Ares Management Corporation (ARES) Earnings Call Transcript & Summary

Good morning, everyone. I'm very pleased to introduce Michael Arougheti. Michael is the CEO, Co-Founder and the Director of Ares Management. Five years ago, Ares managed a little over $100 billion of AUM, and now it's almost $400 billion. Ares ranks #1 in private credit globally, which is arguably the hottest asset class in private markets right now. And Mike is also one of the most respected CEOs in the industry, especially given Ares' performance over the last few years. People those are buying think it's best positioned within the credit cycle and secular growth of private markets. We also have Ares' CFO, Jarrod Phillips; and Director of IR, Carl Drake, in the room here, too. Guys, thank you all for joining us. Welcome to London. And before we get started, Mike, any opening comments?

No. Just really happy to be here to spend some time with you guys.

Great. And for everyone in the audience, we will be taking questions a little bit, too, if you have any. So let's start with the big picture question. So Ares has clearly been on a fast growth trajectory. Your AUM is 4x larger than it was 5 years ago. Can you share the insight into your growth strategy? And can you continue to grow at this robust growth rate?

Yes. So we've been in business for 25 years, founded the firm in 1997. We've actually been growing at a compound annual growth rate in excess of 20% since then. While the numbers are getting bigger, it's really just the compounding effect of the growth in the businesses that we have. I think the growth that we have is frankly a result of three things. One is just meaningful secular growth tailwinds in the private markets and alts, which we can come back and talk about, if you like. But that has a lot to do with regulatory and structural changes in the global banking system. Structural changes in the public equity and public debt markets that have created white space for all private markets practitioners like us, so secular ships. Two is, I think it's just really solid performance over a long period of time. And we have a saying in Ares that results follow performance. If we execute in the core fund families that we manage, then our clients will give us not only more capital in our existing strategies, but into new strategies. So we've been able to grow with our existing investors and have them follow us into new markets and new products as we grow. And third, and this is kind of the maybe least understood element of this is unlike in certainly corners of the public markets, any private markets investing, scale actually is driving out performance in a lot of what we do, and it's leading to further growth. And the reason for that is they know that you differentiate performance is through building differentiated origination and investment capabilities around the globe. And we've been there very early, I think, in understanding the value of local market origination in the private market. And that's the big driver of our growth. And you create competitive advantage in origination and portfolio management, it creates this very deep incumbency in relationship network effect that's very hard to replicate, and that just keeps compounding and amplifying. So the simple answer is, I think we've been the beneficiary of a great industry tailwind. I think that we had outperformed the market because of the competitive advantages we have in performance. But I do think that we are just getting started. The globalization of alts is still in the early innings, the retailization of alts is still in the early innings. We are now, I think, about to see a second wave of transformation in the banking market, particularly in the U.S., that should open up a pretty big opportunity for leading private credit managers like us. So I do think we can continue. I'll maybe just end to remind everybody, I think you know this, but we put out guidance at our Investor Day in the summer of 2021 that we expected to hit AUM of $500 billion by the end of 2025 and that we would expect to grow our FRE and our dividend at 20% plus. And obviously, we've been well on track. So that's not probably as far out as you were hoping in terms of the crystal ball for growth, but it's a good indication that at least for the near term, we think the growth trend is very much intact.

So Mike, you just hit on one key competitive advantage, investment performance. What are several of the other key competitive advantages? And do you think at this moment, I mean your stock has being rated versus peers, do you think some of them are still underappreciated by investors?

In terms of what differentiates us?

Yes.

