Q3 2023 Ares Management Corp Earnings Call

Participants

Carl G. Drake; Partner, Head of Public Markets IR & Corporate Communications; Ares Management Corporation

Jarrod Morgan Phillips; Partner & CFO; Ares Management Corporation

Michael J. Arougheti; Co-Founder, CEO, President & Director; Ares Management Corporation

Alexander Blostein; Lead Capital Markets Analyst; Goldman Sachs Group, Inc., Research Division

Benjamin Elliot Budish; Research Analyst; Barclays Bank PLC, Research Division

Brennan Hawken; Executive Director and Equity Research Analyst of Financials; UBS Investment Bank, Research Division

Craig William Siegenthaler; MD & Head of the North American Asset Managers, Brokers & Exchanges Team; BofA Securities, Research Division

Kenneth Brooks Worthington; MD; JPMorgan Chase & Co, Research Division

Michael C. Brown; MD; Keefe, Bruyette, & Woods, Inc., Research Division

Michael J. Cyprys; Executive Director and Senior Research Analyst; Morgan Stanley, Research Division

Michael Patrick Davitt; Senior Analyst of US Asset Managers; Autonomous Research US LP

Presentation

Operator

Welcome to Ares Management Corporation's Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded on Tuesday, October 31, 2023.
I will now turn the call over to Carl Drake, Head of Public Market Investor Relations for Ares Management.

Carl G. Drake

Good morning, and thank you for joining us today for our third quarter 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 senior professionals with us today who will be available during the Q&A session.
Before we begin, I want to remind you that comments made during this call contain 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 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 third quarter earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures.
Note that we plan to file our Form 10-Q in the first week of November. This morning, we announced that we declared our fourth quarter common dividend of $0.77 per share in the company's Class A and nonvoting common stock, representing an increase of 26% over our dividend for the same quarter a year ago. The dividend will be paid on December 29, 2023, to holders of record on December 15. Of note, we plan to update investors about our new quarterly dividends for 2024 during our fourth quarter earnings call early next year.
Now I will turn the call over to Michael Arougheti.

