Ares Management Corporation (ARES) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Patrick Davitt, the U.S. asset manager analyst at Autonomous. As a reminder, if you'd like to submit a question, you can scan the QR code in your pamphlet to get into Pigeonhole, and we'll try to get to those if there are any at the end. It's my pleasure to welcome Ares' CEO, Mike Arougheti. Ares is a $325 billion assets under management -- alternative asset manager known mostly for private credit and direct lending, but with strong franchises in private equity, real assets and secondary solutions as well. So thanks for coming, Mike. Really appreciate it.

Sure. Thanks for having us.

So since we've had, I think every -- almost every large alternative manager CEO here this week, I've been starting every discussion with a series of similar kind of macro questions. So the Federal Reserve has never been able to tackle inflation like this without starting a recession and the market clearly is leaning towards that outcome. So with that in mind, could you frame what economic trends Ares are seeing through the lens of your own portfolio?

Sure. Well, the good news is we participate only in private markets. There's a very small corner of our credit business where we're buying loans and bonds, but through structures where we can actually navigate and benefit from volatility in those markets. So number one, being in the private markets exclusively around the globe, we don't have to get caught up in the daily gyrations or monthly gyrations of the liquid markets. I think we need to be directionally accurate on macro, just in terms of how we're thinking about positioning the business, but we don't need to be thinking about it with the same precision. That's not to say that we don't, but we don't have to, which is one of the benefits of all. The other benefit of being an alt manager like us is you have a lot of private market data points to measure against how the liquid markets are behaving. We have investments in probably close to 3,000 private companies. We own hundreds of private assets in lots of markets. And what I would tell you is without commenting on this quarter, if you look at the information that's coming out of our portfolios up to the most recent reported date, it will tell you what you would hopefully expect to see, which is the fundamentals in the economy continue to be very strong. That's true for our middle market corporate books where we're continuing to see a pretty persistent EBITDA growth. We've made some good information publicly available through our publicly traded BDC, where we've demonstrated that we're still seeing mid- to high teens type of EBITDA growth for portfolio. In our real estate business on the ground, we're continuing to see healthy increases in rent and occupancy translating to growing NOI, particularly in multis and industrial. So everybody's hand ringing is obviously forward-looking and granted that we are in an inflationary environment. But up until now, most of the companies that we're invested in have had the opportunity and ability to pass those prices through. They're sticking and the margins are holding. So the question is where do we go from here? And how do you position going forward, but at least what we're seeing on the ground today, I think that as you would expect, pretty strong still.

So on that last point, I think, obviously, private credit has been a great success story for you and others, but there's this kind of sticky view in the marketplace that shadow banking is bad or private credit is bad and there's a lot of systemic risk hiding here. I think it's a hard view for us to push back on until it's tested, but how would you push back on that view?

How much time do we have? I'm going to try to keep composed here because I've been in the private credit business for almost 30 years. And as long as I can remember, there's been a persistent narrative that private credit is somehow lacking in transparency, taking inappropriate risk that is becoming increasingly systemic risk. I don't know where that narrative is coming from. There's nothing to support the narrative. Maybe it's coming from banks who are seeing large chunks of market share getting transitioned into private markets, maybe it's coming from regulators who are seeing certain corners of the regulatory portfolio shifting to other regulatory portfolios. But if you look at private credit, yes, it is growing. It is still growing at a fraction of the capital that exists in the private markets. So I think it's important to think about private credit and why it exists. It exists because private credit managers are using fund structures, unlike banks that are long duration, load unlevered. They don't take deposits. They don't take federal guarantees. They are regulated. And because of those structures, they're actually making what I would say, more flexible risk-return decisions. They're not shoehorned into a certain type of risk like a bank might be or an insurance company might be based on the regulatory capital framework. So viewed from the lens of someone who is financially repressed by a red cap regime or a view on certain credits, you may say private credit markets take risk that are inappropriate. But there's nothing to support it, and we have been through credit cycles. So Ares has a 25-year track record in the private credit markets. We've navigated some pretty large private credit portfolios through the GFC. We've navigated through the taper tantrum. We've navigated through COVID. We're navigating through the current inflationary rate environment and crisis in the Ukraine. And with each successive prices that we go through, we're demonstrating that we're actually delivering very, very durable performance, low loss rates, low default rates, very active portfolio management. Part of that is the underwriting. A lot of it is the asset class. These tend to be loans that are supporting institutional equity owners of companies and assets at fairly low loans to value. And so if you really want to talk about risk in the private credit markets, as we define them, you really should be thinking about what's the risk in the private equity markets first before you start talking about risk in the private credit market. So I've kind of gotten used to the question. I can understand it because at this point is a very substantial market globally. It continues to grow for the right reasons. And now there are hundreds of billions of dollars of line items that could be actuarially underwritten to understand how these assets perform. And I think that almost across the board, the performance has been exceptionally good.

