Ares grows assets as volatility hits earnings

The alternative investment firm saw revenues fall steeply on the back of mark-to-market unrealised losses in Q3. At the same time, the asset manager grew assets almost 15 percent from September 2014, including a second close on its European direct lending fund and healthy performance in DL strategies.  

Ares Management saw its assets rise 14.9 per cent to $91.5 billion in the third quarter despite economic net income (ENI) declining sharply, the firm said announcing its third quarter results.

Michael Arougheti (pictured), president, blamed mark-to-market losses and volatility as ENI fell to $6 million for the three months ending 30 September, compared with $72.1 million last year. This was as the firm’s fee-earning assets under management rose by 11 percent to $66.7 billion over the same time frame.

“During the third quarter, fears of slowing global economic growth, declining commodity prices and uncertain Federal Reserve policy all contributed to increased volatility for risk assets,” said president Michael Arougheti, speaking on Ares Management’s earnings call.

“These market fluctuations, not surprisingly, had an impact on our performance related earnings in certain business segments as the unrealised lower marks on our assets impact our balance sheet investments and our net performance fees.”

Ares’ distributable earnings dropped to $39.6 million on a pre-tax basis, or $0.14 per common unit in Q3, from $65.3 million ($0.26 per common unit) this time last year.

“Importantly, we don’t believe that these fluctuations had much to do with the fundamental performance of our funds and portfolio investments during the third quarter as the underwriting aggregate performance of these investments continues to be very strong,” Arougheti said.

“While the contribution of performance-related earnings to our ENI is important, the short-term unrealised impact is less relevant until investment outcomes are ultimately realised.”

Fee-related earnings were up 28 percent for the first nine months in the year, compared with the same period last year. However, they dropped slightly quarter-on-quarter due to increasing technology and staff costs, Arougheti said.

The firm raised $6.5 billion in gross new capital in Q3, of which $3.6 billion was towards direct lending strategies, including $2.4 billion for the third European direct-lending fund (comprised of $1.5 billion in equity and $900 million in debt), $400 million in separate European direct-lending mandates and $400 million in a US separately-managed account.

The firm had a first closing on the Ares Capital Europe III fund at €1.4 billion in equity in Q3, followed by another €400 million of equity raised in Q4 for a second close. Ares expects to hold a final close above its €2 billion target early next year.

The direct-lending strategies posted 2 percent aggregate returns on net asset value (NAV) and were largely unaffected by volatility during the third quarter, Arougheti said. The US and European direct-lending funds have generated NAV and dividend returns of approximately 10 percent and 12 percent, respectively, over the last 12 months.

The tradable credit group also closed two new US CLOs in the quarter, and priced a third for $1.9 billion in aggregate issuance. The real estate group closed about $700 million in real estate private equity funds.

Speaking about the investor makeup in new capital, Arougheti said about 75 percent of new funds were raised from returning investors, while the remaining 25 percent was raised from new institutional clients. About 45 percent of the investors were European, a third were North American and the remainder came from the Middle East, Asia and Australia.

Over the past 12 months, the firm raised about $15.5 billion in gross capital. The two largest investor types were pensions and insurance companies, followed by the private bank wealth management channel. More than half of the $15.5 billion of capital is yet to earn management fees, Arougheti said.

About 20 percent of this capital was in the form of fund level leverage and is not eligible for fees. Also, about 37 percent of the capital is comprised of direct-lending and special situations funds, which only charge fees on invested capital, not commitments, and the capital has not yet been deployed.

The firm is also raising its fifth US and European private equity fund with a $6.5 billion target and a fifth power private equity fund with a $2 billion target. The first closes for both are expected in the fourth quarter.

Addressing the collapse or Ares’ planned merger with Kayne Anderson, Arougheti said:  “After carefully considering various alternatives, we both determined that not moving forward with the transaction was in the best interest of our respective stakeholders. We are pleased that we continuing to collaborate on certain opportunities with Kayne and we look forward to investing in certain of their energy investment funds.”

The firm agreed to reimburse Kayne Anderson for its estimated merger expenses of $30 million.

Arougheti also said the firm has been adding staff in tandem with expected growth, including in its business development, marketing and investor relations groups.