Ares Management Corporation ($ARES)

All right. We're going to go ahead and get started here. I'm Mike Cyprys, equity analyst covering brokers, asset managers and exchanges, and I'm thrilled to welcome for our keynote fireside lunch. Michael Arougheti, Co-Founder and CEO of Ares Management. Mike, thanks for joining us. .

A great conference. Appreciate it.

And Ares, as you all may know, has over $640 billion of assets under management. It is one of the world's largest alternative investment managers. So let's kick off with the macro mic here. Three months ago, there's a lot of debate centered around tariffs and growth. And today, discussion has shifted toward inflation persistence, fiscal deficits geopolitical risk, energy markets. So what would you say has changed the most in your outlook over the last quarter? And where do you think investors are still misreading the environment?

Yes. Look, it's -- we're just saying over there, it feels like a year's worth of news and market developments in 5 months. But frankly, not much has changed. And for those that we've spent time with, I think you've heard us just talk about conviction around hire for longer and to see that now playing through with some of the geopolitical issues globally. . We're not having to reposition our thinking. But I do think that is a meaningful change. I think the stickiness of inflation and rates is something the market has finally come to grips with. I think what people may be misunderstanding in that environment is that in the alt space, higher for longer, especially at these levels could actually benefit performance, not her performance. There are definitely corners of the alternative space. Equity is an example where, obviously, higher rates has an impact on levered performance. But in places like private credit, where the instruments are structured around short-term base rates higher rates are actually a pretty big boon to performance, and I think will help continue to spur investor demand, but also to mitigate some of the anxiety around risk in these portfolios because that excess return is a pretty big offset to potential loss. In terms of the macro, though, and this is -- it just really speaks to the resilience of the market. We have investments in over 3,000 companies and real estate all over the globe and big investors in the digital infrastructure transformation happening. And everything we're seeing on the ground, which is what we're seeing in public market earnings as well is that the fundamentals are still really strong. We're seeing EBITDA in our corporate portfolio is growing plus or minus 10%. We're seeing high occupancy rates in our real estate book, 95% to 98%. And the lease demand for our data centers is as good as we could ever hope it would be. consumer is proving to be resilient, albeit the talk of the K-shaped economy is valid. But when you look at it on an index basis, the fundamentals are still very strong.

What would you say are the 2 or 3 KPIs or indicators that you're watching the tele environment is becoming meaningfully better or worse than...

Yes. We look -- we first go to the portfolio level data that we have, which is unique because we get it more frequently than public markets do, and we have access things like working capital line facility draws that are leading indicators of potential liquidity hoarding or distress. So I'd say on the lending side, it's the things that people know that we look at, which is just loan-to-value and debt service coverage and EBITDA growth and all of those things. But the leading indicator is revolver dress. Because what you see in moments of stress people pull forward on the revolvers to either get ahead of illiquidity or to just start hoarding cash to make sure that they meet their debt service. And we are not seeing any abnormalities and the way that people are managing operating cash, we wouldn't expect to, but that's kind of an indicator and even in things like COVID or tariffs, you'll see people pull lines. They're not -- they're not doing that now. On the real estate portfolio, obviously, we're looking at NOI and property level data, but the key there is just lease velocity and rent growth. And as I said, that continues to be very strong. And then on the data center side, we're looking at all of the raw material inputs as we develop properties, but I think the most significant thing to look at is just lease demand and lease rates. And as I said, those continue to be pretty strong. We then go to the secondary sources, which is card companies, banks, et cetera. And again, if you look there, credit performance, when you look at net charge-offs and delinquencies is still really low relative to historical cycles. So there's not a lot we're seeing that would cause us concern in our book. And then when we zoom out and look at the traded credit markets and the banking card companies, we're not seeing it either.

So given that constructive tone on the macro, let's shift and talk about deployment, right? How are you thinking about putting your, call it, over $100 billion of dry powder to work in this environment. Where are you seeing some of the most compelling opportunities as you look across the globe? And do you think '26 could be a better year than '25 per deployment.

