Ares Management Corporation (ARES) Earnings Call Transcript & Summary

All right. Well, thank you, everybody. Good morning, and thank you for joining us. We're going to go from talking about electronic trading in credit markets to private markets. So a slightly different turn here. But it's my pleasure to welcome Mike Arougheti, CEO of Ares Management, a leading global alternative asset manager with $465 billion in assets on the management and of course, deep expertise in credit, real estate, private equity. The firm remains one of the fastest-growing companies that we cover with over $60 billion of capital raised this year, on track for a record year, as Mike and team talked about, been quite busy on the acquisition front as well. So plenty to talk about as always. I always look forward to having this conversation. Thank you for joining us again.

Thanks for having me.

So I wanted to start a little bit of like a 2025 priorities question for you guys. You held an Investor Day early this year. You set out new 5-year targets, including 16% to 20% FRE CAGR, over 20% total earnings growth, which obviously is important. As you execute against this plan, why don't you start us off with what are some of the top of mind things you're working on in '25?

Yes. So that was guidance that we gave through 2028. So maybe just to start off at a very high level. I think one of the things that we love about our business is the kind of predictability of that growth trajectory, which we can talk about a little bit later. So needless to say, as we're marching from '24 through to 2028. We just have to execute on the core business, which means continued investment in diversified fundraising. We're going to have about 15 institutional funds in the market next year. We have to continue to execute well on just core deployment, which is a big driver of our earnings growth and margin expansion opportunity. We would expect to continue to grow our wealth business, which is showing some really, really exciting growth over the last 12 months, continued investment in our insurance practice, both our captive and third party. And then I would say, generally, and you know this, we're not margin focused. As we deploy, we will continue to hopefully be able to invest in margin expansion, not just through that absorption, but also just through continued operating efficiency and innovation. Not in the guidance, you mentioned acquisitions. We have announced but not yet closed an acquisition of a company called GCP, which is a very large international real estate and digital infrastructure manager. That will give us a lot of exciting growth opportunities and growth vectors. 2025, a lot of what's in front of us will just be prioritizing, making sure that we get that integration right and then we begin to execute on the revenue strategy there, which is grow the core business, continue to drive growth internationally, build out the data center and digital infrastructure business. So I think we'll go from integration to growth there as well, which can be big priority for next year.

I got you. Well, lots to cover. We'll get to all of these topics. I did want to stick with a bit of a macro question first. And this has been really consistent throughout this day and yesterday, the excitement around the pace of capital markets has been robust, I guess, to say the least and mostly excitement so far. But it does feel like the conversation post the U.S. elections, have turned a little bit more constructive. Curious what you guys are seeing in your pipelines when it comes to direct lending deployment, in particular, it's been a tougher environment to deploy capital over the last year. So how are you thinking about that into '25?

Yes. Well, it's interesting. We were talking about this before we got on the stage. The economies have been in great shape for the last 24-plus months. And so this idea that now we're somehow in a new paradigm, I just think, is interesting because I think people have been doing well. The markets are happy. I think it's a combination of declining rates in theory, deregulation or lighter touch regulation and pro-growth, pro-business sentiment. So all that is good. We are seeing it show up in our private market pipelines. I would say there was a low heading into the election as people were just bracing for uncertainty and getting ready. There's been a lot of pent-up demand because the transaction volumes have been low for the last 24 months. M&A volumes have been low, IPO volumes have been down. So you are seeing some release on that pent-up demand. It is showing up in our pipelines. I would expect going into 2025 that we'll see an acceleration of deal activity, which would be great for our business.

Let's -- okay, let's turn a little bit to some of the more specifics. Let's start with fundraising. As we talked about Ares is on track for a record year and fundraising. We talked about $80 billion is kind of what you're hoping to get to in '24. You're well on your way there across a pretty wide range of products. What are your expectations for '25? I know you said you're going to be in the market with, I think, 15 institutional products. But if you kind of wrap it up for us and thinking about next year versus that $80 billion...

