Ares Management Corporation (ARES) Earnings Call Transcript & Summary

All right. Hello, everyone. Welcome to our next session here. I'm Ben Budish, Barclays analyst covering the U.S. brokers, asset managers and exchanges. And with us, we've got Mike Arougheti, CEO of Ares. Mike, thanks so much for being with us.

Thanks for having me. Hi, everybody.

Maybe just to start out with a high-level macro question. Can you just kind of talk about what you're seeing out there in the environment, the broader fundraising deployment realizations? How are things kind of shaking up? How are they evolving since we kind of last caught up last earnings?

We talked about it on the last earnings call, obviously, that given the rapid increase in rates that buyer and seller expectations were not aligned, and that was leading to a reduction in deal flow. But at the same time, pointed to the fact that we deployed a little over $15 billion in the quarter, which while slower year-on-year, I think was still a very healthy number. And I think that speaks a little bit to the diversity of the strategies that we have on the platform globally. The positioning of a lot of our product to be opportunistic capital provider into the markets when they freeze up like this and the opportunity gets created for us to come in, particularly on the credit side, when the banks are derisking and pulling back. We did say, though, that we thought that there would begin to be a falling of the markets towards the back half of the year as we approached terminal rate. We are seeing that. I think deal flow is picking up in Q3 and I would expect that, that should translate into higher deal flow in both Q3 and Q4. Q4 is typically a seasonally strong quarter for the Alts business, generally speaking, as everyone is rushing to get things done by year-end. So there is still an opportunity as we've seen in years past, particularly in 2021. Q4 can accelerate pretty quickly. We'll know more in the next 30 to 45 days here how the pipeline is developing. But I think the deployment picture is improving. Obviously, you'll still have to get to a point where the cost of capital works for people in the market. But now that we're probably at or near the very end and there's going to be stability in rates. I think buyer and seller expectations will start to come back together.

Great. And maybe one other sort of macro topical question just in terms of overall credit performance, what are your sort of observations there? I think you kind of investor price at ARCC, I think, non-accruals sort of declined in the second quarter. What are you -- in question, are you seeing there?

Yes, I think generally, across the credit portfolios in private credit, fundamental performance continues to be really strong. If I were to say the only place where we're seeing modest weakening in the very low end of some of our consumer credit portfolios, but, a, that's very small amount of what we do; and b, it's high rate of change, but still well within historical averages. So something to keep an eye on, but not overly concerning. But in terms of the corporate book, as you highlighted, a very interesting time to be in our business because normally, when people are talking about economic downturns and recessions, rates are coming down, and we're seeing meaningful degradation in company performance. We have not seen that. So as rates have been moving up on the private credit side of our book, we've basically been accelerating all of that total return into the portfolios, which has been a big benefit for fund performance but also for our P&L because we get incremental incentive fees over fixed hurdle rates, but we haven't seen deterioration. You mentioned the nonaccruals actually went down quarter-over-quarter. They currently sit at about 2% at cost at about 1.3% of fair value, which means even where we've seen challenges, we've been able to write those down and again, historical averages are in and around 3%. But at the same time, we're seeing solid cash flow performance. So quarter-over-quarter, the corporate books were logging high single-digit year-on-year EBITDA, down from 12% in the prior quarter. So part of the story is we're seeing a slowing of growth, but we're not we're not seeing a reversal of growth, and I would expect that to continue as well.

Okay. Very helpful. Thinking about sort of the growth in Private Credit, it's obviously become one of the hottest asset classes among the alternatives. Maybe can you walk us through the opportunity you're seeing as it's evolved this year, particularly given the pullback from the broader bank syndicated loan?

