Ares Management Corporation ($ARES)

Good morning, everyone. I'm Patrick Davitt, the U.S. Asset Manager Analyst at Autonomous Research. It's my pleasure to welcome back Ares CEO, Michael Arougheti. As a reminder, if you want to ask any questions, I'll try to throw them in, you can submit them to the Pigeonhole app, and I get it right here on the iPad, and I'll try to sprinkle them in as they come in. Thanks for coming, Mike. Glad to you see you again. So it feels like a broken record every year at this event with a new bugaboo in the industry. So as I usually do at the event, particularly since we have most of the major alts here, I want to start with some higher-level macro questions.

So it's been a crazy few months, got an Iran war, a big private credit freakout and now concerns around sticky inflation, higher for longer rates and slowing economic growth, and even some higher probability of stagflation we hear. So from that seat, the mix seems pretty toxic for levered assets like private equity in particular, but maybe incrementally positive for pockets of private credit. Do you agree with that view? And what is your current thinking on inflation rates in the economy and then Ares positioning within that mix?

Sure. Freakout and toxic maybe a little more hyperbolic than I would say. But I think you do highlight the challenge in the markets as we are getting thrown a lot of different things at once. Last year, we dealt with tariffs. This year, we're dealing with geopolitics and wars and oil supply shock. So there's a lot to navigate. The one thing I would say at the outset is obviously as a private market manager, we need to be macro aware but we're less reactive to gyrations in the markets. And while rates are a big driver of the business in certain corners, the diversification of our strategies, I think, allows us to continue to grow profitably in any rate environment. Whenever we talk about the economy globally, we always go right to our primary information. One of the nice things about our size at $650 billion of AUM is we have investments in over 3,000 middle market companies. We own close to 1 million square feet of industrial real estate around the globe, a very large participant in the digital infrastructure market. And so we're seeing things real time on the ground. And what we're seeing in the portfolio is at least up until this point is continued strength fundamentally. Our portfolio companies are growing 9% to 12%, depending on the geographic region. It's pretty broad-based. Our real estate portfolio is we're seeing high utilization rates. We're seeing strong on-the-ground rent demand and NOI growth. So a lot of what we're seeing in the traded markets in terms of the earnings momentum we're seeing in our private portfolios as well. So I think the anxiety around persistently high rates and inflation is probably well placed, but it's not yet showing up. In terms of what it means for our individual portfolio, generally speaking, rates are going to affect cap rates and multiples in equity, as you mentioned. That being said, I think anyone who's investing in equities with a view of capturing multiple expansion is probably not investing for the long term. So whether we're talking about our real estate portfolios or our corporate equity portfolios, it's all about cash flow growth, NOI growth, underwriting real fundamental demand drivers and then hoping for the right multiple outcome over that 5- to 10-year hold period. So you have to really think more about what does it mean for your income on the ground. I think the good news is a lot of what we do broadly speaking, is in and around private credit markets, direct lending, real estate lending, infrastructure lending and all those flavors. Those investments are based off of floating rate, short-term interest rates. And so generally, what we've seen is, as the short end moves higher and if it stays higher for longer, it tends to benefit those portfolios in the form of higher rates of return. And so to the extent that rates stay where they are or go higher, I think you would really deliver outperformance in the floating rate private credit book, which is a big part of what we do. I think the other nice thing is, if you look at the trajectory of rates historically, these portfolios were already underwritten and managed through significantly higher rates. So when you look at the interest coverage ratios and the debt service positioning of those underlying borrowers, they've kind of already been through a rate environment that was 200 basis points higher on the short end. And so I think we're well structured to withstand a higher-for-longer environment. My own view, I think we should brace for higher for longer. I think the market has historically been lagging that understanding. But you mentioned we've got oil supply. We've got fiscal deficit spending. We've got AI CapEx, increased energy prices, there's just a lot that we need to work through to get back to a place where we're talking about meaningful reductions in the rate environment. The only other thing I would add vis-a-vis how private credit performs, you tend to see significantly lower refinancings because of the [ repositionings ] in the existing book. And so when you think about how we make money as an asset manager to the extent that you're seeing less refinancing and more durability in the book that tends to mean that you're going to generate higher management fee income.

So you touched on this. The press, obviously, is still kind of hyper focused on direct lending specifically. But if we do potentially get a slowing economy and rates remain high, where do you see the biggest risk of something breaking in private credit broadly? Or do you think this concern and attention should be focused elsewhere entirely?

Yes. You called it a freakout out, I would say it's maybe a misunderstanding. .

