Ares Management Corporation (ARES) Earnings Call Transcript & Summary

Good morning. I'm Patrick Davitt, the U.S. asset manager analyst here at Autonomous. It's my pleasure to welcome back Ares Management's CEO, Michael Arougheti. So thanks for...

Thanks for having me.

And spending your summer Friday with us. As a reminder, if you want to ask any questions, you can submit them through Pigeonhole, and they'll show up here on my iPad, and I'll try to work them in as appropriate.

Mike, given we have had most of the major alternative manager CEOs here this week, I'm starting all the conversations with similar high-level macro questions. So given your position as 1 of the largest credit managers, I think it's best to start there. I'm sensing from investors concerned that stickier inflation, higher for longer, slower economic growth could be a particularly bad mix for levered risk assets. What's your updated thoughts on that concern? Do you agree with that concern? And what's the latest thinking on inflation rates in the economy within Ares?

Sure. Good to see everybody, and I also appreciate you spending your summer Friday with me. Look, we have a pretty good lens into the real economy globally through our direct lending franchise. We touch probably 3,000 middle-market companies around the globe through our industrial logistics business. We manage 600 million square feet of distribution centers and warehouse assets and so generally have a good sense for flow of goods. We have a $40 billion alternative credit business that has a pretty good lens into the consumer. And so when we're asked that question, we always just kind of lean into what it is that we're seeing in the portfolios. And I would say, broadly speaking, the portfolio has continued to be incredibly strong and resilient. We're seeing positive NOI growth, positive EBITDA growth, deleveraging, consumers proving to be resilient. And so I do have a view that inflation will be more persistent than maybe people want it to be and that rates will generally stay higher for longer than people want them to, but I'm not in the world view that we're in a world of stagflation. I think that the fundamentals in the economy continue to flash strong. We're at or near full employment. I think when people are employed, they spend money. Markets are happy right now. And so I'm cautiously optimistic that despite a lot of the volatility that is poking its head up, that what we're seeing in the portfolio tells us that the fundamental strength of the economy is intact.

Great. So in that vein, private credit and direct lending specifically appears to kind of always be in the presses kind of target or for whatever reason. So where do you see the biggest risk of something breaking in these portfolios? Or on the other hand, how often is this concern, and should the attention be focused somewhere else entirely?

So I've been in the private -- what is now called private credit, it's the direct lending private credit business for 30 years. And the business has always been in the eyes of the media, 1 headline away from blowing up the economy. And I don't understand where that comes from. And so I always just try to remind people what it is that we do and why we exist. So if you think about direct lending, private credit, we're not taking risks that other forms of capital won't take. We're taking risk that other forms of capital can't take because of some regulatory capital constraint or some balance sheet constraint that kind of doesn't make it profitable for them to do it. But if you actually look at the borrowers that we tend to lend to, they tend to be the highest quality borrowers because they are able to take on leverage, and they tend to be supported by institutional equity. And so if you take direct lending, just as 1 example, but directionally would be the same for our real asset portfolios. Our corporate direct lending portfolios today sit at 42% loan to value. Which means that there is some institutional equity owner that owns the 58% of the balance sheet that we don't. So what I always try to gently remind people is if you actually have concern that there will be losses in the private credit market broadly, then you've decimated the private equity industry. And generally speaking, if you've decimated the private equity industry, we're all going to be pretty unhappy with what we're seeing in our public fixed income and public equity portfolios. So I know this is going to sound completely biased, but private credit is almost the last place that you're going to start to see losses. And if you look at the history of the asset class, the direct lending indices, like if you look at the Cliffwater Direct Lending Index, it actually outperformed the Loan and Bond Index over the last 20 years in terms of default rate and actual losses. So it's not to say you're not going to see idiosyncratic portfolios having higher loss rate. But I think the structure of the market, given the LTVs, given the high margins, given the growth in EBITDA, the first thing, I just don't see it.

On this point, there's also some reporting about the dynamics between the broadly syndicated market and direct lending. And a concern, I guess, that when the BSL market is open, the relative credit quality shifts from direct lending to BSL, in other words, higher quality companies can refi out into BSL and vice versa. It seems rational, but probably too simplistic. So what is this -- what is that...