Let me contextualize next year just by focusing a little bit on this year because it's the diversification of our fundraising is a big part of growth and transformation of the company. So -- yes, we have guided on our last earnings call that we would expect to probably get into the mid-80s, $80 billion this year on fundraising, which would be a record -- or probably representing $76 billion or $77 billion. But if you look at the composition, it's interesting, about 1/3 of that has come from what we would call the traditional commingled institutional fund part of our business. About 20% of that is coming from institutional SMAs. These are bespoke customized relationships that we set up, usually with our largest institutional clients around a part of our business. That's about 20%. So if you say those 2 combined, it's about 50% institutional. That 20% of our growth is actually coming from the wealth channel. And if you look at what we've done year-to-date, we raised about $7 billion of equity in the first 9 months, levered to about $11 billion. It's meaningful growth year-over-year. And a little less than 10% is coming from growth in our insurance platform. The remainder which is 25% to 30% is coming from permanent capital vehicles, publicly traded companies like ARCC, our CLO franchise. So the point is, if you look at the business today versus where it was 10 or 15 years ago, 65% to 70% of our fundraising is actually coming from the noninstitutional, noncore fund side of the business. And so what that's done, and we've been talking about this for years is it's kind of raised the floor for fundraising going into any new year. So we have a lot of interesting large commingled funds coming into the market next year in that 15 but we're less reliant year-on-year on that core fund pipeline in order to hit our numbers and continue to support our growth. So when we look at 2025, I think you'll see a similar complexion to the fundraising, continued growth in wealth, continued growth in insurance, continued scaling on the permanent capital and CLO side of the house. And then the institutional is just going to be more diversified. We did have the benefit of 2 of our largest private credit funds rolling through the numbers in 2023 and 2024. Those will not be in the fund queue in 2025, but we'll have more funds coming into the market in 2025. So that should balance out.

Great. Okay. Perfect. Well, let's spend a couple of minutes on private credit. I have a bunch of questions on this, and nobody better to talk to than you guys about this, given your deep expertise in this part of the market. Why don't we start with direct lending? It is very clear that market share in direct lending is consolidating pretty rapidly. You guys have been a big beneficiary of that. At the same time, the growth in some of the semi-liquid products and then the instant demand that, that creates in the marketplace is putting some pressure maybe on spreads, maybe for now until deal activity picks up. But how are you thinking about balancing kind of relatively tight spreads in the market today versus the need to put capital to work? And what do you think ultimately that means for pricing within direct lending over time?

Well, there's a lot to unpack there, and some of it is their crosscurrents, it seems like they're part of the same narrative, and I don't know if they are. So maybe I'll hit each one separately. The market is absolutely consolidating and has been for decades. Just as a data point to put it in perspective, one of the trade pubs, private debt investor does an annual fundraising review where they look back 5 years at fundraising in the private credit space. If you look at the top 25 players out of what they identify as 200 of the largest players, 53% of fundraising has gone to the top 25 people. And it's highly concentrated in the top 10 with Ares at the top of the list. That number, if you go back 5 years, it was probably 35% or 40%. So there is a continued consolidation in the hands of the larger players. And not to go into all of the reasons why, the highlights are size is a big benefit to performance in private credit and direct lending because you get to invest deeper in origination, portfolio management, risk management systems, larger balance sheet scale, more flexible capital solutions. So it is not coincidental that the large are getting larger because they're actually creating real competitive advantage in the market. And I would expect that to continue. And when you look at the types of fundraising numbers that the large players are putting up, it would indicate that, that's still happening. The introduction of retail money into this space has changed the dynamic a little bit, you're right. We have been quite vocal that while we have a leading nontraded BDC that is scaling quite nicely that we always believe that you need to be diversified in the way that you fund your private markets business, particularly private credit. So not surprisingly, we have our traded BDC, our nontraded BDC, institutional funds and institutional SMAs that are all working together to capture the market opportunity because we do not want to be forced to be in a market that we don't like. And that is a change. So I think there's a cautionary tale here, which is when you are growing in wealth, you have to make sure that you're doing it with an eye on the investable market and making sure that you're keeping that tension. I don't feel like that money has overwhelmed the opportunity. So I don't think that spreads are tightening because wealth is growing. I think spreads are tightening because credit performance has been extraordinarily benign. We look at loss rates, loss given default, and it's really, really low, well below historical averages. We're running at near all-time low nonaccruals. So in the credit markets, credit spreads are a reflection of credit risk. There is a supply-demand balance, but it's a reflection of credit risk. And I think people are looking at their portfolios and frankly, not seeing a significant amount of risk, which has them with a greater appetite for deployment in this market. And again, when I look at the setup for a lot of these portfolios, I think the performance will continue to persist. You'll see some dispersion between managers, but on an index basis, I think the credit performance will still be strong.

