Ares(ARES) - 2021 Q2 - Quarterly Report

Cover Page Information This section provides general filing information, registered securities, filer status, and outstanding shares General Information This section identifies the filing as a Form 10-Q Quarterly Report for Ares Management Corporation for Q2 2021 - The document is a Form 10-Q Quarterly Report for Ares Management Corporation, covering the period ended June 30, 2021[3] - The registrant is a Delaware corporation with Commission File No. 001-36429[3] Securities Registered Class A common stock, par value $0.01 per share, is registered on the NYSE under trading symbol ARES - Class A common stock, par value $0.01 per share, is registered on the New York Stock Exchange under trading symbol ARES[2] Filer Status and Outstanding Shares Ares Management Corporation is a Large Accelerated Filer, with 163.5 million Class A common shares outstanding as of August 2, 2021 - The registrant is a Large Accelerated Filer and has complied with all filing requirements[3] Outstanding Shares as of August 2, 2021 | Class of Stock | Shares Outstanding | | :-------------------- | :----------------- | | Class A common stock | 163,459,152 | | Non-voting common stock | 3,489,911 | | Class B common stock | 1,000 | | Class C common stock | 120,908,190 | Table of Contents This section provides an organized listing of all chapters and sub-sections within the report Preliminary Information This section covers forward-looking statements, organizational structure, and non-GAAP financial measures Cautionary Note Regarding Forward-Looking Statements The report contains forward-looking statements subject to risks and uncertainties, with actual results potentially differing materially - The report contains forward-looking statements identifiable by words like 'outlook,' 'believes,' 'expects,' etc[6] - These statements are subject to risks and uncertainties, and actual results may vary materially[6] - The company does not undertake to publicly update or review any forward-looking statement, except as required by law[6] Organizational Structure and Consolidation Principles Ares Management Corporation reorganized its operating group on April 1, 2021, and consolidates entities with majority voting interest or as primary VIE beneficiary - On April 1, 2021, Ares completed an internal reorganization, merging Ares Offshore and Ares Investments with Ares Holdings, making Ares Holdings the sole entity in the Ares Operating Group[7] - Under GAAP, the company consolidates entities where it holds a majority voting interest or is the primary beneficiary of VIEs, including Ares-affiliated funds and CLOs[9] - Consolidation reflects assets, liabilities, revenues, expenses, and cash flows on a gross basis, with net income attributable to third-party investors presented as non-controlling interests[9] Non-GAAP Financial Information The report presents non-GAAP financial measures like Fee Related Earnings (FRE) and Realized Income (RI) to assess segment performance, excluding consolidated funds - Results are presented on a 'segment basis' (deconsolidating funds and removing proportional results of consolidated joint ventures) and 'unconsolidated reporting basis' (combined segment results with Operations Management Group)[10] - These non-GAAP measures (e.g., FRE, RI) are used by management to assess segment performance and are not substitutes for GAAP measures[10][15] - The Operations Management Group (OMG) provides shared infrastructure and administrative support, with its expenses not allocated to reportable segments[10] Glossary This section defines key financial and operational terms used throughout the report, including AUM, FPAUM, FRE, and RI Key Terms and Definitions This section defines key financial metrics like AUM, FPAUM, FRE, and RI, noting potential incomparability with other companies' measures - AUM generally refers to assets managed, including NAV, drawn/undrawn debt, and uncalled committed capital[12] - FPAUM refers to AUM from which management fees are directly earned, based on various fee bases[13] - FRE (non-GAAP) assesses core operating performance by comparing recurring revenue (primarily management fees) to operating expenses, excluding performance income and certain other items[13] - RI (non-GAAP) evaluates business performance by removing fluctuations of unrealized income and losses, focusing on operating performance and segment contribution[14] - The definitions of AUM, FPAUM, FRE, and RI may not be comparable to those used by other companies or regulatory bodies[15] PART I—FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and related notes Item 1. Financial Statements This section presents the condensed consolidated financial statements, including statements of financial condition, operations, comprehensive income, changes in equity, and cash flows Condensed Consolidated Statements of Financial Condition The Condensed Consolidated Statements of Financial Condition show a significant increase in total assets and liabilities from December 31, 2020, to June 30, 2021 Condensed Consolidated Statements of Financial Condition (Amounts in Thousands) | Metric | June 30, 2021 (unaudited) | December 31, 2020 | | :-------------------------------------- | :------------------------ | :---------------- | | Assets | | | | Cash and cash equivalents | $582,906 | $539,812 | | Investments | $2,916,226 | $1,682,759 | | Other assets | $1,868,450 | $812,419 | | Assets of Consolidated Funds: | | | | Cash and cash equivalents | $848,875 | $522,377 | | U.S. Treasury securities, at fair value | $1,000,057 | — | | Investments, at fair value | $10,592,646 | $10,877,097 | | Total assets | $18,639,587 | $15,168,992 | | Liabilities | | | | Performance related compensation payable| $1,608,141 | $813,378 | | Debt obligations | $1,088,050 | $642,998 | | Liabilities of Consolidated Funds: | | | | Payable for securities purchased | $1,329,530 | $514,946 | | CLO loan obligations, at fair value | $9,296,585 | $9,958,076 | | Total liabilities | $14,181,617 | $12,596,852 | | Total equity | $3,441,115 | $2,471,774 | - Total assets increased by $3.47 billion (22.9%) from December 31, 2020, to June 30, 2021, primarily due to higher investments and U.S. Treasury securities within Consolidated Funds[19] - Total liabilities increased by $1.58 billion (12.6%) over the same period, driven by higher performance-related compensation payable and debt obligations[19] Condensed Consolidated Statements of Operations The Condensed Consolidated Statements of Operations show substantial revenue growth for Q2 and H1 2021, primarily from increased carried interest allocation, leading to higher net income Condensed Consolidated Statements of Operations (Amounts in Thousands) | Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :------------------------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | | | | | | Management fees | $367,286 | $266,867 | $687,559 | $530,716 | | Carried interest allocation | $852,521 | $303,278 | $1,150,056 | $72,402 | | Incentive fees | $15,904 | $331 | $18,724 | $(2,918) | | Total revenues | $1,294,819 | $602,758 | $1,953,207 | $616,167 | | Expenses | | | | | | Compensation and benefits | $269,689 | $185,131 | $501,539 | $365,215 | | Performance related compensation | $656,381 | $237,108 | $877,813 | $69,209 | | Total expenses | $1,024,732 | $483,567 | $1,549,841 | $565,526 | | Net income attributable to Ares Management Corporation | $141,644 | $56,371 | $200,022 | $25,335 | | Net income attributable to Ares Management Corporation Class A and non-voting common stockholders | $124,980 | $50,946 | $177,933 | $14,485 | | Basic EPS | $0.70 | $0.36 | $1.07 | $0.08 | | Diluted EPS | $0.69 | $0.35 | $1.03 | $0.08 | - Total revenues for the three months ended June 30, 2021, increased by 115% YoY, primarily driven by a 181% increase in carried interest allocation[22] - Net income attributable to Ares Management Corporation Class A and non-voting common stockholders increased by 145% YoY for the three months ended June 30, 2021, and by 1128% for the six months ended June 30, 2021[22] Condensed Consolidated Statements of Comprehensive Income The Condensed Consolidated Statements of Comprehensive Income show a significant increase in comprehensive income for Q2 and H1 2021, reflecting improved net income and foreign currency adjustments Condensed Consolidated Statements of Comprehensive Income (Amounts in Thousands) | Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :------------------------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $271,319 | $216,676 | $435,629 | $(59,121) | | Foreign currency translation adjustments, net of tax | $3,458 | $2,687 | $(7,115) | $(11,521) | | Total comprehensive income (loss) | $274,777 | $219,363 | $428,514 | $(70,642) | | Comprehensive income attributable to Ares Management Corporation | $142,402 | $55,983 | $200,235 | $20,145 | - Comprehensive income attributable to Ares Management Corporation increased by 154% YoY for the three months ended June 30, 2021, and by 894% for the six months ended June 30, 2021[25] Condensed Consolidated Statements of Changes in Equity The Condensed Consolidated Statements of Changes in Equity reflect significant activity, including Series A Preferred Stock redemption and common stock issuance, leading to a substantial increase in total equity Key Changes in Equity (Amounts in Thousands) | Metric | Balance at Dec 31, 2020 | Balance at June 30, 2021 | | :-------------------------------------- | :---------------------- | :----------------------- | | Series A Preferred Stock | $298,761 | — | | Class A Common Stock | $1,472 | $1,631 | | Non-voting Common Stock | — | $35 | | Class C Common Stock | $1,124 | $1,176 | | Additional Paid-in-Capital | $1,043,669 | $1,750,144 | | Retained Earnings | $(151,824) | $(131,400) | | Total Stockholders' Equity | $1,193,685 | $1,622,282 | | Non-Controlling Interest in AOG Entities| $738,369 | $1,257,628 | | Non-Controlling Interest in Consolidated Funds | $539,720 | $561,205 | | Redeemable Interest in Consolidated Funds | — | $916,824 | | Total Equity | $2,471,774 | $3,441,115 | - Total equity increased by $969.3 million (39.2%) from December 31, 2020, to June 30, 2021[28] - The Series A Preferred Stock was fully redeemed by June 30, 2021, with a redemption premium of $11.2 million[28] - Issuances of common stock and capital contributions significantly increased additional paid-in-capital and non-controlling interests in AOG entities[28] Condensed Consolidated Statements of Cash Flows The Condensed Consolidated Statements of Cash Flows show a net change in cash of $43.1 million for H1 2021, with financing activities providing cash while operating and investing activities used significant amounts Condensed Consolidated Statements of Cash Flows (Amounts in Thousands) | Cash Flow Activity | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :------------------------------------------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(1,069,043) | $(150,839) | | Net cash used in investing activities | $(786,096) | $(43,924) | | Net cash provided by financing activities | $1,894,872 | $962,230 | | Effect of exchange rate changes | $3,361 | $(15,811) | | Net change in cash and cash equivalents | $43,094 | $751,656 | | Cash and cash equivalents, beginning of period | $539,812 | $138,384 | | Cash and cash equivalents, end of period | $582,906 | $890,040 | - Net cash used in operating activities significantly increased from $(150.8) million in H1 2020 to $(1,069.0) million in H1 2021, largely due to adjustments related to non-controlling interests in Consolidated Funds[36] - Net cash used in investing activities increased from $(43.9) million in H1 2020 to $(786.1) million in H1 2021, primarily due to acquisitions (e.g., Landmark Acquisition)[36] - Net cash provided by financing activities nearly doubled from $962.2 million in H1 2020 to $1,894.9 million in H1 2021, driven by proceeds from stock issuance and subordinated notes[36] Notes to the Unaudited Condensed Consolidated Financial Statements This section provides detailed notes on accounting policies, business combinations, goodwill, investments, fair value, debt, and other financial disclosures Note 1. ORGANIZATION Ares Management Corporation reorganized its operating group on April 1, 2021, and consolidates various investment entities, impacting gross financials but not net income - Ares Management Corporation is a global alternative investment manager with integrated groups across Credit, Private Equity, Real Estate, Secondary Solutions, and Strategic Initiatives[39] - An internal reorganization on April 1, 2021, merged Ares Offshore and Ares Investments with Ares Holdings, simplifying the Ares Operating Group structure[41] - The company consolidates certain Ares funds, co-investment entities, CLOs, and a SPAC (AAC), which significantly increases reported assets, liabilities, revenues, expenses, and cash flows but has no direct effect on net income attributable to Ares Management Corporation[42] - Non-controlling interests in AOG entities represent equity and net income attributable to owners of AOG Units not held by the Company, including Ares Owners Holdings L.P. and strategic joint ventures[43] - The company completed the acquisition of a majority interest in SSG Capital Holdings Limited on July 1, 2020, which now operates as Ares SSG, an alternative investment manager in Asia Pacific[45] Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation, accounting for business combinations and U.S. Treasury securities, and the impact of COVID-19 and recent accounting pronouncements - Financial statements are unaudited and prepared in accordance with GAAP for interim financial information, excluding some annual disclosures[47] - Management's estimates and assumptions are subject to higher variability due to the ongoing COVID-19 pandemic[48] - Business combinations are accounted for using the acquisition method, allocating purchase price to acquired assets and assumed liabilities at fair value, with any excess recorded as goodwill[49] - U.S. Treasury securities held by consolidated SPACs (like AAC) are recorded at fair value, with interest income and fair value changes recognized in the Consolidated Statements of Operations[50] - The company is evaluating the impact of ASU 2020-04 and ASU 2021-01 on reference rate reform, which provides optional expedients for contracts and hedging relationships affected by LIBOR discontinuation[54] Note 3. BUSINESS COMBINATIONS On June 2, 2021, Ares acquired Landmark Partners, LLC for $1.1 billion, expanding into the secondaries market and resulting in $417.2 million in goodwill and significant intangible assets - On June 2, 2021, Ares acquired 100% of Landmark Partners, LLC for $1.1 billion, expanding into the secondaries market[55] Landmark Acquisition Consideration Transferred | Component | Amount (Thousands) | | :-------- | :----------------- | | Cash | $803,829 | | Equity | $299,640 | | Total | $1,103,469 | Landmark Acquisition: Fair Values of Assets Acquired and Liabilities Assumed (Thousands) | Asset/Liability | Fair Value (Thousands) | | :------------------------------ | :--------------------- | | Cash | $25,685 | | Other tangible assets | $22,826 | | Management contracts | $425,880 | | Client relationships | $197,160 | | Trade name | $86,200 | | Total identifiable assets acquired | $757,751 | | Accounts payable, accrued expenses and other liabilities | $71,466 | | Net identifiable assets acquired | $686,285 | | Goodwill | $417,184 | | Net assets acquired | $1,103,469 | - Landmark's revenues and net income of $12.9 million and $4.8 million, respectively, are included in the Company's Consolidated Statements of Operations for the three months ended June 30, 2021[60] Note 4. GOODWILL AND INTANGIBLE ASSETS Finite-lived intangible assets and goodwill significantly increased due to the Landmark Acquisition, leading to higher amortization expense and $417.2 million goodwill allocated to the Secondary Solutions Group Finite Lived Intangible Assets, Net (Amounts in Thousands) | Asset | June 30, 2021 | December 31, 2020 | | :------------------------- | :------------ | :---------------- | | Management contracts | $636,737 | $210,857 | | Client relationships | $222,301 | $25,141 | | Trade name | $97,279 | $11,079 | | Total intangible assets | $956,317 | $247,077 | | Less: accumulated amortization | $(55,916) | $(28,082) | | Intangible assets, net | $902,666 | $222,088 | - Amortization expense for intangible assets increased significantly to $17.3 million for Q2 2021 (from $1.6 million in Q2 2020) and $27.9 million for H1 2021 (from $2.6 million in H1 2020), primarily due to the Landmark Acquisition[65] Goodwill by Segment (Amounts in Thousands) | Segment | Balance as of Dec 31, 2020 | Acquisitions | Balance as of June 30, 2021 | | :-------------------------- | :------------------------- | :----------- | :-------------------------- | | Credit Group | $32,196 | — | $32,196 | | Private Equity Group | $58,600 | — | $58,600 | | Real Estate Group | $53,120 | $20 | $53,140 | | Secondary Solutions Group | — | $417,184 | $417,175 | | Strategic Initiatives | $227,131 | $(491) | $226,640 | | Total | $371,047 | $417,184 | $787,751 | - Goodwill increased by $416.7 million (112.3%) from December 31, 2020, to June 30, 2021, with the entire Landmark Acquisition goodwill allocated to the Secondary Solutions Group[67] Note 5. INVESTMENTS The company's total investments increased significantly, driven by equity method investments and accrued carried interest, with Consolidated Funds allocating $1 billion to U.S. Treasury securities Company's Investments (Amounts in Thousands) | Investment Type | June 30, 2021 | December 31, 2020 | | :---------------------------------------------------------------------------- | :------------ | :---------------- | | Equity method investments: | | | | Equity method private investment partnership interests - principal | $513,055 | $366,471 | | Equity method - carried interest | $2,207,763 | $1,145,853 | | Total equity method investments | $2,859,361 | $1,628,403 | | Collateralized loan obligations and other fixed income, at fair value | $55,840 | $53,349 | | Common stock, at fair value | $1,025 | $1,007 | | Total investments | $2,916,226| $1,682,759 | - Total investments increased by $1.23 billion (73.3%) from December 31, 2020, to June 30, 2021, largely due to a 92.7% increase in accrued carried interest[69] - Net gains from equity method investments were $53.8 million for Q2 2021 (vs. $21.7 million in Q2 2020) and $80.4 million for H1 2021 (vs. $7.2 million net losses in H1 2020)[70] Investments of Consolidated Funds (Amounts in Thousands) | Investment Type | June 30, 2021 | December 31, 2020 | | :-------------------------------------------- | :------------ | :---------------- | | Fixed income investments: | | | | Bonds | $440,894 | $397,494 | | Loans | $9,644,514 | $10,012,948 | | U.S. Treasury securities | $1,000,057 | — | | Investments in CLO warehouse | $10,000 | — | | Total fixed income investments | $11,095,465 | $10,410,442 | | Equity securities | $234,038 | $227,031 | | Partnership interests | $263,200 | $239,624 | | Total investments, at fair value | $11,592,703| $10,877,097 | - Consolidated Funds' investments increased by $715.6 million (6.6%) from December 31, 2020, to June 30, 2021, primarily due to $1 billion in U.S. Treasury securities from the AAC SPAC IPO[74] Note 6. FAIR VALUE This note details fair value measurements using a three-level hierarchy, with significant Level III classifications for company and Consolidated Funds' investments, highlighting reliance on unobservable inputs - Fair value measurements are classified into Level I (quoted prices in active markets), Level II (observable inputs other than Level I), and Level III (significant unobservable inputs)[75][76] Company's Financial Instruments Measured at Fair Value (June 30, 2021, Amounts in Thousands) | Asset/Liability Type | Level I | Level II | Level III | Measured at NAV | Total | | :------------------------------------------------- | :------ | :------- | :-------- | :-------------- | :------- | | Investments: Collateralized loan obligations and other fixed income | — | — | $55,840 | — | $55,840 | | Investments: Common stock and other equity securities | — | $1,025 | $107,240 | — | $108,265 | | Investments: Partnership interests | — | — | $2,575 | $4,575 | $7,150 | | Derivatives-foreign exchange contracts and interest rate contracts | — | $3,024 | — | — | $3,024 | | Total assets, at fair value | — | $4,049 | $165,655 | $4,575 | $174,279 | | Liabilities: Derivatives-foreign exchange contracts | — | $(700) | — | — | $(700) | Consolidated Funds' Financial Instruments Measured at Fair Value (June 30, 2021, Amounts in Thousands) | Asset/Liability Type | Level I | Level II | Level III | Measured at NAV | Total | | :------------------------------------------------- | :---------- | :---------- | :-------- | :-------------- | :----------- | | Investments: Fixed income investments: Bonds | — | $440,893 | $1 | — | $440,894 | | Investments: Fixed income investments: Loans | — | $9,189,089 | $455,425 | — | $9,644,514 | | Investments: Fixed income investments: U.S. Treasury securities | $1,000,057 | — | — | — | $1,000,057 | | Investments: Equity securities | $3,540 | $1,198 | $229,300 | — | $234,038 | | Investments: Partnership interests | — | — | $255,278 | $7,922 | $263,200 | | Total assets, at fair value | $1,003,597 | $9,641,180 | $940,151 | $7,922 | $11,592,850 | | Liabilities: Loan obligations of CLOs | — | $(9,296,585)| — | — | $(9,296,585) | - Transfers out of Level III generally occurred when investments experienced more significant market activity, allowing for valuation using observable inputs. Transfers into Level III occurred when market activity was less significant, limiting observable inputs[96] Note 7. DERIVATIVE FINANCIAL INSTRUMENTS The company and Consolidated Funds use derivative instruments, primarily foreign exchange and interest rate contracts, to mitigate credit and foreign exchange risk, recognized at fair value - Derivative instruments are used to mitigate credit and foreign exchange risk and are recognized at fair value[106] Company's Derivative Contracts (Amounts in Thousands) | Derivative Type | June 30, 2021 Notional | June 30, 2021 Assets Fair Value | June 30, 2021 Liabilities Fair Value | Dec 31, 2020 Notional | Dec 31, 2020 Assets Fair Value | Dec 31, 2020 Liabilities Fair Value | | :--------------------------- | :--------------------- | :------------------------------ | :----------------------------------- | :-------------------- | :----------------------------- | :---------------------------------- | | Foreign exchange contracts | $74,514 | $3,019 | $700 | $30,040 | $1,440 | $1,565 | | Interest rate contracts | $20,073 | $5 | — | — | — | — | | Total derivatives, at fair value | $94,587 | $3,024 | $700 | $30,040 | $1,440 | $1,565 | Consolidated Funds' Derivative Contracts (Amounts in Thousands) | Derivative Type | June 30, 2021 Notional | June 30, 2021 Assets Fair Value | June 30, 2021 Liabilities Fair Value | Dec 31, 2020 Notional | Dec 31, 2020 Assets Fair Value | Dec 31, 2020 Liabilities Fair Value | | :--------------------------- | :--------------------- | :------------------------------ | :----------------------------------- | :-------------------- | :----------------------------- | :---------------------------------- | | Warrants | — | — | $25,000 | — | — | — | | Asset swap - other | $51,687 | $147 | $1,805 | $7,600 | $1,104 | $44 | | Total derivatives, at fair value | $51,687 | $147 | $26,805 | $7,600 | $1,104 | $44 | Note 8. DEBT Ares Management Corporation's debt increased significantly with $450 million in 2051 Subordinated Notes. Consolidated CLOs have substantial loan obligations, and all debt covenants were in compliance as of June 30, 2021 Company's Debt Obligations (Amounts in Thousands) | Debt Obligation | Maturity | June 30, 2021 Carrying Value | June 30, 2021 Interest Rate | December 31, 2020 Carrying Value | December 31, 2020 Interest Rate | | :------------------------ | :-------- | :--------------------------- | :-------------------------- | :------------------------------- | :------------------------------ | | Credit Facility (Revolver)| 3/31/2026 | — | — % | — | — % | | 2024 Senior Notes | 10/8/2024 | $247,627 | 4.21 % | $247,285 | 4.21 % | | 2030 Senior Notes | 6/15/2030 | $395,935 | 3.28 % | $395,713 | 3.28 % | | 2051 Subordinated Notes | 6/30/2051 | $444,488 | 4.13 % | — | — % | | Total debt obligations| | $1,088,050 | | $642,998 | | - Total debt obligations increased by $445.1 million (69.2%) from December 31, 2020, to June 30, 2021, primarily due to the issuance of 2051 Subordinated Notes[111] Loan Obligations of Consolidated CLOs (Amounts in Thousands) | Loan Obligation | June 30, 2021 Fair Value | Dec 31, 2020 Fair Value | | :------------------------ | :----------------------- | :---------------------- | | Senior secured notes | $9,029,021 | $9,665,804 | | Subordinated notes | $267,564 | $292,272 | | Total loan obligations| $9,296,585 | $9,958,076 | - Loan obligations of Consolidated CLOs decreased by $661.5 million (6.6%) from December 31, 2020, to June 30, 2021[116] - All debt covenants for the company and Consolidated Funds were in compliance as of June 30, 2021[112][118] Note 9. COMMITMENTS AND CONTINGENCIES Ares Management Corporation has $716.4 million in unfunded commitments, a $300 million contingent liability for the Landmark MIP, and $275.7 million in potential performance income repayment obligations - Unfunded commitments to invest in funds or support strategic initiatives totaled $716.4 million as of June 30, 2021 (down from $784.2 million at Dec 31, 2020)[123] - A management incentive program (MIP) was established for Landmark professionals, with a contingent liability not exceeding $300 million, based on fundraising targets. As of June 30, 2021, the fair value of this liability was $236.0 million[124][125] - Performance income is subject to potential repayment if funds do not achieve certain return thresholds. As of June 30, 2021, this amount was approximately $275.7 million, with $215.8 million reimbursable by professionals[126][129] Lease Liabilities (Amounts in Thousands) | Lease Type | June 30, 2021 | December 31, 2020 | | :---------------------- | :------------ | :---------------- | | Operating lease liabilities | $198,289 | $180,236 | | Finance lease obligations | $893 | $1,273 | | Total lease liabilities | $199,182 | $181,509 | - Weighted-average remaining lease terms are 5.7 years for operating leases and 2.5 years for finance leases as of June 30, 2021[139] Note 10. RELATED PARTY TRANSACTIONS Substantially all of Ares Management Corporation's revenue is from affiliated funds, with various receivables from and payables to affiliates, including tax receivable agreement liabilities - Substantially all of the Company's revenue is earned from its