Michael J. Arougheti

Thank you, Carl, and good morning.
Before we begin, I wanted to take a moment to acknowledge the horrific terrorist attacks that occurred in Israel and the subsequent loss of lives. Our hearts go out to all the innocent people and for the pain and suffering on both sides throughout the region. We are all holding on to hope for a peaceful resolution.
Now I'd like to begin with some market commentary and quarterly business and strategic highlights. During the third quarter, the markets adjusted to the expectation for rates to stay higher for longer while the underlying economy remained resilient with robust GDP, a strong labor market and continued modest growth in corporate profits. We're seeing the lag effects from higher rates and the slow and uneven economic growth play out across the global markets that we invest in.
Transaction activity remains slower than usual due to the higher cost of capital and valuation disparities among buyers and sellers yet there's significant pent-up demand and a large amount of aging private equity dry powder available to be invested.
We're seeing our private pipeline build generally with higher quality assets and strong growth characteristics coming to market. We're also seeing a growing need for creative liquidity solutions, recapitalizations and rescue financings and more interest in secondaries.
With this economic backdrop, it remains a compelling time to invest across private market assets with defensive characteristics, particularly within private credit, as we see risk-reward characteristics that are as favorable as we've seen in many years.
Our quarterly results continue to demonstrate our strong growth and resiliency in these slower and more challenging market environments. We raised $21.9 billion in new commitments in the quarter, our second highest fundraising quarter in the history of our firm, and we've now raised $53.4 billion through the end of the third quarter.
We continue to benefit from our existing institutional investors who re-up or cross over into new Ares fund products, along with new investors who recognize our consistent fund performance and leadership in managing private assets. We also saw an increase in flows from our wealth management channel, supported by our newly launched non-traded BDC.
Fund performance across our primary investment strategies also continues to be a highlight as approximately 3/4 of those strategies performed well compared to their respective relative public indices or exceeded their annualized target returns in the third quarter. We also incrementally increased our third quarter deployment, which supported growth in our management fees and fee-related earnings. For the first 9 months, our management fees and fee-related earnings each grew by 20% or better compared to the same period last year.
Now let me provide an update on our 3 private credit funds, which are all on track or have already closed at levels in excess of prior vintages. In the third quarter, we held the first close for our third U.S. senior direct lending fund of nearly $6.5 billion in equity commitments plus nearly $2 billion in committed fund leverage. The first closing of LP commitments for this fund exceeded 80% of the total equity commitments for the predecessor fund. With additional closes expected into the first half of next year, we expect to meaningfully exceed the prior fund size of $8 billion in equity commitments and $15 billion in total investable capital.
Overall, our U.S. direct lending business raised $11.6 billion in the third quarter which brought our total AUM in this strategy to nearly $118 billion.
As a market leader, we believe that our global direct lending business continues to have significant white space as the private credit markets are meaningfully undersized compared to the $5 trillion of private equity AUM. We also raised an additional EUR 750 million for our sixth European direct lending fund in the third quarter and almost EUR 800 million more in October, bringing total commitments to EUR 9.9 billion to date. We have line of sight to over EUR 11 billion of equity commitments by year-end which would equal or exceed our prior fund vintage. We expect to surpass our prior vintage with additional closings from investors in our pipeline by early in the second quarter of 2024. With over 85 investment professionals located in 6 offices across Europe, we believe that we have the largest and most tenured direct lending franchise on the continent, managing over $60 billion of AUM.
With our leading Alternative Credit strategy, Pathfinder II closed approximately $2.2 billion in the third quarter, bringing total commitments to $5.8 billion at quarter end. And as we publicly announced yesterday, Pathfinder II held its final close at its hard cap of $6.6 billion, nearly double the size of the predecessor fund. We experienced significant investor demand hitting our hard cap in only 7 months since the first closing.
In addition to Pathfinder II, our open-end core Alternative Credit fund raised $750 million in the quarter, bringing total commitments to over $4.2 billion. The strong investor demand for Alternative Credit strategies is driven in part by filling the gaps created by a pullback from traditional providers, along with the structural changes that we're witnessing in the banking industry. With more than $32 billion in AUM, our Alternative Credit business is a leader in the private, nonrated and illiquid segment of the asset-backed market and is poised for growth in what we believe is at least a $4 trillion global addressable market.
In Asia credit, we raised nearly $400 million in the quarter, including an approximate $200 million final close in Ares SSG Capital Partners VI, bringing final commitments to $2.4 billion, including a sidecar fund. We're seeing strong economic trends and robust corporate earnings growth in India and Australia which account for 60% of our investments across the region, and we're seeing a growing opportunity set for financing solutions for sponsor-led acquisitions in these markets.
Within Real Assets, we raised more than $500 million in a European real estate debt mandate, which now totals over $1 billion, and we anticipate that this strategy will continue to grow. Our real estate debt business now exceeds $11 billion, and we believe the team is well positioned for further growth due to investor demand and the current acute need for capital in the industry.
Our second climate infrastructure fund raised another $200 million in the quarter, plus an additional $300 million in October, and this completed the funds first closed with total equity commitments of nearly $1.1 billion or approximately 80% of the total equity commitments in the prior fund vintage.
We currently have over 30 funds in the market, and by year-end, we expect to have first closes in our seventh corporate private equity fund, our inaugural credit secondaries fund and our third infrastructure secondaries fund as well as additional closings in our larger funds, such as our fourth U.S. opportunistic real estate equity fund, our second climate infrastructure fund and our sixth European Direct Lending fund, as just discussed.
Through the end of October, we have now raised nearly $58 billion, and we expect total fundraising for the year to exceed $65 billion, well ahead of the $57 billion we raised last year. Throughout next year, we have several of our largest fund series expected to hold first closings for successor funds, including our 6 infrastructure debt fund, our third special opportunities fund and our third U.S. junior direct lending fund.
While our core fundraising continues to be supported by expanding within the global institutional market, our strategically important insurance and wealth management channels are also poised for growth. Our affiliated insurance business, Aspida, continued its organic growth with new assets of more than $1 billion, bringing total AUM to $10.6 billion by quarter end. We believe investors are attracted not only to Ares' credit investing expertise, but also the technological advantages that Aspida is bringing to the annuity market.
Our growth outlook is promising as we're seeing demand for new annuities, reinsurance flow and opportunities for block trades, which we would expect to fund largely with third-party capital. We believe that we are on track to meet or exceed our goal of reaching $25 billion or more in Aspida AUM by the end of 2025.
Within Wealth Management, our ongoing objective is to market a limited number of core semiliquid institutional quality products through our global wealth management channel. We're well on our way to accomplishing this over the next several years and today, we're one of the largest alternative managers in the wealth industry with over 120 professionals, a footprint across North America, Europe and Asia, 6 products and relationships with nearly every major wirehouse and private bank. We expect to continue adding strategic partnerships and gain market share as we scale each one of these products.
After launching our non-traded BDC, ASIF, primarily on one wirehouse in June that has seen steady momentum with approximately $550 million raised in the first 3 months, including the September flows, which closed on October 1, bringing total AUM to over $2.7 billion. There are 4 additional global platforms that we expect will add ASIF in the first half of 2024. And despite a tough market for real estate fundraising, we continue to see net aggregate flows collectively across our 2 non-traded REITs, including the 1031 Exchange programs.
Turning to deployment. We invested $16.7 billion in the third quarter, which was up from the $15.2 billion in the second quarter, but down from $18.3 billion in the third quarter of 2022. We're beginning to see signs of large deal activity returning as Q3 was the third highest quarter for $1 billion plus unit tranche deals financed by the private credit markets. While still early and markets remain slower than we'd like, we're encouraged by our fourth quarter-to-date investment activity and our pipeline.
For 2024, we currently expect market activity to improve due to the aging private equity dry powder that is approaching the end of its investment period, growing pressure from LPs to return capital, stronger sentiment among middle market companies and further pressure on balance sheets and capital structures as rates stay higher for longer.
We're also seeing a growing opportunity to partner with the banking sector through our Alternative Credit business. The bank market continues to be impacted by regulatory changes, asset-liability mismatches and an inverted yield curve, all of which changed the way banks participate in certain segments of the market.
Over the years, we've developed extensive bank partnerships where we have the opportunity to provide solutions to augment their existing businesses to improve risk weightings and reduce capital charges, while at the same time generate attractive returns for our investors. Our Alternative Credit team believes that we're in the early innings of these types of transactions and we're seeing an increase in our collaboration with our banking partners.
Finally, we continue to explore inorganic growth opportunities to expand our business through both product and geographic expansion. In October, we closed on the acquisition of Crescent Point, a leading Asia-focused private equity firm with $3.7 billion in assets under management. The Asia Pacific region is a key geographic target for us and we continue to look at various ways to expand each of our business lines into that region, either through organic team builds or strategic acquisitions. And as you may have seen, we also recently closed a strategic partnership and investment in Vinci Partners, a leading alternative asset manager in Latin America.
We've known the Vinci team for over a decade and are excited to collaborate on distribution, product development and other business opportunities in Brazil and across Latin America. We believe that the Latin American markets are in the very early stages of shifting capital into the private markets, particularly within private credit. This is similar to the trends that we saw in the early 2000s in Europe, and what we're seeing now beginning to play out in the APAC region. We'll continue to look for unique and attractive global growth opportunities for our business.
And now I'd like to turn the call over to Jarrod for comments on our financial results. Jarrod?

