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Edited Transcript of ARES earnings conference call or presentation 31-Oct-19 4:00pm GMT

Q3 2019 Ares Management Corp Earnings Call

Los Angeles Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Ares Management Corp earnings conference call or presentation Thursday, October 31, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl G. Drake

Ares Management Corporation - Partner/Head of Public IR & Communications

* Michael J. Arougheti

Ares Management Corporation - Co-Founder, CEO, President & Director

* Michael Robert McFerran

Ares Management Corporation - Partner, Executive VP, CFO & COO

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Conference Call Participants

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* Alexander Blostein

Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Craig William Siegenthaler

Crédit Suisse AG, Research Division - MD

* Kenneth Brooks Worthington

JP Morgan Chase & Co, Research Division - MD

* Kenneth S. Lee

RBC Capital Markets, Research Division - VP of Equity Research

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Robert Andrew Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst

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Presentation

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Operator [1]

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Welcome to Ares Management Corporation's Third Quarter Ended September 30, 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded on Thursday, October 31, 2019.

I will now turn the call over to Carl Drake, Head of Public Company Investor Relations for Ares Management.

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Carl G. Drake, Ares Management Corporation - Partner/Head of Public IR & Communications [2]

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Thank you, Hailie. Good afternoon. Happy Halloween and thank you for joining us today for our third quarter 2019 conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Michael McFerran, our Chief Operating Officer and Chief Financial Officer. In addition, Bennett Rosenthal, co-head of our Private equity Group; Kipp deVeer, Head of our Credit Group, will be available for the question-and-answer session.

Before we begin, I want to remind you that comments made during the course of this conference call and webcast contain forward-looking statements and are subject to risks and uncertainties. Our actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. We assume no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Moreover, please note that performance of and investment in our funds discrete from performance of and investment in Ares Management Corporation.

During this conference call, we will refer to certain non-GAAP financial measures such as fee-related earnings and realized income. We use these as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with GAAP. These measures may not be comparable to like-titled measures used by other companies.

In addition, please note that our management fees include ARCC Part I fees. Please refer to our third quarter earnings presentation we filed this morning for definitions and reconciliations of the measures to the most directly comparable GAAP measures.

This presentation is also available under the Investor Resources section of our website at www.aresmgmt.com and can be used as a reference for today's call.

I'd like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any securities of Ares or any other person, including any interest in any fund.

This morning, we announced that we declared our fourth quarter common dividend of $0.32 per (sic) [share of] Class A common stock, a 14% year-over-year increase. Dividend will be paid on December 31 to holders of record on December 17. We also declared our quarterly preferred dividend of $0.4375 per Series A preferred share, which is payable on December 31, 2019, to effective holders of record on December 13.

Now I'll turn the call over to Michael Arougheti, who will start with some quarterly financial and business highlights.

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [3]

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Thanks, Carl. Good afternoon, everyone.

Our third quarter results marked our 10th consecutive quarter of sequential AUM, management fee and fee-related earnings growth. All of these metrics grew in the mid-teens or better on a year-over-year basis.

Our AUM and fee-paying AUM increased 15% and 18%, respectively. Our management fees increased 22% and our fee-related earnings increased 35% versus the prior year. We're also pleased to see our FRE margins meaningfully expand during Q3. Our FRE margin increased to 33% from just under 31% last quarter driven by a pickup in management fees across all 3 investment groups from a combination of deployment and strong fundraising activities.

Continued strength in our fund performance is highlighted by the 38% growth in our accrued net performance fees year-to-date.

During the third quarter, we added $3.5 billion in new gross capital commitments, which brings our year-to-date commitments to $17 billion and our last-12-month gross commitments to over $27 billion. We continue to expand our wallet share with our existing client base, and we've seen a strong influx of new investors to the platform. Of the capital raised directly from institutions in the third quarter, approximately 80% was from existing Ares fund investors and 20% from new investors. Clearly, the deepening of our valuable relationships with our clients continues to drive our growth as we perform and expand our solutions across the entire platform.