Okay. Great. Well, speaking of consolidation. Let's touch on that as well. We've seen a number of deals in the private credit landscape for many obvious reasons. It's an area of a lot of growth. We've seen traditional managers coming in. Obviously, the headline grabbing announcement was from BlackRock and HPS about, I guess, 1.5 weeks ago. I'm curious to get your perspective on how a deal of that size could impact competitive dynamics in this space? And how do you think about consolidation in private credit broadly?

Yes. So without going into the specifics of that deal or that company, I'll make a couple of comments. One, the headline number is 30 times. Two, is a meaningful competitor in the market and has been for quite some time. So I look at that and I actually say, wow, that's a validation of the value proposition in private credit, certainly that's a full price. And I look at it and it says to me, these are businesses that are very hard to build organically and some of this consolidation and competitive advantage has to be real because if you are a large well-capitalized company like BlackRock, you come to the conclusion that you can't build something yourself and you pay full price for it. That's a good indication to me that what we have is quite unique. In terms of what it means for the business going forward, I don't know that it's necessarily going to change the competitive dynamic. And when you look at prior acquisitions, not to go down memory lane, but Antares got sold by GE to CPPIB 10 years ago. In theory, that's a well-capitalized partner that should have seen massive scaling in the business. It didn't. T. Rowe bought Oak Hill. Theoretically, you would think that would lead to transformation. It didn't. And so it's not to say that BlackRock can unlock value there. But I think when you put private markets businesses in non-private markets platforms, I think it's really value creating and diversifying, but it doesn't necessarily mean that, that platform will change behavior. So everything we've seen historically is that when we see these acquisitions happen, there's a strengthening of that one competitor in certain respects, but they've been competitors of ours for 20, 30 years. So it's not as though they're creating a new competitor. So I think it's more important when we're thinking about these markets is do we see new competition coming in or do we just see transformation within the existing competitive landscape? And it's been well over a decade since we've seen any meaningful new entrant come into our market.

Right, which speaks again to the competitive mode and the -- let's talk about another leg of the stool within your private credit business, which is all credit. There's a lot of names for it, and I feel like whether it's private credit 2.0, investment-grade private, et cetera, et cetera. So it's a big growth lane for the industry. So I guess, a couple of questions here, but I was hoping you could start with your origination capabilities and bank partnerships in this part of the market, how differentiated you guys are versus competitors? And as a follow-up question to that, we've obviously seen some discussion about potential bank deregulation. So I'm curious just to kind of get your thoughts to what extent that could suppress some of the supply opportunities you see in the market if banks become more active again.

So people call it lots of different things. Some call it structured credit. We call it alternative credit. Some people call it asset-based finance. So let's assume it's all of those things. Just to level set, this is not lending to corporates, this is lending to portfolios of assets that generate cash flow. So that's anything music royalties, shipping containers, aircraft leases, single-family residential, residential solar and so on and so forth. It is a very technically complex business, particularly when you do it on the nonrated side of the balance sheet. We've been in this business for close to 20 years. This was before it became the next great thing and we'll talk about why everyone is talking about it. But we have about 75 investment professionals running that business. Today, they're covering no less than 30 different asset types around the global markets. The reason that this market is growing is partially assets are leaving the banking system the same way that some of the corporate assets that have fueled our growth left the banking system 20 years ago. Some of it is kind of the dismantling of the securitization apparatus post the financial crisis and splintering of the specialty finance market. And so there is definitely a fragmentation that has occurred, and this is kind of a reconsolidation in the institutional part of the market as opposed to in the hands of large finance companies like CIT, GE, et cetera. And three, it's a comment on the deeper affiliation between insurance companies and private credit managers. And this is where there is a big differentiation. When you are doing these securitization transactions around these portfolios in the private market, you are still creating investment-grade rated tranches or investment-grade equivalent tranches and nonrated. We cover the waterfront, nonrated core and opportunistic. And we're investing on behalf of our institutional clients and our insurance affiliate. So when a lot of our peers are talking about the growth in this market, they are largely talking about it through the lens of the insurance affiliate, looking to broadly capture that rated high-grade piece of the market, which is large, growing, but comes with a different set of return, a different set of economics from a management fee and profitability standpoint. And then there's the nonrated piece. If you look at our business historically, as we've built it, we have been disproportionately focused on the nonrated piece, where we believe that we can generate more alpha, get paid for it because we're generating higher returns and therefore, drive a higher fee rate and a higher margin. It's not to say we're ignoring the high-grade opportunity because it's too large to ignore. But I think we're differentiated in the length of time that we've been in this business, the size of our teams and the size of our capital base. And then the fact that we are probably the largest nonrated player in the market by a pretty wide margin.

