There goes another one.
Ares Management is, metaphorically speaking, straightening its hair, applying some eye-shadow, and preparing to step out into the full glare of public scrutiny.
The firm filed to go public in late March, ending speculation about the asset management firm’s plans for the future after undertaking a rapid expansion of its investment platform and assets under management through the last decade.
Tony Ressler, Bennett Rosenthal, David Kaplin John Kissick and Michael Arougheti founded Ares in 1997. A tradable credit platform focusing on long-only strategies, special situations and multi-strategy credit comprised the bulk of its AUM through the early 2000s, though it quickly diversified with the launch of a private equity fund in 2003 as well as a business development company (BDC) and private debt vehicle the following year. As Ares continued its diversification, AUM grew quickly from $5 billion in 2003 to $74 billion through the end of last year.
In the years following the financial crisis, the firm’s rapid ascent gave all the appearances that a public offering was in the works (though it reportedly rejected an IPO last July, instead selling a 6.35 percent stake in itself to insurer Alleghany Corp). The pending IPO clearly represents a major step forward for Ares, and it will eventually allow its founders to monetize their positions in the firm.
Even so, news of a multi-billion dollar manager’s plans to plunge into the public market’s waters doesn’t produce the ripples that it used to. Should Ares proceed with its listing (under the functional does-what-it-says-on-the-tin ticker ‘ARES’), the firm would join alternative asset managers The Blackstone Group, Apollo Global Management, Oaktree Capital Management, Kohlberg Kravis Roberts and Fortress Investment Group on the New York Stock Exchange. Shares of The Carlyle Group, the last alternative asset manager to go public, are traded on the NASDAQ stock market.
Unlike some of its publicly traded peers, however, Ares’ pre-IPO business model seems better suited to handle the pressures of public shareholder expectations. Public markets have not offered a warm reception to many alternative asset firms, particularly those with backgrounds in private equity. Shares of Blackstone, which floated in 2007, did not rise above their initial listing price until December 2013. Fortress shares were trading for less than $10 at press time, well below their $35 per share market debut.
Private equity returns rely on firms’ abilities to realize portfolio investments. If the market for an exit (or dividend recapitalisation) is non-existent, actual returns will flounder, thereby limiting distributions to shareholders. While most of the above firms have diversified their platforms beyond the lumpy returns generated by their buyout funds, public market response has only recently begun to recognize that evolution.
Although Ares has many widely publicised private equity holdings, approximately 75 percent of its AUM is tied to its tradable credit and direct lending platforms, strategies that deliver regular interest income. In fact, 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 its S-1 filing with the US Securities and Exchange Commission.
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. “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,” it added.
The above conditions would also increase the risk of default for the firm’s debt and credit investments.
Even so, Ares’ ability to deliver consistent, regular returns through its tradable credit and direct lending platforms should assuage the concerns of its future shareholders, particularly those who may have been burned by previous asset manager IPOs (Blackstone co-founder Stephen Schwarzman lost more than $6 billion personally when the firm’s stock hit its low during the financial crisis, according to a Bloomberg report). In fact, the 100 funds managed across the two strategies already comprise approximately 73 percent of Ares’ fee revenues, according to its S-1.
Last year, Ares generated $517 million in management fees, according to its S-1, which accounts for 84 percent of its total fee revenue.
“We have a well-balanced and diverse capital base, which we believe is the result of demonstrated expertise across each of our four investment groups,” according to the filing.
Ares’ reliance on its tradable credit and direct lending platforms for performance and management fees gives it the ability to deliver consistent returns. That ability will be vital to its attractiveness as a public company. Debutantes only get one shot at the ball, and public shareholders have a tendency to be somewhat fickle in their affections for listed asset managers.