Jarrod Morgan Phillips

Thanks, Mike. Hello, everyone. Thanks for joining us today.
In the third quarter, we continued to see strong growth in our management fees, fee-related earnings, AUM and fee paying AUM compared to the third quarter of 2022. While realizations were light in the third quarter as we expected, we have a clear line of sight on stronger fourth quarter realizations due to our European-style waterfall funds. We're also on track to recognize a meaningful year-over-year increase in FRPR from our credit funds, as I will discuss.
Starting with AUM. We ended the third quarter with $395 billion of AUM and we're tracking well to meet or exceed our target of $500 billion or more by the end of 2025. Our FP AUM grew to over $247 billion, up from over $218 billion this time last year, driven by deployment across our credit and special opportunities funds and new commitments to funds in our Real Assets Group.
For the first time in our firm's history, we have over $100 billion in dry powder of which over $65 billion is AUM not yet paying fees and available for future deployment. Upon deployment, this would generate nearly $650 million in incremental management fees and position us for continued FRE growth and margin efficiencies.
From a revenue perspective, our management fees totaled over $643 million in the quarter, an increase of 17% compared to the same period last year, primarily driven by deployment of our available capital in our credit group. Other fee income of approximately $20 million was down from the prior period as there were certain episodic transaction fees that contributed to our second quarter's results.
As it relates to FRPR in 2023, we continue to expect approximately 95% of our FRPR to be realized in the fourth quarter. Currently, the potential FRPR from our credit funds is tracking well ahead of last year as we're experiencing the benefits of a higher for longer interest rate environment, along with a modestly positive impact on loan pricing from tighter credit spreads. We are currently estimating FRPR from our credit funds of approximately $110 million to $120 million for the fourth quarter or $40 million to $44 million of FRE after compensation expense.
I will caveat that this is still subject to the total return performance of these credit strategies for the full year, including changes in market values in the fourth quarter.
Regarding FRPR from our real estate group as of September 30, the 2 non-traded REITs had not accrued any incentive fees on their balance sheets. Given the upward pressure on cap rates, we do not expect to recognize FRPR from these non-traded REITs in 2023 and earning FRPR in 2024 from these REITs may require an improvement in the current valuation environment.
Fee-related earnings totaled $274 million, an increase of 18% from the third quarter of 2022, driven by higher management fees from deployment. For the year-to-date period, we're tracking at over 20% growth in FRE. We remain confident in our ability to generate 20% or better FRE growth annually through 2025 excluding any FRPR from our non-traded REITs as we discussed on our call in February.
Our FRE margin in the third quarter was 41.2%, a roughly 40 basis point improvement from the second quarter of 2023, and a 100 basis point improvement from the year ago period. As we have said in the past, we expect to see a gradual expansion in margins that could accelerate in periods of higher deployment and corresponding growth in FDAUM.
As a reminder, in the fourth quarter, we typically see a drag on our FRE margins related to FRPR, which are typically in the mid-30% range. Excluding this FRPR impact, we do expect continued modest FRE margin expansion in Q4, and we remain confident in our ability to reach a 45% run rate FRE margin by the end of 2025.
Our realization activity was slower in the third quarter due to limited American style realizations in several of our equity strategies, coupled with the typically slow third quarter for European-style waterfall realizations as discussed on our last call. Given the early ages of many of our European waterfall style funds, we typically see tax-related distributions in the fourth quarter with a cleanup amount in the second quarter related to tax filing. However, as our 2017 and 2018 vintage European waterfall style funds continue to season, we expect to see larger and more consistent European waterfall realizations likely beginning in 2025 and thereafter. For the fourth quarter, we currently expect approximately $45 million in European waterfall style net realized performance income.
Looking forward, our potential net performance fee income from European style funds has increased from $2.5 billion earlier in the year to $3.5 billion. This potential amount has continued to grow as we raise additional European style funds, along with the compounding effect of higher interest rates in our credit like funds. At the same time, we're seeing the duration of these expected cash flows extend out as there are fewer repayments and less overall transaction activity. The extended fund duration has a positive compounding effect on the total realization value as the investments remain in our portfolio longer, but it impacts the timing of these realizations.
Based on our updated estimates and including the fourth quarter guidance I provided, we currently expect approximately $80 million of net realized performance income in 2023 from our EU waterfall funds and about $160 million in 2024. Our initial view is that there's more than $250 million in 2025.
Our net accrued performance receivables stood at $969 million, up 9% from the year ago period despite nearly $150 million in distributed net realized performance income over the last 12 months. Notably, approximately $94 million of this increase comes from our credit funds where we're seeing the benefits of higher interest rates above our fixed hurdle rates. Unlike equity style funds, where increases in performance fees are based on capital appreciation driven by market multiples and EBITDA growth, our eligible credit funds can generate more predictable income from net returns after any credit losses above fixed hurdle rates with limited mark-to-market risk.
For example, of the $969 million of net accrued performance receivables, $694 million or over 70% were in European style waterfall funds with over $500 million in private credit like funds. We now have nearly $125 billion or over 50% of our incentive eligible AUM in European-style waterfall funds, and we expect this balance will continue to grow.
Realized income in the third quarter totaled $264 million and after-tax realized income per share of Class A common stock was $0.83, up 11% compared to the third quarter of 2022. As Mike mentioned earlier, approximately 3/4 of our primary investment strategies performed well compared to their respective relative public indices or exceeded their annualized target returns for the third quarter, with particular strength across U.S. direct lending, Alternative Credit, Asia credit, infrastructure debt and special opportunities.
In credit, all of our primary investment strategies have generated double-digit gross returns in the last 12 months as we continue to benefit from higher base rates, attractive spreads, low defaults and strong fundamental performance.
Our credit metrics remain strong across our portfolios. As an example, in U.S. direct lending, Ares Capital Corp's nonaccruals at cost declined to 1.2%, which remains well below our historical average and the industry averages. And portfolio company EBITDA growth remains in the healthy mid- to high single digits for our U.S. and European direct lending portfolios. Loan-to-value ratios also remain attractive in the low 40% range in the U.S. and mid-40% for our European portfolios.
In private equity, both of our investment strategies performed well compared to the public equity markets in the third quarter. We continue to see double-digit EBITDA growth across our ACOF portfolios.
Within real estate, higher cap rates are offsetting the relatively strong rent growth that we're seeing in our portfolios, which are heavily weighted towards a more resilient industrial and multifamily sectors. This is leading to muted returns for the third quarter, yet due to our significant overweighting in these strongest performing sectors of industrial and multifamily, which account for more than 75% of our real estate gross value, our U.S. and European real estate strategies have performed well relative to the respective public real estate markets over the past 2 years.
With that, I'll turn the call back to Mike for closing remarks.

