Ares Management Corporation (ARES) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome to our next session here. I'm Ben Budish, Barclays' Analyst covering the Brokers, Asset Managers and Exchanges. And for this fireside chat, we've got Jarrod Phillips, CFO of Ares Management. Jarrod, welcome. Thanks so much for being here.

Thanks for having me.

Maybe just to start, can you give us a brief update of what you're seeing in the private credit landscape? How is credit quality looking? What are you seeing in terms of deployment activity going into the back half of the year? What's your kind of view there?

Sure. Starting with credit quality. Credit quality has really stayed pretty strong. And I think a lot of people may have even been surprised by how strong credits performed over the last cycle. And what we've seen actually is that EBITDA has continued to grow at a healthy clip for us using ARCC as a proxy. EBITDA was up 12% year-over-year. So you continue to see that increase. Where LTVs that are close to all-time lows that are in the low 40% range. Interest coverage has actually started to improve now as you've seen interest rates flatten and then the curve start to go down in the future. So what you've seen there is interest rate coverage got real tight for a while, and now it's starting to improve and expand. And if you just look at where we're at in terms of our overall delinquencies, we're below our historical average. So we've been very happy with how our portfolio has performed and is continuing to perform. Now we have seen in the marketplace that you've seen those delinquencies start to tick back up more broadly. I think if you've heard Kipp, on our ARCC calls. He said that we do expect delinquencies to increase a little bit. But with the coming rate cuts as expected, that certainly helps and takes off a lot of the pressure, from those companies. And really, if you look, I think, our ARCC team did the analysis recently, if you throw out the outliers, it's actually the delinquencies have been relatively consistent over that period. So from the credit performance side of things, I think we've been pretty pleased, and I think that that's been maybe different than what the macro expectations were in terms of how credit would perform with higher rates for a longer period of time. In terms of deployment opportunities, we've talked a lot about the expiring dry powder at private equity firms. We've talked a little about the aged assets at private equity firms that need to be monetized in order for those firms to return the capital to their LPs and get on with the fundraising over their next cycles. That continues to be, I would say, a tailwind to potential deployment. We had our second best quarter ever of deployment in the second quarter. However, if you look at what the overall market did from an M&A standpoint, the overall market was slightly up on dollars, and it was pretty well down on count. So it's not like the overall market has bounced back yet. However, if you juxtapose that with last year at this time, where I think we were still worried about when is transaction activity ever going to commence, there's a lot of deals building in the pipeline. We're seeing a lot of solid pipeline build, and we're seeing a lot more desire to transact. And if that transaction activity doesn't happen here in the back half of the year, it is going to almost have to happen in 2025 due to those factors that I listed earlier. So I'd say that the backdrop for deployment is as positive as it has been in a while, and we would expect to see that to improve it's maybe surprising that it hasn't happened yet. And I think others have said that, I would echo that that we probably thought that you'd have a little bit more overall macro activity than we've had, but everything is set up for that activity to come.

Got it. And I was going to ask you about the upcoming election. How might that impact deployment activity, fundraising? But maybe also as we're kind of getting longer in the process, have you seen any sort of policy proposals that could potentially impact private markets, private credit in particular? It feels like it's always like a -- there's a regulatory bogeyman that comes up like will regulation come -- but what are your thoughts there?

We've been around for over 25 years now. So we've come and gone through many different administrations. We know what the Republican Administration did from '16 to '20. I think the Democratic Administration will probably continue along the same lines that it's doing now. So I don't think there's a lot of ambiguity in terms of what would overall happen. I think people would like to see an orderly election, and that would be maybe the biggest risk. I think in terms of the liquid markets, the election has maybe a little bit more impact. I've heard people are cautious about maybe the last 2 weeks of October, the first week of November. So that maybe takes those 3 weeks of transaction activity time out of it. Don't know how much of that affects the private markets. But I would assume that there's a little bit of that. At this point, they're thinking, I held on to my assets for so long, why would I rush to do something before the uncertainty of an election. But I haven't heard it really scaring off activity or creating a move one way or the other. There's always a potential for more regulation that tends to benefit the larger scale players of which we fall into. It is easier to deal with that regulation and to bear that when you have a large legal compliance team that's able to handle those things. So if that does come, I think that we're well positioned for it. But overall, I would say that from a -- it's maybe a boring answer, but the election is something that will occur, but I don't think that it will drive things one way or the other for us.