Yes. The interesting thing about private markets versus public markets, and I say this with -- in the full light of day, but the beauty of what we do is we make investments with perfect inside information because we're entering into bilateral relationships with borrowers and companies that are looking for capital. And so we don't pull up a CUSIP on a screen and buy it. Our business is to be in a local market talking to companies and company owners and assets and asset owners about what their financing needs are. And when we engage, it could take a 6- to 12-month diligence process to evaluate whether we want to make that investment. So it's just a fundamentally different business, and that may not be perfectly understood. Because of what we've built from an origination funnel standpoint, we also get to be very selective. So whether you're looking at our private credit business or real assets or private equity, when we make an investment, typically, we say yes about 5% of the time. So if you think about last year when we put out $80 billion of capital across the platform, that effectively represented 5% of the available investments that we saw. So that's just another indication of how this scale drives performance because you get to be more selective. But what's also happening, which is I think, unique to us is that incumbency then allows you to re-underwrite and reinvest in your best companies. So in our corporate private credit franchises, as an example, about 50% of our investments go into our existing borrower universe. So we've been living with them. They're in the portfolio. We have that private side information advantage, and that's just compounding. And what you begin to see in markets like the one we're in now where the liquid markets are dislocated and the M&A transaction volumes are low, that incumbency benefit is actually driving differentiated deployment. So if you actually look at Q1 and Q2, probably 2/3 of our deployment was into the existing book. So that's very unique. And I would say the second thing, which is maybe a little bit softer, but I think for those who know the company, because of the way the business was built, there are very few, if any, silos within the way that deals are sourced and evaluated within the firm. So the culture of the place is very, very collaborative. You and I have talked about this over the years, Craig. The partnership has been together for 25 years. We've had very low turnover, if any, at the senior levels. And so there's been this culture build over time that is quite unique. And what that allows you to do is to look across all of the portfolios and get differentiated information. So there's very much an information edge that we bring to the portfolios that we manage. So if you think about the $380 billion that we manage today, and you aggregate it, we have investments in over 3,000 middle-market companies privately. We are getting monthly financial statements from those companies. We're talking to the management teams daily, if not weekly. That information is very quickly aggregated and then able to be transmitted out to the rest of the organization. And so when you think about portfolio positioning, whether it's how proactive we want to be on the new investment side or decisions that we want to make on the portfolio management side, that information edge is pretty critical, and I think quite unique too.

So I mean with the 25-year partnership, what I thought was also impressive is how many top investors and executives you've actually attracted from other great alt firms over that period, too. So that was kind of a trend that I'd like to see.

Well, I think just to that, I think those folks are realizing that the business that they want to do can only be done on a platform with the global scale that we have because of all of these countervailing trends towards consolidation and growth. If you are a high-quality portfolio manager in a smaller kind of single asset type shop, you're going to want to find your way to a larger platform. And because of this lack of siloing, I just think it's easier for them to come to us versus others.

So I wanted your perspective not on the overall growth rate, but we've seen the institutional channel, especially in the U.S. with pension plans, endowments, but looks quite mature. Retail insurance were quite immature. So first, maybe on where the puck is going on the distribution side globally and also by channel.

Yes. I don't think that the institutional market is mature by any stretch. If you look at some of the published research by the Preqins of the world, they'll still tell you that there's a significant amount of growth in the institutional market for alts in the, call it, low double-digit range. So maybe just to hit that, if you think about a market generally and alt's growing at 10% to 12%, they're growing at 2x, the index market rate, which speaks again to the large getting larger. But the pension funds are still dealing with the problem they've been dealing with for decades, which is particularly in a low interest rate environment, the U.S. pension system is largely underfunded. And the only way to actually get on sides is to drive higher risk-adjusted returns through alts. So each plan is going to be in a slightly different place, but I think each will generally say that they are under allocated and will meaningfully be allocating with a focus on private credit and real assets, which, again, is kind of right in the sweet spot of what we offer. In terms of the globalization of the institutional market, you're beginning to see other parts of the world turn on as well, either because they themselves are maturing as investors or because regulation is now being supportive. So just as one esoteric data point, you could take in Mexico, the forays were statutorily unable to invest in non-local alt managers. There's been a regulatory change that now has opened that market up to institutional investment outside of their home market. And you're seeing that play out globally as well. And I think that will be a good tailwind for the global institutional investor to find their way to alts platforms. Retail and insurance are clearly we talked about as big growth areas. I think that, that is with merit. The democratization of alts is a real trend. I think if you look broadly in that market, it's probably an average 3% allocation to alts in the high net worth population. And I think most advisers would like to see that grow to 2x or 3x that. Our quant teams and research analysts have actually been putting forward a 50% alts allocation as an alternative to the 60-40 portfolio for a certain segment of the retail population. And so there's definitely an appetite and a significant growth opportunity in retail, but not that easy to access. It requires significant investment in distribution and servicing globally and a significant investment in product. And so I think Ares and a handful of others will in the not-too-distant future be very differentiated in terms of growth in that in that channel. But while the end market is significant, the fundraising numbers are still a fraction of what we're seeing institutionally. So record funds raised in that market are approaching $87 billion two years ago at the peak. It's probably $27 billion through the first 6 months of this year. So even if it's a $50 billion to $80 billion market, it's not -- we're not quite there yet where it's cannibalizing the institutional opportunity. And then insurance is a really interesting growth opportunity for two reasons. One, a lot of what I would call enlightened insurers now are understanding the value of creating excess return on the asset side of the balance sheet through alternative credit. And so we have seen, for example, our third-party insurance client base grow quite dramatically to the point now where we manage over $50 billion, I believe, for about 150 separate global insurance companies. And then there's a secondary trend, which we and others are participating in, which is creating affiliated life and annuity platforms to get access to the differentiated liabilities. And what's differentiated about insurance, which is why folks are so excited about it is, it allows you to focus now on high-grade fixed income alternatives as opposed to the higher risk-adjusted return. And there's a whole -- we could speak for hours about the risks and opportunities in insurance by moving up the balance sheet for lower risk-adjusted return, but it does open up, from an origination standpoint, a whole corner of the market an alternative credit that heretofore wasn't really as open to us.

