generated $22.8 million of carried interest allocation during the period |
| Private equity funds | (53.2 | ) | Reduction of fair value of an ACOF IV industrial portfolio company and market depreciation of ACOF III's investment in Floor & Decor | | (27.7 | ) | Reductions of fair value of an ACOF IV industrial portfolio company and an Ares Energy Investors Fund V, L.P. (“EIF V”) asset; offset by market appreciation of ACOF III's investment in Floor & Decor |
| Real estate funds | 14.4 |
| Market appreciation from multiple properties within four of our U.S. real estate equity funds and EF IV | | 26.9 |
| Market appreciation from multiple properties within six of our U.S. real estate equity funds, EF IV and a certain European real estate equity fund |
| Carried interest allocation | $ | (13.4 | ) | | | $ | 40.7 |
| |
Incentive Fees. Incentive fees increased by $2.5 million, and $41.5 million of carried interest allocationsor 32%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 and by $14.2 million, or 111%, for the six months ended June 30, 2018, respectively, attributable2019 compared to the Credit Groupsix
months ended June 30, 2018. The increases were primarily due to certain Europeandriven by direct lending funds generatingthat did not generate incentive fees in the prior periods but generated returns in excess of their hurdle rates; (ii) $14.4 million and $27.0 million of carried interest allocations forrates in 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 ACOF IV industrial portfolio company and by a reduction in fair value in an Ares Energy Investors Fund V, L.P. (“EIF V”) energy portfolio company.current year periods.
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 primarily due to certain European direct lending funds generating returns in excess of their hurdle rates.
Incentive Fees. Incentive feesPrincipal Investment Income. Principal investment incomeincreased by $3.5$4.0 million to $7.7$5.8 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $5.4$27.8 million to $12.8$34.6 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017. As2018. The increase for the three month comparative period was primarily driven by a higher fair value of our investment in ACOF IV as a result of a pending sale of ACOF IV's investment in a portfolio company. The increase for the six month comparative period was primarily driven by a higher fair value of our adoptioninvestment in ACOF III as a result of ASC 606, usingmarket appreciation of Floor & Decor, which benefited from the modified retrospective approach, we now recognize incentive fee revenue only when the amount is realizedgeneral equity market rebound during 2019 and no longer subject to reversalby a higher fair value of our investment in ACOF IV as a result of a pending sale of ACOF IV's investment in a portfolio company.
Administrative, Transaction and no longer recognize unrealized incentiveOther Fees. Administrative fees in revenues subsequent to January 1, 2018. This adoption results in the delayed recognition of unrealized incentiveand other 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 realized $7.7 million and $12.8 million, respectively, across our direct lending and credit opportunity funds.
Principal Investment Income. Principal investment incomedecreased by $36.4$2.8 million, to $1.9 millionor 20%, for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $34.1$5.6 million, to $6.8 millionor 21%, for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018. The decreases for the comparative periods 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 decreaseddriven 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 six month comparative periods, respectively, primarily due to higher reimbursements of costs in the prior year periods related to temporary employees assisting with the integration of ACAS into ARCC. These decreases were offset by increases of $1.3 million and $2.3 million infewer transaction-based fees based on loan originations within certain funds in our Credit Group that will fluctuate periodically with the volume of syndicated loan originations and with the amount of capital available for the three and six month comparative periods, respectively.deployment.
Expenses
Compensation and Benefits. Compensation and benefits expenses increased by $7.8$23.2 million, or 6%17%, to $139.0 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $18.1$45.4 million, or 7%17%, to $273.6 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018. The increases were primarily driven by merit increases,higher incentive compensation attributable to management fee growth, 7% headcount growth, and equityincreases in ARCC Part I Fees compensation increases for the comparative periods. Equity compensation expense increased by $3.6of $5.8 million and $9.6$11.7 million for the three and six month comparative periods, respectively. Therespectively, and increases in equity compensation.
Equity compensation expense wereincreased by $1.5 million and $8.0 million for the three and six month comparative periods primarily due to additional restricted units awardedgranted as part of our annual bonus program and to certain retention programs.awards, including new restricted units granted to our Chief Executive Officer subsequent to June 30, 2018. Additionally, our annual equity compensation bonus program commenced in 2016 with awards scheduled to vest over a four year service period. As such, equity compensation expense for the three and six months ended June 30, 2019 reflects expenses associated with four years of bonus grants, whereas equity compensation expense for the three and six months ended June 30, 2018 reflected only three years of bonus grants.
Performance Related Compensation. Performance related compensation decreasedincreased by $274.7$105.7 million to $92.7 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $289.5$236.3 million to $249.2 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017. The decreases2018.The increases in performance related compensation are largely correlatecorrelated with the decreasesrespective increases in carried interest allocation and incentive fees before giving effect to the carried interest allocation and incentive fees earned from our Consolidated Funds eliminated upon consolidation.fees.
General, Administrative and Other Expenses. General, administrative and other expenses increased by $9.2$5.5 million, or 18%9%, to $59.9 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $6.3$12.2 million, or 6%12%, to $104.4 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018. The currentincreases were primarily driven by higher placement fees of $11.7 million and $11.2 million for the three and six month comparative periods, respectively, largely from fees associated with the launch of a fund in our special opportunities strategy. Additionally, we recognized higher professional service fees of $5.2 million and $9.0 million for the three and six month comparative periods, respectively, largely as a result of professional services related to due diligence, marketing and legal expenses related to the expansion of our existing insurance platform. The prior 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,in the second quarter of 2018, we began to incur certain expenses that were previously incurred theseby ARCC. These expenses resultingresulted in a $0.9approximately $3.5 million increase in recurring occupancy expenseand marketing related expenses for the three and six month comparative periods. Professional service fees increased by $0.9 million and $2.2 million for the three and six month comparative periods, respectively. The increases in professional service fees for both comparative periods were primarily driven by our 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 six month comparative periods, respectively, due to the launch of certain funds within our Credit Group during the prior year periods. Additionally, we made a $2.5 million one-time non-income tax payment during the first quarter of 2017.months ended June 30, 2019.
Transaction Support Expense. Transaction support expense was a one–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.
Expenses of the Consolidated Funds. Expenses of the Consolidated Funds increaseddecreased by $30.6$19.7 million, to $35.1 millionor 56%, for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $28.0$16.4 million, to $36.4 millionor 45%, for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018. The increasesdecreases were primarily driven by higher professional fees related toincurred during the issuance and refinancingprior year periods as a result of CLO debt within our Consolidated Fundsissuances during the current yearthose 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 expenses from two new U.S. CLOs and one new European CLO that we began consolidating during 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 of 2017. The increase for the six month comparative periods was also offset by reductions in 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.
Net Realized and Unrealized Gain (Loss) on Investments. Net realized and unrealized gain (loss) on investments of the Company increased. Net realized and unrealized gain on investments decreased by $9.9$2.7 million, from a loss of $6.6 millionor 84%, for the three months ended June 30, 20172019 compared to a gain of $3.3 million for the three months ended June 30, 2018. Net realized2018 and unrealized gain (loss) on investments of the Company increased by $8.1$1.6 million, from a loss of $5.7 millionor 65%, for the six months ended June 30, 20172019 compared 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 gainsdecrease for the three andmonth comparative periods was primarily due to net gains on our non-core investments recognized during the prior year period. The increase for the six month comparative periods respectively,was primarily due to higher net gains on our non-core fund investments.CLO investments, which benefited from favorable market conditions during the current year period.
Interest and Dividend Income. Interest and dividend income of the Company increaseddecreased by $0.9$0.7 million, to $2.4 millionor 30%, for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $2.3$2.2 million, to $5.7 millionor 39%, for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017. The increases were driven by increases2018. During the second quarter of $0.52018, we sold $219.3 million and $0.9 millionof our investments 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 millionCLO securities primarily resulting in a decrease in interest income from newattributable to CLO investmentssecurities for the three and six month comparative periods, respectively.periods.
Interest Expense. Interest expense of the Company increaseddecreased by $0.7$0.3 million, to $6.1 millionor 5%, for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $2.7$1.6 million, to $12.9 millionor 12%, for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018. The decreases for the comparative periods were primarily driven by the pay off of term loans we had entered into to finance certain investments in CLOs during the second quarter of 2018.
Other income (expense), net. Other income (expense), net increased from other expense, net of $2.0 million and $2.3 million for three and six months ended June 30, 2018, respectively, to other income, net of $4.8 million and $0.3 million for the three and six months ended June 30, 2019. 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 is expected to decrease in future periods as these term loans were paid off during the current year periods.
Other Income (Expense), Net. Other income (expense), net decreased by $4.8 million from net other income of $2.8 million for the three months ended June 30, 2017 to net expenses of $2.0 million for the three months ended June 30, 2018. The decrease was primarily driven by a $3.1 million decrease in transaction gains from the revaluation of certain assets and liabilities denominated in foreign currencies. Subsequentcurrencies for the three and six months ended June 30, 2019. The transaction gains were primarily due to the removalstrengthening of the U.S. risk retention requirements related to open-market CLO managers, we sold $219.3dollar against the British pounds sterling and the Euro.
Net realized and unrealized gain (loss) on investments of Consolidated Funds. Net realized and unrealized gain (loss) on investments of Consolidated Funds decreased from net realized and unrealized gain on investments of Consolidated Funds of $34.5 million of our investments in our CLO securities and used 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 thefor three months ended June 30, 2018.
Other income (expense),2018 to net realized and unrealized loss on investments of Consolidated Funds of $0.1 million. Net realized and unrealized gain on investments of Consolidated Funds decreased by $21.6$17.2 million, from other income of $19.3 millionor 80%, for the six months ended June 30, 20172019 compared to $2.3 million of net expenses for the six months ended June 30, 2018. The decrease wasdecreases for the comparative periods were primarily a result of a $20.3 million reversal of a contingent consideration relateddue to the Energy Investors Funds (“EIF”) acquisition that was reflected as a gain during the first quarter of 2017. Subsequent to the removal of the U.S. risk retention requirements related to open-market CLO managers, we sold $219.3 million of ourlower market prices for certain investments in our CLO securities and used 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 millionAsian private equity fund during the six months ended June 30, 2018.current year periods.
Net Realized and Unrealized Gain (Loss) on Investments of the Consolidated Funds. Net gain (loss) on investments of the Consolidated Funds increased by $47.2 million from a net loss of $12.7 million for the three months ended June 30, 2017 to a net gain of $34.5 million for the three months ended June 30, 2018. The net gain for three months ended June 30, 2018 primarily included the following: (i) $24.3 million in net gains from increased market value of certain investments in an Asian corporate private 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 driven by a change in market value of the fund'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 loss for the three months ended June 30, 2017 primarily included a $12.2 million net loss from lower valuations on certain investments in an Asian corporate private equity fund.
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 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 fund'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 from widely traded bank loans held within our consolidated CLOs primarily driven by market appreciation; (ii) $9.3 million of net 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 of the Consolidated Funds. Interest and other income of the Consolidated Funds increased by $54.3$9.6 million, or 142%10%, to $92.6 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $77.2$38.3 million, or 97%24%, to $157.1 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018. 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, 20172018 resulting in increasesan increase in interest income for the comparative periods.
Interest Expense of the Consolidated Funds. Interest expense of the consolidated fundsConsolidated Funds increased by $29.9$11.3 million, or 111%20%, to $56.8 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $43.0$31.7 million, or 74%31%, to $101.2 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018. 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 by2018 resulting in an increase in interest expense for the deconsolidation of two funds subsequent to June 30, 2017.comparative periods.
Income Tax Expense (Benefit).tax expense. Income tax expense increaseddecreased by $35.7$27.4 million, to $36.9 millionor 74%, for the three months ended June 30, 20182019 compared to the three months ended June 30, 2017. Income tax expense (benefit)2018 and decreased by $57.5$0.6 million, from a tax benefit of $33.0 millionor 3%, for the six months ended June 30, 20172019 compared to tax expense of $24.5 million for the six months ended June 30, 2018. IncomeThe decreases in income tax expense for the three and six months ended June 30, 2018 waswere 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 purposes effective March 1,during 2018. Income tax expense for the three months ended June 30, 2018 was primarily driven byincluded a $28.9 million valuation 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 for the six months ended June 30, 2018. IncomeThe decrease in effective tax expenserate for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily driven by aone-time deferred tax liability arisingitems from the embedded net unrealized gains of both carried interest and the investment portfolio that were not previously subject to corporate taxes. Incometaxes prior to our election to be taxed as a corporation for U.S. federal income tax benefit for the six months ended June 30, 2017 was primarily driven by pre-tax losses recognized by AHI, a U.S. taxable entity, resulting from the $275.2 million transaction support payment made in connection with ARCC's acquisition of ACAS.purposes during 2018.
Non-Controlling Interests. Net income (loss) attributable to non-controlling interests in Ares Operating Group entities represents results attributable to the owners of AOG Units that are not held by Ares Management L.P.Corporation and is allocated based on the weighted average daily ownership of the AOG unitholders.
Net income attributable to non-controlling interests in Ares Operating Group entities decreased by $56.5 million to $16.1 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Net income (loss) attributable to non-controlling interests in Ares Operating Group entities increased from a net loss of $58.4 million for the six months ended June 30, 2017 to net income of $49.2 million for the six months ended June 30, 2018. The weighted average daily ownership for non-controlling AOG unitholders wasdecreased from 55.1% and 57.5% for the three and six months ended June 30, 2018 respectively, compared to 61.4%52.6% and 61.5%52.9% for the three and six months ended June 30, 2017, respectively.2019. The decreases in non–controlling ownership were primarily driven by our common share offering of 5,000,000 sharesstock option exercises during the three months ended June 30, 2019 and by an affiliatevestings of Alleghany Corporation's exchange of 9,750,000 of its AOG Units into common sharesrestricted stock awards during the first quartersix months ended June 30, 2019.
Net income attributable to non-controlling interests in Ares Operating Group entities increased by $18.3 million, or 114%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 and by $44.2 million, or 90%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 . The increases were primarily a result of 2018.net income increasing at a greater rate than the decrease in non-controlling interests in Ares Operating Group entities.
Segment Analysis
For segment reporting purposes, revenues and expenses are presented excludingon a basis before giving effect to the results of our Consolidated Funds. As a result, segment revenues from management fees, performance income and investment income are differentgreater than those presented on a consolidated basis in accordance with GAAP because revenues recognized from Consolidated Funds are eliminated in consolidation. Furthermore, expenses and the effects of other income (expense) are different than related amounts presented on a consolidated basis in accordance with GAAP due to the exclusion of the results of Consolidated Funds.
Discussed below are our results of operations for each of our three reportable segments. In addition to the three segments, we separately discuss the OMG. This information is used by our management to make operating decisions, assess performance and allocate resources. The results of operations for each of our reportable segments are discussed below.
ENIFRE, RI and Other Measures
The following table sets forth FRE PRE, ENI and RI by segment for the three and six months ended June 30, 2018 and 2017. FRE, PRE, ENI and RI are non‑GAAP financial measures our management uses when making resource deployment decisions and in assessing performance of our segments (Forsegments. For definitions of each of these non-GAAP financial measures and how they are being used by management, see the Glossary).Glossary. The following table sets forth FRE and RI by segment for the three and six months ended June 30, 2019 and 2018 ($ in thousands):
| | | | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | June 30, | | June 30, | | June 30, | | June 30, | |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| | (Dollars in thousands) | |
| Fee related earnings: | | | | | | | | | | | | | | | | |
| Fee Related Earnings: | | | | | | | | | | | | | | | | |
| Credit Group | $ | 79,792 |
| | $ | 65,109 |
| | $ | 14,683 |
| | 23 | % | | $ | 157,379 |
| | $ | 131,215 |
| | $ | 26,164 |
| | 20 | % | $ | 97,940 |
| | $ | 79,160 |
| | $ | 18,780 |
| | 24 | % | | $ | 190,119 |
| | $ | 156,108 |
| | $ | 34,011 |
| | 22 | % |
| Private Equity Group | 26,808 |
| | 34,032 |
| | (7,224 | ) | | (21 | )% | | 53,795 |
| | 56,775 |
| | (2,980 | ) | | (5 | )% | 25,959 |
| | 26,808 |
| | (849 | ) | | (3 | )% | | 52,102 |
| | 53,795 |
| | (1,693 | ) | | (3 | )% |
| Real Estate Group | 5,986 |
| | 3,693 |
| | 2,293 |
| | 62 | % | | 11,091 |
| | 6,832 |
| | 4,259 |
| | 62 | % | 6,991 |
| | 5,986 |
| | 1,005 |
| | 17 | % | | 13,234 |
| | 11,091 |
| | 2,143 |
| | 19 | % |
| Operations Management Group | (50,548 | ) | | (49,446 | ) | | (1,102 | ) | | (2 | )% | | (99,770 | ) | | (94,712 | ) | | (5,058 | ) | | (5 | )% | (53,868 | ) | | (49,916 | ) | | (3,952 | ) | | (8 | )% | | (107,161 | ) | | (98,499 | ) | | (8,662 | ) | | (9 | )% |
| Fee related earnings | $ | 62,038 |
| | $ | 53,388 |
| | 8,650 |
| | 16 | % | | $ | 122,495 |
| | $ | 100,110 |
| | 22,385 |
| | 22 | % | |
| Performance related earnings: | | | | |
| |
|
| | | | | |
| |
|
| |
| Fee Related Earnings | | $ | 77,022 |
| | $ | 62,038 |
| | 14,984 |
| | 24 | % | | $ | 148,294 |
| | $ | 122,495 |
| | 25,799 |
| | 21 | % |
| Realized Income: | | | | | |
| |
|
| | | | | |
| |
|
|
| Credit Group | $ | 18,330 |
| | $ | 3,967 |
| | 14,363 |
| | NM |
| | $ | 41,606 |
| | $ | 11,368 |
| | 30,238 |
| | 266 | % | $ | 106,748 |
| | $ | 97,289 |
| | 9,459 |
| | 10 | % | | $ | 210,053 |
| | $ | 175,507 |
| | 34,546 |
| | 20 | % |
| Private Equity Group | 316 |
| | 87,249 |
| | (86,933 | ) | | (100 | )% | | (852 | ) | | 101,745 |
| | (102,597 | ) | | NM |
| 31,544 |
| | 53,408 |
| | (21,864 | ) | | (41 | )% | | 75,568 |
| | 80,735 |
| | (5,167 | ) | | (6 | )% |
| Real Estate Group | 3,128 |
| | 15,075 |
| | (11,947 | ) | | (79 | )% | | 9,729 |
| | 21,462 |
| | (11,733 | ) | | (55 | )% | 10,303 |
| | 6,479 |
| | 3,824 |
| | 59 | % | | 21,280 |
| | 20,148 |
| | 1,132 |
| | 6 | % |
| Operations Management Group | 3,699 |
| | (1,626 | ) | | 5,325 |
| | NM |
| | 6,467 |
| | (776 | ) | | 7,243 |
| | NM |
| (54,284 | ) | | (49,122 | ) | | (5,162 | ) | | (11 | )% | | (107,958 | ) | | (96,263 | ) | | (11,695 | ) | | (12 | )% |
| Performance related earnings | $ | 25,473 |
| | $ | 104,665 |
| | (79,192 | ) | | (76 | )% | | $ | 56,950 |
| | $ | 133,799 |
| | (76,849 | ) | | (57 | )% | |
| Economic net income: | | | | |
| |
|
| | | | | |
| |
|
| |
| Credit Group | $ | 98,122 |
| | $ | 69,076 |
| | 29,046 |
| | 42 | % | | $ | 198,985 |
| | $ | 142,583 |
| | 56,402 |
| | 40 | % | |
| Private Equity Group | 27,124 |
| | 121,281 |
| | (94,157 | ) | | (78 | )% | | 52,943 |
| | 158,520 |
| | (105,577 | ) | | (67 | )% | |
| Real Estate Group | 9,114 |
| | 18,768 |
| | (9,654 | ) | | (51 | )% | | 20,820 |
| | 28,294 |
| | (7,474 | ) | | (26 | )% | |
| Operations Management Group | (46,849 | ) | | (51,072 | ) | | 4,223 |
| | 8 | % | | (93,303 | ) | | (95,488 | ) | | 2,185 |
| | 2 | % | |
| Economic net income | $ | 87,511 |
| | $ | 158,053 |
| | (70,542 | ) | | (45 | )% | | $ | 179,445 |
| | $ | 233,909 |
| | (54,464 | ) | | (23 | )% | |
| Realized income: | | | | |
| |
|
| | | | | |
| |
|
| |
| Credit Group | $ | 97,921 |
| | $ | 73,181 |
| | 24,740 |
| | 34 | % | | $ | 176,778 |
| | $ | 143,126 |
| | 33,652 |
| | 24 | % | |
| Private Equity Group | 53,408 |
| | 50,151 |
| | 3,257 |
| | 6 | % | | 80,735 |
| | 72,496 |
| | 8,239 |
| | 11 | % | |
| Real Estate Group | 6,479 |
| | 5,181 |
| | 1,298 |
| | 25 | % | | 20,148 |
| | 9,769 |
| | 10,379 |
| | 106 | % | |
| Operations Management Group | (49,754 | ) | | (48,346 | ) | | (1,408 | ) | | (3 | )% | | (97,534 | ) | | (91,551 | ) | | (5,983 | ) | | (7 | )% | |
| Realized income | $ | 108,054 |
| | $ | 80,167 |
| | 27,887 |
| | 35 | % | | $ | 180,127 |
| | $ | 133,840 |
| | 46,287 |
| | 35 | % | |
| Realized Income | | $ | 94,311 |
| | $ | 108,054 |
| | (13,743 | ) | | (13 | )% | | $ | 198,943 |
| | $ | 180,127 |
| | 18,816 |
| | 10 | % |
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 and PRE.FRE. The following table presents the reconciliation of income before taxes as reported in the Condensed Consolidated Statements of Operations to ENI, RI FRE, and PRE (in thousands): |
| | | | | | | | | | | | | | | |
| | 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 |
|
| Offering costs | 3 |
| | (5 | ) | | 3 |
| | 655 |
|
| 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 | 87,511 |
| | 158,053 |
| | 179,445 |
| | 233,909 |
|
| 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 | (11,289 | ) | | (5,622 | ) | | (14,667 | ) | | (9,069 | ) |
| Fee related earnings | $ | 62,038 |
| | $ | 53,388 |
| | 122,495 |
| | 100,110 |
|
| Performance related earnings | | | | | | | |
| Economic net income | $ | 87,511 |
| | $ | 158,053 |
| | $ | 179,445 |
| | $ | 233,909 |
|
| Less: fee related earnings | (62,038 | ) | | (53,388 | ) | | (122,495 | ) | | (100,110 | ) |
| Performance related earnings | $ | 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 income to our consolidated carried interest allocation and incentive fees reported in accordance with GAAPFRE (in thousands):
|
| | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Income before taxes | $ | 84,383 |
| | $ | 51,072 |
| | $ | 220,343 |
| | $ | 113,118 |
|
| Adjustments: | | | | | | | |
| Depreciation and amortization expense | 5,221 |
| | 7,711 |
| | 11,045 |
| | 14,887 |
|
| Equity compensation expense | 24,029 |
| | 22,507 |
| | 51,581 |
| | 43,594 |
|
| Acquisition and merger-related expense | 4,207 |
| | 47 |
| | 5,980 |
| | (272 | ) |
| Unamortized placement fees | 12,432 |
| | 1,852 |
| | 12,953 |
| | 3,516 |
|
| Other expense, net | 2 |
| | 13,554 |
| | 1 |
| | 13,561 |
|
| Expense of non-controlling interests in consolidated subsidiaries | 933 |
| | 719 |
| | 1,809 |
| | 1,359 |
|
| Income before taxes of non-controlling interests in Consolidated Funds, net of eliminations | (8,079 | ) | | (9,951 | ) | | (25,124 | ) | | (10,318 | ) |
| Unconsolidated performance income - unrealized | (98,662 | ) | | 124,343 |
| | (245,237 | ) | | 89,225 |
|
| Unconsolidated performance related compensation - unrealized | 67,459 |
| | (100,886 | ) | | 174,762 |
| | (89,877 | ) |
| Unconsolidated net investment (income) loss - unrealized | 2,386 |
| | (2,914 | ) | | (9,170 | ) | | 1,334 |
|
| Realized Income | 94,311 |
| | 108,054 |
| | 198,943 |
| | 180,127 |
|
| Unconsolidated performance income - realized | (35,994 | ) | | (122,608 | ) | | (104,567 | ) | | (145,715 | ) |
| Unconsolidated performance related compensation - realized | 25,229 |
| | 87,881 |
| | 74,446 |
| | 102,750 |
|
| Unconsolidated net investment income - realized | (6,524 | ) | | (11,289 | ) | | (20,528 | ) | | (14,667 | ) |
| Fee Related Earnings | $ | 77,022 |
| | $ | 62,038 |
| | $ | 148,294 |
| | $ | 122,495 |
|
(1) Related to performance income 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
June 30, | | For the Six Months Ended
June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Unconsolidated net investment income | $ | 14,203 |
| | $ | 28,611 |
| | $ | 13,333 |
| | $ | 40,381 |
|
| 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 | — |
| | (32 | ) | | — |
| | 20,216 |
|
| Other non-cash expense | (1,715 | ) | | — |
| | (1,722 | ) | | — |
|
| Offering costs | (3 | ) | | 5 |
| | (3 | ) | | (655 | ) |
| Other income of non-controlling interests in consolidated subsidiaries | 8 |
| | 5 |
| | 15 |
| | 5 |
|
| Total GAAP other income | $ | 67,926 |
|
| $ | (8,920 | ) |
| $ | 70,166 |
|
| $ | 47,715 |
|
(1) Related to performance income 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.
