Ares Management and Kayne Anderson announced the terms of their expected merger after markets closed on Thursday, creating one of the largest alternative asset managers in the world.
The combined firm, Ares Kayne Management, will have a combined $113 billion in assets under management (AUM), based on 31 March 2015 figures.
Ares will pay Kayne Anderson $2.55 billion, split between equity and $500 million in cash. Ares will issue fresh capital at $19 per unit, giving Kanye Anderson, which is management-owned, no less than $1.8 billion and no more than $2.05 billion in equity.
The agreement has built in lock-up periods (up to 2021) for senior management with lengthy non-compete clauses and clawbacks that were described as “punitive” on a call with analysts if managers leave for a rival before the lock-up period expires.
The agreement is expected to close on 1 January 2016, said Tony Ressler, chairman and chief executive of Ares Management.
The merger was described as “complementary” to each side.
Ressler said the investment strategies of the firms were a good fit and that the merged alternative asset manager would create a new energy business vertical within Ares.
Kayne Anderson’s main strength lies in the energy sector and though the firm’s publicly-traded master limited partnership (MLP) vehicles have suffered mark-to-market writedowns since oil prices plummeted, Ric Kayne, the firm’s chairman, maintained that in the long-term, the sector offers value and opportunity.
Along with energy, the merged group will have four other investment divisions: tradable credit; direct lending; private equity; and real estate. Senior management from both firms outlined the plan to create a management fee-driven model with both sides benefitting from cross-selling opportunities to their respective investor bases.
“We’re more orientated towards revenue synergies than cost synergies,” Ares Management’s president Mike Arougheti (pictured) said on the call.
Of their shared 2,700 investors, only 30 LPs have committed with both firms, Ressler said. The combined group will seek to build relationships across the new broader investor base. Ares’ investor profile includes large pension funds, sovereign wealth funds, insurers and private banks, while the Kayne Anderson investor base is more orientated towards high net worth individuals, endowments, foundations and family offices.
“There will be synergies but we haven’t built those into our assumptions,” Arougheti said with reference to cost-cutting.
The financial argument for the deal is the firms’ projection that it will double fee-related earnings (FRE) and distributable earnings.
Presenting the case, Arougheti pointed to the two firms’ projected FRE margin post-merger. Based on both full-year 2014 and first-quarter 2015 numbers, the combined FRE margin was 36 percent, up from 26 percent and 29 percent respectively for Ares (the Kanye Anderson FRE margins were not disclosed).
Arougheti also noted that FRE as a percentage of distributable earnings would have had a bounce of more than 10 percent for 2014, to 76 percent rather than Ares’ standalone figure of 63 percent. This translates into more stable and predictable dividends, he added.
The long-term nature of the firms’ assets also builds into this argument, management said. Of the combined $113 billion in AUM, 21 percent is permanent with another 34 percent bearing a lifetime of seven years or longer.
Management did not make any direct reference to how the two firms will combine their direct-lending operations. Ares is active in both the US and European mid-market lending. Kayne Anderson has four funds operating in the space: a $600 million mezz vehicle; the $355 million 2012 Kayne Senior Credit Fund; a $450 million credit opportunity fund closed last year; and its most recent senior credit vehicle, the $1.1 billion Kayne Senior Credit Fund II.
The Ares credit operation dwarfs it with $28.7 billion in AUM, as of 31 March 2015.
The only outline in the announcement of how the merger will work in practice for other business units said Kanye Anderson’s non-energy investment professionals will move into Ares’ corresponding divisions across private equity, real estate and direct lending. But the firms will manage existing funds and operate under existing brand names.
After the deal closes, Ressler and Kayne Anderson chairman and founder Ric Kayne will take up co-chairmen roles. Kayne Anderson president and chief executive Robert Sinnott will become chairman of the new energy group, which will be headed by Kevin McCarthy from Kayne Anderson, who will also join the board of directors. Ressler will remain chairman and chief executive. Arougheti and current chief financial officer Michael McFerran will also stay in their positions.
Kayne Anderson has roughly 110 investment professionals in eight US offices focusing on energy and energy infrastructure, specialty real estate, mid-market credit and growth private equity.
Moelis & Company and Bank of America Merrill Lynch were financial advisers to Ares, while Wells Fargo was financing adviser. Proskauer Rose acted as Ares’ legal counsel. JPMorgan was financial adviser to Kayne Anderson and Paul Hastings acted as legal counsel.
*This article was updated on 24 July to correct mis-spellings of Kayne Anderson.