It's still funny that Private Credit has become so hot because there are decades where no one wanted to talk about Private Credit, and now it's all anybody who wants to talk about. So I'm having a moment, which is just kind of nice. What are we seeing? The banks -- there are still many things that we can talk about here. I think what you're referring to is how does Private Credit exist with the broadly syndicated loan and high-yield market, and it's interesting because it's getting a lot of attention now. But if you look change in force within those markets, there's been a big move to scale in the loan in the high-yield market that's been in place for the last 20 years. So I always like to remind people, if you go back and you say 20 years ago, what percentage of the loan on our high yield market was in the hands of issuers of $300 million or below, it's 40%. So that meant that your average middle market issue they wanted liquidity can find their way into the owner market. If you look at that percentage today, it's very low single digits, 1% to 3%, depending on when you look at it. So what's been happening and not surprisingly, is the banks have consolidated and restructured and the equity markets have consolidated and concentrated debt markets are doing the same. So if you're going to issue into those markets, you have to be able to certain size with a certain credit quality and a certain prospect for liquidity. And that's the right place for certain people. But I think for a lot of people, you get better execution in the private market. So this is not something new. I think the reason it is getting so much attention now is on the heels of second time that we had to deal with unsold inventory. I think it exposed a little bit of the lack of risk appetite at a certain point in time that the banks have to underwrite and distribute that risk. And when they pull back, there's a huge opportunity for private credit providers to put that in context, if you look at buyout financing that was done last quarter, about 85% of bio-financing was done in the private market. I don't think that's going to be the sustainable number, but it's a pretty good indication that at least right now, the broadly syndicated loan and high-yield market are not functioning at full force. But there's also the other side of the bank per what's going on in the regional banks and how that will roll through to create primary and secondary market opportunity for the Private Credit as well.

You're leading you right into my next question here, there's opportunity with the regional banks. Your ability to kind of pair liabilities or assets they may not want with the right duration liabilities. How do you see that opportunity evolving? What does the pipeline look like? Do you see a lot more deals like the one you announced earlier deal with PacWest? Is there a healthy pipeline there?

Yes. There's a series of complications because -- and we're still early days here. Obviously, the first wave of Silicon Valley Bank, PacWest signature first report, all of that noise analyze the number of transactions, and I'll come back and talk about PacWest because I think it's a good blueprint for how the world works down the road. But now we're in the early innings of, I think, particularly in the context of the new Basel framework and the profit of increased regulation and increased cost of deposits, putting pressure on both bank balances and some P&Ls. People are now doing a pretty significant peak dive into what the path forward for any particular bank is. I think in terms of our opportunity to partner with them, and I want to emphasize, it really is a partner. Again, you'll see this when we talk about the PacWest transaction is how do we use our flexible capital to match up with their balance sheet needs to help them either monetize, improve, optimize their balance sheet or continue to leverage their client franchises the way that they may not be able to do going forward? And at the high level, I think that probably takes 3 forms. One would be reg cap trades where we're using our flexible capital to do something on their balance sheet that is accretive to their regulatory capital ROE and the pipeline of conversations around those types of structures is increasing dramatically as we'd expect. Two, I think, would be generally just portfolio acquisitions. And PacWest is a good example. We announced the transaction with PacWest a couple of months ago to acquire a $3.5 billion portfolio of lender finance exposures. We went in and looked at the book. This was the second portfolio that we bought from PacWest. We actually bought into the market loan book from a template 3 or 4 years ago as well. So it's good connectivity. They had 80 clients in that portfolio. We went and did our work ultimately agreed to take 55 of them, $3.5 billion of aggregate commitment, $2.5 billion of which was funded. And then we went and forced a pretty unique financing from a large G-SIB to make the returns and the risk work for us and for the bank. And so if you think about what happened there is you had a regional bank that had balance sheet constraint needed to free up equity. We had a G-SIB that had a specific structure that for a recap standpoint worked very well for you. And then you had us and our investors that through the use of that structure. We're able to generate some very attractive rates of return. And interestingly, this is a high-performing portfolio that we bought at a reasonable [indiscernible]. So this was not a distressed 30-, 40-point discount, it was a single-digit type discount. Now the way that it's structured, and this is maybe to my point about what does the world look like, those unfunded and that client relationship now kind of sits with both places. So as those loans fund up, we'll take that risk within the structure of the balance sheet, and we now have access to those clients. But I think importantly, PacWest is still interface with them as well. So there's this overarching narrative that out there, which is probably not appropriate that the private credit industry is taking share or acting contrary to the bank's interest. I think this is a good example that actually the opposite, right? We're allowing one regional bank to optimize their balance sheet from serve client relations that allowing another bank to actually get exposure to these assets in a real accretive way and then growing our franchise. So maybe the third thing to keep an eye on is once we go through this wave of portfolio transact into reg cap trades is I think within the banking universe writ large more consolidation, more regulation, higher reg cap requirements, it means that most banks, big and small, will have to go through an appropriate review of what businesses they're in, where they want to put resources where they want to allocate capital. And we'll hopefully be talking to folks like us about how to be a balance sheet partner, right, not a competitor, but I'm deemphasizing a certain business or game XYZ business noncore, you can sell the business to Ares or I can keep the business and work with the Ares as a balance sheet partner to kind of extend the duration and value of my client franchise. And we're also seeing that dialogue pick up well. So it's early days, but I do think that this has been jumping off pretty big secular growth opportunity for private credit as the banks need to consolidate.