So the direct lending market, corporate direct lending market relative to BSL is effectively always open. So -- and it's always open from the lower end of the middle market to the upper end of the middle market. When the BSL market is turned on, it will start to capture share at the upper end of the middle market. But there is a size constraint in terms of the types of companies that are eligible for access to the loan and bond market. If you look at $100 million of EBITDA, for example, as a threshold, that's probably the minimum required size to get into the liquid markets and it's probably higher than that. And so yes, you will see the BSL market trading share with the direct lending market, but that only represents a pretty small fraction of middle market universe. One of the things that we've tried to articulate that differentiates Ares relative to the broader peer set is we actually have deep origination across the entirety of the corporate middle market. And so if you do see relative value shifts between the larger end of the market and the lower, you can move back and forth, and that's generally how we navigate the cycle. But it's not as though when the broadly syndicated loan market is open, there's a change in underlying quality in other parts of the market.

Great. That's helpful. Another on the kind of tug-of-war between BSL and direct lending. It's been pretty volatile this year, given the volatility around Liberation Day with big direct lending gains in April than BSL coming back in May. It looks like there's still been some big direct lending deals over the last few weeks, though. So where are we in that balance now? And through that lens, how has your pipeline been tracking since we last heard from you?

Yes. We were just talking about this before we came on stage. People access the direct lending market generally because they're looking for certainty of execution, creativity and structuring, a partner that can help grow with a business plan, people who can partner with them in good times and bad times. So that -- people need to understand that people are not coming into the private market because the public markets are closed. They're coming to private market generally because they're just getting a better experience. And I think a lot of people who have been in the liquid market have learned over time in down markets, when someone can come into your capital structure and accumulate loans or bonds at a discount to par, that's value destructive if you are the owner of that company. And so there's real value that gets created by having a bilateral agreement with a partner that you trust. So again, back to kind of the myths of direct lending, it's not as though BSL is open, direct lending is closed. Private markets are taking share because they are delivering a value proposition to the client that they want. In terms of where we are, we talked about this on our last earnings call and ARCC's earnings call as well. We had a very, very active Q1. Post April 2, the pipeline kind of froze in place. I wouldn't say that it went away. I think everybody froze in place as they were hoping to get some certainty on the direction of travel. I would say now that we're kind of past peak volatility and people at least can begin to underwrite some range of outcomes here, we've seen the pipeline turn back on, and we're quite busy. Important to note too, obviously, Ares does a lot of things other than direct lending, although people love to talk about our direct lending business. When the direct lending market is closed because there's not a lot of new transaction volume, other parts of the business turn on pretty dramatically. So if you see a slowdown in volumes, you see a pickup in secondaries deployment and opportunistic credit deployment and bank SRT deployment and all of these things. So generally, when we look at deployment pipelines, they tend not to be erratic because we have a diverse enough set of strategies and solutions for the market that the deployment is pretty consistent. It just changes where it is that we're deploying.

Fair. I'm going to stay with direct lending a little bit longer. I'll probably move on. The other side of the kind of the deployment equation is the deployment spreads, right, what spread you're getting on the new loans. And I hear a lot from investors, this concern that there's just so much private credit dry powder that the spreads will tighten so much that it becomes a headwind to your revenue yield. What are they missing? And more specifically, how have new deployment spreads been tracking through the recent volatility?

So -- again, direct lending, private credit generally, not just corporate, is a pretty durable return proposition because it's short duration floating rate. It has a lot of different return components from upfront fee to credit spread to call protection, to exit fees and everything in between. And so while credit spreads fluctuate and base rates fluctuate, you generally have a pretty narrow range of total return that the market requires. And that total return is typically 150 to 350 basis points wide of the liquid alternative. And so again, you have to think about direct lending relative to the liquid markets, just what's happening in the direct lending market because it doesn't -- it's not an unchangeable total return. In terms of what we're seeing in the market, came into the year, markets were healthy. Credit spreads had tightened pretty dramatically. Post Liberation Day, spreads probably gapped out 50 to 75 basis points in fees, gapped out maybe 100 basis points. Fast forward to today, that 50 to 75 is probably plus 25. So it's still wider, but we've given some back. But if you look at what that means from a total return standpoint, people are still generating kind of a 10% return, give or take, in the direct lending asset class, which on a relative basis, given the rate environment we're in, is incredibly attractive. So not surprisingly, still seeing a significant amount of investor demand for the asset.