For the third quarter, we continued to raise capital across all 3 of our groups. In our credit group, we raised approximately $2.3 billion across various strategies, including U.S. and European direct lending, alternative credit and U.S. and European liquid credit. Within private equity, we also added about $300 million to our energy and special opportunity strategies. In real estate, we held the final close for our fifth European opportunistic fund, or EF V which was oversubscribed at its hard cap of EUR 1.8 billion or about $2 billion. This is the largest Ares real estate equity fund raise to date, and it meaningfully exceeded its target of EUR 1.25 billion. 1/3 of the investors in that fund were new to Ares and over half were new to our European real estate strategy. And of the existing investors that reupped, the average upsize of their commitment was over 30%, which reflected, in part, the strong performance of our predecessor fund.

During the third quarter, we also meaningfully expanded real estate debt commitments with an additional $450 million of capital raised as we near $5 billion in total AUM in that growing strategy.

Looking ahead over the next 12 to 24 months, our pipeline is strong as we begin fundraising for several large successor funds across all 3 investment groups. We recently launched our sixth corporate private equity fund with a target of $9.25 billion, and we continue to raise capital in our special opportunities, energy opportunities and climate infrastructure strategies.

In real estate, we're in the market with our third U.S. opportunistic real estate private equity fund, targeting $1.5 billion, and our third European value-add private equity fund, targeting EUR 1 billion. We also continue to actively raise funds in our real estate debt strategy and are seeing meaningful growth in our open-ended fund offerings.

Within credit, we recently launched our flagship alternative credit fund with a target of over $2 billion. In addition, based on the pace of current deployment, several large successor funds are likely to launch next year, including our second junior capital direct lending and our fifth European direct lending funds, with our second U.S. senior direct lending fund following shortly thereafter. We also continue to raise capital in global liquid credit and within all of our public vehicles.

As we've discussed on past calls, we're focused on expanding our fundraising capabilities geographically. To that end, we recently announced the formation of Ares Australia Management to coordinate marketing and investment management in Australia and New Zealand. Ares Australia Management is a strategic joint venture with Fidante, an investment management company that's part of Challenger Limited based in Sydney. The formation of this strategic partnership will better position us to address the increased demand for alternative yield products from that region's growing retirement community. We believe that this joint venture could scale nicely for us over time as we offer funds across all 3 of our groups in the region with a value-added strategic partner.

From an investment standpoint, the markets continue to be challenging, yet investable and constructive. We clearly benefit from our deep origination platform and increased scale, which differentiate us in the market and create moats around our business.

In the third quarter, we used our extensive self-origination capabilities and flexible capital to invest $7 billion in our drawdown funds across the platform. We were most active in U.S. and European direct lending, where we emphasized funding the growth needs of our existing borrowers. To put that in perspective, approximately 40% of our direct lending deal flow continues to come from existing borrowers, and approximately 95% of those loans were senior loans. These incumbent relationships enable us to make new commitments to fund the growth needs of our best borrowers in less competitive situations.

We also invested approximately $2.4 billion in private equity across our corporate infrastructure and power and special opportunity strategies. For example, during the third quarter, we completed the acquisition of a leading provider of safety, quality, patient experience and workforce engagement solutions for health care organizations. And with infrastructure and power, we made an investment to develop the largest single phase, single site wind project in the U.S. And in that deal, we've already signed 80% of its eventual renewable power capacity through long-term contracts with blue-chip corporate clients like Facebook.

Our investing activities continue to translate into steady, positive investment returns for our clients. Our reported quarterly credit, PE and real estate returns all range between 2% to 4% for the third quarter, with our corporate and real estate PE strategies at the high end of that range.

And with that, I'll now turn the call over to Mike McFerran, our CFO, who will walk through our third quarter results in more detail. Mike?

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [4]

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Thanks, Mike. I'll begin with a review of our third quarter results, and then we'll provide some commentary in our current positioning and forward outlook.