Well, I think we'll get to insurance in a little bit. But maybe same question, but the last one is distribution channel. This time asset class. You're seeing some buyout funds shrink from some of your competitors vintage over vintage. This has happened before, but it's not happening in other area. So do you see some areas in the market, private equity, maybe venture, maybe hedge funds that are more mature, weak aggregator growth prospects versus other areas that are raising larger funds, private credit, transition renewable and infrastructure.

You kind of answered the question for me. I mean, I do not think that private equity will stop growing, but private equity is having a moment now where the market is digesting all of the capital that it has raised over the last 3 to 5 years against the backdrop of rapidly rising rates and a slow M&A environment or said differently, a changing valuation environment that's run certain challenges. Interestingly, if you look at the growth in the alternative asset classes over the last 10 years, we have all been roughly on top of one another. But you see more volatility in the growth pattern in places like equity and venture versus private credit, which tends to be just smooth because so much of the return in private credit is coming from yield, right, as opposed to the valuation of the equity. But right now, we are seeing significant investor demand, not surprisingly for floating rate private credit of all flavors, corporate, real assets, real estate, and that's largely a function of the relative value or the risk-adjusted return opportunity in private credit relative to equity. Given where base rates are now, you could make a fairly plain vanilla senior secured loan to a company or an asset and make 12% to 15% rate of return unlevered just because of the shape of the curve right now. So if you're an institutional or a retail investor with an actuarial or get for your fund complex of 6 to 8, the idea that you can pull forward all of that current income 12% to 15% senior secured is a very attractive proposition. So you are seeing a meaningful amount of investor demand coming into private credit from either the traditional fixed rate, fixed income part of the book or equity part of the book. And I would expect that to continue. And even when rates normalize, as I said earlier, you just have this big transformational shift about to happen, particularly in the U.S. market on the backs of the regional banking crisis that we had earlier in the year. New Basel framework and increased regulation that should continue to drive growth into the private markets for the foreseeable future. Infrastructure is another place where we're seeing significant demand. And as you said, all things, digital infrastructure and energy transition are particularly in focus most so in the U.S. market because for years prior to the Inflation Reduction Act, the bulk of available infrastructure investing in the U.S. was traditional fossil fuel energy investing. We just don't have same type of traditional transport and social infrastructure, public to private partnership model that you see in other parts of the world like here. But with the IRA and the amount of government support for the energy transition, it's opened up a huge area of opportunity. And fortunately, we made a decided shift into the energy transition about 5 years ago, both on the equity and debt side, and that's actually helping us on the fundraising as well.

So Mike, moving on to M&A. Most of your growth the last 4 to 5 years has been organic, but you have done a decent amount of M&A, too. It looks like you tried to fill in mostly strategic kind of key product gaps, but maybe also some geographic gaps, too, that we saw in Asia. Maybe walk us through some of the larger transactions and talk about why you did them? And is there -- what's the thought process on evaluating future transactions going forward?