And the gross to net headwind was better than expected in 1Q, given how open the market. I think how has that been tracking in 2Q?

So I can't give you an update on Q2. But back to the diversity of strategy and the way the portfolio has performed. When M&A markets are robust and there's a lot of new transaction and refinancing activity, volumes pick up, but your gross to net goes down. When the markets slow, your net deployment is elevated just because you're not getting refinanced at. So if you look at Q1, I think our gross to net was like 49% and Q1 of '24 is probably half of that. So people love it when the markets are healthy and there's a lot of transaction activity, but we probably perform best when it's okay, but not great in the sense that you're not having to defend the existing exposures and you have ample deployment opportunities, but your gross to net has improved. And it feels like we're kind of in that similar type of a market backdrop where the markets are happy, volumes are picking up, but it's not quite as exuberant as maybe people underwrote coming into the year.

Yes. On that point, given this is a more generous conference, I sense a lot of investors that are not as familiar with how direct lending works through cycle. Don't really understand how you can pivot and how the deployment pivots. So if we are indeed heading for more credit stress, slower deal environment, I think it'd be helpful to get a quick primer on how your direct lending business can pivot and still deploy even when maybe net new like M&A activity isn't as high?

So there's 2 -- so if you look at recent -- if you look at 2024, I think the U.S. M&A volumes were down 7%, and our deployment was up 61%. And that's a reflection of a couple of things. Number one, our companies are growing their EBITDA generally somewhere between 10% and 12%. Publicly announced, you see that. So just the compounding effect of the EBITDA growth and the releveraging of the existing portfolio just creates a natural cycle of deployment that exists away from the M&A market. And that's a big compounder, right? So if you think about a direct lending business that's growing 15% plus a year, half of that plus is coming from just the compounding effect of EBITDA growth within the portfolio. Importantly, the incumbency advantage that we have within the existing portfolio is a big driver of that as well. So about 50% of our deployment in any given year is coming from within the existing portfolio. And that's a function of just these companies doing tuck-in acquisitions, investing in growth, et cetera, et cetera. That's a big part. The second piece is -- and this is back to the loan-to-value concept of sitting at 42%. If the market is stressed or distressed and someone owns 58% of the capital stack, they are incentivized to own that company and support it because effectively, you have a call option on the equity because you're a senior lender at 40%. But what ends up happening is you get into a negotiation, which is why people want to be in the private market between the lender and the borrower that says who's going to put money in and what do you get paid to do it in order to protect enterprise value. Generally speaking, if the company is a high-quality company but is having either liquidity issues because of rates or some modest operational distress, the equity will come in with new capital, deleverage the capital structure. So it actually reduces risk to the credit and ask for some form of relief to extend runway. If we, the lender put money in, it comes at the top of the capital structure. So it goes from 42% to 45%, but then you're getting equity-type returns for that exposure. And so generally speaking, the combination of de-risking, right, from capital coming in or rerisking, where we're getting paid excess return to move modestly down the capital structure leads to outperformance through cycle. So 1 of the things we talk a lot about is if you look at ARCC, our publicly traded BDC, which is a pretty good proxy for how private credit performs through cycles. Their -- since inception, loss rate is plus 80 basis points. And that's a function of the way that the portfolio kind of operates through the different parts of the cycle. And again, this 42% is as low as we've ever seen it. So I have high conviction going into this cycle that even if we were to get a modest credit cycle, that the portfolios are more durable than they've been in any other crisis...

You have had loans that might be a little bit more stressed. You're seeing the sponsors aggressively trying to keep... step in.

Generally, they will. Yes, generally, they will. If they don't, it's because they perceive that equity value doesn't exist anymore. In which case, we now are moving into the equity. But if your underwriting is sound at the outset, generally, you recoup value by taking those companies over. So we would never go into a loan wanting to own the company, but it's something that happens. And what we do, we actually tend to make money in those situations.

Right. So with all that in mind, it sounds like you'd actually like a little stress and wider spreads. What do you think the sweet spot is there toward...

I don't think it's like a little stress. I think it's ironic. I mean, the private credit probably performs the best in slow to low growth environments where rates are stable and deal volumes are active but not ripping. So it's kind of you like a goldilocks market, whereas I think the liquid markets love it when the markets are ripping, there's just a lot of velocity of capital. I think we prefer when it's just kind of somewhere in the middle.

