Ares Management Corporation (ARES) Earnings Call Transcript & Summary

As a reminder, this conference call is being recorded on Friday, July 31, 2026. I will now turn the call over to Greg Mason, Co-Head of Public Markets, Investor Relations for Ares Management.

Good morning, and thank you for joining us today for our second quarter 2026 conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have a number of executives with us today who will be available during Q&A. Before we begin, I want to remind you that comments made during this call contain certain forward-looking statements and are subject to risks and uncertainties including those identified in our risk factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results, and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in Ares or any Ares Fund. During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for, measures prepared in accordance with generally accepted accounting principles. Please refer to our second quarter earnings presentation available on the Investor Resources section of our website for reconciliations to these non-GAAP measures to the most directly comparable GAAP measures. Note that we plan to file our Form 10-Q early next month. This morning, we announced that we declared a quarterly dividend of $1.35 per share on the company's Class A and nonvoting common stock, representing an increase of over 20% over our dividend for the same quarter a year ago. The dividend will be paid on September 30, 2026 to holders of record on September 16. Now I'll turn the call over to Mike, who will start with some comments on the current market environment and our second quarter financial results.

Thank you, Greg, and good morning, everyone. I hope you're all doing well. Our strong second quarter results highlight the growing diversity and durability of our global platform. The depth of our global institutional platform drove another record quarter of fundraising and our broad-based global investment capabilities enabled us to remain very active in a slower transaction environment. This drove 17% year-over-year increases in both our AUM and fee-paying AUM to approximately $671 billion and approximately $410 billion, respectively. This AUM growth translated into even healthier increases in our fee-related earnings and realized income, which increased 20% and over 30%, respectively, as we benefit from our growing scale and strong long-term fund performance. Notably, both growth rates are at the high end or above the long-term growth rate target ranges that we provided at our 2024 Investor Day. Overall, we're pleased with how we're performing, and we remain on track to achieve our financial objectives for the year. The underlying drivers of our future growth continue to improve. We now operate leading franchises in diversified credit, real estate, infrastructure and secondaries across North America, Europe and Asia. Beyond Direct Lending, our scale and leading businesses across asset-based finance, opportunistic credit, liquid credit, global real estate, infrastructure, insurance, and our diversified secondary strategies are increasingly contributing to fundraising, deployment, management fees and earnings growth. For the second quarter, we raised approximately $36 billion of gross capital the highest quarter of fundraising in our history. This positions us with a record $170 billion of dry powder and $114 billions of AUM not yet paying fees which sets us up well for future earnings growth. We've now raised approximately $66 billion through the first half of the year, and we remain on track for another record year of fundraising. The breadth of fundraising across our platform is particularly notable, approximately 70% of the capital that we've raised this year is outside of our 4 largest credit fund families and investors committed capital across approximately 90 different funds and vehicles. This demonstrates the increasing diversification and global reach of our business. We raised our highest ever quarterly amount of contribution from our SDL and ACE franchises neither of which raised equity capital in their flagship commingled funds in the quarter. In our view, our franchise and brand have never been stronger in the eyes of our institutional investors. Institutional investors account for approximately 75% of our overall AUM and have represented more than 80% of our gross equity inflows over the last 12 months. Ares is viewed as a key strategic partner with the scale, performance and breadth of capabilities to serve a wider range of portfolio needs, during a period where global institutional investors are seeking to consolidate. We're seeing the benefits of significant investments in our broad origination capabilities, our time-tested investment approach consistent credit and investment performance and best-in-class client service. Now let me provide some additional details on our various fundraising and investing activities. Starting with fundraising in credit. We continue to see very strong institutional demand across our highly diversified credit strategies and have hit the hard cap on our last 2 private credit fund raises. In alternative credit, which is our asset-based finance strategy, we completed the higher fundraise for Pathfinder III during the second quarter, raising approximately $8.5 billion of equity commitments. The fund significantly exceeded its $6.5 billion target and had demand well in excess of its hard cap Market-leading position in the non-rated asset-backed finance sector as we now manage 4 of the 5 largest institutional ABF funds in the market. We believe that the addressable market is measuring trillions of dollars and our investment pipeline