For the third quarter, we reported fee-related earnings of $86.7 million, which represents a 35% increase over prior year and a sequential 13% increase over the second quarter of this year. As Mike stated, this represents our 10th sequential quarter of FRE growth.

Our fee-related earnings were primarily driven by management fee growth of 22% over prior year through both incremental capital raised during the quarter and deployment of capital where we are paid on invested amounts. While management fees grew 22% over prior year, the growth in fee-related earnings of 35% over prior year reflects the fact that we are growing top line revenue faster than expenses and capturing exponential FRE growth as a result. This is demonstrated as well through our operating margin, which we refer to as our FRE margin.

Our FRE margin increased to 33% for the quarter from just under 31% in the second quarter and 30% for several quarters preceding that. On our last earnings call, I said we expect to achieve margins in the mid-30s within 18 to 24 months. As a considerable amount of our AUM pays us on amounts invested, our expense growth precedes revenue growth as we raise, deploy and manage new funds on our strategies that pay us on invested capital, most notably, Direct Lending. For context, we have grown our FRE margin to 33% from 24% in the first quarter of 2016, 26% in the first quarter of 2017 and 30% in the first quarter of this year. We believe we can continue to expand our margins in future periods into the mid-30s as we benefit from scale and execute on the significant growth opportunities we see.

Realized income for the third quarter was $98 million, an increase of 8% over the third quarter of 2018, and year-to-date realized income through the third quarter totaled $297 million, an increase of 10% year-over-year despite comparatively softer realization activity. While our realizations were lighter in the third quarter and were primarily driven by monetizations in our real estate business, we did recognize a sizable exit of one of our private equity portfolio companies on October 1, which we expect will add approximately $0.10 per share to after-tax realized income for the fourth quarter.

In addition, we do have visibility on another private equity realization that may close in the fourth quarter and enhance realized income further. As we have previously highlighted, we do believe that fee-related earnings is our most important and representative metric to measure our operating performance on a comparable basis, as it reflects our stable recurring earnings and is the most relevant metric in setting our dividend. As a reminder, we have pegged our dividend to our more stable after-tax fee-related earnings.

Since we have been a public company, our fee-related earnings have increased in the mid-double digits. On an annualized basis and for the third quarter, FRE represented 88% of realized income above our 10-quarter average of approximately 70%.

Realized income reflects fee-related earnings plus the realized components of net performance income and net investment income. Since the realized components are inherently lumpy, we view realized income as a metric best measured over longer-term periods rather than any quarter-over-quarter comparison. We believe the best indicators for the growth and future performance income is reflected in the changes in net accrued performance income and incentive-eligible and incentive-generating AUM.

With respect to these metrics, we ended the third quarter with record net accrued performance income of $344 million, which is an increase of 15% from the second quarter of this year and 38% since the beginning of the year.

Incentive eligible AUM ended the third quarter totaling $86.2 billion, an increase of 13% over prior year. Our incentive generating AUM of $38.7 billion increased 4% year-over-year and currently consists of 53% in credit strategies and 39% in private equity strategies, including ACOF V, which began to accrue performance income during the third quarter.

During the third quarter, our AUM reached approximately $144 billion, up over 15% year-over-year driven by capital raising in both new and existing strategies. Our 18% growth over the past year in fee-paying AUM, which reached over $93 billion, is largely driven by the deployment of our AUM previously not yet earning fees and, to a lesser extent, by new commitments added, which become fee-paying during the period.

Looking forward, we believe our AUM metrics provide significant visibility on our future growth potential. We ended the third quarter with available capital of $33.8 billion, down 2% from the prior year period as we have experienced a pickup in our deployment. Our AUM not yet earning fees, or shadow AUM, was $26.4 billion, up 2% from the prior year. Of the $26.4 billion of AUM not yet earning fees, approximately $24.2 billion is available for future deployment with corresponding potential annual management fees totaling $235.6 million.