Yes. I think one of the things that may be underappreciated about the platform that we've built is just how broad-based the origination is in terms of the number of people that we have in local markets up and down the capital structure in real estate, infrastructure, all forms of private credit investment grade, sub-investment grade, so on and so forth. And so when we start to talk about deployment, the conviction that we have is less just a commentary on transaction activity or even macroeconomic strength, but it's just we have so much deployment capacity that we've created in these markets and they work in tandem. So you may see slow M&A growth show up in weaker deployment in corporate direct lending, but then you're going to see deployment pickup in opportunistic credit and secondaries. And so you've seen the floor for our deployment increase every year and then the ceiling is increasing as well as we broaden that capability. We did talk about on our last quarter's earnings call that we were seeing record pipeline levels across the platform. We have about $150 billion of dry powder today. We raised close to $140 billion last year. And so we're kind of raising and deploying at a pretty healthy clip. Right now, the places where we're pricing the most deployment or European direct lending, asset-based finance digital infrastructure and secondaries are probably the 4 most active. The U.S. direct lending business is starting to pick up after what was a seasonally slow Q1. And then the real estate business is kind of, I'd say, in a good place, neither hot or cold.

Well, those are all the different areas we're going to dive into. But before we do, a recurring investor question, has been on whether deployment is translating into fee paying AUM, right? How efficiently is it translating. So I guess how should we think about the sort of gross to net conversion of deployment here in the second quarter and as we move into the second half, especially if volatility is causing refinancing activity and sponsor behavior to happen slow.

Yes. Again, gross to net is an important metric, but it's not the only metric because you have growing TAMs and your kind of gross deployment is outpacing the in-force book. Again, but when you think about the hedge, if you have slowing transaction volume, that's going to reduce your gross deployment, but it probably means that there's something happening in the market that's either rate-driven or geopolitically driven, where your refinancing pace is probably slowing. And so again, back to maybe what's misunderstood. I think there's a view that if rates are high and transaction volumes slowed that, that may not actually translate into profitability. But when that happens, you just see much less opportunistic and regular way refinancing business take hold, and that's kind of what we're experiencing now. And then there's obviously all the growth in permanent capital and open-ended vehicles that's obviously supporting continued positive momentum on the gross to net. So it feels good.

Great. Why don't we over the last 6, 9 months with some notable bankruptcies and media commentary is discussing liquidity and retail-oriented products. while Ares is one of the bigger institutional players in the private credit market. So what are you seeing in the marketplace today and going forward for the remainder of the year? And how much of area's future growth would you say comes from the traditional sponsor-backed lending versus newer areas such as ABF and for credit, real estate lending and so forth.

Like I said, sponsor lending is an important part of the private credit market, but it is not the only part. When we talk about private credit, it's sponsor lending globally. It is real estate lending globally. It's infrastructure lending globally. It's asset-based finance. It's loans and bonds and CLO management. It's systematic fixed income it's credit secondaries. And so sponsor lending is probably the most mature part of the business. There's a real core allocation for investors and a great business for us, but it is becoming less important over time as the market continues to grow and our business diversifies. I would say that this market anxiety for me is there's a disconnect because if you were to look at the credit performance of our portfolios just to speak about what we're seeing. Our loans to value are plus or minus 45%, meaning that the private credit exposures that we have in our corporate book are supported by 55% equity value. And so in a diversified portfolio that is a meaningful, meaningful amount of value that needs to get eaten through in order to see losses start to come into the credit book? Interest coverage ratios are in the low 2s, 2.2%, 2.3%. As I mentioned earlier, EBITDA continues to grow. So there's a natural deleveraging taking place and the rates of return are what people underwrote. Nonaccrual rate in the portfolios is low 2s, 2% at cost and at fair value, it's probably $1.2 billion to $1.5 billion, depending on which geography you're looking at, which is well below historical averages. So if you just parachuted into these portfolios without regard for some of the headlines that you've mentioned, you would not come to the conclusion that there was stress in the private credit markets. So the anxiety is forward-looking, and it's really narrowly concentrated in U.S. wealth. And interestingly, when you look at U.S. wealth, we're seeing really positive momentum in the non-private credit parts of the channel, and we can talk about that because I think that's another way to get your head around just this disconnect that's happening in the market. On the flip side, the institutional investor community continues to allocate aggressively into private credit for 2 main reasons. One, as a cohort, they are underinvested in private credit. And so you just have secular demand continuing to grow. And two, I think they view some of this volatility, which is widened out spreads, increased fees and generally improved returns is a huge opportunity to go in and kind of capture that excess return. And so while there's a little bit of noise in the U.S. wealth channel, we've seen -- as an example, our third opportunistic credit fund got to its hard cap. It was meaningfully in excess of its prior vintage. We had a closing this morning on our third alternative credit fund Pathfinder III, that raised $8.5 billion, which was its hard cap off of a $6.5 billion cover. We also saw about $4 billion of capital from investors and the prior fund extend duration alongside that closing. So $12.5 billion came into that strategy. So the there's nothing that we're seeing institutionally that mirrors the anxiety that is happening in that quarter of the world. And as you and I have talked about, I think what the market doesn't really appreciate is if you look at wealth in private credit, it's about 10% of the business. And so even if you see redemptions in wealth, the vast majority of capital that is flowing in and getting deployed, is coming from the institutional market. And from the lens of Ares Management's business and profitability to the extent that the growth in wealth for private credit is slowing, that deployment just shifts into the institutional funds. So it doesn't have any meaningful P&L impact, which I think people probably misunderstand.