Okay. Great. All right. Let's touch on some of the other products and asset classes. I was hoping to go to real assets next. On the last call, you talked about expectations for improving growth in your real asset strategy or real estate, obviously, being a big part of that. It's been a fairly challenged market for some period of time. What's driving, I guess, the improved outlook? And what are some of the key sources of that improvement that you're seeing?

Yes. Again, I'll try to oversimplify a global real estate market. The 3 things that are going to drive an uplift in real estate is rates, economic growth, and then what I would generally say is just kind of supply fundamentals in the market. So if you look at where we've been, we had a real rate headwind that was pressuring financeability, debt service for existing real estate owners and fundraise. So you've had 2-plus years of very low transaction activity and isolated pockets of stress and distress that have kept capital out of the market. Rates are coming down. We could all debate how fast they're going to come down and over what time period, but they have absolutely peaked and that is already beginning to show relief in the market in terms of transaction volumes and people's ability to finance and transact. So now we're going from a rate headwind to rate tailwind. We talked a little while ago about just economic fundamentals. We still have really good strong economic growth, particularly in the U.S. market. That will continue to drive property level fundamentals in terms of rate growth and occupancy that we'll continue to unthaw the market. And then I think most importantly is all of the headwinds that the market has absorbed over the last couple of years has dramatically shrunk supply. And so the things that typically cause stresses in the real estate market are overbuilding, oversupply and then a big supply-demand imbalance. At this moment in time, most of the major markets that folks like us invest in are undersupplied, which then tends to mean that there is a real demand for capital for new build and new development, but then also a floor to valuations for existing real estate as supply looks to pick up. So we're pretty optimistic that 2025 will continue to see and unlock for that business.

Great. Okay. Let's talk about some of the inorganic things you guys have done recently. You mentioned the GCP acquisition. It's a pretty meaningful deal for you guys, gives you significant or enhances really your footprint in real asset space, especially outside the U.S. Maybe talk to us about the expectations of how the deal is going to get integrated? What are your key milestones you're trying to achieve over the next 1 to 2 years? And what are some of the areas of revenue synergies that you think you address?