Results of Operations by Segment
Credit GroupGroup—Three and Six Months Ended June 30, 2019Compared to Three and Six Months Ended June 30, 2018
Fee Related Earnings:
The following table sets forth certain statementpresents the components of operations datathe Credit Group's FRE and certain other data of ourthe changes for the comparative periods ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Management fees (includes ARCC Part I Fees of $39,157, $77,550 and $29,866, $58,283 for the three and six months ended June 30, 2019 and 2018, respectively) | $ | 172,347 |
| | $ | 135,848 |
| | $ | 36,499 |
| | 27 | % | | $ | 335,313 |
| | $ | 267,614 |
| | $ | 67,699 |
| | 25 | % |
| Other fees | 3,939 |
| | 6,877 |
| | (2,938 | ) | | (43 | )% | | 7,005 |
| | 12,607 |
| | (5,602 | ) | | (44 | )% |
| Compensation and benefits | (64,965 | ) | | (52,271 | ) | | (12,694 | ) | | (24 | )% | | (125,313 | ) | | (102,965 | ) | | (22,348 | ) | | (22 | )% |
| General, administrative and other expenses | (13,381 | ) | | (11,294 | ) | | (2,087 | ) | | (18 | )% | | (26,886 | ) | | (21,148 | ) | | (5,738 | ) | | (27 | )% |
| Fee Related Earnings | $ | 97,940 |
| | $ | 79,160 |
| | 18,780 |
| | 24 | % | | $ | 190,119 |
| | $ | 156,108 |
| | 34,011 |
| | 22 | % |
Management Fees
The charts below present Credit Group segmentmanagement fees and effective management fee rates for the three and six months ended June 30, 2019 ($ in millions):
The increases in management fees were primarily driven by the following: (i) higher ARCC Part I Fees primarily due to increases in interest income from a higher average size and weighted average yield of ARCC's portfolio and due to increases in capital structuring service fees, which were primarily the result of a higher number of transactions with larger portfolio companies in larger issuances; (ii) additional capital deployment within funds in existence in both periods; (iii) the formation of 29 new funds subsequent to June 30, 2018 with FPAUM of $11.4 billion as of June 30, 2019, and (iv) offset by the liquidation of five funds subsequent to June 30, 2018 with FPAUM of $0.8 billion as of June 30, 2018. CLOs accounted for approximately 9.7% of the Credit Group's management fees for the three and six months ended June 30, 2019 and for approximately 10.0% of the Credit Group's management fees for the three and six months ended June 30, 2018.
The increases in the effective management fee rate were primarily due to increased ARCC Part I Fees and to new direct lending funds with higher effective fee rates for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018.
Other Fees. Other fees decreased by $2.9 million, or 43%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 and by $5.6 million, or 44%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decreases were primarily driven by fewer transaction-based fees based on loan originations within certain funds that will fluctuate periodically with the volume of syndicated loan originations and with the amount of capital available for deployment.
Compensation and Benefits. Compensation and benefits expenses increased by $12.7 million, or 24%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 and by $22.3 million, or 22%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increases were primarily driven by higher compensation in connection with higher management fees for the comparative periods, presented.10% headcount growth and by increases in ARCC Part I Fees compensation of $5.8 million and $11.7 million for the three and six month comparative periods, respectively. We continue
to hire investment professionals to support our growing U.S. and European direct lending FPAUM, which increased by 33% for the comparative periods.
General, Administrative and Other Expenses. General, administrative and other expenses increased by $2.1 million, or 18%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 and by $5.7 million, or 27%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Beginning in the second quarter of 2018, we began to incur certain expenses that were previously incurred by ARCC. These expenses resulted in approximately$3.5 million in recurring occupancy and marketing related expenses for the six months ended June 30, 2019. Additionally, we continue to invest in expanding our retail distribution footprint through a joint venture, which pays a third party broker for retail distribution services.
Realized Income:
The following table presents the components of the Credit Group's RI and the changes for the comparative periods ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | June 30, | | | June 30, | |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) |
| 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 | 6,877 |
| | 5,663 |
| | 1,214 |
| | 21 | % | | 12,607 |
| | 10,166 |
| | 2,441 |
| | 24 | % |
| Compensation and benefits | (51,892 | ) | | (45,160 | ) | | (6,732 | ) | | (15 | )% | | (102,172 | ) | | (96,863 | ) | | (5,309 | ) | | (5 | )% |
| General, administrative and other expenses | (11,041 | ) | | (8,048 | ) | | (2,993 | ) | | (37 | )% | | (20,670 | ) | | (16,089 | ) | | (4,581 | ) | | (28 | )% |
| Fee Related Earnings | 79,792 |
| | 65,109 |
| | 14,683 |
| | 23 | % | | 157,379 |
| | 131,215 |
| | 26,164 |
| | 20 | % |
| 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 | 595 |
| | 2,525 |
| | (1,930 | ) | | (76 | )% | | 1,366 |
| | 2,843 |
| | (1,477 | ) | | (52 | )% |
| Investment income (loss)-unrealized | 1,617 |
| | (3,450 | ) | | 5,067 |
| | NM |
| | 1,348 |
| | 1,139 |
| | 209 |
| | 18 | % |
| Interest and other investment income | 3,428 |
| | 2,958 |
| | 470 |
| | 16 | % | | 5,624 |
| | 2,939 |
| | 2,685 |
| | 91 | % |
| Interest expense | (3,596 | ) | | (3,065 | ) | | (531 | ) | | (17 | )% | | (8,269 | ) | | (5,523 | ) | | (2,746 | ) | | (50 | )% |
| Net investment income (loss) | 2,044 |
| | (1,032 | ) | | 3,076 |
| | NM |
| | 69 |
| | 1,398 |
| | (1,329 | ) | | (95 | )% |
| Performance related earnings | 18,330 |
| | 3,967 |
| | 14,363 |
| | NM |
| | 41,606 |
| | 11,368 |
| | 30,238 |
| | 266 | % |
| Economic net income | $ | 98,122 |
| | $ | 69,076 |
| | 29,046 |
| | 42 | % | | $ | 198,985 |
| | $ | 142,583 |
| | 56,402 |
| | 40 | % |
| Realized income | $ | 97,921 |
| | $ | 73,181 |
| | 24,740 |
| | 34 | % | | $ | 176,778 |
| | $ | 143,126 |
| | 33,652 |
| | 24 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Fee Related Earnings | $ | 97,940 |
| | $ | 79,160 |
| | $ | 18,780 |
| | 24 | % | | $ | 190,119 |
| | $ | 156,108 |
| | $ | 34,011 |
| | 22 | % |
| Performance income-realized | 15,959 |
| | 41,672 |
| | (25,713 | ) | | (62 | )% | | 37,884 |
| | 46,743 |
| | (8,859 | ) | | (19 | )% |
| Performance related compensation-realized | (9,564 | ) | | (23,577 | ) | | 14,013 |
| | 59 | % | | (22,227 | ) | | (26,665 | ) | | 4,438 |
| | 17 | % |
| Realized net performance income | 6,395 |
| | 18,095 |
| | (11,700 | ) | | (65 | )% | | 15,657 |
| | 20,078 |
| | (4,421 | ) | | (22 | )% |
| Investment income (loss)-realized | (310 | ) | | 595 |
| | (905 | ) | | NM |
| | 548 |
| | 1,366 |
| | (818 | ) | | (60 | )% |
| Interest and other investment income-realized | 4,631 |
| | 3,035 |
| | 1,596 |
| | 53 | % | | 7,536 |
| | 6,224 |
| | 1,312 |
| | 21 | % |
| Interest expense | (1,908 | ) | | (3,596 | ) | | 1,688 |
| | 47 | % | | (3,807 | ) | | (8,269 | ) | | 4,462 |
| | 54 | % |
| Realized net investment income (loss) | 2,413 |
| | 34 |
| | 2,379 |
| | NM |
| | 4,277 |
| | (679 | ) | | 4,956 |
| | NM |
|
| Realized Income | $ | 106,748 |
| | $ | 97,289 |
| | 9,459 |
| | 10 | % | | $ | 210,053 |
| | $ | 175,507 |
| | 34,546 |
| | 20 | % |
NM - Not meaningful
Accrued carried interest and incentive fee receivable for the Credit Group include the following:
|
| | | | | | | |
| | As of June 30, | | As of December 31, |
| | 2018 | | 2017 |
| | (Dollars in thousands) |
| CLOs | $ | — |
| | $ | 451 |
|
| CSF | 20,819 |
| | 28,158 |
|
| ACE II | 26,072 |
| | 24,090 |
|
| ACE III | 49,734 |
| | 43,595 |
|
| Other credit funds | 51,836 |
| | 72,210 |
|
| Total Credit Group | $ | 148,461 |
| | $ | 168,504 |
|
The following tables present the components of performanceRealized income for the Credit Group. The three and six month periods ended June 30, 2017 include unrealized incentive fees, which are no longer recognized following our adoptionpresented was composed of the new revenue recognition standard.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) |
| CLOs | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | 4,680 |
| | $ | (5,682 | ) | | $ | (1,002 | ) |
| CSF | — |
| | (2,973 | ) | | (2,973 | ) | | — |
| | (2,123 | ) | | (2,123 | ) |
| ACE II | 4,071 |
| | 595 |
| | 4,666 |
| | 3,201 |
| | (652 | ) | | 2,549 |
|
| ACE III | 15,361 |
| | (3,298 | ) | | 12,063 |
| | — |
| | 6,350 |
| | 6,350 |
|
| Other credit funds | 22,214 |
| | 1,108 |
| | 23,322 |
| | 2 |
| | 7,200 |
| | 7,202 |
|
| Total Credit Group | $ | 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 |
|
The following tables present the components of the change inFRE, as explained above, realized net performance income - unrealizedand realized net investment income for the Credit 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.respective periods.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) |
| CLOs | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4,680 | ) | | $ | 233 |
| | $ | (1,235 | ) | | $ | (5,682 | ) |
| CSF | — |
| | — |
| | (2,973 | ) | | (2,973 | ) | | — |
| | — |
| | (2,123 | ) | | (2,123 | ) |
| ACE II | (4,071 | ) | | 4,666 |
| | — |
| | 595 |
| | (3,201 | ) | | 2,549 |
| | — |
| | (652 | ) |
| ACE III | (15,361 | ) | | 12,063 |
| | — |
| | (3,298 | ) | | — |
| | 6,350 |
| | — |
| | 6,350 |
|
| Other credit funds | (10,501 | ) | | 11,837 |
| | (228 | ) | | 1,108 |
| | (2 | ) | | 7,982 |
| | (780 | ) | | 7,200 |
|
| Total Credit Group | $ | (29,933 | ) |
| $ | 28,566 |
|
| $ | (3,201 | ) |
| $ | (4,568 | ) | | $ | (7,883 | ) |
| $ | 17,114 |
|
| $ | (4,138 | ) |
| $ | 5,093 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Performance income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) |
| CLOs | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4,883 | ) | | $ | 897 |
| | $ | (501 | ) | | $ | (4,487 | ) |
| CSF | — |
| | — |
| | (7,339 | ) | | (7,339 | ) | | — |
| | — |
| | (7,418 | ) | | (7,418 | ) |
| ACE II | (4,071 | ) | | 6,399 |
| | — |
| | 2,328 |
| | (3,201 | ) | | 5,759 |
| | — |
| | 2,558 |
|
| ACE III | (15,361 | ) | | 22,830 |
| | — |
| | 7,469 |
| | — |
| | 11,542 |
| | — |
| | 11,542 |
|
| Other credit funds | (10,501 | ) | | 19,939 |
| | (372 | ) | | 9,066 |
| | (8,577 | ) | | 14,700 |
| | (289 | ) | | 5,834 |
|
| Total Credit Group | $ | (29,933 | ) | | $ | 49,168 |
| | $ | (7,711 | ) | | $ | 11,524 |
| | $ | (16,661 | ) | | $ | 32,898 |
| | $ | (8,208 | ) | | $ | 8,029 |
|
Credit Group—Three and Six Months Ended June 30, 2018Compared to Three and Six Months Ended June 30, 2017
Fee Related Earnings:
Fee related earnings increasedRealized net performance income decreased by $14.7$11.7 million, or 23%65%, to $79.8 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $26.2$4.4 million, or 20%22%, to $157.4 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017. Fee related earnings were impacted by fluctuations of the following components:
Management Fees. Total management fees increased by $23.2 million, or 21%, to $135.8 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $33.6 million, or 14%, to $267.6 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Additional invested capital into existing funds increased management fees by $10.1 million and $26.1 million for the three and six month comparative periods, respectively. The formation of 26 new funds with FPAUM of $7.3 billion subsequent to June 30, 2017 increased management fees by $8.3 million and $14.0 million for the three and six month comparative periods, respectively. 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 interest2018. Realized net performance 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 the second quarter 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 increased from 0.97% for the three months ended June 30, 2017 to 1.02% for the three months ended June 30, 2018. ARCC Part I Fees' contribution towards the total effective management fee rate of the Credit Group increased from 0.16% for the three months ended June 30, 2017 to 0.23% for the three months ended June 30, 2018. The increase in the effective management fee rate for the three month comparative periods was primarily due to increased ARCC Part I 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 decreased from 0.23% for the six months ended June 30, 2017 to 0.22% for the six months ended June 30, 2018. The effective management fee rate remained consistent for the six month comparative periods due to the impact of increased ARCC Part I Fees and new direct lending funds with higher effective fee rates being offset by the $10 million quarterly ARCC Part I Fee waiver.
Other Fees. Other fees increased by $1.2 million, or 21%, to $6.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $2.4 million, or 24%, to $12.6 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were primarily driven by transaction fees generated from a growing volume of loans funded from certain direct lending funds.
Compensation and Benefits. Compensation and benefits expenses increased by $6.7 million, or 15%, to $51.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $5.3 million, or 5%, to $102.2 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were primarily driven by higher compensation expense related to ARCC Part I Fees. Compensation and benefits expenses represented 38.2% of management fees for both the three and six months ended June 30, 2018 compared to 40.1% and 41.4% for the three and six months ended June 30, 2017, respectively.
General, Administrative and Other Expenses. General, administrative and other expenses increased by $3.0 million, or 37%, to $11.0 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 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 primarily driven by marketing expenses to support expanding distribution and fundraising efforts, including our joint venture distribution platform. Additionally, occupancy costs increased by $0.9 million related to costs previously paid by ARCC for certain rent and utilities for the three and six months ended June 30, 2018 that we expect to continue.
Performance Related Earnings:
Performance related earnings increased by $14.4 million to $18.3 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $30.2 million to $41.6 million for the six months ended June 30, 2018
compared to the six months ended June 30, 2017. Performance related earnings were impacted by fluctuations2019 was principally composed of the following components:
Net Performance Income. Net performance income includes realized and unrealized performance income, net of realized and unrealized performance related compensation. The impact of reversals of previously recognized performance income and the corresponding performance related compensation expense is reflected as a reduction in unrealized performance income and unrealized performance related compensation.
Net performance income increased by $11.3 million to $16.3 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $31.6 million to $41.5 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were primarily driven by an increased capital base of certain direct lending funds 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 reductionincentive fees 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 the terms of the payment arrangement as payment is not required until revenue is realized.
Net Investment Income (Loss). Net investment income (loss) increased by $3.1 million from a net investment loss of $1.0 million for the three months ended June 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 June 30, 2017 and by $33.7 million, or 24%, to $176.8 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were primarily attributable to increases in FRE of $14.7 million and $26.2 million for the three and six month comparative periods, respectively, and to increases in net realized performance income of $12.1 million and $10.6 million for the three and six month comparative periods, respectively. Increases in net realized performance income were primarily from increased distributions 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 inrate. Realized net realized investment and otherperformance income of $2.1 million and $3.1 million for the three and six month comparative periods, respectively, primarily from our syndicated loan funds in the prior year period.
Economic Net Income:
Economic net income ismonths ended June 30, 2018 was principally composed of fee related earningsincentive fees from certain direct lending funds that are generating returns in excess of their hurdle rate and performance related earnings. Economictax distributions received from ACE III and certain other direct lending funds.
Realized net investment income increased by $29.0$2.4 million or 42%, to $98.1$2.4 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 2017 and by $56.4 million, or 40%, to $199.02018. Realized net investment loss of $0.7 million for the six months ended June 30, 2018 comparedincreased to realized net investment income of $4.3 million for the six months ended June 30, 20172019. The increases were primarily driven by lower interest expense for the comparative periods as a result of decreases in the fluctuations described above.cost basis of investments on which interest expense is allocated.
