ARES — Q2 2026 Financial Report Analysis

Overview

Ares Management's second quarter of 2026 was a story of two different earnings engines moving in opposite directions. The recurring, fee-collecting part of the business grew sharply: management fees rose 13.0% to $1.02 billion and fee related earnings — the profit Ares keeps from predictable fees, before any investment gains — rose 20% to $491.1 million. The performance-linked part of the business shrank: carried interest allocation, which is Ares' share of fund profits, fell 22.8% to $249.9 million, held back by write-downs on two specific positions rather than by weak fundraising or weak fee growth.

The result is a headline that understates the quarter. GAAP net income attributable to Ares rose 9.9% to $150.6 million ($0.49 per share, up from $0.46), while realized income — management's preferred profit measure, which strips out gains and losses that exist only on paper — rose 31% to $521.5 million. Assets under management reached $671.3 billion, up 17.3% year over year, on what the company described as a record quarter of fundraising.

Two definitions worth fixing before the numbers, because they carry most of the analysis:

• AUM (assets under management) is the total pool of client capital Ares manages, including committed money not yet invested. FPAUM (fee paying AUM) is the subset that is actually being charged a management fee. The gap between them is future revenue that has already been raised.
• FRE (fee related earnings) is a non-GAAP measure: management fees plus recurring performance fees from perpetual funds, minus the cost of running the business. It deliberately excludes investment gains. It is the closest thing Ares has to a subscription-revenue profit line, and it is the number that moves least with markets.

Key metrics

FRE margin is computed here as segment FRE divided by total fee-related revenue (segment management fees of $1,030.0 million, fee related performance revenues of $40.5 million and other fees of $92.0 million, versus $900.3 million, $16.7 million and $76.1 million a year earlier). Segment management fees differ slightly from the GAAP figure because fees charged to funds Ares consolidates are eliminated in consolidation.

Why GAAP earnings and realized earnings diverged

The 22.8% drop in carried interest allocation was not broad-based. Three identifiable marks explain most of it, and two are reversals of gains booked in earlier periods:

• A $30.4 million reversal of unrealized carried interest from LREF VIII, a real estate secondaries fund, "primarily driven by the lower valuation of certain multifamily portfolio investments."
• A $20.9 million reversal tied to Kodiak AI, Inc. (Nasdaq: KDK), where the decline was "attributable to the decrease in market value of our investment... driven by its lower stock price." For the first half of 2026 that reversal totals $74.9 million — a single listed holding swinging a reported revenue line.
• A narrower base of credit funds above their hurdle rates. Funds earning carry this quarter held $24.6 billion of incentive generating AUM, against $42.4 billion in the same quarter of 2025.

None of these are cash losses. Carried interest is accrued as fund values move and can be reversed before it is ever collected — which is precisely why Ares reports realized income separately, and why RI grew 31% while GAAP net income grew 9.9%.

A second, less obvious wedge sits between pre-tax income and what shareholders actually keep. Income before taxes rose 34.5% to $385.9 million, but net income attributable to non-controlling interests in Consolidated Funds jumped to $71.2 million from $4.0 million. Ares consolidates certain funds onto its balance sheet, so those funds' gains flow through the income statement and are then subtracted out for the outside investors who own them. Consolidated Funds posted $176.4 million of net realized and unrealized gains this quarter versus $127.8 million a year ago. Most of the improvement in the pre-tax line therefore belonged to fund investors, not to Ares shareholders — which is why a 34.5% pre-tax gain became a 9.9% gain at the bottom line.

The fee engine

Management fees added $117.0 million year over year, and the filing attributes the increase to specific sources rather than to market appreciation:

• $29.4 million from Credit Group publicly-traded and perpetual wealth funds, "primarily driven by increases in FPAUM associated with fundraising."
• $27.0 million from capital deployment in private direct lending and alternative credit funds — that is, committed money being put to work and starting to pay fees.
• $25.9 million of higher Part I Fees (recurring quarterly performance fees on net investment income from perpetual vehicles), attributed to ASIF, an open-ended European direct lending fund and an open-ended core infrastructure fund.

Incentive fees nearly doubled to $42.8 million on NAV appreciation at APMF. The first-half figure of $204.7 million is not comparable to the $55.1 million of a year earlier: $138.5 million of it came from a single event, fees generated by SDL I "in connection with the sale of its remaining assets to a continuation vehicle" in Q1 2026. Anyone annualizing the half-year incentive-fee run rate would be extrapolating a one-off.

