ARES (ARES) Q1 2023: Management Fees Jump 25% as Private Credit Scale Drives Margin Expansion Path
ARES delivered robust management fee and fee-related earnings growth despite market volatility, underpinned by scale in private credit and resilient fundraising momentum. The firm’s asset-light model and dry powder position it to capitalize on dislocation, with margin expansion and new product launches setting up multi-year growth levers. Investors should watch for deployment acceleration and margin trajectory as capital formation and market share gains continue.
Summary
- Private Credit Scale Accelerates: ARES leverages fundraising and deployment to outpace peers in management fee growth.
- Margin Expansion in Focus: Operational leverage from prior hiring and capital deployment sets up for margin gains in 2H 2023 and beyond.
- Capital Formation Opportunity: Market dislocation and bank retrenchment fuel ARES’s ability to be selective and opportunistic in new investments.
Business Overview
ARES is a global alternative asset manager generating revenue through management fees, performance fees, and investment income across private credit, private equity, real assets, and secondaries. The firm’s core business is managing capital for institutional and retail clients in commingled funds, managed accounts, and insurance platforms, with a major focus on private credit and direct lending strategies. Key segments include Credit, Private Equity, Real Assets, and Secondaries, with fee-paying assets under management (AUM) the primary driver of recurring revenue.
Performance Analysis
ARES posted double-digit growth in both management fees and fee-related earnings (FRE), driven by fee-paying AUM expansion and robust fundraising across flagship credit and alternative strategies. Management fees rose 25% year-over-year, outpacing AUM growth, as the company benefited from strong deployment and a shift toward higher-fee products. FRE increased 24% year-over-year, with improvement in FRE margin to 40.6%, and management reiterated the path to a 45% run-rate margin by year-end 2025.
While realization activity remained seasonally light, performance income and accrued carry continued to build, especially in European-style waterfall funds. ARES’s asset-light model insulated the firm from balance sheet volatility, and available capital (“dry powder”) increased to $88.6 billion, positioning the business for opportunistic deployment as market conditions evolve. Realized income per share grew 9% year-over-year, reflecting the firm’s ability to generate distributable earnings even amid muted transaction activity.
- Fundraising Momentum Surges: $16 billion in new commitments in Q1, with shadow AUM rising to $51 billion, signaling strong forward fee growth.
- Private Credit Outperformance: Direct lending portfolios posted mid to high-single digit EBITDA growth, with low non-accruals and rising coupons.
- Retail and Wealth Channel Expansion: Net inflows remained positive, and new products like the non-traded BDC and Access ARES portal are broadening reach.
Segment performance was led by private credit and alternative credit, while real estate and private equity portfolios showed resilience with selective sector exposure and continued rental and EBITDA growth. The secondaries platform is positioned for acceleration as market liquidity needs rise.
Executive Commentary
"Our asset light business model tends to insulate us from balance sheet driven volatility and our long-term investment capital enables us to be opportunistic when other market participants retrench."
Michael Arrighetti, Chief Executive Officer
"Our management fee-centric and FRE-rich business model continues to deliver strong results despite the significant market volatility in the first quarter stemming from rising interest rates, continued geopolitical uncertainty, and the challenges in the banking sector."
Jared Phillips, Chief Financial Officer
Strategic Positioning
1. Private Credit Leadership and Market Share Gains
ARES is consolidating market share in private credit, with both U.S. and European direct lending funds seeing robust investor demand and significant first closes. The firm’s scale, origination network, and multi-decade performance track record act as high barriers to entry, especially as smaller competitors face capital constraints.
2. Opportunistic Capital Deployment in Dislocated Markets
The company’s $88.6 billion in available capital allows it to be highly selective, stepping into funding gaps created by bank retrenchment. Management cites growing pipelines in alternative credit, direct lending, and special opportunities as banks pull back and liquidity remains tight, especially in commercial real estate and middle-market lending.
3. Margin Expansion Through Operational Leverage
After significant hiring and platform investments in 2022, ARES expects margin expansion to accelerate in the second half of 2023 as fundraising and deployment ramp. The firm remains on track for its 45% FRE margin target by year-end 2025, with improved scale and efficiency offsetting prior cost growth.