affiliates, including management fees, carried interest allocation, incentive fees, principal investment income, and administrative expense reimbursements[140] Due from Affiliates (Amounts in Thousands) | Category | June 30, 2021 | December 31, 2020 | | :-------------------------------------------------------------------- | :------------ | :---------------- | | Management fees receivable from non-consolidated funds | $280,435 | $308,581 | | Incentive fee receivable from non-consolidated funds | $693 | $21,495 | | Payments made on behalf of and amounts due from non-consolidated funds and employees | $89,502 | $75,811 | | Due from affiliates—Company | $370,630 | $405,887 | | Amounts due from portfolio companies and non-consolidated funds | $4,348 | $17,172 | | Due from affiliates—Consolidated Funds | $4,348 | $17,172 | Due to Affiliates (Amounts in Thousands) | Category | June 30, 2021 | December 31, 2020 | | :-------------------------------------------------------------------- | :------------ | :---------------- | | Management fee received in advance and rebates payable to non-consolidated funds | $3,200 | $4,808 | | Tax receivable agreement liability | $61,736 | $62,505 | | Undistributed carried interest and incentive fees | $11,158 | $27,322 | | Payments made by non-consolidated funds on behalf of and payable by the Company | $22,350 | $5,551 | | Due to affiliates—Company | $98,444 | $100,186 | Note 11. INCOME TAXES Ares Management Corporation reported a significant increase in income tax expense for Q2 and H1 2021, driven by higher taxable income and increased AMC common stockholder ownership, with a net deferred tax asset of $1.6 million Income Tax Expense (Amounts in Thousands) | Period | Income Tax Expense | | :----------------------------------- | :----------------- | | Three months ended June 30, 2021 | $48,458 | | Three months ended June 30, 2020 | $24,421 | | Six months ended June 30, 2021 | $74,212 | | Six months ended June 30, 2020 | $3,805 | - Income tax expense increased by 98% YoY for Q2 2021 and by 1849% YoY for H1 2021[146] - The increase is primarily due to higher taxable income and an increase in AMC common stockholders' weighted average daily ownership from 53.7% (Q2 2020) to 59.1% (Q2 2021) and from 52.1% (H1 2020) to 58.1% (H1 2021)[147][303] - A net deferred tax asset of $1.6 million was recorded as of June 30, 2021, a decrease from $70.0 million at December 31, 2020[148] Note 12. EARNINGS PER SHARE Ares Management Corporation's basic and diluted EPS for Class A and non-voting common stock significantly increased for Q2 and H1 2021, reflecting improved net income, with the treasury stock method being more dilutive - Earnings per share for Class A and non-voting common stock is presented on a combined basis due to their same economic rights[150] Net Income Per Share of Class A and Non-Voting Common Stock | Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic EPS | $0.70 | $0.36 | $1.07 | $0.08 | | Diluted EPS | $0.69 | $0.35 | $1.03 | $0.08 | - Basic EPS increased by 94.4% YoY for Q2 2021 and by 1237.5% YoY for H1 2021[156] - Diluted EPS increased by 97.1% YoY for Q2 2021 and by 1187.5% YoY for H1 2021[156] - The treasury stock method was the more dilutive method for Q2 2021 and H1 2021, while the two-class method was more dilutive for H1 2020[151] Note 13. EQUITY COMPENSATION Equity-based compensation expense significantly increased due to performance-based restricted units and accelerated expense, with substantial future compensation expense expected to be recognized - The Equity Incentive Plan's available shares reset to 44,510,451 on January 1, 2021, with 40,075,772 shares remaining available as of June 30, 2021[157] Equity-Based Compensation Expense (Amounts in Thousands) | Category | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Restricted units | $46,742 | $28,386 | $90,829 | $56,768 | | Restricted units with a market condition | $22,762 | $297 | $34,324 | $4,429 | | Options | — | — | — | $43 | | Equity-based compensation expense | $69,504 | $28,683 | $125,153 | $61,240 | - Equity-based compensation expense increased by 142% YoY for Q2 2021 and by 104% YoY for H1 2021[159] - The increase was primarily due to performance-based restricted units granted in Q1 2021, including $14.0 million accelerated expense from Tranche I vesting, and future grants approved for 2022-2024[163][166][169][296] - Total compensation expense expected to be recognized for restricted units is approximately $573.6 million over a weighted average period of 3.4 years[165] - Net cash proceeds from stock option exercises were $14.0 million for H1 2021, with $4.0 million in tax benefits[171] Note 14. EQUITY AND REDEEMABLE INTEREST Ares Management Corporation's common stock includes Class A, B, C, and non-voting shares. The company raised $828.2 million from stock offerings in April 2021, redeemed Series A Preferred Stock, and saw increased redeemable interests in Consolidated Funds due to the AAC SPAC IPO - The company's common stock includes Class A, Class B, Class C, and non-voting common stock, with non-voting common stock having the same economic rights as Class A[172] - In April 2021, the company issued 3,489,911 shares of non-voting common stock and 1,234,200 shares of Class A common stock to SMBC in a private placement, generating $250.0 million[174] - A public offering of 10,925,000 shares of Class A common stock in April 