Got it. Maybe thinking about fundraising more broadly. What are you seeing from LPs in terms of their appetite for private credit versus other asset classes? And then given most of the assets you originate are floating rate, how do you think about a series of rate cuts? How could that impact your demand over the next year or 2?

Sure. The nice thing about private credit from a fundraising standpoint is it sits in the middle of the return expectations spectrum. So a lot of times when base rates were near 0, I would get the question of, well, how is that going to change fundraising when base rates are much higher? And now when base rates are much higher, I often get the question, well, if rates come down, how is that going to change our expectations for fundraising? The fact is that in those low base rate times, the investment grade and other products tend to allocate more towards private credit, because it allows them to get a spread to that return and a consistent and durable spread to that return. When it's times like we've had in the recent past that we're currently in where you have very high base rates and high interest rate, what you've seen is people allocate away from equity strategies into credit strategies, because it allows them to move more senior in the capital stack and get a more certain return. So overall, what we've seen is the ability to take from either side in fundraising. And in fact, what we've seen as there are more players in it, and there's more understanding than there's ever been about the private debt market, that you're seeing institutions start to make the decision, because this doesn't go in my alts basket, which is maybe 15% at maximum of their total allocation. And maybe for some of this, it goes into my fixed income basket. Because I understand the return that I'll be able to earn in excess of some of the other fixed income products. I understand the risk that I'm getting paid for. And these are, in fact, fixed income investments that are underlying it. So you are seeing some of that allocation change, which represents the ability to take -- or have a lot more growth from private debt and private credit still as there's a lot more room in the fixed income basket than there is within the equity basket.

Very interesting. Now what about demand for some of your new asset classes that aren't traditional direct to middle market lending? So how do LPs think about infrastructure, real estate debt, other types of asset-backed assets?

Sure. There's -- alt credit certainly something that is -- has been pretty popular for us. And you kind of take alt credit and there's maybe 3 buckets that I would put what we do in and how the markets are kind of shaping up in alt credit. One is that rated structures that's predominated by the insurance companies looking to invest in those rated. Sometimes they're more liquid, but it's also a lower fee business. And then there's the nonrated more illiquid assets. That's where we believe we have the largest platform that's doing that today. And then right in between, you have maybe a mixture of those, and we have an open-ended fund that has a slightly lower return profile, but is able to look for those opportunities and do things that are more on the illiquid side, but also can dip into some of that rated or more liquid things, allowing it to be open-ended and allowing for withdrawals. That whole strategy has proven to be popular. We had our last -- close of our last fund on the illiquid side of Pathfinder II happened last year in the fourth quarter, and that hit its hard cap that's deploying very well in the current market environment, and that's something where we see core continue to grow. And certainly, as the speed has grown, that's enabled us to deploy more into that more liquid side of the business as well. You mentioned infrastructure, I think infrastructure is a very interesting opportunity. We've seen mega funds be raised in the $25 billion, $30 billion on the equity side. We have some of the largest debt funds and our largest fund is $5 billion. So there's a pretty big gap in terms of what's available on the equity side versus what's available on the debt side. And there's a lot of the same attractive features on the debt side that you have on the equity side. So we think that there's a pretty big market for that. At the same time, there's a growing digital infrastructure need with the growth of AI and the growth of just our need for that digital infrastructure across the globe that we think that there is a real opportunity for debt in there. And real estate debt is something where much like we've seen with first with direct lending. And now with alt credit, as I discussed, where you've seen the banks now move to partner, they're able to better optimize their capital structures by working with us on alt credit. Real estate debt as the banks pull back from some of that, that gives another opportunity for them to partner with alternative managers. And they can then maximize their capital structures that way, but also allow some of that real estate debt to flow into those alt managers hands. So there's a lot of opportunity that's matched up against that, that is met with fundraising as well.

Got it. Maybe one last question on the fundraising side. You recently closed a U.S. direct lending fund with $34 billion of capital. How do you think about the scalability of funds? Clearly, there are opportunities. You mentioned a $5 billion in for debt fund where there's meaningful upside to fund size. But given the size of some of these more mature strategies, how do you think about, over time, the place of drawdown funds versus more perpetual strategies?