It is also important to note that the $235.6 million in potential incremental management fees does not include any ARCC Part I fees. Note that the $10 million per quarter ARCC Part I fee waiver expired at the end of the third quarter. All else equal, Ares expects to earn an incremental $10 million in ARCC Part I fees in the fourth quarter at a 40% FRE margin.

And finally, we remain on track for Aspida Financial to close its acquisition of Pavonia Life Insurance Company of Michigan by early 2020, subject to regulatory approval and other closing conditions. As discussed on our last call, we plan to close the transaction using our own capital and then fund the growth for this business largely using outside capital.

Mike will now close with a few thoughts before we open up for Q&A.

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [5]

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Thanks, Mike. So in summary, we're executing well across all aspects of our business, strategic expansion, capital raising and investment performance, and we believe that we've laid a very strong foundation for future growth. We have great visibility into next year's fundraising pipeline, and we expect it to be a very strong year.

The secular growth trends supporting our franchise continue to accelerate, and we firmly believe that the best is yet to come for our business.

With that, operator, if you could please open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Carrier with Bank of America Merrill Lynch.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [2]

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Maybe first one, just on the FRE and the growth. Mike, I think you guys mentioned maybe a little bit, like, some catch-up fees in the quarter. Just maybe what drove that? And then, I guess, just with the outlook. It seems like from a fundraising standpoint, you've got a lot going on over the next 12-plus months. And so we can try to size that opportunity. But with the 33% margin, like mid-30s seems like you're kind of already there. So maybe just a little bit more context around like the opportunity as that fundraising cycle goes through.

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [3]

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Sure. Why don't we start with catch-up fees? Every quarter, we usually do have some catch-up fees. I think in this quarter, it was around $8 million related to closes of funds in our real estate business and in private equity. So really, where you have catch-up fees is when you have subsequent closes to a fund that pays you on committed capital, you receive an accelerated fee as if those investors had been in since day 1. So that's ordinary course for us.

On the margin opportunity of 30s, you're right. I don't know if 33% is mid-30s or 34%. I think in our view, we've continued to expand the margin, as we said. When we talked about the 18- to 24-month horizon we mentioned last quarter, it really was that 35% or better target. So I do think we're getting there quickly. Whether that's 2 quarters from now or 3 really depends on the timing of deployment and when new funds go online and start earning fees. But we have great conviction that we'll continue to show healthy sequential margin expansion in the quarters ahead.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [4]

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Okay. And then just -- go ahead.

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [5]

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I was going to say, as far as the FRE growth outside of the margin, I think we've repeatedly said, based on the capital we have to deploy, the fee waiver rolling off and the fundraising ahead of us, we maintain our conviction that we should be able to continue to grow at fee-related earnings at an annual rate of 15% or better.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [6]

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Okay. Yes, that's helpful. And then just on the credit side. So your performance was healthy, and it seems like you guys were active on the deployment side. It seems like there's some dislocation in the leveraged loan market. So just wanted to get your perspective if it's creating any opportunities or challenges in any parts of the credit business.

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [7]

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Sure. I think there has been a little bit of a dislocation in the leveraged loan market consistent with some of the themes that we've talked about in prior quarters, which is generally a dispersion in the market and probably more sensitivity around quality of underlying borrowers. So recently, we've effectively seen a selloff in weaker single B credit in favor of higher-rated BB credit. That's created some opportunities for us because with that volatility and our market position in the liquid markets, we think that we can capture excess return. And importantly, in our direct lending business, we now get to refer to a wider spread environment as we're pricing new loan transactions.

Also, typically, when we get into a market like the one we're in now where we see some price movement in the single B side of the market, the banks will tend to de-risk, and that creates an opportunity for the direct lending businesses at the upper end of our typical target range.

The downside is, obviously, there's some price action that finds its way through our CLO portfolio. So you'll notice in the quarter that we had some mark-to-market volatility within the pricing of our CLO book. That in and of itself doesn't bother us because those are bought and held and are still performing in line, if not better with our original expectation, but it will show up with some mark-to-market volatility in the CLO book.