Got it. So expanding the private credit window, you and others have pegged the ABS opportunity set as much larger, potentially getting to tens of trillions of dollars, which is largely on the inclusion of asset finance, I think you guys call it alternative credit. Your targets have been a little more conservative than others, but you're still expecting it to double over the next few years. With that in mind, how much of that $40 trillion do you really think is addressable for the alternative managers? And what are the areas Ares is best positioned to stake its claim in that space?

Yes. Look, we've been in the asset-based finance business as long as anybody. We actually started that business in 2006 at Ares and have grown it quite dramatically. It's approaching $50 billion today. The growth ambitions that I think you're referring to is at our Investor Day, we basically said that we would get it to $75 billion or $80 billion, which I think is a 15-ish percent growth rate. It is a large untapped market. And the reason it is getting so much attention now is really twofold. Post the GFC, the securitization apparatus on Wall Street fundamentally changed and a lot of specialty finance companies kind of got disseminated into the market, and they're now either reconsolidating or are at a stage of maturity where they're borrowing in the private market. And two, a lot of folks like us, and others have been much more aggressive in affiliating with insurance clients who have a very strong appetite for the rated tranches of the asset-based finance world. So what we have done to differentiate is, number one, invested in capability and team, that we have over 80 people now in that business covering 40 subsectors with a focus on what we would call sub-investment grade and investment-grade. It's roughly 50-50, whereas I think some of our peers tend to be much more focused on the investment-grade part of the market. We're trying to maintain balance. And how much of it is accessible. It's theoretically all accessible, but I think it's pretty ambitious when people start throwing numbers like $40 trillion because the insurance market is active. The bank market is active. So I think we shouldn't confuse TAM with market share capture, but it is a big TAM. And similar to what we've seen in other parts of the private credit market, there is a value proposition to the client that will have them borrow in the private markets in the asset-based market over time, but I'm not -- I don't know how much of that $40 trillion transfers. I think in order to be successful in that business, though, you have to have a unique investment capability. And it's quite specific and quite skilled. And so I think if you're not in the business now in a meaningful way, you're not going to be in the business just because the talent gap is too big. Two, I think you need to be large because a lot of these transactions are multibillion dollar type transactions, and you need to show up with a full capital solution. And so the large players in this market are, by definition, going to be the large managers like ourselves. And then three, you have to be able to really move between the different parts of the market. Because in 1 part of the cycle, consumer lending may be interesting. In another part of the cycle fund, finance may be interesting. And you have to do all of those things in order to capture the excess return. So I think it's going to be a small handful of players that have a full capital structure capability and a full investment capability that are going to ultimately win the day.

And I think it kind of counterintuitively, I've heard from a lot of other executives that the education process for -- the LP base broadly has been a little bit longer in ABS than it was for direct lending for some reason. Could you update us on that process and where you think we are in kind of unlocking pension funds...

I think we're on the other side of it. It's funny because when we -- similar if you say 30 years ago when we were talking to people about corporate direct lending, they looked at us funny, they didn't understand what it was. And I'd say even 10 years ago, when we were talking about private ABS and ABF, they didn't understand what it was. And I think part of that is the structure of the market used to be -- you had the securitization market and traded ABS. And then you had these little small niche specialty finance companies that were doing things like premium finance or life settlements or litigation finance. But -- so the way the investors experienced asset-based finance in the private markets tended to feel really small, really specialized, really complex, really risky. So part of the education process in the early days was really kind of -- and we were out doing missionary work where we were showing investors cash flow curves across different asset classes, and we would redact what the asset class was. We would say, here's 20 different portfolios of 20 different instruments, leases, receivables, consumer loans, and they all look they all look the same. And so we just tried to anchor people on the structure as opposed to the underlying asset because it's a lot to ask an investor to understand the 40 sub asset classes that we specialize in. So we kind of reoriented the conversation from let us talk to you about premium finance or health care royalties or fiber securitizations and let us show you what these instruments are and how the structure ultimately protects you regardless of what the underlying is. And that was kind of a light bulb moment because what it allowed the investors to do was to get out of the game of allocating small amounts of money to the specialty providers and kind of aggregate their exposure across the landscape of asset-based finance. And then the second unlock was when we and others start to show people rated tranches within these structures over time that brought the insurance companies and the pension funds into the market as well. So I think we're still in the early days of adoption. But I think from an education and understanding standpoint, I think we've made huge strides.