Credit Group— Carried Interest and Incentive Fees
Accrued carried interest and incentive fee receivables for the Credit Group are composed of the following (in thousands):
|
| | | | | | | |
| | As of June 30, | | As of December 31, |
| | 2019 | | 2018 |
| ACE III | $ | 78,331 |
| | $ | 63,338 |
|
| ACE IV | 28,194 |
| | 8,517 |
|
| CSF III | 13,056 |
| | 9,962 |
|
| ARCC | — |
| | 50,246 |
|
| PCS | 37,657 |
| | 21,009 |
|
| Other credit funds | 72,765 |
| | 57,583 |
|
| Total Credit Group | $ | 230,003 |
| | $ | 210,655 |
|
The change in accrued carried interest and incentive fee receivable for the comparative periods was primarily composed of the following: (i) a $66.5 million increase in unrealized carried interest allocation for six months ended June 30, 2019; (ii) $50.2 million of incentive fees realized in 2018 received during the six months ended June 30, 2019; and (iii) foreign currency translation and other adjustments. The following tables presents the components of incentive fees and carried interest allocation for the Credit Group for the three and six months ended June 30, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net |
| ACE III | $ | — |
| | $ | 6,801 |
| | $ | 6,801 |
| | $ | 15,361 |
| | $ | (3,298 | ) | | $ | 12,063 |
|
| ACE IV | — |
| | 7,229 |
| | 7,229 |
| | — |
| | — |
| | — |
|
| CSF III | — |
| | 1,828 |
| | 1,828 |
| | — |
| | 727 |
| | 727 |
|
| PCS | — |
| | 11,282 |
| | 11,282 |
| | — |
| | 6,424 |
| | 6,424 |
|
| Other credit funds | 15,959 |
| | 7,764 |
| | 23,723 |
| | 26,311 |
| | (8,421 | ) | | 17,890 |
|
| Total Credit Group | $ | 15,959 |
| | $ | 34,904 |
| | $ | 50,863 |
| | $ | 41,672 |
| | $ | (4,568 | ) | | $ | 37,104 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net |
| ACE III | $ | 4,706 |
| | $ | 15,256 |
| | $ | 19,962 |
| | $ | 15,361 |
| | $ | 7,469 |
| | $ | 22,830 |
|
| ACE IV | — |
| | 19,702 |
| | 19,702 |
| | — |
| | — |
| | — |
|
| CSF III | — |
| | 3,095 |
| | 3,095 |
| | — |
| | (275 | ) | | (275 | ) |
| PCS | — |
| | 16,398 |
| | 16,398 |
| | — |
| | 10,674 |
| | 10,674 |
|
| Other credit funds | 33,178 |
| | 12,085 |
| | 45,263 |
| | 31,382 |
| | (6,344 | ) | | 25,038 |
|
| Total Credit Group | $ | 37,884 |
| | $ | 66,536 |
| | $ | 104,420 |
| | $ | 46,743 |
| | $ | 11,524 |
| | $ | 58,267 |
|
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 June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending(2) | | Total Credit Group |
| Balance at 3/31/2018 | $ | 17,413 |
| | $ | 4,582 |
| | $ | 3,161 |
| | $ | 4,905 |
| | $ | 34,560 |
| | $ | 12,689 |
| | $ | 77,310 |
|
| Net new par/ equity commitments | 27 |
| | 56 |
| | 36 |
| | 914 |
| | 1,210 |
| | 7,116 |
| | 9,359 |
|
| Net new debt commitments | 457 |
| | — |
| | — |
| | — |
| | 1,533 |
| | — |
| | 1,990 |
|
| Distributions | (172 | ) | | (295 | ) | | (297 | ) | | (73 | ) | | (862 | ) | | (101 | ) | | (1,800 | ) |
| Change in fund value | (98 | ) | | 38 |
| | 31 |
| | 7 |
| | 397 |
| | (376 | ) | | (1 | ) |
| Balance at 6/30/2018 | $ | 17,627 |
| | $ | 4,381 |
| | $ | 2,931 |
| | $ | 5,753 |
| | $ | 36,838 |
| | $ | 19,328 |
| | $ | 86,858 |
|
| Average AUM(1) | $ | 17,520 |
| | $ | 4,482 |
| | $ | 3,046 |
| | $ | 5,329 |
| | $ | 35,699 |
| | $ | 16,009 |
| | $ | 82,085 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Syndicated Loans | | High Yield | | Credit Opportunities | | Alternative Credit | | U.S. Direct Lending | | European Direct Lending | | Total Credit Group |
| Balance at 3/31/2019 | $ | 21,242 |
| | $ | 4,246 |
| | $ | 2,462 |
| | $ | 6,576 |
| | $ | 41,997 |
| | $ | 24,553 |
| | $ | 101,076 |
|
| Net new par/equity commitments | 419 |
| | 21 |
| | 91 |
| | 700 |
| | 1,119 |
| | — |
| | 2,350 |
|
| Net change in debt commitments | (118 | ) | | — |
| | — |
| | 75 |
| | 3,195 |
| | 189 |
| | 3,341 |
|
| Distributions | (761 | ) | | (876 | ) | | (95 | ) | | (75 | ) | | (465 | ) | | (104 | ) | | (2,376 | ) |
| Change in fund value | 142 |
| | 103 |
| | 39 |
| | 63 |
| | 446 |
| | 321 |
| | 1,114 |
|
| Balance at 6/30/2019 | $ | 20,924 |
| | $ | 3,494 |
| | $ | 2,497 |
| | $ | 7,339 |
| | $ | 46,292 |
| | $ | 24,959 |
| | $ | 105,505 |
|
| Average AUM(1) | $ | 21,083 |
| | $ | 3,870 |
| | $ | 2,480 |
| | $ | 6,958 |
| | $ | 44,145 |
| | $ | 24,756 |
| | $ | 103,292 |
|
| | | | 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 | | Alternative Credit | | U.S. Direct Lending | | European Direct Lending | | Total Credit Group |
| Balance at 3/31/2017 | $ | 16,761 |
| | $ | 4,693 |
| | $ | 3,366 |
| | $ | 4,260 |
| | $ | 26,293 |
| | $ | 9,858 |
| | $ | 65,231 |
| |
| Net new par/ equity commitments | 465 |
| | 53 |
| | (35 | ) | | 169 |
| | 1,431 |
| | — |
| | 2,083 |
| |
| Balance at 3/31/2018 | | $ | 17,413 |
| | $ | 4,582 |
| | $ | 3,161 |
| | $ | 4,905 |
| | $ | 34,560 |
| | $ | 12,689 |
| | $ | 77,310 |
|
| Net new par/equity commitments | | 27 |
| | 56 |
| | 36 |
| | 914 |
| | 1,210 |
| | 7,116 |
| | 9,359 |
|
| Net new debt commitments | 881 |
| | — |
| | — |
| | — |
| | 815 |
| | 571 |
| | 2,267 |
| 457 |
| | — |
| | — |
| | — |
| | 1,533 |
| | — |
| | 1,990 |
|
| Distributions | (1,699 | ) | | (341 | ) | | (15 | ) | | — |
| | (1,094 | ) | | (297 | ) | | (3,446 | ) | (172 | ) | | (295 | ) | | (297 | ) | | (73 | ) | | (862 | ) | | (101 | ) | | (1,800 | ) |
| Change in fund value | 181 |
| | 97 |
| | 35 |
| | 82 |
| | 282 |
| | 635 |
| | 1,312 |
| (98 | ) | | 38 |
| | 31 |
| | 7 |
| | 397 |
| | (376 | ) | | (1 | ) |
| Balance at 6/30/2017 | $ | 16,589 |
| | $ | 4,502 |
| | $ | 3,351 |
| | $ | 4,511 |
| | $ | 27,727 |
| | $ | 10,767 |
| | $ | 67,447 |
| |
| Balance at 6/30/2018 | | $ | 17,627 |
| | $ | 4,381 |
| | $ | 2,931 |
| | $ | 5,753 |
| | $ | 36,838 |
| | $ | 19,328 |
| | $ | 86,858 |
|
| Average AUM(1) | $ | 16,675 |
| | $ | 4,598 |
| | $ | 3,359 |
| | $ | 4,386 |
| | $ | 27,010 |
| | $ | 10,313 |
| | $ | 66,341 |
| $ | 17,520 |
| | $ | 4,482 |
| | $ | 3,046 |
| | $ | 5,329 |
| | $ | 35,699 |
| | $ | 16,009 |
| | $ | 82,085 |
|
| |
| (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 six months ended June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Syndicated Loans | | High Yield | | Credit Opportunities | | Alternative Credit | | U.S. Direct Lending | | European Direct Lending | | Total Credit Group |
| Balance at 12/31/2018 | $ | 18,880 |
| | $ | 4,024 |
| | $ | 2,761 |
| | $ | 5,448 |
| | $ | 40,668 |
| | $ | 24,055 |
| | $ | 95,836 |
|
| Net new par/equity commitments | 834 |
| | 75 |
| | (74 | ) | | 1,966 |
| | 1,591 |
| | 523 |
| | 4,915 |
|
| Net change in debt commitments | 1,964 |
| | — |
| | — |
| | 75 |
| | 3,928 |
| | 339 |
| | 6,306 |
|
| Distributions | (966 | ) | | (979 | ) | | (371 | ) | | (327 | ) | | (743 | ) | | (338 | ) | | (3,724 | ) |
| Change in fund value | 212 |
| | 374 |
| | 181 |
| | 177 |
| | 848 |
| | 380 |
| | 2,172 |
|
| Balance at 6/30/2019 | $ | 20,924 |
| | $ | 3,494 |
| | $ | 2,497 |
| | $ | 7,339 |
| | $ | 46,292 |
| | $ | 24,959 |
| | $ | 105,505 |
|
| Average AUM(1) | $ | 20,349 |
| | $ | 3,921 |
| | $ | 2,573 |
| | $ | 6,454 |
| | $ | 42,986 |
| | $ | 24,522 |
| | $ | 100,805 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Syndicated Loans | | High Yield | | Credit Opportunities | | Structured Credit | | U.S. Direct Lending | | E.U. Direct Lending(2) | | Total Credit Group |
| Balance at 12/31/2017 | $ | 16,530 |
| | $ | 4,630 |
| | $ | 3,333 |
| | $ | 4,791 |
| | $ | 30,640 |
| | $ | 11,808 |
| | $ | 71,732 |
|
| Net new par/ equity commitments | 130 |
| | 200 |
| | 39 |
| | 974 |
| | 3,781 |
| | 7,335 |
| | 12,459 |
|
| Net new debt commitments | 1,574 |
| | — |
| | — |
| | — |
| | 2,925 |
| | 246 |
| | 4,745 |
|
| Distributions | (580 | ) | | (453 | ) | | (473 | ) | | (76 | ) | | (1,331 | ) | | (223 | ) | | (3,136 | ) |
| Change in fund value | (27 | ) | | 4 |
| | 32 |
| | 64 |
| | 823 |
| | 162 |
| | 1,058 |
|
| Balance at 6/30/2018 | $ | 17,627 |
| | $ | 4,381 |
| | $ | 2,931 |
| | $ | 5,753 |
| | $ | 36,838 |
| | $ | 19,328 |
| | $ | 86,858 |
|
| Average AUM(1) | $ | 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 | Syndicated Loans | | High Yield | | Credit Opportunities | | Alternative Credit | | U.S. Direct Lending | | European 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 |
| |
| Balance at 12/31/2017 | | $ | 16,530 |
| | $ | 4,630 |
| | $ | 3,333 |
| | $ | 4,791 |
| | $ | 30,640 |
| | $ | 11,808 |
| | $ | 71,732 |
|
| Net new par/equity commitments | | 130 |
| | 200 |
| | 39 |
| | 974 |
| | 3,781 |
| | 7,335 |
| | 12,459 |
|
| Net new debt commitments | 1,290 |
| | — |
| | — |
| | — |
| | 875 |
| | 571 |
| | 2,736 |
| 1,574 |
| | — |
| | — |
| | — |
| | 2,925 |
| | 246 |
| | 4,745 |
|
| Distributions | (2,716 | ) | | (766 | ) | | (29 | ) | | (114 | ) | | (1,559 | ) | | (472 | ) | | (5,656 | ) | (580 | ) | | (453 | ) | | (473 | ) | | (76 | ) | | (1,331 | ) | | (223 | ) | | (3,136 | ) |
| Change in fund value | 236 |
| | 180 |
| | 104 |
| | 202 |
| | 326 |
| | 894 |
| | 1,942 |
| (27 | ) | | 4 |
| | 32 |
| | 64 |
| | 823 |
| | 162 |
| | 1,058 |
|
| Balance at 6/30/2017 | $ | 16,589 |
| | $ | 4,502 |
| | $ | 3,351 |
| | $ | 4,511 |
| | $ | 27,727 |
| | $ | 10,767 |
| | $ | 67,447 |
| |
| Balance at 6/30/2018 | | $ | 17,627 |
| | $ | 4,381 |
| | $ | 2,931 |
| | $ | 5,753 |
| | $ | 36,838 |
| | $ | 19,328 |
| | $ | 86,858 |
|
| Average AUM(1) | $ | 16,870 |
| | $ | 4,724 |
| | $ | 3,340 |
| | $ | 4,342 |
| | $ | 25,043 |
| | $ | 10,062 |
| | $ | 64,381 |
| $ | 17,190 |
| | $ | 4,531 |
| | $ | 3,142 |
| | $ | 5,150 |
| | $ | 34,013 |
| | $ | 14,608 |
| | $ | 78,634 |
|
| |
| (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 June 30, 20182019 and 20172018 (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 | | Alternative Credit | | U.S. Direct Lending | | European Direct Lending | | Total Credit Group |
| FPAUM Balance at 3/31/2018 | $ | 15,592 |
| | $ | 4,578 |
| | $ | 2,621 |
| | $ | 3,515 |
| | $ | 18,158 |
| | $ | 7,076 |
| | $ | 51,540 |
| |
| FPAUM Balance at 3/31/2019 | | $ | 19,666 |
| | $ | 4,247 |
| | $ | 2,060 |
| | $ | 3,190 |
| | $ | 23,681 |
| | $ | 10,080 |
| | $ | 62,924 |
|
| Commitments | 1,721 |
| | 56 |
| | 1 |
| | 35 |
| | 45 |
| | 30 |
| | 1,888 |
| 1,199 |
| | 21 |
| | 91 |
| | 253 |
| | 6 |
| | — |
| | 1,570 |
|
| Subscriptions/deployment/increase in leverage | — |
| | — |
| | 25 |
| | 60 |
| | 1,134 |
| | 732 |
| | 1,951 |
| 2 |
| | — |
| | 13 |
| | 404 |
| | 1,364 |
| | 912 |
| | 2,695 |
|
| Redemptions/distributions/decrease in leverage | (163 | ) | | (293 | ) | | (307 | ) | | (188 | ) | | (890 | ) | | (268 | ) | | (2,109 | ) | (727 | ) | | (875 | ) | | (108 | ) | | (78 | ) | | (924 | ) | | (280 | ) | | (2,992 | ) |
| Change in fund value | (6 | ) | | 39 |
| | 29 |
| | 10 |
| | 186 |
| | (192 | ) | | 66 |
| 55 |
| | 103 |
| | 36 |
| | 59 |
| | 238 |
| | 75 |
| | 566 |
|
| Change in fee basis | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| FPAUM Balance at 6/30/2018 | $ | 17,144 |
| | $ | 4,380 |
| | $ | 2,369 |
| | $ | 3,432 |
| | $ | 18,633 |
| | $ | 7,378 |
| | $ | 53,336 |
| |
| FPAUM Balance at 6/30/2019 | | $ | 20,195 |
| | $ | 3,496 |
| | $ | 2,092 |
| | $ | 3,828 |
| | $ | 24,365 |
| | $ | 10,787 |
| | $ | 64,763 |
|
| Average FPAUM(1) | $ | 16,368 |
| | $ | 4,479 |
| | $ | 2,495 |
| | $ | 3,474 |
| | $ | 18,396 |
| | $ | 7,227 |
| | $ | 52,439 |
| $ | 19,931 |
| | $ | 3,872 |
| | $ | 2,076 |
| | $ | 3,509 |
| | $ | 24,023 |
| | $ | 10,434 |
| | $ | 63,845 |
|
| | | | 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 | | Alternative Credit | | U.S. Direct Lending | | European Direct Lending | | Total Credit Group |
| FPAUM Balance at 3/31/2017 | $ | 15,564 |
| | $ | 4,693 |
| | $ | 2,784 |
| | $ | 3,176 |
| | $ | 14,273 |
| | $ | 5,206 |
| | $ | 45,696 |
| |
| FPAUM Balance at 3/31/2018 | | $ | 15,592 |
| | $ | 4,578 |
| | $ | 2,621 |
| | $ | 3,515 |
| | $ | 18,158 |
| | $ | 7,076 |
| | $ | 51,540 |
|
| Commitments | 1,068 |
| | 49 |
| | — |
| | 80 |
| | 54 |
| | — |
| | 1,251 |
| 1,721 |
| | 56 |
| | 1 |
| | 35 |
| | 45 |
| | 30 |
| | 1,888 |
|
| Subscriptions/deployment/increase in leverage | — |
| | 3 |
| | 18 |
| | 112 |
| | 791 |
| | 341 |
| | 1,265 |
| — |
| | — |
| | 25 |
| | 60 |
| | 1,134 |
| | 732 |
| | 1,951 |
|
| Redemptions/distributions/decrease in leverage | (1,704 | ) | | (341 | ) | | (36 | ) | | (40 | ) | | (300 | ) | | (263 | ) | | (2,684 | ) | (163 | ) | | (293 | ) | | (307 | ) | | (188 | ) | | (890 | ) | | (268 | ) | | (2,109 | ) |
| Change in fund value | 134 |
| | 99 |
| | 31 |
| | 86 |
| | 227 |
| | 179 |
| | 756 |
| (6 | ) | | 39 |
| | 29 |
| | 10 |
| | 186 |
| | (192 | ) | | 66 |
|
| 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 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 17,144 |
| | $ | 4,380 |
| | $ | 2,369 |
| | $ | 3,432 |
| | $ | 18,633 |
| | $ | 7,378 |
| | $ | 53,336 |
|
| Average FPAUM(1) | $ | 15,313 |
| | $ | 4,598 |
| | $ | 2,791 |
| | $ | 3,295 |
| | $ | 14,659 |
| | $ | 5,447 |
| | $ | 46,103 |
| $ | 16,368 |
| | $ | 4,479 |
| | $ | 2,495 |
| | $ | 3,474 |
| | $ | 18,396 |
| | $ | 7,227 |
| | $ | 52,439 |
|
(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 six months ended June 30, 20182019 and 20172018 (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 | | Alternative Credit | | U.S. Direct Lending | | European Direct Lending | | Total Credit Group |
| FPAUM Balance at 12/31/2017 | $ | 15,251 |
| | $ | 4,629 |
| | $ | 2,809 |
| | $ | 3,434 |
| | $ | 16,869 |
| | $ | 6,458 |
| | $ | 49,450 |
| |
| FPAUM Balance at 12/31/2018 | | $ | 18,328 |
| | $ | 4,025 |
| | $ | 2,196 |
| | $ | 2,826 |
| | $ | 21,657 |
| | $ | 8,815 |
| | $ | 57,847 |
|
| Commitments | 2,425 |
| | 189 |
| | 4 |
| | 95 |
| | 75 |
| | 30 |
| | 2,818 |
| 2,628 |
| | 75 |
| | 102 |
| | 583 |
| | 20 |
| | — |
| | 3,408 |
|
| Subscriptions/deployment/increase in leverage | — |
| | 12 |
| | 25 |
| | 149 |
| | 2,373 |
| | 1,356 |
| | 3,915 |
| 17 |
| | — |
| | 23 |
| | 614 |
| | 3,448 |
| | 2,526 |
| | 6,628 |
|
| Redemptions/distributions/decrease in leverage | (566 | ) | | (451 | ) | | (499 | ) | | (289 | ) | | (1,136 | ) | | (393 | ) | | (3,334 | ) | (900 | ) | | (978 | ) | | (403 | ) | | (318 | ) | | (1,239 | ) | | (619 | ) | | (4,457 | ) |
| Change in fund value | 38 |
| | 4 |
| | 30 |
| | 43 |
| | 452 |
| | (73 | ) | | 494 |
| 122 |
| | 374 |
| | 174 |
| | 123 |
| | 479 |
| | 199 |
| | 1,471 |
|
| Change in fee basis | (4 | ) | | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (7 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (134 | ) | | (134 | ) |
| FPAUM Balance at 6/30/2018 | $ | 17,144 |
| | $ | 4,380 |
| | $ | 2,369 |
| | $ | 3,432 |
| | $ | 18,633 |
| | $ | 7,378 |
| | $ | 53,336 |
| |
| FPAUM Balance at 6/30/2019 | | $ | 20,195 |
| | $ | 3,496 |
| | $ | 2,092 |
| | $ | 3,828 |
| | $ | 24,365 |
| | $ | 10,787 |
| | $ | 64,763 |
|
| Average FPAUM(1) | $ | 15,996 |
| | $ | 4,529 |
| | $ | 2,600 |
| | $ | 3,460 |
| | $ | 17,887 |
| | $ | 6,971 |
| | $ | 51,443 |
| $ | 19,396 |
| | $ | 3,923 |
| | $ | 2,116 |
| | $ | 3,281 |
| | $ | 23,234 |
| | $ | 9,894 |
| | $ | 61,844 |
|
| | | | 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 | | Alternative Credit | | U.S. Direct Lending | | European 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 | 1,523 |
| | 96 |
| | 3 |
| | 80 |
| | 81 |
| | — |
| | 1,783 |
| 2,425 |
| | 189 |
| | 4 |
| | 95 |
| | 75 |
| | 30 |
| | 2,818 |
|
| Subscriptions/deployment/increase in leverage | — |
| | 14 |
| | 42 |
| | 147 |
| | 1,165 |
| | 914 |
| | 2,282 |
| — |
| | 12 |
| | 25 |
| | 149 |
| | 2,373 |
| | 1,356 |
| | 3,915 |
|
| Redemptions/distributions/decrease in leverage | (2,630 | ) | | (766 | ) | | (49 | ) | | (131 | ) | | (612 | ) | | (315 | ) | | (4,503 | ) | (566 | ) | | (451 | ) | | (499 | ) | | (289 | ) | | (1,136 | ) | | (393 | ) | | (3,334 | ) |
| Change in fund value | 171 |
| | 181 |
| | 96 |
| | 190 |
| | 330 |
| | 256 |
| | 1,224 |
| 38 |
| | 4 |
| | 30 |
| | 43 |
| | 452 |
| | (73 | ) | | 494 |
|
| Change in fee basis | — |
| | — |
| | — |
| | — |
| | — |
| | 225 |
| | 225 |
| (4 | ) | | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (7 | ) |
| FPAUM Balance at 6/30/2017 | $ | 15,062 |
| | $ | 4,503 |
| | $ | 2,797 |
| | $ | 3,414 |
| | $ | 15,045 |
| | $ | 5,688 |
| | $ | 46,509 |
| |
| FPAUM Balance at 6/30/2018 | | $ | 17,144 |
| | $ | 4,380 |
| | $ | 2,369 |
| | $ | 3,432 |
| | $ | 18,633 |
| | $ | 7,378 |
| | $ | 53,336 |
|
| Average FPAUM(1) | $ | 15,541 |
| | $ | 4,725 |
| | $ | 2,762 |
| | $ | 3,239 |
| | $ | 13,537 |
| | $ | 5,167 |
| | $ | 44,971 |
| $ | 15,996 |
| | $ | 4,529 |
| | $ | 2,600 |
| | $ | 3,460 |
| | $ | 17,887 |
| | $ | 6,971 |
| | $ | 51,443 |
|
(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 June 30, 2018 and 2017 (in millions):
|
| |
FPAUM: $53,336 | FPAUM: $46,509 |
The components of our AUM, including the portion that is FPAUM, for the Credit Group are presented below as of June 30, 20182019 and 20172018 (in millions):
|
| |
AUM: $86,858$105,505 | AUM: $67,447$86,858 |
|
| | | | | | | |
| FPAUM | | AUM not yet earning fees | | Non-fee paying(1) | | General partner and affiliates |
(1) Includes $7.0$7.8 billion and $6.4$7.0 billion of AUM of funds for which we indirectly earn management fees as of June 30, 20182019 and 2017,2018, respectively.