Right.

And I think the misunderstanding is the bulk of the private credit markets are underpinned by private equity markets, whether it's corporate private equity, institutional real estate owners, institutional infrastructure. And so if you're going to be talking about losses in private credit, you kind of have to think about what does that look like for the institutional equity markets? And what does it mean broadly for the other traded market. So it's hard to conceive of an environment where private credit, broadly speaking, is taking on significant losses and it's not showing up in other parts of the market. So that to me is a little bit of a disconnect. To put that in perspective, our direct lending portfolios, which is a portion of our private credit business sit at roughly 40% of loan to value, which means that there's 60% of the capital structure owned by partner, who is obviously economically incentivized and aligned with us to make sure that there's a full recovery of the entire $1 not just the $0.40 cents. That is significantly more equity subordination than has ever existed in the private markets. It's commentary on private equity and institutional equity behavior in a lower rate environment, expressing itself as higher valuations. And so that cushion is going to be a significant mitigant to default and loss. We also look and when I say you can't just look at private credit in isolation, you can look broadly across the credit markets, the loan and high-yield market are not showing any signs of meaningful stress. If you were to look at bank earnings and just look at the credit portfolios across the bank universe, consumer credit cards, audit, you're not just seeing in it. We're not seeing it in our private credit portfolios, too, which is why it's a disconnect. Our direct lending portfolio today sits at a 2% nonaccrual rate at cost and about a 1.2% nonaccrual rate at fair value because we mark those assets to market. That is lower than historical averages. We have actually seen modest improvement in those metrics year-over-year. So if you were to look at this time last year versus this time this year, we've seen modest improvement. So we're -- back to my comment about what we're seeing on the ground, we're not seeing it. So I appreciate that there's some future anxieties, but it does feel a little disconnected from what we're seeing on the ground.

To your point that the portfolios have already absorbed the rate increases, it would stand to reason that the refinancing risk is really in portfolios that haven't?

Yes. And I think -- I would think of it as a refinancing opportunity, not a refinancing risk because these are floating rate instruments. And so to the extent that rates flowed up, it's going to mean that you're going to get less refinancing in your portfolio, which means the gross to net changes. So typically, what happens is if rates are coming down, transaction volumes pick up, your gross deployment increases, your net deployment moderates to the extent that we're in a higher environment, it impacts transactions, then gross deployment goes down, net deployment goes up and that's kind of how you...

Makes sense. So software is the question within this theme that's particularly tough for a lot of people to answer. So could you update us on the trends there? And to what extent you have any incremental views on how much of your software portfolio could be more at risk from AI disintermediation.

Sure. Okay. That's working. Again, I think it is altogether appropriate for anyone investing in any market, not just private credit to be thinking about and to have been thinking about for a long time what the risks and opportunities from the implementation of AI are going to be. So one of the things, again, that's a head scratcher for me is it's as though the markets woke up 3 months ago and said the private markets, which represents where the GDP growth is and has been and is going has exposure to technology transformation. . So I think the first thing, again, is I don't know that it's fair just to think about private equity and private credit exposure as a risk and not an opportunity and to detach that part of the market from everything else that's going on around us, I think, is a little too narrow of a focus. The way that we have thought about it, and this is getting expressed in the traded credit markets as well is the market is absolutely differentiating appropriately between enterprise systems that have entrenched market share, real competitive moats that get created either because they're in regulated markets. They have proprietary data they have an understanding of complex work streams and the barriers to switching are frankly, too high. They're in parts of the market that require 100% accuracy, zero failure. And if you start going through those checking those boxes, you're going to find that there are software businesses that will be meaningful beneficiary from the implementation of AI within their existing product and then there will be parts of the market that will get disrupted in places like content creation. If you look at the traded market, just as an example, the enterprise entrenched software names are now trading at about [ $98, $99, up from $94 to $95 ] when everyone started talking about the SaaSpocalypse and the names that are at higher risk of disruption or trading $0.80 or less. So in that market, I think people have gotten better at differentiating. And I think the private markets need to go through that same exercise of understanding the exposures and who will benefit and who won't. To try to help that, we actually went out with our software portfolio, which represents about 8% of our private credit book and about 11% of our direct lending book is exposed to some part of the software ecosystem. That's about 135 names. And we gave our files to a very large consulting practice that is partnered with one of the large AI businesses to effectively re-underwrite our portfolio, which we're constantly thinking about active portfolio management. And their determination, we talked about this on our earnings call was 86% of our software exposure in their opinion, which aligns with our high conviction view was in what they would call that top bucket of companies that have real competitive advantage and will likely benefit from AI implementation. That 13% of the portfolio they put in a middle bucket, which was market-leading businesses, real competitive advantage. But need to continue to invest in their AI transformation in order to maintain that incumbent advantage and 1%, which represents 3 portfolio companies that they felt were at high risk of disruption. So going through that exercise, we feel really, really good about those exposures. Similar to my comment earlier, they sit at about a 40% loan to value. That's actually up from about 37% because we've been marking down the equity value in those companies as we think about where we sit in the capital stack. Cash flow in those businesses is growing about 9% year-on-year, which is consistent with the broader portfolio mix. And importantly, going back to this loan to value, the weighted average maturity of that portfolio, which I think is probably consistent with other industry participants is about 3 years, 2.9 years, which means that you're going to be at the table with that 60% equity owner within 3 years from now. And that's when this will get resolved either in the form of a shared view that this company is growing, a divergent view where you're either going to get refinanced or paid down. Or a view that the company is not successful in which case the credit would effectively take over that equity and play for some of that equity upside. So this is going to play out over years, not months. I think you have to really start getting into the habit across all of these markets of understanding exactly what the competitive levers are to pull in these businesses, but we actually feel really good about what we own.