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Operator [8]

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Our next question comes from Craig Siegenthaler with Crédit Suisse.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [9]

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I have a follow-up here on fundraising. So can you help us with the timing of the fundraising and the related management fee lift on the $9-ish billion for ACOF VI? And will there be a step down in fees related to ACOF V when the fees for VI turn on?

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [10]

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So the timing is we're in the market right now with ACOF VI. And if I was going to guess, I would assume we're going to start deploying that probably in no later than the beginning of the third quarter is when I would expect it to be turned on. And so we've -- I don't know if that answers your question. There is a step down in the fee.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [11]

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Yes. And I'm sorry, is there a step down in ACOF V?

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [12]

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There is a step down, yes.

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [13]

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And Craig, maybe stating the obvious is...

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [14]

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And it's like half the management fee, or...

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [15]

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Around that, yes. [Taken] off of deployed, not off of committed.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [16]

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Deployed, not committed. Okay. And then just my last one here, and it's sort of related. But I mentioned -- I heard you mention that you're going to be raising for ACOF VI here in the fourth quarter. Is it way too early to expect a -- like a first close in the fourth quarter here? Or is this something we should think about more reasonably in the first half of 2020?

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [17]

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Yes. Yes, that would be correct.

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Operator [18]

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Our next question comes from Ken Worthington with JPMorgan.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [19]

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With regard to fundraising, you highlighted new investors and the various products that are in the market today. Can you tell us how the geographic mix of these new customers is evolving? With the rate environment sort of more negative in Europe and still negative in Japan, are you increasingly seeing investors from those regions making up a bigger part of your investor base?

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [20]

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Yes, is the simple answer. Maybe to drill down on it, and we've talked about this before. Given the interest rate environment, we're seeing just secular demand trends in every class of investor, institutional and retail and from every part of the globe. We have seen an uptick, as you would expect, in appetite, particularly for alternative fixed income product from the insurance community, which we've talked about on prior calls, and obviously, is a fundamental underpinning for our growing Aspida strategy. And then there are new geographies that are coming online, Japan being one of them. The offset to that, maybe stating the obvious, is currency translation. And so as we're thinking about structuring new product to meet that global demand, you have to look at the return net of the currency adjust. I think one of the benefits that we have, given the global footprint, is we're actually raising local currency funds, in some cases, for local currency investors.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [21]

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Okay. Great. And besides the maybe obvious impact of larger fund sizes as a result of a broadened investor base, anything that you're seeing on the fee side? Any -- even if it's not necessarily fees, maybe concessions or terms that are maybe favoring you versus favoring investors were demand to not be as broad based?

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [22]

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No. I think the fee profile across everything we do has been very stable. And as we've said before, the benefit of being a scale provider in self-originated illiquid markets is you just don't see the same type of fee pressure and fee compression that you see in the traditional liquid markets. You don't see the pressure from passive investing, et cetera, et cetera. So the fee rates have been stable.

And when you look at the mix, and it's working its way through the P&L, our average fee rate is actually going up, which is a pretty interesting trend.

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Operator [23]

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Our next question comes from Chris Harris with Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [24]

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Mike, you mentioned another possible private equity exit that may hit in the fourth quarter. Is it possible to size that potential for us?

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [25]

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We highlighted it as -- we talked about the one that's happened, which I gave the number of $0.10 after-tax RI. This one, because -- I'm actually hesitant to do so really because of the timing of it, we're uncertain, and there could be other transactions that come up. As you can imagine, at any given point, some things move faster and some things move slower. But it's -- again, it would be additive to RI.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [26]

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Okay. Just the other thing was interesting about this quarter's results is it looks like the performance fee compensation ratio dipped down quite a lot. What happened there? And what is the outlook, would you say, going forward for that number?

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [27]

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You know, I think historically, it runs in the low 70s. I think it -- I would think that will be fairly consistent going forward. In any given quarter, it's a bit of the mix of strategies and what we comp for different fund families, but I think kind of that historical 72% is the right way to continue to forecast it.

