Ares Management Corporation (ARES) Earnings Call Transcript & Summary

Good morning, everybody. It is my distinct pleasure. By the way, I'm Scott Smith. I'm the Financial Services Sector Specialist at Crédit Suisse. I'm very happy to be introducing Michael Arougheti, who is the Co-Founder and CEO of Ares, which is a $23 billion market cap, $300 billion AUM, Alternative Asset Manager, one of the largest out there. They manage assets across credit, real estate, private equity and secondaries. A couple of things I just wanted to highlight before we got in there, one year-to-date, the best performer of all your peers. So killing it there, which is great. I was actually taking a look this morning, stock is up around 50% over the last 12 months, which means it's one of the better performers across all of financials and certainly one of the better performers, only vested by one of your competitors for the last 12 months. And just as a little nugget, I checked in with our trading desk today, we've actually got buyers of the stock. So in a choppy down market where people are looking to sell stuff, we actually have people who are looking to add to Ares.

All right. Well, then I think we're done here.

So I guess on the back of that, you generated obviously very strong growth last year, AUM up 55%. Do you want to talk to us about what the key drivers of that have been?

Yes. Look, it was a great year for AUM growth, 55%. And the nice thing about it was across all of our strategies. So I think we had 23 commingled funds in the market that raised capital last year. 75% of that growth came organically. That 25% came through some acquisitions, which we may or may not be able to touch on later. But what's been so remarkable is the driver really starts with performance. So if you look at what we were able to do through COVID and then coming out of COVID, I think almost to a strategy private equity, opportunistic credit, real estate equity, put up record fund numbers. And so it sounds oversimplified, but if you put up good investment performance through cycles, investors give you more capital. And so we saw a significant tailwind. Our existing investors supported us across the board, about 80% of the capital that we raised came from existing clients. Those clients were re-upping at a growth rate of over 30%. And while we were bringing new investors onto the platform, we introduced about 400-plus new investors to Ares in the year. The existings are scaling at a 3x multiple in terms of commitment size. So what's not shown in that growth, but will propel the growth forward is those new investors, similar to what we've seen with our existings will scale in their existing strategies and then grow horizontally, and that's kind of that big growth engine. But it's a good time to be in the Alt business, volatilities back in the public equity markets, people are thinking about rates and what that means for their portfolios. Obviously, we're not really rate sensitive, and so we've had this big secular tailwind of demand in retail and institutional markets for Alts, and I think that's just going to accelerate.

So the next question that's on the sheet here that I do want to get to is how are you positioned for current market backdrop or the rising rates and inflation, and how these factors impact particularly credit real estate and PE. But just as a side point, from a trading perspective, we have seen people get nervous about interest rates going up, being a problem the cost of funds in terms of the cost of leverage. And then with equity markets down, people sort of worry about realizations, and that seems to be one of the things that's weighed on the sector overall. So in that context, obviously we have people who are interested in the stock. So just how would you frame all that?