continues to expand as we partner with financial institutions and origination platform forms across various asset classes. In U.S. and European Direct Lending, we raised over [ $12 billion ] of debt and equity capital during the quarter across our vehicles. Institutional engagement for the next generation of our U.S. senior direct lending strategy is very strong, including for both our traditional commingled fund and our new Evergreen core product. We continue to expect the first close for both products sometime in the fall with additional closings next year. We expect to launch our seventh European Direct Lending fund early next year. Taken together, our institutional fundraising pipeline remains robust with our 2 largest fund families in the market with successor funds in the year ahead. Within real assets, fundraising momentum was particularly strong across infrastructure and real estate. In infrastructure, our open-ended core infrastructure fund raised approximately $1.9 billion of equity during the quarter. Demand for the strategy has been exceptional driven by investor interest in high-yielding tax advantage real assets. At the same time, the number of power and digital infrastructure assets coming to market across a diverse set of subsectors is as high as we've seen which sets us up well for accelerating deployment. These same trends are driving strong momentum in our sixth infrastructure debt fund. The fund raised approximately $500 million during the quarter and has now raised approximately $3.7 billion. We expect to complete the final close later this year at a level above the $5 billion raised for the prior vintage, including leverage and related vehicles. Recent momentum with this fund reflects an increasingly attractive infrastructure investment environment and strong performance for our infrastructure debt strategy. We're also seeing strong investor interest in our global digital infrastructure fund, driven by our [ seed ] portfolio of attractive entitled and power projects in top-tier global markets, the persistence and growing demand for computing power, the need for private capital and the differentiated nature of our operating platform. We anticipate holding a series of meaningful closings in late Q3 and into the fourth quarter and expect to complete the fundraise in 2027. In real estate, we also had an active quarter. Our fifth Japan industrial development fund raised approximately $1.8 billion, bringing total commitments to date to [ $3.4 billion ]. We expect to hold our final close in the third quarter at our hard cap and at a level meaningfully above the prior vintage of $2.5 billion based on current exchange rates. In our real estate debt strategy, we raised approximately $2.8 billion across a new global co-mingled fund and separately managed accounts. The current environment remains attractive for real estate credit, given early cycle conditions. We're also encouraged by the improving fundraising trends in our non-traded REITs, where inflows have been building each quarter since the fourth quarter of last year. Within the market, gross sales and net flows are improving as property values stabilize, transaction activity remains positive, and the supply outlook is becoming more favorable across several sectors. Within secondaries, we continue to see good momentum in our global structured solutions strategy, which raised over $500 million quarter. We also expect to complete an initial close for our next real estate secondaries fund in the second half of the year. Investor interest remains strong with the current fundraising pace both faster and ahead of the level that we were seeing at the same point in the prior vintage. Within our Wealth Management platform, our diversified product line continues to deliver solid investment performance, distinguishing us in the marketplace. We raised approximately $3.9 billion in gross equity commitments in the second quarter, an increase of approximately 15% from the prior year period and roughly in line with the approximate $4 billion that we raised in each of the prior 2 quarters. We've raised approximately $8 billion during the first half of the year, and based on our current pipeline, which includes a strong start to Q3 with approximately $1.5 billion in July, we anticipate a similar level of gross fundraising in the second half of this year. Based on industry data from Stanger, Ares has picked up meaningful market share within the channel and ranks #2 in gross fundraising over the last 12 months through June. We finished the second quarter with over $76 billion of AUM in our Wealth products and even with some noise in the channel, our Wealth AUM increased at an annualized rate of more than 25% quarter-over-quarter. Importantly the composition of our wealth fundraising continues to broaden. Our goal from the outset was to build a diverse product offering that meets the needs of investors seeking durable income, tax advantage, real assets and diversified growth. By providing quality offerings across a variety of products, we've demonstrated that we can consistently scale in the wealth channel even as investor sentiment shifts across asset classes. Our Evergreen Core infrastructure product has taken the lead in terms of [ monthly ] inflows, and we're still in the early stage of expanding our distribution partnerships. In just over 2 years, the fund has raised over $5.7 billion in AUM, securing the #2 rank in TTM gross fundraising for infrastructure evergreen funds through June, representing approximately 20% market share. In the wealth channel, we've made significant investments in distribution, education, technology, operations and product development with nearly 200 professionals