Credit Group—Fund Performance Metrics as of June 30, 20182019
The Credit Group managed 152170 funds and accounts as of June 30, 2018 across the liquid and illiquid credit strategies.2019. ARCC contributed approximately 55%53% of the Credit Group’s total management fees for the six months ended June 30, 2018.2019. In addition to ARCC, four significant funds, ACE III, ACE IV, Ares Private Credit Solutions, L.P. (“PCS”) and Ares Credit Strategies Fund III L.P. (“CSF III”), contributed approximately 8%13% of the Credit Group’s management fees for the six months ended June 30, 2018. Our significant non-drawdown funds are ARCC; one sub-advised fund;2019. ACE III and one separately managed account over which we exercise sole investment discretion. Our significant drawdown funds are Ares Capital Europe II, L.P. (“ACE II”), a 2013 vintage commingled fund; and Ares Capital Europe III, L.P. (“ACE III”), a 2015 vintage commingled fund, both of whichIV focus on direct lending to European middle market companies. PCS targets junior capital needs of upper middle market companies in North America. CSF III focuses on European and U.S. direct lending strategies.
We do not present fund performance metrics for significant funds with less than two years of investment performance, which begins from the date of the fund's first investment, except for those significant funds that pay management fees on invested capital, in which case performance is shown at the earlier of (i) the one-year anniversary of the fund's first investment or (ii) such time that the fund has invested at least 50% of its capital. The following table presents the performance data for our significant fundsnon-drawdown fund in the Credit Group that are not drawdown funds:as of June 30, 2019 ($ in millions):
| | | | | | 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 Inception | | AUM | | Current Quarter | | Year-To-Date | | Since Inception(2) | | Primary Investment Strategy |
| Fund | Inception | | (in millions) | | Gross | | Net | | Gross | | Net | | Gross | | Net | | | Gross | | Net | | Gross | | Net | | Gross | | Net | |
| ARCC(3) | 2004 | | $ | 15,020 |
| | N/A | | 3.5 | | N/A |
| | 7.0 |
| | N/A | | 11.9 | | U.S. Direct Lending | 2004 | | $ | 16,645 |
| | N/A | | 2.8 | | N/A | | 5.9 | | N/A | | 11.8 | | U.S. Direct Lending |
| Sub-advised Client A(4) | 2007 | | 618 |
| | 1.2 | | 1.1 | | 0.2 |
| | — |
| | 7.6 | | 7.2 | | High Yield | |
| Separately Managed Account Client B(4) | 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 thisreport. |
| |
(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:funds as of June 30, 2019 ($ 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 |
| Fund | | | | | | | | Gross(3) | | Net(4) | | Gross(5) | | Net(6) | |
| ACE II(7) | 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 | | 5,060 |
| | 2,822 |
| | 3,068 |
| | 235 |
| | 3,347 |
| | 3,582 |
| | 1.2x | | 1.2x | | 17.8 | | 13.5 | | E.U. Direct Lending |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) | |
| CSF III | 2010 | | $ | 1,138 |
| | $ | 1,135 |
| | $ | 1,209 |
| | $ | 617 |
| | $ | 1,112 |
| | $ | 1,729 |
| | 1.5x | | 1.4x | | 8.9 | | 7.9 | | European & U.S. Direct Lending |
| ACE III(7) | 2015 | | 5,050 |
| | 2,822 |
| | 2,505 |
| | 503 |
| | 2,628 |
| | 3,131 |
| | 1.3x | | 1.3x | | 15.4 | | 11.6 | | European Direct Lending |
| PCS | 2017 | | 3,555 |
| | 3,365 |
| | 1,449 |
| | 98 |
| | 1,502 |
| | 1,600 |
| | 1.2x | | 1.1x | | 14.4 | | 10.0 | | U.S. Direct Lending |
| ACE IV Unlevered(8) | 2018 | | 9,014 |
| | 2,851 |
| | 939 |
| | 11 |
| | 974 |
| | 985 |
| | 1.1x | | 1.1x | | N/A | | N/A | | European Direct Lending |
| ACE IV Levered(8) | | | 4,819 |
| | 1,578 |
| | 26 |
| | 1,685 |
| | 1,711 |
| | 1.1x | | 1.1x | | N/A | | N/A | |
| |
| (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 income.carried interest. The gross MoIC for CSF III is before giving effect to management fees performance incomeand carried interest, as applicableapplicable. The gross MoIC for all other credit funds is before giving effect to management fees, carried interest, other expenses and other expenses.taxes, as applicable. |
| |
| (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 income.carried interest. The net MoIC is after giving effect to management fees, performance incomecarried interest, as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. The net MoIC would have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. |
| |
| (5) | The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from the fund and the fund’s residual value at the end of the measurement period. Gross IRR reflects returns to the fee-paying limited partners and, if applicable, excludes interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or performance income.carried interest. The cash flow dates used in the gross IRR calculation are based on the actual dates of the cash flows. GrossThe gross IRRs for CSF III are calculated before giving effect to management fees performance incomeand carried interest, as applicable,applicable. The gross IRRs for all other Credit funds are calculated before giving effect to management fees, carried interest, other expenses and other expenses.taxes, as applicable. |
| |
| (6) | The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund’s residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying limited partners and, if applicable, exclude interests attributable to the non-fee paying limited partners and/or the general partner whowhich does not pay management fees or performance income.carried interest. The cash flow dates used in the net IRR calculations are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees, performance incomecarried interest, as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. Net fund-level IRRs would likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. |
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 12.3% and 9.3%, respectively. The gross and net MoIC for the Euro denominated feeder fund are 1.5x and 1.4x, 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.fund. The gross and net IRR for the U.S. dollar denominated feeder fund are 16.4%15.0% and 12.1%11.3%, respectively. The gross and net MoIC for the U.S. dollar denominated feeder fund are 1.2x1.3x and 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. |
| |
| (8) | ACE IV is made up of four parallel funds: ACE IV (E) Unlevered, ACE IV (G) Unlevered, ACE IV (E) Levered, and ACE IV (G) Levered. The gross and net MoIC presented in the chart are for ACE IV (E) Unlevered and ACE IV (E) Levered. Metrics for ACE IV (E) Levered are inclusive of a U.S. Dollar denominated feeder fund, which has not been presented separately. The gross and net MoIC for ACE IV (G) Unlevered are 1.1x and 1.1x, respectively. The gross and net MoIC for ACE IV (G) Levered are 1.1x and 1.1.x, respectively. Original capital commitments are converted to U.S. Dollars at the prevailing exchange rate at the time of the fund's closing. All other values for ACE IV Unlevered and ACE IV Levered are for the combined levered and unlevered parallel funds and are converted to U.S. Dollars at the prevailing quarter-end exchange rate. |
Private Equity GroupGroup—Three and Six Months Ended June 30, 2019Compared to Three and Six Months Ended June 30, 2018
Fee Related Earnings:
The following table sets forth certain statementpresents the components of operations data and certain other data of ourthe Private Equity Group segmentGroup's FRE and the changes for the comparative periods presented.($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | June 30, | | | June 30, | |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) |
| Management fees | $ | 49,318 |
| | $ | 56,427 |
| | $ | (7,109 | ) | | (13 | )% | | $ | 99,205 |
| | $ | 96,246 |
| | $ | 2,959 |
| | 3 | % |
| Other fees | 337 |
| | 338 |
| | (1 | ) | | — | % | | 677 |
| | 678 |
| | (1 | ) | | — | % |
| Compensation and benefits | (18,672 | ) | | (18,388 | ) | | (284 | ) | | (2 | )% | | (37,871 | ) | | (31,606 | ) | | (6,265 | ) | | (20 | )% |
| General, administrative and other expenses | (4,175 | ) | | (4,345 | ) | | 170 |
| | 4 | % | | (8,216 | ) | | (8,543 | ) | | 327 |
| | 4 | % |
| Fee Related Earnings | 26,808 |
| | 34,032 |
| | (7,224 | ) | | (21 | )% | | 53,795 |
| | 56,775 |
| | (2,980 | ) | | (5 | )% |
| 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 | 9,016 |
| | 2,717 |
| | 6,299 |
| | 232 | % | | 9,687 |
| | 3,296 |
| | 6,391 |
| | 194 | % |
| Investment income (loss)-unrealized | 290 |
| | 25,354 |
| | (25,064 | ) | | (99 | )% | | (3,860 | ) | | 33,900 |
| | (37,760 | ) | | NM |
|
| Interest and other investment income | 3,039 |
| | 1,983 |
| | 1,056 |
| | 53 | % | | 3,368 |
| | 2,135 |
| | 1,233 |
| | 58 | % |
| Interest expense | (1,440 | ) | | (1,397 | ) | | (43 | ) | | (3 | )% | | (2,668 | ) | | (2,910 | ) | | 242 |
| | 8 | % |
| Net investment income | 10,905 |
| | 28,657 |
| | (17,752 | ) | | (62 | )% | | 6,527 |
| | 36,421 |
| | (29,894 | ) | | (82 | )% |
| Performance related earnings | 316 |
| | 87,249 |
| | (86,933 | ) | | (100 | )% | | (852 | ) | | 101,745 |
| | (102,597 | ) | | NM |
|
| Economic net income | $ | 27,124 |
| | $ | 121,281 |
| | (94,157 | ) | | (78 | )% | | $ | 52,943 |
| | $ | 158,520 |
| | (105,577 | ) | | (67 | )% |
| Realized income | $ | 53,408 |
| | $ | 50,151 |
| | 3,257 |
| | 6 | % | | $ | 80,735 |
| | $ | 72,496 |
| | 8,239 |
| | 11 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Management fees | $ | 52,162 |
| | $ | 49,318 |
| | $ | 2,844 |
| | 6 | % | | $ | 103,558 |
| | $ | 99,205 |
| | $ | 4,353 |
| | 4 | % |
| Other fees | — |
| | 337 |
| | (337 | ) | | NM |
| | — |
| | 677 |
| | (677 | ) | | NM |
|
| Compensation and benefits | (21,291 | ) | | (18,672 | ) | | (2,619 | ) | | (14 | )% | | (42,487 | ) | | (37,871 | ) | | (4,616 | ) | | (12 | )% |
| General, administrative and other expenses | (4,912 | ) | | (4,175 | ) | | (737 | ) | | (18 | )% | | (8,969 | ) | | (8,216 | ) | | (753 | ) | | (9 | )% |
| Fee Related Earnings | $ | 25,959 |
| | $ | 26,808 |
| | (849 | ) | | (3 | )% | | $ | 52,102 |
| | $ | 53,795 |
| | (1,693 | ) | | (3 | )% |
NM - Not meaningful
Management Fees
Accrued carried interest for theThe charts below present Private Equity Group includes the following:
|
| | | | | | | |
| | As of June 30, | | As of December 31, |
| | 2018 | | 2017 |
| | (Dollars in thousands) |
| ACOF III | $ | 510,993 |
| | $ | 570,578 |
|
| ACOF IV | 184,204 |
| | 217,354 |
|
| EIF V | — |
| | 16,215 |
|
| Other funds | 7,671 |
| | 11,260 |
|
| Total Private Equity Group | $ | 702,868 |
| | $ | 815,407 |
|
Performance income for the Private Equity Group includes the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) |
| ACOF III | $ | 80,415 |
| | $ | (90,234 | ) | | $ | (9,819 | ) | | $ | 4,263 |
| | $ | 206,293 |
| | $ | 210,556 |
|
| ACOF IV | — |
| | (41,578 | ) | | (41,578 | ) | | 55,853 |
| | 41,203 |
| | 97,056 |
|
| ACOF V | — |
| | — |
| | — |
| | — |
| | (5,719 | ) | | (5,719 | ) |
| EIF V | — |
| | — |
| | — |
| | — |
| | (2,477 | ) | | (2,477 | ) |
| Other funds | — |
| | (1,793 | ) | | (1,793 | ) | | 4,664 |
| | (10,553 | ) | | (5,889 | ) |
| Total Private Equity Group | $ | 80,415 |
|
| $ | (133,605 | ) |
| $ | (53,190 | ) | | $ | 64,780 |
| | $ | 228,747 |
| | $ | 293,527 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total |
| | (Dollars in thousands) |
| ACOF III | $ | 83,209 |
| | $ | (59,584 | ) | | $ | 23,625 |
| | $ | 4,263 |
| | $ | 183,526 |
| | $ | 187,789 |
|
| ACOF IV | 1,604 |
| | (33,150 | ) | | (31,546 | ) | | 55,853 |
| | 96,026 |
| | 151,879 |
|
| ACOF V | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| EIF V | — |
| | (16,215 | ) | | (16,215 | ) | | — |
| | (2,439 | ) | | (2,439 | ) |
| Other funds | — |
| | (3,590 | ) | | (3,590 | ) | | 4,664 |
| | (16,129 | ) | | (11,465 | ) |
| Total Private Equity Group | $ | 84,813 |
| | $ | (112,539 | ) | | $ | (27,726 | ) | | $ | 64,780 |
| | $ | 260,984 |
| | $ | 325,764 |
|
The following tables present the components of the change in performance income - unrealized for the Private Equity Group:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) |
| ACOF III | $ | (80,415 | ) | | $ | — |
| | $ | (9,820 | ) | | $ | (90,235 | ) | | $ | (4,263 | ) | | $ | 210,556 |
| | $ | — |
| | $ | 206,293 |
|
| ACOF IV | — |
| | — |
| | (41,578 | ) | | (41,578 | ) | | (55,853 | ) | | 97,056 |
| | — |
| | 41,203 |
|
| ACOF V | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,719 | ) | | (5,719 | ) |
| EIF V | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,477 | ) | | (2,477 | ) |
| Other funds | — |
| | — |
| | (1,792 | ) | | (1,792 | ) | | (4,664 | ) | | 5 |
| | (5,894 | ) | | (10,553 | ) |
| Total Private Equity Group | $ | (80,415 | ) | | $ | — |
| | $ | (53,190 | ) | | $ | (133,605 | ) | | $ | (64,780 | ) | | $ | 307,617 |
| | $ | (14,090 | ) | | $ | 228,747 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) |
| ACOF III | $ | (83,209 | ) | | $ | 23,625 |
| | $ | — |
| | $ | (59,584 | ) | | $ | (4,263 | ) | | $ | 187,789 |
| | $ | — |
| | $ | 183,526 |
|
| ACOF IV | (1,604 | ) | | — |
| | (31,546 | ) | | (33,150 | ) | | (55,853 | ) | | 151,879 |
| | — |
| | 96,026 |
|
| ACOF V | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| EIF V | — |
| | — |
| | (16,215 | ) | | (16,215 | ) | | — |
| | — |
| | (2,439 | ) | | (2,439 | ) |
| Other funds | — |
| | 961 |
| | (4,551 | ) | | (3,590 | ) | | (4,664 | ) | | 1,014 |
| | (12,479 | ) | | (16,129 | ) |
| Total Private Equity Group | $ | (84,813 | ) | | $ | 24,586 |
| | $ | (52,312 | ) | | $ | (112,539 | ) | | $ | (64,780 | ) | | $ | 340,682 |
| | $ | (14,918 | ) | | $ | 260,984 |
|
Private Equity Group—Threemanagement fees and Six Months Ended June 30, 2018Compared to Three and Six Months Ended June 30, 2017
Fee Related Earnings:
Fee related earnings decreased by $7.2 million, or 21%, to $26.8 millioneffective management fee rates for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $3.0 million, or 5%, to $53.8 million for the six months ended June 30, 2019 and 2018 compared to($ in millions):
Our first energy opportunities fund, which launched in the fourth quarter of 2018, generated management fees of $2.6 million and $5.2 million for the three and six months ended June 30, 2017. Fee related earnings were impacted by fluctuations of the following components:
Management Fees. Total management fees decreased by $7.1 million, or 13%, to $49.3 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. 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, capital2019, respectively. Capital deployment in Ares Special Situations Fund IV, L.P. (“SSF IV”) increased its fee basis, andwhich generated additional management fees by $1.5of $2.2 million and $4.0 million for the three and six month comparative periods, respectively. Conversely, monetizations and distributions of portfolio holdings of infrastructure and power funds and by ACOF III and ACOF IV were the primary drivers for decreases in management fees attributable to those funds of $1.7 million and $4.4 million for the three and six month comparative periods.
Total management feesCompensation and Benefits. Compensation and benefits expenses increased by $3.0$2.6 million, or 3%14%, for the three months ended June 30, 2019 compared to $99.2the three months ended June 30, 2018 and by $4.6 million, or 12%, for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018. The increase for the six month comparative periods wasincreases were primarily driven by an $18.5 million increasethe timing of certain annual discretionary payments that were paid in management fees for the six month comparative periods from Ares Corporate Opportunities Fund V, L.P. (“ACOF V”), which began generating fees in March 2017 and by a $2.4 million increase in management fees for the six month comparative periods attributable to increased invested capital in SSF IV insecond quarter of the current year period. Conversely, management fees from ACOF IV decreased by $8.4 million for the six month comparative 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 recognizedbut paid during the six months ended June 30, 2017. ACOF III, USPF IIIthird quarter in the prior year.
General, administrative and USPF IV sold investments subsequent to June 30, 2017, reducing invested capitalother expenses. General, administrative and resulting in a $4.3other expenses increased by $0.7 million decrease in management fees for the six month comparative periods.
The effective management fee rate, excluding the effect of one-time catch-up fees, increased from 1.18%, or 18%, for the three months ended June 30, 2017 to 1.19% for the three months ended June 30, 2018. The effective management fee rate, excluding 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.
Compensation and Benefits. Compensation and benefits expenses increased by $0.3 million, or 2%, to $18.7 million for the three months ended June 30, 20182019 compared to the three months ended June 30, 20172018 and by $6.3$0.8 million, or 20%9%, to $37.9 million for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017. 2018. General, administrative and other expenses
will generally fluctuate with the volume of deal flow and new fund launches both of which increased during the comparative periods.
Realized Income:
The increasefollowing table presents the components of the Private Equity Group's RI and the changes for the comparative periods ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Fee Related Earnings | $ | 25,959 |
| | $ | 26,808 |
| | $ | (849 | ) | | (3 | )% | | $ | 52,102 |
| | $ | 53,795 |
| | $ | (1,693 | ) | | (3 | )% |
| Performance income-realized | 18,369 |
| | 80,415 |
| | (62,046 | ) | | (77 | )% | | 62,492 |
| | 84,813 |
| | (22,321 | ) | | (26 | )% |
| Performance related compensation-realized | (14,696 | ) | | (64,311 | ) | | 49,615 |
| | 77 | % | | (49,993 | ) | | (67,871 | ) | | 17,878 |
| | 26 | % |
| Realized net performance income | 3,673 |
| | 16,104 |
| | (12,431 | ) | | (77 | )% | | 12,499 |
| | 16,942 |
| | (4,443 | ) | | (26 | )% |
| Investment income-realized | 1,030 |
| | 9,016 |
| | (7,986 | ) | | (89 | )% | | 11,966 |
| | 9,687 |
| | 2,279 |
| | 24 | % |
| Interest and other investment income-realized | 3,318 |
| | 2,920 |
| | 398 |
| | 14 | % | | 3,612 |
| | 2,979 |
| | 633 |
| | 21 | % |
| Interest expense | (2,436 | ) | | (1,440 | ) | | (996 | ) | | (69 | )% | | (4,611 | ) | | (2,668 | ) | | (1,943 | ) | | (73 | )% |
| Realized net investment income | 1,912 |
| | 10,496 |
| | (8,584 | ) | | (82 | )% | | 10,967 |
| | 9,998 |
| | 969 |
| | 10 | % |
| Realized Income | $ | 31,544 |
| | $ | 53,408 |
| | (21,864 | ) | | (41 | )% | | $ | 75,568 |
| | $ | 80,735 |
| | (5,167 | ) | | (6 | )% |
Realized income for the periods presented was composed of FRE, as explained above, realized net performance income and realized net investment income for the respective periods.
Realized net performance income and realized net investment income for the three months ended June 30, 2019 were primarily attributable to a dividend from an ACOF III professional services portfolio company. Realized net performance income and realized net investment income for the six month comparative periods wasmonths ended June 30, 2019 were primarily dueattributable to additional headcount to expand our capabilities within the special situations strategyrealizations from ACOF III's partial sales of its positions in Floor & Decor, a real estate development portfolio company and to supporta dividend from an increasing asset baseACOF III professional services portfolio company.
Realized net performance income and pool of investments within our corporate opportunity strategy, as well as an increase in incentive compensation. Compensation and benefits expenses represented 37.9% and 38.2% of management feesrealized net investment income for the three and six months ended June 30, 2018 comparedwere primarily attributable to 32.6% and 32.8%realizations from the monetization of multiple investments held within ACOF III.
Private Equity Group—Carried Interest
Accrued carried interest for the Private Equity Group is composed of the following (in thousands):
|
| | | | | | | |
| | As of June 30, | | As of December 31, |
| | 2019 | | 2018 |
| ACOF III | $ | 334,471 |
| | $ | 316,377 |
|
| ACOF IV | 287,294 |
| | 183,595 |
|
| EIF V | 15,694 |
| | — |
|
| First flagship energy opportunities fund | 11,033 |
| | — |
|
| Other funds | 4,972 |
| | 6,900 |
|
| Total Private Equity Group | $ | 653,464 |
| | $ | 506,872 |
|
The following table presents the components of carried interest allocation for the Private Equity Group for the three and six months ended June 30, 2017.2019 and 2018 (in thousands):
Performance Related Earnings: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net |
| ACOF III | $ | 18,369 |
| | $ | (32,252 | ) | | $ | (13,883 | ) | | $ | 80,415 |
| | $ | (90,234 | ) | | $ | (9,819 | ) |
| ACOF IV | — |
| | 60,237 |
| | 60,237 |
| | — |
| | (41,578 | ) | | (41,578 | ) |
| EIF V | — |
| | 15,694 |
| | 15,694 |
| | — |
| | — |
| | — |
|
| First flagship energy opportunities fund | — |
| | 5,482 |
| | 5,482 |
| | — |
| | — |
| | — |
|
| Other funds | — |
| | (2,554 | ) | | (2,554 | ) | | — |
| | (1,793 | ) | | (1,793 | ) |
| Total Private Equity Group | $ | 18,369 |
| | $ | 46,607 |
| | $ | 64,976 |
| | $ | 80,415 |
| | $ | (133,605 | ) | | $ | (53,190 | ) |
Performance related earnings decreased by $86.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $102.6 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Performance related earnings were impacted by fluctuations of the following components: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
| | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net |
| ACOF III | $ | 64,665 |
| | $ | 18,094 |
| | $ | 82,759 |
| | $ | 83,209 |
| | $ | (59,584 | ) | | $ | 23,625 |
|
| ACOF IV | — |
| | 103,698 |
| | 103,698 |
| | 1,604 |
| | (33,150 | ) | | (31,546 | ) |
| EIF V | — |
| | 15,694 |
| | 15,694 |
| | — |
| | (16,215 | ) | | (16,215 | ) |
| First flagship energy opportunities fund | — |
| | 11,033 |
| | 11,033 |
| | — |
| | — |
| | — |
|
| Other funds | (2,173 | ) | | (1,904 | ) | | (4,077 | ) | | — |
| | (3,590 | ) | | (3,590 | ) |
| Total Private Equity Group | $ | 62,492 |
| | $ | 146,615 |
| | $ | 209,107 |
| | $ | 84,813 |
| | $ | (112,539 | ) | | $ | (27,726 | ) |
Net Performance Income. Net performance income includes realized and unrealized performance income, net of realized and unrealized performance related compensation. The impact of reversals of previously recognized performance income and the corresponding performance related compensation expense is reflected as a reduction in unrealized performance income and unrealized performance related compensation.