2021 generated approximately $578.2 million[175] Changes in Common Stock (Shares) | Class of Stock | Balance - Jan 1, 2021 | Issuance of stock | Exchanges of AOG Units | Stock option exercises, net | Vesting of restricted stock awards, net | Balance - June 30, 2021 | | :-------------------- | :-------------------- | :---------------- | :--------------------- | :-------------------------- | :-------------------------------------- | :---------------------- | | Class A Common Stock | 147,182,562 | 12,159,200 | 283,724 | 751,091 | 2,675,211 | 163,051,788 | | Non-Voting Common Stock | — | 3,489,911 | — | — | — | 3,489,911 | | Class B Common Stock | 1,000 | — | — | — | — | 1,000 | | Class C Common Stock | 112,447,618 | 5,419,413 | (283,724) | — | — | 117,583,307 | | Total | 259,631,180 | 21,068,524 | — | 751,091 | 2,675,211 | 284,126,006 | - The Series A Preferred Stock was fully redeemed on June 30, 2021, for $310.0 million, including a $5.4 million dividend payment[180] - Redeemable interest in Consolidated Funds increased from $0 at December 31, 2020, to $916.8 million at June 30, 2021, primarily due to the AAC SPAC IPO[184] Note 15. SEGMENT REPORTING Ares Management Corporation operates through Credit, Private Equity, Real Estate, Secondary Solutions, and Strategic Initiatives segments, using non-GAAP measures like FRE and RI to assess performance, excluding Consolidated Funds - The company's operating segments include Credit Group, Private Equity Group, Real Estate Group, Secondary Solutions Group, and Strategic Initiatives[185][186][187][188][189] - The Secondary Solutions Group was formed in Q2 2021 following the Landmark Acquisition, focusing on secondary markets across alternative asset classes[188] - The Operations Management Group (OMG) provides shared infrastructure and administrative support to operating segments, with its expenses not allocated to segments[190] - FRE (non-GAAP) assesses core operating performance by comparing recurring revenue to operating expenses, excluding performance income and certain other items[191] - RI (non-GAAP) evaluates business performance by removing fluctuations of unrealized income and losses, focusing on operating performance and segment contribution[192] Fee Related Earnings (FRE) by Segment (Amounts in Thousands) | Segment | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Credit Group | $169,068 | $115,600 | $316,740 | $229,857 | | Private Equity Group | $19,876 | $26,852 | $43,762 | $53,890 | | Real Estate Group | $12,070 | $7,497 | $23,114 | $17,037 | | Secondary Solutions Group | $7,750 | — | $7,750 | — | | Strategic Initiatives | $9,642 | — | $18,569 | — | | Operations Management Group | $(71,503) | $(52,992) | $(134,566) | $(110,723) | | Total Fee Related Earnings| $146,903 | $96,957 | $275,369 | $190,061 | - Total FRE increased by 52% YoY for Q2 2021 and by 45% YoY for H1 2021[315] Realized Income (RI) by Segment (Amounts in Thousands) | Segment | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Credit Group | $199,458 | $119,781 | $350,207 | $237,172 | | Private Equity Group | $44,850 | $40,714 | $74,539 | $101,621 | | Real Estate Group | $16,390 | $8,142 | $28,885 | $28,227 | | Secondary Solutions Group | $7,747 | — | $7,747 | — | | Strategic Initiatives | $10,067 | — | $16,725 | — | | Operations Management Group | $(71,565) | $(53,389) | $(134,363) | $(117,627) | | Total Realized Income | $206,947 | $115,248 | $343,740 | $249,393 | - Total RI increased by 80% YoY for Q2 2021 and by 38% YoY for H1 2021[315] Note 16. CONSOLIDATION Ares Management Corporation consolidates VIEs where it has control and significant economic interest, with investments at fair value representing maximum loss exposure, noting that Consolidated Funds' liabilities are typically non-recourse - The company consolidates VIEs where it has power to direct significant activities and a potentially significant economic interest, with investments reported at fair value[213] Company's Interests in Consolidated and Non-Consolidated VIEs (Amounts in Thousands) | Metric | June 30, 2021 | December 31, 2020 | | :------------------------------------------------------------------ | :------------ | :---------------- | | Maximum exposure to loss attributable to the Company's investment in non-consolidated VIEs | $274,629 | $224,203 | | Maximum exposure to loss attributable to the Company's investment in consolidated VIEs | $388,140 | $391,963 | | Assets of consolidated VIEs | $11,724,508 | $11,580,003 | | Liabilities of consolidated VIEs | $10,837,725 | $10,716,438 | - The consolidation of funds has a significant gross-up effect on assets, liabilities, and cash flows but no net effect on net income attributable to Ares Management Corporation or stockholders' equity[278] - Liabilities of Consolidated Funds are typically non-recourse to Ares Management Corporation, except for the company's direct investment in the fund[278][443] Note 17. SUBSEQUENT EVENTS Subsequent to June 30, 2021, Ares Management Corporation acquired Black Creek Group's U.S. real estate business, adding $13.7 billion in AUM, and declared a $0.47 per share quarterly dividend - On July 1, 2021, Ares completed the acquisition of Black Creek Group's U.S. real estate investment advisory and distribution business, adding $13.7 billion of AUM[241] - The board of directors declared a quarterly dividend of $0.47 per share for Class A and non-voting