Agreed. I think part of the concern and to your point earlier, Ares did perform quite well through the GFC, but there were a few BDCs that did not. It might be helpful, I think, to kind of frame -- and I think you acquired a couple of -- it might be helpful to frame maybe what's different about the industry now versus then? Because...

Yes. No, it's a good question. And again, we all like to make inferences from that point. So not all private credit managers are created alike and not all BDCs are created alike, but there are structural elements that are consistent that will drive certain outcomes. What has fundamentally changed in the BDC space specifically is the structure of liabilities available to BDC managers and the regulatory leverage framework that we operate under. So if you go pre-GFC and yes, we acquired 2 BDCs that basically were challenged through the GFC, yes, because they did not make great investments, but largely because of the structural constraints of BDCs. Pre-GFC, the only liabilities that were available to BDC managers were typically 1 year revolving credit facilities provided by banks. And Credit 101 is not to mismatch your assets and your liabilities when you're talking about corporate credit, consumer credit, your own financial position, et cetera. And so here, you had BDCs operating with modest amounts of leverage within a regulatory framework of 1:1 with short duration liabilities against long-term assets. And needless to say, when the GFC hit and credit was contracting, some of those banks did not extend credit beyond the 1 year and that precipitated and unwind of certain balance sheet. That is no longer the case. So if you look at the credit that is now available to BDCs, there's a whole host of investment-grade longer-term rated liabilities that are available. You could look at ARCC's balance sheet, where 80% of our liability structure is now long-dated fixed income liabilities with a well-laddered maturity profile. There are longer-dated floating rate term loans available. There are these still revolvers available. There's CLO securitization technology. So the breadth of financing available to BDC managers has improved, which takes a lot of that mismatch risk off the table. Going back to performance. One of the reasons it's improved is people have been able to underwrite the performance of private credit assets, and they're now willing to extend longer-duration liabilities to these companies, whereas in 2005, 2006, maybe they didn't have as much evidence to say, "Yes, I'll do a 5-year term loan instead of a 1-year renewing." So that's number one. Number two, which again is an interesting thing about regulatory risk in private credit. The biggest shift in regulation in the context of private credit and BDCs was the expansion of leverage from 1:1 to 2:1. And what that basically did was it allowed BDCs theoretically to get more levered. I think there's a lot of handwringing going into the implementation of that rule-making, where a lot of investors in the BDC space expected BDC managers to take that incremental leverage, lever up to drive higher ROE. In fact, the opposite happened. Everybody continue to run largely at similar leverage levels but just created a buffer given the experience that we had through the GFC that said, if I see credit degradation or NAV degradation now that it's 2:1, I've effectively derisked the structure and having spent a fair amount of time working through that regulation with Congress, that was the argument, which is no one is just going to go out and lever 2:1 because they can. It's really going to create more stability and more breadth of financing options, which is what happens. So those 2 fundamental changes have really changed, I think, both the risk and return profile for the space. And not surprisingly, it's attracted a whole new generation of what I would call higher quality, larger global credit managers into the space as well.

And I imagine the quality of the borrowers is much higher.

Significantly higher. And that's just -- that's a reflection of the growth in private credit. I mean, we're -- if you were to go look at our pre-GFC private credit portfolios, weighted average EBITDA on those portfolios are probably in the mid-20s and now it's probably $150 million or so.

That's a good point. You mentioned private equity as having to take the losses before private credit, which is why I think those same people that are concerned about private credit are even more concerned about private equity. So you're obviously smaller in that business, but I think there's a view that higher rates, inflation, recession, pick your poison, can't be good for that business. So what's your take on that view? And how is Ares portfolio in particular positioned for what...