And 1 of the areas of growth that you touched on is asset-based finance or ABF, which increasingly looks like one of the largest opportunities in private credit. So where would you say we are today in terms of institutional adoption of ABF and how much of the addressable opportunity do you believe is accessible for alternative asset managers?

I think you have to think about ABF as 2 different markets. One is high-grade ABF and the other is sub-investment grade ABF. The high-grade part of the market is obviously significantly larger just because of the levered capital structures within the asset-backed finance business. . That's a pretty mature part of the market. Banks, insurance companies and the securitization apparatus have done a really nice job kind of serving those borrowers there is meaningful transformation happening in that part of the market though as some of the alternative asset backed insurers are scaling and taking share from those incumbents. And then also innovating around different structures, direct to corporates and direct to assets to grow that business. So I think it's a huge TAM. I don't know that it's growing as much as maybe people would think it is, but there's a huge share shift happening for the benefit of the alternative managers. And then in the subinvestment-grade space, it's a much different business. I tend to think that it is a higher skilled, higher risk part of the business. And so you have to approach it differently, it's also a much higher fee, higher margin business. And so one of the things when we're talking about private credit, the fee rate on non-investment grade is probably 8 to 10 core fixed income and asset-backed. So if we at Ares have $35 billion of nonrated ABF, which is the largest platform in the market by far, that would translate from a P&L perspective to $300 billion to $350 billion of high grade. So again, the market -- we like to throw around numbers, but not all AUM is the same. The outcomes that you're delivering to your investors is different. So relative alternatives in the public markets is different. But yes, ABF, big, big TAM, big transformation shift happening. We have tried to think about the market as wanting to be balanced between the rated and nonrated part of the market because there are origination benefits that you get if you can be scaled at the top of the capital stack and at the bottom. And we've also tried to do it through our own captive insurance business, but also in partnership with our third-party insurance clients because, as you know, we've been very focused on staying asset-light in the way that we've grown the company. So I think you'll continue to see innovation around it. I think you'll continue to see conversations about regulation and structures in response to that innovation, which will get headlines as well. But yes, it's an exciting part of the market, for sure.

Well, since you mentioned regulation, I mean, clearly, we're in a deregulatory backdrop with regulators using capital requirements across the banking sector. But at the same time, the NAIC is actively updating its oversight framework for ensure exposure to private credit. So what do you think -- what do you anticipate from that NAIC insurance capital review and implications might there be across the competitive, the regulatory competitive landscape.

Sure so NAIC reviews and that's a constant in the market. It's not like the NAIC comes into the market every couple of years and makes transformational change. So I don't expect major transformation here. But I think what it is highlighting is that there will probably be a shift to greater transparency required in the market just because as the insurance industry continues to lean into private markets investing, the regulator is going to want more transparency into structures and performance, which is absolutely appropriate. I think you'll see conversations and scrutiny around private ratings and ratings methodologies for some private market exposures versus public? Again, appropriate because if 90% of an insurance company's balance sheet is rated, making sure that you have the right ratings framework is critically important. And I think you'll see certain regulatory capital changes come into the market in places like CLOs and others, which is part of the dialogue now. But there's not going to be wholesale changes. I think you'll see certain pockets of the market get reviewed and have different regulatory capital. All that is beneficial to the long-term growth of private credit in insurance. And I think it's important that people understand insurance companies need private credit. When you look at the requirement to generate excess return and you look at the current size of the traded markets in order for them to meet their objectives of their policyholders, they rely on private credit. So this is not a world where we're all going to wake up one day and the insurance industry is not going to continue to have high demand for private exposures. It's really going to be -- what's going to be the disclosure regime and how much transparency can we get to make sure that they can continue to grow there. I think like all things, and we saw this in the non-investment grade part of the market, I think it will benefit the larger platforms who can invest in regulatory compliance and data and systems and all the things you need to do to drive that type of transparent and access. So I think the implication for competition is you'll see continued consolidation within the private credit space with the larger managers.