Net performance income decreased by $69.2 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $72.7 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Net performance income for the three months ended June 30, 2018 primarily included 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 (iii) $4.7 million of net performance income attributable to ACOF III primarily due to market appreciation of one of its publicly traded retail portfolio companies.
Net performance income for the three and six months ended June 30, 2017 included the following: (i) $42.1 million and $37.6 million, respectively, of net performance income attributable to ACOF III primarily due to significant market appreciation of one of its publicly traded retail portfolio companies following the company's initial public 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 $17.8 million to $10.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 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 and 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 $17.9 million on our investment in our Asian corporate private equity fund primarily due to an increased valuation as a result of a recent round of fundraising of one the fund's portfolio companies for the three months ended June 30, 2018 compared to the three months ended June 30, 2017.
Realized Income:
Realized income increased by $3.3 million, or 6%, to $53.4 million for the three months ended June 30, 2018 compared to the three months ended June 30, 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 increases were primarily driven by increases in net realized investment and other income of $8.2 million and $8.1 million for the three and six month comparative periods, 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 realizations and related distributions from ACOF III's partial sale of its position in a publicly traded retail portfolio company. Conversely, FRE decreased by $7.2 million and $3.0 million for the 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 $94.2 million to $27.1 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $105.6 million to $52.9 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, as a result of the fluctuations described above.
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 June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| Balance at 3/31/2018 | $ | 18,728 |
| | $ | 4,061 |
| | $ | 1,514 |
| | $ | 24,303 |
|
| Net new equity commitments | — |
| | 350 |
| | — |
| | 350 |
|
| Distributions | (485 | ) | | (545 | ) | | (9 | ) | | (1,039 | ) |
| Change in fund value | (157 | ) | | 117 |
| | 28 |
| | (12 | ) |
| Balance at 6/30/2018 | $ | 18,086 |
| | $ | 3,983 |
| | $ | 1,533 |
| | $ | 23,602 |
|
| Average AUM(1) | $ | 18,407 |
| | $ | 4,022 |
| | $ | 1,524 |
| | $ | 23,953 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| Balance at 3/31/2017 | $ | 18,384 |
| | $ | 4,574 |
| | $ | 1,695 |
| | $ | 24,653 |
|
| Net new equity commitments | (3 | ) | | 284 |
| | — |
| | 281 |
|
| Distributions | (535 | ) | | (32 | ) | | (93 | ) | | (660 | ) |
| Change in fund value | 1,624 |
| | (100 | ) | | (28 | ) | | 1,496 |
|
| Balance at 6/30/2017 | $ | 19,470 |
| | $ | 4,726 |
| | $ | 1,574 |
| | $ | 25,770 |
|
| Average AUM(1) | $ | 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 six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Infrastructure & Power | | Special Opportunities | | Energy Opportunities | | Total Private Equity Group |
| Balance at 3/31/2019 | $ | 17,519 |
| | $ | 3,588 |
| | $ | 1,809 |
| | $ | 862 |
| | $ | 23,778 |
|
| Net new equity commitments | — |
| | — |
| | 997 |
| | — |
| | 997 |
|
| Distributions | (523 | ) | | (24 | ) | | (11 | ) | | (1 | ) | | (559 | ) |
| Change in fund value | 425 |
| | (7 | ) | | 77 |
| | 24 |
| | 519 |
|
| Balance at 6/30/2019 | $ | 17,421 |
| | $ | 3,557 |
| | $ | 2,872 |
| | $ | 885 |
| | $ | 24,735 |
|
| Average AUM(1) | $ | 17,470 |
| | $ | 3,573 |
| | $ | 2,340 |
| | $ | 874 |
| | $ | 24,257 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| Balance at 12/31/2017 | $ | 18,557 |
| | $ | 4,423 |
| | $ | 1,550 |
| | $ | 24,530 |
|
| Net new equity commitments | 13 |
| | 350 |
| | — |
| | 363 |
|
| Distributions | (509 | ) | | (763 | ) | | (49 | ) | | (1,321 | ) |
| Change in fund value | 25 |
| | (27 | ) | | 32 |
| | 30 |
|
| Balance at 6/30/2018 | $ | 18,086 |
| | $ | 3,983 |
| | $ | 1,533 |
| | $ | 23,602 |
|
| Average AUM(1) | $ | 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) | 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 June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| FPAUM Balance at 3/31/2018 | $ | 12,104 |
| | $ | 3,634 |
| | $ | 925 |
| | $ | 16,663 |
|
| Commitments | — |
| | 350 |
| | — |
| | 350 |
|
| Subscriptions/deployment/increase in leverage | 94 |
| | 33 |
| | 44 |
| | 171 |
|
| Redemptions/distributions/decrease in leverage | (66 | ) | | (500 | ) | | (24 | ) | | (590 | ) |
| Change in fund value | (5 | ) | | — |
| | — |
| | (5 | ) |
| FPAUM Balance at 6/30/2018 | $ | 12,127 |
| | $ | 3,517 |
| | $ | 945 |
| | $ | 16,589 |
|
| Average FPAUM(1) | $ | 12,116 |
| | $ | 3,576 |
| | $ | 935 |
| | $ | 16,627 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| FPAUM Balance at 3/31/2017 | $ | 12,720 |
| | $ | 3,865 |
| | $ | 597 |
| | $ | 17,182 |
|
| Commitments | (3 | ) | | 284 |
| | — |
| | 281 |
|
| Subscriptions/deployment/increase in leverage | 230 |
| | 9 |
| | 217 |
| | 456 |
|
| Redemptions/distributions/decrease in leverage | (510 | ) | | (24 | ) | | (36 | ) | | (570 | ) |
| Change in fund value | — |
| | (53 | ) | | (4 | ) | | (57 | ) |
| FPAUM Balance at 6/30/2017 | $ | 12,437 |
| | $ | 4,081 |
| | $ | 774 |
| | $ | 17,292 |
|
| Average FPAUM(1) | $ | 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 six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Private Equity - EIF | | Special Situations | | Total Private Equity Group |
| FPAUM Balance at 12/31/2017 | $ | 12,073 |
| | $ | 4,019 |
| | $ | 766 |
| | $ | 16,858 |
|
| Commitments | 13 |
| | 350 |
| | — |
| | 363 |
|
| Subscriptions/deployment/increase in leverage | 123 |
| | 34 |
| | 217 |
| | 374 |
|
| Redemptions/distributions/decrease in leverage | (80 | ) | | (886 | ) | | (50 | ) | | (1,016 | ) |
| Change in fund value | (2 | ) | | — |
| | 12 |
| | 10 |
|
| FPAUM Balance at 6/30/2018 | $ | 12,127 |
| | $ | 3,517 |
| | $ | 945 |
| | $ | 16,589 |
|
| Average FPAUM(1) | $ | 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 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Infrastructure & Power | | Special Opportunities | | Total Private Equity Group |
| Balance at 3/31/2018 | $ | 18,728 |
| | $ | 4,061 |
| | $ | 1,514 |
| | $ | 24,303 |
|
| Net new equity commitments | — |
| | 350 |
| | — |
| | 350 |
|
| Distributions | (485 | ) | | (545 | ) | | (9 | ) | | (1,039 | ) |
| Change in fund value | (157 | ) | | 117 |
| | 28 |
| | (12 | ) |
| Balance at 6/30/2018 | $ | 18,086 |
| | $ | 3,983 |
| | $ | 1,533 |
| | $ | 23,602 |
|
| Average AUM(1) | $ | 18,407 |
| | $ | 4,022 |
| | $ | 1,524 |
| | $ | 23,953 |
|
| |
| (1) | Represents the quarterly average of beginning and ending balances. |
The chartstables below present FPAUMprovide rollforwards of AUM for the Private Equity Group by its fee basis as offor the six months ended June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Infrastructure & Power | | Special Opportunities | | Energy Opportunities | | Total Private Equity Group |
| Balance at 12/31/2018 | $ | 17,159 |
| | $ | 3,842 |
| | $ | 1,733 |
| | $ | 753 |
| | $ | 23,487 |
|
| Net new equity commitments | (125 | ) | | — |
| | 1,072 |
| | 81 |
| | 1,028 |
|
| Distributions | (947 | ) | | (208 | ) | | (43 | ) | | (1 | ) | | (1,199 | ) |
| Change in fund value | 1,334 |
| | (77 | ) | | 110 |
| | 52 |
| | 1,419 |
|
| Balance at 6/30/2019 | $ | 17,421 |
| | $ | 3,557 |
| | $ | 2,872 |
| | $ | 885 |
| | $ | 24,735 |
|
| Average AUM(1) | $ | 17,366 |
| | $ | 3,663 |
| | $ | 2,138 |
| | $ | 833 |
| | $ | 24,000 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Infrastructure & Power | | Special Opportunities | | Total Private Equity Group |
| Balance at 12/31/2017 | $ | 18,557 |
| | $ | 4,423 |
| | $ | 1,550 |
| | $ | 24,530 |
|
| Net new equity commitments | 13 |
| | 350 |
| | — |
| | 363 |
|
| Distributions | (509 | ) | | (763 | ) | | (49 | ) | | (1,321 | ) |
| Change in fund value | 25 |
| | (27 | ) | | 32 |
| | 30 |
|
| Balance at 6/30/2018 | $ | 18,086 |
| | $ | 3,983 |
| | $ | 1,533 |
| | $ | 23,602 |
|
| Average AUM(1) | $ | 18,457 |
| | $ | 4,156 |
| | $ | 1,532 |
| | $ | 24,145 |
|
| |
FPAUM: $16,589(1) | FPAUM: $17,292Represents the quarterly average of beginning and ending balances |
Private Equity Group—Fee Paying AUM
The tables below provide rollforwards of fee paying AUM for the Private Equity Group for the three months ended June 30, 2019 and 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Infrastructure & Power | | Special Opportunities | | Energy Opportunities | | Total Private Equity Group |
| FPAUM Balance at 3/31/2019 | $ | 11,809 |
| | $ | 3,411 |
| | $ | 1,339 |
| | $ | 763 |
| | $ | 17,322 |
|
| Subscriptions/deployment/increase in leverage | 76 |
| | — |
| | 112 |
| | — |
| | 188 |
|
| Redemptions/distributions/decrease in leverage | (317 | ) | | (2 | ) | | (5 | ) | | — |
| | (324 | ) |
| Change in fund value | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| FPAUM Balance at 6/30/2019 | $ | 11,570 |
| | $ | 3,409 |
| | $ | 1,446 |
| | $ | 763 |
| | $ | 17,188 |
|
| Average FPAUM(1) | $ | 11,690 |
| | $ | 3,410 |
| | $ | 1,393 |
| | $ | 763 |
| | $ | 17,256 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Infrastructure & Power | | Special Opportunities | | Total Private Equity Group |
| FPAUM Balance at 3/31/2018 | $ | 12,104 |
| | $ | 3,634 |
| | $ | 925 |
| | $ | 16,663 |
|
| Commitments | — |
| | 350 |
| | — |
| | 350 |
|
| Subscriptions/deployment/increase in leverage | 94 |
| | 33 |
| | 44 |
| | 171 |
|
| Redemptions/distributions/decrease in leverage | (66 | ) | | (500 | ) | | (24 | ) | | (590 | ) |
| Change in fund value | (5 | ) | | — |
| | — |
| | (5 | ) |
| FPAUM Balance at 6/30/2018 | $ | 12,127 |
| | $ | 3,517 |
| | $ | 945 |
| | $ | 16,589 |
|
| Average FPAUM(1) | $ | 12,116 |
| | $ | 3,576 |
| | $ | 935 |
| | $ | 16,627 |
|
(1) Represents the quarterly average of beginning and ending balances.
The tables below provide rollforwards of fee paying AUM for the Private Equity Group for the six months ended June 30, 2019 and 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Infrastructure & Power | | Special Opportunities | | Energy Opportunities | | Total Private Equity Group |
| FPAUM Balance at 12/31/2018 | $ | 11,716 |
| | $ | 3,472 |
| | $ | 1,201 |
| | $ | 682 |
| | $ | 17,071 |
|
| Commitments | — |
| | — |
| | — |
| | 81 |
| | $ | 81 |
|
| Subscriptions/deployment/increase in leverage | 200 |
| | 46 |
| | 254 |
| | — |
| | $ | 500 |
|
| Redemptions/distributions/decrease in leverage | (350 | ) | | (109 | ) | | (9 | ) | | — |
| | $ | (468 | ) |
| Change in fund value | 4 |
| | — |
| | — |
| | — |
| | $ | 4 |
|
| Change in fee basis | — |
| | — |
| | — |
| | — |
| | $ | — |
|
| FPAUM Balance at 6/30/2019 | $ | 11,570 |
| | $ | 3,409 |
| | $ | 1,446 |
| | $ | 763 |
| | $ | 17,188 |
|
| Average FPAUM(1) | $ | 11,698 |
| | $ | 3,431 |
| | $ | 1,329 |
| | $ | 736 |
| | $ | 17,194 |
|
|
| | | | | | | | | | | | | | | |
| | Corporate Private Equity | | Infrastructure & Power | | Special Opportunities | | Total Private Equity Group |
| FPAUM Balance at 12/31/2017 | $ | 12,073 |
| | $ | 4,019 |
| | $ | 766 |
| | $ | 16,858 |
|
| Commitments | 13 |
| | 350 |
| | — |
| | 363 |
|
| Subscriptions/deployment/increase in leverage | 123 |
| | 34 |
| | 217 |
| | 374 |
|
| Redemptions/distributions/decrease in leverage | (80 | ) | | (886 | ) | | (50 | ) | | (1,016 | ) |
| Change in fund value | (2 | ) | | — |
| | 12 |
| | 10 |
|
| FPAUM Balance at 6/30/2018 | $ | 12,127 |
| | $ | 3,517 |
| | $ | 945 |
| | $ | 16,589 |
|
| Average FPAUM(1) | $ | 12,101 |
| | $ | 3,723 |
| | $ | 879 |
| | $ | 16,703 |
|
(1) Represents the quarterly average of beginning and ending balances.
The components of our AUM, including the portion that is FPAUM, for the Private Equity Group are presented below as of June 30, 20182019 and 20172018 (in millions):
|
| |
AUM: $23,602$24,735 | AUM: $25,770$23,602 |
|
| | | | | | | |
| FPAUM | | Non-fee paying | | AUM not yet earning fees | | General partner and affiliates |
Private Equity Group—Fund Performance Metrics as of June 30, 20182019
The Private Equity Group managed 23 commingled funds and related co-investment vehicles as of June 30, 2018. ACOF III, ACOF IV, ACOF V, SSF IV, USPF III, USPF IV and EIF V, each considered a2019. Our significant fund,funds combined for approximately 96%90% of the Private Equity Group’s management fees for the six months ended June 30, 2018.2019. 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 situationsopportunities funds invest opportunistically across a broad spectrum of distressed or mispriced investments. Our U.S.infrastructure and power and energy infrastructure funds focus on generating long-term, stable cash-flowing investments in the power generation, transmission and midstream energy sector. Our energy opportunities fund targets investments in the energy industry where its flexible capital can provide attractive risk-adjusted returns while mitigating commodity risk. ACOF III.III, ACOF IV and U.S. Power Fund IV ("USPF III and USPF IVIV") are in harvest mode, meaning they are generally not seeking to deploy capital into new investment opportunities, while ACOF V, SSF IV, and EIF V and the first flagship energy opportunities fund are in deployment mode.
We do not present fund performance metrics for significant funds with less than two years of historical information,investment performance, which begins from the date of the fund's first investment, except for those significant funds that pay management fees on invested capital, in which case performance is shown at the earlier of (i) the one yearone-year anniversary of the fund's first investment or (ii) such time that the fund ishas invested at least 50% or more invested.of its capital.
The following table presents the performance data as of June 30, 2019 for our significant funds in the Private Equity Group, all of which are drawdown funds:funds ($ 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 | | $ | 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 | | 4,208 |
| | 3,510 |
| | 3,867 |
| | 6,662 |
| | 3,889 |
| | 10,551 |
| | 2.7x | | 2.3x | | 30.7 |
| | 22.9 |
| | Corporate Private Equity | 2008 | | $ | 2,936 |
| | $ | 3,510 |
| | $ | 3,885 |
| | $ | 7,656 |
| | $ | 2,650 |
| | $ | 10,306 |
| | 2.7x | | 2.2x | | 29.1 |
| | 20.8 |
| | Corporate Private Equity |
| USPF IV | 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 | 2010 | | 1,628 |
| | 1,688 |
| | 2,085 |
| | 1,215 |
| | 1,538 |
| | 2,753 |
| | 1.3x | | 1.2x | | 8.5 |
| | 5.3 |
| | Infrastructure and Power |
| ACOF IV | 2012 | | 5,295 |
| | 4,700 |
| | 4,107 |
| | 2,520 |
| | 4,427 |
| | 6,947 |
| | 1.7x | | 1.5x | | 20.4 |
| | 13.7 |
| | Corporate Private Equity | 2012 | | 5,633 |
| | 4,700 |
| | 4,230 |
| | 2,707 |
| | 4,920 |
| | 7,627 |
| | 1.8x | | 1.6x | | 19.0 |
| | 12.3 |
| | 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 | 2015 | | 855 |
| | 801 |
| | 757 |
| | 237 |
| | 680 |
| | 917 |
| | 1.2x | | 1.1x | | 15.4 |
| | 8.9 |
| | Infrastructure and Power |
| SSF IV(7) | 2015 | | 1,367 |
| | 1,515 |
| | 1,693 |
| | 774 |
| | 801 |
| | 1,576 |
| | 0.9x | | 0.9x | | (7.2 | ) | | (8.9 | ) | | Special Situations | 2015 | | 1,518 |
| | 1,515 |
| | 2,805 |
| | 1,458 |
| | 1,305 |
| | 2,763 |
| | 1.0x | | 0.9x | | (1.4 | ) | | (3.3 | ) | | Special Opportunities |
| ACOF V | 2017 | | 7,838 |
| | 7,850 |
| | 2,943 |
| | 118 |
| | 3,015 |
| | 3,133 |
| | 1.1x | | 1.0x | | NA |
| | NA |
| | Corporate Private Equity | 2017 | | 8,198 |
| | 7,850 |
| | 4,570 |
| | 158 |
| | 5,154 |
| | 5,312 |
| | 1.2x | | 1.1x | | 13.9 |
| | 7.4 |
| | Corporate Private Equity |
| First flagship energy opportunities fund | | 2019 | | 885 |
| | 756 |
| | 616 |
| | 4 |
| | 699 |
| | 703 |
| | 1.1x | | 1.1x | | N/A |
| | N/A |
| | Energy Opportunities |
| |
| (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 feescarried interest, other expenses and taxes, as applicable and other expenses.applicable. |
| |
| (4) | The net MoIC for the U.S.infrastructure and power and energy infrastructure and special situation fundsSSF IV is calculated at the fund-level. The net MoIC for the corporate private equity funds is calculated at the investment-level.investment level. For all funds, the net MoIC is based on the interests of the fee-paying limited partnersand if applicable, excludes those interests attributable to the non-fee paying limited partners and/or the general partner whowhich does not pay management fees or performance income.fees. The net MoIC is after giving effect to management fees, performance incomecarried interest, as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. The net MoIC would have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. |
| |
| (5) | The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from investments and the residual value of the investments at the end of the measurement period. Gross IRRs reflect returns to all partners. CashFor SSF IV, cash flows used in the gross IRR calculation are based on the actual dates of the cash flows. For all other funds, cash flows are assumed to occur at month-end. The gross IRRs are calculated before giving effect to management fees, performance incomecarried interest, other expenses and taxes, as applicable, and other expenses.applicable. |
| |
| (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. Net IRRs reflect returns to the fee-paying limited partners and if applicable, exclude interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The cash flow dates used in the net IRR calculationscalculation 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 incomecarried interest 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. IncludingThe funds may utilize a credit facility during the timing on contribution and distributions to and from the corporate private equity funds, net investor IRRs since inception for ACOF III is 22.2%investment period and for ACOF IV is 12.9%.general cash management purposes. Net fund-level IRRs would have generally been lower had such fund called capital from its limited partners instead of utilizing the credit facility. |
| |
| (7) | In January 2017, a new team assumed portfolio management of SSF IV. In addition to presenting the cumulative performance measure byfor SSF IV, we have also adopted a new performance measurement called “SSF IV 2.0”. SSF IV 2.0 is a subset of SSF IV positions and is intended to provide insight into the new 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 their private, illiquid nature. Since January 2017, SSF IV 2.0 has generated gross and net (realized and unrealized) internal rates of return of 15.6%12.2% and 10.8%, respectively,8.2% through June 30, 2018.2019, respectively. The IRR is an annualized since inception 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. Cash flows used in the IRRs calculations are based on the actual dates of the cash flows. The gross IRRs are calculated before giving effect to management fees, carried interest, other expenses and taxes, as applicable. The net IRRs are calculated after giving effect to estimated management fees, carried interest and other expenses. |
Real Estate GroupGroup—Three and Six Months Ended June 30, 2019Compared to Three and Six Months Ended June 30, 2018
Fee Related Earnings:
The following table sets forth certain statementpresents the components of operations datathe Real Estate Group's FRE and certain other data of ourthe changes for the comparative periods ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Management fees | $ | 21,770 |
| | $ | 17,138 |
| | $ | 4,632 |
| | 27 | % | | $ | 40,420 |
| | $ | 32,311 |
| | $ | 8,109 |
| | 25 | % |
| Other fees | 672 |
| | 7 |
| | 665 |
| | NM |
| | 681 |
| | 10 |
| | 671 |
| | NM |
|
| Compensation and benefits | (11,928 | ) | | (8,768 | ) | | (3,160 | ) | | (36 | )% | | (21,212 | ) | | (16,407 | ) | | (4,805 | ) | | (29 | )% |
| General, administrative and other expenses | (3,523 | ) | | (2,391 | ) | | (1,132 | ) | | (47 | )% | | (6,655 | ) | | (4,823 | ) | | (1,832 | ) | | (38 | )% |
| Fee Related Earnings | $ | 6,991 |
| | $ | 5,986 |
| | 1,005 |
| | 17 | % | | $ | 13,234 |
| | $ | 11,091 |
| | 2,143 |
| | 19 | % |
NM - Not meaningful
Management Fees
The charts below present Real Estate Group segmentmanagement fees and effective management fee rates for the three and six months ended June 30, 2019 and 2018 ($ in millions):
Our fifth flagship European real estate equity fund generated additional management fees of $6.3 million and $10.9 million for the three and six month comparative periods, presented.respectively, of which $3.6 million and $4.6 million were attributable to one-time catch up fees for the three and six month comparative periods, respectively, from additional capital commitments to the fund during the three and six month periods ended June 30, 2019. Conversely, multiple property sales held within several of our real estate equity funds resulted in decreases in management fees of $2.1 million and $4.1 million for the three and six month comparative periods, respectively.