On this point, 1 of the large players in ABS is making a big push to make private credit more tradable.

Well then it's not private.

Then it's not private. So that speaks to my question. What are your thoughts on -- I guess, that's a big selling point, right, for the asset class, that it isn't as volatile as public markets. Why are they going down that road? And do you think it could kind of derail, 1 of the selling points of private credit...

Well, I think there's a lot of kind of cross currency at play right now around this conversation of private and public and convergence. So the way I always think about it -- and we talk to our investors this way -- is you could take equity risk and you can take credit risk and you could take it in the form of public exposure or private exposure, and many of our investors do both. I think in order to invest in the private markets, people want excess return because you have less liquidity. You also have less volatility. And so people have come to appreciate that they can get excess return with a lot less volatility in the private market. My own view and maybe I'm just not smart enough to get it. I think once you start trading something that is private, it's now traded. So then it's not private anymore. That doesn't mean it's not still a really attractive instrument, but I think people are getting sucked into this conversation about definitional constructs that I'm not sure is relevant. The value in trading, which is maybe -- I don't know if you were going to talk about this, but there is going to be an evolution and innovation in these markets where portfolios of public and private will come together, and we'll have a need for daily, if not monthly marks, daily, if not monthly liquidity. And so the idea that you can begin to create bid-ask spreads around private assets actually benefits the evolution of the market into some of these structures. So I think part of what's happening is the move towards trading private securities is kind of goes hand in hand with trying to unlock value in these public-private partnerships. But I'm a pretty simplistic guy, I think if it trades, it's traded. If it doesn't trade, it's private, and that's pretty straightforward.

Fair enough. I think that's a nice segue to a more recent concern we've heard from investors that bank deregulation to kind of derail this ABF opportunity. From what you've seen in the proposals, do you think there's anything that could derail the transition, I guess, from bank balance sheets to your wrappers in the ABS space?

Yes. So another thing I think is heavily misunderstood in the growth and evolution of private markets as I think people have a view that it came at the expense of the banks. And the reality is it came in partnership with the banks. And so while the private credit markets have been growing the bank exposure as lenders to private credit portfolios, whether they're asset-backed or direct have also been growing. And so banks have been meaningful beneficiaries of the growth in the private credit markets. And what has happened is rather than build large origination and portfolio management infrastructures to own whole loans, they effectively outsource that to the private credit markets and then lend to the portfolios and in so doing, are generating significantly higher return on equity and doing it with a lot less expense. So it's P&L accretive as well. So I think that structural shift is kind of intact and not necessarily going to change. And even if you look at what's happening in the world today, we and others like us have been meaningful partners to the banking community with SRTs and flow agreements where we're trying to use our differentiated capital to support the balance sheet needs and client franchises of our bank partners. So I'm a huge proponent of bank/nonbank partnership. I don't think that this should be viewed through the lens of we're competing necessarily there. I do think back though to this idea of specialized talent, this de-banking trend has been a 30-year trend. A lot of the practitioners have left the commercial banking system and now exist in the asset management world. I think it's going to be very hard to pull them back in just in terms of the products that they have, the compensation that they make, the ease of use in doing the business. So I -- it's not just you get a recap relief and all of a sudden, your back-end business, I think it's more complicated than...

Talent has migrated. That's great. That's good point. No one's made that yet. All right. Let's move away from credit. You and others have presented a very strong case for growth in infrastructure. Infrastructure is probably the biggest incremental opportunity right now, if it's not credit. TAMs are -- really big TAMs are being thrown around. And you recently boosted your positioning there with the GCP acquisition. So maybe update us on how the integration is progressing? I know it's early. And then more broadly, how you see this boosting your broader infrastructure strategy?