More cynical -- on that point, the more cynical investors I talk to are kind of point to that kind of -- it feels like a bit of limbo state that we're in because we have to wait that 3 years. Are there any levers you can pull ahead of that? Or do you just really need to let it play out?

I think that if you're an equity owner, you have a lot of levers to pull because you're either out in front and you've got to continue to make investments to maintain your competitive advantage. Or if you're at risk, you've got to transform your business quickly. I think in the credit markets, given how high up the capital structure you are, there's very little that you're incentivized to do other than to let equity valuation play out below you. To the extent that someone wants to come, talk about loan modification or maturity extension, it is going to be very, very expensive to make those types of accommodations. And my guess is most owners of these businesses are going to find a better use of capital investing in transformation than investing in higher debt service. So I do think that this is going to play out over time. And if we get to a market where you're neither refinancing nor walking away from the company, the rate of return on that book is going to go up dramatically as well. And I want to make one last point because I think it's maybe misunderstood. If there's 3 years left of weighted average maturity, that probably means you've owned these companies for 3 years up until this point. In the eyes of the institutional owner of the private credit, that means that by the time you get to that maturity date, you will have gotten back 60% of your capital. And so even if, which I'm not suggesting would happen. But even if you had a loss on the loan through the eyes of the IRR since inception, it's not going to have a meaningful impact on the inception to date IRRs for those portfolios or for that asset class. And so while people are paying attention to it, I think the durability of the return in the market is still going to play through.

So to your points on the strength of the portfolio, your BDCs made a statement yesterday with a new bank line re-up. Could you kind of speak to the genesis of that? Was it purely meant to be a signal to the market? Or how did that develop?

No, we are obviously a very large counterparty to the Street and the banking community borrowing across the vast majority of our strategies, either at the portfolio company level or the portfolio level. Typically, every year, we will go back into the market to extend the maturity of our existing credit facilities to make sure that we have 5 years of duration at all times to the extent that we can get it. And to use our scale and performance to drive better terms and pricing. So the announcement yesterday was ordinary course but I think illuminating in terms of what's going on in the market. We've effectively extended duration in our credit facilities for our traded BDC, ARCC. We upsized that by about $150 million to get it to $5.5 billion. and there's a $2.7 billion accordion on that facility. And then for our nontraded BDC, which is in the wealth channel, which is where some of the noise has been, we upsized that facility by about $850 million to, I think, $4.1 billion. There's 40 banks in that first facility, I think 30 banks in the second and in extending the duration an extra year to 2031, we got a 10 basis point price concession. So our duration extended and then the cost of that capital came down. So when you just think about perception of risk, I think it's a good indicator that at least from the perspective of the banks who are coming in and underwriting these portfolios, they're seeing something that's divergent from some of the noise. I think it's also an indication with the changed regulatory bank capital frameworks. There's an anxiety in the market that banks will now be more aggressive competitors directly with private credit managers. I think what actually is going to happen is they will become more aggressive portfolio lenders to the large players in the market. And so I think it's also an indication that with the new [ RedCap ] frameworks that's actually creating more demand for this type of lending within the banks as opposed to having them compete directly with us.

