Morgan Stanley | RESEARCH
Exhibit 10:
We see more favorable risk-reward skew at APO given greater concen- tration of fee related earnings vs. performance fees
Estimated Change to Curent Share Price
30% PCE 26% Downside m Upside 10% 14% 15% "21% 20% “8%
-20% -27% -30% -40%
APO OAK KKR BX ARES CG Avg.
Source: Company Data, Morgan Stanley Research estimates
ARES Conversion Largely Priced In
With the recent run up of ARES stock price, the market seems to have already priced in a good portion of the upside from conver- sion. Year to date, ARES has out performed peers by ~10% likely on the back of this expected conversion. As a result we have looked at the share price of ARES at several time periods to assess what is
embedded in the price already.
We see the market valuing ARES@FRE at 18.3x, with about 3.4x turns of multiple expansion YTD and pricing in a large degree of the poten- tial benefit from C-corp conversion. This is just under half of the total 7.5x turns of FRE multiple expansion that we expect to see in our upside scenario for the Alts. As a result, our upside/downside from for ARES has a less favorable risk reward skew, as much of the upside
is already baked in.
NORTH AMERICA INSIGHT ~~
How do we arrive as such an estimate? We start with the 12/31/2017 share price of $20.00. We then gross up this starting point for the broader performance of peers to isolate just the outperformance of ARES vs the group. The alts group ex ARES YTD is up +10% so we use a starting price for ARES of $21.90.
e We first estimate the implied multiple on future carry for ARES at the pro forma stock price before C-corp conversoin began to be priced in. (we explain this in process in greater detail in the section on Deconstructing Ourlmplied Carry Val- uation).
@ We then take the current share price today and assume that the run up in price was a result purely from multiple expan- sion on fee related earnings. In doing this we hold the per- formance fee multiple and value of future performance fees constant.
e@ We then back into an implied value of FRE using the various components of the SOTP and the current share price. We divide that value by our 2018e FRE to determine our estimate for baked in multiple expansion at ARES. (Please see Ares
Management SOTP and Sensitivity Analysis for more details.)
HOUSE_OVERSIGHT_025560