At our Investor Day, we laid out a number of focus areas for our inorganic growth. Two at the top of the list were growth in Asia real estate and growth in digital infra. So we kind of checked 2 very important boxes with 1 transaction here. Just at a high level, GCP is going to bring about $45 billion of AUM onto the platform. About $20 billion of that AUM sits in their Japanese business. They are one of the longest tenured, we think, higher-performing Japanese real estate managers. That market has very, very strong fundamentals and tailwinds in it. Of that $19 billion to $20 billion in Japan, $13 billion is permanent capital. So not only are we growing now in Asia, we're also doing it with a suite of fund products that we think is quite unique. Two, there's a very significant complement between our U.S. industrial business. So Ares is the third largest industrial real estate owner in the U.S. We have close to 200 million square feet of logistics assets. We are underpenetrated in Europe. This acquisition is actually bringing a similarly scaled capability in the European market. So now when you look at U.S., Europe plus Japan, we will still be one of the largest now but global industrial managers and will grow from what we are stand-alone to roughly 500 million square feet. So there's a globalization and diversification that's happening within our real estate business that's quite exciting. And the revenue synergy is continue to just lean in on that leadership position because I do think it is going to become increasingly important for folks like us to be able to create our own assets. So I think those that will win ultimately are those that can source unique exposures for their clients, owning development capability in industrial real estate and multifamily real estate the way that we do is a big competitive advantage, right? We don't have to buy someone else's product. We can build our own. So that is a big, big revenue synergy. There's also a very large data center platform that comes with the acquisition, about 65 people on the data center development side and a global pipeline of data center development that is already entitled and powered land in places like the U.K., Japan, and Brazil. Today, that's roughly a $7 billion equity funding pipeline, which is a meaningful growth engine for us. So there's a lot to do. In terms of the integration, I don't want to underestimate how hard it is to integrate these businesses. But if you think about it, Japan kind of stands on its own. That's a pretty straightforward integration. The European business kind of stands on its own. There's a lot of collaborative opportunity there. So that's a pretty straightforward. Data centers, there is a really exciting integration opportunity to marry what they have with our renewable power and climate infrastructure teams. You've -- the only thing I think we're talking more about than private credit is the nexus of digital infrastructure and renewable power. So this is going to be a big unlock for our climate infrastructure team to now sit alongside our data center teams kind of offer a holistic one-stop approach to that. So it's not going to be -- it's not a tough cost takeout story. It's more of a revenue synergy story. And because a lot of these businesses stand on their own, I think it's a pretty easy thing for us to push into.

Yes. You talked about how this deal checks a number of really important growth areas for you guys. But at the same time, the balance sheet is in a really good place. The multiple on the stock is very strong. How are you thinking about additional acquisitions you guys have been obviously acquisitive in the past? Where is that on your priority list for the next couple of years?

Well, for 2025, low. We've got a lot to do getting this acquisition right, and we've got a lot to do in the core business. So there's not really a sense of urgency. If you look at our product set globally, we kind of almost have the full set of products and capabilities. So there's probably disproportionate value creation by looking at adjacent markets, organic builds, new product development to unlock value versus going out and making another acquisition. That said, we are in a good place financially. We do have a meaningful corporate strategy capability. So if the right opportunity came along, we would obviously react to it. That's typically not how we do M&A. I think we've talked about this before. Most everything that we've done has been noncompetitive, where we're cultivating an investment thesis in a market and identifying a partner and that takes time. So it's unlikely that we'll reactively buy something. But in a market that is competitive, if the right asset came along, we would take a look at it, but definitely deprioritized.

I got you. Okay. Let's talk about some of the other important growth channels. You mentioned wealth in your earlier remarks, so let's spend a couple of minutes on that. $7 billion of equity raise for the first 3 quarters, really off to a nice start, just really over the last year or so with some of the newer product. What's on the come? How are you thinking about expanding, whether it's new products, additional distribution? It's probably some combination of both. But help us think through what that looks like for the next couple of years.

I'll just level set with what we've told the market, and then we can talk about how we're going to get there. So at our Investor Day, we said our expectation is in 2028, we would get to $100 billion in wealth. We started the year at about $25 billion. We would get to $100 billion in 8 to 10 products. And then our aspiration was to be a top 3 player, whereas now we're a top 5 player, but our market share is growing quite nicely right now. So how do we get there? We have to continue to globalize our distribution, which we're doing over 30% of our capital raise so far this year is actually coming outside of the U.S., which has been a really nice evolution for the business. We need to continue to invest in product. So that 8 to 10 number is still a good number. We're well on our way, scaling the products we have, but we will introduce new products. We talked on our earnings call about growth in infrastructure, talked about potentially growth in sports, media and entertainment. And now post GCP, with the broadening out of our core, core plus real assets capability, there may be things to come off of that. So it's going to be an expansion of the product set. It's a really fascinating time in that business because if you think about Ares as a leader in that market and the investments we've made, we have about 150 people in our wealth business today. So again, hard to build. So I think those that have already made the investment in servicing capability, product, adviser education, et cetera, are already kind of identified as the winners in this space. It's very, very hard to get shelf space and it's very hard to grow. But you have to keep evolving that platform. But if you look at Ares, I think we've raised capital from 5,000 financial advisers which is mid-single digits percent of advisers that are kind of open to buy. If you look at our product, we have product on every wire, but we don't have a product that is on every wire. So there's a -- the way the business works is you have to get on to a platform scale and then you start diversifying. And we're in the very early stages of that rollout. So while we have wirehouse relationships with each of our core products, we're now just beginning to add our second platform in many of our products, and that will start to scale. So as you broaden out the horizontal distribution, you'll continue to see growth there as well. So I think we're well on our way.