And why do you think it's going to be beneficial for private credit managers people think changes...

Regulation, I think -- and we should talk about banks regulation does not mean bad. Regulation, when it's appropriate, means increased transparency and increased understanding. And I think part of this disconnect between what the headlines say and what's actually happening in these portfolios is probably just partially a function of a lack of understanding, a perceived lack of transparency. And so I think if regulation is driving to more appropriate disclosure and better transparency. That is a good thing for the asset class, which is why I say that it's good. I don't think that these regulations are going to constrain the business in any way that's harmful. Similarly, if you look at banking regulation, with the new Basel III end game, you've actually seen that it is now more efficient for banks to lend to nonbank loan portfolios than to make loans themselves. If you were to read the newspaper, you would think the exact opposite is happening, which is we've had red cap relief and all of a sudden, the banks are going to recapture market share in the middle market, and that's not what's going to happen. What's going to happen is they will continue to diversify the risk by investing in the portfolios that we originated and risk manage for them. And then where they are getting relief in places like investment-grade exposures, commercial mortgages, they're going to be able to lean in and capture some share gains there as well. I think generally, when I look across our business, I think the insurance regulations that are being talked about because of the subinvestment grade focus of ours will be probably less relevant than maybe for some of the high-grade focused peers. And I think that the bank regulatory capital changes are going to be a big benefit for liquidity in the private credit space.

Staying with private credit, another topic that often comes up is the durability of excess spread. So when you think about the components of what's driven that in the past, how do you see those components evolving going forward in light of more competition regulation, but at the same time, there are some actors that are looking to bring more liquidity and transparency to aspects of private credit markets. And maybe your answer difference between the sub IG and

And I think -- and again, I think you have to always -- whenever you hear private credit, you have to stop, take a breath and say, are we talking about high grade or subinvestment grid creating liquidity in for example, are zones 100% of most of the loans that we originate. Creating liquidity in that is antithetical to what it means to be in the private credit business. . So the idea is that we're going to trade private exposures, that just means you're now creating syndicated loans and high-yield bonds. That may be originated outside of the banking system may be distributed to different participants, but that, in and of itself, frankly, doesn't make a ton of sense to me. I think in the high-grade world, where you've got massive capital structures and bond math is easier to do and credit risk is maybe less relevant than rate risk. I think you could start to have a slightly different conversation about liquidity and pricing and all of the things that are in the market. So I think it's not as simple as just saying private credit. I can't remember what else you asked me about pricing.

Just about the durability of the spread, but also the components when you think about illiquidity versus the origination.

The overarching view, which is probably true is that over time, the excess spread in private credit was illiquidity premium. What we've always tried to highlight is, it is illiquidity premium for sure, but then there's also what I would call complexity premium in a lot of the corners of the private credit market where you need to have real skill in structuring some of these exposures the right way to get it done. There's always been, at least in our experience, a relationship premium because the borrower who's borrowing in the private markets versus going into the traded markets is doing it because they actually value the bilateral relationship that they have with their lender so that, that lender can fund growth efficiently. And so that when things get difficult, they're negotiating with one person and their capital structure is not trading where someone can come in that has different motivations than they do and actually take their company from them. So there's embedded premium that you can extract because of the value proposition to the client. And so all of that is still there and it's still very, very durable. I also try to remind people that when you look at levered returns, whether you're talking about private equity market or the real assets market, the biggest driver of return is growing your cash flow, and a high-growth EBITDA growth; and the second is multiple expansion way down the list is cost of capital. And once you internalize that, you begin to put yourself in the shoes of that institutional private equity owner or institutional real estate manager, they're going to be much more focused on the solution that you're delivering to them than the cost of the solution. Obviously, it has to be within an appropriate range. There is one other thing that is happening in the market today, which is somewhat counterintuitive is there's now a scale premium that we're seeing in the asset-based finance part of the market and in certain pockets of digital infrastructure lending even the high end of the private credit market, where the loan sizes are getting so large that there are only a few players in the market that can actually deliver the private solution. And so they can command a premium for that execution at that size, which is somewhat counterintuitive. Juxtaposed against what we're seeing in today's market where the lower middle market, smaller assets, smaller companies actually seeing spread if not compression, you're not seeing spread widening right now just because there's enough capital in that market to meet the demands of the borrower community.