Yes. So we have a lot of different portfolios. So I'll try to come at it from a couple of different angles. The one thing I would say is private equity is a very resilient asset class going back to my earlier comment just about the structural benefit of alternatives, right. So -- and not surprisingly, that's translating into just continued secular growth in private markets to the detriment of the public markets because when you're buying a company as a private equity owner versus buying a stock, you can own it for as long as you need to create value in that portfolio company. And if you get into a backdrop where the valuation environment is changing or the operating environment is particularly challenging, you don't have to sell it. You have the theoretical market to market in your mind and on your balance sheet but you don't have to sell it and you're in a structure that doesn't require you to try to monetize. And so the question is when you're going through a complete change in the discount rate and valuation environment. It hurts everybody. There are very few places that you can go where you say it doesn't affect me, but you have to say, where does it affect me less. And so while I think private equity will absolutely see a decline in values. It won't see the decline of value to the same severity as we're seeing in the public markets, and they are equipped because of the structure that they invest through, the operational capabilities they have and the dry powder they have to invest through to outperform is why the asset class continues to grow. We are underexposed to private equity relative to the listed peers. We think that's a big differentiator for us. And when you say, well, what will outperform, private credit will outperform. And the reason it will outperform is because it sits at the top of the capital structure with a lot of control over the outcomes with a lot of equity subordination. So if you look at our corporate private credit books, they are largely invested to about 45% to 50% of enterprise value. So even if the discount rate is changing and valuations coming in, you need to see a company's enterprise value based on multiple and earnings get cut in half before you're having even a conversation about loss of value in a private credit instrument. And interestingly, the way that the asset class performs, were that to ever happen, the incremental dollars that go into support a company in distress owns it. So a lot of times the way the private credit managers actually outperform through cycles is by being that marginal liquidity provider where you capture equity upside when the liquidity is not available elsewhere. Private credit is also floating rain. So if you look at Ares' $325 billion of AUM, $200 billion of it is in credit and about 90% of our exposures are floating rate with fairly short duration. And so obviously, when rates are rising, that's a pretty significant benefit to the ROA. If you are appropriately finance like I referenced ARCC is very significant levered impact to your ROE. And then the only question is, does the rise in rates somehow or another constrain the cash flow and operating flexibility of the underlying companies? But what's interesting about this current environment is while rates are going up and we're dealing with inflation, we're going into this with real strong economic fundamentals, a very low cost of funds as a starting point and therefore, very high coverage ratios. It's true for the consumer largely, too. So we just had an Investor Day for ARCC yesterday, which is our listed BDC. It's a $20 billion roughly pool of private corporate credit. And the management team basically showed that today, the portfolio has 3:1 EBITDA to interest coverage ratio. And if interest rates went up by 200 basis points, I don't remember the exact number, that 3 goes to 2.6. But if interest rates go up by 200 basis points, the earnings of the company go up 25% plus. That's a pretty interesting setup when you think about the risk return and where you can go in environments like the one we're now to take advantage of the current market. And then the other exposures that we have are real assets, so infrastructure and real estate investments. They are really good inflation hedges. There is a constant debate about the correlation of cap rates and real estate valuations to interest rates. But if you look at what's going on the ground in real estate right now, the growth in NOI is actually far outpacing any shift in valuation. And in some counterintuitive way, just given the setup in the global economy right now because of supply chain constraints, because of wage inflation and, in some cases, inability to find laborers, a lot of real estate basis is going to be geared around what's my replacement cost to build a new piece of real estate relative to what I own today. So we have this really interesting place where the markets are not oversupplied. It's hard to bring new supply online cost effectively and timely and you've got great fundamental performance, particularly in multifamily and industrial real estate, which is where the bulk of our exposures are. So I even think there you probably got more structural buffer in terms of the performance of that in-place real estate than you've seen in past cycles because of some of the extenuating circumstance around supply chain and labor right now.

That's helpful. You aren't the only manager that brings up multifamily through the same lens. I imagine pretty short leases, and there's still pretty significant recession concerns. So why shouldn't we be concerned about there's suddenly being a point maybe next year or when these old leases roll out, and you're not raising rents 50%, but you're cutting up 50%.

Well, I think -- again, I think it comes down to supply demand and generally shortage of housing. So it's not true in every market, but a lot of it comes down to affordability. And I don't want to minimize the impact of inflation on a large section of the consumer economy. But what we're seeing in most of the markets that we invest in is the supply-demand imbalance basically is driving people to stay in their apartments. I don't think that you need to see rents increasing 50% to feel happy with your existing.

I know. I mean, it's crazy that's happening.

Well, it's happened. And again, this is -- without playing macroeconomists and going back to your first question, there's a lot that's unknown, right, because we are in an economy that's theoretically been overstimulated. It's been overstimulated this created demand dynamics that may not persist. And we also have an economy that is being undersupplied. And whether it's China reopening from COVID, de-globalization, all these things will also be playing around on the supply side of the inflation question. So I don't want to sit here and say that this is all going to resolve itself quickly, but you have to really parse through, which is why it's so challenging. How much is the over stimulus and how much of that is transient and how much of it is the undersupply and how much of that is transient and then where do we land.

So you're not alone at this conference in saying that these private credit portfolios are not hiding a bunch of systemic risk. Is there anywhere that you think there is systemic risk hiding because obviously, the banks aren't doing risky lending. You guys all say you're not doing it. Where is the risk or the balance sheet is just so much healthier there is...