Great. I want to move to deployment and competition. This tug of war between the BSL market and the direct lending market continues to be a key focus for investors. But your commentary on the 1Q call suggested a better pipeline developing. So through that lens, how has that been tracking through May and have the better dynamics kind of continued?

So on the call when we were talking about the pipeline, we were talking about the aggregated pipeline across the entire Ares platform. So I'll try to break that down. In terms of the direct lending pipeline. One of the things that we try to articulate is a differentiation for us as we cover the broad segments of private credit, small market, middle market, large market and then all the real assets lending, as I said earlier, this tug of war as you described it between BSL and private credit is really happening at the upper end of that market. And so when the broadly syndicated loan and high-yield market are open and risk on, you may see some market share give at the upper end, but we're still deploying through the other parts of the business. And we also have a very significant syndicated loan and high-yield asset management business. We're one of the top CLO managers. And so when the BSL market is taking share benefit through CLO formation and growth in that part of the business. Q1 pipeline was actually slow or activity was slow in U.S. direct lending. We are seeing that pick up now. And similar to what we saw last year with the tariff tantrum, I think you can envision a world where if we get through some of the geopolitical issues here that, that pipeline would convert in Q2 and Q3, putting the U.S. direct lending pipeline aside, we've seen real strength in places like ABF and alternative credit, all parts of our digital infrastructure business, both equity and debt secondaries. So the nice thing about the way that the business is constructed, given the diversity of strategies, you're seeing the pipeline in an aggregated pipelines growing even if you see pockets of weakness in kind of 1 business.

There was also a sense that the spreads and terms for direct lending specifically, we're tracking much better, but it feels like liquid markets are more open at this point. So is that trend stalled? Or does it still feel like you're getting better terms on the pipeline.

We're absolutely getting better terms. One of the benefits of the noise in the market and some of the outflows in wealth is you're seeing less competitive pressure in the market. So we've been able to pivot all of that deployment to our institutional franchise, which is the bulk of the business, and we're doing it now getting 50 to 75 basis points incremental spread, similar number probably on fee, half a turn to a turn less leverage on new investments and better documentation terms. So it has gone from maybe a borrower-friendly market to a lender-friendly market, and that's a good place to be. We have not seen it tightening from there. So it's stabilized there. The broadly syndicated loan market has some technicals where there's probably more capital looking to deploy in that market than flow. And so that market has been tightening. And you've seen good performance there, but we're just not seeing that spill over into the private market?

Good. So let's expand the private credit window. You and others have pegged the opportunity set kind of expanding to the tens of trillions. Everyone has a different number, largely on the conclusion -- or the inclusion of asset back to your point. So higher level, how much of that opposed tens of trillions, do you think is really addressable for the alternative managers in Ares specifically?

A lot of it, but you have to -- when you think about asset-based finance, you have to think about it in terms of investment grade and non-investment grade the investment-grade market is significantly larger, but it is significantly more competitive because you're going head-to-head with insurance companies and banks and the securitization markets. It is lower fee and so it has a different profit profile versus the sub-investment grade market, which is where we have focused most of our attention. And I think we are the largest player in the non-rated parts of the ABF market. We've raised 3 of the 4 largest institutional funds in that business, and that's been a big growth engine for us. I think you want to have both of those operating side by side. It just makes you a more relevant counterparty to potential borrowers. It makes you a better counterparty to the Street. It gives you the ability to play relative value between being an owner of assets or a lender to the assets. And so we're kind of that 50% high-grade 50% sub-investment grade. And that's probably a good mix for us. One thing that I think gets lost when we're throwing at these huge TAMs, the fees on sub-investment grade when you include the opportunity for incentives, et cetera, it's like 8x to 10x the high-grade part of the market. So if you have a $50 billion sub-investment-grade franchise, that would equate to about a $500 billion high-grade franchise. So you can get really excited about big numbers, but I think they're just fundamentally different businesses. But theoretically, that's all accessible, and we do know from our experience in other parts of private credit that the value proposition to buyers -- to borrowers borrowing in the private markets is real. And so it's not surprising that that's finding its way into the high-grade markets, too.

On that point, a lot of observers in this world I've talked about what has been a longer education process for that asset class relative to, say, direct lending in the institutional channel. Where are we in that education process? And given the ongoing volatility, is there any sense that, that could accelerate interest in this as a potential risk mitigant?