common stock, payable on September 30, 2021[241] Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations This section discusses the company's financial condition, results of operations, and key business trends, including liquidity, capital resources, and segment performance Trends Affecting Our Business Ares Management Corporation's business is influenced by global financial markets and economic conditions, with Q2 2021 showing continued recovery across capital markets and increasing real estate values - Approximately 90% of management fees are derived from permanent capital vehicles, CLOs, and closed-end funds, providing a stable capital base[245] - Global capital markets continued recovery in Q2 2021, with inflationary concerns mitigated by improving global growth and easing pandemic restrictions[246] - U.S. high yield bond spreads tightened (ICE BAML High Yield Master II Index returned 2.8% in Q2 2021, 3.7% YTD)[247] - U.S. leveraged loans rallied (Credit Suisse Leveraged Loan Index returned 1.4% in Q2 2021, 3.5% YTD)[247] - Global equity markets recovered (S&P 500 Index returned 8.5% in Q2 2021, 15.2% YTD; MSCI All Country World ex USA Index returned 5.5% in Q2 2021, 9.2% YTD)[249] - Real estate values increased, with the industrial subsector leading recovery (FTSE EPRA/NAREIT Developed Europe returned 8.3% in Q2 2021, 7.3% YTD; FTSE NAREIT All Equity REITs indices returned 11.2% in Q2 2021, 19.6% YTD)[250] Recent Transactions On July 1, 2021, Ares acquired Black Creek Group's U.S. real estate business, adding $13.7 billion in AUM focused on core and core-plus strategies - On July 1, 2021, Ares acquired Black Creek Group's U.S. real estate investment advisory and distribution business[251] - Black Creek Group had $13.7 billion of AUM as of June 30, 2021, in core and core-plus real estate strategies[251] Managing Business Performance Ares Management Corporation measures business performance using key operating metrics like AUM, FPAUM, IEAUM, IGAUM, and available capital, reflecting investment and fundraising performance, fee generation, and future performance income potential - AUM is a key metric for measuring investment and fundraising performance, reflecting assets generally at fair value plus available uncalled capital[252] Total AUM by Segment (Amounts in Millions) | Segment | Balance at 3/31/2021 | Acquisitions | Net new par/equity commitments | Net new debt commitments | Capital reductions | Distributions | Redemptions | Change in fund value | Balance at 6/30/2021 | | :-------------------------- | :------------------- | :----------- | :----------------------------- | :----------------------- | :----------------- | :------------ | :---------- | :------------------- | :------------------- | | Credit Group | $151,116 | — | $11,430 | $5,420 | $(1,565) | $(820) | $(438) | $2,444 | $167,587 | | Private Equity Group | $29,019 | — | $340 | — | $(2) | $(1,395) | — | $2,770 | $30,732 | | Real Estate Group | $17,129 | — | $1,938 | $525 | — | $(492) | $(7) | $632 | $19,725 | | Secondary Solutions Group | — | $19,513 | $100 | — | — | $(125) | — | $(12) | $19,476 | | Strategic Initiatives | $9,894 | — | $480 | $29 | — | $(250) | — | $213 | $10,366 | | Total AUM | $207,158 | $19,513 | $14,288 | $5,974 | $(1,567) | $(3,082) | $(445) | $6,047 | $247,886 | - Total AUM increased by $40.7 billion (19.6%) from March 31, 2021, to June 30, 2021, primarily due to the Landmark Acquisition ($19.5 billion) and net new commitments[255] - FPAUM refers to AUM from which management fees are directly earned, representing the sum of individual fee bases of funds[257] Total FPAUM by Segment (Amounts in Millions) | Segment | Balance at 3/31/2021 | Acquisitions | Commitments | Subscriptions/deployment/increase in leverage | Capital reductions | Distributions | Redemptions | Change in fund value | Change in fee basis | Balance at 6/30/2021 | | :-------------------------- | :------------------- | :----------- | :---------- | :-------------------------------------------- | :----------------- | :------------ | :---------- | :------------------- | :------------------ | :------------------- | | Credit Group | $91,615 | — | $2,255 | $6,542 | $(448) | $(990) | $(353) | $967 | — | $99,588 | | Private Equity Group | $18,527 | — | $340 | $674 | — | $(615) | — | $1 | $(195) | $18,732 | | Real Estate Group | $10,820 | — | $1,067 | $387 | — | $(388) | $(7) | $70 | $(132) | $11,817 | | Secondary Solutions Group | — | $16,839 | $100 | $2 | — | — | — | $(2) | $(12) | $16,927 | | Strategic Initiatives | $6,626 | — | $(68) | $585 | $(179) | $(421) | — | $78 | — | $6,621 | | Total FPAUM | $127,588 | $16,839 | $3,694 | $8,190 | $(627) | $(2,414) | $(360) | $1,114 | $(339) | $153,685 | - Total FPAUM increased by $26.1 billion (20.4%) from March 31, 2021, to June 30, 2021, primarily due to the Landmark Acquisition ($16.8 billion) and subscriptions/deployment[259] - IEAUM represents AUM from which performance income may be generated, while IGAUM refers to AUM currently generating performance income[263][264] - As of June 30, 2021, AUM not yet paying fees of $42.6 billion could generate approximately $400.9 million in potential incremental annual management fees[270] - For Q2 2021, 76% of segment management fees were from funds with three or more years in duration, indicating stable future management fees[272] Consolidation and Deconsolidation of Ares Funds Ares Manageme