I think you have to -- so maybe through that lens, right, you have deployment, which given our model, is actually going to be the biggest driver of profit growth for the next, call it, 12 months. Because as we sit here today, we have $90 billion of capital that we've already raised that has yet to be deployed. Of that $90 billion, $53 billion isn't earning fees yet, and that's largely in our credit business. And so as we deploy that capital, fees turn on and that $53 billion when invested, translates to about $575 million of management fee. So if all we did was deploy at pace, you would see some pretty meaningful profit growth. So you have to think about deployment as a driver to your point, realizations. And we are not a PE-heavy or PE-centric Alt manager. It's one of the biggest differentiators. So if you look at our $300 billion of assets, a little over 10% of that capital sits in our private equity business. What people may not appreciate is if you look at the positioning of our private equity business, about half of it is opportunistic credit. It's distressed special sits, rescue lending. And then the other half is either distressed for control or growth buy up. So while we care about realizations, we're less realization sensitive and a good demonstration of that is if you look at our realized income last quarter, I think 2/3 of our realizations came from credit and real estate, not PE. So we're kind of not in that episodic when am I going to realize a big private equity deal and distribute. And then the third is marks. What's happening to the embedded value and does that change the management fee opportunity. And I think at least from our perspective, we check all of those boxes. Given that we're so credit-focused, if you look at the positioning of those portfolios, the bulk of what we do is short-duration floating rate senior secured credit. Oftentimes, we'll finance those with fixed-rate liabilities. And in every case, we generate incentives over fixed hurdle rates. So I think the market is beginning to appreciate this, and this is where maybe you see the differentiation. As rates go up, the yield on that book goes up over the fixed hurdle rate. If it's levered all the better, but that's actually a pretty big tailwind for profit generation in our credit business. The other thing in the credit book is we already have floors in place. So when you think about the risk to the company, right, is if rates go up, are we going to see constrained ability to service the debt. A lot of these loans have LIBOR floor somewhere between 50 basis points and 100 basis points. So they're already paying as though rates have gone up by 100 basis points. And so you may see a second wave where we'll constrain debt service, but it's going to be a while. And we're also going into this rate hike cycle with all-time high interest covered ratios. So if you look at our publicly traded BDC and other private credit books, we're probably in that 2.5 to 3x interest coverage range. Whereas we were all conditioned to be comfortable investing at 2x. So there has to be a pretty meaningful rise in rates and a pretty significant give back in EBITDA for those companies to feel it. And then lastly, obviously, our real estate and infra book is positioned to see rising value with inflation. And so I think we have a nice inflation hedge there too. So actually feeling pretty good about the background.

Good. I mean given the differential on your price performance versus your peers, it's unsurprising that maybe people are going to be trying to mimic what you do a bit or at least shift the business model. So I'm wondering if you could give us a minute on competition in the U.S. and then competition in the U.S. versus, say, Europe and Asia.

Yes. It depends on the asset class. I mean, clearly, the U.S. markets are more developed. So the good news is, larger accessible addressable market opportunity, but more consistent competition. I think that's true in most of the asset classes. I think the competitive advantages that we've created through origination, scale of our balance sheet, flexibility of the product set, depth of our portfolios all help us compete even as more capital flows into the market. And the value of those incumbent relationships is proving to be a pretty big differentiator. So if you look at our deployment last year in our credit books, probably 50% of that deployment was to people that we already have money with. So what we're experiencing is as these markets mature and we build out the stable of clients, we just monetize them as they delever and we relever them or they're changing owners, et cetera. So I would say U.S., we've got probably the best competitive advantages because we've been in this market the longest, but more consistent competition. And then it changes as you push East. So I think in Europe, we've staked out a pretty meaningful leadership position in European credit, our European real estate equity business, meaningful market leader in terms of the length of time we've been in the market and performance. And given the structure of that economy, there's regional competition as well, right? So it is critical. I think everybody who's successful in the European markets has realized you have to be local, both in terms of how you invest money, but also how you raise that money, and that's a big driver. And then Asia is really just kind of coming online. We've made some pretty big investments in developing our Asia presence, largely leading with private credit, but there's just not that much consistent institutional competition in that region, which is what we like, but there's a lot of missionary work that needs to get done to see that market develop the way that U.S. and Europe have.

Got it. Okay. You did hint at acquisitions. So depending on your willingness to talk about Landmark, Black Creek and the AMP infrastructure deal, what's been driving the big uptick in M&A in your mind? And then how do you think about what that's going to look like in 2022?