Yes. We -- it's a complex asset class. I mean if you look at the way that we approach it, we have specialists in 40 subsegments of asset-based finance. So if you really want to do this business well, you have to have deep structuring capability, but you also have to have real understanding of all of these sub asset classes that make up the asset-based finance world. A lot of that capital and talent used to be in the banking system. And post the GFC, that securitization apparatus kind of exploded and found its way into the world of specialty finance companies. And so we and others have been now -- been going out and kind of reaggregating that talent and that capital. And through that reaggregation, we're now able to talk about asset-based finance in I think an easier to understand way because we're talking about it in terms of big themes, similar structures, similar cash flow profiles as opposed to what used to be is you have a $200 million fund manager who does litigation finance or a $500 million fund manager who does equipment leasing. This reaggregation has really institutionalized the asset class in a way that has made it very appealing to the institutional community on both the high grade and sub-investment grade side of the business. So I think there's a lot more awareness now than there was 5 years ago for sure, but people have accelerated and gotten up the curve pretty quickly.

Great. So through the lens of ABF, insurance is a channel that's been early to adopting that as a core asset class. So could you update us on your insurance strategy through the lens of how the partnership with Aspida is evolving?

Sure. So Aspida is a de novo insurance company that we started building in earnest a little over 6 years ago. We put up $500 million of our balance sheet alongside third-party capital. We own less than 25% of the equity of the insurer today. The way that it is structured is it is both a reinsurance platform and an annuities platform. So we're growing our liabilities through the sale of annuities and reinsurance relationships. The growth has been phenomenal. Today, at the end of 2025, the balance sheet was about $30 billion; in 2021, it's about $2 billion. Last year, 2025, we grew our premiums by $8.8 billion. If you go back 5 years, it was probably $1 billion. And so that's depending on how you want to look at it, it's 60% to 100% growth in the underlying financial metrics of that business. We are out with guidance that we gave at our Investor Day that we would expect the AUM for that business to be $50 billion by the end of 2028. And so if you look at $30 billion at the end of last year with 3 years to go, you're kind of in a good place there. We have about $1 billion of investable capital, which would translate to about $10 billion of incremental balance sheet, and we're reinvesting the earnings as they compound. So we couldn't be happier. A nice thing about doing it de novo, it didn't come with any legacy back book or challenges. It's a completely new tech stack. So we're not dealing with any antiquated systems issues and the interface with the insurance community is pretty seamless and unique. So we don't talk about it probably as much as maybe we should or we could because it is one part of a very large business. We have tried to take a differentiated approach of being balance sheet light, staying true to our positioning is really just an asset-light manager of assets. Whereas I think some of our peers have probably leaned in a little bit more heavily to owning those insurance companies outright. And that just, in my opinion, presents a different financial profile and set of risks and potential opportunities that we've tended to structure them.

So in this kind of retirement umbrella, there's seemingly a light at the end of the tunnel for the alts and 401(k) opportunity. So firstly, do you have any updated thoughts on how quickly you think that adoption could ramp up? And within that, maybe update us on how Ares is positioned to be relevant for that channel.

Yes. I want to make a comment on it first, which is similar to what I've said publicly about the wealth channel, which is $1 in wealth is the same as $1 in the institutional market and $1 in a DC plan is the same as $1 elsewhere. So the constraint to growth for somebody like us is going to be, can we actually source and manage assets around the globe, not how much money you can raise and where do we raise it from. So when we think about opportunities in wealth opportunities and insurance opportunities in defined contribution, we think of it through the lens of diversifying our capital raising, but not necessarily transform the business. So we're excited about all of those, but we tend to get maybe a little less enthusiastic because the real focus has been building these durable origination and portfolio management engines. So all that being said, I think that we are making progress. The executive order helped move things along. It has enhanced the conversation within the regulatory bodies that matter. But I think given some of the concerns that you're seeing pop up in wealth, it's slowing the process down. So I think it had a lot of momentum, and that momentum has probably slowed a little bit. We have been preparing for this, as you would imagine, by working on our product set. So we have products that are ready to go to the extent that it moves in that direction. We have distribution partners lined up to the extent that it happens. But if it doesn't happen, that's okay, too. And obviously, we're focused on making sure that the institutional franchise will allow to -- for the deployment to come on to the platform at a high fee and a high incremental margin.

Okay. I want to move on to some of your other businesses, starting with secondaries. It feels like this could once again be a sweet spot year for secondaries. Sponsors are still struggling to sell legacy positions. Many GPs are feeling pressure to get more liquid. So I think you're one of the better position manager for that given your Landmark acquisition, I think, 5 years ago. Are you seeing these trends translate to significantly more deal flow? And is LP demand forming around that at the same scale?