Sure. The most important thing that we consider is deployment capability. Deployment is really what the limiting factor is in terms of the capital that you're going to raise. And retail and institutional capital behave completely differently in terms of when that capital comes in and then your ability to deploy that capital once it does come in. So there's a tremendous amount of value in having a large commingled fund that has that drawdown capital that can be deployed when the times might be really attractive for deployment, but retail dollars aren't flowing and quite as readily. So to have that juxtaposed against each other means that you can be deploying into any type of environment. And in fact, if you look historically, when we've grown our management fees the most, which because our management fees are largely linked to deployment, that's been in the most volatile markets. In the most volatile markets, normally you're not seeing a tremendous amount of retail inflows. What you're seeing is more institutional deployment during those periods of time. But that also enables you to get better returns because you're investing into a market where there's more opportunity. So for us, as we look at what is our capability to deploy, what do we think that we have in front of us, what does our pipeline look over the next 2 to 3 years, that's really the governor of how we decide how large our commingled products should be. Now we need to compare that with what we think that we'll be able to raise on the retail side to make sure that we're not raising between those 2 things more than we're able to deploy. But having both of those work together gives us a tremendous advantage in multiple types of markets. And it also gives you advantage just in the short term using it as an example, if you're working with someone on a deal and you know that they're going to need to close maybe in 3 or 4 months, you don't need to necessarily reserve that capital and drive your return to a more liquid type return in a retail product if you have undrawn drawdown fund capital that you know you'll be able to meet it with. So that gives you that opportunity to maximize the return for the investor and to have surety of execution on the counter-party side.

Got it. So maybe on the deployment side, in Q2, we saw some improvement in your kind of gross to net deployment ratio. But I think it was still a little bit below where it's been historically. What are you seeing in the back half of the year? What do we need to get back to a more normal level? Is it just a further opening up of capital markets? Or if credit spreads are narrowing? Like how should we think through those factors?

Yes. I'd say a lot of it was driven in the first quarter and even into the very beginning of the second quarter, maybe the April time frame. Credit spreads did tighten pretty significantly during that period, which opened up a big window for refi. So you had a lot of refi activity occur, as you mentioned, which led to our gross number being a lot larger than the net number. And that's something that I do get asked a lot about in terms of credit -- that how should I think about overall refinancing. And I'd remind you that refinancing is much more spread driven than it is base rate driven. So a lot of tension will ask. Well, now that I know that base rates are going to go down. Does that mean I'll see a lot of refi activity and the responses? Well, we really already saw that as the spreads tightened in the first quarter. So that's what really drove a lot of that. Since about April, you've seen the spreads stabilize. And so you've seen less overall refi activity, and that seems to have calmed down. And then to your question, the next step is, okay, when does capital markets activity return in earnest. And that's where we've seen the positive build of the pipeline. Certainly, I think the overall rate environment and a more positive economic backdrop for people to have surety of their own execution to have a belief that this is the right time to transact that will help that, but we do need capital market activity to come back for that net to greatly outpace the growth in terms of its growth period-over-period. The other thing that I would add is that even when growth is so much larger than that like it was in the first quarter. That's not necessarily a bad thing. What it's actually doing is extending the period of which you're going to earn management fees. So if you look at the long term of a business doing that, often what's happening is something that's in an earlier vintage commingled fund that was probably within about 12 months from maturity anyway, is refining into a new vintage of that commingled fund enabling you to essentially extend your management fee earning period in 3, 4, 5 years into the future. So it is showing that we're able to protect the book that we're able to continue to have that incumbency advantage, and that we're able to continue to grow and be stable over the long term.

Got it. Maybe one last question on deployment. Just from an investment perspective. Where are you seeing the most interesting opportunities to put capital to work? What about the longer-term themes, kind of different geographies, kind of all the group in one? But how are you thinking about the landscape of opportunities?

