Ares Management became the latest alternative asset manager to throw itself into the fray of the public markets last week. The $74 billion firm filed to go public with the US Securities and Exchange Commission on 31 March, opting to list alongside The Blackstone Group, Apollo Global Management, Oaktree Capital Management, Kohlberg Kravis Roberts and Fortress Investment Group on the New York Stock Exchange.
The firm’s decision seems very much in line with its approach to growth. While the public market response to offerings floated by Ares’ peers has often been chilly, the circumstances of Ares’ evolution should prove more appetizing to public shareholders' palettes.
Unlike the firms listed above, private equity has never comprised the bulk of Ares’ assets under management.
It’s an important distinction. Private equity returns rely on the realisation of portfolio investments, and firms’ ability to exit or recapitalise their positions in portfolio companies is subject to external pressures. If there is no demand for a particular asset, returns will flounder. That in turn limits distributions to shareholders, which drives down demand for shares.
Of course, credit-related strategies do have drawbacks as well. Should the market hit another rough patch, Ares’ portfolio companies may experience “decreased revenues, financial losses, credit rating downgrades, difficulty in obtaining access to financing and increased funding costs”, according to its S-1. “During such periods, these companies may also have difficulty in expanding their businesses and operations and be unable to meet their debt service obligations or other expenses as they become due, including expenses payable to us. Negative financial results in our funds' portfolio companies may reduce the value of our portfolio companies and the investment returns for our funds, which could have a material adverse effect on our operating results and cash flow.”
The above conditions would also increase the risk of default for the firm’s debt and credit investments.
Even though most of the firms mentioned above diversified their platforms beyond buyouts in the years leading up to their respective IPOs, it's only relatively recently that the public markets have embraced the evolution (or it could just be that equity markets generally have picked up post-recession, of course).
Although Ares carries roughly $10 billion in private equity assets, approximately 75 percent of the firm’s total AUM is tied to its tradable credit and direct lending platforms, strategies that deliver regular interest income. In total, 55 percent of the firm’s performance fee income in 2013 came from contractual interest payments on debt investments and dividends received by its funds.
“As a result, we believe that our performance fees are more predictable and less volatile than investment managers predominantly focused on private equity-style investment strategies, in which performance fees are typically based on market gains and losses,” according to Ares' S-1 filing with the US Securities and Exchange Commission.
That’s on top of the revenues generated by management fees, which generated 84 percent of its total fee revenue ($517 million), according to the filing.
So Ares has the ability to deliver consistent, regular returns through its tradable credit and direct lending platforms.This should assuage any concerns its future shareholders might have, particularly those who may have been burned by previous private equity-heavy alternative investment manager IPOs.