4. Product Innovation and Channel Diversification
New product launches, such as the non-traded BDC and credit secondaries fund, are expanding ARES’s reach into the retail and wealth management channels. The launch of Access ARES and further global retail vehicles position the firm to capture a larger share of the growing alternatives allocation among retail investors.
5. Resilient Fund Performance and Selective Sector Exposure
ARES’s portfolios have delivered positive performance despite market volatility, with credit, private equity, and real estate strategies outperforming public benchmarks. The firm’s underweight to challenged sectors like office and retail, and focus on industrial, multifamily, and alternative real estate, mitigates risk and supports stable cash flows.
Key Considerations
This quarter underscores ARES’s ability to compound recurring fee streams while positioning for opportunistic growth in a disrupted market environment. Management’s focus on capital formation, margin expansion, and product innovation creates a multi-year growth runway, but execution on deployment and continued fundraising momentum will be critical as competition intensifies.
Key Considerations:
- Capital Formation Tailwind: The firm’s shadow AUM and ongoing fundraising set up for future fee acceleration as capital is deployed.
- Dislocation-Driven Opportunity Set: Bank retrenchment and liquidity constraints create unique entry points for private credit and real estate debt strategies.
- Retail Channel Scaling: New BDC and educational initiatives broaden addressable market, but require successful distribution partnerships and advisor engagement.
- Margin Expansion Execution: Realizing the full benefit of prior hiring and platform build-out depends on sustained deployment and scale.
Risks
Key risks include continued market volatility, especially in commercial real estate and credit, which could impact deployment pace or asset values. Bank lending contraction may create opportunity but also raises systemic risk, and margin expansion depends on successful scaling without further cost inflation. Competitive dynamics in private credit and retail alternatives are intensifying, and any slowdown in fundraising or deployment could pressure fee growth and profitability.
Forward Outlook
For Q2 2023, ARES guided to:
- Continued fundraising momentum, with first closes for major commingled funds including U.S. senior direct lending and climate infrastructure.
- Deployment acceleration in direct lending and alternative credit as pipelines build and market activity picks up.
For full-year 2023, management maintained guidance:
- On track for 45% run-rate FRE margin by year-end 2025.
- Visibility on European waterfall performance income, with $100 million expected in 2023.
Management highlighted several factors that will drive results:
- Seasonal pickup in deployment and realization activity as market clarity improves.
- Continued scaling of new product offerings and retail distribution channels.
Takeaways
ARES’s asset-light, fee-centric model is delivering growth and margin expansion even in volatile markets, with private credit scale and capital formation setting up for outsized opportunity as banks retrench.
- Private Credit and Alt Credit Outperformance: These segments are driving both fundraising and deployment, positioning ARES to take share and benefit from higher spreads and better terms as traditional lenders pull back.
- Margin Expansion Path Intact: Prior investments in talent and infrastructure are expected to yield operational leverage and higher profitability as capital is deployed and new funds scale.
- Watch Deployment and Retail Penetration: Investors should monitor the pace of deployment, especially in direct lending and secondaries, and early traction in the retail wealth channel as key levers for future growth.
Conclusion
ARES is executing on its strategy of scaling fee-paying AUM in private credit and alternatives, with a clear path to margin expansion and capitalizing on market dislocation. The firm’s fundraising, operational leverage, and channel innovation position it for continued outperformance, but execution on deployment and retail traction remain key watchpoints.
Industry Read-Through
This quarter reinforces the growing bifurcation in private markets, with scaled incumbents like ARES consolidating share as smaller competitors struggle to raise capital and banks pull back from lending. The asset-light, fee-driven model is proving resilient, but the industry faces rising competition in private credit and retail alternatives, as well as valuation pressure in real estate and credit portfolios. Other asset managers and alternative platforms should expect continued consolidation, with the largest players best positioned to deploy capital into dislocation and capture the secular shift toward private markets by both institutional and retail investors.