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Credit drives Ares’ fee-income growth

The firm’s shadow AUM was also dominated by credit, aided by the $3.2 billion junior debt fund that has yet to be activated.

Ares Management’s credit business has driven growth in both fee-related income and assets under management that aren’t yet earning fees, senior executives said on Friday’s third-quarter earnings call.

The Los Angeles-based alternative asset manager reported fee-related earnings, which excludes performance fees, of $58 million, which the firm said resulted in a 30 percent fee-related earnings margin, meeting a key goal for the firm.

Credit contributed the most, reporting $72.44 million in the third quarter, a year-on-year increase of 14 percent. Private equity and real estate reported $27.85 million and $3.64 million, respectively. Private equity posted a year-on-year increase of 87 percent and real estate fell 42 percent.

In addition, credit stands to contribute even more to fee-related earnings in the future, as it made up the lion’s share of the AUM not yet earning fees, also referred to as shadow AUM, which in the third quarter stood at $14.8 billion. Of that, credit made up $11.57 billion, which included the $3.2 billion raised so far for the firm’s inaugural junior debt fund, Ares Private Credit Solutions (APCS).

While that $14.8 billion figure was a decrease from the $18.37 billion of shadow AUM reported in the third quarter of 2016, credit makes up a much larger portion. Last year, private equity’s contribution to shadow AUM was $9.27 billion. This figure included money raised for Ares’ fifth flagship private equity fund, Ares Corporate Opportunities Fund V, which consisted of $7.6 billion of eventual fee-paying AUM. That fund began earning fees in March.

Total AUM for the firm stood at $105.6 billion, of which credit made up $70.5 billion.

On the fundraising side, Ares pulled in a total of $5.48 billion, of which $5.23 billion came from the firm’s credit group. Notably, it raised two separately managed accounts for its European direct lending strategies, totalling $650 million, and $1.65 billion across two US collateralised loan obligations. APCS raised $409 million during the quarter.

The firm’s business development company, Ares Capital Corporation (ARCC), reported earnings Thursday, and expressed confidence in its plan to rotate out parts of American Capital’s portfolio, which ARCC acquired after it bought the troubled BDC in a deal that closed in January.

The firm’s core earnings stood at 36 cents per share, slightly below its 38-cents-a-share dividend. When net realised gains were taken into account, the earnings per share stood at 44 cents, which chief executive officer Kipp deVeer said the firm believes is the “best proxy to evaluate our dividend”. He later added once rotating out American Capital’s portfolio is completed the BDC’s core EPS would once again exceed its dividend.

“Once it’s resolved, our core earnings will again exceed our dividend,” deVeer explained, “but for the time being we just have to recall what we set ourselves up for in 2017, which was buying a portfolio effectively of low yielding investments and equity positions, which we thought we could monetize and generate gains.”

The firm has exited $1 billion of low-yielding assets from that portfolio, and still has about $875 million remaining, deVeer said.

ARCC reported a net asset value per share for the third quarter of $16.49, down slightly from the $16.59 reported the same quarter last year. The firm was a net seller last quarter, with gross commitments of $1.55 billion and exits of commitments of $1.64 billion.