Yes. Yes to both. We made an acquisition, which has now been obviously fully integrated and scaled of really the pioneering platform in secondaries. Since our acquisition, we've doubled the profitability in AUM in that business and are now seeing meaningful growth accelerating into this trend. And the trend is the installed base of private equity right now is $3 trillion to $4 trillion depending on how you want to slice it against $1 trillion of uninvested capital. . And with the deal market not picking up to the extent that people thought, secondaries is one of the main ways that people are navigating the return of capital to the private equity community. So we've been a big beneficiary of that. But we've also seen as the primary installed base of real estate infrastructure and credit has grown and continues to grow. Those parts of the secondary apparatus are growing too. And probably the most exciting trend that we're investing behind in the market is the shift from LP-led secondaries, which is simply LP selling portfolios of funds at a discount to NAV to what is now GP led, which is close to 50% of the deployment in the business, which is the asset manager themselves using structured solutions in the secondary market to capitalize their management company or affect some kind of repositioning within their portfolio. That's a fundamentally different skill set than buying portfolios. It tends to skew much more towards asset level underwriting and obviously requires a deep set of trusting relationships with the global GP community. And so if you look at Ares' positioning is probably the largest coverage team of GPs and private equity and real assets, we're uniquely positioned, I think, to take advantage of that shift to GP lending.

Within this theme, there's been a lot of focus on the practice of day 1 markups. So firstly, where do you stand on that debate? And secondly, how much is Ares secondaries performance dependent on day 1 markups?

I don't know if everyone understands that I can just describe that. So it's funny that you called it a practice. So GAAP requires that if you buy a portfolio of funds at a discount to NAV that you mark it up to NAV. .

Okay.

So that's not a practice. It's actually the GAAP requires to do that. And the reason I think that it does is everyone else who owns those assets is carrying them at NAV. The fact that someone sold them at a modest discount to NAV doesn't necessarily change the fact that the market is valuing them at NAV. And two, because NAV bounces around, it's actually hard to use a convention where you would amortize that over the life of an investment. So the accounting principle is mark it up and capture that value. So I don't think there's anything nefarious going on there. I wouldn't even call it a debate. I think it's really the accounting convention. And so if the accounting -- if FASB decides to change, then the industry would change around it. In terms of where it shows up for folks like us, the bulk of our secondaries, actually, is getting done in institutional funds that get paid on what we call European style carry waterfalls, so end of the fund life. So it's not really relevant there because you're only getting paid the incentive fee to the extent that you get through to the end of fund life where it shows up is in the perpetual vehicle part of the market, the wealth channel. And there, we have one fund called APMF. It's about $3 billion and about 58%, 60% of that portfolio is LP led. So that's where you would see it within the Ares context. So less than 10% of the AUM. And referring back to my comment about investing in growth of GP led. That's not a thing in the GP-led part of the market. So I think as we continue to see growth in the GP-led part of the market, and we begin to see more of those exposures show up in places like our perpetual capital vehicle, I think that 60% number will come down over time.

Makes sense. Let's move to AI and infrastructure. I think we're now a little over a year since you closed the GCP acquisition. So I think it would be helpful to start with maybe an update on the integration, how that's progressing and what you see as the biggest opportunities for Ares as you move forward with this new platform.

Yes. Integration has gone, frankly, better than we could have hoped it would, both from a cultural and operational standpoint, but also from the ability for us to add value to the acquired platform. We have been acquisitive. I think as you know, 20% of our AUM growth has largely come from transformational acquisitions like GCP and Landmark, 80% organic. This one was unique in the sense it brought us 2 big businesses that were, one, complementary to what we did already and two, opened up new global markets for us. The first being their Japanese real estate business. So with the acquisition, we acquired one of the longest standing, I think, best-performing real estate businesses in Japan that has a traded and institutional franchise that we think is incredibly valuable and an interesting growth perch for us in terms of our growth in the Japanese market and the rest of Asia and a data center development business, which came with an 85-or-so person data center development team that was largely hired out of the industry from all the hyperscalers and a pipeline of in-flight large-scale data center development projects that we've now been forming capital and investment management teams around. So both of those highly transformational assets and again, probably going better than we hoped and underwrite.

On that, there's still a lot of concern that there's not going to be enough revenue to support the amount of CapEx being deployed. So how are you, Ares, structuring these investments protect from that risk?