I would say. So systemic -- I don't know what system we're talking about. So I'm going to maybe rephrase the question, which is where is the excess leverage because right now, it's not theoretically sitting in leverage finance markets, in my opinion. It's not necessarily on bank balance sheets where it is in Central Bank balance sheets, right? And that's what's happened is you've had a major leverage transfer from customers, consumers, corporations to Central Bank balance sheets. And so when you say, where is the leverage? It's on the Fed's back. And so now we have to go through the process of deleveraging, and that's what we're grappling with. But I will say, when you -- we've been through many, many cycles and each one is different. Sometimes the corporates put us into a recession. Sometimes the consumer, sometimes they pull us out. When you look at where we are now, the consumer is largely healthy. I don't know what other people are talking about here. We have a significant amount of investments where we see consumer data. The prime consumer is incredibly healthy. Subprime consumer is as we would expect them to be. And I would say the near-prime consumer is probably starting to move towards getting overextended coming off of a fair amount of stimulus and they're releveraging. But it's hard to say that the consumers are overlevered. Corporate balance sheets don't feel overlevered. I don't know if the bank management teams are probably telling you that, again, the credit quality in their existing books is probably pretty good right now. And when you talk about systemic risk, a lot of, I think, where maybe the fears about private credit is there's this narrative of lack of transparency. But really, it's the most perfectly transparent asset. And the places where we've seen lack of transparency have been in places like [indiscernible] and off balance sheet structures and those don't exist anymore. And so we're seeing an interesting place where the system putting aside the Fed's balance sheet is not necessarily over-levered. We have much more transparency to where the leverage is. The private markets, as they've grown, are actually providing more stability to help navigate some of the volatility that we're seeing in the public markets, which is an interesting dynamic. So I think this is different because obviously, we're dealing with concentrated leverage in the system, but not in the hands of investment managers.

Right. That's helpful. It seems -- we've talked a lot about how much scale private credit has now and it feels like because of that, it could have a little bit more impact of providing ballast to the broader credit market that has historically. So maybe a company that might otherwise have had difficulty getting funding in a tight environment will have an easier time as long as they have a good business, is this fair? Like are we in a situation where private credit actually prevents a deeper credit cycle than we might otherwise have?

I believe we are, yes. And that was kind of what I was just trying to allude to is -- this is an example. It's not a perfect example. But if you just think about high-yield bonds and leveraged loans as liquid or semi-liquid credit instruments. And just if you look at the structure of those markets, we've seen increased retail participation in those markets, which creates volatility, but we've also seen increased alternative structures come in and be able to actually buy those assets as an appropriate cash buyer. And so you're actually seeing bid-ask spreads generally shrink in those markets as they evolve and as private credit managers like us can actually bring private capital into the liquid market. So the simple fact of the structure is creating stability because until we all have the ability to use private long-dated structures to come into these markets, it was largely institutional mutual fund structures or retail, which means if you get $1, you put it in the market, even if the right answers, I don't want to put in the market. And if someone wanted their $1 back, you sell what you can, which sometimes may be your best stuff and then you return the $1. The simple reality of having a pool of capital with availability of cash that can go in at the right time and be that liquidity provider is quite simple, but it's quite revolutionary as you think about how these how these markets develop and you begin to see it happening more and more now, and there have been a fair number of high-profile financings recently, just -- a Peloton, for example, that is struggling in the public markets is a tough public equity story, but is able to go into the private credit markets and get the liquidity they need at the time that the traditional markets are close to them. So this interplay between public and private is definitely a really important part of the narrative going forward. And I do think we'll create more stability.

So it's increased -- you're increasingly getting deals that would have otherwise been financed through high yield or even investment grade markets or are we still in the early stages?

Yes. I think -- we're definitely still in the early stages of this, but you have to think about alternatives as part of a much broader multi-decade secular trend away from public markets or I should say, away from the traditional structure public market. So the public markets are there to provide liquidity to the largest company. So if you look at the high-yield bond market, the average issuer size and the high-yield bond market is growing year-over-year same in leveraged finance markets, leveraged loans. Public equity markets are also moving towards larger concentration. And therefore, because of the amount of capital that's still in the private markets, companies are staying in the private markets longer. So you could look at things like the average time for a venture-backed company to get to the public markets. This is all developing such that the liquid markets are moving more to scale. So if you think about what we're seeing now, particularly the upper end of private credit, we're now in the private markets aggregating enough capital that we can now service probably 90% to 95% of the installed base of credit in the high-yield market. If you go back 20 years, issuer size and high yield were smaller, but we were also much smaller, and that was a different dynamic. It's not to say that private credit will replace the liquid fixed income markets. But clearly, as they continue to move to scale, the private credit markets can come in and capture the lower end of those markets. This becomes increasingly important when you get into market environments like the one we're in now, to your earlier question and comment, which is when the banks are not underwriting and distributing well and you're seeing price action in the liquid markets, the private markets can come in with some pretty meaningful well-structured risk and again, provide liquidity into a market that's otherwise not function well.