Yes. Look, we -- I don't think I ever would have gone into as a strategic plan to say we're going to acquire 3 really attractive businesses in a 12-month period or 18-month period, it just kind of all came together. We had pre-existing relationships with all of those platforms and the timing was right for both of us, and I'm thrilled that it was. Our approach to M&A has actually been pretty unique and differentiated in the sense that we're buying a lot of these platforms in noncompetitive situations. So that gets reflected in the price. And so where you look at where we've been able to acquire these platforms, which are all market leaders with good historical growth and track record, they're coming in at multiples that are probably 30% of our trading value or 40% of our trading value. So there's just real embedded accretion and there's real embedded risk management in terms of the risks that we're taking to onboard them. Each of them, we see something different, but the theme is big growing end market, going through transformational change and a view on our part that you want to participate in that transformational change with scale. So if you take each one of them, secondaries, we've been in the secondaries business, but we were doing it organically. That market is going through a transformational shift from LP-led to GP-led. It's going from a transformational shift from private equity-centric into real assets. And credit secondaries, it was U.S. focused, now it's globalizing. So if you really want to capture that growth, you've got to do it from a larger base. So we made the decision to acquired Landmark with a view that they would give us that scale and that track record in technology, but that we would be able to accelerate the growth through our GP relationships and global footprint. Similarly, Black Creek we see transformational shift happening in retail fundraising and retail distribution. They come with a very well-developed wealth management client service apparatus that's in place. That's now a big growth engine for us, and they're one of the top industrial real estate managers in the U.S., fully vertically integrated. Again, big secular tailwinds in that market have to be big. So if you go acquisition by acquisition, and this is true for things that we acquired 10 or 15 years ago, it's always with an eye towards a growing market where we feel a sense of urgency that we need to participate in that growth with scale or from a different starting point. In terms of what it means for us going forward, I mean, I think the good news is with our core businesses and the acquired companies, there's just not that many gaps that we have in our product set or our distribution, so we'll be more measured, I would imagine. We've said on our earnings call that the bar keeps getting higher as we narrow the gaps, but also is our ability to create business organically improves. So I don't want to say never, but we're -- we've got a lot to work on. And each of the things that we've acquired fortunately has a number of organic growth opportunities ahead of it that, with modest investment, we think can unlock.

Got it. You mentioned retail. So can we spend a minute on retail. It's obviously a key focus of the industry overall in terms of where money is going to come from. But maybe, one, can you frame what you mean by retail and then how that can expand over time? And then just sort of a bigger picture view of your retail movement?

Yes. So when everyone's talking about retail today, what people are enthused about is nontraded retail product. So that's nontraded REITs, non-traded BDCs, interval funds which is an exciting growth area because I think that channel is under-allocated quite significantly to Alts, and these are the products that will work for them. But from our perspective, we view retail to be much larger. And one of the reasons why we have such conviction in our ability to win in that channel as we've been in the retail market a long time. So when I think about our retail footprint, it starts with our listed vehicles, Ares Capital Corporation, which is a $20 billion asset BDC with a close to 20-year track record of outperformance, our mortgage REIT, ACRE, our closed-end credit fund. So we've built the relationships and the credibility in the channel through the listed part of the market, and we'll continue to do that. And I think it's important that we don't lose sight of the opportunity in those permanent capital vehicles. as this new part of the channel shows up. Two is just distributing our core institutional product through the ultrahigh net worth and private banking channel, and that's been a consistent contributor to our asset growth over time. Almost to a fund, when we're raising institutional capital, we're bringing in some 1 or 2 of the platforms into each fund, and that's been again, beneficial in terms of generating the brand awareness and the credibility in that channel. Three is insurance. And I don't want to maybe go down the insurance rabbit hole, but I've actually always thought about at least when it's in a fixed annuity and fixed index annuity wrapper, you're effectively repackaging alternative exposure for the retail consumer and the saver. And so we do talk about insurance and retail separately because they are 2 different trends. But it is a category of retail exposure, if you want to talk about generally the trend towards individuals getting access to Alts. And then that brings us to nontraded. And we already have 3 products at scale in the channel in the form of AREIT, which is our diversified non-traded REIT, AI-REIT, which is our diversified -- our industrial nontraded REIT, and our interval fund. So each of those is at scale and growing. So the apparats is already in place to continue to scale those and bring new product. So the key for us really is just to invest behind the products that we have. In the channel, scale begets scale because people want to see the ability to bring meaningful capital in and get it invest in, and then use what we have to bring new products into the market over time. And then I think you'll probably see us start to move away from a U.S.-centric retail footprint more into Europe and Asia as well.