Every segment grew fee related earnings:

The one-percentage-point of FRE margin expansion, to 42.2%, came despite corporate overhead rising 21%. The Operations Management Group's costs grew on higher salaries and headcount, a transfer of investment professionals into the Capital Solutions Group, and higher professional service and technology spending. Firm-wide, general and administrative expenses rose on marketing of $14.4 million (largely the annual general meeting with investors, program sponsorships and fund formation costs), professional fees of $8.0 million, IT of $4.8 million and occupancy of $3.2 million tied to the New York headquarters expansion, partly offset by $4.6 million lower placement fees. Fee growth outran a genuinely rising cost base, but not by much.

Fundraising and the fee base still to come

The AUM roll-forward shows $22.2 billion of new par/equity commitments and $14.2 billion of new debt commitments, or $36.4 billion of gross inflows — consistent with CEO Michael Arougheti's description of "another record quarter of fundraising with more than $36 billion of inflows." Against that, distributions of $7.0 billion, capital reductions of $4.8 billion and redemptions of $2.0 billion, plus $4.4 billion of fund appreciation, lifted total AUM from $644.3 billion at March 31 to $671.3 billion at June 30.

The most concrete forward indicator in the filing is the fee base that has been raised but is not yet charging fees. As of June 30, 2026, AUM not yet paying fees included $92.6 billion available for future deployment plus $4.1 billion of development assets not yet stabilized, which Ares states "could collectively generate approximately $828.2 million in potential incremental annual management fees, representing a 24% embedded growth rate in our base management fees from the last twelve month period." That is management fee growth contingent only on deployment, not on winning new clients.

Two further durability markers: 94% of management fees came from perpetual capital or long-dated funds, up from 91% a year earlier; and incentive generating AUM included $75.7 billion of funds generating unrealized incentive fees not yet recognized, against $56.2 billion a year ago — future fee income that only converts if those valuations hold.

Takeaway: The 22.8% fall in carried interest is a mark-to-market artifact — two reversals (LREF VIII multifamily and the Kodiak AI share price) account for roughly $51 million of it — while the part of Ares that does not depend on asset marks grew 20%, on a fee base of $409.9 billion that is up 17.3% and a further $92.6 billion of already-raised capital waiting to start paying fees. Judge this quarter on FRE, not on EPS.

The first-half comparison is distorted

Half-year EPS of $0.95 against $0.48 looks like a doubling. It is not. The prior-year period carried $108.8 million of acquisition-related equity compensation from the portion of GCP-related awards that vested immediately in Q1 2025 — a cost that did not recur. The current-year period, meanwhile, includes the $138.5 million SDL I incentive fee described above. Strip both and the first-half improvement is real but far smaller than 98%. First-half revenue growth of 15.8%, to $2.83 billion, is the cleaner figure.

Capital returns and what to watch

Ares declared a quarterly dividend of $1.35 per Class A and non-voting share, payable September 30, 2026, plus $0.84375 per share on its 6.75% Series B mandatory convertible preferred. Worth noting: the quarter's after-tax realized income per share of $1.29 was slightly below the $1.35 declared, so this specific quarter's realized earnings did not fully cover the dividend. Ares sets its dividend against a full-year expectation rather than quarter by quarter, and realization timing is lumpy, but a second consecutive quarter of sub-$1.35 realized income per share would make coverage a live question rather than a timing note.

Management did not publish numeric guidance in the 10-Q. CFO Jarrod Phillips said the firm remains "on track to achieve our financial goals for the year" and pointed to "a record $170 billion of dry powder" — uncalled capital plus undrawn credit lines — supporting "our largest ever forward investment pipeline." Arougheti's framing of the investing environment was more cautious than the fundraising number implies: Ares stayed active "in a slower transaction environment" and is "now seeing a meaningful pickup in our firmwide investment pipeline."

Our read on trajectory: the fee side is the part with visibility, and it is compounding. FPAUM up 17.3%, 94% of fees from perpetual or long-dated vehicles, and $828.2 million of identified incremental annual management fees sitting in undeployed capital together make mid-teens management-fee growth the default expectation rather than a stretch, provided deployment continues. The variable is the performance side. Carried interest here depends on a narrowing set of funds clearing their hurdles ($24.6 billion of incentive generating AUM above hurdle this quarter versus $42.4 billion a year ago) and on marks in real estate and a handful of listed positions. Expect continued divergence between a steady FRE line and a GAAP number that jumps around with those marks — and note that the $75.7 billion of unrealized-incentive-fee-generating AUM is an asset that can shrink as easily as it can crystallize.

Source: Ares Management Corporation Form 10-Q for the quarterly period ended June 30, 2026 (filed August 7, 2026, accession 0001628280-26-054538) and the Q2 2026 earnings release furnished on Form 8-K, Exhibit 99.1 (July 31, 2026).