And is there a particular magnitude of excess spread if we were to quantify that, that you think is durable?

Yes. Over the 30 years we've been in the business, it's typically been 150 to 300 basis points excess return over the rate of equivalent.

And looking forward over the next...

I would expect to be in that range.

In that range. Okay. Why don't we shift gears and talk about digital infrastructure, which you mentioned, the major opportunity team for Ares. Market often treats digital infra oftentimes a simple data center proxy, but in practice, the opportunity spans across development power, renewables, credit, real estate, operating capabilities and so forth and so on. So I guess what have you learned since adding GCP, which probably expanded your footprint capability side? And how are you deciding where Ares has the highest rate to win? And how else is Ares leaning into the...

I think you hit it in your question, which is -- well, our core philosophy has always been that if we want to build vertical capabilities in these various markets. So if we're going to be in real estate, we want to be able to develop real estate. We want to be able to own real estate as an equity owner. We want to be able to lend to other real estate managers. We want to trade the secondaries exposures there. We want to maybe look at REIT stocks, whatever it would be in that ecosystem because what we've learned is, number one, you're a better lender if you have the ability to view the world through the eyes of the equity and you're a better equity investor, if you understand the lending investment thesis and how to best capitalize your asset? It also just gives you, I think, a more rigorous relative value end so that when you're seeing assets and companies, you don't naturally just try to shorten into whatever your capability set is. So if you have the full complement of capital and cost of capital, you could put the right risk to the right structure, and I think it actually benefits performance over time. Digital infra is no different. So when you look at we do in digital infra, we are a big infrastructure development house, both data centers and renewable power, traditional power. We are a very large lender to other developers and owners of these assets. We are playing at the adjacencies in the market and things like transmission, renewable power and all the things that you mentioned. And so bringing that full skill set, I think, is important. In terms of the -- where the most attractive segments are, I'd say, right now for us, and this came on the heels of the GCP acquisition. We acquired a 100 person now. It was CD5 when we bought it. global data center development team, all from industry that had been being built since 2018. And when we bought GCP, that development capability came 2 areas and it came with a pipeline of seed assets that were in flight, totaling about 750 megawatts of power. And so what we've been doing in the early days of the integration and growth of that platform is taking that development capability, integrating into our broader infrastructure business. and then building the investment management capabilities on top of it with some pretty quick success here. That's super attractive to us, but it's a fairly narrow view of how to play data center development. And so what we're doing there is large-scale, urban centers, Tokyo, Osaka, London, Sao Paulo, Washington, D.C., Dallas where we are doing large campuses, 4 hyperscalers, pre-lease 12- to 15-year leases with escalators, that's a really good way to play the market. We are not doing secondary and tertiary markets. We're not speculatively building data centers. We're not focusing on LLM training facilities, we're not speculating on land, right? So it is a very. But back to my comment on scale, these are massive projects. And so if you want to actually own that land entitle it, power it negotiate globally with the hyperscale client, it requires a certain scale in terms of your capability and your capital that very few people have. That view does translate through most of everything else we're doing in digital info. I would say maybe one exception is certain geographies you may want to own versus lend just because the competitive capital may be different or maybe our competitive advantages in places like Tokyo are meaningfully different because we're such a large industrial real estate manager in that market that we can leverage into a land bank that very few people can replicate. But I will say, back to some of these moves in the market and the fundamental strength, this CapEx is real. The pipeline that we have built because we had been seeding if we can bring these projects online, entitled and powered, they're getting leased. I mean it's been remarkable, both the competition on the leasing side and the uptake in terms that we're getting. If we if we can get people to in front of the line because I don't think that the market is bringing capacity on fast enough to meet the demand of the hyperscalers right.

Why don't we turn to fundraising? Ares had a record year in '25, and you recently commented that Ares is likely on track for another record year here after raising $30 billion in the first quarter. So how are conversations with LPs evolving in this market backdrop, where would you say you're seeing incremental demand? And what strategies are you seeing maybe demand exceed your ability to source attractive assets?

