Ares Seeks Higher IPO Value Than Buyout Peers on Stable RevenueLeslie Picker and Devin Banerjee
Ares Management LP is betting that the safe, reliable, utility-like firm will catch the attention of investors -- a case that’s bolstered by the recent drop in shares of its private-equity peers.
Ares, set to price its IPO tonight, is seeking a multiple at least 9.3 times last year’s revenue, according to data compiled by Bloomberg. That’s still 84 percent higher than Blackstone Group LP, which trades at 5.1 times sales, the most expensive of Ares’s five publicly traded peers, the data show. In addition, all five of Ares’s peers have slipped as the broader stock market fell over the past month, with an average decline of 8.1 percent.
The Los Angeles-based firm derives 78 percent of revenue from management fees provided to the firm for advising funds, a more predictable stream of income than incentive-based fees, which are typically produced in lumpy intervals for buyout managers. That compares with 37 percent at Oaktree Capital Group LLC, the next highest, and 18 percent at Apollo Global Management LLC, the lowest of the group.
“Investors will put a higher valuation on a consistent revenue stream over one that has the potential to be higher but more volatile,” said Jeff Davis, managing director of the financial institutions group at advisory firm Mercer Capital Management Inc. in Nashville, Tennessee. “That’s why investors give utilities higher valuations, because they know the earnings.”
Ares and a shareholder are expected to raise as much as $419 million in the IPO, pricing 18.2 million shares at $21 to $23 each, according to a prospectus filed with the U.S. Securities and Exchange Commission. Based on 211.4 million shares outstanding if all Ares Operating Group units are exchanged for newly issued common units, the company would have a valuation of $4.4 billion to $4.9 billion, data compiled by Bloomberg show. Ares posted sales of $478.7 million last year.
The higher proportion of management fees is reflective of Ares’s emphasis on credit rather than on leveraged buyouts, which produce earnings in less predictable intervals. The firm, which runs more than 140 funds, has grown assets under management to $74 billion across four segments -- tradable credit, direct lending, private equity and real estate -- from $5 billion in mostly tradable credit in 2003.
As a publicly traded private-equity firm, Ares will have to appeal to two sets of investors: its limited partners, who have committed money to its funds, and new stockholders. While limited partners want a fee structure that’s aligned with the success of the funds, public investors tend to favor a steady stream of income across the company’s business lines, according to Harvard University’s Josh Lerner.
“There may be a wedge between the interest in limited holders and the unit holders,” said Lerner, who researches private equity at Harvard Business School. “For the general partners, it introduces a conflict that you have two constituencies looking for different things.”
Bill Mendel, a spokesman for Ares at Mendel Communications LLC, declined to comment.
Ares’s offering is the first of a private-equity firm since Carlyle Group LP raised $671 million in its May 2012 IPO. Washington-based Carlyle has gained 46 percent since then.
Ares Chief Executive Officer Tony Ressler, 53, who co-founded the firm in 1997, still says the timing is right for his company to go public.
“Growing over the next five or 10 years, we believe, is actually going to be easier than it has been over the last five or 10 years,” Ressler said in a video posted online that accompanied Ares’s pitch to potential shareholders. “We simply have far more to offer our investors. Going public is the natural next step for Ares.”
Ressler will have a net worth of about $1.5 billion if the offering prices at the midpoint of the range, according to the Bloomberg Billionaires Index.
Both Ares and shareholder Abu Dhabi Investment Authority are selling shares in the IPO. Ares plans to use the proceeds from the offering to repay outstanding debt and fund growth initiatives. ADIA’s stake will decline to 13 percent from more than 17 percent, assuming the full exchange of all Ares Operating Group units ahead of the IPO, the prospectus shows.
JPMorgan Chase & Co. and Bank of America Corp. are managing the sale. The company, which will list its shares on the New York Stock Exchange under the symbol ARES, is expected to start trading tomorrow.