Yes. So GCP, just for those who don't follow the company, it's an acquisition that we closed recently. They are a large global player in the industrial real estate market and have a significant data center development business that came with the transaction as well. The reason that we targeted that, if you were to go back and look at our Investor Day, you saw that we were focusing on expanding our presence in Asia. We were focused on expanding our capability in digital infrastructure. We were focused on continuing to deepen the vertical integration that existed in our real estate business in order to drive more value. And so the acquisition in many respects checked multiple boxes for us in terms of the strategic road map that we've set out for ourselves, about a $40 billion asset manager, half in Japan, half in rest of the world. And kind of the crown jewel asset of GCP is their Japanese real estate business, 1 of the longest tenured, best-performing J-REITs in the market and 1 of the longest tenured industrial developers and asset managers. That was a real big opportunity for us to get a foothold in 1 of the largest economies in the world at a time when we think that the tailwinds for growth are as strong as they've been in decades. What also came with it was a deepening of our vertical integration capabilities in Europe. And then the data center piece. So we acquired about 75 people and a pipeline of projects representing about 2 gig of data center development, $8 billion or so of AUM to be raised and a really unique opportunity to leverage our now global position is probably the second or third largest industrial real estate manager to the land bank and build pipeline for our data center business. So kind of checked a lot of things. The data center business, too, from a financial standpoint, quite interesting because we didn't pay a lot for the option to build it, but coming out of the gate, we're actually absorbing a healthy amount of operating loss to support that development capability while we're ramping the pipeline. So in terms of the progression of the profitability as we're raising capital behind the data center development pipeline, the FRE will pivot pretty...

And as I understand that turns on as it's put in the ground? Or is it a...

So it's all along the evolution. And so 1 of the other things that will change for the presentation of the financials within our real assets business is you now start to get a significant amount of leasing development, acquisition type fees and other income that is new to the company.

Another interesting spot now with secondaries, it feels like we might be entering a bit of a sweet spot there. Sponsors are struggling to sell positions, GP is feeling pressures to get more liquid. I think you have a relatively stronger position given your Landmark acquisition. So are you seeing those trends translate into significantly more deal flow yet? And how is capital formation tracking to take advantage of that deal flow?

Yes. No, it is -- it is definitely in the sweet spot of the market opportunity right now. Maybe to take a step back, we were always in the secondary business through other parts of the company, and we had been an issuer of continuation vehicles and GP type solutions. Five years ago, we acquired a company called Landmark, which was kind of the pioneer in secondaries. $35 billion of AUM, if I remember when we bought it with a view that secondaries, secularly, we're going to go through a transformation, which was largely a shift from what was typically just an LP led market to an LP led and GP-led market. So we are beginning to see that this just wasn't going to be pension funds selling portfolios. It was going to be GPs looking for creative liquidity solutions in the form of minority stakes, preps, loans, NAV loans, et cetera. And that has accelerated dramatically in terms of the addressable market. And I think it speaks a lot to our strengthened GP relationships. So now we're not just covering the GP community with loans, we're covering them with secondary solutions. We also had a view that the primary market for non-PE, i.e., real estate, infra and credit, was mature enough that you'd begin to see a deeper penetration of secondary product in those markets. So you were going to see LPs give way to GPs, and then you're going to see PE start to give way to other parts of the business. And that has played out in space. So in the 5 years since we acquired the platform, we launched a de novo credit secondaries business and are effectively helping to create a market that up until this point didn't exist. Just raised our first fund, we formed about $3 billion of capital there, and that's quite active. We have scaled our infrastructure secondaries business. We have launched a meaningful nontraded product into the retail market. And the deal flow is accelerating rapidly because to your question, the installed base of private equity and private real estate equity is so significant that in this deal environment, it needs other liquidity solutions that are not just selling, and secondary is a big part of that. And so back to the earlier comment I made on deployment is if M&A is slow or even if it picks up, there's so much installed equity in the market that the secondary flow is going to be a pretty meaningful center of activity, I think, for the foreseeable future.

And there's enough kind of demand from the LP, and I guess, retail now to support that deal flow, you think?

Well, yes and no. I mean it's interesting because if you look at secondaries, industry-wide secondary deployment last year was maybe $160 billion. My guess is it will be higher this year. But if you look at the dry powder in the secondaries market, it's probably close to that number. So there is enough capital in the market to kind of satisfy, but not the way other markets are structured. I actually still think the secondary market is pretty undercapitalized relative to the market opportunity, which is why we're seeing the momentum we're seeing in fundraising and deployment.