Somewhat related to that and maybe a little bit more thematic, but curious to get your thoughts on this as well. 401(k), it's got a lot more air in the last month or so. There is a view that perhaps the Trump administration will make it easier to get some litigation relief and therefore, more private market vehicles could make its way into retirement accounts. How are you thinking about that as an opportunity for Ares? And also, how are you thinking about potential partnerships for you guys with some of the traditional players in the 401(k) channel?

Yes. So it is a huge opportunity. I think there's about $11 trillion in DC plans in the U.S. market. $30 trillion globally. So we all love to throw out big numbers, trillions. So if you do have a small share capture, that would be meaningful from a fundraising standpoint. So we're thinking about it a lot. Given our product set and our wealth business, we are well positioned to approach that if and when that day comes. You are right, the biggest constraint is going to be within the ERISA fiduciary regulations and reducing the potential threat of litigation and deemphasizing a focus on fees in order to get private markets exposure into DC plans. I think most people, myself included, believe that target date funds will be the way that people will begin to consume private markets because you're already dealing with kind of longer duration expectation and structure, and that's kind of a natural place for alts to find their way in. And if you look at other parts of the world, there are real -- there's real evidence that it works. So if you look at the Australian supermarket, about 25% of their DC market is now in some form of alternative investments. So there is definitely growing momentum. Similar to retail, though, I want to caution new fundraising channels don't necessarily transform the business, right? It just means that we have ways to diversify the way that we raise capital, which is fundamental good. And things like retail and DC and insurance, the ability to deliver these investment products to people who couldn't get access to them is also really good for the markets, democratizing that access, but it doesn't necessarily transform the business. What grows this business is origination and sourcing of unique product and you have to keep investing in that. How you fund it, it almost doesn't matter if it's a retail dollar, a DC dollar or an institutional dollar, right? So I just want to throw a note of caution that when everyone is throwing out $11 trillion here and $7 trillion in retail, it's great, but we still have to go out and actually execute on sourcing which is really good.

You got to produce returns.

You got to produce returns for your investors first. Insurance is a slightly different story because as I said earlier, we've now opened up high-grade fixed income to the private markets, which does transform the market. So that's different. But we have to be careful that when we're talking about these big new fundraising channels that we don't confuse that with like a tectonic shift in the business. It's really just to diversify.

Yes. And I guess how are you thinking about partnering, right? Because It's a way to propel you into the 401(k) challenge. You've got a lot of operational complexities, lots of barriers to entry, right? There's a few players, obviously, that are very large in the 401(k) space. Is that an avenue of ultimately getting in there? Or you guys thinking...

Well, to address we're actually going to launch our first product that would be perfectly eligible probably in the first quarter of 2025. We have teams of people internally that are working on it. Our product will likely have wrappers around some of our existing product set like our nontraded BDC. And if we go down a road where partnering makes sense, i.e., there's a distribution or a need to partner, we would partner. And so you should expect that we have broad enough relationships to be ready to partner with people if that's where the world goes. But back to my earlier comment, these partnerships will only make sense if the client is getting a differentiated outcome. Are they getting better returns? Are they getting better net returns because there's some fee efficiency that get -- like you really have to look at it through the lens of the client, at least pre the growth in D.C., we feel that our product set is now broad enough that both retail and institutional consumers can access our product very efficiently. And so we don't feel like we're lacking for distribution. If the distribution requirement for our product changes in a DC world, then we would absolutely partner with.

Got it. Okay. Well, we can keep chatting. But unfortunately, we're out of time. Thank you for doing this, Michael. It was great to see you. Appreciate you being here.

Great to see you.