So it's clear we're talking about a TAM that's significantly bigger than the $1 trillion to $1.5 trillion number that gets thrown around right now?

Yes, I think that's right. I mean no one really knows how big the domestic private credit TAM is. When you're talking about corporate credit, it's somewhere between $1 trillion and $1.5 trillion. If you add in alternative credit, that may be add another $4 trillion. But if you just look at the $3 trillion high-yield and leveraged loan market, like I just said, that's going to add now another $1 billion or $2 billion of -- $1 trillion or $2 trillion of TAM, if the market develops where people will continue to go more to the private markets. So I'm not sure that that's exactly the right way to look at it because there's still a real -- there's an important function that those markets play. But when you just think about issuers size, absolutely, you could start to see the TAM get significantly larger.

What's the opportunity to have similar developments occur in other geographies?

It's already occurring in Europe, and it's interesting because each market is evolving quicker than the next. If you said it took 20 years plus for the development of the private markets in the U.S., which is really a function of changing bank behavior and bank regulatory capital frameworks, changing risk behavior within banks, things like Dodd-Frank, et cetera, would change, changing retail behavior, evolution of the liquid markets, the evolution of the securitization markets. There's a lot that needs to happen around the financing ecosystem to see these markets develop. That was a 20- to 30-year trend in the U.S. We launched our European business just as an example, in 2006-2007 pre-GFC. And that market has very quickly caught up in terms of level of sophistication and almost size of the U.S. market and that happened in, call it, 10 or 15 years. Asia Pacific, which is where we also have a leading private credit business, you're beginning to see a lot of those ingredients, evolution of the private equity market changing, bank risk behavior change in regulation that theoretically could accelerate the growth of those markets as well. So clearly, these trends have been kind of moving East world, but Europe has caught up pretty quickly, and I would expect to see it continue to grow.

I guess the other side of the equation is demand from your clients for these strategies. So to what extent should we be concerned that the more liquid credit markets having higher yields starts to slow, the demand for private credit as the pitch that the spread is so much better, starts to become less?

It always sounds like I'm talking my own books. I probably -- [ I'm guilty ]. But obviously, we raised a significant amount of money from retail and institutional investors to invest in the private credit markets. 20 years ago, I think people were thinking about private credit as an absolute return alternative product because of the way that we would manage the asset was largely presenting people with mid- to high teens IRR mezzanine loans as an example. When you look at the way that the private credit markets present to the investors today, it's a much broader set of risk return opportunities with a lot of different fund structures and liquidity profiles for them to access. So capital formation is easier in many respects. But what's also happened is as people have gotten comfortable with those exposures, it goes back to the first discussion just about risk in private credit. Most investors now have a core allocation to private credit. And the reason they have a core allocation to private credit is not because of the absolute return that it generates, but because of the relative return it generates relative to the liquid market equivalent. So if you were to talk to an Ares investor in a mezzanine fund, they would be judging the success of that fund relative to what they can get in the high-yield market. If they were looking at a senior secured loan fund, they would be looking at it relative to what they get in the loan market. If we were putting somebody in a rated structured product, they would be looking at it relative to what they could get in the high-grade fixed income markets. And when you begin to appreciate that, the investors buying excess return and the excess return gets created through the cost to originate and manage the illiquidity, the complexity, all of those things that go into making it an alternative. And so long as that excess return and that premium persists, people will continue to buy it. So it's not as though a CIO is saying, I have a fixed income portfolio. Rates have been secularly declining for 30 years. We're in a rate-rising environment and, therefore, I can get 5% buying munis. So I don't want to make 8% buying something that's alternative, and that's been a fundamental shift in the way that people allocate. And I think that's true with little exception. There may be a handful of investors within certain categories like a defined benefit pension plan or a certain insurance company investors who are just solely focused on matching assets and liabilities where they may behave differently. But based on all of the conversations I have with CIOs, even at that organization, their view is we don't need the liquidity. So why would I give up the excess return. So I would say, generally, the momentum behind flows into the asset class will probably continue even as the liquid market equivalent becomes more attractive.

And I guess the other side of the higher rate question is, is there slower demand for borrowing broadly just because of the cost of borrowing for companies isn't that much higher?