focused on the channel. We're currently working on integral fund solutions designed for the mass affluent and model portfolio markets in the U.S., and we have a robust forward pipeline of additional partners in the U.S. EMEA and APAC to distribute our current flagship funds as well as product extensions. We continue to believe that we are in the early innings of capturing increased individual investor allocations to alternatives. Within our nontraded BDC, redemption themes were consistent with last quarter, with roughly 95% of investor accounts electing to stay in the fund and redemption requests primarily coming from a small number of non-U.S. family offices and smaller institutions. These types of investors represent only approximately 10% of the vehicles NAV and we intend to make certain adjustments to new share classes that we would offer to them going forward. Looking specifically at our core U.S. individual investor base, redemption requests totaled only approximately 2.5% of NAV and declined approximately 35% compared to the prior quarter. Together, these trends support our view that the investment thesis and long-term opportunity within the wealth channel remain intact with continued strength across our core U.S. investor base and sustained engagement from distribution partners and individual investors globally. We built the portfolio within our non-traded BDC with strong credit underwriting, conservative loan structures and a disciplined approach to deployment. Based on the latest public data, the portfolio is performing well with very low non-accruals at around 0.5%, healthy organic EBITDA growth of 13% year-over-year, and the fund has declared stable monthly distributions through September 2026. Let me now highlight some recent investment assets. In part, due to our broad and diversified platform, our overall investment activity increased meaningfully in Q2 to approximately $36 billion compared to approximately $27 billion in the prior year period. Our firm-wide forward investment pipeline also improved nearly 20% quarter-over-quarter to a new record and current transaction discussions across our strategies point to a stronger second half outlook for deployment. Within U.S. Direct Lending, we deployed approximately $12.4 billion gross committed during the quarter. Despite slower M&A activity in the market, deployment improved sequentially compared to the first quarter as we grew with our incumbent bonds, which represented 75% of our Q2 deployment. We're constructive on the second half environment for U.S. Direct Lending as sponsor dialogue improves and more companies return to market after delaying transactions earlier in the year. [ Quarterly ] and first half results were ahead of our initial expectations for the year, and we have a record pipeline pipeline going into the third quarter. The European direct lending market remains more fragmented than the U.S. with fewer scaled lenders and a greater premium on local origination, certainty of execution and long-term sponsored partnerships. We believe that our market-leading origination platform, scaled capital base and long tenure operating in local markets is driving more investment opportunities for us across the continent. We're also seeing tremendous demand across the firm for both debt and equity capital to finance the development of digital infrastructure and related power requirements. The capital needs are significant, and our platform is well positioned to address these opportunities. We have large and long tenured teams that have invested through multiple cycles in power generation, infrastructure equity and infrastructure debt. Notably, our digital infrastructure business and our vertically integrated data center development platform, Ada Infrastructure, continues to grow with over 100 professionals that have significant experience across investing, development, engineering, construction and power procurement. Our Ada team, which has long-standing hyperscaler relationships, is currently executing on 7 large data center campuses representing 22 individual data center investments with approximately 1 gigawatt of compute and has a strong pipeline of future projects. Within real estate, our transaction activity continues to rebound, particularly in North America and Japan as we deployed over $4 billion in the quarter, both sequentially and year-over-year. We continue to see attractive opportunities in our Core Logistics business and are beginning to selectively broaden our investments into properties where we've traditionally been underweight, including hospitality and retail. Our approach remains highly targeted and focused on assets with strong locations limited supply, resilient tenant demand and favorable demographic trends. Within secondaries, market volumes continue to grow as the need for distributions and enhanced liquidity remains a central theme. For example, industry volumes and credit secondaries through the first 6 months of the year have already matched 2025 full year volumes. Within every asset class, we're seeing certain institutional investors seeking liquidity for LP interests. While managers are evaluating GP-led solutions for high-quality assets that they want to continue owning while still delivering DPI to their investors. More broadly, portfolio performance remains strong across the firm. Jarrod will discuss our fund returns and financial results in greater detail, but the consistency of our performance continues to support fundraising, deepen our relationships with investors and reinforce the strength of our franchise. And with that, I will now turn the call over to Jarrod to provide additional details on our financial results. Jarrod?