So give the size of that opportunity, how do you think or how are you doing competition? You mentioned earlier having a moment only you're not the only one even though Ares did seem to quite scaled here and very good, but there are others that do this and presumably again, given the size of the opportunity, more will want to come too, are you seeing -- or is there any worry that there may be too much congestion in the private credit markets from providers like yourself, is competition picking up? Has it increased in the last 6 to 12 months? What's your view there?

Again, it's hard to give a short answer because private credit for Ares is a $250 billion-plus global business, and we're in real assets lending, corporate lending, structured lending and all things in between. The simple answer I would say is no. And despite all the attention that private credit is getting, it is still undercapitalized relative to the total addressable market opportunity that exists for private credit. And one way to think about this, and this would be true if you look at each of the markets is just look at corporate private credit, there's been a healthy amount of capital formation. But if you were to ignore the number of headlines and the number of people who are raising their hands and saying that they're in the Private Credit business, the reality is the bulk of capital getting raised in the Private Credit space has continued to go to incumbent large Private Credit managers because of the benefits of scale in that market. But if you think of it as through the lens of who are the users of this capital, the bulk of users of Private Credit in the corporate space or buyout firms. There's a little over $1 trillion of uninvested buyout Dry Powder in the market today. And if you'd aggregate available private credit dry powder, it's about 20% of that. So despite all of the noise about the amount of capital that's been raised if you think about your typical buyout of today, equity contribution to a buyout today is about 57%. That's an all-time high, which maybe we'll touch on or not in terms of the credit quality of the new investment environment. But if you say 50% equity, 50% debt, that means with $1 trillion of equity Dry Powder, you need $1 trillion of credit capacity to satisfy that. Now over cycles, it's been more like 2:1. So if you have 1 trillion of Dry Powder, you need $2 trillion, we have 10% of that. The high-yield loan market, they'll take some of that, but there's still a lot of room to grow in corporate private credit just to satisfy the demand of the already raised private equity capital putting aside all the things we just talked about in terms of the structural change in the market that will greatly space as well.

Maybe just following up there on the topic of structural changes. So you mentioned equity portions are now much higher, but historically, was a bit lower. I think I've heard you say that we're in an unusual rate environment if you only consider the last 10 years ago proportionate time, this is a fairly normal, risk-free rate 4% to 5%. So do you see that sort of changing? What's kind of like the timeline? How long does it take for factors to get comfortable with that sort of historic equity layer?

Well, I think for the new transaction flow, easy. I mean a lot of it is just you need the discount rate to be reflected in the valuation environment and for people to be able to transact. One of the reasons why equity contribution is high now is because the cost of debt capital is too high to make the valuation work absent equity contribution. As a quick aside, what we are seeing in our market, which is interesting and even going back to the PacWest, sell your best assets at the lowest discount, we're seeing that across the waterfront. So normally when you're talking about a cycle and you're talking about opportunistic investing, you're talking about weaker performers and driving return through structure. Most of the things that are coming to market and transacting are higher quality because they can actually still generate high valuation to access cost-effective financing. So it's an interesting deployment opportunity now because we are putting out real high returning dollars and some of the best quality assets that we've seen in a long time. I forgot what you'd asked me. I can't remember what you'd asked me.