The increases in effective management fee rates between periods were primarily due to deployment of capital within our real estate equity funds. Our latest U.S. and European real estate equity funds pay a lower fixed fee on committed capital and then a higher fee on deployed capital. Immediately following capital raising, our effective fee rate decreases temporarily and increases as capital is subsequently deployed.
Compensation and Benefits. Compensation and benefits expenses increased by $3.2 million, or 36%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 and by $4.8 million, or 29%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increases were primarily driven by higher compensation in connection with higher management fees for the comparative periods.
Realized Income:
The following table presents the components of the Real Estate Group's RI and the changes for the comparative periods ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | June 30, | | | June 30, | |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) |
| Management fees | $ | 17,138 |
| | $ | 16,479 |
| | $ | 659 |
| | 4 | % | | $ | 32,311 |
| | $ | 32,094 |
| | $ | 217 |
| | 1 | % |
| Other fees | 7 |
| | 19 |
| | (12 | ) | | (63 | )% | | 10 |
| | 10 |
| | — |
| | — | % |
| Compensation and benefits | (8,768 | ) | | (9,714 | ) | | 946 |
| | 10 | % | | (16,407 | ) | | (19,450 | ) | | 3,043 |
| | 16 | % |
| General, administrative and other expenses | (2,391 | ) | | (3,091 | ) | | 700 |
| | 23 | % | | (4,823 | ) | | (5,822 | ) | | 999 |
| | 17 | % |
| Fee Related Earnings | 5,986 |
| | 3,693 |
| | 2,293 |
| | 62 | % | | 11,091 |
| | 6,832 |
| | 4,259 |
| | 62 | % |
| 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 | (250 | ) | | 373 |
| | (623 | ) | | NM |
| | 3,100 |
| | 2,156 |
| | 944 |
| | 44 | % |
| Investment income (loss)-unrealized | (525 | ) | | 1,134 |
| | (1,659 | ) | | NM |
| | (1,757 | ) | | 690 |
| | (2,447 | ) | | NM |
|
| Interest and other investment income (expense) | (1,218 | ) | | 1,534 |
| | (2,752 | ) | | NM |
| | (201 | ) | | 1,353 |
| | (1,554 | ) | | NM |
|
| Interest expense | (452 | ) | | (429 | ) | | (23 | ) | | (5 | )% | | (872 | ) | | (861 | ) | | (11 | ) | | (1 | )% |
| Net investment income (loss) | (2,445 | ) | | 2,612 |
| | (5,057 | ) | | NM |
| | 270 |
| | 3,338 |
| | (3,068 | ) | | (92 | )% |
| Performance related earnings | 3,128 |
| | 15,075 |
| | (11,947 | ) | | (79 | )% | | 9,729 |
| | 21,462 |
| | (11,733 | ) | | (55 | )% |
| Economic net income | $ | 9,114 |
| | $ | 18,768 |
| | (9,654 | ) | | (51 | )% | | $ | 20,820 |
| | $ | 28,294 |
| | (7,474 | ) | | (26 | )% |
| Realized income | $ | 6,479 |
| | $ | 5,181 |
| | 1,298 |
| | 25 | % | | $ | 20,148 |
| | $ | 9,769 |
| | 10,379 |
| | 106 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Fee Related Earnings | $ | 6,991 |
| | $ | 5,986 |
| | $ | 1,005 |
| | 17 | % | | $ | 13,234 |
| | $ | 11,091 |
| | $ | 2,143 |
| | 19 | % |
| Performance income-realized | 1,666 |
| | 521 |
| | 1,145 |
| | 220 | % | | 4,191 |
| | 14,159 |
| | (9,968 | ) | | (70 | )% |
| Performance related compensation-realized | (969 | ) | | 7 |
| | (976 | ) | | NM |
| | (2,226 | ) | | (8,214 | ) | | 5,988 |
| | 73 | % |
| Realized net performance income | 697 |
| | 528 |
| | 169 |
| | 32 | % | | 1,965 |
| | 5,945 |
| | (3,980 | ) | | (67 | )% |
| Investment income (loss)-realized | 1,546 |
| | (250 | ) | | 1,796 |
| | NM |
| | 5,026 |
| | 3,100 |
| | 1,926 |
| | 62 | % |
| Interest and other investment income-realized | 2,119 |
| | 667 |
| | 1,452 |
| | 218 | % | | 3,224 |
| | 884 |
| | 2,340 |
| | 265 | % |
| Interest expense | (1,050 | ) | | (452 | ) | | (598 | ) | | (132 | )% | | (2,169 | ) | | (872 | ) | | (1,297 | ) | | (149 | )% |
| Realized net investment income (loss) | 2,615 |
| | (35 | ) | | 2,650 |
| | NM |
| | 6,081 |
| | 3,112 |
| | 2,969 |
| | 95 | % |
| Realized Income | $ | 10,303 |
| | $ | 6,479 |
| | 3,824 |
| | 59 | % | | $ | 21,280 |
| | $ | 20,148 |
| | 1,132 |
| | 6 | % |
NM - Not Meaningful
Realized income for the periods presented was composed of FRE, as explained above, realized net performance income and realized net investment income for the respective periods.
Realized net performance income for the six months ended June 30, 2019 was primarily attributable to the monetization of several properties held within a certain European equity real estate fund and a certain U.S. equity real estate fund. Realized net performance income for the six months ended June 30, 2018 was primarily attributable to tax distributions received from EF IV.
Realized net investment income for the three and six months ended June 30, 2019 was primarily attributable to sales of multiple properties held within various U.S. real estate equity funds resulting in realized gains from our investments in these funds and to interest income from our investment in a U.S. real estate equity funds that was made in the fourth quarter of 2018. Realized net investment income for the six months ended June 30, 2018 was primarily attributable to sales of multiple properties held within Ares US Real Estate Fund VIII, L.P. ("US VIII") and various other U.S. real estate equity funds resulting in net realized gains from our investments in these funds.
Real Estate Group— Carried Interest and Incentive Fees
Accrued carried interest and incentive fee receivablereceivables for the Real Estate Group includeare composed of the following:following (in thousands):
| | | | As of June 30, | | As of December 31, | | | | | |
| | 2018 | | 2017 | As of June 30, | | As of December 31, |
| | (Dollars in thousands) | 2019 | | 2018 |
| US VIII | $ | 37,706 |
| | $ | 32,940 |
| $ | 58,054 |
| | $ | 50,847 |
|
| EF IV | 51,905 |
| | 50,801 |
| 66,186 |
| | 65,166 |
|
| Other real estate funds | 44,117 |
| | 37,528 |
| 64,247 |
| | 57,236 |
|
| Subtotal | 133,728 |
| | 121,269 |
| 188,487 |
| | 173,249 |
|
| Other fee generating funds(1) | 13,313 |
| | 15,362 |
| 12,310 |
| | 12,197 |
|
| Total Real Estate Group | $ | 147,041 |
| | $ | 136,631 |
| $ | 200,797 |
| | $ | 185,446 |
|
| |
| (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 change in accrued carried interest and incentive fee receivable for the comparative periods was composed of the following: (i) a $32.1 million increase in unrealized carried interest allocation for the six months ended June 30, 2019; (ii) $16.9 million of realized carried interest allocation in 2018 received during the six months ended June 30, 2019; and (iii) foreign currency translation and other adjustments.
The following tables presenttable presents the components of performance incomeincentive fees and carried interest allocation for the Real Estate Group. TheGroup for the three and six month periodsmonths ended June 30, 2017 include unrealized incentive fees, which are no longer recognized following our adoption of the new revenue recognition standard.2019 and 2018 (in thousands):
| | | | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 | | | | | | | | | | | | | |
| | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| | (Dollars in thousands) | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net |
| US VIII | $ | — |
| | $ | 436 |
| | $ | 436 |
| | $ | — |
| | $ | 4,074 |
| | $ | 4,074 |
| $ | — |
| | $ | 3,474 |
| | $ | 3,474 |
| | $ | — |
| | $ | 436 |
| | $ | 436 |
|
| EF IV | — |
| | 11,012 |
| | 11,012 |
| | — |
| | 18,964 |
| | 18,964 |
| — |
| | 6,197 |
| | 6,197 |
| | — |
| | 11,012 |
| | 11,012 |
|
| Other real estate funds | — |
| | 2,934 |
| | 2,934 |
| | 267 |
| | 7,734 |
| | 8,001 |
| 1,666 |
| | 7,508 |
| | 9,174 |
| | — |
| | 2,934 |
| | 2,934 |
|
| Subtotal | — |
|
| 14,382 |
|
| 14,382 |
| | 267 |
| | 30,772 |
| | 31,039 |
| 1,666 |
|
| 17,179 |
|
| 18,845 |
| | — |
| | 14,382 |
| | 14,382 |
|
| Other fee generating funds(1) | 521 |
| | (552 | ) | | (31 | ) | | 1,200 |
| | (983 | ) | | 217 |
| — |
| | (27 | ) | | (27 | ) | | 521 |
| | (552 | ) | | (31 | ) |
| Total Real Estate Group | $ | 521 |
|
| $ | 13,830 |
|
| $ | 14,351 |
| | $ | 1,467 |
|
| $ | 29,789 |
|
| $ | 31,256 |
| $ | 1,666 |
|
| $ | 17,152 |
|
| $ | 18,818 |
| | $ | 521 |
|
| $ | 13,830 |
|
| $ | 14,351 |
|
| | | | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 | | | | | | | | | | | | | |
| | Realized | | Unrealized | | Total | | Realized | | Unrealized | | Total | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
| | (Dollars in thousands) | Realized | | Unrealized | | Net | | Realized | | Unrealized | | Net |
| US VIII | $ | — |
| | $ | 4,766 |
| | $ | 4,766 |
| | $ | — |
| | $ | 8,134 |
| | $ | 8,134 |
| $ | — |
| | $ | 7,207 |
| | $ | 7,207 |
| | $ | — |
| | $ | 4,766 |
| | $ | 4,766 |
|
| EF IV | 12,396 |
| | 1,104 |
| | 13,500 |
| | — |
| | 28,055 |
| | 28,055 |
| — |
| | 1,072 |
| | 1,072 |
| | 12,396 |
| | 1,104 |
| | 13,500 |
|
| Other real estate funds | 1,242 |
| | 7,447 |
| | 8,689 |
| | 294 |
| | 8,647 |
| | 8,941 |
| 3,724 |
| | 23,694 |
| | 27,418 |
| | 1,242 |
| | 7,447 |
| | 8,689 |
|
| Subtotal | 13,638 |
| | 13,317 |
| | 26,955 |
| | 294 |
| | 44,836 |
| | 45,130 |
| 3,724 |
| | 31,973 |
| | 35,697 |
| | 13,638 |
| | 13,317 |
| | 26,955 |
|
| Other fee generating funds(1) | 521 |
| | (1,527 | ) | | (1,006 | ) | | 1,200 |
| | (959 | ) | | 241 |
| 467 |
| | 113 |
| | 580 |
| | 521 |
| | (1,527 | ) | | (1,006 | ) |
| Total Real Estate Group | $ | 14,159 |
| | $ | 11,790 |
| | $ | 25,949 |
| | $ | 1,494 |
| | $ | 43,877 |
| | $ | 45,371 |
| $ | 4,191 |
| | $ | 32,086 |
| | $ | 36,277 |
| | $ | 14,159 |
| | $ | 11,790 |
| | $ | 25,949 |
|
| |
| (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 income - unrealized for the Real Estate 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 June 30, 2018 | | Three Months Ended June 30, 2017 |
| | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) |
| US VIII | $ | — |
| | $ | 436 |
| | $ | — |
| | $ | 436 |
| | $ | — |
| | $ | 4,074 |
| | $ | — |
| | $ | 4,074 |
|
| EF IV | — |
| | 11,012 |
| | — |
| | 11,012 |
| | — |
| | 18,964 |
| | — |
| | 18,964 |
|
| Other real estate funds | — |
| | 4,875 |
| | (1,941 | ) | | 2,934 |
| | (267 | ) | | 8,117 |
| | (116 | ) | | 7,734 |
|
| Subtotal | — |
|
| 16,323 |
|
| (1,941 | ) |
| 14,382 |
|
| (267 | ) |
| 31,155 |
|
| (116 | ) |
| 30,772 |
|
| Other fee generating funds(1) | (521 | ) | | 337 |
| | (368 | ) | | (552 | ) | | (1,200 | ) | | 827 |
| | (610 | ) | | (983 | ) |
| Total Real Estate Group | $ | (521 | ) |
| $ | 16,660 |
|
| $ | (2,309 | ) |
| $ | 13,830 |
|
| $ | (1,467 | ) |
| $ | 31,982 |
|
| $ | (726 | ) |
| $ | 29,789 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized | | Performance Income - Realized | | Increases | | Decreases | | Performance Income - Unrealized |
| | (Dollars in thousands) |
| US VIII | $ | — |
| | $ | 4,766 |
| | $ | — |
| | $ | 4,766 |
| | $ | — |
| | $ | 8,134 |
| | $ | — |
| | $ | 8,134 |
|
| EF IV | (12,396 | ) | | 13,500 |
| | — |
| | 1,104 |
| | — |
| | 28,055 |
| | — |
| | 28,055 |
|
| Other real estate funds | (1,242 | ) | | 10,801 |
| | (2,112 | ) | | 7,447 |
| | (294 | ) | | 9,456 |
| | (515 | ) | | 8,647 |
|
| Subtotal | (13,638 | ) | | 29,067 |
| | (2,112 | ) | | 13,317 |
| | (294 | ) | | 45,645 |
| | (515 | ) | | 44,836 |
|
| Other fee generating funds(1) | (521 | ) | | 302 |
| | (1,308 | ) | | (1,527 | ) | | (1,200 | ) | | 1,149 |
| | (908 | ) | | (959 | ) |
| Total Real Estate Group | $ | (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 Six Months Ended June 30, 2018Compared to Three and Six Months Ended June 30, 2017
Fee Related Earnings:
Fee related earnings increased by $2.3 million, or 62%, to $6.0 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $4.3 million, or 62%, to $11.1 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Fee related earnings were impacted by fluctuations of the following components:
Management Fees. Total management fees increased by $0.7 million, or 4%, to $17.1 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $0.2 million, or 1%, to $32.3 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Management fees for the three and six months ended June 30, 2018 included $2.1 million and $2.6 million, respectively, from the launch 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 fund increased management fees by $1.8 million and $3.0 million for the three and six month comparative periods, respectively, of which $0.9 million and $1.1 million were attributable to one-time catch up fees for the three and 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, decreased from 0.97% for the three and six months ended June 30, 2017 to 0.92% for the three months ended June 30, 2018 and to 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 on committed capital increases as capital is invested.
Compensation and Benefits. Compensation and benefits expenses decreased by $0.9 million, or 10%, to $8.8 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $3.0 million, or 16%, to $16.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decreases were primarily driven by reductions in incentive based compensation. Compensation and benefits expenses represented 51.2% and 50.8% of management fees for the three and six months ended June 30, 2018 compared to 58.9% and 60.6% for the three and six months ended June 30, 2017.
General, Administrative and Other Expenses. General, administrative and other expenses decreased by $0.7 million, or 23%, to $2.4 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $1.0 million, or 17%, to $4.8 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decreases were primarily due to fundraising and related travel incurred in the prior year periods related to the launch of our new flagship U.S. real estate equity fund.
Performance Related Earnings:
Performance related earnings decreased by $11.9 million, or 79%, to $3.1 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $11.7 million, or 55%, to $9.7 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Performance related earnings were impacted by fluctuations of the following components:
Net Performance Income. Net performance income includes realized and unrealized performance income, net of realized and unrealized performance related compensation. The impact of reversals of previously recognized performance income and the corresponding performance related compensation expense is reflected as a reduction in unrealized performance income and performance related compensation.
Net performance income decreased by $6.9 million, or 55%, to $5.6 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $8.7 million, or 48%, to $9.5 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decreases were primarily due to greater market appreciation of U.S. and E.U. equity funds' investments in the prior year periods compared to the current year periods.
Net Investment Income (Loss). Net investment income (loss) decreased by $5.1 million from net investment income of $2.6 million for the three months ended June 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 June 30, 2018 compared to the three months ended June 30, 2017 and by $10.4 million, or 106%, to $20.1 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase for the three month comparative periods was primarily driven by an increase in FRE of $2.3 million, offset by a decrease in net realized performance income of $0.8 million and by 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 FRE 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 the six months ended June 30, 2018 exceeded distributions of the prior year comparative period.
Economic Net Income:
Economic net income is composed of fee related earnings and performance related earnings. Economic net income decreased by $9.7 million, or 51%, to $9.1 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $7.5 million, or 26%, to $20.8 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, as a result of the fluctuations described above.