Thanks, Mike. Good morning, everyone. Our second quarter and year-to-date financial results reflect continued strong growth across our key financial metrics, increasing scale and diversification of our platform and the benefits of our strong long-term loan performance. We also continue to benefit from a large base of long-duration capital and strong fundraising and deployment activity across the platform. At quarter end, 84% of our AUM was in perpetual capital or long-dated funds, and 94% of our management fees were generated by those sources. We believe the durability of our capital base, the breadth of our investment capabilities, management fee-centric business model and our asset-light balance sheet help insulate us from market and credit cycles and positions us well to continue generating attractive long-term earnings growth. Turning to our results. Management fees were over $1 billion for the quarter, increasing 14% compared to the prior year period with no catch-up fees in the second quarter. Including FRPR and other fees, total revenues increased 17% from the prior year period. This growth continues to be supported by the expansion of fee-paying AUM, which increased 17% year-over-year to approximately $410 billion. The increase in fee-paying AUM was broad-based. Credit FPAUM increased 17%, secondary increased 28%. Credit equity increased 27%, real assets increased 11% and other businesses. which is primarily comprised of Ares Insurance Solutions increased 54% compared to the prior year period. We're benefiting from strong fund raising and consistent deployment across the platform. [ Part 1 ] fees, which are included in management fees, totaled approximately $154 million in the second quarter, up 20% from the prior year period, driven by positive inflows across 5 different funds that now generate Part 1 fees. Fee-related performance revenues totaled approximately $41 million in the quarter, increasing 143% compared to the prior year period. The majority of this quarter's FRPR was generated by APMF reflecting both continued capital formation and strong underlying investment performance. As a reminder, the timing of FRPR varies by fund and investment strategy, with a meaningful portion of annual revenues typically recognized in the second half of the year. For the third quarter, we expect FRPR from our open-ended core alternative credit fund to be in line for the third quarter of 2025 at approximately $62 million, regarding the potential for fourth quarter FRPR from our nontraded REITs, we currently have approximately $32 million of FRPR accrued by these REITs for potential recognition in the fourth quarter. As I mentioned on last quarter's earnings call, G&A expenses increased this quarter, partially due to our firm-wide AGM for institutional LPs, which we hold every other year during the second quarter. The second quarter included approximately $9 million of expenses associated with this meeting that will now occur in the third and fourth quarter. Fee-related earnings were approximately $491 million in the quarter, increasing 20% year-over-year. Our year-to-date FRE margin was 42.3%, approximately 100 basis points above the prior year period. And we continue to expect that we'll be approaching the upper end of our margin guidance of 0 basis points to 150 basis points for the full year. Turning to performance income. We generated approximately $51 million of realized net performance income during the quarter, more than 3x the amount generated in the prior year period. Year-to-date realized net performance income was approximately $126 million, up 119% compared to approximately $58 million in the prior year period. Based on our current visibility and the realizations, and the performance of our portfolio, we anticipate a limited amount of approximately $10 million of realized net performance income in the third quarter, but continue to feel good about our previously communicated full year expectations. Realized income totaled approximately $522 million for the quarter, representing a growth of 31% year-over-year. After-tax realized income was approximately $468 million for the quarter, increasing 27% year-over-year. An after-tax realized income per share of Class A and nonvoting common stock was $1.29, representing a growth of 25%. Our tax rate for the quarter was 13.7%, which is within our full year tax guidance range of 11% to 15%. As Mike discussed, the underlying financial drivers of the business remain strong. We ended the quarter with approximately $170 billion of available capital, representing an increase of 13% year-over-year. We also had approximately $114 billion of AUM that's not yet paying fees, including approximately $93 million available for future deployment. If deployed the AUM available for future deployment and development assets not yet stabilized, could collectively generate approximately $828 million potential incremental annual management fees. This provides substantial visibility and future growth in fee-paying AUM and management fees even before considering future fund rate. Turning to investment performance. Overall fund returns remain strong, led by our credit and real asset strategies. Over the last 12 months, we generated gross returns of 16.4% in alternative credit, 8.9% in opportunistic credit, 11.2% in U.S. senior Direct Lending, 8.9% in U.S. junior Direct Lending, 8.3% in European Direct Lending and 19% in APAC credit. Across our direct lending portfolios, underlying credit fundamentals remain strong and stable with low loan to values and healthy interest coverage. In U.S. Direct Lending, nonaccrual levels were flat quarter-over-quarter and remain low at less than 2%. We're not seeing any signs of a turn in the credit cycle as evidenced by 9% year-over-year organic EBITDA growth from our portfolio companies. Within real assets, our infrastructure equity and infrastructure debt strategy generated gross 12-month returns of 9.8% and 7.5% respectively. In secondaries, APMF generated a net quarterly return of 6.9%, a net 12-month return of 16.2% and a net return since inception of 15%. In our latest institutional secondaries private equity funds had gross IRR of 26.5% since inception. Within Private Equity, our corporate private equity strategy generated a gross quarterly return of 2.4%. And ACOF VI continues to perform well with a gross IRR of 19.5% since inception. Overall, the breadth and consistency of our investment performance continues to support fundraising, deployment and growth in both management fees and performance-related revenues. We believe the combination of strong fund performance, significant available capital and the scale of our origination platform provide meaning or visibility into continued financial growth. In conclusion, our second quarter and year-to-date results leave us well positioned to achieve our financial objectives for 2026, which remain consistent with our long-term compound annual growth target of 16% to 20% for FRE, 20% plus for RI and dividend growth. I'll now turn the call back over to Mike for his concluding remarks.