So maybe following that a little bit. What's been the reception to the Black Creek retail funds products once you've now got them in-house? And then can you talk about your outlook about getting more sort of partners who are selling their retail product?

So it's -- the industrial logic, and I'll come back to the rationale for the transaction, but both nontraded REITs have been accelerating their growth since we made the acquisition and our interval fund is similarly scaling. So order of magnitude, did about $3 billion in the quarter in all of our nontraded product, which I think has us in the top 3 in terms of capital raised in the channel with -- we're starting to create some separation alongside some of our peers. The good news there also, and you saw this come through our fee-related performance revenue line item at the end of the year, they've also experienced great performance over the last year and particularly since the acquisition. And so back to my earlier comment about assets following performance, it's as important in the retail channel as it is in the institutional channel to demonstrate that performance momentum. Interestingly, our nontraded REITs are largely raising through one of the large platforms and seeing a lot of growth in the RIA channel. Our interval fund is on multiple platforms, but not raising the same amount. So part of the logic of bringing the 2 businesses together is to take the relationships that we've developed with the other platforms, bring the REITs to those platforms and then similarly bring the interval fund into other parts of the market as well.

Okay. And so no issue for platforms who are going to be willing to sell kind of everybody's product or?

If you think about what does it take to win in this channel, you have to have a broad product offering. You have to have a meaningful investment in wholesaling and client service. We have 110 people in our wealth management business. You have to have a broad-based relationship with the platform, and you have to have scale and performance. So I think at the end of the day, I don't want to -- I think you'll see 5 or 6 large players capture a disproportionate amount of the opportunity set there. So I don't want to make it sound so easy that we get on every platform. But brand matters, this is why I was talking about the history of Ares in the channel, the relationship we have at the top of the house. Those things are important as they onboard because they need to know when they bring it that you can scale with them.

You did mention insurance, and you did say it was a rabbit hole. But obviously, really topical last year in particular. So just any thoughts about how -- what we saw last year, obviously, a lot of activity. Do you expect that to persist?

Yes. Look, I -- the marriage of insurance and alternative asset management makes all the sense in the world because insurance clients, whether they're captive or third-party, have the same yield problem, right? They've just -- they cannot generate enough excess return in the traditional markets to meet their requirements. And so any place that they can get excess return in private credit, subinvestment grade or high grade, they're going to do it. So when we talk about insurance, we talk about a little bit more holistically in terms of the growth in our third-party business, which has been one of our fastest-growing end channels relative to just the growth elsewhere and our captive business. And our captive business relative to the peer set is small by design. Number one, we don't want to compete with our third-party insurance partners because they've been very meaningful strategic partners and supporters of our growth. Two, we are building largely de novo. We think it's less risky, more capital efficient to build it organically and that's happening in our reinsurance business and our distribution. And three, we've articulated to the market and we have high conviction that we are a balance sheet-light manager of third-party assets. It's not to say that we don't have aspirations to have a large affiliated insurer, but it will not ever get to a place where the lines blur between our asset manager and our insurance company. I think that's a fundamentally different approach. And so the good news is it's all working. We're seeing great growth in the third-party business. We articulated the vision and the opportunity set organically for our insurance company, Aspida, at our Investor Day in August. It's meaningful, but when you think about the scale of everything else going on around it, it's just not going to ever really overwhelm, I think the balance sheet or the positioning of the business relative to what some other folks are doing.

Got it. And I know everyone is focused on interest rates going higher. Obviously, we're still talking about very low overall levels of interest rates even with multiple hikes. Is there a level of interest rate where the insurance product, in particular, is going to be less attractive? Is this something that we should be thinking about?

I personally don't think so. I think there's been a structural shift and a mind shift in the way people allocate into these markets, where 15, 20 years ago, maybe they were buying absolute return. Now they're buying relative return and really trying to capture the excess return that we can create in the private markets. And we create it through illiquidity. We create it through structure. We create it through creativity around what the product looks like. So I think as long as that excess return persists, which there's no reason to say that it won't, they're going to keep allocating to it. Because if we're in a world where everyone needs more yield, even as the base rate is going up, you still want to capture as much of that premium as you can. So I think the fear should be what would compress the excess return versus do people stop allocating if base rates go up. And I think the fundamental nature of what we all do for a living is just it's hard to envision what it would be that would really compress that excess yield.