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 June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| Balance at 3/31/2018 | $ | 4,505 |
| | $ | 3,388 |
| | $ | 3,003 |
| | $ | 10,896 |
|
| Net new equity commitments | 110 |
| | 197 |
| | — |
| | 307 |
|
| Distributions | (133 | ) | | (99 | ) | | (8 | ) | | (240 | ) |
| Change in fund value | 72 |
| | (135 | ) | | 10 |
| | (53 | ) |
| Balance at 6/30/2018 | $ | 4,554 |
| | $ | 3,351 |
| | $ | 3,005 |
| | $ | 10,910 |
|
| Average AUM(1) | $ | 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 |
| Balance at 3/31/2017 | $ | 4,136 |
| | $ | 3,050 |
| | $ | 2,755 |
| | $ | 9,941 |
|
| Net new equity commitments | 502 |
| | — |
| | — |
| | 502 |
|
| Net new debt commitments | — |
| | — |
| | 236 |
| | 236 |
|
| Distributions | (74 | ) | | (86 | ) | | (8 | ) | | (168 | ) |
| Change in fund value | 95 |
| | 179 |
| | 7 |
| | 281 |
|
| Balance at 6/30/2017 | $ | 4,659 |
| | $ | 3,143 |
| | $ | 2,990 |
| | $ | 10,792 |
|
| Average AUM(1) | $ | 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 Private Equity Group for the six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - Europe | | Real Estate Debt | | Total Real Estate Group |
| Balance at 3/31/2019 | $ | 3,894 |
| | $ | 3,897 |
| | $ | 4,019 |
| | $ | 11,810 |
|
| Net new equity commitments | 38 |
| | 279 |
| | 138 |
| | 455 |
|
| Net new debt commitments | — |
| | — |
| | 111 |
| | 111 |
|
| Distributions | (492 | ) | | (59 | ) | | (99 | ) | | (650 | ) |
| Change in fund value | 64 |
| | 65 |
| | 13 |
| | 142 |
|
| Balance at 6/30/2019 | $ | 3,504 |
| | $ | 4,182 |
| | $ | 4,182 |
| | $ | 11,868 |
|
| Average AUM(1) | $ | 3,699 |
| | $ | 4,040 |
| | $ | 4,101 |
| | $ | 11,840 |
|
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| Balance at 12/31/2017 | $ | 4,578 |
| | $ | 2,704 |
| | $ | 2,947 |
| | $ | 10,229 |
|
| Net new equity commitments | 144 |
| | 965 |
| | 55 |
| | 1,164 |
|
| Distributions | (267 | ) | | (248 | ) | | (16 | ) | | (531 | ) |
| Change in fund value | 99 |
| | (70 | ) | | 19 |
| | 48 |
|
| Balance at 6/30/2018 | $ | 4,554 |
| | $ | 3,351 |
| | $ | 3,005 |
| | $ | 10,910 |
|
| Average AUM(1) | $ | 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 | Real Estate Equity - U.S. | | Real Estate Equity - Europe | | Real Estate Debt | | Total Real Estate Group |
| Balance at 12/31/2016 | $ | 4,106 |
| | $ | 3,100 |
| | $ | 2,546 |
| | $ | 9,752 |
| |
| Balance at 3/31/2018 | | $ | 4,505 |
| | $ | 3,388 |
| | $ | 3,003 |
| | $ | 10,896 |
|
| Net new equity commitments | 521 |
| | — |
| | — |
| | 521 |
| 110 |
| | 197 |
| | — |
| | 307 |
|
| Net new debt commitments | — |
| | — |
| | 509 |
| | 509 |
| |
| Distributions | (93 | ) | | (204 | ) | | (78 | ) | | (375 | ) | (133 | ) | | (99 | ) | | (8 | ) | | (240 | ) |
| Change in fund value | 125 |
| | 247 |
| | 13 |
| | 385 |
| 72 |
| | (135 | ) | | 10 |
| | (53 | ) |
| Balance at 6/30/2017 | $ | 4,659 |
| | $ | 3,143 |
| | $ | 2,990 |
| | $ | 10,792 |
| |
| Balance at 6/30/2018 | | $ | 4,554 |
| | $ | 3,351 |
| | $ | 3,005 |
| | $ | 10,910 |
|
| Average AUM(1) | $ | 4,300 |
| | $ | 3,098 |
| | $ | 2,764 |
| | $ | 10,162 |
| $ | 4,530 |
| | $ | 3,370 |
| | $ | 3,004 |
| | $ | 10,904 |
|
(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 June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 3/31/2018 | $ | 3,008 |
| | $ | 2,729 |
| | $ | 1,014 |
| | $ | 6,751 |
|
| Commitments | 97 |
| | — |
| | — |
| | 97 |
|
| Subscriptions/deployment/increase in leverage | 14 |
| | 240 |
| | 26 |
| | 280 |
|
| Redemptions/distributions/decrease in leverage | (67 | ) | | (40 | ) | | (8 | ) | | (115 | ) |
| Change in fund value | 7 |
| | (67 | ) | | 10 |
| | (50 | ) |
| FPAUM Balance at 6/30/2018 | $ | 3,059 |
| | $ | 2,862 |
| | $ | 1,042 |
| | $ | 6,963 |
|
| Average FPAUM(1) | $ | 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 |
| FPAUM Balance at 3/31/2017 | $ | 2,758 |
| | $ | 2,484 |
| | $ | 1,115 |
| | $ | 6,357 |
|
| Commitments | 390 |
| | — |
| | — |
| | 390 |
|
| Subscriptions/deployment/increase in leverage | 153 |
| | — |
| | 1 |
| | 154 |
|
| Redemptions/distributions/decrease in leverage | (62 | ) | | (26 | ) | | (8 | ) | | (96 | ) |
| Change in fund value | — |
| | 78 |
| | 7 |
| | 85 |
|
| Change in fee basis | (236 | ) | | — |
| | — |
| | (236 | ) |
| FPAUM Balance at 6/30/2017 | $ | 3,003 |
| | $ | 2,536 |
| | $ | 1,115 |
| | $ | 6,654 |
|
| Average FPAUM(1) | $ | 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 six months ended June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - E.U. | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 12/31/2017 | $ | 3,062 |
| | $ | 2,064 |
| | $ | 1,063 |
| | $ | 6,189 |
|
| Commitments | 126 |
| | 737 |
| | — |
| | 863 |
|
| Subscriptions/deployment/increase in leverage | 51 |
| | 338 |
| | 26 |
| | 415 |
|
| Redemptions/distributions/decrease in leverage | (148 | ) | | (83 | ) | | (67 | ) | | (298 | ) |
| Change in fund value | 5 |
| | (27 | ) | | 20 |
| | (2 | ) |
| Change in fee basis | (37 | ) | | (167 | ) | | — |
| | (204 | ) |
| FPAUM Balance at 6/30/2018 | $ | 3,059 |
| | $ | 2,862 |
| | $ | 1,042 |
| | $ | 6,963 |
|
| Average FPAUM(1) | $ | 3,043 |
| | $ | 2,552 |
| | $ | 1,040 |
| | $ | 6,635 |
|
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - Europe | | Real Estate Debt | | Total Real Estate Group |
| Balance at 12/31/2018 | $ | 4,163 |
| | $ | 3,711 |
| | $ | 3,466 |
| | $ | 11,340 |
|
| Net new equity commitments | (72 | ) | | 470 |
| | 219 |
| | 617 |
|
| Net new debt commitments | — |
| | — |
| | 583 |
| | 583 |
|
| Distributions | (788 | ) | | (93 | ) | | (108 | ) | | (989 | ) |
| Change in fund value | 201 |
| | 94 |
| | 22 |
| | 317 |
|
| Balance at 6/30/2019 | $ | 3,504 |
| | $ | 4,182 |
| | $ | 4,182 |
| | $ | 11,868 |
|
| Average AUM(1) | $ | 3,854 |
| | $ | 3,930 |
| | $ | 3,889 |
| | $ | 11,673 |
|
|
| | | | | | | | | | | | | | | |
| | 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 |
|
| Commitments | 390 |
| | — |
| | — |
| | 390 |
|
| Subscriptions/deployment/increase in leverage | 204 |
| | — |
| | 3 |
| | 207 |
|
| Redemptions/distributions/decrease in leverage | (198 | ) | | (46 | ) | | (26 | ) | | (270 | ) |
| Change in fund value | — |
| | 51 |
| | 20 |
| | 71 |
|
| Change in fee basis | (284 | ) | | — |
| | — |
| | (284 | ) |
| FPAUM Balance at 6/30/2017 | $ | 3,003 |
| | $ | 2,536 |
| | $ | 1,115 |
| | $ | 6,654 |
|
| Average FPAUM(1) | $ | 2,884 |
| | $ | 2,517 |
| | $ | 1,116 |
| | $ | 6,517 |
|
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - Europe | | Real Estate Debt | | Total Real Estate Group |
| Balance at 12/31/2017 | $ | 4,578 |
| | $ | 2,704 |
| | $ | 2,947 |
| | $ | 10,229 |
|
| Net new equity commitments | 144 |
| | 965 |
| | 55 |
| | 1,164 |
|
| Distributions | (267 | ) | | (248 | ) | | (16 | ) | | (531 | ) |
| Change in fund value | 99 |
| | (70 | ) | | 19 |
| | 48 |
|
| Balance at 6/30/2018 | $ | 4,554 |
| | $ | 3,351 |
| | $ | 3,005 |
| | $ | 10,910 |
|
| Average AUM(1) | $ | 4,546 |
| | $ | 3,148 |
| | $ | 2,985 |
| | $ | 10,679 |
|
(1) Represents the quarterly average of beginning and ending balances.
Real Estate Group—Fee Paying AUM
The chartstables below present FPAUMprovide rollforwards of fee paying AUM for the Real Estate Group by its fee basis as offor the three months ended June 30, 20182019 and 20172018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - Europe | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 3/31/2019 | $ | 2,625 |
| | $ | 3,317 |
| | $ | 1,033 |
| | $ | 6,975 |
|
| Commitments | — |
| | 279 |
| | — |
| | 279 |
|
| Subscriptions/deployment/increase in leverage | 144 |
| | 32 |
| | 226 |
| | 402 |
|
| Redemptions/distributions/decrease in leverage | (141 | ) | | (12 | ) | | (76 | ) | | (229 | ) |
| Change in fund value | — |
| | 22 |
| | 14 |
| | 36 |
|
| FPAUM Balance at 6/30/2019 | $ | 2,628 |
| | $ | 3,638 |
| | $ | 1,197 |
| | $ | 7,463 |
|
| Average FPAUM(1) | $ | 2,627 |
| | $ | 3,478 |
| | $ | 1,115 |
| | $ | 7,220 |
|
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - Europe | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 3/31/2018 | $ | 3,008 |
| | $ | 2,729 |
| | $ | 1,014 |
| | $ | 6,751 |
|
| Commitments | 97 |
| | — |
| | — |
| | 97 |
|
| Subscriptions/deployment/increase in leverage | 14 |
| | 240 |
| | 26 |
| | 280 |
|
| Redemptions/distributions/decrease in leverage | (67 | ) | | (40 | ) | | (8 | ) | | (115 | ) |
| Change in fund value | 7 |
| | (67 | ) | | 10 |
| | (50 | ) |
| FPAUM Balance at 6/30/2018 | $ | 3,059 |
| | $ | 2,862 |
| | $ | 1,042 |
| | $ | 6,963 |
|
| Average FPAUM(1) | $ | 3,034 |
| | $ | 2,796 |
| | $ | 1,028 |
| | $ | 6,858 |
|
|
| |
FPAUM: $6,963 | FPAUM: $6,654 |
(1)Market value/other includes ACRE Represents the quarterly average of beginning and ending balances.
The tables below provide rollforwards of fee paying AUM which is based on ACRE's stockholders' equity.for the Real Estate Group for the six months ended June 30, 2019 and 2018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - Europe | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 12/31/2018 | $ | 2,739 |
| | $ | 3,269 |
| | $ | 944 |
| | $ | 6,952 |
|
| Commitments | — |
| | 365 |
| | — |
| | 365 |
|
| Subscriptions/deployment/increase in leverage | 155 |
| | 88 |
| | 316 |
| | 559 |
|
| Redemptions/distributions/decrease in leverage | (266 | ) | | (58 | ) | | (86 | ) | | (410 | ) |
| Change in fund value | — |
| | (26 | ) | | 23 |
| | (3 | ) |
| FPAUM Balance at 6/30/2019 | $ | 2,628 |
| | $ | 3,638 |
| | $ | 1,197 |
| | $ | 7,463 |
|
| Average FPAUM(1) | $ | 2,664 |
| | $ | 3,408 |
| | $ | 1,058 |
| | $ | 7,130 |
|
|
| | | | | | | | | | | | | | | |
| | Real Estate Equity - U.S. | | Real Estate Equity - Europe | | Real Estate Debt | | Total Real Estate Group |
| FPAUM Balance at 12/31/2017 | $ | 3,062 |
| | $ | 2,064 |
| | $ | 1,063 |
| | $ | 6,189 |
|
| Commitments | 126 |
| | 737 |
| | — |
| | 863 |
|
| Subscriptions/deployment/increase in leverage | 51 |
| | 338 |
| | 26 |
| | 415 |
|
| Redemptions/distributions/decrease in leverage | (148 | ) | | (83 | ) | | (67 | ) | | (298 | ) |
| Change in fund value | 5 |
| | (27 | ) | | 20 |
| | (2 | ) |
| Change in fee basis | (37 | ) | | (167 | ) | | — |
| | (204 | ) |
| FPAUM Balance at 6/30/2018 | $ | 3,059 |
| | $ | 2,862 |
| | $ | 1,042 |
| | $ | 6,963 |
|
| Average FPAUM(1) | $ | 3,043 |
| | $ | 2,552 |
| | $ | 1,040 |
| | $ | 6,635 |
|
(1) Represents the quarterly average of beginning and ending balances.
The components of our AUM, including the portion that is FPAUM, for the Real Estate Group are presented below as of June 30, 20182019 and 20172018 (in millions):
|
| |
AUM: $10,910$11,868 | AUM: $10,792$10,910 |
|
| | | | | | | |
| FPAUM | | Non-fee paying | | AUM not yet earning fees | | General partner and affiliates |
Real Estate Group—Fund Performance Metrics as of June 30, 20182019
The Real Estate Group managed 4345 funds in real estate debt and in real estate equity as of June 30, 2018. Two2019. Our significant funds in ourthe Real Estate Group each considered a significant fund, combined for approximately 25%57% of the Real Estate Group’s management fees for the six months ended June 30, 2018:2019. EF IV aand our fifth flagship European real estate fund are commingled fundfunds focused on real estate assets located in Europe, primarily in the United Kingdom, France and Germany; and Ares European Property Enhancement Program II,US Real Estate Fund IX, L.P. (“EPEP II”("VEF IX"), a commingled equity fund focused on real estate assets located in Europe.United States.
We do not present fund performance metrics for significant funds with less than two years of investment performance, which begins from the date of the fund's first investment, except for those significant funds that pay management fees on invested capital, in which case performance is shown at the earlier of (i) the one-year anniversary of the fund's first investment or (ii) such time that the fund has invested at least 50% of its capital.
The following table presents the performance data as of June 30, 2019 for our significant funds in the Real Estate Group, eachall of which are drawdown funds:funds ($ 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 | | $ | 990 |
| | $ | 1,302 |
| | $ | 1,103 |
| | $ | 534 |
| | $ | 1,029 |
| | $ | 1,563 |
| | 1.4x | | 1.2x | | 20.8 | | 13.6 | | E.U. Real Estate Equity | 2014 | | $ | 1,074 |
| | $ | 1,302 |
| | $ | 1,105 |
| | $ | 739 |
| | $ | 962 |
| | $ | 1,701 |
| | 1.5x | | 1.3x | | 19.2 | | 13.4 | | European Real Estate Equity |
| EPEP II(8) | 2015 | | 680 |
| | 747 |
| | 342 |
| | 132 |
| | 289 |
| | 422 |
| | 1.2x | | 1.1x | | 18.4 | | 21.3 | | E.U. Real Estate Equity | |
| VEF IX | | 2017 | | 1,029 |
| | 1,040 |
| | 595 |
| | 19 |
| | 584 |
| | 603 |
| | 1.1x | | 1.0x | | N/A | | N/A | | U.S. Real Estate Equity |
| Fifth flagship European real estate fund(8) | | 2018 | | 1,557 |
| | 1,547 |
| | 308 |
| | 43 |
| | 303 |
| | 346 |
| | 1.1x | | 1.0x | | N/A | | N/A | | European 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 incomecarried interest, other expenses and taxes, as applicable and other expenses.applicable. |
| |
| (4) | The net MoIC is calculated at the fund-level and is based on the interests of the fee-paying partners and, if applicable, excludes interests attributable to the non fee-paying partners and/or the general partner whowhich does not pay management fees, or performance incomecarried interest or has such fees rebated outside of the fund. The net MoIC is after giving effect to management fees, performance incomecarried interest as applicable and other expenses. Net fund-level MoICs would generally likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. |
| |
| (5) | The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from investments and the residual value of the investments at the end of the measurement period. Gross IRRs reflect returns to all partners. Cash flows used in the gross IRR calculation are assumed to occur at quarter-end. The gross IRRs are calculated before giving effect to management fees, performance incomecarried interest, other expenses and taxes, as applicable, and other expenses.applicable. |
| |
| (6) | The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund’s residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying partners and, if applicable, excludesexclude interests attributable to the non fee-paying partners and/or the general partner whowhich does not pay management fees or performance incomecarried interest or has such fees rebated outside of the fund. The cash flow dates used in the net IRR calculation are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees, performance incomecarried interest as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. Net fund-level IRRs would generally likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility. |
| |
| (7) | EF 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. dollarEuro denominated parallel fund as that is the larger of the two funds.fund. The gross and net IRRs for the EuroU.S. Dollar denominated parallel fund are 21.1%18.8% and 14.2%13.5%, respectively. The gross and net MoIC for the EuroU.S. Dollar denominated parallel fund are 1.4x1.5x and 1.2x,1.3x, 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 IIOur fifth flagship European real estate fund is made up of dual currency investorstwo parallel funds, one denominated in U.S. Dollars and Euro currency investors.one denominated in Euros. 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 IRRsis for the euro currency investors, which include foreign currency gains and losses, are 17.9% and 20.3%, respectively.Euro denominated parallel fund. The gross and net MoIC for the Euro currency investors, which include foreign currency gainsU.S. Dollar denominated parallel fund are 1.1x and losses, are 1.2x and 1.1x,1.0x, respectively. Original capital commitments are converted to U.S. dollarsDollars at the prevailing exchange rate at the time of fund's closing. All other values for EPEP IIour fifth flagship European real estate fund are for the combined fund and are converted to U.S. dollarsDollars at the prevailing quarter-end exchange rate.
|
Operations Management GroupGroup—Three and Six Months Ended June 30, 2019Compared to Three and Six Months Ended June 30, 2018
Fee Related Earnings:
The following table sets forth certain statement of operations data and certain other datapresents the components of the OMG on a standalone basisOMG's FRE and the changes for the comparative periods presented.($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Favorable (Unfavorable) | | Six Months Ended | | Favorable (Unfavorable) |
| | June 30, | | | June 30, | |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | (Dollars in thousands) |
| Compensation and benefits | $ | (31,059 | ) | | $ | (30,584 | ) | | $ | (475 | ) | | (2 | )% | | $ | (61,665 | ) | | $ | (56,537 | ) | | $ | (5,128 | ) | | (9 | )% |
| General, administrative and other expenses | (19,489 | ) | | (18,862 | ) | | (627 | ) | | (3 | )% | | (38,105 | ) | | (38,175 | ) | | 70 |
| | — | % |
| Fee Related Earnings | (50,548 | ) | | (49,446 | ) | | (1,102 | ) | | (2 | )% | | (99,770 | ) | | (94,712 | ) | | (5,058 | ) | | (5 | )% |
| 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 | (588 | ) | | (463 | ) | | (125 | ) | | (27 | )% | | (1,136 | ) | | (939 | ) | | (197 | ) | | (21 | )% |
| Net investment income (loss) | 3,699 |
| | (1,626 | ) | | 5,325 |
| | NM |
| | 6,467 |
| | (776 | ) | | 7,243 |
| | NM |
|
| Performance related earnings | 3,699 |
| | (1,626 | ) | | 5,325 |
| | NM |
| | 6,467 |
| | (776 | ) | | 7,243 |
| | NM |
|
| Economic net income | $ | (46,849 | ) | | $ | (51,072 | ) | | 4,223 |
| | 8 | % | | $ | (93,303 | ) | | $ | (95,488 | ) | | 2,185 |
| | 2 | % |
| Realized income | $ | (49,754 | ) | | $ | (48,346 | ) | | (1,408 | ) | | (3 | )% | | $ | (97,534 | ) | | $ | (91,551 | ) | | (5,983 | ) | | (7 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Compensation and benefits | $ | (33,994 | ) | | $ | (30,680 | ) | | $ | (3,314 | ) | | (11 | )% | | $ | (66,655 | ) | | $ | (60,872 | ) | | $ | (5,783 | ) | | (10 | )% |
| General, administrative and other expenses | (19,874 | ) | | (19,236 | ) | | (638 | ) | | (3 | )% | | (40,506 | ) | | (37,627 | ) | | (2,879 | ) | | (8 | )% |
| Fee Related Earnings | $ | (53,868 | ) | | $ | (49,916 | ) | | (3,952 | ) | | (8 | )% | | $ | (107,161 | ) | | $ | (98,499 | ) | | (8,662 | ) | | (9 | )% |
Compensation and Benefits. Compensation and benefits expenses increased by $3.3 million, or 11%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 and by $5.8 million, or 10%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increases were primarily driven by higher incentive compensation attributable to management fee growth and 7% headcount growth for the comparative periods. We continue to invest in resources dedicated to help evolve our middle and back office capabilities to support the growing needs of our business in the years ahead.
Realized Income:
The following table presents the components of the OMG's RI and the changes for the comparative periods ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Fee Related Earnings | $ | (53,868 | ) | | $ | (49,916 | ) | | $ | (3,952 | ) | | (8 | )% | | $ | (107,161 | ) | | $ | (98,499 | ) | | $ | (8,662 | ) | | (9 | )% |
| Investment income-realized | — |
| | 798 |
| | (798 | ) | | NM |
| | — |
| | 1,636 |
| | (1,636 | ) | | NM |
|
| Interest and other investment income (loss)-realized | (17 | ) | | 584 |
| | (601 | ) | | NM |
| | (2 | ) | | 1,736 |
| | (1,738 | ) | | NM |
|
| Interest expense | (399 | ) | | (588 | ) | | 189 |
| | 32 | % | | (795 | ) | | (1,136 | ) | | 341 |
| | 30 | % |
| Realized net investment income (loss) | (416 | ) | | 794 |
| | (1,210 | ) | | NM |
| | (797 | ) | | 2,236 |
| | (3,033 | ) | | NM |
|
| Realized Income | $ | (54,284 | ) | | $ | (49,122 | ) | | (5,162 | ) | | (11 | )% | | $ | (107,958 | ) | | $ | (96,263 | ) | | (11,695 | ) | | (12 | )% |
NM - Not Meaningful
Operations Management Group—ThreeRealized income for the periods presented was composed of FRE, as explained above, and Six Months Ended June 30, 2018Compared to Threerealized net investment income for the respective periods.
Realized net investment income decreased from $0.8 million and Six Months Ended June 30, 2017
Fee Related Earnings:
Fee related earnings decreased by $1.1$2.2 million or 2%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $5.1 million, or 5%, for the six months ended June 30, 2018 compared to realized net investment loss of $0.4 million and $0.8 million for the three and six months ended June 30, 2017. Fee related earnings were impacted by the following:
Compensation and Benefits. Compensation and benefits expenses increased by $0.5 million, or 2%, to $31.1 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $5.1 million, or 9%, to $61.7 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were primarily driven by annual merit increases and headcount growth for the comparative periods.
Performance Related Earnings:
Net Investment Income (loss). Net investment income (loss) increased by $5.3 million from a net investment loss of $1.6 million for the three months ended June 30, 2017 to net investment income of $3.7 million for the three months ended June 30, 2018. Net investment income (loss) increased by $7.2 million from a net investment loss of $0.8 million for the six months ended June 30, 2017 to net investment income of $6.5 million for the six months ended June 30, 2018. The increases were primarily due to increases in net gains of $5.0 million and $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, 2017.2019. The decreases were primarily driven by decreasesnet investment income from our non–core energy investments recognized in FREthe prior year periods that were subsequently sold in the fourth quarter of $1.1 million and $5.1 million for the three and six month comparative periods, respectively, and by decreases in net realized investment and other income of $0.3 million and $0.9 million for the three and six month comparative periods, respectively.2018.
Economic Net Income:
Economic net income is composed of fee related earnings and performance related earnings. Economic net income increased by $4.2 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and by $2.2 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increases were a result of the fluctuations described above.
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 income, which is unpredictable as to amount and timing, (4) fund distributions related to our investments that are also unpredictable as to amount and timing and (5) net borrowing from the Credit Facility. As of June 30, 2018,2019, our cash and cash equivalents were $125.4$247.2 million and we had $125.0$320.0 million of borrowings outstanding under our Credit Facility. Our ability to draw from the Credit Facility is subject to debt covenants.a leverage covenant. 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 dividend payments to our Class A common stockholders and preferred shareholdersthe Series A Preferred stockholders in accordance with our dividend policy.