I think over the past 25 years, we've learned to really stick to what we do. So you won't see us pivot very much within any given period between different types of strategies. Now it doesn't mean that there won't be things that catch maybe fundraisings eye or become more media attractive. Certainly, our sports, media & entertainment business is something that a lot of people have read about and a lot of people saw that we were recently approved to be an investor within NFL teams. So that's something that's certainly exciting but not a massive growth driver as it's a limited pool of capital into the future. But really, when it comes to direct lending, we don't like to deviate from our noncyclical businesses that we invest in and we continue to invest in those. I would say that across the platform, though, it has been a very interesting time in alt credit, and there's been a lot of opportunity to partnership with banks there. NAV Lending within alt credit business is another area that's been pretty attractive recently as one of the things that I talked about earlier, the private equity funds are looking for ways to return capital to LPs. Now the lending is a way that they can do that and they can structure that. That also works well with our secondaries business, where we're working on a GP structured solutions fund out of that business that will do something in a similar nature and often alt credit and secondaries will partner on deals as those NAV lending opportunities coming into place. I'd say that even something like real estate, which has been pretty beat up over the last year or 2, we're starting to see signs of life there. We're starting to see activities. We recently did a large transaction there in Orlando that made some headlines. So there are these pockets where we're seeing opportunities come back. But I wouldn't think that you'll see us do something differently than we've historically done. Maybe the biggest forward-look opportunity that we talk about quite a bit is that digital infrastructure. Banks are going to need a partnership there, because there is much more capital needed to increase what's happening in digital infrastructure than it is currently available from banks. So that's, I think, a wonderful opportunity to both grow fundraising and deployment within that space.

Got it. Well, maybe in terms of banks, how do you see the current state of competition between the traditional banking system and private credit managers like yourself evolving? How things look so far this year? What could it look like in 2025? Presumably, as areas gets bigger and bigger, you become a more formidable competitor. So how does that look from your end?

Yes. And I think it's -- I'll zoom out and say that the banks aren't necessarily competitors, but often partners. And frankly, the more active the banks are in the syndicated loan market, the more excited we are about the backdrop. So generally, when the banks are active, what that's telling you is that there's a lot more activity in the marketplace. And if you just look back historically on how we've performed, the more active the banks are, the more active we are. So seeing them over the last couple of quarters, be more active in the upper middle market for us has been something that we've taken as a big positive. Now that certainly put more pressure on the competition in the upper middle market. And so for us, we've always made it important to us that we operate in the lower middle market, the core middle market and the upper middle market. So what that did for us in the first and second quarter is meant we pivoted a little bit more into the lower and the core middle markets for our activity for where we were deploying. So where that did bring down some of the returns on that upper middle market for us, we felt that it was really, really an advantageous time in that core and lower middle market. And in fact, if you just look at what we did in terms of Q1 versus Q2, or median EBITDA of the companies that we did deals with actually dropped from $80 million to $60 million. So that showed how much we pivoted within that period into those lower and core middle markets and found our opportunity there. On the other side of the coin is the alt credit opportunity where banks truly are our partners. And there's a number of things that we've looked at with banks from capital relief trades to doing areas where they maintain the customer relationship and that we take the risk off their books. Again, it enables them to more effectively structure their capital ratios. It enables them to more effectively operate in those environments. So overall, they're viewed much more as a partner there. And then as I mentioned, both real estate and digital infrastructure, there's a tremendous opportunity. I would say that banks don't have the capital to deploy fully into that space. That's where we can become real partners there as well. So I have always viewed banks as much more our partner than our competitor. And in fact, when they're active and "competing" then that enables us to have even more transaction volume and activity. And I'd add, along with that, the banks were extremely active in the syndicated loan market, that led to us having through the first 6 months, a record number of CLOs and record dollar value of CLOs issued off of our platform. So I take it all in that positive.

So in terms of bank partnerships, especially last year coming out of the regional banking crisis, there were a number of publicly announced partnerships from you and some of your peers. How does the pipeline look kind of going forward, do we kind of get this like initial Russia partnerships in response to what was happening then? Or is there sort of still a long tail of partnership opportunities.

I think more what you got was a rush of publicized partnerships, because a lot of times the banks saw a need to publicize that partnership, but there's still a tremendous runway for partnerships to happen. Like I mentioned earlier, there is an opportunity for them to maximize their capital structure and so therefore, to maximize their ROE. So if they're able to work with us to structure their transactions in a certain way, we can take the risk from their balance sheet, they can maintain customer relationships, that can then be a net benefit to their overall capital calc as well so that they can generate better overall returns. So that continues to happen, and it continues to be something that we're very active with. It's an area where our alt credit team has spent a lot of time building those relationships, bringing the banks in to meet us, having events where banks can come and understand our capabilities and really broaden out that partnership set.