Sure. I'll try to go at a high level just because, again, there have been a number of them. And if we want, at the end, we can drill down on any of them. But we have been acquisitive over our history. If you go back and you look at the attribution of our growth organic/inorganic, it's been roughly 70 to 75 organic, 25 to 30 inorganic. But the goal is when we make an acquisition of consequence that we can add value to us so that it starts to grow at the same trend line, if not better, than we are. And that's largely been our been our experience. Our M&A strategy is quite simple, as you articulated it, which is, given our size and scale and cost of capital, it is fairly straightforward for us to build businesses organically. So our significant preference is leverage what we have from a capability standpoint and then move into an adjacent market. A good example of that would have been leveraging our U.S. direct lending business to move it into Europe only in 2006 and 2007, infuse it with capital and talent and then grow it. We have a very, very strong track record of organic growth and a pretty well-defined playbook to do that. So when we're making an acquisition, it starts off with a buy versus build. And the thing that tilts it usually to a buy is going to be an evaluation of the market opportunity and the uniqueness of the capability that would exist in the acquired business. And what I mean by that is there are certain things happening in alternatives where markets are opening up very quickly. And if you believe that scale matters, we might make the decision to push into a market through an acquisition to make sure that we build scale more quickly in a market that's opening up or transitioning. A good example of that would be secondaries. So we made an acquisition of what we thought was one of the pioneers in secondaries investing called Landmark, it's now been rebranded Ares Secondary Solutions, to my point about how we integrate these businesses. And the reason we chose to make that acquisition versus build it ourselves, which we easily could have done, was that market is going through a meaningful transformation and a shift from LP secondaries to GP secondaries and private equity secondaries to all things not private equity. And we wanted to make sure that as that transformation was happening in the industry that we were doing it from a position of leadership. So Landmark was a $23 billion platform. It was stranded inside of another public company. We were able to buy it in a fairly noncompetitive situation because I think the management team of that business and the partner saw the value of being here. And we don't talk -- maybe don't talk enough about it. When we're making these acquisitions, they're coming in at purchase prices and FRE margins that are pretty attractive and accretive. So you get the triple benefit of strategic accretion, financial accretion and then that acquisition of capability. So you might see a transformational shift in what's happening to the market, to your point, geographically. And we have a view, for example, that the Asia Pacific region generally will begin to open up to alternative investing, both on the fundraising and deployment side, similar to the way that we saw the European market develop now 15-plus years ago. And so we built a meaningful beachhead in that market through the acquisition of what we believe is the best private credit manager in that market. Again, smallish, but transformational in the sense that it brought deep expertise in the private credit markets a 15-year track record, 150 people, a Pan-Asian office footprint. And then we can bring capital capability, information edge and all the things that we have to bear. Now that we've been doing this for 25 years, the number of things that we don't have, it's few and far between. So needless to say, given that buy/build and the capability that we have to drive organic growth, the bar for acquisitions has gotten significantly higher, as you would expect that it would. But I think we have a very well-honed lens to think about inorganic growth and it's hard. These are people businesses at the end of the day, and I think that there are very few companies that have the track record of success of integrating businesses the way that we have, and it maybe goes back to some of the cultural comments that I was making earlier about what differentiates us versus some of the other platforms that's allowed us to onboard these companies and have them at the mission.

Mike, let's move the conversation into some of your growth engines. So what is Ares doing in retail today or as many of us noticed the private wealth channel?

Yes. Good question because this is a good segue. So one acquisition that we made a couple of years ago was a company called Black Creek, which probably no one had heard of prior to our acquisition, but they're actually one of the largest developer owner operators and managers of industrial warehouse assets in the U.S. market. And that was actually a really nice complement to the real estate business that we already had in the U.S. market, but again, gave us a leadership position and a vertical integration in that market that we didn't have. But what also came with Black Creek was a 100-plus person wealth manager -- wealth management business with a significant amount of experience selling two nontraded REITs. So what we did is, we effectively took that wealth management platform out of Black Creek, moved it up to the parent, rebranded Ares Wealth Management Solutions, AWMS, merged it with our high net worth and private banking coverage to form what is now one of the largest global teams geared around wealth management. And put again, the catalyst for growth in perspective, when we acquired the company, there were two funds that they were effectively distributing and servicing. One was an industrial REIT in the U.S. and one was a diversified REIT. We took our broader capability. We diversified the type of product going into the REIT. We leveraged our banking and capital market relationships to optimize the leverage and the balance sheet of the REIT complex, and then we began to invest in growth by building teams in Europe and Asia and adding product. We've added a private equity product called the Ares Private Markets Fund. We merged in a diversified credit fund that we manage called CADEX. We launched a nontraded BDC called ASIF, which is actually a very significant growth opportunity for us given our private credit franchise and BDC track record in the traded market, and we've just been expanding. In order to win in retail, I think you need a combination of brought up in performance, you need scale because you need to be able to bring these products into the market, seeded right, with seed capital and a portfolio that could be underwritten. You need a diversity of products because what we're beginning to see is particularly in the wirehouse channel, the folks at the top of the house and the advisers want to invest in more product with fewer managers, right, invest behind the Ares brand and get access to everything they do well from real estate through the REITs to private credit through the BDC or the interval fund to private equity globally. And so as we sit here today, we have over 120 people in this complex distributing and servicing a growing portfolio of product. We are taking significant share in that market. So if you look at the published Stanger information, you'll see that while sales generally in that channel are down year-over-year, we're taking significant share because of the investment that we're making in product. And my hope is that will continue given that the BDC is just getting started. We have product in each of the four major wirehouses. We are seeing increasing growth in the RIA channel, which is actually the fastest-growing segment of the wealth business. And again, requires a whole different architecture and infrastructure to sell to and service. So I think ultimately, there will be, as I said earlier, a small handful of folks. I would expect that we will be one that have that unique combination and the scale to invest in, right? Because back to the scale advantage, if you're a $20 billion private equity manager, and you have a view that you want to access capital in the wealth channel, and you wanted to make the investment to hire 100 people, couldn't do it, right? So there is something quite unique about this opportunity in the P&L constraint that it puts on a company that if you want to make the investment to be in that channel, very few people can actually support that type of investment. There's going to be very significant differentiation here in a very short amount of time.