In the normal course of business, we intend to pay dividends from core operations, which we define as FRE.based on our expected fee related earnings. If cash flowsflow from core operations were insufficient to fund dividends over a sustained period of time, we expect that we would suspend paying such dividends. Unless quarterly dividends have been declared and paid (or declared and set apart for payment) on the preferred shares,Series A Preferred Stock, we may not declare or pay or set apart payment for dividends on any shares of our Class A common sharesstock during the period. Dividends on the preferred sharesSeries A Preferred Stock are not cumulative and the preferred shares areSeries A Preferred Stock is not convertible into our Class A common sharesstock or any other security.
Net realized performance income also provides a sourceIn February 2019, our board of liquidity. Performance income is realized when a portfolio investment is profitably monetized anddirectors authorized the fund’s cumulative returns arerepurchase of up to $150 million of shares of our Class A common stock. Under this stock repurchase program, shares may be repurchased from time to time in excessopen market purchases, privately negotiated transactions or otherwise, including in reliance on Rule 10b5-1 of the preferred return or hurdle rate. Performance incomeSecurities Act. The program is typically realizedscheduled to expire in February 2020. Repurchases under the program depend on the prevailing market conditions and other factors.
During the three and six months ended June 30, 2019, we repurchased 0.4 million shares as part of the stock repurchase program at a total cost of $10.4 million. As of June 30, 2019, the end of each fund’s measurement period when investment performance exceeds a stated benchmark or hurdle rate.amount remaining available for repurchases under the program was $139.6 million.
Our accrued carried interest and incentive fee receivable by segment as of June 30, 20182019 is set forth below.below (in thousands):
|
| | | | | | | | | | | |
| | As of June 30, 2018 |
| | Accrued Carried Interest | | Eliminations(1) | | Consolidated Accrued Carried Interest |
| Segment | (Dollars in thousands) |
| Credit Group | $ | 148,461 |
| | $ | — |
| | $ | 148,461 |
|
| Private Equity Group | 702,868 |
| |
|
| | 702,868 |
|
| Real Estate Group | 133,728 |
| | — |
| | 133,728 |
|
| Total | $ | 985,057 |
| | $ | — |
| | $ | 985,057 |
|
|
| | | |
| | Accrued Carried Interest & Incentive Fee Receivable |
| Credit Group | $ | 230,003 |
|
| Private Equity Group | 653,464 |
|
| Real Estate Group | 188,487 |
|
| Total | $ | 1,071,954 |
|
| |
(1) | Amounts represent accrued performance income 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 resultsthose 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 Funds' investment activitiesFund transactions are presented as cash flows from operations. Liquidity available at our Consolidated Funds is typically not available for corporate liquidity needs, and debt of the Consolidated Funds is non–recourse to the Company except to the extent of the Company's investment in the fund.
Cash Flows
The significant captionstable below summarizes our condensed consolidated statements of cash flows by activity attributable to the Company and amounts from our consolidated financial statements, which include the effects ofto our Consolidated Funds in accordance with GAAP, are summarized below.Funds. Negative amounts represent a net outflow or use of cash.cash (in thousands).
| | | | Six Months Ended June 30, | For the Six Months Ended June 30, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (Dollars in millions) | |
| Statements of cash flows data | | | |
| |
| Net cash provided by the Company's operating activities | | $ | 205,776 |
| | $ | 371,274 |
|
| Net cash used in the Consolidated Funds' operating activities | | (1,497,088 | ) | | (1,658,875 | ) |
| Net cash used in operating activities | (1,288 | ) | | (304 | ) | (1,291,312 | ) | | (1,287,601 | ) |
| Net cash used in investing activities | (7 | ) | | (21 | ) | |
| Net cash used in the Company's investing activities | | (5,653 | ) | | (7,126 | ) |
| Net cash used in the Company's financing activities | | (44,551 | ) | | (349,661 | ) |
| Net cash provided by the Consolidated Funds' financing activities | | 1,489,676 |
| | 1,642,676 |
|
| Net cash provided by financing activities | 1,293 |
| | 108 |
| 1,445,125 |
| | 1,293,015 |
|
| Effect of foreign exchange rate change | 8 |
| | 12 |
| |
| Effect of exchange rate changes | | (11,187 | ) | | 8,231 |
|
| Net change in cash and cash equivalents | $ | 6 |
| | $ | (205 | ) | $ | 136,973 |
| | $ | 6,519 |
|
Operating Activities
Our netNet cash flows used in operating activities waswere $1.3 billion for the six months ended June 30, 2018 compared to $304.22019 and 2018. Net cash flows provided by the Company's operating activities were $205.8 million for the six months ended June 30, 2017. For the six months ended June 30, 2018, net purchases of investments were $1.4 billion2019 compared to $143.7$371.3 million for the six months ended June 30, 2017.2018. The changedecrease in cash used inprovided by the Company's operating activities was primarily driven by a $1.6the sale of $206.0 million of CLO securities in the prior year period subsequent to the removal of U.S. risk retention requirements related to open market CLO managers.
Net cash used in the Consolidated Funds' operating activities was $1.5 billion increase in net purchases of investments of our Consolidated Funds for the comparative periods duesix months ended June 30, 2019 compared to the launchnet cash used in Consolidated Funds' operating activities of two new U.S. CLOs and one new European CLO and the refinancing of one U.S. CLO during$1.7 billion for the six months ended June 30, 2018. Conversely, net proceeds fromNet cash used in the saleConsolidated Funds' operating activities were principally attributable to the consolidation of investments of the Company increased by $257.3 million forrecently launched funds' investment purchases during 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.periods.
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. PurchasesNet cash used in the Company's investing activities was principally composed of fixed assets were $7.1 millionfurniture, fixtures, equipment and $21.2leasehold improvements purchased during the comparative periods.
Financing Activities
Net cash used in the Company's financing activities was $44.6 million for the six months ended June 30, 2018 and 2017, respectively. The decrease2019 compared to $349.7 million for the comparative periods was primarily driven by furniture, fixtures, equipment and leasehold improvements purchased for a new office location in Los Angeles during the six months ended June 30, 2017.
Financing Activities2018. Net cash used in the Company's financing activities for the six months ended June 30, 2019 was principally composed of $163.2 million of distributions to AOG unitholders and dividends to our Class A common stockholders and Series A Preferred stockholders and $10.4 million of stock repurchases, offset by $85.0 million of net borrowings on the Company's Credit Facility and $78.8 million of net cash proceeds from exercises of stock options.
Net cash provided byused in the Company's financing activities was $1.3 billion for the six months ended June 30, 2018 comparedwas principally composed of $192.4 million of distributions to $108.1AOG unitholders, common and preferred shareholders and $247.0 million forof net repayments on the six months ended June 30, 2017. For the six months ended June 30, 2018, net cash inflows were primarily due to net borrowings onCompany's debt facilities, offset by $105.4 million of our Consolidated Funds and net proceeds from our common share issuance offset by net repayments on debt facilities of the Companyoffering. The decrease in distributions and distributions to AOG unitholders and common shareholders. For the six months ended June 30, 2017, net cash inflows were primarily from net borrowings on debt facilities of the Company and our Consolidated Funds partially offset by distributions to AOG unitholders and common shareholders.
Net repayments of our debt obligations were $247.0 million for the six months ended June 30, 2018 compared to net borrowings of $205.0 million for the six months ended June 30, 2017. During the 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 were used to support payments of 2016 annual bonuses, whereas 2017 annual bonuses were paid in 2017. Our Consolidated Funds had net borrowings of $1.6 billion and $26.6 million for the six months ended June 30, 2018 and 2017, respectively. The increasedividends was primarily driven by net borrowings from 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.
Distributionsdue to our preferred, AOG and common shareholders were $192.4 million for the six months ended June 30, 2018 compared to $113.2 million for the six months ended June 30, 2017. The increase in distributions was primarily driven by a change in the timing of dividend payments to our Class A common shareholdersstockholders to match the related income in the current quarter, as a result of our election to be treated as a corporation for U.S. federal income tax purposes. Dividends paid induring 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 fivesix months ended on February 28,June 30, 2019 were related to income for that period, while distributions paid during the six months ended June 30, 2018 were related to income for the last day we were treated as a partnershipnine month period ended June 30, 2018.
Net cash provided by Consolidated Funds' financing activities was $1.5 billion for U.S. federal income tax purposes. Forthe six months ended June 30, 2019 compared to $1.6 billion for the six months ended June 30, 2018 . Net cash provided by Consolidated Funds' financing activities was principally attributable to the consolidation of newly launched funds for both comparative periods. Net borrowings of our Consolidated Funds was $1.4 billion for the six months ended June 30, 2019 compared to net borrowings of $1.6 billion for the six months ended June 30, 2018. Net contributions of our Consolidated Funds were $35.7$84.5 million and $0.4$35.7 million for the six months ended June 30, 2019 and 2018, and 2017, respectively.
Capital Resources
The following table summarizes the Company's debt obligations (in($ in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | As of June 30, 2018 | | December 31, 2017 |
| | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying
Value | | Interest Rate | | Carrying
Value | | Interest Rate |
| Credit Facility(1) | 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 |
| | 245,628 |
| | 4.21% | | 245,308 |
| | 4.21% |
| 2015 Term Loan(3) | 9/2/2015 | | 7/29/2026 | | $ | — |
| | — |
| | N/A | | 35,037 |
| | 2.86% |
| 2016 Term Loan(4) | 12/21/2016 | | 1/15/2029 | | $ | — |
| | — |
| | N/A | | 25,948 |
| | 3.08% |
| 2017 Term Loan A(4) | 3/22/2017 | | 1/22/2028 | | $ | — |
| | — |
| | N/A | | 17,407 |
| | 2.90% |
| 2017 Term Loan B(4) | 5/10/2017 | | 10/15/2029 | | $ | — |
| | — |
| | N/A | | 35,062 |
| | 2.90% |
| 2017 Term Loan C(4) | 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 | | | | | | | $ | 370,628 |
| | | | $ | 616,176 |
| | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | As of June 30, 2019 | | December 31, 2018 |
| | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying
Value | | Interest Rate | | Carrying
Value | | Interest Rate |
| Credit Facility(1) | Revolver | | 3/21/2024 | | N/A |
| | $ | 320,000 |
| | 3.69% | | $ | 235,000 |
| | 4.00% |
| Senior Notes(2) | 10/8/2014 | | 10/8/2024 | | $ | 250,000 |
| | 246,277 |
| | 4.21% | | 245,952 |
| | 4.21% |
| Total debt obligations | | | | | | | $ | 566,277 |
| | | | $ | 480,952 |
| | |
| |
| (1) | The AOG entities are borrowers under the Credit Facility, which 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. On March 21, 2019, the Company amended the Credit Facility to, among other things, extend the maturity date from February 2022 to March 2024 and to reduce borrowing costs on the drawn and undrawn amounts. As of June 30, 2018,2019, base rate loans bear interest calculated based on the base rate plus 0.50%0.25% and the LIBOR rate loans bear interest calculated based on LIBOR plus 1.50%1.25%. The unused commitment fee is 0.20%0.15% 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. |
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(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.
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(4) | The 2016 and 2017 Term Loans (“Term Loans”) were entered into by a subsidiary of the Company that acts as a manager to 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 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 June 30, 2018,2019, we were in compliance with all covenants under our debt obligations.
We intend to use a portion of our available liquidity to makepay cash dividends to our preferredSeries A Preferred stockholders and our Class A common shareholdersstockholders on a quarterly basis in accordance with our dividend policies. Our ability to make cash dividends to the Series A Preferred stockholders and our preferred andClass A common shareholdersstockholders 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 expect dividend payments for the remainder of the fiscal year to be consistent with dividends paid during the six months ended June 30, 2019.
We are required to maintain minimum net capital balances for regulatory purposes for our United Kingdom subsidiary and for our broker-dealer subsidiary. These net capital requirements are met in part by retaining cash, 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 June 30, 2018,2019, we were required to maintain approximately $26.8$28.6 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.shares of our Class A common sharesstock on a one-for-one basis. SubsequentThese exchanges mayare expected to result in increases in the tax basis of the tangible and intangible assets of Ares Management L.P.Corporation that otherwise would not have been available. These increases in tax basis may increase depreciation and amortization for U.S. federal income tax purposes and thereby reduce the amount of tax that Ares Management, L.P.we would otherwise be required to pay in the future. We and our wholly owned subsidiaries are parties toentered into the tax receivable agreement (“TRA”), which with the TRA recipients that provides payment to the TRA recipients of 85% of the amount of actual cash savings, if any, in U.S. federal, state, local and foreign income tax or franchise tax that Ares Management, L.P.we actually realizesrealize as a result of suchthese increases in tax basis and of certain other tax benefits related to entering into the TRA, including increases in tax basisbenefits attributable to payments under the TRA and certain interest accrued thereon. This payment obligation is an obligation 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, As of June 30, 2019, the TRA liability balance was $24.9 million. In 2018, we and AREC Holdings Ltd., a wholly owned subsidiarythere were exchanges of Abu Dhabi Investment Authority (collectively, “ADIA”), completed a public offeringapproximately 13.1 million of 15,000,000AOG Units for shares of our Class A common shares.stock. In connection with this offering, ADIA sold 10,000,000these conversions, we recognized deferred tax benefits of its previously issued and outstanding common shares from$25.2 million, 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.increased
In Apriladditional paid in capital by $3.8 million and our TRA liability by $21.4 million. An immaterial number of AOG Units were exchanged prior to 2018 and during 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. six months ended June 30, 2019.
Series A Preferred EquityStock
As of June 30, 20182019 and December 31, 2017, we2018, the Company had 12,400,000 shares of Series A Preferred Equity (the “Preferred Equity”)Stock, $0.01 par value per share, designated as “7.00% Series A Preferred Stock” outstanding. When, as and if declared by ourthe Company’s board of directors, distributionsdividends on the Series A Preferred EquityStock are paid quarterly at a rate per annum equal to 7.00%. The Series A Preferred EquityStock may be redeemableredeemed at our option, in whole or in part, at any time on or after June 30, 2021, at a price of $25.00 per share.
Cash dividends to our common shareholders may be impacted by any corporate tax liability owed by 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 annum. Although income allocated to our wholly owned subsidiaries in respect of distributions on the GP Mirror Units is subject to tax, cash dividends to our preferred shareholders will not be reduced on account of any income taxes owed by us. As a result, the amounts ultimately distributed by us to our common shareholders may be reduced by any corporate taxes imposed on 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.
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 and Contingencies,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Commitments and Contingencies
Capital Commitments
As of June 30, 20182019 and December 31, 2017,2018, we had aggregate unfunded commitments of $284.5$304.1 million and $285.7$267.6 million, respectively, including commitments to both non-consolidated funds and Consolidated Funds. Total unfunded commitments included $16.3 million and $16.5 million in unfunded commitments to funds not managed by us as of June 30, 2018 and December 31, 2017, respectively.
ARCC Fee Waiver
In conjunction with ARCC's acquisition of American Capital, Ltd. (“ACAS”), the Companywe 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. The 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 carryovercarry over to subsequent quarters. As of June 30, 2018,2019, there are fiveis one remaining quartersquarter as part of the fee waiver agreement, with a maximum of $50$10.0 million in potential waivers. ARCC Part I Fees are reported net of the fee waiver.
IndemnificationsIndemnification Arrangements
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 June 30, 2018,2019, 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, carried interest, a component of performance income, generally, is subject to reversal in the event that the funds incur future losses. These losses are limited to the extent of the cumulative performance income recognized to date.
Due in part to our investment performance and the fact that our performance income is generally determined on a liquidation basis, if the funds were liquidated at their fair values as of June 30, 2019 and December 31, 2018, there would have been $0.2$0.6 million and $0.4 million, respectively, of contingent repayment obligation or liability. No contingent repayment obligation existed as of December 31, 2017.obligations. There can be no assurance that we will not incur additional contingent repayment obligation in the future. If all of the existing investments were deemed worthless, the amount of cumulative revenues that have been recognized would be reversed. We believe that the possibilityAs of all of the existing investments becoming worthless is remote. At June 30, 20182019 and December 31, 2017,2018, had we assumed all existing investments were worthless, the amount of carried interest, net of tax, subject to contingent repayment would have been approximately $472.9$401.0 million and $476.1$469.0 million, respectively, of which approximately $367.5$297.5 million and $370.0$351.9 million, respectively, would be reimbursable to the Companyus by certain professionals who are the recipients of such carried interest. We believe that the possibility of all of the existing investments becoming worthless is remote.
Performance income 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 andpublic equity market volatility, industry trading multiples.multiples and interest rates.
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 income 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 income 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. It 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 approximately 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 six months ended June 30, 2018.2019. For additional information on our market risks, refer to our Annual Report on Form 10-K for the year ended December 31, 2017,2018, which is accessible on the SEC's website at sec.gov.
Item 4. Controls Andand 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 June 30, 2018.2019. Based upon that evaluation and subject to the foregoing, our principal executive officers and principal financial officer concluded that, as of June 30, 2018,2019, 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 June 30, 20182019 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 June 30, 20182019 and December 31, 2017,2018, 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, 2017,2018, 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 20172018 Form 10‑K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.We did not sell any equity securities during the period covered in this report that were not registered under the Securities Act of 1933.
Except as set forth below, all unregistered sales of equity securities during the period covered by this Quarterly Report were previously disclosed in our current reports on Form 8-K or quarterly reports on Form 10-Q ($ in thousands; except share data):
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| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (1) |
| April 1, 2019 - April 30, 2019 | — |
| $ | — |
| — |
| $ | 150,000 |
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| May 1, 2019 - May 31, 2019 | 400,000 |
| 26.12 |
| 400,000 | 139,551 |
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| June 1, 2019 - June 30, 2019 | — |
| — |
| — |
| 139,551 |
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| Total | 400,000 | | 400,000 | |
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| (1) | In February 2019, our board of directors authorized the repurchase of up to $150 million of shares of our Class A common stock. Under this stock repurchase program, shares may be repurchased from time to time in open market purchases, privately negotiated transactions or otherwise, including in reliance on Rule 10b5-1 of the Securities Act. The program is scheduled to expire in February 2020. Repurchases under the program depend on the prevailing market conditions and other factors. |
As permitted by our policies and procedures governing transactions in our securities by our directors, executive officers and other employees, from time to time some of these persons may establish plans or arrangements complying with Rule 10b5‐1 under the Exchange Act, and similar plans and arrangements relating to our Class A common stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
In accordance with applicable SEC rules, the foregoing is intendedDisclosure Pursuant 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 OfficerSection 219 of the Company. Mr. Arougheti also continuesIran Threat Reduction and Syria Human Rights Act
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) and Section 13(r) of the Exchange Act, require an issuer to serve asdisclose in its annual and quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions relating to Iran. On June 20, 2019, certain investment funds managed or advised by U.K.-based affiliates of Ares (the “Ares Entities”) acquired approximately 28.7% of the Co-Founderordinary shares and 54.3% of the preferred shares of AgriBriefing 1364 Limited (“AgriBriefing”), a company based in London that provides price reporting data on a subscription basis to participants in the agricultural industry. Although the Ares Entities do not hold the largest voting position in AgriBriefing, their holdings of ordinary and preferred shares represent a majority of the outstanding equity interests in AgriBriefing. In addition, the Ares Entities hold certain contractual veto rights and the President of the Company. In recognition of Mr. Arougheti’s appointment as CEO of the Company, on July 31, 2018right to appoint a director to the board of directors of AgriBriefing. As a result, under applicable SEC definitions, the Company’s general partner, Ares Management GP LLC, approvedEntities may be deemed to control AgriBriefing; however, this statement is not meant to be an admission that common control exists.
Subsequent to completion of the Ares Entities’ investment in AgriBriefing, in connection with Ares’ routine quarterly survey of its investment funds’ portfolio companies, AgriBriefing informed the Ares Entities that it had subscription contracts with five customers whose billing addresses were based in Iran. We have not been able to verify the identity or affiliations of these customers. As a grantresult, it appears that we are required to provide this disclosure under ITRA and Section 13(r) 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 1the Exchange Act.
These subscriptions generated annual gross revenues of less than €25,000 (less than 1% of AgriBriefing’s revenues) and de minimus net profits.
AgriBriefing has confirmed that 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 referencesubscriptions commenced prior to the termsinvestment in AgriBriefing by the Ares Entities, and that it has terminated these subscriptions and does not intend to engage in any further dealings or transactions with these customers.
Based on currently available information, we and the Ares Entities have no reason to believe that any of the Restricted Unit Agreement, which is filed herewith as Exhibit 10.1five customers are listed on the U.S. Treasury Department Office of Foreign Assets Control list of Specially Designated Nationals or that AgriBriefing has conducted any dealings in violation ITRA.
This disclosure does not relate to any activities conducted by Ares and is incorporateddoes not involve Ares. This disclosure relates solely to activities conducted by reference.
AgriBriefing and its consolidated subsidiaries.
Item 6. Exhibits, Financial Statement Schedules
(a)Exhibits.
The following is a list of all exhibits filed or furnished as part of this report.
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Exhibit No. | | Description |
| | Certificate of Limited PartnershipIncorporation of Ares Management L.P.Corporation (incorporated by reference to Exhibit 3.199.3 to the Registrant’s AnnualCurrent Report on Form 10-K for the year ended December 31, 20158-K (File No. 001-36429,001-36429) filed with the SEC on February 29, 2016)November 15, 2018). |
| | Third Amended and Restated Limited Partnership AgreementBylaws of Ares Management L.P. dated March 1, 2018Corporation (incorporated by reference to Exhibit 3.299.4 to the Registrant’s AnnualCurrent Report on Form 10-K for the year ended December 31, 20178-K (File No. 001-36429,001-36429) filed with the SEC on March 1,November 15, 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.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104* | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
* Filed herewith.
These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.
SIGNATURES
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| | ARES MANAGEMENT L.P.CORPORATION |
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| By: | | Ares Management GP LLC, its general partner |
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Dated: August 6, 20181, 2019 | By: | | /s/ Michael J Arougheti |
| | | Name: | Michael J Arougheti |
| | | Title: | Co‑Founder, Chief Executive Officer & President (Principal Executive Officer) |
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Dated: August 6, 20181, 2019 | By: | | /s/ Michael R. McFerran |
| | | Name: | Michael R. McFerran |
| | | Title: | Chief Financial Officer & Chief Operating Officer (Principal Financial and Accounting Officer) |
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