Capital Properties FX
Capital Properties FX

ARES Management – Strong Momentum to Continue


  • 2023 global AUM in the alternative investments will reach $14 trillion
  • Emerging markets present massive opportunities
  • Ares Management’s track record and ability to deliver risk-adjusted returns to its investors make it the right choice to benefit from the industry’s future growth

“Very few people can afford to be poor.” – George Bernard Shaw

A global alternative asset manager, Ares Management Corporation (ARES), invests in multiple asset classes across various market environments to maximize returns and better manage risk. With almost $150 billion AUM, Ares complements its alternative investment activities with other areas like real estate, credit, and private equity.

Alternative Investments Industry – Past, Present, and Future

Despite recessions and economic crises (e.g., the 2008 financial crisis, Eurozone crisis), the global investment industry grew at a steady pace in the last two decades. Excluding hedge funds, since they invest in other private or listed assets, the global investment industry exceeded $120 trillion in 2018 – a rising trend set to continue.

Alternative Investments

At the end of 2018, alternative investments account for over 7.2% of the global investment market, according to a study published by Fidante. Moreover, a research paper from Prequin, an investment industry data provider, The Future of Alternatives, reveals that the alternative investment industry is set to reach $14 trillion in assets by 2023 – a staggering 8% CAGR from 2017 to 2023.

All asset classes are expected to extend across the horizon mentioned above: private debt, infrastructure, private equity, real estate, natural resources, hedge funds – reaching a total value of over $14 trillion.

Ares Management Strong Momentum

What Makes Ares Management Special in This Environment?

Founded in 1997 and completing its IPO in 2014, Ares converts to a corporation in 2018. It operates three distinct investment groups in the credit, real estate, and private equity markets. Its investments span across five continents, having over 20 offices and a truly global presence – 242 funds and 1200 employees.

Ares Management Alternative Industry

Financial Performance

Ares strives to provide investment management capabilities through various funds and products that meet the needs of a wide range of institutional and retail investors. It gains most from management fees (based on a percentage of average fair value of assets managed, but also fees generated by carried interest allocation, transaction fees, incentive fees, or administrative expense reimbursements.

Ares Annual Report

For Q3 2019, Ares reported a +94.60% increase in net income, mainly driven by a rise in carried interest allocation and incentive fees. Also referred to as performance income, are based on hurdle rates as specified in the funds’ agreements. As such, it comes as no surprise that the bulk of its expenses comes from performance-related compensation. The nine-month ending September 30, 2019, reveals similar numbers, pointing to the business model’s strength ran by Ares Management.

According to the company’s filings with the SEC, at the end of Q3 2019, 70% of AUM were invested in funds with remaining contractual life of 3+ years and 74% in funds with remaining contractual life of 7+ years, enabling Ares Management to focus on different points in the market cycle.

A Dividend Company

With EPS TTM of $0.88 and a PE ratio of 43.57, Ares management seems overvalued – at least when comparing with competitors like The Carlyle Group (CG – PE ratio of 11.52) or Apollo Global Management (APO – PE ratio of 12.93). However, a steady forward dividend and yield $1.28 (3.43%) may be enough to compensate investors for the opportunity cost of looking away from the competition. If that’s not a good enough incentive, the almost double net income YoY tells much about the momentum at Ares Management.

Ares Dividend

Risks and Opportunities Ahead

Ares Management’s results of operations are affected by a variety of factors, particularly in Western Europe and the United States, including conditions in the global financial markets and economic and political events. While the start of 2019 offered an attractive entry point for high yield bonds and as a result both asset classes exceeded most expectations in the United States and Europe, geopolitics shaped the market in 2019, with U.S. – China trade deal and Brexit negotiations heavily influencing market sentiment.

Besides the ongoing geopolitical risk, high-quality valuations trend will continue to grow in 2020. Spreads widening in high-quality assets are likely, and only the best “credit pickers” will perform in such an environment.

Monetary policy is always a wild card, especially considering that Christine Lagarde starts her first year as the President of the European Central Bank (ECB). Therefore, communication missteps from major central banks will only fuel the market’s volatility in a U.S. Presidential election year.

The Rise of Emerging Markets

Opportunities do exist in the alternative investments industry, and Ares Management looks poised to grow in this environment. Over 46% of fund managers feel emerging markets will present the best opportunities by 2023.

The emergence of Asia as a source of long-term and scalable capital for closed-end funds continues. After years of ultra-low domestic interest rates, Japanese institutional investors started to invest in size. Other countries in the region, like Malaysia, Korea, or Taiwan have seen an increase in their powerful investor base – global capital concentration in Asia continues.

Ares Emerging Markets

Industry Consolidations

Only this 2020, Ares Management announced an agreement to acquire a majority interest in SSG Capital Holding Limited. Headquartered in Hong Kong with offices across Asia, SSG fits the expansion plan perfectly into a region with high growth potential in the near to long term.

Alternative Investments Industry Consolidation

Embracing Changing Technologies

Alternative fund management is moving towards data-powered decision making. Software usage has a multitude of benefits like understanding portfolio risk, reporting across the portfolio, or monitoring investments.

The rise of Artificial Intelligence (AI) will enhance the role of technology in the fund management industry. AI-enabled machines will help companies becoming more operationally efficient and timelier in decision-making. Over 75% of fund managers believe AI will be more relevant for the alternative industry by 2023, starting the race for quick implementation and training to obtain improved results over the competition.

The Growing Role of ESG

Environment, Social, and Corporate Governance (ESG) factors will have a significant role in the investment process. In three years from now, all fund managers will have to state the procedures for ESG risks and opportunities clearly – Ares Management already has them in place.

Moreover, green and specialized ESG funds will proliferate. Furthermore, better data, disclosure, and reporting make private capital a driving force in managing environmental and climate-related risks and governance issues.

Increased Competition

The number of active alternative assets funds managers is expected to grow globally. This is both an opportunity and a threat. An opportunity, because it enables players like Ares Management to acquire already established businesses in markets with future potential growth (e.g., Asia Pacific, Africa). On the other hand, it is a threat because current competition is aware of the industry trends as well and will act accordingly. Consolidation within the industry is also anticipated, therefore, the landscape for the alternative investment industry would be dominated by big players.

Alternative Assets Fund Managers

The Technical Perspective

In the three years following the IPO, Ares Management consolidated with the $16 level acting as strong resistance. Once broken at the start of 2019, the interchangeability principle transformed it into support. So strong was the support level at $16 that the bounce that followed turned into a massive rally – ARES Management more than doubled in price in the last thirteen months.

Ares Management

Forecast

There’s room for more. A target of $66 is justified by the waves theory. If the initial break above the $16 is the end of the 1st wave in a five-wave structure, the current rally to $38 is just an intervening or connecting structure. The price may consolidate current levels or continue in the rising channel before consolidation is due.

After a consolidation, typically a triangle, the projected measured move based on the 1st wave’s length points to a minimum of $66 if the consolidation begins right now. If later, we could see even higher.

Ares Forecast

Summary

Based on the historical acceleration of private equity asset growth towards the late stages of the cycle, the largest expected growth in AUM is projected for private equity investments. Moreover, growth in real assets will more than double by 2022, and property and private debt investments will catch up with the growing trend.

With an increase of almost 60% vs. 2017, the 2023 global AUM will reach $14 trillion, triggering a 21% rise in management firms active globally. The trends bring immense opportunities for the current established businesses poised to benefit from the already implemented steps in areas like ESG or technology.

Ares Management’s strong financial performance and constant dividend make it a great pick to benefit from the expanding alternative investments industry.