Exclusive: Private equity firm Ares rejects pitches to do IPO soon

Sources familiar with Ares, which has about $70 billion in assets under management, said major Wall Street banks have been calling on the firm to discuss the merits of an IPO. The success of the listing by private equity heavyweight Carlyle Group LP (CG.O) last year, and a rally in the shares of alternative asset managers this year, provide an attractive backdrop.

Ares also sees long-term trends favoring public alternative asset managers and thinks it is well-positioned to go public. It does not, though, see the need for an IPO in the near future, the sources said.

That view would likely change if Ares foresaw a big acquisition opportunity and wanted to create a publicly traded stock to use as currency for the deal, the sources said. No such deal is currently planned, they added.

Banks that have pitched Ares on the idea of the IPO include JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N), Bank of America Merrill Lynch (BAC.N) and Morgan Stanley (MS.N), the sources said. Ares, which also has a major direct lending business and real estate investment operations, is seen as a potentially attractive firm for stock market investors as it has been diversifying on its own and through acquisitions. Diverse business lines can make an alternative asset manager's cash flows more stable.

But the Los Angeles-based manager is yet to be convinced. Its current structure has allowed Ares to more than double its assets in the past four years and to share its profits broadly with its partners.

The sources asked not to be identified because the deliberations at Ares are private. Spokespeople for Ares and the investment banks declined to comment.

A publicly traded stock brings both benefits and headaches.

Just this week, publicly traded rival KKR & Co LP (KKR.N) said it would acquire its specialty finance company for $2.6 billion, paid for with newly issued KKR shares.

These firms also use their shares to incentivize staff, as publicly traded stock can be sold and bought much more easily than stakes in private firms.

But firms also have to add a battery of compliance and other staff to ensure they are meeting listing rules, are obliged to reveal much more about their performance publicly, and have to worry about how investors will react to volatility in quarterly results. They also have to reassure their fund investors that they remain a top priority.

Since the stock market debuts of Blackstone Group LP (BX.N) and Fortress Investment Group LLC (FIG.N) in 2007, four other major U.S. alternative asset managers have gone public - KKR, Apollo Global Management LLC (APO.N), Oaktree Capital Group LLC (OAK.N) and Carlyle.

These firms have enjoyed big gains this year, thanks to asset sales that have boosted earnings. Shares of Blackstone and KKR, for example, are up 88 percent and 65 percent year-to-date, respectively, compared with a 26 percent rise in the S&P; 500 Index .INX. (Graphic link.reuters.com/dec45v)

"With robust equity market returns, an open exit window, and fundraising tailwind, we see a strong alternative asset manager backdrop heading into 2014," Morgan Stanley analysts wrote in a review of the industry last month, warning that the biggest risk would be a drop in equity values that would weigh on the cash generated from asset sales.

ALLEGHANY INVESTMENT

Ares came to a crossroads in July when it decided it would raise new capital to expand its investment platform and seed new funds. It could have opted for an IPO or a private placement. It chose the latter, selling a 6.25 percent equity stake in the firm to insurer Alleghany Corp (Y.N) for $250 million. The deal valued Ares at $4 billion.

Ares viewed the deal as strategic because Alleghany's shareholding also came with a commitment to invest $1 billion across Ares funds. Like other alternative asset managers including Apollo, Daniel Loeb's Third Point LLC and David Einhorn's Greenlight Capital Inc, Ares is keen to manage such assets because insurance liabilities are seen as a good fit for the returns of its portfolio.

It was the second major private placement that Ares had accepted. In 2007, Abu Dhabi Investment Authority acquired a 20 percent stake in Ares for $375 million, giving it a valuation of $1.9 billion at that time.

If Ares eventually decides to go public, its specialty finance business, Ares Capital Corp (ARCC) (ARCC.O), a lender to mid-sized companies that was launched in 2004, could be a key differentiator of its earnings profile from its peers, the sources said.

Ares has grown ARCC into the biggest and one of the best-performing business development companies (BDCs), which pay at least 90 percent of their annual earnings as dividends to avoid corporate taxation under provisions passed by Congress in 1980.

"It is very lucrative for them but it has also been a great investment for Ares Capital shareholders," said Stephens Inc analyst Kyle Joseph.

Based on the management fees and incentive fees that Ares receives from ARCC, analysts estimate that ARCC could be worth up to $1.5 billion to Ares.

Ares had about $51 billion of its assets as of the end of September in private and public credit strategies. Its stronghold in direct lending and wider credit investments can be traced to the roots of its founders, Antony Ressler, John Kissick, Bennett Rosenthal and David Kaplan. Ressler and Kissick worked as bond traders in the 1980s at Drexel Burnham Lambert, and in 1990 co-founded Apollo alongside Leon Black, Marc Rowan and Joshua Harris.

At Apollo, Ressler and Kissick led the firm's capital markets business and in 1997 spun it out into Ares, which became independent in 2002. Rosenthal joined Ares in 1998 from Merrill Lynch & Co's global leveraged finance group while Kaplan joined in 2003 from investment firm Shelter Capital Partners LLC.

Ares launched its first private equity fund in 2003, raising $750 million. Its latest private equity fund, raised last year, amassed $4.7 billion. With $9 billion in private equity assets as of the end of September, Ares has also been assuming a more prominent profile in corporate buyouts.

In October, Ares and the Canada Pension Plan Investment Board teamed up to acquire luxury department store operator Neiman Marcus Group Ltd for about $6 billion in Ares' biggest-ever leveraged buyout.

In real estate, Ares acquired the majority of its assets this year. It bought real estate asset manager AREA Property Partners LP in July, boosting assets in its real estate group to $8 billion from $2 billion.

In September it bought Alliant Capital LLC, an originator of multi-family loans that was absorbed by its Ares Commercial Real Estate Corp (ACRE.N), a real estate investment trust.

(Editing by Paritosh Bansal, Martin Howell and Christopher Cushing)