Well, I don't -- the second part of your question, I'll answer first. We've been very disciplined in our history of not raising capital that we can deploy timely and deploy within the investment objectives of of the fund. And so whenever we're in the market with the fund, it's sized to meet what we know our deployment capability is. But I made you mentioned that because, again, back to people throwing around large TAMs and AUM numbers the constraint to growth in this market is origination. And the moat is sourcing and origination and portfolio management. you could raise money. But if you can't put that money to work consistently through cycles and generate performance, you don't get the right to grow. And by the way, if you raise too much money and you don't put it to work, that's bad for your investors, too. So when they're allocating, they're allocating to get return, but they're also allocating to get invested. And we have seen people in our market make the mistake of taking capital on that they can't prudently deploy maybe not seeing it appropriately because they're trying to buy share, and then all they do is disappoint the investors. So we don't -- everything we do at the company is through the lens of origination. Scaling origination , creating new capacity and new capability and then that feeds into the fund complex. You saw it in Q1, the momentum was great in both institution and wealth. I mentioned the ABF fund that we announced today, that was in the market for 5 months, and we raised $8.5 billion against $6.5 billion cover. So I think for high-performing products with scale managers, the demand continues to be there in the institutional market. And we're seeing that across the board. I don't I wouldn't say that private credit is outpacing the demand that we're seeing in places like industrial real estate or the data center development business, it's been pretty broad-based demand. And I think it is indicative of the performance that we're able to deliver the differentiation of the performance and the scale because I think for a lot of the large allocators who want these exposures, they need to come to large managers who can get them deployed and that scale benefit continues to feed on itself because if you reinvest in scale, you accumulate more capital, more capability, it's a virtuous circle. And you can see that happening as the private markets mature, the larger, getting larger and it's actually improving performance in a lot of these businesses. And so I think that's -- we're kind of right in the middle of that trend right now, and that's why we're putting up the numbers that we're putting up. The other thing I would highlight is that the momentum in wealth is still incredibly strong as well. For Q2, we did about $3.6 billion gross in the wealth channel that's 10% up year-over-year. And just to put it in perspective, it was about 4.2% in Q1. So roughly flat to flattish to Q1 despite all of the anxieties around private credit. So I think that there's a narrative that maybe even wealth is still not open for business, and it's quite the opposite. You're seeing meaningful uptake across the diversified product set that we have -- as an example, we have a core infrastructure product that we put in the market. Recently, that's been scaling nicely. We did about $1.9 billion in the quarter in that fund $850 million in June alone. So the diversified product set there is kind of growing through the slowdown in private credit.

See you already jumped ahead to one of the other questions I had. So just to make sure, the $3.6 billion is what you did in the second quarter here. That's all done because you have the June already. That's up year-on-year, 10% of that 3.6, there's a core infra retail private wealth vehicle in there that did 1.9 -- and did that get on added to a new platform that's driving that.

It's been pretty broad based. So it's in its early phases. So we're adding platform. So I can't say what it's going to be next quarter, but it's not a [indiscernible]

Sure. Maybe more broadly on wealth, which is a massive addressable market, where you and your peers have all made some headway here with new products, distribution efforts. What do you think ultimately will drive success in the channel and separate the winners from the laggards and talk about some of the steps that you're going to take in the coming years to be on the winning side.

I'll talk about structurally what it takes to just be a meaningful player because you have to be in the game to win the game and then what I think it takes to win. So these products need to be large because you need real diversification and access. And so I think by definition, the market will gravitate to the larger platforms who can build scaled exposures with appropriate diversity, but then who can also build the servicing engines to service the client, educate the adviser community, leverage relationships with the platforms like Morgan Stanley, and that's really what it takes to be meaningful. If you look at what we have in wealth -- we have close to 200 people in 15 offices touching investors in 50 countries around the world, selling 8 diversified products, 7 of which are over $2 billion already. we probably have, as of the most recent publicly released information, a 10% market share, which is probably #2 in the market, still represents an incredibly small piece of our overall business. But I think what we've learned is you have to make a huge investment in product and people and technology and outreach in order to be successful. But like anything, I'm going to go back to what I said earlier, what it takes to win isn't accumulating assets, it's performing. And what it takes to win long term in wealth is for people to get the outcomes that they want -- that they signed up for and to have a positive experience being your client, and that requires the same level of rigor when you're investing in a wealth product that you do for a large pension or sovereign fund. And I think that just -- it's going to take time. You're going to see winners and losers shake out around scale and distribution capacity, and then you're going to see winners within the winners that shake out just based on differentiated performance the same way that we all compete in the institutional market as well.