Thanks, Jarrod. In closing, we're very pleased with our progress, the broad-based strength and momentum we're seeing across the firm and the positioning of our leading global businesses in dynamic growth markets. We raised a record amount of capital across a highly diversified set of strategies. Our deployment pipelines are increasing, and our portfolios continue to perform well for our investors. We believe that the bath and diversity of our investment platform, the flexibility of our product set, the in duration of our capital base, our asset-light balance sheet and the strength of our institutional and wealth franchises position us well for continued durable growth over the long term. These characteristics are even more valuable during periods of market volatility and shifts in business cycles as we can pivot capital formation and deployment towards the most attractive opportunities in the market. We also believe that the scale of our platform is creating meaningful opportunities for continued margin improvement. As we grow, we're benefiting from operating leverage, while our investments in technology and AI are set to improve efficiencies and enhance investment capabilities as we leverage our proprietary data and increase the capacity of our teams. We're also working on strategic growth initiatives like our capital solutions business as well as extensions of certain investment strategies, both organically and inorganically through potential joint ventures and opportunities that will continue to drive the business forward. But before wrapping up, I want to highlight the recent fifth anniversary of the Ares Charitable Foundation which has now committed more than $68 million in grant since 2021 to advance economic mode to help people become workforce ready, start and scale up businesses and strengthen personal financial and skills. In addition to the Ares Foundation, Promote Giving launched last year as an initiative established by Ares in our Pathfinder funds, that commits a portion of performance fees to charitable organizations without reducing returns to our fund investors. We're proud that we've expanded our promote giving initiative across our industry and there are now 15 different asset managers with more than $44 billion of pledged assets that have the potential to generate an estimated $300 million to $350 million of charitable contributions over the next decade. This support will help to create a more durable source of funding for organizations that are advancing education, human well-being and healthier communities around the world. We remain committed, as always, to using the reach of the Ares platform to deliver strong outcomes for our investors, our employees, our shareholders and the communities in which we operate. As always, I'm just so deeply grateful to our employees around the world for their continued hard work, collaboration and commitment to our clients. And I also want to thank you, our investors, for their continued support and trust. We're excited about the opportunities ahead and remain focused on delivering strong long-term results for all of our stakeholders. And with that, operator, could you please open up the line for questions?