Got it. Well, speaking of alt credit one of the themes you talked about at your Investor Day was sort of the reconsolidation of the ABF market, which used to be concentrated at firms like GE Capital prior to the financial crisis and then since really kind of dispersed. So how do you see this evolving over time? How is Ares kind of TAM changing? How big of a piece of this business -- of your business can this be over the next 5 to 10 years?

Because you mentioned GE Capital, just I'll kind of start there and say that was really a story of mismatch in assets and liabilities. So they were using cheap short-term financing against these longer-term assets. So that's really a learning. I think that the market has had and that we've certainly had that it is really, really important to match your durations, also a lesson that we learned in the regional banking crisis or the banks maybe learned as opposed to the alternative lenders. Overall, we believe that that's somewhere in the neighborhood of $28 trillion TAM, and right now at $38 million -- or $38 billion of AUM, we're a very small percentage of that. We believe we have the largest of the illiquids, as I mentioned earlier. So the ability to continue to grow and scale in that place to continue to partner with these banks and really make sure that it's most effective for their capital. But then we're also taking that risk, and we're matching it with long duration funding. So that could be things like our Pathfinder Fund that has locked up long-term capital that enables us to be able to work with the assets and manage the assets and not become forced sellers of the assets, means that, ultimately, I believe that that's more in line with what the regulators would like to have long-term liabilities and the long-term assets as opposed to short-term liabilities like deposits matched up against certain of these assets. So it's a benefit to the regulation, it's a benefit to the bank and it's a benefit to our LPs ultimately as we structure those solutions.

Got it. Maybe tying this into your insurance business. What does it all mean there? You've been quite clear that you're not pursuing the investment-grade approach, thinking by some of your peers. Your insurance capital is still kind of small relative to your total AUM. How do you think about the importance of insurance capital over the next 5 to 10 years?

Well, I would say that we're not doing it. Obviously, we have Aspida and we're very happy with how Aspida has grown. And if you go back to our Investor Day a couple of months ago, we mapped out that we thought Aspida would go from about $25 billion to about $50 billion over the next 5 years. So double in size, but against our $750 billion target of AUM still, as you said, a small percentage. And the important thing there also is that we're a balance sheet like manager, which means that we don't like to put on a lot of assets onto our balance sheet. We really want our shares to be matched up against our management fee streams. And so for us, it's really important that when we built Aspida that we use majority third-party capital for that. So the Aspida, as it's continued to grow, has continued to bring in third-party capital, not various balance sheet capital in order to grow. However, Aspida then allocates about 60% to 70% of its overall inflows to us to manage. And the vast majority of that comes into our alt credit business, which it does manage on behalf of this Aspida, but that's if you remember the 3 that I laid out, that's in the rated liquid side. So that means that it's a little bit lower fee paying. So those fees in general are going to be somewhere to 1/4 to 1/3 of what your management fees on a commingled product would be. So it's a different mix. And it's a little bit different business. And one of the things you probably heard Mike and I speak about it at our Investor Day is we're really looking to grow our AUM with high-quality AUM. And we want a fee rate that is commensurate with that. And so if we're out there and we're raising $1 billion with that 1% fee that we've been pretty steady at for 25 years, to us, that is in a lot of times more advantageous than $300 million at 25 basis points. So part of how we're managing our business is looking for that high-quality AUM, but still showing that we have the capability to partner with insurance companies, working with Aspida and being able to also do that type of asset management if we see a market for it and if we see an opportunity.

Maybe let's talk for some moment about something you mentioned earlier about the sort of LP opportunity outside the traditional alternatives bucket. Your peers that have been more vocal about that or have a very specific investment grade fixed income approach. And so I think investors may be perceived that, that was less of an opportunity for Ares, which doesn't kind of take that similar approach. So how has that been evolving? How do you see those -- how does that -- can you talk about those conversations? What's the appetite for your kind of unrated private credit within that fixed income bucket?

