Fundraising And Acquisitions Will Unlock New Alternative Markets

Key Takeaways

• Aggressive fundraising and strategic acquisitions are driving growth in assets under management, enhancing margins, and boosting earnings potential.
  
• Expansion into new strategies and private wealth channels increases revenue diversification and supports earnings stability.
  
• Ares Management faces revenue threats from market volatility, integration risks from acquisitions, potential credit defaults, and reliance on non-GAAP measures for financial transparency.

Catalysts

Operates as an alternative asset manager in the United States, Europe, and Asia.

• The significant increase in fundraising activity, with Ares raising over $20 billion in new capital commitments, is expected to drive future growth in assets under management (AUM) and management fee revenue.
  
• The acquisition of GCP, which added $45 billion to Ares' AUM, along with anticipated realization of synergies, is positioned to enhance operating margins and contribute to earnings growth.
  
• The expansion into alternative credit and secondaries strategies, particularly in opportunistic market conditions, is expected to capture more deal flows and drive growth in assets and earnings through increased fee income.
  
• The strategy to hold a large amount of dry powder, currently $142 billion, positions Ares to capitalize on market dislocations, driving growth in AUM and management fees, thereby supporting earnings.
  
• Ares' strategic expansion in the private wealth channel, including new product offerings and broader distribution, is anticipated to diversify revenue streams and enhance long-term earnings resilience.

Ares Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ares Management's revenue will grow by 18.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.4% today to 34.0% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $7.36) by about May 2028, up from $359.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.1x on those 2028 earnings, down from 97.1x today. This future PE is greater than the current PE for the US Capital Markets industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Ares Management Future Earnings Per Share Growth

Risks

• Ares Management operates in markets with significant volatility and uncertainty, specifically mentioning the impact of tariffs and geopolitical events, which could threaten revenue and earnings if these factors exacerbate.
  
• The company's growth in management fees and AUM is partly driven by acquisitions such as GCP, which carries integration risks that could negatively impact net margins if synergies are not realized as expected.
  
• With a large proportion of its investments in senior loans within private credit (over 72% of AUM in credit-related products), any significant increase in defaults or nonaccruals due to prolonged economic downturns could negatively affect earnings.
  
• Despite a strong deployment pipeline, instability in M&A markets due to tariff uncertainties might affect the firm's ability to consistently deploy capital, potentially impacting future revenue growth.
  
• The reliance on non-GAAP financial measures, which are subject to adjustments and can obscure a complete understanding of financial performance, poses a risk to transparent evaluation of real earnings and margins.

Valuation

• The analysts have a consensus price target of $170.6 for Ares Management based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $195.0, and the most bearish reporting a price target of just $135.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.1 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 35.1x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $159.63, the analyst price target of $170.6 is 6.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.