So I wanted to jump in insurance a little deeper. But before I do that, I just want to let you know if anyone has a question, please raise your hand. And there's no mic so I can repeat it. But if there's no questions, I'm going to jump in on insurance here. Mike, you covered it briefly between the third party and the internal business, the annuity business. I wanted to go a little deeper into the annuity business because a lot of your large cap peers are doing big things there. They've paid a lot of money. You seem to be doing something in a more cost-effective manner for shareholders. Maybe talk about what your internal annuity business is doing.

So we have a life and annuity platform at Ares that is branded Aspida. And it is managed by a team that resides within areas called Ares Insurance Solutions. Like our peers, I think we all agree that the opportunity for alternative credit managers to add value to an insurance company balance sheet, that's -- we take that for granted. What we've been doing is really trying to use third-party investor capital to drive the growth of our insurance affiliate. It's been a meaningful strategic investment off of our balance sheet, but quite inconsequential both in terms of our capital base but also relative to our peers. So maybe one other way to say it is our -- many of our peers have chosen to take a balance sheet-heavy approach to growth generally, but specifically growth in insurance. I think we've generally tried to stay balance sheet-light, which gives us a different balance sheet and P&L profile. That being said, we are experiencing meaningful growth within our insurance affiliate. We began that business de novo in earnest about 3.5 years ago. It has now grown to in excess of $10 billion of AUM. Back to the Investor Day, I referenced earlier basically showed that we had the ability to grow that business organically of around $5 billion a year and a combination of reinsurance flow agreements that already exist plus the new sale of annuities. I think we feel pretty confident based on what's already in place that those numbers may be conservative. But we've publicly articulated that our expectation is, even in success, we don't want our insurance affiliate to be more than 5% to 10% of our assets. So that $500 billion of guidance that we put out had shown a $25 billion insurance affiliate, so 5%. If it were 10% at $50 billion, it would be a very meaningful insurance entity, we would get all of the strategic benefit of the affiliation. But we'd do it without taking the risk on our balance sheet, and we would do it without competing with our institutional clients, which we're very sensitive to as a third-party asset manager. So there are two different strategies that people are embarking on. I'd say balance sheet heavy, balance sheet light, focus on third party, focus on captive. And at the end of the day, we just feel that those are two fundamentally different approaches. They come with different fee rates. They come with different margins. They come with different risks, particularly in volatile markets. And so we've chosen to try to really focus on creating durable, growing, high-margin asset management fee streams and think about the affiliate as another client of the firm. And ultimately, we'll see how the market reacts to it. But back to your rerating, I think the market has appreciated that approach relative to the balance sheet-heavy approach, which, again, in markets like this is just presenting a completely different set of outcomes.

Mike, a lot of investors in the room are based in Europe. And I think they're curious what's going on in the U.S. We've heard from a lot of bank CEOs in the last couple of days. But as you said earlier, you get monthly income statements on a wide universe of companies. So how do you think the U.S. economy is doing?