Maybe. Maybe. Whenever we go through environments where rates are changing, the market will have to reprice and reset. And obviously, that starts with the equity because a lot of what we do is change of control of an asset or a company. And so when you're seeing this amount of volatility in equity values, by definition, it will slow transaction activity. The mitigant to that, as you can imagine, in a lot of these situations, public or private, when the equity markets are challenged, any form of nondilutive capital that comes in senior to the equity is valuable. So you tend to go through a period where you get 3 to 6 months or so of a reset of expectations in price discovery and then the market turns back on at whatever that new reality is. You give up a little bit of new issue deployment, but you tend to see secondary market deployment kick in because private credit, structured equity, secondary solutions, all of these other asset classes become pretty attractive available capital relative to doing a dilutive equity raise at a time when your equity valuations are declining. So -- and then the only other thing obviously is we see fewer repayments. So if you're thinking about what's the impact on deployment, you have to think about net deployment, not gross deployment. So you may see transaction volumes slow, but you're also not getting refinanced as actively out of your existing investments. So the gross to net, it mitigates some of the slowdown in volume.

I guess there could be more distressed when they occur.

Yes. It's kind of the -- that nondilutive [indiscernible] capital. Yes.

So you have a lot of dry powder. All of your competitors have a lot of direct powder. It feels like deal activity is still decent relative to maybe where we would have thought about it. It would be a few months ago. So how do you navigate the crowded market? And what are the big themes that are kind of guiding your deployment at this point?

Yes. We have a lot of dry powder and some of our public peers do as well, which I think is probably one of the largest strategic benefits that we all have right now is just the liquidity that exists to not just defend existing positions, but really come into the market as a liquidity provider and get paid for the provision of that liquidity. A lot of folks in conversations like this want to focus on the dry powder, the fundraising and the flows. The reality is it's really all about origination and asset gathering. And so where I spend all of my time is not how much money can we raise or how much money do we raise because what we've learned over time is if we can actually originate differentiated exposures for our clients, the money finds the opportunity. So I think the conversation really is just about what have we done to build competitive advantages in sourcing in unique markets with unique structures that are attractive to our investors. And I think through that lens, that's what we're doing, which is we're deploying more people in more offices with more product against more markets that creates more investment opportunities for us, which then allows us to go out and form capital behind them. The other thing that we do, I think, as well as anybody, is, if you think about the $325 billion that we manage globally in private equity and real assets and credit the teams are actively collaborating. But when you get into a market environment like this, that collaboration is increasing in frequency and intensity because everybody is saying, find me something in your market that will inform a new investment decision or portfolio management decision in my market and how that turns on and the information advantage that you get in a platform like ours is quite significant in terms of how you navigate a market environment like this.

Got it. I want to move quickly to the insurance opportunity, which you're attacking, I think, a little bit differently than a lot of the other public alts. Maybe start spending some time comparing and contrasting what you're doing relative to the other large alternative managers?

Yes, I'm not perfectly familiar with what everybody is doing, but I have a general sense. So I'll do my best, but...

Okay. Fair enough.

The first thing I would say, I think insurance -- it's the reason that insurance is so prominently being discussed in the context of alternative asset management is if you just think about insurance, historically, it's been about liabilities investing. And I think people appreciate, again, particularly coming off of a decades-long decline in interest rates is there's a lot of value to be created on the asset side of the house as well to the extent that you can control more assets with higher yield within the regulatory capital framework of insurance company balance sheet. And so the marrying of the unique origination, structuring and excess return opportunities that an alternative manager could create clearly adds value to somebody who's created at sourcing and managing the liability side of the house. And so not surprisingly, we've all begun to bring those capabilities together for the benefit of third-party insurance clients and affiliated insurance company plans. Our view is that trend is something that we want to and will participate in, particularly given our market share in private credit. But we have been probably slower and more measured in the growth of our affiliated insurance entities. We have a significant number of third-party insurance clients. So we probably manage $40 billion plus for close to 150, maybe 140 insurance companies globally. It's an important part of our business. Those are important relationships, important capital providers, thought partners. And so as we've built our affiliated insurance business, we've been mindful that we're doing it in a way that is supportive of and complementary of our existing insurance company partnerships, whereas I think some of our peers have probably pushed harder in terms of the size and scope of their affiliated entities relative to their third-party insurance clients. In terms of what we're doing right now, we're focused largely domestically on the origination and distribution of new annuity products, so fixed income, fixed index and fixed annuities. We have a reinsurance platform, and we are growing both of those through M&A transactions. We put out information in our Investor Day just to frame the ambition or at least the opportunity that showed that we were going to grow our AUM to be $500 billion by 2025. And if you looked at the discussion around insurance, you would have seen that, that part of our business was growing to about $25 billion of AUM, so roughly 5% of our assets. So I think the biggest differentiator, candidly, is just the scale of that business relative to the core business. It will grow meaningfully in absolute terms, but in relative terms, will stay fairly small. And that's by design. Again, we want to be respectful of our third-party relationships. We want to make it abundantly clear to everybody internally and externally that we are a third-party balance sheet light asset manager. That's the business that we run. We don't want to have overexposure on the balance sheet. And I think we've set up an interesting complex of funds where if somebody wants exposure to our balance sheet investments, they can get it through various listed, nonlisted private funds, et cetera. So if an investor wanted both of those exposures, they can get it, but we think it's actually important to keep those separate.