Sure. The unrated private credit really falls into that alt credit, right? That's -- and the ability to do those type of transactions gives us, one, a competitive advantage in sourcing those transactions and working with the counterparties to find the right things, because it doesn't need to fit into an insurance company's capital structure. It doesn't mean to fit into an insurance company's rating. What it is matched up against is the LPs. And what the LPs for years in alt credit had since the global fund crisis that you mentioned earlier is, it was very niche. And so if they wanted to do auto loans or they want to do resi or they wanted to do shipping containers. They had to go find a manager that's specified that's all that they did. And it was probably a $300 million or $500 million fund, meaning if they needed to deploy $100 million and they wanted to in that space, they had to find multiple managers, so they couldn't ultimately go with them because they'd be too large in terms of the size of that fund. What Pathfinder did was it brought in almost 30 different strategies of that type and so it's going to find the gaps and that's the name of their quarterly newsletter as well. It's going to find the gaps to invest in. And it will do -- sometimes it will do auto loans, sometimes it will do resi, sometimes it will do NAV lending, as I mentioned earlier. But it's going to invest in the appropriate places at the appropriate times and give people exposure to those assets. And by having a scale fund, the last one just shy of $7 billion, it enables someone who wants to invest $500 million in that space to come in and have that large check size. So we believe that working on the illiquid side of the coin and building up that platform is advantageous to LPs,, is maintaining that higher fee rate and is doing something that is bringing together a lot of places that were disparate before, but now putting them all into one place to give people access to them.

Got it. Maybe let's move over to the retail side of the business now. So -- maybe can you talk a little bit about your current distribution kind of footprint. I think on the last call, you talked about 1/3 of your flows coming from outside the U.S.. Maybe touch on how that market differs from the U.S.? And then maybe kind of just give us kind of the latest in terms of wirehouse platforms, what your kind of breads look like?

Yes. Maybe I'll start with that. We do now have a product with every wirehouse and every other large platforms. There's a few large platforms that don't technically qualify as wirehouses, but we would say that are kind of in that same bucket. We now have a product with all those platforms, but none of our products are on every platform. So we still have a lot of expansion to do in terms of adding our products to the various platforms. We talked about at our Investor Day that we're probably thinking about 8 to 10 products. In the near term, we have a climate infra BDC that we'll be launching, which is because of the nature of those assets, it generates an after-tax return that's extremely attractive, because it does get a lot of tax benefits in terms of what it's doing. So that will be our next product that's out there. But there's not too many more products that we'll have based on the product set that we have currently domestically. And we have around 120 people domestically. We have another 5 to 10 people in Europe, 5 to 10 people in Asia, and that's going to continue to grow and scale. And to your question of how is Europe or Asia different than it is in the U.S. There isn't a big wirehouse. It's distribution partners that you're working with, and you're working with them to bring them into U.S. or North American products. And you're also working with them within that space. So right now, we have AESIF, which is our European direct lending product. That is, I'd say, the European sister of ASIF, that's our non-traded BDC, that has an attribution partner that it's been working with and is continuing to raise its funds, but that's currently our only international product. We'll have the ability to grow both in Asia and add products in Asia and Europe that look a lot like what we have in North America, but also offering, as you said, about 1/3 of the flows came from Asia or Europe into our North American products. Now we have the ability to do that offering. But I do think there is excitement around and the ability to grow, creating an Asian product for Asian investors and European product for European investors.

Got it. Then maybe in terms of just the economics of the business. On the last earnings call, there was a lot more discussion around distribution fees, which seem to be kind of following your overall growth in inflows. But what are you seeing in terms of the relative economics between areas and your partners. Is there any pressure from distributors to increase their share? Or is this sort of a worry from investors is maybe a bit unfounded?

I think that the wirehouses and distribution partners understand the power of the opportunity that they have for alt managers. I think that, that's an important part of being a scaled manager is that you have the ability to pay those. At the same time, the dollars that they're raising for us are extremely long-lived. So they're in the 10-year plus type range. So it is for what we believe is semipermanent to permanent capital, it's a small amount to pay. Now there's probably a point where it's too much to pay, but I don't think that it's there. But what it does is we've said for a long time that there's only going to be a small number of winners in this space. This is another headwind to those people, who are breaking into the space, because not only do they have to hire all of their own sales force. They then have to take all of the time that it will take to get everything listed and registered then they have to pay these type of fees. That's a tremendous amount of expense before you generate any income. So that's yet another barrier to entry for a lot of smaller players and another reason that we think that there's going to be just a small number of winners. In fact, we believe we're the only one of the platforms that has 6 different products that are all over $1 billion now. So that's enabled us -- that type of access has enabled us to be in a number of different places with a number of different products.