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [28]

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Yes. And in this quarter particularly, we have one legacy set of investment vehicles that came over in the acquisition of AREA where we have a different and more favorable split that affected the numbers this quarter.

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Operator [29]

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Our next question comes from Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst [30]

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Maybe just following up to some questions about scale. So as you think of direct lending, clearly, you have your broad-based [donation] platform. You've been investing in it, but it does feel like you clearly have a lot of other people trying to -- whether it's rush into the market or expand into the market. And how is that kind of -- and given your own growing size in the competitive environment, how are you kind of adjusting to that when you -- as you make -- as you deploy capital, is it forcing you or causing you to look at larger -- somewhat larger transactions? How are you adopting (sic) [adapting] to kind of that increased competition and all the capital coming in?

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [31]

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So it's a couple of things. One, I would just highlight, there's a lot of conversation about the growth in the private credit markets and the direct lending market specifically. But when you actually look at the growth in that market relative to the growth of the high-yield bond market, the leveraged loan market, the high-grade fixed income market, the private equity market and the public equity markets, it's actually pacing almost right on top of those. And so the growth of that market in and of itself doesn't cause us great concern. It's obviously growing in line with the other capital formation we're seeing in the public and private markets.

If you look at a lot of the capital formation in private credit and in direct lending, specifically, it's in sub-$500 million funds, and there are actually very few managers within those strategies, we being one of the largest, that have been able to raise multibillion-dollar funds off of pre-financial crisis track records.

And so while we're seeing increased competition, we think the competitive advantages that we've created in origination, i.e., the number of people and the number of offices we have in the U.S. and Europe, is a big differentiator.

As I mentioned in the prepared remarks, the biggest way to defend is continue to invest in the existing book. And we talk a lot about that with regard to the ARCC performance, both in terms of deployment and credit, 40% to 60%, depending on the quarter, of the dollars that we're deploying are into existing borrower relationships with companies that have been in the portfolio and well underwritten for a very long time. Those come -- tend to come with less economic pressure on terms and less competition, and that's been a big benefit. So just the embedded relationship network that we have is a big way to defend.

The other thing that we do is we keep looking to invest in new markets, leveraging the same playbook that we've used in direct lending such as alternative credit, places like special opportunities where we're able to put considerable people and considerable scale and flexible capital against a market opportunity in ways that other people can. And so we're constantly building out new opportunities to generate excess return for our investors as the direct lending market continues to mature.

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Operator [32]

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Our next question comes from Alex Blostein with Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [33]

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Two questions. I guess first, on deployment. I think $8 billion maybe was a record or near record. And I know, Mike, you gave some general comments around kind of where you guys saw opportunities in the quarter, but maybe give a little bit more specificity in terms of how concentrated deployment was or fairly broad-based. Any sectors in particular that you guys found, I guess, incremental value? And going forward, if we'll continue to see a similar backdrop in the loan markets, is it reasonable to expect a more elevated pace of deployment into Q4 and into 2020?

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [34]

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Sure. So the good news about the deployment, it was $8.2 billion total, $7 billion in our drawdown funds. And if you look at the biggest contributors, corporate private equity was about $1.9 billion. We did 2 very attractive transactions there that drove the bulk of that deployment, one of them I referenced in our prepared remarks. Our European direct lending business deployed about $1.8 billion, so similar size. And U.S. direct lending was about $1.7 billion. So that was the bulk of the contribution. But we were busy across the platform, real estate equity, real estate debt, special ops, alt credit. But the 3 big contributors were corporate PE and EU and U.S. direct lending.

It's still a little too early to tell, but I would expect -- and we saw this, remember, last December as well. As we head into the end of the year, if there's continued volatility in the loan market, and we start to get into a similar situation where we're seeing year-end tax selling and risk positioning within the banks, it could meaningfully impact deployment to the upside towards the end of the year, but we're not quite at a place where we can say that, that's happening yet.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [35]

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Got it. Fair enough. And then my second question just around fee-related expenses. I guess when you look back over the last 3 years, I think expenses grew around 12-ish percent rate sort of per year on average, and I know there might be some kind of volatility quarter-to-quarter. But on average, that seems like that's been the rate. A lot of it is coming on the G&As and non-comp side of things. And again, given the buildout of the platform, that makes a lot of sense.