Michael J. Arougheti

Great. Thanks, Jarrod.
In our view, the long-term secular drivers for our business remain very much intact. Both institutional and retail investors continue to seek out higher risk adjusted returns in less volatile and uncorrelated alternative assets. At the same time, we're seeing traditional capital providers and banks continue to retrench for a whole host of reasons, and Ares continues to play a key role in filling the gaps and providing solutions into these markets.
As you saw with our performance to date as well as past market cycles, we can generate strong growth even in tougher market environments. We continue to make investments for future growth by enhancing our product capabilities in adjacent areas, expanding into new geographies and deepening our distribution channels. With a record amount of dry powder, we're well positioned to invest our capital opportunistically in highly attractive sectors.
And because of the scaling of our private credit business over the past 6 years, we're in a great position to realize a growing amount of performance income in the coming years from our European-style waterfall funds. All of this is to say that we have strong visibility on continued earnings growth, dividend growth and margin expansion.
As always, I'm grateful for the hard work and dedication of our team around the globe and I'm appreciative of our investors' continuing support for our company.
And, operator, I think we can now open up the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
Our first question comes from the line of Craig Siegenthaler with Bank of America.

Craig William Siegenthaler

Mike, Jarrod, I hope everyone is doing well. My first question is an update on the formation of bank partnership and how Ares is working much closer with banks now on asset acquisitions, especially in the ABF market. I think PacWest, that purchase in June might have been the last big announcement. So since then, have you been forming new partnerships? Are you seeing the flow of assets pick up from banks, and what are your expectations for the future with your bank partners?

Michael J. Arougheti

Craig, thanks for the question. PacWest, yes, was the largest transaction that we announced, but I think the press picked up some recent activity too where we did a very significant strategic risk transfer a couple of weeks back with a regional bank. There's about $2 trillion of consumer loan assets sitting on bank balance sheets that are going to need to get addressed in some form or fashion, not to mention some of the challenges that we expect we'll continue to see in the real estate books. So given that we just had our final close on the Pathfinder, funded $6.6 billion, and given that, that's where the bulk of this activity is going to reside, we're still pretty optimistic that the opportunity to partner with banks is still in the early innings and that we're well positioned for it.

Craig William Siegenthaler

And just as my follow-up, a similar question but more on the investing side, focusing on asset-backed finance and the $7 billion Pathfinder fund. And I know this vertical now is $32 billion at Ares, which is very large. What verticals is Joe and team focusing on now? Are there any that they're avoiding and looking at Ares' capabilities today in ABF, are you broadly -- do you broadly fill all the verticals? Are there still some white spaces where you could add investment professionals to sort of fill in, in the future?

Michael J. Arougheti

Without getting into too many specifics, Craig, I think the good news is we have probably one of the biggest and broadest teams in the space, particularly around the sub-investment grade part of the market which we think requires a (technical difficulty) we're focused on now. We talked about resolution of some consumer loan portfolios and lender finance portfolios within the banking system.
In a recent newsletter that that team put out, there was a pretty good discussion, I thought on the opportunity in NAV lending, which is about a $100 billion opportunity. So I'd say broadly speaking, you want to be in a position to move between markets and geographies as the opportunity set develops and there are very few people who can make those types of relative value decisions the way that our team can. But yes, I think for the time being, we're going to be focused on much of the core things that we've been talking about around bank partnerships and lender finance.

Operator

Our next question comes from the line of Alex Blostein with Goldman Sachs.

Alexander Blostein

My question for you outside of credit, maybe just a quick refresher on the opportunities you guys see for fundraising over the next call it, 6 to 12 months in things like private equity and other verticals. So maybe we could start there.