Moving over to capital allocation, M&A. So you've done a few acquisitions over the last few years. It was recently reported in the press, you were in talks to acquire GLP Capital Partners. Well, I imagine you can't comment on that particular deal. Maybe just talk about how M&A fits into the overall toolkit in terms of growth drivers? What might you be looking for in terms of potential targets? How do you think about stock versus cash, those sorts of things?

And you're right that I cannot comment at this time. But ultimately, we look for things that are going to be strategically accretive, financially accretive and perhaps most importantly, culturally accretive. And if it's not all of those things, then it's not a deal that we would do. And when we look at what we have right now in North America, we feel like the platform is pretty well built out. We've talked about it in the past that infrastructure equity is probably the one area we have -- we're very happy with our climate infrastructure business, but our regular way infrastructure equity. We don't really have anything there. And I'd regard that more as a global business, too, not just a geographically focused. And so then if you that menu, so to speak, that we have in North America and you overlay that to Europe and you overlay that to Asia, you can see that Europe is much more built out, probably only lacking an equity strategy on the private equity side, but still room to grow within what we do there. And then in Asia, we recently acquired Crescent Point, which is a growth equity manager as well as our credit platform that we have in Asia. Now when we look at Asia, we look at a lot like we did Europe 10 years ago, and it's about 10 years behind that. So we would say that that's maybe 20 years behind where the U.S. is right now, and it is a very fractured environment compared to how Europe was at that time, because all of the countries really have a different rule of law, really have a different understanding of the rule of business, too, in terms of how you'll set up your surety and security. So ultimately, we think that, that's going to evolve, and we're starting to see it evolve. We're starting to see sponsors use the banks maybe a little bit less and come to alternative providers. And we're starting to see that growth happen, but you need to have boots on the ground. So when we look at what the options are in Asia, if we wanted to grow like Europe, we know that it's going to be combination of organic growth and acquisitive growth. But it is still in very early stages, and we want to establish our presence there. So we have the ability to grow. When it comes to the other part of your question of how we would use stock versus cash. I always prefer to use stock if I'm paying the existing management team that's going to come over, because I want them to be very tied into the performance of Ares as a whole, because that's part of the culture is that we are all for one. So we want to make sure that people come in and have the right essentially incentives. And the way you do that is by giving them stock and making sure they have a significant amount of stock in trade for what was essentially the stock in their one strategy. However, [ I'll ] use Landmark as an example when we acquire a secondaries business, that was partially own by a public company, you can't give them stock. So we had to give them cash and that just depends on what your capital structure looks like at that point. Do you use debt? Do you do an equity offering or do you have the cash on the hand?

Maybe just squeeze in real quick one last financial question. You've indicated that your margin expansion is largely predicated on deployment given the way you earn fees. But just other than that, what are the other considerations where are you sort of investing in OpEx? Where is there kind of natural scale in the business?

Sure. I would say that you kind of look at the maturity of businesses and where they're at in that maturity cycle. And if you think about U.S. direct lending and European direct lending, when we talked about FPL earlier and we obviously have ARCC. So maybe ex the retail side of that, you have pretty mature businesses that are going to have pretty steady margins. And then we talked a lot about alt credit, that's an area for a number of years we made investments in. And now we're starting to see those investments come to bear. Those investments are now showing margin expansion every year out of that alt credit business, and we did a slide on that at our Investor Day. And then if you think about the areas where we invested, we're investing in retail is certainly one of them. So like I mentioned earlier, you're front running all of your expenses in retail before you even generate a dollar of management fee. So you create a tremendous amount of scale and the opportunity to build your margins. And if you think about where we're at with that retail product set right now, we're in the very early stages. This is really the first full year we've had for that product set. So that means we have full years of distribution expenses that -- and we'll continue to have distribution expenses and so we'll continue to generate. But next year, now we'll have management fees that will be in excess of all those distribution expenses. So that gives you the opportunity to expand that margin over time. And then you look at some of the areas where we're building out, one of the things that we have in industrial when we acquired Black Creek is we brought over a vertically integrated manager, which made us a lot more effective and efficient and enabled us to not have to pay out a number of different parties in order for management of some of those assets. We're doing the same thing with our multi-family vertical and really look to be able to do what we've done in industrial with multifamily, which is create specific products for it and be vertically integrated. So that's an area where we invest in front of, again, what the expenses will ultimately be.

Unfortunately, we're out of time. Jarrod, what a pleasure to have you. Thank you so much.

Thanks so much for having me. Thank you, everybody.