I think the market agrees. [ Have you look into that yet? ]

So far.

I want to give you some time given we have a lot of journalists at this conference. I want to give you some time to spend on what the growth outlook is for Ares broadly. What verticals are you seeing the most growth and what you see the biggest opportunities for growth over the near term and long term across all of your business lines?

Yes. It's -- alternative investing is a really good place to be just because we are enjoying secular growth, and it's been disrupted. It's been uninterrupted, and it's hard for people to get their heads around, but you actually see us growing faster through volatile markets. If you look at Ares' experience, and I think most of our peers would tell you the same. We actually grew faster through the GFC and COVID than at any other point in our recent history. And that's because there's a secular growth credit in alts, but there's a consolidation trend where the larger platforms are taking a disproportionate share of that growth. So to put that in perspective, if you look at various third-party sources, alternative assets are projected to be growing 10% to 15% per year depending on where you're investing in alts for the next decade, at least, in my opinion, relative to traditional assets that are probably growing at half that. We're out with public guidance that says that we expect to get to $500 billion by 2025, which is I think a 17% CAGR, which is well below our historical trend, but that we expect to grow our FRE significantly in excess of that. So what that guidance is basically saying is if traditional assets are growing at 5% and alternative assets are growing at 10% to 15%, Ares is growing at 2x a market that's already growing twice as fast as the traditional market. So that's a really fun backdrop to be building a business against. And that growth is being propelled by appetite for alts in retail and institutional markets. So there are opportunities for us to grow just by broadening distribution, which is what we've been doing, both on the institutional and retail side. The markets are globalizing. So there's a lot of things that we're doing to open up new markets. We talked about Europe and Asia private credit as an example. And then there are new parts of the market that are coming online for folks like us, like secondary solutions and an opportunity to provide GP solutions into that market versus LP, growth in insurance and the ability for us to invest behind the scaling of alternative credit. So it's almost to a business. They all have distribution growth opportunities, acquisition and consolidation opportunities, product development opportunities and the ability to capture larger share of very large addressable markets. So I think the reason that we're also excited about this is these markets are growing quickly. We're growing faster than the index, but the addressable markets that we play in are very, very sizable. And even we, as market leaders, have very small market share. And so obviously, markets get to a place of equilibrium where market leaders will eventually get to a place where the market share will stabilize. But if you look at private credit as an example, where we just said it's a $1.5 trillion domestic market and if you view it through the lens of the liquid markets, it's a $3 trillion market. Ares is the market leader, and we have $100 billion of assets, right? So you're looking at low single-digit market shares in markets that are fundamentally growing. So I don't want to sound too cavalier, but there are very few businesses at Ares that aren't growing in line with that guidance trend that we put out.

You have a unique bucket, I guess, relative to other managers I cover called strategic initiatives. Maybe could you spend a little time on what exactly that means? What's in there and why it doesn't fit in the other buckets?

Yes. It's -- I don't know if that's the right name for it. What kind of -- what it really is, is I would call that the R&D lab for lack of better word. That's where we are building businesses that over time, we hope could become substantial, but are not at a point where they are necessarily standing on their own as business lines and business units. So some of the things that are there that you see are the growth in our insurance platform or the growth in our Asian private credit business. But there are a lot of things that you don't see that we're working on where we're incubating new products, new technologies that ultimately will become new growth engines and new growth drivers. We have a whole corporate strategy team and infrastructure that all they do is think about how do we actually innovate and grow around the businesses that we have, how do we innovate and grow around markets that we're not in, and it all sits in that part of the business. Not to say that the business lines themselves are innovating, but that's kind of where we aggregate a lot of that growth in innovation.

Great. A capital question. You talked about running balance sheet light, but you've also been pretty aggressive on the M&A front, I would say, relative to others. So maybe update us on your capital return priorities to what extent you still see M&A being a core part of the growth story?