Michael J. Arougheti

Sure. Thanks for the question. As we talked about on prior calls, I think the good news is, year-over-year, you're going to see less dispersion in fundraising outcomes largely because we have an increased number of larger flagship and core vehicles. Obviously, we're building momentum in the wealth channel and the insurance channel and then the family of open-ended products that are on continuous offer are growing. So we're going into any given year just with a much higher floor to jump off of with the large institutional flagships.
As we talked about in the prepared remarks, we'll clean up the large credit funds here towards the end of the year and into the first half of next year. And then we would expect to see first closes towards the end of this year into the beginning of next year for our seventh corporate private equity fund, our sixth infrastructure debt fund, our climate infrastructure funds, so on and so forth. And then the big things on the horizon, I think, for next year are going to be our third special ops fund, our third junior debt fund are probably the 2 big ones. And then obviously, we'll be growing into our sixth infrastructure debt fund.
So it's interesting, as the product set is growing and diversifying and then we're showing that we can scale vintage over vintage, we're no longer in this world where we're just focusing on a handful of flagships. And you can see that just in terms of the quarter-over-quarter fundraising performance, and I'd expect that to continue into the first half as well.

Alexander Blostein

Great. That helps. The second question I had for you guys is zoning in on some of the retail initiatives. Helpful to hear that ASIF is going to be, I guess, on 4 additional platforms in the first half of next year. Any lessons learned, I guess, from the existing platform and how good of a read across that could be to some of the other ones that you mentioned, given pretty robust momentum we've seen so far. And then I think you launched a European version of that as well. So maybe help us understand sort of how does the competitive market in Europe vary versus the U.S. and the opportunity there you see for the European version of this product relative to the early traction you're seeing in the U.S?

Michael J. Arougheti

Sure. Just to frame it, so everybody is looking at the same numbers, we raised in our wealth products alone, so not looking at our traded product, wealth product, we did about $1.7 billion in the third quarter, obviously, with good momentum on ASIF with only the one platform.
I would expect, Alex, just given the attractiveness of the product at this moment in time in our BDC track record and leadership in private debt that adding those platforms is a pretty good read across. We'll know it when we're in those platforms just how much they scale. But I think there's a pretty significant amount of pent-up demand and respect for the brand in that channel. And so I think that's a good starting point to expect that it would be a good read across.
Europe, it's interesting because the European wealth market generally is less developed. So we just don't have a great amount of precedent to know. But from a competitive standpoint, we have, by far, the leading private credit franchise in that market, both in terms of length of track record, scale of capital and size of team. So it's an interesting, you have a less mature distribution channel, but we have a significantly better competitive positioning, I think, relative to others in that market. And so the two combined hopefully has us having similar experience with that product as we're having with the U.S. product.

Operator

Our next question comes from the line of Ben Budish with Barclays.

Benjamin Elliot Budish

I wanted to ask about some of the LP dynamics. We've been seeing some reports in the media, not about Ares specifically, but about private credit in general, things like investors sort of asking for lower hurdles, pricing concessions. We've seen some competitors concede incentive fees in some of their credit funds. Just curious if there's anything you're seeing in your interactions with your clients that are similar to what we've been hearing elsewhere?

Michael J. Arougheti

We are absolutely not seeing that in any way, shape or form. I would not read into that at least vis-a-vis our platform or the market generally. I would maybe just make a comment that to the extent that someone was trying to play catch up in a growing market without a long track record of performance, you might have to cut fee in order to attract capital, but that has not been our experience in one bit.

Benjamin Elliot Budish

All right. That's very clear. Maybe one follow-up. Just thinking -- I know Aspida is not a huge portion of your business, but thinking about the expected DOL proposed rule today, the beta fiduciary rule. Can you kind of just remind us what is your sort of overall annuity exposure? How much of the business is -- or how much of your growth prospects are sort of reliant on that channel? And what is sort of the makeup of Aspida today?

Michael J. Arougheti

Sure. And we appreciate your highlighting and obviously, this is all unfolding real time. So we're digesting that the same way that you are. We have, as we've said before, taken a more measured approach to the growth of our insurance affiliate with some of our peers. We believe in the investment thesis of asset expertise married with insurance company balance sheets but continue to have a very large and growing stable of important insurance partners in our third-party business and continue to grow that part of our company as well.
Aspida today has raised close to $1 billion of capital and the total AUM there is about $11 billion, $10.6 billion. About 60% of that balance sheet is advised and sub-advised by Ares as one would expect. If you go back to our Investor Day in the summer of 2021 when we put forward our guidance, you'll see that we largely expected that Aspida would grow roughly $5 billion a year to get us to $25 billion of AUM at the end of 2025. So if you looked at the $500 billion that we put out for guidance, $25 billion for Aspida, that would have it at about 5% of our assets. And if you look at where we are on that business plan, we're kind of tracking to that. So I would expect that we will continue to grow that in a measured fashion.
We do think that we have some technological advantages in terms of the way that we are originating and onboarding new business. And I think as many folks know, we're obviously smaller, but we also do not have any legacy exposures given that this was a de novo build. And so when you look at what is in the book, it's all effectively new vintage credit.
So we'll keep an eye on this. But again, I think the good news is for at least for Ares, it's a small part of what we do, and my expectation is that whatever develops here like we've seen in the past, it will largely hopefully be around enhanced disclosures around certain products in the channel, but not really change the economic proposition to the client.

Operator

Our next question comes from the line of Brennan Hawken with UBS.

Brennan Hawken

I know real estate is small for you, but could you maybe give some color on where the cap rates are in your non-traded REITs and maybe how much those have changed versus a couple of years ago? You had spoken to the rent growth there as an offset. But just kind of curious about the base cap rates.

