Ares reports 6.3% AUM increase but acknowledges headwinds

Ares Management Corp. reported $325 billion of assets under management as of March 31, up 6.3% from the end of the prior quarter and a 57% increase year-over-year.

Michael Arougheti, CEO, president and a co-founder of Ares, said during an earnings call on Thursday that the AUM growth was primarily due to a combination of fundraising and the acquisitions of Landmark Partners, Black Creek Group and AMP Capital's infrastructure debt business.

Ares completed the acquisition of AMP's infrastructure debt platform on Feb. 10, which increased AUM by $8.2 billion. The Landmark deal closed on June 2, boosting Ares' AUM by $19.5 billion, and Black Creek closed on July 1, adding about $11.6 billion of AUM.

Mr. Arougheti noted during the earnings call that the tailwinds that boosted Ares' business in 2021 reversed direction in the first quarter.

"In 2021 and especially in the fourth quarter, the financial markets were incredibly active," leading to record investment activity for Ares across most of its strategies, he said.

Then in the first of quarter of 2022, the Federal Reserve stepped up its fight against inflation resulting in a sharp rise in interest rates, Mr. Arougheti said. Those actions plus the beginning of a protracted war in Ukraine and the lockdown in China to tamp down COVID-19 infections added uncertainty and volatility to the seasonal slowdown in transactions that typically occurs in the first quarter, Mr. Arougheti said. The result was that transaction activity slowed in the first quarter, he said.

Despite these headwinds, some financing activity that would have tapped the publicly traded markets shifted to private markets, benefiting private debt managers like Ares, Mr. Arougheti said.

Even with the challenging backdrop, Ares continues to exhibit "strong growth across key financial metrics," Mr. Arougheti said.

Ares earned $477.3 million in management fees in the first quarter, up 49% from the year-earlier quarter. But its carried interest allocation dipped 40.1% to $178.3 million in the first quarter from $297.5 million in first quarter of 2021, while incentive fees rose 486% to $16.4 million in the first quarter from the year-earlier period.

Assets managed in all five of Ares' business lines grew during the 12-month period ended March 31.

The credit business had $196.9 billion in AUM as of March 31, up 2.2% from Dec. 31 and up 30.3% from $151.1 billion year-over-year.

Real assets were at $58.5 billion in AUM at the end of the first quarter, a 27.2% increase from Dec. 31 and up 181% from $20.8 billion as of March 31, 2021. Private equity had $33.6 billion at the end of the quarter, close to 1% more than at Dec. 31 and up 32.3% from March 31, 2021.

In response to an analyst question during the earnings call, Mr. Arougheti acknowledged that limited partners are being asked to commit more capital to alternative investment managers' funds even though those managers had not yet exited investments and made distributions from their prior funds.

Ares executives are "largely experiencing" the phenomenon in its private equity business, he said. Due to the active investment pace, private equity managers are coming to market sooner than expected with new funds.

Investors are spending more time with due diligence of new funds from existing managers than new ones, which is positively impacting Ares, he said.

Ares' newest business, secondary solutions, had $23.5 billion at the end of the first quarter, up 6.3% from the end of the prior quarter, which was the first time Ares included the business in its quarterly reports. Strategic initiatives had $12.5 billion as of March 31, up 8% from Dec. 31 and up 26.3% from the end of the year-earlier quarter.

GAAP net income was $45.9 million for the quarter ended March 31, compared to $58.4 million for the quarter ended March 31, 2021.