I think we got most of it. So maybe one sort of more high-level question on Private Credit as it were. So in terms of geographic mix, you won the largest direct lenders in North America and Europe, you're quite [indiscernible], can you talk a bit about the structural differences between those regions? And are the trends we're seeing here playing out there? Is this sort of -- is there a similar opportunity opening up outside the U.S.? And are there any other sort of tailwinds or the dynamics we should be aware of?

Yes, it's interesting, right. At this moment in time, they are presenting different opportunities. As business builders, we had a view that as when the U.S. would go Europe and as when Europe would go, we have depreciated over time a combination of structural changes within the banking market, development of the capital markets, institutionalization of the equity markets, development of regulatory frameworks to support credit provision. So that's all happening, but it's happening in a different case. So Europe is obviously caught up to the U.S., the Asia region still in its infancy in terms of the institutionalization. Obviously, you're beginning to see different economic outlooks as well, right? And when you have a disconnection to the economic outlook, you're going to see a different opportunity set to invest. So despite the fact that everyone is calling for a recession despite the continued strength of the economy now, 2 years removed from the initial call. The U.S. economy remains very strong and the eurozone economy looks more challenged and that may create a different set of investment opportunities in the European market than in the West. And in the APAC region, obviously, you're dealing with a whole mix of developed and developing countries. You're dealing with a slowdown in China and the need to resolve the real estate prices in that market that has ripple effects. India is obviously differentiating itself pretty aggressively, both in terms of regulatory development, but also growth and demographic profile. So India is an interest side, Asia is an addressing placement right now, and the bulk of what we're doing is to our opportunistic special sits business because of the need to be able to pivot between these different markets, but we have been investing with paramount of success in growing a more traditional Private Credit and Direct Lending business there because we're beginning to see all of the PacWest that we know from our history in the U.S. and Europe are merger. So I think that we're not-too-distant future, you'll begin to see that developed pretty well.

Maybe moving on to fundraising. So starting with another kind of high-level question, maybe your thoughts on sort of broader secular trends and alternative passives, where can institutional allocations go? And how does this differ from asset -by [indiscernible] think about in Private Credit, Private Equity as an alternative bucket? Or how do you think about growth and the opportunity there and from the outside perspective?

Yes. I think that, look, it's -- each investor is different institutional versus retail, but I'd say the general statement if you talk to CIOs or the heads of wealth platforms or large FAs will all tell you that they're under allocated to all improvements. And generally speaking, I think people want higher return per unit risk that they take and if we reunderwritten the value of liquidity and have determined that, particularly in yield strategies, they need less liquid than they was used to. And again, you look at what's been going on, the value of fixed income in an environment like this. And it's great if you have liquidity, but if there's not a price at which you would monetize, why did you pay for it in the first place. So if you were to look across the entire landscape, I would say, generally, the consensus would be that the alternative space is -- has played to grow 10% to 15% across the board. You'll probably see slightly higher growth in private credit. You may see modestly higher growth in infra, but it depends on the investor because certain investors don't have allocation to private credit, you'll see a massive ramp. So I think it's going to be investor-specific, geography-specific, but industry index retailers should be in mid-teens in terms of growth. And then obviously, if you look what we and some of the other large platforms have been able to do, we're growing at twice that industry growth, which speaks a little bit to this trend of the larger getting larger. And maybe that's a good segue to fundraising, our fundraising experience this year has been incredibly positive. There was a lot of conversation coming into 2023 about the denominator effect and the challenges that all managers may space raising capital, particularly in Private Equity because obviously, a lot of capital was raised and deployed in 2021. People have not returned the capital, DPI is low, and so it's hard to go back and ask for it, you haven't returned capital. We came into the new year with a pretty clear view that we articulated to the market that we expected our fundraising this year to exceed last year. Last year, we raised close to $60 billion, about $57 billion, and potentially depending on timing could approach to our record fundraise in the year, which was 2021, which is about $76 billion. So that was kind of the range, call it, $60 billion to $80 billion. Through the first 6 months of the year, we had raised about $31 billion and then as of the date of our earnings call, we had raised about another $7 billion or $8 billion, close to $40 billion in the 6 months. So on pace, and we are in the market with a very sizable commingled funds within our broad credit complex, our U.S. direct lending fund, European direct lending fund, U.S. alternative credit funds. So we're not seeing a slowdown in demand for Private Credit strategies generally across the board. We're not seeing a slowdown for those types of strategies in retail either. So you'll have to see how the rest of the year plays out at least from the Ares perspective, the fundraising momentum is still good.

