Ares Management Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Ares is a leading global alternative investment manager, specializing in credit, private equity, real estate, and infrastructure assets, managing diverse funds across various strategies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Ares operates in the complex world of alternative investments, requiring deep understanding and expertise to generate consistent outperformance.

Business Overview:

Ares Management Corporation (ARES) is a prominent alternative asset manager, operating globally across a range of investment strategies. These primarily include credit, private equity, real estate, and infrastructure. The company aims to deliver superior risk-adjusted returns to its investors.

Revenue Distribution:

ARES earns fees by providing its investors with investment management and advisory services. This revenue is derived from four main segments:

  • Credit: This segment encompasses a range of credit strategies including direct lending, stressed credit, traded credit, and CLOs (collateralized loan obligations). It generates management fees based on assets under management (AUM) and performance fees linked to fund performance.
  • Private Equity: This segment focuses on acquiring and improving middle-market companies. Performance fees are a significant portion of the revenue, based on success in selling investments at gains.
  • Real Estate: In this area, ARES invests in equity and debt related to properties, ranging from development projects to stabilized buildings, generating fees primarily from capital deployment and transactions.
  • Infrastructure: This segment provides private capital financing for infrastructure, mostly renewable energy, and generates revenue from fees related to investments made.
  • Growth in Alternatives: The alternative investments industry continues to experience secular growth, as investors seek higher returns, greater diversification, and less correlation with traditional asset classes.
  • Increased Regulation: Regulations of the financial industry including the SEC and global regulatory authorities are pushing towards a move transparent management practice and improved operational efficiency.
  • Global Investment Flows: Cross-border investments are on the rise, especially in Asia and Europe, increasing competition for high-quality private assets.
  • Private Credit Expansion: Private credit has seen significant growth in recent years, as banks have pulled back on lending, while private credit firms offer flexible capital solutions to companies.
  • Growing ESG Considerations: Environmental, social, and governance factors are increasingly affecting investment strategies, with investors looking for ESG investments.

Competitive Landscape:

The alternative investment industry is highly competitive, with numerous large players such as Blackstone, KKR, and Apollo Global Management, along with many smaller specialist firms. Competition stems from a diverse range of areas:

  • Talent: attracting and retaining qualified investment professionals.
  • Fundraising: securing capital from institutional and high net-worth investors.
  • Performance: delivering superior risk-adjusted returns.
  • Scale and scope: economies of scale and scope allows those companies to be more profitable, and offer clients a wider range of products

What Makes ARES Different:

ARES differentiates itself through:

  • A Broad Platform: ARES’s range of business lines and its ability to cross-sell and leverage different strategies makes it an exception among other pure-play firms.
  • Focus on Credit: ARES maintains a particularly strong presence in credit markets, including private credit, which has seen significant growth over recent years and increased interest from investors seeking yield.
  • Global Presence: The firm has a deep global network, with offices in multiple regions and a keen interest in both developed and emerging markets.
  • Scale: ARES is a large firm with significant assets under management. They leverage their scale to achieve operational efficiency, and their global network and brand make them a sought after fund manager.

ARES’ core business comes from credit and private equity. The company leverages its global scale to capture assets under management and management fees.

Financials:

Ares’ performance has been impacted by the rising interest rates during 2023 and 2024, and the global economies being more volatile. Ares management has been extremely active over the past two years, acquiring many other management firms, and diversifying into different investment areas.

  • Total AUM was $395.0 billion, up 13% YOY, -Fee related AUM was $228.4 Billion, up 7% YOY.
  • Total credit revenue was up 19% YOY to $897 Million, and private equity revenue was down 46% YOY to $329 million
  • Adjusted earnings per share for Q4 were $0.73 vs $0.64 in the prior year quarter, a growth of 14%.
  • Q4 net income was $148 million vs a net loss of $85 million from prior year
  • Management fee revenue reached $572.6 million, which is down 3% QoQ and up by 12% from the same quarter of the prior year.
  • Fee related earnings (FRE) was $295 million in Q4 which is down 11.6% YoY, because of declining transaction related fees in the private equity business.

Key points from management:

  • ARES is focused on the growing private credit segment where they believe they have a significant edge.
  • ARES has strong liquidity and has taken steps to pay down debt.
  • ARES is actively looking for attractive M&A opportunities.

Moat Analysis:

Ares’ moat rating can be summarized as a 3 / 5

  • Strengths (Narrow Moat): Ares has a solid brand and a track record for superior performance, along with the ability to retain top investment talent. These are valuable sources of competitive advantage that will likely help the company to maintain its performance over the coming years.
  • Weaknesses: Although ARES has some competitive advantages, they can still be replicated in terms of expertise, resources, and processes.
  • Durability: ARES’s moat is not as durable as those created by network effects or by a regulatory lock-in. Changes to a company’s strategic focus, or loss of reputation could severely affect the business.

Risks to the Moat and Business Resilience:

  • Market Volatility: Economic downturns and market crises have a big impact on AUM and performance fees in turn affecting profitability and leading to lower share prices and a decline in credit ratings. The market volatility has also created more uncertainty about future growth.
  • Key Personnel Risk: The loss of key investment personnel could disrupt operations and fund performance, leading to reduced AUM.
  • Competition: Fierce competition in the alternative asset management industry could reduce AUM and management fees and lead to reduced profits.
  • Changes in Regulatory Environment: Changes in regulation for financial service companies can lead to greater costs.
  • Leverage: ARES uses leverage for the operation of its business. While this is not unusual for these types of firms, debt can expose the firm to interest rate risk and can increase the risk of financial distress.
  • Cyclicality: Private equity relies on capital gains from asset sales, which can be variable during different economic conditions. This would affect the amount of fees, and therefore hurt revenue.
  • Reputational Risks: Due to the high level of scrutiny in the financial services sector, any impropriety could hurt ARES’ reputation, and result in a loss of AUM and investors.

Understandability:

The business is relatively complex, requiring some understanding of how alternative investment firms operate. The process by which the company obtains capital and earns a profit is rather straightforward, but it gets complicated when you try to evaluate a fund’s structure. Therefore, it is given a rating of 3 / 5.

Balance Sheet Health:

ARES’ balance sheet is fairly strong with high liquidity, debt is manageable. The current ratio of the firm is around 1.2, and its net debt to capitalization is 35% indicating a solid balance sheet. Based on this, ARES’s balance sheet has been assigned a health rating of 4 / 5.

ARES has been very active in acquiring other management firms, which may further help it achieve consistent growth, and also provide synergies across multiple investment management strategies.

ARES’s strategy revolves around building scale, generating stable revenues, and capitalizing on its expertise in specialized segments such as credit. The company’s performance has been solid in recent times, albeit with some challenges such as declining transaction related fees, but there still exists a level of uncertainty in regards to the macroeconomy. ARES’s focus on generating high ROIC with specialized credit products has enabled it to perform well and generate high shareholder value.