To your point on investors having a positive experience in the channel, we often hear questions around to what extent do these redemption proration sort of get in the way of that positive experience. And if this happens over a repeated sort of cycle or time frame and it wasn't that long ago we were here talking about in the nontraded REIT space what point.

Which, by the way, are not -- like if you look at our non-traded reflows a, they were pretty consistent through that period of volatility and b, they've been accelerating again. So there are going to be ebbs and flows. . I think our market made a mistake by not adhering to the 5% redemption limit because it muddy the conversation around why that existed in the first place as a structural feature of the product, not a structural risk of the product. And now we all have to kind of recapture that understanding, which I think the market will do, a, because it has to be because it's the right thing to do. The reason I say that is if you think about investor experience, which is why I have such confidence that the markets will grow through this, -- looking at our own experience in our nontraded BDC, where we limited to the 5%, I want to say that we had 11% redemption requests. It was from less than 5% of our investors. It was largely concentrated in small institutions and family offices, not in the U.S. and had we actually used fund liquidity and to satisfy the redemption demands of less than 5% of our investors, that's not in the interest of the 95%. And that's not being talked about. So as a fiduciary, we have 95% of our investors who believe in what they own, right? They said, I want to own private credit exposures with Ares. I want to make a 8% to 10% return with a high current yield, and that's what they bought. And that's what they want to own. And so you can't then take liquidity away from them to give to somebody who doesn't want to own it anymore. So I think what you're going to see is there's going to be a concentration and we saw this in the REIT space, too, of that redemption queue I think people are elevating their redemption requests in order to try to get a higher pro rata share of whatever redemptions exist and then it will work itself through. So I do think it's important that people ask what's the percentage of investors that wanted capital back? And what do they look like? Where do they live? Are they really investors? Because what I will say, at least based on our experience, the U.S. well-advised high net worth wealth consumer is continuing to grow their alts exposure and they are not redeeming the way that the market may think that they are.

Let's shift and talk about AI, which has been a major theme across markets. We talked about it earlier as a deployment team, but now let's talk about it as an opportunity at the management company level at Ares. Talk about how you're experimenting with it today across the organization, some of the use cases you've put into production, any sort of measurable productivity gains or otherwise that you could comment on?

Yes. I mean, obviously, I think any scaled company, if you're not well advanced in your data and AI strategy, you're already woefully behind. And so we've been reorganizing the plumbing of areas for the last 5-plus years to make sure that we entered this phase of tech transformation with the right data architecture and governance so that we can actually exploit the opportunities that are being created now. . The best way that I would articulate it is we've created a genetic AI layer that sits on top of the 500-plus systems that run the company, and we are doing everything we can to run the business more efficiently. That's a combination of either cost takeout or just economies of scale in places like client service and client reporting and performance analytics, due diligence questionnaires and request for proposal AML, KYC and investor onboarding. So all of the work streams that exist at the company can, in some way, shape or form enhanced through the use of AI, and we're running hard at all of that. Two, we are using it as best we can to not replace or professional investors, but to supplement. So places like the pre-population development of financial models population development of investment committee memos. All of that is geared to make the people that we have more efficient so that we can get more throughput off the people that we have and make sure that our highest talent investors are spending more of their time making investment decisions and analyzing information rather than synthesizing it. And then obviously, we're trying to take those learnings and push them where we can into the portfolio company and trying to drive the same level of growth and efficiency that we're seeing in our own company in the portfolio as well. I think you'll probably hear from a lot of folks, we are in a phase where we're going to see margin expansion. We've already said that we would expect to be at the high end of our guidance. But where we're creating savings, we're reinvesting in growth. And I think that, that's going to be a consistent theme, which is this is not about cost takeout. This is about velocity and being able to reinvest in growth in ways that we weren't before. And it's pretty exciting. .

Great. I'm afraid we're out of time. Mike, thank you so much. Appreciate it.

Thanks for sharing lunch.