Got it. Maybe we take a step back a little bit. Can you talk to everybody about your strategy? You touched on Asia a bit before, but can we maybe dig in a little bit in Australia and China in particular?

Asia is similar to Europe. Everybody is like, oh, what's your European strategy. And Europe is not really a place per se, right? I mean it's a collection of different jurisdictions. And I think Asia, you have to really view through that lens as well. So to your point, you've got developed Asia, Australia, New Zealand at the top of the list. You've got quasi-developed markets like India, where there's more regulatory structure and capital markets opportunity, but some of the challenges still persist there around rates and inflation and regulatory backdrop, et cetera. You've got developing Southeast Asia, and then there's the Japan and China. So really 5 or 6 different conversations. Australia and New Zealand, frankly, is the easiest market for us to penetrate. It looks almost identical to the U.S. market. You have developed capital markets. You have a Western bankruptcy code. You've got private equity capital. You've got the banks that are already understanding how to live with non-banks. So a lot of what we're doing in Australia and New Zealand, at least on the investing side, is just bringing the technology and the road map that we've used to open up the U.S. and Europe. We've also been making investments in distribution in that region because, historically, the retail and institutional investors there have been under-allocated to fixed income. And so we have a long-term view that as we bring investment product into that local market, we'll see demand pick up for that as well. And so it's been both investing and capital raising. China is a little bit of a different story. I mean my view is, long term, if you look at where GDP growth comes from, we have to have a business in China. But we are walking there slowly. One of the things that came with the SSG acquisition was teams in Hong Kong and Mainland China with the relationships and investing experience to at least start to put capital work, but it is a very, very small part of what we do. And I think it will be for quite some time. It's a difficult market to penetrate from a flows and regulation standpoint. But we're learning, and we've made great returns there. The good news is, right now, given the bulk of our business in Asia is special sits distressed opportunistic credit. A lot of the volatility that we're seeing in the China market and the bond market over there is actually, I think, opening up a pretty big securities opportunity for us in the region. So I think over the next 12 to 18 months, that's probably going to be the bulk of what we're doing there.

Okay. Makes sense. In terms of balance sheet, so again, taking another step back. Can we talk about how you're thinking about leverage on the balance sheet? And then in that balance sheet picture as well, how are you thinking about capital and where your deployment capital opportunities look?

Yes. It's -- absent acquisition, right, so going back and you say, well, maybe the pace of acquisition slows, the balance sheet needs for capital are pretty minimal at this point. So when we were earlier in our evolution, we were using a lot of our balance sheet capital to make regular way GP investments in funds. So private market convention was 1% to 3% of every fund, the GP needs to make an investment to be aligned with the private investor. What we have found as the company has grown and our employees have generated more wealth and appetite for Alts, largely, that GP commitment is now getting taken up by our investment teams. So if you were to aggregate all of that capital, it's probably in excess of $1.5 billion of employee capital that's now coming in to support the fundraises, which means what used to get allocated to just regular way new vintages, we can now use much more actively to launch new strategies and seed new funds. So we have shifted a little bit the kind of where we're pointing the balance sheet towards growth areas as opposed to supporting the core business. The other thing that's happening is we've said is our capital policy. We have aligned our dividend to the growth in our fee-related earnings. We just announced an increase in our dividend of 30%. Obviously demonstrating, hopefully, the conviction that we have in the forward growth trajectory. And then what we've articulated is we want to retain our performance fees as retained capital. They compounded a fairly attractive tax rate and then use that as our capital to further invest in growth. So this is going to be an interesting year because we've got good profit generation coming out of the fee business. We've got this pipeline of European waterfall promotes that are going to start to roll in at a time when our balance sheet is fundamentally delevered. So we'll see what happens over the next 12 to 24 months in terms of the capital generation on the balance sheet and whether that changes anything. But right now, we're in a really good spot. We've got about a $1.1 billion revolver largely unutilized. It will fluctuate up and down. We've had free and easy access to the debt capital markets. And now we're in a position where, again, absent acquisition we'll be generating retained earnings onto the balance sheet.