Right. That's a nice segue to retail. You've been earlier in the wealth build-out than some others, but catching up quickly. This is obviously a big part of the growth algorithm for everyone in the space now. First, in the near term, there's still a lot of concern that the expansion into this channel could make alternative flows more volatile. So what areas have been experiencing on that front, kind of post Liberation Day? Any sign these products? And then on the other side of that, any sign that these products could potentially be something investors look at something to rotate into when markets get more volatile?

Yes. So again, maybe taking just a quick step back. We were -- I don't want to say that we were late to the retail game, but we were more measured in our enthusiasm. But by design, and you highlight a couple of reasons why, which is historically, when we raised an institutional fund. It has an expectation of deployment over 3 to 5 years. We can opt into a market or opt out of a market, and we can go into any environment with a significant amount of dry powder to kind of play the cycle. And so if you look at the history of Ares, even though the numbers have gotten bigger, we are typically sitting on 25% to 30% of our total AUM undeployed. That is the kind of a hallmark of how we think about investing. That changes when you start raising capital in the retail market because you get $1, you invest a $1. So you don't have the luxury of knowing what your dry powder is and how aggressive you can be navigating a cycle. And it takes away 1 of the levers we have to drive outperformance, which is to not invest. Right? So you do become more procyclical in the way that you raise money and deploy money when you go into retail. So we wanted to be sure that when we did it, it was as a complement to our institutional franchise so that it's diversified allowed us to grow, but that it didn't overwhelm our ability to play the cycle through dry powder. And as quickly as our retail business is growing, we are laser-focused on maintaining that balance because we think it drives outperformance in both of those markets just because of the durability of our performance and origination. In terms of the volatility, it's going to be interesting to see. If you look at what we're seeing now, we have not seen a slowdown in flows. Now part of that could be that being that we're younger than some of our peers, some of these newer funds have meaningful financial penalties in the first 18 to 24 months of the fundraise. So there's a financial disincentive for people to look for liquidity in our products specifically. And it's still early because some of these have monthly and quarterly liquidity, and we haven't quite seen the queue building. But when I look at the inflows and I look at the investor behavior today, real time, I wouldn't expect it. They're exhibiting a significant amount of resilience and durability in ways that we haven't seen before. And that's really encouraging because again, I think historically, there was a view that the retail investor kind of exiting the market when they should be coming into the market and it made it difficult to manage. We're not seeing that. So I think a lot of the education that we and others have put into the wealth channel, just in terms of the durability and the value of the liquidity is -- seems to be taking hold. But flows are still strong. We're not seeing a lot of redemptions. We have 8 products in the market across the globe, and it's been pretty broad-based demand. So it's not like we're seeing demand for 1 overwhelming the other. It's been pretty broad-based across the entire product in.

I sat in a lot of meeting -- group meetings with your CFO and others yesterday, and this conflict between the retail wrappers and the institutional wrappers came up in almost every single one. Looking forward, if the retail opportunity really is as big as you and everyone thinks it is, how do you manage that conflict when flows to these products are 3, 4, 5x what they are now?

Well, you have to be -- look, I try to anchor people. In private markets, which is important, there's a fundamental capacity constraint when you're building a private market platform, right? A talented private market investor can only do x number of deals a year they can, and they can't scale them. So when you build the organization, you have to be thinking about building investment capacity, and then you build your fund portfolio to kind of meet the investment capacity. So it's always great when we say that there's a $12 trillion opportunity in retail, but if you can't generate $12 trillion of unique investments for that market and the cadence that they need, it's not really a relevant number. So the way that we think about it -- and I don't know how others do -- is it starts with what do we think our actual investment capacity is based on the people we have, based on the capabilities we have, based on the capital we have and then build and construct the capital behind that for the benefit of our investors and our shareholders. So i.e., drive quality growth, profitable growth and don't sacrifice investment return. So I think it's important that when you're thinking about alt managers that you really focus on what is their investment capacity, not what is their fundraising capacity. Because I assure you, I probably raised 5x the amount of money that we could invest. So you have to focus on building capability. So I think what it means in terms of retail is there's a real role for retail. It's diversifying. It is underpenetrated, and growing it allows for a healthy discussion around fees and compensation in both of those markets. So I think it creates a healthy balance, but you will not see Ares over indexing to any 1 of those. I think it will always be a healthy balance of the 2 in order to make sure that the competitive advantages that we think we get from scale and dry powder don't -- don't go away.