So as you guys look out, is there any reason why expense growth should accelerate off of that 12% run rate? So thinking over the next kind of 2 to 3 years. If so, in what areas? Or should we be thinking about that growth rate moderating?

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Michael Robert McFerran, Ares Management Corporation - Partner, Executive VP, CFO & COO [36]

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I actually would expect -- I don't expect it to accelerate. And actually, I think as we continue to capture the benefits of scale, I would expect to see that moderate to some extent over the next few years.

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Operator [37]

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Our next question comes from Michael Cyprys with Morgan Stanley.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [38]

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Just wanted to circle back on the private credit business. I understand most of it is sponsor-related business today. But I was just hoping you could talk to the non-sponsor portion of the private credit business. Just if you could size it up, how large is that today versus, say, a year ago? And what steps are you taking to build out the nonsponsor part of the business? And broadly, how are you seeing the opportunity set there?

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [39]

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Sure. So I think it's important when we talk about private credit that folks understand that when we talk about private credit at Ares, we're not just talking about corporate cash flow middle-market lending. That is a big part of our franchise, but not the only part of our franchise. And I think that it undersizes the global opportunity in private credit generally. So when we talk about private credit, we talk about middle-market cash flow lending. We talk about self-originated asset-backed and asset oriented lending, which is alternative credit. We talk about real estate lending. And then we talk about all of our opportunistic credit businesses. So when you look at the $106 billion of credit and you add real estate to it, it's about $111 billion. $70 billion of it is direct lending, about $10 billion is alternative credit. And as I mentioned in the prepared remarks, $5 billion in real estate.

So the first -- the reason for all of that detail is when you really think about the franchise, you have to look at the commercial real estate credit opportunity and the alternative credit opportunity as largely a non-sponsored business, even though we may be financing institutionally owned assets and properties, think of that as non-sponsored. And then within the cash flow lending business, on a book of that magnitude, our sponsor -- our non-sponsored business is actually quite sizable, typically has run historically somewhere between 10% and 20%, depending on where we are in the cycle. Right now, it's probably on the lower end of that range. The way that we attack that as the franchise builds is 2 ways. One, we have a group of folks that all they do is call directly on companies and intermediaries as a solution provider, direct to corporate. And I think as you've heard us talk about, particularly with regard to the growth in ARCC, we also have organized ourselves around core industry capabilities, and we're building relationships that are specific to the non-sponsor community in places like health care and life sciences, software, oil and gas infrastructure, et cetera, et cetera. It's a longer sales cycle. It is a harder effort in terms of origination. It tends to come with more portfolio management effort, but commensurate with that comes higher return. So we continue to be very focused on it. I think you'll continue to see that part of the business build as our footprint continues to grow. And obviously, given the platform, the private equity positioning that we have and the real estate equity positioning, we do see a number of companies find their way into the private credit book that are getting sourced from relationships that exist elsewhere in the franchise.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [40]

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Great. And just maybe a follow-up question on the strategic joint venture in Australia. Can you just talk about how the structure is going to work? What parts of your business are you putting into this? And how we should see this impacting the P&L? And maybe just more strategically, what drove you to pursue this sort of partners infrastructure versus kind of going it alone? And where else could it make sense for Ares to take a similar sort of JV approach?

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [41]

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Yes. We've -- the way I think about it is we will typically think about a buy versus build around various distribution channels or geographies and we'll lean more towards these JV type of structures if we feel that we can drive more efficient growth through a partnership than building the infrastructure directly.