It's very strong and very resilient. And I think this is the challenge. And I think back to back to the foresight that we get given our portfolio positioning, as recently as the spring of this year, the market was calling for rate cuts in the fourth quarter of this year. And we had a baseline view that, that was just not possible and that we would continue to see rate hikes through the end of the year and then that they would stay higher for longer. That's been our view. And the reason is the performance that we're seeing out of our companies is still quite extraordinary. So if you look at our corporate portfolios, they were growing about 12% EBITDA year-over-year in the first quarter. I think they grew 8% or 9% year-over-year in the second quarter. The information that we're seeing would indicate that the growth is still there. So you're seeing modest deceleration of growth, but you're not seeing negative growth, right? These companies are still growing, and they're doing it now having absorbed higher rates and dealt with all the inflationary pressures on the cost side of their business. And so now as we approach the end of the hiking cycle in the States, maybe we get one more this year, maybe they stay higher for longer, and we start to cut in the back half of next year. But now it's really about absorbing the impact of the hikes up until now. But when you look at the fundamental performance, it's still quite strong. And I think the opportunity and the challenge is the labor market in the U.S. is as strong as it has been in decades. And so there's almost 2 jobs for every worker, which presents a significant amount of opportunity. I think it explains the resilience of the consumer despite the fact that they've absorbing inflation and they're depleting their COVID savings, but obviously it presents a set of challenges for the Fed to deal with just because I think inflation is going to be stickier than some people may have forecasted. What it means for our performance though is, obviously, as these companies continue to grow cash flow, it's derisking the credit profile. And again, 2/3 of our business is credit. But as rates continue to go up and stay there, there's a significant amount of excess return into the business and income generation because most of our credit funds are floating rate assets against fixed rate hurdles on our incentive fee. So when you look at the P&L trajectory of the business, we've been a huge beneficiary of this rate hiking cycle. And as they stay higher for longer, that's a pretty big benefit for us, too. So it's -- if we are going to move into a slowdown in the U.S., I would think it would be mild, short-lived and non-synchronized, meaning you'll see it in certain pockets of the economy, certain sectors, real estate, homebuilding maybe, but I don't think that you're going to see a broad-based recession. That's been our view and everything that we see in the market would probably support that right now.

So a big topic at this conference has been credit quality. And most perspective has been from the European Bank CEO side, but you're #1 private credit in the U.S., you're #1 private credit in Europe. You see both sides. What do you see in terms of credit migration, restructuring activity, maybe potential losses in the future pipeline?

I'm glad you asked it. This is probably what is most misunderstood about what's happening in private credit today but also why I think we're seeing so much demand for it. What we're seeing, as I said, is high single digit cash flow growth and good fundamental performance. We're seeing stable and some of our markets declining default rates, and you could see this in all of the published data as well. Defaults have been hovering in and around 2%. In the U.S., they actually indexed tick down from like 2.1 to 1.65 in the last quarter. Some of that is the function of fundamental performance and some is the function of modification of certain loans. But what's unique about private credit today, we are going into this market with no equity cushion than we've ever seen in the private asset classes. So to put it in perspective, pre-GFC, your typical leverage capital structure probably had 65% debt, 35% equity for smaller businesses and lower quality assets. Because of the way the business has evolved, going into this current moment, our portfolio is roughly levered to about 40% to 42% loan to value. And the reason that's so important is you have so much more equity subordination with institutional sponsorships sitting below the private credit universe than we've ever seen before. And just like we saw in COVID, the incentive, therefore, is for the institutional equity owner of the asset of the company to effectively bring capital into these situations, even if it means they're just paying higher interest to build a bridge to a different rate environment or a different economic environment. So defaults are low. If rates will stay higher for longer, defaults will go up. In some counterintuitive way, that could prove to be a big benefit to the total return opportunity in private credit because there's going to have to be a bilateral negotiation between the lender and the borrower as to how to navigate that modification because, again, most of the challenge that these companies are facing is a result of higher interest rates, and the private credit manager has been the beneficiary of those higher rates. So in every other cycle, when you were talking about defaults, rates were going down and cash flow is decelerating at a rapid rate, and you had less equity, fundamentally different positioning in terms of how you navigate those situations and outcomes versus where we are today. So defaults are low relative to historical averages. I'd expect them to stay low. If they tick up, it does not mean that losses in the credit markets will necessarily follow because I think that the loss given default is going to be different than we've seen before because of the amount of equity that's in the market.

Great. Well, with that, I think we are out of time. So Mike, just on behalf of all of us at Bank of America, thank you for joining our Annual Financials Conference. Thank you for joining us today, guys. Appreciate it.

Thanks.