Yes. And so M&A has been a really interesting part of the growth story. We've been able to acquire some very, very high-quality businesses at attractive prices with a lot of strategic relevance and a lot of revenue synergy. And I think we've been fortunate in that respect. And for the most part, we've been able to buy them in noncompetitive situations at attractive prices, which also helps in terms of mitigating risk and creating opportunity. I think we're always open to it. We have a good playbook there and a good track record on the M&A front. I think our culture is geared to be successful there in terms of finding the right people that would fit and want to get integrated with us. But as we sit here today, there are very few gaps that I see in the business globally that creates a sense of urgency around inorganic growth. So I think we'll be opportunistic. We'll continue to drive the business forward. But I'd say the bar for M&A is higher now than it's ever been, just given our opportunity to grow the businesses that we have organically. In terms of capital, we laid out when we converted to a C-corp pretty straightforward capital policy, which is in keeping with our balance sheet light asset management model, which was we are a management fee FRE-centric business, and you can see that in the stability and growth of our dividend. And what we basically articulated is that we will pay out a dividend that is pegged to the growth in our FRE, which is exactly what we've been doing with a view that we will retain the incentive performance income that comes off of the fund complex and reinvest that in the business. And that's been working because the dividend is growing at pace. We've been harvesting investments, and we've been able to really use that as a cost-effective way to drive growth back into the fee engine. I think that's what we'll do for the foreseeable future. I think the question really becomes, well, what happens if you guys do what you say you're going to do and you start harvesting all of this promote dollars coming off of your European water style funds and growing your fund complex, what changes then. And I think the question is, we'll know -- we'll deal with that when we get there, and that's going to be a combination of reinvestment in growth, reinvestment in new product, M&A, distributions to shareholders, share buybacks, all the things you'd expect us to be thinking about. But we're pretty good at predicting where the business is going to be and understanding how that works and the capital model that we've laid out right now is pretty well positioned.

I have a couple on the dashboard I want to get to. Are there any areas of private credit that you're avoiding due to poor underwriting conditions?

I would say, generally, we do not, as a rule, invest in cyclicals. And again, this is so of shocks basic. But if you look at leverage finance default rates over the underwritable history, the disproportionate amount of defaults have come in 5 industries, right? Oil and gas and energy, telecom, homebuilding, so on and so forth. And that's -- it's true. You never know which one and how proportionate. But if you avoid 5 or 6 industries generally, and you're not forced to manage to a benchmark, you will likely outperform. So what we've learned in our 30 years of investing in the private credit markets is if you don't invest in those industries, you generally will do okay. And the reason that you're able to say I'm not going to do it is private credit is a wonderful, wonderful asset class for all the reasons we just articulated, but it has capped upside, right? You get a coupon, and it has theoretical downside because you could lose principal. So when you think about the asymmetric risk return in credit generally including private credit, it's really no value to putting yourself out there and cyclical. So we continue to avoid those pockets of the market, but that's less a response to the current environment and it's more of a consistent investment thesis that we've deployed over our entire history as credit investors.

One more quick one from the audience. In what circumstances would you be worried about the CLO market and what drivers should we be looking at there?

I would not be worried about the CLO market at all. This is another a little bit of a red herring that has come up now in 3 successive cycles. And if you actually look at CLOs in the way that they are structured and who owns the capital structure is they've proved to be incredibly durable structures. And actually, I think we have a white paper of people, I don't know who asked the question on our website. It's a little dated, but it's from a couple of years ago that goes back and shows how CLOs performed by tranche, by number through the GFC and other crises. And I think what we find is that they've proven to be extremely durable. And the way to think about it is if you take an environment now, CLOs get set up when there's a favorable arbitrage between the cost of the liabilities and the spread environment of the asset markets. And so they don't really turn on unless you get an attractive arbitrage to begin with. So it's not to say that you lock that return in, and there's no risk to it, but generally, they get formed when you have created an opportunity to create levered ROEs that can absorb credit loss. So there's something natural to the structure of CLOs that puts that risk into the market when the market can withstand it. We've been through some pretty tough leverage finance markets and the CLOs have proved to be very durable. So I think there's less risk in CLOs once they're printed, I think where you would see more risk is on bank balance sheets where they're warehousing assets for CLOs or probably more importantly, other securitizations, right? So if you think about some of what happened in GFC, the downdraft in the leveraged finance markets was largely the unwind of bank warehouse lines, not the CLOs themselves. It was people, inventory and risk with the expectation that the risk to be laid off in the securitization market. And then that market closed because the arbitrage didn't work and then those assets got put into the market. So I tend to think that the risk is there. It's preformation, not post formation.

Makes sense. I think it's just because it rhymes with CLOs.

It does. Yes. It's funny because we all have a really terrible habit of coming up with 3- and 4-letter acronyms for everything, and we can't get away from it. We tell ourselves, we'll stop doing it and then we keep doing it. So...

Thank you very much, Mike.

Yes. Thank you. Really appreciate it.

Thanks.