Got it. We were talking about weather at the front of the room before this started. I can't really have a weather conversation with that at least starting to broach the topic of ESG. And so I would love to get your thoughts on how you guys are approaching ESG. Is there an opportunity for something brand new there? Or are you just going to roll it into what you're doing?

All of the above. And I would say ESG and DEI and broadly impact is probably at the top of the list of conversation topics with our private and public investors. So as we think about it, it's really 3 components. One, what are we as a firm, Ares Management, doing to promote better ESG and DEI practices. So what's our own footprint and what are our own metrics. Two, once we establish what we stand for, what can we push into our controlled and noncontrolled portfolio companies. So the first, we call our corporate sustainability initiatives. The second, we call our responsible investing. Every investment now that we're making at the firm goes through a DEI/ESG lens from a diligence investment and portfolio management perspective. And we're getting more ambitious in what we're measuring and how we're holding ourselves accountable for that. And then the third, which is maybe where you were going, is what kind of product opportunity comes off of that. And right now, our probably single most obvious product in that space is our climate infrastructure business. So we made the conscious decision to start repositioning our traditional energy infrastructure funds into the energy transition. So one of the highlights of 2021 was we closed on about $2.2 billion of capital in our climate infrastructure fund and related co-invest vehicles. Good first-mover advantage there. Good track record. I think that will lead to a nice family of funds in and around green tech, renewable energy and the energy transition. There are interesting opportunities around ESG and our liquid credit business, ESG-related CLOs and ESG-related bond funds. We're actually having conversations now reverse inquiry from some of our larger institutional investors for ESG-related private credit funds. So as an example, we've taken the ESG technology in liquid markets for SLLs and pushed it into private credit markets. So now we're starting to put ESG ratchets into our middle market corporate loans in the private market. And if that's done well and you can get the measurement right, there's a whole world of ESG opportunity there. So it's really all 3 of those, and I think they go hand in hand because each one needs to inform the other. And so the way we've really set it up is both ESG and DEI sit at the top of the house, and then we have distributed resources into the businesses to kind of promote the change. But it is amazing how on the back of the pandemic, the acceleration in investor appetite, but also investor demand for accountability. It's just -- it's top of the list, for sure.

So just to dig in on that for 1 second, it's really more of a personal question that I've just cared about for a little while. Given the performance of energy year-to-date with all the global macro factors, how do you think about that sort of tipping point of where does performance, you have stuff that's non-ESG, become a problem versus performance of ESG?

So I think the good news is no one is calling for divestment of fossil fuel business from -- well, not no one. Some people are, but our investors aren't. The prevailing view that we have, and I think many share, is that you need a just transition to renewables and that even if everything that we want to see happen happens at the pace that we want to see it, it's a 20- to 30-year transition, which is transitioning away from fossil fuel power gen dependency, getting battery storage technology up and then getting the distributed grid, right? So if you view it through a 20- to 30-year lens, you have to begin to think about the ownership of legacy assets as a responsible owner. How do I accelerate the transition, how do I convert a nat gas-fired power plant into some renewable source that's proximate to the grid and really see how they work together. Because if all we said was we're going to full renewable power gen today, the economy would unplug. We can't do it. So it has to start with what's realistic and that informs the path forward. And so I think that the conversation we have around our investment and executive committee table and collaboratively with our investors is exactly that, which is what's realistic, what's maybe even aggressive, but let's hold ourselves accountable for something that we can actually do. The conversation is a little bit different in developing markets. So part of the challenge of being global, when you're talking to your colleagues in Indonesia, they will have a different lens, right, which is if we don't have fossil fuels, we're going to condemn the entire country to a life of poverty. So now you've got social considerations that you have to factor in with the environmental considerations. So it's a complicated body. But what we've been doing is really slowing new investment in traditional fossil fee-related investments. So in our sixth buyout fund, we used to have probably a 20-plus percent allocation to energy. We're not doing that now. In our SPAC, we've carved out energy. In our infra business, we went from 50-50 to purely renewable. So you can basically change the path of your new investing. It's really what are you going to do about the old stuff. But there is going to be a big capital gap there. And part of the challenge of getting through this is if no one wants to bring capital into the market or the cost of capital is so cost-prohibitive that you can't make the math work, then we're also going to get stuck. So there's going to be a little bit of a period here where the market's going to have to recalibrate because, right now, capital is not really flowing into the U.S. energy market in a way that it's constructive. So I don't think it's going to be us, but someone is going to make a fair amount of return for some investor group.

