May 18, 2017

Did Ares tell EIF V’s early investors about a potential incentive to slow EIF V fundraising?

Ares’ Energy Investors Fund (EIF) IV performance hit a new low of 10.3% in the first quarter of 2017 (see chart 1). At the same time, Ares may have benefitted financially from its unsuccessful EIF V fundraising.

20170518 EIF 4th update - chart_1 In the first quarter of 2017 Ares booked a $20.3 million gain associated with EIF V’s failure to meet its fundraising targets.  According to Ares’ first quarter earnings report:  “Since EIF did not meet the revenue and fee paying targets, the liability associated with the EIF contingent consideration, which was $20.3 million as of December 31, 2016, was reversed, resulting in a $20.3 million gain during the three months ended March 31, 2017.”[1]

20170518 EIF 4th update - chart_2

The targets were linked to EIF V fundraising, according to the section in Ares’ 2014 annual report on the EIF acquisition: “The transaction also included contingent consideration that is payable to EIF’s former membership interest holders if Ares successfully launches a new fund (“Fund V”) that meets certain revenue and fee paying commitment targets during the commitment period.”[2]

This “contingent consideration” has fallen from $59.2 million when Ares began raising EIF V in 1Q 2015 to zero as of 1Q 2017 (chart 2). Ares President Michael Arougheti stated on the 1Q 2017 earnings call that “we expect to closeout our fifth power and energy infrastructure fund during the second quarter.”[3] This is soon after the contingent consideration payable to EIF’s old owners was zeroed out.

Questions for Investors

  • Was EIF V’s slow fundraising related to the financial obligations to former EIF interest holders?
  • Did Ares wait until it had missed EIF V’s fundraising targets to announce the fund’s anticipated closeout in the second quarter of 2017?
  • Did Ares tell EIF V’s early investors about the financial obligations owed to former EIF interest holders if EIF V met its “revenue and fee paying commitment targets”?
  • How will EIF V limited partners benefit from the $59.2 million that Ares may save as a result of slow EIF V fundraising?

Notes

[1] Ares Management Q1 2017 earnings report https://www.sec.gov/Archives/edgar/data/1176948/000162828017005093/aresmanagement2017q1-10q.htm
[2] Ares Management 2014 Annual Report https://www.sec.gov/Archives/edgar/data/1176948/000104746915002528/a2223704z10-k.htm)
[3] Ares Management 1Q 2017 Earnings Call, 5/8/17, accessed 5/9/17 https://seekingalpha.com/article/4070824-ares-managements-ares-management-q1-2017-results-earnings-call-transcript?part=single

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