You kind of answered my next question about these flagships, but maybe we can talk a minute about some of the newer strategies here on the Ares platform. Second area is infrastructure. How do you see fundraising evolving across those -- in those asset classes? And how do you think about these new strategies scaling up over time?

Yes. Like I said, I think the only place that the market -- everyone in the market is seeing longer fundraising cycles for their core buyout ones. And that's just because you've got denominator effect and a difficult utilization environment. Other than core buyout, I think the appetite for yield product and real assets are still pretty strong. We've seen good demand for our opportunistic real state strategies. We've seen good demand for our real estate lending strategy, our infrastructure product which you asked about, we're in the market with an energy transition and climate infrastructure fund, which is pretty on trend and enjoying the success. And we are, as we talked about on our earnings call, likely to launch the next vintage of our infrastructure credit fund towards the back half of this year and into early next year. And again, I think all things private credit will be well received.

Got it. Maybe moving on to realizations a little bit. I'm thinking specifically about the European waterfall opportunity you have. You've talked a bit about the P&L impact. Can you talk a little bit about the hurdle rate on these funds? Should investors -- is there any kind of realization risk that investors should be thinking about given a lot of these were invested in a sort of low-rate environment understanding that a lot of this Private Credit metrics as it is. But how do we think about -- I think you've laid out the opportunity, what should we understand about the risks?

Yes, it's fine. The risk in and of itself presents other opportunities. And with so interest in that composition of our business now is because of the diversity of strategies and structures and one fund is realizing the other is deploying when utilizations increase, it has certain implications for deployment. So you zoom out and you say what world are we in, you're probably going to see that one part of the firm is benefiting disproportionately in that environment of why we keep talking about it just to level set everybody's understanding is if you look at the incentive fee generating AUM that sits on our platform, significant majority of that is in credit funds and the significant majority of those are European waterfall, which means that we get our incentive fee after the investors have gotten their capital plus or hurdle rate back. So as these funds mature and step up, you begin to generate carried interest incentive income, PRE even absent realization just because you're earning of the hurdle rate and Jarrod, who's here in the audience gathered a great presentation, it's on our website to talk about what that means for us financially, but there's about $2.5 billion of opportunity in the ground in these European waterfall fund that will begin to show up in the P&L in earnest, beginning in the back half of the year in 2024, and that's absent accounting for all of the flagship credit funds that we're raising. What's so interesting about it, and you'll see this if you look at our performance line item on our balance sheet, while many of our peers are seeing that number shrink because the value of the Private Equity portfolio is reducing or is actually growing. And the reason it's growing, to your question is because we earn incentive fee above fixed hurdle rates. And depending on the strategy, it's usually 5%, 6% or 7%. And so if you have a credit fund that is now enjoying 500 basis points of excess return because the base rate has gone up, that basically all flows into that accrued incentive fee bucket and that's a permanent articulation in return. So as these start to mature, you're going to see more predictable and more consistent PRE generation that I think the industry as a customer to see.

Interesting. You kind of answered my next question, too, which was about [indiscernible], that's okay. How sustainable is this trend in 3, 4 years were you going to be talking about the next 5, 6, 7 years and call me a greedy sell-side analyst because you've already given us through 2028. But it sounds like the answer is yes, this is quite sustainable, is that a...