So with just about 4 minutes to go. Maybe we should just see has anybody in the audience have anything they want to ask. Audience question? Richard, wait 1 sec, there's a mic coming since we are webcasting.

You've had impressive AUM growth since day 1 and everything you've talked about today speaks to even accelerated further AUM growth. I'm just wondering, can you talk about investments necessary on the talent side, on the technology side, on the compliance control side to sort of handle all this growth? Where are you there?

Sure. It's worth interesting part of our growth curve in the sense that when we've talked about our margin scaling, a lot of it was the marginal profit that we get just from deployment. So where you've been seeing our margin expansion, it was about 400 basis points last year, I think it's been 1,200 basis points over the last 5 years, has been a lot of the scaling of our in-place talent as we bring this dry powder on. I don't expect that to change. I mean our investment teams and investment talent are largely in place. They're driving huge volumes of potential transaction opportunities onto the platform. And with modest increases in commitment size, you just see some pretty meaningful contribution. So most of the significant investments are actually being made now on the noninvestment side, to your point, it's places like investor relations, distribution, compliance systems. And so on our earnings call, we said margin expansion for '22 would probably moderate. Not to say it's not going to potentially scale, but it will moderate, because we are now at a phase of growth where we've got to make the investments we need to, to get to that $500 billion AUM target that we put out there. So it's a, I'd say, significant in terms of the amount. I wouldn't say it's a heavy lift. I think it's pretty straightforward what it is that we need to do, but we definitely have to backfill some of the noninvestment functions to support the growth.

Any other questions? So I've got one that maybe takes more than 1.5 minute to answer, maybe we can get a quick answer. Given market volatility, right, and it's obviously been in a downward direction in terms of equities, a lot of questions about where the Fed goes. Do they get it wrong? Are they going to go too many and push us into a recession. So if we have a very choppy negative equity market, we have a recessionary kind of outcome, can you talk about how the company is positioned as a defensive play? And how you think about that?

Sure, if you look at our -- we're celebrating our 25th year anniversary. If you look at our history, the fastest periods of growth for our company have been through difficult markets. So the top 2, financial crisis and COVID. So we've had 20% plus compound annual growth rate for a very long time. We accelerated growth through down markets. It's a combination of the structure of our funds. So the beauty of Alts is we have long-dated permanent capital that doesn't see outflows. We tend to go into these cycles with a significant amount of dry powder. And because of the positioning of the in-place book back to the credit versus PE, you don't see a lot of volatility within the existing investment portfolio. So it's not to say that there's not hard work that needs to get done to defend the portfolio when you're going through March 2020. But you're sitting as the big stack at a time when you don't have a lot of stuff to deal within your existing portfolio. The offset to that is transaction volumes tend to slow. So we're able to put more attractive capital out in those markets, but it's not the same volume. So the trade-off is higher rate of return, lower volume versus what we saw in 2021, which was low vol, lots of transaction volume and the flow businesses tend to perform. So I don't want to say that we're rooting for a down market, but volatility tends to actually be a pretty big benefit to the business. 3

Got it. We're just over time. So I guess with that, I thank you very much for being here.

Thanks for having us. Good to see everybody in person. Thank you. Appreciate it.