Yes. So -- and again, this goes back to maybe my software comments. It's not as simple as all data centers are one thing or that all AI businesses are approaching their growth the same way. The way that we have thought about it is we want to do pre-leased large-scale projects in key metropolitan areas. So Tokyo, Osaka, London, Sao Paulo, Northern Virginia that are powered that have 12- to 15-year leases with an investment-grade hyperscale counterparty with inflation escalators. We do not want to take speculative CapEx risk. We are not taking technology risk in speculating on GPU. So these are effectively large powered shells that are getting to the front of the line in the lease SKU because of the quality of the location and the speed with which we can bring them online. So I think for now, what we've tried to do is say focus on baseload cloud computing in metropolitan areas with hyperscalers with the option for AI growth, and we've largely on the development side been avoiding LLM training in secondary and tertiary markets and non-hyperscale quality counterparties.

Great. So expanding further to real assets broadly, I think people are often surprised that your AUM exposure to real assets is pretty close to your direct lending exposure, a little over 20%. So it gets less attention, obviously, given the noise in direct lending. So aside from AI infrastructure, which we just hit on, could you expand on the opportunities you're seeing in your broader real estate business?

Yes. Real estate is an interesting place. I mean -- and I appreciate you bringing it up because I think people think of Ares as a credit-first manager, and that's largely historically been true. But when you look at the growth in our real estate and infrastructure businesses, they're obviously starting to catch up, and that's been years and years of intentional business building and adding of talent and product and capability around the globe. Today, if you look at our real estate business, we're probably the third largest institutional manager of real estate in the market. We have stayed focused on multifamily and industrial real estate for the most part. So largely avoided office, largely avoided retail, largely avoided hospitality. And we've taken the approach, which we think is differentiated that we want to be vertically integrated in those businesses. So we want to develop or at least have the opportunity to develop our own product because, again, in a world that is asset constrained, one of the ways that you differentiate and capture excess return is through the development on your own real estate. We have built businesses in adjacencies to industrial and multifamily, so places like self-storage, student housing where we can leverage those capabilities, but again, create some differentiated exposures for our investors. And similar to what we do on the corporate side of the house, we're doing it equity and debt. So we have the full complement of capabilities from owning the asset to lending to the asset and all things in between. We're really excited about the positioning of the business and where real estate is cyclically. If you go back and just look at how the real estate markets generally have performed through the rate hiking cycle basis is down about 20%. And so history would tell you that if you are entering the real estate market when basis has reset 20%, you're typically going to capture 400 to 500 basis points of excess return for the next part of the cycle. So we think that in this moment, there's an opportunity to own really interesting real estate at good prices and an opportunity to now come in as a lender to real estate with reset basis. So we're spending a lot of time continuing to grow that business. On the infra side, Obviously, a lot of attention, as I just mentioned, being focused on data center development. Those are huge TAMs and really big capital and capital deployment numbers. But we have a very large infrastructure lending business. We're probably one of the largest lenders to other infrastructure managers, similar to our private equity lending business. We have a very large renewable energy and energy transition practice. And so we're trying to attack this digital infrastructure transformation from all sides of the capital structure in all sides of the project from the energy to the building to the transmission surrounding it and everything in between.

So I'm not going to let you get out of here without talking about retail. It's a smaller issue for you than others, but obviously, top of mind given the news flow and the retail flows we can see. And it looks like the gross flow picture, particularly for direct lending products is tracking much lower in 2Q versus 1Q. So what are you hearing from distributors on the demand algorithm for direct lending and the broader retail suite?

Yes. So I want to cover this from a couple of different angles because I think it's -- again, it's probably misunderstood. First thing is the outflow picture in wealth is largely in U.S. direct lending. So if you look at Ares' positioning as kind of top 3 participant in that market, we have 8 products in the market. We have 2 U.S. private credit funds. We have a European private credit fund to real estate funds, a sports media and entertainment vehicle, a secondaries fund and infrastructure fund. The way that you should be thinking about the opportunity in wealth and we saw this with real estate a couple of years ago is the large platforms and the large adviser platforms, whether it's the Morgan Stanleys of the world or the RIAs are meaningfully underallocated to alts. So the tailwinds for increased allocation to alts is intact. To put that in perspective, in the first quarter, Ares saw $4 billion of inflows onto the platform. [indiscernible] about $3 billion net. And we saw largely moderated outflows and everything, but the U.S. private credit funds. So interestingly, European private credit, we saw $1.2 billion inflow in the quarter. So it is isolated we are growing through that trend. And I think this is an opportunity for the incumbents to capture share in wealth because I think there are people who are maybe over-indexed to wealth that will not be able to grow through this step back and because of the disproportionate size of our institutional franchise, all that's really happening in those private credit funds is the deployment is shifting into the institutional funds with no impact on our profitability. And so what that means is we'll be able to capture more share of the private credit deployment opportunity at higher rates than the people who are shrinking because they're over-indexed to retail. I would expect it to continue don't know how long it will go. What is interesting about it, if you look at the underlying performance in these funds, there's nothing in the performance that would indicate that people should be wanting out of these vehicles. I think they were underwritten with an expectation of making an 8% to 10% return. That's what they're doing. Credit performance is strong. If you look at our non-traded BDC, as an example, I think we have 2 companies on nonaccrual. So relative to that 2%, 1% stat I quoted earlier, meaningfully better. We've also noticed a little bit of a trend where some of these redemption requests are coming from non-U.S. geographies and institutional and small -- family office investors as opposed to what I would call well-advised wealth. And that's why going back to my primary comment, I think, for the well-advised high net worth investor, they're continuing to allocate through this. So my expectation is that our guidance on growth for wealth is intact and that the redemption queue will resolve itself, but in the meantime, that demand for alts will just find its way into other parts of the market.