Michael J. Arougheti

Bill, do you want to take that one? I thought Bill Benjamin, our Head of Real Estate was on. I'm happy to take it. If you look at the non-traded REITs for Q3 this year when you look at what's underpinning the valuation, we had cap rates roughly 5.5% to 5.6% depending on the vehicle. If you go back a year, we were probably 50 to 70 basis points, tight of that 4.8% and 5.2%. So we have seen cap rate expansion but as we mentioned, given that these funds are largely focused either exclusively on industrial logistics properties and multis, we are continuing to see pretty significant and healthy fundamental performance in terms of NOI growth and the development of the rent rolls.

Brennan Hawken

And then kind of curious about -- on the European waterfall and expectations for 2024. I believe you said $160 million. But I thought that on the last call, that was more like about $175 million with the potential for upside. So am I remembering that correctly? And could you maybe walk through what happened to that revision? And how we should be thinking about upside and what can drive that from here?

Jarrod Morgan Phillips

Sure, I'll take that one. Ultimately, yes, what we tried to lay out, and we added the 2025 guidance with a little bit more clarity, kind of splitting out the periods between '24 and '25. Based on the current market environment, what we're seeing is a little bit of the extension of the duration of the underlying assets of these funds, which means that it pushes out the overall maturity of the fund a little bit, it actually ends up being a net positive for us in terms of these are assets, these are credit assets that are yielding well above the hurdle. But because of the current market environment, they actually aren't refinancing quite as early as they used to. That's what's pushing out that duration.
So ultimately, what we're seeing is a build over a longer period of time with -- now we're expecting it more to land in that 2025 period as opposed to towards the end of 2024. And that's a little bit of what we've seen happen here in Q4 as well as we're expecting kind of a push of some of that in terms of what we've given as guidance in the past into 2024 and then some of that 2024 really extending into 2025. So I wouldn't really call it a loss of it. It's actually a build and a larger build, but it's pushing it out just a little bit due to the current market environment.

Brennan Hawken

Got it. And is it possible for that duration to continue to get extended, if we see conditions remain challenging for refi or is that like a realistic worst-case scenario right now?

Jarrod Morgan Phillips

Yes, not too much because we're really approaching the natural maturity of a lot of those assets. So it's really just in terms of what the refi activity looks like. And if the market picks up, well, that could all cause refinances and turnover in those earlier portfolios which would then accelerate the recognition of that. So it's really just a matter of what is the exact timing. We know what the total amount could be and the total amount continues to grow. It's when that will perfectly occur and there's kind of arbitrary dates along the way.

Operator

Our next question comes from the line of Ken Worthington with JPMorgan.

Kenneth Brooks Worthington

Maybe first on the fundraising guide. I think the -- your comments that you're on track for $65 billion this year suggests a recently reasonable slowdown in fourth quarter commitments. Is that just you being conservative? Or did some funds that you expect in 4Q maybe get pushed to 1Q? Can you give us a little more flavor there?

Michael J. Arougheti

Yes, I think we said in excess of $65 billion, Ken, just because as you get into the end of the year, you have certain things that will either be pulled forward or roll. So I think we're just trying to be cautious given that some things may slip, but the funds that we've articulated are all in the process of having their closes here in the fourth quarter. One or 2 may slip, 1 or 2 may not, and that's really going to drive the ultimate change, but there's nothing other than timing affecting what the ultimate outcome is going to be.

Kenneth Brooks Worthington

Okay. Great. I sort of figured that. In Alt Credit, I think there's been a talk of a rush of deals to come before year-end. Is that what you're expecting? And what's driving this push into year-end?

Michael J. Arougheti

I think the pipeline there is building significantly. It's probably one of the busiest parts of the firm right now. A lot of this is Basel end game driven and I think just folks trying to get focused on balance sheet composition and construction going into the end of the year. I don't think there's anything more than that, but we are absolutely experiencing that. The pipeline is building, transaction activity there has probably turned on more so than other parts of the firm right now.

Operator

Our next question comes from the line of Michael Cyprys with Morgan Stanley.

Michael J. Cyprys

Great. Maybe just on commercial real estate, I believe in the past, you've mentioned that you'd expect the bulk of the primary market opportunity out of the regional banks to come from CRE lending. So I guess how much activity have you seen so far on the CRE lending front? What steps might you need to take to enhance the platform, if at all, in terms of hiring or build-out in order to best capture the market opportunity set that you guys see?

Michael J. Arougheti

Yes, I don't think that we need to do a lot more than we're currently doing. We have a very well-developed team, both in the U.S. and in Europe. We've been building capability in Asia Pacific as well. As we highlighted on our prepared remarks, we have been forming capital and we'll continue to do so. I think when you think about what's going on in the world of commercial real estate and the change in basis, most of the exciting stuff is going to be happening in the top to middle part of the balance sheet of these entities, and that's going to be a combination of real estate lending, solutions, real estate secondaries, structured equity through our opportunistic real estate business. And obviously, we have large teams against all 3 of those.
So I think the bigger issue is really going to be investor behavior because as much as everybody appreciates how big of an opportunity that is, you have a lot of investors that are also playing defense within their existing exposures. And until they kind of get their heads around what it is that they currently own, I think it's going to be a little hard for them to get on offense. So I think for me, it's really going to be all on the capital side, not the capability side.

