Ares becomes first listed alternatives manager to convert to a C-corporation

The firm has also set a new dividend policy with the potential for special dividends when performance fee income is particularly elevated.

Ares Management has elected to become a C-corporation, abandoning its partnership status, in a move that the Los Angeles-based alternative asset manager says presents a chance to expand its investor base.

The financial behemoth – which invests in private equity, credit and real estate – expects its capital structure to be more liquid as a result. Its shares may be a more attractive currency of consideration for strategic transactions, the firm said in its investor presentation released alongside it fourth-quarter earnings.

The lead Ares analyst at Fitch Ratings, Jared Kirsch, said in a statement: “Ares’ decision to convert to a C-corp from a partnership following tax reform may be the first domino to fall across the alternative [investment management] industry as other firms are expected to more strongly consider converting.”

Ares also adopted a new dividend policy, in which Ares will aim to provide a “steady” quarterly dividend based on after-tax fee-related earnings. The distribution would be open to adjustment depending on the level and increases in after-tax fee-related earnings. The firm may also consider a special dividend in during “periods of heightened performance fees”, the investor presentation said.

A dividend of 9 cents a share will be paid for the month of March, while a quarterly dividend of 28 cents a share will be paid for the second, third and fourth quarters of this year. Existing shareholders, as of 26 February, will receive a five-month 40-cents-a-share distribution.

“This type of conversion could mean higher taxes but it also expands the potential pool of equity investors which could improve stock valuations,” Kirsch added.

Across the alternative asset management industry, conversion to a C-corporation would result in a 16 percent decreased in earnings per share, according to a Morgan Stanley note to clients. For Ares in particular, the change would be a slightly larger decrease of 17.7 percent.

The market has also largely priced in potential upside from the conversion into the firm’s stock price, the note also said. So far, Ares has outperformed other similar firms by 10 percent this year.

Ares also said it now anticipated to retain earnings to fund the future growth of the firm and the potential for share buybacks.

Apollo Global Management and KKR, which have already reported fourth-quarter earnings, have a wait-and-see approach.

Apollo’s co-founder Josh Harris said his firm is “continuing to assess the best path forward for Apollo including how investors value different structures on a sustainable basis”, while KKR’s chief financial officer William Janetschek said the firm would “report back certainly next quarter”.

For its part, Carlyle also said it will be closely examine the effects of a C-corporation conversion. “Converting to a C-corp is a no-going-back kind of decision,” firm co-chief executive Glenn Youngkin said, adding the firm “will revisit this topic when appropriate”, and as the upsides and downsides of such a move become more apparent.

Ares’ Q4 report also revealed an increase in assets under management over the past twelve months, up 11.6 percent from $95.3 billion at the end of 2016 to $106.4 billion in 2017.

The firm say significant new capital commitments of $14.9 billion coming from its credit group over the whole of 2017 and $2.6 billion in Q4.

Management and other fees within the credit group increased by 10% in the 12 months to 31 December 2017 to $502 million while performance related earnings dropped 61% to $36.6 million.

Ares said the growth in management fees was mainly due to deployment of US and EU direct lending strategies and an increase in fee-paying assets. Performance related earnings decline was driven by the wind down of legacy CLOs  and reduced market appreciation for some funds.