To put that in perspective, Fidante has about $40 billion in AUM and 180 employees. They have a presence in that market that would be very difficult for us to replicate. Over time, in theory, we could, but we do have a fair amount of conviction and sense of urgency around the opportunity there, particularly for alternative fixed income. And at a high level so that people appreciate it, if you look at the superannuation system in Australia, today, it's about $2.6 trillion. Given the demographics of that country and the way that, that system is set up, that should accelerate to over $7 trillion in the next 15 years. But when you look at how those dollars are getting invested relative to other parts of the world, only about 10% of the retirement dollars in the Australian market are currently geared towards fixed income investment, and that's versus about 40% when you look at the rest of the developed countries globally. So it's very interesting from an end market perspective, particularly given what we're capable of in and around sub-investment grade and high-grade fixed income alternatives. You have a growing market that's underpenetrated vis-à-vis fixed income. And so we couldn't be more excited about the partnership. They've got a wonderful track record in the region. And we think that through the JV structure, we can just be in the market quicker and be in the market with a much broader set of our products.

I think initially, you should expect that it will be largely coming out of our credit business. But given the breadth of relationship there, obviously, we'll get to leverage the infrastructure to distribute all of our products deeper into the region.

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Operator [42]

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Our final question comes from Kenneth Lee with RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, Research Division - VP of Equity Research [43]

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And this is just briefly related to the previous one about the Australia partnership. In the past, you've talked about the desire to expand non-U. S. distribution. Just wondering, just curious, what other geographies could potentially be good fits over the near term as you think about further expanding distribution?

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [44]

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Yes. I think for now that we're -- it's interesting. You can see it coming through in the fundraising numbers, we've been heavily investing in our own distribution that's predominantly institutional. And we have most of the world very well covered with our own relationship managers and sales folks, say, for parts of the Latin American region where we've used some third parties before. So if I had to pick one, it would probably be in Latin America, but that market is still developing, and it's too early to tell exactly how we'll attack it long term. But I think with this joint venture and the investments that we've made in our own distribution, we're pretty well covered to meet our fundraising objectives for the foreseeable future.

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Kenneth S. Lee, RBC Capital Markets, Research Division - VP of Equity Research [45]

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Great. And just one follow-up, if I may. You talked about recently raising funds for a European real estate fund. But just broadly speaking, in terms of the real estate side of the business, just want to get your latest thoughts about what you see as being the key growth opportunities there over the next few years.

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [46]

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Yes. Look, our real estate -- it's funny, our real estate business is probably one of our fastest growing businesses. Track record of performance there, which you all can see publicly, has really been best-in-class, and that's showing up in the sequential increases in fund size every time we bring a product to market. We talked about the success we just had getting to the hard cap pretty quickly on our fifth fund, but we're experiencing similar momentum in our 2 current funds that are in the market. So I think you'll continue to see steady-state growth opportunity in those core real estate fund families.

We are seeing accelerated growth in our real estate credit business, both in our traditional value-add lending franchise within our mortgage REIT and our SMAs. But the biggest bright spot there has been, as I mentioned in our prepared remarks, the growth in our open-ended fund families as we're probably moving a little bit higher up the capital stack, taking a little bit less risk but going after some of that demand from insurance companies, others -- and others for high-grade fixed income alternatives.

In terms of growth opportunities, what I like about the real estate opportunity for us, it's our single largest addressable global market. It is still very fragmented from a competitive standpoint. It is institutionalizing, both in terms of the borrower and operator community. And at our current size, we are still a top 10 or top 15 institutional real estate manager, but I think that there's a lot of white space to grow in existing businesses, in existing geographies, but also getting into new geographies and different parts of the capital structure.

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Operator [47]

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As we have no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Mike Arougheti for any closing remarks.

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Michael J. Arougheti, Ares Management Corporation - Co-Founder, CEO, President & Director [48]

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Don't have any. I just want to wish everybody a happy Hallowe'en. And for all of our colleagues in California who are dealing with the fires, we hope everybody stays safe and just putting out our best wishes for you and your families. And we will talk to everybody next quarter. Thank you.

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Operator [49]

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Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through December 1, 2019, by dialing (877) 344-7529, and to international callers by dialing 1 (412) 317-0088. For all replays, please reference conference number 10134440. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.