Michael J. Cyprys

Okay. And just a follow-up question. I wanted to circle back to your comments on deployment. I think you mentioned that you were encouraged by the activity so far here in the fourth quarter and the pipeline. I think you mentioned Alternative Credit busiest part of the firm. Just wanted to double-click on that. If you could maybe just elaborate a little bit more, picked up in the third quarter here, but what's the opportunity set for the deployment activity to broaden out beyond Alternative Credit, beyond credit and to some of the other areas of the firm? And how do you see deployment activity evolving as you look out over the next 12 to 24 months. So maybe you could just remind us around some of the seasonality. Does that broadly pick up in 4Q and then slow down in the first quarter?

Michael J. Arougheti

I'll try to hit this from a couple of different places. Number one, I think given the diversity of strategies that we have, similar to my comments on fundraising, I'll make a similar commentary on deployment, which is when you look at the deployment experience, you'll see obviously a slowdown but on a relative basis, still healthy deployment. So if you look at a year ago, in Q3 2022, we deployed about $18.3 billion, obviously led by credit. And in Q3 '23, we deployed $16.7 billion. That was up from $15.2 billion last quarter. So you kind of begin to see these ranges emerge.
If you look at it on an LTM basis, LTM this year, about $66 billion, LTM last year, about $90 billion. So obviously, if we get into a market where we're seeing heightened transaction activity, that also gives you another way to think about the range of outcomes and then just measure that against the $100 billion of dry powder that we referenced earlier and we'll give you a general sense for where we are from a deployment opportunity standpoint as we deploy the dry powder.
Most of what is happening now and it goes back to what I just talked about with real estate, is going to be in and around the opportunistic side of the business, rescue lending, opportunistic refinancings, secondaries, structured equity, et cetera, because the new issue volumes both in corporate private equity and institutional real estate are slow. We continue to have a competitive advantage just given our incumbency and the size of our portfolio. So if you look at our U.S. and European direct lending portfolios, you'll see continuing 40% to 50% of deal volume at Ares is coming from the installed book of business. And so that's a nice ballast as you think about the ability to deploy into a tougher new issue market.
I am optimistic that that transaction volume will pick up. We're seeing it build in the pipelines. If you talk to the sell side, they'll tell you that there's a significant pent-up demand for asset sales to be coming to market. We're seeing it across the platform. But the math of it, if you just look at, for example, private equity and you say, today, buyout funds are sitting on about $2.8 trillion of unexited assets relative to about $1.1 trillion of dry powder. And if you look at that installed base or the aging of it, 50% of the companies that are currently owned by buyout funds are -- have been owned in excess of 4 years. And so if you just think about the weight of that money needing to transact and return capital to LPs while most of what we're doing is kind of on that opportunistic side, I still believe that you're going to see new transaction volumes pick up, particularly now that you're getting into a stabilized rate environment.

Operator

Our next question comes from the line of Patrick Davitt with Autonomous Research.

Michael Patrick Davitt

A quick follow-up on that one. Is the cadence of the pipeline building more of a 2024 pop? Or should we expect to pick up more immediately in 4Q?

Michael J. Arougheti

I think Q4 is shaping up nicely. Again, it's always -- there's always a seasonal pickup in Q4 as people rush to get deals done by year-end, typically just around tax planning and closing out the year. So there's always a flurry of activity towards the end of the year. Sometimes that slips, sometimes it doesn't. But I would expect that it will be a nice ramp through Q4 and then into Q1 based on everything I'm seeing.

Michael Patrick Davitt

And then a higher-level question. There was a rating agency out last week with a report showing large direct lending deals increasingly coming with no maintenance covenants. I think trying to argue that there's more pressure to converge terms with the broadly syndicated market, I'm not sure how they even know that given these are private deals, but is that a trend you're seeing? Is Ares participating? And if so, what is the argument, I guess, for lowering your protection (inaudible).

Michael J. Arougheti

Yes. I don't really know -- to your point, I don't know where that's coming from and you can't paint the entire private credit market with the same brush. I'll make a couple of comments. I do think that in some of these private executions that are syndicated loan proxies, one would expect that some syndicated loan documentation terms would find their way into the private market. That to me is not really newsworthy or noteworthy. In the core middle market, that is not the case. The structures continue to be strong. They're as good as we've ever seen. The pendulum has swung to be obviously more lender-friendly than borrower-friendly. And so it feels a little sensational, but -- and I would expect that that will continue.
The other thing I would just point out, if you actually go back and look at the history of covenant-light loans, there's no evidence to say that covenant-light loans actually performed worse than covenanted loans. And I think the reason is twofold. One, the best quality credits are those that can actually command better structures. And number two, sad as it may be, oftentimes in syndicated structures, many of the participants in those syndicates of different structural constraints or agendas and so when you get into a restructuring conversation, you may have a CLO that can't put new money in or can't take a ratings downgrade. You may have a credit fund that is at the end of fund life and can't participate in a junior security. And so there's all sorts of friction that you see in those syndicated loans that, frankly, when you have no covenants, it's protective of value. And I think that's why you could argue pretty strongly the covenant-light loans for the best borrowers will actually outperform. That's actually what we saw happen through the GFC.
I'd make one last comment, which is why I think everybody is so excited about private credit relative to traded credit, at least vis-a-vis defaults and loss given default. When you are in a private credit instrument, covenanted or not covenanted, it's a bilateral agreement between a borrower and a lender or a very small lender group and there is no ability for anyone else in the market with a different agenda or different entry point to come into that security and destroy value. And oftentimes, in the traded market, obviously, you can see people coming into capital structure and being disruptive in a way that you just don't see in the private market. So even in the absence of covenants, they perform differently because you restructure them through a bilateral negotiation between borrower and lender and the deals that are getting done are no different than what we've seen for the last 30 years.