[Operator Instructions] Our first question comes from Craig Siegenthaler with Bank of America.

And it was nice to see another strong fundraising quarter and also to see how much Ares has supported charitable organizations, especially out of the Pathfinder fund.

Thanks, Craig.

So within that, we wanted to see if you could unpack your commentary that institutional demand for private credit is accelerating. What is driving institutions to private credit now? And when do you expect to see private wealth demand come back? And going forward, do you think these 2 channels will behave somewhat countercyclically?

Sure. So the evidence for the acceleration is just based on what we're seeing in the field. So to reiterate, in the quarter, we raised our third Pathfinder fund first and final close, $8.5 billion against a $6.5 billion cover, which was the hard cap and had meaningful demand in excess of the hard cap. So I don't think in the history of Ares, we've ever seen a fund get raised in a first and final at the hard cap. I think that's a reflection of just extraordinary performance and market positioning, but also just increasing appetite. We had a similar, maybe not as dramatic experience in the third vintage of our opportunistic credit fund, which also raised quicker than prior vintage and got to the hard cap, which was well in excess of the prior. And as we mentioned, we are in market with our fourth institutional loan fund and everything that we're seeing on the ground in terms of demand would indicate that appetite is increasing. I think it's both long-term secular, Craig. When you look at some of the industry data and consulting data, generally speaking, institutions still remain under-allocated to private credit. And I think at this moment in time, given some of the reduction in capital coming from the wealth channel, people perceive an opportunity to capture excess return given a shift in the competitive set, meaning spreads have widened, less competition and therefore, an ability to deploy maybe quicker and better returns. That does go hand-in-hand with what we're seeing in wealth, but I do want to reiterate some of the commentary around wealth. First of all, the entire channel for us grew year-over-year. And that's just based on demand that we're seeing broad-based for the non-U.S. private credit fund. We're particularly pleased with the significant demand that we're seeing in our core infrastructure fund. The momentum in wealth continues. Our July flows on equity were about $1.5 billion. And so we're not seeing any slowdown on the diverse product set. And when you drill down on the nontraded BDC, a couple of things to consider. Number one, we talked about in the prepared remarks, the fundamental performance there is delivering exactly what it's supposed to deliver in terms of dividend yield. Non-accruals are 0.5%. EBITDA is growing 13%. So there's nothing in that fund that would indicate the performance isn't at or above underwriting. Two, when you look at the core ultra-high net worth and individual investor market, which is supported by the adviser platforms in the U.S., we're not seeing any acceleration in redemption requests. It's been consistent in the 2% to 2.5% range, which is what it was before the noise in the channel began. And as I mentioned in my prepared remarks, redemptions in that particular part of our investor base were down 30% quarter-over-quarter. So we're actually seeing a reduced redemption queue in the core investor base. And then lastly, and I think our peers would say the same, the redemption queue in the U.S. private credit funds, and we're not actually seeing it in our European funds, is largely concentrated in the hands of family offices and small institutions in the APAC region. To put that in perspective, if you were to look at the top 10 redeemers in our non-traded BDC, they were about half of redemption requests. And 2/3 of our Q2 redemption requests were from the Q1 Q. So while the individual investor is slowing its request for redemptions, we're satisfying the disproportionate demand coming out of Asia. And that number has been cut in half over the last 2 quarters from about $1.2 billion to a little over $600 million. So assuming that those 2 trends hold, and I have no reason to believe that they won't, that would probably mean that you get back to stasis in the next 2 to 3 quarters is my guess. The other thing I would also highlight because it's going to impact the profitability coming out of that fund, despite the redemption queue just based on Q1 inflows and being underlevered in that fund, I would expect that when we get to the end of the year, our nontraded BDC will actually be larger at year-end '26 than it was at year-end '25. Whether they act countercyclically, I think maybe, obviously, one of the reasons why we have been measured in the way that we've developed our wealth business as we learned through experience running ARCC for the last 20-plus years that the individual investor can sometimes look to divest when they should be investing and running a diversified book in institutional and wealth markets is prudent. I still think it's early days to know exactly how these will play over time, but there is a risk that some of the wealth flows could be more pro-cyclical than people thought they were, which is why we continue to index aggressively into the institutional market.

Our next question is coming from Alex Blostein with Goldman Sachs.

So lots going on, on the organic side and the business continues to hum. But I have to ask, I think, the inorganic question given the headlines in the last few days here. So Mike, I heard your comments around open to deals, both JVs as well as more inorganic opportunities broadly. Maybe you can kind of comment about where on your priority list is something inorganic on the private equity side? And just remind us the key parameters around financial and strategic fit when you think about deals for Ares.