Yes. I think we'll have -- look, we've tended to talk about it in 2-year increments because some of it will be timing dependent in terms of what market environment you're in. But yes, it will reload. So it's interesting. Once it turns on, now that we're raising the next vintage and those are larger or at least the same size as the prior vintage, that number will keep backing. You would ask about refinancing risk. I wouldn't call it a risk, there's a potential that if the market recovers that those portfolios harvest quicker, which would mean that you would see that PRE come in sooner but you wouldn't get all of the compounding opportunity that I was talking about, definitely as much an opportunity at risk because that means, again, that we've returned to a healthy deal environment, we're returning capital to our investors and reloading the machine. But yes, there is mathematically to the extent that the transaction environment picks up dramatically, you accelerated the part of this period that would come in quickly.

Maybe one last question on that topic. So as rates have come up, are you seeing Oaktree demand higher hurdle rates on any of these funds? Is there a risk of that happens, rates come down and then 6 years, the story is different or...

It's interesting because the answer is no. And I think the answer is because these are pretty well entrenched market convention. And if you think about it from the investor perspective, and again, I know that we've all been conditioned to 0 rate, but it moved to a floating hurdle, there were puts and takes on either side of that. And so it is very rare that you're having a negotiation with an investor about that hurdle rate, having a negotiation with the market about where to set it relative to the perceived risk and return opportunity in a given structure. But again, we're in the market now with 25 funds all with different hurdles and no one is trying to improve the value of the fixed hurdle rate.

Got it. Maybe turning over to retail now. So can you kind of remind us what are your new products in the market? Where are you seeing most traction and in particular, ASIF, your newest fund, and what sort of reactivity are you seeing?

Yes. So retail is obviously I think a big opportunity for growth with alternative managers. I think Ares has one of the largest and best developed capabilities in that market. We had about 125 people in our Global Wealth Management Solutions business. It is up until this point, then largely, you're on North American wealth distribution, but a lot of the recent investments we're making are to globalize that into Europe and parts of the Asia Pacific region. Right now, we have 5 key funds in that camp. We have a diversified NAV REIT. We have an industrial NAV REIT. We have a diversified interval fund that focuses on all things credit that we do at Ares. We had something we call the private markets fund, which is a Private Equity exposure where we're leveraging our secondaries business, deliver PE exposure to the retail investor and the most recent, which you referenced is our non-treated BDC, which we booked 8 [indiscernible] on. We launched that with Seed Capital at the beginning of the year, grew it with Seed to a little over $1 billion, about $1.3 billion and then put it into our first wirehouse partner in July. So we're one month in, or I guess 2 months in. Very pleased with the reception that we've gotten and not surprising to us given the urban brand that we've built at Ares Capital Corporation in the traded market. I think that's translating into significant demand for the non-traded product. August, similarly, we're seeing good flows. We'll be continuing with our one wirehouse partner there for the next couple of months. We're seeing good RIA pick up for the product. And then I would expect that we'll see another wave of wires pick up a year or so, yes. Early indicator are the demand that we expected to see is there. And I think given the investments that we've made in the channels that we're taking share. And if you look at the public information, which comes out monthly, you'll see that we're probably the second or third in terms of capital raise in the channel, and I think your share gains, I think you probably picked up more share in that channel in the last year than anybody else. Still a lot to do to continue to build that out and globalize it, but trending in [indiscernible].

Just following up on your distribution comment. I think you were talking about ASIF specifically. So in terms of the broader fund complex, is the distribution work out? Or is there similarly like a long way to go in terms of more wires, more countries, more RIAs.

So we have all of those products, not every product is in every wire, but we have product in every wire and most of the product is in more than one. A lot of build-out of the sell group in the domestic market. It's just basic blocking in my opinion kind of moving through the different platforms to enhance the distribution. I think the big step function change maybe the international expansion, we're really spending a lot of our time.

Great. So maybe another question sort of thinking about real estate, kind of understood on the retail side to be a little bit more challenged, but the momentum is sort of picking up elsewhere credit, private markets sort of funds. But you have a particularly interesting offering with your 1031 Exchange. Can you talk about that a little bit of a brief overview? And how big do you think flows from that specific piece could become over time?