Operator

And our next question comes from the line of Mike Brown with KBW.

Michael C. Brown

Great. I just wanted to follow up on the European waterfall fund dynamic. So Jarrod, it sounds like the amount that you guys were guiding to for the cumulative 2024 and 2025 period would be about in line with the base estimate that you had talked about in the past. You did talk about potential for a high estimate of $650 million previously, if I recall correctly. So should we just assume that that perhaps has been pushed out based on some of the duration commentary that you talked about? Or does that high estimate still hold and it's just a matter of the range is still somewhat wide and timing is still relatively uncertain at this point?

Jarrod Morgan Phillips

I think it's more a case of that. It's -- in terms of looking at the overall environment, again, as I mentioned earlier in the call, if we start to see repayments happen faster, well, you're going to come closer to that higher end of the range because you're pulling a lot of that up. We're trying to be as accurate as we can with that lower end of the range. But yes, I wouldn't say that there's really a change to the range. The good news is as I mentioned earlier, again, is that the accrued balance continues to grow, and this is actually an advantageous market for that to be occurring in terms of extending the duration.

Michael C. Brown

Okay. Great. And I guess the credit metrics, they just continue to hold up really well and seem to really be outperforming expectations. What is really kind of driving that strength in your view here, particularly for Ares? And then when does the pressure from higher rates on cash flows really start to have a greater impact? What would kind of be your outlook here on the credit side if we think out over the next 12 to 18 months?

Michael J. Arougheti

It's funny because we have not been in the recession camp for quite some time. And I think everyone just continues to hope for it. For some reason, it's just not coming. And the simple answer without being cheeky is we just put up a 4.5% plus GDP print in the quarter and the economy is really strong, and we're seeing that play out in our portfolios, and we've tried to articulate that one of the benefits that we have, given the breadth of our platform, is that we're seeing private market information roll through on a monthly basis. And for the most part, we're seeing broad strength. There are obviously pockets of the economy that are weakening. There are certain segments of the consumer economy that are weaker, but taken in the aggregate, it paints a picture of continued economic strength.
I think Kipp and the team have done a good job talking about the credit metrics at ARCC, and I'd reiterate they're consistent across the private credit book. But the biggest protection is coming from the loan to value positioning of those portfolios and the continued growth in EBITDA, which is obviously promoting dollar deleveraging. If you look at where those books sit today, they're at about 1.6x to 1.7x interest coverage ratio on a very conservative definition of interest coverage, meaning pro forma for today's rate environment, not trailing. And I think we all would agree that whether we get 1 or 2 hikes here that we're towards the end. And so I think we feel more confident that we have that we know that we're in a safe place in terms of the interest coverage ratio.
Obviously, at these levels, if rates stay higher for longer, any diminishment in fundamental performance, you'll be having more conversations with more owners of companies and assets than we're having now. But again, I just want to highlight that is not necessarily a bad thing for credit performance. And if the past is any indicator, that probably has those books generating higher net rates of return, given their ability to participate in equity value and to get incremental margin and fees. And so again, I think the books are in a really good spot right now.

Operator

And we have reached the end of question-and-answer session. Therefore, I will turn the call back over to Michael Arougheti for closing remarks.

Carl G. Drake

Operator, Craig Siegenthaler missed the answer to one question, so we're going to repeat that before Mike's closing remarks. Craig asked what verticals in the Alternative Credit space is we most focused on or we're most focused on, what are we avoiding and as Ares need to move this business further horizontally to fill in additional white spaces where you might now have investment staff today?

Michael J. Arougheti

Sure. So I hope what I say now is consistent with what I said before, at least for what you guys heard. Look, the simple answer is I do not think that we need to add capability. One of the reasons why our business is growing the way that it is, is that we are one of the larger teams and one of the better capitalized platforms in the market. We have a fully developed capability around most of the important relevant large segments of alternative credit, and that is a big advantage.
This is a market that like other parts of the private credit landscape is moving to scale. We're obviously growing alongside of it. And as we grow, we continue to invest in capability, both in different geographies and around different asset classes. But not a big build in order to capture the full market opportunity. So again, it's going to be about just continuing to form capital, drive partnerships with other market participants and the banks.
Places that we're spending a lot of time on right now, as we've talked about are bank asset portfolios and lender finance, including NAV lending. NAV lending is a $100 billion market opportunity in my estimation, and we're uniquely positioned to execute. We are working on a number of what I would call rescue loans and structured equity type investments into the financial services market for good platforms with bad balance sheets. And so I'd expect that you'll see more of that.
Eventually, I think the consumer part of the business will turn on. As I said earlier, there's about $2 trillion of consumer loans sitting on bank balance sheets that we think are going to need some form of resolution, which is a pretty big addressable market for us. And Craig had asked if there are things that we avoid.
I think generally, the team has done a good job saying that there are certain things that we categorically avoid like patent litigation, for example, or viatical. But at the end of the day, the whole reason for this platform to exist is to be able to move around with a really good relative value lens between the different parts of the Alternative Credit landscape in the different geographies. So we're pretty excited about what lies ahead for that team.
Okay. So thanks, Carl, for pulling us back online. And sorry, Craig, that we didn't get to you the first time around. I didn't have anything to say other than, again, to thank everybody for their time today and continued support. And we look forward to seeing everybody next quarter, and happy Halloween.

Operator

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 November 28, 2023, by dialing (877) 660-6853 and for international callers by dialing (201) 612-7415. For all replays, please reference conference number 13740717. An archived replay will also be available on a webcast link located on the home page of the Investor Resources section of our website.