You mentioned the 8 products. Do you think that's kind of the right suite at this point? Or is there a pipeline of newer products?

There's always going to be product development. I mean, back to outcomes, I think what we've tried to do is talk to the wealth investor with regard to outcomes, not product, meaning we're going to deliver you durable income. We're going to deliver you differentiated equity exposure. We're going to deliver you tax advantaged real assets exposure with inflation protection. And try to get, again, get people out of this mindset of I'm buying a private credit product. It's -- what does it do for your portfolio. So viewed through that lens, there's always going to be ways for us to innovate around providing solutions into the wealth channel. Interestingly, though, would the 8 that we have to non-traded REITs, a large U.S. BDC, a diversified credit interval fund, a European BDC equivalent, a tax advantaged infrastructure fund, sports, media and entertainment fund. An investor now can kind of get the best of areas across real assets and corporate exposures. But I think there's going to be innovation in combining exposures. I think you might see geographic expansion, geographic specific funds where people are trying to get access to 1 part of the franchise. But I -- as I sit here now with those core 8, any adviser or any investor can now access any part of the Ares organization in terms of what we do, which is a big milestone for us in terms of the development of the product.

Before I get to my concluding questions, there's 1 from the audience that's fairly specific, but I think is interesting. Last year, during the Pluralsight issue, there was a wide dispersion and how the different lenders had that loan marked. You were at the right end of that spectrum. Why do you think there was so much difference there?

I don't know where the other people had -- if I can. I can't comment on that, but I'll give a couple of thoughts. One, again, back to the media and the private credit being the foil, they completely missed the narrative, right? The narrative was there's a default in a large private credit instrument. How many -- how much losses are going to flow through private credit, not what happened in the multibillion dollar equity commitment that just went away right? So it was interesting just to watch how the media and the investor community were digesting that event because it went right to the private credit and then didn't really talk about -- and where was the private equity market? And how did that so I'll just put that aside because I think that's just a good example of this kind of coverage of the market. Private market valuation is -- there's a pretty specific process that we all go through to value. And in healthy companies, it will tend to be pretty narrow in terms of the outcomes because you're looking at the rate of return relative to the traded markets, you're looking at M&A comps, you're looking at public traded comps, you're looking at DCFs, all the things that most of us were probably trained to do, you do, and you just don't get a lot of differentiation in return. When you're going through a restructuring or challenging credit, there's always going to be more subjectivity on what you think the expected outcome is going to be because you shift from pretty tried and true valuation framework to what's going to be the outcome of this restructuring and what's going to be the value of my future securities. And so I think you're always going to see a difference there because it enters a little bit more subjectivity. Why we got it right and others may not have just may speak to the fact that we probably have more experience in these situations than that other people do and had a pretty clear view as to what the outcome was going to be, but that's not -- I think given the amount of moving pieces and situations like that, you're going to see that happen from time to time.

Great. So maybe to conclude, talked about a lot of great things here today. You put out a 5-year fee related earnings growth CAGR of 16% to 20%. How do you think you're tracking versus expectations there? Do you think that's too conservative? And what do you think is the biggest risk to reaching it is?

Well, we haven't changed our guidance. So that's a pretty good indicator of how we're feeling about the business. If you look at our Q1 performance, we were growing in excess of the guidance, but that's neither here or there, but it's just a fact. I always just try to answer it with the -- how remarkable is it that we actually could put out 5 years of guidance at that level of growth and specificity and deliver against it with a fairly tight tolerance, right? So you look at our history as a public company, when we put the guidance out, we've generally met or exceeded it. I only mention that because we're living in a world now where people are pulling guidance a quarter out, 2 quarters out, a year out, and we and others in our industry are standing firm on high conviction 5-year guidance. And so I think that should just be an indication of the durability of these businesses and that we can see forward because of the way that we raise and deploy capital with a high level of conviction into those numbers. So yes, I don't see anything in the market that changes our level of confidence. And -- is it conservative? It's lower -- the guidance that we put out is lower than our historical experience. And I think people have noticed that, but the guidance is the guidance.

Yes. That ties a nice bow around everything. Thanks a lot, Mike.

Thanks for having me.