Sure. Thanks for the question. Obviously, I can't comment on any rumors or speculation in the market, but I appreciate the opportunity to reiterate our framework for thinking about inorganic growth. And as you said, at a very, very high level, regardless of the end market, it's a simple framework, which is we needed it to be culturally accretive because this is a people business at the end of the day. We needed to be strategically accretive, i.e., bring new capability or capacity or distribution to the table. And then we need to have a view that we can actually make the business better by delivering revenue synergy and information and resources. And then lastly, it needs to be financially accretive. If you look at our recent history, that framework has served us very well as we've acquired and integrated Landmark and doubled that business with meaningful growth in secondaries. You've seen what we were able to do with the acquisition of Black Creek and turning that into what is now the engine of growth in our Wealth Management business, and so on and so forth. So it's a pretty well-honed framework, both for identifying candidates and then also for unlocking growth post acquisition. With regard to Private Equity, obviously, Ares has been in the Private Equity business for 20 years with a very strong track record. I mentioned our sixth fund in PE right now is generating close to 20% growth. It's a top quartile performer. I think that the question that we have posed and we've done it publicly with all of you as well is as Ares continues to scale the way that it is, should we be bigger in private equity. And I think the answer is probably if we check all of those three boxes and the industrial logic for that is that if you look at our institutional LP base, they are committed to being in the private equity business. As we continue to deepen and broaden those relationships, I think they would like to continue to invest with us in scale. And so to the extent that we scaled up in PE, I think that we would be able to drive incremental flows. That's all happening at a time when GPs are seeing consolidation of relationships from their LPs. Two, as we kind of hone our origination engines here, being larger in PE will just allow us to offer broader solutions to the companies and entrepreneurs that find their way to Ares. And I think that, that would be value add. It would allow us to deepen our relationships with our banking partners and our capital markets partners in terms of driving equity and debt capital markets business and financing, and that's obviously accretive to other parts of the business as we grow our wallet. It allows us to lean in more heavily to capital markets and fee-generating business in a way that we can just given our scale. And probably lastly, as demand in the wealth channel continues to grow, and we're seeing that, for example, in our APMF fund, the ability to deliver larger amounts of direct exposure either through primary or secondary private equity, I think, will become more relevant. So there's a lot to argue in favor of it. But as I mentioned in last quarter's call, the price has to be right because the growth profile of these businesses is less linear and more episodic than some of the core businesses. And we have to really believe that we can drive culture strategy and and the financial piece of it. So a lot of boxes to check, but I think the industrial logic would make a lot of sense for the right situation.

And we will take our next question from Steven Chubak with Wolfe Research.

So I wanted to double-click into the U.S. Direct Lending outlook. Despite more tepid activity in the quarter, you struck a more constructive tone on U.S. Direct Lending, which is consistent with what [indiscernible] actually said on the ARCC call, talking about activity really building towards the end of 2Q and into 3Q. That said, sponsor M&A remains fairly subdued based on what we've seen in the public data. I just want to get a better sense as to what you're hearing from sponsor clients regarding the appetite to transact -- and how does the pace of deployment that you envisage based on the pipeline inform expectations for management fee growth in the back half?

Sure. So a couple of things. Number one, I think one of the most important things this quarter was the demonstration of just how broad-based and diversified the deployment has become. When you look at a slower Q1 in our U.S. Direct Lending business, we were still able to deploy $36 billion across the platform because we saw accelerated deployment in places like ABF, secondaries, real estate, digital infra. And so while Direct Lending in the U.S. and Europe continue to be big drivers of deployment, the P&L is just fundamentally less dependent on that core direct lending deployment than it has been in years past. If you look at the pipelines across the platform broadly, the pipeline sits at a record level. It's about 20% higher than it was last quarter. So we're seeing broad-based acceleration in deployment as we head into the back part of the year. Europe, as I said in the prepared remarks, has actually been a bright spot. We saw significant deployment in Q1 and Q2, and the pipeline sits at probably the highest level that we've ever seen heading into Q3. With regard to U.S. Direct Lending, we have demonstrated both because of our incumbent relationships and our non-sponsored business that we are able to deploy quite considerably even when sponsor M&A is slow, and I think that will continue. But as [indiscernible] said, which I think is probably the most important is when we look at the U.S. pipeline, we are seeing an acceleration in the pipeline quarter-over-quarter. And then what I would call the shadow pipeline, which would be looking at how many confidentiality agreements are we logging and how many new deals are we logging. The number of NDAs that we've signed is up about 35% quarter-over-quarter and the number of deals we've logged is slightly behind at 30%. So that's kind of the precursor to what we would call pipeline. I can't say with perfect certainty to you that, that 30% to 35% converts perfectly, but it is an indication that sponsor activity is picking up dramatically as we head into the back half of the year.

Our next question is coming from Bill Katz with TD Cowen.

Appreciate all the color this morning. Maybe switching gears a little bit, for one for Jarrod perhaps. Sort of intrigued by your comment that you should be accelerating toward the upper end of your 0 to 150 basis points. year-on-year margin improvement into the back half of the year. I was wondering if you could unpack the drivers for that? Maybe which lines you sort of see the greatest opportunity. And I appreciate it's early days, but just given the step function of earnings power that seems to be building here based on your flows, deployment dynamics et cetera. How are you thinking about maybe the incremental margin opportunity into 2027?