Yes, it's actually -- I hope this doesn't esoteric to talk about because I actually is an example of how we try to innovate around markets. But if you were to look at our non-traded REIT flows, while we've seen inflows slow, we have not actually experienced outflows. So one of the overarching actives for the last 12 months have been outflow pressure in the non-traded REIT market. And if you look at our experience, we're actually seeing net inflows. Some I think of performance, some of it is structural. We're running with lower leverage and different set of exposures. But the big contributor is this 1031 program. And we're now getting into the weeds on what it is, effectively, we mechanism to allow high net worth individuals to contribute property through a 1031 Exchange and over time, take back shares on non-traded REIT. And that's represented historically, depending on when we look at it, 40% to 60% of flows, but there are 2 benefits. One, they're larger. And so the average commitment in the 1031 program this year, I think about $1.8 million, which in the retail space is a pretty big ticket, but it's sticky because of the structure within 1031, that capital stays in the fund longer. And so to some of the outflow pressure that some of our peers are seeing. It's also a huge win for the adviser community to be thinking about a high net worth, ultra-high net worth adviser that has a client with a real estate portfolio, chances are they're not -- that's not in their portfolio, they may see it, they may be in their purview, but they're probably not managing it by accessing our REIT through the 1031, the adviser delivers a great [indiscernible] but they also now bring the NAV shares into that portfolio. So it was actually a share gain. So client gets to execution and deserves the tax-free exchange, the adviser expands the AUM and Ares gets to taking that clients. So pretty innovative, very differentiated in the market. And I do think it's one of the reasons why we're not having the same export.

Great. Moving over to insurance for a minute. It feels like as a much bigger theme for public peers and it's been with Private Credit. Now Ares has plenty of growth drivers even separate from the insurance business. Can you start though, maybe talk a little bit high level what you're kind of doing there? Talk about what are your sort of long-term ambitions for new trans business areas?

Yes. So we, like some of our peers understand value and the linkage between insurance company liabilities and alternative assets, particularly alternative credit. And I think for forever insurance company for largely liability-driven and now the opportunity to generate excess return on the asset side, obviously, is a huge value creator for insurance companies. That is not lost on us and has not, up until a number of years ago, we were largely focused on building our third-party insurance client business versus building an active or an affiliate. So to put that in perspective, if you look at the $380 billion plus assets that we manage, over $50 billion of right now is probably in the hands of third-party insurance clients. Order of magnitude, about 150 global insurance companies have capital with us largely as LPs and our funds, large strategic SMAs around parts of our credit franchise. And then a number of years ago, we set out to build organically life annuity platform called Aspida. We did that with modest investment of the firm's balance sheet. And if you look at our Investor Day presentation from summer of '21, we basically put out a view that we would grow that about $5 billion per year to get to $25 billion of AUM against guidance, it would be $500 million plus, but call it 5% of our AUM at the time. And that success would be Ares managing 50% plus of those balance sheet assets on behalf of the Aspida balance sheet. Where we are today is platform is fully built thing that we did it organically. We're not dealing with any legacy back books. So we're not playing defense in the existing exposures. We turned on our organic annuities distribution in earnest earlier this year, and the combination of our reinsurance flow agreements and our annuities distribution has us pacing almost put on to that $5 billion per year type growth. So at the end of Q2, we were about $9.5 billion of AUM. Ares today manages about 60% of the balance sheet, largely within our Private Credit franchise. And I would expect that growth to continue on trend. In terms of our aspirations, I think it will be a very important complement to our third-party business. It will also be an important complement to our higher risk, higher return type strategies. But I don't expect it to grow beyond that 5% to 10% of our AUM. So unlike some of our peers, I think who have done balance sheet heavy or insurance heavy, we're approaching it a little bit differently with just to meaningfully grow it in absolute terms, obviously, a $50 billion insurance balance sheet is a meaningful business, but we just don't want it to overwhelm the asset at platform, the third-party clients we have.

Understood. Well, Mike, unfortunately, we're out of time, but thank you so much for being here.

Great. Appreciate it. Thanks, everyone, for your time.