You mentioned institutional, and it sounds like from the messaging on the call that institutional demand for direct lending and private credit, broadly, could actually be improving through the volatility. Are you still seeing that trend continue through May and perhaps use that as an opportunity to expand on how the institutional conversations have been tracking through the volatility?

I think they view this as a huge opportunity. So as we talked about on our call, we had a meaningful closing at the hard cap on our opportunistic credit fund. We are in the market with significant momentum with our institutional ABF fund. And because of this demand, we've actually pulled forward the fundraising for our large U.S. institutional loan fund. . I think the institutional investor views this as an opportunity to capture that extra 50 to 75 basis points of return that I referenced earlier. And they tend to be much less what I call, reactive to moves in the market. Private credit for them is a core allocation. They want vintage capture, so they want to be investing through all the pockets of volatility. And going back to what I said earlier, they're happy with the performance they've captured all of the upfront return that came from higher rates. Credit performance continues to be strong. And so when they look at even the potential for underperformance, which I don't know that they are. But similar to my earlier comment, they're still going to get an inception to date return at or above what they underwrote, which is causing them to continue to allocate. And I think if we continue to see disruption in the wealth market, you'll see the institutions come [indiscernible], at least for the larger guys.

So maybe to some taking all what we discussed here, I think it's worth highlighting that Ares has not seen really any impact on its organic growth through the volatility of this year, the volatility of last year, the volatility of the year before that. So you reiterated your FRE growth guidance on the call. So what is about your business, you think that has made the growth algorithm so sticky relative to even your comparables over the last few years.

Exceptionally strong senior manager. I think the -- it's interesting because if you look at the historical growth of the business, we've largely been growing at a 20% CAGR for as long as I can remember, and we grew faster through the GFC and faster [ Audio Gap] speak a little bit to the countercyclical nature of the growth algorithm. The easiest way to just think about this is, number one, as I said, this is an asset-light asset management business that is owning assets with long duration with compounding earnings and compounding fee. So if you just think about the $650 billion that we manage, it's in hundreds of different strategies around the globe, highly, highly diversified, highly granular some operate countercyclically. So you don't see big drawdowns in the business, but it's growing through volatility because these are private assets that are not getting traded and dramatically marked down. And to the comment on institutions, the institutional market tends to give us capital countercyclically. So we tend to see people look for an opportunity to play volatility with us when the markets get choppy and that's why we're able to grow through it. The other thing structurally that's important is because of the institutional franchise, we're typically running with about 25% of our assets under management uninvested. So if you were to look today, we have close to $160 billion of capital that we've already raised that is available for deployment. And the way that we generate management fee and FRE is through the deployment of that capital. So we know now, and this is why it's a linear growth profile that just through the deployment of what we've already raised, we can largely hit our growth objectives. And so it's not as though we have to go back into the market and convince them that they should give us capital to invest into volatility. We already have it. And then to my comment, we don't really have rate exposure. Most of our credit assets are floating rate. And so we're not getting hit with a rate mismatch. We don't have any kind of asset liability mismatch where you could see capital leaving the platform. We tend to run low leverage, so we don't see amplification of risk when the markets get choppy. So you can kind of see a pretty clear growth path to the results, which is why we've been comfortable as you know, going out with 4- and 5-year guidance saying that we're going to grow our FRE 16% to 20% and our ROI 20% plus. And we've been beating that at least up until this point in the year.

Thank you very much, Mike.