Sure. Thanks, Bill. Great to hear from you. Margin is a number of different factors as you know. It's not just the amount of expenses, but the velocity at which we increase our revenue. And right now, as we look forward and we talked a little bit about it in the prepared remarks, we have a great line of sight on some new products like the data center business that will be coming online. Also with the acquisition of GCP, which we've talked about, we've moved past the TSA that we had with the left behind vehicle, and we've now really integrated them as part of the Ares. So when you're adding those new revenues, you're taking away some of those more fixed expenses. And this quarter, I talked about in the prepared remarks, the AGM that we had in the second quarter. Every 2 years, we do that for once in a year as opposed to spread out in a number of events. So you have one giant expense quarter related to those meetings as opposed to have spread out over 4 periods. So we have a little structural items like that, that give us a lot of confidence on margin in the back half of the year. At the same time, the normal pace of the business is still very much driven by deployment. So the more we're able to deploy, the more revenue we generate, which then provides that margin expansion. The one thing that I always caution though is our primary goal is growth. We want to hit 20% plus on RI. And to do that, we often need to invest in. And one of the ways that we do that, you'll see a really strong valuation between how much we spend on marketing expenses and dollars we raised at the same time we also see a healthy correlation between the number of front office professionals we have and our ability to originate. And our business origination is really the king across our credit business in sourcing high-quality assets, which are limited. So the ability to do that and to originate is very, very valuable for us to invest in. So even when we have margin expansion, we're constantly looking at the team. Are there areas where we can be investing to create more business. And once we have that margin expansion, that's a onetime expansion of FRE as sustainable as just the organic growth of creating more revenue. So we feel really, really good about the structure of the business in terms of how it will just provide that natural margin expansion, but we also love how that forward look at our business allows us to choose those areas to reinvest that margin so we can continue to hit our growth targets.

And we'll move next to Patrick Davitt with Autonomous Research.

My question is on the ABF pipeline that you mentioned. We've actually been seeing at least one of the large consumer lenders take more loans on balance sheet instead of pushing through the flow agreement channel. So in that vein, I'd be curious to get your thoughts on to what extent you're seeing issues with flows from the consumer ABF channel? Or do you think there's something else going on there?

Sure. So as I said, our ABF business continues to be a real bright spot, both on fundraising and deployment. It is a very large team that has been growing rapidly across all the different channels. One of the things that differentiates us is our lack of focus and exposure on the consumer part of the market, which I think a lot of our peers spend time because that is your point, a place where you can originate through agreements as opposed to kind of owned origination, which is the way that we think about it. So if you were to actually look at consumer exposure and our ABF portfolio, very low, less than 5%. If you look at subprime consumer, it's de minimis. It's less than 1%. And if you were to look at even auto as kind of an extension of consumer all of our exposure there is prime, and it's probably less than 1%. So I think the market is probably 30% plus exposed to consumer ABF. It's just not been a big area of focus for us. And so to the extent that the captive consumer finance companies are taking more on balance sheet as opposed to flow. I don't think that that's going to have any meaningful impact on our ability to deploy.

And we will move next to Ken Worthington with JPMorgan.

Returns in private equity secondaries was negative this quarter. You called out that APMF is performing particularly well, but some of the other funds are struggling. So maybe first, what's going on there? And then Mike, you mentioned in the prepared remarks that activity levels in secondary markets have been very strong. Can you talk about some of the industry dynamics around secondary returns?

Yes. So with regard to the secondary performance, APMF obviously continues to have strong performance. That performance though I'd highlight also is to be impacted on mix between LP portfolios and GP led. So to the extent that you are more aggressive in originating on the LP side, you tend to see for the NAV discount. And then as you transition to GP-led more consistency, but maybe less volatility. With regard to the secondary performance, Fund 17 is actually which is the first fund that we deployed under Ares. The performance there is pretty strong since inception, returns about 26% gross and net was about 17%. Fund 16 which was the last fund, which is a much older vintage, but a much larger fund can have an outside impact on the composite as we report, and that's basically what's happening there. The older vintage funds, just given its size move down. But if you look at all of the kind of active in the ground funds, Fund 17, APMF, we're actually continuing to see strong, strong returns. I think there was a question about private equity secondaries, I didn't quite understand what the second part of the question was, I apologize.